UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

or

 

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

 

 

Fair values of the financial assets and liabilities listed above are determined using inputs that use as their basis readily observable market data that are actively quoted and are validated through external sources, including third-party pricing services and brokers. The Company purchases marketable securities that are designated as available-for-sale. The foreign currency contracts represent gains and losses on derivative contracts, which is the net difference between the U.S. dollar value to be received or paid at the contracts’ settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current market exchange rate. The interest rate swap contracts represent gains and losses on the derivative contracts, which is the net difference between the fixed interest to be paid and variable interest to be received over the term of the contract based on current market rates. The fair value of the trust owned life insurance (“TOLI”) policies held by the Rabbi Trust is based on the cash-surrender value of the life insurance policies, which are invested primarily in mutual funds and a separately managed fixed income fund. These investments are initially made in the same funds and purchased in substantially the same amounts as the selected investments of participants in the Under Armour, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), which represent the underlying liabilities to participants in the Deferred Compensation Plan. Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments.

As of September 30, 2017, the fair value of the Company's Senior Notes was $557.3 million, and as of September 30, 2016, the carrying value approximated the fair value. The carrying value of the Company's other long term debt approximated its fair value as of September 30, 20162017 and 2015.2016. The fair value of the Company's long termlong-term debt wasis estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2 input)2).

The Company grants a combination of time-based and performance-based restricted stock units and stock options as part of its incentive compensation. Certain senior executives are eligible to receive performance-based awards. During the nine months ended September 30, 2016, 2.42017, 1.8 million performance-based restricted stock units and 0.30.5 million performance-based stock options for shares of our Class C common stock were awarded to certain officers and key employees under the Company's Second Amended and Restated 2005 Omnibus Long-Term Incentive Plan, as amended. TheseThe performance-based restricted stock units and options have weighted average grant date fair values of $36.16$19.05 and $36.18,$8.17, respectively, and have vesting conditions tied to the achievement of certain combined annualrevenue and operating income targets for 20162017 and 2017.2018. Upon the achievement of the targets, one thirdhalf of the restricted stock units and options will vest each in February 2018, February 2019 and February 2020.

If certain lower levels of combined annual revenue and operating income for 20162017 and 20172018 are achieved, fewer or no restricted stock units or options will vest and the remaining restricted stock units and options will be forfeited. The Company deemed the achievement of certain revenue and operating income targets for 20162017 and 20172018 probable during the nine months ended September 30, 2016.2017. The Company assesses the probability of the achievement of the remaining revenue and operating income targets at the end of each reporting period. If it becomes probable that any remaining performance targets related to these performance-based restricted stock units and options will be achieved, a cumulative adjustment will be recorded as if ratable stock-based compensation

Foreign Currency Risk Management

The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions generated by its international subsidiaries in currencies other than their local currencies. These gains and losses are primarily driven by intercompany transactions and inventory purchases denominated in currencies other than the functional currency of the purchasing entity. From time to time, the Company may elect to enter into

As of September 30, 2016,2017, the aggregate notional value of the Company's outstanding foreign currency contracts was $680.4$338.6 million, which was comprised of Canadian Dollar/U.S. Dollar, Euro/U.S. Dollar, Yen/Euro, Mexican Peso/Euro and Pound Sterling/Euro currency pairs with contract maturities ranging from one to fourteen months. A portion of the Company's foreign currency contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are recorded in earnings. The Company also enters into foreign currency contracts designated as cash flow hedges. For foreign currency contracts designated as cash flow hedges, changes in fair value, excluding any ineffective portion, are recorded in other comprehensive income until net income is affected by the variability in cash flows of the hedged transaction. The effective portion is generally released to net income after the maturity of the related derivative and is classified in the same manner as the underlying exposure.

During the three and nine months ended September 30, 2016,2017, the Company reclassified $1.0$0.1 million and $1.8 million from other comprehensive income to cost of goods sold related to foreign currency contracts designated as cash flow hedges.hedges, respectively. The fair values of the Company's foreign currency contracts were a liability of $7.8 million as of September 30, 2017, and were included in accrued expenses on the consolidated balance sheet. The fair values of the Company's foreign currency contracts were assets of $1.6 million, $3.8$15.2 million and $1.4$1.6 million as of September 30, 2016, December 31, 20152016 and September 30, 2015,2016, respectively, and were included in prepaid expenses and other current assets on the consolidated balance sheet. Refer to Note 56 for a discussion of the fair value measurements. Included in other expense, net were the following amounts related to changes in foreign currency exchange rates and derivative foreign currency contracts:

Interest Rate Risk Management

The effective ratesProvision for income taxes were 34.3% and 41.0% fordecreased $81.6 million to a benefit of $1.3 million during the nine months ended September 30, 2016 and 2015, respectively.2017 from $80.3 million during the same period in 2016. For the nine months ended September 30, 2017, the Company's effective tax rate was (3.5%) compared to 34.3% for the same period in 2016. The effective tax rate for the nine months ended September 30, 20162017 was lower than the effective tax rate for the nine months ended September 30, 20152016 primarily due to increasedchallenged results in North America creating a higher proportion of international profitabilityprofits in 2017, partially offset by non-deductible goodwill impairment charges and the recording of certain valuation allowances.

Valuation allowances of $13.2 million were recorded discretely against deferred tax assets as of December 31, 2016 for certain U.S. state jurisdictions. Additionally, valuation allowances were recorded against current year deferred tax assets in certain U.S. state jurisdictions. These valuation allowances were recorded due to lower than expected results in the third quarter of 2017 and a significantly reduced outlook for the remainder of the year.

The Company files income tax benefit relatedreturns in the U.S. federal jurisdiction and various state and foreign jurisdictions which are regularly subject to our prior period acquisitions.examination by tax authorities.  Based on the status of current examinations in various taxing jurisdictions, management believes it is reasonably possible that in the next 12 months the amount of the total liability for unrecognized income tax benefits and interest could decrease by up to $16 million.

The following represents a reconciliation from basic earnings per share to diluted earnings per share:

Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options and restricted stock units representing 83.7233.8 thousand and 47.183.7 thousand shares of Class A common stock outstanding for the three months ended September 30, 20162017 and 2015,2016, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Stock options and restricted stock units representing 1.14.0 million and 47.1 thousand1.1 million shares of Class C common stock outstanding for the three months ended September 30, 20162017 and 2015,2016, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Stock options and restricted stock units representing 86.9272.3 thousand and 463.186.9 thousand shares of Class A common stock outstanding for the nine months ended September 30, 20162017 and 2015,2016, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Stock options and restricted stock units representing 444.3 thousand4.1 million and 463.1 thousand0.4 million shares of Class C common

The Company’s operating segments are based on how the Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. As such, the CODM receives discrete financial information for the Company's principal business by geographic region based on the Company’s strategy to become a global brand. These geographic regions include North America;America, Latin America;America, Europe, the Middle East and Africa (“EMEA”);, and Asia-Pacific. Each geographic segment operates exclusively in one industry: the development, marketing and distribution of branded performance apparel, footwear and accessories. The CODM also receives discrete financial information for the Company's Connected Fitness business. Intersegment revenueTotal expenditures for additions to long-lived assets are not disclosed as this information is generated by Connected Fitness which runs advertising campaigns for the Company's e-commerce business in North America. The Company accounts for this intersegment revenue as if the sales were made to third parties making similar purchases. Duenot regularly provided to the insignificance of the Latin America, EMEA and Asia-Pacific operating segments, they continue to be combined into International for disclosure purposes.CODM.

Some of the statements contained in this Form 10-Q constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, our anticipated charges and restructuring costs and the timing of these measures, the development and introduction of new products, the implementation of our marketing and branding strategies and future benefits and opportunities from acquisitions.acquisitions and other significant investments. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “outlook,” “intends,” “potential” or the negative of these terms or other comparable terminology.

We are a leading developer, marketer and distributor of branded performance apparel, footwear and accessories. The brand’s moisture-wicking fabrications are engineered in many different designs and styles for wear in nearly every climate to provide a performance alternative to traditional products. Our products are sold worldwide and worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as by consumers with active lifestyles. The Under Armour Connected Fitness platform powers the world's largest digital health and fitness community and our strategy is focused on engaging with these consumers and increasing awareness and sales of our products. We plan to grow this community by developing innovative applications, services and other digital solutions to impact how athletes and fitness-minded individuals train, perform and live.

Our net revenues grew to $4.0 billion$4,825.3 million in 20152016 from $1.5 billion$1,834.9 million in 2011. We reported net revenues of $3.5 billion for the first nine months of 2016, which represented a 26% increase from the first nine months of 2015.2012. We believe that theour growth in our businessnet revenues has been driven by a growingincreasing consumer interest in performanceour products and the strength of the Under Armour brand in the marketplace. We plan to continue to increase our net revenues over the long term bymarket place. Our long-term growth strategy is focused on increased sales of our apparel, footwear and accessories, expansion of our wholesale distribution sales channel, growthproducts through ongoing product innovation, investment in our direct to consumer sales channel anddistribution channels, international expansion in international markets and engaging with consumers through our Connected Fitness business.  Our directWhile we plan to consumer sales channel includescontinue to invest in growth, we also plan to improve efficiencies throughout our brandbusiness as we seek to gain scale through our operations and factory house storesreturn on our investments.

Net revenues comprise net sales, license revenues and Connected Fitness revenues. Net sales comprise sales from our primary product categories, which are apparel, footwear and accessories. Our license revenues primarily consist of fees paid to us by our licensees in exchange for the use of our trademarks on ourtheir products. Our Connected Fitness revenues consist of digital advertising, digital fitness platform licenses and subscriptions from our Connected Fitness business.

Cost of goods sold consists primarily of product costs, inbound freight and duty costs, outbound freight costs, handling costs to make products floor-ready to customer specifications, royalty payments to endorsers based on a predetermined percentage of sales of selected products and write downs for inventory obsolescence. The fabrics in many of our products are made primarily of petroleum-based synthetic materials. Therefore our product costs, as well as our inbound and outbound freight costs, could be affected by long term pricing trends of oil. In general, as a percentage of net revenues, we expect cost of goods sold associated with our apparel and accessories to be lower than that of our footwear. A limited portion of cost of goods sold is associated with license and Connected Fitness revenues, primarily website hosting costs and other costs related to our Connected Fitness business.

We include outbound freight costs associated with shipping goods to customers as cost of goods sold; however, we include the majority of outbound handling costs as a component of selling, general and administrative expenses. As a result, our gross profit may not be comparable to that of other companies that include outbound handling costs in their cost of goods sold. Outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate our distribution facilities. These costs were $25.7$25.5 million and $14.3$25.7 million for the three months ended September 30, 20162017 and 2015,2016, respectively, and $65.1$74.5 million and $40.1$65.1 million for the nine months ended September 30, 2017 and 2016, and 2015, respectively.

Our selling, general and administrative expenses consist of costs related to marketing, selling, product innovation and supply chain and corporate services. We consolidate our selling, general and administrative expenses into two primary categories: marketing and other. The other category is the sum of our selling, product innovation and supply chain and corporate services categories. Personnel costs are included in these categories based on the employees’ function. Personnel costs include salaries, benefits, incentives and stock-based compensation related to our employees. Our marketing costs are an important driver of our growth. Marketing costs consist primarily of commercials, print ads, league, team, player and event sponsorships and depreciation expense specific to our in-store fixture program for our concept shops.