UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| | | | | |
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20202021
or
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-33202
UNDER ARMOUR, INC.
(Exact name of registrant as specified in its charter)
______________________________________ | | | | | | | | |
| Maryland | | 52-1990078 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
1020 Hull Street Baltimore, Maryland 21230 | | (410) 454-6428 |
| (Address of principal executive offices) (Zip Code) | | (Registrant’s telephone number, including area code) |
___________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Class A Common Stock | UAA | New York Stock Exchange |
| Class C Common Stock | UA | New York Stock Exchange |
| (Title of each class) | (Trading Symbols) | (Name of each exchange on which registered) |
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☑No☐
Indicate by check mark whether the registrant has submitted electronically 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 such files). Yes ☑ No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | ☑ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐ No☑
As of October 31, 20202021 there were 188,534,457188,645,598 shares of Class A Common Stock, 34,450,000 shares of Class B Convertible Common Stock and 231,683,661253,018,596 shares of Class C Common Stock outstanding.
UNDER ARMOUR, INC.
September 30, 20202021
INDEX TO FORM 10-Q
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| PART I. | | |
| Item 1. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| PART II. | | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 6. | | |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Under Armour, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share data)
| | | September 30,
2020 | | December 31,
2019 | | September 30,
2019 | | September 30,
2021 | | December 31,
2020 | | September 30,
2020 |
| Assets | Assets | | Assets | | | | | |
| Current assets | Current assets | | Current assets | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 865,609 | | | $ | 788,072 | | | $ | 416,603 | | Cash and cash equivalents | $ | 1,253,706 | | | $ | 1,517,361 | | | $ | 865,609 | |
| Accounts receivable, net | Accounts receivable, net | 806,916 | | | 708,714 | | | 843,495 | | Accounts receivable, net | 735,779 | | | 527,340 | | | 806,916 | |
| Inventories | Inventories | 1,056,845 | | | 892,258 | | | 906,544 | | Inventories | 837,740 | | | 895,974 | | | 1,056,845 | |
| Prepaid expenses and other current assets | 243,971 | | | 313,165 | | | 292,447 | | |
| Prepaid expenses and other current assets, net | | Prepaid expenses and other current assets, net | 300,719 | | | 282,300 | | | 243,971 | |
| Total current assets | Total current assets | 2,973,341 | | | 2,702,209 | | | 2,459,089 | | Total current assets | 3,127,944 | | | 3,222,975 | | | 2,973,341 | |
| Property and equipment, net | Property and equipment, net | 680,871 | | | 792,148 | | | 778,894 | | Property and equipment, net | 601,700 | | | 658,678 | | | 680,871 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | 560,146 | | | 591,931 | | | 595,832 | | Operating lease right-of-use assets | 469,638 | | | 536,660 | | | 560,146 | |
| Goodwill | Goodwill | 493,631 | | | 550,178 | | | 541,798 | | Goodwill | 498,166 | | | 502,214 | | | 493,631 | |
| Intangible assets, net | Intangible assets, net | 37,274 | | | 36,345 | | | 37,811 | | Intangible assets, net | 11,474 | | | 13,295 | | | 37,274 | |
| Deferred income taxes | Deferred income taxes | 45,995 | | | 82,379 | | | 90,860 | | Deferred income taxes | 34,543 | | | 23,930 | | | 45,995 | |
| Other long term assets | Other long term assets | 72,293 | | | 88,341 | | | 129,481 | | Other long term assets | 78,836 | | | 72,876 | | | 72,293 | |
| Total assets | Total assets | $ | 4,863,551 | | | $ | 4,843,531 | | | $ | 4,633,765 | | Total assets | $ | 4,822,301 | | | $ | 5,030,628 | | | $ | 4,863,551 | |
| Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | | | | | Liabilities and Stockholders’ Equity | | | | | |
| Current liabilities | Current liabilities | | Current liabilities | |
| | Accounts payable | Accounts payable | $ | 643,315 | | | $ | 618,194 | | | $ | 483,627 | | Accounts payable | $ | 532,919 | | | $ | 575,954 | | | $ | 643,315 | |
| Accrued expenses | Accrued expenses | 309,096 | | | 374,694 | | | 309,305 | | Accrued expenses | 388,275 | | | 378,859 | | | 309,096 | |
| Customer refund liabilities | Customer refund liabilities | 197,496 | | | 219,424 | | | 209,785 | | Customer refund liabilities | 174,274 | | | 203,399 | | | 197,496 | |
| Operating lease liabilities | Operating lease liabilities | 156,885 | | | 125,900 | | | 119,446 | | Operating lease liabilities | 142,566 | | | 162,561 | | | 156,885 | |
| Other current liabilities | Other current liabilities | 141,607 | | | 83,797 | | | 77,498 | | Other current liabilities | 116,504 | | | 92,503 | | | 141,607 | |
| Total current liabilities | Total current liabilities | 1,448,399 | | | 1,422,009 | | | 1,199,661 | | Total current liabilities | 1,354,538 | | | 1,413,276 | | | 1,448,399 | |
| Long term debt, net of current maturities | Long term debt, net of current maturities | 997,347 | | | 592,687 | | | 591,995 | | Long term debt, net of current maturities | 662,903 | | | 1,003,556 | | | 997,347 | |
| Operating lease liabilities, non-current | Operating lease liabilities, non-current | 872,791 | | | 580,635 | | | 588,490 | | Operating lease liabilities, non-current | 728,077 | | | 839,414 | | | 872,791 | |
| Other long term liabilities | Other long term liabilities | 74,668 | | | 98,113 | | | 99,953 | | Other long term liabilities | 99,034 | | | 98,389 | | | 74,668 | |
| Total liabilities | Total liabilities | 3,393,205 | | | 2,693,444 | | | 2,480,099 | | Total liabilities | 2,844,552 | | | 3,354,635 | | | 3,393,205 | |
| Commitments and contingencies (See Note 8) | | |
| Stockholders’ equity | Stockholders’ equity | | Stockholders’ equity | |
| Class A Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of September 30, 2020, December 31, 2019 and September 30, 2019; 188,533,987 shares issued and outstanding as of September 30, 2020, 188,289,680 shares issued and outstanding as of December 31, 2019, and 188,201,145 shares issued and outstanding as of September 30, 2019. | 62 | | | 62 | | | 62 | | |
| Class B Convertible Common Stock, $0.0003 1/3 par value; 34,450,000 shares authorized, issued and outstanding as of September 30, 2020, December 31, 2019 and September 30, 2019. | 11 | | | 11 | | | 11 | | |
| Class C Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of September 30, 2020, December 31, 2019 and September 30, 2019; 231,684,883 shares issued and outstanding as of September 30, 2020, 229,027,730 shares issued and outstanding as of December 31, 2019, and 228,881,215 shares issued and outstanding as of September 30, 2019. | 77 | | | 76 | | | 76 | | |
| Class A Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of September 30, 2021, December 31, 2020 and September 30, 2020; 188,645,131 shares issued and outstanding as of September 30, 2021 (December 31, 2020: 188,603,686, September 30, 2020:188,533,987) | | Class A Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of September 30, 2021, December 31, 2020 and September 30, 2020; 188,645,131 shares issued and outstanding as of September 30, 2021 (December 31, 2020: 188,603,686, September 30, 2020:188,533,987) | 63 | | | 62 | | | 62 | |
| Class B Convertible Common Stock, $0.0003 1/3 par value; 34,450,000 shares authorized, issued and outstanding as of September 30, 2021, December 31, 2020 and September 30, 2020. | | Class B Convertible Common Stock, $0.0003 1/3 par value; 34,450,000 shares authorized, issued and outstanding as of September 30, 2021, December 31, 2020 and September 30, 2020. | 11 | | | 11 | | | 11 | |
| Class C Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of September 30, 2021, December 31, 2020 and September 30, 2020; 252,992,053 shares issued and outstanding as of September 30, 2021 (December 31, 2020: 231,953,667, September 30, 2020: 231,684,883) | | Class C Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of September 30, 2021, December 31, 2020 and September 30, 2020; 252,992,053 shares issued and outstanding as of September 30, 2021 (December 31, 2020: 231,953,667, September 30, 2020: 231,684,883) | 84 | | | 77 | | | 77 | |
| Additional paid-in capital | Additional paid-in capital | 1,050,983 | | | 973,717 | | | 960,451 | | Additional paid-in capital | 1,096,856 | | | 1,061,173 | | | 1,050,983 | |
| Retained earnings | Retained earnings | 490,071 | | | 1,226,986 | | | 1,242,437 | | Retained earnings | 918,664 | | | 673,855 | | | 490,071 | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | (70,858) | | | (50,765) | | | (49,371) | | Accumulated other comprehensive loss | (37,929) | | | (59,185) | | | (70,858) | |
| Total stockholders’ equity | Total stockholders’ equity | 1,470,346 | | | 2,150,087 | | | 2,153,666 | | Total stockholders’ equity | 1,977,749 | | | 1,675,993 | | | 1,470,346 | |
| Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 4,863,551 | | | $ | 4,843,531 | | | $ | 4,633,765 | | Total liabilities and stockholders’ equity | $ | 4,822,301 | | | $ | 5,030,628 | | | $ | 4,863,551 | |
Commitments and contingencies (Note 6)
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Net revenues | $ | 1,433,021 | | | $ | 1,429,456 | | | $ | 3,070,901 | | | $ | 3,825,907 | |
| Cost of goods sold | 746,701 | | | 739,558 | | | 1,604,428 | | | 2,036,901 | |
| Gross profit | 686,320 | | | 689,898 | | | 1,466,473 | | | 1,789,006 | |
| Selling, general and administrative expenses | 553,549 | | | 550,978 | | | 1,586,156 | | | 1,626,309 | |
| Restructuring and impairment charges | 74,201 | | | 0 | | | 549,601 | | | 0 | |
| Income (loss) from operations | 58,570 | | | 138,920 | | | (669,284) | | | 162,697 | |
| Interest expense, net | (14,955) | | | (5,655) | | | (32,251) | | | (15,881) | |
| Other expense, net | (7,184) | | | (429) | | | (10,493) | | | (2,224) | |
| Income (loss) before income taxes | 36,431 | | | 132,836 | | | (712,028) | | | 144,592 | |
| Income tax expense (benefit) | (3,714) | | | 29,344 | | | 14,696 | | | 31,735 | |
| Loss from equity method investments | (1,199) | | | (1,177) | | | (6,906) | | | (5,414) | |
| Net income (loss) | $ | 38,946 | | | $ | 102,315 | | | $ | (733,630) | | | $ | 107,443 | |
| | | | | | | |
| Basic net income (loss) per share of Class A, B and C common stock | $ | 0.09 | | | $ | 0.23 | | | $ | (1.62) | | | $ | 0.24 | |
| Diluted net income (loss) per share of Class A, B and C common stock | $ | 0.09 | | | $ | 0.23 | | | $ | (1.62) | | | $ | 0.24 | |
| | | | | | | |
| Weighted average common shares outstanding Class A, B and C common stock | | | | | | | |
| Basic | 454,541 | | | 451,385 | | | 453,847 | | | 450,739 | |
| Diluted | 456,674 | | | 454,695 | | | 453,847 | | | 454,047 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Net revenues | $ | 1,545,532 | | | $ | 1,433,021 | | | $ | 4,154,261 | | | $ | 3,070,901 | |
| Cost of goods sold | 757,428 | | | 746,701 | | | 2,068,695 | | | 1,604,428 | |
| Gross profit | 788,104 | | | 686,320 | | | 2,085,566 | | | 1,466,473 | |
| Selling, general and administrative expenses | 599,384 | | | 553,549 | | | 1,659,025 | | | 1,586,156 | |
| Restructuring and impairment charges | 16,656 | | | 74,201 | | | 26,382 | | | 549,601 | |
| Income (loss) from operations | 172,064 | | | 58,570 | | | 400,159 | | | (669,284) | |
| Interest income (expense), net | (9,261) | | | (14,955) | | | (36,705) | | | (32,251) | |
| Other income (expense), net | (29,476) | | | (7,184) | | | (75,150) | | | (10,493) | |
| Income (loss) before income taxes | 133,327 | | | 36,431 | | | 288,304 | | | (712,028) | |
| Income tax expense (benefit) | 18,962 | | | (3,714) | | | 38,870 | | | 14,696 | |
| Income (loss) from equity method investments | (921) | | | (1,199) | | | 969 | | | (6,906) | |
| Net income (loss) | $ | 113,444 | | | $ | 38,946 | | | $ | 250,403 | | | $ | (733,630) | |
| | | | | | | |
| Basic net income (loss) per share of Class A, B and C common stock | $ | 0.24 | | | $ | 0.09 | | | $ | 0.54 | | | $ | (1.62) | |
| Diluted net income (loss) per share of Class A, B and C common stock | $ | 0.24 | | | $ | 0.09 | | | $ | 0.54 | | | $ | (1.62) | |
| | | | | | | |
| Weighted average common shares outstanding Class A, B and C common stock | | | | | | | |
| Basic | 470,002 | | | 454,541 | | | 461,908 | | | 453,847 | |
| Diluted | 473,116 | | | 456,674 | | | 464,918 | | | 453,847 | |
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Net income (loss) | $ | 38,946 | | | $ | 102,315 | | | $ | (733,630) | | | $ | 107,443 | |
| Other comprehensive income (loss): | | | | | | | |
| Foreign currency translation adjustment | 12,258 | | | (12,111) | | | (28,785) | | | (4,713) | |
| Unrealized gain (loss) on cash flow hedges, net of tax benefit (expense) of $4,627 and ($2,520) for the three months ended September 30, 2020 and 2019, respectively, and ($3,850) and $632 for the nine months ended September 30, 2020 and 2019, respectively. | (18,498) | | | 7,372 | | | 5,249 | | | (1,338) | |
| Gain (loss) on intra-entity foreign currency transactions | 6,923 | | | (5,140) | | | 3,443 | | | (4,333) | |
| Total other comprehensive income (loss) | 683 | | | (9,879) | | | (20,093) | | | (10,384) | |
| Comprehensive income (loss) | $ | 39,629 | | | $ | 92,436 | | | $ | (753,723) | | | $ | 97,059 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Net income (loss) | $ | 113,444 | | | $ | 38,946 | | | $ | 250,403 | | | $ | (733,630) | |
| Other comprehensive income (loss): | | | | | | | |
| Foreign currency translation adjustment | (7,499) | | | 12,258 | | | 2,897 | | | (28,785) | |
| Unrealized gain (loss) on cash flow hedges, net of tax benefit (expense) of ($4,900) and $4,627 for the three months ended September 30, 2021 and 2020, respectively, and $(5,427) and $(3,850) for the nine months ended September 30, 2021 and 2020, respectively. | 15,468 | | | (18,498) | | | 20,521 | | | 5,249 | |
| Gain (loss) on intra-entity foreign currency transactions | (2,295) | | | 6,923 | | | (2,162) | | | 3,443 | |
| Total other comprehensive income (loss) | 5,674 | | | 683 | | | 21,256 | | | (20,093) | |
| Comprehensive income (loss) | $ | 119,118 | | | $ | 39,629 | | | $ | 271,659 | | | $ | (753,723) | |
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands)
| | | Class A
Common Stock | | Class B
Convertible
Common Stock | | Class C
Common Stock | | Additional Paid-in-Capital | | Retained
Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total
Equity | | Class A
Common Stock | | Class B
Convertible
Common Stock | | Class C
Common Stock | | Additional Paid-in-Capital | | Retained
Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total
Equity |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| Balance as of June 30, 2019 | 188,144 | | | 62 | | | 34,450 | | | 11 | | | 228,653 | | | 76 | | | 946,488 | | | 1,141,129 | | | (39,492) | | | $ | 2,048,274 | | |
| Balance as of June 30, 2020 | | Balance as of June 30, 2020 | 188,461 | | | $ | 62 | | | 34,450 | | | $ | 11 | | | 231,354 | | | $ | 77 | | | $ | 1,044,055 | | | $ | 450,750 | | | $ | (71,541) | | | $ | 1,423,414 | |
| Exercise of stock options | Exercise of stock options | 40 | | | — | | | — | | | — | | | 34 | | | — | | | 265 | | | — | | | — | | | $ | 265 | | Exercise of stock options | 2 | | | — | | | — | | | — | | | 2 | | | — | | | 18 | | | — | | | — | | | 18 | |
| Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | — | | | — | | | — | | | — | | | (59) | | | — | | | — | | | (1,007) | | | — | | | $ | (1,007) | | Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | — | | | — | | | — | | | — | | | (57) | | | — | | | — | | | 375 | | | — | | | 375 | |
| Issuance of Class A Common Stock, net of forfeitures | Issuance of Class A Common Stock, net of forfeitures | 17 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | $ | — | | Issuance of Class A Common Stock, net of forfeitures | 71 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of Class C Common Stock, net of forfeitures | Issuance of Class C Common Stock, net of forfeitures | — | | | — | | | — | | | — | | | 253 | | | — | | | 1,285 | | | — | | | — | | | $ | 1,285 | | Issuance of Class C Common Stock, net of forfeitures | — | | | — | | | — | | | — | | | 386 | | | — | | | 978 | | | — | | | — | | | 978 | |
| Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 12,413 | | | — | | | — | | | $ | 12,413 | | Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 9,513 | | | — | | | — | | | 9,513 | |
| Equity Component value of convertible note issuance, net | | Equity Component value of convertible note issuance, net | — | | | — | | | — | | | — | | | — | | | — | | | (3,581) | | | — | | | — | | | (3,581) | |
| Comprehensive income (loss) | Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 102,315 | | | (9,879) | | | $ | 92,436 | | Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 38,946 | | | 683 | | | 39,629 | |
| Balance as of September 30, 2019 | 188,201 | | | 62 | | | 34,450 | | | 11 | | | 228,881 | | | 76 | | | 960,451 | | | 1,242,437 | | | (49,371) | | | $ | 2,153,666 | | |
| Balance as of September 30, 2020 | | Balance as of September 30, 2020 | 188,534 | | | $ | 62 | | | 34,450 | | | $ | 11 | | | 231,685 | | | $ | 77 | | | $ | 1,050,983 | | | $ | 490,071 | | | $ | (70,858) | | | $ | 1,470,346 | |
| | Balance as of December 31, 2018 | 187,710 | | | 62 | | | 34,450 | | | 11 | | | 226,422 | | | 75 | | | 916,628 | | | 1,139,082 | | | (38,987) | | | $ | 2,016,871 | | |
| Balance as of December 31, 2019 | | Balance as of December 31, 2019 | 188,290 | | | $ | 62 | | | 34,450 | | | $ | 11 | | | 229,028 | | | $ | 76 | | | $ | 973,717 | | | $ | 1,226,986 | | | $ | (50,765) | | | $ | 2,150,087 | |
| Exercise of stock options | Exercise of stock options | 355 | | | — | | | — | | | — | | | 271 | | | — | | | 1,638 | | | — | | | — | | | $ | 1,638 | | Exercise of stock options | 147 | | | — | | | — | | | — | | | 135 | | | — | | | 517 | | | — | | | — | | | 517 | |
| Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | (15) | | | — | | | — | | | — | | | (217) | | | — | | | — | | | (4,088) | | | — | | | $ | (4,088) | | Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | (1) | | | — | | | — | | | — | | | (233) | | | — | | | — | | | (3,285) | | | — | | | (3,285) | |
| Issuance of Class A Common Stock, net of forfeitures | Issuance of Class A Common Stock, net of forfeitures | 151 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | $ | — | | Issuance of Class A Common Stock, net of forfeitures | 98 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of Class C Common Stock, net of forfeitures | Issuance of Class C Common Stock, net of forfeitures | — | | | — | | | — | | | — | | | 2,405 | | | 1 | | | 4,137 | | | — | | | — | | | $ | 4,138 | | Issuance of Class C Common Stock, net of forfeitures | — | | | — | | | — | | | — | | | 2,755 | | | 1 | | | 3,637 | | | — | | | — | | | 3,638 | |
| Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 38,048 | | | — | | | — | | | $ | 38,048 | | Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 32,770 | | | — | | | — | | | 32,770 | |
| Equity Component value of convertible note issuance, net | | Equity Component value of convertible note issuance, net | — | | | — | | | — | | | — | | | — | | | — | | | 40,342 | | | — | | | — | | | 40,342 | |
| Comprehensive income (loss) | Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 107,443 | | | (10,384) | | | 97,059 | | Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (733,630) | | | (20,093) | | | (753,723) | |
| Balance as of September 30, 2019 | 188,201 | | | 62 | | | 34,450 | | | 11 | | | 228,881 | | | 76 | | | 960,451 | | | 1,242,437 | | | (49,371) | | | $ | 2,153,666 | | |
| Balance as of September 30, 2020 | | Balance as of September 30, 2020 | 188,534 | | | $ | 62 | | | 34,450 | | | $ | 11 | | | 231,685 | | | $ | 77 | | | $ | 1,050,983 | | | $ | 490,071 | | | $ | (70,858) | | | $ | 1,470,346 | |
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Stockholders' Equity (continued)
(In thousands)
| | | Class A
Common Stock | | Class B
Convertible
Common Stock | | Class C
Common Stock | | Additional Paid-in-Capital | | Retained
Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total
Equity | | Class A
Common Stock | | Class B
Convertible
Common Stock | | Class C
Common Stock | | Additional Paid-in-Capital | | Retained
Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total
Equity |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| Balance as of June 30, 2020 | 188,461 | | | 62 | | | 34,450 | | | 11 | | | 231,354 | | | 77 | | | 1,044,055 | | | 450,750 | | | (71,541) | | | $ | 1,423,414 | | |
| Balance as of June 30, 2021 | | Balance as of June 30, 2021 | 188,625 | | | $ | 63 | | | 34,450 | | | $ | 11 | | | 245,144 | | | $ | 81 | | | $ | 1,084,018 | | | $ | 806,140 | | | $ | (43,603) | | | $ | 1,846,710 | |
| | Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | | Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | — | | | — | | | — | | | — | | | (52) | | | — | | | — | | | (920) | | | — | | | (920) | |
| Issuance of Class A Common Stock, net of forfeitures | | Issuance of Class A Common Stock, net of forfeitures | 20 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of Class C Common Stock, net of forfeitures | | Issuance of Class C Common Stock, net of forfeitures | — | | | — | | | — | | | — | | | 7,900 | | | 3 | | | 1,790 | | | — | | | — | | | 1,793 | |
| Stock-based compensation expense | | Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 11,048 | | | — | | | — | | | 11,048 | |
| Comprehensive income (loss) | | Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 113,444 | | | 5,674 | | | 119,118 | |
| Balance as of September 30, 2021 | | Balance as of September 30, 2021 | 188,645 | | | $ | 63 | | | 34,450 | | | $ | 11 | | | 252,992 | | | $ | 84 | | | $ | 1,096,856 | | | $ | 918,664 | | | $ | (37,929) | | | $ | 1,977,749 | |
| | Balance as of December 31, 2020 | | Balance as of December 31, 2020 | 188,603 | | | 62 | | | 34,450 | | | 11 | | | 231,954 | | | 77 | | | 1,061,173 | | | 673,855 | | | (59,185) | | | 1,675,993 | |
| Exercise of stock options | Exercise of stock options | 2 | | | — | | | — | | | — | | | 2 | | | — | | | 18 | | | — | | | — | | | $ | 18 | | Exercise of stock options | 6 | | | 1 | | | — | | | — | | | 7 | | | — | | | 23 | | | — | | | — | | | 24 | |
| Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | — | | | — | | | — | | | — | | | (57) | | | — | | | — | | | 375 | | | — | | | $ | 375 | | Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | — | | | — | | | — | | | — | | | (291) | | | — | | | — | | | (5,594) | | | — | | | (5,594) | |
| Issuance of Class A Common Stock, net of forfeitures | Issuance of Class A Common Stock, net of forfeitures | 71 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | $ | — | | Issuance of Class A Common Stock, net of forfeitures | 36 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of Class C Common Stock, net of forfeitures | Issuance of Class C Common Stock, net of forfeitures | — | | | — | | | — | | | — | | | 386 | | | — | | | 978 | | | — | | | — | | | $ | 978 | | Issuance of Class C Common Stock, net of forfeitures | — | | | — | | | — | | | — | | | 21,322 | | | 7 | | | 2,708 | | | — | | | — | | | 2,715 | |
| Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 9,513 | | | — | | | — | | | $ | 9,513 | | Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 32,952 | | | — | | | — | | | 32,952 | |
| Equity Component value of convertible note issuance, net | — | | | — | | | — | | | — | | | — | | | — | | | (3,581) | | | — | | | — | | | $ | (3,581) | | |
| Comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 38,946 | | | 683 | | | 39,629 | | |
| Balance as of September 30, 2020 | 188,534 | | | 62 | | | 34,450 | | | 11 | | | 231,685 | | | 77 | | | 1,050,983 | | | 490,071 | | | (70,858) | | | $ | 1,470,346 | | |
| | Balance as of December 31, 2019 | 188,290 | | | 62 | | | 34,450 | | | 11 | | | 229,028 | | | 76 | | | 973,717 | | | 1,226,986 | | | (50,765) | | | $ | 2,150,087 | | |
| Exercise of stock options | 147 | | | — | | | — | | | — | | | 135 | | | — | | | 517 | | | — | | | — | | | $ | 517 | | |
| Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | (1) | | | — | | | — | | | — | | | (233) | | | — | | | — | | | (3,285) | | | — | | | $ | (3,285) | | |
| Issuance of Class A Common Stock, net of forfeitures | 98 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | $ | — | | |
| Issuance of Class C Common Stock, net of forfeitures | — | | | — | | | — | | | — | | | 2,755 | | | 1 | | | 3,637 | | | — | | | — | | | $ | 3,638 | | |
| Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 32,770 | | | — | | | — | | | $ | 32,770 | | |
| Equity Component value of convertible note issuance, net | — | | | — | | | — | | | — | | | — | | | — | | | 40,342 | | | — | | | — | | | $ | 40,342 | | |
| Comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (733,630) | | | (20,093) | | | (753,723) | | |
| Balance as of September 30, 2020 | 188,534 | | | 62 | | | 34,450 | | | 11 | | | 231,685 | | | 77 | | | 1,050,983 | | | 490,071 | | | (70,858) | | | $ | 1,470,346 | | |
| Comprehensive income (loss) | | Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 250,403 | | | 21,256 | | | 271,659 | |
| Balance as of September 30, 2021 | | Balance as of September 30, 2021 | 188,645 | | | $ | 63 | | | 34,450 | | | $ | 11 | | | 252,992 | | | $ | 84 | | | $ | 1,096,856 | | | $ | 918,664 | | | $ | (37,929) | | | $ | 1,977,749 | |
See accompanying notes.
Under Armour, Inc. and Subsidiaries`
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
| | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| Cash flows from operating activities | Cash flows from operating activities | | | | Cash flows from operating activities | | | |
| Net income (loss) | Net income (loss) | $ | (733,630) | | | $ | 107,443 | | Net income (loss) | $ | 250,403 | | | $ | (733,630) | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities | Adjustments to reconcile net income (loss) to net cash used in operating activities | | Adjustments to reconcile net income (loss) to net cash used in operating activities | |
| Depreciation and amortization | Depreciation and amortization | 124,169 | | | 140,443 | | Depreciation and amortization | 107,847 | | | 124,169 | |
| Unrealized foreign currency exchange rate gain (loss) | Unrealized foreign currency exchange rate gain (loss) | (3,676) | | | 12,885 | | Unrealized foreign currency exchange rate gain (loss) | 12,353 | | | (3,676) | |
| Loss on extinguishment of senior convertible notes | | Loss on extinguishment of senior convertible notes | 58,526 | | | — | |
| Loss on disposal of property and equipment | Loss on disposal of property and equipment | 3,547 | | | 2,884 | | Loss on disposal of property and equipment | 2,624 | | | 3,547 | |
| Impairment charges | 452,945 | | | 0 | | |
| Non-cash restructuring and impairment charges | | Non-cash restructuring and impairment charges | 11,903 | | | 452,945 | |
| Amortization of bond premium | Amortization of bond premium | 6,910 | | | 190 | | Amortization of bond premium | 19,902 | | | 6,910 | |
| Stock-based compensation | Stock-based compensation | 32,770 | | | 38,048 | | Stock-based compensation | 32,953 | | | 32,770 | |
| Deferred income taxes | Deferred income taxes | 19,172 | | | 23,827 | | Deferred income taxes | (23,414) | | | 19,172 | |
| Changes in reserves and allowances | Changes in reserves and allowances | 22,910 | | | (22,778) | | Changes in reserves and allowances | (19,215) | | | 22,910 | |
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
| Accounts receivable | Accounts receivable | (105,874) | | | (187,585) | | Accounts receivable | (200,079) | | | (105,874) | |
| Inventories | Inventories | (159,930) | | | 123,364 | | Inventories | 64,202 | | | (159,930) | |
| Prepaid expenses and other assets | Prepaid expenses and other assets | 64,404 | | | 73,753 | | Prepaid expenses and other assets | (3,738) | | | 64,404 | |
| Other non-current assets | Other non-current assets | (288,111) | | | 5,939 | | Other non-current assets | 52,179 | | | (288,111) | |
| Accounts payable | Accounts payable | 17,972 | | | (67,336) | | Accounts payable | (36,913) | | | 17,972 | |
| Accrued expenses and other liabilities | Accrued expenses and other liabilities | 301,720 | | | (52,466) | | Accrued expenses and other liabilities | (123,273) | | | 301,720 | |
| Customer refund liability | Customer refund liability | (23,164) | | | (88,710) | | Customer refund liability | (29,072) | | | (23,164) | |
| Income taxes payable and receivable | Income taxes payable and receivable | 18,159 | | | (7,433) | | Income taxes payable and receivable | 32,680 | | | 18,159 | |
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | (249,707) | | | 102,468 | | Net cash provided by (used in) operating activities | 209,868 | | | (249,707) | |
| Cash flows from investing activities | Cash flows from investing activities | | Cash flows from investing activities | |
| Purchases of property and equipment | Purchases of property and equipment | (71,639) | | | (105,767) | | Purchases of property and equipment | (57,660) | | | (71,639) | |
| Purchases of other assets | 0 | | | (1,273) | | |
| Sale of property and equipment | | Sale of property and equipment | 1,413 | | | — | |
| Purchase of businesses | Purchase of businesses | (38,848) | | | 0 | | Purchase of businesses | — | | | (38,848) | |
| Net cash used in investing activities | Net cash used in investing activities | (110,487) | | | (107,040) | | Net cash used in investing activities | (56,247) | | | (110,487) | |
| Cash flows from financing activities | Cash flows from financing activities | | Cash flows from financing activities | |
| Proceeds from long term debt and revolving credit facility | Proceeds from long term debt and revolving credit facility | 1,288,753 | | | 25,000 | | Proceeds from long term debt and revolving credit facility | — | | | 1,288,753 | |
| Payments on long term debt and revolving credit facility | Payments on long term debt and revolving credit facility | (800,000) | | | (162,817) | | Payments on long term debt and revolving credit facility | (506,280) | | | (800,000) | |
| Proceeds from capped call | | Proceeds from capped call | 91,722 | | | — | |
| Purchase of capped call | Purchase of capped call | (47,850) | | | 0 | | Purchase of capped call | — | | | (47,850) | |
| | Employee taxes paid for shares withheld for income taxes | Employee taxes paid for shares withheld for income taxes | (3,285) | | | (4,088) | | Employee taxes paid for shares withheld for income taxes | (5,623) | | | (3,285) | |
| Proceeds from exercise of stock options and other stock issuances | Proceeds from exercise of stock options and other stock issuances | 3,855 | | | 5,797 | | Proceeds from exercise of stock options and other stock issuances | 2,739 | | | 3,855 | |
| Payments of debt financing costs | Payments of debt financing costs | (5,150) | | | (2,661) | | Payments of debt financing costs | — | | | (5,150) | |
| Other financing fees | 0 | | | 77 | | |
| | Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | 436,323 | | | (138,692) | | Net cash provided by (used in) financing activities | (417,442) | | | 436,323 | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | Effect of exchange rate changes on cash, cash equivalents and restricted cash | 2,398 | | | 4,809 | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | 1,708 | | | 2,398 | |
| Net increase in (decrease in) cash, cash equivalents and restricted cash | Net increase in (decrease in) cash, cash equivalents and restricted cash | 78,527 | | | (138,455) | | Net increase in (decrease in) cash, cash equivalents and restricted cash | (262,113) | | | 78,527 | |
| Cash, cash equivalents and restricted cash | Cash, cash equivalents and restricted cash | | | | Cash, cash equivalents and restricted cash | | | |
| Beginning of period | Beginning of period | 796,008 | | | 566,060 | | Beginning of period | 1,528,515 | | | 796,008 | |
| End of period | End of period | $ | 874,535 | | | $ | 427,605 | | End of period | $ | 1,266,402 | | | $ | 874,535 | |
| | Non-cash investing and financing activities | Non-cash investing and financing activities | | Non-cash investing and financing activities | |
| Change in accrual for property and equipment | Change in accrual for property and equipment | $ | (12,449) | | | $ | (15,620) | | Change in accrual for property and equipment | $ | (4,704) | | | $ | (12,449) | |
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
NOTE 1. Description of the DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Business
Under Armour, Inc. and(together with its wholly owned subsidiaries, (thethe "Company") is a developer, marketer, and distributor of branded athletic performance apparel, footwear, and accessories. The Company creates products engineered to solve problems and make athletes better, as well as digital health and fitness apps built to connect people and drive performance.better. The Company's products are made, sold, and worn worldwide.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company.Under Armour, Inc. and its wholly owned subsidiaries. Certain information in footnote disclosures normally included in annual financial statements waswere condensed or omitted for the interim periods presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim consolidated financial statements. These unaudited condensed consolidated financial statements are presented in U.S. Dollars. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement of the financial position and results of operations were included. Intercompany balances and transactions were eliminated upon consolidation. The unaudited condensed consolidated balance sheet as of December 31, 2019September 30, 2021 is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 ("Fiscal 2020"), filed with the SEC on February 24, 2021 ("Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”Fiscal 2020"), which should be read in conjunction with these unaudited condensed consolidated financial statements. The unaudited results for the three and nine months ended September 30, 2020,2021, are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2020,2021 ("Fiscal 2021"), or any other portions thereof.
On March 2, 2020,Connected Fitness
Prior to January 1, 2021, the Company's previously reported "Connected Fitness" segment was composed of digital subscription and advertising conducted through various platforms, predominantly the MyFitnessPal, MapMyFitness, consisting of applications such as MapMyRun and MapMyRide (collectively "MMR"), and Endomondo platforms. While the Company acquired, on a cash free, debt free basis, 100% of Triple Pte. Ltd. ("Triple"), a distributorcontinues to operate the MMR platforms, MyFitnessPal was sold in December 2020 and Endomondo was wound down in December 2020 as part of the Company's products2020 restructuring plan. As a result of these changes, beginning in Southeast Asia.the first quarter of Fiscal 2021, the Company no longer reports Connected Fitness as a discrete reportable segment. The operating results of operations of this acquisitionMMR are now included within the Company’s Corporate Other segment. Where applicable, all prior periods that used to separately reflect financial information about the Connected Fitness business have been recast to be included within the Corporate Other reportable segment, in order to conform with current period presentation. Such reclassifications did not affect total consolidated net revenues, consolidated income from operations or consolidated net income.
Management Estimates and COVID-19 Update
The preparation of financial statements in conformity with thoseU.S. GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates, judgments and assumptions are evaluated on an on-going basis. The Company beginningbases its estimates on March 2, 2020. Referhistorical experience and on various other assumptions that it believes are reasonable at that time; however, actual results could differ from these estimates.
Further, COVID-19 continues to Note 4 for a discussionsignificantly impact the global economy. As the impacts of the acquisition.
COVID-19
In March 2020, a novel strain of coronavirus (COVID-19) was declared a global pandemic bycontinue to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment. The extent to which the World Health Organization. Thisevolving pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures and orders to “shelter-in-place”. The Company has been focused on protecting the health and safety of its teammates, athletes and consumers, working with its customers and suppliers to minimize potential disruptions and supporting the community to address challenges posed by the global pandemic, while managingimpacts the Company's business in response tofinancial statements will depend on a changing dynamic. The Company's business operations and financial performance for the three and nine months ended September 30, 2020 were materially impacted by COVID-19. These impacts are discussed within these notes to the unaudited consolidated financial statements,number of factors including, but not limited to, discussions relatedany new information that may emerge concerning the severity of COVID-19 and the actions that governments around the world may take to long-lived asset and goodwill impairment, leases, long term debt, and income taxes.
In response tocontain the pandemic, global legislation, including the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, were announced. The Company recognized certain incentives totaling $1.5 million and $6.6 million for the three and nine months ended September 30, 2020. The incentives were recorded as a reduction of the associated costs whichvirus or treat its impact. While the Company incurred within selling, generalbelieves it has made appropriate accounting estimates and administrative expensesassumptions based on the facts and circumstances available as of this reporting date, the Company may experience further impacts based on long-term effects on the Company's customers and the countries in which the
Company operates. Please see the risk factors discussed in Part I, Item 1A "Risk Factors" in the unaudited consolidated statement of operations. Further, the CARES Act includes modification to income tax provisions. Refer to Note 12Company's Annual Report on Form 10-K for discussion of the impacts of modifications to income tax provisions under the CARES Act.Fiscal 2020.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. The Company's restricted cash is reserved for payments related to claims for its captive insurance program, which is included in prepaid expenses and other current assets on the Company's unaudited condensed consolidated balance sheets.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported withinto the balances shown in the unaudited consolidated balance sheets to the unauditedcondensed consolidated statements of cash flows.
| | (In thousands) | (In thousands) | September 30, 2020 | | December 31, 2019 | | September 30, 2019 | (In thousands) | September 30, 2021 | | December 31, 2020 | | September 30, 2020 |
| Cash and cash equivalents | Cash and cash equivalents | $ | 865,609 | | | $ | 788,072 | | | $ | 416,603 | | Cash and cash equivalents | $ | 1,253,706 | | | $ | 1,517,361 | | | $ | 865,609 | |
| Restricted cash | Restricted cash | 8,926 | | | 7,936 | | | 11,002 | | Restricted cash | 12,696 | | | 11,154 | | | 8,926 | |
| Total Cash, cash equivalents and restricted cash | $ | 874,535 | | | $ | 796,008 | | | $ | 427,605 | | |
| Total cash, cash equivalents and restricted cash | | Total cash, cash equivalents and restricted cash | $ | 1,266,402 | | | $ | 1,528,515 | | | $ | 874,535 | |
Concentration of Credit Risk
Financial instruments that subject the Company to significant concentration of credit risk consist primarily of accounts receivable. The majority of the Company’s accounts receivable is due from large wholesale customers. One of the Company's customers accounted for more than 10.0% of the accounts receivable balance as of September 30, 2021. None of the Company's customers accounted for more than 10% of the accounts receivable balance as of December 31, 2020 and September 30, 2020, and December 31, 2019, respectively. One of the Company's customers accounted for 10% of accounts receivable as of September 30, 2019. For the three and nine months ended September 30, 20202021, one customer in North America accounted for more than 10% of the Company's net revenues. For the three and 2019,nine months ended September 30, 2020, no customer accounted for more than 10% of the Company's net revenues. Given the current global economic environment and impacts of COVID-19, theThe Company regularly evaluates the credit risk of the large wholesale customers which make up the majority of the Company's accounts receivable. Refer to the "Credit Losses - Allowance for Doubtful Accounts" below for a discussion of the evaluation of credit losses.
Sale of Accounts Receivable
The Company has an agreement with a financial institution to sell selected accounts receivable on a recurring, non-recourse basis. Under the agreement, at any time and from time to time the balance of up to $140.0 million of the Company's accounts receivable may be sold to the financial institution. The Company's ability to utilize these agreements, however, may be limited by the credit ratings of the Company's customers. The Company removes the sold accounts receivable from the unaudited consolidated balance sheets at the time of sale. The Company does not retain any interests in the sold accounts receivable. The Company acts as the collection agent for the outstanding accounts receivable on behalf of the financial institutions.
As of September 30, 2020, December 31, 2019 and September 30, 2019, no amounts remained outstanding under these agreements. The funding fee charged by the financial institutions is included in the other income (expense), net line item in the unaudited consolidated statement of operations.
Credit Losses - Allowance for Doubtful Accounts
Credit losses are the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit losses primarily through customer receivables associated with the salessale of productproducts within the Company's wholesale and Connected Fitness channels, recorded inwithin accounts receivable, net on the Company's unaudited condensed consolidated balance sheet. The Company also has other receivables, including receivables from licensing arrangements recorded in prepaid expenses and other current assets on the Company's unaudited condensed consolidated balance sheet.
Credit is extended to customers based on a credit review. The credit review considers each customer’s financial condition, including a review of the customers established credit rating or, if an established customer rating is not available, then the Company's assessment of the customer’s creditworthiness is based on their financial statements, absent a credit rating, local industry practices, and business strategy. A credit limit and terms of credit are established for each customer based on the outcome of this review. The Company actively monitors ongoing credit exposure through review of customer balances against terms and payments against due dates. To mitigate credit risk, the Company may require customers to provide security in the form of guarantees, letters of credit, or prepayment. The Company is also exposed to credit losses through credit card receivables associated with the salessale of products within the Company's direct to consumerdirect-to-consumer channel.
The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of customer accounts. The Company makes ongoing estimates relating to the collectibility of accounts receivable and records an allowance for estimated losses resultingexpected from the inability of its customers to make required payments. The Company establishes expected credit losses by evaluating historical levels of credit losses, current economic conditions that may affect a customer’s ability to pay, and creditworthiness of significant customers. These inputs are used to determine a range of expected credit losses and an allowance is recorded within the range. Accounts receivable are written off when there is no reasonable expectation of recovery.
| | | | | | | | | | | | | | |
| (In thousands) | Balance as of
June 30, 2020 | Charged to
Costs and
Expenses | Write-Offs
Net of
Recoveries | Balance as of
September 30, 2020 |
Allowance for doubtful accounts -
accounts receivable, net | $ | 29,658 | | $ | (1,103) | | $ | (154) | | $ | 28,401 | |
Allowance for doubtful accounts -
prepaid expenses and other current assets | $ | 7,359 | | $ | 9 | | $ | 0 | | $ | 7,368 | |
| | | | | | | | | | | | | | |
| (In thousands) | Balance as of December 31, 2019 | Charged to
Costs and
Expenses | Write-Offs
Net of
Recoveries | Balance as of
September 30, 2020 |
Allowance for doubtful accounts -
accounts receivable, net | $ | 15,083 | | $ | 13,504 | | $ | (186) | | $ | 28,401 | |
Allowance for doubtful accounts -
prepaid expenses and other current assets | $ | 0 | | $ | 7,368 | | $ | 0 | | $ | 7,368 | |
ForThe following table illustrates the
three months ended September 30, 2020, the decreaseactivity in the
reserve is primarily due to the collection of account balances that were previously reserved for. For the nine months ended September 30, 2020, the increase in the reserve is primarily due to the evaluation of certain account balances in connection with negative developments that represent a higher risk of credit default. Company's allowance for doubtful accounts:
| | | | | | | | | | | | | | |
| (In thousands) | Balance as of
December 31, 2020 | Increases (decreases) to
Costs and
Expenses | Write-Offs
Net of
Recoveries | Balance as of
September 30, 2021 |
Allowance for doubtful accounts -
within accounts receivable, net | $ | 20,350 | | $ | (4,149) | | $ | (2,100) | | $ | 14,101 | |
Allowance for doubtful accounts -
within prepaid expenses and other current assets | $ | 7,029 | | $ | — | | $ | — | | $ | 7,029 | |
The allowance for doubtful accounts was established with information available as of September 30, 2021, including reasonable and supportable estimates of future risk to the Company as of September 30, 2020. There may be further impacts due to COVID-19.
As of September 30, 2019, the allowance for doubtful accounts was $16.5 million.risk.
Revenue Recognition
The Company recognizes revenue pursuant to Accounting Standards Codification 606 ("ASC 606"). Net revenues consist of net sales of apparel, footwear and accessories, license revenues and Connected Fitness revenue. revenues from digital subscriptions and advertising.
The Company recognizes revenue when it satisfies its performance obligations by transferring control of promised products or services to its customers, which occurs either at a point in time or over time, depending on when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that the Company ultimately expects to be entitled to in exchange for the products or services and is subject to an overall constraint that a significant revenue reversal will not occur in future periods. Sales taxes imposed on the Company’s revenues from product sales are presented on a net basis on the unaudited condensed consolidated statements of operations, and therefore do not impact net revenues or costs of goods sold.
Revenue transactions associated with the sale of apparel, footwear, and accessories, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumerdirect-to-consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control has passed to the customer, based on the terms of sale. In the Company’s wholesale channel, transfer of control is based upon shipment under free on board shipping point for most goods or upon receipt by the customer depending on the country of the sale and the agreement with the customer. The Company may also ship product directly from its supplier to wholesale customers and recognize revenue when the product is delivered to and accepted by the customer. In the Company’s direct to consumerdirect-to-consumer channel, transfer of control takes place at the point of sale for brand and factory house customers and upon shipment to substantially all e-commerce customers. Payment terms for wholesale transactions are established in accordance with local and industry practices. Payment is generally required within 30 to 60 days of shipment to or receipt by the wholesale customer in the United States, and generally within 60 to 90 days of shipment to or receipt by the wholesale customer internationally. The Company has provided extensions to standard payment terms for certain customers in connection with COVID-19. Payment is generally due at the time of sale for direct to consumerdirect-to-consumer transactions.
Gift cards issued to customers by the Company are recorded as contract liabilities until they are redeemed, at which point revenue is recognized. The Company also estimates and recognizes revenue for gift card balances not expected to ever be redeemed ("breakage") to the extent that it does not have a legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdiction as unclaimed or abandoned property. Such estimates are based upon historical redemption trends, with breakage income recognized in proportion to the pattern of actual customer redemptions.
Revenue from the Company's licensing arrangements is recognized over time during the period that licensees are provided access to the Company's trademarks and benefit from such access through their sales of licensed products. These arrangements require licensees to pay a sales-based royalty, which for most arrangements may be subject to a contractually guaranteed minimum royalty amount. Payments are generally due quarterly. The Company recognizes revenue for sales-based royalty arrangements (including those for which the royalty exceeds any contractually guaranteed minimum royalty amount) as licensed products are sold by the licensee. If a sales-based royalty is not ultimately expected to exceed a contractually guaranteed minimum royalty amount, the minimum is recognized as revenue over the contractual period, if all other criteria of revenue recognition have been met. This sales-based output measure of progress and pattern of recognition best represents the value transferred to the licensee over the term of the arrangement, as well as the amount of consideration that the Company is entitled to receive in exchange for providing access to its trademarks.
Revenue from Connected Fitnessdigital subscriptions is recognized on a gross basis and is recognized over the term of the subscription. The Company receives payments in advance of revenue recognition for subscriptions and these
payments are recorded as contract liabilities in the Company's unaudited condensed consolidated balance sheet. Related commission cost is included in selling, general and administrative expense in the unaudited condensed consolidated statement of operations. Revenue from Connected Fitness digital advertising is recognized as the Company satisfies performance obligations pursuant to customer insertion orders.
The Company records reductions to revenue for estimated customer returns, allowances, markdowns, and discounts. The Company bases its estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns and allowances that have not yet been received by the Company. The actual amount of customer returns and allowances, which is inherently uncertain, may differ from the Company’s estimates. If the Company determines that actual or expected returns or allowances are significantly higher or lower than the reserves it established, it would record a reduction or increase, as appropriate, to net sales in the period in which it makes such a determination. Provisions for customer specific discounts are based on negotiated arrangements with certain major customers. Reserves for returns, allowances, markdowns, and discounts are included within customer refund liability and the value of inventory associated with reserves for sales returns are included within prepaid expenses and other current assets on the unaudited condensed consolidated balance sheet. TheAt a minimum, the Company reviews and refines these estimates on at least a quarterly basis. As of September 30, 2020, December 31, 2019 and September 30, 2019, there were $197.5 million, $219.4 million and $209.8 million, respectively, in reserves for returns, allowances, markdowns and discounts within
The following table presents the customer refund liability, and $50.8 million, $61.1 million and $58.7 million, respectively,as well as the estimatedassociated value of inventory associated withfor the reserves for sales returns within prepaid expenses and other current assets on the unaudited consolidated balance sheet.periods indicated: | | | | | | | | | | | | | | | | | |
| (In thousands) | Balance as of
September 30, 2021 | | Balance as of
December 31, 2020 | | Balance as of
September 30, 2020 |
| Customer refund liability | $ | 174,274 | | | $ | 203,399 | | | $ | 197,496 | |
| Inventory associated with the reserves | $ | 50,544 | | | $ | 57,867 | | | $ | 50,779 | |
Contract Liabilities
Contract liabilities are recorded when a customer pays consideration, or the Company has a right to an amount of consideration that is unconditional, before the transfer of a good or service to the customer, and thus represent the Company's obligation to transfer the good or service to the customer at a future date. The Company's contract liabilities primarily consist of payments received in advance of revenue recognition for subscriptions for the Company's Connected Fitnessdigital fitness applications and royalty arrangements, included in other current and other long-term liabilities, and gift cards, included in accrued expenses, on the Company's unaudited condensed consolidated balance sheets. As of September 30, 2020,2021, December 31, 2019,2020, and September 30, 2019,2020, contract liabilities were $64.9$24.3 million, $60.4$26.7 million and $60.6$64.9 million, respectively.
For the three and nine months ended September 30, 2021, the Company recognized $3.1 million and $10.8 million, respectively, of revenue that was previously included in contract liabilities as of December 31, 2020. For the three and nine months ended September 30, 2020, the Company recognized $9.9 million and $21.2 million, respectively, of revenue that was previously included in contract liabilities as of December 31, 2019. For the three and nine months ended September 30, 2019, the Company recognized $9.2 million and $22.6 million of revenue that was previously included in contract liabilities as of December 31, 2018. The change in the contract liabilities balance primarily results from the timing differences between the Company's satisfaction of performance obligations and the customer's payment. Commissions related to subscription revenue are capitalized and recognized over the subscription period.
Shipping and Handling Costs
The Company charges certain customers shipping and handling fees. These fees based on contractual terms, which are recorded in net revenues. The Company incurs freight costs associated with shipping goods to customers. These costs are recorded as a component of cost of goods sold.
The Company also incurs outbound handling costs associated with preparing goods to ship to customers and certain costs to operate the Company’s distribution facilities. These costs are recorded as a component of selling, general and administrative expensesexpenses. For the three and were $21.2 million and $20.8 million for the threenine months ended September 30, 2020 and 2019, respectively, and $61.22021, these costs totaled $13.8 million and $63.0$63.3 million, for therespectively, (three and nine months ended September 30, 2020 - $21.2 million and 2019, respectively.$61.2 million, respectively).
Equity Method Investment
The Company has a common stock investment of 29.5% in Dome Corporation ("Dome"), the Company's Japanese licensee. The Company accounts for its investment in Dome under the equity method, given it has the ability to exercise significant influence, but not control, over Dome.
In the first quarter of 2020, the Company performed a qualitative assessment of potential impairment indicators for its investment in Dome and determined that indicators of impairment existed due to impacts from COVID-19. The Company performed a valuation of its investment in Dome and determined that the fair value of its investment was less than its carrying value by $3.7 million. The Company determined this decline in value to be other-than-temporary considering Dome's near and long-term financial forecast. Accordingly, the Company's results for the nine months ended September 30, 2020 include the impact of recording a $3.7 million impairment of the Company's equity method investment in Dome during the first quarter, which reduced the carrying value to 0. The impairment charge was recorded within income (loss) from equity method investment on the unaudited consolidated statements of operations and as a reduction to the invested balance within other long term assets on the unaudited consolidated balance sheets. The Company calculated fair value using the discounted cash flows model, which indicates the fair value of the investment based on the present value of the cash flows that it expects the investment to generate in the future.
As of September 30, 2020, December 31, 2019 and September 30, 2019 there was 0 carrying value, $5.1 million, and $47.4 million, respectively, associated with the Company’s equity investment in Dome. The Company did 0t record its allocable share of Dome's net loss for the three months ended September 30, 2020 as losses are not recognized in excess of the total investment. The Company recorded its allocable share of Dome’s net lossincome (loss) of $1.2$0 and $1.8 million for the three and nine months ended September 30, 2019,2021, respectively, (three and $1.4 million and $5.4 million for the nine months ended September 30, 2020 - $0 and 2019, respectively,$(1.4) million, respectively) within income
(loss) from equity method investment on the unaudited condensed consolidated statements of operations and as an adjustment to the invested balance within other long term assets on the unaudited condensed consolidated balance sheets. As of September 30, 2021, the carrying value of the Company's investment in Dome was $1.8 million. The Company's investment in Dome had no carrying value as of December 31, 2020 and September 30, 2020.
In addition to the investment in Dome, the Company has a license agreement with Dome. The Company recorded license revenues from Dome of $10.9$11.1 million and $9.2$22.9 million for the three and nine months ended September 30, 20202021, respectively (three and 2019, respectively, and $17.4 million and $20.9 million for the nine months ended September 30, 2020 and 2019, respectively. Of the- $10.9 million of license revenues recorded for the three months ended September 30, 2020, $3.0and $17.4 million, was related to license revenues earned in the three months ended June 30, 2020 but collected in the third quarter, as the Company had previously deemed the collection of this amount not probable.respectively). As of September 30, 2020,2021, December 31, 2019,2020, and September 30, 2019,2020, the Company had $8.5$8.9 million, $15.6$22.9 million, and $9.1$8.5 million, respectively, in licensing receivables outstanding, recorded in the prepaid expenses and other current assets line item within the Company's unaudited condensed consolidated balance sheets.
On March 2, 2020, as part of the Company's acquisition of Triple Pte. Ltd., the Company assumed 49.5% of common stock ownership in UA Sports (Thailand) Co., Ltd. (“UA Sports Thailand”). The Company accounts for its investment in UA Sports Thailand under the equity method, given it has the ability to exercise significant influence, but not control, over UA Sports Thailand. For the three and nine months ended September 30, 2020,2021, the Company recorded the allocable share of UA Sports Thailand’s net lossincome (loss) of $(921) thousand and $(873) thousand, respectively (three and nine months ended September 30, 2020 - $1.2 million and $1.8 million, respectively,respectively) within income (loss) from equity method investment on the unaudited condensed consolidated statements of operations and as an adjustment to the invested balance within other long term assets on the unaudited condensed consolidated balance sheets. As of September 30, 2021, December 31, 2020, and September 30, 2020, the carrying value of the Company’s total investment in UA Sports Thailand was $4.7 million, $4.5 million and $3.7 million. Refer to Note 4 for discussion of the acquisition.
Management Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Further, the full impact of COVID-19 cannot reasonably be estimated. The Company has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of the reporting date. The Company may experience further impacts based on long-term effects on the Company's customers and the countries in which the Company operates. As a result of these uncertainties, actual results could differ from those estimates and assumptions.million, respectively.
Recently Issued Accounting Standards
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06 "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)" ("ASU 2020-06.2020-06"). The amendment in this update simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. The update also requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The guidance is effective for interim and annual periods beginning after December 15, 2021. The Company is currently evaluatingdoes not expect this guidance to determine thehave a material impact it may have on its unaudited condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting. TheReporting and then issued a subsequent amendment to the initial guidance under ASU 2021-01 (collectively Topic 848). Topic 848 provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, derivatives and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, derivatives and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. This ASU is currently effective and upon adoption may be applied prospectively to contract modifications and hedging relationships made on or before December 31, 2022. The Company is currently evaluating this guidanceadopted Topic 848 in the third quarter of Fiscal 2021. The adoption did not have an impact to determine the impact it may have on itsCompany's unaudited condensed consolidated financial statements.
Recently Adopted Accounting Standards
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting for income taxes. The ASU impacts various topic areas within ASC 740, including accounting for taxes under hybrid tax regimes, accounting for increases in goodwill, allocation of tax amounts to separate company financial statements within a group that files a consolidated tax return, intraperiod tax allocation, interim period accounting, and accounting for ownership changes in investments, among other minor codification improvements. The guidance in this ASU becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and may be early adopted. The Company has elected to early adopt this standard as of January 1, 2020. The adoption of this ASU did not have a material impact on the unaudited consolidated financial statements or disclosures in 2020. The aspect of this ASU which may have the most significant impact to the Company in future periods is the removal of a limit on the tax benefit recognized on pre-tax losses in interim periods that exceeds the anticipated tax benefit for the full year.
In June 2016, the FASB issued ASU 2016-13 - Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amended the impairment model to utilize an expected loss methodology in place of the previously used incurred loss methodology, which results in more timely recognition of losses. The new standard applies to financial assets measured at amortized cost basis, including receivables that result from revenue transactions. The Company adopted this ASU on January 1, 2020 and there was no material impact to the unaudited consolidated financial statements as of the date of adoption. Results for reporting periods as of January 1, 2020 are presented under the new standard, while prior results continue to be reported under the previous standard.
NOTE 3. Restructuring and Related Impairment ChargesRESTRUCTURING AND RELATED IMPAIRMENT CHARGES
On March 31,During Fiscal 2020, the Company's Board of Directors approved the previously announceda restructuring plan ("2020 Restructuring"ranging between $550 million to $600 million in costs (the "2020 restructuring plan") designed to rebalance the Company’s cost base to further improve profitability and cash flow generation. The Company identified further opportunities and on September 2, 2020, the Company’s Board of Directors approved a $75 million increase to the restructuring plan, resulting in an updated 2020 restructuring plan of approximately $550 million to $600 million of total estimated pre-tax restructuring and related charges.
The restructuring and related charges primarily consist of up to approximately:
•$224 million of cash restructuring charges, comprised of up to: $63 million in facility and lease termination costs, $30 million in employee severance and benefit costs, and $131 million in contract termination and other restructuring costs; and
•$376 million of non-cash charges comprised of an impairment of $291 million related to the Company’s New York City flagship store and $85 million of intangibles and other asset related impairments.
The Company recorded $70.2 million and $410.3 million of restructuringRestructuring and related impairment charges for the three and nine months ended September 30, 2020, respectively. The summary of the costs recorded during the three and nine months ended September 30, 2020, as well as the Company's current estimates of the amount expected to be incurred in connection with the 2020 restructuring plan is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Restructuring and Related Impairment Charges Recorded | | Estimated Restructuring and Related Impairment Charges |
| (In thousands) | Three months ended September 30, 2020 | | Nine months ended September 30, 2020 (A) | | Remaining to be Incurred (B) | | Total to be Incurred (1)
(A+B) |
| Costs recorded in cost of goods sold: | | | | | | | |
| Contract-based royalties | $ | 0 | | $ | 0 | | $ | 11,000 | | $ | 11,000 |
| Inventory write-offs | 0 | | 0 | | 2,000 | | 2,000 |
| Total costs recorded in cost of goods sold | 0 | | 0 | | 13,000 | | 13,000 |
| | | | | | | |
| Costs recorded in restructuring and related impairment charges: | | | | | | | |
| Property and equipment impairment | 3,307 | | | 26,211 | | | 17,789 | | | 44,000 | |
| Intangible asset impairment | 0 | | | 0 | | | 4,000 | | | 4,000 | |
| ROU asset impairment | 0 | | | 290,813 | | | 4,187 | | | 295,000 | |
| Employee related costs | 26,410 | | | 27,239 | | | 2,761 | | | 30,000 | |
| Contract exit costs (2) | 38,520 | | | 53,462 | | | 124,538 | | | 178,000 | |
| Other restructuring costs | 1,995 | | | 12,533 | | | 23,467 | | | 36,000 | |
| Total costs recorded in restructuring and related impairment charges | 70,232 | | | 410,258 | | | 176,742 | | | 587,000 | |
| Total restructuring and related impairment and restructuring related costs | $ | 70,232 | | | $ | 410,258 | | | $ | 189,742 | | | $ | 600,000 | |
(1) Estimated restructuring and related impairment charges to be incurred reflect the high-end of the range of the estimated remaining charges expected to be taken by the Company in connection with the restructuring plan. The Company currently anticipates that most of the total restructuring and related charges will occur by the end of fiscal 2020.
(2) Contract exit costs are primarily comprised of proposed lease exits of certain brand and factory house stores and office facilities, and proposed marketing and other contract exits.
All restructuring and related impairment charges are included in the Company's Corporate Other non-operating segment, of which $39.1 million are North America related, $11.5 million are EMEA related, $6.1 million are Latin America related, $3.6 million are Asia-Pacific related and $0.1 million are Connected Fitness related for the three months ended September 30, 2020 and $367.4 million are North America related, $11.6 million are EMEA related, $6.4 million are Latin America related, $3.6 million are Asia-Pacific related and $0.1 million are Connected Fitness related for the nine months ended September 30, 2020.
The lease term for the Company's New York City flagship store commenced on March 1, 2020 and an operating lease ROU asset and corresponding operating lease liability of $344.8 million was recorded on the Company's unaudited consolidated balance sheet. In March 2020, as a part of the 2020 Restructuring, the Company made the strategic decision to forgo the opening of its New York City flagship store and the property is actively being marketed for sublease. Accordingly, in the first quarter of 2020, the Company recognized a ROU asset impairment of $290.8 million, reducing the carrying value of the lease asset to its estimated fair value. Fair value was estimated using an income-approach based on management's forecast of future cash flows expected to be derived from the property based on current sublease market rent. Rent expense or sublease income related to
this lease will be recorded within other income (expense) on the unaudited consolidated statements of operations. There were 0 related ROU asset impairment charges for the three months ended September 30, 2020.
These chargesrecoveries require the Company to make certain judgementsjudgments and estimates regarding the amount and timing of restructuring and related impairmentas to when these charges or recoveries.recoveries occur. The estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, the Company conducts an evaluation of the related liabilities and expenses and revises its assumptions and estimates as appropriate, as new or updated information becomes available. As of September 30,
2021, the Company currently estimates total restructuring and related charges associated with the 2020 restructuring plan will range between $525 million to $575 million.
The restructuring and related charges primarily consist of approximately:
•$199 million of cash restructuring charges, of which approximately $28 million relates to employee severance and benefit costs, $14 million relates to facility and lease termination costs and $157 million relates to contract termination and other restructuring costs; and
•$376 million of non-cash charges, of which approximately $291 million relates to an impairment charge on the Company’s New York City flagship store and $85 million relates to intangibles and other asset related impairments.
The Company recorded $16.8 million and $26.9 million of restructuring and related impairment charges for the three and nine months ended September 30, 2021, respectively, and $70.2 million and $410.3 million for the three and nine months ended September 30, 2020, respectively, under the 2020 restructuring plan. As of September 30, 2021, $499.6 million of restructuring and related impairment charges under the 2020 restructuring plan have been recorded to date since the inception of the plan.
The following table illustrates the costs recorded during the three and nine months ended September 30, 2021, as well as the Company's current estimates of the amount expected to be incurred in connection with the 2020 restructuring plan: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Restructuring and Impairment Charges Recorded | | Estimated Restructuring and Impairment Charges (1) |
| (In thousands) | Three months ended September 30, | | Nine months ended September 30, | | Remaining to be Incurred | | Total to be Incurred under plan |
| 2021 | 2020 | | 2021 | 2020 | | | | |
| Costs recorded in cost of goods sold: | | | | | | | | | |
| Contract-based royalties | $ | — | | $ | — | | | $ | — | | $ | — | | | $ | — | | $ | 11,608 |
| Inventory write-offs | 107 | | — | | | 515 | | — | | | 1,000 | | 2,283 |
| Total costs recorded in cost of goods sold | 107 | | — | | | 515 | | — | | | 1,000 | | 13,891 |
| | | | | | | | | |
| Net costs (recoveries) recorded in restructuring and related impairment charges: | | | | | | | | | |
| Property and equipment impairment | 3,064 | | 3,307 | | | 3,064 | | 26,211 | | | — | | | 32,344 | |
| Intangible asset impairment | — | | — | | | — | | — | | | — | | | 4,351 | |
| Right-of-use asset impairment | — | | — | | | — | | 290,813 | | | — | | | 293,495 | |
| Employee related costs | (424) | | 26,410 | | | (845) | | 27,239 | | | — | | | 27,734 | |
| Contract exit costs (2) | 10,794 | | 38,520 | | | 15,041 | | 53,462 | | | 58,999 | | | 153,048 | |
| Other asset write off | 1,055 | | — | | | 2,400 | | — | | | 7,349 | | | 22,823 | |
| Other restructuring costs | 2,167 | | 1,995 | | | 6,722 | | 12,533 | | | 8,028 | | | 27,314 | |
| Total costs recorded in restructuring and impairment charges | 16,656 | | 70,232 | | | 26,382 | | 410,258 | | | 74,376 | | | 561,109 | |
| Total restructuring and impairment charges | $ | 16,763 | | $ | 70,232 | | | $ | 26,897 | | $ | 410,258 | | | $ | 75,376 | | | $ | 575,000 | |
(1) Estimated restructuring and impairment charges reflect the high-end of the range of the estimated charges expected by the Company in connection with the 2020 restructuring plan.
(2) Contract exit costs primarily consist of proposed lease exits of certain brand and factory house stores and office facilities, and proposed marketing and other contract exits.
All restructuring and related impairment charges are included in the Company's Corporate Other segment.
For the three months ended September 30, 2021, approximately $10.5 million of the charges are North America related, $5.9 million are Latin America related and $1.4 million are Asia-Pacific related. These charges were offset by a recovery of $1.1 million related to EMEA.
For the three months ended September 30, 2020, approximately $39.1 million of the charges are North America related, $11.5 million are EMEA related, $6.1 million are Latin America related, and $3.6 million are Asia-Pacific related.
For the nine months ended September 30, 2021, approximately $16.7 million of the charges are North America related, $9.2 million are Latin America related and $2.1 million are Asia-Pacific related. These charges were offset by a recovery of $1.1 million related to EMEA.
For the nine months ended September 30, 2020, approximately $367.4 million of the charges are North America related, $11.6 million are EMEA related, $6.4 million are Latin America related and $3.6 million are Asia-Pacific related.
A summary of the activity in the restructuring reserve related to the Company's 2020 restructuring plan, as well as prior restructuring plans in 2018 and 2017 are as follows:
| | | | | | | | | | | | | | | | | |
| (In thousands) | Employee Related Costs | | Contract Exit Costs | | Other Restructuring Related Costs |
| Balance at January 1, 2020 | $ | 462 | | | $ | 17,843 | | | $ | 0 | |
| Additions charged to expense | 26,930 | | | 42,391 | | | 11,843 | |
| Cash payments charged against reserve | (4,279) | | | (14,618) | | | (3,699) | |
| Changes in reserve estimate | (462) | | | 42 | | | 0 | |
| Balance at September 30, 2020 | $ | 22,651 | | | $ | 45,658 | | | $ | 8,144 | |
| | | | | | | | | | | | | | | | | |
| (In thousands) | Employee Related Costs | | Contract Exit Costs | | Other Restructuring Related Costs |
| Balance at January 1, 2021 | $ | 12,868 | | | $ | 61,642 | | | $ | 6,098 | |
| Net additions (recoveries) charged to expense | (845) | | | 17,814 | | | (872) | |
| Cash payments charged against reserve | (5,471) | | | (45,378) | | | (6,078) | |
| Foreign exchange and other | (1,086) | | | (1,443) | | | 140 | |
| Balance at September 30, 2021 | $ | 5,466 | | | $ | 32,635 | | | $ | (712) | |
4. Acquisition
On March 2, 2020, the Company acquired, on a cash free, debt free basis, 100% of Triple Pte. Ltd. ("Triple"), a distributor of the Company's products in Southeast Asia. The purchase price for the acquisition was $32.9 million in cash, net of $8.9 million of cash acquired that was held by Triple at closing and settlement of $5.1 million in pre-existing trade receivables due from Triple prior to the acquisition. The results of operations of this acquisition have been consolidated with those of the Company beginning on March 2, 2020.
There were 0 acquisition related costs expensed during the three months ended September 30, 2020. The Company recognized $1.0 million in acquisition related costs that were expensed during the nine months ended September 30, 2020. These costs are included in selling, general and administrative expenses within the unaudited consolidated statement of operations. Pro forma results are not presented, as the acquisition was not considered material to the consolidated Company.
5. Long-Lived Asset and Goodwill Impairment
Long-Lived Asset Impairment
As a result of the impacts of COVID-19, the Company determined that sufficient indicators existed to trigger the performance of an interim long-lived asset impairment analysis as of March 31, 2020. In the first quarter of 2020, the Company performed undiscounted cash flow analyses on it's long-lived assets, including retail stores at an individual store level. Based on these undiscounted cash flow analyses, the Company determined that certain long-lived assets had net carrying values that exceeded their estimated undiscounted future cash flows. The Company estimated the fair values of these long-lived assets based on their discounted cash flows or market rent assessments. The Company compared these estimated fair values to the net carrying values. Additionally, the Company recognized long-lived asset impairment charges of $4.0 million for the three months ended September 30, 2020, included within the North America operating segment. The Company recognized $87.8 million of long-lived asset impairment charges for the nine months ended September 30, 2020. The long-lived impairment charge was recorded within restructuring and impairment charges on the unaudited consolidated statements of operations and as a reduction to the related asset balances on the unaudited consolidated balance sheets. The long-lived asset impairment charges are included within the Company's operating segments as follows: $47.4 million recorded in North America, $25.5 million recorded in Asia-Pacific, $12.8 million recorded in Latin America, and $2.1 million recorded in EMEA for the nine months ended September 30, 2020.
The significant estimates used in the fair value methodology, which are based on Level 3 inputs, include: the Company's expectations for future operations and projected cash flows, including net revenue, gross profit and operating expenses and market conditions, including estimated market rent.
Additionally, the Company recognized $290.8 million of long-lived asset impairment charges related to the Company's New York City flagship store, which was recorded in connection with the Company's 2020 Restructuring Plan for the nine months ended September 30, 2020. Refer to Note 3 for further discussion of the restructuring and related impairment charges.
Goodwill Impairment
As a result of the impacts of COVID-19, the Company determined that sufficient indicators existed to trigger an interim goodwill impairment analysis for all of the Company’s reporting units as of March 31, 2020. In the first quarter of 2020, the Company performed discounted cash flow analyses and determined that the estimated fair values of the Latin America reporting unit and the Canada reporting unit, within the North America operating segment, no longer exceeded its carrying value, resulting in an impairment of goodwill. The Company recognized goodwill impairment charges of $51.6 million for the nine months ended September 30, 2020 for these reporting units. The goodwill impairment charge was recorded within restructuring and impairment charges on the unaudited consolidated statements of operations and as a reduction to the goodwill balance on the unaudited consolidated balance sheets. There were 0 triggering events or goodwill impairment charges recorded for the three months ended September 30, 2020.
The determination of the Company’s reporting units' fair value includes assumptions that are subject to various risks and uncertainties. The significant estimates used in the discounted cash flow analyses, which are based on Level 3 inputs, include: the Company’s weighted average cost of capital, adjusted for the risk attributable to the geographic regions of the reporting unit's business, long-term rate of growth and profitability of the reporting unit's business, working capital effects, and changes in market conditions, consumer trends or strategy.
As of March 31, 2020, the fair value of each of the Company's other reporting units substantially exceeded its carrying value with the exception of the EMEA reporting unit. The fair value of the EMEA reporting unit exceeded its carrying value by 16%. Holding all other assumptions used in the fair value measurement of the EMEA reporting unit constant, a reduction in the growth rate of revenue by 1.5 percentage points or a reduction in the growth rate of net income by 2.3 percentage points would eliminate the headroom. No events occurred during the three and nine months ended September 30, 2021, the Company also incurred net costs of $6.4 million and $10.3 million, respectively, associated with abandoned facilities and the write off of fixed assets under the 2020 that indicated it was more likely than not that goodwill was impaired for this reporting unit.
The following table summarizes changes in the carrying amount of the Company’s goodwill by reportable segment as of the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | North America | | EMEA | | Asia-Pacific | | Latin America | | Connected Fitness | | Total |
| Balance as of December 31, 2019 | | 318,288 | | | 106,066 | | | 79,168 | | | 46,656 | | | 0 | | | 550,178 | |
| Effect of currency translation adjustment | | (1,572) | | | 1,076 | | | 5,950 | | | (10,426) | | | 0 | | | (4,972) | |
| Impairment | | (15,345) | | | 0 | | | 0 | | | (36,230) | | | | | (51,575) | |
| Balance as of September 30, 2020 | | $ | 301,371 | | | $ | 107,142 | | | $ | 85,118 | | | $ | 0 | | | $ | 0 | | | $ | 493,631 | |
6. LeasesNOTE 4. LEASES
The Company enters into operating leases both domestically and internationally to lease certain warehouse space, office facilities, space for its brand and factory house stores, and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2035, excluding extensions at the Company's option, and include provisions for rental adjustments.
The Company accounts for a contract as a lease when it has the right to direct the use of the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its right-of-use ("ROU") assets and lease liabilities at the lease commencement date and thereafter if modified. ROU assets represent the Company’s right to control the underlying assets under lease, over the contractual term. ROU assets and lease liabilities are recognized on the unaudited condensed consolidated balance sheets based on the present value of future minimum lease payments to be made over the lease term. ROU assets and lease liabilities are established on the Company's unaudited condensed consolidated balance sheets for leases with an expected term greater than one year. Short-term lease payments were not material for the quarterthree and nine months ended September 30, 2021 and 2020.
As the rate implicit in a lease is not readily determinable, the Company uses its secured incremental borrowing rate to determine the present value of the lease payments. The Company calculates the incremental borrowing rate based on the current market yield curve and adjusts for foreign currency impacts for international leases.
Fixed lease costs are included in the recognition of ROU assets and lease liabilities. Variable lease costs are not included in the measurement of the lease liability. These variable lease payments are recognized in the unaudited condensed consolidated statements of operations in the period in which the obligation for those payments is incurred. Variable lease payments primarily consist of payments dependent on sales in brand and factory house stores. The Company has elected to combine lease and non-lease components in the determination of lease costs for its leases. The lease liability includes lease payments related to options to extend or renew the lease term only if the Company is reasonably certain to exercise those options.
The Company recognizes lease expense on a straight-line basis over the lease term. Included in selling, general and administrative expenses were operating lease costs of $36.9 million and $37.6 million for the three months ended September 30, 2020 and 2019, respectively, and $108.6 million and $113.4 million for the nine months ended September 30, 2020 and 2019, respectively, under non-cancelable operating lease agreements. The operating lease costs include $2.9 million and $3.4 million in variable lease payments, for the three months ended September 30, 2020 and 2019, respectively, and $5.4 million and $8.8 million for the nine months ended September 30, 2020 and 2019, respectively.
As a result of the impacts of COVID-19, the Company sought concessions during Fiscal 2020 from landlords for certain leases of brand and factory house stores in the form of rent deferrals or rent waivers. Consistent with
updated guidance from the FASB in April 2020, the Company elected to account for the accounting policy of treating these concessions as though the enforceable rights and obligations to the deferrals existed in the respective contracts at lease inception and will not account for the concessions as lease modifications, unless the concession results in a substantial change in the Company's obligations.
The Company's rent deferrals had no impact to rent expense during the three and nine months ended September 30, 2021 and 2020, and amounts deferred and payable in future periods have been included in short term lease liability on the Company's unaudited condensed consolidated balance sheet as of September 30, 2020.2021. The Company's rent waivers, which were recorded as a reduction of rent expense, were not materialapproximately $2.2 million and $5.1 million for the three and nine months ended September 30, 2020.2021, respectively, and $1.0 million and $3.4 million for the three and nine months ended September 30, 2020, respectively.
Lease Costs and Other Information
The Company recognizes lease expense on a straight-line basis over the lease term.
The following table illustrates operating and variable lease costs, included in selling, general and administrative expenses within the Company's unaudited condensed consolidated statement of operations, for the periods indicated: | | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
| (In thousands) | 2021 | 2020 | 2021 | 2020 |
| Operating lease costs | $ | 35,630 | | $ | 36,882 | | $ | 106,973 | | $ | 108,614 | |
| Variable lease costs | $ | 4,650 | | $ | 2,879 | | $ | 12,025 | | $ | 5,447 | |
There are no residual value guarantees that exist, and there are no restrictions or covenants imposed by leases. The Company rents or subleases excess office facilities and warehouse space to third parties. Sublease income is not material. The weighted average remaining lease term and discount rate for the periods indicated below were as follows: | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 | | September 30, 2020 |
| Weighted average remaining lease term (in years) | 8.84 | | 9.12 | | 9.24 |
| Weighted average discount rate | 3.73 | % | | 3.83 | % | | 3.82 | % |
Supplemental balance sheetCash Flow Information
The following table presents supplemental information relatedrelating to leases was as follows:
| | | | | | | | | | | |
| Three months ended September 30, 2020 | | Three months ended September 30, 2019 |
| Weighted average remaining lease term (in years) | 9.24 | | 6.96 |
| Weighted average discount rate | 3.82 | | 4.29 |
Supplemental cash flow and other information related to leases was as follows:
| | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
| (In thousands) | 2020 | 2019 | 2020 | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities | | | | |
| Operating cash outflows from operating leases | $ | 37,810 | | $ | 32,331 | | $ | 113,784 | | $ | 83,183 | |
| Leased assets obtained in exchange for new operating lease liabilities | $ | 11,018 | | $ | 17,732 | | $ | 393,850 | | $ | 47,832 | |
| | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
| (In thousands) | 2021 | 2020 | 2021 | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities | | | | |
| Operating cash outflows from operating leases | $ | 44,161 | | $ | 37,810 | | $ | 135,035 | | $ | 113,784 | |
| Leased assets obtained in exchange for new operating lease liabilities | $ | 5,348 | | $ | 11,018 | | $ | 18,396 | | $ | 393,850 | |
MaturitiesMaturity of Lease Liabilities
The following table presents the future minimum lease payments under our operating lease liabilities are as follows:
| | | | | |
| (In thousands) | |
| 2020 | $ | 51,619 | |
| 2021 | 184,576 | |
| 2022 | 161,460 | |
| 2023 | 143,281 | |
| 2024 | 124,598 | |
| 2025 and thereafter | 564,996 | |
| Total lease payments | $ | 1,230,530 | |
| Less: Interest | 200,854 | |
| Total present value of lease liabilities (1) | $ | 1,029,676 | |
(1) Amounts above reflect lease liabilities associated with the Company's New York City flagship store lease, which commenced on March 1, 2020. Refer to Note 3 for discussion of
the impairment of the associated ROU lease asset.September 30, 2021: | | | | | |
| (In thousands) | |
| Fiscal year ending December 31, | |
| 2021 (three months ended) | $ | 49,090 | |
| 2022 | 164,404 | |
| 2023 | 144,415 | |
| 2024 | 124,609 | |
| 2025 | 95,162 | |
| 2026 and thereafter | 453,252 | |
| Total lease payments | $ | 1,030,932 | |
| Less: Interest | 160,289 | |
| Total present value of lease liabilities | $ | 870,643 | |
As of September 30, 2020,2021, the Company has additional operating lease obligations that have not yet commenced of approximately $12.8$12.2 million, which are not reflected in the table above.
7. Long Term DebtNOTE 5. CREDIT FACILITY AND OTHER LONG TERM DEBT
The Company's outstanding debt consisted of the following: | | | | | | | | | | | | | | | | | |
| (In thousands) | As of September 30, 2021 | | As of December 31, 2020 | | As of September 30, 2020 |
| 1.50% Convertible Senior Notes due 2024 | $ | 80,919 | | | $ | 500,000 | | | $ | 500,000 | |
| 3.25% Senior Notes due 2026 | 600,000 | | | 600,000 | | | 600,000 | |
| Credit Facility borrowings | — | | | — | | | — | |
| Total principal payments due | 680,919 | | | 1,100,000 | | | 1,100,000 | |
| | | | | |
| Unamortized debt discount on Convertible Senior Notes | (10,105) | | | (79,031) | | | (84,127) | |
| Unamortized debt discount on Senior Notes | (1,194) | | | (1,385) | | | (1,448) | |
| Unamortized debt issuance costs - Convertible Senior Notes | (1,086) | | | (8,763) | | | (9,403) | |
| Unamortized debt issuance costs - Senior Notes | (2,536) | | | (2,940) | | | (3,074) | |
| Unamortized debt issuance costs - Credit facility | (3,095) | | | (4,325) | | | (4,601) | |
| Total amount outstanding | 662,903 | | | 1,003,556 | | | 997,347 | |
| Less: | | | | | |
| Current portion of long-term debt: | | | | | |
| Credit Facility borrowings | — | | | — | | | — | |
| | | | | |
| Non-current portion of long-term debt | $ | 662,903 | | | $ | 1,003,556 | | | $ | 997,347 | |
| | | | | |
Credit Facility
In May 2020,On March 8, 2019, the Company entered into an amendment to the amended and restated credit agreement dated as of March 8, 2019, by and among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and arrangers party thereto (the "prior credit agreement", as amended, the "amended credit“credit agreement” or "the revolving credit facility"). As described below, the amended credit agreement provides the Company with certain relief from and revisions to its financial covenants for specified periods, which the Company expects will provide it with sufficient access to liquidity during the ongoing disruption related to the COVID-19 pandemic.
The amended credit agreement has a term of five years, maturing in March 2024, with permitted extensions under certain circumstances, and providescircumstances. In May 2020, the Company entered into an amendment to the credit agreement (the “first amendment”), pursuant to which the prior revolving credit commitments of upwere reduced from $1.25 billion to $1.1 billion of borrowings,borrowings. Subsequently, in May 2021, the Company entered into a reduction fromsecond amendment to the $1.25 billioncredit agreement (the "second amendment" and, the credit agreement as amended by the first amendment and the second amendment, the "amended credit agreement" or the "revolving credit facility"). The second amendment provides for certain changes to the Company's covenants and decreases to certain applicable
rates effected by the first amendment. Where the first amendment previously provided for suspensions of and adjustments to the Company's existing interest coverage covenant and leverage covenant (each as defined below), and further required the Company to maintain a specific amount of minimum liquidity during certain quarters, the second amendment provided that these financial covenants became effective again as of March 31, 2021 and removed the minimum liquidity covenant. The second amendment also (i) decreases the interest rate margins that were previously provided for under the prior credit agreement. Duringfirst amendment; (ii) reverses limitations effected by the three months ended September 30, 2020,first amendment on expansions of and extensions of the Company repaid $250 millionmaturity of borrowings under the revolving credit facility whichduring the Company had borrowedcovenant suspension period; (iii) removes additional limitations on the availability of certain exceptions to the negative covenants, including the restricted payments covenant, that were imposed during the covenant suspension period; and (iv) provides mechanics relating to a transition away from LIBOR as a precautionary measurebenchmark interest rate and the replacement of LIBOR by a replacement alternative benchmark rate or mechanism for loans made in order to increase its cash positionU.S. Dollars and preserve liquidity given the ongoing uncertainty in global markets resulting from the COVID-19 pandemic. non-U.S. Dollar currencies.
As of September 30, 2020,2021, December 31, 20192020 and September 30, 2019,2020 there were 0 amounts outstanding under the revolving credit facility.
Except during the covenant suspension period (as defined below), atAt the Company's request and thea lender's consent, commitments under the amended credit agreement may be increased by up to $300.0 million in aggregate, subject to certain conditions as set forth in the amended credit agreement. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time the Company seeks to incur such borrowings.
Borrowings, if any, under the revolving credit facility have maturities of less than one year. Up to $50.0 million of the facility may be used for the issuance of letters of credit. There were $15.5 million, $5.0 million and $5.1As of September 30, 2021, there was $4.4 million of letters of credit outstanding as of(December 31, 2020 and September 30, 2020 December 31, 2019had $4.3 million and September 30, 2019, respectively.$15.5 million letters of credit outstanding, respectively).
The obligations of the Company under the amended credit agreement which under the prior credit agreement were unsecured and not guaranteed by subsidiaries, are guaranteed by certain domestic significant subsidiaries of the Company,Under Armour, Inc., subject to customary exceptions (the “subsidiary guarantors”) and primarily secured by a first-priority security interest in substantially all of the assets of the CompanyUnder Armour, Inc. and the subsidiary guarantors, excluding real property, capital stock in and debt of subsidiaries of the CompanyUnder Armour, Inc. holding certain real property and other customary exceptions.
As with the prior credit agreement, theThe amended credit agreement contains negative covenants that, subject to significant exceptions, limit the Company's ability to, engage in certain transactions. The negative covenant governingamong other things: incur additional secured and unsecured indebtedness; pledge the incurrence of
indebtedness of the Companyassets as security; make investments, loans, advances, guarantees and its subsidiaries affords $50.0 million of additional capacity for secured debt, while the capacity to incur $100.0 million of additional unsecured debt remains unchanged from the prior credit agreement. The Company’s futureacquisitions, (including investments in and loans to non-guarantor subsidiaries are subject to additional limitations under the amended credit agreement, as is the ability of the Company tosubsidiaries); undergo fundamental changes; sell assets outside the ordinary course of business. The amended credit agreement further provides for a temporary suspension of the Company’s ability tobusiness; enter into transactions with affiliates; and make certain voluntary restricted payments during the covenant suspension period.payments.
The amended credit agreementCompany is also contains financial covenants that require the Company to comply with specific consolidated leverage and interest coverage ratios during specified periods. Under the prior credit agreement, the Company was required to maintain a ratio of consolidated EBITDA, to consolidated interest expense of not less than 3.50 to 1.0 (the “interest"interest coverage covenant”covenant") and wasthe Company is not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.0 (the “leverage covenant”"leverage covenant"), as described in more detail in the prioramended credit agreement. The amended credit agreement provides for suspensions of and adjustments to the leverage covenant (including definitional changes impacting the calculation of the ratio) and the interest coverage covenant beginning with the quarter ended June 30, 2020, and ending on the date on which financial statements for the quarter ended June 30, 2022 are delivered to lenders under the amended credit agreement (the “covenant suspension period”) as summarized below and described in more detail in the amended credit agreement:
•For the fiscal quarter ended June 30, 2020, the interest coverage covenant was suspended and the leverage covenant required that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.5 to 1.0.
•For the fiscal quarters ending September 30, 2020, December 31, 2020, March 31, 2021 and June 30, 2021, compliance with the interest coverage covenant and the leverage covenant are both suspended. Beginning on September 30, 2020 through and including December 31, 2021, the Company must instead maintain minimum liquidity of $550.0 million (the “liquidity covenant”) (with liquidity being the sum of certain cash and cash equivalents held by the Company and its subsidiaries and available borrowing capacity under the amended credit agreement).
•For the fiscal quarter ending September 30, 2021, the interest coverage covenant is suspended, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.5 to 1.0 and the Company must comply with the liquidity covenant.
•For the fiscal quarter ending December 31, 2021, the interest coverage covenant is suspended, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.0 to 1.0 and the Company must comply with the liquidity covenant.
•Beginning on January 1, 2022, the liquidity covenant is terminated. For the fiscal quarter ending March 31, 2022, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 3.5 to 1.0 and the interest coverage covenant will require that the ratio of consolidated EBITDA to consolidated interest expense be greater than or equal to 3.5 to 1.0.
As of September 30, 2020,2021, the Company was in compliance with the applicable covenants.
In addition, the amended credit agreement contains events of default that are customary for a facility of this nature, and similar to the prior credit agreement, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the amended credit agreement, will be considered an event of default under the amended credit agreement.
DuringBorrowings under the covenant suspension period, the applicable margin for loans will be 2.00% for adjusted LIBOR loans and 1.00% for alternate base rate loans. Otherwise, borrowings under theamended credit agreement bear interest at a rate per annum equal to, at the Company’s option, either (a) an alternate base rate, or (b) a rate based on the rates applicable for deposits in the interbank market for U.S. Dollars or the applicable currency in which the loans are made (“adjusted LIBOR”), (c) a rate based on the rates applicable for deposits in the interbank market for Japanese Yen ("adjusted TIBOR"), (d) a rate based on the rates applicable for deposits in the interbank market for Canadian Dollars ("adjusted CDOR"), or (e) a rate based on the rates applicable for deposits in the interbank market for Euro ("adjusted EURIBOR"), plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to a grid (the “pricing grid”) based on the consolidated leverage ratio of consolidated total indebtedness to consolidated EBITDA and ranges between 1.25% to 1.75% for adjusted LIBOR, adjusted TIBOR, adjusted CDOR and adjusted EURIBOR loans and 0.25% to 0.75% for alternate base rate loans. The weighted average interest rate under the revolving credit facility borrowings was 2.1% during the three months ended September 30, 2020, and 2.3% and 3.6% for the nine months ended September 30, 2020 and 2019, respectively. During the covenant suspension period, the commitment fee rateCompany will be 0.40% per annum. Otherwise, the Company paysalso pay a commitment fee determined in accordance with the pricing grid on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit.
The weighted average interest rate under the revolving credit facility borrowings was 2.1% and 2.3% during the three and nine months ended September 30, 2020, respectively. There were no borrowings outstanding during the nine months ended September 30, 2021. As of September 30, 2020,2021, the commitment fee was 15.025.0 basis points. The Company incurred and deferred $7.2 million in financing costs in connection with the amended credit agreement.
1.50% Convertible Senior Notes
In May 2020, the Company issued $500.0 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at the rate of 1.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The Convertible Senior Notes will mature on June 1, 2024, unless earlier converted in accordance with their terms, redeemed in accordance with their terms or repurchased.
The net proceeds from the offering (including the net proceeds from the exercise of the over-allotment option) was $488.8 million, after deducting the initial purchasers’ discount and estimated offering expenses paid by the Company, of which the Company used $47.9 million to pay the cost of the capped call transactions described below. The Company utilized $439.9 million to repay indebtedness that was outstanding under its revolving credit facility at the time, and to pay related fees and expenses.
The Convertible Senior Notes are not secured and are not guaranteed by any of the Company’s subsidiaries. The indenture governing the Convertible Senior Notes does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries.
In May 2021, the Company entered into exchange agreements with certain holders of the Convertible Senior Notes (the "first exchanging holders"), who agreed to exchange $250.0 million in aggregate principal amount of the Convertible Senior Notes for cash and/or shares of the Company's Class C Common Stock, plus payment for accrued and unpaid interest (the "First Exchange"). In connection with the First Exchange, the Company paid approximately $300.0 million cash and issued approximately 11.1 million shares of the Company's Class C Common Stock to the first exchanging holders. In August 2021, the Company entered into additional exchange agreements with certain holders of the Convertible Senior Notes (the "second exchanging holders"), who agreed to exchange approximately $169.1 million in aggregate principal amount of the Convertible Senior Notes for cash and/or shares of the Company's Class C Common Stock, plus payment for accrued an unpaid interest (the "Second Exchange" and, together with the First Exchange, the "Exchanges"). In connection with the Second Exchange, the Company paid approximately $207.0 million cash and issued approximately 7.7 million shares of the Company's Class C Common Stock to the second exchanging holders. In connection with the Exchanges, the Company recognized a loss on debt extinguishment of approximately $23.8 million and $58.5 million for the three and nine months ended September 30, 2021, respectively, which has been recorded within Other Income (Expense), net on the Company's unaudited condensed consolidated statement of operations. Following the Exchanges, approximately $80.9 million aggregate principal amount of the Convertible Senior Notes remain outstanding.
The Convertible Senior Notes are convertible into cash, shares of the Company’s Class C common stockCommon Stock or a combination of cash and shares of Class C common stock,Common Stock, at the Company’s election, as described further below. The initial conversion rate is 101.8589 shares of the Company’s Class C common stockCommon Stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $9.82 per share of Class C common stock)Common Stock), subject to adjustment if certain events occur. Prior to the close of business on the business day immediately preceding January 1, 2024, theholders may (at their option) convert their Convertible Senior Notes will be convertible only upon satisfaction of one or more of the following conditions:
•during any calendar quarter commencing after the calendar quarter endingended on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s Class C common stockCommon Stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class C common stockCommon Stock and the conversion rate on each such trading day;
•upon the occurrence of specified corporate events or distributions on the Company’s Class C common stock;Common Stock; or
•if the Company calls any Convertible Senior Notes for redemption prior to the close of business on the business day immediately preceding January 1, 2024.
On or after January 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Senior Notes at the conversion rate at any time irrespective of the foregoing conditions.
On or after December 6, 2022, the Company may redeem for cash all or any part of the Convertible Senior Notes, at its option, if the last reported sale price of the Company’s Class C common stockCommon Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If the Company undergoes a fundamental change (as defined in the indenture governing the Convertible Senior Notes) prior to the maturity date, subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Convertible Senior Notes in principal amounts of $1,000 or an integral multiple thereof at a price which will be equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Concurrently with the offering of the Convertible Senior Notes, the Company entered into privately negotiated capped call transactions with JPMorgan Chase Bank, National Association, HSBC Bank USA, National Association, and Citibank, N.A. (the “option counterparties”). The capped call transactions are expected generally to
reduce potential dilution to the Company’s Class C common stockCommon Stock upon any conversion of Convertible Senior Notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted Convertible Senior Notes upon any conversion thereof, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactions is initially $13.4750 per share of the Company’s Class C common stock,Common Stock, representing a premium of 75% above the last reported sale price of the Company’s Class C common stockCommon Stock on May 21, 2020, and is subject to certain adjustments under the terms of the capped call transactions.
In May 2021 and August 2021, concurrently with the Exchanges, the Company entered into, with each of the option counterparties, termination agreements relating to a number of options corresponding to the number of Convertible Senior Notes exchanged. Pursuant to such termination agreements, each of the option counterparties paid the Company a cash settlement amount in respect of the portion of capped call transactions being terminated. The Company received approximately $53.0 million and $38.6 million, in connection with such termination agreements related to the First Exchange and the Second Exchange, respectively.
The Convertible Senior Notes contain a cash conversion feature, and as a result, the Company has separated it into liability and equity components. The Company valued the liability component based on its borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which is recognized as a debt discount, was valued as the difference between the face value of the Convertible Senior Notes and the fair value of the liability component.
In connection with the Convertible Senior Notes issuance, the Company incurred deferred financing costs of $12.3 million, primarily related to fees paid to the initial purchasers of the offering, as well as legal and accounting fees. These costs were allocated on a pro rata basis, with $10.1$10.0 million allocated to the debt component and $2.2 million allocated to the equity component.
The debt discount and the debt portion of the deferred financing costs are being amortized to interest expense over the term of the Convertible Senior Notes using anthe effective interest rate ofmethod. The effective interest rate for the three months ended September 30, 2021 was 6.8%.
The Convertible Senior Notes consist of the following components:
| | | | | | | | |
| (In thousands) | September 30, 2020 | September 30, 2019 |
| Liability component | | |
| Principal | $ | 500,000 | | $ | 0 | |
| Unamortized debt discount | (84,127) | | 0 | |
| Unamortized issuance costs | (9,123) | | 0 | |
| Net carrying amount | $ | 406,750 | | $ | 0 | |
| | |
| Equity component, net of issuance costs | $ | 88,672 | | $ | 0 | |
Interest expense related to the Convertible Senior Notes consists of the following as of the periods indicated:
| | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
| (In thousands) | 2020 | 2019 | 2020 | 2019 |
| Coupon interest | $ | 1,875 | | $ | 0 | | $ | 2,500 | | $ | 0 | |
| Non-cash amortization of debt discount | 5,040 | | 0 | | 6,720 | | 0 | |
| Amortization of deferred financing costs | 622 | | 0 | | 829 | | 0 | |
| Convertible senior notes interest expense | $7,537 | $0 | $10,049 | $0 |
In connection with the issuance of the Convertible Senior Notes, the Company recorded an $11.0 million net deferred tax liability and a corresponding reduction in valuation allowance. As a result, there was no net impact to the Company’s deferred income taxes or additional paid in capital on the unaudited consolidated balance sheet.
3.250% Senior Notes
In June 2016, the Company issued $600.0 million aggregate principal amount of 3.250% senior unsecured notes due June 15, 2026 (the “Senior Notes”). Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. The Company may redeem some or all of the Senior Notes at any time, or from time to time, at redemption prices described in the indenture governing the Senior Notes. The indenture governing the Senior Notes contains negative covenants that limit the Company’s ability to engage in certain transactions and are subject to material exceptions described in the indenture. The Company incurred and deferred $5.3$5.4 million in financing costs in connection with the Senior Notes.
Interest Expense
Interest Expense
Interest expense, net, was $15.0 million and $5.7 million for the three months ended September 30, 2020 and 2019, respectively, and $32.3 million and $15.9 million for the nine months ended September 30, 2020 and 2019, respectively, inclusive of amounts related to the Senior Convertible Notes, as detailed above. Interest expense includes amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long term debt facilities.
Interest expense, net, was $9.3 million and $15.0 million for the three months ended September 30, 2021 and 2020, respectively, and $36.7 million and $32.3 million for the nine months ended September 30, 2021 and 2020, respectively.
The Company monitors the financial health and stability of its lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets, lenders could be negatively impacted in their ability to perform under these facilities.
8. Commitments and ContingenciesNOTE 6. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in litigation and other proceedings, including matters related to commercial and intellectual property disputes, as well as trade, regulatory and other claims related to its business. Other than as described below, the Company believes that all current proceedings are routine in nature and incidental to the conduct of its business, and that the ultimate resolution of any such proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
In re Under Armour Securities Litigation
On March 23, 2017, 3 separate securities cases previously filed against the Company in the United States District Court for the District of Maryland (the “District Court”) were consolidated under the caption In re Under Armour Securities Litigation, Case No. 17-cv-00388-RDB (the “Consolidated Securities Action”). On August 4, 2017, the lead plaintiff in the Consolidated Securities Action, Aberdeen City Council as Administrating Authority for the North East Scotland Pension Fund (“Aberdeen”), joined by named plaintiff Bucks County Employees Retirement Fund (“Bucks County”), filed a consolidated amended complaint (the “Amended Complaint”) against the Company, the Company’s then-Chief Executive Officer, Kevin Plank, and former Chief Financial Officers Lawrence Molloy and Brad Dickerson. The Amended Complaint alleged violations of Section 10(b) (and Rule 10b-5) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 20(a) control person liability under the Exchange Act against the officers named in the Amended Complaint, claiming that the defendants made material misstatements and omissions regarding, among other things, the Company's growth and consumer demand for certain of the Company's products. The class period identified in the Amended Complaint iswas September 16, 2015 through January 30, 2017. The Amended Complaint also asserted claims under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), in connection with the Company’s public offering of senior unsecured notes in June 2016. The Securities Act claims were asserted against the Company, Mr. Plank, Mr. Molloy, the Company’s directors who signed the registration statement pursuant to which the offering was made and the underwriters that participated in the offering. The Amended Complaint alleged that the offering materials utilized in connection with the offering contained false and/or misleading statements and omissions regarding, among other things, the Company’s growth and consumer demand for certain of the Company’s products.
On November 9, 2017, the Company and the other defendants filed motions to dismiss the Amended Complaint. On September 19, 2018, the District Court dismissed the Securities Act claims with prejudice and the Exchange Act claims without prejudice. Lead plaintiff Aberdeen, joined by named plaintiff Monroe County Employees’ Retirement Fund (“Monroe”), filed a Second Amended Complaint on November 16, 2018, asserting claims under the Exchange Act and naming the Company and Mr. Plank as the remaining defendants. The remaining defendants filed a motion to dismiss the Second Amended Complaint on January 17, 2019. On August 19, 2019, the District Court dismissed the Second Amended Complaint with prejudice.
In September 2019, plaintiffs Aberdeen and Bucks County filed an appeal in the United States Court of Appeals for the Fourth Circuit challenging the decisions by the District Court on September 19, 2018 and August 19, 2019 (the “Appeal”). The Appeal was fully briefed as of January 16, 2020.
On November 6 and December 17, 2019, two2 purported shareholders of the Company filed putative securities class actions in the District Court against the Company and certain of its current and former executives (captioned Patel v. Under Armour, IncInc.., No. 1:19-cv-03209-RDB (“Patel”Patel”), and Waronker v. Under Armour, Inc., No. 1:19-cv-03581-RDB (“Waronker”Waronker”), respectively). The complaints in Patel and Waronker alleged violations of Section 10(b) (and Rule 10b-5) of the Exchange Act, against all defendants, and Section 20(a) control person liability under the Exchange Act against the current and former officers named in the complaints. The complaints claimed that the
defendants’ disclosures and statements supposedly misrepresented or omitted that the Company was purportedly shifting sales between quarterly periods allegedly to appear healthier and that the Company was under investigation
by and cooperating with the United States Department of Justice (“DOJ”) and the United States Securities and Exchange Commission (“SEC”) since July 2017.
On November 18, 2019, Aberdeen, the lead plaintiff in the Consolidated Securities Action, filed in the District Court a motion for an indicative ruling under Federal Rule of Civil Procedure 62.1 (the “Rule 62.1 Motion”) seeking relief from the final judgment pursuant to Federal Rule of Civil Procedure 60(b). The Rule 62.1 Motion alleged that purported newly discovered evidence entitled Aberdeen to relief from the District Court’s final judgment. Aberdeen also filed motions seeking (i) to consolidate the Patel and Waronker cases with the Consolidated Securities Action, and (ii) to be appointed lead plaintiff over the consolidated cases.
On January 22, 2020, the District Court granted Aberdeen’s Rule 62.1 motion and indicated that it would grant a motion for relief from the final judgment and provide Aberdeen with the opportunity to file a third amended complaint if the Fourth Circuit remanded for that purpose. The District Court further stated that it would, upon remand, consolidate the Patel and Waronker cases with the Consolidated Securities Action and appoint Aberdeen as the lead plaintiff over the consolidated cases.
On August 13, 2020, the Fourth Circuit remanded the Appeal to the District Court for the limited purpose of allowing the District Court to rule on Aberdeen’s motion seeking relief from the final judgment pursuant to Federal Rule of Civil Procedure 60(b). On September 14, 2020, the District Court issued an order granting that relief. The District Court’s order also consolidated the Patel and Waronker cases into the Consolidated Securities Action and appointed Aberdeen as lead plaintiff over the Consolidated Securities Action.
On October 14, 2020, Aberdeen, along with named plaintiffs Monroe and KBC Asset Management NV, filed a third amended complaint (the “TAC”) in the Consolidated Securities Action, asserting claims under Sections 10(b) and 20(a) of the Exchange Act against the Company and Mr. Plank and under Section 20A of the Exchange Act against Mr. Plank. The TAC alleges that the defendants supposedly concealed purportedly declining consumer demand for certain of the Company's products between the third quarter of 2015 and the fourth quarter of 2016 by making allegedly false and misleading statements regarding the Company’s performance and future prospects and by engaging in undisclosed and allegedly improper sales and accounting practices, including shifting sales between quarterly periods allegedly to appear healthier. The TAC also alleges that the defendants purportedly failed to disclose that the Company was under investigation by and cooperating with DOJ and the SEC since July 2017. The class period identified in the TAC is September 16, 2015 through November 1, 2019.
On December 4, 2020, the Company and Mr. Plank filed a motion to dismiss the TAC for failure to state a claim. That motion was denied by the Court on May 18, 2021. Discovery in the Consolidated Securities Action commenced on June 4, 2021 and is currently ongoing. On July 23, 2021, the Company and Mr. Plank filed an answer to the TAC denying all allegations of wrongdoing and asserting affirmative defenses to the claims asserted in the TAC.
The Company continues to believe that the claims asserted in the Consolidated Securities Action are without merit and intends to defend the lawsuit vigorously. However, because of the inherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of this matter.
2018State Court Derivative Complaints
In June and July 2018, 32 purported stockholder derivative complaints were filed. NaN of the complaints were filed in Maryland state court (in cases captioned Kenney v. Plank, et al. (filed June 29, 2018) and Luger v. Plank, et al. (filed July 26, 2018), respectively), and those. The cases were consolidated on October 19, 2018 under the caption Kenney v. Plank, et. al. The otherconsolidated complaint was filed in the United States District Court for the District of Maryland (in a case captioned Andersen v. Plank et al. (filed July 23, 2018)). The operative complaints in these cases nameKenney matter names Mr. Plank, certain other current and former members of the Company’s Board of Directors, and certain former Company executives, and Sagamore Development Company, LLC (“Sagamore”) as defendants, and namenames the Company as a nominal defendant. The operative complaints includeconsolidated complaint asserts breach of fiduciary duty, unjust enrichment, and corporate waste claims against the individual defendants and asserts a claim against Sagamore for aiding and abetting certain of the alleged breaches of fiduciary duty. The consolidated complaint seeks damages on behalf of the Company and certain corporate governance related actions.
The consolidated complaint includes allegations similar to those in the Amended Complaint in the Consolidated Securities Action matter discussed above, challenging, among other things, the Company’s disclosures related to growth and consumer demand for certain of the Company’s products, andas well as stock sales by certain individual defendants. The operative complaints in each of these cases assert breach of fiduciary duty and unjust enrichment claims against the individual defendants. These complaints seek damages on behalf of the Company and certain corporate governance related actions.
The operativeconsolidated complaint in the Kenney matter also makes allegations related to the Company’s purchase of certain parcels of land from entities controlled by Mr. Plank (through Sagamore Development Company, LLC (“Sagamore”))Sagamore). Sagamore purchased the parcels in 2014. Its total investment in the parcels was approximately $72.0 million, which included the initial $35.0 million purchase price for the property, an additional $30.6 million to terminate a lease encumbering the property and approximately $6.4 million of development costs. As previously disclosed, in June 2016, the Company purchased the
unencumbered parcels for $70.3 million in order to further expand the Company’s corporate headquarters to accommodate its growth needs. The Company negotiated a
purchase price for the parcels that it determined represented the fair market value of the parcels and approximated the cost to the seller to purchase and develop the parcels. In connection with its evaluation of the potential purchase, the Company engaged an independent third-party to appraise the fair market value of the parcels, and the Audit Committee of the Company’s Board of Directors engaged its own independent appraisal firm to assess the parcels. The Audit Committee determined that the terms of the purchase were reasonable and fair, and the transaction was approved by the Audit Committee in accordance with the Company’s policy on transactions with related persons. The operative complaint asserts breach of fiduciary duty and corporate waste claims against the individual defendants in connection with the Company’s purchase of these parcels and a claim against Sagamore for supposedly aiding and abetting those alleged breaches.
The Andersen action was stayed from December 2018 to August 2019 and again from September 2019 to September 2020 (the “2019 Stay Order”). Pursuant to a court ordered stipulation issued in October 2020, the parties in the Andersen action have agreed to present to the court a schedule for further proceedings in the action on or before November 20, 2020 and that the terms of the 2019 Stay Order shall remain in effect through and including November 20, 2020.
On March 29, 2019, the court in the consolidated Kenney action granted the Company’s and the defendants’ motion to stay that case pending the outcome of both the Consolidated Securities Action and an earlier-filed derivative action asserting similar claims relating to the Company’s purchase of parcels in Port Covington (which derivative action has since been dismissed in its entirety).The court ordered stay in the consolidated Kenney action remains in effect at this time. In March 2021, the court in the consolidated Kenney action issued a notice of contemplated dismissal for lack of prosecution without prejudice pursuant to Maryland Rule 2-507. The court issued a second notice of contemplated dismissal for lack of prosecution without prejudice in August 2021.
Prior to the filing of the derivative complaints in Kenney v. Plank, et al., and Luger v. Plank, et al., and Andersen v. Plank et al., eachboth of the purported stockholders had sent the Company’s Board of Directors a letter demanding that the Company pursue claims similar to the claims asserted in the derivative complaints. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company and informed eachboth of these purported stockholders of that determination.
The Company believes that the claims asserted in the derivative complaints are without merit and intends to defend these matters vigorously. However, because of the inherent uncertainty as to the outcome of these proceedings, the Company is unable at this time to estimate the possible impact of the outcome of these matters.
2020 Derivative Complaints
Between August 11, 2020 and October 21, 2020, five3 additional purported shareholder derivative complaints were filed. Three complaints were filed in Maryland state court (in cases captioned Cordell v. Plank, et al. (filed August 11, 2020), Klein v. Plank, et al. (filed October 2, 2020), and Salo v. Plank, et al. (filed October 21, 2020), respectively). The other two complaints were filed in the United States District Court for the District of Maryland (in cases captioned Olin v. Plank, et al. (filed September 1, 2020), and Smith v. Plank, et al. (filed September 8, 2020), respectively).
The complaints in these cases name Mr. Plank, certain other current and former members of the Company’s Board of Directors, and certain current and former Company executives as defendants, and name the Company as a nominal defendant.
The complaints in these actions assert allegations similar to those in the TAC filed in the Consolidated Securities Action matter discussed above, including allegations challenging (i) the Company’s disclosures related to growth and consumer demand for certain of the Company’s products; (ii) the Company’s practice of shifting sales between quarterly periods supposedly to appear healthier and its purported failure to disclose that practice; (iii) the Company’s internal controls with respect to revenue recognition and inventory management; (iv) the Company’s supposed failure to timely disclose investigations by the SEC and DOJ; (v) the compensation paid to the Company’s directors and executives while the alleged wrongdoing was occurring; and/or (vi) stock sales by certain individual defendants. The complaints assert breach of fiduciary duty, gross mismanagement, unjust enrichment, and/orand corporate waste claims against the individual defendants. These complaints seek damages on behalf of the Company and certain corporate governance related actions.
Prior to the filing of the derivative complaints in these five3 actions, none of the purported stockholders made a demand that the Company’s Board of Directors pursue the claims asserted in the complaints.
In March 2021, the court issued an order dismissing the Klein matter for lack of jurisdiction without prejudice pursuant to Maryland Rule 2-507. In October 2021, the court issued an order (i) consolidating the Cordell and Salo actions with the consolidated Kenney action into a single consolidated derivative action (the "Consolidated State Derivative Action"); (ii) designating the Kenney action as the lead case; and (iii) specifying that the scheduling order in the Kenney action shall control the Consolidated State Derivative Action.
The Company believes that the claims asserted in thesethe derivative complaints filed in Maryland state court are without merit and intends to defend these matters vigorously. However, because of the inherent uncertainty as to the outcome of these proceedings, the Company is unable at this time to estimate the possible impact of the outcome of these matters.
Federal Court Derivative Complaints
In July 2018, a stockholder derivative complaint was filed in the United States District Court for the District of Maryland, in a case captioned Andersen v. Plank, et al. The complaint in the Andersen matter names Mr. Plank, certain other current and former members of the Company’s Board of Directors and certain former Company executives as defendants, and names the Company as a nominal defendant. The complaint asserts breach of fiduciary duty and unjust enrichment claims against the individual defendants, and seeks damages on behalf of the Company and certain corporate governance related actions. The complaint includes allegations similar to those in the Amended Complaint in the Consolidated Securities Action matter discussed above, challenging, among other
things, the Company’s disclosures related to growth and consumer demand for certain of the Company’s products and stock sales by certain individual defendants.
The Andersen action was stayed from December 2018 to August 2019 and again from September 2019 to September 2020 (the “2019 Stay Order”). Pursuant to a series of court ordered stipulations, the terms of the 2019 Stay Order remained in effect through and including January 19, 2021. The stay expired on January 19, 2021.
Prior to the filing of the complaint in the Andersen action, the plaintiff had sent the Company’s Board of Directors a letter demanding that the Company pursue claims similar to the claims asserted in the complaint. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company and informed the plaintiff of that determination. During the pendency of the Andersen action, the plaintiff sent the Company’s Board of Directors a second letter demanding that the Company pursue claims similar to the claims asserted in the TAC in the Consolidated Securities Action. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company and informed the plaintiff of that determination.
Wells Notices
In additionThe complaints in the Olin, Smith, and Viskovich cases name Mr. Plank, certain other current and former members of the Company’s Board of Directors, and certain current and former Company executives as defendants, and name the Company as a nominal defendant. The complaints in these actions assert allegations similar to those in the TAC filed in the Consolidated Securities Action matter discussed above, including allegations challenging (i) the Company’s disclosures related to growth and consumer demand for certain of the Company’s products; (ii) the Company’s practice of shifting sales between quarterly periods supposedly to appear healthier and its purported failure to disclose that practice; (iii) the Company’s internal controls with respect to revenue recognition and inventory management; (iv) the Company’s supposed failure to timely disclose investigations by the SEC and DOJ; and/or (v) the compensation paid to the Company’s material pending legal proceedings, as previously disclosed, in July 2020,directors and executives while the Company, as well as Kevin Plank and David Bergman (together,alleged wrongdoing was occurring. The complaints assert breach of fiduciary duty, unjust enrichment, gross mismanagement, and/or corporate waste claims against the “Executives”), received “Wells Notices” fromindividual defendants. The Viskovich complaint also asserts a contribution claim against certain defendants under the SEC relating to the Company’s disclosures covering the third quarterfederal securities laws. These complaints seek damages on behalf of 2015 through the period ending December 31, 2016, regarding the use of “pull forward” sales in connection with revenue during those quarters. The Wells Notices informed the Company that the SEC Staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company and eachcertain corporate governance related actions.
On January 27, 2021, the court entered an order consolidating for all purposes the Andersen, Olin, Smith and Viskovich actions into a single action under the caption Andersen v. Plank, et al. (the “Federal Court Derivative Action”). In February 2021, counsel for the Smith and Olin plaintiffs, on the one hand, and counsel for the Andersen and Viskovich plaintiffs, on the other hand, filed motions seeking to be appointed as lead counsel in the Federal Court Derivative Action. These motions are currently pending.
The Company believes that the claims asserted in the Federal Court Derivative Action are without merit and intends to defend this matter vigorously. However, because of the Executives that would allege certain violationsinherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and certain rules promulgated thereunder. The Wells Notices delivered to the Executives also reference potential charges related to the Executives’ participation in the Company’s violations, as well as control person liability under the Exchange Act.
The potential relief to be sought referenced in the Wells Notices included an injunction, a cease-and-desist order, disgorgement, prejudgment interest, and civil monetary penalties, as well as, in the case of the Executives, a bar from serving as an officer or director of a public company. A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law, and to date no legal proceedings have been brought against the Company or the Executives with respect to this matter. The Company and the Executives maintain that their actions were appropriate and are pursuing the Wells Notice process, and also are engaging in a dialogue with the SEC Staff to work toward a resolutionoutcome of this matter.
Data Incident
In 2018, an unauthorized third party acquired data associated with the Company's Connected Fitness users' accounts for the Company's MyFitnessPal application and website. The Company has faced consumer class action lawsuits associated with this incident and has received inquiries regarding the incident from certain government regulators and agencies. The Company does not currently consider these matters to be material and believes its insurance coverage will provide coverage should any significant expense arise.
9. Fair Value MeasurementsNOTE 7. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The fair value accounting guidance outlines a valuation framework, creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures, and prioritizes the inputs used in measuring
fair value as follows:
| | | | | |
| Level 1: | Observable inputs such as quoted prices in active markets; |
| |
| Level 2: | Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |
| |
| Level 3: | Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions. |
FinancialOur financial assets (liabilities) measured at fair value on a recurring basis are set forth inconsisted of the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| Derivative foreign currency contracts (see Note 11) | | $ | 0 | | | $ | (203) | | | $ | 0 | | | $ | 0 | | | $ | (7,151) | | | $ | 0 | | | $ | 0 | | | $ | 18,695 | | | $ | 0 | |
| TOLI policies held by the Rabbi Trust | | 0 | | | 7,229 | | | 0 | | | 0 | | | 6,543 | | | 0 | | | 0 | | | 6,139 | | | 0 | |
| Deferred Compensation Plan obligations | | 0 | | | (13,113) | | | 0 | | | 0 | | | (10,839) | | | 0 | | | 0 | | | (10,269) | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | | September 30, 2020 |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| Derivative foreign currency contracts (see Note 8) | | $ | — | | | $ | 3,197 | | | $ | — | | | $ | — | | | $ | (22,122) | | | $ | — | | | $ | — | | | $ | (203) | | | $ | — | |
| TOLI policies held by the Rabbi Trust | | $ | — | | | $ | 8,525 | | | $ | — | | | $ | — | | | $ | 7,697 | | | $ | — | | | $ | — | | | $ | 7,229 | | | $ | — | |
| Deferred Compensation Plan obligations | | $ | — | | | $ | (15,122) | | | $ | — | | | $ | — | | | $ | (14,314) | | | $ | — | | | $ | — | | | $ | (13,113) | | | $ | — | |
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 foreign currency contracts represent unrealized 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 fair value of the trust owned life insurance (“TOLI”) policies held by the Rabbi Trust are 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, 2021, December 31, 2020,, and September 30, 2020, the fair value of the Company's Convertible Senior Notes was $150.2 million, $828.2 million, and $624.8 million. million, respectively. The Company entered into exchange agreements with certain holders during the three and nine months ended September 30, 2021 to exchange approximately $169.0 million and $419.0 million, respectively, in aggregate principal amount of the Convertible Senior Notes for a combination of cash and shares (see Note 5 to the unaudited condensed consolidated financial statements).
As of September 30, 2020, 2021, December 31, 2019,2020, and September 30, 2019,2020, the fair value of the Company's Senior Notes was $622.5 million, $602.6 million, and $566.6 million, $587.5 million and $579.7 million, respectively. The carrying value of the Company's other long term debt approximated its fair value as of September 30, 2020, December 31, 2019 and September 30, 2019.
The fair value of long term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2).
SomeCertain assets are not measured atremeasured to fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets and goodwill that have been reduced to fair value when impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
10. Stock Based Compensation
Performance-Based Equity Compensation
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. The Company did not grant any performance-based restricted stock units or stock options during the three and nine months ended September 30, 2020. During 2019, the Company granted performance-based restricted stock units or stock options with vesting conditions tied to the achievement of revenue and operating income targets for 2019 and 2020. As of March 31, 2020, the Company deemed the achievement of these revenue and operating income targets improbable, accordingly, a reversal of $2.9 million of expense was recorded for the performance-based restricted stock units and stock options. NaN expense for these awards was recorded during the three months ended September 30, 2020.
11. Risk Management and DerivativesNOTE 8. RISK MANAGEMENT AND DERIVATIVES
The Company is exposed to global market risks, including the effects of changes in foreign currency and interest rates. The Company uses derivative instruments to manage financial exposures that occur in the normal course of business and does not hold or issue derivatives for trading or speculative purposes.
The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking
all derivatives designated as hedges to forecasted cash flows and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships.
The Company's foreign exchange risk management program consists of designated cash flow hedges and undesignated hedges. As of September 30, 2020,2021, the Company has hedge instruments primarily for U.S Dollar/Chinese Renminbi, for:
•British Pound/U.S. Dollar, Dollar;
•U.S. Dollar/Chinese Renminbi;
•Euro/U.S. Dollar, Dollar;
•U.S. Dollar/Canadian Dollar, Australian Dollar/U.S. Dollar, and Dollar;
•U.S. Dollar/Mexican PesoPeso;
•U.S. Dollar/Japanese Yen; and
•U.S. Dollar/Korean Won currency pairs.
All derivatives are recognized on the unaudited condensed consolidated balance sheets at fair value and classified based on the instrument’s maturity date.
The following table presents the fair values of derivative instruments within the unaudited condensed consolidated balance sheets. Refer to Note 97 of the unaudited condensed consolidated financial statements for a discussion of the fair value measurements.
| | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Balance Sheet Classification | September 30, 2020 | | December 31, 2019 | | September 30, 2019 | | |
| Derivatives designated as hedging instruments under ASC 815 | | | | | | | | |
| Foreign currency contracts | Other current assets | $ | 5,659 | | | $ | 4,040 | | | $ | 18,866 | | | | | |
| Foreign currency contracts | Other long term assets | 0 | | | 24 | | | 1,220 | | | | | |
| Total derivative assets designated as hedging instruments | $ | 5,659 | | | $ | 4,064 | | | $ | 20,086 | | | | | |
| | | | | | | | | | |
| Foreign currency contracts | Other current liabilities | $ | 4,942 | | | $ | 8,772 | | | $ | 1,260 | | | | | |
| Foreign currency contracts | Other long term liabilities | 0 | | | $ | 2,443 | | | $ | 0 | | | | | |
| Total derivative liabilities designated as hedging instruments | $ | 4,942 | | | $ | 11,215 | | | $ | 1,260 | | | | | |
| | | | | | | | | | |
| Derivatives not designated as hedging instruments under ASC 815 | | | | | | | | |
| Foreign currency contracts | Other current assets | $ | 5,373 | | | $ | 2,337 | | | $ | 1,393 | | | | | |
| Total derivative assets not designated as hedging instruments | $ | 5,373 | | | $ | 2,337 | | | $ | 1,393 | | | | | |
| | | | | | | | | | |
| Foreign currency contracts | Other current liabilities | $ | 1,714 | | | $ | 9,510 | | | $ | 2,794 | | | | | |
| Total derivative liabilities not designated as hedging instruments | $ | 1,714 | | | $ | 9,510 | | | $ | 2,794 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Balance Sheet Classification | September 30, 2021 | | December 31, 2020 | | September 30, 2020 | | |
| Derivatives designated as hedging instruments under ASC 815 | | | | | | | | |
| Foreign currency contracts | | Other current assets | $ | 6,424 | | | $ | — | | | $ | 5,659 | | | | | |
| Foreign currency contracts | | Other long term assets | 4,377 | | | — | | | — | | | | | |
| Total derivative assets designated as hedging instruments | $ | 10,801 | | | $ | — | | | $ | 5,659 | | | | | |
| | | | | | | | | | | |
| Foreign currency contracts | | Other current liabilities | $ | 7,123 | | | $ | 17,601 | | | $ | 4,942 | | | | | |
| Foreign currency contracts | | Other long term liabilities | 620 | | | 6,469 | | | — | | | | | |
| Total derivative liabilities designated as hedging instruments | $ | 7,743 | | | $ | 24,070 | | | $ | 4,942 | | | | | |
| | | | | | | | | | | |
| Derivatives not designated as hedging instruments under ASC 815 | | | | | | | | |
| Foreign currency contracts | | Other current assets | $ | 4,935 | | | $ | 2,384 | | | $ | 5,373 | | | | | |
| Total derivative assets not designated as hedging instruments | $ | 4,935 | | | $ | 2,384 | | | $ | 5,373 | | | | | |
| | | | | | | | | | | |
| Foreign currency contracts | | Other current liabilities | $ | 2,242 | | | $ | 6,464 | | | $ | 1,714 | | | | | |
| Total derivative liabilities not designated as hedging instruments | $ | 2,242 | | | $ | 6,464 | | | $ | 1,714 | | | | | |
The following table presents the amounts in the unaudited condensed consolidated statements of operations in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (In thousands) | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity |
| Net revenues | $ | 1,433,021 | | $218 | | $ | 1,429,456 | | $ | 6,125 | | | $ | 3,070,901 | | $3,495 | | $3,825,907 | $ | 14,337 | |
| Cost of goods sold | 746,701 | | 4,496 | | | 739,558 | | 1,317 | | | 1,604,428 | | 7,179 | | | 2,036,901 | | 3,525 | |
| Interest expense, net | (14,955) | | (9) | | | (5,655) | | (9) | | | (32,251) | | (27) | | | (15,881) | | 1,607 | |
| Other expense, net | (7,184) | | 4 | | | (429) | | 44 | | | (10,493) | | 25 | | | (2,224) | | 836 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (In thousands) | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity |
| Net revenues | $ | 1,545,532 | | $ | (1,953) | | | $ | 1,433,021 | | $ | 218 | | | $ | 4,154,261 | | $ | (7,477) | | | $3,070,901 | $ | 3,495 | |
| Cost of goods sold | $ | 757,428 | | $ | (3,947) | | | $ | 746,701 | | $ | 4,496 | | | 2,068,695 | | (8,586) | | | 1,604,428 | | 7,179 | |
| Interest income (expense), net | $ | (9,261) | | $ | (9) | | | $ | (14,955) | | $ | (9) | | | (36,705) | | (27) | | | (32,251) | | (27) | |
| Other income (expense), net | $ | (29,476) | | $ | — | | | $ | (7,184) | | $ | 4 | | | (75,150) | | — | | | (10,493) | | 25 | |
The following tables present the amounts affecting the unaudited statements of comprehensive income (loss).: | | | | | | | | | | | | | | |
| (In thousands) | Balance as of June 30, 2021 | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | Balance as of September 30, 2021 |
| Derivatives designated as cash flow hedges | | | |
| Foreign currency contracts | $ | (20,346) | | $ | 14,459 | | $ | (5,900) | | $ | 13 | |
| Interest rate swaps | (522) | | — | | (9) | | (513) | |
| Total designated as cash flow hedges | $ | (20,868) | | $ | 14,459 | | $ | (5,909) | | $ | (500) | |
| | (In thousands) | (In thousands) | Balance as of
June 30, 2020 | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | Balance as of September 30, 2020 | (In thousands) | Balance as of
December 31, 2020 | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | Balance as of September 30, 2021 |
| Derivatives designated as cash flow hedges | Derivatives designated as cash flow hedges | | Derivatives designated as cash flow hedges | |
| Foreign currency contracts | Foreign currency contracts | 26,200 | | (18,432) | | 4,701 | | 3,066 | | Foreign currency contracts | $ | (25,908) | | $ | 9,858 | | $ | (16,063) | | $ | 13 | |
| Interest rate swaps | Interest rate swaps | (559) | | 0 | | (9) | | (550) | | Interest rate swaps | (541) | | — | | (28) | | $ | (513) | |
| Total designated as cash flow hedges | Total designated as cash flow hedges | $ | 25,641 | | $ | (18,432) | | $ | 4,692 | | $ | 2,516 | | Total designated as cash flow hedges | $ | (26,449) | | $ | 9,858 | | $ | (16,091) | | $ | (500) | |
| | (In thousands) | (In thousands) | Balance as of
December 31, 2019 | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | Balance as of September 30, 2020 | (In thousands) | Balance as of
June 30, 2020 | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | Balance as of September 30, 2020 |
| Derivatives designated as cash flow hedges | Derivatives designated as cash flow hedges | | Derivatives designated as cash flow hedges | |
| Foreign currency contracts | Foreign currency contracts | (6,005) | | 19,727 | | 10,655 | | 3,066 | | Foreign currency contracts | $ | 26,200 | | $ | (18,432) | | $ | 4,701 | | $ | 3,066 | |
| Interest rate swaps | Interest rate swaps | (577) | | 0 | | (27) | | (550) | | Interest rate swaps | (559) | | — | | (9) | | (550) | |
| Total designated as cash flow hedges | Total designated as cash flow hedges | $ | (6,582) | | $ | 19,727 | | $ | 10,628 | | $ | 2,516 | | Total designated as cash flow hedges | $ | 25,641 | | $ | (18,432) | | $ | 4,692 | | $ | 2,516 | |
| | (In thousands) | (In thousands) | Balance as of
June 30, 2019 | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | Balance as of
September 30, 2019 | (In thousands) | Balance as of
December 31, 2019 | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | Balance as of September 30, 2020 |
| Derivatives designated as cash flow hedges | Derivatives designated as cash flow hedges | | Derivatives designated as cash flow hedges | |
| Foreign currency contracts | Foreign currency contracts | 11,595 | | 17,378 | | 7,495 | | 21,478 | | Foreign currency contracts | $ | (6,005) | | $ | 19,727 | | $ | 10,655 | | $ | 3,066 | |
| Interest rate swaps | Interest rate swaps | (595) | | 0 | | (9) | | (586) | | Interest rate swaps | (577) | | — | | (27) | | (550) | |
| Total designated as cash flow hedges | Total designated as cash flow hedges | $ | 11,000 | | $ | 17,378 | | $ | 7,486 | | $ | 20,892 | | Total designated as cash flow hedges | $ | (6,582) | | $ | 19,727 | | $ | 10,628 | | $ | 2,516 | |
| | | | | | | | | | | | | | |
| (In thousands) | Balance as of
December 31, 2018 | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | Balance as of
September 30, 2019 |
| Derivatives designated as cash flow hedges | | | |
| Foreign currency contracts | 21,908 | | 18,277 | | 18,707 | | 21,478 | |
| Interest rate swaps | 954 | | 67 | | 1,607 | | (586) | |
| Total designated as cash flow hedges | $ | 22,862 | | $ | 18,344 | | $ | 20,314 | | $ | 20,892 | |
The following table presents the amounts in the unaudited condensed consolidated statements of operations in which the effects of undesignated derivative instruments are recorded and the effects of fair value hedge activity on these line items.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (In thousands) | Total | Amount of Gain (Loss) on Fair Value Hedge Activity | | Total | Amount of Gain (Loss) on Fair Value Hedge Activity | | Total | Amount of Gain (Loss) on Fair Value Hedge Activity | | Total | Amount of Gain (Loss) on Fair Value Hedge Activity |
| Other expense, net | $ | (7,184) | | $ | (962) | | | $ | (429) | | $ | (474) | | | $ | (10,493) | | $ | 1,022 | | | $ | (2,224) | | $ | (2,629) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (In thousands) | Total | Amount of Gain (Loss) on Fair Value Hedge Activity | | Total | Amount of Gain (Loss) on Fair Value Hedge Activity | | Total | Amount of Gain (Loss) on Fair Value Hedge Activity | | Total | Amount of Gain (Loss) on Fair Value Hedge Activity |
| Other income (expense), net | $ | (29,476) | | $ | (2,382) | | | $ | (7,184) | | $ | (962) | | | $ | (75,150) | | $ | (3,197) | | | $ | (10,493) | | $ | 1,022 | |
Cash Flow Hedges
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 driven by non-functional currency generated revenue, non-functional currency inventory purchases, investments in U.S. Dollar denominated available-for-sale debt securities, and certain other intercompany transactions. The Company enters into foreign currency contracts to reduce the risk associated with the foreign currency exchange rate fluctuations on these transactions. Certain contracts are designated as cash flow hedges. As of September 30, 2020,2021, December 31, 20192020, and September 30, 2019,2020, the aggregate notional value of the Company's outstanding cash flow hedges was $301.2$739.1 million, $879.8$812.5 million, and $568.3$301.2 million, respectively, with contract maturities ranging from one to twenty-four months.
The Company may enter into long term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of the Company's long term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations. The interest rate swap
contracts are accounted for as cash flow hedges. Refer to Note 75 of the unaudited condensed consolidated financial statements for a discussion of long term debt. As of September 30, 2021, December 31, 2020, and September 30, 2020, the Company had no outstanding interest rate swap contracts.
For contracts designated as cash flow hedges, the changes in fair value are reported as other comprehensive income (loss) and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. Effective hedge results are classified in the unaudited condensed consolidated statements of operations in the same manner as the underlying exposure.
The Company evaluated the probability of certain hedged forecasted transactions and determined certain transactions, against which hedges were designated, were no longer probable of occurring by the end of the originally specified time period, as a result of the impacts of COVID-19. The amounts recorded in other income (expense), previously recorded in accumulated other comprehensive income, as a result of the discontinuance of cash flow hedges were not material for the nine months ended September 30, 2020. There were no amounts recorded in other income (expense) as a result of the discontinuance of cash flow hedges for the three months ended September 30, 2020.
Undesignated Derivative Instruments
The Company may elect to enter into foreign exchange forward contracts to mitigate the change in fair value of specific assets and liabilities on the unaudited condensed consolidated balance sheets. These undesignated instruments are recorded at fair value as a derivative asset or liability on the unaudited condensed consolidated balance sheets with their corresponding change in fair value recognized in other expense, net, together with the re-measurement gain or loss from the hedged balance sheet position. As of September 30, 2020,2021, December 31, 20192020, and September 30, 2019,2020, the total notional value of the Company's outstanding undesignated derivative instruments was $262.9$431.1 million, $304.2$313.1 million, and $454.0$262.9 million, respectively.
Credit Risk
The Company enters into derivative contracts with major financial institutions with investment grade credit ratings and is exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the derivative contracts. However, the Company monitors the credit quality of these financial institutions and considers the risk of counterparty default to be minimal.
12. NOTE 9. PROVISION FOR INCOME TAXES
Provision for Income Taxes
ProvisionThe Company computes its quarterly income tax provision under the effective tax rate method by applying an estimated anticipated annual effective rate to the year-to-date earnings. Losses from jurisdictions for which no benefit can be recognized are excluded from the overall computations of the estimated annual effective tax rate and a separate estimated annual effective tax rate is computed and applied to ordinary income or loss in the loss jurisdiction. Income Taxestaxes for any significant and unusual or extraordinary transactions are computed and recorded in the period in which the specific transaction occurs.For the comparable three and nine months ended September 30, 2021 and 2020 respectively, all global jurisdictions were included in the estimated annual effective tax rate.
The effective rates for income taxes were 14.2% and (10.2)% and 22.1% for the three months ended September 30, 20202021 and 2019,2020, respectively. The change in the Company’s effective tax rate was primarily driven by the proportion of earnings subject to tax in the United States as compared to foreign jurisdictions in each period, and the recording of valuation allowancesallowance releases against the majority of 2020 lossescurrent 2021 earnings forecasted in the United States, and discrete items during the three months ended September 30, 2020.
Cares Act
On March 27, 2020 the United States enacted the CARES Act to combat the negative economic impact
The Company’s effective tax rate for the three months ended September 30, 2020 includes the income tax accounting impacts of the CARES Act. More specifically, the effective tax rate includes a benefit for the portion of forecasted 2020 net operating losses in the United State federal jurisdiction able to be carried back to offset taxable income in the five-year carryback period. This benefit partially offsets the impact of recording valuation allowances against the majority of the Company’s deferred tax assets in the United States federal jurisdiction.
Valuation Allowance
The Company evaluates on a quarterly basis whether the deferred tax assets are realizable which requires significant judgment. The Company considers all available positive and negative evidence, including historical operating performance and expectations of future operating performance. To the extent the Company believes it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established
against the Company's deferred tax assets, which increase income tax expense in the period when such a determination is made.
As noted in the Company's Annual Report on Form 10-K for Fiscal 2020, a significant portion of the Company’s deferred tax assets relate to United States federal and state taxing jurisdictions. Realization of these deferred tax assets is dependent on future United States pre-tax earnings. As of December 31, 2019September 30, 2021 the Company believedcontinues to believe that the weight of the positivenegative evidence outweighedoutweighs the negativepositive evidence regarding the realization of the Company’s United States federal and the majority of the United States state deferred tax assets. Accordingly, the Company continues to maintain valuation allowances on these deferred tax assets. Furthermore, consistent with prior periods, valuation allowances have also been recorded against select foreign deferred tax assets and no valuation allowance was recorded. However,in jurisdictions where the weight of the negative evidence outweighedoutweighs the positive evidence regarding the realization of the majority of the Company’s United States state deferred tax assets and a valuation allowance was recorded.
Based on developments during the first quarter of 2020, including the negative economic impact of the COVID-19 pandemic and an increase in the range of pre-tax charges forecast to be incurred in connection with the 2020 Restructuring Plan, the Company no longer believes it is more likely than not that a majority of the Company’s U.S. federal deferred tax assets will be realized. As such in the first quarter of 2020, the Company recorded a valuation allowance on the portion of U.S. deferred tax assets which are not forecast to be utilized with the 2020 net operating loss carryback. Additionally, based on similar factors during the first quarter of 2020, the Company recorded a valuation allowance on all China deferred tax assets. The Company has recorded additional valuation allowances on pre-tax losses incurred year to date for the US and China during the second and third quarter of 2020 and will continue to evaluate the Company’s ability to realize its deferred tax assets on a quarterly basis.
13. Earnings per ShareNOTE 10. EARNINGS PER SHARE
The following represents a reconciliation from basic income (loss) per share to diluted income (loss) per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands, except per share amounts) | 2020 | | 2019 | | 2020 | | 2019 |
| Numerator | | | | | | | |
| Net income (loss) | $ | 38,946 | | | $ | 102,315 | | | $ | (733,630) | | | $ | 107,443 | |
| Denominator | | | | | | | |
| Weighted average common shares outstanding Class A, B and C | 454,541 | | | 451,385 | | | 453,847 | | | 450,739 | |
| Effect of dilutive securities Class A, B, and C | 2,133 | | | 3,310 | | | 0 | | | 3,308 | |
| Weighted average common shares and dilutive securities outstanding Class A, B, and C | 456,674 | | | 454,695 | | | 453,847 | | | 454,047 | |
| | | | | | | |
| Basic net income (loss) per share of Class A, B and C common stock | $ | 0.09 | | | $ | 0.23 | | | $ | (1.62) | | | $ | 0.24 | |
| Diluted net income (loss) per share of Class A, B and C common stock | $ | 0.09 | | | $ | 0.23 | | | $ | (1.62) | | | $ | 0.24 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands, except per share amounts) | 2021 | | 2020 | | 2021 | | 2020 |
| Numerator | | | | | | | |
| Net income (loss) | $ | 113,444 | | | $ | 38,946 | | | $ | 250,403 | | | $ | (733,630) | |
| Denominator | | | | | | | |
| Weighted average common shares outstanding Class A, B and C | 470,002 | | | 454,541 | | | 461,908 | | | 453,847 | |
| Effect of dilutive securities Class A, B, and C | 3,114 | | | 2,133 | | | 3,010 | | | — | |
| Weighted average common shares and dilutive securities outstanding Class A, B, and C | 473,116 | | | 456,674 | | | 464,918 | | | 453,847 | |
| | | | | | | |
| Basic net income (loss) per share of Class A, B and C common stock | $ | 0.24 | | | $ | 0.09 | | | $ | 0.54 | | | $ | (1.62) | |
| Diluted net income (loss) per share of Class A, B and C common stock | $ | 0.24 | | | $ | 0.09 | | | $ | 0.54 | | | $ | (1.62) | |
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options and restricted stock units representing 7.30.5 million and 0.61.9 million shares of Class A and Class C common stockCommon Stock outstanding for the three and nine months ended September 30, 2021, respectively, (three and nine months ended September 30, 2020 - 7.3 million and 2019, respectively, and 1.9 million for the nine months ended September 30, 2019,0 respectively), were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Due to the Company being in a net loss position for the nine months months ended September 30, 2020, there were 0no stock options or restricted stock units included in the computation of diluted earnings per share, as their effect would have been anti-dilutive.
14. Segment Data and Disaggregated RevenueNOTE 11. SEGMENT DATA AND DISAGGREGATED REVENUE
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 becomeof being a global brand. These geographic regions include North America, Europe, the Middle East and Africa (“EMEA”), Asia-Pacific, and Latin America. 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 segment. Total expenditures for additions to long-lived assets are not disclosed as this information is not regularly provided to the CODM.
Prior to the sale of MyFitnessPal in December 2020, the CODM also received discrete financial information for the Connected Fitness Segment. However, beginning January 1, 2021, the Company no longer reports Connected Fitness as a discrete reportable operating segment (see Note 1 to the unaudited condensed consolidated financial
statements). All prior period balances have been recast to conform to current period presentation. Such reclassifications did not affect total consolidated revenues, consolidated income from operations or consolidated net income.
The Company excludes certain corporate costs from its segment profitability measures. The Company reports these costs within Corporate Other, along with the revenue and costs related to the Company's MMR platforms, which is designed to provide increased transparency and comparability of the Company's operating segments' performance. Furthermore, the majority of the costs included within Corporate Other consists largely of general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain, innovation, and other corporate support functions; costs related to the Company's global assets and global marketing,marketing; costs related to the Company’s headquarters;headquarters such as restructuring and restructuring related charges; and certain foreign currency hedge gains and losses.
The following tables summarize the Company's net revenues and operating income (loss) associated with the Company's segments are summarized in the following tables. Net revenues represent sales to external customers for each segment.by its geographic segments. Intercompany balances were eliminated for separate disclosure.disclosure: | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| Net revenues | | | | | | | |
| North America | $ | 1,035,862 | | | $ | 962,565 | | | $ | 2,747,082 | | | $ | 2,021,247 | |
| EMEA | 241,201 | | | 210,111 | | | 642,308 | | | 437,140 | |
| Asia-Pacific | 211,950 | | | 178,895 | | | 614,539 | | | 397,846 | |
| Latin America | 56,380 | | | 44,338 | | | 151,203 | | | 108,573 | |
| Corporate Other (1) | 139 | | | 37,112 | | | (871) | | | 106,095 | |
| Total net revenues | $ | 1,545,532 | | | $ | 1,433,021 | | | $ | 4,154,261 | | | $ | 3,070,901 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| Operating income (loss) | | | | | | | |
| North America | $ | 292,367 | | | $ | 224,593 | | | $ | 728,698 | | | $ | 251,579 | |
| EMEA | 41,772 | | | 40,834 | | | 108,350 | | | 43,840 | |
| Asia-Pacific | 40,529 | | | 19,248 | | | 111,088 | | | (30,040) | |
| Latin America | 10,831 | | | 1,802 | | | 18,289 | | | (50,756) | |
| Corporate Other (1) | (213,435) | | | (227,907) | | | (566,266) | | | (883,907) | |
| Total operating income (loss) | 172,064 | | | 58,570 | | | 400,159 | | | (669,284) | |
| Interest expense, net | (9,261) | | | (14,955) | | | (36,705) | | | (32,251) | |
| Other income (expense), net | (29,476) | | | (7,184) | | | (75,150) | | | (10,493) | |
| Income (loss) before income taxes | $ | 133,327 | | | $ | 36,431 | | | $ | 288,304 | | | $ | (712,028) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| Net revenues | | | | | | | |
| North America | $ | 962,565 | | | $ | 1,015,920 | | | $ | 2,021,247 | | | $ | 2,675,389 | |
| EMEA | 210,111 | | | 160,981 | | | 437,140 | | | 440,405 | |
| Asia-Pacific | 178,895 | | | 154,898 | | | 397,846 | | | 453,296 | |
| Latin America | 44,338 | | | 52,186 | | | 108,573 | | | 141,095 | |
| Connected Fitness | 36,894 | | | 39,346 | | | 102,600 | | | 101,385 | |
| Corporate Other (1) | 218 | | | 6,125 | | | 3,495 | | | 14,337 | |
| Total net revenues | $ | 1,433,021 | | | $ | 1,429,456 | | | $ | 3,070,901 | | | $ | 3,825,907 | |
(1) Corporate Other consist of foreign currency hedge gains and losses related to revenues generated by entities withinThe following tables summarize the Company's operating segments, but managed through the Company's central foreign exchange risk management program.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| Operating income (loss) | | | | | | | |
| North America | $ | 224,593 | | | $ | 237,229 | | | $ | 251,579 | | | $ | 536,700 | |
| EMEA | 40,834 | | | 21,989 | | | 43,840 | | | 44,700 | |
| Asia-Pacific | 19,248 | | | 34,666 | | | (30,040) | | | 74,116 | |
| Latin America | 1,802 | | | 233 | | | (50,756) | | | (4,017) | |
| Connected Fitness | 6,629 | | | 7,023 | | | 14,020 | | | 8,103 | |
| Corporate Other | (234,536) | | | (162,220) | | | (897,927) | | | (496,905) | |
| Total operating income (loss) | 58,570 | | | 138,920 | | | (669,284) | | | 162,697 | |
| Interest expense, net | (14,955) | | | (5,655) | | | (32,251) | | | (15,881) | |
| Other expense, net | (7,184) | | | (429) | | | (10,493) | | | (2,224) | |
| Income (loss) before income taxes | $ | 36,431 | | | $ | 132,836 | | | $ | (712,028) | | | $ | 144,592 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| Apparel | $ | 1,058,231 | | | $ | 927,041 | | | $ | 2,742,465 | | | $ | 1,951,186 | |
| Footwear | 329,718 | | | 298,687 | | | 981,406 | | | 693,464 | |
| Accessories | 126,345 | | | 145,060 | | | 355,244 | | | 268,912 | |
| Net Sales | 1,514,294 | | | 1,370,788 | | | 4,079,115 | | | 2,913,562 | |
| License revenues | 31,099 | | | 25,121 | | | 76,017 | | | 51,244 | |
| Corporate Other (1) | 139 | | | 37,112 | | | (871) | | | 106,095 | |
| Total net revenues | $ | 1,545,532 | | | $ | 1,433,021 | | | $ | 4,154,261 | | | $ | 3,070,901 | |
Net revenues by product category are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| Apparel | $ | 927,041 | | | $ | 985,623 | | | $ | 1,951,186 | | | $ | 2,499,989 | |
| Footwear | 298,687 | | | 250,596 | | | 693,464 | | | 827,223 | |
| Accessories | 145,060 | | | 118,164 | | | 268,912 | | | 306,406 | |
| Net Sales | 1,370,788 | | | 1,354,383 | | | 2,913,562 | | | 3,633,618 | |
| License revenues | 25,121 | | | 29,602 | | | 51,244 | | | 76,567 | |
| Connected Fitness | 36,894 | | | 39,346 | | | 102,600 | | | 101,385 | |
| Corporate Other (1) | 218 | | | 6,125 | | | 3,495 | | | 14,337 | |
| Total net revenues | $ | 1,433,021 | | | $ | 1,429,456 | | | $ | 3,070,901 | | | $ | 3,825,907 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| Wholesale | $ | 910,655 | | | $ | 830,478 | | | $ | 2,477,853 | | | $ | 1,721,432 | |
| Direct-to-consumer | 603,639 | | | 540,310 | | | 1,601,262 | | | 1,192,130 | |
| Net Sales | 1,514,294 | | | 1,370,788 | | | 4,079,115 | | | 2,913,562 | |
| License revenues | 31,099 | | | 25,121 | | | 76,017 | | | 51,244 | |
| | | | | | | |
| Corporate Other (1) | 139 | | | 37,112 | | | (871) | | | 106,095 | |
| Total net revenues | $ | 1,545,532 | | | $ | 1,433,021 | | | $ | 4,154,261 | | | $ | 3,070,901 | |
(1) Prior to Fiscal 2021, the Company's Connected Fitness segment was separately disclosed, however, effective January 1, 2021, Corporate Other consist of foreign currency hedge gains and losses related to revenues generated by entities withinnow includes the Company's operating segments, but managed through the Company's central foreign exchange risk management program.
Net revenues by distribution channel are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| Wholesale | $ | 830,478 | | | $ | 891,709 | | | $ | 1,721,432 | | | $ | 2,417,028 | |
| Direct to Consumer | 540,310 | | | 462,674 | | | 1,192,130 | | | 1,216,590 | |
| Net Sales | 1,370,788 | | | 1,354,383 | | | 2,913,562 | | | 3,633,618 | |
| License revenues | 25,121 | | | 29,602 | | | 51,244 | | | 76,567 | |
| Connected Fitness | 36,894 | | | 39,346 | | | 102,600 | | | 101,385 | |
| Corporate Other (1) | 218 | | | 6,125 | | | 3,495 | | | 14,337 | |
| Total net revenues | $ | 1,433,021 | | | $ | 1,429,456 | | | $ | 3,070,901 | | | $ | 3,825,907 | |
(1) Corporate Other consist of foreign currency hedge gains and losses related to revenues generated by entities within the Company's operating segments, but managed through the Company's central foreign exchange risk management program.
15. Subsequent Events
On October 28, 2020, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) to sell UAremaining Connected Fitness Inc. (“UACF”), a wholly-owned subsidiarybusiness consisting of MMR for Fiscal 2021 and the Company, pursuantentire Connected Fitness business for Fiscal 2020. All prior periods were recast to which the Company will sell its MyFitnessPal business through a sale of all of the issued and outstanding shares of common stock of UACF, subjectconform to the terms and conditions ofcurrent period presentation. Such reclassifications did not affect total consolidated net revenues, consolidated income from operations or consolidated net income (see Note 1 to the Purchase Agreement. The aggregate sale price is $345 million, of which $215 million is payable at the closing of the sale and up to $130 million in earnout payments which are based on the achievement of certain revenue targets over the three-year period following the closing date as set forth in the Purchase Agreement. The purchase price is subject to working capital and other customary adjustments. The potential earnout payments include up to $35 million payable in 2022, $45 million payable in 2023 and $50 million payable in 2024. The transaction is currently expected to close during the fourth quarter of 2020, subject to applicable regulatory approvals (including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and other customary closing conditions.unaudited condensed consolidated financial statements).
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Forward-Looking Statements
Some of the statements contained in this Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), 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, the impact of the COVID-19 pandemic on our business and results of operations and the operations of our suppliers and logistics providers, our plans to reduce our operating expenses, anticipated charges and restructuring costs, projected savings related to our restructuring plans and our planned sale of our MyFitnessPal platform and the timing thereof, the development and introduction of new products, the implementation of our marketing and branding strategies, and the future benefits and opportunities from 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,” “potential” or the negative of these terms or other comparable terminology.terminology.
The forward-looking statements contained in this Form 10-Q reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by these forward-looking statements, including, but not limited to, those factors described in “Risk Factors” and “Management’s DiscussionMD&A herein and Analysis of Financial Condition and Results of Operations.”in our Annual Report on Form 10-K for Fiscal 2020. These factors include without limitation:
limitation
•the impact of the COVID-19 pandemic on our industry and our business, financial condition and results of operations;operations, including recent impacts on the global supply chain;
•failure of our suppliers or manufacturers to produce or deliver our products in a timely or cost-effective manner;
•changes in general economic or market conditions that could affect overall consumer spending or our industry;
•increased competition causing us to lose market share or reduce the prices of our products or to increase our marketing efforts significantly;
•fluctuations in the costs of raw materials and commodities we use in our products and our supply chain;
•changes to the financial health of our customers;
•loss of key suppliers or manufacturers or failure of our suppliers or manufacturers to produce or deliver our products in a timely or cost-effective manner;
•our ability to access capital and financing required to manage our business on terms acceptable to us;
•our ability to successfully execute our long-term strategies;
•our ability to effectively drive operational efficiency in our business and successfully execute any potential restructuring plans and realize their expected benefits;
•our ability to effectively drive operational efficiency in our business;
•our ability to manage the increasingly complex operations of our global business;
•our ability to comply with existing trade and other regulations, and the potential impact of new trade, tariff and tax regulations on our profitability;
•our ability to effectively develop and launch new, innovative and updated products;
•our ability to accurately forecast consumer shopping preferences and consumer demand for our products and manage our inventory in response to changing demands;
•any disruptions, delaysloss of key customers, suppliers or deficiencies in the design, implementation or application of our new global operating and financial reporting information technology system;
•increased competition causing us to lose market share or reduce the prices of our products or to increase significantly our marketing efforts;
•fluctuations in the costs of our products;manufacturers;
•our ability to further expand our business globally and to drive brand awareness and consumer acceptance of our products in other countries;
•our ability to accurately anticipate and respond to seasonal or quarterly fluctuations inmanage the increasingly complex operations of our operating results;global business;
•our ability to successfully manage or realize expected results from acquisitionssignificant transactions and other significant investments or capital expenditures;
•risks related to foreign currency exchange rate fluctuations;investments;
•our ability to effectively market and maintain a positive brand image;
•the availability, integration and effective operation of information systems and other technology, as well as any potential interruption of such systems or technology;
•risks related to data securityany disruptions, delays or privacy breaches;
•deficiencies in the design, implementation or application of our potential exposure to litigationglobal operating and other proceedings; andfinancial reporting information technology system;
•our ability to attract key talent and retain the services of our senior management and key employees.employees;
•our ability to access capital and financing required to manage our business on terms acceptable to us;
•our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;
•risks related to foreign currency exchange rate fluctuations;
•our ability to comply with existing trade and other regulations, and the potential impact of new trade, tariff and tax regulations on our profitability;
•risks related to data security or privacy breaches; and
•our potential exposure to litigation and other proceedings.
The forward-looking statements contained in this Form 10-Q reflect our views and assumptions only as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.events.
The following MD&A is intended to help readers understand our results of operations and financial condition, and is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying Notes to our unaudited condensed consolidated financial statements under Part I of this Quarterly Report on Form 10-Q.
All dollar and percentage comparisons made herein refer to the three and nine months ended September 30, 2021 compared with the three and nine months ended September 30, 2020, unless otherwise stated. Due to the significant impact of COVID-19 on our Fiscal 2020 figures, certain comparisons to comparable periods of our fiscal year ended December 31, 2019 ("Fiscal 2019") have been included for additional context.
OverviewOVERVIEW
We are a leading developer, marketer, and distributor of branded athletic performance apparel, footwear, and accessories. We create productsOur brand’s moisture-wicking fabrications are engineered in various designs and styles for wear in nearly every climate to solve problems and make athletes lives better, as well as digital health and fitness apps builtprovide a performance alternative to connect people and drive performance.traditional products. Our products are made, sold worldwide and worn worldwide.by athletes at all levels, from youth to professional, on playing fields around the globe, and by consumers with active lifestyles.
Our net revenues grew to $5,267.1 million in 2019 from $3,963.3 million in 2015. We believe that our growth in net revenues was driven by a growing interest in performance products and the strength of the Under Armour brand in the marketplace. Our long-term growth strategy is focused on increased sales of our products through ongoing product innovation, investment in our distribution channels and international expansion. While we plan to continue to invest in growth, we also plan to improve efficiencies throughout our business as we seek to gain scale through our operations and return on our investments.
COVID-19
In March 2020, a novel strain of coronavirus (COVID-19) was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures and orders to “shelter-in-place”.
During the first quarter of 2020, we took action to close substantially all of our brand and factory house stores based on regional conditions, a majority of which remained closed into the second quarter of 2020. By the end ofThrough the third quarter of 2020, substantially allFiscal 2021, we have realized better than expected wholesale and direct-to-consumer sales based on better sell through and demand for Under Armour products in North America, Asia-Pacific, and EMEA. Strategically and operationally, we remain focused on driving premium brand right growth and improved profitability. In the near term, and particularly in our North American business, we are focused on the quality of our brandsales driven by four main strategies: reducing our promotional activities; constraining supply against demand; exiting undifferentiated retail; and factory house stores were re-opened. The followingmaintaining an appropriate level of sales to the off-price channel. Over the long term, our growth strategy is a summarypredicated on delivering industry-leading product innovation; return-driven investments into connecting even more deeply with our consumers through marketing activations and premium experiences; and the expansion of our owneddirect-to-consumer and operated store closures and their statusinternational businesses.
Quarterly Results
Financial highlights for the three months ended September 30, 2021, as ofcompared to the end of September 2020:same period in Fiscal 2020 include:
•North America: Beginning in mid-March we closed all of our stores in the North America operating segment, which remained closed through the end of April. We began a progressive re-opening of stores in May and more than 85% of our stores were open by the end of June. All of our stores were open by the end of September.Total net revenues increased 7.9%.
•EMEA: Beginning in mid-March we closed all ofWithin our stores in the EMEA operating segment, of which, over 65% remained closed through the end of April. We continued the re-opening of stores in Maychannels, wholesale revenue increased 9.7% and more than 95% of our stores were open by the end of June. All of our stores were open by the end of September.direct-to-consumer revenue increased 11.7%.
•Asia-Pacific: Stores in China were closed from late-January through early-March, when a slowly progressive re-opening process started. Stores in the remainder of the Asia-Pacific operating segment were also closed from time to time based on local conditions. More than 80% ofWithin our stores were open by the end of Aprilproduct categories, apparel revenue increased 14.2%, footwear increased 10.4%, and more than 95% of the stores were open by the end of June, which remained consistent through the end of September.accessories revenue decreased 12.9%.
•Latin America: BeginningRevenue in mid-March we closed allour North America, EMEA, Asia-Pacific, and Latin-America segments increased 7.6%, 14.8%, 18.5%, and 27.2%, respectively.
•Revenues from Corporate Other decreased 99.6% primarily due to the sale of our storesthe MyFitnessPal platform in the Latin America operating segment, which remained closed in April and through the end of May. We began a progressive re-opening of stores in June and more than 25% of our stores were open by the end of June. We continued the progressive re-opening of stores through September and more than 85% of stores were open by the end of September.December 2020.
The discussion above reflects the status of our owned and operated store closures through the end of September 2020, however, depending on the progression of COVID-19, stores in certain regions may close from time to time.
Additionally, throughout this time, many of our wholesale customers also closed their stores or operated them at limited capacity. As this pandemic progressed, we estimated that, in mid-May, approximately 80% of locations where our products are sold were closed. By the end of May and throughout June, our owned and partner doors and those of our wholesale customers began reopening, though they continued to operate at limited capacity and experienced significantly decreased traffic. By the end of June, over 90% of our owned and partner doors had reopened, and most of our wholesale customers had also reopened their stores. Throughout the second and third
quarters,•Gross margin increased 310 basis points to 51.0%.
•Selling, general and administrative expenses increased 8.3%.
•Restructuring and impairment charges decreased 77.6% from $74.2 million during the three months ended September 30, 2020 to $16.7 million during the three months ended September 30, 2021.
COVID-19 Update
The COVID-19 pandemic has caused, and we experienced significant growthexpect will continue to cause, disruption and volatility in our global e-commerce business. Although we expect e-commerce sales to represent a higher portionbusiness and in the businesses of our overall businesswholesale customers, licensing partners, suppliers, and vendors.
For instance, the pandemic has caused manufacturing challenges, with temporary closures or other restrictions placed on factories, in 2020, saleskey sourcing countries in this channel have historically represented a small percentageSoutheast Asia, including Vietnam, where we source approximately one third of our total revenue. For example, in 2019 sales throughproducts. Additionally, the COVID-19 pandemic has caused global logistical challenges, including shipping container shortages, transportation delays, and port congestion. These challenges have disrupted some of our direct to consumer channel represented 34% of net revenues, with our e-commerce business representing less than half of the total direct to consumer business.
Our business operationsnormal inbound and financial performance in 2020 were materially impacted by the developments discussed above, including decreases in net revenue and decreases in overall profitability as compared to the prior year. These developments have furtheroutbound inventory flow, which has required us to recognizeincur increased freight costs, and are impacting the timing of sales to some of our customers as we work to manage product availability and inventory levels and in certain long-lived assetcases adjust orders and goodwill impairment charges, discussedshipping with our factory partners and logistic suppliers. While at the time of filing of this Form 10-Q nearly all the factories that we do business with are open, including in further detail below,Vietnam, we expect that these manufacturing and record valuation allowancessourcing challenges will continue into the next several quarters and could negatively impact our sales, especially as we believe it will take some time to reach full operating capacity levels again. We also expect to continue to incur increased freight costs as a means to mitigate some inventory delays over the next several quarters.
Moreover, governments worldwide continue to periodically impose preventative and protective actions, such as temporary travel bans, forced business closures, and stay-at-home orders, all in an effort to reduce the spread of the virus. However, such government measures are not implemented consistently or simultaneously around the world, thus making our business susceptible to volatility on a global and regional basis. We believe we may continue to experience varying degrees of volatility, business disruptions and periods of closure of our stores, distribution centers and corporate facilities, although, as of September 30, 2021, the majority of our deferred tax assetsbrand and recognize impairment onfactory house stores and the stores of our wholesale customers have reopened. In certain equity method investments.locations, however, primarily Asia Pacific, some of our brand and factory house stores and the stores of our wholesale customers remain closed. Where reopening has been permitted, some of these retail stores are operating with restrictive and precautionary measures in place such as reduced operating hours, physical distancing, enhanced cleaning and sanitation, and limited occupancy levels.
In additionThe COVID-19 pandemic and related disruptions across the global supply chain and retail environment, remains a risk that could have material adverse impacts to our future revenue growth as well as to our overall profitability. The extent of the impactsimpact of the COVID-19 pandemic on our sales outlined above, this pandemic has also impacted the operationsoperational and financial performance depends on future developments that are outside of our distribution centers,control. For a more complete discussion of the COVID-19 related risks facing our third-party logistics providers and our manufacturing and supplier partners, including through the closure or reduced capacity of facilities and operational changes to accommodate social distancing. Depending on the progression of COVID-19, we may experience further disruptions or increased operational and logistics costs throughout our supply chain which could negatively impact our ability to obtain inventory or service our customers.
As we have navigated these unprecedented circumstances, we continued to focus on preserving our liquidity and managing our cash flows through certain preemptive actions designed to enhance our ability to meet our short-term liquidity needs. During the second quarter of 2020, we amended our credit agreement which provides temporary relief from or revisions to certain of our financial covenants in the near-term, providing us with improved access to liquidity during this time period. We also completed a sale of $500 million of Convertible Senior Notes, the net proceeds of which we used to repay amounts outstanding under our amended credit agreement. Additional actions include, among others, reductionsbusiness, refer to our discretionary spending and changes to"Risk Factors" section included in Item 1A in our investment strategies, negotiating payment terms with our vendors, including revised lease terms with landlords in the form of rent deferrals or rent waivers, reductions in compensation costs, including through temporary reductions in pay, layoffs and decreases in incentive compensation, and limiting certain marketing and capital expenditures. Further, inAnnual Report on Form 10-K for Fiscal 2020.
In connection with global legislation, including the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, we recognized certain incentives totaling $0.6 million and $2.7 million for the three and nine months ended September 30, 2021, respectively, and $1.5 million and $6.6 million for the three and nine months ended September 30, 2020.2020, respectively. The incentives were recorded as a reduction of the associated costs which we incurred within selling, general and administrative expenses in the unaudited condensed consolidated statement of operations.
We do expectSegment Presentation and Marketing
As previously disclosed, effective January 1, 2021, we no longer report Connected Fitness as a discrete reportable operating segment. Corporate Other now includes the pandemicremaining Connected Fitness business consisting of MMR for Fiscal 2021 and the entire Connected Fitness business for Fiscal 2020. Please refer to continueNote 1 for a basis of our presentation and to Note 11 for a complete presentation of the segment data. All prior period balances have a material impact on our financial condition, resultsbeen recast to conform to current period presentation.
Corporate Other consists primarily of operationsrevenue and cash flows from operations in future periods. In the fourth quarter of 2020, we expect net revenues and profitability to be materially lower than the prior year period. Specifically, we are expecting timing impacts from COVID-19,costs related to customer order flowour MMR platforms, as well as general and changes inadministrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain, timing, which is expectedinnovation, and other corporate support functions; costs related to result in more planned spring product deliveries in early 2021 versus late 2020. We anticipate this change will negatively impact our fourth quarter net revenues by approximately 9 percentage points comparedglobal assets and global marketing, costs related to the prior-year fourth quarter. We expect the negative impacts of COVID-19 to continue into 2021.
Further, we could experience material impacts, in addition to those noted above, including, but not limited to, increased sales-related reserves, increased charges from allowance for doubtful accounts, charges from adjustments of the carrying amount of inventory, increased cost of product, costs to alter production plans, changes in the designation of our hedging instruments, volatility in our effective tax rateheadquarters; restructuring and impacts to cash flows from operations due to delays in cash receipts from customers. The extent of the impact of the COVID-19 pandemic on our operationalimpairment related charges; and financial performance depends on future developments outside of our control, including the durationcertain foreign currency hedge gains and spread of the pandemic and related actions taken by federal, state and local government officials, and international governments to prevent disease spread. Given that the current circumstances are dynamic and highly uncertain, we cannot reasonably estimate the impact of future store closures and shopping behaviors, including the related impact on store traffic patterns, conversion or overall consumer demand. For a more complete discussion of the COVID-19 related risks facing our business, refer to the “Risk Factors” section included in Part II, Item 1A of our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 and those included in this Quarterly Report on Form 10-Q.
Quarterly Results
Financial highlights
Fiscal Year End Change
During the first quarter of Fiscal 2021, our Board of Directors approved a change in our fiscal year end from December 31 to March 31, effective for the fiscal year beginning April 1, 2022. Because our largest quarters are currently realized in the period from July 1 through December 31, we believe that this change will provide greater alignment with our business cycle and financial reporting. There will be no change to Fiscal 2021, which will end on December 31, 2021 and is expected to be reported in February of 2022. Following a three months ended September 30, 2020 as compared to the prior yearmonth-transition period include:
•Net revenues increased 0.2%.
•Wholesale revenue decreased 6.9%(January 1, 2022 – March 31, 2022), while direct-to-consumer revenue increased 16.8%.
•Apparel revenue decreased5.9%, while footwear and accessories revenue increased 19.2% and 22.8%, respectively.
•Revenue in our North America and Latin-America segments decreased 5.3% and 15.0%, respectively, respectively, while revenue in our EMEA and Asia-Pacific segments increased 30.5% and 15.5%, respectively.
•Gross margin decreased 40 basis points.
•Selling, general and administrative expense increased 0.5%.
•Restructuring and impairment charges were $74.2 million, comprised of $70.2 million of restructuring and related impairment charges and $4.0 million of long-lived asset impairment charges.Fiscal 2023 will run from April 1, 2022 through March 31, 2023. Consequently, there will be no Fiscal 2022.
2020 Restructuring
On March 31,During Fiscal 2020, our Board of Directors approved the previously announceda restructuring plan ("2020 Restructuring"ranging between $550.0 million to $600.0 million in costs (the "2020 restructuring plan") designed to rebalance our cost base to further improve profitability and cash flow generation. We identified further opportunities
Restructuring and on September 2, 2020, our Board of Directors approved a $75 million increaserelated impairment charges and recoveries require us to make certain judgments and estimates regarding the amount and timing as to when these charges or recoveries occur. The estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, we conduct an evaluation of the related liabilities and expenses and may revise our assumptions and estimates as appropriate, as new or updated information becomes available. As of September 30, 2021, we currently estimate total restructuring plan, resulting in an updatedand related charges associated with the 2020 restructuring plan of approximately $550will range between $525 million to $600 million of total estimated pre-tax restructuring and related charges.$575 million.
The restructuring and related charges primarily consist of up to approximately:
•$224199.0 million of cash restructuring charges, comprised of up to: $63which approximately $28.0 million inrelates to employee severance and benefit costs, $14 million relates to facility and lease termination costs $30and $157.0 million in employee severance and benefit costs, and $131 million inrelates to contract termination and other restructuring costs; and
•$376376.0 million of non-cash charges, comprised of which approximately $291.0 million relates to an impairment of $291 million related tocharge on our New York City flagship store and $85$85.0 million ofrelates to intangibles and other asset related impairments.
As a result of our restructuring efforts, we expect approximately $40 million to $60 million of pre-tax savings in 2020 from our restructuring plan.
We recorded $70.2$16.8 million and $410.3$26.9 million of restructuring and related impairment charges for the three and nine months ended September 30, 2020,2021, respectively, including the right of use asset ("ROU") impairment related to our New York City flagship store. The summary of the costs recorded duringand $70.2 million and $410.3 million for the three and nine months
ended September 30, 2020, as well as our current estimates of the amount expected to be incurred in connection with the 2020 restructuring plan is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Restructuring and Related Impairment Charges Recorded | | Estimated Restructuring and Related Impairment Charges |
| (In thousands) | Three months ended September 30, 2020 | | Nine months ended September 30, 2020
(A) | | Remaining Charges to be Incurred (B) | | Total Charges to be Incurred (1)
(A+B) |
| Costs recorded in cost of goods sold: | | | | | | | |
| Contract-based royalties | $ | — | | $ | — | | $ | 11,000 | | $ | 11,000 |
| Inventory write-offs | — | | — | | 2,000 | | 2,000 |
| Total costs recorded in cost of goods sold | — | | — | | 13,000 | | 13,000 |
| | | | | | | |
| Costs recorded in restructuring and related impairment charges: | | | | | | | |
| Property and equipment impairment | 3,307 | | | 26,211 | | | 17,789 | | | 44,000 | |
| Intangible asset impairment | — | | | — | | | 4,000 | | | 4,000 | |
| ROU asset impairment | — | | | 290,813 | | | 4,187 | | | 295,000 | |
| Employee related costs | 26,410 | | | 27,239 | | | 2,761 | | | 30,000 | |
| Contract exit costs (2) | 38,520 | | | 53,462 | | | 124,538 | | | 178,000 | |
| Other restructuring costs | 1,995 | | | 12,533 | | | 23,467 | | | 36,000 | |
| Total costs recorded in restructuring and related impairment charges | 70,232 | | | 410,258 | | | 176,742 | | | 587,000 | |
| Total restructuring and related impairment and restructuring related costs | $ | 70,232 | | | $ | 410,258 | | | $ | 189,742 | | | $ | 600,000 | |
(1) Estimated restructuring and related impairment charges to be incurred reflect the high-end of the range of the estimated remaining charges expected to be taken in connection with the restructuring plan. We currently anticipate that most of the total restructuring and related charges will occur by the end of fiscal 2020.
(2) Contract exit costs are primarily comprised of proposed lease exits of certain brand and factory house stores and office facilities, and proposed marketing and other contract exits.
All restructuring and related impairment charges are included in our Corporate Other non-operating segment, of which $39.1 million are North America related, $11.5 million are EMEA related, $6.1 million are Latin America related, $3.6 million are Asia-Pacific related and $0.1 million are Connected Fitness related for the three months ended September 30, 2020 and $367.4 million are North America related, $11.6 million are EMEA related, $6.4 million are Latin America related, $3.6 million are Asia-Pacific related and $0.1 million are Connected Fitness related for the nine months ended September 30, 2020.
The lease term for our New York City flagship store commenced on March 1, 2020 and an operating lease ROU asset and corresponding operating lease liability of $344.8 million was recorded on our unaudited consolidated balance sheet. In March, as a part of the 2020 Restructuring, we made the strategic decision to forgo the opening of our New York City flagship store and the property is actively being marketed for sublease. We recognized a ROU asset impairment of $290.8 million for the nine months ended September 30, 2020, reducingrespectively, under the carrying value of the lease asset to its estimated fair value. Fair value was estimated using an income-approach based on our forecast of future cash flows expected to be derived from the property based on current sublease market rent. Rent expense or sublease income related to this lease will be recorded within other income (expense)2020 restructuring plan. For more details on the 2020 restructuring plan, see Note 3 to our unaudited condensed consolidated statements of operations. There were no related ROU asset impairment charges for the three months ended September 30, 2020.financial statements.
These charges require us to make certain judgementsjudgments and estimates regarding the amount and timing of restructuring and related impairment charges or recoveries. Our estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, we conduct an evaluation of theWe expect to recognize any remaining charges related liabilities and expenses and revise our assumptions and estimates as appropriate.
Long-Lived Asset Impairment
As a result of the impacts of COVID-19, we determined that sufficient indicators existed to trigger the performance of an interim long-lived asset impairment analysis as of March 31, 2020. Inthis plan by the first quarter of 2020, we performed undiscounted cash flow analyses of our long-lived assets, including retail stores at an individual store level. Based on these undiscounted cash flow analyses, we determined that certain long-lived assets had netcalendar year 2022.
carrying values that exceeded their estimated undiscounted future cash flows. We estimate the fair values of these long-lived assets based on their discounted cash flows or market rent assessments. We compared these estimated fair values to the net carrying values. Additionally, we recognized long-lived asset impairment charges of $4.0 million for the three months ended September 30, 2020, included within the North America operating segment. As a result, we recognized $87.8 million of long-lived asset impairment charges for the nine months ended September 30, 2020. The long-lived impairment charge was recorded within restructuring and impairment charges on the unaudited consolidated statements of operations and as a reduction to the related asset balances on the unaudited consolidated balance sheets. The long-lived asset impairment charges are included with our operating segments as follows: $47.4 million recorded in North America, $25.5 million recorded in Asia-Pacific, $12.8 million recorded in Latin America, and $2.1 million recorded in EMEA for the nine months ended September 30, 2020.
The significant estimates used in the fair value methodology, which are based on Level 3 inputs, include: management's expectations for future operations and projected cash flows, including net revenue, gross profit and operating expenses and market conditions, including estimated market rent.
Additionally, we recognized $290.8 million of long-lived asset impairment charges related to our New York City flagship store, which was recorded in connection with our 2020 Restructuring Plan for the nine months ended September 30, 2020. Refer to the 2020 Restructuring section above for further discussion of the restructuring and related impairment charges.
Goodwill Impairment
As a result of the impacts of COVID-19, we determined that sufficient indicators existed to trigger an interim goodwill impairment analysis for all of our reporting units as of March 31, 2020. In the first quarter of 2020, we performed discounted cash flow analyses and determined that the estimated fair values of Latin America reporting unit and Canada reporting unit, related, within our North America operating segment, no longer exceeded its carrying value, resulting in an impairment of goodwill. We recognized goodwill impairment charges of $51.6 million for the nine months ended September 30, 2020 for these reporting units. The goodwill impairment charge was recorded within restructuring and impairment on the unaudited consolidated statements of operations and as a reduction to the goodwill balance on the unaudited consolidated balance sheets. The goodwill impairment charges are included with our operating segments as follows: $15.4 million recorded in North America and $36.2 million recorded in Latin America for the nine months ended, September 30, 2020. There were no triggering events or goodwill impairment charges recorded for the three months ended September 30, 2020.
The determination of our reporting units' fair value includes assumptions that are subject to various risks and uncertainties. The significant estimates used in the discounted cash flow analyses, which are based on Level 3 inputs, include: our weighted average cost of capital, adjusted for the risk attributable to the geographic regions of the reporting units business, long-term rate of growth and profitability of the reporting units business, working capital effects, and changes in market conditions, consumer trends or strategy.
As of March 31, 2020, the fair value of each of our other reporting units substantially exceeded its carrying value with the exception of our EMEA reporting unit. The fair value of our EMEA reporting unit exceeded its carrying value by 16%. Holding all other assumptions used in the fair value measurement of the EMEA reporting unit constant, a reduction in the growth rate of revenue by 1.5 percentage points or a reduction in the growth rate of net income by 2.3 percentage points would eliminate the headroom. No events occurred during the three and nine months ended September 30, 2020 that indicated it was more likely than not that goodwill was impaired for this reporting unit.RESULTS OF OPERATIONS
Acquisition
On March 2, 2020, we acquired, on a cash free, debt free basis, 100%The following tables set forth key components of Triple Pte. Ltd. ("Triple"), a distributor of our products in Southeast Asia. The purchase price for the acquisition was $32.9 million in cash, net of $8.9 million of cash acquired that was held by Triple at closing and settlement of $5.1 million in pre-existing trade receivables due from Triple prior to the acquisition. The results of operations of this acquisition have been consolidated with our results of operations beginning on March 2, 2020.
Pending Salefor the periods indicated, both in dollars and as a percentage of MyFitnessPal
On October 28, 2020, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) to sell UA Connected Fitness, Inc. (“UACF”), a wholly-owned subsidiary, pursuant to which we will sell our MyFitnessPal business through a sale of all of the issued and outstanding shares of common stock of UACF, subject to the terms and conditions of the Purchase Agreement. The aggregate sale price is $345 million, of which $215 million is payable at the closing of the sale and up to $130 million in earnout payments which are based on the achievement of certain revenue targets over the three-year period following the closing date as set forth in the Purchase
Agreement. The purchase price is subject to working capital and other customary adjustments. The potential earnout payments include up to $35 million payable in 2022, $45 million payable in 2023 and $50 million payable in 2024. The transaction is currently expected to close during the fourth quarter of 2020, subject to applicable regulatory approvals (including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and other customary closing conditions. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2021 | | 2020 | Change increase (decrease) | | 2021 | | 2020 | Change increase (decrease) |
| Net revenues | $ | 1,545,532 | | | $ | 1,433,021 | | $ | 112,511 | | | $ | 4,154,261 | | | $ | 3,070,901 | | $ | 1,083,360 | |
| Cost of goods sold | 757,428 | | | 746,701 | | 10,727 | | | 2,068,695 | | | 1,604,428 | | 464,267 | |
| Gross profit | 788,104 | | | 686,320 | | 101,784 | | | 2,085,566 | | | 1,466,473 | | 619,093 | |
| Selling, general and administrative expenses | 599,384 | | | 553,549 | | 45,835 | | | 1,659,025 | | | 1,586,156 | | 72,869 | |
| Restructuring and impairment charges | 16,656 | | | 74,201 | | (57,545) | | | 26,382 | | | 549,601 | | (523,219) | |
| Income (loss) from operations | 172,064 | | | 58,570 | | 113,494 | | | 400,159 | | | (669,284) | | 1,069,443 | |
| Interest income (expense), net | (9,261) | | | (14,955) | | 5,694 | | | (36,705) | | | (32,251) | | (4,454) | |
| Other income (expense), net | (29,476) | | | (7,184) | | (22,292) | | | (75,150) | | | (10,493) | | (64,657) | |
| Income (loss) before income taxes | 133,327 | | | 36,431 | | 96,896 | | | 288,304 | | | (712,028) | | 1,000,332 | |
| Income tax expense (benefit) | 18,962 | | | (3,714) | | 22,676 | | | 38,870 | | | 14,696 | | 24,174 | |
| Income (loss) from equity method investments | (921) | | | (1,199) | | 278 | | | 969 | | | $ | (6,906) | | $ | 7,875 | |
| Net income (loss) | $ | 113,444 | | | $ | 38,946 | | $ | 74,498 | | | $ | 250,403 | | | $ | (733,630) | | $ | 984,033 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (As a percentage of net revenues) | 2021 | | 2020 | | 2021 | | 2020 |
| Net revenues | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | 49.0 | % | | 52.1 | % | | 49.8 | % | | 52.2 | % |
| Gross profit | 51.0 | % | | 47.9 | % | | 50.2 | % | | 47.8 | % |
| Selling, general and administrative expenses | 38.8 | % | | 38.6 | % | | 39.9 | % | | 51.7 | % |
| Restructuring and impairment charges | 1.1 | % | | 5.2 | % | | 0.6 | % | | 17.9 | % |
| Income (loss) from operations | 11.1 | % | | 4.1 | % | | 9.6 | % | | (21.8) | % |
| Interest income (expense), net | (0.6) | % | | (1.0) | % | | (0.9) | % | | (1.1) | % |
| Other income (expense), net | (1.9) | % | | (0.5) | % | | (1.8) | % | | (0.3) | % |
| Income (loss) before income taxes | 8.6 | % | | 2.5 | % | | 6.9 | % | | (23.2) | % |
| Income tax expense (benefit) | 1.2 | % | | (0.3) | % | | 0.9 | % | | 0.5 | % |
| Loss from equity method investment | (0.1) | % | | (0.1) | % | | — | % | | (0.2) | % |
| Net income (loss) | 7.3 | % | | 2.7 | % | | 6.0 | % | | (23.9) | % |
GeneralRevenues:
Net revenues compriseconsist of net sales, license revenues, and Connected Fitness revenues.revenues from digital subscriptions and advertising. Net sales compriseconsist of sales from our primary product categories, which are apparel, footwear and accessories.accessories product. Our license revenues primarily consist of fees paid to us by our licensees in exchange for the use of our trademarks on their products. Our
Net revenues by product category are summarized below for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| (In thousands) | 2021 | | 2020 | Change increase (decrease) | | 2021 | | 2020 | Change increase (decrease) | | | | |
| Apparel | $ | 1,058,231 | | | $ | 927,041 | | $ | 131,190 | | | $ | 2,742,465 | | | $ | 1,951,186 | | $ | 791,279 | | | | | |
| Footwear | 329,718 | | | 298,687 | | 31,031 | | | 981,406 | | | 693,464 | | 287,942 | | | | | |
| Accessories | 126,345 | | | 145,060 | | (18,715) | | | 355,244 | | | 268,912 | | 86,332 | | | | | |
| Net Sales | 1,514,294 | | | 1,370,788 | | 143,506 | | | 4,079,115 | | | 2,913,562 | | 1,165,553 | | | | | |
| License revenues | 31,099 | | | 25,121 | | 5,978 | | | 76,017 | | | 51,244 | | 24,773 | | | | | |
| Corporate Other (1) | 139 | | | 37,112 | | (36,973) | | | (871) | | | 106,095 | | (106,966) | | | | | |
| Total net revenues | $ | 1,545,532 | | | $ | 1,433,021 | | $ | 112,511 | | | $ | 4,154,261 | | | $ | 3,070,901 | | $ | 1,083,360 | | | | | |
(1) Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program. Effective January 1, 2021, included within Corporate Other is the operating results of the remaining Connected Fitness business consisting of MMR for Fiscal 2021 and the entire Connected Fitness for Fiscal 2020. All prior periods were recast to conform to the current period presentation. Such reclassifications did not affect total consolidated revenues, consistconsolidated income from operations or consolidated net income (see Note 1 to our unaudited condensed consolidated financial statements).
Net sales
Net sales increased by $143.5 million, or 10.5%, to $1,514.3 million during the three months ended September 30, 2021, as compared to $1,370.8 million during the same period in Fiscal 2020. The increase in net sales was primarily driven by increased revenues in apparel and footwear, partially offset by a decrease in revenues in accessories. Apparel saw strength across several sports categories, particularly Train and Golf, and footwear grew primarily in Run, with revenue growth in both product types driven primarily by higher average selling prices, which benefited from less promotions and discounts. Decreases in accessories revenues were due to lower unit sales, primarily due to lower demand for sports masks. When compared to the same period in Fiscal 2019, net sales increased 11.8%.
Net sales increased by $1,165.6 million, or 40.0%, to $4,079.1 million during the nine months ended September 30, 2021, as compared to $2,913.6 million during the same period in Fiscal 2020. The increase in net sales was primarily driven by increased unit sales across all our product categories including apparel, footwear, and accessories. The increase in demand was primarily due to the significant disruptions we experienced during the second quarter of digital advertising, digital fitness platform licensesFiscal 2020 related to COVID-19, including cancellations of orders by our wholesale partners and subscriptionsclosures of retail locations, with the majority shut down or operating at a reduced capacity in the prior period, including our own brand and factory house stores as well as the stores of our wholesale customers. Increased demand for the nine months ended September 30, 2021 was also driven by changes to customer order flow and supply chain timing from the fourth quarter of Fiscal 2020 to the first quarter of Fiscal 2021. When compared to the same period in Fiscal 2019, net sales increased 12.3%.
License revenues
License revenues increased by $6.0 million, or 23.8%, to $31.1 million for the three months ended September 30, 2021, as compared to $25.1 million during the same period in Fiscal 2020 driven by higher demand and improved business and financial conditions of our licensees. The increased revenue was primarily from our Connected Fitness business.licensing partners in North America, as this region continues to recover from the impacts of COVID-19.
License revenues increased by $24.8 million, or 48.3%, to $76.0 million for the nine months ended September 30, 2021, as compared to $51.2 million during the same period in Fiscal 2020 driven by higher demand and improved business and financial conditions of our licensees. The increased revenue was primarily from our licensing partners in North America, as this region continues to recover from the impacts of COVID-19.
Revenues from Corporate Other
Revenues from Corporate Other decreased by $37.0 million for the three months ended September 30, 2021, and by $107.0 million for the nine months ended September 30, 2021, as compared to the same periods in Fiscal 2020, primarily due to the sale of MyFitnessPal in December 2020. See Note 1 to our unaudited condensed consolidated financial statements for more details.
Gross Profit
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. 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 Connected Fitnessdigital subscription and advertising revenues, primarily website hosting costs, and no cost of goods sold is associated with our license revenues.
We include outbound freight costs associated with shipping goods to customers as cost of goods sold,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 $21.2$13.8 million and $20.8$21.2 million for the three months ended September 30, 20202021 and 2019,2020, respectively, and $61.2$63.3 million and $63.0$61.2 million for the nine months ended September 30, 2021 and 2020, respectively.
Gross profit increased by $101.8 million to $788.1 million for the three months ended September 30, 2021, as compared to $686.3 million during the same period in Fiscal 2020. Gross profit as a percentage of net revenues, or gross margin, increased by 310 basis points to 51.0% for the three months ended September 30, 2021, compared to 47.9% during the same period in Fiscal 2020.
This increase in gross margin was primarily driven by the following:
•approximately 400 basis points of pricing improvements driven by lower promotional activity within our direct-to-consumer channel, along with lower promotions and 2019, respectively.markdowns within our wholesale business; and
•approximately 120 basis points resulting from channel mix, primarily related to lower mix of off-price sales.
These increases were partially offset by the following decreases in gross margin:
•approximately 100 basis points related to the absence of MyFitnessPal, which was sold in December 2020; and
•approximately 90 basis points relating primarily to higher freight and logistic costs due to COVID-19 related supply chain pressures
Gross profit increased by $619.1 million to $2,085.6 million for the nine months ended September 30, 2021, as compared to $1,466.5 million during the same period in Fiscal 2020. Gross profit as a percentage of net revenues, or gross margin, increased 240 basis points to 50.2%, compared to 47.8% during the same period in Fiscal 2020.
This increase in gross margin was primarily driven by the following:
•approximately 380 basis points of pricing improvements driven by lower promotional activity within our direct-to-consumer channel along with lower promotions and markdowns within our wholesale channel; and
•approximately 50 basis points resulting from a benefit of foreign exchange impacts.
These increases were partially offset by the following decreases in gross margin:
•approximately 130 basis points related to the absence of MyFitnessPal, which was sold in December 2020; and
•approximately 40 basis points related to channel mix primarily due to a lower mix of e-commerce and a higher mix of off-price sales compared to last year, when this channel was essentially closed for a part of the period during the nine months ended September 30, 2020.
Through the remainder of Fiscal 2021, we expect gross margin will continue to benefit from pricing and changes in foreign currency, partially offset by increased freight and logistic expenses and the sale of MyFitnessPal, which carried a high gross margin rate.
Selling, General and Administrative Expenses
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. The marketing category consists primarily of sports and brand marketing, media, and retail presentation. Sports and brand marketing includes professional, club and collegiate sponsorship agreements, individual athlete and influencer agreements, and providing and selling products
directly to team equipment managersteams and to individual athletes. Media includes digital, broadcast, and print media outlets, including social and mobile media. Retail presentation includes sales displays and concept shops and depreciation expense specific to our in-store fixture programs. Our marketing costs are an important driver of our growth.
Selling, general and administrative expensesincreased by $45.8 million, or 8.3%, to $599.4 million for the three months ended September 30, 2021, as compared to $553.5 million during the same period in Fiscal 2020. Within selling, general and administrative expenses:
•Marketing costs increased $36.6 million to $167.3 million, as compared to $130.7 million during the same period in Fiscal 2020. The increase was primarily attributable to reduced marketing activity in the prior fiscal year due to the COVID-19 pandemic. As a percentage of net revenues, marketing costs increased to 10.8% from 9.1% in the prior fiscal year period.
•Other costs increased $9.3 million to $432.1 million, as compared to $422.8 million during the same period in Fiscal 2020. The increase was primarily driven by higher incentive compensation expenses and non salaried wages, and general increase in business activities in Fiscal 2021, as compared to the same period in Fiscal 2020. As a percentage of net revenues, other costs decreased to 28.0% from 29.5%.
As a percentage of net revenues, total selling, general and administrative expenses increased to 38.8% for the three months ended September 30, 2021, compared to 38.6% during the same period in Fiscal 2020.
Selling, general and administrative expenses increased by$72.9 million, or 4.6%,to $1,659.0 million for the nine months ended September 30, 2021, as compared to $1,586.2 million during the same period in Fiscal 2020. Within selling, general and administrative expense:
•Marketing costs increased $54.1 million to $444.6 million, as compared to $390.5 million during the same period in Fiscal 2020. The increase was primarily attributable to reduced marketing activity in the prior fiscal year due to the COVID-19 pandemic. This increase was partially offset by reduced rights fees for sports marketing assets and reductions in retail marketing within our wholesale channel. As a percentage of net revenues, marketing costs decreased to 10.7% due to increased revenues, from 12.7% in the prior fiscal year.
•Other costs increased $18.7 million to $1,214.4 million, as compared to $1,195.7 million during the same period in Fiscal 2020. The increase was primarily driven by higher incentive compensation, non salaried wages, and retail facility expenses, and general increase in business activities in Fiscal 2021, as compared to the same period in Fiscal 2020, which was more severely impacted by COVID-19. These increases were partially offset by incurring lower legal and depreciation expense. As a percentage of net revenues, other costs decreased to 29.2% from 38.9% during the same period in Fiscal 2020.
As a percentage of net revenues, selling, general and administrative expenses decreased to 39.9% as compared to 51.7% during the same period in Fiscal 2020.
Restructuring and Impairment Charges
Restructuring and impairment chargeswithin our operating expenses were $16.7 million and $74.2 million for the three months ended September 30, 2021 and 2020, respectively. Refer to the "2020 Restructuring" section above for further discussion of the 2020 restructuring plan.
Restructuring and impairment charges within our operating expenses were $26.4 million and $549.6 million for the nine months ended September 30, 2021 and 2020, respectively. Included in the prior fiscal year was $135.4 million of long-lived asset and goodwill impairment charges, as well as a right of use asset impairment charge of $290.8 million relating to our flagship store in New York City.
Income (Loss) from Operations
Income from operations increased by $113.5 million to $172.1 million for the three months ended September 30, 2021, and increased by $1,069.4 million to $400.2 million for the nine months ended September 30, 2021. The increase in income from operations for both the three and nine month period was driven primarily by increased revenues along with significantly lower restructuring and impairment charges compared to the prior fiscal year.
Interest Expense, Net
Interest expense, net is primarily comprised of interest paid and accrued on our debt facilities, offset by interest income earned on our cash and cash equivalents.
Interest expense, net decreased by $5.7 million to $9.3 million for the three months ended September 30, 2021, as compared to $15.0 million during the same period in Fiscal 2020. The decrease was primarily due to less interest on our Convertible Senior Notes as a result of our repurchase of $419.1 million aggregate principal amount of Convertible Senior Notes. See Note 5 to our unaudited condensed consolidated financial statements.
Interest expense, net increased by $4.5 million to $36.7 million for the nine months ended September 30, 2021, as compared to $32.3 million during the same period in Fiscal 2020. The increase was primarily due to the full year impact of interest expense associated with our Convertible Senior Notes issued in May 2020, offset by a reduction in interest expense on our Convertible Senior Notes as a result of our repurchase of $419.1 million in aggregate principal noted above. See Note 5 to our unaudited condensed consolidated financial statements.
Other Income (Expense)
Other income (expense), net primarily consists of unrealized and realized gains and losses on our foreign currency derivative financial instruments, and unrealized and realized gains and losses on adjustments that arise from fluctuations in foreign currency exchange rates relating to transactions generated by our international subsidiaries. WeOther income (expense), net also includeincludes rent expense relating to lease assets held solely for sublet purposes, which is comprised entirely ofprimarily the lease related to our New York City flagship store.
Results of Operations
The following tables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage ofOther expense, net, revenues:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| Net revenues | $ | 1,433,021 | | | $ | 1,429,456 | | | $ | 3,070,901 | | | $ | 3,825,907 | |
| Cost of goods sold | 746,701 | | | 739,558 | | | 1,604,428 | | | 2,036,901 | |
| Gross profit | 686,320 | | | 689,898 | | | 1,466,473 | | | 1,789,006 | |
| Selling, general and administrative expenses | 553,549 | | | 550,978 | | | 1,586,156 | | | 1,626,309 | |
| Restructuring and impairment charges | 74,201 | | | — | | | 549,601 | | | — | |
| Income (loss) from operations | 58,570 | | | 138,920 | | | (669,284) | | | 162,697 | |
| Interest expense, net | (14,955) | | | (5,655) | | | (32,251) | | | (15,881) | |
| Other expense, net | (7,184) | | | (429) | | | (10,493) | | | (2,224) | |
| Income (loss) before income taxes | 36,431 | | | 132,836 | | | (712,028) | | | 144,592 | |
| Income tax expense (benefit) | (3,714) | | | 29,344 | | | 14,696 | | | 31,735 | |
| Loss from equity method investments | (1,199) | | | (1,177) | | | (6,906) | | | $ | (5,414) | |
| Net income (loss) | $ | 38,946 | | | $ | 102,315 | | | $ | (733,630) | | | $ | 107,443 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (As a percentage of net revenues) | 2020 | | 2019 | | 2020 | | 2019 |
| Net revenues | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | 52.1 | % | | 51.7 | % | | 52.2 | % | | 53.2 | % |
| Gross profit | 47.9 | % | | 48.3 | % | | 47.8 | % | | 46.8 | % |
| Selling, general and administrative expenses | 38.6 | % | | 38.5 | % | | 51.7 | % | | 42.5 | % |
| Restructuring and impairment charges | 5.2 | % | | — | % | | 17.9 | % | | — | % |
| Income (loss) from operations | 4.1 | % | | 9.7 | % | | (21.8) | % | | 4.3 | % |
| Interest expense, net | (1.0) | % | | (0.4) | % | | (1.1) | % | | (0.4) | % |
| Other expense, net | (0.5) | % | | — | % | | (0.3) | % | | (0.1) | % |
| Income (loss) before income taxes | 2.5 | % | | 9.3 | % | | (23.2) | % | | 3.8 | % |
| Income tax expense (benefit) | (0.3) | % | | 2.1 | % | | 0.5 | % | | 0.8 | % |
| Loss from equity method investment | (0.1) | % | | (0.1) | % | | (0.2) | % | | (0.1) | % |
| Net income (loss) | 2.7 | % | | 7.2 | % | | (23.9) | % | | 2.8 | % |
Consolidated Results of Operations
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Net revenues increased $3.6by $22.3 million or 0.2%, to $1,433.0 million from $1,429.5 million in 2019. Net revenues by product category are summarized below:
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| (In thousands) | 2020 | | 2019 | | | | |
| Apparel | $ | 927,041 | | | $ | 985,623 | | | | | |
| Footwear | 298,687 | | | 250,596 | | | | | |
| Accessories | 145,060 | | | 118,164 | | | | | |
| Net Sales | 1,370,788 | | | 1,354,383 | | | | | |
| License revenues | 25,121 | | | 29,602 | | | | | |
| Connected Fitness | 36,894 | | | 39,346 | | | | | |
| Corporate Other (1) | 218 | | | 6,125 | | | | | |
| Total net revenues | $ | 1,433,021 | | | $ | 1,429,456 | | | | | |
(1) Corporate Other consists of foreign currency hedge gains and losses related to revenues generated by entities within our geographic operating segments, but managed through our central foreign exchange risk management program.
The increase in net sales was primarily driven by unit sales growth in footwear and accessories. Footwear growth was due to strength in our run and train categories and accessories growth was driven by our sports masks, which we began selling in the second quarter of this year. This was largely offset by a unit sales decline in apparel primarily from our team sports and train categories.
License revenues decreased $4.5 million, or 15.1%, to $25.1 million from $29.6 million in 2019, primarily driven by the collectability assessment relating to one of our licensing partners in North America, in which we did not recognize revenue for the three months ended September 30, 2021, as compared to the same period in Fiscal 2020, and decreased revenue from our licensing partners in North America due to softer demandprimarily as a result of impactsa $23.8 million loss we recognized upon the extinguishment of COVID-19. Included$169.1 million in principal amount of our Convertible Senior Notes. For more details see Note 5 to our unaudited condensed consolidated financial statements.
Other expense, net increased by $64.7 million for the threenine months ended September 30, 2021 as compared to the same period in Fiscal 2020, is $3.0primarily as a result of a $58.5 million loss we recognized upon the extinguishment of license revenues earned in the three months ended June 30, 2020 but collected in the third quarter, as we previously deemed the collection of this amount not probable.
We expect lower licensing revenue for the full year, due to significantly lower contractual royalty minimums and contract settlements in the fourth quarter of 2019.
Connected Fitness revenue decreased $2.5 million, or 6.2%, to $36.9 million from $39.3an aggregate $419.1 million in 2019, primarily driven by a one-time development fee from a partner in 2019, which did not repeat in 2020, and a decrease in advertising revenue, partially offset by an increase in new subscription revenue.
Gross profit decreased $3.6 million to $686.3 million from $689.9 million in 2019. Gross profit as a percentageprincipal amount of net revenues, or gross margin, decreased 40 basis points to 47.9% compared to 48.3% in 2019. This decrease in gross margin percentage was primarily driven by the following:
•an approximate 130 basis point decrease driven by COVID-19 related pricing and discounting impacts; and
•an approximate 20 basis point decrease driven by product mix, primarily due to higher footwear sales, which carries a lower gross margin rate.
This decrease was partially offset by:
•an approximate 60 basis point increase driven by supply chain initiatives primarily related to product cost improvements; and
•an approximate 60 basis point increase driven by channel mix, primarily due to a lower percentage of off-price sales within our wholesale channel and a higher percentage of direct-to-consumer sales, led by e-commerce.
We expect gross margin increases from supply chain initiatives and channel mix and gross margin decreases from COVID-19 related pricing and discounting to continue for the remainder of the year.
Selling, general and administrative expenses increased$2.6 million, or 0.5%, to $553.5 million from $551.0 million in 2019. Within selling, general and administrative expenses:
•Marketing costs decreased $3.2 million to $130.7 million from $133.9 million in 2019. This decrease was primarily driven by reduced rights fees for sports marketing assets and reductions in retail marketing within our wholesale channel, primarily due to impacts of COVID-19, including event cancellations and store closures. These decreases were partially offset by increased brand marketing and retail marketing within our direct-to-consumer channel. As a percentage of net revenues, marketing costs decreased to 9.1% from 9.4% in 2019.
•Other costs increased $5.7 million to $422.8 million from $417.1 million in 2019. This increase was driven primarily by increased charitable donations and higher legal expense, partially offset by lower incentive compensation. As a percentage of net revenues, other costs increased marginally to 29.5% from 29.2% in 2019.
As a percentage of net revenues, selling, general and administrative expenses increased marginally to 38.6% compared to 38.5% in 2019.
Restructuring and impairment charges were $74.2 million, comprised of $70.2 million of restructuring and related impairment charges and $4.0 million of long-lived asset impairment charges for the three months ended September 30, 2020. There were no restructuring and impairment charges in the three months ended September 30, 2019. Refer to the "2020 Restructuring" section above for further discussion of restructuring and related impairment charges.
Income from operations decreased $80.4 million to $58.6 million from $138.9 million in 2019, primarily driven by the restructuring and impairment charges discussed above for the three months ended September 30, 2020.
Interest expense, net increased $9.3 million to $15.0 million from $5.7 million in 2019. This increase was primarily due to the amortization of the debt discount and interest expense associated with our Convertible Senior Notes, and higher interest expense related to borrowing on our revolving credit facility.
Other expense, net increased $6.8an increase of $3.2 million to $7.2 million from $0.4 million in 2019. This increase was primarily due toassociated with rent expense incurred in connection with our New York City flagship store and deal-costs related to the pending salean increase of MyFitnessPal.$4.2 million associated with changes in foreign exchange rates.
Income Tax Expense
Income tax benefit expense increased $33.0by $22.7 million to $19.0 million during the three months ended September 30, 2021, as compared to an income tax benefit of $3.7 million from income tax expense of $29.3 millionduring the same period in 2019. OurFiscal 2020. For the three months ended September 30, 2021, our effective tax rate was (10.2)%14.2% compared to 22.1%(10.2)% for the same period in 2019.Fiscal 2020. The change in our effective tax rate was primarily driven by the proportion of earnings subject to tax in the United States as compared to foreign jurisdictions in each period, and the recording of valuation allowancesallowance releases against the majority of 2020 lossescurrent 2021 earnings forecasted in the United States, and discrete items during the three months September 30, 2020.
Loss from equity method investment was flat at $1.2 million compared to $1.2 million in 2019. The current period reflects our allocable share of the net loss of our joint venture in Thailand, in which we acquired a minority investment beginning in March 2020. The prior year period reflects our allocable share the net loss of our Japanese licensee, in which we hold a minority interest. We did not record our allocable share of the net loss in our Japanese licensee for the three months ended September 30, 2020 as losses are not recognized in excess of the total investment. As of September 30, 2020, there was no carrying value associated with our equity investment in our Japanese licensee.2020.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Net revenues decreased$755.0 million, or 19.7%, to $3,070.9 million from $3,825.9 million in 2019. Net revenuesIncome tax expense increased by product category are summarized below:
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| (In thousands) | 2020 | | 2019 | | | | |
| Apparel | $ | 1,951,186 | | | $ | 2,499,989 | | | | | |
| Footwear | 693,464 | | | 827,223 | | | | | |
| Accessories | 268,912 | | | 306,406 | | | | | |
| Net Sales | 2,913,562 | | | 3,633,618 | | | | | |
| License revenues | 51,244 | | | 76,567 | | | | | |
| Connected Fitness | 102,600 | | | 101,385 | | | | | |
| Corporate Other (1) | 3,495 | | | 14,337 | | | | | |
| Total net revenues | $ | 3,070,901 | | | $ | 3,825,907 | | | | | |
(1) Corporate Other consists of foreign currency hedge gains and losses related to revenues generated by entities within our geographic operating segments, but managed through our central foreign exchange risk management program.
The decrease in net sales was driven primarily by a decline in apparel, footwear and accessories across all categories due to decreased demand, primarily related to impacts of COVID-19 including cancellations of orders by wholesale customers, closures of brand and factory house stores and lower traffic upon store re-openings, and a unit sales decrease of off-price sales within our wholesale channel.
Although we have experienced lower traffic upon store re-openings, the overall rate of conversion has increased. We expect the lower traffic trends to continue for the remainder of the year. We also expect decreased off-price sales within our wholesale channel to continue for the remainder of the year.
License revenues decreased $25.3 million, or 33.1%, to $51.2 million from $76.6 million in 2019 driven primarily by decreased revenue from our licensing partners in North America and Japan due to softer demand as a result of impacts of COVID-19.
We expect lower licensing revenue for the full year, due to significantly lower contractual royalty minimums and contract settlements in the fourth quarter of 2019.
Connected Fitness revenue increased $1.2 million, or 1.2%, to $102.6 million from $101.4 million in 2019, primarily driven by an increase in new subscription revenue, partially offset by a decrease in advertising revenue and a one-time development fee from a partner in 2019, which did not repeat in 2020.
Gross profit decreased $322.5 millionto $1,466.5 million from $1,789.0 million in 2019. Gross profit as a percentage of net revenues, or gross margin, increased 100 basis points to 47.8% compared to 46.8% in 2019. The increase in gross margin percentage was primarily driven by the following:
•an approximate 240 basis point increase driven by channel mix, primarily due to a lower percentage of off-price sales within our wholesale channel and a higher percentage of direct-to-consumer sales, led by e-commerce; and
•an approximate 60 basis point increase driven by supply chain initiatives primarily related to product cost improvements.
The increase was partially offset by an approximate 190 basis point decrease driven by COVID-19 related pricing and discounting impacts.
We expect gross margin increases from supply chain initiatives and channel mix and gross margin decreases from COVID-19 related pricing and discounting to continue for the remainder of the year.
Selling, general and administrative expenses decreased$40.2 million, or 2.5%,to $1,586.2 million from $1,626.3 million in 2019. Within selling, general and administrative expense:
•Marketing costs decreased $21.0$24.2 million to $390.5$38.9 million from $411.5 million in 2019. This decrease was primarily driven by reduced rights fees for sports marketing assets and reductions in retail marketing within our wholesale channel. These decreases were primarily due to impacts of COVID-19, including event cancellations and store closures. These decreases were partially offset by increased brand marketing and retail marketing within our direct-to-consumer channel. As a percentage of net revenues, marketing costs increased to 12.7% from 10.8% in 2019.
•Other costs decreased $19.1 million to $1,195.7 million from $1,214.8 million in 2019. This decreasewas driven primarily by lower incentive compensation, decreased travel and entertainment, and lower depreciation mostly due to reductions in capital expenditures in prior periods. The decreases in incentive compensation and travel and entertainment were primarily due to impacts of COVID-19, including store closures and travel restrictions. These decreases were partially offset by higher legal expense, an increase in allowance for doubtful account reserves, due to negative developments regarding certain customer balances that represent a higher risk of credit default, and increased charitable donations. As a percentage of net revenues, other costs increased to 38.9% from 31.8% in 2019.
As a percentage of net revenues, selling, general and administrative expenses increased to 51.7% compared to 42.5% in 2019.
Restructuring and impairment charges were $549.6 million comprised of $410.3 million of restructuring and related impairment charges and $139.3 million of long-lived asset and goodwill impairment charges forduring the nine months ended September 30, 2021 as compared to $14.7 million during the same period in Fiscal 2020. There was no restructuring and impairment charges inFor the nine months ended September 30, 2019. Refer to the "2020 Restructuring" and "Long-Lived Asset and Goodwill Impairment" sections above for further discussion of restructuring and impairment charges.
Income (loss) from operationsdecreased $832.0 million to a loss of $669.3 million from income of $162.7 million in 2019, primarily driven by the restructuring and impairment charges and the decrease in net revenues discussed above.
Interest expense, net increased $16.4 million to $32.3 million from $15.9 million in 2019. This increase was primarily due to the amortization of the debt discount and interest expense associated with2021, our Convertible Senior Notes and higher interest expense related to borrowing on our revolving credit facility.
Other expense, net increased $8.3 millionto $10.5 million from $2.2 million in 2019. This increase was primarily due to rent expense incurred in connection with our New York City flagship store and deal-costs related to the pending sale of MyFitnessPal, partially offset by foreign exchange gains, including gain associated with the de-designation of certain derivative instruments, as a result of the impacts of COVID-19.
Income tax expense decreased$17.0 millionto $14.7 million from $31.7 million in 2019. Our effective tax rate was (2.1)%13.5% compared to 21.9%(2.1)% for the same period in 2019.Fiscal 2020. The change in our effective tax rate was primarily driven by the proportion of earnings subject to tax in the United States as compared to foreign jurisdictions in each period and the recording of valuation allowances against the majority of 2020 losses forecastedforecast in the United States, and against all of the 2020 losses forecastedforecast in China, and discrete items, including the recording of valuation allowances on certain previously recognized deferred tax assets in the United States and China during the nine months ended September 30, 2020.
Income (Loss) from Equity Method Investments
Loss from equity method investmentwas $0.9 million for the three months ended September 30, 2021, as compared to a loss of $1.2 million during the same period in Fiscal 2020. See Note 2 to our unaudited condensed consolidated financial statements, under Equity Method Investment, for more details.
Income from equity method investment increased $1.5by $7.9 million to $1.0 million during the nine months ended September 30, 2021, as compared to a loss of $6.9 million from $5.4 millionduring the same period in 2019.Fiscal 2020. This increase was primarily due to a $3.7 million impairment of our equity method investment in our Japanese licensee, forDome, recorded in the nine months ended September 30, 2020.prior fiscal year.
Segment Results of OperationsSEGMENT RESULTS OF OPERATIONS
Our operating segments are based on how theour Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. Our segments are defined by geographic regions, including North America, EMEA, Asia-Pacific, and Latin America.
Prior to the sale of MyFitnessPal in December 2020, our CODM also received discrete financial information for our Connected Fitness is also anSegment. However, beginning January 1, 2021, we no longer report Connected Fitness as a discrete reportable operating segment.segment (see Note 1 to our unaudited condensed consolidated financial statements). All prior period balances have been recast to conform to current period presentation. Such reclassifications did not affect total consolidated revenues, consolidated income from operations or consolidated net income.
We exclude certain corporate costs from our segment profitability measures. We report these costs within Corporate Other, which is designed to provide increased transparency and comparability of our operating segments performance. The costs included within Corporate Other consists largely of revenue and costs related to our MMR platforms, as well as general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain and innovation, and other corporate support functions; costs related to our global assets and global marketing, costs related to our headquarters; restructuring and restructuring related charges; and certain foreign currency hedge gains and losses.
The net revenues and operating income (loss) associated with our segments are summarized in the following tables.
Three Months Ended September 30, 20202021 Compared to Three Months Ended September 30, 20192020
Net revenues by segment and Corporate Other are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| (In thousands) | 2021 | | 2020 | | $ Change | | % Change |
| North America | $ | 1,035,862 | | | $ | 962,565 | | | $ | 73,297 | | | 7.6 | % |
| EMEA | 241,201 | | | 210,111 | | | 31,090 | | | 14.8 | % |
| Asia-Pacific | 211,950 | | | 178,895 | | | 33,055 | | | 18.5 | % |
| Latin America | 56,380 | | | 44,338 | | | 12,042 | | | 27.2 | % |
| Corporate Other (1) | 139 | | | 37,112 | | | (36,973) | | | (99.6) | % |
| Total net revenues | $ | 1,545,532 | | | $ | 1,433,021 | | | $ | 112,511 | | | 7.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| (In thousands) | 2020 | | 2019 | | $ Change | | % Change |
| North America | $ | 962,565 | | | $ | 1,015,920 | | | $ | (53,355) | | | (5.3) | % |
| EMEA | 210,111 | | | 160,981 | | | 49,130 | | | 30.5 | % |
| Asia-Pacific | 178,895 | | | 154,898 | | | 23,997 | | | 15.5 | % |
| Latin America | 44,338 | | | 52,186 | | | (7,848) | | | (15.0) | % |
| Connected Fitness | 36,894 | | | 39,346 | | | (2,452) | | | (6.2) | % |
| Corporate Other (1) | 218 | | | 6,125 | | | (5,907) | | | (96.4) | % |
| Total net revenues | $ | 1,433,021 | | | $ | 1,429,456 | | | $ | 3,565 | | | 0.2 | % |
(1) Corporate Other consists ofprimarily includes foreign currency hedge gains and losses related to revenues generated by entities within our geographic operating segments but managed through our central foreign exchange risk management program.Effective January 1, 2021, included within Corporate Other is the operating results of the remaining Connected Fitness business consisting of MMR for Fiscal 2021 and the entire Connected Fitness business for Fiscal 2020. All prior periods were recast to conform to the current period presentation. Such reclassifications did not affect total consolidated revenues, consolidated income from operations or consolidated net income (see Note 1 to our financial statements).
The increase in total net revenues for the three months ended September 30, 2020,2021, compared to the same period in 2019,Fiscal 2020 was driven by the following:
•Net revenues in our North America operating segment decreased $53.3region increased $73.3 million, or 7.6%, to $1,035.9 million for the three months ended September 30, 2021, as compared to $962.6 million from $1,015.9 millionduring the same period in 2019.Fiscal 2020. This decreaseincrease was primarily due to a decrease of unit sales withindriven by growth in our wholesale channel, impacted by cancellations of orders by our wholesale customers due to COVID-19. This decrease was partially offset by increased unit salesretail business within our direct-to-consumer channel, through e-commerce.channel. When compared to the same period in Fiscal 2019, net revenues in our North America region increased by 2.0%.
•Net revenues in our EMEA operating segmentregion increased $49.1$31.1 million, or 14.8%, to $241.2 million for the three months ended September 30, 2021, as compared to $210.1 million from $161.0 millionduring the same period in 2019,Fiscal 2020. This increase was primarily due to increased unit salesdriven by growth within our wholesale and direct-to-consumer channels. Increaseschannel. When compared to the same period in Fiscal 2019, net revenues in our wholesale channel were impactedEMEA region increased by a seasonal product launch shift due to COVID-19, from the second quarter to the third quarter. Increases in our direct-to-consumer channel were primarily a result of increased unit sales through e-commerce.49.8%.
•Net revenues in our Asia-Pacific operating segmentregion increased $24.0$33.1 million, or 18.5%, to $212.0 million for the three months ended September 30, 2021, as compared to $178.9 million from $154.9 millionduring the same period in 2019,Fiscal 2020. This increase was primarily due to increased unit sales within our direct-to-consumer and wholesale channels, partially offsetdriven by impacts of additional returns reserves and markdownsgrowth within our wholesale channel duechannel. When compared to COVID-19.
•Netthe same period in Fiscal 2019, net revenues in our Latin America operating segment decreased $7.9 million to $44.3 million from $52.2 million in 2019. This decrease was primarily due to decreased unit sales within our wholesale channel, impactedAsia-Pacific region increased by cancellations of orders by wholesale customers due to closures of stores. This decrease was partially offset by increased unit sales within our direct-to-consumer channel, through e-commerce.36.8%.
•Net revenues in our Connected Fitness operating segment decreased $2.5 million to $36.9 million from $39.3 million in 2019, primarily driven by a one-time development fee from a partner in 2019 and a decrease in advertising revenue, partially offset by an increase in new subscription revenue.
Operating income •by segment and Corporate Other is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| (In thousands) | 2020 | | 2019 | | $ Change | | % Change |
| North America | $ | 224,593 | | | $ | 237,229 | | | $ | (12,636) | | | (5.3) | % |
| EMEA | 40,834 | | | 21,989 | | | 18,845 | | | 85.7 | % |
| Asia-Pacific | 19,248 | | | 34,666 | | | (15,418) | | | (44.5) | % |
| Latin America | 1,802 | | | 233 | | | 1,569 | | | 673.4 | % |
| Connected Fitness | 6,629 | | | 7,023 | | | (394) | | | (5.6) | % |
| Corporate Other | (234,536) | | | (162,220) | | | (72,316) | | | (44.6) | % |
| Total operating income | $ | 58,570 | | | $ | 138,920 | | | $ | (80,350) | | | (57.8) | % |
The decreaseNet revenues in total operating incomeour Latin America region increased $12.0 million, or 27.2%, to $56.4 million for the three months ended September 30, 2020,2021, as compared to $44.3 million during the same period in Fiscal 2020. This increase was primarily driven by growth in our wholesale channel, partially offset by a decrease in our direct-to-consumer channels, primarily related to a decline in our e-commerce business. When compared to the same period in Fiscal 2019, was driven by the following:
Operating segments
•Operating income in our North America operating segment decreased $12.6 million to $224.6 million from $237.2 million in 2019, primarily driven by decreases in net revenues discussed above, partially offset by product cost improvements.
•Operating income in our EMEA operating segment increased $18.8 millionto $40.8 million from $22.0 million in 2019, primarily driven by increases in net revenues discussed above and the related gross margin benefits due to channel mix, partially offset by increased distribution and selling costs in connection with increased e-commerce sales.
•Operating income in our Asia-Pacific operating segment decreased$15.4 million to $19.2 million from $34.7 million in 2019, primarily driven by gross margin decreases due to COVID-19 related pricing and discounting impacts and increased selling, distribution and facilities costs in connection with increased direct-to-consumer sales, partially offset by increases in net revenues discussed above.
•Operating income in our Latin America operating segmentregion increased $1.6 million to $1.8 million from $0.2 million in 2019, primarily driven by gross margin benefits due to channel mix, decreased marketing related activities and compensation expense, partially offset by decreases in net revenues discussed above.
•Operating income in our Connected Fitness segment decreased $0.4 million to $6.6 million from $7.0 million in 2019, primarily driven by the decrease in net revenues discussed above partially offset by decreased compensation expense.
Non-operating segment
•Operating loss in our Corporate Other non-operating segment increased $72.3 million to $234.5 million compared to $162.2 million in 2019, primarily driven by $70.2 million of restructuring and related impairment charges related to the 2020 restructuring plan and higher legal expense, partially offset by lower incentive compensation.8.0%.
•The decrease in Corporate Other for the three months ended September 30, 2021, compared to the same period in Fiscal 2020 is primarily due to the sale of MyFitnessPal in December 2020.
Nine Months Ended September 30, 20202021 Compared to Nine Months Ended September 30, 20192020
Net revenues by segment and Corporate Other are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2021 | | 2020 | | $ Change | | % Change |
| North America | $ | 2,747,082 | | | $ | 2,021,247 | | | $ | 725,835 | | | 35.9 | % |
| EMEA | 642,308 | | | 437,140 | | | 205,168 | | | 46.9 | % |
| Asia-Pacific | 614,539 | | | 397,846 | | | 216,693 | | | 54.5 | % |
| Latin America | 151,203 | | | 108,573 | | | 42,630 | | | 39.3 | % |
| Corporate Other (1) | (871) | | | 106,095 | | | (106,966) | | | (100.8) | % |
| Total net revenues | $ | 4,154,261 | | | $ | 3,070,901 | | | $ | 1,083,360 | | | 35.3 | % |
(1)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2020 | | 2019 | | $ Change | | % Change |
| North America | $ | 2,021,247 | | | $ | 2,675,389 | | | $ | (654,142) | | | (24.5) | % |
| EMEA | 437,140 | | | 440,405 | | | (3,265) | | | (0.7) | % |
| Asia-Pacific | 397,846 | | | 453,296 | | | (55,450) | | | (12.2) | % |
| Latin America | 108,573 | | | 141,095 | | | (32,522) | | | (23.0) | % |
| Connected Fitness | 102,600 | | | 101,385 | | | 1,215 | | | 1.2 | % |
| Corporate Other (1) | 3,495 | | | 14,337 | | | (10,842) | | | (75.6) | % |
| Total net revenues | $ | 3,070,901 | | | $ | 3,825,907 | | | $ | (755,006) | | | (19.7) | % |
(1) Corporate Other consists ofprimarily includes foreign currency hedge gains and losses related to revenues generated by entities within our geographic operating segments but managed through our central foreign exchange risk management program.Effective January 1, 2021, included within Corporate Other is the operating results of the remaining Connected Fitness business consisting of MMR for Fiscal 2021 and the entire Connected Fitness business for Fiscal 2020. All prior period balances were recast to conform to the current period presentation. Such reclassifications did not affect total consolidated revenues, consolidated income from operations or consolidated net income (see Note 1 to our financial statements).
The decreaseNet revenues increased across each of our regional operating segments due to increased demand, as compared to the same period in in Fiscal 2020, as we experienced significant disruptions in Fiscal 2020 related to COVID-19. In addition to the impact of COVID-19, the increase in total net revenues for the nine months ended September 30, 2020,2021, compared to the same period in 2019,2020, was driven by the following:
•Net revenues in our North America operating segment decreased $654.2region increased $725.8 million, or 35.9%, to $2,747.1 million for the nine months ended September 30, 2021, as compared to $2,021.2 million from $2,675.4 millionduring the same period in 2019.Fiscal 2020. This decreaseincrease was primarily due to a decrease of unit salesdriven by growth within both our wholesale and direct-to-consumer channels. DecreasesWhen compared to the same period in Fiscal 2019, net revenues in our wholesale channel were impactedNorth America region increased by cancellations of orders by our wholesale customers due to COVID-19 and decreased unit sales to off-price customers. Decreases in our direct-to-consumer channel were impacted by closures of our brand and factory house stores and lower traffic upon store re-openings, partially offset by increased unit sales through e-commerce.2.7%.
•Net revenues in our EMEA operating segment decreased $3.3region increased $205.2 million, or 46.9%, to $642.3 million for the nine months ended September 30, 2021, as compared to $437.1 million from $440.4 millionduring the same period in 2019,Fiscal 2020. This increase was primarily driven by growth within both our wholesale and direct-to-consumer channels.The increase in demand was also due to decreased unit sales withintiming shifts related to changes in customer order flow and supply chain timing from the fourth quarter of Fiscal 2020 to the first quarter of Fiscal 2021. When compared to the same period in Fiscal 2019, net revenues in our wholesale channel, which was impactedEMEA region increased by cancellations of orders by wholesale customers due to closures of stores. This decrease was partially offset by increased unit sales within our direct-to-consumer channel, through e-commerce.45.8%.
•Net revenues in our Asia-Pacific operating segment decreased $55.5region increased $216.7 million, or 54.5%, to $614.5 million for the nine months ended September 30, 2021, as compared to $397.8 million from $453.3 millionduring the same period in 2019,Fiscal 2020. This increase was primarily driven by growth within both our wholesale and direct-to-consumer channels. The increase in demand was also due to decreased unit sales, impactedtiming shifts related to changes in customer order flow and supply chain timing from the fourth quarter of Fiscal 2020 to the first quarter of Fiscal 2021. When compared to the same period in Fiscal 2019, net revenues in our Asia-Pacific region increased by cancellations of orders by wholesale customers due to closures of stores and impacts of additional returns reserves and markdowns within our wholesale channel, due to COVID-19. This decrease was partially offset by increased unit sales within our direct-to-consumer channel, led by e-commerce.35.6%.
•Net revenues in our Latin America operating segment decreased $32.5region increased $42.6 million, or 39.3%, to $108.6$151.2 million from $141.1 million in 2019. This decrease was primarily due to decreased unit sales within our wholesale and direct-to-consumer channels. Decreases in our wholesale channel were impacted by cancellations of orders by wholesale customers due to closures of stores. Decreases in our direct-to-consumer channel were impacted by closures of our brand and factory house stores, partially offset by increased unit sales through e-commerce.
•Net revenues in our Connected Fitness operating segment increased $1.2 million to $102.6 million from $101.4 million in 2019 primarily driven by an increase in new subscription revenue, partially offset by a decrease in advertising revenue and a one-time development fee from a partner in 2019.
Operating income (loss) by segment is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2020 | | 2019 | | $ Change | | % Change |
| North America | $ | 251,579 | | | $ | 536,700 | | | $ | (285,121) | | | (53.1) | % |
| EMEA | 43,840 | | | 44,700 | | | (860) | | | (1.9) | % |
| Asia-Pacific | (30,040) | | | 74,116 | | | (104,156) | | | (140.5) | % |
| Latin America | (50,756) | | | (4,017) | | | (46,739) | | | (1,163.5) | % |
| Connected Fitness | 14,020 | | | 8,103 | | | 5,917 | | | 73.0 | % |
| Corporate Other | (897,927) | | | (496,905) | | | (401,022) | | | (80.7) | % |
| Total operating income (loss) | $ | (669,284) | | | $ | 162,697 | | | $ | (831,981) | | | (511.4) | % |
The decrease in total operating income, to a loss for the nine months ended September 30, 2020,2021, as compared to income for$108.6 million during the same period in Fiscal 2020. This increase was primarily driven by growth within our wholesale channel partially offset by a decrease in our direct-to-consumer channel as we have moved to a distributor operating model for
certain countries within this region. When compared to the same period in Fiscal 2019, net revenues in our Latin America region increased by 7.2%.
•The decrease in Corporate Other for the nine months ended September 30, 2021, compared to the same period in Fiscal 2020 is primarily due to the sale of MyFitnessPal in December 2020.
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Operating income (loss) by segment and Corporate Other is summarized below: | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| (In thousands) | 2021 | | 2020 | | $ Change | | % Change |
| North America | $ | 292,367 | | | $ | 224,593 | | | $ | 67,774 | | | 30.2 | % |
| EMEA | 41,772 | | | 40,834 | | | 938 | | | 2.3 | % |
| Asia-Pacific | 40,529 | | | 19,248 | | | 21,281 | | | 110.6 | % |
| Latin America | 10,831 | | | 1,802 | | | 9,029 | | | 501.1 | % |
| Corporate Other | (213,435) | | | (227,907) | | | 14,472 | | | 6.3 | % |
| Total operating income | $ | 172,064 | | | $ | 58,570 | | | $ | 113,494 | | | 193.8 | % |
The increase in total operating income was driven by the following:
•Operating income in our North America operating segment decreased $285.1region increased $67.8 million to $251.6$292.4 million from $536.7for the three months ended September 30, 2021, as compared to $224.6 million during the same period in 2019 primarily driven by decreasesFiscal 2020. This increase in operating income was due to increases in net revenues discussed above, $43.4 million of long-lived asset impairment and $15.3 million of goodwill impairment,along with improvements in gross margin due to improvements in pricing related to our business in Canada,lower markdowns and reduced promotional activity, as well as improved sales mix with lower liquidation. These increases were partially offset by an increase in allowance for doubtful account reservesselling, general and higher sellingadministrative costs in connection with increased e-commerce sales, partially offset by gross margin benefitsprimarily due to channel mix, decreased wages due to store closuresincreased compensation expense and decreasedincreased digital marketing related activities.spend.
•Operating income in our EMEA operating segment decreasedregion increased $0.9 millionto $43.8$41.8 million from $44.7for the three months ended September 30, 2021, as compared to $40.8 million during the same period in 2019 primarily driven by increased distribution and selling costsFiscal 2020. This increase in connection with increased e-commerce sales and decreasesoperating income was due to increases in net revenues discussed above, along with improved gross margins resulting from a more favorable channel mix. These increases were partially offset by an increase in marketing-related expenses.
•Operating income in our Asia-Pacific region increased $21.3 million to $40.5 million for the three months ended September 30, 2021, as compared to $19.2 million during the same period in Fiscal 2020, This increase in operating income was due to increases in net revenues discussed above, along with improvements in gross margin benefitsprimarily due to channel mixlower promotional activity. These increases were partially offset by increased marketing-related expenses.
•Operating income in our Latin America region increased $9.0 million to $10.8 million for the three months ended September 30, 2021, as compared to $1.8 million during the same period in Fiscal 2020. This increase in operating income was due to increases in net revenues discussed above, along with improvements in gross margin from lower promotional activity and markdowns, as well as a decrease in selling, general and administrative costs.
•Operating loss in our Corporate Other segment decreased marketing related activities.$14.5 million to $213.4 million for the three months ended September 30, 2021, as compared to $227.9 million during the same period in Fiscal 2020. The decrease in operating loss was primarily due to lower restructuring charges incurred in Fiscal 2021 as compared to Fiscal 2020, partially offset by the sale of MyFitnessPal in December 2020.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Operating income (loss) by segment and Corporate Other is summarized below: | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2021 | | 2020 | | $ Change | | % Change |
| North America | $ | 728,698 | | | $ | 251,579 | | | $ | 477,119 | | | 189.6 | % |
| EMEA | 108,350 | | | 43,840 | | | 64,510 | | | 147.1 | % |
| Asia-Pacific | 111,088 | | | (30,040) | | | 141,128 | | | 469.8 | % |
| Latin America | 18,289 | | | (50,756) | | | 69,045 | | | 136.0 | % |
| Corporate Other | (566,266) | | | (883,907) | | | 317,641 | | | 35.9 | % |
| Total operating income (loss) | $ | 400,159 | | | $ | (669,284) | | | $ | 1,069,443 | | | 159.8 | % |
The increase in total operating income was driven by the following:
•Operating income in our Asia-PacificNorth America region increased $477.1 million to $728.7 million for the nine months ended September 30, 2021, as compared to $251.6 million during the same period in Fiscal 2020. This increase in operating segment decreased $104.1 millionincome was due due to a loss of $30.0 million from income of $74.1 million in 2019 primarily driven by decreasesincreases in net revenues discussed above, along with improvements in gross margin due to pricing improvements, including lower promotional activity and $25.5 million of long-livedmarkdowns, as well as improved sales mix due to lower liquidations. Additionally, North America incurred lower bad debt expense in the nine months ended September 30, 2021 and was impacted by long lived asset impairment and increased selling, distribution and facilities costscharges recorded in connection with increased direct-to-consumer sales.
•Operating loss in our Latin America operating segment increased $46.8 million to $50.8 million from $4.0 million in 2019 primarily driven by $36.2 million of goodwill impairment charges and $12.8 million of long-lived asset impairment andthe prior year. These decreases in net revenues discussed above,were partially offset by gross margin benefits due to channel mix and decreased marketing related activities.increased incentive compensation expense, non-salaried wages, as well as increased marketing-related expenses.
•Operating income in our Connected Fitness segmentEMEA region increased $5.9$64.5 million to $14.0$108.4 million from $8.1for the nine months ended September 30, 2021, as compared to $43.8 million during the same period in 2019 primarily driven by decreased compensation expense and theFiscal 2020. This increase in operating income was due to increases in net revenues discussed above.above, along with improved gross margins due to better channel mix. These improvements were partially offset by an increase in marketing-related expenses as well as increased distribution related expenses associated with larger sales volume.
Non-operating segment•Operating income in our Asia-Pacific region increased $141.1 million to $111.1 million for the nine months ended September 30, 2021, as compared to a loss of $30.0 million during the same period in Fiscal 2020. This increase in operating income was due to increases in net revenues discussed above, along with improvements in gross margin due to pricing improvements driven primarily by lower promotional activity. Additionally, operating income in our Asia-Pacific region was impacted by long-lived asset impairment charges recorded in the prior year.
•Operating income in our Latin America region increased $69.0 million to $18.3 million for the nine months ended September 30, 2021, as compared to a loss of $50.8 million during the same period in Fiscal 2020. This increase in operating income was due to increases in net revenues discussed above, along with improved gross margin due to lower promotional activities, and from the recording of long-lived asset impairment charges in the first quarter of Fiscal 2020.
•Operating loss in our Corporate Other non-operating segment increased $401.0decreased $317.6 million to $897.9$566.3 million for the nine months ended September 30, 2021, as compared to $496.9$883.9 million during the same period in 2019,Fiscal 2020. The decrease in operating loss was primarily driven by $410.3 million ofdue to lower restructuring and related impairment charges relatedincurred in Fiscal 2021 as compared to theFiscal 2020, restructuring plan and higher legal expense, partially offset by lower incentive compensation.the sale of MyFitnessPal in December 2020.
Financial Position, Capital Resources and LiquidityFINANCIAL POSITIONS, CAPITAL RESOURCES AND LIQUIDITY
Our cash requirements have principally been for working capital and capital expenditures. We fund our working capital, primarily inventory, and capital investments from cash flows from operating activities, cash and cash equivalents on hand, and borrowings available under our credit and long term debt facilities. Our working capital requirements generally reflect the seasonality in our business as we historically recognize the majority of our net
revenues in the last two quarters of the calendar year. Our capital investments have generally included expanding our in-store fixture and branded concept shop program, improvements and expansion of our distribution and corporate facilities, leasehold improvements to our brand and factory house stores, and investment and improvements in information technology systems. Our inventory strategy is focused on continuing to meet consumer demand while improving our inventory efficiency over the long term by putting systems and processes in place to improve our inventory management. These systems and processes are designed to improve our forecasting and supply planning capabilities. In addition to systems and processes, key areas of focus that we believe enhance inventory performance are added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our factory house stores and other liquidation channels. In response to the COVID-19 pandemic, however,
As of September 30, 2021, we have reduced our inventory purchaseshad $1.3 billion of cash and capital expenditures as we manage our liquidity and working capital through this period.
cash equivalents. We believe our cash and cash equivalents on hand, cash from operations, our ability to reduce our expenditures as needed, borrowings available to us under our amended credit agreement, our ability to access the capital markets, and other financing alternatives are adequate to meet our liquidity needs and capital expenditure requirements for at least the next twelve months. During the fiscal year ended December 31, 2019, our liquidity needs were primarily funded through cash from operations. During the first quarter of 2019, we borrowed $25 million under our revolving credit facility and repaid those amounts during the same quarter. Our prior credit agreement remained undrawn for the remainder of 2019. However, during the six months ended June 30, 2020, our cash generated from operations was negatively impacted due to widespread temporary store closures as a result of the COVID-19 pandemic. As of the start of the second quarter, we had borrowed $700 million under our revolving credit facility as a precautionary measure in order to increase our cash position and preserve liquidity given the upcoming uncertainty in global markets resulting from the COVID-19 outbreak. In May 2020, we issued $500 million of convertible senior notes through a securities offering and utilized approximately $440 million of the net proceeds from the offering to repay amounts outstanding under our revolving credit facility.
Due to the negative impacts of the COVID-19 pandemic, we supplemented our cash from operations with additional sources of liquidity during 2020, including the issuance of convertible senior notes and borrowingsaddition, from time to time, underbased on prevailing market conditions, our revolving credit facility. Beginningliquidity requirements, contractual restrictions and other factors and subject to compliance with the third quarter of 2020,applicable laws and regulations, we are requiredmay seek to maintainutilize cash on hand, borrowings or raise capital to retire, repurchase or redeem our debt securities, repay debt, or otherwise enter into similar transactions to support our capital structure and business or utilize excess cash flow on a specifiedstrategic basis. For example, in May 2021 and August 2021, we entered in Exchange Agreements pursuant to which we repurchased $250 million and approximately $169.1 million, respectively, aggregate principal amount of "minimum liquidity" under the termsour Convertible Senior Notes in exchange for a combination of cash and shares for our revolving credit facility. Class C Common Stock.
Our credit agreement limits our ability to incur additional indebtedness. We currently expect to be able to comply with these requirements without pursuing additional sources of financing to support our liquidity over the next twelve months. However, if
If the COVID-19 pandemic persists in a material way or there are unexpected material impacts to our business in future periods from COVID-19 and we need to raise or conserve additional cash to fund our operations, or satisfy this requirement, we may consider additional alternatives similar to those we used in Fiscal 2020, including further reducing our expenditures, including reductions to our discretionary spending and changes tochanging our investment strategies, negotiating payment terms with our customers and vendors,
reductions in compensation costs, including through temporary reductions in pay and layoffs, and limiting certain marketing and capital expenditures. In addition, we may seek alternative sources of liquidity, including but not limited to, accessing the capital markets, sale leaseback transactions or other sales of assets, or other alternative financing measures. However, instability in, or tightening of the capital markets, could adversely affect our ability to access the capital markets on terms acceptable to us or at all. Although we believe we have adequate sources of liquidity over the long term, a prolonged or more severe economic recession or a slow recovery could adversely affect our business and liquidity.
Refer to our “Risk Factors” section included in Part II, Item 1A, of this Quarterly"Risk Factors" in our Annual Report on Form 10-Q10-K for a further discussion of risks related to our indebtedness.
As discussed in the "Overview", as we navigate these unprecedented circumstances, we are focused on preserving our liquidity and managing our cash flows through certain preemptive actions designed to enhance our ability to meet our short-term liquidity needs. These actions include those noted above. In addition, from time to time we may take action to manage liquidity as of the end of a quarterly period, including our level of indebtedness or cash on hand. For example, some of our customers have delayed payments in connection with COVID-19 as they manage their own cash balances, and we have also delayed payments as well. Furthermore, our revolving credit agreement includes leverage and minimum liquidity covenants that apply from time to time. We may repay indebtedness as of the end of a fiscal quarter and reborrow amounts immediately after or take other action to manage liquidity in connection with these requirements. We are also continuing to evaluate benefits that may be available to us under global legislation and the CARES Act.
Cash Flows
The following table presents the major components of netour cash flows provided by and used in operating, investing and financing activities for the periods presented: | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2021 | | 2020 |
| Net cash provided by (used in): | | | |
| Operating activities | $ | 209,868 | | | $ | (249,707) | |
| Investing activities | (56,247) | | | (110,487) | |
| Financing activities | (417,442) | | | 436,323 | |
| Effect of exchange rate changes on cash and cash equivalents | 1,708 | | | 2,398 | |
| Net increase (decrease) in cash and cash equivalents | $ | (262,113) | | | $ | 78,527 | |
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2020 | | 2019 |
| Net cash provided by (used in): | | | |
| Operating activities | $ | (249,707) | | | $ | 102,468 | |
| Investing activities | (110,487) | | | (107,040) | |
| Financing activities | 436,323 | | | (138,692) | |
| Effect of exchange rate changes on cash and cash equivalents | 2,398 | | | 4,809 | |
| Net increase (decrease) in cash and cash equivalents | $ | 78,527 | | | $ | (138,455) | |
Operating Activities
Operating activities consist primarily of net income (loss) adjusted for certain non-cash items. Adjustments to net income for non-cash items include depreciation and amortization, unrealized foreign currency exchange rate gains and losses, losses on disposals of property and equipment, impairment charges, stock-based compensation, excess tax benefits from stock-based compensation arrangements, deferred income taxes and changes in reserves and allowances. In addition, operating cash flows include the effect of changes in operating assets and liabilities, principally inventories, accounts receivable, income taxes payable and receivable, prepaid expenses and other assets, accounts payable and accrued expenses.
Cash flows used in operating activities increased $352.2 million to $249.7 million for the nine months ended September 30, 2020 from cash
Cash flows provided by operating activities of $102.5increased by $459.6 million, for the same period in 2019. The increase in cash used in operating activities was primarily driven by the following:
•an increase in net loss of $423.5 million, net of non-cash items of $417.6 million, which includes restructuring related impairment and long-lived and goodwill impairment;
•a change in other non current assets, increasing by $294.1 million for the nine months ended September 30, 2020 as compared to the same period in 2019,Fiscal 2020, primarily due todriven by an increase in net income, before the operating lease ROU asset associated with lease commencementimpact of the space originally planned to be our New York City flagship store; and
•a change in inventory, increasing by $283.3non-cash items, of $528.8 million, for the nine months ended September 30, 2020 as compared to the same period in 2019.
This was partially offset by:by a decrease from changes in working capital of $69.2 million. The decrease from changes in working capital were primarily due to decreases of:
•a change$425.0 million resulting from changes in cash provided by accrued expenses and other liabilities, increasingprimarily due to the commencement of the operating lease relating to our New York City flagship store which was included in Fiscal 2020;
•$94.2 million resulting from changes in accounts receivable primarily due to our previously disclosed changes to customer order flow and supply chain timing from the fourth quarter of Fiscal 2020 to the first quarter of Fiscal 2021, and an increase in net revenues of $984.0 million;
•$68.1 million resulting from changes in prepaid expenses and other assets, primarily due to increased spending in marketing and information technology-related initiatives; and
•$54.9 million resulting from changes in accounts payable.
These decreases in working capital were partially offset by $354.2increases in working capital of:
•$340.3 million forresulting from changes in other non-current assets, primarily due to the nine months ended September 30, 2020commencement of our New York City flagship store and the related operating lease ROU asset which was included in Fiscal 2020; and
•$224.1 million resulting from changes in inventories on account of better inventory management and demand constraints.
Investing Activities
Cash flows used in investing activities decreased by $54.2 million, as compared to the same period in 2019,Fiscal 2020, primarily due to the operating lease liability associated with the lease commencementas a result of the space originally planned to be our New York City flagship store;$38.8 million of acquisition-related activity that occurred in Fiscal 2020.
•a changeFinancing Activities
Cash flows used in cash providedfinancing activities decreased by accounts payable, increasing by $85.3$853.8 million, for the nine months ended September 30, 2020 as compared to the same period in 2019; and
•a change in cash provided by accounts receivable, increasing by $81.7 million forFiscal 2020. During the nine months ended September 30, 2020 as compared to the same period in 2019.
Investing Activities
Cash2021, we used in investing activities increased $3.4 million to $110.5 million for the nine months ended September 30, 2020 from $107.0 million for the same period in 2019, primarily due to the acquisition of Triple, a distributor of our products in Southeast Asia, partially offset by lower capital expenditures for the nine months ended September 30, 2020 as compared to the same period in 2019.
Capital expenditures for the full year 2020 are expected to be approximately $80 million, compared to $144.3$417.5 million in 2019. In response to the COVID-19 pandemic and the related impact on our results from operations, we have taken action to reduce our capital expenditures during 2020, through reductions and delays of expenditures related to global retail, including owned and operated retail stores and wholesale fixtures, as well as certain planned investments in our corporate offices. Capital expenditures in 2020 are comprised primarily of investments in our retail stores, global wholesale fixtures, digital initiatives and corporate offices.
Financing Activities
Cash provided bycash for financing activities, increased$575.0 million to $436.3 million for the nine months ended September 30, 2020 from $138.7 million of cash used in financing activitieswhereas during the same period in 2019,Fiscal 2020, we had cash inflow of $436.3 million from financing activities. The cash outflow of $417.5 million was primarily duerelated to approximately $506.3 million paid to certain holders for the issuanceexchange of $419.1 million in aggregate principal amount of our 1.50% convertible senior notes (the "Convertible Senior Notes"). Concurrently with these exchanges we entered into agreements to terminate a portion of the capped call transactions previously entered into in connection with our initial offering of the Convertible Senior Notes.Notes and received approximately $91.7 million from the option counterparties in connection with such termination agreements. For more details, see discussion below under "1.50% Convertible Senior Notes".
Capital Resources
Credit Facility
In May 2020,On March 8, 2019, we entered into an amendment to the amended and restated credit agreement dated as of March 8, 2019, by and among the Company,us, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and arrangers party thereto (the "prior credit agreement" as amended by the amendment, the “amended credit“credit agreement” or "the revolving credit facility"). As described below, the amended credit agreement provides us with certain relief from and revisions to from our financial covenants for specified periods, which we expect to provide us with sufficient access to liquidity during the ongoing disruption related to the COVID-19 pandemic.
The amended credit agreement has a term of five years, maturing in March 2024, with permitted extensions under certain circumstances, and providescircumstances. In May 2020, we entered into an amendment to the credit agreement (the “first amendment”), pursuant to which the prior revolving credit commitments of upwere reduced from $1.25 billion to $1.1 billion of borrowings,borrowings. Subsequently, in May 2021, we entered into a reduction fromsecond amendment to the $1.25 billioncredit agreement (the "second amendment" and, the credit agreement as amended by the first amendment and the second amendment, the "amended credit agreement" or the "revolving credit facility"). The second amendment provides for certain changes to our covenants and decreases to certain applicable rates effected by the first amendment. Where the first amendment previously provided for suspensions of commitmentsand adjustments to our existing interest coverage covenant and leverage covenant (each as defined below), and further required us to maintain a specific amount of minimum liquidity during certain quarters, the second amendment provided that these financial covenants became effective again as of March 31, 2021 and removed the minimum liquidity covenant. The second amendment also (i) decreases the interest rate margins that were previously provided for under the prior credit agreement. Duringfirst amendment; (ii) reverses limitations effected by the three months ended September 30, 2020, we repaid $250 millionfirst amendment on expansions of borrowings underand extensions of the maturity of the revolving credit facility which we had borrowedduring the covenant suspension period; (iii) removes additional limitations on the availability of certain exceptions to the negative covenants, including the restricted payments covenant, that were imposed during the covenant suspension period; and (iv) provides mechanics relating to a transition away from LIBOR as a precautionary measurebenchmark
interest rate and the replacement of LIBOR by a replacement alternative benchmark rate or mechanism for loans made in order to increase our cash positionU.S. Dollars and preserve liquidity given the ongoing uncertainty in global markets resulting from the COVID-19 pandemic. non-U.S. Dollar currencies.
As of September 30, 2020,2021, December 31, 20192020 and September 30, 2019,2020, there were no amounts outstanding under the revolving credit facility.
Except during the covenant suspension period (as defined below), atAt our request and thea lender's consent, commitments under the amended credit agreement may be increased by up to $300.0 million in aggregate, subject to certain conditions as set forth in the amended credit agreement. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time we seek to incur such borrowings.
Borrowings, if any, under the revolving credit facility have maturities of less than one year. Up to $50.0 million of the facility may be used for the issuance of letters of credit. There were $15.5 million, $5.0 million and $5.1As of September 30, 2021, there was $4.4 million of letters of credit outstanding as of(December 31, 2020 and September 30, 2020 December 31, 2019had $4.3 million and September 30, 2019, respectively.$15.5 million letters of credit outstanding, respectively).
Our obligations under the amended credit agreement which under the prior credit agreement were unsecured and not guaranteed by subsidiaries, are guaranteed by certain domestic significant subsidiaries of the Company,Under Armour, Inc., subject to customary exceptions (the “subsidiary guarantors”) and primarily secured by a first-priority
security interest in substantially all of the assets of the CompanyUnder Armour, Inc. and the subsidiary guarantors, excluding real property, capital stock in and debt of our subsidiaries of Under Armour, Inc. holding certain real property and other customary exceptions.
The amended credit agreement contains negative covenants that, subject to significant exceptions, limit our ability to, among other things,things: incur additional secured and unsecured indebtedness,indebtedness; pledge ourthe assets as security,security; make investments, loans, advances, guarantees and acquisitions, (including investments in and loans to non-guarantor subsidiaries),; undergo fundamental changes,changes; sell our assets outside the ordinary course of business,business; enter into transactions with affiliatesaffiliates; and make restricted payments (including a temporary suspension of certain voluntary restricted payments during the covenant suspension period (as defined below)).payments.
We are also required to comply with specific consolidated leverage and interest coverage ratios during specified periods. Under the prior credit agreement, we were required to maintain a ratio of consolidated EBITDA, to consolidated interest expense of not less than 3.50 to 1.0 (the “interest"interest coverage covenant”covenant"), and we wereare not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.0 (the “leverage covenant”"leverage covenant"), as described in more detail in the prioramended credit agreement. The amended credit agreement provides for suspensions
As of and adjustments to the leverage covenant (including definitional changes impacting the calculation of the ratio and the interest coverage covenant beginning with the quarter ended September 30, 2020, and ending on the date on which financial statements for the quarter ended June 30, 2022 are delivered to lenders under the amended credit agreement (the “covenant suspension period”) as summarized below and described in more detail in the amended credit agreement:
•For the fiscal quarter ended June 30, 2020, the interest coverage covenant was suspended and the leverage covenant required that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.5 to 1.0.
•For the fiscal quarters ending September 30, 2020, December 31, 2020, March 31, 2021 and June 30, 2021, compliance with the interest coverage covenant and the leverage covenant are both suspended. Beginning on September 30, 2020 through and including December 31, 2021, we must instead maintain minimum liquidity of $550.0 million (the “liquidity covenant”) (with liquidity being the sum of certain cash and cash equivalents held by the Company and its subsidiaries and available borrowing capacity under the amended credit agreement).
•For the fiscal quarter ending September 30, 2021, the interest coverage covenant is suspended, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.5 to 1.0 and we must comply with the liquidity covenant.
•For the fiscal quarter ending December 31, 2021, the interest coverage covenant is suspended, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.0 to 1.0 and we must comply with the liquidity covenant.
•Beginning on January 1, 2022, the liquidity covenant is terminated. For the fiscal quarter ending March 31, 2022, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 3.5 to 1.0 and the interest coverage covenant will require that the ratio of consolidated EBITDA to consolidated interest expense be greater than or equal to 3.5 to 1.0.
As of June 30, 2020, we were in compliance with the applicable covenants.
In addition, the amended credit agreement contains events of default that are customary for a facility of this nature, and similar to the prior cred agreement, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the amended credit agreement, will be considered an event of default under the amended credit agreement.
DuringBorrowings under the covenant suspension period, the applicable margin for loans will be 2.00% for adjusted LIBOR loans and 1.00% for alternate base rate loans. Otherwise, borrowings under theamended credit agreement bear interest at a rate per annum equal to, at our option, either (a) an alternate base rate, or (b) a rate based on the rates applicable for deposits in the interbank market for U.S. Dollars or the applicable currency in which the loans are made (“adjusted LIBOR”), (c) a rate based on the rates applicable for deposits in the interbank market for Japanese Yen ("adjusted TIBOR"), (d) a rate based on the rates applicable for deposits in the interbank market for Canadian Dollars ("adjusted CDOR"), or (e) a rate based on the rates applicable for deposits in the interbank market for Euro ("adjusted EURIBOR"), plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to a grid (the “pricing grid”) based on the consolidated leverage ratio of consolidated total indebtedness to consolidated EBITDA and ranges between 1.25% to 1.75% for adjusted LIBOR, adjusted TIBOR, adjusted CDOR and adjusted EURIBOR loans and 0.25% to 0.75% for alternate base rate loans. The weighted average interest rate under the revolving credit facility borrowings was 2.1% during the three months ended September 30, 2020, and 2.3% and 3.6% for the nine months ended September 30, 2020 and 2019, respectively. During the covenant suspension period, the commitment fee rateWe will be 0.40% per annum. Otherwise, wealso pay a commitment fee determined in accordance with the pricing grid on the average daily unused amount of the revolving credit facility
and certain fees with respect to letters of credit.
The weighted average interest rate under the revolving credit facility borrowings was 2.1% and 2.3% during the three and nine months ended September 30, 2020, respectively. There were no borrowings outstanding during the nine months ended September 30, 2021. As of September 30, 2020,2021, the commitment fee was 15.025.0 basis points. We incurred and deferred $7.2 million in financing costs in connection with the amended credit agreement.
1.50% Convertible Senior Notes
In May 2020, we issued $500.0 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at the rate of 1.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The
Convertible Senior Notes will mature on June 1, 2024, unless earlier converted in accordance with their terms, redeemed in accordance with their terms or repurchased.
The net proceeds from the offering (including the net proceeds from the exercise of the over-allotment option) werewas $488.8 million, after deducting the initial purchasers’ discount and estimated offering expenses that we paid, by us, of which we used approximately $47.9 million to pay the cost of the capped call transactions described below. We utilized $439.9 million to repay indebtedness that was outstanding under our revolving credit facility at the time, and to pay related fees and expenses.
The Convertible Senior Notes are not secured and are not guaranteed by any of our subsidiaries. The indenture governing the Convertible Senior Notes does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.
In May 2021, we entered into exchange agreements with certain holders of the Convertible Senior Notes (the "first exchanging holders"), who agreed to exchange $250.0 million in aggregate principal amount of the Convertible Senior Notes for cash and/or shares of our Class C Common Stock, plus payment for accrued and unpaid interest (the "First Exchange"). In connection with the First Exchange, we paid approximately $300.0 million cash and issued approximately 11.1 million shares of the Company's Class C Common Stock to the first exchanging holders. In August 2021, we entered into additional exchange agreements with certain holders of the Convertible Senior Notes (the "second exchanging holders"), who agreed to exchange approximately $169.1 million in aggregate principal amount of the Convertible Senior Notes for cash and/or shares of our Class C Common Stock, plus payment for accrued an unpaid interest (the "Second Exchange" and, together with the First Exchange, the "Exchanges"). In connection with the Second Exchange, we paid approximately $207.0 million cash and issued approximately 7.7 million shares of our Class C Common Stock to the second exchanging holders. In connection with the Exchanges, we recognized a loss on debt extinguishment of approximately $23.8 million and $58.5 million for the three and nine months ended September 30, 2021, respectively, which has been recorded within Other Income (Expense), net on our unaudited condensed consolidated statement of operations. Following the Exchanges, approximately $80.9 million aggregate principal amount of the Convertible Senior Notes remain outstanding.
The Convertible Senior Notes are convertible into cash, shares of our Class C Common Stock or a combination of cash and shares of Class C Common Stock, at our election, as described further below. The initial conversion rate is 101.8589 shares of our Class C Common Stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $9.82 per share of Class C Common Stock), subject to adjustment if certain events occur. Prior to the close of business on the business day immediately preceding January 1, 2024, theholders may (at their option) convert their Convertible Senior Notes will be convertible only upon satisfaction of certain conditionsone or more of the following conditions:
•during any calendar quarter commencing after the calendar quarter ended on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our Class C Common Stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during certain periods. the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our Class C Common Stock and the conversion rate on each such trading day;
•upon the occurrence of specified corporate events or distributions on our Class C Common Stock; or
•if we call any Convertible Senior Notes for redemption prior to the close of business on the business day immediately preceding January 1, 2024.
On or after January 1, 2024, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Senior Notes. The initialNotes at the conversion rate is 101.8589 sharesat any time irrespective of our Class C common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $9.82 per share of Class C common stock), subject to adjustment if certain events occur.the foregoing conditions.
On or after December 6, 2022, we may redeem for cash all or any part of the Convertible Senior Notes, at our option, if the last reported sale price of our Class C common stockCommon Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the
date on which we provide notice of redemption at a redemption price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If we undergo a fundamental change (as defined in the indenture governing the Convertible Senior Notes) prior to the maturity date, subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Convertible Senior Notes in principal amounts of $1,000 or an integral multiple thereof at a price which will be equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Concurrently with the offering of the Convertible Senior Notes, we entered into privately negotiated capped call transactions with JPMorgan Chase Bank, National Association, HSBC Bank USA, National Association, and Citibank, N.A. (the “option counterparties”). The capped call transactions are expected generally to reduce potential dilution to our Class C common stockCommon Stock upon any conversion of Convertible Senior Notes and/or offset any cash payments we are required to make in excess of the aggregate principal amount of converted Convertible Senior Notes upon any conversion thereof, as the case may be, with such reduction and/or offset subject to a cap based on an initialthe cap price. The cap price of the capped call transactions is initially $13.4750 per share of our Class C common stock,Common Stock, representing a premium of 75% above the last reported sale price of our Class C Common Stock on May 21, 2020, and is subject to certain adjustments under the terms of the capped call transactions.
In May 2021 and August 2021, concurrently with the Exchanges, we entered into, with each of the option counterparties, termination agreements relating to a number of options corresponding to the number of Convertible Senior Notes exchanged. Pursuant to such termination agreements, each of the option counterparties paid us a cash settlement amount in respect of the portion of capped call transactions being terminated. We received approximately $53.0 million and $38.6 million in connection with such termination agreements related to the First Exchange and the Second Exchange, respectively.
The Convertible Senior Notes contain a cash conversion feature, and as a result, we have separated it into liability and equity components. We valued the liability component based on our borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which is recognized as a debt discount, was valued as the difference between the face value of the Convertible Senior Notes and the fair value of the liability component.
In connection with the Convertible Senior Notes issuance, we incurred deferred financing costs of $12.3 million, primarily related to fees paid to the initial purchasers of the offering, as well as legal and accounting fees. These costs were allocated on a pro rata basis, with $10.0 million allocated to the debt component and $2.2 million allocated to the equity component.
The debt discount and the debt portion of the deferred financing costs are being amortized to interest expense over the term of the Convertible Senior Notes using the effective interest rate method. The effective interest rate for the three months ended September 30, 2021 was 6.8%.
3.250% Senior Notes
In June 2016, we issued $600.0 million aggregate principal amount of 3.250% senior unsecured notes due June 15, 2026 (the “Senior Notes”). The proceeds were used to pay down amounts outstanding under the revolving credit facility.facility, at the time. Interest is payable semi-annually on June 15 and December 15 beginning December 15,
2016. Prior to March 15, 2026 (three months prior to the maturity date of the Notes), we may redeem some or all of the Senior Notes at any time or from time to time at a redemption price equal to the greater of 100% of the principal amount of the Senior Notes to be redeemed or a "make-whole" amount applicable to such Senior Notes as described in the indenture governing the Senior Notes, plus accrued and unpaid interest to, but excluding, the redemption date.
The indenture governing the Senior Notes contains covenants, including limitations that restrict our ability and the ability of certain of our subsidiaries to create or incur secured indebtedness and enter into sale and leaseback transactions and our ability to consolidate, merge or transfer all or substantially all of our properties or assets to another person, in each case subject to material exceptions described in the indenture.
Interest Expense
Interest expense, net, was $15.0 million and $5.7 million for the three months ended September 30, 2020 and 2019, respectively, and $32.3 million and $15.9 million for the nine months ended September 30, 2020 and 2019, respectively. Interest expense includes the amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long term debt facilities.
We monitor the financial health and stability of our lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets, lenders could be negatively impacted in their ability to perform under these facilities.
Contractual Commitments and Contingencies
CONTRACTUAL COMMITMENTS AND CONTINGENCIES
Other than the borrowings and repayments disclosed above in the "Capital Resources" section and changes which occur in the normal course of business, there were no significant changes to the contractual obligations
reported in our 2019Annual Report on Form 10-K for Fiscal 2020, as updated in our Form 10-Q for the quarter ended September 30, 2020.2021.
Critical Accounting Policies and EstimatesCRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities. Actual results could be significantly different from these estimates. We believe the following addresses the critical accounting policies that are necessary to understand and evaluate our reported financial results.
Our significant accounting policies are described in Note 2 of the audited consolidated financial statements included in our 2019Annual Report on Form 10-K.10-K for Fiscal 2020. The SEC suggests companies provide additional disclosure on those accounting policies considered most critical. The SEC considers an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant judgments and estimates on the part of management in its application. Our estimates are often based on complex judgments, probabilities and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. For a complete discussion of our critical accounting policies, see the “Critical Accounting Policies” section of the MD&A in our 2019Annual Report on Form 10-K.10-K for Fiscal 2020. Other than adoption of recent accounting standards as discussed in Note 2 of our unaudited condensed consolidated financial statements, there were no significant changes to our critical accounting policies during the nine months ended September 30, 2020.2021.
Recently Issued Accounting Standards
Refer to Note 2 of our unaudited condensed consolidated financial statements, included in this Form 10-Q, for our assessment of recently issued accounting standards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to our market risk since December 31, 2019.2020. For a discussion of our exposure to market risk, refer to our Annual Report on Form 10-K for the year ended December 31, 2019.Fiscal 2020.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
COVID-19
There were no material impacts, due to COVID-19 and the resulting need to close our books remotely, on our ability to maintain internal control over financial reporting and disclosure controls and procedures for the three and nine months ended September 30, 2020.
Changes in Internal Controls
In 2015, we beganWe have assessed the process of implementing a global operating and financial reporting information technology system, SAP Fashion Management Solution ("FMS"), as part of a multi-year plan to integrate and upgrade our systems and processes. The first phase of this implementation became operational in July 2017, in our North America, EMEA, and Connected Fitness operations. The second phase of this implementation became operational in April 2019 in China and South Korea. The third phase of this implementation became operational in April 2020 in Mexico. We believe the implementation of the systems and relatedimpact on changes to internal controls will enhance our internal controls over financial reporting. We also expect to continue to see enhancements to our global systems, which will then continue to strengthen our internal financial reporting controls by automating select manual processes and standardizing both business processes and relied upon reporting across our organization. We believe that our robust assessment provides effective global coverage for key control activities that support our internal controls over financial reporting, conclusion. For a discussion of risks related to the implementation of new systems, see Item 1A - "Risk Factors - Risks Related to Our Business - The process of implementing a new operating and information system, which involves risks and uncertaintiesconclude that could adversely affect our business " in our Annual Report on Form 10-K for the year ended December 31, 2019.
During the quarter ended March 31, 2020, we implemented controls to ensure we adequately evaluate expected credit losses for trade receivables and properly assessed the impact of the new credit losses accounting standard on our financial statements in connection with the adoption of ASU 2016-13 on January 1, 2020.
Therethere have been no changes in our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), during the most recent fiscal quarter that have materially affected, or that are reasonably likely to materially affect our internal controlcontrols over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that a significant number of our employees are working remotely due to the COVID-19 pandemic. We continue to monitor and assess impacts of the COVID-19 pandemic on our control environment and control activities in order to minimize the impact on the design and operating effectiveness of our controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in litigation and other proceedings, including matters related to commercial and intellectual property, as well as trade, regulatory and other claims related to our business. See Note 86 to our Consolidated Financial Statementsunaudited condensed consolidated financial statements for information on certain legal proceedings, which is incorporated by reference herein.
ITEM 1A. RISK FACTORS
Our results of operations and financial condition could be adversely affected by numerous risks.In addition to the other information in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors detailed below anddiscussed in our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission for the quarter ended March 31, 2020, which supersede the risk factors disclosedPart I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K filed withfor Fiscal 2020. These are not the Securitiesonly risks and Exchange Commission for the year ended December 31, 2019.
Our credit agreement contains financial covenants, and both our credit agreement and debt securities contain other restrictions on our actions, which could limit our operational flexibilityuncertainties facing us. Additional risks not currently known to us or otherwise adversely affect our financial condition.
We have, from time to time, financed our liquidity needs in part from borrowings made under our credit facility and the issuance of debt securities. Our 3.250% senior notes limit our ability to, subject to certain significant exceptions, incur secured debt and engage in sale leaseback transactions. Our amended credit agreement contains negative covenants that subject to significant exceptions limit our ability, among other things to incur additional indebtedness, make restricted payments, sell or dispose of assets, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. In addition, during specified periods, we must maintain a certain leverage ratio and interest coverage ratio as defined in the amended credit agreement. Our ability to continue to borrow amounts under our amended credit agreement is limited by continued compliance with these financial covenants, and in the past we have amended our credit agreement to provide certain relief from and revisions to our financial covenants for specified future periods and provide us with sufficient access to liquidity during those periods. During certain quarters, our amended credit agreement requires us to maintain a specified amount of minimum liquidity.If our cash flows and capital resourcescurrently believe are insufficient to maintain this liquidity level, weimmaterial may need to take further actions to reduce our expenditures, and potentially seek alternative sources of liquidity, including but not limited to accessing the capital markets, sale leaseback transactions or other sales of assets, or other alternative financing measures.Failure to comply with these operating or financial covenants could result from, among other things, changes in our results of operations or general economic conditions. These covenants may restrict our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants under the amended credit agreement or our senior notes could result in a default, which couldalso negatively impact our access to liquidity.
In addition, the amended credit agreement includes a cross default provision whereby an event of default under certain other debt obligations (including our debt securities) will be considered an event of default under the amended credit agreement. If an event of default occurs, the commitments of the lenders under the amended credit agreement may be terminated and the maturity of amounts owed may be accelerated. Our debt securities include a cross acceleration provision which provides that the acceleration of certain other debt obligations in excess of $100 million (including amounts outstanding under our credit agreement) may result in an event of default under our debt securities if such accelerated debt is not discharged or the acceleration is not cured, waived, rescinded or annulled within 30 days of us receiving notice from the trustee of our debt securities or holders of at least 25% of the principal amount of our outstanding notes. Under those circumstances, holders of our senior notes and convertible senior notes would have the right to accelerate our debt securities to become immediately payable.
We are the subject of a number of ongoing legal proceedings that have resulted in significant expense, and adverse developments in our ongoing proceedings and/or future legal proceedings could have a material adverse effect on our business, reputation, financial condition, results of operations and future prospects.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Equity Securities
On August 19, 2021, we entered into exchange agreements with certain holders (the "second exchanging holders") of our 1.50% convertible senior notes due 2024 (the "Convertible Senior Notes"), who agreed to exchange approximately $169.1 million in aggregate principal amount of the Convertible Senior Notes for cash and/or stock price.
We are currently involved in a varietyshares of litigation, investigationsour Class C Common Stock, plus payment for accrued and other legal mattersunpaid interest (the "Second Exchange"). In connection with the Second Exchange, we issued 7,698,223 shares of our Class C Common Stock and may be subjectpaid approximately $207.0 million cash to additional investigations, arbitration proceedings, audits, regulatory inquiries and similar actions, including matters related to commercial disputes, intellectual property, employment, securities laws, disclosures, tax, accounting, class action and product liability, as well as trade, regulatory and other claims related tothe second exchanging holders. The shares of our business
and our industry, which we refer to collectively as legal proceedings. For example, we are subject to an ongoing securities class action proceeding regarding our prior disclosures and derivative complaints regarding related matters, as well as past related party transactions, among other proceedings. Refer to Note 8 to our Consolidated Financial Statements included in Part I, Item 8 of this Quarterly Report on Form 10-Q for additional information regarding these specific matters. We may face legal proceedingsClass C Common Stock issued in connection with actions we have takenthe Second Exchange were not registered under the Securities Act of 1933, as amended (the "Securities Act"), and were issued in response toreliance on the COVID-19 pandemic. For example, we have delayed or suspended payments to certain of our vendors based on regional facts and circumstances. While we are currently negotiating with many of these counterparties, we may face future disputes if we are unable to reach agreement with respect to these payments. In addition, as previously disclosed in November 2019, we have been responding to requests for documents and informationexemption from the U.S.registration requirements thereof provided by Section 4(a)(2) of the Securities andAct in a transaction by an issuer not involving a public offering. Additionally, concurrently with the Second Exchange, Commission (“SEC”) and Departmentwe entered into agreements to terminate a portion of Justice (“DOJ”) beginning with submissions to the SEC in July 2017, and in July 2020 we and two members of our senior management received “Wells Notices” from the SEC relating to our disclosures covering the third quarter of 2015 through the period ending December 31, 2016, regarding the use of “pull forward” salescapped call transactions previously entered into in connection with revenue during those quarters. Inour initial offering of the course of cooperatingConvertible Senior Notes and received approximately $38.6 million in aggregate from the option counterparties in connection with such termination agreements. See Note 5 to our unaudited condensed consolidated financial statements for more information regarding the SEC and DOJ requests, we have reviewed our disclosures and we continue to believe they were appropriate. However, we cannot predict the outcome of any particular proceeding, or whether ongoing investigations, including the SEC and DOJ investigations, will be resolved favorably or ultimately result in charges or material damages, fines or other penalties, enforcement actions, bars against serving as an officer or director, or practicing before the SEC, or civil or criminal proceedings against us or members of our senior management.
Legal proceedings in general, and securities and class action litigation and regulatory investigations in particular, can be expensive and disruptive. Our insurance may not cover all claims that may be asserted against us, and we are unable to predict how long the legal proceedings to which we are currently subject will continue. An unfavorable outcome of any legal proceeding may have an adverse impact on our business, financial condition and results of operations orour stock price. Any proceeding could negatively impact our reputation among our customers or our shareholders. Furthermore, publicity surrounding ongoing legal proceedings, even if resolved favorably for us, could result in additional legal proceedings against us, as well as damage our brand image.
Second Exchange.
ITEM 6. EXHIBITS
| | | | | |
Exhibit
No. | |
| Under Armour, Inc. AmendedForm of Termination Agreement, dated August 19, 2021, by and Restated Executive Incentive Compensation Plan.between the Company and the applicable capped call counterparty (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on August 19, 2021). |
| Section 302 Chief Executive Officer Certification |
| Section 302 Chief Financial Officer Certification |
| Section 906 Chief Executive Officer Certification |
| Section 906 Chief Financial Officer Certification |
| 101.INS | XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| UNDER ARMOUR, INC. |
| | |
| By: | /s/ DAVIDDavid E. BERGMAN Bergman |
| | David E. Bergman |
| | Chief Financial Officer
|
Date: November 5, 20204, 2021
