UNDER ARMOUR, INC.
Forward-Looking Statements
Some of the statements contained in this Form 10-Q constitute forward-looking
statements. Forward-looking statements relate to expectations, beliefs,
projections, future plans and strategies, anticipated events or trends and
similar expressions concerning matters that are not historical facts, such as
statements regarding our future financial condition or results of operations,
our prospects and strategies for future growth, the impact of the COVID-19
pandemic on our business and results of operations, our plans to reduce our
operating expenses, anticipated charges and restructuring costs, the timing of
these measures and projected savings related to our restructuring plans, 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.
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 Discussion and
Analysis of Financial Condition and Results of Operations." These factors
include without limitation:
•the impact of the COVID-19 pandemic on our industry and our business, financial
condition and results of operations;
•changes in general economic or market conditions that could affect overall
consumer spending or our industry;
•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 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 demand for our products and manage
our inventory in response to changing demands;
•any disruptions, delays 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;
•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 in our operating results;
•our ability to successfully manage or realize expected results from
acquisitions and other significant investments or capital expenditures;
•risks related to foreign currency exchange rate fluctuations;
•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;
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Table of Contents •risks related to data security or privacy breaches; •our potential exposure to litigation and other proceedings; and •our ability to attract key talent and retain the services of our senior management and key employees.
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.
Overview
We are a leading developer, marketer and distributor of branded athletic performance apparel, footwear and accessories. We create products engineered to solve problems and make athletes lives better, as well as digital health and fitness apps built to connect people and drive performance. Our products are made, sold and worn worldwide. 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 InMarch 2020 , a novel strain of coronavirus (COVID-19) was declared a global pandemic by theWorld Health Organization . This pandemic has negatively affected theU.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 and a majority of our stores remained closed into the second quarter of 2020. The following is a summary of our owned and operated store closures and their current status: •North America: Beginning in mid-March we closed all of our stores in theNorth 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. •EMEA: Beginning in mid-March we closed all of 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 May and more than 95% of our stores were open by the end of June. •Asia-Pacific: Stores inChina were closed from late-January through early-March, when a slowly progressive re-opening process started. Stores in the remainder of theAsia-Pacific operating segment were also closed from time to time based on local conditions. More than 80% of our stores were open by the end of April and over 95% of the stores were open by the end of June. •Latin America: Beginning in mid-March we closed all of our stores in theLatin 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. 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 quarter, as stores remained closed, we experienced significant growth in our global e-commerce business. Although we expect e-commerce sales to represent a higher portion of our overall business in 2020, sales in this channel have historically represented a small percentage of our total revenue. For example, in 2019 sales through 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 operations and financial performance for the three and six months endedJune 30, 2020 were materially impacted by the developments discussed above, including decreases in net revenue and decreases in 32 -------------------------------------------------------------------------------- Table of Contents overall profitability as compared to the prior year. These developments have further required us to recognize certain long-lived asset and goodwill impairment charges, discussed in further detail below, and record valuation allowances on the majority of our deferred tax assets and recognize impairment on certain equity method investments. In addition to the impacts on our sales outlined above, this pandemic has also impacted the operations of our distribution centers, 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. As the pandemic progresses, throughout our supply chain we may face further disruptions or increased operational and logistics costs. 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. 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, reductions to our discretionary spending and changes to 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, in connection with the Coronavirus Aid, Relief, and Economic Security ("CARES") Act and similar legislation in foreign jurisdictions, we recognized payroll subsidies totaling$4.6 million and$5.2 million under these wage subsidy programs and similar plans in other jurisdictions for the three and six months endedJune 30, 2020 . The subsidies were recorded as a reduction of the associated costs which we incurred within selling, general and administrative expenses in the unaudited consolidated statement of operations. We do expect the pandemic to continue to have a material impact on our financial condition, results of operations and cash flows from operations in future periods. For the remainder of our 2020 fiscal year, we expect net revenues and profitability to be materially lower than the prior year period. Specifically, in the fourth quarter of 2020 we are expecting a larger percentage decline in net revenues due to expected year-end timing impacts from COVID-19 due to customer-requested order flow and product availability through our supply chain, resulting in more deliveries in early 2021 versus late 2020. 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 rate 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 operational and financial performance depends on future developments outside of our control, including the duration 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 endedMarch 31, 2020 and those included in this Quarterly Report on Form 10-Q. Quarterly Results Financial highlights for the three months endedJune 30, 2020 as compared to the prior year period include: •Net revenues decreased 40.6%. •Wholesale and direct-to-consumer revenue decreased 57.7% and 13.0%, respectively. •Apparel, footwear and accessories revenue decreased 42.4%, 34.8% and 47.2%, respectively. •Revenue in ourNorth America ,Asia-Pacific ,Latin America and EMEA segments decreased 44.9%, 20.0%, 71.9% and 38.7%, respectively. •Gross margin increased 280 basis points. •Selling, general and administrative expense decreased 15.2%. •Restructuring and impairment charges were$38.9 million . There were no long-lived asset or goodwill impairment charges. 33 -------------------------------------------------------------------------------- Table of Contents 2020 Restructuring OnMarch 31, 2020 , our Board of Directors approved the previously announced restructuring plan ("2020 Restructuring") designed to rebalance our cost base to further improve profitability and cash flow generation. This restructuring plan was developed prior to assessing the potential impacts of the COVID-19 pandemic on our business and we continue to evaluate what actions may be necessary related to the pandemic. In connection with the restructuring plan, we expect to incur total estimated pre-tax restructuring and related charges in the range of$475 million to$525 million during 2020 primarily consisting of up to approximately: •$175 million of cash restructuring charges, comprised of up to:$55 million in facility and lease termination costs,$25 million in employee severance and benefit costs, and$95 million in contract termination and other restructuring costs; and •$350 million of non-cash charges comprised of an impairment of$290 million related to ourNew York City flagship store and$60 million of 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$38.9 million and$340.0 million of restructuring and related impairment charges for the three and six months endedJune 30, 2020 , respectively, including the right of use asset ("ROU") impairment related to ourNew York City flagship store. The summary of the costs recorded during the three and six months endedJune 30, 2020 , as well as our current estimates of the amount expected to be incurred during the remainder of 2020 in connection with the 2020 restructuring plan is as follows: Estimated Restructuring and Related Impairment Restructuring and Related Impairment Charges Charges to be Incurred Recorded (1) Year Ending Three months ended Six months
ended Six Months Ending
June 30, 2020 June 30, 2020 December 31, 2020 2020
Costs recorded in cost of goods
sold:
Contract-based royalties $ - $ - $ 11,000 $ 11,000
Total costs recorded in cost of
goods sold - - 11,000 11,000
Costs recorded in restructuring and
related impairment charges:
Property and equipment impairment 15,810 22,904 21,096 44,000
ROU asset impairment - 290,813 - 290,813
Employee related costs 829 829 24,171 25,000
Contract exit costs (2) 14,942 14,942 100,058 115,000
Other restructuring costs 7,356 10,538 28,462 39,000
Total costs recorded in
restructuring and related impairment
charges 38,937 340,026 173,787 513,813
Total restructuring and related
impairment and restructuring related
costs $ 38,937 $ 340,026 $ 184,787 $ 524,813
(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 during 2020 in connection with the restructuring plan.
(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 $30.4 million are North America related,
$0.3 million are Latin America related, and $0.1 million are EMEA related for
the three months ended June 30, 2020 and $328.3 million are North America
related, $0.3 million are Latin America related, and $0.1 million are EMEA
related for the six months ended June 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 six months ended June 30, 2020 , reducing the carrying
value of the lease asset to its estimated fair value. Fair value was estimated
using an income-approach
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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) on the
unaudited consolidated statements of operations. There were no related ROU asset
impairment charges for the three months ended June 30, 2020 .
These charges require us to make certain judgements 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 the 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 . In 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 net 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. As a result, we recognized $83.8 million of long-lived asset
impairment charges for the six months ended June 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: $43.4 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 six months ended June 30, 2020 . There were no triggering events
or long-lived asset impairment charges recorded for the three months ended June
30, 2020 .
The significant estimates, all of which are considered Level 3 inputs, used in
the fair value methodology include: management's expectations for future
operations and projected cash flows, including net revenue, gross profit and
operating expenses and market conditions.
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 six months ended June 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 the performance of 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 six months ended June 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 within goodwill 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 six months ended,
June 30, 2020 . There were no triggering events or goodwill impairment charges
recorded for the three months ended June 30, 2020 .
The determination of our reporting units' fair value includes assumptions that
are subject to various risks and uncertainties. The significant estimates, all
of which are considered Level 3 inputs, used in the discounted cash flow
analyses 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 six months ended June 30, 2020 that indicated it was more likely than
not that goodwill was impaired for this reporting unit.
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Acquisition
On March 2, 2020 , we acquired, on a cash free, debt free basis, 100% 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 .
General
Net revenues comprise net sales, license revenues andConnected Fitness revenues. Net sales comprise sales from our primary product categories, which are apparel, footwear and accessories. Our license revenues primarily consist of fees paid to us by our licensees in exchange for the use of our trademarks on their products. OurConnected Fitness revenues consist of digital advertising, digital fitness platform licenses and subscriptions from ourConnected Fitness business. Cost of goods sold consists primarily of product costs, inbound freight and duty costs, outbound freight costs, handling costs to make products floor-ready to customer specifications, royalty payments to endorsers based on a predetermined percentage of sales of selected products and write downs for inventory obsolescence. 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 withConnected Fitness 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, 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$21.7 million and$20.5 million for the three months endedJune 30, 2020 and 2019, respectively, and$36.5 million and$42.2 million for the six months endedJune 30, 2020 and 2019, respectively. Our selling, general and administrative expenses consist of costs related to marketing, selling, product innovation and supply chain and corporate services. We consolidate our selling, general and administrative expenses into two primary categories: marketing and other. The other category is the sum of our selling, product innovation and supply chain, and corporate services categories. The marketing category consists primarily of sports and brand marketing, media, and retail presentation. Sports and brand marketing includes professional, club, collegiate sponsorship, individual athlete and influencer agreements, and providing and selling products directly to team equipment managers and to individual athletes. Media includes digital, broadcast and print media outlets, including social and mobile media. Retail presentation includes sales displays and concept shops and depreciation expense specific to our in-store fixture programs. Our marketing costs are an important driver of our growth. Other expense, net consists of unrealized and realized gains and losses on our foreign currency derivative financial instruments, unrealized and realized gains and losses on adjustments that arise from fluctuations in foreign currency exchange rates relating to transactions generated by our international subsidiaries. We also include rent expense relating to lease assets held solely for sublet purposes, which is comprised entirely of the lease related to ourNew York City flagship store. 36 -------------------------------------------------------------------------------- Results of Operations The following tables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues: Six Months Ended June Three Months Ended June 30, 30, (In thousands) 2020 2019 2020 2019 Net revenues$ 707,640 $
1,191,729
358,471 637,408 857,727 1,297,343
Gross profit 349,169 554,321 780,153 1,099,108
Selling, general and administrative
expenses 479,906 565,803 1,032,607 1,075,331
Restructuring and impairment charges 38,937 - 475,400 -
Income (loss) from operations (169,674) (11,482) (727,854) 23,777
Interest expense, net (11,336) (5,988) (17,296) (10,226)
Other expense, net (4,843) (1,128) (3,309) (1,795)
Income (loss) before income taxes (185,853) (18,598) (748,459) 11,756
Income tax expense (benefit) (3,137) (5,740) 18,410 2,391
Loss from equity method investments (179) (4,491) (5,707) $ (4,237)
Net income (loss) $ (182,895) $ (17,349) $ (772,576) $ 5,128
Six Months Ended June
Three Months Ended June 30, 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 50.7 % 53.5 % 52.4 % 54.1 %
Gross profit 49.3 % 46.5 % 47.6 % 45.9 %
Selling, general and administrative
expenses 67.8 % 47.5 % 63.0 % 44.9 %
Restructuring and impairment charges 5.5 % - % 29.0 % - %
Income (loss) from operations (24.0) % (1.0) % (44.4) % 1.0 %
Interest expense, net (1.6) % (0.5) % (1.1) % (0.4) %
Other expense, net (0.7) % (0.1) % (0.2) % (0.1) %
Income (loss) before income taxes (26.3) % (1.6) % (45.7) % 0.5 %
Income tax expense (benefit) (0.4) % (0.5) % 1.1 % 0.1 %
Loss from equity method investment - % (0.4) % (0.3) % (0.2) %
Net income (loss) (25.8) % (1.5) % (47.2) % 0.2 %
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