The information contained in this section should be read in conjunction with our Consolidated Financial Statements and related notes and the information contained elsewhere in this Form 10-K under the captions "Risk Factors," "Selected Financial Data," and "Business." This Annual Report on Form 10-K, including this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of theU.S. Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of theU.S. Securities Act of 1933, as amended ("the Securities Act"), and is subject to the safe harbors created by those sections. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. 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 Consolidated Financial Statements and the accompanying Notes to our Consolidated Financial Statements under Part II, Item 8 of this Annual Report on Form 10-K. All dollar and percentage comparisons made herein refer to the year endedDecember 31, 2020 ("Fiscal 2020") compared with the year endedDecember 31, 2019 ("Fiscal 2019"), unless otherwise noted. Please refer to Part II, Item 7 of our Annual Report on Form 10-K for Fiscal 2019, filed with theSecurities Exchange Commission ("SEC") onFebruary 26, 2020 , for a comparative discussion of our Fiscal 2019 financial results as compared to year endedDecember 31, 2018 ("Fiscal 2018"). See "Forward-looking statements." Overview We are a leading developer, marketer and distributor of branded performance apparel, footwear and accessories. The brand's moisture-wicking fabrications are engineered in many different designs and styles for wear in nearly every climate to provide a performance alternative to traditional products. Our products are sold worldwide and worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as by consumers with active lifestyles. Our digital strategy is focused on engaging with these consumers and increasing awareness and sales of our products. We believe that our net revenues have been 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. Fiscal 2020 Performance Financial highlights for Fiscal 2020 as compared to Fiscal 2019 include: •Net revenues decreased 15%. •Wholesale revenues decreased 25% and direct-to-consumer revenues increased 2%, driven by growth in our e-commerce business. •Apparel revenue decreased 17%. Footwear revenue declined 14% and accessories revenue was relatively flat. •Revenue in ourNorth America segment declined 19%. Revenue in ourAsia-Pacific , EMEA andLatin America segments decreased 1%, 4% and 16%, respectively. •Gross margin increased 140 basis points. •Selling, general and administrative expense decreased 3%. A large majority of our products are sold inNorth America ; however, we believe our products appeal to athletes and consumers around the globe. Internationally, our net revenues are generated primarily from a mix of sales to retailers and distributors in our wholesale channel and sales through our direct-to-consumer channels. We believe there is an increasing recognition of the health benefits of an active lifestyle. We believe this trend provides us with an expanding consumer base for our products. We also believe there is a continuing shift in consumer demand from traditional non-performance products to performance products, which are intended to provide better performance by wicking perspiration away from the skin, helping to regulate body temperature and 31 -------------------------------------------------------------------------------- enhancing comfort. We plan to continue to grow our business over the long term through increased sales of our apparel, footwear and accessories, expansion of our wholesale distribution, growth in our direct-to-consumer sales channel and expansion in international markets. Although we believe these trends will facilitate our growth, we also face potential challenges that could limit our ability to take advantage of these opportunities or negatively impact our financial results, including, among others, the risk of general economic or market conditions that could affect consumer spending and the financial health of our retail customers. For example, recent and ongoing developments regarding COVID-19 may negatively impact our results of operations. Additionally, we may not be able to successfully execute on our long-term strategies, or successfully manage the increasingly complex operations of our global business effectively. Although we have implemented restructuring plans in the past and may implement additional plans in the future, we may not fully realize the expected benefits of these plans or other operating or cost-saving initiatives. In addition, we may not consistently be able to anticipate consumer preferences and develop new and innovative products that meet changing preferences in a timely manner. Furthermore, our industry is very competitive, and competition pressures could cause us to reduce the prices of our products or otherwise affect our profitability. We also rely on third-party suppliers and manufacturers outside theU.S. to provide fabrics and to produce our products, and disruptions to our supply chain could harm our business. For a more complete discussion of the risks facing our business, refer to the "Risk Factors" section included in Item 1A. 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 Fiscal 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 Fiscal 2020. By the end of the third quarter of Fiscal 2020, substantially all of our brand and factory house stores were re-opened. As pandemic conditions worsened globally during the fourth quarter of Fiscal 2020, we again closed certain stores based on regional conditions, particularly in EMEA andLatin America . The following is a summary of our owned and operated store closures and their status throughout Fiscal 2020 and as of the end ofJanuary 2021 : •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 our stores in May and more than 85% of our stores were open by the end of June. As of the end ofSeptember 2020 , all of our stores were open and approximately 95% of our stores were open as of the end ofJanuary 2021 . •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 our stores in May and more than 95% of the stores were open at the end of June. As of the end ofSeptember 2020 , all of our stores were open, however, in the fourth quarter we had to close almost 60% of our stores based on regional conditions. As of the end ofJanuary 2021 , only 25% of our stores were open. •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 by the end ofJune 2020 more than 95% of the stores were open and continued to be open until the end ofSeptember 2020 . As of the end ofJanuary 2021 , approximately 90% of our stores were open. •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, and by the end ofSeptember 2020 approximately 85% of our stores remained open. However, in the fourth quarter, we had to close certain stores based on regional conditions, and approximately 55% of our stores were open as of the end ofJanuary 2021 . The discussion above reflects the status of our owned and operated stores through the end ofJanuary 2021 , 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 32 -------------------------------------------------------------------------------- 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, we estimated that over 90% of our owned and partner doors had reopened, and most of our wholesale customers had also reopened their stores. However, in the fourth quarter our owned and partners doors began to close from time to time based on regional conditions. While store closures significantly impacted sales throughout Fiscal 2020, since the beginning of the second quarter, we experienced significant growth in our global e-commerce business. Although e-commerce sales represented a higher portion of our overall business in Fiscal 2020, sales in this channel have historically represented a small percentage of our total revenue. For example, in Fiscal 2020 sales through our direct-to-consumer channel represented 41% of net revenues, with our e-commerce business representing approximately 47% of the total direct-to-consumer business. Our business operations and financial performance in Fiscal 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 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. 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 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, including amending our credit agreement to provide 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 and completing a sale of$500 million of Convertible Senior Notes. 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 global legislation, including the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, we recognized certain incentives totaling$9.0 million for Fiscal 2020. These incentives were recorded as a reduction of the associated costs which we incurred within selling, general and administrative expenses in the Consolidated Statements 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 into 2021 as compared to the end of 2020. Specifically, we experienced timing impacts from COVID-19, related to customer order flow and changes in supply chain timing, which resulted in more planned spring product deliveries shifting from the fourth quarter of 2020 to early 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 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 and the pace of vaccination efforts. 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 Item 1A. Segment Presentation and Marketing 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 our global assets and global marketing, costs related to our headquarters; restructuring and impairment related charges; and certain foreign currency hedge gains and losses. 33 -------------------------------------------------------------------------------- 2020 Restructuring OnMarch 31, 2020 , our Board of Directors approved a restructuring plan ("2020 restructuring plan") designed to rebalance our cost base to further improve profitability and cash flow generation. We identified further opportunities and onSeptember 2, 2020 , our 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: •$219 million of cash restructuring charges, comprised of up to:$61 million in facility and lease termination costs,$30 million in employee severance and benefit costs, and$128 million in contract termination and other restructuring costs; and •$381 million of non-cash charges comprised of an impairment of$291 million related to ourNew York City flagship store and$90 million of intangibles and other asset related impairments. We recorded$472.7 million and$183.1 million of restructuring and related impairment charges for Fiscal 2020 and Fiscal 2018, respectively. There were no restructuring charges incurred during Fiscal 2019. The summary of the costs recorded during Fiscal 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 Estimated restructuring and related charges recorded Impairment charges (1) Year ended December Remaining to be Total (A+B) (In thousands) 31, 2020 (A) incurred (B) Costs recorded in cost of goods sold: Contract-based royalties $ 11,608 - 11,608 Inventory write-offs 768 3,400 4,168 Total costs recorded in cost of goods sold 12,376 3,400 15,776 Costs recorded in restructuring and impairment charges: Property and equipment impairment 29,280 8,098 37,378 Intangible asset impairment 4,351 - 4,351 Right-of-use asset impairment 293,495 - 293,495 Employee related costs 28,579 1,421 30,000 Contract exit costs (2) 79,008 89,992 169,000 Other asset write off 13,074 15,926 29,000 Other restructuring costs 12,564 8,436 21,000 Total costs recorded in restructuring and related impairment charges 460,351 123,873 584,224 Total restructuring and impairment charges $ 472,727$ 127,273 $ 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 recorded by us 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$397.6 million areNorth America related,$14.4 million are EMEA related,$14.9 million areLatin America related,$6.8 million areAsia-Pacific related and$4.6 million areConnected Fitness related for Fiscal 2020. The lease term for ourNew York City flagship store commenced onMarch 1, 2020 and an operating lease right-of-use ("ROU") asset and corresponding operating lease liability of$344.8 million was recorded on our Consolidated Balance Sheet. InMarch 2020 , as a part of the 2020 restructuring plan, we made the strategic decision to forgo the opening of ourNew York City flagship store and the property is actively being marketed for sublease. Accordingly, in the first quarter of 2020, we 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- 34 -------------------------------------------------------------------------------- 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 Consolidated Statements of Operations. These charges require us to make certain judgements and estimates regarding the amount and timing of restructuring and related impairment charges or recoveries. 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 revise our assumptions and estimates as appropriate as new or updated information becomes available. 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. We performed undiscounted cash flow analyses on 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 estimated the fair values of these long-lived assets based on their market rent assessments or discounted cash flows. We compared these estimated fair values to the net carrying values and recognized$89.7 million of long-lived asset impairment charges for Fiscal 2020. There were no long-lived asset impairment charges for Fiscal 2019 and Fiscal 2018. The long-lived impairment charge was recorded within restructuring and impairment charges on the Consolidated Statements of Operations and as a reduction to the related asset balances on the Consolidated Balance Sheets. The long-lived asset impairment charges are included within the Company's operating segments as follows:$47.6 million recorded inNorth America ,$23.0 million recorded inAsia-Pacific ,$13.3 million recorded inLatin America , and$5.8 million recorded in EMEA for Fiscal 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 ourNew York City flagship store, which was recorded in connection with our 2020 restructuring plan for Fiscal 2020. Refer to the 2020 Restructuring section above for a 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 the Company's reporting units as ofMarch 31, 2020 . In the first quarter of Fiscal 2020, we performed discounted cash flow analyses and determined that the estimated fair values of theLatin America reporting unit and theCanada reporting unit within theNorth America operating segment no longer exceeded its carrying value and resulted in an impairment of goodwill. We recognized goodwill impairment charges of$51.6 million for Fiscal 2020 for these reporting units. The goodwill impairment charge was recorded within restructuring and impairment charges on the Consolidated Statements of Operations and as a reduction to the goodwill balance on the Consolidated Balance Sheets. There were no triggering events or goodwill impairment charges recorded during the remainder of Fiscal 2020. The goodwill impairment charges are included with our operating segments as follows:$15.4 million recorded inNorth America and$36.2 million recorded inLatin America for Fiscal 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. Acquisitions and Dispositions OnMarch 2, 2020 , we acquired, on a cash free, debt free basis, 100% ofTriple Pte. Ltd. ("Triple"), a distributor of our products inSoutheast 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 onMarch 2, 2020 . OnOctober 28, 2020 , we entered into a Stock Purchase Agreement (the "Purchase Agreement") to sell our MyFitnessPal platform, and onDecember 18, 2020 , the sale was completed. Pursuant to the Purchase Agreement, the aggregate sale price for the transaction was$345 million , of which$215 million was payable upon closing. We 35 -------------------------------------------------------------------------------- received$198.7 million at closing after giving effect to$16 million of purchase price and other adjustments. The sale includes up to$130 million in earn-out payments, which are based on the achievement of certain revenue targets over a three-year period. The potential earn-out payments include up to$35 million payable in calendar year 2022,$45 million payable in calendar year 2023 and$50 million payable in calendar year 2024. We recognized a gain of approximately$179.3 million , which is included in Other income (expenses), net in our Consolidated Statements of Operations. During the fourth quarter of Fiscal 2020, we determined to change to a distributor model inChile and have executed an asset sale agreement. We expect to close this sale in early Fiscal 2021.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 from licensees in exchange for the use of our trademarks on their products. OurConnected Fitness revenues consist of digital advertising 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. The fabrics in many of our products are made primarily of petroleum-based synthetic materials. Therefore our product costs, as well as our inbound and outbound freight costs, could be affected by long term pricing trends of oil. In general, as a percentage of net revenues, we expect cost of goods sold associated with our apparel and accessories to be lower than that of our footwear. A limited portion of cost of goods sold is associated with license andConnected Fitness 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 outbound handling costs were$80.5 million ,$81 million and$91.8 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively. Our selling, general and administrative expenses consist of costs related to marketing, selling, product innovation and supply chain and corporate services. We consolidate our selling, general and administrative expenses into two primary categories: marketing and other. The other category is the sum of our selling, product innovation and supply chain, and corporate services categories. The marketing category consists primarily of sports and brand marketing, media, and retail presentation. Sports and brand marketing includes professional, club, collegiate sponsorship, individual athlete and influencer agreements, and products provided directly to team equipment managers and to individual athletes. Media includes digital, broadcast and print media outlets, including social and mobile media. Retail presentation includes sales displays and concept shops and depreciation expense specific to our in-store fixture programs. Our marketing costs are an important driver of our growth. Other expense, net consists of unrealized and realized gains and losses on our foreign currency derivative financial instruments and unrealized and realized gains and losses on adjustments that arise from fluctuations in foreign currency exchange rates relating to transactions generated by our international subsidiaries. 36 -------------------------------------------------------------------------------- Results of Operations The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues: Year Ended December 31, (In thousands) 2020 2019 2018 Net revenues$ 4,474,667 $ 5,267,132 $ 5,193,185 Cost of goods sold 2,314,572 2,796,599 2,852,714 Gross profit 2,160,095 2,470,533 2,340,471
Selling, general and administrative expenses 2,171,934 2,233,763 2,182,339
Restructuring and impairment charges 601,599
- 183,149
Income (loss) from operations (613,438)
236,770 (25,017)
Interest expense, net (47,259)
(21,240) (33,568)
Other income (expense), net 168,153
(5,688) (9,203)
Income (loss) before income taxes (492,544)
209,842 (67,788)
Income tax expense (benefit) 49,387
70,024 (20,552)
Income (loss) from equity method investment (7,246) (47,679) 934 Net income (loss)$ (549,177) $ 92,139 $ (46,302) Year Ended December 31, (As a percentage of net revenues) 2020 2019 2018 Net revenues 100.0 % 100.0 % 100.0 % Cost of goods sold 51.7 53.1 54.9 Gross profit 48.3 46.9 45.1 Selling, general and administrative expenses 48.5 42.4 42.0 Restructuring and impairment charges 13.4 - 3.5 Income (loss) from operations (13.7) 4.5 (0.4) Interest expense, net (1.1) (0.4) (0.7) Other income (expense), net 3.8 (0.1) (0.2) Income (loss) before income taxes (11.0) 4.0 (1.3) Income tax expense (benefit) 1.1 1.3 (0.4) Income (loss) from equity method investment (0.2) (0.9) - Net income (loss) (12.3) % 1.7 % (0.9) % 37
-------------------------------------------------------------------------------- Consolidated Results of Operations Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Net revenues decreased$792.5 million , or 15%, to$4,474.7 million in Fiscal 2020 from$5,267.1 million in Fiscal 2019. Net revenues by product category are summarized below: Year Ended December 31, (In thousands) 2020 2019 $ Change % Change 2018 $ Change % Change Apparel$ 2,882,562 $ 3,470,285 $ (587,723) (16.9) %$ 3,464,120 $ 6,165 0.2 % Footwear 934,333 1,086,551 (152,218) (14.0) 1,063,175 23,376 2.2 Accessories 414,082 416,354 (2,272) (0.5) 422,496 (6,142) (1.5) Net Sales 4,230,977 4,973,190 (742,213) (14.9) 4,949,791 23,399 0.5 License revenues 105,779 138,775 (32,996) (23.8) 124,785 13,990 11.2 Connected Fitness 135,813 136,378 (565) (0.4) 120,357 16,021 13.3 Corporate Other (1) 2,098 18,789 (16,691) (88.8) (1,748) 20,537 1,174.9 Total net revenues$ 4,474,667 $ 5,267,132 $ (792,465) (15.0) %$ 5,193,185 $ 73,947 1.4 % (1) Corporate Other revenues consist 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 primarily driven by a unit sales 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. The decrease was partially offset by growth in the e-commerce business and sale of specialty products, such as sports masks, within our accessories category. License revenues decreased$33 million , or 23.8%, to$105.8 million in Fiscal 2020 from$138.8 million in Fiscal 2019 driven primarily by lower contractual royalty minimums, decreased revenue from our licensing partners inNorth America due to softer demand as a result of impacts of COVID-19. Further, Fiscal 2019 included one-time settlements with two of our North American partners.Connected Fitness revenue decreased$0.6 million , or 0.4%, to$135.8 million in Fiscal 2020 from$136.4 million in Fiscal 2019 primarily driven by a decrease in advertising revenue and one-time development fee from a partner in Fiscal 2019. Additionally, the decrease in revenue is due to the sale of the MyFitnessPal platform during the fourth quarter of Fiscal 2020. Gross profit decreased$310.4 million to$2,160.1 million in Fiscal 2020 from$2,470.5 million in Fiscal 2019. Gross profit as a percentage of net revenues, or gross margin, increased 140 basis points to 48.3% in Fiscal 2020 compared to 46.9% in Fiscal 2019. This increase in gross margin percentage was primarily driven by the following: •an approximate 220 basis point increase driven by channel mix, primarily due to a lower percentage of off-price sales within our wholesale channel which carry a lower gross margin, and a higher percentage of direct-to-consumer sales, led by e-commerce; and •an approximate 70 basis point increase driven by supply chain initiatives primarily related to product cost improvements. The increase was partially offset by an approximate 130 basis point decrease driven by COVID-19 related pricing and discounting impacts primarily within the direct-to-consumer business, as well as 30 basis points due to restructuring related expenses. Selling, general and administrative expenses decreased$61.8 million to$2,171.9 million in Fiscal 2020 from$2,233.8 million in Fiscal 2019. As a percentage of net revenues, selling, general and administrative expenses increased to 48.5% in Fiscal 2020 from 42.4% in Fiscal 2019. Selling, general and administrative expense was impacted by the following: •Marketing costs decreased$28.5 million to$550.4 million in Fiscal 2020 from$578.9 million in Fiscal 2019. This decrease was primarily driven by reduced rights fees for sports marketing assets and reductions in 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 38 -------------------------------------------------------------------------------- increased brand marketing and direct-to-consumer marketing investments. As a percentage of net revenues, marketing costs increased to 12.3% in Fiscal 2020 from 11.0% in Fiscal 2019. •Other costs decreased$33.3 million to$1,621.6 million in Fiscal 2020 from$1,654.9 million in Fiscal 2019. This decrease was driven primarily by lower incentive compensation, decreased travel and entertainment, and lower depreciation mostly due to reductions in capital expenditures. The decreases in incentive compensation and travel and entertainment were primarily due to impacts of COVID-19. These decreases were partially offset by higher legal expense, increased third party distribution costs to support e-commerce revenues, and an increase in allowance for doubtful account reserves due to negative developments regarding certain customer balances that represent a higher risk of credit default. As a percentage of net revenues, other costs increased to 36.2% in Fiscal 2020 from 31.4% in Fiscal 2019. Restructuring and impairment charges were$602 million comprised of$461 million of restructuring and related impairment charges and$141 million of long-lived asset impairment charges for Fiscal 2020. There were no restructuring and impairment charges for Fiscal 2019. Income (loss) from operations decreased$850.2 million , or 359.1%, to a loss of$613.4 million in Fiscal 2020 from income of$236.8 million in Fiscal 2019, primarily driven by the restructuring and impairment charges and the decrease in net revenues discussed above. Interest expense, net increased$26 million to$47.3 million in Fiscal 2020 from$21.2 million in Fiscal 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 income (expense), net increased$173.8 million to an income of$168.2 million in Fiscal 2020 from an expense of$5.7 million in Fiscal 2019. This increase was primarily due to the gain on sale of MyFitnessPal platform of$179.3 million and foreign exchange gains, including a gain associated with the de-designation of certain derivative instruments as a result of the impacts of COVID-19. The increase was partially offset by the rent expense incurred in connection with ourNew York City flagship store. Income tax expense (benefit) decreased$20.6 million to$49.4 million in Fiscal 2020 from$70.0 million in Fiscal 2019. We recorded 2020 income tax expense on pretax losses, including the impact of recording valuation allowances for previously recognized deferred tax assets inthe United States ("U.S.") andChina , and current yearU.S. pre-tax losses not able to be carried back, compared to 2019 income tax expense recorded on pre-tax income. Loss from equity method investment was$7.2 million in Fiscal 2020 and$47.7 million in Fiscal 2019. This relates to the impairment of our equity method investment in our Japanese licensee in Fiscal 2019. 39 -------------------------------------------------------------------------------- Segment Results of Operations Our operating segments are based on how the Chief Operating Decision Maker ("CODM") makes decisions about allocating resources and assessing performance. Our segments are defined by geographic regions, includingNorth America , EMEA,Asia-Pacific , andLatin America .Connected Fitness is also an operating segment. 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. 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 information technology, global supply chain, 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. EffectiveJanuary 1, 2021 , following the sale of MyFitnessPal and the winding down of the Endomondo platform, revenues for the remaining MapMyFitness business will be included in Corporate Other. Refer to Note 19 to the Consolidated Financial Statements for net revenues by segment. The net revenues and operating income (loss) associated with our segments are summarized in the following tables. Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Net revenues by segment are summarized below: Year Ended December 31, (In thousands) 2020 2019 $ Change % Change North America$ 2,944,978 $ 3,658,353 $ (713,375) (19.5) % EMEA 598,296 621,137 (22,841) (3.7) Asia-Pacific 628,657 636,343 (7,686) (1.2) Latin America 164,825 196,132 (31,307) (16.0) Connected Fitness 135,813 136,378 (565) (.4) Corporate Other (1) 2,098 18,789 (16,691) (88.8) Total net revenues$ 4,474,667 $ 5,267,132 $ (792,465) (15.0) % (1) Corporate Other revenues consist 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 total net revenues was driven by the following: •Net revenues in ourNorth America operating segment decreased$713.4 million to$2,945.0 million in Fiscal 2020 from$3,658.4 million in Fiscal 2019. This decrease was primarily due to a decrease of unit sales within our wholesale and direct-to-consumer channels. Decreases in our wholesale channel were impacted 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 our e-commerce channel. •Net revenues in our EMEA operating segment decreased$22.8 million to$598.3 million in Fiscal 2020 from$621.1 million in Fiscal 2019 primarily due to cancellations of orders by wholesale customers due to closures of stores, as well as orders that shifted out of the fourth quarter into the first quarter of 2021 due to timing impacts from COVID-19 related to customer order flow, and changes in supply chain timing. 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 our e-commerce channel. •Net revenues in ourAsia-Pacific operating segment decreased$7.7 million to$628.7 million in Fiscal 2020 from$636.3 million in Fiscal 2019 primarily due to cancellations of orders by wholesale customers due to closures of stores, impact of additional returns reserves and markdowns within our wholesale channel due to COVID-19, as well as orders that shifted out of the fourth quarter into the first quarter of 2021 due to timing impacts from COVID-19 related to customer order flow, and changes in supply chain timing. This decrease was partially offset by increased unit sales within our direct-to-consumer channel, 40 -------------------------------------------------------------------------------- led by our e-commerce channel. •Net revenues in ourLatin America operating segment decreased$31.3 million to$164.8 million in Fiscal 2020 from$196.1 million in Fiscal 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 as a result of COVID-19. Decreases in our direct-to-consumer channel were impacted by closures of our brand and factory house stores as a result of COVID-19, partially offset by increased unit sales through our e-commerce channel. •Net revenues in ourConnected Fitness operating segment decreased$0.6 million to$135.8 million in Fiscal 2020 from$136.4 million in Fiscal 2019 primarily driven by a decrease in advertising revenue and one-time development fee from a partner in Fiscal 2019. Additionally, the decrease in revenue is due to the sale of the MyFitnessPal platform during the fourth quarter of Fiscal 2020. Operating income (loss) by segment is summarized below: Year Ended December 31, (In thousands) 2020 2019 $ Change % Change North America$ 474,584 $ 733,442 $ (258,858) (35.3) % EMEA 60,592 53,739 6,853 12.8 Asia-Pacific 2 97,641 (97,639) (100.0) Latin America (42,790) (3,160) (39,630) (1254.1) Connected Fitness 17,063 17,140 (77) (.4) Corporate Other (1,122,889) (662,032) (460,857) (69.6)
Total operating income (loss)
The decrease in total operating income was driven by the following: Operating segments •Operating income in ourNorth America operating segment decreased$258.9 million to$474.6 million in Fiscal 2020 from$733.4 million in Fiscal 2019, primarily driven by decreases in net revenues discussed above, an increase in allowance for doubtful account reserves and higher selling costs in connection with increased e-commerce sales, partially offset by gross margin benefits due to channel mix, lower incentive compensation, decreased wages due to store closures and decreased marketing related activities. •Operating income in our EMEA operating segment increased$6.9 million to$60.6 million in Fiscal 2020 from$53.7 million in Fiscal 2019, primarily driven by gross margin benefits due to channel mix with higher unit sales through our e-commerce, as well as lower off-price sales, partially offset by higher selling, general and administrative expenses. The selling, general and marketing expense increased primarily due to increased distribution and selling costs related to increased e-commerce sales, as well as right of use asset impairment charges. These increases within selling, general and administrative expenses were partially offset by reduced marketing spend and event sponsorship costs as a result of COVID-19. •Operating income in ourAsia-Pacific operating segment decreased$97.6 million to$2 thousand in Fiscal 2020 from$97.6 million in Fiscal 2019, primarily driven by a decline in revenue discussed above, as well as higher returns and promotional activity that negatively impacted gross margins. Additionally, selling, general and administrative expenses increased due to right of use asset impairments charges, higher compensation in part due to the Triple acquisition in March of 2020, as well as theHong Kong office build-out and increase distribution and selling costs. •Operating loss in ourLatin America operating segment increased$39.6 million to$42.8 million in Fiscal 2020 from$3.2 million in Fiscal 2019, primarily driven by decreases in net revenues discussed above, partially offset by gross margin benefits due to channel mix and decreased marketing related activities. •Operating income in ourConnected Fitness segment was flat in Fiscal 2020 compared to Fiscal 2019. 41 -------------------------------------------------------------------------------- Non-operating segment •Operating loss in our Corporate Other non-operating segment increased$460.9 million to$1,122.9 million in Fiscal 2020 from$662.0 million in Fiscal 2019, primarily driven by$472.7 million of restructuring and impairment charges related to the 2020 restructuring plan, partially offset by lower incentive compensation. Financial Position, 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, in Fiscal 2020 we reduced our inventory purchases and capital expenditures as we managed our liquidity and working capital through this period. 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 six months endedJune 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 uncertainty in global markets resulting from the COVID-19 outbreak. InMay 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. During the third quarter of Fiscal 2020, we repaid the remaining balance outstanding under our revolving credit facility and no amounts remained outstanding as ofDecember 31, 2020 . In Fiscal 2021, we will continue to monitor and assess impacts of the COVID-19 pandemic on our business. Beginning with the third quarter of Fiscal 2020, we are required to maintain a specified amount of "minimum liquidity" under the terms of our revolving credit facility. 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 the COVID-19 pandemic persists or there are unexpected impacts to our business during this period and we need to raise or conserve additional cash to fund our operations or satisfy this requirement, we may consider additional alternatives similar to what we did in Fiscal 2020, including further reducing our expenditures, including reductions to our discretionary spending and changes to 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 - Financial Risks" section included in Part I, Item 1A of this Annual Report on Form 10-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 42 -------------------------------------------------------------------------------- cash on hand. For example, in Fiscal 2020 some of our customers delayed payments in connection with COVID-19 as they managed their own cash balances, and we 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. As ofDecember 31, 2020 ,$383.1 million , or approximately 25.2%, of cash and cash equivalents was held by our foreign subsidiaries. Based on the capital and liquidity needs of our foreign operations, we intend to indefinitely reinvest these funds outsidethe United States . In addition, ourUnited States operations do not require the repatriation of these funds to meet our currently projected liquidity needs. Should we require additional capital inthe United States , we may elect to repatriate indefinitely reinvested foreign funds or raise capital inthe United States . The Company will continue to permanently reinvest these earnings, as well as future earnings from our foreign subsidiaries, to fund international growth and operations. If we were to repatriate indefinitely reinvested foreign funds, we would be required to accrue and pay certain taxes upon repatriation, including foreign withholding taxes and certainU.S. state taxes and record foreign exchange rate impacts. Determination of the unrecorded deferred tax liability that would be incurred if such amounts were repatriated is not practicable. Cash Flows The following table presents the major components of net cash flows used in and provided by operating, investing and financing activities for the periods presented: Year Ended December 31, (In thousands) 2020 2019 2018 Net cash provided by (used in): Operating activities$ 212,864 $ 509,031 $ 628,230 Investing activities 66,345 (147,113) (202,904) Financing activities 436,853 (137,070) (189,868) Effect of exchange rate changes on cash and cash equivalents 16,445 5,100 12,467 Net increase in cash and cash equivalents$ 732,507
Operating Activities Operating activities consist primarily of net income 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, gain on sale of MyFitnessPal platform in Fiscal 2020, losses on disposals of property and equipment, stock-based compensation, 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 provided by operating activities decreased$296.2 million to$212.9 million in Fiscal 2020 from$509 million in Fiscal 2019. The decrease was due to net loss in Fiscal 2020 of$549.2 million compared to net income of$92.1 million in Fiscal 2019. This decrease was offset by increased net cash inflows from operating assets and liabilities of$75.9 million . The increase in cash inflows related to changes in operating assets and liabilities period over period was primarily driven by the following: •an increase in accounts payable and accrued expenses of$237.4 million in Fiscal 2020 as compared to Fiscal 2019; •an increase in cash provided by accounts receivable of$213.1 million in Fiscal 2020 as compared to Fiscal 2019; •an increase in customer refund liabilities and Income taxes payable and receivable of$45.1 million which was offset by a decrease of$5.7 million in prepaid expenses and other assets in Fiscal 2020 as compared to Fiscal 2019; and •a decrease in other non-current assets of$279.7 million in Fiscal 2020 as compared to Fiscal 2019. Investing Activities Cash provided by investing activities increased$213.5 million to$66.3 million in Fiscal 2020 from cash used in investing activities of$147.1 million in Fiscal 2019 primarily due to proceeds from the sale of MyFitnessPal of$198.9 million in the fourth quarter of Fiscal 2020. 43 -------------------------------------------------------------------------------- Total capital expenditures in Fiscal 2020 decreased by$53.5 million to$92.3 million compared to$145.8 million in Fiscal 2019. Financing Activities Cash provided by financing activities increased$573.9 million to$436.9 million in Fiscal 2020 from cash used in financing activities of$137.1 million in Fiscal 2019. This increase was primarily due to the issuance of$500 million of 1.50% convertible senior notes in Fiscal 2020. Capital Resources Credit Facility OnMarch 8, 2019 , we entered into an amended and restated credit agreement by and among the Company, as borrower,JPMorgan Chase Bank, N.A ., as administrative agent, and the other lenders and arrangers party thereto (the "credit agreement"). The credit agreement has a term of five years, maturing inMarch 2024 , with permitted extensions under certain circumstances. InMay 2020 , we entered into an amendment to the credit agreement (the "amendment" and, the credit agreement as amended, the "amended credit agreement" or the "revolving credit facility"), pursuant to which the prior revolving credit commitments were reduced from$1.25 billion to$1.1 billion of borrowings. From time to time throughout Fiscal 2020, we borrowed funds under this facility as a precautionary measure in order to increase our cash position and preserve liquidity given the ongoing uncertainty in global markets resulting from the COVID-19 pandemic. As of the end of Fiscal 2020 and Fiscal 2019, there were no amounts outstanding under the revolving credit facility. Except during the covenant suspension period (as defined below), at our request and the lender's consent, commitments under the amended credit agreement may be increased by up to$300 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 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$4.3 million of letters of credit outstanding as of the end of Fiscal 2020 (Fiscal 2019:$5.0 million ). Our obligations under the amended credit agreement are guaranteed by certain domestic significant subsidiaries of the Company, subject to customary exceptions (the "subsidiary guarantors") and primarily secured by a first-priority security interest in substantially all of the assets of the Company and the subsidiary guarantors, excluding real property, capital stock in and debt of our subsidiaries 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, incur additional secured and unsecured indebtedness, pledge our assets as security, make investments, loans, advances, guarantees and acquisitions, (including investments in and loans to non-guarantor subsidiaries), undergo fundamental changes, sell our assets outside the ordinary course of business, enter into transactions with affiliates and make restricted payments (including a temporary suspension of certain voluntary restricted payments during the covenant suspension period (as defined below)). We are also required to comply with specific consolidated leverage and interest coverage ratios during specified periods. Prior to the amendment, 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 coverage covenant"), and we were 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"), as described in more detail in the 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 endedJune 30, 2020 , and ending on the date on which financial statements for the quarter endedJune 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 endedJune 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 endingSeptember 30, 2020 ,December 31, 2020 ,March 31, 2021 andJune 30, 2021 , compliance with the interest coverage covenant and the leverage covenant are both suspended. Beginning onSeptember 30, 2020 through and includingDecember 31, 2021 , we must instead maintain minimum liquidity of$550.0 million (the "liquidity covenant") (with liquidity being the sum of certain cash and 44 -------------------------------------------------------------------------------- cash equivalents held by the Company and its subsidiaries and available borrowing capacity under the amended credit agreement). •For the fiscal quarter endingSeptember 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 endingDecember 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 onJanuary 1, 2022 , the liquidity covenant is terminated. For the fiscal quarter endingMarch 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 ofDecember 31, 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 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. During the covenant suspension period, the applicable margin for loans is 2.00% for adjusted LIBOR loans and 1.00% for alternate base rate loans. Otherwise, borrowings under the amended 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 forU.S. Dollars or the applicable currency in which the loans are made ("adjusted LIBOR"), 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 and ranges between 1.25% to 1.75% for adjusted LIBOR loans and 0.25% to 0.75% for alternate base rate loans. The weighted average interest rate under the revolving credit facility borrowings was 2.3% and 3.6% during Fiscal 2020 and Fiscal 2019, respectively. During the covenant suspension period, the commitment fee rate is 0.40% per annum. Otherwise, we 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. As of the end of Fiscal 2020, the commitment fee was 15 basis points. We incurred and deferred$7.2 million in financing costs in connection with the amended credit agreement. 1.50% Convertible Senior Notes InMay 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 onJune 1 andDecember 1 of each year, beginningDecember 1, 2020 . The Convertible Senior Notes will mature onJune 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) were$488.8 million , after deducting the initial purchasers' discount and estimated offering expenses 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 outstanding under our revolving credit facility and pay related fees and expenses. In connection with the issuance of the Convertible Senior Notes, we recorded an$11 million net deferred tax liability and a corresponding reduction in valuation allowance. As a result, there was no net impact to our deferred income taxes or additional paid in capital on the Consolidated Financial Statements. 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. Prior to the close of business on the business day immediately precedingJanuary 1, 2024 , the Convertible Senior Notes will be convertible only upon satisfaction of certain conditions and during certain periods. On or afterJanuary 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 initial conversion rate is 101.8589 shares of our Class C common stock per$1,000 principal amount of Convertible Senior Notes 45 -------------------------------------------------------------------------------- (equivalent to an initial conversion price of approximately$9.82 per share of Class C common stock), subject to adjustment if certain events occur. On or afterDecember 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 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 withJPMorgan Chase Bank, National Association, HSBC Bank USA, National Association andCitibank, N.A . (the "option counterparties"). The capped call transactions are expected generally to reduce potential dilution to our Class C common 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 initial cap price of$13.4750 per share of our Class C common stock, subject to certain adjustments under the terms of the capped call transactions. 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. 3.250% Senior Notes InJune 2016 , we issued$600 million aggregate principal amount of 3.250% senior unsecured notes dueJune 15, 2026 (the "Senior Notes"). The proceeds were used to pay down amounts outstanding under the revolving credit facility. Interest is payable semi-annually onJune 15 andDecember 15 beginningDecember 15, 2016 . Prior toMarch 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. Other Long Term Debt InDecember 2012 , we entered into a$50 million recourse loan collateralized by the land, buildings and tenant improvements comprising our corporate headquarters. InJuly 2018 , this loan was repaid in full, without penalties, using borrowings under our revolving credit facility. Interest expense, net was$47.3 million ,$21.2 million , and$33.6 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, 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. Amortization of deferred financing costs was$3.8 million ,$2.4 million , and$1.5 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively. We monitor the financial health and stability of our lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets lenders could be negatively impacted in their ability to perform under these facilities. 46 -------------------------------------------------------------------------------- Contractual Commitments and Contingencies We lease warehouse space, office facilities, space for our brand and factory house stores and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2035, excluding extensions at our option, and include provisions for rental adjustments. In addition, this table includes executed lease agreements for brand and factory house stores that we did not yet occupy as of the end of Fiscal 2020. The operating leases generally contain renewal provisions for varying periods of time. Our significant contractual obligations and commitments as of the end of Fiscal 2020 as well as significant agreements entered into during the period after Fiscal 2020 through the date of this report are summarized in the following table: Payments Due by Period Less Than More Than (in thousands) Total 1 Year 1 to 3 Years 3 to 5 Years 5 Years Contractual obligations Long term debt obligations (1)$ 1,226,750 $
19,500
1,200,324 202,220 308,485 222,258 467,361 Product purchase obligations (3) 1,136,896 1,136,896 - - - Sponsorships and other (4) 361,619 106,727 154,544 87,895 12,453 Total$ 3,925,589 $ 1,465,343 $ 502,029 $ 849,153 $ 1,109,064 (1) Includes estimated interest payments based on applicable fixed interest rates as of the end of Fiscal 2020, timing of scheduled payments, and the term of the debt obligations. (2) Includes the minimum payments for lease obligations. The lease obligations do not include any contingent rent expense we may incur at our brand and factory house stores based on future sales above a specified minimum or payments made for maintenance, insurance and real estate taxes. Contingent rent expense was$9.3 million for Fiscal 2020. (3) We generally place orders with our manufacturers at least three to four months in advance of expected future sales. The amounts listed for product purchase obligations primarily represent our open production purchase orders with our manufacturers for our apparel, footwear and accessories, including expected inbound freight, duties and other costs. These open purchase orders specify fixed or minimum quantities of products at determinable prices. The product purchase obligations also includes fabric commitments with our suppliers, which secure a portion of our material needs for future seasons. The reported amounts exclude product purchase liabilities included in accounts payable as of the end of Fiscal 2020. (4) Includes sponsorships with professional teams, professional leagues, colleges and universities, individual athletes, athletic events and other marketing commitments in order to promote our brand. Some of these sponsorship agreements provide for additional performance incentives and product supply obligations. It is not possible to determine how much we will spend on product supply obligations on an annual basis as contracts generally do not stipulate specific cash amounts to be spent on products. The amount of product provided to these sponsorships depends on many factors including general playing conditions, the number of sporting events in which they participate and our decisions regarding product and marketing initiatives. In addition, it is not possible to determine the performance incentive amounts we may be required to pay under these agreements as they are primarily subject to certain performance based and other variables. The amounts listed above are the fixed minimum amounts required to be paid under these sponsorship agreements. Additionally, these amounts include minimum guaranteed royalty payments to endorsers and licensors based upon a predetermined percent of sales of particular products. The future cash installment payments for the one-time transition tax on deemed repatriation of undistributed earnings of foreign subsidiaries enacted as part of the Tax Act in 2017, will be fully offset by our net operating loss carryback receivable under the CARES Act and therefore are no longer reflected as a long-term liability as of the balance sheet date. The table above excludes a liability of$33.5 million for uncertain tax positions, including the related interest and penalties, recorded in accord with applicable accounting guidance, as we are unable to reasonable estimate the timing of settlement. Refer to Note 13 to the Consolidated Financial Statements for a further discussion of our uncertain tax positions. 47 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements In connection with various contracts and agreements, we have agreed to indemnify counterparties against certain third party claims relating to the infringement of intellectual property rights and other items. Generally, such indemnification obligations do not apply in situations in which our counterparties are grossly negligent, engage in willful misconduct, or act in bad faith. Based on our historical experience and the estimated probability of future loss, we have determined the fair value of such indemnifications is not material to our financial position or results of operations. Critical Accounting Policies and Estimates Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America . 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 discussion 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 Consolidated Financial Statements. We consider 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. There were no significant changes to our critical accounting policies during Fiscal 2020. The following description of our critical accounting policies largely summarize generally accepted accounting principles inthe United States and are meant to provide clarity regarding our existing application of these policies. Change in Year End We operate and report with a fiscal year end ofDecember 31 . During the first quarter of 2021, we announced a change in our fiscal year end toMarch 31 fromDecember 31 , effective for the fiscal year beginning afterApril 1, 2022 . Accordingly, we will report a transition quarter that runs fromJanuary 1, 2022 throughMarch 31, 2022 . Our next fiscal year will run fromApril 1, 2022 throughMarch 31, 2023 . Revenue Recognition We recognize revenue pursuant to Accounting Standards Codification 606 ("ASC 606"). Net revenues consist of net sales of apparel, footwear and accessories, license andConnected Fitness revenue. We recognize revenue when we satisfy our performance obligations by transferring control of promised products or services to our 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 we ultimately expect 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 our revenues from product sales are presented on a net basis within the 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-consumer channels. We satisfy the performance obligation and record revenues when transfer of control has passed to the customer, based on the terms of sale. In our 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. We may also ship product directly from our supplier to wholesale customers and recognize revenue when the product is delivered to and accepted by the customer. In our direct 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 inthe United States , and generally within 60 to 90 days of shipment to or receipt by the wholesale customer internationally. Payment is generally due at the time of sale for direct-to-consumer transactions. 48 -------------------------------------------------------------------------------- Gift cards issued to customers by us are recorded as contract liabilities until they are redeemed, at which point revenue is recognized. We also estimate and recognize revenue for gift card balances not expected to ever be redeemed ("breakage") to the extent that we do 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 our licensing arrangements is recognized over time during the period that licensees are provided access to our 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. We recognize 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. 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 we are entitled to receive in exchange for providing access to our trademarks. Revenue fromConnected Fitness subscriptions is recognized on a gross basis and is recognized over the term of the subscription. We receive payments in advance of revenue recognition for subscriptions and these payments are recorded as contract liabilities in our consolidated balance sheet. Related commission cost is included in selling, general and administrative expense in the Consolidated Statement of Operations. Revenue fromConnected Fitness digital advertising is recognized as we satisfy performance obligations pursuant to customer insertion orders. We record reductions to revenue at the time of the transaction for estimated customer returns, allowances, markdowns and discounts. We base these 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 us. The actual amount of customer returns and allowances, which are inherently uncertain, may differ from our estimates. If we determine that actual or expected returns or allowances are significantly higher or lower than the reserves we established, we would record a reduction or increase, as appropriate, to net sales in the period in which we make such a determination. Provisions for customer specific discounts are based on contractual obligations 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 consolidated balance sheet. As of the end of Fiscal 2020 and Fiscal 2019, there were$203.4 million and$219.4 million , respectively, in reserves for returns, allowances, markdowns and discounts within customer refund liability and$57.9 million and$61.1 million , respectively, as the estimated value of inventory associated with the reserves for sales returns within prepaid expenses and other current assets on the consolidated balance sheet. Refer to Note 2 to the Consolidated Financial Statements for a further discussion of revenue recognition. Allowance for Doubtful Accounts We make ongoing estimates relating to the collectability of accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the reserve, we consider historical levels of credit losses and significant economic developments within the retail environment that could impact the ability of our customers to pay outstanding balances and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from estimates. If the financial condition of customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determine a smaller or larger reserve is appropriate, we would record a benefit or charge to selling, general and administrative expense in the period in which such a determination was made. As of the end of Fiscal 2020 and Fiscal 2019, the allowance for doubtful accounts was$20.4 million and$15.1 million , respectively. Inventory Valuation and Reserves Inventories consist primarily of finished goods. Costs of finished goods inventories include all costs incurred to bring inventory to its current condition, including inbound freight, duties and other costs. We value our inventory at standard cost which approximates landed cost, using the first-in, first-out method of cost determination. Net realizable value is estimated based upon assumptions made about future demand and retail market conditions. If we determine that the estimated net realizable value of our inventory is less than the carrying value of such inventory, we record a charge to cost of goods sold to reflect the lower of cost or net realizable value. If actual 49 -------------------------------------------------------------------------------- market conditions are less favorable than those that we projected, further adjustments may be required that would increase the cost of goods sold in the period in which such a determination was made.Goodwill , Intangible Assets and Long-Lived AssetsGoodwill and intangible assets are recorded at their estimated fair values at the date of acquisition and are allocated to the reporting units that are expected to receive the related benefits.Goodwill and indefinite lived intangible assets are not amortized and are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. In conducting an annual impairment test, we first review qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If factors indicate that is the case, we perform the goodwill impairment test. We compare the fair value of the reporting unit with its carrying amount. We estimate fair value using the discounted cash flows model, under the income approach, which indicates the fair value of the reporting unit based on the present value of the cash flows that we expect the reporting unit to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital, long-term rate of growth and profitability of the reporting unit's business, and working capital effects. If the carrying amount of a reporting unit exceeds its fair value, goodwill is impaired to the extent that the carrying value exceeds the fair value of the reporting unit. We perform our annual impairment testing in the fourth quarter of each year. 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 the Company's reporting units as ofMarch 31, 2020 . During Fiscal 2020, we recognized goodwill impairment charges of$51.6 million for theLatin America reporting unit and theCanada reporting unit, within theNorth America operating segment. Refer to Note 7 to the Consolidated Financial Statements for a further discussion of goodwill. We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable. These factors may include a significant deterioration of operating results, changes in business plans, or changes in anticipated cash flows. When factors indicate that an asset should be evaluated for possible impairment, we review long-lived assets to assess recoverability from future operations using undiscounted cash flows. If future undiscounted cash flows are less than the carrying value, an impairment is recognized in earnings to the extent that the carrying value exceeds fair value.Equity Method Investment InApril 2018 , we invested ¥4.2 billion or$39.2 million in exchange for an additional 10% common stock ownership inDome Corporation ("Dome"), our Japanese licensee. This additional investment brought our total investment in Dome's common stock to 29.5%, from 19.5%. We account for our investment in Dome under the equity method, given that we have the ability to exercise significant influence, but not control, over Dome. Investments under the equity method are required to be considered for impairment when events or circumstances suggest that the carrying amount may not be recoverable. If a qualitative assessment indicates that our investment in Dome may be impaired, a quantitative assessment is performed. If the quantitative assessment indicates a decline in value that is determined to be other-than-temporary, an impairment charge would be recognized. In connection with the preparation of our financial statements for the Fiscal 2019, we performed a qualitative assessment of potential impairment indicators for our investment in Dome and determined that indicators of impairment exist. While there was no single event or factor, we considered Dome's future rate of growth and profitability and strategic objectives. We performed a valuation of our investment in Dome and determined that the fair value of our investment is less than its carrying value by$39 million . We determined this decline in value to be other-than-temporary considering the extent to which the market value of our investment is less than the carrying value, the amount of Dome's indebtedness maturing within a short-term period, and Dome's long-term financial forecast. As a result, we recorded a$39 million impairment of our equity method investment in Dome in the fourth quarter of Fiscal 2019. The impairment charge was recorded within income (loss) from equity method investment on the Consolidated Statements of Operations and as a reduction to the investment balance within other long term assets on the Consolidated Balance Sheets. We calculate 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 we expect the investment to generate in the future. For Fiscal 2020, we recorded the allocable share of Dome's net income of$3.5 million (Fiscal 2019: net loss of$8.7 million ; Fiscal 2018: net income of$1.0 million ) within income (loss) from equity method investment on our Consolidated Statements of Operations, and as an adjustment to the investment balance within other long term assets on our Consolidated Balance Sheets. We performed a qualitative assessment of potential impairment 50 -------------------------------------------------------------------------------- indicators for our investment in Dome and determined that indicators of impairment existed due to impacts from COVID-19. Accordingly, we performed a valuation of our investment in Dome and determined that the fair value of our investment was less than its carrying value by$8.6 million . We determined this decline in value to be other-than-temporary considering Dome's near and long-term financial forecast. Accordingly, our results for Fiscal 2020 include the impact of recording a$8.6 million impairment of our equity method investment in Dome, which reduced the carrying value to zero. The impairment charge was recorded within income (loss) from equity method investment on the Consolidated Statements of Operations and as a reduction to the investment balance within other long term assets on the Consolidated Balance Sheets. We 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 the end of Fiscal 2020 and Fiscal 2019, the carrying value of our total investment in Dome was$0 million and$5.1 million , respectively. In addition to the investment in Dome, we have a license agreement with Dome. We recorded license revenues from Dome of$40.1 million and$37.8 million for Fiscal 2020 and 2019, respectively. As of the end of Fiscal 2020, we have$22.9 million (Fiscal 2019:$15.6 million ) in licensing receivables outstanding, recorded in the prepaid expenses and other current assets line item within our Consolidated Balance Sheets. To the extent Dome continues to experience challenges in the performance of their business, we may not continue to realize the licensing revenues received from them in line with their past results. Furthermore, based on Dome's financial performance, our ability to recover our investment in the long-term may be limited. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary. The Company has made the policy election to record any liability associated with Global Intangible Low Taxed Income ("GILTI") in the period in which it is incurred. Assessing whether deferred tax assets are realizable requires significant judgment. We consider all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent we believe it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against our deferred tax assets, which increase income tax expense in the period when such a determination is made. A significant portion of our deferred tax assets relate toU.S. federal and state taxing jurisdictions. Realization of these deferred tax assets is dependent on futureU.S. pre-tax earnings. In evaluating the recoverability of these deferred tax assets as of the end of Fiscal 2020, the Company has considered all available evidence, both positive and negative, including but not limited to the following: Positive •No history ofU.S. federal and state tax attributes expiring unused. •Restructuring plans undertaken in 2017, 2018, and 2020, which aim to improve future profitability. •Existing sources of taxable income. •Available prudent and feasible tax planning strategies. Negative •Restructuring plan undertaken in Fiscal 2020 resulting in significant charges in pre-tax income, reducing profitability inthe United States . •The negative economic impact and uncertainty resulting from the COVID-19 pandemic. •Cumulative pre-tax losses in recent years inthe United States . •Inherent challenges in forecasting future pre-tax earnings which rely, in part, on improved profitability from our restructuring efforts. As of the end of Fiscal 2020, we believe that the weight of the negative evidence outweighs the positive evidence regarding the realization of ourU.S. deferred tax assets and have recorded a valuation allowance against theU.S. deferred tax assets. We will continue to evaluate our ability to realize our net deferred tax assets on a quarterly basis. 51 -------------------------------------------------------------------------------- Income taxes include the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions or obtaining new information on particular tax positions may cause a change to the effective tax rate. We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the Consolidated Statements of Operations. Stock-Based Compensation We account for stock-based compensation in accordance with accounting guidance that requires all stock-based compensation awards granted to employees and directors to be measured at fair value and recognized as an expense in the financial statements. As of the end of Fiscal 2020, we had$67.5 million of unrecognized compensation expense expected to be recognized over a weighted average period of 2.39 years. This unrecognized compensation expense does not include any expense related to performance-based restricted stock units and stock options granted in Fiscal 2019 for which the performance targets were not deemed probable as of the end of Fiscal 2020. All such performance awards for Fiscal 2019 were forfeited due to the performance targets not being achieved. We did not grant any performance awards in Fiscal 2020. The assumptions used in calculating the fair value of stock-based compensation awards represent management's best estimates, but the estimates involve inherent uncertainties and the application of management judgment. In addition, compensation expense for performance-based awards is recorded over the related service period when achievement of the performance targets is deemed probable, which requires management judgment. Refer to Note 2 and Note 15 to the Consolidated Financial Statements for a further discussion on stock-based compensation. Recently Issued Accounting Standards Refer to Note 2 to the Consolidated Financial Statements included in this Form 10-K for our assessment of recently issued accounting standards. 52
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