ua-20240930
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
Form 10-Q
______________________________________
(Mark One) |
☑ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
or |
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-33202
______________________________________
UNDER ARMOUR, INC.
(Exact name of registrant as specified in its charter)
______________________________________ |
Maryland | |
52-1990078 |
(State or other jurisdiction of
incorporation or organization) | |
(I.R.S. Employer
Identification No.) |
1020 Hull Street
Baltimore, Maryland 21230 | |
(410) 468-2512 |
(Address of principal executive offices) (Zip Code) | |
(Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: |
Class A Common Stock |
UAA |
New York Stock Exchange |
Class C Common Stock |
UA |
New York Stock Exchange |
(Title of each class) |
(Trading Symbols) |
(Name of each exchange on which registered) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer |
☑ |
Accelerated filer |
☐ |
Non-accelerated filer |
☐ |
Smaller reporting company |
☐ |
Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of October 31, 2024 there were 188,822,461 shares of Class A Common Stock, 34,450,000 shares of Class B Convertible Common Stock and 209,115,334 shares of Class C Common Stock outstanding.
UNDER ARMOUR, INC.
QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Under Armour, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited; In thousands, except share data)
|
September 30, 2024 |
March 31, 2024 |
Assets |
Current assets |
Cash and cash equivalents |
$ |
530,701 |
$ |
858,691 |
Accounts receivable, net (Note 3) | 723,042 |
757,339 |
Inventories |
1,105,884 |
958,495 |
Prepaid expenses and other current assets, net |
210,109 |
289,157 |
Total current assets |
2,569,736 |
2,863,682 |
Property and equipment, net (Note 4) | 677,400 |
664,503 |
Operating lease right-of-use assets (Note 5) | 415,386 |
434,699 |
Goodwill (Note 6) | 495,029 |
478,302 |
Intangible assets, net (Note 7) | 6,092 |
7,000 |
Deferred income taxes (Note 18) | 241,502 |
221,033 |
Other long-term assets |
89,448 |
91,515 |
Total assets |
$ |
4,494,593 |
$ |
4,760,734 |
Liabilities and Stockholders' Equity |
Current liabilities |
Current maturities of long-term debt (Note 9) | $ |
- |
$ |
80,919 |
Accounts payable |
562,582 |
483,731 |
Accrued expenses |
292,259 |
287,853 |
Customer refund liabilities (Note 12) | 144,983 |
139,283 |
Operating lease liabilities (Note 5) | 135,691 |
139,331 |
Other current liabilities |
45,614 |
34,344 |
Total current liabilities |
1,181,129 |
1,165,461 |
Long-term debt, net of current maturities (Note 9) | 594,592 |
594,873 |
Operating lease liabilities, non-current (Note 5) | 601,497 |
627,665 |
Other long-term liabilities |
132,174 |
219,449 |
Total liabilities |
2,509,392 |
2,607,448 |
Stockholders' equity (Note 11) |
Class A Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of September 30, 2024 and March 31, 2024; 188,821,994 shares issued and outstanding as of September 30, 2024 (March 31, 2024: 188,802,043) | 63 |
63 |
Class B Convertible Common Stock, $0.0003 1/3 par value; 34,450,000 shares authorized, issued and outstanding as of September 30, 2024 and March 31, 2024 | 11 |
11 |
Class C Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of September 30, 2024 and March 31, 2024; 209,057,637 shares issued and outstanding as of September 30, 2024 (March 31, 2024: 212,711,353) | 69 |
70 |
Additional paid-in capital |
1,212,378 |
1,181,854 |
Retained earnings |
864,027 |
1,048,411 |
Accumulated other comprehensive income (loss) |
(91,347) |
(77,123) |
Total stockholders' equity |
1,985,201 |
2,153,286 |
Total liabilities and stockholders' equity |
$ |
4,494,593 |
$ |
4,760,734 |
Commitments and Contingencies (Note 10)
See accompanying notes.
1
Under Armour, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited; In thousands, except per share amounts)
|
| Three Months Ended September 30, |
Six Months Ended September 30, |
2024 |
2023 |
2024 |
2023 |
Net revenues (Note 12) | $ |
1,399,023 |
$ |
1,566,674 |
$ |
2,582,688 |
$ |
2,883,639 |
Cost of goods sold |
702,891 |
818,151 |
1,323,881 |
1,523,621 |
Gross profit |
696,132 |
748,523 |
1,258,807 |
1,360,018 |
Selling, general and administrative expenses |
519,840 |
609,050 |
1,357,157 |
1,198,122 |
Restructuring charges (Note 13) | 3,212 |
- |
28,298 |
- |
Income (loss) from operations |
173,080 |
139,473 |
(126,648) |
161,896 |
Interest income (expense), net |
(1,747) |
(373) |
597 |
(1,999) |
Other income (expense), net |
(3,420) |
(6,104) |
(6,150) |
(12,164) |
Income (loss) before income taxes |
167,913 |
132,996 |
(132,201) |
147,733 |
Income tax expense (benefit) (Note 18) | (2,136) |
28,436 |
3,013 |
32,764 |
Income (loss) from equity method investments |
333 |
151 |
170 |
(248) |
Net income (loss) |
$ |
170,382 |
$ |
104,711 |
$ |
(135,044) |
$ |
114,721 |
|
Basic net income (loss) per share of Class A, B and C common stock (Note 19) | $ |
0.39 |
$ |
0.24 |
$ |
(0.31) |
$ |
0.26 |
Diluted net income (loss) per share of Class A, B and C common stock (Note 19) | $ |
0.39 |
$ |
0.23 |
$ |
(0.31) |
$ |
0.25 |
|
Weighted average common shares outstanding Class A, B and C common stock |
Basic |
432,225 |
443,525 |
433,950 |
444,195 |
Diluted |
435,685 |
453,715 |
433,950 |
454,107 |
See accompanying notes.
2
Under Armour, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited; In thousands)
|
| Three Months Ended September 30, |
Six Months Ended September 30, |
2024 |
2023 |
2024 |
2023 |
Net income (loss) |
$ |
170,382 |
$ |
104,711 |
$ |
(135,044) |
$ |
114,721 |
Other comprehensive income (loss): |
Foreign currency translation adjustment |
9,306 |
(12,631) |
(7,257) |
(8,078) |
Unrealized gain (loss) on cash flow hedges, net of tax benefit (expense) of $6,295 and $(9,393), for the three months ended September 30, 2024 and 2023, respectively; $460 and $(2,208) for the six months ended September 30, 2024 and 2023, respectively. | (28,797) |
26,486 |
(11,181) |
18,230 |
Gain (loss) on intra-entity foreign currency transactions |
4,978 |
(989) |
4,214 |
(9,371) |
Total other comprehensive income (loss) |
(14,513) |
12,866 |
(14,224) |
781 |
Comprehensive income (loss) |
$ |
155,869 |
$ |
117,577 |
$ |
(149,268) |
$ |
115,502 |
See accompanying notes.
3
Under Armour, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited; In thousands)
|
Class A
Common Stock |
Class B
Convertible
Common Stock |
Class C
Common Stock |
Additional Paid-in-Capital |
Retained
Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total
Equity |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Balance as of June 30, 2023 |
188,705 |
$ |
63 |
34,450 |
$ |
11 |
222,060 |
$ |
73 |
$ |
1,149,183 |
$ |
905,212 |
$ |
(79,927) |
$ |
1,974,615 |
Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements |
- |
- |
- |
- |
(32) |
- |
- |
(214) |
- |
(214) |
Excise tax on repurchases of common stock |
- |
- |
- |
- |
- |
- |
(425) |
- |
- |
(425) |
Class C Common Stock repurchased |
- |
- |
- |
- |
(7,616) |
(2) |
1,299 |
(51,297) |
- |
(50,000) |
Issuance of Class A Common Stock, net of forfeitures |
20 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
Issuance of Class C Common Stock, net of forfeitures |
- |
- |
- |
- |
277 |
- |
911 |
- |
- |
911 |
Stock-based compensation expense |
- |
- |
- |
- |
- |
- |
11,580 |
- |
- |
11,580 |
Comprehensive income (loss) |
- |
- |
- |
- |
- |
- |
- |
104,711 |
12,866 |
117,577 |
Balance as of September 30, 2023 |
188,725 |
$ |
63 |
34,450 |
$ |
11 |
214,689 |
$ |
71 |
$ |
1,162,548 |
$ |
958,412 |
$ |
(67,061) |
$ |
2,054,044 |
|
Balance as of March 31, 2023 |
188,705 |
$ |
63 |
34,450 |
$ |
11 |
221,347 |
$ |
73 |
$ |
1,136,536 |
$ |
897,306 |
$ |
(67,842) |
$ |
1,966,147 |
Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements |
- |
- |
- |
- |
(333) |
- |
- |
(2,318) |
- |
(2,318) |
Excise tax on repurchases of common stock |
- |
- |
- |
- |
- |
- |
(425) |
- |
- |
(425) |
Class C Common Stock repurchased |
- |
- |
- |
- |
(7,616) |
(2) |
1,299 |
(51,297) |
- |
(50,000) |
Issuance of Class A Common Stock, net of forfeitures |
20 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
Issuance of Class C Common Stock, net of forfeitures |
- |
- |
- |
- |
1,291 |
- |
1,781 |
- |
- |
1,781 |
Stock-based compensation expense |
- |
- |
- |
- |
- |
- |
23,357 |
- |
- |
23,357 |
Comprehensive income (loss) |
- |
- |
- |
- |
- |
- |
- |
114,721 |
781 |
115,502 |
Balance as of September 30, 2023 |
188,725 |
$ |
63 |
34,450 |
$ |
11 |
214,689 |
$ |
71 |
$ |
1,162,548 |
$ |
958,412 |
$ |
(67,061) |
$ |
2,054,044 |
4
Under Armour, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited; In thousands)
|
Class A
Common Stock |
Class B
Convertible
Common Stock |
Class C
Common Stock |
Additional Paid-in-Capital |
Retained
Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total
Equity |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Balance as of June 30, 2024 |
188,802 |
$ |
63 |
34,450 |
$ |
11 |
208,794 |
$ |
69 |
$ |
1,199,163 |
$ |
694,100 |
$ |
(76,834) |
$ |
1,816,572 |
Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements |
- |
- |
- |
- |
(61) |
- |
- |
(455) |
- |
(455) |
Issuance of Class A Common Stock, net of forfeitures |
20 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
Issuance of Class C Common Stock, net of forfeitures |
- |
- |
- |
- |
325 |
- |
671 |
- |
- |
671 |
Stock-based compensation expense |
- |
- |
- |
- |
- |
- |
12,544 |
- |
- |
12,544 |
Comprehensive income (loss) |
- |
- |
- |
- |
- |
- |
- |
170,382 |
(14,513) |
155,869 |
Balance as of September 30, 2024 |
188,822 |
$ |
63 |
34,450 |
$ |
11 |
209,058 |
$ |
69 |
$ |
1,212,378 |
$ |
864,027 |
$ |
(91,347) |
$ |
1,985,201 |
|
Balance as of March 31, 2024 |
188,802 |
$ |
63 |
34,450 |
$ |
11 |
212,711 |
$ |
70 |
$ |
1,181,854 |
$ |
1,048,411 |
$ |
(77,123) |
$ |
2,153,286 |
Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements |
- |
- |
- |
- |
(1,255) |
- |
- |
(8,399) |
- |
(8,399) |
Excise tax on repurchases of common stock |
- |
- |
- |
- |
- |
- |
(200) |
- |
- |
(200) |
Class C Common Stock repurchased |
- |
- |
- |
- |
(5,940) |
(2) |
943 |
(40,941) |
- |
(40,000) |
Issuance of Class A Common Stock, net of forfeitures |
20 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
Issuance of Class C Common Stock, net of forfeitures |
- |
- |
- |
- |
3,542 |
1 |
1,313 |
- |
- |
1,314 |
Stock-based compensation expense |
- |
- |
- |
- |
- |
- |
28,468 |
- |
- |
28,468 |
Comprehensive income (loss) |
- |
- |
- |
- |
- |
- |
- |
(135,044) |
(14,224) |
(149,268) |
Balance as of September 30, 2024 |
188,822 |
$ |
63 |
34,450 |
$ |
11 |
209,058 |
$ |
69 |
$ |
1,212,378 |
$ |
864,027 |
$ |
(91,347) |
$ |
1,985,201 |
See accompanying notes.
5
Under Armour, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited; In thousands) |
| Six Months Ended September 30, |
2024 |
2023 |
Cash flows from operating activities |
Net income (loss) |
$ |
(135,044) |
$ |
114,721 |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |
Depreciation and amortization |
65,565 |
68,287 |
Unrealized foreign currency exchange rate (gain) loss |
(14,535) |
21,145 |
Loss on disposal of property and equipment |
2,598 |
696 |
Non-cash restructuring and impairment charges |
3,679 |
- |
Amortization of bond premium and debt issuance costs |
1,107 |
1,096 |
Stock-based compensation |
28,468 |
23,357 |
Deferred income taxes |
(6,400) |
(10,788) |
Changes in reserves and allowances |
(607) |
18,471 |
Changes in operating assets and liabilities: |
Accounts receivable |
31,461 |
(51,327) |
Inventories |
(144,058) |
30,034 |
Prepaid expenses and other assets |
23,950 |
(13,421) |
Other non-current assets |
9,428 |
47,671 |
Accounts payable |
73,733 |
(120,353) |
Accrued expenses and other liabilities |
(107,102) |
(71,161) |
Customer refund liabilities |
5,671 |
(11,244) |
Income taxes payable and receivable |
(6,323) |
8,299 |
Net cash provided by (used in) operating activities |
(168,409) |
55,483 |
Cash flows from investing activities |
Purchases of property and equipment |
(91,503) |
(75,384) |
Sale of MyFitnessPal platform |
50,000 |
45,000 |
Sale of MapMyFitness platform |
8,000 |
- |
Purchase of UNLESS COLLECTIVE, Inc, net of cash acquired |
(9,788) |
- |
Net cash provided by (used in) investing activities |
(43,291) |
(30,384) |
Cash flows from financing activities |
Common shares repurchased |
(40,000) |
(50,000) |
Repayment of long-term debt |
(80,919) |
- |
Employee taxes paid for shares withheld for income taxes |
(8,399) |
(2,318) |
Proceeds from exercise of stock options and other stock issuances |
1,314 |
1,781 |
Payments of debt financing costs |
(1,388) |
- |
Net cash provided by (used in) financing activities |
(129,392) |
(50,537) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
14,023 |
(28,671) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
(327,069) |
(54,109) |
Cash, cash equivalents and restricted cash |
Beginning of period |
876,917 |
726,745 |
End of period |
$ |
549,848 |
$ |
672,636 |
|
Non-cash investing and financing activities |
Change in accrual for property and equipment |
$ |
1,974 |
$ |
(10,333) |
|
Reconciliation of cash, cash equivalents and restricted cash |
September 30, 2024 |
September 30, 2023 |
Cash and cash equivalents |
$ |
530,701 |
$ |
654,885 |
Restricted cash |
19,147 |
17,751 |
Total cash, cash equivalents and restricted cash |
$ |
549,848 |
$ |
672,636 |
See accompanying notes.
6
Under Armour, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited; Tabular amounts in thousands, except share and per share data)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Business
Under Armour, Inc. (together with its wholly owned subsidiaries, the "Company") is a developer, marketer and distributor of branded athletic performance apparel, footwear and accessories. The Company creates products engineered to make athletes better with a vision to inspire performance solutions you never knew you needed and can't imagine living without. The Company's products are made, sold and worn worldwide.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements are presented in U.S. Dollars and include the accounts of Under Armour, Inc. and its wholly owned subsidiaries. Certain information in footnote disclosures normally included in annual financial statements were condensed or omitted for the interim periods presented in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC") and accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim consolidated financial statements. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement of the financial position and results of operations were included. Intercompany balances and transactions were eliminated upon consolidation.
The unaudited Condensed Consolidated Balance Sheets as of September 30, 2024 is derived from the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2024 ("Fiscal 2024"), filed with the SEC on May 29, 2024 ("Annual Report on Form 10-K for Fiscal 2024"), which should be read in conjunction with these unaudited Condensed Consolidated Financial Statements. The unaudited results for the three and six months ended September 30, 2024 are not necessarily indicative of the results to be expected for the fiscal year ending March 31, 2025 ("Fiscal 2025"), or any other portions thereof.
Reclassifications
Certain prior period comparative amounts have been reclassified to conform to the current period presentation. Such reclassifications were not material and did not affect the unaudited Condensed Consolidated Financial Statements.
Revisions to previously issued financial statements
As previously disclosed in the Company's Annual Report on Form 10-K for Fiscal 2024, the Company identified and corrected certain accounting errors. Using the guidance in Accounting Standards Codification ("ASC") Topic 250, Accounting Changes and Error Corrections, ASC Topic 250-S99-1, Assessing Materiality, and ASC Topic 250-S99-2, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated whether its previously issued consolidated financial statements were materially misstated due to these errors. Based upon the evaluation of both quantitative and qualitative factors, the Company concluded that the effects of these errors were not material individually or in the aggregate to any previously reported quarterly or annual period. However, the Company revised its previously issued annual consolidated financial statements to correct these errors. See Note 1 to the Company's Consolidated Financial Statements included in Part II, Item 8 of the Company's Annual Report on Form 10-K for Fiscal 2024, filed with the SEC on May 29, 2024 for additional details.
The following tables set forth the Company's revisions to the unaudited Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2023 and unaudited Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2023. The unaudited Condensed Consolidated Financial Statements and accompanying notes included within this Quarterly Report on Form 10-Q have been revised to reflect these corrections.
7
Condensed Consolidated Statements of Operations |
Three Months Ended September 30, 2023 |
Six Months Ended September 30, 2023 |
(in thousands) |
As Previously Reported |
Adjustment |
As Revised |
As Previously Reported |
Adjustment |
As Revised |
Net revenues |
$ |
1,566,710 |
$ |
(36) |
$ |
1,566,674 |
$ |
2,883,722 |
$ |
(83) |
$ |
2,883,639 |
Cost of goods sold |
814,715 |
3,436 |
818,151 |
1,523,991 |
(370) |
1,523,621 |
Gross profit |
751,995 |
(3,472) |
748,523 |
1,359,731 |
287 |
1,360,018 |
Selling, general and administrative expenses |
606,236 |
2,814 |
609,050 |
1,193,042 |
5,080 |
1,198,122 |
Income (loss) from operations |
145,759 |
(6,286) |
139,473 |
166,689 |
(4,793) |
161,896 |
Interest income (expense), net |
(373) |
- |
(373) |
(1,999) |
- |
(1,999) |
Other income (expense), net |
(6,429) |
325 |
(6,104) |
(12,814) |
650 |
(12,164) |
Income (loss) before income taxes |
138,957 |
(5,961) |
132,996 |
151,876 |
(4,143) |
147,733 |
Income tax expense (benefit) |
29,494 |
(1,058) |
28,436 |
33,465 |
(701) |
32,764 |
Income (loss) from equity method investments |
151 |
- |
151 |
(248) |
- |
(248) |
Net income (loss) |
$ |
109,614 |
$ |
(4,903) |
$ |
104,711 |
$ |
118,163 |
$ |
(3,442) |
$ |
114,721 |
|
Basic net income (loss) per share |
$ |
0.25 |
$ |
(0.01) |
$ |
0.24 |
$ |
0.27 |
$ |
(0.01) |
$ |
0.26 |
Diluted net income (loss) per share |
$ |
0.24 |
$ |
(0.01) |
$ |
0.23 |
$ |
0.26 |
$ |
(0.01) |
$ |
0.25 |
Condensed Consolidated Statements of Cash Flows |
Six Months Ended September 30, 2023 |
(in thousands) |
As Previously Reported |
Adjustment |
As Revised |
Cash flows from operating activities |
Net income (loss) |
$ |
118,163 |
$ |
(3,442) |
$ |
114,721 |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |
Depreciation and amortization |
71,177 |
(2,890) |
68,287 |
Unrealized foreign currency exchange rate (gain) loss |
21,145 |
- |
21,145 |
Loss on disposal of property and equipment |
696 |
- |
696 |
Amortization of bond premium and debt issuance costs |
1,096 |
- |
1,096 |
Stock-based compensation |
23,357 |
- |
23,357 |
Deferred income taxes |
(10,788) |
- |
(10,788) |
Changes in reserves and allowances |
18,471 |
- |
18,471 |
Changes in operating assets and liabilities: |
Accounts receivable |
(52,721) |
1,394 |
(51,327) |
Inventories |
33,270 |
(3,236) |
30,034 |
Prepaid expenses and other assets |
(10,934) |
(2,487) |
(13,421) |
Other non-current assets |
49,659 |
(1,988) |
47,671 |
Accounts payable |
(120,353) |
- |
(120,353) |
Accrued expenses and other liabilities |
(75,751) |
4,590 |
(71,161) |
Customer refund liability |
(11,244) |
- |
(11,244) |
Income taxes payable and receivable |
9,000 |
(701) |
8,299 |
Net cash provided by (used in) operating activities |
64,243 |
(8,760) |
55,483 |
Cash flows from investing activities |
Purchases of property and equipment |
(84,144) |
8,760 |
(75,384) |
Sale of MyFitnessPal platform |
45,000 |
- |
45,000 |
Net cash provided by (used in) investing activities |
(39,144) |
8,760 |
(30,384) |
Cash flows from financing activities |
Net cash provided by (used in) financing activities |
(50,537) |
- |
(50,537) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
(28,671) |
- |
(28,671) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
(54,109) |
- |
(54,109) |
Cash, cash equivalents and restricted cash |
Beginning of period |
727,726 |
(981) |
726,745 |
End of period |
$ |
673,617 |
$ |
(981) |
$ |
672,636 |
8
Management Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. These estimates, judgments and assumptions are evaluated on an on-going basis. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable at that time; however, actual results could differ from these estimates.
As the impacts of major global events continue to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment. The extent to which the evolving events impact the Company's financial statements will depend on a number of factors including, but not limited to, any new information that may emerge concerning the severity of these major events and the actions that governments around the world may take in response. While the Company believes it has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of this reporting date, the Company may experience further impacts based on long-term effects on the Company's customers and the countries in which the Company operates. Refer to the risk factors discussed in Part I, Item 1A "Risk Factors" of the Company's Annual Report on Form 10-K for Fiscal 2024.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
The Company assesses the applicability and impact of all Accounting Standard Updates ("ASUs") issued by the Financial Accounting Standards Board ("FASB"). There were no ASUs adopted during the first half of Fiscal 2025.
Supplier Finance Programs
In September 2022, the FASB issued ASU 2022-04 "Liabilities - Supplier Finance Programs (Subtopic 405-50)" ("ASU 2022-04") which requires entities to disclose the key terms of supplier finance programs used in connection with the purchase of goods and services along with information about their obligations under these programs, including a rollforward of those obligations. The Company adopted ASU 2022-04 on April 1, 2023 on a retrospective basis, except for the amendments relating to the rollforward requirement, which was adopted on April 1, 2024 and will be effective for the Company's Annual Report on Form 10-K for Fiscal 2025. The adoption did not have a material impact on the Company's Condensed Consolidated Financial Statements. Refer to Note 8 of these Condensed Consolidated Financial Statements for a discussion of the Company's supply chain finance program.
Recently Issued Accounting Pronouncements
The Company assessed all recently issued ASUs and, other than those described below, determined them to be either not applicable or expected to have no material impact on its Condensed Consolidated Financial Statements and related disclosures.
Disaggregation of Income Statement Expenses
In November 2024, the FASB issued ASU 2024-03 "Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures" ("ASU 2024-03"), which will require disaggregated disclosure of certain costs and expenses, including purchases of inventory, employee compensation, depreciation, amortization and depletion, within relevant income statement captions. ASU 2024-03 is effective for the Company's Fiscal 2028 annual period and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating this ASU to determine the impact of adoption on its consolidated financial statements and related disclosures.
Income Tax
In December 2023, the FASB issued ASU 2023-09 "Improvements to Income Tax Disclosures" ("ASU 2023-09"), which requires expanded income tax disclosures primarily related to an entity's effective tax rate reconciliation and income taxes paid. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 and should be adopted on a prospective basis. Early adoption is permitted. The Company is currently evaluating this ASU to determine the impact of adoption on its consolidated financial statements and related disclosures.
Reportable Segments
In November 2023, the FASB issued ASU 2023-07 "Improvements to Reportable Segment Disclosures" ("ASU 2023-07"), which requires expanded disclosures about an entity's reportable segments,
9
including more enhanced information about a reportable segment's expenses, interim segment profit or loss, and how an entity's chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocating resources. ASU 2023-07 is effective for the Company's Fiscal 2025 annual period and interim periods thereafter. The Company is currently evaluating this ASU to determine the impact of adoption on its consolidated financial statements and related disclosures.
NOTE 3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company's allowance for doubtful accounts was established with information available as of September 30, 2024, including reasonable and supportable estimates of future risk. The following table illustrates the activity in the Company's allowance for doubtful accounts:
|
Allowance for doubtful accounts - within accounts receivable, net |
Balance as of March 31, 2024 |
$ |
14,994 |
Increases to costs and expenses |
2,834 |
Write-offs, net of recoveries |
(149) |
Balance as of September 30, 2024 |
$ |
17,679 |
NOTE 4. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
|
As of September 30, 2024 |
As of March 31, 2024 |
Leasehold and tenant improvements |
$ |
499,110 |
$ |
495,181 |
Furniture, fixtures and displays |
306,302 |
301,897 |
Buildings |
68,230 |
68,230 |
Software |
280,890 |
350,811 |
Office equipment |
140,597 |
139,223 |
Plant equipment |
178,294 |
178,316 |
Land |
82,410 |
82,410 |
Construction in progress (1) | 236,712 |
175,960 |
Other |
23,247 |
28,910 |
Subtotal property and equipment |
1,815,792 |
1,820,938 |
Accumulated depreciation |
(1,138,392) |
(1,156,435) |
Property and equipment, net |
$ |
677,400 |
$ |
664,503 |
(1)Construction in progress primarily includes costs incurred for construction of corporate offices, leasehold improvements and in-store fixtures and displays not yet placed in use.
Depreciation expense related to property and equipment for the three and six months ended September 30, 2024 was $32.3 million and $64.8 million, respectively (three and six months ended September 30, 2023: $33.2 million and $67.5 million, respectively).
NOTE 5. LEASES
The Company enters into operating leases domestically and internationally to lease certain warehouse space, office facilities, space for its Brand and Factory House stores, and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2038. Short-term lease payments were not material for the three and six months ended September 30, 2024 and 2023.
Lease Costs and Other Information
The Company recognizes lease expense on a straight-line basis over the lease term. There are no residual value guarantees that exist, and there are no restrictions or covenants imposed by leases. The following table illustrates operating and variable lease costs, included in selling, general and administrative expenses and certain
10
costs relating to lease assets held solely for sublet purposes, included in other income (expense), net within the Company's Condensed Consolidated Statements of Operations, for the periods indicated:
|
Three Months Ended September 30, |
Six Months Ended September 30, |
2024 |
2023 |
2024 |
2023 |
Operating lease costs |
$ |
37,667 |
$ |
37,418 |
$ |
75,460 |
$ |
75,310 |
Variable lease costs |
$ |
28,039 |
$ |
22,054 |
$ |
49,540 |
$ |
42,162 |
As previously disclosed, historically, variable lease costs primarily consisted of lease payments dependent on sales in Brand and Factory House stores. Prior period amounts, included in the table above, have been revised to also include other non-lease components payable to the lessor. Additionally, certain amounts previously disclosed as operating lease costs in error have been corrected to be classified as variable lease costs. This presentation change did not affect total lease related costs recorded within the Company's Condensed Consolidated Statements of Operations.
The Company subleases certain excess office facilities and warehouse space to third parties. Sublease income for the three and six months ended September 30, 2024 was not material.
The weighted average remaining lease term and discount rate for the periods indicated below were as follows: |
As of September 30, 2024 |
As of March 31, 2024 |
Weighted average remaining lease term (in years) |
7.36 |
7.62 |
Weighted average discount rate |
4.93 |
% |
4.95 |
% |
Supplemental Cash Flow Information
The following table presents supplemental information relating to cash flow arising from lease transactions: |
Three Months Ended September 30, |
Six Months Ended September 30, |
2024 |
2023 |
2024 |
2023 |
Operating cash outflows from operating leases |
$ |
46,257 |
$ |
44,704 |
$ |
92,846 |
$ |
88,318 |
Leased assets obtained in exchange for new operating lease liabilities |
$ |
22,761 |
$ |
16,079 |
$ |
36,316 |
$ |
21,459 |
Maturity of Lease Liabilities
The following table presents the future minimum lease payments under the Company's operating lease liabilities as of September 30, 2024: |
Fiscal year ending March 31, |
2025 (six months ending) |
$ |
87,424 |
2026 |
153,412 |
2027 |
130,530 |
2028 |
111,069 |
2029 |
74,833 |
2030 and thereafter |
314,522 |
Total lease payments |
$ |
871,790 |
Less: Interest |
134,602 |
Total present value of lease liabilities |
$ |
737,188 |
As of September 30, 2024, the Company has additional operating lease obligations that have not yet commenced of approximately $77.7 million, which are not reflected in the table above. This amount includes approximately $60.1 million relating to an agreement entered into during Fiscal 2024 with a new third-party logistics provider to operate a distribution center in the Netherlands, which has been assessed as containing a lease and is expected to commence in February 2026.
11
NOTE 6. GOODWILL
The following table summarizes changes in the carrying amount of the Company's goodwill by reportable segment as of the periods indicated: |
North America |
EMEA |
Asia-Pacific |
Total |
Balance as of March 31, 2024 |
$ |
301,371 |
$ |
101,958 |
$ |
74,973 |
$ |
478,302 |
Purchase of UNLESS COLLECTIVE, Inc (1) | 9,784 |
- |
- |
9,784 |
Effect of currency translation adjustment |
- |
4,635 |
2,308 |
6,943 |
Balance as of September 30, 2024 |
$ |
311,155 |
$ |
106,593 |
$ |
77,281 |
$ |
495,029 |
(1)The goodwill is not expected to be deductible for tax purposes.
NOTE 7. INTANGIBLE ASSETS, NET
The following tables summarize the Company's intangible assets as of the periods indicated:
|
| Useful Lives from Date of Acquisitions (in years) |
As of September 30, 2024 |
Gross Carrying
Amount |
Accumulated
Amortization |
Net Carrying
Amount |
Intangible assets subject to amortization: |
Customer relationships | 2-6 | $ |
9,026 |
$ |
(6,709) |
$ |
2,317 |
Lease-related intangible assets | 1-15 | 1,573 |
(1,511) |
62 |
Total |
$ |
10,599 |
$ |
(8,220) |
$ |
2,379 |
Indefinite-lived intangible assets |
3,713 |
Intangible assets, net |
$ |
6,092 |
|
|
Useful Lives from Date of Acquisitions (in years) |
As of March 31, 2024 |
Gross Carrying
Amount |
Accumulated
Amortization |
Net Carrying
Amount |
Intangible assets subject to amortization: |
Customer relationships | 2-6 | $ |
8,609 |
$ |
(5,708) |
$ |
2,901 |
Lease-related intangible assets | 1-15 | 1,756 |
(1,677) |
79 |
Total |
$ |
10,365 |
$ |
(7,385) |
$ |
2,980 |
Indefinite-lived intangible assets |
4,020 |
Intangible assets, net |
$ |
7,000 |
Amortization expense, which is included in selling, general and administrative expenses, for the three and six months ended September 30, 2024 was $0.4 million and $0.7 million, respectively (three and six months ended September 30, 2023: $0.4 million and $0.7 million, respectively).
The following is the estimated future amortization expense for the Company's intangible assets as of September 30, 2024:
|
Fiscal year ending March 31, |
2025 (six months ending) |
$ |
836 |
2026 |
1,534 |
2027 |
9 |
2028 and thereafter |
- |
Total amortization expense of intangible assets |
$ |
2,379 |
12
NOTE 8. SUPPLY CHAIN FINANCE PROGRAM
The Company facilitates a supply chain finance program, administered through third party platforms, which provides participating suppliers with the opportunity to finance payments due from the Company with certain third-party financial institutions. Participating suppliers may, at their sole discretion, elect to finance one or more invoices of the Company prior to their scheduled due dates at a discounted price with the participating financial institution.
The Company's obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by the supplier's decision to finance amounts under these arrangements. As such, the outstanding payment obligations under the Company's supply chain financing programare included within Accounts Payable in the Condensed Consolidated Balance Sheets and within operating activities in the Condensed Consolidated Statement of Cash Flows.
The Company's outstanding payment obligations under this program were $199.4 million as of September 30, 2024 (March 31, 2024: $159.4 million).
NOTE 9. CREDIT FACILITY AND OTHER LONG-TERM DEBT
The Company's outstanding debt consisted of the following: |
As of
September 30, 2024 |
As of
March 31, 2024 |
1.50% Convertible Senior Notes due 2024 | $ |
- |
$ |
80,919 |
3.25% Senior Notes due 2026 | 600,000 |
600,000 |
Total principal payments due |
600,000 |
680,919 |
|
Unamortized debt discount on Senior Notes |
(433) |
(560) |
Unamortized debt issuance costs - Convertible Senior Notes |
- |
(16) |
Unamortized debt issuance costs - Senior Notes |
(920) |
(1,189) |
Unamortized debt issuance costs - Credit facility |
(4,055) |
(3,362) |
Total amount outstanding |
594,592 |
675,792 |
Less: |
Current portion of long-term debt: |
1.50% Convertible Senior Notes due 2024 | - |
80,919 |
|
Non-current portion of long-term debt |
$ |
594,592 |
$ |
594,873 |
Credit Facility
On March 8, 2019, the Company 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"). In July 2024, the Company entered into the fifth amendment to the credit agreement (the credit agreement as amended, the "amended credit agreement" or the "revolving credit facility"). The amended credit agreement provides for an aggregate $1.1 billion of revolving credit commitments comprised of two tranches: (i) one tranche of $50 million that has a term that ends on December 3, 2026, and (ii) a second tranche of $1.05 billion that has a term that ends on December 3, 2027, in each case with permitted extensions under certain circumstances. As of September 30, 2024 and March 31, 2024, there were no amounts outstanding under the revolving credit facility.
At the Company's request and a lender's consent, commitments under the amended credit agreement may be increased by up to $300.0 million in aggregate, subject to certain conditions as set forth in the amended credit agreement. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time the Company seeks to incur such borrowings.
Borrowings, if any, under the revolving credit facility have maturities of less than one year. Up to $50.0 million of the facility may be used for the issuance of letters of credit. As of September 30, 2024, $45.4 million of letters of credit were outstanding (March 31, 2024: $4.2 million).
13
The obligations of the Company under the amended credit agreement are guaranteed by certain domestic significant subsidiaries of Under Armour, Inc., subject to customary exceptions (the "subsidiary guarantors") and primarily secured by a first-priority security interest in substantially all of the assets of Under Armour, Inc. and the subsidiary guarantors, excluding real property, capital stock in and debt of subsidiaries of Under Armour, Inc. holding certain real property and other customary exceptions. The amended credit agreement provides for the permanent fall away of guarantees and collateral upon the Company's achievement of investment grade rating from two rating agencies.
The amended credit agreement contains negative covenants that, subject to significant exceptions, limit the Company's ability to, among other things: incur additional secured and unsecured indebtedness; pledge the assets as security; make investments, loans, advances, guarantees and acquisitions (including investments in and loans to non-guarantor subsidiaries); undergo fundamental changes; sell assets outside the ordinary course of business; enter into transactions with affiliates; and make restricted payments.
The Company is also 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 the Company is not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.0 (the "leverage covenant"), as described in more detail in the amended credit agreement. The Company was in compliance with the applicable covenants for the quarter ended September 30, 2024. In July 2024, the Company entered into an amendment to the credit agreement to exclude from the definition of consolidated EBITDA certain charges related to the settlement of the Company's Class Action Securities litigation described in Note 10 of these Condensed Consolidated Financial Statements.
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.
The amended credit agreement implemented SOFR as the replacement for LIBOR as a benchmark interest rate for U.S. dollar borrowings (and analogous benchmark rate replacements for borrowings in Yen, Pound Sterling and Euro). Borrowings under the amended credit agreement bear interest at a rate per annum equal to, at the Company's option, either (a) an alternate base rate (for borrowings in U.S. dollars), (b) a term rate (for borrowings in U.S. dollars, Euro or Japanese Yen) or (c) a "risk free" rate (for borrowings in U.S. dollars or Pounds Sterling), 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 leverage ratio of consolidated total indebtedness to consolidated EBITDA and ranges between 1.00% to 1.75% (or, in the case of alternate base loans, 0.00% to 0.75%). The Company will also 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 September 30, 2024, the commitment fee was 15.0 basis points.
1.50% Convertible Senior Notes
On June 1, 2024, the Company's previously outstanding $80.9 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the "Convertible Senior Notes") matured. The Convertible Senior Notes bore interest at the fixed rate of 1.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. Upon maturity, the Company repaid the $80.9 million aggregate principal amount of the Convertible Senior Notes outstanding, plus $0.6 million of accrued interest, using cash on hand. No holders exercised their rights to convert prior to maturity.
3.25% Senior Notes
In June 2016, the Company issued $600.0 million aggregate principal amount of 3.25% senior unsecured notes due June 15, 2026 (the "Senior Notes"). The Senior Notes bear interest at the fixed rate of 3.25% per annum, payable semi-annually on June 15 and December 15 beginning December 15, 2016. The Company may redeem some or all of the Senior Notes at any time, or from time to time, at redemption prices described in the indenture governing the Senior Notes. The indenture governing the Senior Notes contains negative covenants that limit the Company's ability to engage in certain transactions and are subject to material exceptions described in the indenture. The Company incurred and deferred $5.4 million in financing costs in connection with the Senior Notes.
Interest Expense
Interest expense, which includes amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long-term debt facilities, was $6.1 million and
14
$11.7 million for the three and six months ended September 30, 2024, respectively (three and six months ended September 30, 2023: $5.5 million and $11.3 million, respectively).
Maturity of Long-Term Debt
The following are the scheduled maturities of long-term debt as of September 30, 2024: |
Fiscal year ending March 31, |
2025 (six months ending) |
$ |
- |
2026 |
- |
2027 |
600,000 |
2028 and thereafter |
- |
Total scheduled maturities of long-term debt |
$ |
600,000 |
|
Current maturities of long-term debt |
$ |
- |
The Company monitors the financial health and stability of its lenders under the credit and other long-term debt facilities, however during any period of significant instability in the credit markets, lenders could be negatively impacted in their ability to perform under these facilities.
NOTE 10. COMMITMENTS AND CONTINGENCIES
In connection with various contracts and agreements, the Company has 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 the counterparties are grossly negligent, engage in willful misconduct, or act in bad faith. Based on the Company's historical experience and the estimated probability of future loss, the Company has determined that the fair value of such indemnifications is not material to its consolidated financial position or results of operations.
From time to time, the Company is involved in litigation and other proceedings, including matters related to commercial and intellectual property disputes, as well as trade, regulatory and other claims related to its business. Other than as described below, the Company believes that all current proceedings are routine in nature and incidental to the conduct of its business. However, the matters described below, if decided adversely to or settled by the Company, could result, individually or in the aggregate, in a liability material to the Company's consolidated financial position, results of operations or cash flows.
In re Under Armour Securities Litigation
On March 23, 2017, three separate securities cases previously filed against the Company in the United States District Court for the District of Maryland (the "District Court") were consolidated under the caption In re Under Armour Securities Litigation, Case No. 17-cv-00388-RDB (the "Consolidated Securities Action"). On September 14, 2020, the District Court issued an order that, among other things, consolidated two additional securities cases into the Consolidated Securities Action.
The operative complaint (the "TAC") in the Consolidated Securities Action was filed on October 14, 2020. The TAC asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against the Company and Mr. Plank and under Section 20A of the Exchange Act against Mr. Plank. The TAC alleges that the defendants supposedly concealed purportedly declining consumer demand for certain of the Company's products between the third quarter of 2015 and the fourth quarter of 2016 by making allegedly false and misleading statements regarding the Company's performance and future prospects and by engaging in undisclosed and allegedly improper sales and accounting practices, including shifting sales between quarterly periods allegedly to appear healthier. The TAC also alleges that the defendants purportedly failed to disclose that the Company was under investigation by and cooperating with the U.S. Department of Justice ("DOJ") and the U.S. Securities and Exchange Commission (the "SEC") since July 2017. The class period identified in the TAC is September 16, 2015 through November 1, 2019.
On July 23, 2021, the Company and Mr. Plank filed an answer to the TAC denying all allegations of wrongdoing and asserting affirmative defenses to the claims asserted in the TAC. On December 1, 2021, the plaintiffs filed a motion seeking, among other things, certification of the class they are seeking to represent in the Consolidated Securities Action. On September 29, 2022, the District Court granted the plaintiffs' class certification motion. Discovery in the Consolidated Securities Action concluded on August 31, 2023. On October 2, 2023, the
15
Company and Mr. Plank filed a motion for summary judgment seeking an order dismissing the Consolidated Securities Action with prejudice which motion was denied by the District Court on February 26, 2024.
On June 20, 2024, the defendants reached an agreement with the plaintiffs to enter into a settlement resolving the Consolidated Securities Action (the "Settlement"). Under the terms of the Settlement, the Company paid $434 million to the members of the class, which was funded using balance sheet cash together with $73 million of insurance proceeds and was deposited by the Company into a settlement fund escrow in August 2024. In addition, the Company agreed to two additional, non-monetary provisions, specifically to continue to separate the roles of Chair and Chief Executive Officer for a period of at least three years beginning on the date that the court order approving the settlement and dismissing the Consolidated Securities Action becomes final and non-appealable (the "Three-Year Period"), and that all restricted stock or restricted stock units granted by the Company to its Chief Executive Officer, Chief Financial Officer and Chief Legal Officer during the Three-Year Period include a performance-based vesting condition to be set by the Human Capital and Compensation Committee of the Company's Board of Directors. In exchange, the plaintiffs and the Class will grant customary releases in favor of Defendants of all of their claims that were or could have been asserted in the Consolidated Securities Action.
On July 12, 2024, the parties executed a formal stipulation of settlement documenting the terms of the Settlement. On July 15, 2024, the plaintiffs filed an unopposed motion in the District Court seeking preliminary approval of the Settlement. On July 22, 2024, the District Court granted that motion and entered an order preliminarily approving the Settlement and scheduling a final approval hearing on November 7, 2024. On October 3, 2024, the plaintiffs filed a motion in the District Court seeking final approval of the Settlement. The deadline to file any objections to the Settlement was October 17, 2024, and that deadline passed without the filing of any such objections. On November 7, 2024, the District Court granted the plaintiffs' motion for final approval of the Settlement.
By entering into the Settlement, the defendants in no way conceded or admitted liability for any of the claims that were or could have been asserted in the Consolidated Securities Action. The defendants expressly have denied and continue to deny each and all of the claims asserted in the Consolidated Securities Action, and entered into the Settlement to eliminate the uncertainty, risk, costs, and burdens inherent in any litigation, including the Consolidated Securities Action.
Consolidated Kenney Derivative Litigation
In June and July 2018, two purported stockholder derivative complaints were filed in Maryland state court (in cases captioned Kenney v. Plank, et al. (filed June 29, 2018) and Luger v. Plank, et al. (filed July 26, 2018), respectively). The cases were consolidated on October 19, 2018 under the caption Kenney v. Plank, et. al. The consolidated complaint in the Kenney action names Mr. Plank, certain other current and former members of the Company's Board of Directors, certain former Company executives, and Sagamore Development Company, LLC ("Sagamore") as defendants, and names the Company as a nominal defendant. The consolidated complaint asserts breach of fiduciary duty, unjust enrichment, and corporate waste claims against the individual defendants and asserts a claim against Sagamore for aiding and abetting certain of the alleged breaches of fiduciary duty. The consolidated complaint seeks damages on behalf of the Company and certain corporate governance related actions.
The consolidated complaint includes allegations challenging, among other things, the Company's disclosures related to growth and consumer demand for certain of the Company's products, as well as stock sales by certain individual defendants. The consolidated complaint also makes allegations related to the Company's 2016 purchase from entities controlled by Mr. Plank (through Sagamore) of certain parcels of land to accommodate the Company's growth needs, which was approved by the Audit Committee of the Company's Board of Directors in accordance with the Company's policy on transactions with related persons.
On March 29, 2019, the court in the Kenney action granted the Company's and the defendants' motion to stay that case pending the outcome of both the Consolidated Securities Action and an earlier-filed derivative action asserting similar claims to those asserted in the Kenney action relating to the Company's purchase of parcels in the Baltimore Peninsula, an area of Baltimore previously referred to as Port Covington (which derivative action has since been dismissed in its entirety).
Prior to the filing of the derivative complaints in Kenney v. Plank, et al. and Luger v. Plank, et al., both of the purported stockholders had sent the Company's Board of Directors a letter demanding that the Company pursue claims similar to the claims asserted in the derivative complaints. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company and both of these purported stockholders were informed of that determination.
16
In 2020, two additional purported shareholder derivative complaints were filed in Maryland state court, in cases captioned Cordell v. Plank, et al. (filed August 11, 2020) and Salo v. Plank, et al. (filed October 21, 2020), respectively.
Prior to the filing of the derivative complaints in these two actions, neither of the purported stockholders made a demand that the Company's Board of Directors pursue the claims asserted in the complaints. In October 2021, the court issued an order (i) consolidating the Cordell and Salo actions with the consolidated Kenney action into a single consolidated derivative action (the "Consolidated Kenney Derivative Action"); (ii) designating the Kenney action as the lead case; and (iii) specifying that the scheduling order in the Kenney action shall control the Consolidated Kenney Derivative Action.
On October 27, 2023, an additional purported stockholder derivative complaint was filed in Maryland state court by four purported stockholders, in a case captioned Viskovich, et al. v. Plank, et al. (the "Viskovich Action"). Prior to the filing of this complaint, each of the four purported stockholders had sent the Company's Board of Directors a letter demanding that the Company pursue claims similar to the claims asserted in the derivative complaint. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company and these purported stockholders were informed of that determination. On March 20, 2024, the court issued an order (i) consolidating the Viskovich Action into the Consolidated Kenney Derivative Action; (ii) designating the Kenney action as the lead case; and (iii) specifying that the scheduling order in the Kenney action shall control the Consolidated Kenney Derivative Action. The parties in the Consolidated Kenney Action and the Consolidated Paul Derivative Action (described below) have agreed to engage in private mediation in an effort to potentially resolve the claims in the two actions.
The Company believes that the claims asserted in the Consolidated Kenney Derivative Action are without merit and intends to defend this matter vigorously. However, because of the inherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of the outcome of this matter.
Consolidated Paul Derivative Litigation
On January 27, 2021, the District Court entered an order consolidating for all purposes four separate stockholder derivative cases that previously had been filed in the court. On February 2, 2023, the District Court issued an order appointing Balraj Paul and Anthony Viskovich as lead plaintiffs ("Derivative Lead Plaintiffs"), appointing counsel for the Derivative Lead Plaintiffs as lead counsel, and recaptioning the consolidated case as Paul et al. v. Plank et al. (the "Consolidated Paul Derivative Action"). Prior to filing their derivative complaints, both of the Derivative Lead Plaintiffs had sent the Company's Board of Directors a letter demanding that the Company pursue claims similar to the claims asserted in the derivative complaints. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company, and the Derivative Lead Plaintiffs were informed of that determination.
On March 16, 2023, the District Court issued an order granting a motion for voluntary dismissal without prejudice that had been filed by the plaintiff in one of the four derivative cases who had not been appointed as a lead plaintiff.
On April 24, 2023, the Derivative Lead Plaintiffs designated an operative complaint in the Consolidated Paul Derivative Action. The operative complaint named Mr. Plank, certain other current and former members of the Company's Board of Directors, and certain other current and former Company executives as defendants, and named the Company as a nominal defendant. It asserted allegations similar to those in the TAC filed in the Consolidated Securities Action matter discussed above, including allegations challenging (i) the Company's disclosures related to growth and consumer demand for certain of the Company's products; (ii) the Company's practice of shifting sales between quarterly periods supposedly to appear healthier and its purported failure to disclose that practice; (iii) the Company's internal controls with respect to revenue recognition and inventory management; and (iv) the Company's supposed failure to timely disclose investigations by the SEC and DOJ. The operative complaint asserted breach of fiduciary duty and unjust enrichment claims against the defendants and asserted a contribution claim against certain defendants. The operative complaint sought damages on behalf of the Company and also sought certain corporate governance related actions.
The Company and the defendants filed a motion to dismiss the operative complaint on June 23, 2023. The District Court granted that motion on September 27, 2023, dismissing the Consolidated Paul Derivative Action without prejudice, due to lack of subject matter jurisdiction. Following that decision, Viskovich, one of the Derivative Lead Plaintiffs, filed the above-referenced Viskovich Action in Maryland State Court.
The other Derivative Lead Plaintiff, Paul, filed a motion in the District Court seeking reconsideration of the dismissal decision or leave to amend the operative complaint. On January 9, 2024, the District Court entered an
17
order denying Paul's motion and ordering that the Consolidated Paul Derivative Action remained dismissed without prejudice.
In February 2024, Paul filed a notice of appeal to the U.S. Court of Appeals for the Fourth Circuit (the "Fourth Circuit") from the decisions by the District Court on September 27, 2023 and January 9, 2024. Briefing on the appeal began on April 24, 2024 and was completed as of July 22, 2024. No decision has been issued in the appeal, which remains pending before the Fourth Circuit. As described above, the parties in the Consolidated Kenney Action and the Consolidated Paul Derivative Action have agreed to engage in private mediation in an effort to potentially resolve the claims in the two actions.
The Company continues to believe that the claims asserted in the Consolidated Paul Derivative Action are without merit and intends to defend this matter vigorously. However, because of the inherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of the outcome of this matter.
Contingencies
In accordance with ASC Topic 450 "Contingencies" ("Topic 450"), the Company establishes accruals for contingencies when (i) the Company believes it is probable that a loss will be incurred and (ii) the amount of the loss can be reasonably estimated. If the reasonable estimate is a range, the Company will accrue the best estimate in that range; where no best estimate can be determined, the Company will accrue the minimum. Legal proceedings and other contingencies for which no accrual has been established are disclosed to the extent required by ASC Topic 450.
In connection with the matters described above and previously disclosed government investigations, the Company provided notice of claims under multiple director and officer liability insurance policy periods. While the Company's director and officer insurance carriers from each policy period have funded a portion of the settlement amount, as previously disclosed, the Company remains in litigation with certain of its insurance carriers regarding coverage with respect to one of these policy periods. On March 26, 2024, the District Court issued a decision and order that obligated these insurance carriers to provide coverage. On April 25, 2024, the insurance carriers filed a motion for entry of judgment or leave to appeal the March 26, 2024 decision. The Company has opposed the insurance carriers' motion, and briefing on the motion was completed on May 23, 2024. If the District Court's decision is appealed by the insurance carriers and the appeals court were to reverse the District Court's decision, the Company may be required to repay the settlement amount funded by the insurance carriers, as well as any defense costs from the Consolidated Securities Action paid by these carriers. $90 million of the insurance proceeds recognized as of September 30, 2024 remains subject to appeal by the insurance carriers.
From time to time, the Company's view regarding probability of loss with respect to outstanding legal proceedings will change, proceedings for which the Company is able to estimate a loss or range of loss will change, and the estimates themselves will change. In addition, while many matters presented in financial disclosures involve significant judgment and may be subject to significant uncertainties, estimates with respect to legal proceedings are subject to particular uncertainties. Other than as described above, the Company believes that all current proceedings are routine in nature and incidental to the conduct of its business.
NOTE 11. STOCKHOLDERS' EQUITY
The Company's Class A Common Stock and Class B Convertible Common Stock have an authorized number of 400.0 million shares and 34.45 million shares, respectively, and each have a par value of $0.0003 1/3 per share as of September 30, 2024. Holders of Class A Common Stock and Class B Convertible Common Stock have identical rights, including liquidation preferences, except that the holders of Class A Common Stock are entitled to one vote per share and holders of Class B Convertible Common Stock are entitled to 10 votes per share on all matters submitted to a stockholder vote. Class B Convertible Common Stock may only be held by Kevin Plank, the Company's founder, President and Chief Executive Officer, or a related party of Mr. Plank, as defined in the Company's charter. As a result, Mr. Plank has a majority voting control over the Company. Upon the transfer of shares of Class B Convertible Stock to a person other than Mr. Plank or a related party of Mr. Plank, the shares automatically convert into shares of Class A Common Stock on a one-for-one basis. In addition, all of the outstanding shares of Class B Convertible Common Stock will automatically convert into shares of Class A Common Stock on a one-for-one basis upon the death or disability of Mr. Plank or on the record date for any stockholders' meeting upon which the shares of Class A Common Stock and Class B Convertible Common Stock beneficially owned by Mr. Plank is less than 15% of the total shares of Class A Common Stock and Class B Convertible Common Stock outstanding or upon the other events specified in the Class C Articles Supplementary to the
18
Company's charter as documented below. Holders of the Company's common stock are entitled to receive dividends when and if authorized and declared out of assets legally available for the payment of dividends.
The Company's Class C Common Stock has an authorized number of 400.0 million shares and has a par value of $0.0003 1/3 per share as of September 30, 2024. The terms of the Class C Common Stock are substantially identical to those of the Company's Class A Common Stock, except that the Class C Common Stock has no voting rights (except in limited circumstances), will automatically convert into Class A Common Stock under certain circumstances and includes provisions intended to ensure equal treatment of Class C Common Stock and Class B Common Stock in certain corporate transactions, such as mergers, consolidations, statutory share exchanges, conversions or negotiated tender offers, and including consideration incidental to these transactions.
Share Repurchase Program
On May 15, 2024, the Company's Board of Directors authorized the Company to repurchase up to $500 million (exclusive of fees and commissions) of outstanding shares of the Company's Class C Common Stock through May 31, 2027. The Class C Common Stock may be repurchased from time to time at prevailing prices in the open market, through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, via private purchases through forward, derivative, accelerated share repurchase transactions or otherwise, subject to applicable regulatory restrictions on volume, pricing and timing. The timing and amount of any repurchases will depend on market conditions, the Company's financial condition, results of operations, liquidity and other factors.
During the six months ended September 30, 2024, pursuant to the previously disclosed accelerated share repurchase transaction that the Company entered into in May 2024, the Company repurchased 5.9 million shares of Class C Common Stock, which were immediately retired. No shares were repurchased during the three months ended September 30, 2024.
During the three and six months ended September 30, 2023, the Company repurchased and immediately retired 7.6 million Class C Common Stock, under the Company's previously approved $500 million share repurchase program which was completed in December 2023. No shares were repurchased during the three months ended June 30, 2023.
NOTE 12. REVENUES
The following tables summarize the Company's net revenues by product category and distribution channels: |
| Three Months Ended September 30, |
Six Months Ended September 30, |
2024 |
2023 |
2024 |
2023 |
Apparel |
$ |
947,188 |
$ |
1,070,401 |
$ |
1,704,980 |
$ |
1,895,014 |
Footwear |
312,760 |
351,202 |
623,149 |
714,872 |
Accessories |
116,381 |
113,933 |
208,926 |
211,795 |
Net Sales |
1,376,329 |
1,535,536 |
2,537,055 |
2,821,681 |
License revenues |
24,796 |
28,646 |
46,467 |
53,718 |
Corporate Other |
(2,102) |
2,492 |
(834) |
8,240 |
Total net revenues |
$ |
1,399,023 |
$ |
1,566,674 |
$ |
2,582,688 |
$ |
2,883,639 |
|
| Three Months Ended September 30, |
Six Months Ended September 30, |
2024 |
2023 |
2024 |
2023 |
Wholesale |
$ |
825,993 |
$ |
939,725 |
$ |
1,506,506 |
$ |
1,681,683 |
Direct-to-consumer |
550,336 |
595,811 |
1,030,549 |
1,139,998 |
Net Sales |
1,376,329 |
1,535,536 |
2,537,055 |
2,821,681 |
License revenues |
24,796 |
28,646 |
46,467 |
53,718 |
Corporate Other |
(2,102) |
2,492 |
(834) |
8,240 |
Total net revenues |
$ |
1,399,023 |
$ |
1,566,674 |
$ |
2,582,688 |
$ |
2,883,639 |
The Company records reductions to revenue for estimated customer returns, allowances, markdowns and discounts. These reserves are included within customer refund liability and the value of the inventory associated
19
with reserves for sales returns are included within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. The following table presents the customer refund liability, as well as the associated value of inventory for the periods indicated:
|
As of
September 30, 2024 |
As of
March 31, 2024 |
Customer refund liability |
$ |
144,983 |
$ |
139,283 |
Inventory associated with reserves for sales returns |
$ |
31,447 |
$ |
29,514 |
Contract Liabilities
Contract liabilities are recorded when a customer pays consideration, or the Company has a right to an amount of consideration that is unconditional, before the transfer of a good or service to the customer, and thus represent the Company's obligation to transfer the good or service to the customer at a future date. The Company's contract liabilities primarily consist of (i) gift cards, which are included in accrued expenses on the Company's Condensed Consolidated Balance Sheets, and (ii) points associated with the loyalty programs and payments received in advance of revenue recognition for royalty arrangements, which are included in other current liabilities on the Company's Condensed Consolidated Balance Sheets.
The following table summarizes the change in the contract liabilities balance during the six months ended September 30, 2024, which primarily results from the timing differences between the Company's satisfaction of performance obligations and the customer's payment.
|
Total Contract Liabilities |
Balance as of March 31, 2024 |
$ |
26,322 |
Revenues deferred |
25,893 |
Revenues recognized (1) | (21,250) |
Foreign exchange and other |
(4,042) |
Balance as of September 30, 2024 |
$ |
26,923 |
(1)Includes approximately $4.3 million of revenue from gift cards and subscriptions that was previously included in contract liabilities as of March 31, 2024. Loyalty points are not separately identifiable and therefore revenues recognized from the redemption of loyalty points consists of both points that were included in the liability balance at the beginning of the period and those that were issued during the period.
NOTE 13. RESTRUCTURING AND RELATED CHARGES
On May 15, 2024, the Company's Board of Directors approved a restructuring plan (the "2025 restructuring plan") designed to strengthen and support the Company's financial and operational efficiencies. On September 5, 2024, the Company's Board of Directors approved a $70 million increase to the 2025 restructuring plan, resulting in an updated restructuring plan of approximately $140 million to $160 million of pre-tax restructuring and related charges to be incurred during Fiscal 2025 and the fiscal year ending March 31, 2026 ("Fiscal 2026"), including:
•Up to $75 million in cash-related charges, consisting of approximately $30 million in employee severance and benefits costs and $45 million related to various transformational initiatives; and
•Up to $85 million in non-cash charges, including approximately $7 million in employee severance and benefits costs and $78 million in facility, software, and other asset-related charges and impairments.
Restructuring and related charges are included in the Company's Corporate Other segment. The costs recorded during the three and six months ended September 30, 2024 were primarily North America related. The summary of these costs, as well as the Company's current estimates of the remaining amount expected to be incurred in connection with the 2025 restructuring plan is as follows:
20
|
Estimated Restructuring and Related Charges(1) |
Three Months Ended
September 30, 2024 |
Six Months Ended
September 30, 2024 |
Remaining to be incurred |
Total to be incurred under plan |
Costs recorded in restructuring charges: |
Employee-related costs |
$ |
1,393 |
$ |
11,738 |
Facility-related costs |
4,457 |
12,495 |
Other restructuring costs(2) | (2,638) |
4,065 |
Total costs recorded in restructuring charges |
$ |
3,212 |
$ |
28,298 |
$ |
87,702 |
$ |
116,000 |
Costs recorded in selling, general and administrative expenses: |
Employee related costs |
938 |
9,460 |
Other transformation initiatives |
1,786 |
1,921 |
Total costs recorded in selling, general and administrative expenses |
$ |
2,724 |
$ |
11,381 |
$ |
32,619 |
$ |
44,000 |
Total restructuring and related charges |
$ |
5,936 |
$ |
39,679 |
$ |
120,321 |
$ |
160,000 |
(1) Estimated restructuring and related charges reflect the high-end of the range of the total estimated charges expected to be incurred by the Company in connection with the 2025 restructuring plan.
(2) Includes a net gain of $5.3 million recognized during the three months ended September 30, 2024 resulting from the sale of the MapMyFitness platform.
Restructuring and related charges and recoveries require the Company to make certain judgments and estimates regarding the amount and timing as to when these charges or recoveries occur. The estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. The restructuring reserve is recorded within current and long-term liabilities on the Condensed Consolidated Balance Sheets. On a quarterly basis, the Company conducts an evaluation of the related liabilities and expenses and revises its assumptions and estimates as appropriate, as new or updated information becomes available.
A summary of the activity in the restructuring reserve related to the Company's 2025 restructuring plan for the six months ended September 30, 2024 is as follows:
|
Employee Related Costs |
Facility Related Costs |
Other Restructuring Related Costs |
Balance as of March 31, 2024 |
$ |
- |
$ |
- |
$ |
- |
Net additions (recoveries) charged to expense (1) | 11,738 |
5,800 |
7,083 |
Cash payments |
(10,666) |
(5,800) |
(6,953) |
Foreign exchange and other |
(8) |
- |
- |
Balance as of September 30, 2024 |
$ |
1,064 |
$ |
- |
$ |
130 |
(1) Amount excludes approximately $9.0 million of non-cash facility-related and other charges and a $5.3 million non-cash gain from the sale of the MapMyFitness platform.
NOTE 14. OTHER EMPLOYEE BENEFITS
The Company offers a 401(k) Deferred Compensation Plan for the benefit of eligible employees. Employee contributions are voluntary and subject to Internal Revenue Service limitations. The Company matches a portion of the participant's contribution and recorded expense for the three and six months ended September 30, 2024 of $2.5 million and $6.1 million, respectively (three and six months ended September 30, 2023: $3.4 million and $6.7 million, respectively).
In addition, the Company offers the Under Armour, Inc. Deferred Compensation Plan (the "Deferred Compensation Plan") which allows a select group of management or highly compensated employees, as approved by the Human Capital and Compensation Committee of the Board of Directors, to make an annual base salary and/or bonus deferral for each year. As of September 30, 2024, the Deferred Compensation Plan obligations, which are
21
included in other long-term liabilities on the Condensed Consolidated Balance Sheets, were $18.2 million (March 31, 2024: $16.2 million).
The Company established a Rabbi Trust to fund obligations to participants in the Deferred Compensation Plan. As of September 30, 2024, the assets held in the Rabbi Trust were trust owned life insurance ("TOLI") policies with cash-surrender values of $9.0 million (March 31, 2024: $9.1 million). These assets are consolidated and are included in other long-term assets on the Condensed Consolidated Balance Sheets.
Refer to Note 16 of these Condensed Consolidated Financial Statements for a discussion of the fair value measurements of the assets held in the Rabbi Trust and the Deferred Compensation Plan obligations.
NOTE 15. STOCK BASED COMPENSATION
The Under Armour, Inc. Fourth Amended and Restated 2005 Omnibus Long-Term Incentive Plan as amended (the "2005 Plan") provides for the issuance of stock options, restricted stock, restricted stock units and other equity awards to officers, directors, key employees and other persons. The 2005 Plan terminates in 2033. As of September 30, 2024, 8.3 million Class A shares and 28.1 million Class C shares are available for future grants of awards under the 2005 Plan.
Awards Granted to Employees and Non-Employee Directors
Total stock-based compensation expense associated with awards granted to employees and non-employee directors for the three and six months ended September 30, 2024 was $11.0 million and $25.4 million, respectively (three and six months ended September 30, 2023: $10.0 million and $20.3 million, respectively). As of September 30, 2024, the Company had $73.8 million of unrecognized compensation expense related to these awards expected to be recognized over a weighted average period of 2.24 years. The unrecognized expense does not include any expense related to performance-based restricted stock unit awards for which the performance targets have been deemed improbable as of September 30, 2024. Refer to "Stock Options" and "Restricted Stock and Restricted Stock Unit Awards" below for further information on these awards. A summary of each of these plans is as follows:
Employee Stock Compensation Plan
Stock options, restricted stock and restricted stock unit awards under the 2005 Plan generally vest ratably over a period of twoto five years. The contractual term for stock options is generally 10 years from the date of grant. The Company generally receives a tax deduction for any ordinary income recognized by a participant in respect to an award under the 2005 Plan.
Non-Employee Director Compensation Plan
The Company's Non-Employee Director Compensation Plan (the "Director Compensation Plan") provides for cash compensation and equity awards to non-employee directors of the Company under the 2005 Plan. Non-employee directors have the option to defer the value of their annual cash retainers as deferred stock units in accordance with the Under Armour, Inc. Non-Employee Deferred Stock Unit Plan (the "DSU Plan"). Each new non-employee director receives an award of restricted stock units upon the initial election to the Board of Directors, with the units covering stock valued at $100 thousand on the grant date and vesting in three equal annual installments. In addition, each non-employee director receives, following each annual stockholders' meeting, a grant under the 2005 Plan of restricted stock units covering stock valued at $150 thousand on the grant date. Each award vests 100% on the date of the next annual stockholders' meeting following the grant date.
The receipt of the shares otherwise deliverable upon vesting of the restricted stock units automatically defers into deferred stock units under the DSU Plan. Under the DSU Plan each deferred stock unit represents the Company's obligation to issue one share of the Company's Class A or Class C Common Stock with the shares delivered six months following the termination of the director's service. The Company had 1.0 million deferred stock units outstanding as of September 30, 2024.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plans (the "ESPPs") allow for the purchase of Class A Common Stock and Class C Common Stock by all eligible employees at a 15% discount from fair market value subject to certain limits as defined in the ESPPs. As of September 30, 2024, 2.7 million Class A shares and 2.4 million Class C shares are available for future purchases under the ESPPs. During the three and six months ended September 30, 2024, 0.1 million and 0.2 million Class C shares, respectively, were purchased under the ESPPs (three and six months ended September 30, 2023: 0.2 million and 0.3 million, respectively).
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Awards granted to Certain Marketing and Other Partners
In addition to the plans discussed above, the Company may also, from time to time, issue deferred stock units or restricted stock units to certain of our marketing and other partners in connection with their entering into endorsement or other service agreements with the Company. The terms of each agreement set forth the number of units to be granted and the delivery dates for the shares, which range over a multi-year period, depending on the contract.
Total stock-based compensation expense related to these awards for the three and six months ended September 30, 2024 was $1.8 million and $3.7 million, respectively (three and six months ended September 30, 2023: $2.4 million and $4.7 million, respectively). As of September 30, 2024, the Company had $67.7 million of unrecognized compensation expense associated with these awards expected to be recognized over a weighted average period of 9.82 years.
Summary by Award Classification:
Stock Options
A summary of the Company's stock options activity for the six months ended September 30, 2024 is presented below: |
Number
of Stock
Options |
Weighted
Average
Exercise
Price |
Weighted
Average
Remaining
Contractual
Life (Years) |
Total
Intrinsic
Value |
Outstanding at March 31, 2024 | 1,578 |
$ |
19.44 |
3.82 |
$ |
- |
Granted, at fair market value |
- |
- |
- |
- |
Exercised |
- |
- |
- |
- |
Forfeited |
- |
- |
- |
- |
Outstanding at September 30, 2024 | 1,578 |
$ |
19.44 |
3.32 |
$ |
- |
Options exercisable at September 30, 2024 | 1,578 |
$ |
19.44 |
3.32 |
$ |
- |
Restricted Stock and Restricted Stock Unit Awards
A summary of the Company's restricted stock and restricted stock unit awards activity for the six months ended September 30, 2024 is presented below:
|
Number of
Restricted Shares |
Weighted Average
Grant Date Fair Value |
Outstanding at March 31, 2024 | 20,776 |
$ |
8.58 |
Granted |
9,109 |
6.31 |
Forfeited |
(2,917) |
7.54 |
Vested |
(3,531) |
9.40 |
Outstanding at September 30, 2024 | 23,437 |
$ |
7.72 |
The awards outstanding at September 30, 2024 in the table above includes 2.3 million of performance-based restricted stock units with financial performance conditions that were awarded to certain executives and key employees under the 2005 Plan. The performance-based restricted stock units with financial performance conditions awarded during Fiscal 2025, Fiscal 2024 and Fiscal 2023 have a weighted average fair value of $6.85, $6.93 and $9.13, respectively, and have vesting that is tied to the achievement of certain annual revenue and operating income targets.
As of September 30, 2024, the Company deemed the achievement of the targets for the performance-based restricted stock units granted during Fiscal 2024 and Fiscal 2023 to be improbable and as such no stock-based compensation expense was recorded during the three and six months ended September 30, 2024.
As of September 30, 2024, the Company deemed the achievement of the targets for the performance-based restricted stock units awarded during the Fiscal 2025 to be probable and recorded stock-based compensation expense of $0.9 million and $1.3 million, for the three and six months ended September 30, 2024, respectively.
23
The Company assesses the probability of the achievement of the revenue and operating income targets at the end of each reporting period and based on that assessment cumulative adjustments may be recorded in future periods.
The awards outstanding at September 30, 2024 in the table above also include 2.0 million of performance-based restricted stock units awarded to the Company's President and CEO under the 2005 plan during Fiscal 2025 that are based on market performance conditions. The performance-based restricted stock units based on market conditions have a weighted average fair value of $4.13 and have vesting that is tied to the achievement of certain stock price targets for the Company's Class C Common Stock. The fair value of these awards was determined on the grant date using a Monte Carlo simulation model. The Company recorded $0.5 million and $0.7 million of compensation expense related to these awards during the three and six months ended September 30, 2024, respectively.
NOTE 16. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value accounting guidance outlines a valuation framework, creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures, and prioritizes the inputs used in measuring fair value as follows:
|
Level 1: |
Observable inputs such as quoted prices in active markets; |
|
Level 2: |
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |
|
Level 3: |
Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Financial assets and liabilities measured at fair value on a recurring basis
The Company's financial assets (liabilities) measured at fair value on a recurring basis consisted of the following types of instruments as of the following periods:
|
September 30, 2024 |
March 31, 2024 |
Level 1 |
Level 2 |
Level 3 |
Level 1 |
Level 2 |
Level 3 |
Derivative foreign currency contracts (see Note 17) | $ |
- |
$ |
(21,944) |
$ |
- |
$ |
- |
$ |
(4,643) |
$ |
- |
TOLI policies held by the Rabbi Trust (see Note 14) | $ |
- |
$ |
8,992 |
$ |
- |
$ |
- |
$ |
9,105 |
$ |
- |
Deferred Compensation Plan obligations (see Note 14) | $ |
- |
$ |
(18,158) |
$ |
- |
$ |
- |
$ |
(16,151) |
$ |
- |
Fair values of the financial assets and liabilities listed above are determined using inputs that use as their basis readily observable market data that are actively quoted and are validated through external sources, including third-party pricing services and brokers. The foreign currency contracts represent unrealized gains and losses on derivative contracts, which is the net difference between the U.S. dollar value to be received or paid at the contracts' settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current market exchange rate. The fair value of the TOLI policies held by the Rabbi Trust are based on the cash-surrender value of the life insurance policies, which are invested primarily in mutual funds and a separately managed fixed income fund. These investments are initially made in the same funds and purchased in substantially the same amounts as the selected investments of participants in the Deferred Compensation Plan, which represent the underlying liabilities to participants. Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants' selected investments.
Fair value of Long-Term Debt
The fair value of long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2). As of September 30, 2024, the fair value of the Senior Notes was $582.1 million (March 31, 2024: $569.1 million).
24
Assets and liabilities measured at fair value on a non-recurring basis
Certain assets are not remeasured to fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets and goodwill that have been reduced to fair value when impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
NOTE 17. RISK MANAGEMENT AND DERIVATIVES
The Company is exposed to global market risks, including the effects of changes in foreign currency and interest rates. The Company uses derivative instruments to manage financial exposures that occur in the normal course of business and does not hold or issue derivatives for trading or speculative purposes.
The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to forecasted cash flows and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships.
The Company's foreign exchange risk management program consists of designated cash flow hedges and undesignated hedges. As of September 30, 2024, the Company has hedge instruments primarily for:
•British Pound/U.S. Dollar;
•Euro/U.S. Dollar;
•U.S. Dollar/Chinese Renminbi;
•U.S. Dollar/Canadian Dollar;
•U.S. Dollar/Mexican Peso; and
•U.S. Dollar/Korean Won.
All derivatives are recognized on the Condensed Consolidated Balance Sheets at fair value and classified based on the instrument's maturity date.
The following table presents the fair values of derivative instruments within the Condensed Consolidated Balance Sheets. Refer to Note 16 of these Condensed Consolidated Financial Statements for a discussion of the fair value measurements.
|
Balance Sheet Classification |
September 30, 2024 |
March 31, 2024 |
Derivatives designated as hedging instruments under ASC 815 |
Foreign currency contracts |
Other current assets |
$ |
7,959 |
$ |
10,477 |
Foreign currency contracts |
Other long-term assets |
1,266 |
2,760 |
Total derivative assets designated as hedging instruments |
$ |
9,225 |
$ |
13,237 |
|
Foreign currency contracts |
Other current liabilities |
$ |
24,339 |
$ |
17,761 |
Foreign currency contracts |
Other long-term liabilities |
6,868 |
1,171 |
Total derivative liabilities designated as hedging instruments |
$ |
31,207 |
$ |
18,932 |
|
Derivatives not designated as hedging instruments under ASC 815 |
Foreign currency contracts |
Other current assets |
$ |
104 |
$ |
559 |
Total derivative assets not designated as hedging instruments |
$ |
104 |
$ |
559 |
|
Foreign currency contracts |
Other current liabilities |
$ |
66 |
$ |
600 |
Total derivative liabilities not designated as hedging instruments |
$ |
66 |
$ |
600 |
25
The following table presents the amounts in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items: |
Three Months Ended September 30, |
Six Months Ended September 30, |
2024 |
2023 |
2024 |
2023 |
Total |
Amount of Gain (Loss) on Cash Flow Hedge Activity |
Total |
Amount of Gain (Loss) on Cash Flow Hedge Activity |
Total |
Amount of Gain (Loss) on Cash Flow Hedge Activity |
Total |
Amount of Gain (Loss) on Cash Flow Hedge Activity |
Net revenues |
$ |
1,399,023 |
$ |
(3,229) |
$ |
1,566,674 |
$ |
1,071 |
$ |
2,582,688 |
$ |
(3,154) |
$ |
2,883,639 |
$ |
5,546 |
Cost of goods sold |
$ |
702,891 |
$ |
(410) |
$ |
818,151 |
$ |
(523) |
$ |
1,323,881 |
$ |
(3,571) |
$ |
1,523,621 |
$ |
(229) |
Interest income (expense), net |
$ |
(1,747) |
$ |
(9) |
$ |
(373) |
$ |
(9) |
$ |
597 |
$ |
(18) |
$ |
(1,999) |
$ |
(18) |
Other income (expense), net |
$ |
(3,420) |
$ |
- |
$ |
(6,104) |
$ |
- |
$ |
(6,150) |
$ |
- |
$ |
(12,164) |
$ |
- |
The following tables present the amounts affecting the Condensed Consolidated Statements of Comprehensive Income (Loss) from derivatives designated as cash flow hedges:
|
Balance as of
June 30, 2024 |
Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives |
Amount of gain (loss) reclassified from other comprehensive income (loss) into income |
Balance as of
September 30, 2024 |
Foreign currency contracts |
$ |
12,797 |
$ |
(38,740) |
$ |
(3,639) |
$ |
(22,304) |
Interest rate swaps |
(413) |
- |
(9) |
(404) |
Total designated as cash flow hedges |
$ |
12,384 |
$ |
(38,740) |
$ |
(3,648) |
$ |
(22,708) |
|
Balance as of
March 31, 2024 |
Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives |
Amount of gain (loss) reclassified from other comprehensive income (loss) into income |
Balance as of
September 30, 2024 |
Foreign currency contracts |
$ |
(10,645) |
$ |
(18,384) |
$ |
(6,725) |
$ |
(22,304) |
Interest rate swaps |
(422) |
- |
(18) |
(404) |
Total designated as cash flow hedges |
$ |
(11,067) |
$ |
(18,384) |
$ |
(6,743) |
$ |
(22,708) |
|
Balance as of
June 30, 2023 |
Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives |
Amount of gain (loss) reclassified from other comprehensive income (loss) into income |
Balance as of
September 30, 2023 |
Foreign currency contracts |
$ |
(20,214) |
$ |
36,418 |
$ |
548 |
$ |
15,656 |
Interest rate swaps |
(449) |
- |
(9) |
(440) |
Total designated as cash flow hedges |
$ |
(20,663) |
$ |
36,418 |
$ |
539 |
$ |
15,216 |
|
Balance as of
March 31, 2023 |
Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives |
Amount of gain (loss) reclassified from other comprehensive income (loss) into income |
Balance as of
September 30, 2023 |
Foreign currency contracts |
$ |
(4,764) |
$ |
25,737 |
$ |
5,317 |
$ |
15,656 |
Interest rate swaps |
(458) |
- |
(18) |
(440) |
Total designated as cash flow hedges |
$ |
(5,222) |
$ |
25,737 |
$ |
5,299 |
$ |
15,216 |
26
The following table presents the amounts in the Condensed Consolidated Statements of Operationsin which the effects of undesignated derivative instruments are recorded and the effects of fair value hedge activity on these line items: |
Three Months Ended September 30, |
Six Months Ended September 30, |
2024 |
2023 |
2024 |
2023 |
Total |
Amount of Gain (Loss) on Fair Value Hedge Activity |
Total |
Amount of Gain (Loss) on Fair Value Hedge Activity |
Total |
Amount of Gain (Loss) on Fair Value Hedge Activity |
Total |
Amount of Gain (Loss) on Fair Value Hedge Activity |
Other income (expense), net |
$ |
(3,420) |
$ |
3,541 |
$ |
(6,104) |
$ |
(2,259) |
$ |
(6,150) |
$ |
4,592 |
$ |
(12,164) |
$ |
(4,571) |
Cash Flow Hedges
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions generated by its international subsidiaries in currencies other than their local currencies. These gains and losses are driven by non-functional currency generated revenue, non-functional currency inventory purchases and certain other intercompany transactions. The Company enters into foreign currency contracts to reduce the risk associated with the foreign currency exchange rate fluctuations on these transactions. Certain contracts are designated as cash flow hedges. As of September 30, 2024, the aggregate notional value of the Company's outstanding cash flow hedges was $1,094.6 million (March 31, 2024: $1,199.1 million), with contract maturities ranging from oneto twenty-four months.
The Company may enter into long-term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of the Company's long-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations. The interest rate swap contracts are accounted for as cash flow hedges. Refer to Note 9 of these Condensed Consolidated Financial Statements for a discussion of long-term debt.
For contracts designated as cash flow hedges, the changes in fair value are reported as other comprehensive income (loss) and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. Effective hedge results are classified in the Condensed Consolidated Statements of Operations in the same manner as the underlying exposure.
Undesignated Derivative Instruments
The Company has entered into foreign exchange forward contracts to mitigate the change in fair value of specific assets and liabilities on the Condensed Consolidated Balance Sheets. Undesignated instruments are recorded at fair value as a derivative asset or liability on the Condensed Consolidated Balance Sheets with their corresponding change in fair value recognized in other expense, net, together with the re-measurement gain or loss from the hedged balance sheet position. As of September 30, 2024, the total notional value of the Company's outstanding undesignated derivative instruments was $504.3 million (March 31, 2024: $449.0 million).
Credit Risk
The Company enters into derivative contracts with major financial institutions with investment grade credit ratings and is exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the derivative contracts. However, the Company monitors the credit quality of these financial institutions and considers the risk of counterparty default to be minimal.
NOTE 18. PROVISION FOR INCOME TAXES
The Company computes its quarterly income tax provision under the effective tax rate method by applying an estimated anticipated annual effective rate to the Company's year-to-date earnings, except for significant and unusual or extraordinary transactions. Losses from jurisdictions for which no benefit can be recognized are excluded from the overall computations of the estimated annual effective tax rate and a separate estimated annual effective tax rate is computed and applied to earnings in the loss jurisdiction. Income tax provision for any significant and unusual or extraordinary transactions are computed and recorded in the period in which the specific transaction occurs.
27
The effective rates for income taxes were (1.3)% and 21.4% for the three months ended September 30, 2024 and 2023, respectively. The decrease in the Company's effective tax rate was primarily driven by the proportion of earnings subject to tax in the U.S. as compared to foreign jurisdictions in each period and the Fiscal 2025 impact of U.S. losses on foreign earnings subject to tax in the United States.
The effective rates for income taxes were (2.3)% and 22.2% for the six months ended September 30, 2024 and 2023, respectively. The decrease in the Company's effective tax rate was primarily driven by the proportion of earnings subject to tax in the U.S. as compared to foreign jurisdictions in each period and the Fiscal 2025 impact of U.S. losses on foreign earnings subject to tax in the United States.
Valuation Allowance
The Company evaluates on a quarterly basis whether the deferred tax assets are realizable which requires significant judgment. The Company considers all available positive and negative evidence, including historical operating performance and expectations of future operating performance. To the extent the Company believes it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against the Company's deferred tax assets, which increase income tax expense in the period when such a determination is made.
As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of September 30, 2024, for U.S. states and certain foreign taxing jurisdictions, the Company believe the weight of the negative evidence continues to outweigh the positive evidence regarding the realization of these deferred tax assets and have maintained a valuation allowance against these assets. The Company will continue to evaluate its ability to realize its net deferred tax assets on a quarterly basis.
NOTE 19. EARNINGS PER SHARE
The following represents a reconciliation from basic net income (loss) per share to diluted net income (loss) per share: |
Three Months Ended September 30, |
Six Months Ended September 30, |
2024 |
2023 |
2024 |
2023 |
Numerator |
Net income (loss) - Basic |
$ |
170,382 |
$ |
104,711 |
$ |
(135,044) |
$ |
114,721 |
Interest on Convertible Senior Notes due 2024, net of tax (1)(2) | - |
225 |
- |
450 |
Net income (loss) - Diluted |
$ |
170,382 |
$ |
104,936 |
$ |
(135,044) |
$ |
115,171 |
Denominator |
Weighted average common shares outstanding Class A, B and C - Basic |
432,225 |
443,525 |
433,950 |
444,195 |
Dilutive effect of Class A, B, and C securities (1) | 3,460 |
1,948 |
- |
1,670 |
Dilutive effect of Convertible Senior Notes due 2024 (1)(2) | - |
8,242 |
- |
8,242 |
Weighted average common shares and dilutive securities outstanding Class A, B, and C |
435,685 |
453,715 |
433,950 |
454,107 |
|
Class A and Class C securities excluded as anti-dilutive (3) | 12,064 |
13,793 |
15,022 |
18,193 |
|
Basic net income (loss) per share of Class A, B and C common stock |
$ |
0.39 |
$ |
0.24 |
$ |
(0.31) |
$ |
0.26 |
Diluted net income (loss) per share of Class A, B and C common stock |
$ |
0.39 |
$ |
0.23 |
$ |
(0.31) |
$ |
0.25 |
(1)Effects of potentially dilutive securities are presented only in periods in which they are dilutive. No stock options, restricted stock units, or effects from the Convertible Senior Notes due 2024 are included in the computation of diluted earnings per share during periods when the Company is in the net loss position, as their effect would be anti-dilutive.
(2)The Company's Convertible Senior Notes matured on June 1, 2024. Upon maturity, the Company repaid the approximately $80.9 million aggregate principal amount of the Convertible Senior Notes outstanding using cash on hand. Refer to Note 9 of these Condensed Consolidated Financial Statements for additional details.
28
(3)Represents stock options and restricted stock units of Class A and Class C Common Stock outstanding that were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.
NOTE 20. SEGMENT DATA
The Company's operating segments are based on how the Chief Operating Decision Maker ("CODM") makes decisions about allocating resources and assessing performance. As such, the CODM receives discrete financial information for the Company's principal business by geographic region based on the Company's strategy of being a global brand. These geographic regions include North America, EMEA, Asia-Pacific and Latin America. Each geographic segment operates exclusively in one industry: the development, marketing and distribution of branded performance apparel, footwear and accessories. Total expenditures for additions to long-lived assets are not disclosed as this information is not regularly provided to the CODM.
The Company excludes certain corporate items from its segment profitability measures. The Company reports these items within Corporate Other, which is designed to provide increased transparency and comparability of the Company's operating segments' performance. Corporate Other consists primarily of (i) general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain and innovation, and other corporate support functions; (ii) restructuring and restructuring related charges, if any; (iii) certain foreign currency hedge gains and losses; and (iv) operating results from the MapMyFitness digital platform, which was sold during the three months ended September 30, 2024.
The following tables summarize the Company's net revenues and operating income (loss) by its geographic segments. Intercompany balances were eliminated in consolidation and are not reviewed when evaluating segment performance. |
Three Months Ended September 30, |
Six Months Ended September 30, |
2024 |
2023 |
2024 |
2023 |
Net revenues |
North America |
$ |
863,345 |
$ |
991,357 |
$ |
1,572,605 |
$ |
1,817,962 |
EMEA |
283,178 |
287,091 |
510,070 |
513,732 |
Asia-Pacific |
207,661 |
232,065 |
389,497 |
434,297 |
Latin America |
46,941 |
53,669 |
111,350 |
109,408 |
Corporate Other |
(2,102) |
2,492 |
(834) |
8,240 |
Total net revenues |
$ |
1,399,023 |
$ |
1,566,674 |
$ |
2,582,688 |
$ |
2,883,639 |
|
Three Months Ended September 30, |
Six Months Ended September 30, |
2024 |
2023 |
2024 |
2023 |
Operating income (loss) |
North America |
$ |
217,259 |
$ |
211,071 |
$ |
365,148 |
$ |
371,785 |
EMEA |
51,595 |
38,826 |
72,051 |
68,605 |
Asia-Pacific |
34,214 |
54,608 |
44,149 |
70,006 |
Latin America |
12,171 |
13,615 |
27,342 |
19,392 |
Corporate Other (1) | (142,159) |
(178,647) |
(635,338) |
(367,892) |
Total operating income (loss) |
173,080 |
139,473 |
(126,648) |
161,896 |
Interest income (expense), net |
(1,747) |
(373) |
597 |
(1,999) |
Other income (expense), net |
(3,420) |
(6,104) |
(6,150) |
(12,164) |
Income (loss) before income taxes |
$ |
167,913 |
$ |
132,996 |
$ |
(132,201) |
$ |
147,733 |
(1)Results for the three and six months ended September 30, 2024, include $(13) million and $261 million, respectively, of litigation expense, net of insurance proceeds, related to the settlement of the Class Action Securities litigation. Refer to Note 10 of these Condensed Consolidated Financial Statements for additional details.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("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 Condensed Consolidated Financial Statements and the accompanying Notes to our Condensed Consolidated Financial Statements under Part I, Item 1 of this Quarterly Report on Form 10-Q, which include the revisions for the previously disclosed accounting corrections, and in our Annual Report on Form 10-K for Fiscal 2024, filed with the Securities Exchange Commission ("SEC") on May 29, 2024, under the captions "Business" and "Risk Factors".
This Quarterly Report on Form 10-Q, including this MD&A, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the U.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. See "Forward Looking Statements."
All dollar and percentage comparisons made herein refer to three and six months ended September 30, 2024 with the three and six months ended September 30, 2023, unless otherwise noted.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Quarterly Report on Form 10-Q, including this MD&A, constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, expectations regarding promotional activities, freight, product cost pressures and foreign currency impacts, the impact of global economic conditions and inflation on our results of operations, our liquidity and use of capital resources, the development and introduction of new products, the implementation of our marketing and branding strategies, the future benefits and opportunities from significant investments and the impact of litigation or other proceedings. In many cases, you can identify forward-looking statements by terms such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "outlook," "potential" or the negative of these terms or other comparable terminology.
The forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by these forward-looking statements, including, but not limited to, those factors described in "Risk Factors" and MD&A herein and in our Annual Report on Form 10-K for Fiscal 2024. These factors include without limitation:
•changes in general economic or market conditions, including increasing inflation, that could affect overall consumer spending or our industry;
•increased competition causing us to lose market share or reduce the prices of our products or to increase our marketing efforts significantly;
•fluctuations in the costs of raw materials and commodities we use in our products and our supply chain (including labor);
•our ability to successfully execute our long-term strategies;
•our ability to effectively drive operational efficiency in our business;
•changes to the financial health of our customers;
•our ability to effectively develop and launch new, innovative and updated products;
•our ability to accurately forecast consumer shopping and engagement preferences and consumer demand for our products and manage our inventory in response to changing demands;
30
•our ability to successfully execute any potential restructuring plans and realize their expected benefits;
•our ability to comply with existing trade and other regulations, and the potential impact of new trade, tariff and tax regulations on our profitability;
•loss of key customers, suppliers or manufacturers;
•our ability to further expand our business globally and to drive brand awareness and consumer acceptance of our products in other countries;
•our ability to manage the increasingly complex operations of our global business;
•the impact of global events beyond our control, including military conflicts;
•the impact of global or regional public health emergencies on our industry and our business, financial condition and results of operations, including impacts on the global supply chain;
•our ability to successfully manage or realize expected results from significant transactions and investments;
•our ability to effectively market and maintain a positive brand image;
•our ability to attract key talent and retain the services of our senior management and other key employees;
•our ability to effectively meet regulatory requirements and stakeholder expectations with sustainability and social matters;
•the availability, integration and effective operation of information systems and other technology, as well as any potential interruption of such systems or technology;
•any disruptions, delays or deficiencies in the design, implementation or application of our global operating and financial reporting information technology system;
•our ability to access capital and financing required to manage our business on terms acceptable to us;
•our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;
•risks related to foreign currency exchange rate fluctuations;
•risks related to data security or privacy breaches;
•our ability to remediate the material weaknesses discussed elsewhere in this Quarterly Report on Form 10-Q; and
•our potential exposure to and the financial impact of litigation and other proceedings, including those legal proceedings discussed elsewhere in this Quarterly Report on Form 10-Q.
The forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our views and assumptions only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
OVERVIEW
We are a leading developer, marketer, and distributor of branded performance apparel, footwear, and accessories. Our brand's moisture-wicking fabrications are engineered in various 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 and by consumers with active lifestyles.
Strategically and operationally, we remain focused on driving premium brand-right growth and improved profitability. We plan to continue to grow our business over the long term through increased sales of our apparel, footwear and accessories; growth in our direct-to-consumer sales channel; and expansion of our wholesale distribution. We believe that achievement of our long-term growth objectives depends, in part, on our ability to execute strategic initiatives in key areas including our wholesale, footwear, women's and direct-to-consumer businesses. Additionally, our digital strategy is focused on supporting these long-term objectives, emphasizing connection and engagement with our consumers through multiple digital touchpoints.
Quarterly Results
During the three months ended September 30, 2024, we continued to face a challenging retail environment, particularly in North America, that included lower demand in our wholesale channel, in addition to the impacts of
31
proactive strategies to reduce discounting and promotional activity in our direct-to-consumer channel, particularly in e-commerce. We also faced a challenging retail environment in our Asia-Pacific region.
Financial highlights for three months ended September 30, 2024 as compared to three months ended September 30, 2023 include:
•Total net revenues decreased 10.7%.
•Within our channels, wholesale revenue decreased 12.1% and direct-to-consumer revenue decreased 7.6%.
•Within our product categories, apparel revenue decreased 11.5%, footwear revenue decreased 10.9%, and accessories revenue increased 2.1%.
•Net revenue decreased 12.9% in North America, decreased 1.4% in EMEA, decreased 10.5% in Asia-Pacific and decreased 12.5% in Latin America.
•Gross margin increased 200 basis points to 49.8%.
•Selling, general and administrative expenses decreased 14.6%.
2025 Restructuring Plan
On May 15, 2024, our Board of Directors approved a restructuring plan (the "2025 restructuring plan") designed to strengthen and support our financial and operational efficiencies. On September 5, 2024, our Board of Directors approved a $70 million increase to the 2025 restructuring plan, resulting in an updated restructuring plan of approximately $140 million to $160 million of pre-tax restructuring and related charges to be incurred during Fiscal 2025 and the fiscal year ending March 31, 2026 ("Fiscal 2026"), including:
•Up to $75 million in cash-related charges, consisting of approximately $30 million in employee severance and benefits costs and $45 million related to various transformational initiatives; and
•Up to $85 million in non-cash charges, including approximately $7 million in employee severance and benefits costs and $78 million in facility, software, and other asset-related charges and impairments.
Restructuring and related charges are included in our Corporate Other segment. The costs recorded during the three and six months ended September 30, 2024 were primarily North America related. The summary of these costs, as well as our current estimate of the remaining amounts expected to be incurred in connection with the 2025 restructuring plan is as follows:
|
Estimated Restructuring and Related Charges (1) |
Three Months Ended
September 30, 2024 |
Six Months Ended
September 30, 2024 |
Remaining to be incurred |
Total to be incurred under plan |
Costs recorded in restructuring charges: |
Employee-related costs |
$ |
1,393 |
$ |
11,738 |
Facility-related costs |
4,457 |
12,495 |
Other restructuring costs (2) | (2,638) |
4,065 |
Total costs recorded in restructuring charges |
$ |
3,212 |
$ |
28,298 |
$ |
87,702 |
$ |
116,000 |
Costs recorded in selling, general and administrative expenses: |
Employee related costs |
938 |
9,460 |
Other transformation initiatives |
1,786 |
1,921 |
Total costs recorded in selling, general and administrative expenses |
$ |
2,724 |
$ |
11,381 |
$ |
32,619 |
$ |
44,000 |
Total restructuring and related charges |
$ |
5,936 |
$ |
39,679 |
$ |
120,321 |
$ |
160,000 |
(1) Estimated restructuring and related charges reflect the high-end of the range of the total estimated charges expected to be incurred in connection with the 2025 restructuring plan.
(2) Includes a net gain of $5.3 million recognized during the three months ended September 30, 2024 resulting from the sale of the MapMyFitness platform.
Restructuring charges and recoveries require us to make certain judgments and estimates regarding the amount and timing as to when these charges or recoveries occur. The estimated liability could change subsequent
32
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 revises its assumptions and estimates as appropriate, as new or updated information becomes available.
Effects of Inflation and Other Global Events
Macroeconomic factors, such as inflationary pressures and fluctuations in foreign currency exchange rates, have and may continue to impact our business. We continue to monitor these factors and the potential impacts they may have on our financial results, including product input costs, freight costs and consumer discretionary spending and therefore consumer demand for our products. We also continue to monitor the broader impacts of conflicts around the world on the economy, including its effect on inflationary pressures and the price of oil globally.
See "Risk Factors-Economic and Industry Risks-Our business depends on consumer purchases of discretionary items, which can be negatively impacted during an economic downturn or periods of inflation. This could materially impact our sales, profitability, results of operations and financial condition"; "-Fluctuations in the cost of raw materials and commodities we use in our products and costs related to our supply chain could negatively affect our operating results"; "-Our financial results and ability to grow our business may be negatively impacted by global events beyond our control"; and "-Financial Risks-Our financial results could be adversely impacted by currency exchange rate fluctuations" included in Item 1A of our Annual Report on Form 10-K for Fiscal 2024.
RESULTS OF OPERATIONS
During Fiscal 2024, we identified and corrected certain accounting errors, primarily related to cost of goods sold and selling, general and administrative expenses on the Consolidated Statement of Operations, as well as corresponding impacts to our other Consolidated Financial Statements. The impacts of these revisions were not material to our previously filed financial statements. Information presented in the tables below for the three and six months ended September 30, 2023 have been revised to reflect these corrections. See Note 1 of these Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
The following tables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues:
|
(In thousands) |
Three Months Ended September 30, |
Six Months Ended September 30, |
2024 |
2023 |
2024 |
2023 |
Net revenues |
$ |
1,399,023 |
$ |
1,566,674 |
$ |
2,582,688 |
$ |
2,883,639 |
Cost of goods sold |
702,891 |
818,151 |
1,323,881 |
1,523,621 |
Gross profit |
696,132 |
748,523 |
1,258,807 |
1,360,018 |
Selling, general and administrative expenses |
519,840 |
609,050 |
1,357,157 |
1,198,122 |
Restructuring charges |
3,212 |
- |
28,298 |
- |
Income (loss) from operations |
173,080 |
139,473 |
(126,648) |
161,896 |
Interest income (expense), net |
(1,747) |
(373) |
597 |
(1,999) |
Other income (expense), net |
(3,420) |
(6,104) |
(6,150) |
(12,164) |
Income (loss) before income taxes |
167,913 |
132,996 |
(132,201) |
147,733 |
Income tax expense (benefit) |
(2,136) |
28,436 |
3,013 |
32,764 |
Income (loss) from equity method investments |
333 |
151 |
170 |
(248) |
Net income (loss) |
$ |
170,382 |
$ |
104,711 |
$ |
(135,044) |
$ |
114,721 |
33
|
Three Months Ended September 30, |
Six Months Ended September 30, |
(As a percentage of net revenues) |
2024 |
2023 |
2024 |
2023 |
Net revenues |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
Cost of goods sold |
50.2 |
% |
52.2 |
% |
51.3 |
% |
52.8 |
% |
Gross profit |
49.8 |
% |
47.8 |
% |
48.7 |
% |
47.2 |
% |
Selling, general and administrative expenses |
37.2 |
% |
38.9 |
% |
52.5 |
% |
41.5 |
% |
Restructuring charges |
0.2 |
% |
- |
% |
1.1 |
% |
- |
% |
Income (loss) from operations |
12.4 |
% |
8.9 |
% |
(4.9) |
% |
5.6 |
% |
Interest income (expense), net |
(0.1) |
% |
- |
% |
- |
% |
(0.1) |
% |
Other income (expense), net |
(0.2) |
% |
(0.4) |
% |
(0.2) |
% |
(0.4) |
% |
Income (loss) before income taxes |
12.0 |
% |
8.5 |
% |
(5.1) |
% |
5.1 |
% |
Income tax expense (benefit) |
(0.2) |
% |
1.8 |
% |
0.1 |
% |
1.1 |
% |
Income (loss) from equity method investments |
- |
% |
- |
% |
- |
% |
- |
% |
Net income (loss) |
12.2 |
% |
6.7 |
% |
(5.2) |
% |
4.0 |
% |
Revenues
Net revenues consist of net sales and license revenues. Net sales consist of sales from apparel, footwear and accessories products. Our license revenues primarily consist of fees paid to us by licensees in exchange for the use of our trademarks on their products. The following tables summarize net revenues by product category and distribution channel for the periods indicated:
|
Three Months Ended September 30, |
Six Months Ended September 30, |
(In thousands) |
2024 |
2023 |
Change ($) |
Change (%) |
2024 |
2023 |
Change ($) |
Change (%) |
Net Revenues by Product Category |
Apparel |
$ |
947,188 |
$ |
1,070,401 |
$ |
(123,213) |
(11.5) |
% |
$ |
1,704,980 |
$ |
1,895,014 |
$ |
(190,034) |
(10.0) |
% |
Footwear |
312,760 |
351,202 |
(38,442) |
(10.9) |
% |
623,149 |
714,872 |
(91,723) |
(12.8) |
% |
Accessories |
116,381 |
113,933 |
2,448 |
2.1 |
% |
208,926 |
211,795 |
(2,869) |
(1.4) |
% |
Net Sales |
1,376,329 |
1,535,536 |
(159,207) |
(10.4) |
% |
2,537,055 |
2,821,681 |
(284,626) |
(10.1) |
% |
License revenues |
24,796 |
28,646 |
(3,850) |
(13.4) |
% |
46,467 |
53,718 |
(7,251) |
(13.5) |
% |
Corporate Other(1) | (2,102) |
2,492 |
(4,594) |
(184.3) |
% |
(834) |
8,240 |
(9,074) |
(110.1) |
% |
Total net revenues |
$ |
1,399,023 |
$ |
1,566,674 |
$ |
(167,651) |
(10.7) |
% |
$ |
2,582,688 |
$ |
2,883,639 |
$ |
(300,951) |
(10.4) |
% |
|
Net Revenues by Distribution Channel |
Wholesale |
$ |
825,993 |
$ |
939,725 |
$ |
(113,732) |
(12.1) |
% |
$ |
1,506,506 |
$ |
1,681,683 |
$ |
(175,177) |
(10.4) |
% |
Direct-to-consumer |
550,336 |
595,811 |
(45,475) |
(7.6) |
% |
1,030,549 |
1,139,998 |
(109,449) |
(9.6) |
% |
Net Sales |
1,376,329 |
1,535,536 |
(159,207) |
(10.4) |
% |
2,537,055 |
2,821,681 |
(284,626) |
(10.1) |
% |
License revenues |
24,796 |
28,646 |
(3,850) |
(13.4) |
% |
46,467 |
53,718 |
(7,251) |
(13.5) |
% |
Corporate Other(1) | (2,102) |
2,492 |
(4,594) |
(184.3) |
% |
(834) |
8,240 |
(9,074) |
(110.1) |
% |
Total net revenues |
$ |
1,399,023 |
$ |
1,566,674 |
$ |
(167,651) |
(10.7) |
% |
$ |
2,582,688 |
$ |
2,883,639 |
$ |
(300,951) |
(10.4) |
% |
(1)Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program.
Net Sales
Net sales decreased by $159.2 million, or 10.4%, to $1,376.3 million during the three months ended September 30, 2024, from $1,535.5 million during the three months ended September 30, 2023. Apparel decreased primarily due to lower unit sales. Footwear decreased primarily due to lower unit sales and lower average selling prices. Accessories increased primarily due to higher unit sales, partially offset by unfavorable channel mix and lower average selling prices. From a channel perspective, the decrease in net sales was due to a decrease in both wholesale and direct-to-consumer.
34
Net sales decreased by $284.6 million, or 10.1%, to $2,537.1 million during the six months ended September 30, 2024, from $2,821.7 million during the six months ended September 30, 2023. Apparel decreased primarily due to lower unit sales, partially offset by higher average selling prices. Footwear decreased primarily due to lower unit sales. Accessories decreased primarily due to unfavorable channel mix. From a channel perspective, the decrease in net sales was due to a decrease in both wholesale and direct-to-consumer.
License Revenues
License revenues decreased by $3.9 million or 13.4%, to $24.8 million during the three months ended September 30, 2024, from $28.6 million during the three months ended September 30, 2023. This was primarily due to lower revenues from our licensing partners in North America.
License revenues decreased by $7.3 million or 13.5%, to $46.5 million during the six months ended September 30, 2024, from $53.7 million during the six months ended September 30, 2023. This was primarily due to lower revenues from our licensing partners in North America and our Japanese licensee.
Gross Profit
Cost of goods sold consists primarily of product costs, inbound freight and duty costs, outbound freight costs, handling costs to make products floor-ready to customer specifications, royalty payments to endorsers based on a predetermined percentage of sales of selected products and write downs for inventory obsolescence. In general, as a percentage of net revenues, we expect cost of goods sold associated with our apparel and accessories to be lower than that of our footwear. No cost of goods sold is associated with our license revenues.
We include outbound freight costs associated with shipping goods to customers as cost of goods sold; however, we include the majority of outbound handling costs as a component of selling, general and administrative expenses. As a result, our gross profit may not be comparable to that of other companies that include outbound handling costs in their cost of goods sold. Outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate our distribution facilities. These costs were $20.8 million and $38.3 million for the three and six months ended September 30, 2024, respectively (three and six months ended September 30, 2023: $20.7 million and $39.1 million, respectively).
Gross profit decreased by $52.4 million to $696.1 million during the three months ended September 30, 2024, as compared to $748.5 million during the three months ended September 30, 2023. Gross profit as a percentage of net revenues, or gross margin, increased to 49.8% from 47.8%. This increase in gross margin of 200 basis points was primarily driven by favorable impacts of approximately 120 basis points from supply chain benefits, due mainly to lower product costs, 50 basis points from favorable channel mix, and 40 basis of pricing benefits from lower levels of discounting and promotions within our direct-to-consumer channel and lower markdowns in our wholesale channel. These favorable impacts were partially offset by 10 basis points from unfavorable changes in foreign currency and regional mix.
Gross profit decreased by $101.2 million to $1,258.8 million during the six months ended September 30, 2024, as compared to $1,360.0 million during the six months ended September 30, 2023. Gross profit as a percentage of net revenues, or gross margin, increased to 48.7% from 47.2%. This increase in gross margin of 150 basis points was primarily driven by favorable impacts of 130 basis points from supply chain benefits related to lower product and freight costs and lower inventory reserves, approximately 40 basis points of pricing benefits from lower levels of discounting and promotions within our direct-to-consumer channel, partially offset by unfavorable impacts of approximately 50 basis points from changes in foreign currency.
We expect the trends listed above to continue through the remainder of Fiscal 2025, but to a lesser extent.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of costs related to marketing, selling, product innovation and supply chain, and corporate services. We consolidate our selling, general and administrative expenses into two primary categories: marketing and other. The other category is the sum of our selling, product innovation and supply chain, and corporate services categories. The marketing category consists primarily of sports and brand marketing, media, and retail presentation. Sports and brand marketing includes professional, club and collegiate sponsorship agreements, individual athlete and influencer agreements, and providing and selling products directly to teams and individual athletes. Media includes digital, broadcast, and print media outlets, including social and mobile media. Retail presentation includes sales displays and concept shops and depreciation expense specific to our in-store fixture programs. Our marketing costs are an important driver of our growth.
35
|
Three Months Ended September 30, |
Six Months Ended September 30, |
(In thousands) |
2024 |
2023 |
Change ($) |
Change (%) |
2024 |
2023 |
Change ($) |
Change (%) |
Selling, General and Administrative Expenses |
$ |
519,840 |
$ |
609,050 |
$ |
(89,210) |
(14.6) |
% |
$ |
1,357,157 |
$ |
1,198,122 |
$ |
159,035 |
13.3 |
% |
Selling, general and administrative expenses decreased by $89.2 million, or 14.6%, during three months ended September 30, 2024 as compared to three months ended September 30, 2023. Within selling, general and administrative expense:
•Marketing costs decreased $29.2 million or 18.8%, due to a reduction in marketing activities during the period. As a percentage of net revenues, marketing costs decreased to 9.0% from 9.9%.
•Other costs decreased $60.1 million or 13.2%, primarily due to higher recovery of insurance proceeds and lower salaries expense. The insurance proceeds received include $27.0 million of recoveries related to legal expenses from prior fiscal years and $13.0 million of recoveries related to the settlement of the Consolidated Securities Action as discussed in Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. As a percentage of net revenues, other costs decreased to 28.2% from 29.0%.
As a percentage of net revenues, selling, general and administrative expenses decreased to 37.2% during the three months ended September 30, 2024 as compared to 38.9% during the three months ended September 30, 2023.
Selling, general and administrative expenses increased by $159.0 million, or 13.3%, during six months ended September 30, 2024 as compared to six months ended September 30, 2023. Within selling, general and administrative expense:
•Marketing costs decreased $47.8 million or 16.2%, due to a reduction in marketing activities during the period. As a percentage of net revenues, marketing costs decreased to 9.6% from 10.2%.
•Other costs increased $206.9 million or 22.9%, primarily driven by higher litigation expense, which includes a recovery of insurance proceeds. The insurance proceeds received include $73.0 million of recoveries related to the settlement of the Consolidated Securities Action as discussed in Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and $27.0 million of recoveries related to legal expenses from prior fiscal years. Additionally, other costs increased due to transformational charges recorded in connection with the 2025 restructuring plan. See Note 13 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details. As a percentage of net revenues, other costs increased to 43.0% from 31.3%. These increases were partially offset by lower salaries expenses and lower selling and distribution expenses.
As a percentage of net revenues, selling, general and administrative expenses increased to 52.5% during the six months ended September 30, 2024 as compared to 41.5% during the six months ended September 30, 2023.
Restructuring Charges
On May 15, 2024, our Board of Directors approved a restructuring plan designed to strengthen and support our financial and operational efficiencies. Restructuring charges within our operating expenses primarily consist of employee severance and benefit costs, various transformational initiatives and facility, software and other asset-related charges and impairments.
|
Three Months Ended September 30, |
Six Months Ended September 30, |
(In thousands) |
2024 |
2023 |
Change ($) |
Change (%) |
2024 |
2023 |
Change ($) |
Change (%) |
Restructuring charges |
$ |
3,212 |
$ |
- |
$ |
3,212 |
100.0 |
% |
$ |
28,298 |
$ |
- |
$ |
28,298 |
100.0 |
% |
Restructuring charges increased by $3.2 million during the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to $1.4 million of employee-related charges and $4.5 million of facility-related charges, partially offset by $2.6 million of other restructuring-related recoveries.
36
Restructuring charges increased by $28.3 million during the six months ended September 30, 2024 compared to the six months ended September 30, 2023 primarily due to $11.7 million of employee-related charges, $12.5 million of facility-related charges, and $4.1 million of other restructuring charges.
See Note 13 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details.
Interest Income (Expense), net
Interest income (expense), net is primarily comprised of interest income earned on our cash and cash equivalents, offset by interest incurred on our debt facilities. See Note 9 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details.
|
Three Months Ended September 30, |
Six Months Ended September 30, |
(In thousands) |
2024 |
2023 |
Change ($) |
Change (%) |
2024 |
2023 |
Change ($) |
Change (%) |
Interest income (expense), net |
$ |
(1,747) |
$ |
(373) |
$ |
(1,374) |
(368.4) |
% |
$ |
597 |
$ |
(1,999) |
$ |
2,596 |
129.9 |
% |
Interest expense, net increased by $1.4 million to $1.7 million during the three months ended September 30, 2024, primarily due to a decrease in interest income.
Interest income, net increased by $2.6 million to $0.6 million during the six months ended September 30, 2024, primarily due to an increase in interest income.
Other Income (Expense), net
Other income (expense), net generally consists of unrealized and realized gains and losses on our foreign currency derivative financial instruments, and unrealized and realized gains and losses on adjustments that arise from fluctuations in foreign currency exchange rates relating to transactions generated by our international subsidiaries. Other income (expense), net also includes earn-out income recorded in connection with the sale of the MyFitnessPal platform and rent expense relating to lease assets held solely for sublet purposes, primarily the lease related to our New York City, 5th Avenue location.
|
Three Months Ended September 30, |
Six Months Ended September 30, |
(In thousands) |
2024 |
2023 |
Change ($) |
Change (%) |
2024 |
2023 |
Change ($) |
Change (%) |
Other income (expense), net |
$ |
(3,420) |
$ |
(6,104) |
$ |
2,684 |
44.0 |
% |
$ |
(6,150) |
$ |
(12,164) |
$ |
6,014 |
49.4 |
% |
Other expense, net decreased by $2.7 million to $3.4 million during the three months ended September 30, 2024, primarily due to a net gain from on foreign currency hedges.
Other expense, net decreased by $6.0 million to $6.2 million during the six months ended September 30, 2024, primarily due to a net gain from on foreign currency hedges.
Income Tax Expense (Benefit)
|
Three Months Ended September 30, |
Six Months Ended September 30, |
(In thousands) |
2024 |
2023 |
Change ($) |
Change (%) |
2024 |
2023 |
Change ($) |
Change (%) |
Income tax expense (benefit) |
$ |
(2,136) |
$ |
28,436 |
$ |
(30,572) |
(107.5) |
% |
$ |
3,013 |
$ |
32,764 |
$ |
(29,751) |
(90.8) |
% |
Income tax expense decreased $30.6 million to a benefit of $2.1 million during the three months ended September 30, 2024 from income tax expense of $28.4 million during the three months ended September 30, 2023. For the three months ended September 30, 2024, our effective tax rate was (1.3)% compared to 21.4% for the three months ended September 30, 2023. The decrease in our effective tax rate was primarily driven by the proportion of earnings subject to tax in the U.S. as compared to foreign jurisdictions in each period and the Fiscal 2025 impact of U.S. losses on foreign earnings subject to tax in the United States.
Income tax expense decreased $29.8 million to $3.0 million during the six months ended September 30, 2024 from income tax expense of $32.8 million during the six months ended September 30, 2023. For the six months ended September 30, 2024, our effective tax rate was (2.3)% compared to 22.2% for the six months ended September 30, 2023. The decrease in our effective tax rate was primarily driven by the proportion of earnings subject to tax in the U.S. as compared to foreign jurisdictions in each period and the Fiscal 2025 impact of U.S. losses on foreign earnings subject to tax in the United States.
37
SEGMENT RESULTS OF OPERATIONS
Our operating segments are based on how our Chief Operating Decision Maker ("CODM") makes decisions about allocating resources and assessing performance. Our segments are defined by geographic regions, including North America, EMEA, Asia-Pacific and Latin America.
We exclude certain corporate items from our segment profitability measures. We report these items within Corporate Other, which is designed to provide increased transparency and comparability of our operating segments' performance. Corporate Other consists primarily of (i) general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain and innovation, and other corporate support functions; (ii) restructuring and restructuring related charges, if any; (iii) certain foreign currency hedge gains and losses; and (iv) operating results from the MapMyFitness digital platform, which was sold during the three months ended September 30, 2024.
The net revenues and operating income (loss) associated with our segments are summarized in the following tables.
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023
Net Revenues
|
Three Months Ended September 30, |
(In thousands) |
2024 |
2023 |
Change ($) |
Change (%) |
North America |
$ |
863,345 |
$ |
991,357 |
$ |
(128,012) |
(12.9) |
% |
EMEA |
283,178 |
287,091 |
(3,913) |
(1.4) |
% |
Asia-Pacific |
207,661 |
232,065 |
(24,404) |
(10.5) |
% |
Latin America |
46,941 |
53,669 |
(6,728) |
(12.5) |
% |
Corporate Other (1) | (2,102) |
2,492 |
(4,594) |
(184.3) |
% |
Total net revenues |
$ |
1,399,023 |
$ |
1,566,674 |
$ |
(167,651) |
(10.7) |
% |
(1) Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program.
The decrease in total net revenues for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, was driven by the following:
•Net revenues in our North America region decreased by $128.0 million, or 12.9%, to $863.3 million from $991.4 million. This was driven by a decrease in both our wholesale channel and our direct-to-consumer channel as well as a decrease in licensing revenues. Within our direct-to-consumer channel, net revenues decreased in both e-commerce and owned and operated retail stores.
•Net revenues in our EMEA region decreased by $3.9 million, or 1.4%, to $283.2 million from $287.1 million. This was driven by a decrease in our wholesale channel partially offset by an increase in our direct-to-consumer channel. Within our direct-to-consumer channel, net revenues increased in both e-commerce and owned and operated retail stores.
•Net revenues in our Asia-Pacific region decreased by $24.4 million, or 10.5%, to $207.7 million from $232.1 million. This was driven by a decrease in both our direct-to-consumer channel and our wholesale channel. Within our direct-to-consumer channel, net revenues decreased in both e-commerce and owned and operated retail stores.
•Net revenues in our Latin America region decreased by $6.7 million, or 12.5%, to $46.9 million from $53.7 million. This was driven by a decrease in our wholesale channel partially offset by an increase in our direct-to-consumer channel. Within our direct-to-consumer channel, net revenues increased in both e-commerce and owned and operated retail stores. Net revenues in our Latin America region were also negatively impacted by changes in foreign exchange rates.
•Net revenues in our Corporate Other non-operating segment decreased by $4.6 million to $(2.1) million from $2.5 million. This was primarily driven by foreign currency hedge losses related to revenues generated by entities within our operating segments.
38
Operating Income (Loss)
|
Three Months Ended September 30, |
(In thousands) |
2024 |
2023 |
Change ($) |
Change (%) |
North America |
$ |
217,259 |
$ |
211,071 |
$ |
6,188 |
2.9 |
% |
EMEA |
51,595 |
38,826 |
12,769 |
32.9 |
% |
Asia-Pacific |
34,214 |
54,608 |
(20,394) |
(37.3) |
% |
Latin America |
12,171 |
13,615 |
(1,444) |
(10.6) |
% |
Corporate Other (1) | (142,159) |
(178,647) |
36,488 |
20.4 |
% |
Total operating income (loss) |
$ |
173,080 |
$ |
139,473 |
$ |
33,607 |
24.1 |
% |
(1) Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program. Corporate Other also includes expenses related to our central supporting functions.
The increase in total operating income for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, was primarily driven by the following:
•Operating income in our North America region increased by $6.2 million to $217.3 million from $211.1 million. This was primarily due to lower marketing-related and selling and distribution expenses, partially offset by a decrease in gross profit. The decrease in gross profit was primarily driven by lower net revenues as discussed above, partially offset by lower product input costs.
•Operating income in our EMEA region increased by $12.8 million to $51.6 million from $38.8 million. This was primarily due to lower marketing-related expenses and an increase in gross profit. The increase in gross profit was primarily driven by lower product input costs.
•Operating income in our Asia-Pacific region decreased by $20.4 million to $34.2 million from $54.6 million. This was primarily due to a decrease in gross profit and higher marketing-related and selling and distribution expenses. The decrease in gross profit was primarily driven by lower net revenues as discussed above, partially offset by inventory returns.
•Operating income in our Latin America region decreased by $1.4 million to $12.2 million from $13.6 million. This was primarily due to a decrease in gross profit, partially offset by lower marketing-related and selling and distribution expenses. The decrease in gross profit was primarily driven by lower net revenues as discussed above.
•Operating loss in our Corporate Other non-operating segment decreased by $36.5 million to $142.2 million from $178.6 million. This was primarily due to higher recovery of insurance proceeds, which included $27.0 million of recoveries related to legal expenses from prior fiscal years and $13.0 million of recoveries related to the settlement of the Consolidated Securities Action as discussed in Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. This was partially offset by an increase in restructuring charges as a result of charges incurred under the 2025 restructuring plan as discussed above.
Six Months Ended September 30, 2024 Compared to Six Months Ended September 30, 2023
Net Revenues
|
Six Months Ended September 30, |
(In thousands) |
2024 |
2023 |
Change ($) |
Change (%) |
North America |
$ |
1,572,605 |
$ |
1,817,962 |
$ |
(245,357) |
(13.5) |
% |
EMEA |
510,070 |
513,732 |
(3,662) |
(0.7) |
% |
Asia-Pacific |
389,497 |
434,297 |
(44,800) |
(10.3) |
% |
Latin America |
111,350 |
109,408 |
1,942 |
1.8 |
% |
Corporate Other (1) | (834) |
8,240 |
(9,074) |
(110.1) |
% |
Total net revenues |
$ |
2,582,688 |
$ |
2,883,639 |
$ |
(300,951) |
(10.4) |
% |
(1) Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program.
39
The decrease in total net revenues for the six months ended September 30, 2024, compared to the six months ended September 30, 2023, was driven by the following:
•Net revenues in our North America region decreased by $245.4 million, or 13.5%, to $1,572.6 million from $1,818.0 million. This was driven by a decrease in both our wholesale channel and our direct-to-consumer channel as well as a decrease in licensing revenues. Within our direct-to-consumer channel, net revenues decreased in both e-commerce and owned and operated retail stores.
•Net revenues in our EMEA region decreased by $3.7 million, or 0.7%, to $510.1 million from $513.7 million. This was driven by a decrease in our wholesale channel, partially offset by an increase in our direct-to-consumer channel. Within our direct-to-consumer channel, net revenues increased in both e-commerce and owned and operated retail stores.
•Net revenues in our Asia-Pacific region decreased by $44.8 million, or 10.3%, to $389.5 million from $434.3 million. This was driven by a decrease in both our direct-to-consumer channel and our wholesale channel. Within our direct-to-consumer channel, net revenues decreased in both e-commerce and owned and operated retail stores. Net revenues in our Asia-Pacific region were also negatively impacted by changes in foreign exchange rates.
•Net revenues in our Latin America region increased by $1.9 million, or 1.8%, to $111.4 million from $109.4 million. This was driven by an increase in our direct-to-consumer channel, partially offset by a decrease in our wholesale channel. Within our direct-to-consumer channel, net revenues increased in both e-commerce and owned and operated retail stores. Net revenues in our Latin America region were also negatively impacted by changes in foreign exchange rates.
•Net revenues in our Corporate Other non-operating segment decreased by $9.1 million to $(0.8) million from $8.2 million. This was primarily driven by foreign currency hedge losses related to revenues generated by entities within our operating segments.
Operating Income (Loss)
|
Six Months Ended September 30, |
(In thousands) |
2024 |
2023 |
Change ($) |
Change (%) |
North America |
$ |
365,148 |
$ |
371,785 |
$ |
(6,637) |
(1.8) |
% |
EMEA |
72,051 |
68,605 |
3,446 |
5.0 |
% |
Asia-Pacific |
44,149 |
70,006 |
(25,857) |
(36.9) |
% |
Latin America |
27,342 |
19,392 |
7,950 |
41.0 |
% |
Corporate Other (1) | (635,338) |
(367,892) |
(267,446) |
(72.7) |
% |
Total operating income (loss) |
$ |
(126,648) |
$ |
161,896 |
$ |
(288,544) |
(178.2) |
% |
(1) Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program. Corporate Other also includes expenses related to our central supporting functions.
The decrease in total operating income for the six months ended September 30, 2024, compared to the six months ended September 30, 2023, was primarily driven by the following:
•Operating income in our North America region decreased by $6.6 million to $365.1 million from $371.8 million. This was primarily due to a decrease in gross profit, partially offset by lower marketing-related, selling and distribution expenses. The decline in gross profit was primarily driven by lower net revenues as discussed above, partially offset by lower product input costs.
•Operating income in our EMEA region increased by $3.4 million to $72.1 million from $68.6 million. This was primarily due to an increase in gross profit, partially offset by higher non-salaried wage, marketing-related and facility-related expenses. The increase in gross profit was primarily driven by lower product input costs.
•Operating income in our Asia-Pacific region decreased by $25.9 million to $44.1 million from $70.0 million. This was primarily due to a decrease in gross profit, partially offset by lower bad debt expenses. The decline in gross profit was primarily driven by lower net revenues as discussed above.
•Operating income in our Latin America region increased by $8.0 million to $27.3 million from $19.4 million. This was primarily due to an increase in gross profit and lower marketing-related expenses. The increase in gross profit was primarily driven by higher net revenues as discussed above and lower product input costs.
40
•Operating loss in our Corporate Other non-operating segment increased by $267.4 million to $635.3 million from $367.9 million. This was primarily due to higher litigation expense, which includes a recovery of insurance proceeds. The insurance proceeds received include $73.0 million of recoveries related to the settlement of the Consolidated Securities Action as discussed in Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and $27.0 million of recoveries related to legal expenses from prior fiscal years. In addition, restructuring charges increased as a result of charges incurred under the 2025 restructuring plan as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
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, including construction of our new global headquarters, 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, we strive to enhance our inventory performance by focusing on adding discipline around product purchasing, reducing production lead time and improving planning and execution for selling excess inventory through our Factory House stores and other liquidation channels.
As of September 30, 2024, we had approximately $530.7 million of cash and cash equivalents. In August 2024, we utilized a combination of our cash on hand and insurance proceeds to fund the settlement of the Class Action litigation into an escrow account in accordance with the terms of the preliminary settlement agreement. See Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details. 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. In addition, from time to time, based on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors and subject to compliance with applicable laws and regulations, we may seek to utilize cash on hand, borrowings or raise capital to retire, repurchase or redeem our debt securities, repay debt, repurchase shares of our common stock or otherwise enter into similar transactions to support our capital structure and business or utilize excess cash flow on a strategic basis. For example, as further described below, in May 2024, our Board of Directors authorized a new share repurchase program pursuant to which we are authorized to repurchase a total of $500 million of our Class C Common Stock through May 2027.
If there are unexpected material impacts to our business in future periods from global or regional public health emergencies or other global macroeconomic factors, we may consider additional alternatives, including further reducing our expenditures, changing our investment strategies, reducing compensation costs, including through temporary reductions in pay and layoffs, limiting certain marketing and capital expenditures, and negotiating, extending or delaying payment terms with our customers and vendors. 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, inflationary pressure, or a slow recovery could adversely affect our business and liquidity and could require us to take certain of the liquidity preserving actions described above.
Our Annual Report on Form 10-K for Fiscal 2024 noted that we will continue to permanently reinvest our non-U.S. subsidiaries' cumulative undistributed earnings of $1.5 billion, as well as future earnings from our foreign subsidiaries, to fund international growth and operations. During the first quarter of Fiscal 2025, we evaluated the undistributed earnings of our foreign subsidiaries and determined to repatriate a portion of these earnings. In connection with this evaluation, we recognized approximately $500 million of prior and current year earnings that are no longer considered to be indefinitely reinvested. We expect to incur approximately $0.4 million of income tax
41
expense, net of valuation allowances, related to the repatriation of these earnings. The remainder of our prior and current year undistributed foreign earnings will continue to be indefinitely reinvested to fund international growth and operations. As the majority of such earnings have been previously subject to U.S. federal tax, additional taxes due including currency gains or losses, capital gains, foreign withholding taxes, and U.S. federal and state taxes are not expected to be material.
Refer to our "Risk Factors" section included in Part I, Item 1A of our Annual Report on Form 10-K for Fiscal 2024.
Share Repurchase Program
On May 15, 2024, our Board of Directors authorized us to repurchase up to $500 million (exclusive of fees and commissions) of outstanding shares of our Class C Common Stock through May 31, 2027. The Class C Common Stock may be repurchased from time to time at prevailing prices in the open market, through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, via private purchases through forward, derivative, accelerated share repurchase transactions or otherwise, subject to applicable regulatory restrictions on volume, pricing and timing. The timing and amount of any repurchases will depend on market conditions, our financial condition, results of operations, liquidity and other factors.
During the six months ended September 30, 2024, pursuant to the previously disclosed accelerated share repurchase transaction entered into in May 2024, we repurchased 5.9 million shares of Class C Common Stock, which were immediately retired. No shares were repurchased during the three months ended September 30, 2024.
During the three and six months ended September 30, 2023, we repurchased and immediately retired 7.6 million Class C Common Stock, under our previously approved $500 million share repurchase program which was completed in December 2023. No shares were repurchased during the three months ended June 30, 2023.
Cash Flows
The following table presents the major components of our cash flows provided by and used in operating, investing and financing activities for the periods presented: |
Six Months Ended September 30, |
(In thousands) |
2024 |
2023 |
Change ($) |
Net cash provided by (used in): |
Operating activities |
$ |
(168,409) |
$ |
55,483 |
$ |
(223,892) |
Investing activities |
(43,291) |
(30,384) |
(12,907) |
Financing activities |
(129,392) |
(50,537) |
(78,855) |
Effect of exchange rate changes on cash and cash equivalents |
14,023 |
(28,671) |
42,694 |
Net increase (decrease) in cash and cash equivalents |
$ |
(327,069) |
$ |
(54,109) |
$ |
(272,960) |
Operating Activities
Cash flows from operating activities decreased by $223.9 million, as compared to six months ended September 30, 2024, primarily driven by an increase from changes in working capital of $68.3 million, offset by a decrease in net income before the impact of non-cash items of $292.2 million.
The changes in working capital were due to the following inflows:
•$194.1 million from changes in accounts payable;
•$82.8 million from changes in accounts receivable;
•$37.4 million from changes in prepaid expenses and other current assets; and
•$16.9 million from changes in customer refund liabilities.
These inflows were partially offset by the following working capital outflows:
•$174.1 million from changes in inventories;
•$38.2 million from changes in other non-current assets;
•$35.9 million from changes in accrued expenses and other liabilities; and
•$14.6 million from changes in income taxes payable and receivable, net.
42
Investing Activities
Cash flows used in investing activities increased by $12.9 million, as compared to the six months ended September 30, 2023. This was primarily due to an increase in capital expenditures and the acquisition of UNLESS COLLECTIVE, Inc. These outflows were partially offset a higher earn-out collected in connection with the sale of the MyFitnessPal platform and the proceeds from the sale of the MapMyFitness platform.
Total capital expenditures during the six months ended September 30, 2024 were $91.5 million, or approximately 4% of net revenues, representing a $16.1 million increase from $75.4 million during the six months ended September 30, 2023. Our long-term operating principle for capital expenditures is to spend between 3% and 5% of annual net revenues as we invest in our global direct-to-consumer, e-commerce and digital businesses, information technology systems, distribution centers and our global offices, including our new global headquarters in the Baltimore Peninsula, an area of Baltimore, Maryland. During the six months ended September 30, 2024, we incurred capital expenditures of $64.9 million relating to the construction of our new global headquarters. As previously disclosed, our plans for our new headquarters have been designed in line with our long-term sustainability strategy which includes a commitment to reduce greenhouse gas emissions and increase sourcing of renewable electricity in our owned and operated facilities. A portion of our capital expenditures include investments incorporating sustainable and intelligent building design features into this facility.
Financing Activities
Cash flows used in financing activities increased by $78.9 million, as compared to the six months ended September 30, 2023. During the six months ended September 30, 2024, we repaid the $80.9 million aggregate principal amount of the Convertible Senior Notes outstanding using cash on hand. Additionally, we paid $40.0 million to repurchase shares of our Class C Common Stock through accelerated share repurchase transactions during the six months ended September 30, 2024. During the six months ended September 30, 2023, we paid $50.0 million to repurchase shares of our Class C Common Stock through accelerated share repurchase transactions. For more details, see discussion above under "Share Repurchase Program".
Capital Resources
Credit Facility
On March 8, 2019, we entered into an amended and restated credit agreement by and among us, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and arrangers party thereto (the "credit agreement"). In July 2024, we entered into the fifth amendment to the credit agreement (the credit agreement as amended, the "amended credit agreement" or the "revolving credit facility"). The amended credit agreement provides for an aggregate $1.1 billion of revolving credit commitments comprised of two tranches: (i) one tranche of $50 million that has a term that ends on December 3, 2026, and (ii) a second tranche of $1.05 billion that has a term that ends on December 3, 2027, in each case with permitted extensions under certain circumstances. As of September 30, 2024 and March 31, 2024, there were no amounts outstanding under the revolving credit facility.
At our request and a lender's consent, commitments under the amended credit agreement may be increased by up to $300.0 million in aggregate, subject to certain conditions as set forth in the amended credit agreement. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time we seek to incur such borrowings.
Borrowings, if any, under the revolving credit facility have maturities of less than one year. Up to $50.0 million of the facility may be used for the issuance of letters of credit. As of September 30, 2024, $45.4 million of letters of credit were outstanding (March 31, 2024: $4.2 million).
Our obligations under the amended credit agreement are guaranteed by certain domestic significant subsidiaries of Under Armour, Inc., subject to customary exceptions (the "subsidiary guarantors") and primarily secured by a first-priority security interest in substantially all of the assets of Under Armour, Inc. and the subsidiary guarantors, excluding real property, capital stock in and debt of subsidiaries of Under Armour, Inc. holding certain real property and other customary exceptions. The amended credit agreement provides for the permanent fall away of guarantees and collateral upon our achievement of investment grade rating from two rating agencies.
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 the assets as security; make investments, loans, advances, guarantees and acquisitions (including investments in and loans to non-guarantor subsidiaries); undergo fundamental changes; sell assets outside the ordinary course of business; enter into transactions with affiliates; and make restricted payments.
43
We are also 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 are 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 amended credit agreement. As of September 30, 2024, we were in compliance with the applicable covenants. In July 2024, we entered into an amendment to the credit agreement to exclude from the definition of consolidated EBITDA certain charges related to the settlement of the Class Action Securities litigation described in Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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.
The amended credit agreement implemented SOFR as the replacement for LIBOR as a benchmark interest rate for U.S. dollar borrowings (and analogous benchmark rate replacements for borrowings in Yen, Pound Sterling and Euro). Borrowings under the amended credit agreement bear interest at a rate per annum equal to, at our option, either (a) an alternate base rate (for borrowings in U.S. dollars), (b) a term rate (for borrowings in U.S. dollars, Euro or Japanese Yen) or (c) a "risk free" rate (for borrowings in U.S. dollars or Pounds Sterling), 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 leverage ratio of consolidated total indebtedness to consolidated EBITDA and ranges between 1.00% to 1.75% (or, in the case of alternate base loans 0.00% to 0.75%). We will also 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 September 30, 2024, the commitment fee was 15.0 basis points.
1.50% Convertible Senior Notes
On June 1, 2024, our previously outstanding $80.9 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the "Convertible Senior Notes") matured. The Convertible Senior Notes bore interest at the fixed rate of 1.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. Upon maturity, we repaid the $80.9 million aggregate principal amount of the Convertible Senior Notes outstanding, plus $0.6 million of accrued interest, using cash on hand. No holders exercised their rights to convert prior to maturity.
3.25% Senior Notes
In June 2016, we issued $600.0 million aggregate principal amount of 3.25% senior unsecured notes due June 15, 2026 (the "Senior Notes"). The Senior Notes bear interest at the fixed rate of 3.25% per annum, payable semi-annually on June 15 and December 15 beginning December 15, 2016. Prior to March 15, 2026 (three months prior to the maturity date of the Notes), we may redeem some or all of the Senior Notes at any time or from time to time at a redemption price equal to the greater of 100% of the principal amount of the Senior Notes to be redeemed or a "make-whole" amount applicable to such Senior Notes as described in the indenture governing the Senior Notes, plus accrued and unpaid interest to, but excluding, the redemption date.
The indenture governing the Senior Notes contains covenants, including limitations that restrict our ability and the ability of certain of our subsidiaries to create or incur secured indebtedness and enter into sale and leaseback transactions and our ability to consolidate, merge or transfer all or substantially all of our properties or assets to another person, in each case subject to material exceptions described in the indenture.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
Our Condensed Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities. 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. Actual results could be significantly different from these estimates.
44
Refer to Note 2 of our Consolidated Financial Statements, included in our Annual Report on Form 10-K for Fiscal 2024, for a summary of our significant accounting policies and our assessment of recently issued accounting standards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to our market risk since March 31, 2024. For a discussion of our exposure to market risk, refer to Part II, Item 7A. of our Annual report on Form 10-K for Fiscal 2024.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the "Exchange Act")) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting described below.
Material Weaknesses in Internal Control Over Financial Reporting
As previously reported in the Company's Annual Report on Form 10-K for Fiscal 2024, we identified material weaknesses in our internal control over financial reporting. We did not design and maintain effective controls over certain aspects of the period-end financial reporting process, including the review and execution of certain balance sheet account reconciliations. Additionally, we did not design and maintain effective controls over the classification and presentation of general ledger accounts in the appropriate financial statement line items within the consolidated financial statements.
Although these material weaknesses did not result in a material misstatement of our consolidated financial statements, these material weaknesses resulted in immaterial errors in our consolidated interim and annual financial statements for Fiscal 2024, Fiscal 2023, the Transition Period and Fiscal 2021. Additionally, until we remediate these material weaknesses, they could result in material misstatements to our interim or annual consolidated financial statements that would not be prevented or detected on a timely basis.
Remediation Progress for the Material Weaknesses
With respect to the material weaknesses, management, under the oversight of the Audit Committee, is in the process of designing appropriate internal controls specific to the impacted areas. While we have taken steps to implement our remediation plan, these material weaknesses will not be considered fully remediated until we complete the design and implementation of the applicable controls, and they operate for a sufficient period of time and management has concluded through testing that the controls are operating effectively. We are committed to continuing to improve our internal control over financial reporting, and as we continue to evaluate and work to improve our internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
As described above, we are taking steps to remediate the material weakness in our internal control over financial reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
45
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we have been involved in litigation and other proceedings, including matters related to commercial disputes and intellectual property, as well as trade, regulatory and other claims related to our business. See Note 10 to our Condensed Consolidated Financial Statements for information on certain legal proceedings, which is incorporated by reference herein.
ITEM 1A. RISK FACTORS
Our results of operations and financial condition could be adversely affected by numerous risks. In addition to the other information in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for Fiscal 2024. These are not the only risks and uncertainties facing us. Additional risks not currently known to us or that we currently believe are immaterial may also negatively impact our business, financial condition, results of operations and future prospects.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer purchases of equity securities:
The Company did not repurchase any of its Class C Common Stock during the three months ended September 30, 2024 under the three-year $500 million share repurchase program authorized by the Company's Board of Directors in May 2024. See Note 11 to our Condensed Consolidated Financial Statementsfor details.
|
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of a Publicly Announced Program |
Approximately Dollar Value of Shares that May Yet be Purchased Under the Program
(in millions) |
07/01/2024 to 07/31/2024 |
- |
$ |
- |
- |
$ |
460.0 |
08/01/2024 to 08/31/2024 |
- |
$ |
- |
- |
$ |
460.0 |
09/01/2024 to 09/30/2024 |
- |
$ |
- |
- |
$ |
460.0 |
ITEM 5. OTHER INFORMATION
(c)
During the three months ended September 30, 2024, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement", as each term is defined in Item 408(a) of Regulation S-K.
46
ITEM 6. EXHIBITS
|
Exhibit
No. | |
| Amendment No. 5, dated July 3, 2024, to the Amended and Restated Credit Agreement, dated March 8, 2019, by and among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and arrangers party thereto. |
| Separation Agreement between the Company and Jim Dausch dated August 30, 2024, including General Release.* |
| Section 302 Chief Executive Officer Certification. |
| Section 302 Chief Financial Officer Certification. |
| Section 906 Chief Executive Officer Certification. |
| Section 906 Chief Financial Officer Certification. |
101.INS |
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH |
XBRL Taxonomy Extension Schema Document |
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
*Management contract or a compensatory plan or arrangement required to be filed as an Exhibit pursuant to Item 6 of Form 10-Q.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
UNDER ARMOUR, INC. |
|
By: |
/s/ DAVID E. BERGMAN |
David E. Bergman |
Chief Financial Officer |
Date: November 7, 2024
48