Notes to the Unaudited Consolidated Financial Statements
1. Description of the Business
Under Armour, Inc. is a developer, marketer and distributor of branded performance apparel, footwear and accessories. These products are sold worldwide and worn by athletes at all levels, from youth to professional on playing fields around the globe, as well as by consumers with active lifestyles. The Under Armour Connected Fitness
TM
platform powers the world's largest digital health and fitness community. The Company uses this platform to engage its consumers and increase awareness and sales of its products.
2
. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Under Armour, Inc. and its wholly owned subsidiaries (the “Company”). Certain information in footnote disclosures normally included in annual financial statements was 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 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. The consolidated balance sheet as of
December 31, 2016
is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended
December 31, 2016
(the “
2016
Form 10-K”), which should be read in conjunction with these consolidated financial statements. The results for the three and six months ended June 30, 2017, are not necessarily indicative of the results to be expected for the year ending
December 31, 2017
or any other portions thereof.
On June 3, 2016, the Board of Directors approved the payment of a
$59.0 million
dividend to the holders of the Company's Class C stock in connection with shareholder litigation related to the creation of the Class C stock. The Company's Board of Directors approved the payment of this dividend in the form of additional shares of Class C stock, with cash in lieu of any fractional shares. This dividend was distributed on June 29, 2016, in the form of
1,470,256
shares of Class C stock and
$2.9 million
in cash.
Concentration of Credit Risk
Financial instruments that subject the Company to significant concentration of credit risk consist primarily of accounts receivable. The majority of the Company’s accounts receivable is due from large retailers. Credit is extended based on an evaluation of each customer’s financial condition and collateral is not required. The Company's largest customer accounted for
19.4%
,
16.1%
and
18.3%
of accounts receivable as of
June 30, 2017
,
December 31, 2016
and
June 30, 2016
, respectively. For the
six months ended June 30, 2017
, no customer accounted for more than
10%
of the Company's net revenues. For the
six months ended June 30, 2016
, the Company's largest customer accounted for
11.1%
of net revenues.
Allowance for Doubtful Accounts
As of
June 30, 2017
,
December 31, 2016
and
June 30, 2016
, the allowance for doubtful accounts was
$13.2 million
,
$11.3 million
and
$34.4 million
, respectively.
Shipping and Handling Costs
The Company charges certain customers shipping and handling fees. These fees are recorded in net revenues. The Company includes the majority of outbound handling costs as a component of selling, general and administrative expenses. Outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate the Company’s distribution facilities. These costs, included within selling, general and administrative expenses, were
$24.2 million
and
$19.3 million
for the
three months ended June 30, 2017
and
2016
, respectively, and
$48.9 million
and
$39.4 million
, for the
six months ended June 30, 2017
and
2016
, respectively. The Company includes outbound freight costs associated with shipping goods to customers as a component of cost of goods sold.
Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2014-09, which supersedes the most current revenue recognition requirements. This ASU requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. In 2016, the FASB issued ASUs 2016-08, 2016-10, 2016-11 and 2016-12, which provide supplemental adoption guidance and clarification to ASU 2014-09. These ASUs will be effective for annual and interim periods beginning after December 15, 2017, with early adoption for annual and interim periods beginning after December 15, 2016 permitted, and should be applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. The Company will adopt the guidance in this new ASU effective January 1, 2018, and has not yet determined its adoption method. While the Company has made progress on its scoping review and assessment phase, it is still evaluating the impact this ASU will have on its financial statements and related disclosures. At this time the Company’s key areas of focus include wholesale customer support costs, direct to consumer incentive programs and presentation of customer related returns reserves on the balance sheet.
In February 2016, the FASB issued ASU 2016-02, which amends the existing guidance for leases and will require recognition of operating leases with lease terms of more than twelve months and all financing leases on the balance sheet. For these leases, companies will record assets for the rights and liabilities for the obligations that are created by the leases. This ASU will require disclosures that provide qualitative and quantitative information for the lease assets and liabilities recorded in the financial statements. This ASU is effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating this ASU to determine the impact of its adoption on its consolidated financial statements. The Company currently anticipates adopting the new standard effective January 1, 2019. The Company has formed a committee and initiated the review process for adoption of this ASU. While the Company is still in the process of completing its analysis on the complete impact this ASU will have on its consolidated financial statements and related disclosures, it expects the ASU to have a material impact on its consolidated balance sheet for recognition of lease-related assets and liabilities.
In January 2017, the FASB issued ASU 2017-04, which simplifies how an entity is required to test goodwill for impairment by eliminating step two of the test. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for annual or goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not yet decided if it will early adopt the provisions in this ASU for its annual goodwill impairment test as of September 30, 2017.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU 2016-09, which affects all entities that issue share-based payment awards to their employees. The amendments in this ASU cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures and the classification of those taxes paid on the statement of cash flows. The Company adopted the provisions of this ASU on January 1, 2017 on a prospective basis and recorded an excess tax deficiency of
$1.3 million
as an increase in income tax expense related to share-based compensation for vested awards. Additionally, the Company made a policy election under the provisions of this ASU to account for forfeitures when they occur rather than estimating the number of awards that are expected to vest. As a result of this election, the Company recorded a
$1.9 million
cumulative-effect benefit to retained earnings as of the date of adoption. The Company adopted the provisions of this ASU related to changes on the Consolidated Statement of Cash Flows on a retrospective basis. Excess tax benefits and deficiencies have been classified within cash flows from operating activities and employee taxes paid for shares withheld for income taxes have been classified within cash flows from financing activities on the Consolidated Statement of Cash Flows. This resulted in an increase of
$37.1 million
and a decrease of
$13.7 million
to the cash flows from operating activities and cash flows from financing activities sections of the Consolidated Statement of Cash Flows for the six months ended June 30, 2016, respectively.
In October 2016, the FASB issued ASU 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company
adopted the provisions of this ASU on a modified retrospective basis on January 1, 2017 resulting in a cumulative-effect benefit to retained earnings of
$26.0 million
as of the date of adoption.
3. Restructuring
On July 27, 2017, the Company’s Board of Directors approved a restructuring plan to more closely align its financial resources with the critical priorities of its business. In conjunction with this plan, the Company expects to incur total estimated pre-tax restructuring and related charges of approximately
$110.0 million
to
$130.0 million
for the year ended December 31, 2017.
During the three months ended June 30, 2017, the Company incurred
$3.1 million
in cash restructuring related charges including
$0.6 million
in employee severance and benefit related charges and
$2.5 million
in other restructuring related charges.
The strategic shifts associated with this restructuring plan may impact the future cash flow assumptions in the Company's Connected Fitness reporting unit. The Company expects to finalize its assumptions during the third quarter of 2017, which could impact the carrying value of the assets in its Connected Fitness reporting unit.
4
. Long Term Debt
Credit Facility
The Company is
party to a credit agreement that provides revolving credit commitments for up to
$1.25 billion
of borrowings, as well as term loan commitments, in each case maturing in
January 2021
. As of
June 30, 2017
, there was
$150.0 million
outstanding under the revolving credit facility and
$173.8 million
of term loan borrowings outstanding.
At
the Company's
request and the lender's consent, revolving and or term loan borrowings may be increased by up to
$300.0 million
in aggregate, subject to certain conditions as set forth in the credit agreement, as amended. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time
the Company seeks
to incur such borrowings.
The borrowings under the revolving credit facility have maturities of less than one year. Up to
$50.0 million
of the facility may be used for the issuance of letters of credit. There were
$3.7 million
of letters of credit outstanding as of
June 30, 2017
.
The credit agreement contains negative covenants that, subject to significant exceptions, limit the ability of
the Company and its subsidiaries to,
among other things, incur additional indebtedness, make restricted payments, pledge
their
assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates.
The Company is
also required to maintain a ratio of consolidated EBITDA, as defined in the credit agreement, to consolidated interest expense of not less than
3.50
to
1.00
and is not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than
3.25
to
1.00
("consolidated leverage ratio"). As of
June 30, 2017
, the Company was
in compliance with these ratios. In addition, the 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 credit agreement, will be considered an event of default under the credit agreement.
Borrowings under the credit agreement bear interest at a rate per annum equal to,
at the Company’s option,
either (a) an alternate base rate, or (b) a rate based on the rates applicable for deposits in the interbank market for U.S. Dollars or the applicable currency in which the loans are made (“adjusted LIBOR”), plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to a grid (the “Pricing Grid”) based on the consolidated leverage ratio and ranges between
1.00%
to
1.25%
for adjusted LIBOR loans and
0.00%
to
0.25%
for alternate base rate loans. The weighted average interest rates under the outstanding term loans and revolving credit facility borrowings were
2.2%
and
2.0%
during the three and
six months ended June 30, 2017
, respectively. The Company pays
a commitment fee on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit.
As of
June 30, 2017
,
the commitment fee was
15.0
basis points. Since inception,
the Company
incurred and deferred
$3.9 million
in financing costs in connection with the credit agreement.
3.250% Senior Notes
In June 2016,
the Company
issued
$600.0 million
aggregate principal amount of
3.250%
senior unsecured notes due
June 15, 2026
(the “Notes”). The proceeds were used to pay down amounts outstanding under the revolving credit facility. Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. Prior to March 15, 2026 (three months prior to the maturity date of the Notes),
the Company
may redeem some or all of the 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 Notes to be redeemed or a “make-whole” amount applicable to such Notes as described in the indenture governing the Notes, plus accrued and unpaid interest to, but excluding, the redemption date. On or after March 15, 2026 (three months prior to the maturity date of the Notes),
the Company
may redeem some or all of the Notes at any time or from time to time at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The indenture governing the Notes contains covenants, including limitations that restrict
the Company’s
ability and the ability of certain of
its
subsidiaries to create or incur secured indebtedness and enter into sale and leaseback transactions and
the Company’s
ability to consolidate, merge or transfer all or substantially all of
its
properties or assets to another person, in each case subject to material exceptions described in the indenture.
The Company
incurred and deferred
$5.3 million
in financing costs in connection with the Notes.
Other Long Term Debt
In December 2012,
the Company
entered into a
$50.0 million
recourse loan collateralized by the land, buildings and tenant improvements comprising
the Company's
corporate headquarters. The loan has a
seven
year term and maturity date of
December 2019
.
The loan bears interest at one month LIBOR plus a margin of
1.50%
,
and allows for prepayment without penalty. The loan includes covenants and events of default substantially consistent with
the Company's
credit agreement discussed above. The loan also requires prior approval of the lender for certain matters related to the property, including transfers of any interest in the property.
As of
June 30, 2017
,
December 31, 2016
and
June 30, 2016
, the outstanding balance on the loan was
$41.0 million
,
$42.0 million
and
$43.0 million
, respectively.
The weighted average interest rate on the loan was
2.50%
and
2.40%
for the three and
six months ended June 30, 2017
, respectively.
Interest expense, net was
$7.8 million
and
$5.8 million
for the
three months ended June 30, 2017
and
2016
, respectively, and
$15.7 million
and
$10.3 million
for the
six months ended June 30, 2017
, and
2016
, respectively.
Interest expense includes the amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long term debt facilities
.
The Company
monitor
s
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.
5
. Commitments and Contingencies
There were no significant changes to the contractual obligations reported in the
2016
Form 10-K other than those which occur in the normal course of business.
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, and that the ultimate resolution of any such proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
On March 23, 2017, three separate securities cases previously filed against the Company in the United States District Court for the District of Maryland were consolidated under the caption
In re Under Armour Securities Litigation
, Case No. 17-cv-00388-RDB (the “Consolidated Action”). On August 4, 2017, the lead plaintiff in the Consolidated Action, North East Scotland Pension Fund (“NESFP”), filed a consolidated amended complaint (the “Amended Complaint”) against the Company, the Company’s Chief Executive Officer and former Chief Financial Officers, Lawrence Molloy and Brad Dickerson. The Amended Complaint alleges violations of Section 10(b) (and Rule 10b-5) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 20(a) control person liability under the Exchange Act against the officers named in the Amended Complaint, claiming that the defendants made material misstatements and omissions regarding, among other things, the Company's growth and consumer demand for certain
of the Company's products. The class period identified in the Amended Complaint is September 16, 2015 through January 30, 2017.
A new plaintiff, Bucks County Employees Retirement Fund (“Bucks County”), joined NESFP in filing the Amended Complaint. In addition to joining the claims noted above, Bucks County also asserts claims under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), in connection with the Company’s public offering of senior unsecured notes in June 2016. The Securities Act claims are asserted against the Company, the Company’s Chief Executive Officer, Mr. Molloy, the Company’s directors who signed the registration statement pursuant to which the offering was made and the underwriters that participated in the offering. Bucks County alleges that the offering materials utilized in connection with the offering contained false and/or misleading statements and omissions regarding, among other things, the Company’s growth and consumer demand for certain of the Company’s products.
The Company believes that the claims asserted in the Consolidated Action are without merit and intends to defend the lawsuit vigorously. However, because of the inherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of the outcome of this matter.
6
. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The fair value accounting guidance outlines a valuation framework, creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures, and prioritizes the inputs used in measuring fair value as follows:
|
|
|
Level 1:
|
Observable inputs such as quoted prices in active markets;
|
|
|
Level 2:
|
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Financial assets and (liabilities) measured at fair value are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2016
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Derivative foreign currency contracts (see Note 8)
|
|
—
|
|
|
(4,554
|
)
|
|
—
|
|
|
—
|
|
|
15,238
|
|
|
—
|
|
|
—
|
|
|
463
|
|
|
—
|
|
Interest rate swap contracts (see Note 8)
|
|
—
|
|
|
(35
|
)
|
|
—
|
|
|
—
|
|
|
(420
|
)
|
|
—
|
|
|
—
|
|
|
(5,126
|
)
|
|
—
|
|
TOLI policies held by the Rabbi Trust
|
|
—
|
|
|
5,258
|
|
|
—
|
|
|
—
|
|
|
4,880
|
|
|
—
|
|
|
—
|
|
|
4,650
|
|
|
—
|
|
Deferred Compensation Plan obligations
|
|
—
|
|
|
(8,753
|
)
|
|
—
|
|
|
—
|
|
|
(7,023
|
)
|
|
—
|
|
|
—
|
|
|
(6,474
|
)
|
|
—
|
|
Fair values of the financial assets and liabilities listed above are determined using inputs that use as their basis readily observable market data that are actively quoted and are validated through external sources, including third-party pricing services and brokers. The Company purchases marketable securities that are designated as available-for-sale. The foreign currency contracts represent gains and losses on derivative contracts, which is the net difference between the U.S. dollar value to be received or paid at the contracts’ settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current market exchange rate. The interest rate swap contracts represent gains and losses on the derivative contracts, which is the net difference between the fixed interest to be paid and variable interest to be received over the term of the contract based on current market rates. The fair value of the trust owned life insurance (“TOLI”) policies held by the Rabbi Trust is based on the cash-surrender value of the life insurance policies, which are invested primarily in mutual funds and a separately managed fixed income fund. These investments are initially made in the same funds and purchased in substantially the same amounts as the selected investments of participants in the Under Armour, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), which represent the underlying liabilities to participants in the Deferred Compensation Plan. Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments.
As of
June 30, 2017
, the fair value of the Company's Senior Notes was
$562.4 million
, and as of June 30, 2016, the carrying value approximated the fair value. The carrying value of the Company's other long term debt approximated
its fair value as of
June 30, 2017
and
2016
. 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).
7. Stock-Based Compensation
During the
six months ended June 30, 2017
,
3.2 million
time-based restricted stock units,
0.2 million
time-based stock options,
1.3 million
performance-based restricted stock units and
0.5 million
performance-based stock options
for shares of our Class C common stock were awarded to certain officers and key employees under the Company's Second Amended and Restated 2005 Omnibus Long-Term Incentive Plan, as amended. The time-based restricted stock units and options have weighted average grant date fair values of
$19.03
and
$8.17
, respectively, and vest in four equal annual installments. The performance-based restricted stock units and options have weighted average grant date fair values of
$19.02
and
$8.17
, respectively, and have vesting conditions tied to the achievement of certain combined annual revenue and operating income targets for 2017 and 2018. Upon the achievement of the targets, one half of the restricted stock units and options will vest each in
February 2019
and
February 2020
. If certain lower levels of combined annual revenue and operating income for 2017 and 2018 are achieved, fewer or no restricted stock units or options will vest and the remaining restricted stock units and options will be forfeited. The Company deemed the achievement of certain operating income targets for 2017 and 2018 probable during the
six months ended June 30, 2017
. The Company assesses the probability of the achievement of the remaining operating income targets at the end of each reporting period. If it becomes probable that any remaining performance targets related to these performance-based restricted stock units and options will be achieved, a cumulative adjustment will be recorded as if ratable stock-based compensation expense had been recorded since the grant date. Additional stock based compensation of up to
$2.3 million
would have been recorded during the
six months ended June 30, 2017
, for these performance-based restricted stock units and options had the achievement of the remaining revenue and operating income targets been deemed probable.
During 2016, the Company granted performance-based restricted stock units and options with vesting conditions tied to the achievement of certain combined annual operating income targets for 2016 and 2017. As of
June 30, 2017
, the Company deems the achievement of these operating income targets improbable. As such, no expense for these awards has been recorded during the three and six months ended June 30, 2017.
8. Risk Management and Derivatives
Foreign Currency Risk Management
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions generated by its international subsidiaries in currencies other than their local currencies. These gains and losses are primarily driven by intercompany transactions and inventory purchases denominated in currencies other than the functional currency of the purchasing entity. From time to time, the Company may elect to enter into foreign currency contracts to reduce the risk associated with foreign currency exchange rate fluctuations on intercompany transactions and projected inventory purchases for its international subsidiaries.
As of
June 30, 2017
, the aggregate notional value of the Company's outstanding foreign currency contracts was
$540.5 million
, which was comprised of Canadian Dollar/U.S. Dollar, Euro/U.S. Dollar, Yen/Euro, Mexican Peso/Euro and Pound Sterling/Euro currency pairs with contract maturities ranging from
one
to
fourteen months
. A portion of the Company's foreign currency contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are recorded in earnings. The Company also enters into foreign currency contracts designated as cash flow hedges. For foreign currency contracts designated as cash flow hedges, changes in fair value, excluding any ineffective portion, are recorded in other comprehensive income until net income is affected by the variability in cash flows of the hedged transaction. The effective portion is generally released to net income after the maturity of the related derivative and is classified in the same manner as the underlying exposure. During the three and
six months ended June 30, 2017
, the Company reclassified
$0.9 million
and
$1.7 million
from other comprehensive income to cost of goods sold related to foreign currency contracts designated as cash flow hedges, respectively. The fair values of the Company's foreign currency contracts were a liability of
$4.6 million
as of
June 30, 2017
, and were included in accrued expenses on the consolidated balance sheet. The fair values of the Company's foreign currency contracts were assets of
$15.2 million
and
$0.5 million
as of
December 31, 2016
and
June 30, 2016
, respectively, and were included in prepaid expenses and other current assets on the consolidated balance sheet. Refer to Note
6
for a discussion of the fair value measurements. Included in
other expense, net
were the following amounts related to changes in foreign currency exchange rates and derivative foreign currency contracts:
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Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Unrealized foreign currency exchange rate gains (losses)
|
$
|
21,080
|
|
|
$
|
(7,387
|
)
|
|
$
|
29,393
|
|
|
$
|
3,861
|
|
Realized foreign currency exchange rate gains (losses)
|
(2,084
|
)
|
|
(138
|
)
|
|
(2,356
|
)
|
|
459
|
|
Unrealized derivative gains (losses)
|
(521
|
)
|
|
(1,128
|
)
|
|
(1,225
|
)
|
|
(917
|
)
|
Realized derivative gains (losses)
|
(16,425
|
)
|
|
7,145
|
|
|
(22,790
|
)
|
|
(2,841
|
)
|
Interest Rate Risk Management
In order to maintain liquidity and fund business operations, the Company enters 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 Company utilizes interest rate swap contracts to convert a portion of variable rate debt to fixed rate debt. The contracts pay fixed and receive variable rates of interest. The interest rate swap contracts are accounted for as cash flow hedges. Accordingly, the effective portion of the changes in their fair value are recorded in other comprehensive income and reclassified into interest expense over the life of the underlying debt obligation.
Refer to Note
4
for a discussion of long term debt.
As of
June 30, 2017
, the notional value of the Company's outstanding interest rate swap contracts was
$144.4 million
. During the
three months ended June 30, 2017
and
2016
, the Company recorded a
$0.3 million
and
$0.6 million
increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. During the
six months ended June 30, 2017
and
2016
, the Company recorded a
$0.6 million
and
$1.1 million
increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. The fair values of the interest rate swap contracts were liabilities of less than
$0.1 million
as of
June 30, 2017
, and were included in other long term liabilities on the consolidated balance sheet. The fair values of the interest rate swap contracts were liabilities of
$5.1 million
as of
June 30, 2016
, and were included in other long term liabilities on the consolidated balance sheet.
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.
9. Provision for Income Taxes
Provision for income taxes decreased
$16.8 million
to
$1.4 million
during the
six months ended June 30, 2017
from
$18.2 million
during the same period in
2016
. For the
six months ended June 30, 2017
, the Company's effective tax rate was
(10.3)%
compared to
41.6%
for the same period in
2016
. The effective tax rate for the
six months ended June 30, 2017
was lower than the effective tax rate for the
six months ended June 30, 2016
primarily due to reserves for net operating losses in foreign markets which are discrete events in the period
.
10. Earnings per Share
The following represents a reconciliation from basic earnings per share to diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended June 30,
|
(In thousands, except per share amounts)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(12,308
|
)
|
|
$
|
6,344
|
|
|
$
|
(14,581
|
)
|
|
$
|
25,524
|
|
Adjustment payment to Class C capital stockholders
|
—
|
|
|
59,000
|
|
|
—
|
|
|
59,000
|
|
Net loss available to all stockholders
|
$
|
(12,308
|
)
|
|
$
|
(52,656
|
)
|
|
$
|
(14,581
|
)
|
|
$
|
(33,476
|
)
|
Denominator
|
|
|
|
|
|
|
|
Weighted average common shares outstanding Class A and B
|
219,168
|
|
|
217,711
|
|
|
218,938
|
|
|
217,262
|
|
Effect of dilutive securities Class A and B
|
—
|
|
|
3,665
|
|
|
—
|
|
|
4,241
|
|
Weighted average common shares and dilutive securities outstanding Class A and B
|
219,168
|
|
|
221,376
|
|
|
218,938
|
|
|
221,503
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding Class C
|
221,255
|
|
|
217,832
|
|
|
220,956
|
|
|
217,323
|
|
Effect of dilutive securities Class C
|
—
|
|
|
3,664
|
|
|
—
|
|
|
4,240
|
|
Weighted average common shares and dilutive securities outstanding Class C
|
221,255
|
|
|
221,496
|
|
|
220,956
|
|
|
221,563
|
|
|
|
|
|
|
|
|
|
Basic net loss per share of Class A and B common stock
|
$
|
(0.03
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.08
|
)
|
Basic net income (loss) per share of Class C common stock
|
$
|
(0.03
|
)
|
|
$
|
0.15
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.19
|
|
Diluted net loss per share of Class A and B common stock
|
$
|
(0.03
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.08
|
)
|
Diluted net income (loss) per share of Class C common stock
|
$
|
(0.03
|
)
|
|
$
|
0.15
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.19
|
|
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. As the Company incurred net losses for the three and
six months ended June 30, 2017
, there were no warrants, stock options or restricted stock units included in the computation of diluted earnings per share, as their effect would have been anti-dilutive.
For the
three months ended June 30, 2016
, stock options and restricted stock units representing
25.2 thousand
shares of Class A common stock outstanding and
49.5 thousand
shares of Class C common stock outstanding were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.
For the
six months ended June 30, 2016
, stock options and restricted stock units representing
195.1 thousand
shares of Class A common stock outstanding and
217.5 thousand
shares of Class C common stock outstanding were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.
11. Segment Data and Related Information
The Company’s operating segments are based on how the Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. As such, the CODM receives discrete financial information for the Company's principal business by geographic region based on the Company’s strategy to become a global brand. These geographic regions include North America, Latin America, Europe, the Middle East and Africa (“EMEA”), and Asia-Pacific. Each geographic segment operates exclusively in one industry: the development, marketing and distribution of branded performance apparel, footwear and accessories. The CODM also receives discrete financial information for the Company's Connected Fitness business.
The net revenues and operating income (loss) associated with the Company's segments are summarized in the following tables. Net revenues represent sales to external customers for each segment. Intercompany balances were eliminated for separate disclosure. The majority of corporate service costs within North America have not been allocated to the Company's other segments. As the Company continues to grow its business outside of North America, a larger portion of its corporate overhead costs have begun to support global functions. Due to the individual materiality of our Asia-Pacific segment, the Company has separately presented its Asia-Pacific, EMEA and Latin America segments, and will no longer combine these segments for presentation purposes. Net revenues and operating income by segment
presented for prior periods have been conformed to the current presentation. Total expenditures for additions to long-lived assets are not disclosed as this information is not regularly provided to the CODM.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net revenues
|
|
|
|
|
|
|
|
North America
|
$
|
829,805
|
|
|
$
|
827,132
|
|
|
$
|
1,701,076
|
|
|
$
|
1,707,727
|
|
EMEA
|
103,896
|
|
|
66,193
|
|
|
206,751
|
|
|
132,460
|
|
Asia-Pacific
|
93,574
|
|
|
49,553
|
|
|
179,392
|
|
|
103,175
|
|
Latin America
|
38,001
|
|
|
34,408
|
|
|
76,455
|
|
|
63,875
|
|
Connected Fitness
|
22,969
|
|
|
23,497
|
|
|
41,902
|
|
|
41,998
|
|
Intersegment eliminations
|
—
|
|
|
—
|
|
|
—
|
|
|
(750
|
)
|
Total net revenues
|
$
|
1,088,245
|
|
|
$
|
1,000,783
|
|
|
$
|
2,205,576
|
|
|
$
|
2,048,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Operating income (loss)
|
|
|
|
|
|
|
|
North America
|
$
|
(5,417
|
)
|
|
$
|
28,149
|
|
|
$
|
(1,703
|
)
|
|
$
|
68,244
|
|
EMEA
|
(4,616
|
)
|
|
(2,956
|
)
|
|
(2,987
|
)
|
|
(35
|
)
|
Asia-Pacific
|
15,249
|
|
|
9,913
|
|
|
34,877
|
|
|
27,247
|
|
Latin America
|
(8,093
|
)
|
|
(8,194
|
)
|
|
(15,952
|
)
|
|
(17,200
|
)
|
Connected Fitness
|
(1,908
|
)
|
|
(7,534
|
)
|
|
(11,484
|
)
|
|
(23,995
|
)
|
Total operating income (loss)
|
(4,785
|
)
|
|
19,378
|
|
|
2,751
|
|
|
54,261
|
|
Interest expense, net
|
(7,841
|
)
|
|
(5,754
|
)
|
|
(15,662
|
)
|
|
(10,286
|
)
|
Other expense, net
|
(2,884
|
)
|
|
(2,955
|
)
|
|
(313
|
)
|
|
(253
|
)
|
Income (loss) before income taxes
|
$
|
(15,510
|
)
|
|
$
|
10,669
|
|
|
$
|
(13,224
|
)
|
|
$
|
43,722
|
|
Net revenues by product category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net Revenues
|
|
|
|
|
|
|
|
Apparel
|
$
|
680,653
|
|
|
$
|
612,840
|
|
|
$
|
1,396,090
|
|
|
$
|
1,279,411
|
|
Footwear
|
236,925
|
|
|
242,706
|
|
|
506,583
|
|
|
506,952
|
|
Accessories
|
122,588
|
|
|
100,734
|
|
|
211,686
|
|
|
180,435
|
|
Total net sales
|
1,040,166
|
|
|
956,280
|
|
|
2,114,359
|
|
|
1,966,798
|
|
License revenues
|
25,110
|
|
|
21,006
|
|
|
49,315
|
|
|
40,439
|
|
Connected Fitness
|
22,969
|
|
|
23,497
|
|
|
41,902
|
|
|
41,998
|
|
Intersegment eliminations
|
—
|
|
|
—
|
|
|
—
|
|
|
(750
|
)
|
Total net revenues
|
$
|
1,088,245
|
|
|
$
|
1,000,783
|
|
|
$
|
2,205,576
|
|
|
$
|
2,048,485
|
|