Notes to the Unaudited Consolidated Financial Statements
1. Description of the Business
Under Armour, Inc. and 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 solve problems and make athletes better, as well as digital health and fitness apps built to connect people and drive performance. The Company's products are made, sold and worn worldwide.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of 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 ("U.S. GAAP") for interim consolidated financial statements. These consolidated financial statements are presented in U.S. Dollars. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement of the financial position and results of operations were included. Intercompany balances and transactions were eliminated upon consolidation. The consolidated balance sheet as of December 31, 2019 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, 2019 (the “2019 Form 10-K”), which should be read in conjunction with these unaudited consolidated financial statements. The unaudited results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results to be expected for the year ending December 31, 2020, or any other portions thereof.
On March 2, 2020, the Company acquired, on a cash free, debt free basis, 100% of Triple Pte. Ltd. ("Triple"), a distributor of the Company's products in Southeast Asia. The results of operations of this acquisition have been consolidated with those of the Company beginning on March 2, 2020. Refer to Note 4 for a discussion of the acquisition.
COVID-19
In March 2020, a novel strain of coronavirus (COVID-19) was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures and orders to “shelter-in-place”. The Company has been focused on protecting the health and safety of its teammates, athletes and consumers, working with its customers and suppliers to minimize potential disruptions and supporting the community to address challenges posed by the global pandemic, while managing the Company's business in response to a changing dynamic. The Company's business operations and financial performance for the three and nine months ended September 30, 2020 were materially impacted by COVID-19. These impacts are discussed within these notes to the unaudited consolidated financial statements, including but not limited to discussions related to long-lived asset and goodwill impairment, leases, long term debt, and income taxes.
In response to the pandemic, global legislation, including the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, were announced. The Company recognized certain incentives totaling $1.5 million and $6.6 million for the three and nine months ended September 30, 2020. The incentives were recorded as a reduction of the associated costs which the Company incurred within selling, general and administrative expenses in the unaudited consolidated statement of operations. Further, the CARES Act includes modification to income tax provisions. Refer to Note 12 for discussion of the impacts of modifications to income tax provisions under the CARES Act.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. The Company's restricted cash is reserved for payments related to claims for its captive insurance program, which is included in prepaid expenses and other current assets on the Company's unaudited consolidated balance sheets. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited consolidated balance sheets to the unaudited consolidated statements of cash flows.
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(In thousands)
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September 30, 2020
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December 31, 2019
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|
September 30, 2019
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Cash and cash equivalents
|
$
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865,609
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|
|
$
|
788,072
|
|
|
$
|
416,603
|
|
|
Restricted cash
|
8,926
|
|
|
7,936
|
|
|
11,002
|
|
|
Total Cash, cash equivalents and restricted cash
|
$
|
874,535
|
|
|
$
|
796,008
|
|
|
$
|
427,605
|
|
Concentration of Credit Risk
Financial instruments that subject the Company to significant concentration of credit risk consist primarily of accounts receivable. The majority of the Company’s accounts receivable is due from large wholesale customers. None of the Company's customers accounted for more than 10% of accounts receivable as of September 30, 2020 and December 31, 2019, respectively. One of the Company's customers accounted for 10% of accounts receivable as of September 30, 2019. For the three and nine months ended September 30, 2020 and 2019, no customer accounted for more than 10% of the Company's net revenues. Given the current global economic environment and impacts of COVID-19, the Company regularly evaluates the credit risk of the large wholesale customers which make up the majority of the Company's accounts receivable. Refer to the "Credit Losses - Allowance for Doubtful Accounts" for a discussion of the evaluation of credit losses.
Sale of Accounts Receivable
The Company has an agreement with a financial institution to sell selected accounts receivable on a recurring, non-recourse basis. Under the agreement, at any time and from time to time the balance of up to $140.0 million of the Company's accounts receivable may be sold to the financial institution. The Company's ability to utilize these agreements, however, may be limited by the credit ratings of the Company's customers. The Company removes the sold accounts receivable from the unaudited consolidated balance sheets at the time of sale. The Company does not retain any interests in the sold accounts receivable. The Company acts as the collection agent for the outstanding accounts receivable on behalf of the financial institutions.
As of September 30, 2020, December 31, 2019 and September 30, 2019, no amounts remained outstanding under these agreements. The funding fee charged by the financial institutions is included in the other income (expense), net line item in the unaudited consolidated statement of operations.
Credit Losses - Allowance for Doubtful Accounts
Credit losses are the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit losses primarily through customer receivables associated with the sales of product within the Company's wholesale and Connected Fitness channels, recorded in accounts receivable, net on the Company's unaudited consolidated balance sheet. The Company also has other receivables, including receivables from licensing arrangements, recorded in prepaid expenses and other current assets on the Company's unaudited consolidated balance sheet.
Credit is extended to customers based on a credit review. The credit review considers each customer’s financial condition, including review of the customers established credit rating or the Company's assessment of the customer’s creditworthiness based on their financial statements absent a credit rating, local industry practices, and business strategy. A credit limit and terms are established for each customer based on the outcome of this review. The Company actively monitors ongoing credit exposure through review of customer balances against terms and payments against due dates. To mitigate credit risk, the Company may require customers to provide security in the form of guarantees, letters of credit, or prepayment. The Company is also exposed to credit losses through credit card receivables associated with the sales of products within the Company's direct to consumer channel.
The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of customer accounts. The Company makes ongoing estimates relating to the collectibility of accounts receivable and records an allowance for estimated losses resulting from the inability of its customers to make required payments. The Company establishes expected credit losses by evaluating historical levels of credit losses, current economic conditions that may affect a customer’s ability to pay, and creditworthiness of significant customers. These inputs are used to determine a range of expected credit losses and an allowance is recorded within the range. Accounts receivable are written off when there is no reasonable expectation of recovery.
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(In thousands)
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Balance as of
June 30, 2020
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Charged to
Costs and
Expenses
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Write-Offs
Net of
Recoveries
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Balance as of
September 30, 2020
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Allowance for doubtful accounts -
accounts receivable, net
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$
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29,658
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$
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(1,103)
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$
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(154)
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$
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28,401
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Allowance for doubtful accounts -
prepaid expenses and other current assets
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$
|
7,359
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|
$
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9
|
|
$
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—
|
|
$
|
7,368
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|
|
|
|
|
|
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|
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|
|
|
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|
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(In thousands)
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Balance as of December 31, 2019
|
Charged to
Costs and
Expenses
|
Write-Offs
Net of
Recoveries
|
Balance as of
September 30, 2020
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Allowance for doubtful accounts -
accounts receivable, net
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$
|
15,083
|
|
$
|
13,504
|
|
$
|
(186)
|
|
$
|
28,401
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Allowance for doubtful accounts -
prepaid expenses and other current assets
|
$
|
—
|
|
$
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7,368
|
|
$
|
—
|
|
$
|
7,368
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|
For the three months ended September 30, 2020, the decrease in the reserve is primarily due to the collection of account balances that were previously reserved for. For the nine months ended September 30, 2020, the increase in the reserve is primarily due to the evaluation of certain account balances in connection with negative developments that represent a higher risk of credit default. The allowance for doubtful accounts was established with information available, including reasonable and supportable estimates of future risk to the Company as of September 30, 2020. There may be further impacts due to COVID-19.
As of September 30, 2019, the allowance for doubtful accounts was $16.5 million.
Revenue Recognition
The Company recognizes revenue pursuant to Accounting Standards Codification 606 ("ASC 606"). Net revenues consist of net sales of apparel, footwear and accessories, license and Connected Fitness revenue. The Company recognizes revenue when it satisfies its performance obligations by transferring control of promised products or services to its customers, which occurs either at a point in time or over time, depending on when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that the Company ultimately expects to be entitled to in exchange for the products or services and is subject to an overall constraint that a significant revenue reversal will not occur in future periods. Sales taxes imposed on the Company’s revenues from product sales are presented on a net basis on the unaudited consolidated statements of operations, and therefore do not impact net revenues or costs of goods sold.
Revenue transactions associated with the sale of apparel, footwear, and accessories, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control has passed to the customer, based on the terms of sale. In the Company’s wholesale channel, transfer of control is based upon shipment under free on board shipping point for most goods or upon receipt by the customer depending on the country of the sale and the agreement with the customer. The Company may also ship product directly from its supplier to wholesale customers and recognize revenue when the product is delivered to and accepted by the customer. In the Company’s direct to consumer channel, transfer of control takes place at the point of sale for brand and factory house customers and upon shipment to substantially all e-commerce customers. Payment terms for wholesale transactions are established in accordance with local and industry practices. Payment is generally required within 30 to 60 days of shipment to or receipt by the wholesale customer in the United States, and generally within 60 to 90 days of shipment to or receipt by the wholesale customer internationally. The Company has provided extensions to standard payment terms for certain customers in connection with COVID-19. Payment is generally due at the time of sale for direct to consumer transactions.
Gift cards issued to customers by the Company are recorded as contract liabilities until they are redeemed, at which point revenue is recognized. The Company also estimates and recognizes revenue for gift card balances not expected to ever be redeemed ("breakage") to the extent that it does not have a legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdiction as unclaimed or abandoned property. Such estimates are based upon historical redemption trends, with breakage income recognized in proportion to the pattern of actual customer redemptions.
Revenue from the Company's licensing arrangements is recognized over time during the period that licensees are provided access to the Company's trademarks and benefit from such access through their sales of licensed products. These arrangements require licensees to pay a sales-based royalty, which for most arrangements may be subject to a contractually guaranteed minimum royalty amount. Payments are generally due quarterly. The Company recognizes revenue for sales-based royalty arrangements (including those for which the royalty exceeds any contractually guaranteed minimum royalty amount) as licensed products are sold by the licensee. If a sales-based royalty is not ultimately expected to exceed a contractually guaranteed minimum royalty amount, the minimum is recognized as revenue over the contractual period, if all other criteria of revenue recognition have been met. This sales-based output measure of progress and pattern of recognition best represents the value transferred to the licensee over the term of the arrangement, as well as the amount of consideration that the Company is entitled to receive in exchange for providing access to its trademarks.
Revenue from Connected Fitness subscriptions is recognized on a gross basis and is recognized over the term of the subscription. The Company receives payments in advance of revenue recognition for subscriptions and these payments are recorded as contract liabilities in the Company's unaudited consolidated balance sheet. Related commission cost is included in selling, general and administrative expense in the unaudited consolidated statement of operations. Revenue from Connected Fitness digital advertising is recognized as the Company satisfies performance obligations pursuant to customer insertion orders.
The Company records reductions to revenue for estimated customer returns, allowances, markdowns and discounts. The Company bases its estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns and allowances that have not yet been received by the Company. The actual amount of customer returns and allowances, which is inherently uncertain, may differ from the Company’s estimates. If the Company determines that actual or expected returns or allowances are significantly higher or lower than the reserves it established, it would record a reduction or increase, as appropriate, to net sales in the period in which it makes such a determination. Provisions for customer specific discounts are based on negotiated arrangements with certain major customers. Reserves for returns, allowances, markdowns and discounts are included within customer refund liability and the value of inventory associated with reserves for sales returns are included within prepaid expenses and other current assets on the unaudited consolidated balance sheet. The Company reviews and refines these estimates on at least a quarterly basis. As of September 30, 2020, December 31, 2019 and September 30, 2019, there were $197.5 million, $219.4 million and $209.8 million, respectively, in reserves for returns, allowances, markdowns and discounts within customer refund liability and $50.8 million, $61.1 million and $58.7 million, respectively, as the estimated value of inventory associated with the reserves for sales returns within prepaid expenses and other current assets on the unaudited consolidated balance sheet.
Contract Liabilities
Contract liabilities are recorded when a customer pays consideration, or the Company has a right to an amount of consideration that is unconditional, before the transfer of a good or service to the customer, and thus represent the Company's obligation to transfer the good or service to the customer at a future date. The Company's contract liabilities primarily consist of payments received in advance of revenue recognition for subscriptions for the Company's Connected Fitness applications and royalty arrangements, included in other current liabilities, and gift cards, included in accrued expenses, on the Company's unaudited consolidated balance sheets. As of September 30, 2020, December 31, 2019, and September 30, 2019, contract liabilities were $64.9 million, $60.4 million and $60.6 million, respectively.
For the three and nine months ended September 30, 2020, the Company recognized $9.9 million and $21.2 million of revenue that was previously included in contract liabilities as of December 31, 2019. For the three and nine months ended September 30, 2019, the Company recognized $9.2 million and $22.6 million of revenue that was previously included in contract liabilities as of December 31, 2018. The change in the contract liabilities balance primarily results from the timing differences between the Company's satisfaction of performance obligations and the customer's payment. Commissions related to subscription revenue are capitalized and recognized over the subscription period.
Shipping and Handling Costs
The Company charges certain customers shipping and handling fees. These fees are recorded in net revenues. The Company incurs freight costs associated with shipping goods to customers. These costs are recorded as a component of cost of goods sold.
The Company also incurs outbound handling costs associated with preparing goods to ship to customers and certain costs to operate the Company’s distribution facilities. These costs are recorded as a component of selling, general and administrative expenses and were $21.2 million and $20.8 million for the three months ended September 30, 2020 and 2019, respectively, and $61.2 million and $63.0 million for the nine months ended September 30, 2020 and 2019, respectively.
Equity Method Investment
The Company has a common stock investment of 29.5% in Dome Corporation ("Dome"), the Company's Japanese licensee. The Company accounts for its investment in Dome under the equity method, given it has the ability to exercise significant influence, but not control, over Dome.
In the first quarter of 2020, the Company performed a qualitative assessment of potential impairment indicators for its investment in Dome and determined that indicators of impairment existed due to impacts from COVID-19. The Company performed a valuation of its investment in Dome and determined that the fair value of its investment was less than its carrying value by $3.7 million. The Company determined this decline in value to be other-than-temporary considering Dome's near and long-term financial forecast. Accordingly, the Company's results for the nine months ended September 30, 2020 include the impact of recording a $3.7 million impairment of the Company's equity method investment in Dome during the first quarter, which reduced the carrying value to zero. The impairment charge was recorded within income (loss) from equity method investment on the unaudited consolidated statements of operations and as a reduction to the invested balance within other long term assets on the unaudited consolidated balance sheets. The Company calculated fair value using the discounted cash flows model, which indicates the fair value of the investment based on the present value of the cash flows that it expects the investment to generate in the future.
As of September 30, 2020, December 31, 2019 and September 30, 2019 there was no carrying value, $5.1 million, and $47.4 million, respectively, associated with the Company’s equity investment in Dome. The Company did not record its allocable share of Dome's net loss for the three months ended September 30, 2020 as losses are not recognized in excess of the total investment. The Company recorded its allocable share of Dome’s net loss of $1.2 million for the three months ended September 30, 2019, and $1.4 million and $5.4 million for the nine months ended September 30, 2020 and 2019, respectively, within income (loss) from equity method investment on the unaudited consolidated statements of operations and as an adjustment to the invested balance within other long term assets on the unaudited consolidated balance sheets.
In addition to the investment in Dome, the Company has a license agreement with Dome. The Company recorded license revenues from Dome of $10.9 million and $9.2 million for the three months ended September 30, 2020 and 2019, respectively, and $17.4 million and $20.9 million for the nine months ended September 30, 2020 and 2019, respectively. Of the $10.9 million of license revenues recorded for the three months ended September 30, 2020, $3.0 million was related to license revenues earned in the three months ended June 30, 2020 but collected in the third quarter, as the Company had previously deemed the collection of this amount not probable. As of September 30, 2020, December 31, 2019, and September 30, 2019, the Company had $8.5 million, $15.6 million, and $9.1 million, respectively, in licensing receivables outstanding, recorded in the prepaid expenses and other current assets line item within the Company's unaudited consolidated balance sheets.
On March 2, 2020, as part of the Company's acquisition of Triple, the Company assumed 49.5% of common stock ownership in UA Sports (Thailand) Co., Ltd. (“UA Sports Thailand”). The Company accounts for its investment in UA Sports Thailand under the equity method, given it has the ability to exercise significant influence, but not control, over UA Sports Thailand. For the three and nine months ended September 30, 2020, the Company recorded the allocable share of UA Sports Thailand’s net loss of $1.2 million and $1.8 million, respectively, within income (loss) from equity method investment on the unaudited consolidated statements of operations and as an adjustment to the invested balance within other long term assets on the unaudited consolidated balance sheets. As of September 30, 2020, the carrying value of the Company’s total investment in UA Sports Thailand was $3.7 million. Refer to Note 4 for discussion of the acquisition.
Management Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Further, the full impact of COVID-19 cannot reasonably be estimated. The Company has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of the reporting date. The Company may experience further impacts based on long-term effects on the Company's customers and the countries in which the Company operates. As a result of these uncertainties, actual results could differ from those estimates and assumptions.
Recently Issued Accounting Standards
In August 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-06. The amendment in this update simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. The update also requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The guidance is effective for interim and annual periods beginning after December 15, 2021. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting. The ASU provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. This ASU is currently effective and upon adoption may be applied prospectively to contract modifications and hedging relationships made on or before December 31, 2022. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
Recently Adopted Accounting Standards
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting for income taxes. The ASU impacts various topic areas within ASC 740, including accounting for taxes under hybrid tax regimes, accounting for increases in goodwill, allocation of tax amounts to separate company financial statements within a group that files a consolidated tax return, intraperiod tax allocation, interim period accounting, and accounting for ownership changes in investments, among other minor codification improvements. The guidance in this ASU becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and may be early adopted. The Company has elected to early adopt this standard as of January 1, 2020. The adoption of this ASU did not have a material impact on the unaudited consolidated financial statements or disclosures in 2020. The aspect of this ASU which may have the most significant impact to the Company in future periods is the removal of a limit on the tax benefit recognized on pre-tax losses in interim periods that exceeds the anticipated tax benefit for the full year.
In June 2016, the FASB issued ASU 2016-13 - Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amended the impairment model to utilize an expected loss methodology in place of the previously used incurred loss methodology, which results in more timely recognition of losses. The new standard applies to financial assets measured at amortized cost basis, including receivables that result from revenue transactions. The Company adopted this ASU on January 1, 2020 and there was no material impact to the unaudited consolidated financial statements as of the date of adoption. Results for reporting periods as of January 1, 2020 are presented under the new standard, while prior results continue to be reported under the previous standard.
3. Restructuring and Related Impairment Charges
On March 31, 2020, the Company's Board of Directors approved the previously announced restructuring plan ("2020 Restructuring") designed to rebalance the Company’s cost base to further improve profitability and cash flow generation. The Company identified further opportunities and on September 2, 2020, the Company’s Board of Directors approved a $75 million increase to the restructuring plan, resulting in an updated 2020 restructuring plan of approximately $550 million to $600 million of total estimated pre-tax restructuring and related charges.
The restructuring and related charges primarily consist of up to approximately:
•$224 million of cash restructuring charges, comprised of up to: $63 million in facility and lease termination costs, $30 million in employee severance and benefit costs, and $131 million in contract termination and other restructuring costs; and
•$376 million of non-cash charges comprised of an impairment of $291 million related to the Company’s New York City flagship store and $85 million of intangibles and other asset related impairments.
The Company recorded $70.2 million and $410.3 million of restructuring and related impairment charges for the three and nine months ended September 30, 2020, respectively. The summary of the costs recorded during the three and nine months ended September 30, 2020, as well as the Company's current estimates of the amount expected to be incurred in connection with the 2020 restructuring plan is as follows:
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Restructuring and Related Impairment Charges Recorded
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Estimated Restructuring and Related Impairment Charges
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(In thousands)
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Three months ended September 30, 2020
|
|
Nine months ended September 30, 2020 (A)
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Remaining to be Incurred (B)
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Total to be Incurred (1)
(A+B)
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|
Costs recorded in cost of goods sold:
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|
|
|
|
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Contract-based royalties
|
$
|
—
|
|
$
|
—
|
|
$
|
11,000
|
|
$
|
11,000
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Inventory write-offs
|
—
|
|
—
|
|
2,000
|
|
2,000
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|
Total costs recorded in cost of goods sold
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—
|
|
—
|
|
13,000
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|
13,000
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Costs recorded in restructuring and related impairment charges:
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|
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Property and equipment impairment
|
3,307
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|
|
26,211
|
|
|
17,789
|
|
|
44,000
|
|
|
Intangible asset impairment
|
—
|
|
|
—
|
|
|
4,000
|
|
|
4,000
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|
|
ROU asset impairment
|
—
|
|
|
290,813
|
|
|
4,187
|
|
|
295,000
|
|
|
Employee related costs
|
26,410
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|
|
27,239
|
|
|
2,761
|
|
|
30,000
|
|
|
Contract exit costs (2)
|
38,520
|
|
|
53,462
|
|
|
124,538
|
|
|
178,000
|
|
|
Other restructuring costs
|
1,995
|
|
|
12,533
|
|
|
23,467
|
|
|
36,000
|
|
|
Total costs recorded in restructuring and related impairment charges
|
70,232
|
|
|
410,258
|
|
|
176,742
|
|
|
587,000
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|
|
Total restructuring and related impairment and restructuring related costs
|
$
|
70,232
|
|
|
$
|
410,258
|
|
|
$
|
189,742
|
|
|
$
|
600,000
|
|
(1) Estimated restructuring and related impairment charges to be incurred reflect the high-end of the range of the estimated remaining charges expected to be taken by the Company in connection with the restructuring plan. The Company currently anticipates that most of the total restructuring and related charges will occur by the end of fiscal 2020.
(2) Contract exit costs are primarily comprised of proposed lease exits of certain brand and factory house stores and office facilities, and proposed marketing and other contract exits.
All restructuring and related impairment charges are included in the Company's Corporate Other non-operating segment, of which $39.1 million are North America related, $11.5 million are EMEA related, $6.1 million are Latin America related, $3.6 million are Asia-Pacific related and $0.1 million are Connected Fitness related for the three months ended September 30, 2020 and $367.4 million are North America related, $11.6 million are EMEA related, $6.4 million are Latin America related, $3.6 million are Asia-Pacific related and $0.1 million are Connected Fitness related for the nine months ended September 30, 2020.
The lease term for the Company's New York City flagship store commenced on March 1, 2020 and an operating lease ROU asset and corresponding operating lease liability of $344.8 million was recorded on the Company's unaudited consolidated balance sheet. In March 2020, as a part of the 2020 Restructuring, the Company made the strategic decision to forgo the opening of its New York City flagship store and the property is actively being marketed for sublease. Accordingly, in the first quarter of 2020, the Company recognized a ROU asset impairment of $290.8 million, reducing the carrying value of the lease asset to its estimated fair value. Fair value was estimated using an income-approach based on management's forecast of future cash flows expected to be derived from the property based on current sublease market rent. Rent expense or sublease income related to
this lease will be recorded within other income (expense) on the unaudited consolidated statements of operations. There were no related ROU asset impairment charges for the three months ended September 30, 2020.
These charges require the Company to make certain judgements and estimates regarding the amount and timing of restructuring and related impairment charges or recoveries. The estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, 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 2020 restructuring plan, as well as prior restructuring plans in 2018 and 2017 are as follows:
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|
|
|
|
|
|
|
(In thousands)
|
Employee Related Costs
|
|
Contract Exit Costs
|
|
Other Restructuring Related Costs
|
|
Balance at January 1, 2020
|
$
|
462
|
|
|
$
|
17,843
|
|
|
$
|
—
|
|
|
Additions charged to expense
|
26,930
|
|
|
42,391
|
|
|
11,843
|
|
|
Cash payments charged against reserve
|
(4,279)
|
|
|
(14,618)
|
|
|
(3,699)
|
|
|
Changes in reserve estimate
|
(462)
|
|
|
42
|
|
|
—
|
|
|
Balance at September 30, 2020
|
$
|
22,651
|
|
|
$
|
45,658
|
|
|
$
|
8,144
|
|
4. Acquisition
On March 2, 2020, the Company acquired, on a cash free, debt free basis, 100% of Triple Pte. Ltd. ("Triple"), a distributor of the Company's products in Southeast Asia. The purchase price for the acquisition was $32.9 million in cash, net of $8.9 million of cash acquired that was held by Triple at closing and settlement of $5.1 million in pre-existing trade receivables due from Triple prior to the acquisition. The results of operations of this acquisition have been consolidated with those of the Company beginning on March 2, 2020.
There were no acquisition related costs expensed during the three months ended September 30, 2020. The Company recognized $1.0 million in acquisition related costs that were expensed during the nine months ended September 30, 2020. These costs are included in selling, general and administrative expenses within the unaudited consolidated statement of operations. Pro forma results are not presented, as the acquisition was not considered material to the consolidated Company.
5. Long-Lived Asset and Goodwill Impairment
Long-Lived Asset Impairment
As a result of the impacts of COVID-19, the Company determined that sufficient indicators existed to trigger the performance of an interim long-lived asset impairment analysis as of March 31, 2020. In the first quarter of 2020, the Company performed undiscounted cash flow analyses on it's long-lived assets, including retail stores at an individual store level. Based on these undiscounted cash flow analyses, the Company determined that certain long-lived assets had net carrying values that exceeded their estimated undiscounted future cash flows. The Company estimated the fair values of these long-lived assets based on their discounted cash flows or market rent assessments. The Company compared these estimated fair values to the net carrying values. Additionally, the Company recognized long-lived asset impairment charges of $4.0 million for the three months ended September 30, 2020, included within the North America operating segment. The Company recognized $87.8 million of long-lived asset impairment charges for the nine months ended September 30, 2020. The long-lived impairment charge was recorded within restructuring and impairment charges on the unaudited consolidated statements of operations and as a reduction to the related asset balances on the unaudited consolidated balance sheets. The long-lived asset impairment charges are included within the Company's operating segments as follows: $47.4 million recorded in North America, $25.5 million recorded in Asia-Pacific, $12.8 million recorded in Latin America, and $2.1 million recorded in EMEA for the nine months ended September 30, 2020.
The significant estimates used in the fair value methodology, which are based on Level 3 inputs, include: the Company's expectations for future operations and projected cash flows, including net revenue, gross profit and operating expenses and market conditions, including estimated market rent.
Additionally, the Company recognized $290.8 million of long-lived asset impairment charges related to the Company's New York City flagship store, which was recorded in connection with the Company's 2020 Restructuring Plan for the nine months ended September 30, 2020. Refer to Note 3 for further discussion of the restructuring and related impairment charges.
Goodwill Impairment
As a result of the impacts of COVID-19, the Company determined that sufficient indicators existed to trigger an interim goodwill impairment analysis for all of the Company’s reporting units as of March 31, 2020. In the first quarter of 2020, the Company performed discounted cash flow analyses and determined that the estimated fair values of the Latin America reporting unit and the Canada reporting unit, within the North America operating segment, no longer exceeded its carrying value, resulting in an impairment of goodwill. The Company recognized goodwill impairment charges of $51.6 million for the nine months ended September 30, 2020 for these reporting units. The goodwill impairment charge was recorded within restructuring and impairment charges on the unaudited consolidated statements of operations and as a reduction to the goodwill balance on the unaudited consolidated balance sheets. There were no triggering events or goodwill impairment charges recorded for the three months ended September 30, 2020.
The determination of the Company’s reporting units' fair value includes assumptions that are subject to various risks and uncertainties. The significant estimates used in the discounted cash flow analyses, which are based on Level 3 inputs, include: the Company’s weighted average cost of capital, adjusted for the risk attributable to the geographic regions of the reporting unit's business, long-term rate of growth and profitability of the reporting unit's business, working capital effects, and changes in market conditions, consumer trends or strategy.
As of March 31, 2020, the fair value of each of the Company's other reporting units substantially exceeded its carrying value with the exception of the EMEA reporting unit. The fair value of the EMEA reporting unit exceeded its carrying value by 16%. Holding all other assumptions used in the fair value measurement of the EMEA reporting unit constant, a reduction in the growth rate of revenue by 1.5 percentage points or a reduction in the growth rate of net income by 2.3 percentage points would eliminate the headroom. No events occurred during the three and nine months ended September 30, 2020 that indicated it was more likely than not that goodwill was impaired for this reporting unit.
The following table summarizes changes in the carrying amount of the Company’s goodwill by reportable segment as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
North America
|
|
EMEA
|
|
Asia-Pacific
|
|
Latin America
|
|
Connected Fitness
|
|
Total
|
|
Balance as of December 31, 2019
|
|
318,288
|
|
|
106,066
|
|
|
79,168
|
|
|
46,656
|
|
|
—
|
|
|
550,178
|
|
|
Effect of currency translation adjustment
|
|
(1,572)
|
|
|
1,076
|
|
|
5,950
|
|
|
(10,426)
|
|
|
—
|
|
|
(4,972)
|
|
|
Impairment
|
|
(15,345)
|
|
|
—
|
|
|
—
|
|
|
(36,230)
|
|
|
|
|
(51,575)
|
|
|
Balance as of September 30, 2020
|
|
$
|
301,371
|
|
|
$
|
107,142
|
|
|
$
|
85,118
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
493,631
|
|
6. Leases
The Company enters into operating leases both domestically and internationally, to lease certain warehouse space, office facilities, space for its brand and factory house stores and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2035, excluding extensions at the Company's option, and include provisions for rental adjustments.
The Company accounts for a contract as a lease when it has the right to direct the use of the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its right-of-use ("ROU") assets and lease liabilities at the lease commencement date and thereafter if modified. ROU assets represent the Company’s right to control the underlying assets under lease, over the contractual term. ROU assets and lease liabilities are recognized on the unaudited consolidated balance sheets based on the present value of future minimum lease payments to be made over the lease term. ROU assets and lease liabilities are established on the unaudited consolidated balance sheets for leases with an expected term greater than one year. Short-term lease payments were not material for the quarter ended September 30, 2020.
As the rate implicit in a lease is not readily determinable, the Company uses its secured incremental borrowing rate to determine the present value of the lease payments. The Company calculates the incremental borrowing rate based on the current market yield curve and adjusts for foreign currency for international leases.
Fixed lease costs are included in the recognition of ROU assets and lease liabilities. Variable lease costs are not included in the measurement of the lease liability. These variable lease payments are recognized in the unaudited consolidated statements of operations in the period in which the obligation for those payments is incurred. Variable lease payments primarily consist of payments dependent on sales in brand and factory house stores. The Company has elected to combine lease and non-lease components in the determination of lease costs for its leases. The lease liability includes lease payments related to options to extend or renew the lease term only if the Company is reasonably certain to exercise those options.
The Company recognizes lease expense on a straight-line basis over the lease term. Included in selling, general and administrative expenses were operating lease costs of $36.9 million and $37.6 million for the three months ended September 30, 2020 and 2019, respectively, and $108.6 million and $113.4 million for the nine months ended September 30, 2020 and 2019, respectively, under non-cancelable operating lease agreements. The operating lease costs include $2.9 million and $3.4 million in variable lease payments, for the three months ended September 30, 2020 and 2019, respectively, and $5.4 million and $8.8 million for the nine months ended September 30, 2020 and 2019, respectively.
As a result of the impacts of COVID-19, the Company sought concessions from landlords for certain leases of brand and factory house stores in the form of rent deferrals or rent waivers. Consistent with updated guidance from the FASB in April 2020, the Company elected to account for the accounting policy of treating these concessions as though the enforceable rights and obligations to the deferrals existed in the respective contracts at lease inception and will not account for the concessions as lease modifications, unless the concession results in a substantial change in the Company's obligations. The Company's rent deferrals had no impact to rent expense during the three and nine months ended September 30, 2020 and amounts deferred and payable in future periods have been included in short term lease liability on the Company's unaudited consolidated balance sheet as of September 30, 2020. The Company's rent waivers, which were recorded as a reduction of rent expense, were not material for the three and nine months ended September 30, 2020.
There are no residual value guarantees that exist, and there are no restrictions or covenants imposed by leases. The Company rents or subleases excess office facilities and warehouse space to third parties. Sublease income is not material.
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
|
Three months ended September 30, 2019
|
|
Weighted average remaining lease term (in years)
|
9.24
|
|
6.96
|
|
Weighted average discount rate
|
3.82
|
|
4.29
|
Supplemental cash flow and other information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
(In thousands)
|
2020
|
2019
|
2020
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
Operating cash outflows from operating leases
|
$
|
37,810
|
|
$
|
32,331
|
|
$
|
113,784
|
|
$
|
83,183
|
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
$
|
11,018
|
|
$
|
17,732
|
|
$
|
393,850
|
|
$
|
47,832
|
|
Maturities of lease liabilities are as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
2020
|
$
|
51,619
|
|
|
2021
|
184,576
|
|
|
2022
|
161,460
|
|
|
2023
|
143,281
|
|
|
2024
|
124,598
|
|
|
2025 and thereafter
|
564,996
|
|
|
Total lease payments
|
$
|
1,230,530
|
|
|
Less: Interest
|
200,854
|
|
|
Total present value of lease liabilities (1)
|
$
|
1,029,676
|
|
(1) Amounts above reflect lease liabilities associated with the Company's New York City flagship store lease, which commenced on March 1, 2020. Refer to Note 3 for discussion of the impairment of the associated ROU lease asset.
As of September 30, 2020, the Company has additional operating lease obligations that have not yet commenced of approximately $12.8 million which are not reflected in the table above.
7. Long Term Debt
Credit Facility
In May 2020, the Company entered into an amendment to the amended and restated credit agreement, dated as of March 8, 2019, by and among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and arrangers party thereto (the "prior credit agreement", as amended, the "amended credit agreement” or "the revolving credit facility"). As described below, the amended credit agreement provides the Company with certain relief from and revisions to its financial covenants for specified periods, which the Company expects will provide it with sufficient access to liquidity during the ongoing disruption related to the COVID-19 pandemic.
The amended credit agreement has a term of five years, maturing in March 2024, with permitted extensions under certain circumstances, and provides revolving credit commitments of up to $1.1 billion of borrowings, a reduction from the $1.25 billion of commitments under the prior credit agreement. During the three months ended September 30, 2020, the Company repaid $250 million of borrowings under the revolving credit facility, which the Company had borrowed as a precautionary measure in order to increase its cash position and preserve liquidity given the ongoing uncertainty in global markets resulting from the COVID-19 pandemic. As of September 30, 2020, December 31, 2019 and September 30, 2019, there were no amounts outstanding under the revolving credit facility.
Except during the covenant suspension period (as defined below), at the Company's request and the 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 under the revolving credit facility have maturities of less than one year. Up to $50.0 million of the facility may be used for the issuance of letters of credit. There were $15.5 million, $5.0 million and $5.1 million of letters of credit outstanding as of September 30, 2020, December 31, 2019 and September 30, 2019, respectively.
The obligations of the Company under the amended credit agreement, which under the prior credit agreement were unsecured and not guaranteed by subsidiaries, are guaranteed by certain domestic significant subsidiaries of the Company, subject to customary exceptions (the “subsidiary guarantors”) and primarily secured by a first-priority security interest in substantially all of the assets of the Company and the subsidiary guarantors, excluding real property, capital stock in and debt of subsidiaries of the Company holding certain real property and other customary exceptions.
As with the prior credit agreement, the amended credit agreement contains negative covenants that limit the Company's ability to engage in certain transactions. The negative covenant governing the incurrence of
indebtedness of the Company and its subsidiaries affords $50.0 million of additional capacity for secured debt, while the capacity to incur $100.0 million of additional unsecured debt remains unchanged from the prior credit agreement. The Company’s future investments in and loans to non-guarantor subsidiaries are subject to additional limitations under the amended credit agreement, as is the ability of the Company to sell assets outside the ordinary course of business. The amended credit agreement further provides for a temporary suspension of the Company’s ability to make certain voluntary restricted payments during the covenant suspension period.
The amended credit agreement also contains financial covenants that require the Company to comply with specific consolidated leverage and interest coverage ratios during specified periods. Under the prior credit agreement, the Company was required to maintain a ratio of consolidated EBITDA to consolidated interest expense of not less than 3.50 to 1.0 (the “interest coverage covenant”) and was 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 prior credit agreement. The amended credit agreement provides for suspensions of and adjustments to the leverage covenant (including definitional changes impacting the calculation of the ratio) and the interest coverage covenant beginning with the quarter ended June 30, 2020, and ending on the date on which financial statements for the quarter ended June 30, 2022 are delivered to lenders under the amended credit agreement (the “covenant suspension period”) as summarized below and described in more detail in the amended credit agreement:
•For the fiscal quarter ended June 30, 2020, the interest coverage covenant was suspended and the leverage covenant required that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.5 to 1.0.
•For the fiscal quarters ending September 30, 2020, December 31, 2020, March 31, 2021 and June 30, 2021, compliance with the interest coverage covenant and the leverage covenant are both suspended. Beginning on September 30, 2020 through and including December 31, 2021, the Company must instead maintain minimum liquidity of $550.0 million (the “liquidity covenant”) (with liquidity being the sum of certain cash and cash equivalents held by the Company and its subsidiaries and available borrowing capacity under the amended credit agreement).
•For the fiscal quarter ending September 30, 2021, the interest coverage covenant is suspended, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.5 to 1.0 and the Company must comply with the liquidity covenant.
•For the fiscal quarter ending December 31, 2021, the interest coverage covenant is suspended, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.0 to 1.0 and the Company must comply with the liquidity covenant.
•Beginning on January 1, 2022, the liquidity covenant is terminated. For the fiscal quarter ending March 31, 2022, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 3.5 to 1.0 and the interest coverage covenant will require that the ratio of consolidated EBITDA to consolidated interest expense be greater than or equal to 3.5 to 1.0.
As of September 30, 2020, the Company was in compliance with the applicable covenants.
In addition, the amended credit agreement contains events of default that are customary for a facility of this nature and similar to the prior credit agreement, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the amended credit agreement, will be considered an event of default under the amended credit agreement.
During the covenant suspension period, the applicable margin for loans will be 2.00% for adjusted LIBOR loans and 1.00% for alternate base rate loans. Otherwise, borrowings under 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 1.25% to 1.75% for adjusted LIBOR loans and 0.25% to 0.75% for alternate base rate loans. The weighted average interest rate under the revolving credit facility borrowings was 2.1% during the three months ended September 30, 2020, and 2.3% and 3.6% for the nine months ended September 30, 2020 and 2019, respectively. During the covenant suspension period, the commitment fee rate will be 0.40% per annum. Otherwise, the Company pays 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, 2020, the commitment fee was 15.0 basis points. The Company incurred and deferred $7.2 million in financing costs in connection with the amended credit agreement.
1.50% Convertible Senior Notes
In May 2020, the Company issued $500.0 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at the rate of 1.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The Convertible Senior Notes will mature on June 1, 2024, unless earlier converted in accordance with their terms, redeemed in accordance with their terms or repurchased.
The net proceeds from the offering (including the net proceeds from the exercise of the over-allotment option) was $488.8 million, after deducting the initial purchasers’ discount and estimated offering expenses paid by the Company, of which the Company used $47.9 million to pay the cost of the capped call transactions described below. The Company utilized $439.9 million to repay indebtedness outstanding under its revolving credit facility and pay related fees and expenses.
The Convertible Senior Notes are not secured and are not guaranteed by any of the Company’s subsidiaries. The indenture governing the Convertible Senior Notes does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries.
The Convertible Senior Notes are convertible into cash, shares of the Company’s Class C common stock or a combination of cash and shares of Class C common stock, at the Company’s election as described further below. The initial conversion rate is 101.8589 shares of the Company’s Class C common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $9.82 per share of Class C common stock), subject to adjustment if certain events occur. Prior to the close of business on the business day immediately preceding January 1, 2024, the Convertible Senior Notes will be convertible only upon satisfaction of one or more of the following conditions:
•during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s Class C common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class C common stock and the conversion rate on each such trading day;
•upon the occurrence of specified corporate events or distributions on the Company’s Class C common stock; or
•if the Company calls any Convertible Senior Notes for redemption prior to the close of business on the business day immediately preceding January 1, 2024.
On or after January 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Senior Notes at the conversion rate at any time irrespective of the foregoing conditions.
On or after December 6, 2022, the Company may redeem for cash all or any part of the Convertible Senior Notes, at its option, if the last reported sale price of the Company’s Class C common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If the Company undergoes a fundamental change (as defined in the indenture governing the Convertible Senior Notes) prior to the maturity date, subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Convertible Senior Notes in principal amounts of $1,000 or an integral multiple thereof at a price which will be equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Concurrently with the offering of the Convertible Senior Notes, the Company entered into privately negotiated capped call transactions with JPMorgan Chase Bank, National Association, HSBC Bank USA, National Association and Citibank, N.A. (the “option counterparties”). The capped call transactions are expected generally to
reduce potential dilution to the Company’s Class C common stock upon any conversion of Convertible Senior Notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted Convertible Senior Notes upon any conversion thereof, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactions is initially $13.4750 per share of the Company’s Class C common stock, representing a premium of 75% above the last reported sale price of the Company’s Class C common stock on May 21, 2020, and is subject to certain adjustments under the terms of the capped call transactions.
The Convertible Senior Notes contain a cash conversion feature, and as a result, the Company has separated it into liability and equity components. The Company valued the liability component based on its borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which is recognized as a debt discount, was valued as the difference between the face value of the Convertible Senior Notes and the fair value of the liability component.
In connection with the Convertible Senior Notes issuance, the Company incurred deferred financing costs of $12.3 million, primarily related to fees paid to the initial purchasers of the offering, as well as legal and accounting fees. These costs were allocated on a pro rata basis, with $10.1 million allocated to the debt component and $2.2 million allocated to the equity component.
The debt discount and the debt portion of the deferred financing costs are being amortized to interest expense over the term of the Convertible Senior Notes using an effective interest rate of 6.8%.
The Convertible Senior Notes consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30, 2020
|
September 30, 2019
|
|
Liability component
|
|
|
|
Principal
|
$
|
500,000
|
|
$
|
—
|
|
|
Unamortized debt discount
|
(84,127)
|
|
—
|
|
|
Unamortized issuance costs
|
(9,123)
|
|
—
|
|
|
Net carrying amount
|
$
|
406,750
|
|
$
|
—
|
|
|
|
|
|
|
Equity component, net of issuance costs
|
$
|
88,672
|
|
$
|
—
|
|
Interest expense related to the Convertible Senior Notes consists of the following as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
(In thousands)
|
2020
|
2019
|
2020
|
2019
|
|
Coupon interest
|
$
|
1,875
|
|
$
|
—
|
|
$
|
2,500
|
|
$
|
—
|
|
|
Non-cash amortization of debt discount
|
5,040
|
|
—
|
|
6,720
|
|
—
|
|
|
Amortization of deferred financing costs
|
622
|
|
—
|
|
829
|
|
—
|
|
|
Convertible senior notes interest expense
|
$7,537
|
$0
|
$10,049
|
$0
|
In connection with the issuance of the Convertible Senior Notes, the Company recorded an $11.0 million net deferred tax liability and a corresponding reduction in valuation allowance. As a result, there was no net impact to the Company’s deferred income taxes or additional paid in capital on the unaudited consolidated balance sheet.
3.250% Senior Notes
In June 2016, the Company issued $600.0 million aggregate principal amount of 3.250% senior unsecured notes due June 15, 2026 (the “Senior Notes”). Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. The Company may redeem some or all of the Senior Notes at any time, or from time to time, at redemption prices described in the indenture governing the Senior Notes. The indenture governing the Senior Notes contains negative covenants that limit the Company’s ability to engage in certain transactions and are subject to material exceptions described in the indenture. The Company incurred and deferred $5.3 million in financing costs in connection with the Senior Notes.
Interest Expense
Interest expense, net, was $15.0 million and $5.7 million for the three months ended September 30, 2020 and 2019, respectively, and $32.3 million and $15.9 million for the nine months ended September 30, 2020 and 2019, respectively, inclusive of amounts related to the Senior Convertible Notes, as detailed above. Interest expense includes amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long term debt facilities.
The Company monitors the financial health and stability of its lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets, lenders could be negatively impacted in their ability to perform under these facilities.
8. Commitments and Contingencies
From time to time, the Company is involved in litigation and other proceedings, including matters related to commercial and intellectual property disputes, as well as trade, regulatory and other claims related to its business. Other than as described below, the Company believes that all current proceedings are routine in nature and incidental to the conduct of its business, and that the ultimate resolution of any such proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
In re Under Armour Securities Litigation
On March 23, 2017, 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 August 4, 2017, the lead plaintiff in the Consolidated Securities Action, Aberdeen City Council as Administrating Authority for the North East Scotland Pension Fund (“Aberdeen”), joined by named plaintiff Bucks County Employees Retirement Fund (“Bucks County”), filed a consolidated amended complaint (the “Amended Complaint”) against the Company, the Company’s then-Chief Executive Officer, Kevin Plank, and former Chief Financial Officers Lawrence Molloy and Brad Dickerson. The Amended Complaint alleged violations of Section 10(b) (and Rule 10b-5) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 20(a) control person liability under the Exchange Act against the officers named in the Amended Complaint, claiming that the defendants made material misstatements and omissions regarding, among other things, the Company's growth and consumer demand for certain of the Company's products. The class period identified in the Amended Complaint is September 16, 2015 through January 30, 2017. The Amended Complaint also asserted claims under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), in connection with the Company’s public offering of senior unsecured notes in June 2016. The Securities Act claims were asserted against the Company, Mr. Plank, Mr. Molloy, the Company’s directors who signed the registration statement pursuant to which the offering was made and the underwriters that participated in the offering. The Amended Complaint alleged that the offering materials utilized in connection with the offering contained false and/or misleading statements and omissions regarding, among other things, the Company’s growth and consumer demand for certain of the Company’s products.
On November 9, 2017, the Company and the other defendants filed motions to dismiss the Amended Complaint. On September 19, 2018, the District Court dismissed the Securities Act claims with prejudice and the Exchange Act claims without prejudice. Lead plaintiff Aberdeen, joined by named plaintiff Monroe County Employees’ Retirement Fund (“Monroe”), filed a Second Amended Complaint on November 16, 2018, asserting claims under the Exchange Act and naming the Company and Mr. Plank as the remaining defendants. The remaining defendants filed a motion to dismiss the Second Amended Complaint on January 17, 2019. On August 19, 2019, the District Court dismissed the Second Amended Complaint with prejudice.
In September 2019, plaintiffs Aberdeen and Bucks County filed an appeal in the United States Court of Appeals for the Fourth Circuit challenging the decisions by the District Court on September 19, 2018 and August 19, 2019 (the “Appeal”). The Appeal was fully briefed as of January 16, 2020.
On November 6 and December 17, 2019, two purported shareholders of the Company filed putative securities class actions in the District Court against the Company and certain of its current and former executives (captioned Patel v. Under Armour, Inc., No. 1:19-cv-03209-RDB (“Patel”), and Waronker v. Under Armour, Inc., No. 1:19-cv-03581-RDB (“Waronker”), respectively). The complaints in Patel and Waronker alleged violations of Section 10(b) (and Rule 10b-5) of the Exchange Act, against all defendants, and Section 20(a) control person liability under the Exchange Act against the current and former officers named in the complaints. The complaints claimed that the
defendants’ disclosures and statements supposedly misrepresented or omitted that the Company was purportedly shifting sales between quarterly periods allegedly to appear healthier and that the Company was under investigation by and cooperating with the United States Department of Justice (“DOJ”) and the United States Securities and Exchange Commission (“SEC”) since July 2017.
On November 18, 2019, Aberdeen, the lead plaintiff in the Consolidated Securities Action, filed in the District Court a motion for an indicative ruling under Federal Rule of Civil Procedure 62.1 (the “Rule 62.1 Motion”) seeking relief from the final judgment pursuant to Federal Rule of Civil Procedure 60(b). The Rule 62.1 Motion alleged that purported newly discovered evidence entitled Aberdeen to relief from the District Court’s final judgment. Aberdeen also filed motions seeking (i) to consolidate the Patel and Waronker cases with the Consolidated Securities Action, and (ii) to be appointed lead plaintiff over the consolidated cases.
On January 22, 2020, the District Court granted Aberdeen’s Rule 62.1 motion and indicated that it would grant a motion for relief from the final judgment and provide Aberdeen with the opportunity to file a third amended complaint if the Fourth Circuit remanded for that purpose. The District Court further stated that it would, upon remand, consolidate the Patel and Waronker cases with the Consolidated Securities Action and appoint Aberdeen as the lead plaintiff over the consolidated cases.
On August 13, 2020, the Fourth Circuit remanded the Appeal to the District Court for the limited purpose of allowing the District Court to rule on Aberdeen’s motion seeking relief from the final judgment pursuant to Federal Rule of Civil Procedure 60(b). On September 14, 2020, the District Court issued an order granting that relief. The District Court’s order also consolidated the Patel and Waronker cases into the Consolidated Securities Action and appointed Aberdeen as lead plaintiff over the Consolidated Securities Action.
On October 14, 2020, Aberdeen, along with named plaintiffs Monroe and KBC Asset Management NV, filed a third amended complaint (the “TAC”) in the Consolidated Securities Action, asserting claims under Sections 10(b) and 20(a) of the Exchange Act against the Company and Mr. Plank and under Section 20A of the Exchange Act against Mr. Plank. The TAC alleges that the defendants supposedly concealed purportedly declining consumer demand for certain of the Company's products between the third quarter of 2015 and the fourth quarter of 2016 by making allegedly false and misleading statements regarding the Company’s performance and future prospects and by engaging in undisclosed and allegedly improper sales and accounting practices, including shifting sales between quarterly periods allegedly to appear healthier. The TAC also alleges that the defendants purportedly failed to disclose that the Company was under investigation by and cooperating with DOJ and the SEC since July 2017. The class period identified in the TAC is September 16, 2015 through November 1, 2019.
The Company continues to believe that the claims asserted in the Consolidated Securities Action are without merit and intends to defend the lawsuit vigorously. However, because of the inherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of this matter.
2018 Derivative Complaints
In June and July 2018, three purported stockholder derivative complaints were filed. Two of the complaints were filed in Maryland state court (in cases captioned Kenney v. Plank, et al. (filed June 29, 2018) and Luger v. Plank, et al. (filed July 26, 2018), respectively), and those cases were consolidated on October 19, 2018 under the caption Kenney v. Plank, et. al. The other complaint was filed in the United States District Court for the District of Maryland (in a case captioned Andersen v. Plank et al. (filed July 23, 2018)). The operative complaints in these cases name Mr. Plank, certain other current and former members of the Company’s Board of Directors and certain former Company executives as defendants, and name the Company as a nominal defendant. The operative complaints include allegations similar to those in the Amended Complaint in the Consolidated Securities Action matter discussed above, challenging, among other things, the Company’s disclosures related to growth and consumer demand for certain of the Company’s products and stock sales by certain individual defendants. The operative complaints in each of these cases assert breach of fiduciary duty and unjust enrichment claims against the individual defendants. These complaints seek damages on behalf of the Company and certain corporate governance related actions.
The operative complaint in the Kenney matter also makes allegations related to the Company’s purchase of certain parcels of land from entities controlled by Mr. Plank (through Sagamore Development Company, LLC (“Sagamore”)). Sagamore purchased the parcels in 2014. Its total investment in the parcels was approximately $72.0 million, which included the initial $35.0 million purchase price for the property, an additional $30.6 million to terminate a lease encumbering the property and approximately $6.4 million of development costs. As previously disclosed, in June 2016, the Company purchased the unencumbered parcels for $70.3 million in order to further expand the Company’s corporate headquarters to accommodate its growth needs. The Company negotiated a
purchase price for the parcels that it determined represented the fair market value of the parcels and approximated the cost to the seller to purchase and develop the parcels. In connection with its evaluation of the potential purchase, the Company engaged an independent third-party to appraise the fair market value of the parcels, and the Audit Committee of the Company’s Board of Directors engaged its own independent appraisal firm to assess the parcels. The Audit Committee determined that the terms of the purchase were reasonable and fair, and the transaction was approved by the Audit Committee in accordance with the Company’s policy on transactions with related persons. The operative complaint asserts breach of fiduciary duty and corporate waste claims against the individual defendants in connection with the Company’s purchase of these parcels and a claim against Sagamore for supposedly aiding and abetting those alleged breaches.
The Andersen action was stayed from December 2018 to August 2019 and again from September 2019 to September 2020 (the “2019 Stay Order”). Pursuant to a court ordered stipulation issued in October 2020, the parties in the Andersen action have agreed to present to the court a schedule for further proceedings in the action on or before November 20, 2020 and that the terms of the 2019 Stay Order shall remain in effect through and including November 20, 2020.
On March 29, 2019, the court in the consolidated Kenney action granted the Company’s and the defendants’ motion to stay that case pending the outcome of both the Consolidated Securities Action and an earlier-filed derivative action asserting similar claims relating to the Company’s purchase of parcels in Port Covington (which action has since been dismissed in its entirety). The court ordered stay in the consolidated Kenney action remains in effect at this time.
Prior to the filing of the derivative complaints in Kenney v. Plank, et al., Luger v. Plank, et al., and Andersen v. Plank et al., each of the purported stockholders had sent the Company’s Board of Directors a letter demanding that the Company pursue claims similar to the claims asserted in the derivative complaints. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company and informed each of these purported stockholders of that determination.
The Company believes that the claims asserted in the derivative complaints are without merit and intends to defend these matters vigorously. However, because of the inherent uncertainty as to the outcome of these proceedings, the Company is unable at this time to estimate the possible impact of the outcome of these matters.
2020 Derivative Complaints
Between August 11, 2020 and October 21, 2020, five purported shareholder derivative complaints were filed. Three complaints were filed in Maryland state court (in cases captioned Cordell v. Plank, et al. (filed August 11, 2020), Klein v. Plank, et al. (filed October 2, 2020), and Salo v. Plank, et al. (filed October 21, 2020), respectively). The other two complaints were filed in the United States District Court for the District of Maryland (in cases captioned Olin v. Plank, et al. (filed September 1, 2020), and Smith v. Plank, et al. (filed September 8, 2020), respectively). The complaints in these cases name Mr. Plank, certain other current and former members of the Company’s Board of Directors, and certain current and former Company executives as defendants, and name the Company as a nominal defendant.
The complaints in these actions assert allegations similar to those in the TAC filed in the Consolidated Securities Action matter discussed above, including allegations challenging (i) the Company’s disclosures related to growth and consumer demand for certain of the Company’s products; (ii) the Company’s practice of shifting sales between quarterly periods supposedly to appear healthier and its purported failure to disclose that practice; (iii) the Company’s internal controls with respect to revenue recognition and inventory management; (iv) the Company’s supposed failure to timely disclose investigations by the SEC and DOJ; (v) the compensation paid to the Company’s directors and executives while the alleged wrongdoing was occurring; and/or (vi) stock sales by certain individual defendants. The complaints assert breach of fiduciary duty, gross mismanagement, unjust enrichment, and/or corporate waste claims against the individual defendants. These complaints seek damages on behalf of the Company and certain corporate governance related actions.
Prior to the filing of the derivative complaints in these five actions, none of the purported stockholders made a demand that the Company’s Board of Directors pursue the claims asserted in the complaints.
The Company believes that the claims asserted in these derivative complaints are without merit and intends to defend these matters vigorously. However, because of the inherent uncertainty as to the outcome of these proceedings, the Company is unable at this time to estimate the possible impact of the outcome of these matters.
Wells Notices
In addition to the Company’s material pending legal proceedings, as previously disclosed, in July 2020, the Company, as well as Kevin Plank and David Bergman (together, the “Executives”), received “Wells Notices” from the SEC relating to the Company’s disclosures covering the third quarter of 2015 through the period ending December 31, 2016, regarding the use of “pull forward” sales in connection with revenue during those quarters. The Wells Notices informed the Company that the SEC Staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company and each of the Executives that would allege certain violations of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and certain rules promulgated thereunder. The Wells Notices delivered to the Executives also reference potential charges related to the Executives’ participation in the Company’s violations, as well as control person liability under the Exchange Act.
The potential relief to be sought referenced in the Wells Notices included an injunction, a cease-and-desist order, disgorgement, prejudgment interest, and civil monetary penalties, as well as, in the case of the Executives, a bar from serving as an officer or director of a public company. A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law, and to date no legal proceedings have been brought against the Company or the Executives with respect to this matter. The Company and the Executives maintain that their actions were appropriate and are pursuing the Wells Notice process, and also are engaging in a dialogue with the SEC Staff to work toward a resolution of this matter.
Data Incident
In 2018, an unauthorized third party acquired data associated with the Company's Connected Fitness users' accounts for the Company's MyFitnessPal application and website. The Company has faced consumer class action lawsuits associated with this incident and has received inquiries regarding the incident from certain government regulators and agencies. The Company does not currently consider these matters to be material and believes its insurance coverage will provide coverage should any significant expense arise.
9. Fair Value 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 (liabilities) measured at fair value on a recurring basis are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
September 30, 2019
|
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Derivative foreign currency contracts (see Note 11)
|
|
$
|
—
|
|
|
$
|
(203)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7,151)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,695
|
|
|
$
|
—
|
|
|
TOLI policies held by the Rabbi Trust
|
|
—
|
|
|
7,229
|
|
|
—
|
|
|
—
|
|
|
6,543
|
|
|
—
|
|
|
—
|
|
|
6,139
|
|
|
—
|
|
|
Deferred Compensation Plan obligations
|
|
—
|
|
|
(13,113)
|
|
|
—
|
|
|
—
|
|
|
(10,839)
|
|
|
—
|
|
|
—
|
|
|
(10,269)
|
|
|
—
|
|
Fair values of the financial assets and liabilities listed above are determined using inputs that use as their basis readily observable market data that are actively quoted and are validated through external sources, including third-party pricing services and brokers. The foreign currency contracts represent unrealized gains and losses on derivative contracts, which is the net difference between the U.S. dollar value to be received or paid at the contracts’
settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current market exchange rate. The fair value of the trust owned life insurance (“TOLI”) policies held by the Rabbi Trust are based on the cash-surrender value of the life insurance policies, which are invested primarily in mutual funds and a separately managed fixed income fund. These investments are initially made in the same funds and purchased in substantially the same amounts as the selected investments of participants in the Under Armour, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), which represent the underlying liabilities to participants in the Deferred Compensation Plan. Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments.
As of September 30, 2020, the fair value of the Company's Convertible Senior Notes was $624.8 million. As of September 30, 2020, December 31, 2019, and September 30, 2019, the fair value of the Company's Senior Notes was $566.6 million, $587.5 million and $579.7 million, respectively. The carrying value of the Company's other long term debt approximated its fair value as of September 30, 2020, December 31, 2019 and September 30, 2019. The fair value of long term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2).
Some assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets and goodwill that have been reduced to fair value when impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
10. Stock Based Compensation
Performance-Based Equity Compensation
The Company grants a combination of time-based and performance-based restricted stock units and stock options as part of its incentive compensation. Certain senior executives are eligible to receive performance-based awards. The Company did not grant any performance-based restricted stock units or stock options during the three and nine months ended September 30, 2020. During 2019, the Company granted performance-based restricted stock units or stock options with vesting conditions tied to the achievement of revenue and operating income targets for 2019 and 2020. As of March 31, 2020, the Company deemed the achievement of these revenue and operating income targets improbable, accordingly, a reversal of $2.9 million of expense was recorded for the performance-based restricted stock units and stock options. No expense for these awards was recorded during the three months ended September 30, 2020.
11. Risk Management and Derivatives
The Company is exposed to global market risks, including the effects of changes in foreign currency and interest rates. The Company uses derivative instruments to manage financial exposures that occur in the normal course of business and does not hold or issue derivatives for trading or speculative purposes.
The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to forecasted cash flows and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships.
The Company's foreign exchange risk management program consists of designated cash flow hedges and undesignated hedges. As of September 30, 2020, the Company has hedge instruments, primarily for U.S Dollar/Chinese Renminbi, British Pound/U.S. Dollar, Euro/U.S. Dollar, U.S. Dollar/Canadian Dollar, Australian Dollar/U.S. Dollar, and U.S. Dollar/Mexican Peso currency pairs. All derivatives are recognized on the unaudited consolidated balance sheets at fair value and classified based on the instrument’s maturity date.
The following table presents the fair values of derivative instruments within the unaudited consolidated balance sheets. Refer to Note 9 for a discussion of the fair value measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balance Sheet Classification
|
September 30, 2020
|
|
December 31, 2019
|
|
September 30, 2019
|
|
|
|
Derivatives designated as hedging instruments under ASC 815
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
Other current assets
|
$
|
5,659
|
|
|
$
|
4,040
|
|
|
$
|
18,866
|
|
|
|
|
|
|
Foreign currency contracts
|
Other long term assets
|
—
|
|
|
24
|
|
|
1,220
|
|
|
|
|
|
|
Total derivative assets designated as hedging instruments
|
$
|
5,659
|
|
|
$
|
4,064
|
|
|
$
|
20,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
Other current liabilities
|
$
|
4,942
|
|
|
$
|
8,772
|
|
|
$
|
1,260
|
|
|
|
|
|
|
Foreign currency contracts
|
Other long term liabilities
|
—
|
|
|
$
|
2,443
|
|
|
$
|
—
|
|
|
|
|
|
|
Total derivative liabilities designated as hedging instruments
|
$
|
4,942
|
|
|
$
|
11,215
|
|
|
$
|
1,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under ASC 815
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
Other current assets
|
$
|
5,373
|
|
|
$
|
2,337
|
|
|
$
|
1,393
|
|
|
|
|
|
|
Total derivative assets not designated as hedging instruments
|
$
|
5,373
|
|
|
$
|
2,337
|
|
|
$
|
1,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
Other current liabilities
|
$
|
1,714
|
|
|
$
|
9,510
|
|
|
$
|
2,794
|
|
|
|
|
|
|
Total derivative liabilities not designated as hedging instruments
|
$
|
1,714
|
|
|
$
|
9,510
|
|
|
$
|
2,794
|
|
|
|
|
|
The following table presents the amounts in the unaudited consolidated statements of operations in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(In thousands)
|
Total
|
Amount of Gain (Loss) on Cash Flow Hedge Activity
|
|
Total
|
Amount of Gain (Loss) on Cash Flow Hedge Activity
|
|
Total
|
Amount of Gain (Loss) on Cash Flow Hedge Activity
|
|
Total
|
Amount of Gain (Loss) on Cash Flow Hedge Activity
|
|
Net revenues
|
$
|
1,433,021
|
|
$218
|
|
$
|
1,429,456
|
|
$
|
6,125
|
|
|
$
|
3,070,901
|
|
$3,495
|
|
$3,825,907
|
$
|
14,337
|
|
|
Cost of goods sold
|
746,701
|
|
4,496
|
|
|
739,558
|
|
1,317
|
|
|
1,604,428
|
|
7,179
|
|
|
2,036,901
|
|
3,525
|
|
|
Interest expense, net
|
(14,955)
|
|
(9)
|
|
|
(5,655)
|
|
(9)
|
|
|
(32,251)
|
|
(27)
|
|
|
(15,881)
|
|
1,607
|
|
|
Other expense, net
|
(7,184)
|
|
4
|
|
|
(429)
|
|
44
|
|
|
(10,493)
|
|
25
|
|
|
(2,224)
|
|
836
|
|
The following tables present the amounts affecting the unaudited statements of comprehensive income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balance as of
June 30, 2020
|
Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives
|
Amount of gain (loss) reclassified from other comprehensive income (loss) into income
|
Balance as of September 30, 2020
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
Foreign currency contracts
|
26,200
|
|
(18,432)
|
|
4,701
|
|
3,066
|
|
|
Interest rate swaps
|
(559)
|
|
—
|
|
(9)
|
|
(550)
|
|
|
Total designated as cash flow hedges
|
$
|
25,641
|
|
$
|
(18,432)
|
|
$
|
4,692
|
|
$
|
2,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balance as of
December 31, 2019
|
Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives
|
Amount of gain (loss) reclassified from other comprehensive income (loss) into income
|
Balance as of September 30, 2020
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
Foreign currency contracts
|
(6,005)
|
|
19,727
|
|
10,655
|
|
3,066
|
|
|
Interest rate swaps
|
(577)
|
|
—
|
|
(27)
|
|
(550)
|
|
|
Total designated as cash flow hedges
|
$
|
(6,582)
|
|
$
|
19,727
|
|
$
|
10,628
|
|
$
|
2,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balance as of
June 30, 2019
|
Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives
|
Amount of gain (loss) reclassified from other comprehensive income (loss) into income
|
Balance as of
September 30, 2019
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
Foreign currency contracts
|
11,595
|
|
17,378
|
|
7,495
|
|
21,478
|
|
|
Interest rate swaps
|
(595)
|
|
—
|
|
(9)
|
|
(586)
|
|
|
Total designated as cash flow hedges
|
$
|
11,000
|
|
$
|
17,378
|
|
$
|
7,486
|
|
$
|
20,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balance as of
December 31, 2018
|
Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives
|
Amount of gain (loss) reclassified from other comprehensive income (loss) into income
|
Balance as of
September 30, 2019
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
Foreign currency contracts
|
21,908
|
|
18,277
|
|
18,707
|
|
21,478
|
|
|
Interest rate swaps
|
954
|
|
67
|
|
1,607
|
|
(586)
|
|
|
Total designated as cash flow hedges
|
$
|
22,862
|
|
$
|
18,344
|
|
$
|
20,314
|
|
$
|
20,892
|
|
The following table presents the amounts in the unaudited consolidated statements of operations in which the effects of undesignated derivative instruments are recorded and the effects of fair value hedge activity on these line items.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(In thousands)
|
Total
|
Amount of Gain (Loss) on Fair Value Hedge Activity
|
|
Total
|
Amount of Gain (Loss) on Fair Value Hedge Activity
|
|
Total
|
Amount of Gain (Loss) on Fair Value Hedge Activity
|
|
Total
|
Amount of Gain (Loss) on Fair Value Hedge Activity
|
|
Other expense, net
|
$
|
(7,184)
|
|
$
|
(962)
|
|
|
$
|
(429)
|
|
$
|
(474)
|
|
|
$
|
(10,493)
|
|
$
|
1,022
|
|
|
$
|
(2,224)
|
|
$
|
(2,629)
|
|
Cash Flow Hedges
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions generated by its international subsidiaries in currencies other than their local currencies. These gains and losses are driven by non-functional currency generated revenue, non-functional currency inventory purchases, investments in U.S. Dollar denominated available-for-sale debt securities, and certain other intercompany transactions. The Company enters into foreign currency contracts to reduce the risk associated with the foreign currency exchange rate fluctuations on these transactions. Certain contracts are designated as cash flow hedges. As of September 30, 2020, December 31, 2019 and September 30, 2019, the aggregate notional value of the Company's outstanding cash flow hedges was $301.2 million, $879.8 million and $568.3 million, respectively, with contract maturities ranging from one to twenty-four months.
The Company may enter into long term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of the Company's long term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations. The interest rate swap
contracts are accounted for as cash flow hedges. Refer to Note 7 for a discussion of long term debt. As of September 30, 2020, the Company had no outstanding interest rate swap contracts.
For contracts designated as cash flow hedges, the changes in fair value are reported as other comprehensive income (loss) and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. Effective hedge results are classified in the unaudited consolidated statements of operations in the same manner as the underlying exposure.
The Company evaluated the probability of certain hedged forecasted transactions and determined certain transactions, against which hedges were designated, were no longer probable of occurring by the end of the originally specified time period, as a result of the impacts of COVID-19. The amounts recorded in other income (expense), previously recorded in accumulated other comprehensive income, as a result of the discontinuance of cash flow hedges were not material for the nine months ended September 30, 2020. There were no amounts recorded in other income (expense) as a result of the discontinuance of cash flow hedges for the three months ended September 30, 2020.
Undesignated Derivative Instruments
The Company may elect to enter into foreign exchange forward contracts to mitigate the change in fair value of specific assets and liabilities on the unaudited consolidated balance sheets. These undesignated instruments are recorded at fair value as a derivative asset or liability on the unaudited consolidated balance sheets with their corresponding change in fair value recognized in other expense, net, together with the re-measurement gain or loss from the hedged balance sheet position. As of September 30, 2020, December 31, 2019 and September 30, 2019, the total notional value of the Company's outstanding undesignated derivative instruments was $262.9 million, $304.2 million and $454.0 million, respectively.
Credit Risk
The Company enters into derivative contracts with major financial institutions with investment grade credit ratings and is exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the derivative contracts. However, the Company monitors the credit quality of these financial institutions and considers the risk of counterparty default to be minimal.
12. Provision for Income Taxes
Provision for Income Taxes
The effective rates for income taxes were (10.2)% and 22.1% for the three months ended September 30, 2020 and 2019, respectively. The change in the Company’s effective tax rate was primarily driven by the proportion of earnings subject to tax in the United States as compared to foreign jurisdictions in each period and the recording of valuation allowances against the majority of 2020 losses forecasted in the United States and discrete items during the three months ended September 30, 2020.
Cares Act
On March 27, 2020 the United States enacted the CARES Act to combat the negative economic impact of the COVID-19 pandemic. The CARES Act includes several provisions aimed at assisting corporate taxpayers, including the allowance of a five-year carryback for net operating losses originating in the 2018, 2019, and 2020 tax years; removal of the taxable income limitation on net operating loss utilization for tax years before 2021; loosening of the interest deduction limitation in the 2019 and 2020 tax years; and technical corrections from the Tax Cuts and Jobs Act related to the tax life for qualified improvement property.
The Company’s effective tax rate for the three months ended September 30, 2020 includes the income tax accounting impacts of the CARES Act. More specifically, the effective tax rate includes a benefit for the portion of forecasted 2020 net operating losses in the United State federal jurisdiction able to be carried back to offset taxable income in the five-year carryback period. This benefit partially offsets the impact of recording valuation allowances against the majority of the Company’s deferred tax assets in the United States federal jurisdiction.
Valuation Allowance
The Company evaluates on a quarterly basis whether the deferred tax assets are realizable which requires significant judgment. The Company considers all available positive and negative evidence, including historical operating performance and expectations of future operating performance. To the extent the Company believes it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established
against the Company's deferred tax assets, which increase income tax expense in the period when such a determination is made.
As noted in the Company's Annual Report on Form 10-K, a significant portion of the Company’s deferred tax assets relate to United States federal and state taxing jurisdictions. Realization of these deferred tax assets is dependent on future United States pre-tax earnings. As of December 31, 2019 the Company believed the weight of the positive evidence outweighed the negative evidence regarding the realization of the Company’s United States federal deferred tax assets and no valuation allowance was recorded. However, the weight of the negative evidence outweighed the positive evidence regarding the realization of the majority of the Company’s United States state deferred tax assets and a valuation allowance was recorded.
Based on developments during the first quarter of 2020, including the negative economic impact of the COVID-19 pandemic and an increase in the range of pre-tax charges forecast to be incurred in connection with the 2020 Restructuring Plan, the Company no longer believes it is more likely than not that a majority of the Company’s U.S. federal deferred tax assets will be realized. As such in the first quarter of 2020, the Company recorded a valuation allowance on the portion of U.S. deferred tax assets which are not forecast to be utilized with the 2020 net operating loss carryback. Additionally, based on similar factors during the first quarter of 2020, the Company recorded a valuation allowance on all China deferred tax assets. The Company has recorded additional valuation allowances on pre-tax losses incurred year to date for the US and China during the second and third quarter of 2020 and will continue to evaluate the Company’s ability to realize its deferred tax assets on a quarterly basis.
13. Earnings per Share
The following represents a reconciliation from basic income (loss) per share to diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(In thousands, except per share amounts)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
38,946
|
|
|
$
|
102,315
|
|
|
$
|
(733,630)
|
|
|
$
|
107,443
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding Class A, B and C
|
454,541
|
|
|
451,385
|
|
|
453,847
|
|
|
450,739
|
|
|
Effect of dilutive securities Class A, B, and C
|
2,133
|
|
|
3,310
|
|
|
—
|
|
|
3,308
|
|
|
Weighted average common shares and dilutive securities outstanding Class A, B, and C
|
456,674
|
|
|
454,695
|
|
|
453,847
|
|
|
454,047
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share of Class A, B and C common stock
|
$
|
0.09
|
|
|
$
|
0.23
|
|
|
$
|
(1.62)
|
|
|
$
|
0.24
|
|
|
Diluted net income (loss) per share of Class A, B and C common stock
|
$
|
0.09
|
|
|
$
|
0.23
|
|
|
$
|
(1.62)
|
|
|
$
|
0.24
|
|
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options and restricted stock units representing 7.3 million and 0.6 million shares of Class A and C common stock outstanding for the three months ended September 30, 2020 and 2019, respectively, and 1.9 million for the nine months ended September 30, 2019, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Due to the Company being in a net loss position for the nine months months ended September 30, 2020, there were no stock options or restricted stock units included in the computation of diluted earnings per share, as their effect would have been anti-dilutive.
14. Segment Data and Disaggregated Revenue
The Company’s operating segments are based on how the Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. As such, the CODM receives discrete financial information for the Company's principal business by geographic region based on the Company’s strategy to become a global brand. These geographic regions include North America, Europe, the Middle East and Africa (“EMEA”), Asia-Pacific, and Latin America. Each geographic segment operates exclusively in one industry: the
development, marketing and distribution of branded performance apparel, footwear and accessories. The CODM also receives discrete financial information for the Company's Connected Fitness segment. Total expenditures for additions to long-lived assets are not disclosed as this information is not regularly provided to the CODM.
The Company excludes certain corporate costs from its segment profitability measures. The Company reports these costs within Corporate Other, which is designed to provide increased transparency and comparability of the Company's operating segments' performance. Corporate Other consists largely of general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain, innovation and other corporate support functions; costs related to the Company's global assets and global marketing, costs related to the Company’s headquarters; restructuring and restructuring related charges; and certain foreign currency hedge gains and losses.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net revenues
|
|
|
|
|
|
|
|
|
North America
|
$
|
962,565
|
|
|
$
|
1,015,920
|
|
|
$
|
2,021,247
|
|
|
$
|
2,675,389
|
|
|
EMEA
|
210,111
|
|
|
160,981
|
|
|
437,140
|
|
|
440,405
|
|
|
Asia-Pacific
|
178,895
|
|
|
154,898
|
|
|
397,846
|
|
|
453,296
|
|
|
Latin America
|
44,338
|
|
|
52,186
|
|
|
108,573
|
|
|
141,095
|
|
|
Connected Fitness
|
36,894
|
|
|
39,346
|
|
|
102,600
|
|
|
101,385
|
|
|
Corporate Other (1)
|
218
|
|
|
6,125
|
|
|
3,495
|
|
|
14,337
|
|
|
Total net revenues
|
$
|
1,433,021
|
|
|
$
|
1,429,456
|
|
|
$
|
3,070,901
|
|
|
$
|
3,825,907
|
|
(1) Corporate Other consist of foreign currency hedge gains and losses related to revenues generated by entities within the Company's operating segments, but managed through the Company's central foreign exchange risk management program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
North America
|
$
|
224,593
|
|
|
$
|
237,229
|
|
|
$
|
251,579
|
|
|
$
|
536,700
|
|
|
EMEA
|
40,834
|
|
|
21,989
|
|
|
43,840
|
|
|
44,700
|
|
|
Asia-Pacific
|
19,248
|
|
|
34,666
|
|
|
(30,040)
|
|
|
74,116
|
|
|
Latin America
|
1,802
|
|
|
233
|
|
|
(50,756)
|
|
|
(4,017)
|
|
|
Connected Fitness
|
6,629
|
|
|
7,023
|
|
|
14,020
|
|
|
8,103
|
|
|
Corporate Other
|
(234,536)
|
|
|
(162,220)
|
|
|
(897,927)
|
|
|
(496,905)
|
|
|
Total operating income (loss)
|
58,570
|
|
|
138,920
|
|
|
(669,284)
|
|
|
162,697
|
|
|
Interest expense, net
|
(14,955)
|
|
|
(5,655)
|
|
|
(32,251)
|
|
|
(15,881)
|
|
|
Other expense, net
|
(7,184)
|
|
|
(429)
|
|
|
(10,493)
|
|
|
(2,224)
|
|
|
Income (loss) before income taxes
|
$
|
36,431
|
|
|
$
|
132,836
|
|
|
$
|
(712,028)
|
|
|
$
|
144,592
|
|
Net revenues by product category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Apparel
|
$
|
927,041
|
|
|
$
|
985,623
|
|
|
$
|
1,951,186
|
|
|
$
|
2,499,989
|
|
|
Footwear
|
298,687
|
|
|
250,596
|
|
|
693,464
|
|
|
827,223
|
|
|
Accessories
|
145,060
|
|
|
118,164
|
|
|
268,912
|
|
|
306,406
|
|
|
Net Sales
|
1,370,788
|
|
|
1,354,383
|
|
|
2,913,562
|
|
|
3,633,618
|
|
|
License revenues
|
25,121
|
|
|
29,602
|
|
|
51,244
|
|
|
76,567
|
|
|
Connected Fitness
|
36,894
|
|
|
39,346
|
|
|
102,600
|
|
|
101,385
|
|
|
Corporate Other (1)
|
218
|
|
|
6,125
|
|
|
3,495
|
|
|
14,337
|
|
|
Total net revenues
|
$
|
1,433,021
|
|
|
$
|
1,429,456
|
|
|
$
|
3,070,901
|
|
|
$
|
3,825,907
|
|
(1) Corporate Other consist of foreign currency hedge gains and losses related to revenues generated by entities within the Company's operating segments, but managed through the Company's central foreign exchange risk management program.
Net revenues by distribution channel are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Wholesale
|
$
|
830,478
|
|
|
$
|
891,709
|
|
|
$
|
1,721,432
|
|
|
$
|
2,417,028
|
|
|
Direct to Consumer
|
540,310
|
|
|
462,674
|
|
|
1,192,130
|
|
|
1,216,590
|
|
|
Net Sales
|
1,370,788
|
|
|
1,354,383
|
|
|
2,913,562
|
|
|
3,633,618
|
|
|
License revenues
|
25,121
|
|
|
29,602
|
|
|
51,244
|
|
|
76,567
|
|
|
Connected Fitness
|
36,894
|
|
|
39,346
|
|
|
102,600
|
|
|
101,385
|
|
|
Corporate Other (1)
|
218
|
|
|
6,125
|
|
|
3,495
|
|
|
14,337
|
|
|
Total net revenues
|
$
|
1,433,021
|
|
|
$
|
1,429,456
|
|
|
$
|
3,070,901
|
|
|
$
|
3,825,907
|
|
(1) Corporate Other consist of foreign currency hedge gains and losses related to revenues generated by entities within the Company's operating segments, but managed through the Company's central foreign exchange risk management program.
15. Subsequent Events
On October 28, 2020, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) to sell UA Connected Fitness, Inc. (“UACF”), a wholly-owned subsidiary of the Company, pursuant to which the Company will sell its MyFitnessPal business through a sale of all of the issued and outstanding shares of common stock of UACF, subject to the terms and conditions of the Purchase Agreement. The aggregate sale price is $345 million, of which $215 million is payable at the closing of the sale and up to $130 million in earnout payments which are based on the achievement of certain revenue targets over the three-year period following the closing date as set forth in the Purchase Agreement. The purchase price is subject to working capital and other customary adjustments. The potential earnout payments include up to $35 million payable in 2022, $45 million payable in 2023 and $50 million payable in 2024. The transaction is currently expected to close during the fourth quarter of 2020, subject to applicable regulatory approvals (including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and other customary closing conditions.