Under Armour, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net revenues
|
$
|
4,976,553
|
|
|
$
|
4,825,335
|
|
|
$
|
3,963,313
|
|
Cost of goods sold
|
2,737,830
|
|
|
2,584,724
|
|
|
2,057,766
|
|
Gross profit
|
2,238,723
|
|
|
2,240,611
|
|
|
1,905,547
|
|
Selling, general and administrative expenses
|
2,086,831
|
|
|
1,823,140
|
|
|
1,497,000
|
|
Restructuring and impairment charges
|
124,049
|
|
|
—
|
|
|
—
|
|
Income from operations
|
27,843
|
|
|
417,471
|
|
|
408,547
|
|
Interest expense, net
|
(34,538
|
)
|
|
(26,434
|
)
|
|
(14,628
|
)
|
Other expense, net
|
(3,614
|
)
|
|
(2,755
|
)
|
|
(7,234
|
)
|
Income (loss) before income taxes
|
(10,309
|
)
|
|
388,282
|
|
|
386,685
|
|
Income tax expense
|
37,951
|
|
|
131,303
|
|
|
154,112
|
|
Net income (loss)
|
(48,260
|
)
|
|
256,979
|
|
|
232,573
|
|
Adjustment payment to Class C capital stockholders
|
—
|
|
|
59,000
|
|
|
—
|
|
Net income (loss) available to all stockholders
|
(48,260
|
)
|
|
197,979
|
|
|
232,573
|
|
|
|
|
|
|
|
Basic net income (loss) per share of Class A and B common stock
|
$
|
(0.11
|
)
|
|
$
|
0.45
|
|
|
$
|
0.54
|
|
Basic net income (loss) per share of Class C common stock
|
$
|
(0.11
|
)
|
|
$
|
0.72
|
|
|
$
|
0.54
|
|
Diluted net income (loss) per share of Class A and B common stock
|
$
|
(0.11
|
)
|
|
$
|
0.45
|
|
|
$
|
0.53
|
|
Diluted net income (loss) per share of Class C common stock
|
$
|
(0.11
|
)
|
|
$
|
0.71
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
Weighted average common shares outstanding Class A and B common stock
|
Basic
|
219,254
|
|
|
217,707
|
|
|
215,498
|
|
Diluted
|
219,254
|
|
|
221,944
|
|
|
220,868
|
|
|
|
|
|
|
|
Weighted average common shares outstanding Class C common stock
|
Basic
|
221,475
|
|
|
218,623
|
|
|
215,498
|
|
Diluted
|
221,475
|
|
|
222,904
|
|
|
220,868
|
|
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (loss)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income (loss)
|
$
|
(48,260
|
)
|
|
$
|
256,979
|
|
|
$
|
232,573
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Foreign currency translation adjustment
|
23,357
|
|
|
(13,798
|
)
|
|
(31,816
|
)
|
Unrealized gain (loss) on cash flow hedge, net of tax of $(5,668), $3,346 and $415 for the years ended December 31, 2017, 2016, and 2015 respectively.
|
(16,624
|
)
|
|
9,084
|
|
|
1,611
|
|
Gain (loss) on intra-entity foreign currency transactions
|
7,199
|
|
|
(2,416
|
)
|
|
—
|
|
Total other comprehensive income (loss)
|
13,932
|
|
|
(7,130
|
)
|
|
(30,205
|
)
|
Comprehensive income (loss)
|
$
|
(34,328
|
)
|
|
$
|
249,849
|
|
|
$
|
202,368
|
|
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
Common Stock
|
|
Class B
Convertible
Common Stock
|
|
Class C
Common Stock
|
|
Additional Paid-in-Capital
|
|
Retained
Earnings
|
|
Accumulated Other Comprehensive Income (loss)
|
|
Total
Equity
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Balance as of December 31, 2014
|
177,296
|
|
|
$
|
59
|
|
|
36,600
|
|
|
$
|
12
|
|
|
213,896
|
|
|
71
|
|
|
$
|
508,279
|
|
|
$
|
856,687
|
|
|
$
|
(14,808
|
)
|
|
$
|
1,350,300
|
|
Exercise of stock options
|
360
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
360
|
|
|
—
|
|
|
2,852
|
|
|
—
|
|
|
—
|
|
|
2,852
|
|
Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements
|
(172
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(172
|
)
|
|
—
|
|
|
—
|
|
|
(12,727
|
)
|
|
—
|
|
|
(12,727
|
)
|
Issuance of Class A Common Stock, net of forfeitures
|
1,996
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1,996
|
|
|
1
|
|
|
19,134
|
|
|
—
|
|
|
—
|
|
|
19,136
|
|
Class B Convertible Common Stock converted to Class A Common Stock
|
2,150
|
|
|
1
|
|
|
(2,150
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
60,376
|
|
|
—
|
|
|
—
|
|
|
60,376
|
|
Net excess tax benefits from stock-based compensation arrangements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45,917
|
|
|
—
|
|
|
—
|
|
|
45,917
|
|
Comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
232,573
|
|
|
(30,205
|
)
|
|
202,368
|
|
Balance as of December 31, 2015
|
181,630
|
|
|
61
|
|
|
34,450
|
|
|
11
|
|
|
216,080
|
|
|
72
|
|
|
636,558
|
|
|
1,076,533
|
|
|
(45,013
|
)
|
|
1,668,222
|
|
Exercise of stock options
|
792
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
971
|
|
|
—
|
|
|
6,203
|
|
|
—
|
|
|
—
|
|
|
6,203
|
|
Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements
|
(199
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(276
|
)
|
|
—
|
|
|
—
|
|
|
(15,098
|
)
|
|
—
|
|
|
(15,098
|
)
|
Issuance of Class A Common Stock, net of forfeitures
|
1,592
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,884
|
|
|
—
|
|
|
—
|
|
|
7,884
|
|
Issuance of Class C Common Stock, net of forfeitures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,852
|
|
|
1
|
|
|
25,834
|
|
|
—
|
|
|
—
|
|
|
25,835
|
|
Issuance of Class C dividend
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,547
|
|
|
—
|
|
|
56,073
|
|
|
(59,000
|
)
|
|
—
|
|
|
(2,927
|
)
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,149
|
|
|
—
|
|
|
—
|
|
|
46,149
|
|
Net excess tax benefits from stock-based compensation arrangements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
44,783
|
|
|
—
|
|
|
—
|
|
|
44,783
|
|
Comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
256,979
|
|
|
(7,130
|
)
|
|
249,849
|
|
Balance as of December 31, 2016
|
183,815
|
|
|
61
|
|
|
34,450
|
|
|
11
|
|
|
220,174
|
|
|
73
|
|
|
823,484
|
|
|
1,259,414
|
|
|
(52,143
|
)
|
|
2,030,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
Common Stock
|
|
Class B
Convertible
Common Stock
|
|
Class C
Common Stock
|
|
Additional Paid-in-Capital
|
|
Retained
Earnings
|
|
Accumulated Other Comprehensive Income (loss)
|
|
Total
Equity
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Exercise of stock options
|
609
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
556
|
|
|
—
|
|
|
3,664
|
|
|
—
|
|
|
—
|
|
|
3,664
|
|
Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements
|
(65
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(78
|
)
|
|
—
|
|
|
—
|
|
|
(2,781
|
)
|
|
—
|
|
|
(2,781
|
)
|
Issuance of Class A Common Stock, net of forfeitures
|
898
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of Class C Common Stock, net of forfeitures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,723
|
|
|
1
|
|
|
7,852
|
|
|
—
|
|
|
—
|
|
|
7,853
|
|
Impact of adoption of accounting standard updates
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,666
|
)
|
|
(23,932
|
)
|
|
—
|
|
|
(26,598
|
)
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39,932
|
|
|
—
|
|
|
—
|
|
|
39,932
|
|
Comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(48,260
|
)
|
|
13,932
|
|
|
(34,328
|
)
|
Balance as of December 31, 2017
|
185,257
|
|
|
61
|
|
|
34,450
|
|
|
11
|
|
|
222,375
|
|
|
74
|
|
|
872,266
|
|
|
1,184,441
|
|
|
(38,211
|
)
|
|
2,018,642
|
|
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Cash flows from operating activities
|
|
|
|
|
|
Net income (loss)
|
$
|
(48,260
|
)
|
|
$
|
256,979
|
|
|
$
|
232,573
|
|
Adjustments to reconcile net income (loss) to net cash used in operating activities
|
|
|
|
|
|
Depreciation and amortization
|
173,747
|
|
|
144,770
|
|
|
100,940
|
|
Unrealized foreign currency exchange rate loss (gains)
|
(29,247
|
)
|
|
12,627
|
|
|
33,359
|
|
Impairment charges
|
71,378
|
|
|
—
|
|
|
—
|
|
Amortization of bond premium
|
254
|
|
|
—
|
|
|
—
|
|
Loss on disposal of property and equipment
|
2,313
|
|
|
1,580
|
|
|
549
|
|
Stock-based compensation
|
39,932
|
|
|
46,149
|
|
|
60,376
|
|
Excess tax benefit (loss) from stock-based compensation arrangements
|
(75
|
)
|
|
44,783
|
|
|
45,917
|
|
Deferred income taxes
|
55,910
|
|
|
(43,004
|
)
|
|
(4,426
|
)
|
Changes in reserves and allowances
|
108,757
|
|
|
70,188
|
|
|
40,391
|
|
Changes in operating assets and liabilities (net of acquisitions):
|
|
|
|
|
|
Accounts receivable
|
(79,106
|
)
|
|
(249,853
|
)
|
|
(191,876
|
)
|
Inventories
|
(222,391
|
)
|
|
(148,055
|
)
|
|
(278,524
|
)
|
Prepaid expenses and other assets
|
(55,503
|
)
|
|
(25,284
|
)
|
|
(76,476
|
)
|
Accounts payable
|
145,695
|
|
|
202,446
|
|
|
(22,583
|
)
|
Accrued expenses and other liabilities
|
109,823
|
|
|
67,754
|
|
|
76,854
|
|
Income taxes payable and receivable
|
(39,164
|
)
|
|
(16,712
|
)
|
|
(2,533
|
)
|
Net cash provided by operating activities
|
234,063
|
|
|
364,368
|
|
|
14,541
|
|
Cash flows from investing activities
|
|
|
|
|
|
Purchases of property and equipment
|
(281,339
|
)
|
|
(316,458
|
)
|
|
(298,928
|
)
|
Purchases of property and equipment from related parties
|
—
|
|
|
(70,288
|
)
|
|
—
|
|
Purchase of businesses, net of cash acquired
|
—
|
|
|
—
|
|
|
(539,460
|
)
|
Purchases of available-for-sale securities
|
—
|
|
|
(24,230
|
)
|
|
(103,144
|
)
|
Sales of available-for-sale securities
|
—
|
|
|
30,712
|
|
|
96,610
|
|
Purchases of other assets
|
(1,648
|
)
|
|
(875
|
)
|
|
(2,553
|
)
|
Net cash used in investing activities
|
(282,987
|
)
|
|
(381,139
|
)
|
|
(847,475
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
Proceeds from long term debt and revolving credit facility
|
763,000
|
|
|
1,327,601
|
|
|
650,000
|
|
Payments on long term debt and revolving credit facility
|
(665,000
|
)
|
|
(1,170,750
|
)
|
|
(265,202
|
)
|
Employee taxes paid for shares withheld for income taxes
|
(2,781
|
)
|
|
(15,098
|
)
|
|
(12,728
|
)
|
Proceeds from exercise of stock options and other stock issuances
|
11,540
|
|
|
15,485
|
|
|
10,310
|
|
Payments of debt financing costs
|
—
|
|
|
(6,692
|
)
|
|
(947
|
)
|
Cash dividends paid
|
—
|
|
|
(2,927
|
)
|
|
—
|
|
Contingent consideration payments for acquisitions
|
—
|
|
|
(1,505
|
)
|
|
|
|
Net cash provided by financing activities
|
106,759
|
|
|
146,114
|
|
|
381,433
|
|
Effect of exchange rate changes on cash and cash equivalents
|
4,178
|
|
|
(8,725
|
)
|
|
(11,822
|
)
|
Net increase (decrease) in cash and cash equivalents
|
62,013
|
|
|
120,618
|
|
|
(463,323
|
)
|
Cash and cash equivalents
|
|
|
|
|
|
Beginning of period
|
250,470
|
|
|
129,852
|
|
|
593,175
|
|
End of period
|
$
|
312,483
|
|
|
$
|
250,470
|
|
|
$
|
129,852
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
Change in accrual for property and equipment
|
$
|
10,580
|
|
|
$
|
16,973
|
|
|
$
|
17,758
|
|
Non-cash dividends
|
—
|
|
|
(56,073
|
)
|
|
|
Property and equipment acquired under build-to-suit leases
|
—
|
|
|
—
|
|
|
5,631
|
|
Other supplemental information
|
|
|
|
|
|
Cash paid for income taxes
|
36,921
|
|
|
135,959
|
|
|
99,708
|
|
Cash paid for interest, net of capitalized interest
|
29,750
|
|
|
21,412
|
|
|
11,176
|
|
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Notes to the Audited Consolidated Financial Statements
1
. Description of the Business
Under Armour, Inc. is a developer, marketer and distributor of branded performance apparel, footwear and accessories. These products are sold worldwide and worn by athletes at all levels, from youth to professional on playing fields around the globe, as well as by consumers with active lifestyles. The Under Armour Connected Fitness
TM
platform powers the world's largest digital health and fitness community. The Company uses this platform to engage its consumers and increase awareness and sales of its products.
2
. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Under Armour, Inc. and its wholly owned subsidiaries (the “Company”). All intercompany balances and transactions have been eliminated. The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.
On June 3, 2016, the Board of Directors approved the payment of a
$59.0 million
dividend to the holders of the Company's Class C stock in connection with shareholder litigation related to the creation of the Class C stock. The Company's Board of Directors approved the payment of this dividend in the form of additional shares of Class C stock, with cash in lieu of any fractional shares. This dividend was distributed on June 29, 2016, in the form of
1,470,256
shares of Class C stock and
$2.9 million
in cash.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at date of inception to be cash and cash equivalents. Included in interest expense, net for the years ended
December 31, 2017
,
2016
and
2015
was interest income of
$0.4 million
,
$0.3 million
and
$0.2 million
, respectively, related to cash and cash equivalents.
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 sporting goods retailers. Credit is extended based on an evaluation of the customer’s financial condition and collateral is not required. The Company's largest customer in North America accounted for
12%
and
16%
of accounts receivable as of
December 31, 2017
and
December 31, 2016
, respectively. The Company's largest customer accounted for
10%
and
12%
of net revenues for the years ended December 31, 2016 and 2015, respectively. For the year ended December 31, 2017, no customer accounted for more than 10% of net revenues.
Allowance for Doubtful Accounts
The Company
make
s
ongoing estimates relating to the collectability of accounts receivable and maintain
s
an allowance for estimated losses resulting from the inability of
its
customers to make required payments. In determining the amount of the reserve,
the Company
consider
s
historical levels of credit losses and significant economic developments within the retail environment that could impact the ability of
its
customers to pay outstanding balances and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Because
the Company
cannot predict future changes in the financial stability of
its
customers, actual future losses from uncollectible accounts may differ from estimates. If the financial condition of customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event
the Company
determine
s
a smaller or larger reserve is appropriate,
it
would record a benefit or charge to selling, general and administrative expense in the period in which such a determination was made.
As of
December 31, 2017
and
2016
, the allowance for doubtful accounts was
$19.7 million
and
$11.3 million
, respectively.
Inventories
Inventories consist primarily of finished goods. Costs of finished goods inventories include all costs incurred to bring inventory to its current condition, including inbound freight, duties and other costs.
The Company
value
s its
inventory at standard cost which approximates landed cost, using the first-in, first-out method of cost determination. Market value is estimated based upon assumptions made about future demand and retail market conditions. If
the Company
determine
s
that the estimated market value of
its
inventory is less than the carrying value of such inventory,
it
record
s
a charge to cost of goods sold to reflect the lower of cost or market. If actual market conditions are less favorable than
those
projected
by the Company
, further adjustments may be required that would increase the cost of goods sold in the period in which such a determination was made.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of
the Company’s
assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary.
Assessing whether deferred tax assets are realizable requires significant judgment.
The Company
consider
s
all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent
the Company
believe
s
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.
Income taxes include the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions, or obtaining new information on particular tax positions may cause a change to the effective tax rate.
The Company
recognize
s
accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the consolidated statements of income.
Property and Equipment
Property and equipment are stated at cost, including the cost of internal labor for software customized for internal use, less accumulated depreciation and amortization. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets:
3
to
10
years for furniture, office equipment, software and plant equipment and
10
to
35
years for site improvements, buildings and building equipment. Leasehold and tenant improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. The cost of in-store apparel and footwear fixtures and displays are capitalized, included in furniture, fixtures and displays, and depreciated over
3
years. The Company periodically reviews assets’ estimated useful lives based upon actual experience and expected future utilization. A change in useful life is treated as a change in accounting estimate and is applied prospectively.
The Company capitalizes the cost of interest for long term property and equipment projects based on the Company’s weighted average borrowing rates in place while the projects are in progress. Capitalized interest was
$2.1 million
and
$1.8 million
as of
December 31, 2017
and
2016
, respectively.
Upon retirement or disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in selling, general and administrative expenses for that period. Major additions and betterments are capitalized to the asset accounts while maintenance and repairs, which do not improve or extend the lives of assets, are expensed as incurred.
As a part of the Company's 2017 restructuring plan, the Company abandoned the use of several assets included within Property and Equipment, resulting in an impairment charge of
$30.7 million
, reducing the carrying value of these assets to their estimated fair values.
Goodwill, Intangible Assets and Long-Lived Assets
Goodwill and intangible assets are recorded at their estimated fair values at the date of acquisition and are allocated to the reporting units that are expected to receive the related benefits. Goodwill and indefinite lived intangible assets are not amortized and are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. In conducting an annual impairment test,
the Company first reviews
qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If factors indicate that is the case,
the Company performs the goodwill impairment test. The Company compares the fair value of the reporting unit with its carrying amount. The Company calculates fair value using the discounted cash flows model, which indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include: the Company's weighted average cost of capital, long-term rate of growth and profitability of the reporting unit’s business, and working capital effects. If the carrying amount exceeds its fair value, goodwill is impaired to the extent that the carrying value exceeds the fair value of the reporting unit.
During the third quarter of 2017, the Company made the strategic decision to not pursue certain planned future revenue streams in its Connected Fitness business in connection with the 2017 Restructuring Plan. The Company determined sufficient indication existed to trigger the performance of an interim impairment for the Company’s Connected Fitness reporting unit resulting in goodwill impairment of
$28.6 million
, which represents all goodwill allocated to this reporting unit. The Company performs its
annual impairment tests in the fourth quarter of each fiscal year. As of December 31, 2017, no impairment of goodwill was identified and the fair value of each reporting unit substantially exceeded its carrying value.
The Company
continually evaluate
s
whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable. These factors may include a significant deterioration of operating results, changes in business plans, or changes in anticipated cash flows. When factors indicate that an asset should be evaluated for possible impairment,
the Company
review
s
long-lived assets to assess recoverability from future operations using undiscounted cash flows. If future undiscounted cash flows are less than the carrying value, an impairment is recognized in earnings to the extent that the carrying value exceeds fair value.
In connection with the Company's 2017 Restructuring Plan, strategic decisions were made during the third quarter in 2017 to abandon the use of certain intangible assets in the Company's Connected Fitness reporting unit. These intangible assets included technology and brand names, resulting in total intangible asset impairment charges of
$12.1 million
Accrued Expenses
At
December 31, 2017
, accrued expenses primarily included $
92.7 million
and $
47.0 million
of accrued compensation and benefits and marketing expenses, respectively. At
December 31, 2016
, accrued expenses primarily included $
60.8 million
and $
24.7 million
of accrued compensation and benefits and marketing expenses, respectively.
Foreign Currency Translation and Transactions
The functional currency for each of the Company’s wholly owned foreign subsidiaries is generally the applicable local currency. The translation of foreign currencies into U.S. dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the period. Capital accounts are translated at historical foreign currency exchange rates. Translation gains and losses are included in stockholders’ equity as a component of accumulated other comprehensive income. Adjustments that arise from foreign currency exchange rate changes on transactions, primarily driven by intercompany transactions, denominated in a currency other than the functional currency are included in other expense, net on the consolidated statements of income.
Derivatives and Hedging Activities
The Company uses derivative financial instruments in the form of foreign currency and interest rate swap contracts to minimize the risk associated with foreign currency exchange rate and interest rate fluctuations. The Company accounts for derivative financial instruments pursuant to applicable accounting guidance. This guidance establishes accounting and reporting standards for derivative financial instruments and requires all derivatives to be recognized as either assets or liabilities on the balance sheet and to be measured at fair value. Unrealized derivative gain positions are recorded as other current assets or other long term assets, and unrealized derivative loss positions are recorded as other current liabilities or other long term liabilities, depending on the derivative financial instrument’s maturity date.
Currently, the majority of the Company’s foreign currency contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are included in other expense, net on the consolidated statements of income. During 2014, the Company began entering into foreign currency contracts designated as cash flow hedges, and consequently, changes in fair value, excluding any ineffective portion, are recorded in other comprehensive income until net income is affected by the variability in cash flows of the hedged transaction. The effective portion is generally released to net income after the maturity of the related derivative and is classified in the same manner as the underlying exposure. Additionally, the Company has designated its interest rate swap contract as a cash flow hedge and accordingly, the effective portion of changes in fair value are recorded in other comprehensive income and reclassified into interest expense over the life of the underlying debt obligation. The ineffective portion, if any, is recognized in current period earnings. The Company does not enter into derivative financial instruments for speculative or trading purposes.
Revenue Recognition
The Company recognizes revenue pursuant to applicable accounting standards. Net revenues consist of both net sales and license and other revenues. Net sales are recognized upon transfer of ownership, including passage of title to the customer and transfer of risk of loss related to those goods. Transfer of title and risk of loss 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. In some instances, transfer of title and risk of loss takes place at the point of sale, for example, at the Company’s brand and factory house stores. The Company may also ship product directly from its supplier to the customer and recognize revenue when the product is delivered to and accepted by the customer. License and other revenues are primarily recognized based upon shipment of licensed products sold by the Company’s licensees. Sales taxes imposed on the Company’s revenues from product sales are presented on a net basis on the consolidated statements of income and therefore do not impact net revenues or costs of goods sold.
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 contractual obligations with certain major customers. Reserves for returns, allowances, markdowns and discounts are recorded as an offset to accounts receivable as settlements are made through offsets to outstanding customer invoices. As of
December 31, 2017
and
2016
, there were
$246.6 million
and
$146.2 million
, respectively, in reserves for customer returns, allowances, markdowns and discounts.
Advertising Costs
Advertising costs are charged to selling, general and administrative expenses. Advertising production costs are expensed the first time an advertisement related to such production costs is run. Media (television, print and radio) placement costs are expensed in the month during which the advertisement appears, and costs related to event sponsorships are expensed when the event occurs. In addition, advertising costs include sponsorship expenses. Accounting for sponsorship payments is based upon specific contract provisions and the payments are generally expensed uniformly over the term of the contract after recording expense related to specific performance incentives once they are deemed probable. Advertising expense, including amortization of in-store marketing fixtures and displays, was
$565.1 million
,
$
477.5 million
and $
417.8 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. At
December 31, 2017
and
2016
, prepaid advertising costs were $
41.2 million
and $
32.0 million
, respectively.
Shipping and Handling Costs
The Company charges certain customers shipping and handling fees. These fees are recorded in net revenues. The Company includes the majority of outbound handling costs as a component of selling, general and administrative expenses. Outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate the Company’s distribution facilities. These costs, included within selling, general and administrative expenses, were $
101.5 million
, $
89.9 million
and $
63.7 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The Company includes outbound freight costs associated with shipping goods to customers as a component of cost of goods sold.
Minority Investment
The Company holds a minority investment in Dome Corporation (“Dome”), the Company’s Japanese licensee. The Company invested ¥
1,140.0 million
, or $
15.5 million
, in exchange for
19.5%
common stock ownership in Dome. As of
December 31, 2017
and
2016
, the carrying value of the Company’s investment was $
12.7 million
and $
11.7 million
, respectively, and was included in other long term assets on the consolidated balance sheets. The investment is subject to foreign currency translation rate fluctuations as it is held by the Company’s European subsidiary.
The Company accounts for its investment in Dome under the cost method given that it does not have the ability to exercise significant influence. Additionally, the Company concluded that no event or change in circumstances occurred during the year ended
December 31, 2017
that may have a significant adverse effect on the fair value of the investment.
Earnings per Share
Basic earnings per common share is computed by dividing net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Any stock-based compensation awards that are determined to be participating securities, which are stock-based compensation awards that entitle the holders to receive dividends prior to vesting, are included in the calculation of basic earnings per share using the two class method. Diluted earnings per common share is computed by dividing net income available to common stockholders for the period by the diluted weighted average common shares outstanding during the period. Diluted earnings per share reflects the potential dilution from common shares issuable through stock options, warrants, restricted stock units and other equity awards. Refer to Note
11
for further discussion of earnings per share.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with accounting guidance that requires all stock-based compensation awards granted to employees and directors to be measured at fair value and recognized as an expense in the financial statements. In addition, this guidance requires that excess tax benefits related to stock-based compensation awards be reflected as operating cash flows.
The Company uses the Black-Scholes option-pricing model to estimate the fair market value of stock-based compensation awards. The Company uses the “simplified method” to estimate the expected life of options, as permitted by accounting guidance. The “simplified method” calculates the expected life of a stock option equal to the time from grant to the midpoint between the vesting date and contractual term, taking into account all vesting tranches. The risk free interest rate is based on the yield for the U.S. Treasury bill with a maturity equal to the expected life of the stock option. Expected volatility is based on the Company's historical average. Compensation expense is recognized net of forfeitures on a straight-line basis over the total vesting period, which is the implied requisite service period. Compensation expense for performance-based awards is recorded over the implied requisite service period when achievement of the performance target is deemed probable.
The Company issues new shares of Class A Common Stock and Class C Common Stock upon exercise of stock options, grant of restricted stock or share unit conversion. Refer to Note
12
for further details on stock-based compensation.
Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Fair Value of Financial Instruments
The carrying amounts shown for the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short term maturity of those instruments. The fair value of the Company's Senior Notes was
$526.3 million
and
$568.1 million
as of
December 31, 2017
and
2016
, respectively. The fair value of the Company's other long term debt approximates its carrying value based on the variable nature of interest rates and current market rates available to the Company. The fair value of foreign currency contracts is based on the net difference between the U.S. dollars 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 exchange rate. The fair value of the interest rate swap
contract is based on the net difference between the fixed interest to be paid and variable interest to be received over the term of the contract based on current market rates.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2014-09, which supersedes the most current revenue recognition requirements. This ASU requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. This ASU will be effective for annual and interim periods beginning after December 15, 2017, with early adoption for annual and interim periods beginning after December 15, 2016 permitted.
The Company’s initial assessment of the guidance in this ASU has identified wholesale customer support costs, direct to consumer incentive programs and customer related returns as transactions potentially affected by this guidance. On the Consolidated Balance Sheet, reserves for returns, allowances, discounts and markdowns will be included as other current liabilities rather than accounts receivable, net and the value of inventory associated with reserves for sales returns will be included within prepaid expenses and other current assets. While the Company has not completed its evaluation, it expects the impact of the adoption of this ASU would primarily change presentation within its consolidated financial statements but is currently not expected to have a material effect on income from operations.
The Company will adopt the guidance in this new ASU effective January 1, 2018, and plans to use the modified retrospective transition approach, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying this guidance to contracts in effect as of the adoption date. Under this approach, the Company would not restate the prior financial statements presented. The guidance in this ASU requires the Company to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018 as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes, if any.
In January of 2016, the FASB issued ASU 2016-01 which simplifies the impairment assessment of equity investments. This ASU requires equity investments to be measured at fair value with changes recognized in net income. This ASU eliminates the requirement to disclose the methods and assumptions to estimate fair value for financial instruments, requires the use of the exit price for disclosure purposes, requires the change in liability due to a change in credit risk to be presented in other comprehensive income, requires separate presentation of financial assets and liabilities by measurement category and form of asset (securities and loans) and clarifies the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU becomes effective for fiscal periods beginning January 1, 2018 using a cumulative-effect adjustment to the balance sheet. The guidance related to equity securities without readily determinable fair values (including disclosure requirements) shall be applied prospectively to equity investments that exist as of the date of adoption of this update. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, which amends the existing guidance for leases and will require recognition of operating leases with lease terms of more than twelve months and all financing leases on the balance sheet. For these leases, companies will record assets for the rights and liabilities for the obligations that are created by the leases. This ASU will require disclosures that provide qualitative and quantitative information for the lease assets and liabilities recorded in the financial statements. This ASU is effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating this ASU to determine the impact of its adoption on its consolidated financial statements. The Company currently anticipates adopting the new standard effective January 1, 2019. The Company has formed a committee and initiated the review process for adoption of this ASU. While the Company is still in the process of completing its analysis on the complete impact this ASU will have on its consolidated financial statements and related disclosures, it expects the ASU to have a material impact on its consolidated balance sheet for recognition of lease-related assets and liabilities.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period costs are both acceptable methods subject to an accounting policy election. The Company has not yet made an accounting policy election in regards to the GILTI provisions under the Tax Act. The Company will make its GILTI accounting policy election during the one-year measurement period as allowed by the SEC. No amounts have been recorded in the Company's 2017 financial statements for the impact of GILTI provisions.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU 2016-09, which affects all entities that issue share-based payment awards to their employees. The amendments in this ASU cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures and the classification of those taxes paid on the statement of cash flows. The Company adopted the provisions of this ASU on January 1, 2017 on a prospective basis and recorded an excess tax deficiency of
$1.3 million
as an increase in income tax expense related to share-based compensation for vested awards. Additionally, the Company made a policy election under the provisions of this ASU to account for forfeitures when they occur rather than estimating the number of awards that are expected to vest. As a result of this election, upon adoption of the guidance in this ASU, the Company recorded a
$1.9 million
cumulative-effect benefit to retained earnings as of the date of adoption. The Company adopted the provisions of this ASU related to changes on the Consolidated Statement of Cash Flows on a retrospective basis. Excess tax benefits and deficiencies have been classified within cash flows from operating activities and employee taxes paid for shares withheld for income taxes have been classified within cash flows from financing activities on the Consolidated Statement of Cash Flows. This resulted in increases of
$44.8 million
and
$45.9 million
to cash flows from operating activities for the years ended December 31, 2016 and 2015, respectively. This also resulted in decreases of
$15.1 million
and
$12.7 million
to cash flows from financing activities for the year ended December 31, 2015 and 2016, respectively.
In October 2016, the FASB issued ASU 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted the provisions of this ASU on a modified retrospective basis on January 1, 2017, resulting in a cumulative-effect benefit to retained earnings of
$26.0 million
as of the date of adoption.
In January 2017, the FASB issued ASU 2017-04, which simplifies how an entity is required to test goodwill for impairment by eliminating step two of the test. The Company adopted the provisions of this ASU on July 1, 2017, and recorded an impairment charge of
$28.6 million
during its interim goodwill impairment test for the Connected Fitness reporting unit.
3. Restructuring and Impairment
A description of significant restructuring and related impairment charges is included below:
2017 Restructuring Plan
On July 27, 2017, the Company’s Board of Directors approved a restructuring plan (the “2017 restructuring plan”) to more closely align its financial resources with the critical priorities of the business. After completion of the 2017 restructuring plan, the Company recognized approximately
$100.4 million
of pre-tax charges in connection with this restructuring plan. In addition to these charges, the Company also recognized restructuring related goodwill impairment charges of approximately
$28.6 million
for its Connected Fitness business.
Impairment
As a part of the 2017 restructuring plan, the Company abandoned the use of several assets included within Property and Equipment, resulting in an impairment charge of
$30.7 million
, reducing the carrying value of these assets to their estimated fair values. Fair value was estimated using an income-approach based on management’s forecast of future cash flows expected to be derived from the assets' use.
Additionally, in connection with the 2017 restructuring plan, strategic decisions were made during the third quarter of 2017 to abandon the use of certain intangible assets in the Company's Connected Fitness reporting unit. These intangible assets included technology and brand names, resulting in total intangible asset impairment charges of
$12.1 million
, reducing the carrying value of these assets to their estimated fair values. Fair value was estimated using an income-approach based on management’s forecast of future cash flows expected to be derived from the assets use. In addition, the Company also made the strategic decision to not pursue certain other planned future revenue streams in connection with the 2017 restructuring plan.
The Company determined sufficient indication existed to trigger the performance of an interim goodwill impairment for the Company’s Connected Fitness reporting unit. Using updated cash flow projections, the Company calculated the fair value of the Connected Fitness reporting unit based on the discounted cash flows model. The carrying value exceeded the fair value, resulting in an impairment of goodwill. As the excess of the carrying value for the Connected Fitness reporting unit was greater than the goodwill for this reporting unit, all of the goodwill was impaired.
The summary of the costs incurred during the year ended December 31, 2017 in connection with the 2017 restructuring plan are as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands)
|
|
2017
|
|
Costs recorded in cost of goods sold:
|
|
|
|
Inventory write-offs (1)
|
|
$
|
5,077
|
|
|
Total costs recorded in cost of goods sold
|
|
5,077
|
|
|
|
|
|
|
Costs recorded in restructuring and impairment charges:
|
|
|
|
Goodwill impairment
|
|
28,647
|
|
|
Property and equipment impairment
|
|
30,677
|
|
|
Employee related costs
|
|
14,572
|
|
|
Intangible asset impairment
|
|
12,054
|
|
|
Contract exit costs
|
|
12,029
|
|
|
Other restructuring costs
|
|
26,070
|
|
|
Total costs recorded in restructuring and impairment charges
|
|
124,049
|
|
|
Total restructuring, impairment and restructuring related costs
|
|
$
|
129,126
|
|
|
(1) This table includes an additional non-cash charge of
$5.1 million
for the year ended December 31, 2017 associated with the disposition of inventory outside of current liquidation channels in line with the 2017 restructuring plan.
A summary of the activity in the restructuring reserve related to the 2017 Restructuring Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Related costs
|
|
Contract Exit Costs
|
|
Other Restructuring Related Costs
|
Balance at January 1, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Additions charged to expense
|
14,572
|
|
|
12,029
|
|
|
13,070
|
|
Cash payments charged against reserve
|
(10,017
|
)
|
|
(9,181
|
)
|
|
(10,070
|
)
|
Balance at December 31, 2017
|
$
|
4,555
|
|
|
$
|
2,848
|
|
|
$
|
3,000
|
|
2018 Restructuring Plan
On February 9, 2018, the Company's Board of Directors approved an additional restructuring plan (the "2018 restructuring plan") identifying further opportunities to optimize operations. In conjunction with this plan, approximately
$110
to
$130 million
of pre-tax restructuring and related charges are expected to be incurred during the Company's 2018 fiscal year, including:
|
|
•
|
Up to
$105.0 million
in cash charges, consisting of up to:
$55.0 million
in facility and lease terminations and
$50.0 million
in contract termination and other restructuring charges; and,
|
|
|
•
|
Up to
$25.0 million
in non-cash charges comprised of approximately
$10.0 million
of inventory related charges and approximately
$15.0 million
of intangibles and other asset related impairments.
|
4
. Property and Equipment, Net
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2017
|
|
2016
|
Leasehold and tenant improvements
|
|
$
|
431,761
|
|
|
$
|
326,617
|
|
Furniture, fixtures and displays
|
|
204,926
|
|
|
168,720
|
|
Buildings
|
|
47,625
|
|
|
47,216
|
|
Software
|
|
232,660
|
|
|
151,059
|
|
Office equipment
|
|
98,802
|
|
|
75,196
|
|
Plant equipment
|
|
144,484
|
|
|
124,140
|
|
Land
|
|
83,574
|
|
|
83,574
|
|
Construction in progress
|
|
148,488
|
|
|
204,362
|
|
Other
|
|
20,438
|
|
|
20,383
|
|
Subtotal property and equipment
|
|
1,412,758
|
|
|
1,201,267
|
|
Accumulated depreciation
|
|
(526,984
|
)
|
|
(397,056
|
)
|
Property and equipment, net
|
|
$
|
885,774
|
|
|
$
|
804,211
|
|
Construction in progress primarily includes costs incurred for software systems, leasehold improvements and in-store fixtures and displays not yet placed in use.
Depreciation expense related to property and equipment was
$164.3 million
,
$130.7 million
and
$86.3 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
5
. Goodwill and Intangible Assets, Net
The following table summarizes changes in the carrying amount of the Company’s goodwill by reportable segment as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
EMEA
|
|
Asia-Pacific
|
|
Latin America
|
|
Connected Fitness
|
|
Total
|
Balance as of December 31, 2016
|
|
$
|
317,323
|
|
|
$
|
99,245
|
|
|
$
|
77,586
|
|
|
$
|
42,436
|
|
|
$
|
27,001
|
|
|
$
|
563,591
|
|
Effect of currency translation adjustment
|
|
1,132
|
|
|
11,910
|
|
|
3,737
|
|
|
2,305
|
|
|
1,646
|
|
|
20,730
|
|
Impairment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28,647
|
)
|
|
(28,647
|
)
|
Balance as of December 31, 2017
|
|
$
|
318,455
|
|
|
$
|
111,155
|
|
|
$
|
81,323
|
|
|
$
|
44,741
|
|
|
$
|
—
|
|
|
$
|
555,674
|
|
The following table summarizes the Company’s intangible assets as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
(In thousands)
|
|
Useful Lives from Date of Acquisitions (in years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Net Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
User base
|
|
10
|
|
$
|
48,561
|
|
|
$
|
(13,499
|
)
|
|
$
|
—
|
|
|
$
|
35,062
|
|
|
$
|
47,653
|
|
|
$
|
(8,733
|
)
|
|
$
|
38,920
|
|
Technology
|
|
5-7
|
|
19,611
|
|
|
(9,524
|
)
|
|
(10,087
|
)
|
|
—
|
|
|
19,612
|
|
|
(8,221
|
)
|
|
11,391
|
|
Customer relationships
|
|
2-3
|
|
9,527
|
|
|
(9,527
|
)
|
|
—
|
|
|
—
|
|
|
9,527
|
|
|
(9,527
|
)
|
|
—
|
|
Trade name
|
|
4-5
|
|
7,653
|
|
|
(5,686
|
)
|
|
(1,967
|
)
|
|
—
|
|
|
7,653
|
|
|
(4,816
|
)
|
|
2,837
|
|
Nutrition database
|
|
10
|
|
4,500
|
|
|
(1,256
|
)
|
|
—
|
|
|
3,244
|
|
|
4,500
|
|
|
(806
|
)
|
|
3,694
|
|
Lease-related intangible assets
|
|
1-15
|
|
3,896
|
|
|
(3,232
|
)
|
|
—
|
|
|
664
|
|
|
3,896
|
|
|
(3,075
|
)
|
|
821
|
|
Other
|
|
5-10
|
|
1,353
|
|
|
(892
|
)
|
|
—
|
|
|
461
|
|
|
1,373
|
|
|
(666
|
)
|
|
707
|
|
Total
|
|
|
|
$
|
95,101
|
|
|
$
|
(43,616
|
)
|
|
$
|
(12,054
|
)
|
|
$
|
39,431
|
|
|
$
|
94,214
|
|
|
$
|
(35,844
|
)
|
|
$
|
58,370
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
7,564
|
|
|
|
|
|
|
5,940
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
$
|
46,995
|
|
|
|
|
|
|
$
|
64,310
|
|
Amortization expense, which is included in selling, general and administrative expenses, was
$8.2 million
,
$13.0 million
and
$13.9 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The following is the estimated amortization expense for the Company’s intangible assets as of
December 31, 2017
:
|
|
|
|
|
(In thousands)
|
|
2018
|
$
|
5,715
|
|
2019
|
5,608
|
|
2020
|
5,536
|
|
2021
|
5,447
|
|
2022
|
5,428
|
|
2023 and thereafter
|
11,697
|
|
Amortization expense of intangible assets
|
$
|
39,431
|
|
6
. Credit Facility and Other Long Term Debt
Credit Facility
The Company is party to a credit agreement that provides revolving commitments for up to
$1.25 billion
of borrowings, as well as term loan commitments, in each case maturing in
January 2021
. As of
December 31, 2017
the outstanding balance under the revolving credit facility was $125.0 million and $161.3 million of term loan borrowings remained outstanding.
At
the Company's request and the lender's consent, revolving and or term loan borrowings may be increased by up to
$300.0 million
in aggregate, subject to certain conditions as set forth in the credit agreement, as amended. Incremental borrowings are uncommitted and the availability thereof, will depend on market conditions at the time the Company
seek
s
to incur such borrowings.
The borrowings under the revolving credit facility have maturities of less than
one year
. Up to
$50.0 million
of the facility may be used for the issuance of letters of credit. There were
$4.5 million
of letters of credit outstanding as of
December 31, 2017
.
The credit agreement contains negative covenants that, subject to significant exceptions,
limit
the
ability
of the Company and its subsidiaries
to, among other things, incur additional indebtedness, make restricted payments, pledge
their
assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates.
The Company is
also required to maintain a ratio of consolidated EBITDA, as defined in the credit agreement, to consolidated interest expense of not less than
3.50
to
1.00
and
is
not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than
3.25
to
1.00
("consolidated leverage ratio"). As of
December 31, 2017
, the Company was
in compliance with these ratios. In February 2018,
the Company
amended the credit agreement to amend the definition of consolidated EBITDA, and to provide that
the Company's
trailing four-quarter consolidated leverage ratio may not exceed 3.75 to 1.00 for the four quarters ended June 30, 2018, and 4.00 to 1.00 for the four quarters ended September 30, 3018. Beginning with the four quarters ended December 31, 2018 and thereafter, the consolidated leverage ratio requirement will return to 3.25 to 1.00.
In addition, the credit agreement contains events of default that are customary for a facility of this nature, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the credit agreement, will be considered an event of default under the credit agreement.
Borrowings under the credit agreement bear interest at a rate per annum equal to, at
the Company’s
option, either (a) an alternate base rate, or (b) a rate based on the rates applicable for deposits in the interbank market for U.S. Dollars or the applicable currency in which the loans are made (“adjusted LIBOR”), plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to a grid (the “Pricing Grid”) based on the consolidated leverage ratio and ranges between
1.00%
to
1.25%
for adjusted LIBOR loans and
0.00%
to
0.25%
for alternate base rate loans. The weighted average interest rate under the outstanding term loans and revolving credit facility borrowings was
2.2%
and
1.6%
during the years ended
December 31, 2017
and
2016
, respectively.
The Company pays
a commitment fee on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit. As of
December 31, 2017
, the commitment fee was
17.5
basis points. Since inception,
the Company
incurred and deferred
$3.9 million
in financing costs in connection with the credit agreement.
3.250% Senior Notes
In June 2016,
the Company
issued
$600.0 million
aggregate principal amount of
3.250%
senior unsecured notes due
June 15, 2026
(the “Notes”). The proceeds were used to pay down amounts outstanding under the revolving credit facility. Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. Prior to March 15, 2026 (three months prior to the maturity date of the Notes), the Company
may redeem some or all of the Notes at any time or from time to time at a redemption price equal to the greater of 100% of the principal amount of the Notes to be redeemed or a “make-whole” amount applicable to such Notes as described in the indenture governing the Notes, plus accrued and unpaid interest to, but excluding, the redemption date. On or after March 15, 2026 (three months prior to the maturity date of the Notes),
the Company
may redeem some or all of the Notes at any time or from time to time at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The indenture governing the Notes contains covenants, including limitations that restrict
the Company’s
ability and the ability of certain of
its
subsidiaries to create or incur secured indebtedness and enter into sale and leaseback transactions and
the Company’s
ability to consolidate, merge or transfer all or substantially all of
its
properties or assets to another person, in each case subject to material exceptions described in the indenture.
The Company
incurred and deferred
$5.3 million
in financing costs in connection with the Notes.
Other Long Term Debt
In December 2012,
the Company
entered into a
$50.0 million
recourse loan collateralized by the land, buildings and tenant improvements comprising
the Company's
corporate headquarters. The loan has a
seven
year term and maturity date of
December 2019
. The loan bears interest at one month LIBOR plus a margin of
1.50%
,
and allows for prepayment without penalty. The loan includes covenants and events of default substantially consistent with
the Company's
credit agreement discussed above. The loan also requires prior approval of the lender for certain matters related to the property, including transfers of any interest in the property. As of
December 31, 2017
and
2016
,
the outstanding balance on the loan was
$40.0 million
and
$42.0 million
, respectively. The weighted average interest rate on the loan was
2.5%
and
2.0%
for the years ended
December 31, 2017
and
2016
, respectively.
The following are the scheduled maturities of long term debt as of
December 31, 2017
:
|
|
|
|
|
(In thousands)
|
|
2018
|
$
|
27,000
|
|
2019
|
63,000
|
|
2020
|
25,000
|
|
2021
|
86,250
|
|
2022
|
—
|
|
2023 and thereafter
|
600,000
|
|
Total scheduled maturities of long term debt
|
$
|
801,250
|
|
|
|
Current maturities of long term debt
|
$
|
27,000
|
|
Interest expense, net was
$34.5 million
,
$26.4 million
, and
$14.6 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Interest expense includes the amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long term debt facilities. Amortization of deferred financing costs was
$1.3 million
,
$1.2 million
, and
$0.8 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
The Company
monitor
s
the financial health and stability of
its
lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets lenders could be negatively impacted in their ability to perform under these facilities.
7
. Commitments and Contingencies
Obligations Under Operating Leases
The Company
leases 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
2033
, excluding extensions at
the Company’s
option, and include provisions for rental adjustments.
The table below includes executed lease agreements for brand and factory house stores that the Company did not yet occupy as of
December 31, 2017
and does not include contingent rent the Company may incur at its stores based on future sales above a specified minimum or payments made for maintenance, insurance and real estate taxes. The following is a schedule of future minimum lease payments for non-cancelable real property operating leases as of
December 31, 2017
as well as significant operating lease agreements entered into during the period after
December 31, 2017
through the date of this report:
|
|
|
|
|
|
(In thousands)
|
|
|
2018
|
|
140,257
|
|
2019
|
|
139,304
|
|
2020
|
|
158,455
|
|
2021
|
|
147,094
|
|
2022
|
|
132,312
|
|
2023 and thereafter
|
|
772,047
|
|
Total future minimum lease payments
|
|
$
|
1,489,469
|
|
Included in selling, general and administrative expense was rent expense of
$141.2 million
,
$109.0 million
and
$83.0 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, under non-cancelable operating lease agreements. Included in these amounts was contingent rent expense of
$15.5 million
,
$13.0 million
and
$11.0 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Sports Marketing and Other Commitments
Within the normal course of business, the Company enters into contractual commitments in order to promote the Company’s brand and products. These commitments include sponsorship agreements with teams and athletes on the collegiate and professional levels, official supplier agreements, athletic event sponsorships and other marketing commitments. The following is a schedule of the Company’s future minimum payments under its sponsorship and other marketing agreements as of
December 31, 2017
, as well as significant sponsorship and other marketing agreements entered into during the period after
December 31, 2017
through the date of this report:
|
|
|
|
|
(In thousands)
|
|
2018
|
150,428
|
|
2019
|
135,165
|
|
2020
|
126,026
|
|
2021
|
121,710
|
|
2022
|
119,783
|
|
2023 and thereafter
|
517,736
|
|
Total future minimum sponsorship and other payments
|
$
|
1,170,848
|
|
The amounts listed above are the minimum compensation obligations and guaranteed royalty fees required to be paid under the Company’s sponsorship and other marketing agreements. The amounts listed above do not include additional performance incentives and product supply obligations provided under certain agreements. It is not possible to determine how much the Company will spend on product supply obligations on an annual basis as contracts generally do not stipulate specific cash amounts to be spent on products. The amount of product provided to the sponsorships depends on many factors including general playing conditions, the number of sporting events in which they participate and the Company’s decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers.
Other
In connection with various contracts and agreements, the Company has agreed to indemnify counterparties against certain third party claims relating to the infringement of intellectual property rights and other items. Generally, such indemnification obligations do not apply in situations in which the counterparties are grossly negligent, engage in willful misconduct, or act in bad faith. Based on the Company’s historical experience and the estimated probability of future loss, the Company has determined that the fair value of such indemnifications is not material to its consolidated financial position or results of operations.
From time to time, the Company is involved in litigation and other proceedings, including matters related to commercial and intellectual property disputes, as well as trade, regulatory and other claims related to its business. Other than as described below, the Company believes that all current proceedings are routine in nature and incidental to the conduct of its business, and that the ultimate resolution of any such proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
On March 23, 2017,
three
separate securities cases previously filed against the Company in the United States District Court for the District of Maryland (the “Court”) were consolidated under the caption
In re Under Armour Securities Litigation
, Case No. 17-cv-00388-RDB (the “Consolidated Action”). On August 4, 2017, the lead plaintiff in the Consolidated Action, North East Scotland Pension Fund, joined by named plaintiff Bucks County Employees Retirement Fund, filed a consolidated amended complaint (the “Amended Complaint”) against the Company, the Company’s Chief Executive Officer and former Chief Financial Officers, Lawrence Molloy and Brad Dickerson. The Amended Complaint alleges violations of Section 10(b) (and Rule 10b-5) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 20(a) control person liability under the Exchange Act against the officers named in the Amended Complaint, claiming that the defendants made material misstatements and omissions regarding, among other things, the Company's growth and consumer demand for certain of the Company's products. The class period identified in the Amended Complaint is September 16, 2015 through January 30, 2017. The Amended Complaint also asserts claims under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), in connection with the Company’s public offering of senior unsecured notes in June 2016. The Securities Act claims are asserted against the Company, the Company’s Chief Executive Officer, Mr. Molloy, the Company’s directors who signed the registration statement pursuant to which the offering was made and the underwriters that participated in the offering. The Amended Complaint alleges that the offering materials utilized in connection with the offering contained false and/or misleading statements and omissions regarding, among other things, the Company’s growth and consumer demand for certain of the Company’s products. On November 9, 2017, the Company and the other defendants filed a motion to dismiss the Amended Complaint, which is still pending with the Court. The Company believes that the claims asserted in the Consolidated Action are without merit and intends to defend the lawsuit vigorously. However, because of the inherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of the outcome of this matter.
8
. Stockholders’ Equity
The Company’s Class A Common Stock and Class B Convertible Common Stock have an authorized number of shares at
December 31, 2017
of
400.0 million
shares and
34.5 million
shares, respectively, and each have a par value of $0.0003 1/3 per share. Holders of Class A Common Stock and Class B Convertible Common Stock have identical rights, including liquidation preferences, except that the holders of Class A Common Stock are entitled to
one
vote per share and holders of Class B Convertible Common Stock are entitled to
10
votes per share on all matters submitted to a stockholder vote. Class B Convertible Common Stock may only be held by Kevin Plank, the Company’s founder and Chief Executive Officer, or a related party of Mr. Plank, as specified in the Company’s charter. As a result, Mr. Plank has a majority voting control over the Company. Upon the transfer of shares of Class B Convertible Stock to a person other than Mr. Plank or a related party of Mr. Plank, the shares automatically convert into shares of Class A Common Stock on a
one-for-one
basis. In addition, all of the outstanding shares of Class B Convertible Common Stock will automatically convert into shares of Class A Common Stock on a
one-for-one
basis upon the death or disability of Mr. Plank or on the record date for any stockholders’ meeting upon which the shares of Class A Common Stock and Class B Convertible Common Stock beneficially owned by Mr. Plank is less than
15%
of the total shares of Class A Common Stock and Class B Convertible Common Stock outstanding or upon the other events specified in the Class C Charter. Holders of the Company’s common stock are entitled to receive dividends when and if authorized and declared out of assets legally available for the payment of dividends.
In June 2015, the Company's Board of Directors (the “Board”) approved Articles Supplementary to the Company's charter which designated
400.0 million
shares of common stock as a new class of common stock, referred to as the Class C common stock, par value $0.0003 1/3 per share. The Articles Supplementary became effective on June 15, 2015. In April 2016, the Company issued shares of Class C common stock as a dividend to the Company's holders of Class A and Class B common stock on a one-for-one basis. The terms of the Class C common stock are substantially identical to those of the Company's Class A common stock, except that the Class C common stock has no voting rights (except in limited circumstances), will automatically convert into Class A common stock under certain circumstances and includes provisions intended to ensure equal treatment of Class C common stock and Class B common stock in certain corporate transactions, such as mergers, consolidations, statutory share exchanges, conversions or negotiated tender offers, and including consideration incidental to these transactions.
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 and (liabilities) measured at fair value are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Derivative foreign currency contracts (see Note 8)
|
|
$
|
—
|
|
|
$
|
(6,818
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,238
|
|
|
$
|
—
|
|
Interest rate swap contracts (see Note 8)
|
|
—
|
|
|
1,088
|
|
|
—
|
|
|
—
|
|
|
(420
|
)
|
|
—
|
|
TOLI policies held by the Rabbi Trust
|
|
—
|
|
|
5,756
|
|
|
—
|
|
|
—
|
|
|
4,880
|
|
|
—
|
|
Deferred Compensation Plan obligations
|
|
—
|
|
|
(7,971
|
)
|
|
—
|
|
|
—
|
|
|
(7,023
|
)
|
|
—
|
|
Fair values of the financial assets and liabilities listed above are determined using inputs that use as their basis readily observable market data that are actively quoted and are validated through external sources, including third-party pricing services and brokers. The Company purchases marketable securities that are designated as available-for-sale. The foreign currency contracts represent gains and losses on derivative contracts, which is the net difference between the U.S. dollar value to be received or paid at the contracts’ settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current market exchange rate. The interest rate swap contracts represent gains and losses on the derivative contracts, which is the net difference between the fixed interest to be paid and variable interest to be received over the term of the contract based on current market rates. The fair value of the trust
owned life insurance (“TOLI”) policies held by the Rabbi Trust is based on the cash-surrender value of the life insurance policies, which are invested primarily in mutual funds and a separately managed fixed income fund. These investments are initially made in the same funds and purchased in substantially the same amounts as the selected investments of participants in the Under Armour, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), which represent the underlying liabilities to participants in the Deferred Compensation Plan. Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments.
As of the fair value of the Company's Senior Notes was
$526.3 million
and
$568.1 million
as of
December 31, 2017
and
2016
, respectively. The carrying value of the Company's other long term debt approximated its fair value as of
December 31, 2017
and
2016
. The fair value of long-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2).
10
. Provision for Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the United States. The Tax Act includes a number of changes to existing U.S. tax laws that impact the Company including the reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after
December 31, 2017
. The Tax Act also provides for a one-time transition tax on indefinitely reinvested foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective change beginning in 2018, including the elimination of certain domestic deductions and credits, capitalization of research and development expenditures, and additional limitations on the deductibility of executive compensation and interest.
The Company recognized the income tax effects of the Tax Act in its
2017
financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the Tax Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the Tax Act for which accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. The Company did not identify items for which the income tax effects of the Tax Act have not been completed and a reasonable estimate could not be determined as of
December 31, 2017
.
The changes to existing U.S. tax laws as a result of the Tax Act, which have the most significant impact on the company’s provision for income taxes as of
December 31, 2017
are as follows:
Reduction of the U.S. Corporate Income Tax Rate
The company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the company’s deferred tax assets and liabilities were adjusted to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent, resulting in a
$24.9 million
increase in income tax expense for the year ended
December 31, 2017
and a corresponding
$24.9 million
decrease in net deferred tax assets as of
December 31, 2017
.
Transition Tax on Foreign Earnings
The company recognized a provisional income tax expense of
$13.9 million
for the year ended
December 31, 2017
related to the one-time transition tax on indefinitely reinvested foreign earnings. The determination of the transition tax requires further analysis regarding the amount and composition of the company’s historical foreign earnings, the amount of foreign tax credits available, and the ability to utilize certain foreign tax credits, which is expected to be completed in 2018.
The adjustments to the deferred tax assets and liabilities and the liability for the transition tax on indefinitely reinvested foreign earnings, including the analysis of our ability to fully utilize foreign tax credits associated with the transition tax, are provisional amounts estimated based on information reviewed as of
December 31, 2017
. As we complete our analysis of the Tax Act, review all information, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to the provisional amounts that we have recorded as of
December 31, 2017
that may materially impact our provision for income taxes. Any subsequent adjustment will be recorded to current income tax expense in the quarter of 2018 when the analysis is completed.
Income (loss) before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
Income (loss) before income taxes:
|
|
|
|
|
|
United States
|
$
|
(131,475
|
)
|
|
$
|
251,321
|
|
|
$
|
272,739
|
|
Foreign
|
121,166
|
|
|
136,961
|
|
|
113,946
|
|
Total
|
$
|
(10,309
|
)
|
|
$
|
388,282
|
|
|
$
|
386,685
|
|
The components of the provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
2017
|
|
2016
|
|
2015
|
Current
|
|
|
|
|
|
Federal
|
$
|
(46,931
|
)
|
|
$
|
116,637
|
|
|
$
|
102,317
|
|
State
|
(8,336
|
)
|
|
29,989
|
|
|
27,500
|
|
Other foreign countries
|
34,005
|
|
|
32,394
|
|
|
28,336
|
|
|
(21,262
|
)
|
|
179,020
|
|
|
158,153
|
|
Deferred
|
|
|
|
|
|
Federal
|
51,447
|
|
|
(35,748
|
)
|
|
707
|
|
State
|
12,080
|
|
|
(10,658
|
)
|
|
(5,703
|
)
|
Other foreign countries
|
(4,314
|
)
|
|
(1,311
|
)
|
|
955
|
|
|
59,213
|
|
|
(47,717
|
)
|
|
(4,041
|
)
|
Provision for income taxes
|
$
|
37,951
|
|
|
$
|
131,303
|
|
|
$
|
154,112
|
|
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
U.S. federal statutory income tax rate
|
$
|
(3,608
|
)
|
35.0
|
%
|
|
$
|
135,899
|
|
35.0
|
%
|
|
$
|
135,340
|
|
35.0
|
%
|
State taxes, net of federal tax impact
|
(9,537
|
)
|
92.5
|
|
|
9,447
|
|
2.4
|
|
|
12,252
|
|
3.2
|
|
Unrecognized tax benefits
|
1,178
|
|
(11.4
|
)
|
|
4,377
|
|
1.1
|
|
|
12,931
|
|
3.4
|
|
Permanent tax benefits/nondeductible expenses
|
2,246
|
|
(21.8
|
)
|
|
(5,177
|
)
|
(1.3
|
)
|
|
8,475
|
|
2.2
|
|
Goodwill impairment
|
8,522
|
|
(82.7
|
)
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Foreign rate differential
|
(25,563
|
)
|
248.0
|
|
|
(25,768
|
)
|
(6.6
|
)
|
|
(21,262
|
)
|
(5.5
|
)
|
Valuation allowance
|
29,563
|
|
(290.3
|
)
|
|
8,798
|
|
2.3
|
|
|
10,504
|
|
2.7
|
|
Impacts related to Tax Act
|
38,833
|
|
(376.7
|
)
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Other
|
(3,683
|
)
|
39.2
|
|
|
3,727
|
|
0.9
|
|
|
(4,128
|
)
|
(1.1
|
)
|
Effective income tax rate
|
$
|
37,951
|
|
(368.2
|
)%
|
|
$
|
131,303
|
|
33.8
|
%
|
|
$
|
154,112
|
|
39.9
|
%
|
The decrease in the
2017
full year effective income tax rate, as compared to
2016
, is primarily attributable to the significant decrease in pre-tax earnings. In
2017
, the Company recorded tax benefits for losses in the United States and reductions in the Company's total liability for unrecognized tax benefits as a result of a lapse in the statute of limitations during the current period. These benefits were offset by the impact of the Tax Act, non-deductible goodwill impairment charges and the recording of certain valuation allowances.
Deferred tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2017
|
|
2016
|
Deferred tax asset
|
|
|
|
|
Allowance for doubtful accounts and sales return reserves
|
|
$
|
52,745
|
|
|
$
|
53,811
|
|
Foreign net operating loss carry-forwards
|
|
34,542
|
|
|
26,964
|
|
Tax basis inventory adjustment
|
|
30,531
|
|
|
25,776
|
|
Reserves and accrued liabilities
|
|
20,500
|
|
|
38,819
|
|
Stock-based compensation
|
|
19,002
|
|
|
32,910
|
|
Deferred rent
|
|
18,735
|
|
|
21,168
|
|
U.S. net operating loss carryforward
|
|
13,382
|
|
|
3,032
|
|
Foreign tax credit carry-forwards
|
|
11,918
|
|
|
8,664
|
|
State tax credits, net of federal impact
|
|
8,555
|
|
|
7,408
|
|
Inventory obsolescence reserves
|
|
5,241
|
|
|
15,479
|
|
Other
|
|
4,340
|
|
|
3,107
|
|
Total deferred tax assets
|
|
219,491
|
|
|
237,138
|
|
Less: valuation allowance
|
|
(73,544
|
)
|
|
(37,969
|
)
|
Total net deferred tax assets
|
|
145,947
|
|
|
199,169
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
Property, plant and equipment
|
|
(43,924
|
)
|
|
(45,178
|
)
|
Prepaid expenses
|
|
(18,336
|
)
|
|
(8,628
|
)
|
Intangible assets
|
|
—
|
|
|
(6,815
|
)
|
Other
|
|
(1,218
|
)
|
|
(2,506
|
)
|
Total deferred tax liabilities
|
|
(63,478
|
)
|
|
(63,127
|
)
|
Total deferred tax assets, net
|
|
$
|
82,469
|
|
|
$
|
136,042
|
|
|
|
|
|
|
|
All deferred tax assets and liabilities are classified in non-current on the Consolidated Balance Sheets as of
December 31, 2017
and
December 31, 2016
. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and actual operating results in future years could differ from our current assumptions, judgments and estimates.
A significant portion of the Company's deferred tax assets relate to U.S. federal and state taxing jurisdictions. Realization of these deferred tax assets is dependent on future U.S. pre-tax earnings. Due to the Company's losses in the United States, the Company incurred significant net operating losses (“NOLs”) in these jurisdictions in
2017
. Based on these factors, the Company has evaluated its ability to utilize these deferred tax assets in future years. In evaluating the recoverability of these deferred tax assets at
December 31, 2017
, the Company has considered all available evidence, both positive and negative, including but not limited to the following:
Positive
|
|
•
|
Availability of taxable income in the U.S. federal and certain state NOL carryback periods;
|
|
|
•
|
U.S. federal NOLs have an indefinite carryforward period beginning in 2018, pursuant to the Tax Act.
|
|
|
•
|
Definite lived tax attributes with relatively long carryforward periods; a majority from 10 to 20 years;
|
|
|
•
|
No history of U.S. federal and state tax attributes expiring unused;
|
|
|
•
|
Three year cumulative U.S. federal and state pre-tax income;
|
|
|
•
|
Relatively low values of pre-tax income required to realized deferred tax assets relative to historic income levels;
|
|
|
•
|
Restructuring plans being undertaken to improve profitability; and
|
|
|
•
|
Availability of prudent and feasible tax planning strategies.
|
Negative
|
|
•
|
Inherent challenges in forecasting future pre-tax earnings which rely on improved profitability from our restructuring efforts;
|
|
|
•
|
The continuing challenge of changes in the U.S. consumer retail business environment; and
|
|
|
•
|
While relatively long, existence of definite lived tax attributes of certain U.S. federal tax credits and state NOLs.
|
Based on all available evidence considered, the Company believes it is more likely than not, that most of the U.S. federal and state deferred tax assets recorded will ultimately be realized. However, as of
December 31, 2017
, a valuation allowance of
$15.9 million
has been recorded against certain state deferred tax assets where the Company has determined realization is not more likely than not. Additionally, valuation allowances have been recorded against certain deferred tax assets associated with foreign and state net operating loss carryforwards and foreign and state tax credit carryforwards as discussed further below.
As of
December 31, 2017
, the Company had
$34.5 million
in deferred tax assets associated with approximately
$116.0 million
in foreign net operating loss carryforwards, the majority of which have an indefinite carryforward period. As of
December 31, 2017
, the Company is not able to forecast the utilization of the majority of the deferred tax assets associated with foreign net operating loss carryforwards. Therefore, a valuation allowance of
$32.8 million
was recorded against the Company's net deferred tax assets in
2017
.
As of
December 31, 2017
the Company had
$13.4 million
in deferred tax assets associated with
$207.5 million
in state net operating loss carryforwards, which will begin to expire in
3
to
20 years
. As of
December 31, 2017
the Company believes certain deferred tax assets associated with state net operating loss carryforwards will expire unused based on the Company’s projections. Therefore, a valuation allowance of
$11.7 million
is recorded against these net deferred tax assets as of
December 31, 2017
.
As of
December 31, 2017
, the Company had
$11.9 million
in deferred tax assets associated with foreign tax credits. As of
December 31, 2017
the Company believes that a portion of the foreign taxes paid would not be creditable against its future income taxes. Therefore, a valuation allowance of
$9.9 million
was recorded against the Company's net deferred tax assets as of
December 31, 2017
.
As of
December 31, 2017
, the Company had
$8.6 million
in deferred tax assets associated with state tax credits, net of federal impact, which will begin to expire in
5
to
20 years
. As of
December 31, 2017
, the Company is not able to forecast the utilization of certain deferred tax assets associated with state tax credits. Therefore a valuation allowance of
$3.2 million
is recorded against these net deferred tax assets as of
December 31, 2017
.
As of
December 31, 2017
, approximately
$158.7 million
of cash and cash equivalents was held by the Company's non-U.S. subsidiaries whose cumulative undistributed earnings total
$488.4 million
. These earnings were subject to the one-time transition tax on indefinitely reinvested foreign earnings required by the Tax Act. The Company will continue to permanently reinvest these earnings, as well as future earnings from our foreign subsidiaries, to fund international growth and operations.
As of
December 31, 2017
and
2016
, the total liability for unrecognized tax benefits, including related interest and penalties, was approximately
$55.3 million
and
$70.4 million
, respectively. The following table represents a reconciliation of the Company's total unrecognized tax benefits balances, excluding interest and penalties, for the years ended
December 31, 2017
,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2015
|
Beginning of year
|
|
$
|
64,359
|
|
|
$
|
42,611
|
|
|
$
|
28,353
|
|
Increases as a result of tax positions taken in a prior period
|
|
457
|
|
|
661
|
|
|
203
|
|
Decreases as a result of tax positions taken in a prior period
|
|
(40
|
)
|
|
—
|
|
|
—
|
|
Increases as a result of tax positions taken during the current period
|
|
14,580
|
|
|
26,482
|
|
|
14,382
|
|
Decreases as a result of tax positions taken during the current period
|
|
—
|
|
|
—
|
|
|
—
|
|
Decreases as a result of settlements during the current period
|
|
(13,885
|
)
|
|
—
|
|
|
—
|
|
Reductions as a result of a lapse of statute of limitations during the current period
|
|
(13,656
|
)
|
|
(5,395
|
)
|
|
(327
|
)
|
End of year
|
|
$
|
51,815
|
|
|
$
|
64,359
|
|
|
$
|
42,611
|
|
As of
December 31, 2017
,
$46.2 million
of unrecognized tax benefits, excluding interest and penalties, would impact the Company's effective tax rate if recognized.
As of
December 31, 2017
and
2016
, the liability for unrecognized tax benefits included
$3.5 million
and
$6.1 million
, respectively, for the accrual of interest and penalties. For each of the years ended
December 31, 2017
,
2016
and
2015
, the Company recorded
$1.6 million
,
$3.1 million
and
$1.7 million
, respectively, for the accrual of interest and penalties in its consolidated statements of operations. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the consolidated statements of operations.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is currently under audit by the Internal Revenue Service for the 2015 and 2016 tax years. The majority of the Company's returns for years before 2014 are no longer subject to U.S. federal, state and local or foreign income tax examinations by tax authorities.
The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, will change significantly during the next twelve months. However, changes in the occurrence, expected outcomes, and timing of such events could cause the Company's current estimate to change materially in the future.
11
. Earnings per Share
The calculation of earnings per share for common stock shown below excludes the income attributable to outstanding restricted stock awards from the numerator and excludes the impact of these awards from the denominator. The following is a reconciliation of basic earnings per share to diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands, except per share amounts)
|
|
2017
|
|
2016
|
|
2015
|
Numerator
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(48,260
|
)
|
|
$
|
256,979
|
|
|
$
|
232,573
|
|
Adjustment payment to Class C capital stockholders
|
|
—
|
|
|
59,000
|
|
|
—
|
|
Net income (loss) available to all stockholders
|
|
$
|
(48,260
|
)
|
|
$
|
197,979
|
|
|
$
|
232,573
|
|
|
|
|
|
|
|
|
Denominator - Class A and B shares
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
219,254
|
|
|
217,707
|
|
|
215,498
|
|
Effect of dilutive securities
|
|
—
|
|
|
4,237
|
|
|
5,370
|
|
Weighted average common shares and dilutive securities outstanding
|
|
219,254
|
|
|
221,944
|
|
|
220,868
|
|
Earnings per share Class A and B —basic
|
|
$
|
(0.11
|
)
|
|
$
|
0.45
|
|
|
$
|
0.54
|
|
Earnings per share Class A and B—diluted
|
|
$
|
(0.11
|
)
|
|
$
|
0.45
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
Denominator - Class C shares
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
221,475
|
|
|
218,623
|
|
|
215,498
|
|
Effect of dilutive securities
|
|
—
|
|
|
4,281
|
|
|
5,370
|
|
Weighted average common shares and dilutive securities outstanding
|
|
221,475
|
|
|
222,904
|
|
|
220,868
|
|
Earnings (loss) per share Class C — basic
|
|
$
|
(0.11
|
)
|
|
$
|
0.72
|
|
|
$
|
0.54
|
|
Earnings (loss) per share Class C — diluted
|
|
$
|
(0.11
|
)
|
|
$
|
0.71
|
|
|
$
|
0.53
|
|
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options, restricted stock units and warrants representing
256.0 thousand
,
114.0 thousand
and
770.0 thousand
shares of Class A common stock outstanding for the years ended
December 31, 2017
,
2016
and
2015
, respectively, were excluded from the computation of diluted earnings per share because their effect would be anti-dilutive. Stock options, restricted stock units and warrants representing
4.7 million
,
691.6 thousand
and
770.0 thousand
shares of Class C common stock outstanding for the years ended
December 31, 2017
,
2016
and
2015
, respectively, were excluded from the computation of diluted earnings per share because their effect would be anti-dilutive.
12
. Stock-Based Compensation
Stock Compensation Plans
The Under Armour, Inc. Second Amended and Restated 2005 Omnibus Long-Term Incentive Plan as amended (the “2005 Plan”) provides for the issuance of stock options, restricted stock, restricted stock units and other equity awards to officers, directors, key employees and other persons. Stock options and restricted stock and restricted stock unit awards under the 2005 Plan generally vest ratably over a two to five year period. The contractual term for stock options is generally ten years from the date of grant. The Company generally receives a tax deduction for any ordinary income recognized by a participant in respect to an award under the 2005 Plan. The 2005 Plan terminates in 2025. As of
December 31, 2017
,
7.9 million
Class A shares and
15.5 million
Class C shares are available for future grants of awards under the 2005 Plan.
Total stock-based compensation expense for the years ended
December 31, 2017
,
2016
and
2015
was $
39.9 million
, $
46.1 million
and $
60.4 million
, respectively. As of
December 31, 2017
, the Company had $
87.7 million
of unrecognized compensation expense expected to be recognized over a weighted average period of
3.2
years. This unrecognized compensation expense does not include any expense related to performance-based restricted stock units and stock options for which the performance targets have not been deemed probable as of
December 31, 2017
. Refer to “Stock Options” and “Restricted Stock and Restricted Stock Units” below for further information on these awards.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (the “ESPP”) allows for the purchase of Class A Common Stock and Class C Common Stock by all eligible employees at a
15%
discount from fair market value subject to certain limits as defined in the ESPP. As of
December 31, 2017
,
2.7 million
Class A shares and
1.2 million
Class C shares are available for future purchases under the ESPP. During the years ended
December 31, 2017
,
2016
and
2015
,
563.9 thousand
,
290.8 thousand
and
103.3 thousand
shares were purchased under the ESPP, respectively
.
Non-Employee Director Compensation Plan and Deferred Stock Unit Plan
The Company’s Non-Employee Director Compensation Plan (the “Director Compensation Plan”) provides for cash compensation and equity awards to non-employee directors of the Company under the 2005 Plan. Non-employee directors have the option to defer the value of their annual cash retainers as deferred stock units in accordance with the Under Armour, Inc. Non-Employee Deferred Stock Unit Plan (the “DSU Plan”). Each new non-employee director receives an award of restricted stock units upon the initial election to the Board of Directors, with the units covering stock valued at
$100.0 thousand
on the grant date and vesting in three equal annual installments. In addition, each non-employee director receives, following each annual stockholders’ meeting, a grant under the 2005 Plan of restricted stock units covering stock valued at
$150.0 thousand
on the grant date. Each award vests
100%
on the date of the next annual stockholders’ meeting following the grant date.
The receipt of the shares otherwise deliverable upon vesting of the restricted stock units automatically defers into deferred stock units under the DSU Plan. Under the DSU Plan each deferred stock unit represents the Company’s obligation to issue one share of the Company’s Class C Common Stock with the shares delivered six months following the termination of the director’s service.
Stock Options
The weighted average fair value of a stock option granted for the years ended
December 31, 2017
,
2016
, and
2015
was $
19.04
, $
14.87
, and $
27.21
respectively. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Risk-free interest rate
|
2.1
|
%
|
|
1.4
|
%
|
|
1.8
|
%
|
Average expected life in years
|
6.50
|
|
|
6.50
|
|
|
6.00
|
|
Expected volatility
|
39.6
|
%
|
|
39.5
|
%
|
|
44.3
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
A summary of the Company’s stock options as of
December 31, 2017
,
2016
and
2015
, and changes during the years then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
Year Ended December 31,
|
2017
|
|
2016
|
|
2015
|
|
|
Number
of Stock
Options
|
|
Weighted
Average
Exercise
Price
|
|
Number
of Stock
Options
|
|
Weighted
Average
Exercise
Price
|
|
Number
of Stock
Options
|
|
Weighted
Average
Exercise
Price
|
Outstanding, beginning of year
|
|
4,265
|
|
|
$
|
9.63
|
|
|
6,008
|
|
|
$
|
7.26
|
|
|
5,622
|
|
|
$
|
4.14
|
|
Granted, at fair market value
|
|
734
|
|
|
19.04
|
|
|
335
|
|
|
36.05
|
|
|
1,158
|
|
|
20.15
|
|
Exercised
|
|
(1,046
|
)
|
|
3.72
|
|
|
(1,763
|
)
|
|
3.52
|
|
|
(720
|
)
|
|
3.96
|
|
Expired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(171
|
)
|
|
17.59
|
|
|
(315
|
)
|
|
26.26
|
|
|
(52
|
)
|
|
2.27
|
|
Outstanding, end of year
|
|
3,782
|
|
|
$
|
12.71
|
|
|
4,265
|
|
|
$
|
9.63
|
|
|
6,008
|
|
|
$
|
7.26
|
|
Options exercisable, end of year
|
|
2,512
|
|
|
$
|
5.85
|
|
|
3,385
|
|
|
$
|
4.30
|
|
|
4,892
|
|
|
$
|
4.13
|
|
Included in the table above are
0.5 million
and
0.3 million
performance-based stock options awarded to certain executives and key employees under the 2005 Plan during the years ended
December 31, 2017
and
2016
, respectively.
The performance-based stock options awarded in
2017
and
2016
have weighted average grant date fair values of
$19.04
and
$14.87
, respectively, and have vesting that is tied to the achievement of certain combined annual operating income targets.
The intrinsic value of stock options exercised during the years ended
December 31, 2017
,
2016
and
2015
was
$16.3 million
,
$63.9 million
and
$27.5 million
, respectively.
The following table summarizes information about stock options outstanding and exercisable as of
December 31, 2017
:
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Number of
Underlying
Shares
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Total
Intrinsic
Value
|
|
Number of
Underlying
Shares
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Total
Intrinsic
Value
|
3,782
|
|
$
|
12.71
|
|
|
4.55
|
|
$
|
22,679
|
|
|
2,512
|
|
$
|
5.85
|
|
|
2.52
|
|
$
|
22,553
|
|
Restricted Stock and Restricted Stock Units
A summary of the Company’s restricted stock and restricted stock units as of
December 31, 2017
,
2016
and
2015
, and changes during the years then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
(In thousands, except per share amounts)
|
|
Number
of
Restricted
Shares
|
|
Weighted
Average
Grant Date Fair Value
|
|
Number
of
Restricted
Shares
|
|
Weighted
Average
Fair Value
|
|
Number
of
Restricted
Shares
|
|
Weighted
Average
Fair Value
|
Outstanding, beginning of year
|
|
6,771
|
|
|
$
|
19.68
|
|
|
6,760
|
|
|
$
|
23.23
|
|
|
9,020
|
|
|
$
|
15.21
|
|
Granted
|
|
7,630
|
|
|
18.84
|
|
|
4,002
|
|
|
35.20
|
|
|
2,030
|
|
|
38.36
|
|
Forfeited
|
|
(2,290
|
)
|
|
28.71
|
|
|
(935
|
)
|
|
30.35
|
|
|
(652
|
)
|
|
24.29
|
|
Vested
|
|
(2,188
|
)
|
|
24.78
|
|
|
(3,056
|
)
|
|
16.25
|
|
|
(3,638
|
)
|
|
11.61
|
|
Outstanding, end of year
|
|
9,923
|
|
|
24.41
|
|
|
6,771
|
|
|
19.68
|
|
|
6,760
|
|
|
23.23
|
|
Included in the table above are
1.9 million
,
2.5 million
and
1.7 million
performance-based restricted stock units awarded to certain executives and key employees under the 2005 Plan during the years ended
December 31, 2017
,
2016
and
2015
, respectively. The performance-based restricted stock units awarded in
2017
,
2016
and
2015
have weighted average grant date fair values of
$18.76
,
$35.71
and
$37.87
, respectively, and have vesting that is tied to the achievement of certain combined annual operating income targets.
During the year ended
December 31, 2017
, the Company deemed the achievement of certain revenue and operating income targets improbable for the performance-based stock options and restricted stock units granted in 2017, and recorded a reversal of expense of
$4.2 million
for the three months ended December 31, 2017. During the year ended December 31, 2016, the Company deemed the achievement of certain operating income targets improbable for the performance-based stock options and restricted stock units granted in 2015 and 2016, and recorded reversals of expense of
$3.6 million
and
$8.0 million
, respectively, for the three months ended December 31, 2016. During the year ended December 31, 2015, the Company deemed the achievement of certain operating income targets probable for the performance-based stock options and restricted stock units granted in 2015 and 2014, and recorded
$33.2 million
for these awards, including a cumulative adjustment of
$10.0 million
during the three months ended September 30, 2015. The Company will assess the probability of the achievement of the operating income targets at the end of each reporting period. If it becomes probable that any remaining performance targets related to these performance-based stock options and restricted stock units will be achieved, a cumulative adjustment will be recorded as if ratable stock-based compensation expense had been recorded since the grant date. Additional stock based compensation of up to $
5.7 million
would have been recorded through
December 31, 2017
for all performance-based stock options and restricted stock units granted in 2017 had the full achievement of these operating income targets been deemed probable.
Warrants
In 2006, the Company issued fully vested and non-forfeitable warrants to purchase
1.92 million
shares of the Company's Class A Common Stock and
1.93 million
shares of the Company’s Class C Common Stock to NFL Properties as partial consideration for footwear promotional rights which were recorded as an intangible asset. The warrants have a term of
12 years
from the date of issuance and an exercise price of
$4.66
per Class A share and
$4.59
per Class C share. As of
December 31, 2017
, all outstanding warrants were exercisable, and
no
warrants were exercised.
13
. Other Employee Benefits
The Company offers a 401(k) Deferred Compensation Plan for the benefit of eligible employees. Employee contributions are voluntary and subject to Internal Revenue Service limitations. The Company matches a portion of the participant’s contribution and recorded expense of
$7.4 million
,
$9.0 million
and
$7.0 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Shares of the Company’s Class A Common Stock and Class C common stock are not investment options in this plan.
In addition, the Company offers the Under Armour, Inc. Deferred Compensation Plan which allows a select group of management or highly compensated employees, as approved by the Compensation Committee, to make an annual base salary and/or bonus deferral for each year. As of
December 31, 2017
and
2016
, the Deferred Compensation Plan obligations were
$8.0 million
and
$7.0 million
, respectively, and were included in other long term liabilities on the consolidated balance sheets.
The Company established the Rabbi Trust to fund obligations to participants in the Deferred Compensation Plan. As of
December 31, 2017
and
2016
, the assets held in the Rabbi Trust were TOLI policies with cash-surrender values of
$5.8 million
and
$4.9 million
, respectively. These assets are consolidated and are included in other long term assets on the consolidated balance sheet. Refer to Note
9
for a discussion of the fair value measurements of the assets held in the Rabbi Trust and the Deferred Compensation Plan obligations.
14
. Risk Management and Derivatives
Foreign Currency Risk Management
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions generated by its international subsidiaries in currencies other than their local currencies. These gains and losses are primarily driven by intercompany transactions and inventory purchases denominated in currencies other than the functional currency of the purchasing entity. From time to time, the Company may elect to enter into foreign currency contracts to reduce the risk associated with foreign currency exchange rate fluctuations on intercompany transactions and projected inventory purchases for its international subsidiaries.
As of
December 31, 2017
, the aggregate notional value of the Company's outstanding foreign currency contracts was $
601.0 million
, which had contract maturities ranging from
one
to
eleven
months. A portion of the Company's foreign currency contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are recorded in earnings. The Company enters into foreign currency contracts designated as cash flow hedges. For foreign currency contracts designated as cash flow hedges, changes in fair value, excluding any ineffective portion, are recorded in other comprehensive income until net income is affected by the variability in cash flows of the hedged transaction. The effective portion is generally released to net income after the maturity of the related derivative and is classified in the same manner as the underlying exposure. During the years ended
December 31, 2017
and
2016
, the Company reclassified
$0.4 million
and
$0.3 million
from other comprehensive income to cost of goods sold related to foreign currency contracts designated as cash flow hedges, respectively. The fair value of the Company’s foreign currency contracts was a liability of $
6.8 million
as of
December 31, 2017
and was included in other current liabilities on the consolidated balance sheet. The fair value of the Company's foreign currency contracts was an asset of
$15.2 million
as of
December 31, 2016
and was included in prepaid expenses and other current assets on the consolidated balance sheet. Refer to Note
9
for a discussion of the fair value measurements. Included in other expense, net were the following amounts related to changes in foreign currency exchange rates and derivative foreign currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Year Ended December 31,
|
2017
|
|
2016
|
|
2015
|
Unrealized foreign currency exchange rate gains (losses)
|
|
$
|
29,246
|
|
|
$
|
(12,627
|
)
|
|
$
|
(33,359
|
)
|
Realized foreign currency exchange rate gains (losses)
|
|
611
|
|
|
(6,906
|
)
|
|
7,643
|
|
Unrealized derivative gains (losses)
|
|
(1,217
|
)
|
|
729
|
|
|
388
|
|
Realized derivative gains (losses)
|
|
(26,537
|
)
|
|
15,192
|
|
|
16,404
|
|
Interest Rate Risk Management
In order to maintain liquidity and fund business operations, the Company enters into long term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of the Company's long-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate
fluctuations. The Company utilizes interest rate swap contracts to convert a portion of variable rate debt to fixed rate debt. The contracts pay fixed and receive variable rates of interest. The interest rate swap contracts are accounted for as cash flow hedges and accordingly, the effective portion of the changes in their fair value are recorded in other comprehensive income and reclassified into interest expense over the life of the underlying debt obligation.
Refer to Note
6
for a discussion of long term debt.
As of
December 31, 2017
, the notional value of the Company's outstanding interest rate swap contracts was
$135.6 million
. During the years ended
December 31, 2017
and
2016
, the Company recorded a
$0.9 million
and
$2.0 million
increase in interest expense, respectively, representing the effective portion of the contracts reclassified from accumulated other comprehensive income. The fair value of the interest rate swap contracts was an asset of
$1.1 million
as of
December 31, 2017
and was included in other long term assets on the consolidated balance sheet. The fair value of the interest rate swap contracts was a liability of
$0.4 million
as of
December 31, 2016
and was included in other long term liabilities on the consolidated balance sheet.
The Company enters into derivative contracts with major financial institutions with investment grade credit ratings and is exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the derivative contracts. However, the Company monitors the credit quality of these financial institutions and considers the risk of counterparty default to be minimal.
15
. Related Party Transactions
The Company has an operating lease agreement with an entity controlled by the Company’s Chief Executive Officer to lease an aircraft for business purposes. The Company paid
$2.0 million
,
$2.0 million
, and
$2.0 million
in lease payments to the entity for its use of the aircraft during the years ended
December 31, 2017
,
2016
and
2015
, respectively. No amounts were payable to this related party as of
December 31, 2017
and
2016
. The Company determined the lease payments were at fair market lease rates.
In June 2016, the Company purchased parcels of land from an entity controlled by the Company's CEO, to be utilized to expand the Company’s corporate headquarters to accommodate its growth needs. The purchase price for these parcels totaled
$70.3 million
. The Company determined that the purchase price for the land represented the fair market value of the parcels and approximated the cost to the seller to purchase and develop the parcels, including costs related to the termination of a lease encumbering the parcels.
In connection with the purchase of these parcels, in September 2016, the parties entered into an agreement pursuant to which the parties will share the burden of any special taxes arising due to infrastructure projects in the surrounding area. The allocation to the Company is based on the expected benefits to the Company’s parcels from these projects. No obligations were owed by either party under this agreement as of
December 31, 2017
.
16
. Segment Data and Related Information
The Company’s operating segments are based on how the Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. As such, the CODM receives discrete financial information for the Company's principal business by geographic region based on the Company’s strategy to become a global brand. These geographic regions include North America; Latin America; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific. Each geographic segment operates exclusively in
one
industry: the development, marketing and distribution of branded performance apparel, footwear and accessories. The CODM also receives discrete financial information for the Company's Connected Fitness business.
The net revenues and operating income (loss) associated with the Company's segments are summarized in the following tables. Net revenues represent sales to external customers for each segment. Intercompany balances were eliminated for separate disclosure. The majority of corporate service costs within North America have not been allocated to the Company's other segments. As the Company continues to grow its business outside of North America, a larger portion of its corporate overhead costs have begun to support global functions. Total expenditures for additions to long-lived assets are not disclosed as this information is not regularly provided to the CODM.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Year Ended December 31,
|
2017
|
|
2016
|
|
2015
|
Net revenues
|
|
|
|
|
|
|
North America
|
|
$
|
3,802,406
|
|
|
$
|
4,005,314
|
|
|
$
|
3,455,737
|
|
EMEA
|
|
469,997
|
|
|
330,584
|
|
|
203,109
|
|
Asia-Pacific
|
|
433,647
|
|
|
268,607
|
|
|
144,877
|
|
Latin America
|
|
181,324
|
|
|
141,793
|
|
|
106,175
|
|
Connected Fitness
|
|
89,179
|
|
|
80,447
|
|
|
53,415
|
|
Intersegment Eliminations
|
|
—
|
|
|
(1,410
|
)
|
|
—
|
|
Total net revenues
|
|
$
|
4,976,553
|
|
|
$
|
4,825,335
|
|
|
$
|
3,963,313
|
|
Net revenues in the United States were
$3,626.6 million
,
$3,843.7 million
, and
$3,317.0 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Year Ended December 31,
|
2017
|
|
2016
|
|
2015
|
Operating income (loss)
|
|
|
|
|
|
|
North America
|
|
$
|
20,179
|
|
|
$
|
408,424
|
|
|
$
|
460,961
|
|
EMEA
|
|
17,976
|
|
|
11,420
|
|
|
3,122
|
|
Asia-Pacific
|
|
82,039
|
|
|
68,338
|
|
|
36,358
|
|
Latin America
|
|
(37,085
|
)
|
|
(33,891
|
)
|
|
(30,593
|
)
|
Connected Fitness
|
|
(55,266
|
)
|
|
(36,820
|
)
|
|
(61,301
|
)
|
Total operating income
|
|
27,843
|
|
|
417,471
|
|
|
408,547
|
|
Interest expense, net
|
|
(34,538
|
)
|
|
(26,434
|
)
|
|
(14,628
|
)
|
Other expense, net
|
|
(3,614
|
)
|
|
(2,755
|
)
|
|
(7,234
|
)
|
Income (loss) before income taxes
|
|
$
|
(10,309
|
)
|
|
$
|
388,282
|
|
|
$
|
386,685
|
|
The operating income information presented above includes the impact of restructuring and impairment charges related to each of the Company's 2017 restructuring plan and 2018 restructuring plan. Charges incurred and expected to be incurred by segment in connection with each of the respective restructuring plans are as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Costs Incurred During the Year Ended December 31, 2017 (1)
|
|
Costs to be Incurred During the Year Ending December 31, 2018
|
Costs recorded in restructuring and impairment charges:
|
|
|
|
|
North America
|
|
$
|
63,170
|
|
|
$
|
109,000
|
|
EMEA
|
|
1,525
|
|
|
6,000
|
|
Asia-Pacific
|
|
38
|
|
|
—
|
|
Latin America
|
|
11,506
|
|
|
18,000
|
|
Connected Fitness
|
|
47,810
|
|
|
—
|
|
Total costs recorded in restructuring and impairment charges
|
|
$
|
124,049
|
|
|
$
|
133,000
|
|
(1) This table excludes additional non-cash charges of
$5.1 million
associated with the reduction of inventory outside of current liquidation channels in line with the 2017 restructuring plan.
Long-lived assets are primarily composed of Property and equipment, net. The Company's long-lived assets by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Year Ended December 31,
|
2017
|
|
2016
|
|
Long-lived assets
|
|
|
|
|
|
United States
|
|
$
|
763,477
|
|
|
$
|
728,841
|
|
|
Canada
|
|
14,077
|
|
|
11,126
|
|
|
Total North America
|
|
777,554
|
|
|
739,967
|
|
|
Other foreign countries
|
|
108,220
|
|
|
64,244
|
|
|
Total long lived assets
|
|
$
|
885,774
|
|
|
$
|
804,211
|
|
|
Net revenues by product category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Year Ended December 31,
|
2017
|
|
2016
|
|
2015
|
Apparel
|
|
$
|
3,287,121
|
|
|
$
|
3,229,142
|
|
|
$
|
2,801,062
|
|
Footwear
|
|
1,037,840
|
|
|
1,010,693
|
|
|
677,744
|
|
Accessories
|
|
445,838
|
|
|
406,614
|
|
|
346,885
|
|
Total net sales
|
|
4,770,799
|
|
|
4,646,449
|
|
|
3,825,691
|
|
Licensing revenues
|
|
116,575
|
|
|
99,849
|
|
|
84,207
|
|
Connected Fitness
|
|
89,179
|
|
|
80,447
|
|
|
53,415
|
|
Intersegment Eliminations
|
|
—
|
|
|
(1,410
|
)
|
|
—
|
|
Total net revenues
|
|
$
|
4,976,553
|
|
|
$
|
4,825,335
|
|
|
$
|
3,963,313
|
|
Net revenues in the United States were
$3,626.6 million
,
$3,843.7 million
, and
$3,317.0 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
17
. Unaudited Quarterly Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Quarter Ended (unaudited)
|
|
Year Ended
December 31,
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,117,331
|
|
|
$
|
1,088,245
|
|
|
$
|
1,405,615
|
|
|
$
|
1,365,362
|
|
|
$
|
4,976,553
|
|
Gross profit
|
|
505,423
|
|
|
498,246
|
|
|
645,350
|
|
|
589,704
|
|
|
2,238,723
|
|
Income (loss) from operations
|
|
7,536
|
|
|
(4,785
|
)
|
|
62,180
|
|
|
(37,088
|
)
|
|
27,843
|
|
Net income (loss)
|
|
(2,272
|
)
|
|
(12,308
|
)
|
|
54,242
|
|
|
(87,922
|
)
|
|
(48,260
|
)
|
Net income (loss) available to all stockholders
|
|
$
|
(2,272
|
)
|
|
$
|
(12,308
|
)
|
|
$
|
54,242
|
|
|
$
|
(87,922
|
)
|
|
$
|
(48,260
|
)
|
Basic net income (loss) per share of Class A and B common stock
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.11
|
)
|
Basic net income (loss) per share of Class C common stock
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.11
|
)
|
Diluted net income (loss) per share of Class A and B common stock
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.11
|
)
|
Diluted net income (loss) per share of Class C common stock
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,047,702
|
|
|
$
|
1,000,783
|
|
|
$
|
1,471,573
|
|
|
$
|
1,305,277
|
|
|
$
|
4,825,335
|
|
Gross profit
|
|
480,636
|
|
|
477,647
|
|
|
698,624
|
|
|
583,704
|
|
|
2,240,611
|
|
Income from operations
|
|
34,883
|
|
|
19,378
|
|
|
199,310
|
|
|
163,900
|
|
|
417,471
|
|
Net income
|
|
19,180
|
|
|
6,344
|
|
|
128,225
|
|
|
103,230
|
|
|
256,979
|
|
Adjustment payment to Class C
capital stockholders
|
|
—
|
|
|
59,000
|
|
|
—
|
|
|
—
|
|
|
59,000
|
|
Net income (loss) available to all stockholders
|
|
19,180
|
|
|
(52,656
|
)
|
|
128,225
|
|
|
103,230
|
|
|
197,979
|
|
Basic net income (loss) per share of Class A and B common stock
|
|
$
|
0.04
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.29
|
|
|
$
|
0.24
|
|
|
$
|
0.45
|
|
Basic net income (loss) per share of Class C common stock
|
|
$
|
0.04
|
|
|
$
|
0.15
|
|
|
$
|
0.29
|
|
|
$
|
0.24
|
|
|
$
|
0.72
|
|
Diluted net income (loss) per share of Class A and B common stock
|
|
$
|
0.04
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.29
|
|
|
$
|
0.23
|
|
|
$
|
0.45
|
|
Diluted net income (loss) per share of Class C common stock
|
|
$
|
0.04
|
|
|
$
|
0.15
|
|
|
$
|
0.29
|
|
|
$
|
0.23
|
|
|
$
|
0.71
|
|
Basic and diluted net income (loss) per share are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not equal the total for the year.