Property and Equipment
In accordance with ASC Topic 360 "Property, Plant 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, as follows: | | | | | |
| Years |
Furniture, fixtures and displays, office equipment, software and plant equipment (1) | 3 to 10 |
| Site improvements, buildings and building equipment | 10 to 35 |
Leasehold and tenant improvements | Shorter of the remaining lease term or related asset life |
(1) The cost of in-store apparel and footwear fixtures and displays are capitalized as part of "furniture, fixtures and displays", and depreciated over three years.
The Company periodically reviews its 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 $1.2 million as of December 31, 2021 (Fiscal 2020: $1.4 million).
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 useful lives of the assets, are expensed as incurred.
Leases
The Company enters into operating leases domestically and internationally to lease certain warehouse space, office facilities, space for its Brand and Factory House stores, and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2035, excluding extensions at the Company's option, and include provisions for rental adjustments.
In accordance with ASC Topic 842 "Leases", the Company accounts for a contract as a lease when it has the right to direct the use of the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its right-of-use ("ROU") assets and lease liabilities at the lease commencement date and thereafter if modified. ROU assets represent the Company’s right to control the underlying assets under lease, over the contractual term. ROU assets and lease liabilities are recognized on the Consolidated Balance Sheets based on the present value of future minimum lease payments to be made over the lease term. ROU assets and lease liabilities are established on the Company's Consolidated Balance Sheets for leases with an expected term greater than one year. Short-term lease payments were not material for Fiscal 2021 and Fiscal 2020.
As the rate implicit in a lease is not readily determinable, the Company uses its secured incremental borrowing rate to determine the present value of the lease payments. The Company calculates the incremental borrowing rate based on the current market yield curve and adjusts for foreign currency impacts for international leases.
Fixed lease costs are included in the recognition of ROU assets and lease liabilities. Variable lease costs are not included in the measurement of the lease liability. These variable lease payments are recognized in the Consolidated Statements of Operations in the period in which the obligation for those payments is incurred. Variable lease payments primarily consist of payments dependent on sales in Brand and Factory House stores. The Company has elected to combine lease and non-lease components in the determination of lease costs for its leases. The lease liability includes lease payments related to options to extend or renew the lease term only if the Company is reasonably certain to exercise those options.
Income Taxes
In accordance with ASC Topic 740 "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. The Company has made the policy election to record any liability associated with Global Intangible Low Tax Income (“GILTI”) in the period in which it is incurred.
Assessing whether deferred tax assets are realizable requires significant judgment. The Company considers 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 believes it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against the Company’s deferred tax assets, which increase income tax expense in the period when such a determination is made.
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 recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes line on the Consolidated Statements of Operations.
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, in accordance with ASC Topic 350-20 "Goodwill", are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. In conducting an annual impairment test, 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 estimates fair value using the discounted cash flows model, under the income approach, which indicates the fair value of the reporting unit based on the present value of the cash flows that 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 of a reporting unit exceeds its fair value, goodwill is impaired to the extent that the carrying value exceeds the fair value of the reporting unit. The Company performs its annual impairment testing in the fourth quarter of each year.
The Company continually evaluates 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 reviews 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.
During Fiscal 2021, the Company performed an impairment analysis on its long-lived assets, including retail stores at an individual store level. Based on this analysis, the Company determined that certain long-lived assets had net carrying values that exceeded their estimated undiscounted future cash flows. Accordingly, the Company estimated the fair values of these long-lived assets based on their market rent assessments or discounted cash flows. The Company compared these estimated fair values to the net carrying values. Accordingly, the Company recognized $2.0 million of long-lived asset impairment charges for Fiscal 2021 (Fiscal 2020: $89.7 million; Fiscal 2019: $0). In Fiscal 2021, the long-lived asset impairment charge was recorded within selling, general and administrative expenses on the Consolidated Statements of Operations and recorded as a reduction to the related asset balances on the Consolidated Balance Sheets. In Fiscal 2020, these long-lived asset impairment charges were part of our restructuring and impairment charges on the Consolidated Statements of Operations. The long-lived asset impairment charges for Fiscal 2021 are included within the Company's operating segments as follows: $0.2 million recorded in North America, $1.7 million recorded in Asia-Pacific,and $0.1 million recorded in Latin America.
The significant estimates used in the fair value methodology, which are based on Level 3 inputs, include: the Company's expectations for future operations and projected cash flows, including net revenue, gross profit and operating expenses and market conditions, including estimated market rent.
Additionally, during Fiscal 2021, the Company recognized $1.7 million of long-lived asset impairment charges related to the Company's New York City flagship store, which was recorded in connection with the Company's 2020 restructuring plan (Fiscal 2020: $290.8 million; Fiscal 2019: $0). Refer to Note 12 for a further discussion of the restructuring and related impairment charges.
Accrued Expenses
As of December 31, 2021, accrued expenses primarily included $151.9 million and $58.8 million of accrued compensation and benefits and marketing expenses, respectively (as of December 31, 2020: $77.9 million and $45.9 million, 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. In accordance with ASC Topic 830 "Foreign Currency Matters", 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 Operations.
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 in accordance with ASC Topic 815 "Derivatives and Hedging". 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.
For contracts designated as cash flow hedges, changes in fair value are reported as other comprehensive income and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. One of the criteria for this accounting treatment is the notional value of these derivative contracts should not be in excess of specifically identified anticipated transactions. By their very nature, the Company's estimates of the anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decline below hedged levels, or if it is no longer probable a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time, the Company is required to reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Other comprehensive income (loss) to Other expense, net during the period in which the decrease occurs. The Company does not enter into derivative financial instruments for speculative or trading purposes.
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606 "Revenue from Contracts with Customers". Net revenues primarily consist of net sales of apparel, footwear and accessories, license revenues and revenues from digital subscriptions, advertising and other digital business.
The Company recognizes revenue when it satisfies its performance obligations by transferring control of promised products or services to its customers, which occurs either at a point in time or over time, depending on when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that the Company ultimately expects to be entitled to in exchange for the products or services and is subject to an overall constraint that a significant revenue reversal will not occur in future periods.
Sales taxes imposed on the Company’s revenues from product sales are presented on a net basis on the Consolidated Statements of Operations, and therefore do not impact net revenues or costs of goods sold.
Revenue transactions associated with the sale of apparel, footwear, and accessories, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct-to-consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control has passed to the customer, based on the terms of sale. In the Company’s wholesale channel, transfer of control is based upon shipment under free on board shipping point for most goods or upon receipt by the customer depending on the country of the sale and the agreement with the customer. The Company may also ship product directly from its supplier to wholesale customers and recognize revenue when the product is delivered to and accepted by the customer. In the Company’s direct-to-consumer channel, transfer of control takes place at the point of sale for Brand and Factory House customers and upon shipment to substantially all e-commerce customers. Payment terms for wholesale transactions are established in accordance with local and industry practices. Payment is generally required within 30 to 60 days of shipment to or receipt by the wholesale customer in the United States, and generally within 60 to 90 days of shipment to or receipt by the wholesale customer internationally. Payment is generally due at the time of sale for direct-to-consumer transactions.
Gift cards issued to customers by the Company are recorded as contract liabilities until they are redeemed, at which point revenue is recognized. The Company also estimates and recognizes revenue for gift card balances not expected to ever be redeemed ("breakage") to the extent that it does not have a legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdiction as unclaimed or abandoned property. Such estimates are based upon historical redemption trends, with breakage income recognized in proportion to the pattern of actual customer redemptions.
Revenue from the Company's licensing arrangements is recognized over time during the period that licensees are provided access to the Company's trademarks and benefit from such access through their sales of licensed products. These arrangements require licensees to pay a sales-based royalty, which for most arrangements may be subject to a contractually guaranteed minimum royalty amount. Payments are generally due quarterly. The Company recognizes revenue for sales-based royalty arrangements (including those for which the royalty exceeds any contractually guaranteed minimum royalty amount) as licensed products are sold by the licensee. If a sales-based royalty is not ultimately expected to exceed a contractually guaranteed minimum royalty amount, the minimum is recognized as revenue over the contractual period, if all other criteria of revenue recognition have been met. This sales-based output measure of progress and pattern of recognition best represents the value transferred to the licensee over the term of the arrangement, as well as the amount of consideration that the Company is entitled to receive in exchange for providing access to its trademarks.
Revenue from digital subscriptions is recognized on a gross basis and is recognized over the term of the subscription. The Company receives payments in advance of revenue recognition for subscriptions and these payments are recorded as contract liabilities in the Company's Consolidated Balance Sheets. Related commission cost is included in selling, general and administrative expense in the Consolidated Statements of Operations. Revenue from digital advertising is recognized as the Company satisfies performance obligations pursuant to customer insertion orders.
The Company records reductions to revenue for estimated customer returns, allowances, markdowns, and discounts. The Company bases its estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns and allowances that have not yet been received by the Company. The actual amount of customer returns and allowances, which is inherently uncertain, may differ from the Company’s estimates. If the Company determines that actual or expected returns or allowances are significantly higher or lower than the reserves it established, it would record a reduction or increase, as appropriate, to net sales in the period in which it makes such a determination. Provisions for customer specific discounts are based on negotiated arrangements with certain major customers. Reserves for returns, allowances, markdowns, and discounts are included within customer refund liability and the value of inventory associated with reserves for sales returns are included within prepaid expenses and other current assets on the Consolidated Balance Sheets. At a minimum, the Company reviews and refines these estimates on a quarterly basis.
Practical Expedients and Policy Elections
The Company has made a policy election to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment cost rather than an additional promised service. Additionally, the Company has elected not to disclose certain information related to unsatisfied performance obligations for subscriptions for its MMR platforms as they have an original expected length of one year or less.
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 $649.2 million for Fiscal 2021 (Fiscal 2020 and Fiscal 2019: $550.4 million and $578.9 million, respectively). As of December 31, 2021, prepaid advertising costs were $22.4 million (as of December 31, 2020: $15.2 million).
Shipping and Handling Costs
The Company charges customers shipping and handling fees based on contractual terms, which are recorded in net revenues. The Company incurs freight costs associated with shipping goods to customers. These costs are recorded as a component of cost of goods sold.
The Company also incurs outbound handling costs associated with preparing goods to ship to customers and certain costs to operate the Company’s distribution facilities. These costs are recorded as a component of selling, general and administrative expenses. For Fiscal 2021, these costs totaled $82.9 million (Fiscal 2020 and Fiscal 2019: $80.5 million and $81.0 million, respectively).
Equity Method Investment
The Company has a common stock investment of 29.5% in its Japanese licensee. The Company accounts for its investment in its licensee under the equity method, given it has the ability to exercise significant influence, but not control, over the entity. The Company recorded its allocable share of its Japanese licensee's net income (loss) of $1.8 million for Fiscal 2021, (Fiscal 2020 and Fiscal 2019: $3.5 million and $(8.7) million, respectively) within income (loss) from equity method investment on the Consolidated Statements of Operations and as an adjustment to the invested balance within other long term assets on the Consolidated Balance Sheets. As of December 31, 2021, the carrying value of the Company's investment in its Japanese licensee was $1.8 million. The Company's investment in its Japanese licensee had no carrying value as of December 31, 2020 as it was fully impaired in Fiscal 2020.
In connection with the license agreement with the Japanese licensee, the Company recorded license revenues of $42.4 million for Fiscal 2021 (Fiscal 2020 and Fiscal 2019: $40.1 million and $37.8 million, respectively). As of December 31, 2021 and December 31, 2020, the Company had $17.1 million and $22.9 million, respectively, in licensing receivables outstanding, recorded in the prepaid expenses and other current assets line item within the Company's Consolidated Balance Sheets.
On March 2, 2020, as part of the Company's acquisition of Triple Pte. Ltd., the Company assumed 49.5% of common stock ownership in UA Sports (Thailand) Co., Ltd. (“UA Sports Thailand”). The Company accounts for its investment in UA Sports Thailand under the equity method, given it has the ability to exercise significant influence, but not control, over UA Sports Thailand. For Fiscal 2021, the Company recorded the allocable share of UA Sports Thailand’s net income (loss) of $(0.6) million (Fiscal 2020 and Fiscal 2019: $(1.1) million and $0, respectively) within income (loss) from equity method investment on the Consolidated Statements of Operations and as an adjustment to the invested balance within other long term assets on the Consolidated Balance Sheets. As of December 31, 2021 and December 31, 2020, the carrying value of the Company’s investment in UA Sports Thailand was $5.0 million and $4.5 million, respectively.
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 18 for a further discussion of earnings per share.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718 "Compensation - Stock Compensation", which requires all stock-based compensation awards granted to be measured at fair value and recognized as an expense in the financial statements over the service period. 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 option awards and grant date fair value for other 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 14 for further details on stock-based compensation.
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. As of December 31, 2021, the fair value of the Company's 3.250% Senior Notes were $619.9 million (December 31, 2020: $602.6 million). The fair value of the Company's 1.50% Convertible Senior Notes, was $149.6 million as of December 31, 2021 (December 31, 2020: $828.2 million). 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 a foreign currency contract 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 an 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 August 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-06 "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)" ("ASU 2020-06"). The amendment in this update simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. The update also requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The guidance is effective for interim and annual periods beginning after December 15, 2021. The Company will adopt ASU 2020-06, effective January 1, 2022 by applying a cumulative effect adjustment to retained earnings. The effect on the Company's Consolidate Statement of Operations and related disclosures will not be material.
Recently Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting and then issued a subsequent amendment to the initial guidance under ASU 2021-01 (collectively Topic 848). Topic 848 provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, derivatives and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, derivatives and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. The Company adopted Topic 848 in the third quarter of Fiscal 2021. The adoption did not have an impact to the Company's Consolidated Financial Statements.
NOTE 3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following table illustrates the activity in the Company's allowance for doubtful accounts:
| | | | | | | | | | | |
| (In thousands) | Allowance for doubtful accounts - within accounts receivable, net | | Allowance for doubtful accounts - within prepaid expenses and other current assets (1) |
| Balance at December 31, 2019 | $ | 15,083 | | | $ | — | |
| Increases (decreases) to costs and expenses | 10,456 | | | 7,029 | |
| Write-offs, net of recoveries | (5,188) | | | — | |
| Balance at December 31, 2020 | $ | 20,350 | | | $ | 7,029 | |
| Increases (decreases) to costs and expenses | (3,821) | | | — | |
| Write-offs, net of recoveries | (9,401) | | | — | |
| Balance at December 31, 2021 | $ | 7,128 | | | $ | 7,029 | |
(1) Includes an allowance pertaining to a royalty receivable.
The allowance for doubtful accounts was established with information available as of December 31, 2021, including reasonable and supportable estimates of future risk.
For Fiscal 2020, the increase in allowance for doubtful accounts was primarily due to negative developments experienced by our customers as a result of the COVID-19 pandemic, representing a higher risk of credit default.
NOTE 4. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2021 | | 2020 (1) |
| Leasehold and tenant improvements | $ | 462,588 | | | $ | 462,597 | |
| Furniture, fixtures and displays | 259,534 | | | 237,275 | |
| Buildings | 48,382 | | | 48,382 | |
| Software | 333,560 | | | 342,937 | |
| Office equipment | 132,629 | | | 129,546 | |
| Plant equipment | 178,187 | | | 200,625 | |
| Land | 83,626 | | | 83,626 | |
Construction in progress (2) | 52,598 | | | 31,217 | |
| Other | 5,545 | | | 6,047 | |
| Subtotal property and equipment | 1,556,649 | | | 1,542,252 | |
| Accumulated depreciation | (949,423) | | | (883,574) | |
| Property and equipment, net | $ | 607,226 | | | $ | 658,678 | |
(1) Certain prior period balances have been reclassified to conform to the current period presentation. Such reclassifications were not considered material and did not affect the consolidated financial statements.
(2) 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 $139.2 million for Fiscal 2021 (Fiscal 2020: $154.4 million; Fiscal 2019: $177.3 million).
NOTE 5. LEASES
The Company enters into operating leases domestically and internationally to lease certain warehouse space, office facilities, space for its Brand and Factory House stores, and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2035, excluding extensions at the Company's option, and include provisions for rental adjustments. Short-term lease payments were not material for Fiscal 2021 and Fiscal 2020.
As a result of the impacts of COVID-19, the Company sought concessions during Fiscal 2020 from landlords for certain leases of Brand and Factory House stores in the form of rent deferrals or rent waivers. Consistent with updated guidance from the FASB in April 2020, the Company elected to account for treating these concessions as though the enforceable rights and obligations to the deferrals existed in the respective contracts at lease inception and will not account for the concessions as lease modifications, unless the concession results in a substantial change in the Company's obligations.
The Company's rent deferrals had no impact to rent expense during Fiscal 2021 and Fiscal 2020, and amounts deferred and payable in future periods have been included in short term lease liability on the Company's Consolidated Balance Sheet as of December 31, 2021. The Company's rent waivers, which were recorded as a reduction of rent expense, were approximately $5.5 million for Fiscal 2021 (Fiscal 2020: $4.1 million; Fiscal 2019: $0).
Lease Costs and Other Information
The Company recognizes lease expense on a straight-line basis over the lease term.
The following table illustrates operating and variable lease costs, included in selling, general and administrative expenses within the Company's Consolidated Statements of Operations, for the periods indicated: | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Operating lease costs | $ | 142,965 | | | $ | 147,390 | | | $ | 153,551 | |
| Variable lease costs | $ | 16,115 | | | $ | 9,293 | | | $ | 12,856 | |
There are no residual value guarantees that exist, and there are no restrictions or covenants imposed by leases. The Company rents or subleases excess office facilities and warehouse space to third parties. Sublease income is not material.
The weighted average remaining lease term and discount rate for the periods indicated below were as follows: | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Weighted average remaining lease term (in years) | 8.73 | | 9.12 |
| Weighted average discount rate | 3.72 | % | | 3.83 | % |
Supplemental Cash Flow Information
The following table presents supplemental information relating to cash flow arising from lease transactions: | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | |
| Operating cash outflows from operating leases | $ | 177,391 | | | $ | 155,990 | | | $ | 116,811 | |
| Leased assets obtained in exchange for new operating lease liabilities | $ | 28,244 | | | $ | 390,957 | | | $ | 70,075 | |
Maturity of Lease Liabilities
The following table presents the future minimum lease payments under our operating lease liabilities as of December 31, 2021: | | | | | |
| (In thousands) | |
| Fiscal year ending December 31, | |
| 2022 | $ | 169,994 | |
| 2023 | 146,732 | |
| 2024 | 126,466 | |
| 2025 | 96,066 | |
| 2026 | 75,225 | |
| 2027 and thereafter | 379,133 | |
| Total lease payments | $ | 993,616 | |
| Less: Interest | 151,841 | |
| Total present value of lease liabilities | $ | 841,775 | |
As of December 31, 2021, the Company has additional operating lease obligations that have not yet commenced of approximately $1.5 million, which are not reflected in the table above.
NOTE 6. GOODWILL
The following table summarizes changes in the carrying amount of the Company’s goodwill by reportable segment as of the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | North America | | EMEA | | Asia-Pacific | | Latin America | | Total |
| Balance as of December 31, 2019 | $ | 318,288 | | | $ | 106,066 | | | $ | 79,168 | | | $ | 46,656 | | | $ | 550,178 | |
| Effect of currency translation adjustment | (1,420) | | | 6,971 | | | 8,486 | | | (10,426) | | | 3,611 | |
| Impairment | (15,345) | | | — | | | — | | | (36,230) | | | (51,575) | |
| Balance as of December 31, 2020 | 301,523 | | | 113,037 | | | 87,654 | | | — | | | 502,214 | |
| Effect of currency translation adjustment | (152) | | | (5,296) | | | (1,551) | | | — | | | (6,999) | |
| | | | | | | | | |
| Balance as of December 31, 2021 | $ | 301,371 | | | $ | 107,741 | | | $ | 86,103 | | | $ | — | | | $ | 495,215 | |
During Fiscal 2021, there were no goodwill impairments recorded.
During Fiscal 2020, as a result of the impacts of COVID-19, the Company determined that sufficient indicators existed to trigger an interim goodwill impairment analysis for all of the Company’s reporting units. The Company recognized goodwill impairment charges of $51.6 million for the Latin America reporting unit and the Canada reporting unit, which is within the North America operating segment.
NOTE 7. INTANGIBLE ASSETS, NET
The following tables summarize the Company’s intangible assets as of the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| (In thousands) | Useful Lives from Date of Acquisitions (in years) | Gross
Carrying
Amount | | Accumulated
Amortization | | Impairment | | Sale of Business | | Purchase of Business | | Net
Carrying
Amount |
| Intangible assets subject to amortization: | | | | | | | | | | | |
| Technology | 5-7 | $ | 2,536 | | | $ | (2,003) | | | $ | — | | | $ | — | | | $ | — | | | $ | 533 | |
| Customer relationships | 2-3 | 8,567 | | | (2,552) | | | — | | | — | | | — | | | 6,015 | |
| User/Nutrition database | 10 | — | | | — | | | — | | | — | | | — | | | — | |
| Lease-related intangible assets | 1-15 | 8,852 | | | (8,602) | | | — | | | — | | | — | | | 250 | |
| Other | 5-10 | 475 | | | (415) | | | — | | | — | | | — | | | 60 | |
| Total | | $ | 20,430 | | | $ | (13,572) | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,858 | |
| Indefinite-lived intangible assets | | | | | | | | | | | | 4,152 | |
| Intangible assets, net | | | | | | | | | | | | $ | 11,010 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| (In thousands) | Useful Lives from Date of Acquisitions (in years) | Gross
Carrying
Amount | | Accumulated
Amortization | | Impairment | | Sale of Business | | Purchase of Business | | Net
Carrying
Amount |
| Intangible assets subject to amortization: | | | | | | | | | | | |
| Technology | 5-7 | $ | 1,138 | | | $ | (145) | | | $ | — | | | $ | — | | | $ | — | | | $ | 993 | |
| Customer relationships | 2-3 | — | | | (1,208) | | | — | | | — | | | 8,770 | | | 7,562 | |
| User/Nutrition database | 10 | 46,314 | | | (23,790) | | | (4,351) | | | (18,173) | | | — | | | — | |
| Lease-related intangible assets | 1-15 | 12,896 | | | (9,180) | | | (1,058) | | | — | | | — | | | 2,658 | |
| Other | 5-10 | 295 | | | (188) | | | — | | | — | | | — | | | 107 | |
| Total | | $ | 60,643 | | | $ | (34,510) | | | $ | (5,410) | | | $ | (18,173) | | | $ | 8,770 | | | $ | 11,320 | |
| Indefinite-lived intangible assets | | | | | | | | | | | | 1,975 | |
| Intangible assets, net | | | | | | | | | | | | $ | 13,295 | |
Amortization expense, which is included in selling, general and administrative expenses, was $2.0 million, $7.0 million and $6.1 million for Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively.
The following is the estimated amortization expense for the Company’s intangible assets as of December 31, 2021: | | | | | |
| (In thousands) | |
| 2022 | $ | 2,000 | |
| 2023 | 1,641 | |
| 2024 | 1,479 | |
| 2025 | 1,479 | |
| 2026 | 259 | |
| 2027 and thereafter | — | |
| Amortization expense of intangible assets | $ | 6,858 | |
NOTE 8. CREDIT FACILITY AND OTHER LONG TERM DEBT
The Company's outstanding debt consisted of the following: | | | | | | | | | | | |
| (In thousands) | As of December 31, 2021 | | As of December 31, 2020 |
1.50% Convertible Senior Notes due 2024 | $ | 80,919 | | | $ | 500,000 | |
3.25% Senior Notes due 2026 | 600,000 | | | 600,000 | |
| Credit Facility borrowings | — | | | — | |
| Total principal payments due | 680,919 | | | 1,100,000 | |
| | | |
| Unamortized debt discount on Convertible Senior Notes | (9,207) | | | (79,031) | |
| Unamortized debt discount on Senior Notes | (1,131) | | | (1,385) | |
| Unamortized debt issuance costs - Convertible Senior Notes | (779) | | | (8,763) | |
| Unamortized debt issuance costs - Senior Notes | (2,401) | | | (2,940) | |
| Unamortized debt issuance costs - Credit facility | (4,870) | | | (4,325) | |
| Total amount outstanding | 662,531 | | | 1,003,556 | |
| Less: | | | |
| Current portion of long-term debt: | | | |
| Credit Facility borrowings | — | | | — | |
| | | |
| Non-current portion of long-term debt | $ | 662,531 | | | $ | 1,003,556 | |
Credit Facility
On March 8, 2019, the Company entered into an amended and restated credit agreement by and among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and arrangers party thereto (the “credit agreement”). In May 2020, the Company entered into an amendment to the credit agreement (the “first amendment”), pursuant to which the prior revolving credit commitments were reduced from $1.25 billion to $1.1 billion of borrowings. Subsequently, in May 2021, the Company entered into a second amendment to the credit agreement (the "second amendment"), which provides for certain changes to the Company's covenants and decreases to certain applicable rates effected by the first amendment. In December 2021, the Company entered into a third amendment to the credit agreement (the "third amendment" and, the credit agreement as amended by the first amendment and the second amendment, the "amended credit agreement" or the "revolving credit facility"), which extends the term of the credit agreement from March 8, 2024 to December 3, 2026, with permitted extensions under certain circumstances. As of December 31, 2021 and December 31, 2020 there were no amounts outstanding under the revolving credit facility.
Where the first amendment previously provided for suspensions of and adjustments to the Company's existing interest coverage covenant and leverage covenant (each as defined below), and further required the Company to maintain a specific amount of minimum liquidity during certain quarters, the second amendment provided that these financial covenants became effective again as of March 31, 2021 and removed the minimum liquidity covenant. The second amendment also (i) decreases the interest rate margins that were previously provided for under the first amendment; (ii) reverses limitations effected by the first amendment on expansions of and extensions of the maturity of the revolving credit facility during the covenant suspension period; and (iii) removes additional limitations on the availability of certain exceptions to the negative covenants, including the restricted payments covenant, that were imposed during the covenant suspension period.
The third amendment also (i) decreases the applicable margins for borrowings and undrawn commitment fees; (ii) provides for the fall away of collateral and guarantee requirements following an investment-grade rating from two rating agencies; (iii) implements SOFR as the replacement of LIBOR as a benchmark interest rate for U.S. dollar borrowings (and analogous benchmark rate replacements for borrowings in Yen, Canadian Dollars, Pound Sterling and Euro); and (iv) amends certain affirmative and negative covenants and related definitions.
At the Company's request and a lender's consent, commitments under the amended credit agreement may be increased by up to $300.0 million in aggregate, subject to certain conditions as set forth in the amended credit agreement. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time the Company seeks to incur such borrowings.
Borrowings, if any, under the revolving credit facility have maturities of less than one year. Up to $50.0 million of the facility may be used for the issuance of letters of credit. As of December 31, 2021, there were $4.3 million of letters of credit outstanding (December 31, 2020 had $4.3 million letters of credit outstanding).
The obligations of the Company under the amended credit agreement are guaranteed by certain domestic significant subsidiaries of Under Armour, Inc., subject to customary exceptions (the “subsidiary guarantors”) and primarily secured by a first-priority security interest in substantially all of the assets of Under Armour, Inc. and the subsidiary guarantors, excluding real property, capital stock in and debt of subsidiaries of Under Armour, Inc. holding certain real property and other customary exceptions. However, the third amendment provides for the permanent fall away of guarantees and collateral upon the Company's achievement of investment grade rating from two rating agencies.
The amended credit agreement contains negative covenants that, subject to significant exceptions, limit the Company's ability to, among other things: incur additional secured and unsecured indebtedness; pledge the assets as security; make investments, loans, advances, guarantees and acquisitions, (including investments in and loans to non-guarantor subsidiaries); undergo fundamental changes; sell assets outside the ordinary course of business; enter into transactions with affiliates; and make restricted payments.
The Company is also required to maintain a ratio of consolidated EBITDA, to consolidated interest expense of not less than 3.50 to 1.0 (the "interest coverage covenant") and the Company is not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.0 (the "leverage covenant"), as described in more detail in the amended credit agreement. As of December 31, 2021, the Company was in compliance with the applicable covenants.
In addition, the amended credit agreement contains events of default that are customary for a facility of this nature, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the amended credit agreement, will be considered an event of default under the amended credit agreement.
Borrowings under the amended credit agreement bear interest at a rate per annum equal to, at the Company’s option, either (a) an alternate base rate (for borrowings in U.S. dollars), (b) a term rate (for borrowings in U.S. dollars, Euro, Japaneses Yen or Canadian Dollars) or (c) a "risk free" rate (for borrowings in U.S. dollars or Pounds Sterling), plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to a grid (the “pricing grid”) based on the leverage ratio of consolidated total indebtedness to consolidated EBITDA and ranges between 1.00% to 1.75% (or, in the case of alternate base loans, 0.00% to 0.75%). The Company will also pay a commitment fee determined in accordance with the pricing grid on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit.
The weighted average interest rate under the revolving credit facility borrowings was 2.3% during Fiscal 2020. There were no borrowings outstanding during Fiscal 2021. As of December 31, 2021, the commitment fee was 15 basis points.
1.50% Convertible Senior Notes
In May 2020, the Company issued $500.0 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at the rate of 1.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The Convertible Senior Notes will mature on June 1, 2024, unless earlier converted in accordance with their terms, redeemed in accordance with their terms or repurchased.
The net proceeds from the offering (including the net proceeds from the exercise of the over-allotment option) were $488.8 million, after deducting the initial purchasers’ discount and estimated offering expenses paid by the Company, of which the Company used $47.9 million to pay the cost of the capped call transactions described below. The Company utilized $439.9 million to repay indebtedness that was outstanding under its revolving credit facility at the time, and to pay related fees and expenses.
The Convertible Senior Notes are not secured and are not guaranteed by any of the Company’s subsidiaries. The indenture governing the Convertible Senior Notes does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries.
In May 2021, the Company entered into exchange agreements with certain holders of the Convertible Senior Notes (the "first exchanging holders"), who agreed to exchange $250.0 million in aggregate principal amount of the Convertible Senior Notes for cash and/or shares of the Company's Class C Common Stock, plus payment for accrued and unpaid interest (the "First Exchange"). In connection with the First Exchange, the Company paid
approximately $300.0 million cash and issued approximately 11.1 million shares of the Company's Class C Common Stock to the first exchanging holders. In August 2021, the Company entered into additional exchange agreements with certain holders of the Convertible Senior Notes (the "second exchanging holders"), who agreed to exchange approximately $169.1 million in aggregate principal amount of the Convertible Senior Notes for cash and/or shares of the Company's Class C Common Stock, plus payment for accrued an unpaid interest (the "Second Exchange" and, together with the First Exchange, the "Exchanges"). In connection with the Second Exchange, the Company paid approximately $207.0 million cash and issued approximately 7.7 million shares of the Company's Class C Common Stock to the second exchanging holders. In connection with the Exchanges, the Company recognized a loss on debt extinguishment of approximately $58.5 million for Fiscal 2021, which has been recorded within Other Income (Expense), net on the Company's Consolidated Statements of Operations. Following the Exchanges, approximately $80.9 million aggregate principal amount of the Convertible Senior Notes remain outstanding.
The Convertible Senior Notes are convertible into cash, shares of the Company’s Class C Common Stock or a combination of cash and shares of Class C Common Stock, at the Company’s election, as described further below. The initial conversion rate is 101.8589 shares of the Company’s Class C Common Stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $9.82 per share of Class C Common Stock), subject to adjustment if certain events occur. Prior to the close of business on the business day immediately preceding January 1, 2024, holders may (at their option) convert their Convertible Senior Notes only upon satisfaction of one or more of the following conditions:
•during any calendar quarter commencing after the calendar quarter ended on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s Class C Common Stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class C Common Stock and the conversion rate on each such trading day;
•upon the occurrence of specified corporate events or distributions on the Company’s Class C Common Stock; or
•if the Company calls any Convertible Senior Notes for redemption prior to the close of business on the business day immediately preceding January 1, 2024.
On or after January 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Senior Notes at the conversion rate at any time irrespective of the foregoing conditions.
On or after December 6, 2022, the Company may redeem for cash all or any part of the Convertible Senior Notes, at its option, if the last reported sale price of the Company’s Class C Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If the Company undergoes a fundamental change (as defined in the indenture governing the Convertible Senior Notes) prior to the maturity date, subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Convertible Senior Notes in principal amounts of $1,000 or an integral multiple thereof at a price which will be equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Concurrently with the offering of the Convertible Senior Notes, the Company entered into privately negotiated capped call transactions with JPMorgan Chase Bank, National Association, HSBC Bank USA, National Association, and Citibank, N.A. (the “option counterparties”). The capped call transactions are expected generally to reduce potential dilution to the Company’s Class C Common Stock upon any conversion of Convertible Senior Notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal
amount of converted Convertible Senior Notes upon any conversion thereof, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactions is initially $13.4750 per share of the Company’s Class C Common Stock, representing a premium of 75% above the last reported sale price of the Company’s Class C Common Stock on May 21, 2020, and is subject to certain adjustments under the terms of the capped call transactions.
In May 2021 and August 2021, concurrently with the Exchanges, the Company entered into, with each of the option counterparties, termination agreements relating to a number of options corresponding to the number of Convertible Senior Notes exchanged. Pursuant to such termination agreements, each of the option counterparties paid the Company a cash settlement amount in respect of the portion of capped call transactions being terminated. The Company received approximately $53.0 million and $38.6 million, in connection with such termination agreements related to the First Exchange and the Second Exchange, respectively.
The Convertible Senior Notes contain a cash conversion feature, and as a result, the Company has separated it into liability and equity components. The Company valued the liability component based on its borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which is recognized as a debt discount, was valued as the difference between the face value of the Convertible Senior Notes and the fair value of the liability component.
In connection with the Convertible Senior Notes issuance, the Company incurred deferred financing costs of $12.3 million, primarily related to fees paid to the initial purchasers of the offering, as well as legal and accounting fees. These costs were allocated on a pro rata basis, with $10.0 million allocated to the debt component and $2.2 million allocated to the equity component. As of December 31, 2021, the equity component, net of issuance costs was $88.7 million.
The debt discount and the debt portion of the deferred financing costs are being amortized to interest expense over the term of the Convertible Senior Notes using the effective interest rate method. The effective interest rate for Fiscal 2021 was 6.8%.
3.250% Senior Notes
In June 2016, the Company issued $600.0 million aggregate principal amount of 3.250% senior unsecured notes due June 15, 2026 (the “Senior Notes”). Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. The Company may redeem some or all of the Senior Notes at any time, or from time to time, at redemption prices described in the indenture governing the Senior Notes. The indenture governing the Senior Notes contains negative covenants that limit the Company’s ability to engage in certain transactions and are subject to material exceptions described in the indenture. The Company incurred and deferred $5.4 million in financing costs in connection with the Senior Notes.
Interest Expense
Interest expense includes amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long term debt facilities.
Interest expense, net, was $44.3 million, $47.3 million and $21.2 million for Fiscal 2021, 2020 and 2019, respectively.
The following are the scheduled maturities of long term debt as of December 31, 2021: | | | | | |
| (In thousands) | |
| 2022 | $ | — | |
| 2023 | — | |
| 2024 | 80,919 | |
| 2025 | — | |
| 2026 | 600,000 | |
| 2027 and thereafter | |
| Total scheduled maturities of long term debt | $ | 680,919 | |
| |
| Current maturities of long term debt | $ | — | |
The Company monitors the financial health and stability of its lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets, lenders could be negatively impacted in their ability to perform under these facilities.
NOTE 9. COMMITMENTS AND CONTINGENCIES
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, 2021: | | | | | |
| (In thousands) | |
| 2022 | $ | 98,726 | |
| 2023 | 78,038 | |
| 2024 | 61,134 | |
| 2025 | 37,205 | |
| 2026 | 8,108 | |
| 2027 and thereafter | 4,345 | |
| Total future minimum sponsorship and other payments | $ | 287,556 | |
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 the 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. However, the matters described below, if decided adversely to or settled by the Company, could result, individually or in the aggregate, in a liability material to the Company's consolidated financial position, results of operations or cash flows.
In re Under Armour Securities Litigation
On March 23, 2017, three separate securities cases previously filed against the Company in the United States District Court for the District of Maryland (the “District Court”) were consolidated under the caption In re Under Armour Securities Litigation, Case No. 17-cv-00388-RDB (the “Consolidated Securities Action”). On August 4, 2017, the lead plaintiff in the Consolidated Securities Action, Aberdeen City Council as Administrating Authority for the North East Scotland Pension Fund (“Aberdeen”), joined by named plaintiff Bucks County Employees Retirement Fund (“Bucks County”), filed a consolidated amended complaint (the “Amended Complaint”) against the Company, the Company’s then-Chief Executive Officer, Kevin Plank, and former Chief Financial Officers Lawrence Molloy and Brad Dickerson. The Amended Complaint alleged violations of Section 10(b) (and Rule 10b-5) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 20(a) control person liability under the Exchange Act against the officers named in the Amended Complaint, claiming that the defendants made material misstatements and omissions regarding, among other things, the Company's growth and consumer demand for certain of the Company's products. The class period identified in the Amended Complaint was September 16, 2015 through January 30, 2017. The Amended Complaint also asserted claims under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), in connection with the Company’s public offering of senior
unsecured notes in June 2016. The Securities Act claims were asserted against the Company, Mr. Plank, Mr. Molloy, the Company’s directors who signed the registration statement pursuant to which the offering was made and the underwriters that participated in the offering. The Amended Complaint alleged that the offering materials utilized in connection with the offering contained false and/or misleading statements and omissions regarding, among other things, the Company’s growth and consumer demand for certain of the Company’s products.
On November 9, 2017, the Company and the other defendants filed motions to dismiss the Amended Complaint. On September 19, 2018, the District Court dismissed the Securities Act claims with prejudice and the Exchange Act claims without prejudice. Lead plaintiff Aberdeen, joined by named plaintiff Monroe County Employees’ Retirement Fund (“Monroe”), filed a Second Amended Complaint on November 16, 2018, asserting claims under the Exchange Act and naming the Company and Mr. Plank as the remaining defendants. The remaining defendants filed a motion to dismiss the Second Amended Complaint on January 17, 2019. On August 19, 2019, the District Court dismissed the Second Amended Complaint with prejudice.
In September 2019, plaintiffs Aberdeen and Bucks County filed an appeal in the United States Court of Appeals for the Fourth Circuit challenging the decisions by the District Court on September 19, 2018 and August 19, 2019 (the “Appeal”). The Appeal was fully briefed as of January 16, 2020.
On November 6 and December 17, 2019, two purported shareholders of the Company filed putative securities class actions in the District Court against the Company and certain of its current and former executives (captioned Patel v. Under Armour, Inc., No. 1:19-cv-03209-RDB (“Patel”), and Waronker v. Under Armour, Inc., No. 1:19-cv-03581-RDB (“Waronker”), respectively). The complaints in Patel and Waronker alleged violations of Section 10(b) (and Rule 10b-5) of the Exchange Act, against all defendants, and Section 20(a) control person liability under the Exchange Act against the current and former officers named in the complaints. The complaints claimed that the defendants’ disclosures and statements supposedly misrepresented or omitted that the Company was purportedly shifting sales between quarterly periods allegedly to appear healthier and that the Company was under investigation by and cooperating with the United States Department of Justice (“DOJ”) and the United States Securities and Exchange Commission (“SEC”) since July 2017.
On November 18, 2019, Aberdeen, the lead plaintiff in the Consolidated Securities Action, filed in the District Court a motion for an indicative ruling under Federal Rule of Civil Procedure 62.1 (the “Rule 62.1 Motion”) seeking relief from the final judgment pursuant to Federal Rule of Civil Procedure 60(b). The Rule 62.1 Motion alleged that purported newly discovered evidence entitled Aberdeen to relief from the District Court’s final judgment. Aberdeen also filed motions seeking (i) to consolidate the Patel and Waronker cases with the Consolidated Securities Action, and (ii) to be appointed lead plaintiff over the consolidated cases.
On January 22, 2020, the District Court granted Aberdeen’s Rule 62.1 motion and indicated that it would grant a motion for relief from the final judgment and provide Aberdeen with the opportunity to file a third amended complaint if the Fourth Circuit remanded for that purpose. The District Court further stated that it would, upon remand, consolidate the Patel and Waronker cases with the Consolidated Securities Action and appoint Aberdeen as the lead plaintiff over the consolidated cases.
On August 13, 2020, the Fourth Circuit remanded the Appeal to the District Court for the limited purpose of allowing the District Court to rule on Aberdeen’s motion seeking relief from the final judgment pursuant to Federal Rule of Civil Procedure 60(b). On September 14, 2020, the District Court issued an order granting that relief. The District Court’s order also consolidated the Patel and Waronker cases into the Consolidated Securities Action and appointed Aberdeen as lead plaintiff over the Consolidated Securities Action.
On October 14, 2020, Aberdeen, along with named plaintiffs Monroe and KBC Asset Management NV, filed a third amended complaint (the “TAC”) in the Consolidated Securities Action, asserting claims under Sections 10(b) and 20(a) of the Exchange Act against the Company and Mr. Plank and under Section 20A of the Exchange Act against Mr. Plank. The TAC alleges that the defendants supposedly concealed purportedly declining consumer demand for certain of the Company's products between the third quarter of 2015 and the fourth quarter of 2016 by making allegedly false and misleading statements regarding the Company’s performance and future prospects and by engaging in undisclosed and allegedly improper sales and accounting practices, including shifting sales between quarterly periods allegedly to appear healthier. The TAC also alleges that the defendants purportedly failed to disclose that the Company was under investigation by and cooperating with DOJ and the SEC since July 2017. The class period identified in the TAC is September 16, 2015 through November 1, 2019.
On December 4, 2020, the Company and Mr. Plank filed a motion to dismiss the TAC for failure to state a claim. That motion was denied by the Court on May 18, 2021. Discovery in the Consolidated Securities Action commenced on June 4, 2021 and is currently ongoing. On July 23, 2021, the Company and Mr. Plank filed an answer to the TAC denying all allegations of wrongdoing and asserting affirmative defenses to the claims asserted
in the TAC. On December 1, 2021, the plaintiffs filed a motion seeking, among other things, certification of the class they are seeking to represent in the Consolidated Securities Action. The Company and Mr. Plank have opposed this motion, and briefing on the motion is scheduled to be completed as of May 12, 2022.
The Company continues to believe that the claims asserted in the Consolidated Securities Action are without merit and intends to defend the lawsuit vigorously. However, because of the inherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of this matter.
State Court Derivative Complaints
In June and July 2018, two purported stockholder derivative complaints were filed in Maryland state court (in cases captioned Kenney v. Plank, et al. (filed June 29, 2018) and Luger v. Plank, et al. (filed July 26, 2018), respectively). The cases were consolidated on October 19, 2018 under the caption Kenney v. Plank, et. al. The consolidated complaint in the Kenney matter names Mr. Plank, certain other current and former members of the Company’s Board of Directors, certain former Company executives, and Sagamore Development Company, LLC (“Sagamore”) as defendants, and names the Company as a nominal defendant. The consolidated complaint asserts breach of fiduciary duty, unjust enrichment, and corporate waste claims against the individual defendants and asserts a claim against Sagamore for aiding and abetting certain of the alleged breaches of fiduciary duty. The consolidated complaint seeks damages on behalf of the Company and certain corporate governance related actions.
The consolidated complaint includes allegations similar to those in the Amended Complaint in the Consolidated Securities Action matter discussed above, challenging, among other things, the Company’s disclosures related to growth and consumer demand for certain of the Company’s products, as well as stock sales by certain individual defendants. The consolidated complaint also makes allegations related to the Company’s purchase of certain parcels of land from entities controlled by Mr. Plank (through Sagamore). Sagamore purchased the parcels in 2014. Its total investment in the parcels was approximately $72.0 million, which included the initial $35.0 million purchase price for the property, an additional $30.6 million to terminate a lease encumbering the property and approximately $6.4 million of development costs. As previously disclosed, in June 2016, the Company purchased the unencumbered parcels for $70.3 million in order to further expand the Company’s corporate headquarters to accommodate its growth needs. The Company negotiated a purchase price for the parcels that it determined represented the fair market value of the parcels and approximated the cost to the seller to purchase and develop the parcels. In connection with its evaluation of the potential purchase, the Company engaged an independent third-party to appraise the fair market value of the parcels, and the Audit Committee of the Company’s Board of Directors engaged its own independent appraisal firm to assess the parcels. The Audit Committee determined that the terms of the purchase were reasonable and fair, and the transaction was approved by the Audit Committee in accordance with the Company’s policy on transactions with related persons.
On March 29, 2019, the court in the consolidated Kenney action granted the Company’s and the defendants’ motion to stay that case pending the outcome of both the Consolidated Securities Action and an earlier-filed derivative action asserting similar claims relating to the Company’s purchase of parcels in Port Covington (which derivative action has since been dismissed in its entirety).
Prior to the filing of the derivative complaints in Kenney v. Plank, et al. and Luger v. Plank, et al., both of the purported stockholders had sent the Company’s Board of Directors a letter demanding that the Company pursue claims similar to the claims asserted in the derivative complaints. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company and informed both of these purported stockholders of that determination.
In 2020, two additional purported shareholder derivative complaints were filed in Maryland state court, in cases captioned Cordell v. Plank, et al. (filed August 11, 2020) and Salo v. Plank, et al. (filed October 21, 2020), respectively.
The complaints in the Cordell and Salo cases name Mr. Plank, certain other current and former members of the Company’s Board of Directors, and certain current and former Company executives as defendants, and name the Company as a nominal defendant. The complaints in these actions assert allegations similar to those in the TAC filed in the Consolidated Securities Action matter discussed above, including allegations challenging (i) the Company’s disclosures related to growth and consumer demand for certain of the Company’s products; (ii) the Company’s practice of shifting sales between quarterly periods supposedly to appear healthier and its purported failure to disclose that practice; (iii) the Company’s internal controls with respect to revenue recognition and inventory management; (iv) the Company’s supposed failure to timely disclose investigations by the SEC and DOJ; (v) the compensation paid to the Company’s directors and executives while the alleged wrongdoing was occurring; and/or (vi) stock sales by certain individual defendants. The complaints assert breach of fiduciary duty, unjust
enrichment, and corporate waste claims against the individual defendants. These complaints seek damages on behalf of the Company and certain corporate governance related actions.
Prior to the filing of the derivative complaints in these two actions, neither of the purported stockholders made a demand that the Company’s Board of Directors pursue the claims asserted in the complaints.
In October 2021, the court issued an order (i) consolidating the Cordell and Salo actions with the consolidated Kenney action into a single consolidated derivative action (the "Consolidated State Derivative Action"); (ii) designating the Kenney action as the lead case; and (iii) specifying that the scheduling order in the Kenney action shall control the Consolidated State Derivative Action. On December 20, 2021, the court issued an order dismissing the Consolidated State Derivative Action for lack of prosecution pursuant to Maryland Rule 2-507 without prejudice to plaintiffs' right to reinstate the action.
Federal Court Derivative Complaints
In July 2018, a stockholder derivative complaint was filed in the United States District Court for the District of Maryland, in a case captioned Andersen v. Plank, et al. The complaint in the Andersen matter names Mr. Plank, certain other current and former members of the Company’s Board of Directors and certain former Company executives as defendants, and names the Company as a nominal defendant. The complaint asserts breach of fiduciary duty and unjust enrichment claims against the individual defendants, and seeks damages on behalf of the Company and certain corporate governance related actions. The complaint includes allegations similar to those in the Amended Complaint in the Consolidated Securities Action matter discussed above, challenging, among other things, the Company’s disclosures related to growth and consumer demand for certain of the Company’s products and stock sales by certain individual defendants.
The Andersen action was stayed from December 2018 to August 2019 and again from September 2019 to September 2020 (the “2019 Stay Order”). Pursuant to a series of court ordered stipulations, the terms of the 2019 Stay Order remained in effect through and including January 19, 2021. The stay expired on January 19, 2021.
Prior to the filing of the complaint in the Andersen action, the plaintiff had sent the Company’s Board of Directors a letter demanding that the Company pursue claims similar to the claims asserted in the complaint. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company and informed the plaintiff of that determination. During the pendency of the Andersen action, the plaintiff sent the Company’s Board of Directors a second letter demanding that the Company pursue claims similar to the claims asserted in the TAC in the Consolidated Securities Action. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company and informed the plaintiff of that determination.
In September 2020, two additional derivative complaints were filed in the United States District Court for the District of Maryland (in cases captioned Olin v. Plank, et al. (filed September 1, 2020), and Smith v. Plank, et al. (filed September 8, 2020), respectively). Prior to the filing of the derivative complaints in these two actions, neither of the purported stockholders made a demand that the Company’s Board of Directors pursue the claims asserted in the complaints. On November 20, 2020, another derivative complaint was filed in the United States District Court for the District of Maryland, in a case captioned Viskovich v. Plank, et al. Prior to filing his derivative complaint, the plaintiff in the Viskovich matter made a demand that the Company’s Board of Directors pursue the claims asserted in the complaint but filed suit before the Board had responded to the demand. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims asserted in the demand by the plaintiff in the Viskovich action should not be pursued by the Company and informed the plaintiff of that determination.
The complaints in the Olin, Smith, and Viskovich cases name Mr. Plank, certain other current and former members of the Company’s Board of Directors, and certain current and former Company executives as defendants, and name the Company as a nominal defendant. The complaints in these actions assert allegations similar to those in the TAC filed in the Consolidated Securities Action matter discussed above, including allegations challenging (i) the Company’s disclosures related to growth and consumer demand for certain of the Company’s products; (ii) the Company’s practice of shifting sales between quarterly periods supposedly to appear healthier and its purported failure to disclose that practice; (iii) the Company’s internal controls with respect to revenue recognition and inventory management; (iv) the Company’s supposed failure to timely disclose investigations by the SEC and DOJ; and/or (v) the compensation paid to the Company’s directors and executives while the alleged wrongdoing was occurring. The complaints assert breach of fiduciary duty, unjust enrichment, gross mismanagement, and/or corporate waste claims against the individual defendants. The Viskovich complaint also asserts a contribution claim against certain defendants under the federal securities laws. These complaints seek damages on behalf of the Company and certain corporate governance related actions.
On January 27, 2021, the court entered an order consolidating for all purposes the Andersen, Olin, Smith and Viskovich actions into a single action under the caption Andersen v. Plank, et al. (the “Federal Court Derivative Action”). In February 2021, counsel for the Smith and Olin plaintiffs, on the one hand, and counsel for the Andersen and Viskovich plaintiffs, on the other hand, filed motions seeking to be appointed as lead counsel in the Federal Court Derivative Action. These motions are currently pending.
The Company believes that the claims asserted in the Federal Court Derivative Action are without merit and intends to defend this matter vigorously. However, because of the inherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of the outcome of this matter.
NOTE 10. STOCKHOLDERS’ EQUITY
The Company’s Class A Common Stock and Class B Convertible Common Stock have an authorized number of 400.0 million shares and 34.45 million shares, respectively, and each have a par value of $0.0003 1/3 per share as of December 31, 2021. 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, Executive Chairman and Brand Chief, or a related party of Mr. Plank, as defined in the Company’s charter. As a result, Mr. Plank has a majority voting control over the Company. Upon the transfer of shares of Class B Convertible Stock to a person other than Mr. Plank or a related party of Mr. Plank, the shares automatically convert into shares of Class A Common Stock on a one-for-one basis. In addition, all of the outstanding shares of Class B Convertible Common Stock will automatically convert into shares of Class A Common Stock on a one-for-one basis upon the death or disability of Mr. Plank or on the record date for any stockholders’ meeting upon which the shares of Class A Common Stock and Class B Convertible Common Stock beneficially owned by Mr. Plank is less than 15% of the total shares of Class A Common Stock and Class B Convertible Common Stock outstanding or upon the other events specified in the Class C Articles Supplementary to the Company's charter as documented below. Holders of the Company’s common stock are entitled to receive dividends when and if authorized and declared out of assets legally available for the payment of dividends.
The Company's Class C Common Stock has an authorized number of of 400.0 million shares and have a par value of $0.0003 1/3 per share as of December 31, 2021. 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.
NOTE 11. REVENUES
For a discussion of disaggregated revenue, refer to Note 19.
The Company records reductions to revenue for estimated customer returns, allowances, markdowns and discounts. These reserves are included within customer refund liability and the value of the inventory associated with reserves for sales returns are included within prepaid expenses and other current assets on the Consolidated Balance Sheets. The following table presents the customer refund liability, as well as the associated value of inventory for the periods indicated: | | | | | | | | | | | |
| (In thousands) | Balance as of
December 31, 2021 | | Balance as of
December 31, 2020 |
| Customer refund liability | $ | 164,294 | | | $ | 203,399 | |
| Inventory associated with the reserves | $ | 47,569 | | | $ | 57,867 | |
Contract Liabilities
Contract liabilities are recorded when a customer pays consideration, or the Company has a right to an amount of consideration that is unconditional, before the transfer of a good or service to the customer, and thus represent the Company's obligation to transfer the good or service to the customer at a future date. The Company's contract liabilities primarily consist of payments received in advance of revenue recognition for subscriptions for the Company's digital fitness applications and royalty arrangements, included in other current and other long-term
liabilities, and gift cards, included in accrued expenses on the Company's Consolidated Balance Sheets. As of December 31, 2021 and December 31, 2020, contract liabilities were $39.1 million and $26.7 million, respectively.
For Fiscal 2021, the Company recognized $21.5 million of revenue that was previously included in contract liabilities as of December 31, 2020. For Fiscal 2020, the Company recognized $16.1 million of revenue that was previously included in contract liabilities as of December 31, 2019. The change in the contract liabilities balance primarily results from the timing differences between the Company's satisfaction of performance obligations and the customer's payment. Commissions related to subscription revenue are capitalized and recognized over the subscription period.
NOTE 12. RESTRUCTURING AND RELATED IMPAIRMENT CHARGES
During Fiscal 2020, the Company's Board of Directors approved a restructuring plan ranging between $550 million to $600 million in costs (the "2020 restructuring plan") designed to rebalance the Company’s cost base to further improve profitability and cash flow generation.
Restructuring and related impairment charges and recoveries require the Company to make certain judgments and estimates regarding the amount and timing as to when these charges or recoveries occur. The estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, the Company conducts an evaluation of the related liabilities and expenses and revises its assumptions and estimates as appropriate, as new or updated information becomes available. As of December 31, 2021, the Company currently estimates total restructuring and related charges associated with the 2020 restructuring plan will range between $525 million to $550 million.
The restructuring and related charges primarily consist of approximately:
•$172 million of cash restructuring charges, of which approximately $26 million relates to employee severance and benefit costs, $14 million relates to facility and lease termination costs and $132 million relates to contract termination and other restructuring costs; and
•$378 million of non-cash charges, of which approximately $293 million relates to an impairment charge on the Company’s New York City flagship store and $85 million relates to intangibles and other asset related impairments.
The Company recorded $41.0 million of restructuring and related impairment charges during Fiscal 2021 and $472.7 million during Fiscal 2020, under the 2020 restructuring plan. As of December 31, 2021, $513.8 million of restructuring and related impairment charges under the 2020 restructuring plan have been recorded since the inception of the plan.
The following table illustrates the costs recorded during Fiscal 2021 and Fiscal 2020, as well as the Company's current estimates of the amount expected to be incurred in connection with the 2020 restructuring plan:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Estimated Restructuring and Impairment Charges (1) |
| (In thousands) | Year ended December 31, | | Remaining to be Incurred | | Total Plan |
| 2021 | | 2020 | |
| Costs recorded in cost of goods sold: | | | | | | | |
| Contract-based royalties | $ | — | | | $ | 11,608 | | | $ | — | | | $ | 11,608 | |
| Inventory write-offs | 515 | | | 768 | | | — | | | 1,283 | |
| Total costs recorded in cost of goods sold | 515 | | | 12,376 | | | — | | | 12,891 | |
| Net costs (recoveries) recorded in restructuring and related impairment charges: | | | | | | | |
| Property and equipment impairment | 3,064 | | | 29,280 | | | — | | | 32,344 | |
| Intangible asset impairment | — | | | 4,351 | | | — | | | 4,351 | |
| Right-of-use asset impairment | 1,686 | | | 293,495 | | | — | | | 295,181 | |
| Employee related costs | (1,655) | | | 28,579 | | | — | | | 26,924 | |
Contract exit costs (2) | 14,954 | | | 79,008 | | | 35,240 | | | 129,202 | |
| Other asset write off | 1,821 | | | 13,074 | | | — | | | 14,895 | |
| Other restructuring costs | 20,648 | | | 12,564 | | | 1,000 | | | 34,212 | |
| Total costs recorded in restructuring and impairment charges | 40,518 | | | 460,351 | | | 36,240 | | | 537,109 | |
| Total restructuring and impairment charges | $ | 41,033 | | | $ | 472,727 | | | $ | 36,240 | | | $ | 550,000 | |
(1) Estimated restructuring and impairment charges reflect the high end of the range of the estimated charges expected by the Company in connection with the 2020 restructuring plan.
(2) Contract exit costs primarily consist of proposed lease exits of certain Brand and Factory House stores and office facilities, and proposed marketing and other contract exits.
All restructuring and related impairment charges are included in the Company's Corporate Other segment.
For Fiscal 2021, approximately $17.6 million of the charges are North America related, $23.2 million are Latin America related and $1.8 million are Asia-Pacific related. These charges were offset by a recovery of $1.6 million related to EMEA.
For Fiscal 2020, approximately $397.6 million of the charges are North America related, $14.4 million are EMEA related, $14.9 million are Latin America related and $6.8 million are Asia-Pacific related and $4.6 million are Connected Fitness related.
A summary of the activity in the restructuring reserve related to the Company's 2020 restructuring plan, as well as prior restructuring plans in 2018 and 2017, for Fiscal 2021 and Fiscal 2020 are as follows: | | | | | | | | | | | | | | | | | |
| (In thousands) | Employee Related Costs | | Contract Exit Costs | | Other Restructuring Related Costs |
| Balance at January 1, 2020 | $ | 462 | | | $ | 17,843 | | | $ | — | |
| Net additions (recoveries) charged to expense | 27,452 | | | 72,747 | | | 11,843 | |
| Cash payments charged against reserve | (14,584) | | | (28,456) | | | (5,745) | |
| Changes in reserve estimate | (462) | | | (492) | | | — | |
| Balance at December 31, 2020 | $ | 12,868 | | | $ | 61,642 | | | $ | 6,098 | |
| Net additions (recoveries) charged to expense | (1,655) | | | 17,814 | | | (1,494) | |
| Cash payments charged against reserve | (5,473) | | | (47,486) | | | (6,078) | |
| Foreign exchange and other | (2,192) | | | (565) | | | 120 | |
| Balance at December 31, 2021 | $ | 3,548 | | | $ | 31,405 | | | $ | (1,354) | |
During Fiscal 2021, the Company also incurred net costs of $25.9 million associated with abandoned facilities and the write-off of fixed assets under the 2020 restructuring plan.
Latin America operating model change
During the Fiscal 2021, the Company substantially completed its change to a distributor model for certain countries within its Latin America region. The Company recognized a net loss on disposal of its assets and liabilities of approximately $30.6 million, which has been recorded as part of total restructuring expense.
NOTE 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 $8.9 million, $5.4 million and $7.5 million for Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. During Fiscal 2020, the Company temporarily suspended 401(k) matching contributions for approximately five months as part of the Company's capital preservation efforts in response to COVID-19. 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, 2021 and 2020, the Deferred Compensation Plan obligations were $14.5 million and $14.3 million, respectively, and were included in other long term liabilities on the Consolidated Balance Sheets.
The Company established a Rabbi Trust to fund obligations to participants in the Deferred Compensation Plan. As of December 31, 2021 and 2020, the assets held in the Rabbi Trust were TOLI policies with cash-surrender values of $9.0 million and $7.7 million, respectively. These assets are consolidated and are included in other long term assets on the Consolidated Balance Sheets. Refer to Note 15 for a discussion of the fair value measurements of the assets held in the Rabbi Trust and the Deferred Compensation Plan obligations.
NOTE 14. STOCK BASED COMPENSATION
The Under Armour, Inc. Third Amended and Restated 2005 Omnibus Long-Term Incentive Plan as amended (the “2005 Plan”) provides for the issuance of stock options, restricted stock, restricted stock units and other equity awards to officers, directors, key employees and other persons. The 2005 Plan terminates in 2025. As of December 31, 2021, 8.3 million Class A shares and 28.6 million Class C shares are available for future grants of awards under the 2005 Plan.
Awards Granted to Employees and Non-Employee Directors
Total stock-based compensation expense associated with awards granted to employees and non-employee directors for Fiscal 2021, Fiscal 2020 and Fiscal 2019 was $43.8 million, $42.1 million and $49.6 million, respectively. The related tax benefits, excluding consideration of valuation allowances, were $8.2 million, $9.0 million, and $11.8 million for Fiscal 2021, Fiscal 2020, and Fiscal 2019, respectively. The deferred tax assets and valuation allowances associated with these benefits were $7.2 million, $9.0 million, and $2.7 million for Fiscal 2021, Fiscal 2020, and Fiscal 2019, respectively. As of December 31, 2021, the Company had $78.5 million of unrecognized compensation expense related to these awards expected to be recognized over a weighted average period of 2.44 years. Refer to “Stock Options” and “Restricted Stock and Restricted Stock Unit Awards” below for further information on these awards.
A summary of each of these plans is as follows:
Employee Stock Compensation Plan
Stock options, restricted stock and restricted stock unit awards under the 2005 Plan generally vest ratably over a two to five years period. The contractual term for stock options is generally 10 years from the date of grant. The Company generally receives a tax deduction for any ordinary income recognized by a participant in respect to an award under the 2005 Plan.
Non-Employee Director Compensation Plan
The Company’s Non-Employee Director Compensation Plan (the “Director Compensation Plan”) provides for cash compensation and equity awards to non-employee directors of the Company under the 2005 Plan. Non-employee directors have the option to defer the value of their annual cash retainers as deferred stock units in accordance with the Under Armour, Inc. Non-Employee Deferred Stock Unit Plan (the “DSU Plan”). Each new non-
employee director receives an award of restricted stock units upon the initial election to the Board of Directors, with the units covering stock valued at $100 thousand on the grant date and vesting in three equal annual installments. In addition, each non-employee director receives, following each annual stockholders’ meeting, a grant under the 2005 Plan of restricted stock units covering stock valued at $150 thousand on the grant date. Each award vests 100% on the date of the next annual stockholders’ meeting following the grant date.
The receipt of the shares otherwise deliverable upon vesting of the restricted stock units automatically defers into deferred stock units under the DSU Plan. Under the DSU Plan each deferred stock unit represents the Company’s obligation to issue one share of the Company’s Class A or Class C Common Stock with the shares delivered six months following the termination of the director’s service.
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, 2021, 2.7 million Class A shares and 1.7 million Class C shares are available for future purchases under the ESPP. During Fiscal 2021, Fiscal 2020 and Fiscal 2019, 234.7 thousand, 482.9 thousand and 329.1 thousand Class C shares were purchased under the ESPP, respectively.
Awards granted to Marketing Partners
In addition to the plans discussed above, the Company may also, from time to time, issue deferred stock units or restricted stock units to certain of our marketing partners in connection with their entering into endorsement and other marketing services agreements with us. The terms of each agreement set forth the number of units to be granted and the delivery dates for the shares, which range over a multi-year period, depending on the contract.
Total stock-based compensation expense related to these awards for Fiscal 2021, Fiscal 2020 and Fiscal 2019 was $3.5 million, $3.5 million and $3.1 million, respectively. As of December 31, 2021, we had $8.5 million of unrecognized compensation expense associated with these awards expected to be recognized over a weighted average period of 2.74 years.
Summary by Award Classification:
Stock Options
No stock options were granted during Fiscal 2021. The weighted average fair value of a stock option granted for Fiscal 2020 and Fiscal 2019 was $6.61 and $8.70, 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, |
| | 2021 | | 2020 | | 2019 |
| Risk-free interest rate | n/a | | 1.5 | % | | 2.5 | % |
| Average expected life in years | n/a | | 6.25 | | 6.50 |
| Expected volatility | n/a | | 43.1 | % | | 41.0 | % |
| Expected dividend yield | n/a | | — | % | | — | % |
A summary of the Company’s stock options as of December 31, 2021 and changes during the year then ended is presented below: | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands, except per share amounts) | Number of Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Total Intrinsic Value |
| Outstanding, beginning of year | 1,862 | | | $ | 19.31 | | | 7.18 | | $ | 186 | |
| Granted, at fair market value | — | | | — | | | | | |
| Exercised | (13) | | | 4.08 | | | | | |
| Forfeited | (271) | | | 19.38 | | | | | |
| Outstanding, end of year | 1,578 | | | $ | 19.44 | | | 6.07 | | $ | 2,403 | |
| Options exercisable, end of year | 1,092 | | | $ | 20.88 | | | 5.53 | | $ | 1,362 | |
Included in the table above are 0.2 million performance-based stock options awarded to the Company’s
Executive Chairman and Brand Chief under the 2005 Plan for Fiscal 2019, which have been fully forfeited due to the failure to meet performance conditions. There were no performance-based stock options awarded during Fiscal 2021 or Fiscal 2020. The performance-based stock options awarded in Fiscal 2019 had a weighted average fair value of $8.70 and had vesting that is tied to the achievement of certain combined annual operating income targets.
The intrinsic value of stock options exercised during Fiscal 2021, Fiscal 2020 and Fiscal 2019 was $0.2 million, $4.5 million and $12.4 million, respectively.
For Fiscal 2021, Fiscal 2020 and Fiscal 2019 income tax benefits related to stock options exercised, excluding consideration of valuation allowances were $0.0, $1.2 million, and $2.7 million, respectively.
Restricted Stock and Restricted Stock Unit Awards
A summary of the Company’s restricted stock and restricted stock unit awards as of December 31, 2021 and changes during the year then ended is presented below:
| | | | | | | | | | | |
| (In thousands, except per share amounts) | Number of Restricted Shares | | Weighted Average Grant Date Fair Value |
| Outstanding, beginning of year | 6,274 | | | $ | 15.52 | |
| Granted | 4,514 | | | 19.18 | |
| Forfeited | (1,154) | | | 17.77 | |
| Vested | (2,601) | | | 16.85 | |
| Outstanding, end of year | 7,033 | | | $ | 16.40 | |
Included in the table above are 0.6 million performance-based restricted stock units awarded to certain executives and key employees under the 2005 Plan during Fiscal 2019, which have been fully forfeited due to the failure to meet the performance conditions. There were no performance-based restricted stock units awarded during Fiscal 2021 or Fiscal 2020. The performance-based restricted stock units awarded in Fiscal 2019 had weighted average grant date fair values of $19.39 and had vesting that was tied to the achievement of certain combined annual revenue and operating income targets. The Company deemed the achievement of these revenue and operating income targets improbable, and accordingly, a reversal of expense of $2.9 million and $1.5 million were recorded for the performance-based restricted stock units and stock options for Fiscal 2020 and Fiscal 2019, respectively.
NOTE 15. 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. |
The Company's financial assets (liabilities) measured at fair value on a recurring basis consisted of the following types of instruments as of the following periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (In thousands) | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Derivative foreign currency contracts (see Note 16) | $ | — | | | $ | 631 | | | $ | — | | | $ | — | | | $ | (22,122) | | | $ | — | |
TOLI policies held by the Rabbi Trust (see Note 13) | $ | — | | | $ | 9,008 | | | $ | — | | | $ | — | | | $ | 7,697 | | | $ | — | |
Deferred Compensation Plan obligations (see Note 13) | $ | — | | | $ | (14,489) | | | $ | — | | | $ | — | | | $ | (14,314) | | | $ | — | |
Fair values of the financial assets and liabilities listed above are determined using inputs that use as their basis readily observable market data that are actively quoted and are validated through external sources, including third-party pricing services and brokers. The foreign currency contracts represent unrealized gains and losses on
derivative contracts, which is the net difference between the U.S. dollar value to be received or paid at the contracts’ settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current market exchange rate. The fair value of the trust owned life insurance (“TOLI”) policies held by the Rabbi Trust are based on the cash-surrender value of the life insurance policies, which are invested primarily in mutual funds and a separately managed fixed income fund. These investments are initially made in the same funds and purchased in substantially the same amounts as the selected investments of participants in the Under Armour, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), which represent the underlying liabilities to participants in the Deferred Compensation Plan. Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments.
The fair value of long term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2).
As of December 31, 2021 and December 31, 2020, the fair value of the Convertible Senior Notes was $149.6 million and $828.2 million, respectively. The Company entered into exchange agreements with certain holders during Fiscal 2021 to exchange approximately $419.0 million in aggregate principal amount of the Convertible Senior Notes for a combination of cash and shares (see Note 8 to the Consolidated Financial Statements).
As of December 31, 2021 and December 31, 2020 the fair value of the Senior Notes was $619.9 million and $602.6 million, respectively.
Certain assets are not remeasured to fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets and goodwill that have been reduced to fair value when impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
NOTE 16. RISK MANAGEMENT AND DERIVATIVES
The Company is exposed to global market risks, including the effects of changes in foreign currency and interest rates. The Company uses derivative instruments to manage financial exposures that occur in the normal course of business and does not hold or issue derivatives for trading or speculative purposes.
The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to forecasted cash flows and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships.
The Company's foreign exchange risk management program consists of designated cash flow hedges and undesignated hedges. As of December 31, 2021, the Company has hedge instruments primarily for:
•British Pound/U.S. Dollar;
•U.S. Dollar/Chinese Renminbi;
•Euro/U.S. Dollar;
•U.S. Dollar/Canadian Dollar;
•U.S. Dollar/Mexican Peso; and
•U.S. Dollar/Japanese Yen.
All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument’s maturity date.
The following table presents the fair values of derivative instruments within the Consolidated Balance Sheets. Refer to Note 15 of the Consolidated Financial Statements for a discussion of the fair value measurements.
| | | | | | | | | | | | | | | | | |
| (In thousands) | | Balance Sheet Classification | December 31, 2021 | | December 31, 2020 |
| Derivatives designated as hedging instruments under ASC 815 | | | |
| Foreign currency contracts | | Other current assets | $ | 7,488 | | | $ | — | |
| Foreign currency contracts | | Other long term assets | 2,887 | | | — | |
| Total derivative assets designated as hedging instruments | $ | 10,375 | | | $ | — | |
| | | | | |
| Foreign currency contracts | | Other current liabilities | $ | 8,663 | | | $ | 17,601 | |
| Foreign currency contracts | | Other long term liabilities | 779 | | | 6,469 | |
| Total derivative liabilities designated as hedging instruments | $ | 9,442 | | | $ | 24,070 | |
| | | | | |
| Derivatives not designated as hedging instruments under ASC 815 | | | |
| Foreign currency contracts | | Other current assets | $ | 1,999 | | | $ | 2,384 | |
| Total derivative assets not designated as hedging instruments | $ | 1,999 | | | $ | 2,384 | |
| | | | | |
| Foreign currency contracts | | Other current liabilities | $ | 4,648 | | | $ | 6,464 | |
| Total derivative liabilities not designated as hedging instruments | $ | 4,648 | | | $ | 6,464 | |
The following table presents the amounts in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) | Total | | Amount of Gain (Loss) on Cash Flow Hedge Activity | | Total | | Amount of Gain (Loss) on Cash Flow Hedge Activity | | Total | | Amount of Gain (Loss) on Cash Flow Hedge Activity |
| Net revenues | $ | 5,683,466 | | | $ | (6,410) | | | $4,474,667 | | $ | 2,098 | | | $ | 5,267,132 | | | $ | 18,789 | |
| Cost of goods sold | $ | 2,821,967 | | | $ | (11,825) | | | $ | 2,314,572 | | | $ | 9,516 | | | $ | 2,796,599 | | | $ | 4,703 | |
| Interest income (expense), net | $ | (44,300) | | | $ | (37) | | | $ | (47,259) | | | $ | (36) | | | $ | (21,240) | | | $ | 1,598 | |
| Other income (expense), net | $ | (51,113) | | | $ | — | | | $ | 168,153 | | | $ | 25 | | | $ | (5,688) | | | $ | 871 | |
The following tables present the amounts affecting the Consolidated Statements of Comprehensive Income (Loss):
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Balance as of
December 31, 2020 | | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | | Balance as of December 31, 2021 |
| Derivatives designated as cash flow hedges | | | | | | |
| Foreign currency contracts | $ | (25,908) | | | $ | 6,056 | | | $ | (18,235) | | | $ | (1,617) | |
| Interest rate swaps | (541) | | | — | | | (37) | | | (504) | |
| Total designated as cash flow hedges | $ | (26,449) | | | $ | 6,056 | | | $ | (18,272) | | | $ | (2,121) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Balance as of
December 31, 2019 | | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | | Balance as of
December 31, 2020 |
| Derivatives designated as cash flow hedges | | | | | | |
| Foreign currency contracts | $ | (6,005) | | | $ | (8,336) | | | $ | 11,567 | | | $ | (25,908) | |
| Interest rate swaps | (577) | | | — | | | (36) | | | (541) | |
| Total designated as cash flow hedges | $ | (6,582) | | | $ | (8,336) | | | $ | 11,531 | | | $ | (26,449) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Balance as of
December 31, 2018 | | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | | Balance as of
December 31, 2019 |
| Derivatives designated as cash flow hedges | | | | | | |
| Foreign currency contracts | $ | 21,908 | | | $ | (3,550) | | | $ | 24,363 | | | $ | (6,005) | |
| Interest rate swaps | 954 | | | 67 | | | 1,598 | | | (577) | |
| Total designated as cash flow hedges | $ | 22,862 | | | $ | (3,483) | | | $ | 25,961 | | | $ | (6,582) | |
The following table presents the amounts in the Consolidated Statements of Operations in which the effects of undesignated derivative instruments are recorded and the effects of fair value hedge activity on these line items: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) | Total | | Amount of Gain (Loss) on Fair Value Hedge Activity | | Total | | Amount of Gain (Loss) on Fair Value Hedge Activity | | Total | | Amount of Gain (Loss) on Fair Value Hedge Activity |
| Other income (expense), net | $ | (51,113) | | | $ | (8,502) | | | $ | 168,153 | | | $ | (2,173) | | | $ | (5,688) | | | $ | (6,141) | |
Cash Flow Hedges
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions generated by its international subsidiaries in currencies other than their local currencies. These gains and losses are driven by non-functional currency generated revenue, non-functional currency inventory purchases, investments in U.S. Dollar denominated available-for-sale debt securities, and certain other intercompany transactions. The Company enters into foreign currency contracts to reduce the risk associated with the foreign currency exchange rate fluctuations on these transactions. Certain contracts are designated as cash flow hedges. As of December 31, 2021 and December 31, 2020, the aggregate notional value of the Company's outstanding cash flow hedges was $556.5 million and $812.5 million, respectively, with contract maturities ranging from one to twenty-four months.
The Company may enter into long term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of the Company's long term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations. The interest rate swap contracts are accounted for as cash flow hedges. Refer to Note 8 of the Consolidated Financial Statements for a discussion of long term debt.
For contracts designated as cash flow hedges, the changes in fair value are reported as other comprehensive income (loss) and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. Effective hedge results are classified in the Consolidated Statements of Operations in the same manner as the underlying exposure.
Undesignated Derivative Instruments
The Company may elect to enter into foreign exchange forward contracts to mitigate the change in fair value of specific assets and liabilities on the Consolidated Balance Sheets. These undesignated instruments are recorded at fair value as a derivative asset or liability on the Consolidated Balance Sheets with their corresponding
change in fair value recognized in other expense, net, together with the re-measurement gain or loss from the hedged balance sheet position. As of December 31, 2021 and December 31, 2020, the total notional value of the Company's outstanding undesignated derivative instruments was $258.2 million and $313.1 million, respectively.
Credit Risk
The Company enters into derivative contracts with major financial institutions with investment grade credit ratings and is exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the derivative contracts. However, the Company monitors the credit quality of these financial institutions and considers the risk of counterparty default to be minimal.
NOTE 17. PROVISION FOR INCOME TAXES
Income (loss) before income taxes is as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Income (loss) before income taxes | | | | | |
| United States | $ | 191,201 | | | $ | (478,465) | | | $ | 81,122 | |
| Foreign | 199,676 | | | (14,079) | | | 128,720 | |
| Total | $ | 390,877 | | | $ | (492,544) | | | $ | 209,842 | |
The components of the income tax expense (benefit) consisted of the following:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Current | | | | | |
| Federal | $ | (2,454) | | | $ | (30,047) | | | $ | 7,232 | |
| State | 864 | | | 34 | | | 771 | |
| Foreign | 36,304 | | | 16,720 | | | 21,952 | |
| 34,714 | | | (13,293) | | | 29,955 | |
| Deferred | | | | | |
| Federal | 5,148 | | | 50,620 | | | 12,750 | |
| State | (3,645) | | | 587 | | | 25,508 | |
| Foreign | (4,145) | | | 11,473 | | | 1,811 | |
| (2,642) | | | 62,680 | | | 40,069 | |
| Income tax expense (benefit) | $ | 32,072 | | | $ | 49,387 | | | $ | 70,024 | |
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| U.S. federal statutory income tax rate | $ | 82,086 | | | 21.0 | % | | $ | (103,434) | | | 21.0 | % | | $ | 44,067 | | | 21.0 | % |
| State taxes, net of federal tax impact | 23,508 | | | 6.0 | % | | (29,341) | | | 6.0 | % | | 4,620 | | | 2.2 | % |
| Foreign rate differential | (10,697) | | | (2.7) | % | | (972) | | | 0.2 | % | | (10,494) | | | (5.0) | % |
| Permanent tax benefits/nondeductible expenses | (12,343) | | | (3.2) | % | | 15,993 | | | (3.2) | % | | 328 | | | 0.2 | % |
| Permanent tax benefits/nondeductible losses - divestitures | 7,317 | | | 1.9 | % | | (118,321) | | | 24.0 | % | | — | | | — | % |
| Unrecognized tax benefits | 9,813 | | | 1.1 | % | | 2,260 | | | (0.5) | % | | (2,031) | | | (1.0) | % |
| Impacts related to U.S. Tax Act | — | | | — | % | | (13,987) | | | 2.8 | % | | — | | | — | % |
| Valuation allowance | (63,418) | | | (14.9) | % | | 302,575 | | | (61.4) | % | | 30,137 | | | 14.4 | % |
| Other | (4,194) | | | (1.1) | % | | (5,386) | | | 1.1 | % | | 3,397 | | | 1.6 | % |
| Effective income tax rate | $ | 32,072 | | | 8.2 | % | | $ | 49,387 | | | (10.0) | % | | $ | 70,024 | | | 33.4 | % |
Income tax expense decreased $17.3 million to an expense of $32.1 million in 2021 from an expense of $49.4 million in 2020. The Company recorded 2021 income tax expense on pretax earnings, inclusive of benefits for the reduction in U.S. valuation allowances, compared to 2020 income tax expense on pretax losses, which included the impact of recording valuation allowances for previously recognized deferred tax assets in the U.S. and China.
Deferred tax assets and liabilities consisted of the following:
| | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2021 | | 2020 |
| Deferred tax assets | | | |
| Operating lease liabilities | $ | 197,682 | | | $ | 257,233 | |
| U.S. Federal and State Capital Loss | 57,097 | | | 69,332 | |
| Reserves and accrued liabilities | 41,943 | | | 50,226 | |
| Foreign net operating loss carry-forwards | 33,875 | | | 51,040 | |
| Inventory | 26,860 | | | 28,079 | |
| Intangible assets | 26,281 | | | 31,965 | |
| U.S. state net operating loss | 16,636 | | | 28,343 | |
| Allowance for doubtful accounts and sales return reserves | 14,940 | | | 19,864 | |
| Stock-based compensation | 11,301 | | | 12,447 | |
| Foreign tax credits | 8,606 | | | 10,023 | |
| U.S. tax credits | 7,273 | | | 8,775 | |
| Deductions limited by income | 3,288 | | | 7,509 | |
| Other | 5,490 | | | 3,303 | |
| Total deferred tax assets | 451,272 | | | 578,139 | |
| Less: valuation allowance | (318,221) | | | (388,432) | |
| Total net deferred tax assets | $ | 133,051 | | | $ | 189,707 | |
| | | |
| Deferred tax liabilities | | | |
| Right-of-use asset | $ | (98,085) | | | $ | (136,308) | |
| Prepaid expenses | (8,356) | | | (9,443) | |
| Property, plant and equipment | (7,018) | | | (8,107) | |
| Convertible debt instruments | (1,066) | | | (9,878) | |
| Other | (3,743) | | | (4,780) | |
| Total deferred tax liabilities | (118,268) | | | (168,516) | |
| Total deferred tax assets, net | $ | 14,783 | | | $ | 21,191 | |
All deferred tax assets and liabilities are classified as non-current on the Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020. 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 the Company's 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. In evaluating the recoverability of these deferred tax assets at December 31, 2021, the Company has considered all available evidence, both positive and negative, including but not limited to the following:
Positive
•Current year pre-tax earnings.
•Restructuring plans undertaken in 2017, 2018, and 2020, which aim to improve future profitability.
•No history of U.S. federal and state tax attributes expiring unused.
•Existing sources of taxable income.
•Available prudent and feasible tax planning strategies.
Negative
•Restructuring plan undertaken in 2020 resulting in significant charges in pre-tax income, reducing profitability in the United States.
•The negative economic impact and uncertainty resulting from the COVID-19 pandemic.
•Cumulative pre-tax losses in recent years in the United States.
•Inherent challenges in forecasting future pre-tax earnings which rely, in part, on improved profitability from our restructuring efforts.
As of December 31, 2021, the Company believes that the weight of the negative evidence outweighs the positive evidence regarding the realization of the United States deferred tax assets and have recorded a valuation allowance of $250.1 million against the U.S. federal and state deferred tax assets.
As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of DTAs. The Company's current forecasts for the United States indicate that it is probable that additional deferred taxes could be realizable based on near term trend towards three-year cumulative taxable earnings. The actualization of these forecasted results may potentially outweigh the negative evidence, resulting in a reversal of all or a portion of previously recorded valuation allowances in the United States. The release of valuation allowances would result in a benefit to income tax expense in the period the release is recorded, which could have a material impact on net income. The timing and amount of the potential valuation allowance release are subject to significant management judgment, as well as prospective pre-tax earnings in the United States. The Company will continue to evaluate its ability to realize its net deferred tax assets on a quarterly basis.
As of December 31, 2021, the Company had $16.6 million in deferred tax assets associated with $295.1 million in state net operating loss carryforwards and $7.3 million in deferred tax assets associated with state and federal tax credits, the majority of which are definite lived. Certain of the definite lived state net operating losses and state tax credits will begin to expire within one to five years, and the majority will begin to expire within five to twenty years. The Company had $57.1 million in deferred tax assets associated with federal and state capital loss carryforwards of $126.8 million, which, if unused, will expire in four years. The Company is not able to forecast the utilization of the deferred tax assets associated with state net operating loss carryforwards, the deferred tax assets associated with federal and state capital loss carryforwards, and a majority of the deferred tax assets associated with state and federal tax credits and has recorded a valuation allowance of $80 million against these deferred tax assets.
As of December 31, 2021, the Company had $39.2 million in deferred tax assets associated with approximately $199.4 million in foreign net operating loss carryforwards and $8.6 million in deferred tax assets associated with foreign tax credit carryforwards. While the majority of the foreign net operating loss carryforwards and foreign tax credit carryforwards have an indefinite carryforward period, certain are definite lived, with the majority to expire within 5 to 12 years. Additionally, the Company is not able to forecast the utilization of a majority of the deferred tax assets associated with foreign net operating loss carryforwards, foreign tax credit carryforwards and certain other foreign deferred tax assets and has recorded a valuation allowance of $68.2 million against these foreign deferred tax assets.
As of December 31, 2021, approximately $612.2 million of cash and cash equivalents was held by the Company's non-U.S. subsidiaries whose cumulative undistributed earnings total $957.3 million. The Tax Cuts and Jobs Act of 2017 imposed U.S. federal tax on all post-1986 foreign unrepatriated earnings accumulated through December 31, 2017. The portion of these earnings not subject to U.S. federal income tax as part of the one-time transition tax should, in general, not be subject to U.S. federal income tax. The Company will continue to permanently reinvest these earnings, as well as future earnings from its foreign subsidiaries, to fund international growth and operations. If the Company was to repatriate indefinitely reinvested foreign funds, it would still be required to accrue and pay certain taxes upon repatriation, including foreign withholding taxes and certain U.S. state taxes and record foreign exchange rate impacts. Determination of the unrecorded deferred tax liability that would be incurred if such amounts were repatriated is not practicable.
The following table represents a reconciliation of the Company's total unrecognized tax benefits balances, excluding interest and penalties, for Fiscal 2021, Fiscal 2020 and Fiscal 2019. | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Beginning of year | $ | 40,314 | | | $ | 41,194 | | | $ | 55,855 | |
| Increases as a result of tax positions taken in a prior period | 6,713 | | | 1,738 | | | 1,545 | |
| Decreases as a result of tax positions taken in a prior period | (332) | | | (2,309) | | | (11,005) | |
| Increases as a result of tax positions taken during the current period | 2,430 | | | 2,142 | | | 1,158 | |
| Decreases as a result of settlements during the current period | — | | | (1,500) | | | (6,359) | |
| Reductions as a result of divestiture | — | | | (951) | | | — | |
| End of year | $ | 49,125 | | | $ | 40,314 | | | $ | 41,194 | |
As of December 31, 2021, 2020 and 2019, the total liability for unrecognized tax benefits was approximately $54.6 million, $44.6 million and $44.3 million, respectively. These liabilities include $5.5 million, $4.3 million, and $3.1 million, respectively, for the accrual of interest and penalties. For each of Fiscal 2021, Fiscal 2020 and Fiscal 2019, the Company recorded $1.2 million, $1.2 million, and $2.0 million, respectively, for the accrual of interest and penalties within the provision for income taxes on its Consolidated Statements of Operations. As of December 31, 2021, $35.8 million of unrecognized tax benefits, excluding interest and penalties, would impact the Company's effective tax rate if recognized. Also included in the balance are unrecognized tax benefits of $11.7 million that, if recognized, would result in adjustments to other tax accounts, primarily valuation allowances on deferred tax assets.
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 U.S. Internal Revenue Service for the years 2015 through 2017. The majority of the Company's other returns for years before 2015 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.
NOTE 18. EARNINGS PER SHARE
The following represents a reconciliation from basic income (loss) per share to diluted income (loss) per share: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands, except per share amounts) | 2021 | | 2020 | | 2019 |
| Numerator | | | | | |
| Net income (loss) | $ | 360,060 | | | $ | (549,177) | | | $ | 92,139 | |
| Denominator | | | | | |
| Weighted average common shares outstanding Class A, B and C | 465,504 | | | 454,089 | | | 450,964 | |
| Effect of dilutive securities Class A, B, and C | 3,140 | | | — | | | 3,310 | |
| Weighted average common shares and dilutive securities outstanding Class A, B, and C | 468,644 | | | 454,089 | | | 454,274 | |
| | | | | |
| Basic net income (loss) per share of Class A, B and C common stock | $ | 0.77 | | | $ | (1.21) | | | $ | 0.20 | |
| Diluted net income (loss) per share of Class A, B and C common stock | $ | 0.77 | | | $ | (1.21) | | | $ | 0.20 | |
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options and restricted stock units representing 1.6 million, 6.4 million and 1.8 million shares of Class A and Class C Common Stock outstanding for Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Due to the Company
being in a net loss position for Fiscal 2020, there were no stock options or restricted stock units included in the computation of diluted earnings per share, as their effect would have been anti-dilutive.
NOTE 19. SEGMENT DATA AND DISAGGREGATED REVENUE
The Company’s operating segments are based on how the Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. As such, the CODM receives discrete financial information for the Company's principal business by geographic region based on the Company’s strategy of being a global brand. These geographic regions include North America, Europe, the Middle East and Africa (“EMEA”), Asia-Pacific, and Latin America. Each geographic segment operates exclusively in one industry: the development, marketing and distribution of branded performance apparel, footwear and accessories. Total expenditures for additions to long-lived assets are not disclosed as this information is not regularly provided to the CODM.
Prior to the sale of MyFitnessPal in December 2020, the CODM also received discrete financial information for the Connected Fitness segment. However, beginning January 1, 2021, the Company no longer reports Connected Fitness as a discrete reportable operating segment (see Note 1 to the Consolidated Financial Statements). All prior period balances have been recast to conform to current period presentation. Such reclassifications did not affect total consolidated revenues, consolidated income from operations or consolidated net income.
The Company excludes certain corporate costs from its segment profitability measures. The Company reports these costs within Corporate Other, along with the revenue and costs related to the Company's MMR platforms, which is designed to provide increased transparency and comparability of the Company's operating segments' performance. Furthermore, the majority of the costs included within Corporate Other consist largely of general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain, innovation and other corporate support functions; costs related to the Company's global assets and global marketing; costs related to the Company’s headquarters, such as restructuring and restructuring related charges; and certain foreign currency hedge gains and losses.
The following tables summarize the Company's net revenues and operating income (loss) by its geographic segments. Intercompany balances were eliminated for separate disclosure: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Net revenues | | | | | |
| North America | $ | 3,810,372 | | | $ | 2,944,978 | | | $ | 3,658,353 | |
| EMEA | 842,511 | | | 598,296 | | | 621,137 | |
| Asia-Pacific | 831,762 | | | 628,657 | | | 636,343 | |
| Latin America | 195,248 | | | 164,825 | | | 196,132 | |
Corporate Other (1) | 3,573 | | | 137,911 | | | 155,167 | |
| Total net revenues | $ | 5,683,466 | | | $ | 4,474,667 | | | $ | 5,267,132 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Operating income (loss) | | | | | |
| North America | $ | 972,093 | | | $ | 474,584 | | | $ | 733,442 | |
| EMEA | 132,602 | | | 60,592 | | | 53,739 | |
| Asia-Pacific | 132,911 | | | 2 | | | 97,641 | |
| Latin America | 22,388 | | | (42,790) | | | (3,160) | |
Corporate Other (1) | (773,704) | | | (1,105,826) | | | (644,892) | |
| Total operating income (loss) | 486,290 | | | (613,438) | | | 236,770 | |
| Interest expense, net | (44,300) | | | (47,259) | | | (21,240) | |
| Other income (expense), net | (51,113) | | | 168,153 | | | (5,688) | |
| Income (loss) before income taxes | $ | 390,877 | | | $ | (492,544) | | | $ | 209,842 | |
The following tables summarize the Company's net revenues by product category and distribution channels: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Apparel | $ | 3,841,249 | | | $ | 2,882,562 | | | $ | 3,470,285 | |
| Footwear | 1,264,127 | | | 934,333 | | | 1,086,551 | |
| Accessories | 461,894 | | | 414,082 | | | 416,354 | |
| Net Sales | 5,567,270 | | | 4,230,977 | | | 4,973,190 | |
| License revenues | 112,623 | | | 105,779 | | | 138,775 | |
Corporate Other (1) | 3,573 | | | 137,911 | | | 155,167 | |
| Total net revenues | $ | 5,683,466 | | | $ | 4,474,667 | | | $ | 5,267,132 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Wholesale | $ | 3,245,749 | | | $ | 2,383,353 | | | $ | 3,167,625 | |
| Direct-to-consumer | 2,321,521 | | | 1,847,624 | | | 1,805,565 | |
| Net Sales | 5,567,270 | | | 4,230,977 | | | 4,973,190 | |
| License revenues | 112,623 | | | 105,779 | | | 138,775 | |
| | | | | |
Corporate Other (1) | 3,573 | | | 137,911 | | | 155,167 | |
| Total net revenues | $ | 5,683,466 | | | $ | 4,474,667 | | | $ | 5,267,132 | |
(1) Prior to Fiscal 2021, the Company's Connected Fitness segment was separately disclosed, however, effective January 1, 2021, Corporate Other now includes the remaining Connected Fitness business consisting of MMR for Fiscal 2021 and the entire Connected Fitness business for Fiscal 2020 and Fiscal 2019. All prior periods were recast to conform to the current period presentation. Such reclassifications did not affect total consolidated net revenues, consolidated income from operations or consolidated net income (see Note 1 to the Consolidated Financial Statements).
Long-lived assets are primarily composed of Property and equipment, net and Operating lease right-of-use assets. The Company's long-lived assets by geographic area were as follows: | | | | | | | | | | | |
| (In thousands) | Year Ended December 31, |
| 2021 | | 2020 |
| Long-lived assets | | | |
| United States | $ | 801,130 | | | $ | 896,789 | |
| Canada | 21,094 | | | 23,122 | |
| Total North America | 822,224 | | | 919,911 | |
| Other foreign countries | 233,366 | | | 275,427 | |
| Total long-lived assets | $ | 1,055,590 | | | $ | 1,195,338 | |
NOTE 20. RELATED PARTY TRANSACTIONS
The Company has an operating lease agreement with an entity controlled by the Company’s Executive Chairman and Brand Chief to lease an aircraft for business purposes. The Company paid $2.0 million in lease payments to the entity for its use of the aircraft during Fiscal 2021 ($2.0 million for both Fiscal 2020 and Fiscal 2019) No amounts were payable to this related party as of December 31, 2021 and 2020. 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 Executive Chairman and Brand Chief, 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, 2021.
NOTE 21. SUBSEQUENT EVENT
Share Repurchase Plan
On February 23, 2022, the Company’s board of directors authorized the repurchase of up to $500 million of the Company’s Class C Common Stock over the next two years. The Class C Common Stock may be repurchased from time to time at prevailing prices in the open market, through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, via private purchases through forward, derivative, accelerated share repurchase transactions or otherwise, subject to applicable regulatory restrictions on volume, pricing and timing. The timing and amount of any repurchases will depend on market conditions, the Company’s financial condition, results of operations, liquidity and other factors.