Notes to the Audited Consolidated Financial Statements
1. Description of the Business
Under Armour, Inc. (together with its wholly owned subsidiaries, the "Company") is a developer, marketer and distributor of branded athletic performance apparel, footwear, and accessories. The Company creates products engineered to solve problems and make athletes better, as well as digital health and fitness apps built to connect people and drive performance. The Company's products are made, sold and worn worldwide.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Under Armour, Inc. and its wholly owned subsidiaries (the “Company”). All intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
During the first quarter of 2021, the Company's Board of Directors approved a change in fiscal year end to March 31 from December 31, effective for the fiscal year beginning after April 1, 2022. Accordingly, the Company’s 2021 fiscal year will end on December 31, 2021, followed by a three-month transition period from January 1, 2022 through March 31, 2022. The Company’s 2023 fiscal year will run from April 1, 2022 through March 31, 2023.
On March 2, 2020, the Company acquired, on a cash free, debt free basis, 100% of Triple Pte. Ltd. ("Triple"), a distributor of the Company's products in Southeast Asia. The results of operations of this acquisition have been consolidated with those of the Company beginning on March 2, 2020. Refer to Note 5 for a discussion of the acquisition.
On December 18, 2020, the Company completed the previously announced sale of its MyFitnessPal platform to an entity affiliated with Francisco Partners Management, L.P. and recognized a gain of approximately $179.3 million, which is included within Other income (expenses), net in the Consolidated Statements of Operations. Refer to Note 4 for a discussion of the sale.
During the year ended December 31, 2019 ("Fiscal 2019"), the Company recorded an adjustment related to prior periods to correct unrecorded consulting expenses incurred primarily in connection with the 2018 restructuring plan. Selling, general and administrative expenses for Fiscal 2019 includes $5.5 million of expense that was understated in prior periods. The Company concluded that the error was not material to any prior or interim periods presented.
During the year ended December 31, 2018 ("Fiscal 2018"), the Company identified an immaterial error in the presentation of premium subscriptions in its Connected Fitness reporting segment. Subscription revenue was previously recorded net of any related commission. Beginning in the first quarter of Fiscal 2018, subscription revenue is recorded on a gross basis and the related commission cost is included in selling, general and administrative expense in the Consolidated Statements of Operations. The Company concluded that the error was not material to any of its previously issued financial statements.
COVID-19
In March 2020, a novel strain of coronavirus (COVID-19) was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures and orders to “shelter-in-place”. The Company has been focused on protecting the health and safety of its teammates, athletes and consumers, working with its customers and suppliers to minimize potential disruptions and supporting the community to address challenges posed by the global pandemic, while managing the Company's business in response to a changing dynamic. The Company's business operations and financial performance for the year ended December 31, 2020 ("Fiscal 2020") were materially impacted by COVID-19. These impacts are discussed within these notes to the consolidated financial statements, including but not limited to discussions related to long-lived asset and goodwill impairment, leases, long-term debt, and income taxes.
In response to the pandemic, global legislation, including the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, was announced. The Company recognized certain incentives totaling $9 million during Fiscal 2020. The incentives were recorded as a reduction of the associated costs which the Company incurred within selling, general and administrative expenses in the Consolidated Statements of Operations. Further, the
CARES Act includes modification to income tax provisions. Refer to Note 13 for discussion of the impacts of modifications to income tax provisions under the CARES Act.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less at date of inception to be cash and cash equivalents. The Company's restricted cash is reserved for payments related to claims for its captive insurance program, which is included in prepaid expenses and other current assets on the Company's Consolidated Balance Sheet. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows.
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December 31, 2020
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December 31, 2019
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Cash and cash equivalents
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$
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1,517,361
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$
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788,072
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Restricted cash
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11,154
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7,936
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Total cash, cash equivalents and restricted cash
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$
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1,528,515
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$
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796,008
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Concentration of Credit Risk
Financial instruments that subject the Company to significant concentration of credit risk consist primarily of accounts receivable. The majority of the Company’s accounts receivable is due from its large wholesale customers. Credit is extended based on an evaluation of the customer’s financial condition and collateral is not required. None of the Company's customers accounted for more than 10% of accounts receivable for Fiscal 2020 and Fiscal 2019, respectively. For Fiscal 2020, Fiscal 2019 and Fiscal 2018, no customer accounted for more than 10% of net revenues. Given the current global economic environment and impacts of COVID-19, the Company regularly evaluates the credit risk of its large wholesale customers which make up the majority of the Company's accounts receivable. Refer to "Credit Losses - Allowance for Doubtful Accounts" for a discussion of the evaluation of credit losses.
Sale of Accounts Receivable
The Company has an agreement with a financial institution to sell selected accounts receivable on a recurring, non-recourse basis. Under the agreement, at any time and from time to time the balance of up to $140 million of the Company's accounts receivable may be sold to the financial institution. The Company's ability to utilize this agreement, however, may be limited by the credit ratings of the Company's customers. The Company removes the sold accounts receivable from the Consolidated Balance Sheets at the time of sale. The Company does not retain any interests in the sold accounts receivable. The Company acts as the collection agent for the outstanding accounts receivable on behalf of the financial institution.
For Fiscal 2020 and Fiscal 2019, there were no amounts outstanding in connection with these arrangements. The funding fee charged by the financial institutions is included in the other income (expense), net line item in the Consolidated Statements of Operations.
Credit Losses - Allowance for Doubtful Accounts
Credit losses are the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit losses primarily through customer receivables associated with the sales of product within the Company's wholesale and Connected Fitness channels, which are recorded in accounts receivable, net on the Company's Consolidated Balance Sheet. The Company also has other receivables, including receivables from licensing arrangements, which are recorded in prepaid expenses and other current assets on the Company's Consolidated Balance Sheet.
Credit is extended to customers based on a credit review. The credit review considers each customer’s financial condition, including the customer's established credit rating or the Company's assessment of the customer’s creditworthiness based on their financial statements absent a credit rating, local industry practices, and business strategy. A credit limit and terms are established for each customer based on the outcome of this review. The Company actively monitors ongoing credit exposure through continuous review of customer balances against terms and payments against due dates. To mitigate credit risk, the Company may require customers to provide security in the form of guarantees, letters of credit, or prepayment. The Company is also exposed to credit losses through credit card receivables associated with the sales of products within the Company's direct to consumer channel.
The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of customer accounts. The Company makes ongoing estimates relating to the collectibility of accounts receivable and records an allowance for estimated losses resulting from the inability of its customers to make required payments. The Company establishes expected credit losses by evaluating historical levels of credit losses, current economic conditions that may affect a customer’s ability to pay, and creditworthiness of significant customers. These inputs are used to determine a range of expected credit losses and an allowance is recorded within the range. Accounts receivable are written off when there is no reasonable expectation of recovery.
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(In thousands)
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Balance as of December 31, 2019
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Charged to
Costs and
Expenses
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Write-Offs
Net of
Recoveries
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Balance as of
December 31, 2020
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Allowance for doubtful accounts -
accounts receivable, net
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$
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15,083
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$
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10,456
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$
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(5,188)
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$
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20,350
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Allowance for doubtful accounts -
prepaid expenses and other current assets (1)
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$
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—
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$
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7,029
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$
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—
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$
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7,029
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(1) This balance includes an allowance pertaining to a royalty receivable.
As of the end of Fiscal 2019, the allowance for doubtful accounts was $15.1 million.
For Fiscal 2020, the increase in the reserve is primarily due to the evaluation of certain account balances in connection with negative developments that represent a higher risk of credit default. The allowance for doubtful accounts was established with information available, including reasonable and supportable estimates of future risk to the Company as of the end of Fiscal 2020. There may be further impacts due to COVID-19.
Inventories
Inventories consist primarily of finished goods. Costs of finished goods inventories include all costs incurred to bring inventory to its current condition, including inbound freight, duties and other costs. The Company values its inventory at standard cost which approximates landed cost, using the first-in, first-out method of cost determination. Net realizable value is estimated based upon assumptions made about future demand and retail market conditions. If the Company determines that the estimated net realizable value of its inventory is less than the carrying value of such inventory, it records a charge to cost of goods sold to reflect the lower of cost or net realizable value. If actual market conditions are less favorable than those projected by the Company, further adjustments may be required that would increase the cost of goods sold in the period in which such a determination was made.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary. 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 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 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.
As a result of the impacts of COVID-19, the Company determined that sufficient indicators existed to trigger an interim goodwill impairment analysis for all of the Company’s reporting units as of March 31, 2020. During Fiscal 2020, the Company recognized goodwill impairment charges of $51.6 million for the Latin America reporting unit and the Canada reporting unit, within the North America operating segment. Further, as a result of the impacts of COVID-19, the Company determined that sufficient indicators existed to trigger the performance of an interim long-lived asset impairment analysis. As a result, the Company recognized $89.7 million of long-lived asset impairment charges for Fiscal 2020. Refer to Note 7 to the consolidated financial statements for a further discussion of goodwill.
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.
Accrued Expenses
For Fiscal 2020, accrued expenses primarily included $77.9 million (Fiscal 2019: $118.7 million) and $45.9 million (Fiscal 2019: $63.2 million) of accrued compensation and benefits, and marketing expenses, respectively.
Foreign Currency Translation and Transactions
The functional currency for each of the Company’s wholly owned foreign subsidiaries is generally the applicable local currency. The translation of foreign currencies into U.S. dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the period. Capital accounts are translated at historical foreign currency exchange rates. Translation gains and losses are included in stockholders’ equity as a component of accumulated other comprehensive income. Adjustments that arise from foreign currency exchange rate changes on transactions, primarily driven by intercompany transactions, denominated in a currency other than the functional currency are included in other expense, net on the Consolidated Statements of 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 pursuant to applicable accounting guidance. This guidance establishes accounting and reporting standards for derivative financial instruments and requires all derivatives to be recognized as either assets or liabilities on the balance sheet and to be measured at fair value. Unrealized derivative gain positions are recorded as other current assets or other long term assets, and unrealized derivative loss positions are recorded as other current liabilities or other long term liabilities, depending on the derivative financial instrument’s maturity date.
For contracts designated as cash flow hedges, the 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 pursuant to Accounting Standards Codification 606 ("ASC 606"). Net revenues consist of net sales of apparel, footwear and accessories, license and Connected Fitness revenue. The Company recognizes revenue when it satisfies its performance obligations by transferring control of promised products or services to its customers, which occurs either at a point in time or over time, depending on when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that the Company ultimately expects to be entitled to in exchange for the products or services and is subject to an overall constraint that a significant revenue reversal will not occur in future periods. Sales taxes imposed on the Company’s revenues from product sales are presented on a net basis on the 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. This sales-based output measure of progress and pattern of recognition best represents the value transferred to the licensee over the term of the arrangement, as well as the amount of consideration that the Company is entitled to receive in exchange for providing access to its trademarks.
Revenue from Connected Fitness subscriptions is recognized on a gross basis and is recognized over the term of the subscription. The Company receives payments in advance of revenue recognition for subscriptions and are recorded as contract liabilities in the Company's Consolidated Balance Sheet. Related commission cost is included in selling, general and administrative expense in the Consolidated Statements of Operations. Revenue from Connected Fitness digital advertising is recognized as the Company satisfies performance obligations pursuant to customer insertion orders.
The Company records reductions to revenue for estimated customer returns, allowances, markdowns and discounts. The Company bases its estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns and allowances that have not yet been received by the Company. The actual amount of customer returns and allowances, which is inherently uncertain, may differ from the Company’s estimates. If the Company determines that actual or expected returns or allowances are significantly
higher or lower than the reserves it established, it would record a reduction or increase, as appropriate, to net sales in the period in which it makes such a determination. Provisions for customer specific discounts are based on negotiated arrangements with certain major customers. Reserves for returns, allowances, markdowns and discounts are included within customer refund liability and the value of inventory associated with reserves for sales returns are included within prepaid expenses and other current assets on the Consolidated Balance Sheet. The Company reviews and refines these estimates on at least a quarterly basis. For Fiscal 2020 and Fiscal 2019, there were $203.4 million and $219.4 million, respectively, in reserves for returns, allowances, markdowns and discounts within customer refund liability and $57.9 million and $61.1 million, respectively, as the estimated value of inventory associated with the reserves for sales returns within prepaid expenses and other current assets on the Consolidated Balance Sheet. Refer to Note 19 to the Consolidated Financial Statements for a further discussion of disaggregated revenues.
Contract Liability
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 consist of payments received in advance of revenue recognition for subscriptions for the Company's Connected Fitness applications, gift cards and royalty arrangements. Contract liabilities are included in other liabilities on the Company's Consolidated Balance Sheet. For Fiscal 2020 and Fiscal 2019, contract liability was $26.7 million and $60.4 million, respectively.
For Fiscal 2020, the Company recognized $16.1 million of revenue that was previously included in contract liability as of the end of Fiscal 2019. For Fiscal 2019, the Company recognized $48.5 million of revenue that was previously included in contract liability as of the end of Fiscal 2018. The change in the contract liability 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.
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 Connected Fitness applications 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 $550.4 million, $578.9 million and $543.8 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively. For Fiscal 2020, prepaid advertising costs were $15.2 million (Fiscal 2019: $26.9 million).
Shipping and Handling Costs
The Company charges certain customers shipping and handling fees. These fees are recorded in net revenues. The Company includes the majority of outbound handling costs as a component of selling, general and administrative expenses. Outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate the Company’s distribution facilities. These outbound handling costs, included within selling, general and administrative expenses, were $80.5 million, $81.0 million and $91.8 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively. The Company includes outbound freight costs associated with shipping goods to customers as a component of cost of goods sold.
Equity Method Investment
The Company has a common stock investment of 29.5% in Dome Corporation ("Dome"), the Company's Japanese licensee. The Company accounts for its investment in Dome under the equity method, given it has the ability to exercise significant influence, but not control, over Dome. During Fiscal 2020, the Company recorded its allocable share of Dome's net income of $3.5 million (Fiscal 2019: net loss of $8.7 million; Fiscal 2018: net income
of $1 million), within income (loss) from equity method investment on the Consolidated Statements of Operations and as an adjustment to the investment balance within other long term assets on the Consolidated Balance Sheet.
The Company performed a qualitative assessment of potential impairment indicators for its investment in Dome and determined that indicators of impairment existed due to impacts from COVID-19. Accordingly, the Company performed a valuation of its investment in Dome and determined that the fair value of its investment was less than its carrying value by $8.6 million. The Company determined this decline in value to be other-than-temporary considering Dome's near and long-term financial forecast. Accordingly, the Company's results for Fiscal 2020 include the impact of recording a $8.6 million impairment of the Company's equity method investment in Dome, which reduced the carrying value to zero.The impairment charge was recorded within income (loss) from equity method investment on the Consolidated Statements of Operations and as a reduction to the investment balance within other long term assets on the Consolidated Balance Sheets. The Company calculated fair value using the discounted cash flows model, which indicates the fair value of the investment based on the present value of the cash flows that it expects the investment to generate in the future. For Fiscal 2020 there was no carrying value associated with the Company's equity investment in Dome (Fiscal 2019: $5.1 million).
In addition to the investment in Dome, the Company has a license agreement with Dome. The Company recorded license revenues from Dome of $40.1 million and $37.8 million for Fiscal 2020 and Fiscal 2019, respectively. For Fiscal 2020, the Company had $22.9 million (Fiscal 2019: $15.6 million) in licensing receivables outstanding recorded in the prepaid expenses and other current assets line item within the Company's Consolidated Balance Sheet.
On March 2, 2020, as part of the Company's acquisition of Triple, the Company assumed 49.5% of common stock ownership in UA Sports (Thailand) Co., Ltd. (“UA Sports Thailand”). The Company accounts for its investment in UA Sports Thailand under the equity method, given it has the ability to exercise significant influence, but not control, over UA Sports Thailand. For Fiscal 2020, the Company recorded the allocable share of UA Sports Thailand’s net loss of $1.1 million within income (loss) from equity method investment on the Consolidated Statements of Operations and as an adjustment to the investment balance within other long term assets on the Consolidated Balance Sheets. As of the end of Fiscal 2020 , the carrying value of the Company’s total investment in UA Sports Thailand was $4.5 million. Refer to Note 5 for a discussion of the acquisition.
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 14 for a further discussion of earnings per share.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with accounting guidance that requires all stock-based compensation awards granted to employees and directors to be measured at fair value and recognized as an expense in the financial statements. In addition, this guidance requires that excess tax benefits related to stock-based compensation awards be reflected as operating cash flows.
The Company uses the Black-Scholes option-pricing model to estimate the fair market value of stock-based compensation awards. The Company uses the “simplified method” to estimate the expected life of options, as permitted by accounting guidance. The “simplified method” calculates the expected life of a stock option equal to the time from grant to the midpoint between the vesting date and contractual term, taking into account all vesting tranches. The risk free interest rate is based on the yield for the U.S. Treasury bill with a maturity equal to the expected life of the stock option. Expected volatility is based on the Company's historical average. Compensation expense is recognized net of forfeitures on a straight-line basis over the total vesting period, which is the implied requisite service period. Compensation expense for performance-based awards is recorded over the implied requisite service period when achievement of the performance target is deemed probable.
The Company issues new shares of Class A Common Stock and Class C Common Stock upon exercise of stock options, grant of restricted stock or share unit conversion. Refer to Note 15 for further details on stock-based compensation.
Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Further, the full impact of COVID-19 cannot reasonably be estimated. The Company has made appropriate
accounting estimates and assumptions based on the facts and circumstances available as of the reporting date.
The Company may experience further impacts based on long-term effects on the Company's customers and the
countries in which the Company operates. As a result of these uncertainties, actual results could differ from those
estimates and assumptions.
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 the end of Fiscal 2020, the fair value of the Company's 3.250% Senior Notes were $602.6 million (Fiscal 2019: $587.5 million). The fair value of the Company's 1.50% Convertible Senior Notes, which was issued in May 2020, was $828.2 million as of the end of Fiscal 2020. The fair value of the Company's other long term debt approximates its carrying value based on the variable nature of interest rates and current market rates available to the Company. The fair value of foreign currency contracts is based on the net difference between the U.S. dollars to be received or paid at the contracts’ settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current exchange rate. The fair value of the interest rate swap contract is based on the net difference between the fixed interest to be paid and variable interest to be received over the term of the contract based on current market rates.
Recently Issued Accounting Standards
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) 2020-06. The amendment in this update simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. The update also requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The guidance is effective for interim and annual periods beginning after December 15, 2021. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting. The ASU provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. This ASU is currently effective and upon adoption may be applied prospectively to contract modifications and hedging relationships made on or before December 31, 2022. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
Recently Adopted Accounting Standards
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting for income taxes. The ASU impacts various topic areas within ASC 740, including accounting for taxes under hybrid tax regimes, accounting for increases in goodwill, allocation of tax amounts to separate company financial statements within a group that files a consolidated tax return, intra-period tax allocation, interim period accounting, and accounting for ownership changes in investments, among other minor codification improvements. The guidance in this ASU becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and may be early adopted. The Company has elected to early adopt this standard as of January 1, 2020. The adoption of this ASU did not have a material impact on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 - Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amended the impairment model to utilize an expected loss methodology in place of the previously used incurred loss methodology, which results in more timely recognition of losses. The new standard applies to financial assets measured at amortized cost basis, including receivables that result from revenue transactions. The Company adopted this ASU on January 1, 2020 and there was no material impact to the Consolidated Financial Statements as of the date of adoption. Results for reporting periods as of January 1, 2020 are presented under the new standard, while prior results continue to be reported under the previous standard.
3. Restructuring and Related Impairment Charges
On March 31, 2020, the Company's Board of Directors approved a restructuring plan ("2020 restructuring plan") designed to rebalance the Company’s cost base to further improve profitability and cash flow generation. The Company identified further opportunities and on September 2, 2020, the Company’s Board of Directors approved a $75 million increase to the restructuring plan, resulting in an updated 2020 restructuring plan of approximately $550 million to $600 million of total estimated pre-tax restructuring and related charges.
The restructuring and related charges primarily consist of up to approximately:
•$219 million of cash restructuring charges, comprised of up to: $61 million in facility and lease termination costs, $30 million in employee severance and benefit costs, and $128 million in contract termination and other restructuring costs; and
•$381 million of non-cash charges comprised of an impairment of $291 million related to the Company’s New York City flagship store and $90 million of intangibles and other asset related impairments.
The Company recorded $472.7 million and $183.1 million of restructuring and related impairment charges for Fiscal 2020 and Fiscal 2018, respectively. There were no restructuring charges incurred during Fiscal 2019. The Company previously implemented a restructuring plan in 2018. The summary of the costs recorded during Fiscal 2020 as well as the Company's current estimates of the amount expected to be incurred in connection with the 2020 restructuring plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and related impairment charges recorded
|
|
Estimated restructuring and related Impairment charges (1)
|
(In thousands)
|
|
Year ended December 31, 2020 (A)
|
|
Remaining to be incurred (B)
|
|
Total (A+B)
|
Costs recorded in cost of goods sold:
|
|
|
|
|
|
|
Contract-based royalties
|
|
$
|
11,608
|
|
|
—
|
|
|
11,608
|
|
Inventory write-offs
|
|
768
|
|
|
3,400
|
|
|
4,168
|
|
Total costs recorded in cost of goods sold
|
|
12,376
|
|
|
3,400
|
|
|
15,776
|
|
|
|
|
|
|
|
|
Costs recorded in restructuring and impairment charges:
|
|
|
|
|
|
|
Property and equipment impairment
|
|
29,280
|
|
|
8,098
|
|
|
37,378
|
|
Intangible asset impairment
|
|
4,351
|
|
|
—
|
|
|
4,351
|
|
Right-of-use asset impairment
|
|
293,495
|
|
|
—
|
|
|
293,495
|
|
Employee related costs
|
|
28,579
|
|
|
1,421
|
|
|
30,000
|
|
Contract exit costs (2)
|
|
79,008
|
|
|
89,992
|
|
|
169,000
|
|
Other asset write off
|
|
13,074
|
|
|
15,926
|
|
|
29,000
|
|
Other restructuring costs
|
|
12,564
|
|
|
8,436
|
|
|
21,000
|
|
Total costs recorded in restructuring and related impairment charges
|
|
460,351
|
|
|
123,873
|
|
|
584,224
|
|
Total restructuring and impairment charges
|
|
$
|
472,727
|
|
|
$
|
127,273
|
|
|
$
|
600,000
|
|
(1) Estimated restructuring and related impairment charges to be incurred reflect the high-end of the range of the estimated remaining charges expected to be recorded by the Company in connection with the restructuring plan.
(2) Contract exit costs are primarily comprised of proposed lease exits of certain brand and factory house stores and office facilities, and proposed marketing and other contract exits.
The lease term for the Company's New York City flagship store commenced on March 1, 2020 and an operating lease right-of-use ("ROU") asset and corresponding operating lease liability of $344.8 million was recorded on the Company's Consolidated Balance Sheet. In March 2020, as a part of the 2020 restructuring plan, the Company made the strategic decision to forgo the opening of its New York City flagship store and the property is actively being marketed for sublease. Accordingly, in the first quarter of Fiscal 2020, the Company recognized a ROU asset impairment of $290.8 million, reducing the carrying value of the lease asset to its estimated fair value. Fair value was estimated using an income-approach based on management's forecast of future cash flows expected to be derived from the property based on current sublease market rent. Rent expense or sublease income related to this lease will be recorded within other income (expense) on the Consolidated Statements of Operations.
All restructuring and related impairment charges are included in the Company's Corporate Other non-operating segment, of which $397.6 million are North America related, $14.4 million are EMEA related, $14.9 million are Latin America related, $6.8 million are Asia-Pacific related and $4.6 million are Connected Fitness related for Fiscal 2020.
These charges require the Company to make certain judgements and estimates regarding the amount and timing of restructuring and related impairment charges or recoveries. The estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, the Company conducts an evaluation of the related liabilities and expenses and revises its assumptions and estimates as appropriate as new or updated information becomes available.
A summary of the activity in the restructuring reserve related to the Company's 2020 restructuring plan, as well as prior restructuring plans in 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Employee Related Costs
|
|
Contract Exit Costs
|
|
Other Restructuring Related Costs
|
Balance at January 1, 2020
|
$
|
462
|
|
|
$
|
17,843
|
|
|
$
|
—
|
|
Additions 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
|
|
Latin America operating model change
During the fourth quarter of Fiscal 2020, the Company determined to change to a distributor model in Chile, which is expected to be effective in early 2021. The Company determined that as of the end of Fiscal 2020, the Chile subsidiary met the criteria to be classified as held for sale under Accounting Standard Codification (ASC) 360, Property, Plant, and Equipment. Included within Total current assets and Total other long term assets on the Consolidated Balance Sheet as of the end of Fiscal 2020 are inventory with the carrying value of $1.2 million and property and equipment with the carrying value of $13.6 million, respectively, which represent assets held for sale.
4. Sale of MyFitnessPal
On October 28, 2020, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) to sell its MyFitnessPal platform, and on December 18, 2020, the sale was completed. Pursuant to the Purchase Agreement, the aggregate sale price for the transaction was $345 million, of which $215 million was payable upon closing. The Company received $198.7 million at closing after giving effect to $16 million of purchase price and other adjustments. The sale includes up to $130 million in earnout payments, which are based on the achievement of certain revenue targets over a three-year period. The potential earnout payments include up to $35 million payable in calendar year 2022, $45 million payable in calendar year 2023 and $50 million payable in calendar year 2024. The Company recognized a gain of approximately $179.3 million, which is included in Other income (expenses), net in the Consolidated Statements of Operations. The Company made an election to record the contingent earnout portion of the arrangement when the earnout payments are determined to be realizable in the future periods. In connection with the sale, we agreed to provide certain transition services to MyFitnessPal for an expected period up to nine months from the date of sale. The continuing cash flows related to these items are not expected to be significant.
5. Acquisition
Triple Pte. Ltd.
On March 2, 2020, the Company acquired, on a cash free, debt free basis, 100% of Triple Pte. Ltd. ("Triple"), a distributor of the Company's products in Southeast Asia. The purchase price for the acquisition was $32.9 million in cash, net of $8.9 million of cash acquired that was held by Triple at closing and settlement of $5.1 million in pre-existing trade receivables due from Triple prior to the acquisition. The results of operations of this acquisition have been consolidated with those of the Company beginning on March 2, 2020.
The Company incurred $1.0 million in acquisition related costs that were expensed during Fiscal 2020. These costs are included in selling, general and administrative expenses within the Consolidated Statements of Operations. Pro forma results are not presented, as the acquisition was not considered material to the consolidated Company.
6. Property and Equipment, Net
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, 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, included in furniture, fixtures and displays, and depreciated over 3 years.
The Company periodically reviews assets’ estimated useful lives based upon actual experience and expected future utilization. A change in useful life is treated as a change in accounting estimate and is applied prospectively.
The Company capitalizes the cost of interest for long term property and equipment projects based on the Company’s weighted average borrowing rates in place while the projects are in progress. Capitalized interest was $1.4 million as of the end of Fiscal 2020 (Fiscal 2019: $1.6 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 lives of assets, are expensed as incurred.
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
Leasehold and tenant improvements
|
|
$
|
540,847
|
|
|
$
|
563,061
|
|
Furniture, fixtures and displays
|
|
236,527
|
|
|
235,721
|
|
Buildings
|
|
48,382
|
|
|
52,184
|
|
Software
|
|
339,756
|
|
|
337,577
|
|
Office equipment
|
|
125,695
|
|
|
126,412
|
|
Plant equipment
|
|
130,155
|
|
|
144,844
|
|
Land
|
|
83,626
|
|
|
83,626
|
|
Construction in progress
|
|
31,217
|
|
|
54,771
|
|
Other
|
|
6,047
|
|
|
4,071
|
|
Subtotal property and equipment
|
|
1,542,252
|
|
|
1,602,267
|
|
Accumulated depreciation
|
|
(883,574)
|
|
|
(810,119)
|
|
Property and equipment, net
|
|
$
|
658,678
|
|
|
$
|
792,148
|
|
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 $154.4 million for Fiscal 2020 (Fiscal 2019: $177.3 million; Fiscal 2018: $173.4 million).
7. Long-Lived Asset and Goodwill Impairment
Long-Lived Asset Impairment
As a result of the impacts of COVID-19, the Company determined that sufficient indicators existed to trigger the performance of an interim long-lived asset impairment analysis in Fiscal 2020. The Company performed undiscounted cash flow analyses on its long-lived assets, including retail stores at an individual store level. Based on these undiscounted cash flow analyses, the Company determined that certain long-lived assets had net carrying values that exceeded their estimated undiscounted future cash flows. 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 $89.7 million of long-lived asset impairment charges for Fiscal 2020. There were no long-lived asset impairment charges in Fiscal 2019 or Fiscal 2018. The long-lived impairment charge was recorded within restructuring and impairment charges on the Consolidated Statements of Operations and as a reduction to the related asset balances on the Consolidated Balance Sheets. The long-lived asset impairment charges for Fiscal 2020 are included within the Company's operating segments as follows: $47.6 million recorded in North America, $23.0 million recorded in Asia-Pacific, $13.3 million recorded in Latin America, and $5.8 million recorded in EMEA.
The significant estimates used in the fair value methodology, which are based on Level 3 inputs, include: the Company's expectations for future operations and projected cash flows, including net revenue, gross profit and operating expenses and market conditions, including estimated market rent.
Additionally, the Company recognized $290.8 million of long-lived asset impairment charges related to the Company's New York City flagship store, which was recorded in connection with the Company's 2020 restructuring plan for Fiscal 2020. Refer to Note 3 for a further discussion of the restructuring and related impairment charges.
Goodwill Impairment
As a result of the impacts of COVID-19, the Company determined that sufficient indicators existed to trigger an interim goodwill impairment analysis for all of the Company’s reporting units as of March 31, 2020. In the first quarter of 2020, the Company performed discounted cash flow analyses and determined that the estimated fair values of the Latin America reporting unit and the Canada reporting unit within the North America operating segment no longer exceeded their carrying value, resulting in a full impairment of the goodwill allocated to their respective reporting units. The Company recognized goodwill impairment charges of $51.6 million for Fiscal 2020 for these reporting units within restructuring and impairment charges on the Consolidated Statements of Operation, and as a reduction to the goodwill balance on the Consolidated Balance Sheets. There were no triggering events or goodwill impairment charges recorded during the remainder of Fiscal 2020.
The determination of the Company’s reporting units' fair value includes assumptions that are subject to various risks and uncertainties. The significant estimates used in the discounted cash flow analyses, which are based on Level 3 inputs, include: the Company’s weighted average cost of capital, adjusted for the risk attributable to the geographic regions of the reporting unit's business, long-term rate of growth and profitability of the reporting unit's business, working capital effects, and changes in market conditions, consumer trends or strategy.
The following table summarizes changes in the carrying amount of the Company’s goodwill by reportable segment as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
North America
|
|
EMEA
|
|
Asia-Pacific
|
|
Latin America
|
|
Connected Fitness
|
|
Total
|
Balance as of December 31, 2018
|
|
$
|
317,500
|
|
|
$
|
104,823
|
|
|
$
|
79,410
|
|
|
$
|
44,761
|
|
|
$
|
—
|
|
|
$
|
546,494
|
|
Effect of currency translation adjustment
|
|
788
|
|
|
1,243
|
|
|
(242)
|
|
|
1,895
|
|
|
—
|
|
|
3,684
|
|
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
|
|
Intangible Assets, net
The following tables summarize the Company’s intangible assets as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(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
|
|
|
$
|
(965)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,571
|
|
Customer relationships
|
|
2-3
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
User/Nutrition database
|
|
10
|
|
52,727
|
|
|
(25,472)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27,255
|
|
Lease-related intangible assets
|
|
1-15
|
|
5,152
|
|
|
(2,380)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,772
|
|
Other
|
|
5-10
|
|
1,428
|
|
|
(1,154)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
275
|
|
Total
|
|
|
|
$
|
61,843
|
|
|
$
|
(29,970)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,871
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,474
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,345
|
|
Amortization expense, which is included in selling, general and administrative expenses, was $7.0 million, $6.1 million and $6.1 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively. The following is the estimated amortization expense for the Company’s intangible assets as of the end of Fiscal 2020:
|
|
|
|
|
|
(In thousands)
|
|
2021
|
$
|
2,124
|
|
2022
|
2,020
|
|
2023
|
1,660
|
|
2024
|
1,497
|
|
2025
|
1,497
|
|
2026 and thereafter
|
272
|
|
Amortization expense of intangible assets
|
$
|
9,070
|
|
8. Leases
The Company enters into operating leases both domestically and internationally, to lease certain warehouse space, office facilities, space for its brand and factory house stores and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2035, excluding extensions at the Company's option, and include provisions for rental adjustments.
The Company accounts for a contract as a lease when it has the right to direct the use of the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial
classification and measurement of its 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 Consolidated Balance Sheets for leases with an expected term greater than one year. Short-term lease payments were not material for Fiscal 2020.
As the rate implicit in the Company's lease agreements is not readily determinable, the Company uses its secured incremental borrowing rate to determine the present value of the lease payments. The Company calculates the incremental borrowing rate based on the current market yield curve and adjusts for foreign currency for international leases.
Fixed lease costs are included in the recognition of ROU assets and lease liabilities. Variable lease costs are not included in the measurement of the lease liability. These variable lease payments are recognized in the Consolidated Statements of Operations in the period in which the obligation for those payments is incurred. Variable lease payments primarily consist of payments dependent on sales in brand and factory house stores. The Company has elected to combine lease and non-lease components in the determination of lease costs for its leases. The lease liability includes lease payments related to options to extend or renew the lease term only if the Company is reasonably certain to exercise those options.
The Company recognizes lease expense on a straight-line basis over the lease term. Included in selling, general and administrative expenses were operating lease costs of $156.7 million for Fiscal 2020 (Fiscal 2019: $166.4 million; Fiscal 2018: $152.7 million). Included in these amounts were $9.3 million in variable lease payments under non-cancelable operating lease agreements for Fiscal 2020 (Fiscal 2019: $12.9 million; Fiscal 2018: $14.2 million).
There are no residual value guarantees that exist, and there are no restrictions or covenants imposed by leases. The Company rents or subleases excess office facilities and warehouse space to third parties. Sublease income is not material.
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2020
|
2019
|
Weighted average remaining lease term (in years)
|
9.12
|
6.73
|
Weighted average discount rate
|
3.83
|
%
|
4.26
|
%
|
Supplemental cash flow and other information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(In thousands)
|
2020
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash outflows from operating leases
|
$
|
155,990
|
|
$
|
116,811
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
$
|
390,957
|
|
$
|
70,075
|
|
Maturities of lease liabilities are as follows:
|
|
|
|
|
|
(In thousands)
|
|
2021
|
$
|
196,725
|
|
2022
|
163,631
|
|
2023
|
143,868
|
|
2024
|
125,173
|
|
2025
|
97,085
|
|
2026 and thereafter
|
467,361
|
|
Total lease payments
|
$
|
1,193,843
|
|
Less: Interest
|
191,866
|
|
Total present value of lease liabilities
|
$
|
1,001,977
|
|
|
|
As of the end of Fiscal 2020, the Company has additional operating lease obligations that have not yet commenced of approximately $6.5 million, which are not reflected in the table above.
9. Credit Facility and Other Long Term Debt
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”). The credit agreement has a term of five years, maturing in March 2024, with permitted extensions under certain circumstances. In May 2020, the Company entered into an amendment to the credit agreement (the “amendment” and, the credit agreement as amended, the “amended credit agreement” or the “revolving credit facility”), pursuant to which the prior revolving credit commitments were reduced from $1.25 billion to $1.1 billion of borrowings. From time to time throughout 2020, the Company borrowed funds under this facility as a precautionary measure in order to increase the cash position and preserve liquidity given the ongoing uncertainty in global markets resulting from the COVID-19 pandemic. As of the end of Fiscal 2020 and Fiscal 2019, there were no amounts outstanding under the revolving credit facility.
Except during the covenant suspension period (as defined below), at the Company's request and the lender's consent, commitments under the amended credit agreement may be increased by up to $300 million in aggregate, subject to certain conditions as set forth in the amended credit agreement. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time the Company seeks to incur such borrowings.
Borrowings under the revolving credit facility have maturities of less than one year. Up to $50 million of the facility may be used for the issuance of letters of credit. There were $4.3 million of letters of credit outstanding as of then end of Fiscal 2020 (Fiscal 2019: $5.0 million).
The obligations of the Company under the amended credit agreement are guaranteed by certain domestic significant subsidiaries of the Company, subject to customary exceptions (the “subsidiary guarantors”) and primarily secured by a first-priority security interest in substantially all of the assets of the Company and the subsidiary guarantors, excluding real property, capital stock in and debt of the subsidiaries holding certain real property and other customary exceptions.
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 the assets outside the ordinary course of business, enter into transactions with affiliates and make restricted payments (including a temporary suspension of certain voluntary restricted payments during the covenant suspension period (as defined below)).
The Company is required to comply with specific consolidated leverage and interest coverage ratios during specified periods. Prior to the amendment, the Company was required to maintain a ratio of consolidated EBITDA, to consolidated interest expense of not less than 3.50 to 1.0 (the “interest coverage covenant”), and the Company was not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.0 (the “leverage covenant”), as described in more detail in the credit agreement. The amended credit agreement provides for suspensions of and adjustments to the leverage covenant (including definitional changes
impacting the calculation of the ratio) and the interest coverage covenant beginning with the quarter ended June 30, 2020, and ending on the date on which financial statements for the quarter ended June 30, 2022 are delivered to lenders under the amended credit agreement (the “covenant suspension period”) as summarized below and described in more detail in the amended credit agreement:
•For the fiscal quarter ended June 30, 2020, the interest coverage covenant was suspended and the leverage covenant required that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.5 to 1.0.
•For the fiscal quarters ending September 30, 2020, December 31, 2020, March 31, 2021 and June 30, 2021, compliance with the interest coverage covenant and the leverage covenant are both suspended. Beginning on September 30, 2020 through and including December 31, 2021, the Company must instead maintain minimum liquidity of $550.0 million (the “liquidity covenant”) (with liquidity being the sum of certain cash and cash equivalents held by the Company and its subsidiaries and available borrowing capacity under the amended credit agreement).
•For the fiscal quarter ending September 30, 2021, the interest coverage covenant is suspended, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.5 to 1.0 and the Company must comply with the liquidity covenant.
•For the fiscal quarter ending December 31, 2021, the interest coverage covenant is suspended, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 4.0 to 1.0 and the Company must comply with the liquidity covenant.
•Beginning on January 1, 2022, the liquidity covenant is terminated. For the fiscal quarter ending March 31, 2022, the leverage covenant will require that the ratio of consolidated total indebtedness to consolidated EBITDA be less than or equal to 3.5 to 1.0 and the interest coverage covenant will require that the ratio of consolidated EBITDA to consolidated interest expense be greater than or equal to 3.5 to 1.0.
As of the end of Fiscal 2020, the Company was in compliance with the applicable covenants.
In addition, the amended credit agreement contains events of default that are customary for a facility of this nature and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the amended credit agreement, will be considered an event of default under the amended credit agreement.
During the covenant suspension period, the applicable margin for loans is 2.00% for adjusted LIBOR loans and 1.00% for alternate base rate loans. Otherwise, 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, or (b) a rate based on the rates applicable for deposits in the interbank market for U.S. Dollars or the applicable currency in which the loans are made (“adjusted LIBOR”), plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to a grid (the “pricing grid”) based on the consolidated leverage ratio and ranges between 1.25% to 1.75% for adjusted LIBOR loans and 0.25% to 0.75% for alternate base rate loans. The weighted average interest rate under the revolving credit facility borrowings was 2.3% and 3.6% during Fiscal 2020 and Fiscal 2019, respectively. During the covenant suspension period, the commitment fee rate is 0.40% per annum. Otherwise, the Company pays a commitment fee determined in accordance with the pricing grid on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit. As of the end of Fiscal 2020, the commitment fee was 15 basis points. The Company incurred and deferred $7.2 million in financing costs in connection with the amended credit agreement.
1.50% Convertible Senior Notes
In May 2020, the Company issued $500 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at the rate of 1.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The Convertible Senior Notes will mature on June 1, 2024, unless earlier converted in accordance with their terms, redeemed in accordance with their terms or repurchased.
The net proceeds from the offering (including the net proceeds from the exercise of the over-allotment option) was $488.8 million, after deducting the initial purchasers’ discount and estimated offering expenses paid by the Company, of which the Company used $47.9 million to pay the cost of the capped call transactions described below. The Company utilized $439.9 million to repay indebtedness outstanding under its revolving credit facility and pay related fees and expenses.
The Convertible Senior Notes are not secured and are not guaranteed by any of the Company’s subsidiaries. The indenture governing the Convertible Senior Notes does not contain any financial or operating
covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries.
The Convertible Senior Notes are convertible into cash, shares of the Company’s Class C common stock or a combination of cash and shares of Class C common stock, at the Company’s election as described further below. The initial conversion rate is 101.8589 shares of the Company’s Class C common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $9.82 per share of Class C common stock), subject to adjustment if certain events occur. Prior to the close of business on the business day immediately preceding January 1, 2024, the Convertible Senior Notes will be convertible only upon satisfaction of one or more of the following conditions:
•during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s Class C common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class C common stock and the conversion rate on each such trading day;
•upon the occurrence of specified corporate events or distributions on the Company’s Class C common stock; or
•if the Company calls any Convertible Senior Notes for redemption prior to the close of business on the business day immediately preceding January 1, 2024.
On or after January 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Senior Notes at the conversion rate at any time irrespective of the foregoing conditions.
On or after December 6, 2022, the Company may redeem for cash all or any part of the Convertible Senior Notes, at its option, if the last reported sale price of the Company’s Class C common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If the Company undergoes a fundamental change (as defined in the indenture governing the Convertible Senior Notes) prior to the maturity date, subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Convertible Senior Notes in principal amounts of $1,000 or an integral multiple thereof at a price which will be equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Concurrently with the offering of the Convertible Senior Notes, the Company entered into privately negotiated capped call transactions with JPMorgan Chase Bank, National Association, HSBC Bank USA, National Association and Citibank, N.A. (the “option counterparties”). The capped call transactions are expected generally to reduce potential dilution to the Company’s Class C common stock upon any conversion of Convertible Senior Notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted Convertible Senior Notes upon any conversion thereof, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactions is initially $13.4750 per share of the Company’s Class C common stock, representing a premium of 75% above the last reported sale price of the Company’s Class C common stock on May 21, 2020, and is subject to certain adjustments under the terms of the capped call transactions.
The Convertible Senior Notes contain a cash conversion feature, and as a result, the Company has separated its carrying value 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.
The debt discount and the debt portion of the deferred financing costs are being amortized to interest expense over the term of the Convertible Senior Notes using an effective interest rate of 6.8%.
The Convertible Senior Notes consist of the following components:
|
|
|
|
|
|
|
Year ended December 31,
|
(In thousands)
|
2020
|
Liability component
|
|
Principal
|
$
|
500,000
|
|
Unamortized debt discount
|
(79,031)
|
|
Unamortized issuance costs
|
(8,501)
|
|
Net carrying amount
|
$
|
412,468
|
|
|
|
Equity component, net of issuance costs
|
$
|
88,672
|
|
Interest expense related to the Convertible Senior Notes consists of the following components:
|
|
|
|
|
|
|
Year ended December 31,
|
(In thousands)
|
2020
|
Coupon interest
|
$
|
4,375
|
|
Non-cash amortization of debt discount
|
11,816
|
|
Amortization of deferred financing costs
|
1,451
|
|
Convertible senior notes interest expense
|
$
|
17,642
|
|
In connection with the issuance of the Convertible Senior Notes, the Company recorded an $11 million net deferred tax liability and a corresponding reduction in valuation allowance. As a result, there was no net impact to the Company’s deferred income taxes or additional paid in capital on the Consolidated Balance Sheet.
3.250% Senior Notes
In June 2016, the Company issued $600 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.
Other Long Term Debt
In December 2012, the Company entered into a $50 million recourse loan collateralized by the land, buildings and tenant improvements comprising its corporate headquarters. In July 2018, this loan was paid in full, without penalties, using borrowings under the Company's revolving credit facility.
The following are the scheduled maturities of long term debt as of the end of Fiscal 2020:
|
|
|
|
|
|
(In thousands)
|
|
2021
|
$
|
—
|
|
2022
|
—
|
|
2023
|
—
|
|
2024
|
500,000
|
|
2025
|
—
|
|
2026 and thereafter
|
600,000
|
|
Total scheduled maturities of long term debt
|
$
|
1,100,000
|
|
|
|
Current maturities of long term debt
|
$
|
—
|
|
Interest expense, net was $47.3 million, $21.2 million, and $33.6 million for Fiscal 2020, 2019 and 2018, respectively. Interest expense includes the amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long term debt facilities. Amortization of deferred financing costs was $3.8 million, $2.4 million, and $1.5 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively.
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.
10. 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, 2020, as well as significant sponsorship and other marketing agreements entered into during the period after December 31, 2020 through the date of this report:
|
|
|
|
|
|
(In thousands)
|
|
2021
|
$
|
106,727
|
|
2022
|
85,090
|
|
2023
|
69,454
|
|
2024
|
55,525
|
|
2025
|
32,370
|
|
2026 and thereafter
|
12,453
|
|
Total future minimum sponsorship and other payments
|
$
|
361,619
|
|
The amounts listed above are the minimum compensation obligations and guaranteed royalty fees required to be paid under the Company’s sponsorship and other marketing agreements. The amounts listed above do not include additional performance incentives and product supply obligations provided under certain agreements. It is not possible to determine how much the Company will spend on product supply obligations on an annual basis as contracts generally do not stipulate specific cash amounts to be spent on products. The amount of product provided to the sponsorships depends on many factors including general playing conditions, the number of sporting events in which they participate and the Company’s decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers.
Other
In connection with various contracts and agreements, the Company has agreed to indemnify counterparties against certain third party claims relating to the infringement of intellectual property rights and other items. Generally, such indemnification obligations do not apply in situations in which the counterparties are grossly negligent, engage in willful misconduct, or act in bad faith. Based on the Company’s historical experience and the estimated probability of future loss, the Company has determined that the fair value of such indemnifications is not material to its consolidated financial position or results of operations.
From time to time, the Company is involved in litigation and other proceedings, including matters related to commercial and intellectual property disputes, as well as trade, regulatory and other claims related to its business. Other than as described below, the Company believes that all current proceedings are routine in nature and incidental to the conduct of its business, and that the ultimate resolution of any such proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
In re Under Armour Securities Litigation
On March 23, 2017, three separate securities cases previously filed against the Company in the United States District Court for the District of Maryland (the “District Court”) were consolidated under the caption In re Under Armour Securities Litigation, Case No. 17-cv-00388-RDB (the “Consolidated Securities Action”). On August 4, 2017, the lead plaintiff in the Consolidated Securities Action, Aberdeen City Council as Administrating Authority for the North East Scotland Pension Fund (“Aberdeen”), joined by named plaintiff Bucks County Employees Retirement Fund (“Bucks County”), filed a consolidated amended complaint (the “Amended Complaint”) against the Company, the Company’s then-Chief Executive Officer, Kevin Plank, and former Chief Financial Officers Lawrence Molloy and Brad Dickerson. The Amended Complaint alleged violations of Section 10(b) (and Rule 10b-5) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 20(a) control person liability under the Exchange Act against the officers named in the Amended Complaint, claiming that the defendants made material misstatements and omissions regarding, among other things, the Company's growth and consumer demand for certain of the Company's products. The class period identified in the Amended Complaint is September 16, 2015 through January 30, 2017. The Amended Complaint also asserted claims under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), in connection with the Company’s public offering of senior unsecured notes in June 2016. The Securities Act claims were asserted against the Company, Mr. Plank, Mr. Molloy, the Company’s directors who signed the registration statement pursuant to which the offering was made and the underwriters that participated in the offering. The Amended Complaint alleged that the offering materials utilized in connection with the offering contained false and/or misleading statements and omissions regarding, among other things, the Company’s growth and consumer demand for certain of the Company’s products.
On November 9, 2017, the Company and the other defendants filed motions to dismiss the Amended Complaint. On September 19, 2018, the District Court dismissed the Securities Act claims with prejudice and the Exchange Act claims without prejudice. Lead plaintiff Aberdeen, joined by named plaintiff Monroe County Employees’ Retirement Fund (“Monroe”), filed a Second Amended Complaint on November 16, 2018, asserting claims under the Exchange Act and naming the Company and Mr. Plank as the remaining defendants. The remaining defendants filed a motion to dismiss the Second Amended Complaint on January 17, 2019. On August 19, 2019, the District Court dismissed the Second Amended Complaint with prejudice.
In September 2019, plaintiffs Aberdeen and Bucks County filed an appeal in the United States Court of Appeals for the Fourth Circuit challenging the decisions by the District Court on September 19, 2018 and August 19, 2019 (the “Appeal”). The Appeal was fully briefed as of January 16, 2020.
On November 6 and December 17, 2019, two purported shareholders of the Company filed putative securities class actions in the District Court against the Company and certain of its current and former executives (captioned Patel v. Under Armour, Inc., No. 1:19-cv-03209-RDB (“Patel”), and Waronker v. Under Armour, Inc., No. 1:19-cv-03581-RDB (“Waronker”), respectively). The complaints in Patel and Waronker alleged violations of Section 10(b) (and Rule 10b-5) of the Exchange Act, against all defendants, and Section 20(a) control person liability under the Exchange Act against the current and former officers named in the complaints. The complaints claimed that the defendants’ disclosures and statements supposedly misrepresented or omitted that the Company was purportedly shifting sales between quarterly periods allegedly to appear healthier and that the Company was under investigation by and cooperating with the United States Department of Justice (“DOJ”) and the United States Securities and Exchange Commission (“SEC”) since July 2017.
On November 18, 2019, Aberdeen, the lead plaintiff in the Consolidated Securities Action, filed in the District Court a motion for an indicative ruling under Federal Rule of Civil Procedure 62.1 (the “Rule 62.1 Motion”) seeking relief from the final judgment pursuant to Federal Rule of Civil Procedure 60(b). The Rule 62.1 Motion alleged that purported newly discovered evidence entitled Aberdeen to relief from the District Court’s final judgment. Aberdeen also filed motions seeking (i) to consolidate the Patel and Waronker cases with the Consolidated Securities Action, and (ii) to be appointed lead plaintiff over the consolidated cases.
On January 22, 2020, the District Court granted Aberdeen’s Rule 62.1 motion and indicated that it would grant a motion for relief from the final judgment and provide Aberdeen with the opportunity to file a third amended
complaint if the Fourth Circuit remanded for that purpose. The District Court further stated that it would, upon remand, consolidate the Patel and Waronker cases with the Consolidated Securities Action and appoint Aberdeen as the lead plaintiff over the consolidated cases.
On August 13, 2020, the Fourth Circuit remanded the Appeal to the District Court for the limited purpose of allowing the District Court to rule on Aberdeen’s motion seeking relief from the final judgment pursuant to Federal Rule of Civil Procedure 60(b). On September 14, 2020, the District Court issued an order granting that relief. The District Court’s order also consolidated the Patel and Waronker cases into the Consolidated Securities Action and appointed Aberdeen as lead plaintiff over the Consolidated Securities Action.
On October 14, 2020, Aberdeen, along with named plaintiffs Monroe and KBC Asset Management NV, filed a third amended complaint (the “TAC”) in the Consolidated Securities Action, asserting claims under Sections 10(b) and 20(a) of the Exchange Act against the Company and Mr. Plank and under Section 20A of the Exchange Act against Mr. Plank. The TAC alleges that the defendants supposedly concealed purportedly declining consumer demand for certain of the Company's products between the third quarter of 2015 and the fourth quarter of 2016 by making allegedly false and misleading statements regarding the Company’s performance and future prospects and by engaging in undisclosed and allegedly improper sales and accounting practices, including shifting sales between quarterly periods allegedly to appear healthier. The TAC also alleges that the defendants purportedly failed to disclose that the Company was under investigation by and cooperating with DOJ and the SEC since July 2017. The class period identified in the TAC is September 16, 2015 through November 1, 2019.
On December 4, 2020, the Company and Mr. Plank filed a motion to dismiss the TAC for failure to state a claim. Briefing on the motion to dismiss is expected to be completed in March 2021.
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 action has since been dismissed in its entirety). The court ordered stay in the consolidated Kenney action remains in effect at this time.
Prior to the filing of the derivative complaints in Kenney v. Plank, et al. 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.
Between August 11, 2020 and October 21, 2020, three additional purported shareholder derivative complaints were filed in Maryland state court (in cases captioned Cordell v. Plank, et al. (filed August 11, 2020), Klein v. Plank, et al. (filed October 2, 2020), and Salo v. Plank, et al. (filed October 21, 2020), respectively).
The complaints in these cases name Mr. Plank, certain other current and former members of the Company’s Board of Directors, and certain current and former Company executives as defendants, and name the Company as a nominal defendant. The complaints in these actions assert allegations similar to those in the TAC filed in the Consolidated Securities Action matter discussed above, including allegations challenging (i) the Company’s disclosures related to growth and consumer demand for certain of the Company’s products; (ii) the Company’s practice of shifting sales between quarterly periods supposedly to appear healthier and its purported failure to disclose that practice; (iii) the Company’s internal controls with respect to revenue recognition and inventory management; (iv) the Company’s supposed failure to timely disclose investigations by the SEC and DOJ; (v) the compensation paid to the Company’s directors and executives while the alleged wrongdoing was occurring; and/or (vi) stock sales by certain individual defendants. The complaints assert breach of fiduciary duty, 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 three actions, none of the purported stockholders made a demand that the Company’s Board of Directors pursue the claims asserted in the complaints.
The Company believes that the claims asserted in the derivative complaints filed in Maryland state court are without merit and intends to defend these matters vigorously. However, because of the inherent uncertainty as to the outcome of these proceedings, the Company is unable at this time to estimate the possible impact of the outcome of these matters.
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.
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”).
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.
Wells Notices
In addition to the Company’s material pending legal proceedings, as previously disclosed, in July 2020, the Company, as well as Kevin Plank and David Bergman (together, the “Executives”), received “Wells Notices” from the SEC relating to the Company’s disclosures covering the third quarter of 2015 through the period ending December 31, 2016, regarding the use of “pull forward” sales in connection with revenue during those quarters. The Wells Notices informed the Company that the SEC Staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company and each of the Executives that would allege certain violations of the Securities Act and the Securities Exchange Act and certain rules promulgated thereunder. The Wells Notices delivered to the Executives also reference potential charges related to the Executives’ participation in the Company’s violations, as well as control person liability under the Exchange Act.
The potential relief to be sought referenced in the Wells Notices included an injunction, a cease-and-desist order, disgorgement, prejudgment interest, and civil monetary penalties, as well as, in the case of the Executives, a bar from serving as an officer or director of a public company. A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law, and to date no legal proceedings have been brought against the Company or the Executives with respect to this matter. The Company and the Executives maintain that their actions were appropriate and are pursuing the Wells Notice process, and also are engaging in a dialogue with the SEC Staff to work toward a resolution of this matter.
11. Stockholders’ Equity
The Company’s Class A Common Stock and Class B Convertible Common Stock have an authorized number of 400.0 million shares and 34.5 million shares, respectively, and each have a par value of $0.0003 1/3 per share as of December 31, 2020. 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, 2020. 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.
12. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The fair value accounting guidance outlines a valuation framework, creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures, and prioritizes the inputs used in measuring fair value as follows:
|
|
|
|
|
|
Level 1:
|
Observable inputs such as quoted prices in active markets;
|
|
|
Level 2:
|
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Financial assets and (liabilities) measured at fair value are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Derivative foreign currency contracts (see Note 17)
|
|
$
|
—
|
|
|
$
|
(22,122)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7,151)
|
|
|
$
|
—
|
|
Interest rate swap contracts (see Note 17)
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
TOLI policies held by the Rabbi Trust
|
|
$
|
—
|
|
|
$
|
7,697
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,543
|
|
|
$
|
—
|
|
Deferred Compensation Plan obligations
|
|
$
|
—
|
|
|
$
|
(14,314)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(10,839)
|
|
|
$
|
—
|
|
Fair values of the financial assets and liabilities listed above are determined using inputs that use as their basis readily observable market data that are actively quoted and are validated through external sources, including third-party pricing services and brokers. The Company purchases marketable securities that are designated as available-for-sale. The foreign currency contracts represent gains and losses on derivative contracts, which is the net difference between the U.S. dollar value to be received or paid at the contracts’ settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current market exchange rate. The interest rate swap contracts represent gains and losses on the derivative contracts, which is the net difference between the fixed interest to be paid and variable interest to be received over the term of the contract based on current market rates. The fair value of the trust owned life insurance (“TOLI”) policies held by the Rabbi Trust is based on the cash-surrender value of the life insurance policies, which are invested primarily in mutual funds and a separately managed fixed income fund. These investments are initially made in the same funds and purchased in substantially the same amounts as the selected investments of participants in the Under Armour, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), which represent the underlying liabilities to participants in the Deferred Compensation Plan. Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments.
As of the end of December 31, 2020, the fair value of the Company's Convertible Senior Notes was $828.2 million. As of December 31, 2020 and December 31, 2019, the fair value of the Company's Senior Notes was $602.6 million and $587.5 million, respectively. The carrying value of the Company's other long term debt approximated its fair value as of the end of Fiscal 2020 and Fiscal 2019. The fair value of long term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2).
Some assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets and goodwill that have been reduced to
fair value when impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
13. Provision for Income Taxes
Income (loss) before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
2020
|
|
2019
|
|
2018
|
Income (loss) before income taxes
|
|
|
|
|
|
United States
|
$
|
(478,465)
|
|
|
$
|
81,122
|
|
|
$
|
(121,396)
|
|
Foreign
|
(14,079)
|
|
|
128,720
|
|
|
53,608
|
|
Total
|
$
|
(492,544)
|
|
|
$
|
209,842
|
|
|
$
|
(67,788)
|
|
The components of the income tax expense (benefit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
2020
|
|
2019
|
|
2018
|
Current
|
|
|
|
|
|
Federal
|
$
|
(30,047)
|
|
|
$
|
7,232
|
|
|
$
|
(15,005)
|
|
State
|
34
|
|
|
771
|
|
|
3,253
|
|
Foreign
|
16,720
|
|
|
21,952
|
|
|
34,975
|
|
|
(13,293)
|
|
|
29,955
|
|
|
23,223
|
|
Deferred
|
|
|
|
|
|
Federal
|
50,620
|
|
|
12,750
|
|
|
(27,808)
|
|
State
|
587
|
|
|
25,508
|
|
|
(6,202)
|
|
Foreign
|
11,473
|
|
|
1,811
|
|
|
(9,765)
|
|
|
62,680
|
|
|
40,069
|
|
|
(43,775)
|
|
Income tax expense (benefit)
|
$
|
49,387
|
|
|
$
|
70,024
|
|
|
$
|
(20,552)
|
|
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2020
|
|
2019
|
|
2018
|
U.S. federal statutory income tax rate
|
$
|
(103,434)
|
|
21.0
|
%
|
|
$
|
44,067
|
|
21.0
|
%
|
|
$
|
(14,235)
|
|
21.0
|
%
|
State taxes, net of federal tax impact
|
(29,341)
|
|
6.0
|
%
|
|
4,620
|
|
2.2
|
%
|
|
(6,715)
|
|
9.9
|
%
|
Unrecognized tax benefits
|
2,260
|
|
(0.5)
|
%
|
|
(2,031)
|
|
(1.0)
|
%
|
|
(7,598)
|
|
11.2
|
%
|
Permanent tax benefits - MyFitnessPal Sale
|
(118,321)
|
|
24.0
|
%
|
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
Other permanent tax benefits/nondeductible expenses
|
15,993
|
|
(3.2)
|
%
|
|
328
|
|
0.2
|
%
|
|
5,609
|
|
(8.2)
|
%
|
Intercompany asset sale
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
|
(18,834)
|
|
27.8
|
%
|
Foreign rate differential
|
(972)
|
|
0.2
|
%
|
|
(10,494)
|
|
(5.0)
|
%
|
|
(12,294)
|
|
18.1
|
%
|
Valuation allowance
|
302,575
|
|
(61.4)
|
%
|
|
30,137
|
|
14.4
|
%
|
|
33,058
|
|
(48.8)
|
%
|
Impacts related to Tax Act
|
(13,987)
|
|
2.8
|
%
|
|
—
|
|
—
|
%
|
|
1,536
|
|
(2.3)
|
%
|
Other
|
(5,386)
|
|
1.1
|
%
|
|
3,397
|
|
1.6
|
%
|
|
(1,079)
|
|
1.6
|
%
|
Effective income tax rate
|
$
|
49,387
|
|
(10.0)
|
%
|
|
$
|
70,024
|
|
33.4
|
%
|
|
$
|
(20,552)
|
|
30.3
|
%
|
On March 27, 2020, the CARES Act, which provides relief to taxpayers affected by COVID-19, was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including provisions for the deferral of the employer share of payroll tax payments, modifications to the net interest deduction limitations, carryback of net operating losses generated in Fiscal 2018, Fiscal 2019 and Fiscal 2020 tax years, alternative minimum tax credit refunds, and technical corrections to tax depreciation methods for qualified improvement property.
The provision with the most significant impact on the Company relates to the carryback of the federal net operating losses. The Company has recorded a benefit to income tax expense of approximately $35 million for current year net operating losses to be carried back under the CARES Act, including $13.9 million benefit for years with a statutory rate of 35% compared to the current statutory rate of 21%.
The Company recorded 2020 income tax expense on pretax losses, including the impact of recording valuation allowances for previously recognized deferred tax assets in the U.S. and China and current year U.S. pre-tax losses not able to be carried back, compared to 2019 income tax expense recorded on pre-tax income.
Deferred tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
Deferred tax assets
|
|
|
|
|
Operating lease liabilities
|
|
$
|
257,233
|
|
|
$
|
140,673
|
|
U.S. Federal and State Capital Loss
|
|
69,332
|
|
|
—
|
|
Foreign net operating loss carry-forwards
|
|
51,040
|
|
|
31,524
|
|
Reserves and accrued liabilities
|
|
50,226
|
|
|
25,676
|
|
Intangible assets
|
|
31,965
|
|
|
20,041
|
|
U.S. state net operating loss
|
|
28,343
|
|
|
24,124
|
|
Inventory
|
|
28,079
|
|
|
32,209
|
|
Allowance for doubtful accounts and sales return reserves
|
|
19,864
|
|
|
23,257
|
|
Stock-based compensation
|
|
12,447
|
|
|
14,828
|
|
Foreign tax credits
|
|
10,023
|
|
|
11,807
|
|
Tax credits
|
|
8,775
|
|
|
7,480
|
|
Deductions limited by income
|
|
7,509
|
|
|
714
|
|
Other
|
|
3,303
|
|
|
4,835
|
|
Total deferred tax assets
|
|
578,139
|
|
|
337,168
|
|
Less: valuation allowance
|
|
(388,432)
|
|
|
(101,997)
|
|
Total net deferred tax assets
|
|
$
|
189,707
|
|
|
$
|
235,171
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
Right-of-use asset
|
|
$
|
(136,308)
|
|
|
$
|
(118,917)
|
|
Convertible debt instruments
|
|
(9,878)
|
|
|
—
|
|
Prepaid expenses
|
|
(9,443)
|
|
|
(15,862)
|
|
Property, plant and equipment
|
|
(8,107)
|
|
(16,956)
|
|
Other
|
|
(4,780)
|
|
|
(1,717)
|
|
Total deferred tax liabilities
|
|
(168,516)
|
|
|
(153,452)
|
|
Total deferred tax assets, net
|
|
$
|
21,191
|
|
|
$
|
81,719
|
|
All deferred tax assets and liabilities are classified as non-current on the Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019. 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, 2020, the Company has considered all available evidence, both positive and negative, including but not limited to the following:
Positive
•No history of U.S. federal and state tax attributes expiring unused.
•Restructuring plans undertaken in 2017, 2018, and 2020, which aim to improve future profitability.
•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 the end of Fiscal 2020, 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 $308.2 million against the U.S. deferred tax assets, excluding certain state tax credits. The Company will continue to evaluate its ability to realize its net deferred tax assets on a quarterly basis.
As of the end of Fiscal 2020, the Company had $28.3 million in deferred tax assets associated with $473.3 million in state net operating loss carryforwards and $8.8 million in deferred tax assets associated with 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 $69.3 million in deferred tax assets associated with federal and state capital loss carryforwards totaling $125.1 million as of December 31, 2020, which, if unused, will expire in five years.
As of the end of Fiscal 2020, the Company had $51 million in deferred tax assets associated with approximately $231.3 million in foreign net operating loss carryforwards and $10 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, as of December 31, 2020, 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 $80.2 million against these foreign deferred tax assets.
As of the end of Fiscal 2020, approximately $383.1 million of cash and cash equivalents was held by the Company's non-U.S. subsidiaries whose cumulative undistributed earnings total $644.2 million. The Tax Act 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.
As of the end of Fiscal 2020 and Fiscal 2019, the total liability for unrecognized tax benefits, including related interest and penalties, was approximately $46.9 million and $44.3 million, respectively. The following table represents a reconciliation of the Company's total unrecognized tax benefits balances, excluding interest and penalties, for Fiscal 2020, Fiscal 2019 and Fiscal 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
Beginning of year
|
|
$
|
41,194
|
|
|
$
|
55,855
|
|
|
$
|
51,815
|
|
Increases as a result of tax positions taken in a prior period
|
|
1,738
|
|
|
1,545
|
|
|
1,978
|
|
Decreases as a result of tax positions taken in a prior period
|
|
(2,309)
|
|
|
(11,005)
|
|
|
(1,600)
|
|
Increases as a result of tax positions taken during the current period
|
|
2,142
|
|
|
1,158
|
|
|
12,802
|
|
Decreases as a result of settlements during the current period
|
|
(1,500)
|
|
|
(6,359)
|
|
|
—
|
|
Reductions as a result of a lapse of statute of limitations during the current period
|
|
—
|
|
|
—
|
|
|
(9,140)
|
|
Reductions as a result of divestiture
|
|
(951)
|
|
|
—
|
|
|
—
|
|
End of year
|
|
$
|
40,314
|
|
|
$
|
41,194
|
|
|
$
|
55,855
|
|
As of the end of Fiscal 2020, $31.7 million of unrecognized tax benefits, excluding interest and penalties, would impact the Company's effective tax rate if recognized.
As of the end of Fiscal 2020, Fiscal 2019 and Fiscal 2018, the liability for unrecognized tax benefits included $4.3 million, $3.1 million, and $4.2 million, respectively, for the accrual of interest and penalties. For each of Fiscal 2020, Fiscal 2019 and Fiscal 2018, the Company recorded $1.2 million, $2.0 million, and $1.9 million, respectively, for the accrual of interest and penalties in its Consolidated Statements of Operations. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the Consolidated Statements of Operations.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is currently under audit by the 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.
14. Earnings (Loss) per Share
The calculation of earnings (loss) per share for common stock shown below excludes the income attributable to outstanding restricted stock awards from the numerator and excludes the impact of these awards from the denominator. The following is a reconciliation of basic earnings (loss) per share to diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands, except per share amounts)
|
|
2020
|
|
2019
|
|
2018
|
Numerator
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(549,177)
|
|
|
$
|
92,139
|
|
|
$
|
(46,302)
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
Weighted average common shares outstanding Class A, B and C
|
|
454,089
|
|
|
450,964
|
|
|
445,815
|
|
Effect of dilutive securities Class A, B and C
|
|
—
|
|
|
3,310
|
|
|
—
|
|
Weighted average common shares and dilutive securities outstanding Class A, B and C
|
|
454,089
|
|
|
454,274
|
|
|
445,815
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share of Class A, B and C common stock
|
|
$
|
(1.21)
|
|
|
$
|
0.20
|
|
|
$
|
(0.10)
|
|
Diluted net income (loss) per share of Class A, B and C common stock
|
|
$
|
(1.21)
|
|
|
$
|
0.20
|
|
|
$
|
(0.10)
|
|
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options, and restricted stock units representing 6.4 million, 1.8 million and 3.3 million shares of Class A and C common stock outstanding for Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively, were excluded from the computation of diluted earnings per share because their effect would be anti-dilutive. Due to the Company being in a net loss position for Fiscal 2020 and Fiscal 2018, 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.
15. Stock-Based Compensation
Stock Compensation Plans
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. Stock options and restricted stock and restricted stock unit awards under the 2005 Plan generally vest ratably over a two to five year period. The
contractual term for stock options is generally 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. The 2005 Plan terminates in 2025. As of the end of Fiscal 2020, 10.1 million Class A shares and 24.9 million Class C shares are available for future grants of awards under the 2005 Plan.
Total stock-based compensation expense for Fiscal 2020, Fiscal 2019 and Fiscal 2018 was $42.1 million , $49.6 million and $41.8 million, respectively. The related tax benefits, excluding consideration of valuation allowances, were $9.0 million, $11.8 million, and $10.0 million for Fiscal 2020, Fiscal 2019, and Fiscal 2018, respectively. The valuation allowances associated with these benefits were $9.0 million, $2.7 million, and $1.1 million for Fiscal 2020, Fiscal 2019, and Fiscal 2018, respectively. As of the end of Fiscal 2020, the Company had $67.5 million of unrecognized compensation expense expected to be recognized over a weighted average period of 2.39 years. This unrecognized compensation expense does not include any expense related to performance-based restricted stock units and stock options for which the performance targets have not been deemed probable as of the end of Fiscal 2020 and Fiscal 2018. Refer to “Stock Options” and “Restricted Stock and Restricted Stock Units” below for further information on these awards.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (the “ESPP”) allows for the purchase of Class A Common Stock and Class C Common Stock by all eligible employees at a 15% discount from fair market value subject to certain limits as defined in the ESPP. As of the end of Fiscal 2020, 2.7 million Class A shares and 2.0 million Class C shares are available for future purchases under the ESPP. During Fiscal 2020, Fiscal 2019 and Fiscal 2018, 482.9 thousand, 329.1 thousand and 393.8 thousand Class C shares were purchased under the ESPP, respectively.
Non-Employee Director Compensation Plan and Deferred Stock Unit Plan
The Company’s Non-Employee Director Compensation Plan (the “Director Compensation Plan”) provides for cash compensation and equity awards to non-employee directors of the Company under the 2005 Plan. Non-employee directors have the option to defer the value of their annual cash retainers as deferred stock units in accordance with the Under Armour, Inc. Non-Employee Deferred Stock Unit Plan (the “DSU Plan”). Each new non-employee director receives an award of restricted stock units upon the initial election to the Board of Directors, with the units covering stock valued at $100 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.
Stock Options
The weighted average fair value of a stock option granted for Fiscal 2020, Fiscal 2019 and Fiscal 2018 was $6.61, $8.70 and $6.91, 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,
|
|
2020
|
|
2019
|
|
2018
|
Risk-free interest rate
|
1.5
|
%
|
|
2.5
|
%
|
|
2.8
|
%
|
Average expected life in years
|
6.25
|
|
6.50
|
|
6.50
|
Expected volatility
|
43.1
|
%
|
|
41.0
|
%
|
|
40.4
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
A summary of the Company’s stock options as of the end of Fiscal 2020, Fiscal 2019 and Fiscal 2018, and changes during the years then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
Year Ended December 31,
|
2020
|
|
2019
|
|
2018
|
|
|
Number
of Stock
Options
|
|
Weighted
Average
Exercise
Price
|
|
Number
of Stock
Options
|
|
Weighted
Average
Exercise
Price
|
|
Number
of Stock
Options
|
|
Weighted
Average
Exercise
Price
|
Outstanding, beginning of year
|
|
1,969
|
|
|
$
|
16.61
|
|
|
2,732
|
|
|
$
|
12.98
|
|
|
3,782
|
|
|
$
|
12.71
|
|
Granted, at fair market value
|
|
303
|
|
|
15.13
|
|
|
460
|
|
|
19.39
|
|
|
579
|
|
|
15.41
|
|
Exercised
|
|
(410)
|
|
|
3.54
|
|
|
(733)
|
|
|
3.41
|
|
|
(1,262)
|
|
|
5.53
|
|
Expired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
(490)
|
|
|
19.04
|
|
|
(367)
|
|
|
35.55
|
|
Outstanding, end of year
|
|
1,862
|
|
|
$
|
19.31
|
|
|
1,969
|
|
|
$
|
16.61
|
|
|
2,732
|
|
|
$
|
12.98
|
|
Options exercisable, end of year
|
|
766
|
|
|
$
|
22.41
|
|
|
913
|
|
|
$
|
15.45
|
|
|
1,366
|
|
|
$
|
7.70
|
|
Included in the table above are 0.2 million and 0.3 million performance-based stock options awarded to the Company’s Executive Chairman and Brand Chief under the 2005 Plan for Fiscal 2019 and Fiscal 2018, respectively. There were no performance-based stock options awarded during Fiscal 2020. The performance-based stock options awarded in Fiscal 2019 have weighted average fair values of $8.70 and have vesting that is tied to the achievement of certain combined annual operating income targets.
The intrinsic value of stock options exercised during Fiscal 2020, Fiscal 2019 and Fiscal 2018 was $4.5 million, $12.4 million and $15.2 million, respectively.
For Fiscal 2020, Fiscal 2019 and Fiscal 2018 income tax benefits related to stock options exercised, excluding consideration of valuation allowances were $1.2 million, $2.7 million, and $3.5 million, respectively. The valuation allowances associated with these benefits were $0.3 million, $0.7 million, and $0.5 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively.
The following table summarizes information about stock options outstanding and exercisable as of the end of Fiscal 2020:
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Number of
Underlying
Shares
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Total
Intrinsic
Value
|
|
Number of
Underlying
Shares
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Total
Intrinsic
Value
|
1,862
|
|
|
$
|
19.31
|
|
|
7.18
|
|
$
|
186
|
|
|
766
|
|
|
$
|
22.41
|
|
|
6.02
|
|
$
|
186
|
|
Restricted Stock and Restricted Stock Units
A summary of the Company’s restricted stock and restricted stock units as of the end of Fiscal 2020, Fiscal 2019 and Fiscal 2018, and changes during the years then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
(In thousands, except per share amounts)
|
|
Number
of
Restricted
Shares
|
|
Weighted
Average
Grant Date Fair Value
|
|
Number
of
Restricted
Shares
|
|
Weighted
Average
Fair Value
|
|
Number
of
Restricted
Shares
|
|
Weighted
Average
Fair Value
|
Outstanding, beginning of year
|
|
6,661
|
|
|
$
|
18.02
|
|
|
8,284
|
|
|
$
|
18.03
|
|
|
9,923
|
|
|
$
|
24.41
|
|
Granted
|
|
4,572
|
|
|
13.09
|
|
|
3,501
|
|
|
19.32
|
|
|
5,165
|
|
|
15.57
|
|
Forfeited
|
|
(2,217)
|
|
|
16.68
|
|
|
(2,760)
|
|
|
18.56
|
|
|
(4,745)
|
|
|
27.43
|
|
Vested
|
|
(2,742)
|
|
|
17.86
|
|
|
(2,364)
|
|
|
20.24
|
|
|
(2,059)
|
|
|
24.95
|
|
Outstanding, end of year
|
|
6,274
|
|
|
$
|
15.52
|
|
|
6,661
|
|
|
$
|
18.02
|
|
|
8,284
|
|
|
$
|
18.03
|
|
Included in the table above are 0.6 million and 0.8 million performance-based restricted stock units awarded to certain executives and key employees under the 2005 Plan during Fiscal 2019 and Fiscal 2018, respectively.
There were no performance-based restricted stock units awarded during Fiscal 2020. The performance-based restricted stock units awarded in Fiscal 2019 and Fiscal 2018 have weighted average grant date fair values of $19.39, and $15.60, respectively, and have vesting that is tied to the achievement of certain combined annual revenue and operating income targets.
During Fiscal 2019, the Company granted performance-based restricted stock units or stock options with vesting conditions tied to the achievement of revenue and operating income targets for 2019 and 2020. During Fiscal 2019, the Company deemed the achievement of these revenue and operating income targets improbable, 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.
Warrants
The Company issued fully vested and non-forfeitable warrants to purchase 1.92 million shares of the Company's Class A Common Stock and 1.93 million shares of the Company’s Class C Common Stock to NFL Properties as partial consideration for footwear promotional rights which were recorded as an intangible asset in 2006. The warrants had a term of 12 years from the date of issuance and an exercise price of $4.66 per Class A share and $4.56 per Class C share. In August 2018, all of the warrants were exercised on a net exercise basis.
16. 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 $5.4 million, $7.5 million and $9.9 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, 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 the end of Fiscal 2020 and Fiscal 2019, the Deferred Compensation Plan obligations were $14.3 million and $10.8 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 the end of Fiscal 2020 and Fiscal 2019, the assets held in the Rabbi Trust were TOLI policies with cash-surrender values of $7.7 million and $6.5 million, respectively. These assets are consolidated and are included in other long term assets on the Consolidated Balance Sheet. Refer to Note 12 for a discussion of the fair value measurements of the assets held in the Rabbi Trust and the Deferred Compensation Plan obligations.
17. Risk Management and Derivatives
Foreign Currency Risk Management
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 the end of Fiscal 2020, 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 Australian Dollar/U.S. Dollar currency pairs. All derivatives are recognized on the Consolidated Balance Sheets at fair value and classified based on the instrument’s maturity date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balance Sheet Classification
|
December 31, 2020
|
|
December 31, 2019
|
Derivatives designated as hedging instruments under ASC 815
|
|
|
Foreign currency contracts
|
Other current assets
|
$
|
—
|
|
|
$
|
4,040
|
|
Foreign currency contracts
|
Other long term assets
|
—
|
|
|
24
|
|
Interest rate swap contracts
|
Other long term assets
|
—
|
|
|
—
|
|
Total derivative assets designated as hedging instruments
|
$
|
—
|
|
|
$
|
4,064
|
|
|
|
|
|
|
Foreign currency contracts
|
Other current liabilities
|
$
|
17,601
|
|
|
8,772
|
|
Foreign currency contracts
|
Other long term liabilities
|
6,469
|
|
|
2,443
|
|
Total derivative liabilities designated as hedging instruments
|
$
|
24,070
|
|
|
$
|
11,215
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under ASC 815
|
|
|
Foreign currency contracts
|
Other current assets
|
$
|
2,384
|
|
|
2,337
|
|
Total derivative assets not designated as hedging instruments
|
$
|
2,384
|
|
|
2,337
|
|
|
|
|
|
|
Foreign currency contracts
|
Other current liabilities
|
$
|
6,464
|
|
|
9,510
|
|
Total derivative liabilities not designated as hedging instruments
|
$
|
6,464
|
|
|
9,510
|
|
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,
|
|
2020
|
|
2019
|
|
2018
|
(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
|
$
|
4,474,667
|
|
$
|
2,098
|
|
|
$
|
5,267,132
|
|
$
|
18,789
|
|
|
$
|
5,193,185
|
|
$
|
(1,748)
|
|
Cost of goods sold
|
$
|
2,314,572
|
|
$
|
9,516
|
|
|
$
|
2,796,599
|
|
$
|
4,703
|
|
|
$
|
2,852,714
|
|
$
|
(1,279)
|
|
Interest expense, net
|
$
|
(47,259)
|
|
$
|
(36)
|
|
|
$
|
(21,240)
|
|
$
|
1,598
|
|
|
$
|
(33,568)
|
|
$
|
386
|
|
Other expense, net
|
$
|
168,153
|
|
$
|
25
|
|
|
$
|
(5,688)
|
|
$
|
871
|
|
|
$
|
(9,203)
|
|
$
|
1,537
|
|
The following tables present the amounts affecting the Statements of Comprehensive Income (Loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balance as of
December 31, 2017
|
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, 2018
|
Derivatives designated as cash flow hedges
|
|
|
|
Foreign currency contracts
|
$
|
(8,312)
|
|
$
|
28,730
|
|
$
|
(1,490)
|
|
$
|
21,908
|
|
Interest rate swaps
|
438
|
|
902
|
|
386
|
|
954
|
|
Total designated as cash flow hedges
|
$
|
(7,874)
|
|
$
|
29,632
|
|
$
|
(1,104)
|
|
$
|
22,862
|
|
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,
|
|
2020
|
|
2019
|
|
2018
|
(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 expense, net
|
$
|
168,153
|
|
$
|
(2,173)
|
|
|
$
|
(5,688)
|
|
$
|
(6,141)
|
|
|
$
|
(9,203)
|
|
$
|
(13,688)
|
|
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 the end of Fiscal 2020, the aggregate notional value of the Company's outstanding cash flow hedges was $812.5 million, 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 9 for a discussion of long term debt. As of the end of Fiscal 2020, the Company had no outstanding interest rate swap contracts.
For contracts designated as cash flow hedges, the changes in fair value are reported as other comprehensive income (loss) and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. Effective hedge results are classified in the 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 the end of Fiscal 2020, the total notional value of the Company's outstanding undesignated derivative instruments was $313.1 million.
Credit Risk
The Company enters into derivative contracts with major financial institutions with investment grade credit ratings and is exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the derivative contracts. However, the Company monitors the credit quality of these financial institutions and considers the risk of counterparty default to be minimal.
18. 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 each of Fiscal 2020, Fiscal 2019 and Fiscal 2018. No amounts were payable to this related party as of the end of Fiscal 2020 and Fiscal 2019. 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 the end of Fiscal 2020.
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 to become a global brand. These geographic regions include North America, Europe, the Middle East and Africa (“EMEA”), Asia-Pacific, and Latin America. Each geographic segment operates exclusively in one industry: the development, marketing and distribution of branded performance apparel, footwear and accessories. The CODM also receives discrete financial information for the Company's Connected Fitness business. Total expenditures for additions to long-lived assets are not disclosed as this information is not regularly provided to the CODM. As a result of the change in the operating model in Chile, there will be no impact on segment reporting and Latin America will continue to be disclosed as a separate reportable segment, based on reporting to CODM for Fiscal 2021.
Corporate Other consists largely of general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain, innovation and other corporate support functions; costs related to the Company's global assets and global marketing, costs related to the Company’s headquarters; restructuring and restructuring related charges; and certain foreign currency hedge gains and losses. Effective January 1, 2021, following the sale of MyFitnessPal and the winding down of the Endomondo platform, revenues for the remaining MapMyFitness platform will be included in Corporate Other.
Segment Data
The net revenues and operating income (loss) associated with the Company's segments are summarized in the following tables. Net revenues represent sales to external customers for each segment. Intercompany balances were eliminated for separate disclosure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Year Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Net revenues
|
|
|
|
|
|
|
North America
|
|
$
|
2,944,978
|
|
|
$
|
3,658,353
|
|
|
$
|
3,735,293
|
|
EMEA
|
|
598,296
|
|
|
621,137
|
|
|
591,057
|
|
Asia-Pacific
|
|
628,657
|
|
|
636,343
|
|
|
557,431
|
|
Latin America
|
|
164,825
|
|
|
196,132
|
|
|
190,795
|
|
Connected Fitness
|
|
135,813
|
|
|
136,378
|
|
|
120,357
|
|
Corporate Other (1)
|
|
2,098
|
|
|
18,789
|
|
|
(1,748)
|
|
Total net revenues
|
|
$
|
4,474,667
|
|
|
$
|
5,267,132
|
|
|
$
|
5,193,185
|
|
(1) Corporate Other revenues consist of foreign currency hedge gains and losses related to revenues generated by entities within the Company's operating segments, but managed through the Company's central foreign exchange risk management program.
Net revenues in the United States were $2,720.3 million, $3,394.4 million, and $3,464 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Year Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Operating income (loss)
|
|
|
|
|
|
|
North America
|
|
$
|
474,584
|
|
|
$
|
733,442
|
|
|
$
|
718,195
|
|
EMEA
|
|
60,592
|
|
|
53,739
|
|
|
30,388
|
|
Asia-Pacific
|
|
2
|
|
|
97,641
|
|
|
103,527
|
|
Latin America
|
|
(42,790)
|
|
|
(3,160)
|
|
|
(16,879)
|
|
Connected Fitness
|
|
17,063
|
|
|
17,140
|
|
|
5,948
|
|
Corporate Other
|
|
(1,122,889)
|
|
|
(662,032)
|
|
|
(866,196)
|
|
Total operating income (loss)
|
|
(613,438)
|
|
|
236,770
|
|
|
(25,017)
|
|
Interest expense, net
|
|
(47,259)
|
|
|
(21,240)
|
|
|
$
|
(33,568)
|
|
Other income (expense), net
|
|
168,153
|
|
|
(5,688)
|
|
|
$
|
(9,203)
|
|
Income (loss) before income taxes
|
|
$
|
(492,544)
|
|
|
$
|
209,842
|
|
|
$
|
(67,788)
|
|
The operating income (loss) information for Corporate Other presented above includes the impact of all restructuring and impairment related charges related to the Company's 2020 and 2018 restructuring plans. These unallocated charges are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Year Ended December 31,
|
2020
|
|
2018
|
Unallocated restructuring, impairment and restructuring related charges
|
|
|
|
North America related
|
$
|
397,616
|
|
|
$
|
115,687
|
|
EMEA related
|
14,388
|
|
|
34,699
|
|
Asia-Pacific related
|
6,771
|
|
|
1
|
|
Latin America related
|
14,915
|
|
|
27,107
|
|
Connected Fitness related
|
4,694
|
|
|
1,505
|
|
Corporate Other related
|
21,967
|
|
|
24,950
|
|
Total unallocated restructuring, impairment and restructuring related charges
|
$
|
460,351
|
|
|
$
|
203,949
|
|
There were no restructuring charges incurred during Fiscal 2019.
Long-lived assets are primarily composed of Property and Equipment, net and ROU assets. The Company's long-lived assets by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Year Ended December 31,
|
2020
|
|
2019
|
Long-lived assets
|
|
|
|
United States
|
$
|
896,789
|
|
|
$
|
1,051,089
|
|
Canada
|
23,122
|
|
|
23,268
|
|
Total North America
|
919,911
|
|
|
1,074,357
|
|
Other foreign countries
|
275,427
|
|
|
309,722
|
|
Total long-lived assets
|
$
|
1,195,338
|
|
|
$
|
1,384,079
|
|
Disaggregation of Revenue
The following tables disaggregate the Company's net revenues into categories that depict how the nature, amount, timing, and uncertainty of net revenues and cash flows are affected by economic factors for the fiscal periods presented.
Net revenues by product category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Year Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Apparel
|
$
|
2,882,562
|
|
|
$
|
3,470,285
|
|
|
$
|
3,464,120
|
|
Footwear
|
934,333
|
|
|
1,086,551
|
|
|
1,063,175
|
|
Accessories
|
414,082
|
|
|
416,354
|
|
|
422,496
|
|
Net Sales
|
4,230,977
|
|
|
4,973,190
|
|
|
4,949,791
|
|
License revenues
|
105,779
|
|
|
138,775
|
|
|
124,785
|
|
Connected Fitness
|
135,813
|
|
|
136,378
|
|
|
120,357
|
|
Corporate Other (1)
|
2,098
|
|
|
18,789
|
|
|
(1,748)
|
|
Total net revenues
|
$
|
4,474,667
|
|
|
$
|
5,267,132
|
|
|
$
|
5,193,185
|
|
(1) Corporate Other revenues consist of foreign currency hedge gains and losses related to revenues generated by entities within the Company's operating segments, but managed through the Company's central foreign exchange risk management program.
Net revenues by distribution channel are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Year Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Wholesale
|
$
|
2,383,353
|
|
|
$
|
3,167,625
|
|
|
$
|
3,141,983
|
|
Direct-to-Consumer
|
1,847,624
|
|
|
1,805,565
|
|
|
1,807,808
|
|
Net Sales
|
4,230,977
|
|
|
4,973,190
|
|
|
4,949,791
|
|
License revenues
|
105,779
|
|
|
138,775
|
|
|
124,785
|
|
Connected Fitness
|
135,813
|
|
|
136,378
|
|
|
120,357
|
|
Corporate Other (1)
|
2,098
|
|
|
18,789
|
|
|
(1,748)
|
|
Total Net Revenues
|
$
|
4,474,667
|
|
|
$
|
5,267,132
|
|
|
$
|
5,193,185
|
|
(1) Corporate Other revenues consist of foreign currency hedge gains and losses related to revenues generated by entities within the Company's operating segments, but managed through the Company's central foreign exchange risk management program.
20. Unaudited Quarterly Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Quarter Ended (unaudited)
|
|
Year Ended
December 31,
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
930,240
|
|
|
$
|
707,640
|
|
|
$
|
1,433,021
|
|
|
$
|
1,403,766
|
|
|
$
|
4,474,667
|
|
Gross profit
|
|
430,984
|
|
|
349,169
|
|
|
686,320
|
|
|
693,622
|
|
|
2,160,095
|
|
Income (loss) from operations
|
|
(558,180)
|
|
|
(169,674)
|
|
|
58,570
|
|
|
55,846
|
|
|
(613,438)
|
|
Net income (loss)
|
|
$
|
(589,681)
|
|
|
$
|
(182,896)
|
|
|
$
|
38,946
|
|
|
$
|
184,454
|
|
|
$
|
(549,177)
|
|
Basic net income (loss) per share of Class A, B and C common stock
|
|
$
|
(1.30)
|
|
|
$
|
(0.40)
|
|
|
$
|
0.09
|
|
|
$
|
0.41
|
|
|
$
|
(1.21)
|
|
Diluted net income (loss) per share of Class A, B and C common stock
|
|
$
|
(1.30)
|
|
|
$
|
(0.40)
|
|
|
$
|
0.09
|
|
|
$
|
0.40
|
|
|
$
|
(1.21)
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,204,722
|
|
|
$
|
1,191,729
|
|
|
$
|
1,429,456
|
|
|
$
|
1,441,225
|
|
|
$
|
5,267,132
|
|
Gross profit
|
|
544,787
|
|
|
554,321
|
|
|
689,898
|
|
|
681,527
|
|
|
2,470,533
|
|
Income (loss) from operations
|
|
35,259
|
|
|
(11,482)
|
|
|
138,920
|
|
|
74,073
|
|
|
236,770
|
|
Net income (loss)
|
|
$
|
22,477
|
|
|
$
|
(17,349)
|
|
|
$
|
102,315
|
|
|
$
|
(15,304)
|
|
|
$
|
92,139
|
|
Basic net income (loss) per share of Class A, B and C common stock
|
|
$
|
0.05
|
|
|
$
|
(0.04)
|
|
|
$
|
0.23
|
|
|
$
|
(0.03)
|
|
|
$
|
0.20
|
|
Diluted net income (loss) per share of Class A, B and C common stock
|
|
$
|
0.05
|
|
|
$
|
(0.04)
|
|
|
$
|
0.23
|
|
|
$
|
(0.03)
|
|
|
$
|
0.20
|
|