Under Armour, Inc. - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
Form 10-Q
______________________________________
(Mark One)
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2021
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File No. 001-33202
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UNDER ARMOUR, INC.
(Exact name of registrant as specified in its charter)
______________________________________
| Maryland | 52-1990078 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
1020 Hull Street Baltimore, Maryland 21230 | (410) 454-6428 | |||||||
| (Address of principal executive offices) (Zip Code) | (Registrant’s telephone number, including area code) | |||||||
______________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Class A Common Stock | UAA | New York Stock Exchange | ||||||
| Class C Common Stock | UA | New York Stock Exchange | ||||||
| (Title of each class) | (Trading Symbols) | (Name of each exchange on which registered) | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☑ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of April 30, 2021 there were 188,622,016 shares of Class A Common Stock, 34,450,000 shares of Class B Convertible Common Stock and 233,919,099 shares of Class C Common Stock outstanding.
UNDER ARMOUR, INC.
March 31, 2021
INDEX TO FORM 10-Q
| PART I. | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 6. | ||||||||
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Under Armour, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share data)
| March 31, 2021 | December 31, 2020 | March 31, 2020 | |||||||||||||||
| Assets | |||||||||||||||||
| Current assets | |||||||||||||||||
| Cash and cash equivalents | $ | 1,348,737 | $ | 1,517,361 | $ | 959,318 | |||||||||||
| Accounts receivable, net | 696,287 | 527,340 | 668,409 | ||||||||||||||
| Inventories | 851,829 | 895,974 | 940,236 | ||||||||||||||
| Prepaid expenses and other current assets, net | 260,865 | 282,300 | 300,044 | ||||||||||||||
| Total current assets | 3,157,718 | 3,222,975 | 2,868,007 | ||||||||||||||
| Property and equipment, net | 632,307 | 658,678 | 726,568 | ||||||||||||||
| Operating lease right-of-use assets | 511,130 | 536,660 | 583,418 | ||||||||||||||
| Goodwill | 497,970 | 502,214 | 485,672 | ||||||||||||||
| Intangible assets, net | 12,548 | 13,295 | 40,490 | ||||||||||||||
| Deferred income taxes | 23,796 | 23,930 | 39,576 | ||||||||||||||
| Other long term assets | 78,827 | 72,876 | 93,844 | ||||||||||||||
| Total assets | $ | 4,914,296 | $ | 5,030,628 | $ | 4,837,575 | |||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||||||||
| Current liabilities | |||||||||||||||||
| Revolving credit facility, current | $ | — | $ | — | $ | 600,000 | |||||||||||
| Accounts payable | 490,860 | 575,954 | 417,397 | ||||||||||||||
| Accrued expenses | 311,905 | 378,859 | 267,115 | ||||||||||||||
| Customer refund liabilities | 191,979 | 203,399 | 208,172 | ||||||||||||||
| Operating lease liabilities | 160,918 | 162,561 | 129,758 | ||||||||||||||
| Other current liabilities | 78,655 | 92,503 | 69,060 | ||||||||||||||
| Total current liabilities | 1,234,317 | 1,413,276 | 1,691,502 | ||||||||||||||
| Long term debt, net of current maturities | 1,009,951 | 1,003,556 | 593,281 | ||||||||||||||
| Operating lease liabilities, non-current | 801,292 | 839,414 | 913,754 | ||||||||||||||
| Other long term liabilities | 98,537 | 98,389 | 88,858 | ||||||||||||||
| Total liabilities | 3,144,097 | 3,354,635 | 3,287,395 | ||||||||||||||
| Stockholders’ equity | |||||||||||||||||
Class A Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of March 31, 2021, December 31, 2020 and March 31, 2020; 188,622,010 shares issued and outstanding as of March 31, 2021, December 31, 2020: 188,603,686, March 31, 2020: 188,450,989 | 62 | 62 | 62 | ||||||||||||||
Class B Convertible Common Stock, $0.0003 1/3 par value; 34,450,000 shares authorized, issued and outstanding as of March 31, 2021, December 31, 2020 and March 31, 2020. | 11 | 11 | 11 | ||||||||||||||
Class C Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of March 31, 2021, December 31, 2020 and March 31, 2020; 233,934,560 shares issued and outstanding as of March 31, 2021, December 31, 2020: 231,953,667, March 31, 2020: 231,150,002 | 78 | 77 | 77 | ||||||||||||||
| Additional paid-in capital | 1,072,401 | 1,061,173 | 985,831 | ||||||||||||||
| Retained earnings | 747,231 | 673,855 | 634,452 | ||||||||||||||
| Accumulated other comprehensive loss | (49,584) | (59,185) | (70,253) | ||||||||||||||
| Total stockholders’ equity | 1,770,199 | 1,675,993 | 1,550,180 | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | 4,914,296 | $ | 5,030,628 | $ | 4,837,575 | |||||||||||
Commitments and contingencies (Note 6)
See accompanying notes.
1
Under Armour, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net revenues | $ | 1,257,195 | $ | 930,240 | |||||||
| Cost of goods sold | 628,554 | 499,256 | |||||||||
| Gross profit | 628,641 | 430,984 | |||||||||
| Selling, general and administrative expenses | 514,638 | 552,701 | |||||||||
| Restructuring and impairment charges | 7,113 | 436,463 | |||||||||
| Income (loss) from operations | 106,890 | (558,180) | |||||||||
| Interest expense, net | (14,137) | (5,960) | |||||||||
| Other income (expense), net | (7,180) | 1,534 | |||||||||
| Income (loss) before income taxes | 85,573 | (562,606) | |||||||||
| Income tax expense | 9,881 | 21,547 | |||||||||
| Income (loss) from equity method investments | 2,060 | (5,528) | |||||||||
| Net income (loss) | $ | 77,752 | $ | (589,681) | |||||||
| Basic net income (loss) per share of Class A, B and C common stock | $ | 0.17 | $ | (1.30) | |||||||
| Diluted net income (loss) per share of Class A, B and C common stock | $ | 0.17 | $ | (1.30) | |||||||
| Weighted average common shares outstanding Class A, B and C common stock | |||||||||||
| Basic | 456,014 | 452,871 | |||||||||
| Diluted | 459,226 | 452,871 | |||||||||
See accompanying notes.
2
Under Armour, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net income (loss) | $ | 77,752 | $ | (589,681) | |||||||
| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation adjustment | 3,318 | (47,679) | |||||||||
Unrealized gain on cash flow hedges, net of tax benefit (expense) of ($1,232) and $11,435 for the three months ended March 31, 2021 and 2020, respectively | 8,798 | 32,545 | |||||||||
| Loss on intra-entity foreign currency transactions | (2,515) | (4,354) | |||||||||
| Total other comprehensive income (loss) | 9,601 | (19,488) | |||||||||
| Comprehensive income (loss) | $ | 87,353 | $ | (609,169) | |||||||
See accompanying notes.
3
Under Armour, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands)
| Class A Common Stock | Class B Convertible Common Stock | Class C Common Stock | Additional Paid-in-Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | 188,290 | $ | 62 | 34,450 | $ | 11 | 229,028 | $ | 76 | $ | 973,717 | $ | 1,226,986 | $ | (50,765) | $ | 2,150,087 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 143 | — | — | — | 131 | — | 484 | — | — | 484 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | (1) | — | — | — | (176) | — | — | (2,853) | — | (2,853) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A Common Stock, net of forfeitures | 19 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class C Common Stock, net of forfeitures | — | — | — | — | 2,167 | 1 | 1,165 | — | — | 1,166 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | 10,465 | — | — | 10,465 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | — | — | — | — | (589,681) | (19,488) | (609,169) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2020 | 188,451 | $ | 62 | 34,450 | $ | 11 | 231,150 | $ | 77 | $ | 985,831 | $ | 634,452 | $ | (70,253) | $ | 1,550,180 | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 188,603 | $ | 62 | 34,450 | $ | 11 | 231,954 | $ | 77 | $ | 1,061,173 | $ | 673,855 | $ | (59,185) | $ | 1,675,993 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 3 | — | — | — | 3 | — | 6 | — | — | 6 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | — | — | — | — | (228) | — | — | (4,376) | — | (4,376) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A Common Stock, net of forfeitures | 16 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class C Common Stock, net of forfeitures | — | — | — | — | 2,206 | 1 | 850 | — | — | 851 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | 10,372 | — | — | 10,372 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | — | — | — | — | 77,752 | 9,601 | 87,353 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | 188,622 | $ | 62 | 34,450 | $ | 11 | 233,935 | $ | 78 | $ | 1,072,401 | $ | 747,231 | $ | (49,584) | $ | 1,770,199 | ||||||||||||||||||||||||||||||||||||||||||
See accompanying notes.
4
Under Armour, Inc. and Subsidiaries`
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income (loss) | $ | 77,752 | $ | (589,681) | |||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities | |||||||||||
| Depreciation and amortization | 35,512 | 48,565 | |||||||||
| Unrealized foreign currency exchange rate gain (loss) | 14,702 | 12,976 | |||||||||
| Loss on disposal of property and equipment | 575 | 129 | |||||||||
| Impairment charges | 5,601 | 437,517 | |||||||||
| Amortization of bond premium | 5,273 | 63 | |||||||||
| Stock-based compensation | 10,372 | 10,465 | |||||||||
| Deferred income taxes | (9) | 23,253 | |||||||||
| Changes in reserves and allowances | (9,262) | 10,130 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (170,493) | 27,596 | |||||||||
| Inventories | 49,246 | (59,701) | |||||||||
| Prepaid expenses and other assets | 22,295 | 27,153 | |||||||||
| Other non-current assets | 19,467 | (336,357) | |||||||||
| Accounts payable | (80,092) | (192,651) | |||||||||
| Accrued expenses and other liabilities | (121,841) | 226,315 | |||||||||
| Customer refund liability | (10,949) | (8,334) | |||||||||
| Income taxes payable and receivable | 1,263 | (4,150) | |||||||||
| Net cash provided by (used in) operating activities | (150,588) | (366,712) | |||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of property and equipment | (8,465) | (31,498) | |||||||||
| Sale of property and equipment | 561 | — | |||||||||
| Purchase of businesses | — | (37,343) | |||||||||
| Net cash used in investing activities | (7,904) | (68,841) | |||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from long term debt and revolving credit facility | — | 700,000 | |||||||||
| Payments on long term debt and revolving credit facility | — | (100,000) | |||||||||
| Employee taxes paid for shares withheld for income taxes | (4,301) | (2,732) | |||||||||
| Proceeds from exercise of stock options and other stock issuances | 858 | 1,649 | |||||||||
| Other financing fees | — | 35 | |||||||||
| Net cash provided by (used in) financing activities | (3,443) | 598,952 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (6,900) | 8,761 | |||||||||
| Net increase in (decrease in) cash, cash equivalents and restricted cash | (168,835) | 172,160 | |||||||||
| Cash, cash equivalents and restricted cash | |||||||||||
| Beginning of period | 1,528,515 | 796,008 | |||||||||
| End of period | $ | 1,359,680 | $ | 968,168 | |||||||
| Non-cash investing and financing activities | |||||||||||
| Change in accrual for property and equipment | $ | (40) | $ | (13,081) | |||||||
See accompanying notes.
5
Under Armour, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
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.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Under Armour Inc. and its wholly owned subsidiaries. Certain information in footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim consolidated financial statements. These unaudited condensed consolidated financial statements are presented in U.S. Dollars. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement of the financial position and results of operations were included. Intercompany balances and transactions were eliminated upon consolidation. The unaudited condensed consolidated balance sheet as of March 31, 2021 is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 ("Fiscal 2020"), filed with the SEC on February 24, 2021 ("Annual Report on Form 10-K for Fiscal 2020"), which should be read in conjunction with these unaudited condensed consolidated financial statements. The unaudited results for the three months ended March 31, 2021, are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2021 ("Fiscal 2021"), or any other portions thereof.
Connected Fitness
Prior to January 1, 2021, the Company's previously reported "Connected Fitness" segment was composed of digital subscription and advertising conducted through various platforms, predominantly the MyFitnessPal, MapMyFitness, consisting of applications such as MapMyRun and MapMyRide (collectively "MMR"), and Endomondo platforms. While the Company continues to operate the MMR platforms, MyFitnessPal was sold in December 2020 and Endomondo was wound down in December 2020 as part of the Company's 2020 restructuring plan. As a result of these changes, starting in the first quarter of Fiscal 2021 the Company no longer reports Connected Fitness as a discrete reportable segment. The operating results of MMR are now included within the Company’s Corporate Other segment. Where applicable, all prior period balances that used to reflect Connected Fitness discretely have been recast to be included within the Corporate Other reportable segment, to conform with current period presentation. Such reclassifications did not affect total consolidated net revenues, consolidated income from operations or consolidated net income.
Management Estimates and COVID-19 Update
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates, judgments and assumptions are evaluated on an on-going basis. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable at that time; however, actual results could differ from these estimates.
Further, COVID-19 continues to significantly impact the global economy. As the impacts of the pandemic continue to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment. The extent to which the evolving pandemic impacts the Company's financial statements will depend on a number of factors including, but not limited to, any new information that may emerge concerning the severity of COVID-19 and the actions that governments may take to contain the virus or treat its impact. While the Company believes it has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of this reporting date, the Company may experience further impacts based on long-term effects on the Company's customers and the countries in which the
6
Company operates. Please see the risk factors discussed in Part I, Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for Fiscal 2020.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. The Company's restricted cash is reserved for payments related to claims for its captive insurance program, which is included in prepaid expenses and other current assets on the Company's unaudited condensed consolidated balance sheets.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets to the unaudited condensed consolidated statements of cash flows:
| (In thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Cash and cash equivalents | $ | 1,348,737 | $ | 1,517,361 | $ | 959,318 | |||||||||||
| Restricted cash | 10,943 | 11,154 | 8,850 | ||||||||||||||
| Total Cash, cash equivalents and restricted cash | $ | 1,359,680 | $ | 1,528,515 | $ | 968,168 | |||||||||||
Concentration of Credit Risk
Financial instruments that subject the Company to significant concentration of credit risk consist primarily of accounts receivable. The majority of the Company’s accounts receivable is due from large wholesale customers. None of the Company's customers accounted for more than 10% of accounts receivable as of March 31, 2021, December 31, 2020 and March 31, 2020, respectively. For the three months ended March 31, 2021 and 2020, no customer accounted for more than 10% of the Company's net revenues. The Company regularly evaluates the credit risk of the large wholesale customers which make up the majority of the Company's accounts receivable. Refer to the "Credit Losses - Allowance for Doubtful Accounts" below for a discussion of the evaluation of credit losses.
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 sale of products within the Company's wholesale channels, recorded within accounts receivable, net on the Company's unaudited condensed consolidated balance sheet. The Company also has other receivables, including receivables from licensing arrangements recorded in prepaid expenses and other current assets on the Company's unaudited condensed consolidated balance sheet.
Credit is extended to customers based on a credit review. The credit review considers each customer’s financial condition, including a review of the customers established credit rating or, if an established customer rating is not available, then the Company's assessment of the customer’s creditworthiness is based on their financial statements, local industry practices, and business strategy. A credit limit and terms of credit are established for each customer based on the outcome of this review. The Company actively monitors ongoing credit exposure through review of customer balances against terms and payments against due dates. To mitigate credit risk, the Company may require customers to provide security in the form of guarantees, letters of credit, or prepayment. The Company is also exposed to credit losses through credit card receivables associated with the sale 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 expected 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.
7
The following table illustrates the activity in the Company's allowance for doubtful accounts:
| (In thousands) | Balance as of December 31, 2020 | Increases (decreases) to Costs and Expenses | Write-Offs Net of Recoveries | Balance as of March 31, 2021 | ||||||||||
| Allowance for doubtful accounts - within accounts receivable, net | $ | 20,350 | $ | (1,316) | $ | (45) | $ | 18,989 | ||||||
| Allowance for doubtful accounts - within prepaid expenses and other current assets | $ | 7,029 | $ | — | $ | — | $ | 7,029 | ||||||
The allowance for doubtful accounts was established with information available as of March 31, 2021, including reasonable and supportable estimates of future risk.
For the three months ended March 31, 2021, the decrease in the reserve is primarily due to the collection of account balances that were previously reserved for.
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 revenues and revenues from digital subscriptions and advertising.
The Company recognizes revenue when it satisfies its performance obligations by transferring control of promised products or services to its customers, which occurs either at a point in time or over time, depending on when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that the Company ultimately expects to be entitled to in exchange for the products or services and is subject to an overall constraint that a significant revenue reversal will not occur in future periods. Sales taxes imposed on the Company’s revenues from product sales are presented on a net basis on the unaudited condensed 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
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amount, the minimum is recognized as revenue over the contractual period, if all other criteria of revenue recognition have been met. This sales-based output measure of progress and pattern of recognition best represents the value transferred to the licensee over the term of the arrangement, as well as the amount of consideration that the Company is entitled to receive in exchange for providing access to its trademarks.
Revenue from digital subscriptions is recognized on a gross basis and is recognized over the term of the subscription. The Company receives payments in advance of revenue recognition for subscriptions and these payments are recorded as contract liabilities in the Company's unaudited condensed consolidated balance sheet. Related commission cost is included in selling, general and administrative expense in the unaudited condensed consolidated statement of operations. Revenue from digital advertising is recognized as the Company satisfies performance obligations pursuant to customer insertion orders.
The Company records reductions to revenue for estimated customer returns, allowances, markdowns and discounts. The Company bases its estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns and allowances that have not yet been received by the Company. The actual amount of customer returns and allowances, which is inherently uncertain, may differ from the Company’s estimates. If the Company determines that actual or expected returns or allowances are significantly higher or lower than the reserves it established, it would record a reduction or increase, as appropriate, to net sales in the period in which it makes such a determination. Provisions for customer specific discounts are based on negotiated arrangements with certain major customers. Reserves for returns, allowances, markdowns and discounts are included within customer refund liability and the value of inventory associated with reserves for sales returns are included within prepaid expenses and other current assets on the unaudited condensed consolidated balance sheet. At a minimum, the Company reviews and refines these estimates on a quarterly basis.
The following table presents the customer refund liability, as well as the associated value of inventory for the periods indicated:
| (In thousands) | Balance as of March 31, 2021 | Balance as of December 31, 2020 | Balance as of March 31, 2020 | ||||||||||||||
| Customer refund liability | $ | 191,979 | $ | 203,399 | $ | 208,172 | |||||||||||
| Inventory associated with the reserves | $ | 54,540 | $ | 57,867 | $ | 63,339 | |||||||||||
Contract Liabilities
Contract liabilities are recorded when a customer pays consideration, or the Company has a right to an amount of consideration that is unconditional, before the transfer of a good or service to the customer, and thus represent the Company's obligation to transfer the good or service to the customer at a future date. The Company's contract liabilities primarily consist of payments received in advance of revenue recognition for subscriptions for the Company's digital fitness applications and royalty arrangements, included in other current liabilities, and gift cards, included in accrued expenses, on the Company's unaudited condensed consolidated balance sheets. As of March 31, 2021, December 31, 2020, and March 31, 2020, contract liabilities were $25.5 million, $26.7 million and $58.5 million, respectively.
For the three months ended March 31, 2021, the Company recognized $4.3 million of revenue that was previously included in contract liabilities as of December 31, 2020. For the three months ended March 31, 2020, the Company recognized $20.3 million of revenue that was previously included in contract liabilities as of December 31, 2019. The change in the contract liabilities balance primarily results from the timing differences between the Company's satisfaction of performance obligations and the customer's payment. Commissions related to subscription revenue are capitalized and recognized over the subscription period.
Shipping and Handling Costs
The Company charges customers shipping and handling fees based on contractual terms, which are recorded in net revenues. The Company incurs freight costs associated with shipping goods to customers. These costs are recorded as a component of cost of goods sold.
The Company also incurs outbound handling costs associated with preparing goods to ship to customers and certain costs to operate the Company’s distribution facilities. These costs are recorded as a component of selling, general and administrative expenses and were $23.3 million and $14.9 million for the three months ended March 31, 2021 and 2020, respectively.
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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. The Company recorded its allocable share of Dome’s net income (loss) of $1.8 million and $(1.4) million for the three months ended March 31, 2021 and 2020, respectively, within income (loss) from equity method investment on the unaudited condensed consolidated statements of operations and as an adjustment to the invested balance within other long term assets on the unaudited condensed consolidated balance sheets. As of March 31, 2021, the carrying value of the Company's investment in Dome was $1.8 million.
In addition to the investment in Dome, the Company has a license agreement with Dome. The Company recorded license revenues from Dome of $6.8 million and $6.7 million for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, December 31, 2020, and March 31, 2020, the Company had $5.4 million, $22.9 million, and $7.0 million, respectively, in licensing receivables outstanding, recorded in the prepaid expenses and other current assets line item within the Company's unaudited condensed consolidated balance sheets.
On March 2, 2020, as part of the Company's acquisition of Triple Pte. Ltd., the Company assumed 49.5% of common stock ownership in UA Sports (Thailand) Co., Ltd. (“UA Sports Thailand”). The Company accounts for its investment in UA Sports Thailand under the equity method, given it has the ability to exercise significant influence, but not control, over UA Sports Thailand. For the three months ended March 31, 2021 and 2020, respectively, the Company recorded the allocable share of UA Sports Thailand’s net income of $0.2 million and net loss of $0.4 million, respectively, within income (loss) from equity method investment on the unaudited condensed consolidated statements of operations and as an adjustment to the invested balance within other long term assets on the unaudited condensed consolidated balance sheets. As of March 31, 2021, the carrying value of the Company’s investment in UA Sports Thailand was $5.2 million.
Recently Issued Accounting Standards
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06 "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)" ("ASU 2020-06"). The amendment in this update simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. The update also requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The guidance is effective for interim and annual periods beginning after December 15, 2021. The Company is currently evaluating this guidance to determine the impact it may have on its unaudited condensed 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 and then issued a subsequent amendment to the initial guidance under ASU 2021-01 (collectively Topic 848). Topic 848 provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, derivatives and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, derivatives and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. Topic 848 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 unaudited condensed consolidated financial statements.
NOTE 3. RESTRUCTURING AND RELATED IMPAIRMENT CHARGES
During Fiscal 2020, the Company's Board of Directors approved a restructuring plan ranging between $550 million to $600 million in costs ("2020 restructuring plan") designed to rebalance the Company’s cost base to further improve profitability and cash flow generation.
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The restructuring and related charges primarily consist of approximately:
•$219 million of cash restructuring charges, comprised of approximately: $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 charge of $291 million related to the Company’s New York City flagship store and $90 million related to intangibles and other asset related impairments.
The Company recorded $7.1 million and $301.1 million of restructuring and related impairment charges for the three months ended March 31, 2021 and 2020, respectively under the 2020 restructuring plan. As of March 31, 2021, $479.8 million of restructuring and related impairment charges under the 2020 restructuring plan have been recorded to date.
Restructuring and related impairment charges and recoveries require the Company to make certain judgments and estimates regarding the amount and timing as to when these charges or recoveries occur. The estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, the Company conducts an evaluation of the related liabilities and expenses and revises its assumptions and estimates as appropriate, as new or updated information becomes available.
The following table illustrates the costs recorded during the three months ended March 31, 2021, as well as the Company's current estimates of the amount expected to be incurred in connection with the 2020 restructuring plan:
| Restructuring and Impairment Charges Recorded | Estimated Restructuring and Impairment Charges (1) | ||||||||||||||||||||||
| (In thousands) | Three months ended March 31, 2020 | Three months ended March 31, 2021 | Remaining to be Incurred | Total to be Incurred under plan | |||||||||||||||||||
| Costs recorded in cost of goods sold: | |||||||||||||||||||||||
| Contract-based royalties | $ | — | $ | — | $ | — | $ | 11,608 | |||||||||||||||
| Inventory write-offs | — | — | 4,500 | 5,268 | |||||||||||||||||||
| Total costs recorded in cost of goods sold | — | — | 4,500 | 16,876 | |||||||||||||||||||
| Net costs (recoveries) recorded in restructuring and related impairment charges: | |||||||||||||||||||||||
| Property and equipment impairment | 7,094 | — | 8,342 | 37,622 | |||||||||||||||||||
| Intangible asset impairment | — | — | — | 4,351 | |||||||||||||||||||
| Right-of-use asset impairment | 290,813 | — | — | 293,495 | |||||||||||||||||||
| Employee related costs | — | (584) | 2,005 | 30,000 | |||||||||||||||||||
| Contract exit costs (2) | — | 434 | 86,242 | 165,684 | |||||||||||||||||||
| Other asset write off | — | 1,298 | 16,300 | 30,672 | |||||||||||||||||||
| Other restructuring costs | 3,182 | 5,965 | 2,771 | 21,300 | |||||||||||||||||||
| Total costs recorded in restructuring and impairment charges | 301,089 | 7,113 | 115,660 | 583,124 | |||||||||||||||||||
| Total restructuring and impairment charges | $ | 301,089 | $ | 7,113 | $ | 120,160 | $ | 600,000 | |||||||||||||||
(1) Estimated restructuring and impairment charges reflect the high-end of the range of the estimated charges expected by the Company in connection with the 2020 restructuring plan.
(2) Contract exit costs are primarily comprised of proposed lease exits of certain brand and factory house stores and office facilities, and proposed marketing and other contract exits.
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All restructuring and related impairment charges are included in the Company's Corporate Other segment.
For the three months ended March 31, 2021, approximately $2.6 million of the charges are North America related, $4.2 million are Latin America related, and $0.2 million are Asia-Pacific related.
For the three months ended March 31, 2020, the charges were primarily North America related.
A summary of the activity in the restructuring reserve related to the Company's 2020 restructuring plan, as well as prior restructuring plans in 2018 and 2017 are as follows:
| (In thousands) | Employee Related Costs | Contract Exit Costs | Other Restructuring Related Costs | ||||||||||||||
| Balance at January 1, 2021 | $ | 12,868 | $ | 61,642 | $ | 6,098 | |||||||||||
| Net additions (recoveries) charged to expense | (584) | 3,581 | 520 | ||||||||||||||
| Cash payments charged against reserve | (2,922) | (22,789) | (3,005) | ||||||||||||||
| Foreign exchange and other | 155 | 735 | 77 | ||||||||||||||
| Balance at March 31, 2021 | $ | 9,517 | $ | 43,169 | $ | 3,690 | |||||||||||
During the three months ended March 31, 2021, the Company also incurred net costs of $3.6 million associated with abandoned facilities and the write off of fixed assets under the 2020 restructuring plan.
NOTE 4. LEASES
The Company enters into operating leases both domestically and internationally, to lease certain warehouse space, office facilities, space for its brand and factory house stores and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2035, excluding extensions at the Company's option, and include provisions for rental adjustments.
The Company accounts for a contract as a lease when it has the right to direct the use of the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its right-of-use ("ROU") assets and lease liabilities at the lease commencement date and thereafter if modified. ROU assets represent the Company’s right to control the underlying assets under lease, over the contractual term. ROU assets and lease liabilities are recognized on the unaudited condensed consolidated balance sheets based on the present value of future minimum lease payments to be made over the lease term. ROU assets and lease liabilities are established on the unaudited condensed consolidated balance sheets for leases with an expected term greater than one year. Short-term lease payments were not material for the three months ended March 31, 2021 and 2020.
As the rate implicit in a lease is not readily determinable, the Company uses its secured incremental borrowing rate to determine the present value of the lease payments. The Company calculates the incremental borrowing rate based on the current market yield curve and adjusts for foreign currency impacts for international leases.
Fixed lease costs are included in the recognition of ROU assets and lease liabilities. Variable lease costs are not included in the measurement of the lease liability. These variable lease payments are recognized in the unaudited condensed 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.
As a result of the impacts of COVID-19, the Company sought concessions from landlords for certain leases of brand and factory house stores in the form of rent deferrals or rent waivers. Consistent with updated guidance from the FASB in April 2020, the Company elected to account for treating these concessions as though the enforceable rights and obligations to the deferrals existed in the respective contracts at lease inception and will not account for the concessions as lease modifications, unless the concession results in a substantial change in the Company's obligations.
The Company's rent deferrals had no impact to rent expense during the three months ended March 31, 2021 and amounts deferred and payable in future periods have been included in short term lease liability on the Company's unaudited condensed consolidated balance sheet as of March 31, 2021. The Company's rent waivers,
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which were recorded as a reduction of rent expense, were not material for the three months ended March 31, 2021 and 2020, respectively.
Lease Costs and Other Information
The Company recognizes lease expense on a straight-line basis over the lease term.
The following table illustrates operating and variable lease costs, included in selling, general and administrative expenses within the Company's unaudited condensed consolidated statement of operations, for the periods indicated:
| Three months ended March 31, | ||||||||
| (In thousands) | 2021 | 2020 | ||||||
| Operating lease costs | $ | 34,935 | $ | 37,872 | ||||
| Variable lease costs | $ | 2,920 | $ | 1,986 | ||||
There are no residual value guarantees that exist, and there are no restrictions or covenants imposed by leases. The Company rents or subleases excess office facilities and warehouse space to third parties. Sublease income is not material.
The weighted average remaining lease term and discount rate for the periods indicated below were as follows:
| March 31, 2021 | December 31, 2020 | March 31, 2020 | |||||||||||||||
| Weighted average remaining lease term (in years) | 9.05 | 9.12 | 9.64 | ||||||||||||||
| Weighted average discount rate | 3.82 | % | 3.83 | % | 3.99 | % | |||||||||||
Supplemental Cash Flow Information
The following table presents supplemental information relating to cash flow arising from lease transactions:
| Three months ended March 31, | ||||||||
| (In thousands) | 2021 | 2020 | ||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash outflows from operating leases | $ | 45,909 | $ | 36,547 | ||||
| Leased assets obtained in exchange for new operating lease liabilities | $ | 4,074 | $ | 72,963 | ||||
Maturity of Lease Liabilities
The following table presents the future minimum lease payments under our operating lease liabilities as of March 31, 2021:
| (In thousands) | |||||
| 2021 | $ | 150,290 | |||
| 2022 | 163,805 | ||||
| 2023 | 143,554 | ||||
| 2024 | 124,776 | ||||
| 2025 | 96,576 | ||||
| 2026 and thereafter | 467,029 | ||||
| Total lease payments | $ | 1,146,030 | |||
| Less: Interest | 183,820 | ||||
| Total present value of lease liabilities (1) | $ | 962,210 | |||
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(1) Amounts above reflect lease liabilities associated with the Company's New York City flagship store, in which the lease commenced on March 1, 2020. See Note 3 to the Company's Annual Report on Form 10-K for Fiscal 2020 for a discussion of the impairment associated with this ROU lease asset.
As of March 31, 2021, the Company has additional operating lease obligations that have not yet commenced of approximately $5.5 million which are not reflected in the table above.
NOTE 5. 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. As of March 31, 2021 and December 31, 2020, there were no amounts outstanding under the revolving credit facility, respectively. As of March 31, 2020, there was $600.0 million outstanding under the revolving credit facility (prior to its amendment), which the Company had borrowed as a precautionary measure in connection with the uncertain conditions created by COVID-19 in early calendar year 2020.
Except during the covenant suspension period (as defined below), at the Company's request and the lender's consent, commitments under the amended credit agreement may be increased by up to $300.0 million in aggregate, subject to certain conditions as set forth in the amended credit agreement. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time the Company seeks to incur such borrowings.
Borrowings, if any, under the revolving credit facility have maturities of less than one year. Up to $50.0 million of the facility may be used for the issuance of letters of credit. As of March 31, 2021, there was $4.3 million of letters of credit outstanding. (December 31, 2020 and March 31, 2020 had $4.3 million and $5.0 million, respectively).
The obligations of the Company under the amended credit agreement are guaranteed by certain domestic significant subsidiaries of Under Armour, Inc., subject to customary exceptions (the “subsidiary guarantors”) and primarily secured by a first-priority security interest in substantially all of the assets of Under Armour, Inc. and the subsidiary guarantors, excluding real property, capital stock in and debt of subsidiaries of Under Armour Inc. holding certain real property and other customary exceptions.
The amended credit agreement contains negative covenants that, subject to significant exceptions, limit the Company's ability to, among other things: incur additional secured and unsecured indebtedness; pledge the assets as security; make investments, loans, advances, guarantees and acquisitions, (including investments in and loans to non-guarantor subsidiaries); undergo fundamental changes; sell assets outside the ordinary course of business; enter into transactions with affiliates; and make restricted payments (including a temporary suspension of certain voluntary restricted payments during the covenant suspension period (as defined below)).
The Company is also required to comply with specific consolidated leverage and interest coverage ratios during specified periods. Under the amended credit agreement, the Company is required to maintain a ratio of consolidated EBITDA, to consolidated interest expense of not less than 3.50 to 1.0 (the "interest coverage covenant") and the Company is not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.0 (the "leverage covenant"), as described in more detail in the amended credit agreement. However, 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 quarters ending 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).
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•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 March 31, 2021, the Company was in compliance with the applicable covenants.
In addition, the amended credit agreement contains events of default that are customary for a facility of this nature and similar to the prior credit agreement, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the amended credit agreement, will be considered an event of default under the amended credit agreement.
During the covenant suspension period, the applicable margin for loans 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. 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. For the three months ended March 31, 2021 and 2020, the weighted average interest rate under the revolving credit facility borrowings was nil and 3.2%, respectively. As of March 31, 2021, the commitment fee was 15.0 basis points. The Company incurred and deferred $7.2 million in financing costs in connection with the amended credit agreement.
1.50% Convertible Senior Notes
In May 2020, the Company issued $500.0 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at the rate of 1.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The Convertible Senior Notes will mature on June 1, 2024, unless earlier converted in accordance with their terms, redeemed in accordance with their terms or repurchased.
The net proceeds from the offering (including the net proceeds from the exercise of the over-allotment option) was $488.8 million, after deducting the initial purchasers’ discount and estimated offering expenses paid by the Company, of which the Company used $47.9 million to pay the cost of the capped call transactions described below. The Company utilized $439.9 million to repay indebtedness that was outstanding under its revolving credit facility at the time, and to pay related fees and expenses.
The Convertible Senior Notes are not secured and are not guaranteed by any of the Company’s subsidiaries. The indenture governing the Convertible Senior Notes does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries.
The Convertible Senior Notes are convertible into cash, shares of the Company’s Class C common stock or a combination of cash and shares of Class C common stock, at the Company’s election, as described further below. The initial conversion rate is 101.8589 shares of the Company’s Class C common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $9.82 per share of Class C common stock), subject to adjustment if certain events occur. Prior to the close of business on the business day immediately preceding January 1, 2024, holders may (at their option) convert their Convertible Senior Notes only upon satisfaction of one or more of the following conditions:
•during any calendar quarter commencing after the calendar quarter ended on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s Class C common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days
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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 business day period after any consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class C common stock and the conversion rate on each such trading day;
•upon the occurrence of specified corporate events or distributions on the Company’s Class C common stock; or
•if the Company calls any Convertible Senior Notes for redemption prior to the close of business on the business day immediately preceding January 1, 2024.
On or after January 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Senior Notes at the conversion rate at any time irrespective of the foregoing conditions.
On or after December 6, 2022, the Company may redeem for cash all or any part of the Convertible Senior Notes, at its option, if the last reported sale price of the Company’s Class C common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If the Company undergoes a fundamental change (as defined in the indenture governing the Convertible Senior Notes) prior to the maturity date, subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Convertible Senior Notes in principal amounts of $1,000 or an integral multiple thereof at a price which will be equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Concurrently with the offering of the Convertible Senior Notes, the Company entered into privately negotiated capped call transactions with JPMorgan Chase Bank, National Association, HSBC Bank USA, National Association and Citibank, N.A. (the “option counterparties”). The capped call transactions are expected generally to reduce potential dilution to the Company’s Class C common stock upon any conversion of Convertible Senior Notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted Convertible Senior Notes upon any conversion thereof, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactions is initially $13.4750 per share of the Company’s Class C common stock, representing a premium of 75% above the last reported sale price of the Company’s Class C common stock on May 21, 2020, and is subject to certain adjustments under the terms of the capped call transactions.
The Convertible Senior Notes contain a cash conversion feature, and as a result, the Company has separated it into liability and equity components. The Company valued the liability component based on its borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which is recognized as a debt discount, was valued as the difference between the face value of the Convertible Senior Notes and the fair value of the liability component.
In connection with the Convertible Senior Notes issuance, the Company incurred deferred financing costs of $12.3 million, primarily related to fees paid to the initial purchasers of the offering, as well as legal and accounting fees. These costs were allocated on a pro rata basis, with $10.0 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 the effective interest rate method. The effective interest rate for the three months ended March 31, 2021 was 6.8%.
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The following table illustrates the components of the Convertible Senior Notes for the periods indicated:
| Balance As of | ||||||||
| (In thousands) | March 31, 2021 | December 31, 2020 | ||||||
| Liability component | ||||||||
| Principal | $ | 500,000 | $ | 500,000 | ||||
| Unamortized debt discount | (73,821) | (79,031) | ||||||
| Unamortized issuance costs | (7,879) | (8,501) | ||||||
| Net carrying amount | $ | 418,300 | $ | 412,468 | ||||
| Equity component, net of issuance costs | $ | 71,646 | $ | 88,672 | ||||
The following table illustrates the components of interest expense relating to the Convertible Senior Notes. There was no such comparable interest expense recorded for the same period in the prior fiscal year as the Convertible Senior Notes were not yet outstanding.
| Three months ended March 31, | |||||
| (In thousands) | 2021 | ||||
| Coupon interest | $ | 1,875 | |||
| Non-cash amortization of debt discount | 5,210 | ||||
| Amortization of deferred financing costs | 622 | ||||
| Convertible senior notes interest expense | $7,707 | ||||
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.
Interest Expense
Interest expense, net, was $14.1 million and $6.0 million for the three months ended March 31, 2021 and 2020, respectively, inclusive of amounts related to the Senior Convertible Notes, as detailed above. Interest expense includes amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long term debt facilities.
The Company monitors the financial health and stability of its lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets, lenders could be negatively impacted in their ability to perform under these facilities.
NOTE 6. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in litigation and other proceedings, including matters related to commercial and intellectual property disputes, as well as trade, regulatory and other claims related to its business. Other than as described below, the Company believes that all current proceedings are routine in nature and incidental to the conduct of its business, and that the ultimate resolution of any such proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
Under Armour Securities Litigation
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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
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District Court’s order also consolidated the Patel and Waronker cases into the Consolidated Securities Action and appointed Aberdeen as lead plaintiff over the Consolidated Securities Action.
On October 14, 2020, Aberdeen, along with named plaintiffs Monroe and KBC Asset Management NV, filed a third amended complaint (the “TAC”) in the Consolidated Securities Action, asserting claims under Sections 10(b) and 20(a) of the Exchange Act against the Company and Mr. Plank and under Section 20A of the Exchange Act against Mr. Plank. The TAC alleges that the defendants supposedly concealed purportedly declining consumer demand for certain of the Company's products between the third quarter of 2015 and the fourth quarter of 2016 by making allegedly false and misleading statements regarding the Company’s performance and future prospects and by engaging in undisclosed and allegedly improper sales and accounting practices, including shifting sales between quarterly periods allegedly to appear healthier. The TAC also alleges that the defendants purportedly failed to disclose that the Company was under investigation by and cooperating with DOJ and the SEC since July 2017. The class period identified in the TAC is September 16, 2015 through November 1, 2019.
On December 4, 2020, the Company and Mr. Plank filed a motion to dismiss the TAC for failure to state a claim. That motion is currently pending.
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
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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.
In February 2021, the court issued notices of contemplated dismissal for lack of jurisdiction without prejudice pursuant to Maryland Rule 2-507 in the Klein matter (as to the individual defendants and Under Armour) and in the Cordell matter (as to the individual defendants). Consistent with these notices, in March 2021, the court issued (i) an order dismissing the Klein matter as to the individual defendants and Under Armour for lack of jurisdiction without prejudice; and (ii) an order dismissing the Cordell matter as to the individual defendants for lack of jurisdiction without prejudice. On March 16, 2021, the court issued a notice of contemplated dismissal for lack of jurisdiction without prejudice pursuant to Maryland Rule 2-507 in the Salo matter (as to the individual defendants and Under Armour). On March 23, 2021, the plaintiff in the Salo matter filed a motion to defer entry of an order of dismissal. That motion is currently pending.
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.
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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”). In February 2021, counsel for the Smith and Olin plaintiffs, on the one hand, and counsel for the Andersen and Viskovich plaintiffs, on the other hand, filed motions seeking to be appointed as lead counsel in the Federal Court Derivative Action. These motions are currently pending.
The Company believes that the claims asserted in the Federal Court Derivative Action are without merit and intends to defend this matter vigorously. However, because of the inherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of the outcome of this matter.
Wells Notices
On May3, 2021, the Company announced that it entered into a settlement with the SEC resolving the previously announced SEC investigation related to disclosure and the impact of certain “pull forward” sales for the third quarter of 2015 through the fourth quarter of 2016. The Company agreed to pay a civil monetary penalty of $9.0 million and to cease and desist from committing or causing any violations and any future violations of Section 17(a)(2) and (a)(3) of the Securities Act and Sections 13(a) or the Exchange Act and specific rules thereunder while neither admitting nor denying the SEC’s findings. The SEC Staff has confirmed that it does not intend to recommend that any enforcement action be taken against the Company’s Executive Chairman, Chief Financial Officer or any other member of management in connection with this investigation.This settlement resolves all outstanding SEC claims with respect to the investigation that was the subject of the previously disclosed Wells Notices received by the Company and its Executive Chairman and Chief Financial Officer.
As previously announced, the Company had also received requests for documents and information from the U.S. Department of Justice (the “DOJ”) arising out of substantially the same matters. The Company has not received any requests from the DOJ since the second quarter of 2020, and although there can be no assurance, absent new information, the Company does not currently anticipate additional engagement with the DOJ relating to this matter.
NOTE 7. 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:
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| 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. | ||||
Our financial assets (liabilities) measured at fair value on a recurring basis consisted of the following types of instruments as of March 31, 2021, December 31, 2020 and March 31, 2020:
| March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||||||||||||
| Derivative foreign currency contracts (see Note 8) | $ | — | $ | (13,173) | $ | — | $ | — | $ | (22,122) | $ | — | $ | — | $ | 35,971 | $ | — | ||||||||||||||||||||||||||||||||||||||
| TOLI policies held by the Rabbi Trust | $ | — | $ | 8,001 | $ | — | $ | — | $ | 7,697 | $ | — | $ | — | $ | 5,471 | $ | — | ||||||||||||||||||||||||||||||||||||||
| Deferred Compensation Plan obligations | $ | — | $ | (14,641) | $ | — | $ | — | $ | (14,314) | $ | — | $ | — | $ | (10,443) | $ | — | ||||||||||||||||||||||||||||||||||||||
Fair values of the financial assets and liabilities listed above are determined using inputs that use as their basis readily observable market data that are actively quoted and are validated through external sources, including third-party pricing services and brokers. The foreign currency contracts represent unrealized gains and losses on derivative contracts, which is the net difference between the U.S. dollar value to be received or paid at the contracts’ settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current market exchange rate. The fair value of the trust owned life insurance (“TOLI”) policies held by the Rabbi Trust are based on the cash-surrender value of the life insurance policies, which are invested primarily in mutual funds and a separately managed fixed income fund. These investments are initially made in the same funds and purchased in substantially the same amounts as the selected investments of participants in the Under Armour, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), which represent the underlying liabilities to participants in the Deferred Compensation Plan. Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments.
As of March 31, 2021 and December 31, 2020 the fair value of the Company's Convertible Senior Notes was $982.9 million and $828.2 million, respectively. The Company did not have Convertible Senior Notes as of March 31, 2020.
As of March 31, 2021, December 31, 2020, and March 31, 2020, the fair value of the Company's Senior Notes was $602.2 million, $602.6 million and $551.5 million, respectively.
The carrying value of the Company's other long term debt approximated its fair value as of March 31, 2021, December 31, 2020 and March 31, 2020, respectively. 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.
NOTE 8. RISK MANAGEMENT AND DERIVATIVES
The Company is exposed to global market risks, including the effects of changes in foreign currency and interest rates. The Company uses derivative instruments to manage financial exposures that occur in the normal course of business and does not hold or issue derivatives for trading or speculative purposes.
The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to forecasted cash flows and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships.
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The Company's foreign exchange risk management program consists of designated cash flow hedges and undesignated hedges. As of March 31, 2021, the Company has hedge instruments primarily for:
•British Pound/U.S. Dollar;
•Euro/U.S. Dollar;
•U.S. Dollar/Chinese Renminbi;
•U.S. Dollar/Canadian Dollar;
•U.S. Dollar/Mexican Peso; and
•U.S. Dollar/Japanese Yen currency pairs.
All derivatives are recognized on the unaudited condensed consolidated balance sheets at fair value and classified based on the instrument’s maturity date.
The following table presents the fair values of derivative instruments within the unaudited condensed consolidated balance sheets. Refer to Note 7 of the unaudited condensed consolidated financial statements for a discussion of the fair value measurements.
| (In thousands) | Balance Sheet Classification | March 31, 2021 | December 31, 2020 | March 31, 2020 | |||||||||||||||||||
| Derivatives designated as hedging instruments under ASC 815 | |||||||||||||||||||||||
| Foreign currency contracts | Other current assets | $ | 1,759 | $ | — | $ | 35,087 | ||||||||||||||||
| Foreign currency contracts | Other long term assets | 727 | — | 4,791 | |||||||||||||||||||
| Total derivative assets designated as hedging instruments | $ | 2,486 | $ | — | $ | 39,878 | |||||||||||||||||
| Foreign currency contracts | Other current liabilities | $ | 13,021 | $ | 17,601 | $ | 789 | ||||||||||||||||
| Foreign currency contracts | Other long term liabilities | 3,331 | 6,469 | — | |||||||||||||||||||
| Total derivative liabilities designated as hedging instruments | $ | 16,352 | $ | 24,070 | $ | 789 | |||||||||||||||||
| Derivatives not designated as hedging instruments under ASC 815 | |||||||||||||||||||||||
| Foreign currency contracts | Other current assets | $ | 5,114 | $ | 2,384 | $ | 8,582 | ||||||||||||||||
| Total derivative assets not designated as hedging instruments | $ | 5,114 | $ | 2,384 | $ | 8,582 | |||||||||||||||||
| Foreign currency contracts | Other current liabilities | $ | 1,087 | $ | 6,464 | $ | 1,740 | ||||||||||||||||
| Total derivative liabilities not designated as hedging instruments | $ | 1,087 | $ | 6,464 | $ | 1,740 | |||||||||||||||||
The following table presents the amounts in the unaudited condensed consolidated statements of operations in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items.
| Three months ended March 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| (In thousands) | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | |||||||||||||
| Net revenues | $ | 1,257,195 | $ | (3,147) | $ | 930,240 | $ | 1,788 | |||||||||
| Cost of goods sold | $ | 628,554 | $ | (2,218) | $ | 499,256 | $ | 1,117 | |||||||||
| Interest expense, net | $ | (14,137) | $ | (9) | $ | (5,960) | $ | (9) | |||||||||
| Other income (expense), net | $ | (7,180) | $ | — | $ | 1,534 | $ | 21 | |||||||||
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The following tables present the amounts affecting the unaudited statements of comprehensive income (loss).
| (In thousands) | Balance as of December 31, 2020 | Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | Amount of gain (loss) reclassified from other comprehensive income (loss) into income | Balance as of March 31, 2021 | ||||||||||
| Derivatives designated as cash flow hedges | ||||||||||||||
| Foreign currency contracts | $ | (25,908) | $ | 4,656 | $ | (5,365) | $ | (15,886) | ||||||
| Interest rate swaps | (541) | — | (9) | (531) | ||||||||||
| Total designated as cash flow hedges | $ | (26,449) | $ | 4,656 | $ | (5,374) | $ | (16,417) | ||||||
| (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 March 31, 2020 | ||||||||||
| Derivatives designated as cash flow hedges | ||||||||||||||
| Foreign currency contracts | $ | (6,005) | $ | 46,876 | $ | 2,905 | $ | 37,965 | ||||||
| Interest rate swaps | (577) | — | (9) | (568) | ||||||||||
| Total designated as cash flow hedges | $ | (6,582) | $ | 46,876 | $ | 2,896 | $ | 37,397 | ||||||
The following table presents the amounts in the unaudited condensed consolidated statements of operations in which the effects of undesignated derivative instruments are recorded and the effects of fair value hedge activity on these line items.
| Three months ended March 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| (In thousands) | Total | Amount of Gain (Loss) on Fair Value Hedge Activity | Total | Amount of Gain (Loss) on Fair Value Hedge Activity | |||||||||||||
| Other income (expense), net | $ | (7,180) | $ | (2,737) | $ | 1,534 | $ | (2,826) | |||||||||
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 March 31, 2021, December 31, 2020 and March 31, 2020, the aggregate notional value of the Company's outstanding cash flow hedges was $688.9 million, $812.5 million and $681.5 million, respectively, with contract maturities ranging from 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 5 of the unaudited condensed consolidated financial statements for a discussion of long term debt. As of March 31, 2021, December 31, 2020 and March 31, 2020, the Company had no outstanding interest rate swap contracts, respectively.
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
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hedged transaction affects current earnings. Effective hedge results are classified in the unaudited condensed 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 unaudited condensed consolidated balance sheets. These undesignated instruments are recorded at fair value as a derivative asset or liability on the unaudited condensed 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 March 31, 2021, December 31, 2020 and March 31, 2020, the total notional value of the Company's outstanding undesignated derivative instruments was $317.7 million, $313.1 million and $303.0 million, respectively.
Credit Risk
The Company enters into derivative contracts with major financial institutions with investment grade credit ratings and is exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the derivative contracts. However, the Company monitors the credit quality of these financial institutions and considers the risk of counterparty default to be minimal.
NOTE 9. PROVISION FOR INCOME TAXES
Provision for Income Taxes
The Company computes its quarterly income tax provision under the effective tax rate method by applying an estimated anticipated annual effective rate to our year-to-date income, except for significant unusual or extraordinary transactions. Losses from jurisdictions for which no benefit can be recognized are excluded from the overall computations of the estimated annual effective tax rate and a separate estimated annual effective tax rate is computed and applied to ordinary income or loss in the loss jurisdiction. Income taxes for any significant and unusual or extraordinary transactions are computed and recorded in the period in which the specific transaction occurs. For the period ended March 31, 2021, the United States and certain other foreign jurisdictions, primarily in Latin America, were considered loss jurisdictions.These jurisdictions are treated discretely and were excluded from the annual effective tax rate computation for purposes of computing the interim tax provision and a separate annual effective rate was computed for each of these jurisdictions and applied against their respective year-to-date ordinary income or loss. For the comparable period ended March 31, 2020, all global jurisdictions were included in the estimated annual effective tax rate.
The effective rates for income taxes were 11.5% and (3.8)% for the three months ended March 31, 2021 and 2020, respectively. The change in the Company’s effective tax rate was primarily driven by the income tax effect of the United States being considered a loss jurisdiction as of the three months ended March 31, 2021 and the non-recurring recording of valuation allowances on certain previously recognized deferred tax assets in the United States and China during the three months ended March 31, 2021.
Valuation Allowance
The Company evaluates on a quarterly basis whether the deferred tax assets are realizable which requires significant judgment. The Company considers all available positive and negative evidence, including historical operating performance and expectations of future operating performance. To the extent the Company believes it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against the Company's deferred tax assets, which increase income tax expense in the period when such a determination is made.
As noted in the Company's Annual Report on Form 10-K for Fiscal 2020, a significant portion of the Company’s deferred tax assets relate to United States federal and state taxing jurisdictions. Realization of these deferred tax assets is dependent on future United States pre-tax earnings. As of March 31, 2021 the Company continues to believe that the weight of the negative evidence outweighs the positive evidence regarding the realization of the Company’s United States federal and the majority of the United States state deferred tax assets. Accordingly, the Company continues to maintain valuation allowances on these deferred tax assets. Furthermore, consistent with prior periods, valuation allowances have also been recorded against select foreign deferred tax assets in jurisdictions where the weight of negative evidence outweighs the positive evidence regarding the realization of deferred tax assets.
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NOTE 10. EARNINGS PER SHARE
The following represents a reconciliation from basic income (loss) per share to diluted income (loss) per share:
| Three Months Ended March 31, | |||||||||||
| (In thousands, except per share amounts) | 2021 | 2020 | |||||||||
| Numerator | |||||||||||
| Net income (loss) | $ | 77,752 | $ | (589,681) | |||||||
| Denominator | |||||||||||
| Weighted average common shares outstanding Class A, B and C | 456,014 | 452,871 | |||||||||
| Effect of dilutive securities Class A, B, and C | 3,212 | — | |||||||||
| Weighted average common shares and dilutive securities outstanding Class A, B, and C | 459,226 | 452,871 | |||||||||
| Basic net income (loss) per share of Class A, B and C common stock | $ | 0.17 | $ | (1.30) | |||||||
| Diluted net income (loss) per share of Class A, B and C common stock | $ | 0.17 | $ | (1.30) | |||||||
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options and restricted stock units representing 4.3 million shares of Class A and C common stock outstanding for the three months ended March 31, 2021, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Due to the Company being in a net loss position for the three months ended March 31, 2020, there were no stock options or restricted stock units included in the computation of diluted earnings per share, as their effect would have been anti-dilutive.
NOTE 11. 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. Total expenditures for additions to long-lived assets are not disclosed as this information is not regularly provided to the CODM.
Prior to the sale of MyFitnessPal in December 2020, the CODM also received discrete financial information for the Connected Fitness Segment. However, starting January 1, 2021, the Company no longer reports Connected Fitness as a discrete reportable operating segment (see Note 1 to the unaudited condensed consolidated financial statements). All prior period balances have been recast to conform to current period presentation. Such reclassifications did not affect total consolidated revenues, consolidated income from operations or consolidated net income.
The Company excludes certain corporate costs from its segment profitability measures. The Company reports these costs within Corporate Other, along with the revenue and costs related to the Company's remaining MMR platforms, which is designed to provide increased transparency and comparability of the Company's operating segments' performance. Furthermore, the majority of the costs included within Corporate Other 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 such as restructuring and restructuring related charges; and certain foreign currency hedge gains and losses.
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The following tables summarize the Company's net revenues and operating income (loss) by its geographic segments. Intercompany balances were eliminated for separate disclosure.
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Net revenues | |||||||||||
| North America | $ | 805,727 | $ | 608,980 | |||||||
| EMEA | 193,883 | 137,904 | |||||||||
| Asia-Pacific | 210,220 | 95,686 | |||||||||
| Latin America | 48,311 | 53,088 | |||||||||
| Corporate Other (1) | (946) | 34,582 | |||||||||
| Total net revenues | $ | 1,257,195 | $ | 930,240 | |||||||
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Operating income (loss) | |||||||||||
| North America | $ | 210,562 | $ | (3,773) | |||||||
| EMEA | 26,686 | 3,704 | |||||||||
| Asia-Pacific | 46,513 | (36,841) | |||||||||
| Latin America | 1,457 | (48,184) | |||||||||
| Corporate Other (1) | (178,328) | (473,086) | |||||||||
| Total operating income (loss) | 106,890 | (558,180) | |||||||||
| Interest expense, net | (14,137) | (5,960) | |||||||||
| Other income (expense), net | (7,180) | 1,534 | |||||||||
| Income (loss) before income taxes | $ | 85,573 | $ | (562,606) | |||||||
The following tables summarize the Company's net revenues by product category and distribution channels.
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Apparel | $ | 810,041 | $ | 598,287 | |||||||
| Footwear | 309,047 | 209,688 | |||||||||
| Accessories | 117,396 | 67,748 | |||||||||
| Net Sales | 1,236,484 | 875,723 | |||||||||
| License revenues | 21,657 | 19,935 | |||||||||
| Corporate Other (1) | (946) | 34,582 | |||||||||
| Total net revenues | $ | 1,257,195 | $ | 930,240 | |||||||
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Wholesale | $ | 799,587 | $ | 591,772 | |||||||
| Direct to Consumer | 436,897 | 283,951 | |||||||||
| Net Sales | 1,236,484 | 875,723 | |||||||||
| License revenues | 21,657 | 19,935 | |||||||||
| Corporate Other (1) | (946) | 34,582 | |||||||||
| Total net revenues | $ | 1,257,195 | $ | 930,240 | |||||||
(1) Prior to Fiscal 2021, the Company's Connected Fitness segment was discretely disclosed, however, effective January 1, 2021 Corporate Other now includes the remaining Connected Fitness business consisting of MMR for Fiscal 2021 and the entire
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Connected Fitness for Fiscal 2020. All prior period balances were recast to conform to the current period presentation. Such reclassifications did not affect total consolidated net revenues, consolidated income from operations or consolidated net income (see Note 1 to the unaudited condensed consolidated financial statements).
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the impact of the COVID-19 pandemic on our business and results of operations, our plans to reduce our operating expenses, anticipated charges and restructuring costs, projected savings related to our restructuring plans and the timing thereof, the development and introduction of new products, the implementation of our marketing and branding strategies, and the future benefits and opportunities from significant investments. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “outlook,” “potential” or the negative of these terms or other comparable terminology.
The forward-looking statements contained in this Form 10-Q reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by these forward-looking statements, including, but not limited to, those factors described in “Risk Factors” and MD&A herein and under our Annual Report on Form 10-K for Fiscal 2020. These factors include without limitation:
•the impact of the COVID-19 pandemic on our industry and our business, financial condition and results of operations;
•changes in general economic or market conditions that could affect overall consumer spending or our industry;
•increased competition causing us to lose market share or reduce the prices of our products or to increase significantly our marketing efforts;
•fluctuations in the costs of raw materials and commodities we use in our products and our supply chain;
•changes to the financial health of our customers;
•our ability to successfully execute our long-term strategies;
•our ability to effectively drive operational efficiency in our business and successfully execute any restructuring plans and realize their expected benefits;
•our ability to effectively develop and launch new, innovative and updated products;
•our ability to accurately forecast consumer shopping preferences and consumer demand for our products and manage our inventory in response to changing demands;
•loss of key customers, suppliers or manufacturers or failure of our suppliers or manufacturers to produce or deliver our products in a timely or cost-effective manner;
•our ability to further expand our business globally and to drive brand awareness and consumer acceptance of our products in other countries;
•our ability to manage the increasingly complex operations of our global business;
•our ability to successfully manage or realize expected results from significant transactions and investments;
•our ability to effectively market and maintain a positive brand image;
•the availability, integration and effective operation of information systems and other technology, as well as any potential interruption of such systems or technology;
•any disruptions, delays or deficiencies in the design, implementation or application of our global operating and financial reporting information technology system;
•our ability to attract key talent and retain the services of our senior management and key employees;
•our ability to access capital and financing required to manage our business on terms acceptable to us;
•our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;
•risks related to foreign currency exchange rate fluctuations;
•our ability to comply with existing trade and other regulations, and the potential impact of new trade, tariff and tax regulations on our profitability;
•risks related to data security or privacy breaches; and
•our potential exposure to litigation and other proceedings.
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The forward-looking statements contained in this Form 10-Q reflect our views and assumptions only as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
The following MD&A is intended to help readers understand our results of operations and financial condition, and is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying Notes to our unaudited condensed consolidated financial statements under Part I of this Quarterly Report on Form 10-Q.
All dollar and percentage comparisons made herein refer to the three months ended March 31, 2021 compared with the three months ended March 31, 2020, unless otherwise stated.
OVERVIEW
We are a leading developer, marketer and distributor of branded performance apparel, footwear and accessories. Our brand’s moisture-wicking fabrications are engineered in many different designs and styles for wear in nearly every climate to provide a performance alternative to traditional products. Our products are sold worldwide and worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as by consumers with active lifestyles. Our digital strategy is focused on engaging with these consumers and increasing awareness and sales of our products.
In the first quarter of Fiscal 2021, we realized better than expected wholesale and direct-to-consumer sales based on strong demand for the Under Armour brand in North America, Asia-Pacific and EMEA. Strategically and operationally, we remain focused on driving premium brand right growth and improved profitability. In the near term, and particularly in our North American business, we are focused on the quality of our sales driven by four main strategies: reducing our promotional activities; constraining supply against demand; exiting undifferentiated retail; and maintaining an appropriate level of sales to the off-price channel. Over the long term, our growth strategy is predicated on the delivery of industry-leading product innovation; return-driven investments into connecting even more deeply with our consumers through marketing activations and premium experiences; and the expansion of our direct-to-consumer and international businesses.
Quarterly Results
Financial highlights for the three months ended March 31, 2021,as compared to the same period of the prior fiscal year include:
•Total net revenues increased 35.1%.
•Within our channels, wholesale revenue increased 35.1%, and direct-to-consumer revenue increased 53.9%.
•Within our product categories, apparel revenue increased 35.4%, footwear increased 47.4% and accessories revenue increased 73.3%.
•Revenue in our North America, EMEA and Asia-Pacific segments increased 32.3%, 40.6% and 119.7%, respectively, while revenue in our Latin-America segment decreased 9.0%.
•Revenues from Corporate Other decreased 103% primarily due to the sale of MyFitnessPal in December 2020.
•Gross margin increased 370 basis points to 50.0%.
•Selling, general and administrative expense decreased 6.9%.
•Restructuring and impairment charges decreased 98.4% from $436.5 million during the three months ended March 31, 2020 to $7.1 million during the three months ended March 31, 2021.
COVID-19 Update
We continue to see disruption and volatility in our business caused by the COVID-19 pandemic.
In certain locations, our brand and factory house retail stores and the retail stores of our wholesale customers remain closed. Where opening is permitted, some of these retail stores are operating with restrictive and precautionary measures in place such as reduced operating hours, physical distancing, enhanced cleaning and sanitation, and limited occupancy levels.
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Governments worldwide continue to periodically impose preventative and protective actions, such as temporary travel bans, forced business closures and stay-at-home orders, all in an effort to reduce the spread of the virus. However, such government measures are not implemented consistently or simultaneously around the world, thus making our business susceptible to volatility on a global and regional basis. For example, we continued to experience store closures in EMEA in the first quarter of Fiscal 2021, with approximately one third of the retail stores where our products are sold being closed as of March 31, 2021. Whereas, on the other hand, in North America, particularly in the United States, COVID-19 restrictions were lower during the quarter ended March 31, 2021, resulting in higher than expected sales.
Management believes the Company will continue to experience varying degrees of volatility, business disruptions and periods of closure of its stores, distribution centers and corporate facilities throughout the remainder of Fiscal 2021. COVID-19 can also disrupt the business of the Company's wholesale customers, licensing partners, suppliers and vendors leading to, among other things, supply chain disruption, increased freight, and ultimately higher commodity costs. There remains a risk that COVID-19 could have material adverse impacts to our future revenue growth as well as to our overall profitability, and it may also lead to higher than normal inventory levels in various markets. As a result, the Company may be forced to offer higher discounts or markdowns, including higher than expected liquidation sales in certain regions to manage inventory levels. In addition, as supply chain disruptions may continue, the timing of sales to our customers may be impacted as we work to manage product availability and inventory levels. The extent of the impact of the COVID-19 pandemic on our operational and financial performance depends on future developments that are outside of our control.
Further, in connection with global legislation, including the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, we recognized certain incentives totaling $1.5 million and $0.5 million for the three months ended March 31, 2021 and 2020, respectively. The incentives were recorded as a reduction of the associated costs which we incurred within selling, general and administrative expenses in the unaudited condensed consolidated statement of operations.
Segment Presentation and Marketing
Starting in the first quarter of Fiscal 2021, we no longer view Connected Fitness as a discrete reportable operating segment. Effective January 1, 2021, Corporate Other now includes the remaining Connected Fitness business consisting of MMR for Fiscal 2021 and the entire Connected Fitness business for Fiscal 2020. Please refer to Note 1 for a basis of our presentation and to Note 11 for a complete presentation of the segment data. All prior period balances have been recast to conform to current period presentation.
Corporate Other consists largely of revenue and costs related to our MMR platforms, as well as 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 our global assets and global marketing, costs related to our headquarters; restructuring and impairment related charges; and certain foreign currency hedge gains and losses.
Fiscal Year End Change
During the fourth quarter of Fiscal 2020, our Board of Directors authorized a change in our fiscal year end from December 31 to March 31, effective for the fiscal year beginning April 1, 2022. Because our largest quarters are currently realized in the period from July 1 through December 31, we believe that this change will provide greater alignment with our business cycle and financial reporting. There will be no change to Fiscal 2021, which will end on December 31, 2021 and is expected to be reported in February of 2022. Following a three month-transition period (January 1 – March 31, 2022), our Fiscal 2023 will run from April 1, 2022 through March 31, 2023. Consequently, there will be no Fiscal 2022.
2020 Restructuring
During Fiscal 2020, our Board of Directors approved a restructuring plan ranging between $550 million to $600 million in costs ("2020 restructuring plan") designed to rebalance our cost base to further improve profitability and cash flow generation.
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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.
During the three months ended March 31, 2021 and 2020, we recorded $7.1 million and $301.1 million of restructuring and related impairment charges, respectively, under the 2020 restructuring plan. For more details on our 2020 restructuring plan, please see Note 3 to our unaudited condensed consolidated financial statements.
These charges require us to make certain judgments and estimates regarding the amount and timing of restructuring and related impairment charges or recoveries. Our estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, we conduct an evaluation of the related liabilities and expenses and revise our assumptions and estimates as appropriate.
GENERAL
Net revenues are comprised of net sales, license revenues and revenues from digital subscriptions and advertising. Net sales are comprised of sales from our primary product categories, which are apparel, footwear and accessories. Our license revenues primarily consist of fees paid to us by our licensees in exchange for the use of our trademarks on their products.
Cost of goods sold consists primarily of product costs, inbound freight and duty costs, outbound freight costs, handling costs to make products floor-ready to customer specifications, royalty payments to endorsers based on a predetermined percentage of sales of selected products and write downs for inventory obsolescence. In general, as a percentage of net revenues, we expect cost of goods sold associated with our apparel and accessories to be lower than that of our footwear. A limited portion of cost of goods sold is associated with digital subscription and advertising revenues, primarily website hosting costs, and no cost of goods sold is associated with our license revenues.
We include outbound freight costs associated with shipping goods to customers as cost of goods sold, however, we include the majority of outbound handling costs as a component of selling, general and administrative expenses. As a result, our gross profit may not be comparable to that of other companies that include outbound handling costs in their cost of goods sold. Outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate our distribution facilities. These costs were $23.3 million and $14.9 million for the three months ended March 31, 2021 and 2020, respectively.
Our selling, general and administrative expenses consist of costs related to marketing, selling, product innovation and supply chain and corporate services. We consolidate our selling, general and administrative expenses into two primary categories: marketing and other. The other category is the sum of our selling, product innovation and supply chain, and corporate services categories. The marketing category consists primarily of sports and brand marketing, media, and retail presentation. Sports and brand marketing includes professional, club and collegiate sponsorship agreements, individual athlete and influencer agreements, and providing and selling products directly to teams and individual athletes. Media includes digital, broadcast and print media outlets, including social and mobile media. Retail presentation includes sales displays and concept shops and depreciation expense specific to our in-store fixture programs. Our marketing costs are an important driver of our growth.
Other income (expense), net consists of unrealized and realized gains and losses on our foreign currency derivative financial instruments, and unrealized and realized gains and losses on adjustments that arise from fluctuations in foreign currency exchange rates relating to transactions generated by our international subsidiaries. We also include rent expense relating to lease assets held solely for sublet purposes, which is comprised entirely of the lease related to our New York City flagship store.
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RESULTS OF OPERATIONS
The following tables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Net revenues | $ | 1,257,195 | $ | 930,240 | |||||||
| Cost of goods sold | 628,554 | 499,256 | |||||||||
| Gross profit | 628,641 | 430,984 | |||||||||
| Selling, general and administrative expenses | 514,638 | 552,701 | |||||||||
| Restructuring and impairment charges | 7,113 | 436,463 | |||||||||
| Income (loss) from operations | 106,890 | (558,180) | |||||||||
| Interest expense, net | (14,137) | (5,960) | |||||||||
| Other income (expense), net | (7,180) | 1,534 | |||||||||
| Income (loss) before income taxes | 85,573 | (562,606) | |||||||||
| Income tax expense | 9,881 | 21,547 | |||||||||
| Income (loss) from equity method investments | 2,060 | (5,528) | |||||||||
| Net income (loss) | $ | 77,752 | $ | (589,681) | |||||||
| Three Months Ended March 31, | |||||||||||
| (As a percentage of net revenues) | 2021 | 2020 | |||||||||
| Net revenues | 100.0 | % | 100.0 | % | |||||||
| Cost of goods sold | 50.0 | % | 53.7 | % | |||||||
| Gross profit | 50.0 | % | 46.3 | % | |||||||
| Selling, general and administrative expenses | 40.9 | % | 59.4 | % | |||||||
| Restructuring and impairment charges | 0.6 | % | 46.9 | % | |||||||
| Income (loss) from operations | 8.5 | % | (60.0) | % | |||||||
| Interest expense, net | (1.1) | % | (0.6) | % | |||||||
| Other income (expense), net | (0.6) | % | 0.2 | % | |||||||
| Income (loss) before income taxes | 6.8 | % | (60.5) | % | |||||||
| Income tax expense | 0.8 | % | 2.3 | % | |||||||
| Loss from equity method investment | 0.2 | % | (0.6) | % | |||||||
| Net income (loss) | 6.2 | % | (63.4) | % | |||||||
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Net revenues increased $327.0 million, or 35.1%, to $1,257.2 million from $930.2 million in 2020. Net revenues by product category are summarized below:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Apparel | $ | 810,041 | $ | 598,287 | |||||||
| Footwear | 309,047 | 209,688 | |||||||||
| Accessories | 117,396 | 67,748 | |||||||||
| Net Sales | 1,236,484 | 875,723 | |||||||||
| License revenues | 21,657 | 19,935 | |||||||||
| Corporate Other (1) | (946) | 34,582 | |||||||||
| Total net revenues | $ | 1,257,195 | $ | 930,240 | |||||||
(1) Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program. Effective January 1, 2021, included within Corporate Other is the operating results of the remaining Connected Fitness business consisting of MMR for Fiscal 2021 and the entire Connected Fitness for Fiscal 2020. All prior period balances were recast to conform to the current
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period presentation. Such reclassifications did not affect total consolidated revenues, consolidated income from operations or consolidated net income (see Note 1 to our unaudited condensed consolidated financial statements).
The increase in net sales was driven by increased unit sales across all our product categories including apparel, footwear and accessories. During the first quarter of Fiscal 2020, we experienced significant disruption across all channels of our business, as developments related to COVID-19 resulted in cancellations of orders by our wholesale partners and closures of retail locations worldwide including our own brand and factory house stores as well as wholesaler retail locations. In addition to higher demand for our products relative to the prior year, nearly half of the net sales growth was related to the previously disclosed impact of COVID-19 resulting in changes to customer order flow and supply chain timing from the fourth quarter of Fiscal 2020 to the first quarter of Fiscal 2021.
License revenues increased $1.7 million, or 8.6%, to $21.7 million for the three months ended March 31, 2021 from $19.9 million during the same period in Fiscal 2020 primarily due to increased revenue from our licensing partners in North America.
Revenues from Corporate Other decreased $35.5 million for the three months ended March 31, 2021 compared to the same period in Fiscal 2020 primarily as the result of the sale of MyFitnessPal in December 2020. See Note 1 to our unaudited condensed consolidated financial statements for more details.
Gross profit increased $197.7 million to $628.6 million for the three months ended March 31, 2021 from $431.0 million during the same period in Fiscal 2020. Gross profit as a percentage of net revenues, or gross margin, increased 370 basis points to 50.0% for the three months ended March 31, 2021, compared to 46.3% during the same period in Fiscal 2020. This increase in gross margin was primarily driven by the following:
•approximately 270 basis points of pricing improvements driven by lower promotional activity within our direct to consumer channel along with lower promotions and markdowns within our wholesale channel;
•approximately 130 basis points of supply chain benefits, including lower returns and product cost improvements;
•approximately 50 basis points of benefit driven by channel mix as a result of a lower mix of off-price sales in the quarter along with a higher mix of e-commerce sales which carry higher gross margins; and
•approximately 30 basis points of benefit driven by regional mix.
These increases were partially offset by an approximate 140 basis point negative impact due to the sale of MyFitnessPal.
Selling, general and administrative expenses decreased $38.1 million, or 6.9%, to $514.6 million for the three months ended March 31, 2021 from $552.7 million during the same period in Fiscal 2020. Within selling, general and administrative expenses:
•Marketing costs decreased $15.2 million to $138.7 million from $154.0 million. This decrease was primarily driven by reduced rights fees for sports marketing assets. As a percentage of net revenues, marketing costs decreased to 11.0% from 16.5%.
•Other costs decreased $22.9 million to $375.9 million from $398.8 million. This decrease was driven primarily by lower legal expense and lower depreciation mostly due to reductions in capital expenditures and asset write offs incurred under our 2020 restructuring plan. These decreases were partially offset by higher incentive compensation expenses. As a percentage of net revenues, other costs decreased to 29.9% from 42.9%.
As a percentage of net revenues, total selling, general and administrative expenses decreased to 40.9% for the three months ended March 31, 2021 compared to 59.4% during the same period in Fiscal 2020.
Restructuring and impairment charges were $7.1 million and $436.5 million for the three months ended March 31, 2021 and 2020, respectively. Refer to the "2020 restructuring" section above for further discussion of the 2020 restructuring plan. In addition, restructuring and impairment charges were lower this quarter compared to the prior fiscal year as a result of approximately $135 million of goodwill and long-lived asset impairment charges that were recorded in the first quarter of Fiscal 2020.
Income from operations increased $665.1 million to $106.9 million for the three months ended March 31, 2021 from a loss of $558.2 million, primarily driven by increased revenues in Fiscal 2021 along with significantly lower restructuring and impairment charges compared to the prior year.
Interest expense, net increased $8.2 million to $14.1 million for the three months ended March 31, 2021 from $6.0 million during the same period in Fiscal 2020. This increase was primarily due to interest expense associated with our 1.50% Convertible Senior Notes issued in May 2020.
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Other income (expense), net decreased $8.7 million to an expense of $7.2 million for the three months ended March 31, 2021 from income of $1.5 million during the same period in Fiscal 2020. This decrease was primarily due to foreign exchange losses and rent expense incurred in connection with our New York City flagship store.
Income tax expense decreased $11.6 million to $9.9 million during the three months ended March 31, 2021 from income tax expense of $21.5 million during the same period in Fiscal 2020. For the the three months ended March 31, 2021, our effective tax rate was 11.5% compared to (3.8)% for the same period in Fiscal 2020. The change in our effective tax rate was primarily driven by the income tax effect of the United States being considered a loss jurisdiction during the three months ended March 31, 2021 and the non-recurring recording of valuation allowances on certain previously recognized deferred tax assets in the United States and China during the three months ended March 31, 2020.
Income (loss) from equity method investment was $2.1 million for the three months ended March 31, 2021 compared to a loss of $5.5 million during the same period in Fiscal 2020. These results primarily reflect our allocable share of the net income of our Japanese licensee, Dome, in which we hold a minority investment. See Note 2 to our unaudited condensed consolidated financial statements, under Equity Method Investment, for more details.
SEGMENT RESULTS OF OPERATIONS
Our operating segments are based on how our Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. Our segments are defined by geographic regions, including North America, EMEA, Asia-Pacific, and Latin America.
Prior to the sale of MyFitnessPal in December 2020, our CODM also received discrete financial information for our Connected Fitness Segment. However, starting January 1, 2021, we no longer report Connected Fitness as a discrete reportable operating segment (see Note 1 to our unaudited condensed consolidated financial statements). All prior period balances have been recast to conform to current period presentation. Such reclassifications did not affect total consolidated revenues, consolidated income from operations or consolidated net income.
We exclude certain corporate costs from our segment profitability measures. We report these costs within Corporate Other, which is designed to provide increased transparency and comparability of our operating segments performance. The costs included within Corporate Other consists largely of revenue and costs related to our MMR platforms, as well as 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 our global assets and global marketing, costs related to our headquarters; restructuring and restructuring related charges; and certain foreign currency hedge gains and losses.
The net revenues and operating income (loss) associated with our segments are summarized in the following tables.
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Net revenues by segment and Corporate Other are summarized below:
| Three Months Ended March 31, | |||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | $ Change | % Change | |||||||||||||||||||
| North America | $ | 805,727 | $ | 608,980 | $ | 196,747 | 32.3 | % | |||||||||||||||
| EMEA | 193,883 | 137,904 | 55,979 | 40.6 | % | ||||||||||||||||||
| Asia-Pacific | 210,220 | 95,686 | 114,534 | 119.7 | % | ||||||||||||||||||
| Latin America | 48,311 | 53,088 | (4,777) | (9.0) | % | ||||||||||||||||||
| Corporate Other (1) | (946) | 34,582 | (35,528) | (102.7) | % | ||||||||||||||||||
| Total net revenues | $ | 1,257,195 | $ | 930,240 | $ | 326,955 | 35.1 | % | |||||||||||||||
(1) Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program. Effective January 1, 2021, included within Corporate Other is the operating results of the remaining Connected Fitness business consisting of MMR for Fiscal 2021 and the entire Connected Fitness for Fiscal 2020. All prior period balances were recast to conform to the current
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period presentation. Such reclassifications did not affect total consolidated revenues, consolidated income from operations or consolidated net income (see Note 1 to our financial statements).
The increase in total net revenues was driven by the following:
•Net revenues in our North America operating segment increased $196.7 million to $805.7 million for the three months ended March 31, 2021 from $609.0 million during the same period in Fiscal 2020. This increase was driven by increased unit sales within both our wholesale and direct-to-consumer channels due to increased demand, as well as the previously disclosed timing shifts related to changes in customer order flow and supply chain timing from the fourth quarter of Fiscal 2020 to the first quarter of Fiscal 2021.
•Net revenues in our EMEA operating segment increased $56 million to $193.9 million for the three months ended March 31, 2021 from $137.9 million during the same period in Fiscal 2020, primarily due to wholesale channels, inclusive of the previously disclosed impact of COVID-19 resulting in timing shifts related to changes in customer order flow and supply chain from the fourth quarter of Fiscal 2020 to the first quarter of Fiscal 2021. Additionally, we experienced growth in our direct-to-consumer channel, led by e-commerce, partially offset by impacts due to retail store closures in the quarter connected with COVID-19.
•Net revenues in our Asia-Pacific operating segment increased $114.5 million to $210.2 million for the three months ended March 31, 2021 from $95.7 million, primarily due to increased unit sales within our wholesale channel inclusive of the previously disclosed impact of COVID-19 resulting in timing shifts related to changes in customer order flow and supply chain from the fourth quarter of Fiscal 2020 to the first quarter of Fiscal 2021. Within our direct-to-consumer channel, we continued to experience growth in e-commerce, as well as our retail stores, as a majority of our owned and operated stores were open throughout the quarter.
•Net revenues in our Latin America operating segment decreased $4.8 million to $48.3 million for the three months ended March 31, 2021 from $53.1 million during the same period in Fiscal 2020. This decrease was primarily due to decreased unit sales within our wholesale channel, offset partially by increased unit sales within our direct-to-consumer channel, led by e-commerce.
The decrease in Corporate Other is primarily due to the sale of MyFitnessPal which was included in the presentation for the three months ended March 31, 2020, but not included during the current fiscal quarter as this business was sold in December 2020.
Operating income by segment and Corporate Other is summarized below:
| Three Months Ended March 31, | |||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | $ Change | % Change | |||||||||||||||||||
| North America | $ | 210,562 | $ | (3,773) | $ | 214,335 | 5680.8 | % | |||||||||||||||
| EMEA | 26,686 | 3,704 | 22,982 | 620.5 | % | ||||||||||||||||||
| Asia-Pacific | 46,513 | (36,841) | 83,354 | 226.3 | % | ||||||||||||||||||
| Latin America | 1,457 | (48,184) | 49,641 | 103.0 | % | ||||||||||||||||||
| Corporate Other | (178,328) | (473,086) | 294,758 | 62.3 | % | ||||||||||||||||||
| Total operating income | $ | 106,890 | $ | (558,180) | $ | 665,070 | 119.1 | % | |||||||||||||||
The increase in total operating income was driven by the following:
•Operating income in our North America operating segment increased $214.3 million to $210.6 million for the three months ended March 31, 2021 from a loss of $3.8 million during the same period in Fiscal 2020. This increase was primarily driven by increases in net revenues discussed above, along with improvements in gross margin due to better pricing, lower promotional activity and product costing benefits. Additionally, North America benefited from lower marketing spend and from the absence of long-lived asset impairment charges recorded for the three month period ended March 31, 2020.
•Operating income in our EMEA operating segment increased $23.0 million to $26.7 million for the three months ended March 31, 2021 from $3.7 million during the same period in Fiscal 2020, primarily driven by increases in net revenues discussed above, along with improving gross margin driven by a higher mix of direct-to-consumer sales. Partially offsetting these cost improvements was higher distribution costs and selling expenses related to e-commerce.
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•Operating income in our Asia-Pacific operating segment increased $83.4 million to $46.5 million for the three months ended March 31, 2021 from a loss of $36.8 million during the same period in Fiscal 2020, primarily driven by increases in revenue discussed above, and the absence of long-lived asset impairment charges recorded for the three month period ended March 31, 2020. Offsetting these savings was higher marketing and distribution costs.
•Operating income in our Latin America operating segment increased $49.6 million to $1.5 million for the three months ended March 31, 2021 from a loss of $48.2 million during the same period in Fiscal 2020. This increase is primarily driven by the absence of goodwill impairment charges and long-lived asset impairment charges that were recorded during the three months ended March 31, 2020.
•Operating loss in our Corporate Other segment decreased $294.8 million to $178.3 million for the three months ended March 31, 2021 compared to $473.1 million during the same period in Fiscal 2020.This decrease is primarily driven by the non-reoccurrence of $301.1 million of restructuring and related impairment charges and higher legal expenses recorded during the three months ended March 31, 2020. The decrease in Corporate Other was partially offset by higher incentive compensation expense due to improved business performance.
FINANCIAL POSITIONS, CAPITAL RESOURCES AND LIQUIDITY
Our cash requirements have principally been for working capital and capital expenditures. We fund our working capital, primarily inventory, and capital investments from cash flows from operating activities, cash and cash equivalents on hand, and borrowings available under our credit and long term debt facilities. Our working capital requirements generally reflect the seasonality in our business as we historically recognize the majority of our net revenues in the last two quarters of the calendar year. Our capital investments have generally included expanding our in-store fixture and branded concept shop program, improvements and expansion of our distribution and corporate facilities, leasehold improvements to our brand and factory house stores, and investment and improvements in information technology systems. Our inventory strategy is focused on continuing to meet consumer demand while improving our inventory efficiency over the long term by putting systems and processes in place to improve our inventory management. These systems and processes are designed to improve our forecasting and supply planning capabilities. In addition to systems and processes, key areas of focus that we believe enhance inventory performance are added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our factory house stores and other liquidation channels.
As of March 31, 2021 we had $1.3 billion of cash and cash equivalents. We believe our cash and cash equivalents on hand, cash from operations, our ability to reduce our expenditures as needed, borrowings available to us under our amended credit agreement, our ability to access the capital markets, and other financing alternatives are adequate to meet our liquidity needs and capital expenditure requirements for at least the next twelve months. In addition, from time to time, based on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors and subject to compliance with applicable laws and regulations, we may seek to utilize cash on hand, borrowings or raise capital to retire, repurchase or redeem our debt securities, repay debt, or otherwise enter into similar transactions to support our capital structure and business or utilize excess cash flow on a strategic basis.
We are currently required to maintain a specified amount of "minimum liquidity" under the terms of our revolving credit facility. Our credit agreement limits our ability to incur additional indebtedness. We currently expect to be able to comply with these requirements without pursuing additional sources of financing to support our liquidity over the next twelve months.
If the COVID-19 pandemic persists or there are unexpected impacts to our business during this period and we need to raise or conserve additional cash to fund our operations or satisfy this requirement, we may consider additional alternatives similar to those we used in Fiscal 2020, including further reducing our expenditures, changing our investment strategies, negotiating payment terms with our customers and vendors, reductions in compensation costs, including through temporary reductions in pay and layoffs, and limiting certain marketing and capital expenditures. In addition, we may seek alternative sources of liquidity, including but not limited to, accessing the capital markets, sale leaseback transactions or other sales of assets, or other alternative financing measures. However, instability in, or tightening of the capital markets, could adversely affect our ability to access the capital markets on terms acceptable to us or at all. Although we believe we have adequate sources of liquidity over the long term, a prolonged or more severe economic recession or a slow recovery could adversely affect our business and liquidity.
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Refer to our “Risk Factors” section included in Item 1A, "Risk Factors" in our Annual Report on Form 10-K for Fiscal 2020.
Cash Flows
The following table presents the major components of our cash flows provided by and used in operating, investing and financing activities for the periods presented:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | (150,588) | $ | (366,712) | |||||||
| Investing activities | (7,904) | (68,841) | |||||||||
| Financing activities | (3,443) | 598,952 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (6,900) | 8,761 | |||||||||
| Net increase (decrease) in cash and cash equivalents | $ | (168,835) | $ | 172,160 | |||||||
Cash flows used in operating activities
Cash flows provided by operating activities increased by $216.1 million compared to the prior fiscal year, primarily driven by an increase in net income, before the impact of non-cash items, of $187.1 million and an increase in changes from working capital of $29.0 million. The increase from changes in working capital were primarily due to increases of:
•$355.8 million resulting from a change in other non current assets, primarily due to the commencement of our New York City flagship store and the related operating lease ROU which was included in Fiscal 2020;
•$112.6 million resulting from a change in accounts payable; and
•$108.9 million resulting from a change in inventories.
These increases in working capital were partially offset by decreases in working capital of:
•$348.2 million resulting from changes in accrued expenses, as Fiscal 2020 included higher accrued expenses resulting from longer payment terms associated with impacts from COVID-19, and
•$198.1 million resulting from changes in accounts receivable primarily due to our previously disclosed changes to customer order flow and supply chain timing from the fourth quarter of Fiscal 2020 to the first quarter of Fiscal 2021.
Investing Activities
Cash flows used in investing activities decreased by $60.9 million compared to the prior fiscal year, primarily as a result of reduced spending on capital expenditures of $23.0 million in Fiscal 2021 and the absence of $37.3 million of acquisition-related activity that occurred in the three months ended March 31, 2020.
Financing Activities
Cash flows provided by financing activities decreased by $602.4 million compared to the prior fiscal year, primarily due to the absence of $600.0 million of net borrowings made under the Revolver during the three months ended March 31, 2020.
Capital Resources
Credit Facility
On March 8, 2019, we 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,we 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. As of March 31, 2021 and December 31, 2020, there were no amounts outstanding
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under the revolving credit facility, respectively. As of March 31, 2020, there was $600.0 million outstanding under the revolving credit facility (prior to its amendment), which we had borrowed as a precautionary measure in connection with the uncertain conditions created by COVID-19 in early calendar year 2020.
Except during the covenant suspension period (as defined below), at our request and the lender's consent, commitments under the amended credit agreement may be increased by up to $300.0 million in aggregate, subject to certain conditions as set forth in the amended credit agreement. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time we seek to incur such borrowings.
Borrowings, if any, under the revolving credit facility have maturities of less than one year. Up to $50.0 million of the facility may be used for the issuance of letters of credit. As of March 31, 2021, there was $4.3 million of letters of credit outstanding. (December 31, 2020 and March 31, 2020 had $4.3 million and $5.0 million, respectively).
Our obligations under the amended credit agreement are guaranteed by certain domestic significant subsidiaries of Under Armour, Inc., subject to customary exceptions (the “subsidiary guarantors”) and primarily secured by a first-priority security interest in substantially all of the assets of Under Armour, Inc. and the subsidiary guarantors, excluding real property, capital stock in and debt of subsidiaries of Under Armour, Inc. holding certain real property and other customary exceptions.
The amended credit agreement contains negative covenants that, subject to significant exceptions, limit our ability to, among other things: incur additional secured and unsecured indebtedness; pledge our assets as security; make investments, loans, advances, guarantees and acquisitions, (including investments in and loans to non-guarantor subsidiaries); undergo fundamental changes; sell assets outside the ordinary course of business; enter into transactions with affiliates; and make restricted payments (including a temporary suspension of certain voluntary restricted payments during the covenant suspension period (as defined below)).
We are also required to comply with specific consolidated leverage and interest coverage ratios during specified periods.Under the amended credit agreement, we are 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 we are not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.0 (the "leverage covenant"), as described in more detail in the amended credit agreement. However, 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 quarters ending 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, we 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 us and our 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 we 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 we 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.
In addition, the amended credit agreement contains events of default that are customary for a facility of this nature and similar to the prior credit agreement, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the amended credit agreement, will be considered an event of default under the amended credit agreement.
During the covenant suspension period, the applicable margin for loans 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 our option, either (a) an alternate base rate, or (b) a rate based on the rates
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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. During the covenant suspension period, the commitment fee rate is 0.40% per annum. Otherwise, we pay a commitment fee determined in accordance with the pricing grid on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit. For the three months ended March 31, 2021 and 2020, the weighted average interest rate under the revolving credit facility borrowings was nil and 3.2%, respectively. As of March 31, 2021, the commitment fee was 15.0 basis points. We incurred and deferred $7.2 million in financing costs in connection with the amended credit agreement.
1.50% Convertible Senior Notes
In May 2020, we issued $500.0 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at the rate of 1.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The Convertible Senior Notes will mature on June 1, 2024, unless earlier converted in accordance with their terms, redeemed in accordance with their terms or repurchased.
The net proceeds from the offering (including the net proceeds from the exercise of the over-allotment option) was $488.8 million, after deducting the initial purchasers’ discount and estimated offering expenses we paid, of which we used $47.9 million to pay the cost of the capped call transactions described below. We utilized $439.9 million to repay indebtedness that was outstanding under our revolving credit facility at the time, and to pay related fees and expenses.
The Convertible Senior Notes are not secured and are not guaranteed by any of our 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 us or any of our subsidiaries.
The Convertible Senior Notes are convertible into cash, shares of our Class C common stock or a combination of cash and shares of Class C common stock, at our election, as described further below. The initial conversion rate is 101.8589 shares of our 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 ended on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our 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 our Class C common stock and the conversion rate on each such trading day;
•upon the occurrence of specified corporate events or distributions on our Class C common stock; or
•if we call any Convertible Senior Notes for redemption prior to the close of business on the business day immediately preceding January 1, 2024.
As of March 31, 2021, none of the above conditions have been satisfied.
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, we may redeem for cash all or any part of the Convertible Senior Notes, at our option, if the last reported sale price of our 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 we provide notice of redemption at a redemption price equal to 100% of the aggregate
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principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If we 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 us 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, we 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 our Class C common stock upon any conversion of Convertible Senior Notes and/or offset any cash payments we are 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 our Class C common stock, representing a premium of 75% above the last reported sale price of our 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, we have separated it into liability and equity components. We valued the liability component based on our 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.
3.250% Senior Notes
In June 2016, we issued $600.0 million aggregate principal amount of 3.250% senior unsecured notes due June 15, 2026 (the “Senior Notes”). The proceeds were used to pay down amounts outstanding under the revolving credit facility, at the time. Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. Prior to March 15, 2026 (three months prior to the maturity date of the Notes), we may redeem some or all of the Senior Notes at any time or from time to time at a redemption price equal to the greater of 100% of the principal amount of the Senior Notes to be redeemed or a "make-whole" amount applicable to such Senior Notes as described in the indenture governing the Senior Notes, plus accrued and unpaid interest to, but excluding, the redemption date.
The indenture governing the Senior Notes contains covenants, including limitations that restrict our ability and the ability of certain of our subsidiaries to create or incur secured indebtedness and enter into sale and leaseback transactions and our ability to consolidate, merge or transfer all or substantially all of our properties or assets to another person, in each case subject to material exceptions described in the indenture.
Interest Expense
Interest expense, net, was $14.1 million and $6.0 million for the three months ended March 31, 2021 and 2020, 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.
We monitor the financial health and stability of our 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.
CONTRACTUAL COMMITMENTS AND CONTINGENCIES
Other than the borrowings and repayments disclosed above in the "Capital Resources" section and changes which occur in the normal course of business, there were no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for Fiscal 2020, as updated in our Form 10-Q for the quarter ended March 31, 2021.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities. Actual results could
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be significantly different from these estimates. We believe the following addresses the critical accounting policies that are necessary to understand and evaluate our reported financial results.
Our significant accounting policies are described in Note 2 of the audited consolidated financial statements included in our Annual Report on Form 10-K for Fiscal 2020. The SEC suggests companies provide additional disclosure on those accounting policies considered most critical. The SEC considers an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant judgments and estimates on the part of management in its application. Our estimates are often based on complex judgments, probabilities and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. For a complete discussion of our critical accounting policies, see the “Critical Accounting Policies” section of the MD&A in our Annual Report on Form 10-K for Fiscal 2020. Other than adoption of recent accounting standards as discussed in Note 2 of our unaudited condensed consolidated financial statements, there were no significant changes to our critical accounting policies during the three months ended March 31, 2021.
Recently Issued Accounting Standards
Refer to Note 2 of our unaudited condensed consolidated financial statements, included in this Form 10-Q, for our assessment of recently issued accounting standards.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to our market risk since December 31, 2020. For a discussion of our exposure to market risk, refer to our Annual Report on Form 10-K for Fiscal 2020.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
We have assessed the impact on changes to our internal controls over financial reporting, and conclude that there have been no changes in our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), during the most recent fiscal quarter that have materially affected, or that are reasonably likely to materially affect our internal controls over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that a significant number of our employees are working remotely due to the COVID-19 pandemic. We continue to monitor and assess impacts of the COVID-19 pandemic on our controls in order to minimize the impact on the design and operating effectiveness of our controls.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in litigation and other proceedings, including matters related to commercial and intellectual property, as well as trade, regulatory and other claims related to our business. See Note 6 to our unaudited condensed consolidated financial statements for information on certain legal proceedings, which is incorporated by reference herein.
ITEM 1A. RISK FACTORS
Our results of operations and financial condition could be adversely affected by numerous risks. In addition to the other information in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for Fiscal 2020. These are not the only risks and uncertainties facing us. Additional risks not currently known to us or that we currently believe are immaterial may also negatively impact our business, financial condition, results of operations and future prospects.
ITEM 6. EXHIBITS
| Exhibit No. | |||||
| Section 302 Chief Executive Officer Certification | |||||
| Section 302 Chief Financial Officer Certification | |||||
| Section 906 Chief Executive Officer Certification | |||||
| Section 906 Chief Financial Officer Certification | |||||
| 101.INS | XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | ||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| UNDER ARMOUR, INC. | ||||||||
| By: | /s/ DAVID E. BERGMAN | |||||||
| David E. Bergman | ||||||||
| Chief Financial Officer | ||||||||
Date: May 7, 2021
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