|
|
|
|
|
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Report of Management on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on our evaluation, we have concluded that our internal control over financial reporting was effective as of December 31, 2019.
The effectiveness of our internal control over financial reporting as of December 31, 2019, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
|
|
|
|
|
|
|
|
|
/s/ PATRIK FRISK
|
|
Chief Executive Officer and President
|
Patrik Frisk
|
|
|
|
|
|
/s/ DAVID E. BERGMAN
|
|
Chief Financial Officer
|
David E. Bergman
|
|
|
Dated: February 26, 2020
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Under Armour, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Under Armour, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for its leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment – Latin America Reporting Unit
As described in Notes 2 and 5 to the consolidated financial statements, the Company’s consolidated goodwill balance was $550.2 million as of December 31, 2019, and the goodwill associated with the Latin America reporting unit was $46.7 million. Management conducts an impairment test at least annually in the fourth quarter or sooner if events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Management estimates fair value of the reporting unit using the discounted cash flow model under the income approach, which indicates the fair value of the reporting unit based on the present value of the cash flows that management expects the reporting unit to generate in the future. Management’s significant estimates in the discounted cash flows model include the Company's weighted average cost of capital, long-term rate of growth and profitability of the reporting unit’s business, and working capital effects. If the carrying amount of a reporting unit exceeds its fair value, goodwill is impaired to the extent that the carrying value exceeds the fair value of the reporting unit.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Latin America reporting unit is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting unit, which in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures and evaluating significant assumptions, including the Company’s long-term rate of growth and profitability. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment test, including controls over the valuation of the Company’s reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimate; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of the underlying data used in the model; and evaluating the reasonableness of significant assumptions, including the long-term rate of growth and profitability. Evaluating management’s assumptions related to the long-term rate of growth and profitability involved evaluating management’s ability to execute on future growth strategies and evaluating whether the assumptions used were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these
assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow model and certain assumptions, including the Company’s weighted average cost of capital.
Reserve for Customer Returns
As described in Note 2 to the consolidated financial statements, the Company recorded $219.4 million as of December 31, 2019 in reserves for returns, allowances, markdowns and discounts within customer refund liability. Management bases its estimates of the reserve for customer returns 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 principal considerations for our determination that performing procedures relating to the reserve for customer returns is a critical audit matter are there was significant judgment by management in estimating the customer returns reserve, which in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures and evaluating the significant assumptions used in developing the estimate, including the amount of outstanding returns that have not yet been received by the Company.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the estimation of management’s customer returns reserve, including the assumption related to the outstanding returns that have not yet been received by the Company. These procedures also included, among others, testing management’s process for developing the customer returns reserve; evaluating the appropriateness of the method; testing the completeness, accuracy, and relevance of underlying data used in the estimate; and evaluating the reasonableness of significant assumptions, including the amount of outstanding returns that have not yet been received by the Company. Evaluating management’s assumption related to outstanding returns that have not yet been received by the Company involved evaluating whether the assumption used by management was reasonable considering (i) historical rates of customer returns, (ii) specific identification of outstanding returns, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
February 26, 2020
We have served as the Company’s auditor since 2003.
Under Armour, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Assets
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
788,072
|
|
|
$
|
557,403
|
|
Accounts receivable, net
|
708,714
|
|
|
652,546
|
|
Inventories
|
892,258
|
|
|
1,019,496
|
|
Prepaid expenses and other current assets
|
313,165
|
|
|
364,183
|
|
Total current assets
|
2,702,209
|
|
|
2,593,628
|
|
Property and equipment, net
|
792,148
|
|
|
826,868
|
|
Operating lease right-of-use assets
|
591,931
|
|
|
—
|
|
Goodwill
|
550,178
|
|
|
546,494
|
|
Intangible assets, net
|
36,345
|
|
|
41,793
|
|
Deferred income taxes
|
82,379
|
|
|
112,420
|
|
Other long term assets
|
88,341
|
|
|
123,819
|
|
Total assets
|
$
|
4,843,531
|
|
|
$
|
4,245,022
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
Current liabilities
|
|
|
|
Accounts payable
|
$
|
618,194
|
|
|
$
|
560,884
|
|
Accrued expenses
|
374,694
|
|
|
340,415
|
|
Customer refund liabilities
|
219,424
|
|
|
301,421
|
|
Operating lease liabilities
|
125,900
|
|
|
—
|
|
Current maturities of long term debt
|
—
|
|
|
25,000
|
|
Other current liabilities
|
83,797
|
|
|
88,257
|
|
Total current liabilities
|
1,422,009
|
|
|
1,315,977
|
|
Long term debt, net of current maturities
|
592,687
|
|
|
703,834
|
|
Operating lease liabilities, non-current
|
580,635
|
|
|
—
|
|
Other long term liabilities
|
98,113
|
|
|
208,340
|
|
Total liabilities
|
2,693,444
|
|
|
2,228,151
|
|
Commitments and contingencies (see Note 8)
|
|
|
|
Stockholders’ equity
|
|
|
|
Class A Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of December 31, 2019 and 2018; 188,289,680 shares issued and outstanding as of December 31, 2019, and 187,710,319 shares issued and outstanding as of December 31, 2018.
|
62
|
|
|
62
|
|
Class B Convertible Common Stock, $0.0003 1/3 par value; 34,450,000 shares authorized, issued and outstanding as of December 31, 2019 and 2018.
|
11
|
|
|
11
|
|
Class C Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of December 31, 2019 and 2018; 229,027,730 shares issued and outstanding as of December 31, 2019, and 226,421,963 shares issued and outstanding as of December 31, 2018.
|
76
|
|
|
75
|
|
Additional paid-in capital
|
973,717
|
|
|
916,628
|
|
Retained earnings
|
1,226,986
|
|
|
1,139,082
|
|
Accumulated other comprehensive loss
|
(50,765)
|
|
|
(38,987)
|
|
Total stockholders’ equity
|
2,150,087
|
|
|
2,016,871
|
|
Total liabilities and stockholders’ equity
|
$
|
4,843,531
|
|
|
$
|
4,245,022
|
|
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net revenues
|
$
|
5,267,132
|
|
|
$
|
5,193,185
|
|
|
$
|
4,989,244
|
|
Cost of goods sold
|
2,796,599
|
|
|
2,852,714
|
|
|
2,737,830
|
|
Gross profit
|
2,470,533
|
|
|
2,340,471
|
|
|
2,251,414
|
|
Selling, general and administrative expenses
|
2,233,763
|
|
|
2,182,339
|
|
|
2,099,522
|
|
Restructuring and impairment charges
|
—
|
|
|
183,149
|
|
|
124,049
|
|
Income (loss) from operations
|
236,770
|
|
|
(25,017)
|
|
|
27,843
|
|
Interest expense, net
|
(21,240)
|
|
|
(33,568)
|
|
|
(34,538)
|
|
Other expense, net
|
(5,688)
|
|
|
(9,203)
|
|
|
(3,614)
|
|
Income (loss) before income taxes
|
209,842
|
|
|
(67,788)
|
|
|
(10,309)
|
|
Income tax expense (benefit)
|
70,024
|
|
|
(20,552)
|
|
|
37,951
|
|
Income (loss) from equity method investment
|
(47,679)
|
|
|
934
|
|
|
—
|
|
Net income (loss)
|
$
|
92,139
|
|
|
$
|
(46,302)
|
|
|
$
|
(48,260)
|
|
|
|
|
|
|
|
Basic net income (loss) per share of Class A, B and C common stock
|
$
|
0.20
|
|
|
$
|
(0.10)
|
|
|
$
|
(0.11)
|
|
Diluted net income (loss) per share of Class A, B and C common stock
|
$
|
0.20
|
|
|
$
|
(0.10)
|
|
|
$
|
(0.11)
|
|
|
|
|
|
|
|
Weighted average common shares outstanding Class A, B and C common stock
|
|
|
|
|
|
Basic
|
450,964
|
|
|
445,815
|
|
|
440,729
|
|
Diluted
|
454,274
|
|
|
445,815
|
|
|
440,729
|
|
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net income (loss)
|
$
|
92,139
|
|
|
$
|
(46,302)
|
|
|
$
|
(48,260)
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Foreign currency translation adjustment
|
10,754
|
|
|
(18,535)
|
|
|
23,357
|
|
Unrealized gain (loss) on cash flow hedge, net of tax benefit (expense) of $7,798, $(7,936), and $5,668 for the years ended December 31, 2019, 2018, and 2017, respectively.
|
(21,646)
|
|
|
22,800
|
|
|
(16,624)
|
|
Loss on intra-entity foreign currency transactions
|
(886)
|
|
|
(5,041)
|
|
|
7,199
|
|
Total other comprehensive income (loss)
|
(11,778)
|
|
|
(776)
|
|
|
13,932
|
|
Comprehensive income (loss)
|
$
|
80,361
|
|
|
$
|
(47,078)
|
|
|
$
|
(34,328)
|
|
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
Common Stock
|
|
|
|
Class B
Convertible
Common Stock
|
|
|
|
Class C
Common Stock
|
|
|
|
Additional Paid-in-Capital
|
|
Retained
Earnings
|
|
Accumulated Other Comprehensive Income
|
|
Total
Equity
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
183,815
|
|
|
61
|
|
|
34,450
|
|
|
11
|
|
|
220,174
|
|
|
73
|
|
|
823,484
|
|
|
1,259,414
|
|
|
(52,143)
|
|
|
$
|
2,030,900
|
|
Exercise of stock options
|
609
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
556
|
|
|
—
|
|
|
3,664
|
|
|
—
|
|
|
—
|
|
|
3,664
|
|
Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements
|
(65)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(78)
|
|
|
—
|
|
|
—
|
|
|
(2,781)
|
|
|
—
|
|
|
(2,781)
|
|
Issuance of Class A Common Stock, net of forfeitures
|
898
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of Class C Common Stock, net of forfeitures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,723
|
|
|
1
|
|
|
7,852
|
|
|
—
|
|
|
—
|
|
|
7,853
|
|
Impact of adoption of accounting standard updates
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,666)
|
|
|
(23,932)
|
|
|
—
|
|
|
(26,598)
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39,932
|
|
|
—
|
|
|
—
|
|
|
39,932
|
|
Comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(48,260)
|
|
|
13,932
|
|
|
(34,328)
|
|
Balance as of December 31, 2017
|
185,257
|
|
|
$
|
61
|
|
|
34,450
|
|
|
$
|
11
|
|
|
222,375
|
|
|
$
|
74
|
|
|
$
|
872,266
|
|
|
$
|
1,184,441
|
|
|
$
|
(38,211)
|
|
|
$
|
2,018,642
|
|
Exercise of stock options and warrants
|
2,084
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
2,127
|
|
|
—
|
|
|
6,747
|
|
|
—
|
|
|
—
|
|
|
6,748
|
|
Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements
|
(23)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(140)
|
|
|
—
|
|
|
—
|
|
|
(2,564)
|
|
|
—
|
|
|
(2,564)
|
|
Issuance of Class A Common Stock, net of forfeitures
|
392
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of Class C Common Stock, net of forfeitures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,060
|
|
|
1
|
|
|
(4,168)
|
|
|
—
|
|
|
—
|
|
|
(4,167)
|
|
Impact of adoption of accounting standard updates
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,507
|
|
|
—
|
|
|
3,507
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41,783
|
|
|
—
|
|
|
—
|
|
|
41,783
|
|
Comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(46,302)
|
|
|
(776)
|
|
|
(47,078)
|
|
Balance as of December 31, 2018
|
187,710
|
|
|
$
|
62
|
|
|
34,450
|
|
|
$
|
11
|
|
|
226,422
|
|
|
$
|
75
|
|
|
$
|
916,628
|
|
|
$
|
1,139,082
|
|
|
$
|
(38,987)
|
|
|
$
|
2,016,871
|
|
Exercise of stock options
|
441
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
293
|
|
|
—
|
|
|
2,101
|
|
|
—
|
|
|
—
|
|
|
2,101
|
|
Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements
|
(15)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(227)
|
|
|
—
|
|
|
—
|
|
|
(4,235)
|
|
|
—
|
|
|
(4,235)
|
|
Issuance of Class A Common Stock, net of forfeitures
|
154
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of Class C Common Stock, net of forfeitures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,540
|
|
|
1
|
|
|
5,370
|
|
|
—
|
|
|
—
|
|
|
5,371
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49,618
|
|
|
—
|
|
|
—
|
|
|
49,618
|
|
Comprehensive income (loss)
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
92,139
|
|
|
(11,778)
|
|
|
|
80,361
|
|
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
|
|
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities
|
|
|
|
|
|
Net income (loss)
|
$
|
92,139
|
|
|
$
|
(46,302)
|
|
|
$
|
(48,260)
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities
|
|
|
|
|
|
Depreciation and amortization
|
186,425
|
|
|
181,768
|
|
|
173,747
|
|
Unrealized foreign currency exchange rate gain (loss)
|
(2,073)
|
|
|
14,023
|
|
|
(29,247)
|
|
Impairment charges
|
39,000
|
|
|
9,893
|
|
|
71,378
|
|
Amortization of bond premium
|
254
|
|
|
254
|
|
|
254
|
|
Loss on disposal of property and equipment
|
4,640
|
|
|
4,256
|
|
|
2,313
|
|
Stock-based compensation
|
49,618
|
|
|
41,783
|
|
|
39,932
|
|
Excess tax benefit (loss) from stock-based compensation arrangements
|
—
|
|
|
—
|
|
|
(75)
|
|
Deferred income taxes
|
38,132
|
|
|
(38,544)
|
|
|
55,910
|
|
Changes in reserves and allowances
|
(26,096)
|
|
|
(234,998)
|
|
|
108,757
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
(45,450)
|
|
|
186,834
|
|
|
(79,106)
|
|
Inventories
|
149,519
|
|
|
109,919
|
|
|
(222,391)
|
|
Prepaid expenses and other assets
|
24,334
|
|
|
(107,855)
|
|
|
(52,106)
|
|
Other non-current assets
|
19,966
|
|
|
—
|
|
|
—
|
|
Accounts payable
|
59,458
|
|
|
26,413
|
|
|
145,695
|
|
Accrued expenses and other liabilities
|
(18,987)
|
|
|
134,594
|
|
|
109,823
|
|
Customer refund liability
|
(80,710)
|
|
|
305,141
|
|
|
—
|
|
Income taxes payable and receivable
|
18,862
|
|
|
41,051
|
|
|
(39,164)
|
|
Net cash provided by operating activities
|
509,031
|
|
|
628,230
|
|
|
237,460
|
|
Cash flows from investing activities
|
|
|
|
|
|
Purchases of property and equipment
|
(145,802)
|
|
|
(170,385)
|
|
|
(281,339)
|
|
Sale of property and equipment
|
—
|
|
|
11,285
|
|
|
—
|
|
Purchase of equity method investment
|
—
|
|
|
(39,207)
|
|
|
—
|
|
Purchases of other assets
|
(1,311)
|
|
|
(4,597)
|
|
|
(1,648)
|
|
Net cash (used in) provided by investing activities
|
(147,113)
|
|
|
(202,904)
|
|
|
(282,987)
|
|
Cash flows from financing activities
|
|
|
|
|
|
Proceeds from long term debt and revolving credit facility
|
25,000
|
|
|
505,000
|
|
|
763,000
|
|
Payments on long term debt and revolving credit facility
|
(162,817)
|
|
|
(695,000)
|
|
|
(665,000)
|
|
Employee taxes paid for shares withheld for income taxes
|
(4,235)
|
|
|
(2,743)
|
|
|
(2,781)
|
|
Proceeds from exercise of stock options and other stock issuances
|
7,472
|
|
|
2,580
|
|
|
11,540
|
|
Other financing fees
|
63
|
|
|
306
|
|
|
—
|
|
Payments of debt financing costs
|
(2,553)
|
|
|
(11)
|
|
|
—
|
|
Net cash used in financing activities
|
(137,070)
|
|
|
(189,868)
|
|
|
106,759
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
5,100
|
|
|
12,467
|
|
|
4,178
|
|
Net increase in cash, cash equivalents and restricted cash
|
229,948
|
|
|
247,925
|
|
|
65,410
|
|
Cash, cash equivalents and restricted cash
|
|
|
|
|
|
Beginning of period
|
566,060
|
|
|
318,135
|
|
|
252,725
|
|
End of period
|
$
|
796,008
|
|
|
$
|
566,060
|
|
|
$
|
318,135
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
Change in accrual for property and equipment
|
$
|
(8,084)
|
|
|
$
|
(14,611)
|
|
|
$
|
10,580
|
|
Other supplemental information
|
|
|
|
|
|
Cash paid (received) for income taxes, net of refunds
|
23,352
|
|
|
(16,738)
|
|
|
36,921
|
|
Cash paid for interest, net of capitalized interest
|
18,031
|
|
|
28,586
|
|
|
29,750
|
|
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Notes to the Audited Consolidated Financial Statements
1. Description of the Business
Under Armour, Inc. is a developer, marketer and distributor of branded performance apparel, footwear, and accessories. The Company creates products engineered to solve problems and make athletes better, as well as digital health and fitness apps built to connect people and drive performance. The Company's products are made, sold and worn worldwide.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Under Armour, Inc. and its wholly owned subsidiaries (the “Company”). All intercompany balances and transactions have been eliminated. The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
During 2019, the Company recorded an adjustment related to prior periods to correct unrecorded consulting expenses incurred primarily in connection with the 2018 restructuring plan. Selling, general and administrative expenses for the year ended December 31, 2019 includes $5.5 million of expense that was understated in prior periods. The Company concluded that the error was not material to any prior or interim periods presented.
During 2018, the Company identified an immaterial error in the presentation of premium subscriptions in its Connected Fitness reporting segment. Subscription revenue was previously recorded net of any related commission. Beginning in the first quarter of 2018, subscription revenue is recorded on a gross basis and the related commission cost is included in selling, general and administrative expense in the consolidated statement of operations. The Company revised 2017 to be consistent with the current presentation resulting in an increase in net revenues and selling, general and administrative expense of $12.7 million for the year ended December 31, 2017. There was no impact in any period on income (loss) from operations. The Company concluded that the error was not material to any of its previously issued financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at date of inception to be cash and cash equivalents. The Company's restricted cash is reserved for payments related to claims for its captive insurance program, which is included in prepaid expenses and other current assets on the Company's consolidated balance sheet. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Cash and cash equivalents
|
$
|
788,072
|
|
|
$
|
557,403
|
|
Restricted cash
|
7,936
|
|
|
8,657
|
|
Total cash, cash equivalents and restricted cash
|
$
|
796,008
|
|
|
$
|
566,060
|
|
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 retailers. Credit is extended based on an evaluation of the customer’s financial condition and collateral is not required. None of the Company's customers accounted for more than 10% of accounts receivable as of December 31, 2019 and December 31, 2018, respectively. For the years ended December 31, 2019, 2018 and 2017, no customer accounted for more than 10% of net revenues.
Sale of Accounts Receivable
In 2018, the Company entered into agreements with two financial institutions to sell selected accounts receivable on a recurring, non-recourse basis. In 2019, the Company amended one agreement to reduce the facility amount. Under each agreement, the Company may sell up to $140.0 million and $50.0 million, respectively, provided the accounts receivable of certain customers cannot be outstanding simultaneously with both institutions. Balances may remain outstanding at any point in time. The Company removes the sold accounts receivable from
the consolidated balance sheets at the time of sale. The Company does not retain any interests in the sold accounts receivable. The Company acts as the collection agent for the sold accounts receivable balances on behalf of the financial institutions.
As of December 31, 2019 and 2018, there were no amounts outstanding in connection with these arrangements. The funding fee charged by the financial institutions is included in the other income (expense), net line item in the consolidated statement of operations.
Allowance for Doubtful Accounts
The Company makes ongoing estimates relating to the collectability of accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the reserve, the Company considers historical levels of credit losses and significant economic developments within the retail environment that could impact the ability of its customers to pay outstanding balances and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Because the Company cannot predict future changes in the financial stability of its customers, actual future losses from uncollectible accounts may differ from estimates. If the financial condition of customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event the Company determines a smaller or larger reserve is appropriate, it would record a benefit or charge to selling, general and administrative expense in the period in which such a determination was made. As of December 31, 2019 and 2018, the allowance for doubtful accounts was $15.1 million and $22.2 million, respectively.
Inventories
Inventories consist primarily of finished goods. Costs of finished goods inventories include all costs incurred to bring inventory to its current condition, including inbound freight, duties and other costs. The Company values its inventory at standard cost which approximates landed cost, using the first-in, first-out method of cost determination. Net realizable value is estimated based upon assumptions made about future demand and retail market conditions. If the Company determines that the estimated net realizable value of its inventory is less than the carrying value of such inventory, it records a charge to cost of goods sold to reflect the lower of cost or net realizable value. If actual market conditions are less favorable than those projected by the Company, further adjustments may be required that would increase the cost of goods sold in the period in which such a determination was made.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary. The Company has made the policy election to record any liability associated with Global Intangible Low Taxed Income ("GILTI") in the period in which it is incurred.
Assessing whether deferred tax assets are realizable requires significant judgment. The Company considers all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent the Company believes it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against the Company’s deferred tax assets, which increase income tax expense in the period when such a determination is made.
Income taxes include the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions or obtaining new information on particular tax positions may cause a change to the effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the consolidated statements of operations.
Goodwill, Intangible Assets and Long-Lived Assets
Goodwill and intangible assets are recorded at their estimated fair values at the date of acquisition and are allocated to the reporting units that are expected to receive the related benefits. Goodwill and indefinite lived intangible assets are not amortized and are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. In conducting an annual impairment test, the Company first reviews
qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If factors indicate that is the case, the Company performs the goodwill impairment test. The Company compares the fair value of the reporting unit with its carrying amount. The Company estimates fair value using the discounted cash flows model, under the income approach, which indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include: the Company's weighted average cost of capital, long-term rate of growth and profitability of the reporting unit’s business, and working capital effects. If the carrying amount of a reporting unit exceeds its fair value, goodwill is impaired to the extent that the carrying value exceeds the fair value of the reporting unit. The Company performs its annual impairment testing in the fourth quarter of each year.
As of the Company's annual impairment test, no impairment of goodwill was identified. The fair value of each reporting unit substantially exceeded its carrying value, with the exception of its Latin America reporting unit. No events occurred during the period ended December 31, 2019 that indicated it was more likely than not that goodwill was impaired. Refer to Note 5 to the Consolidated Financial Statements for a further discussion of goodwill.
The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable. These factors may include a significant deterioration of operating results, changes in business plans, or changes in anticipated cash flows. When factors indicate that an asset should be evaluated for possible impairment, the Company reviews long-lived assets to assess recoverability from future operations using undiscounted cash flows. If future undiscounted cash flows are less than the carrying value, an impairment is recognized in earnings to the extent that the carrying value exceeds fair value.
Accrued Expenses
At December 31, 2019, accrued expenses primarily included $118.7 million and $63.2 million of accrued compensation and benefits and marketing expenses, respectively. At December 31, 2018, accrued expenses primarily included $130.8 million and $60.1 million of accrued compensation and benefits and marketing expenses, respectively.
Foreign Currency Translation and Transactions
The functional currency for each of the Company’s wholly owned foreign subsidiaries is generally the applicable local currency. The translation of foreign currencies into U.S. dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the period. Capital accounts are translated at historical foreign currency exchange rates. Translation gains and losses are included in stockholders’ equity as a component of accumulated other comprehensive income. Adjustments that arise from foreign currency exchange rate changes on transactions, primarily driven by intercompany transactions, denominated in a currency other than the functional currency are included in other expense, net on the consolidated statements of operations.
Derivatives and Hedging Activities
The Company uses derivative financial instruments in the form of foreign currency and interest rate swap contracts to minimize the risk associated with foreign currency exchange rate and interest rate fluctuations. The Company accounts for derivative financial instruments pursuant to applicable accounting guidance. This guidance establishes accounting and reporting standards for derivative financial instruments and requires all derivatives to be recognized as either assets or liabilities on the balance sheet and to be measured at fair value. Unrealized derivative gain positions are recorded as other current assets or other long term assets, and unrealized derivative loss positions are recorded as other current liabilities or other long term liabilities, depending on the derivative financial instrument’s maturity date.
For contracts designated as cash flow hedges, the changes in fair value are reported as other comprehensive income and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. One of the criteria for this accounting treatment is the notional value of these derivative contracts should not be in excess of specifically identified anticipated transactions. By their very nature, the Company's estimates of the anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decline below hedged levels, or if it is no longer probable a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time, the Company is required to reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Other comprehensive income (loss) to
Other expense, net during the period in which the decrease occurs. The Company does not enter into derivative financial instruments for speculative or trading purposes.
Revenue Recognition
The Company recognizes revenue pursuant to Accounting Standards Codification 606 ("ASC 606"). Net revenues consist of net sales of apparel, footwear and accessories, license and Connected Fitness revenue. The Company recognizes revenue when it satisfies its performance obligations by transferring control of promised products or services to its customers, which occurs either at a point in time or over time, depending on when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that the Company ultimately expects to be entitled to in exchange for the products or services and is subject to an overall constraint that a significant revenue reversal will not occur in future periods. Sales taxes imposed on the Company’s revenues from product sales are presented on a net basis on the consolidated statements of operations, and therefore do not impact net revenues or costs of goods sold.
Revenue transactions associated with the sale of apparel, footwear, and accessories, comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct to consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control has passed to the customer, based on the terms of sale. In the Company’s wholesale channel, transfer of control is based upon shipment under free on board shipping point for most goods or upon receipt by the customer depending on the country of the sale and the agreement with the customer. The Company may also ship product directly from its supplier to wholesale customers and recognize revenue when the product is delivered to and accepted by the customer. In the Company’s direct to consumer channel, transfer of control takes place at the point of sale for brand and factory house customers and upon shipment to substantially all e-commerce customers. Payment terms for wholesale transactions are established in accordance with local and industry practices. Payment is generally required within 30 to 60 days of shipment to or receipt by the wholesale customer in the United States, and generally within 60 to 90 days of shipment to or receipt by the wholesale customer internationally. Payment is generally due at the time of sale for direct to consumer transactions.
Gift cards issued to customers by the Company are recorded as contract liabilities until they are redeemed, at which point revenue is recognized. The Company also estimates and recognizes revenue for gift card balances not expected to ever be redeemed ("breakage") to the extent that it does not have a legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdiction as unclaimed or abandoned property. Such estimates are based upon historical redemption trends, with breakage income recognized in proportion to the pattern of actual customer redemptions
Revenue from the Company's licensing arrangements is recognized over time during the period that licensees are provided access to the Company's trademarks and benefit from such access through their sales of licensed products. These arrangements require licensees to pay a sales-based royalty, which for most arrangements may be subject to a contractually guaranteed minimum royalty amount. Payments are generally due quarterly. The Company recognizes revenue for sales-based royalty arrangements (including those for which the royalty exceeds any contractually guaranteed minimum royalty amount) as licensed products are sold by the licensee. If a sales-based royalty is not ultimately expected to exceed a contractually guaranteed minimum royalty amount, the minimum is recognized as revenue over the contractual period. This sales-based output measure of progress and pattern of recognition best represents the value transferred to the licensee over the term of the arrangement, as well as the amount of consideration that the Company is entitled to receive in exchange for providing access to its trademarks.
Revenue from Connected Fitness subscriptions is recognized on a gross basis and is recognized over the term of the subscription. The Company receives payments in advance of revenue recognition for subscriptions and are recorded as contract liabilities in the Company's consolidated balance sheet. Related commission cost is included in selling, general and administrative expense in the consolidated statement of operations. Revenue from Connected Fitness digital advertising is recognized as the Company satisfies performance obligations pursuant to customer insertion orders.
The Company records reductions to revenue for estimated customer returns, allowances, markdowns and discounts. The Company bases its estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns and allowances that have not yet been received by the Company. The actual amount of customer returns and allowances, which is inherently uncertain, may differ from the Company’s estimates. If the Company determines that actual or expected returns or allowances are significantly higher or lower than the reserves it established, it would record a reduction or increase, as appropriate, to net sales
in the period in which it makes such a determination. Provisions for customer specific discounts are based on negotiated arrangements with certain major customers. Reserves for returns, allowances, markdowns and discounts are included within customer refund liability and the value of inventory associated with reserves for sales returns are included within prepaid expenses and other current assets on the consolidated balance sheet. The Company reviews and refines these estimates on at least a quarterly basis. As of December 31, 2019 and 2018, there were $219.4 million and $301.4 million, respectively, in reserves for returns, allowances, markdowns and discounts within customer refund liability and $61.1 million and $113.9 million, respectively, as the estimated value of inventory associated with the reserves for sales returns within prepaid expenses and other current assets on the consolidated balance sheet.
Refer to Note 17 to the Consolidated Financial Statements for a further discussion of disaggregated revenues.
Contract Liability
Contract liabilities are recorded when a customer pays consideration, or the Company has a right to an amount of consideration that is unconditional, before the transfer of a good or service to the customer and thus represent the Company's obligation to transfer the good or service to the customer at a future date. The Company's contract liabilities consist of payments received in advance of revenue recognition for subscriptions for the Company's Connected Fitness applications, gift cards and royalty arrangements. Contract liabilities are included in other liabilities on the Company's consolidated balance sheet. As of December 31, 2019 and 2018, contract liability was $60.4 million and $55.0 million, respectively.
For the year ended December 31, 2019, the Company recognized $48.5 million of revenue that was previously included in contract liability as of December 31, 2018. For the year ended December 31, 2018, the Company recognized $41.1 million of revenue that was previously included in contract liability as of December 31, 2017. The change in the contract liability balance primarily results from the timing differences between the Company's satisfaction of performance obligations and the customer's payment. Commissions related to subscription revenue are capitalized and recognized over the subscription period.
Practical Expedients and Policy Elections
The Company has made a policy election to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment cost rather than an additional promised service. Additionally, the Company has elected not to disclose certain information related to unsatisfied performance obligations for subscriptions for its Connected Fitness applications as they have an original expected length of one year or less.
Advertising Costs
Advertising costs are charged to selling, general and administrative expenses. Advertising production costs are expensed the first time an advertisement related to such production costs is run. Media (television, print and radio) placement costs are expensed in the month during which the advertisement appears, and costs related to event sponsorships are expensed when the event occurs. In addition, advertising costs include sponsorship expenses. Accounting for sponsorship payments is based upon specific contract provisions and the payments are generally expensed uniformly over the term of the contract after recording expense related to specific performance incentives once they are deemed probable. Advertising expense, including amortization of in-store marketing fixtures and displays, was $578.9 million, $543.8 million and $565.1 million for the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019 and 2018, prepaid advertising costs were $26.9 million and $20.8 million, respectively.
Shipping and Handling Costs
The Company charges certain customers shipping and handling fees. These fees are recorded in net revenues. The Company includes the majority of outbound handling costs as a component of selling, general and administrative expenses. Outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate the Company’s distribution facilities. These costs, included within selling, general and administrative expenses, were $81.0 million, $91.8 million and $101.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. The Company includes outbound freight costs associated with shipping goods to customers as a component of cost of goods sold.
Equity Method Investment
In April 2018, the Company invested ¥4.2 billion or $39.2 million in exchange for an additional 10% common stock ownership in Dome Corporation ("Dome"), the Company's Japanese licensee. This additional investment brought the Company's total investment in Dome's common stock to 29.5%, from 19.5%. The Company accounted for its investment in Dome under the equity method, given that it has the ability to exercise significant influence, but not control, over Dome. Investments under the equity method are required to be considered for impairment when events or circumstances suggest that the carrying amount may not be recoverable. If a qualitative assessment indicates that the Company's investment in Dome may be impaired, a quantitative assessment is performed. If the quantitative assessment indicates a decline in value that is determined to be other-than-temporary, an impairment charge would be recognized.
The Company performed a qualitative assessment of potential impairment indicators for its investment in Dome and determined that indicators of impairment exist. While there was no single event or factor, the Company considered Dome's future rate of growth and profitability and strategic objectives. The Company performed a valuation of its investment in Dome and determined that the fair value of its investment is less than its carrying value by $39.0 million. The Company determined this decline in value to be other-than-temporary considering the extent to which the market value of its investment is less than the carrying value, the amount of Dome's indebtedness maturing within a short-term period, and Dome's long-term financial forecast. As a result, the Company recorded a $39.0 million impairment of the Company's equity method investment in Dome in the fourth quarter of 2019, for the year ended, December 31, 2019. The impairment charge was recorded within income (loss) from equity method investment on the consolidated statements of operations and as a reduction to the invested balance within other long term assets on the consolidated balance sheets. The Company calculated fair value using the discounted cash flows model, which indicates the fair value of the investment based on the present value of the cash flows that it expects the investment to generate in the future.
For the years ended December 31, 2019 and 2018, the Company recorded the allocable share of Dome’s net loss of $8.7 million and net income of $1.0 million, respectively, within income (loss) from equity method investment on the consolidated statements of operations and as an adjustment to the invested balance within other long term assets on the consolidated balance sheets. As of December 31, 2019 and 2018, the carrying value of the Company's total investment in Dome was $5.1 million and $52.8 million, respectively.
In addition to the investment in Dome, the Company has a license agreement with Dome. The Company recorded license revenues from Dome of $37.8 million and $35.6 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, respectively, the Company had $15.6 million and $13.1 million in licensing receivables outstanding, recorded in the prepaid expenses and other current assets line item within the Company's consolidated balance sheet.
Earnings per Share
Basic earnings per common share is computed by dividing net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Any stock-based compensation awards that are determined to be participating securities, which are stock-based compensation awards that entitle the holders to receive dividends prior to vesting, are included in the calculation of basic earnings per share using the two class method. Diluted earnings per common share is computed by dividing net income available to common stockholders for the period by the diluted weighted average common shares outstanding during the period. Diluted earnings per share reflects the potential dilution from common shares issuable through stock options, warrants, restricted stock units and other equity awards. Refer to Note 12 for further discussion of earnings per share.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with accounting guidance that requires all stock-based compensation awards granted to employees and directors to be measured at fair value and recognized as an expense in the financial statements. In addition, this guidance requires that excess tax benefits related to stock-based compensation awards be reflected as operating cash flows.
The Company uses the Black-Scholes option-pricing model to estimate the fair market value of stock-based compensation awards. The Company uses the “simplified method” to estimate the expected life of options, as permitted by accounting guidance. The “simplified method” calculates the expected life of a stock option equal to the time from grant to the midpoint between the vesting date and contractual term, taking into account all vesting tranches. The risk free interest rate is based on the yield for the U.S. Treasury bill with a maturity equal to the expected life of the stock option. Expected volatility is based on the Company's historical average. Compensation expense is recognized net of forfeitures on a straight-line basis over the total vesting period, which is the implied
requisite service period. Compensation expense for performance-based awards is recorded over the implied requisite service period when achievement of the performance target is deemed probable.
The Company issues new shares of Class A Common Stock and Class C Common Stock upon exercise of stock options, grant of restricted stock or share unit conversion. Refer to Note 13 for further details on stock-based compensation.
Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Fair Value of Financial Instruments
The carrying amounts shown for the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short term maturity of those instruments. The fair value of the Company's Senior Notes was $587.5 million and $500.1 million as of December 31, 2019 and 2018. The fair value of the Company's other long term debt approximates its carrying value based on the variable nature of interest rates and current market rates available to the Company. The fair value of foreign currency contracts is based on the net difference between the U.S. dollars to be received or paid at the contracts’ settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current exchange rate. The fair value of the interest rate swap contract is based on the net difference between the fixed interest to be paid and variable interest to be received over the term of the contract based on current market rates.
Recently Issued Accounting Standards
In June 2016, the Financial Accounting Standards Boards ("FASB") issued ASU 2016-13 - Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses. The new standard applies to financial assets measured at amortized cost basis, including receivables that result from revenue transactions. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and early adoption is permitted for fiscal years beginning after December 15, 2018. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting for income taxes. The ASU impacts various topic areas within ASC 740, including accounting for taxes under hybrid tax regimes, accounting for increases in goodwill, allocation of tax amounts to separate company financial statements within a group that files a consolidated tax return, intra period tax allocation, interim period accounting, and accounting for ownership changes in investments, among other minor codification improvements. The guidance in this ASU becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating this guidance and anticipates adopting effective January 1, 2021. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.
Recently Adopted Accounting Standards
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, an update that amends and simplifies certain aspects of hedge accounting rules to increase transparency of the impact of risk management activities in the financial statements. The Company adopted this ASU on January 1, 2019. There was no material impact to the Company's consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends the existing guidance for leases and requires recognition of operating leases with lease terms of more than twelve months and all financing leases on the balance sheet. For these leases, companies record assets for the rights and liabilities for the obligations that are created by the leases. This ASU requires disclosures that provide qualitative and quantitative information for the lease assets and liabilities recorded in the financial statements. The Company adopted this ASU and related amendments on January 1, 2019, and has elected certain practical expedients permitted under the transition guidance. The Company elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. Accordingly, results for reporting periods as of
January 1, 2019 are presented under the new standard, while prior period results continue to be reported under the previous standard. As permitted, the Company (i) did not reassess whether existing contracts are or contain leases, (ii) carried forward the lease classification for any existing or expired leases, and (iii) did not reassess any initial direct costs for any existing leases and whether existing land easements and rights of way, which were not previously accounted for as leases, are leases. The Company did not elect the practical expedient of hindsight when determining the lease term of existing contracts at the effective date. The Company implemented a new lease accounting system in connection with the adoption of this ASU. The Company has operating lease right-of-use assets of $613.8 million and operating lease liabilities of $724.6 million on the Company's consolidated balance sheets upon the date of adoption, January 1, 2019. The difference between the operating lease right-of-use assets and operating lease liabilities primarily represents the existing deferred rent and tenant improvement allowance liabilities balance, resulting from historical straight-lining of operating leases, which were effectively reclassified upon adoption to reduce the measurement of the leased assets. The adoption of Topic 842 had no material impact to the consolidated statements of operations, consolidated statements of comprehensive income, consolidated statement of shareholders' equity and consolidated statements of cash flows. Refer to Note 6 for a discussion of leases.
3. Restructuring and Impairment
As previously announced, in both 2017 and 2018, the Company's Board of Directors approved restructuring plans (the "2017 restructuring plan" and "2018 restructuring plan") designed to more closely align its financial resources with the critical priorities of the business and optimize operations. The Company recognized approximately $203.9 million of pre-tax charges in connection with the 2018 restructuring plan and approximately $129.1 million of pre-tax charges in connection with the 2017 restructuring plan, inclusive of $28.6 million of restructuring related goodwill impairment charges for the Company's Connected Fitness business. All restructuring charges under the plans were incurred by December 31, 2018.
Property and equipment impairment
As a part of the 2018 and 2017 restructuring plans, the Company abandoned the use of several assets included within Property and equipment, resulting in an impairment charge of $12.1 million and $30.7 million during the years ended December 31, 2018 and 2017, respectively, reducing the carrying value of these assets to their estimated fair values. Fair value was estimated using an income-approach based on management’s forecast of future cash flows expected to be derived from the asset's use.
Intangible asset impairment
In connection with the 2017 restructuring plan, strategic decisions were made during the third quarter of 2017 to abandon the use of certain intangible assets in the Company's Connected Fitness reporting unit. These intangible assets included technology and brand names, resulting in total intangible asset impairment charges of $12.1 million, reducing the carrying value of these assets to their estimated fair values. Fair value was estimated using an income-approach based on management’s forecast of future cash flows expected to be derived from the asset's use.
Goodwill impairment
In addition, the Company also made the strategic decision to not pursue certain other planned future revenue streams in connection with the 2017 restructuring plan. The Company determined sufficient indication existed to trigger the performance of an interim goodwill impairment for the Company’s Connected Fitness reporting unit. Using updated cash flow projections, the Company calculated the fair value of the Connected Fitness reporting unit based on the discounted cash flows model. The carrying value exceeded the fair value, resulting in an impairment of goodwill. As the excess of the carrying value for the Connected Fitness reporting unit was greater than the goodwill for this reporting unit, the Company recorded goodwill impairment of $28.6 million, which represented all of the goodwill for this reporting unit.
The summary of the costs incurred during the years ended December 31, 2018 and 2017, in connection with the 2018 and 2017 restructuring plans, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Year Ended December 31, 2018
|
|
Year Ended
December 31, 2017
|
Costs recorded in cost of goods sold:
|
|
|
|
Inventory write-offs
|
$
|
20,800
|
|
|
$
|
5,077
|
|
Total cost recorded in cost of goods sold
|
20,800
|
|
|
5,077
|
|
|
|
|
|
Costs recorded in restructuring and impairment charges:
|
|
|
|
Property and equipment impairment
|
12,146
|
|
|
30,677
|
|
Intangible asset impairment
|
—
|
|
|
12,054
|
|
Goodwill impairment
|
—
|
|
|
28,647
|
|
Employee related costs
|
9,949
|
|
|
14,572
|
|
Contract exit costs
|
114,126
|
|
|
12,029
|
|
Other restructuring costs
|
46,928
|
|
|
26,070
|
|
Total costs recorded in restructuring and impairment charges
|
183,149
|
|
|
124,049
|
|
Total restructuring, impairment and restructuring related costs
|
$
|
203,949
|
|
|
$
|
129,126
|
|
A summary of the activity in the restructuring reserve related to the Company's 2017 and 2018 Restructuring Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Employee Related Costs
|
|
Contract Exit Costs
|
|
Other Restructuring Related Costs
|
Balance at January 1, 2019
|
$
|
8,532
|
|
|
$
|
71,356
|
|
|
$
|
4,876
|
|
Additions charged to expense
|
—
|
|
|
—
|
|
|
—
|
|
Cash payments charged against reserve
|
(5,732)
|
|
|
(21,914)
|
|
|
(4,794)
|
|
Reclassification to operating lease liabilities (1)
|
—
|
|
|
(30,572)
|
|
|
—
|
|
Changes in reserve estimate
|
(2,338)
|
|
|
(1,027)
|
|
|
(82)
|
|
Balance at December 31, 2019
|
$
|
462
|
|
|
$
|
17,843
|
|
|
$
|
—
|
|
(1) Certain restructuring reserves have been reclassified to operating lease liabilities on the consolidated balance sheets in connection with the adoption of ASU 2016-02.
4. Property and Equipment, Net
Property and equipment are stated at cost, including the cost of internal labor for software customized for internal use, less accumulated depreciation and amortization. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets: 3 to 10 years for furniture, office equipment, software and plant equipment and 10 to 35 years for site improvements, buildings and building equipment. Leasehold and tenant improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. The cost of in-store apparel and footwear fixtures and displays are capitalized, included in furniture, fixtures and displays, and depreciated over 3 years. The Company periodically reviews assets’ estimated useful lives based upon actual experience and expected future utilization. A change in useful life is treated as a change in accounting estimate and is applied prospectively.
The Company capitalizes the cost of interest for long term property and equipment projects based on the Company’s weighted average borrowing rates in place while the projects are in progress. Capitalized interest was $1.6 million and $1.9 million as of December 31, 2019 and 2018, respectively.
Upon retirement or disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in selling, general and administrative expenses for that period. Major additions and betterments are capitalized to the asset accounts while maintenance and repairs, which do not improve or extend the lives of assets, are expensed as incurred.
As part of the Company's 2018 restructuring plan, the Company abandoned the use of several assets included within Property and equipment, resulting in an impairment charge of $12.1 million during the year ended December 31, 2018, reducing the carrying value of these assets to their estimated fair values.
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
Leasehold and tenant improvements
|
|
$
|
563,061
|
|
|
$
|
446,330
|
|
Furniture, fixtures and displays
|
|
235,721
|
|
|
218,930
|
|
Buildings
|
|
52,184
|
|
|
48,230
|
|
Software
|
|
337,577
|
|
|
286,014
|
|
Office equipment
|
|
126,412
|
|
|
121,202
|
|
Plant equipment
|
|
144,844
|
|
|
138,867
|
|
Land
|
|
83,626
|
|
|
83,626
|
|
Construction in progress
|
|
54,771
|
|
|
136,916
|
|
Other
|
|
4,071
|
|
|
2,348
|
|
Subtotal property and equipment
|
|
1,602,267
|
|
|
1,482,463
|
|
Accumulated depreciation
|
|
(810,119)
|
|
|
(655,595)
|
|
Property and equipment, net
|
|
$
|
792,148
|
|
|
$
|
826,868
|
|
Construction in progress primarily includes costs incurred for software systems, leasehold improvements and in-store fixtures and displays not yet placed in use.
Depreciation expense related to property and equipment was $177.3 million, $173.4 million and $164.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
5. Goodwill and Intangible Assets, Net
The following table summarizes changes in the carrying amount of the Company’s goodwill by reportable segment as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
North America
|
|
EMEA
|
|
Asia-Pacific
|
|
Latin America
|
|
Connected Fitness
|
|
Total
|
Balance as of December 31, 2017
|
|
$
|
318,455
|
|
|
$
|
111,155
|
|
|
$
|
81,323
|
|
|
$
|
44,741
|
|
|
$
|
—
|
|
|
$
|
555,674
|
|
Effect of currency translation adjustment
|
|
(955)
|
|
|
(6,332)
|
|
|
(1,913)
|
|
|
20
|
|
|
—
|
|
|
$
|
(9,180)
|
|
Balance as of December 31, 2018
|
|
317,500
|
|
|
104,823
|
|
|
79,410
|
|
|
44,761
|
|
|
—
|
|
|
546,494
|
|
Effect of currency translation adjustment
|
|
788
|
|
|
1,243
|
|
|
(242)
|
|
|
1,895
|
|
|
—
|
|
|
3,684
|
|
Balance as of December 31, 2019
|
|
$
|
318,288
|
|
|
$
|
106,066
|
|
|
$
|
79,168
|
|
|
$
|
46,656
|
|
|
$
|
—
|
|
|
$
|
550,178
|
|
As of December 31, 2019, the Company's goodwill had an aggregate carrying value of $550.2 million. The Company performed its annual impairment testing in the fourth quarter of 2019. As of the Company's annual impairment test, no impairment of goodwill was identified. The fair value of each reporting unit substantially exceeded its carrying value, with the exception of the Latin America reporting unit. The fair value of the Latin America reporting unit exceeded its carrying value by 19%. Holding all other assumptions used in the fair value measurement of the Latin America reporting unit constant, a reduction in the growth rate of revenue by 2.25 percentage points or a reduction in the growth rate of net income by 3.5 percentage points would eliminate the headroom. No events occurred during the period ended December 31, 2019 that indicated it was more likely than not that goodwill was impaired.
The following table summarizes the Company’s intangible assets as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
(In thousands)
|
|
Useful Lives from Date of Acquisitions (in years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Impairment
|
Net Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Impairment
|
Net Carrying
Amount
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
User base
|
|
10
|
|
$
|
48,227
|
|
|
$
|
(23,316)
|
|
|
$
|
—
|
|
$
|
24,911
|
|
|
$
|
48,326
|
|
|
$
|
(18,456)
|
|
|
$
|
—
|
|
$
|
29,870
|
|
Technology
|
|
5-7
|
|
2,536
|
|
|
(965)
|
|
|
—
|
|
1,571
|
|
|
2,536
|
|
|
(386)
|
|
|
—
|
|
2,150
|
|
Customer relationships
|
|
2-3
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
9,851
|
|
|
(9,851)
|
|
|
—
|
|
—
|
|
Nutrition database
|
|
10
|
|
4,500
|
|
|
(2,156)
|
|
|
—
|
|
2,344
|
|
|
4,500
|
|
|
(1,706)
|
|
|
—
|
|
2,794
|
|
Lease-related intangible assets
|
|
1-15
|
|
5,152
|
|
|
(2,380)
|
|
|
—
|
|
2,772
|
|
|
6,114
|
|
|
(3,633)
|
|
|
—
|
|
2,481
|
|
Other
|
|
5-10
|
|
1,428
|
|
|
(1,154)
|
|
|
—
|
|
274
|
|
|
1,376
|
|
|
(1,128)
|
|
|
—
|
|
248
|
|
Total
|
|
|
|
$
|
61,843
|
|
|
$
|
(29,970)
|
|
|
$
|
—
|
|
$
|
31,871
|
|
|
$
|
72,703
|
|
|
$
|
(35,160)
|
|
|
$
|
—
|
|
$
|
37,543
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
4,474
|
|
|
|
|
|
|
|
4,250
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
$
|
36,345
|
|
|
|
|
|
|
|
$
|
41,793
|
|
In connection with the Company's sale of its Brazil subsidiary, the Company sold certain indefinite-lived intangible assets in 2018, which resulted in a reduction to the net carrying amount of the Company's indefinite-lived intangible assets.
Amortization expense, which is included in selling, general and administrative expenses, was $6.1 million, $6.1 million and $8.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. The following is the estimated amortization expense for the Company’s intangible assets as of December 31, 2019:
|
|
|
|
|
|
(In thousands)
|
|
2020
|
$
|
6,870
|
|
2021
|
6,582
|
|
2022
|
6,332
|
|
2023
|
5,690
|
|
2024
|
5,341
|
|
2025 and thereafter
|
1,056
|
|
Amortization expense of intangible assets
|
$
|
31,871
|
|
6. Leases
The Company enters into operating leases both domestically and internationally, to lease certain warehouse space, office facilities, space for its brand and factory house stores and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2035, excluding extensions at the Company's option, and include provisions for rental adjustments.
The Company accounts for a contract as a lease when it has the right to direct the use of the asset for a period of time while obtaining substantially all of the asset’s economic benefits. The Company determines the initial classification and measurement of its right-of-use ("ROU") assets and lease liabilities at the lease commencement date and thereafter if modified. ROU assets represent the Company’s right to control the underlying assets under lease, over the contractual term. ROU assets and lease liabilities are recognized on the consolidated balance sheets based on the present value of future minimum lease payments to be made over the lease term. ROU assets and lease liabilities are established on the consolidated balance sheets for leases with an expected term greater than one year. Short-term lease payments were not material for the year ended December 31, 2019.
As the rate implicit in the lease is not readily determinable, the Company uses its secured incremental borrowing rate to determine the present value of the lease payments. The Company calculates the incremental borrowing rate based on the current market yield curve and adjusts for foreign currency for international leases.
Fixed lease costs are included in the recognition of ROU assets and lease liabilities. Variable lease costs are not included in the measurement of the lease liability. These variable lease payments are recognized in the consolidated statements of operations in the period in which the obligation for those payments is incurred. Variable lease payments primarily consist of payments dependent on sales in brand and factory house stores. The Company has elected to combine lease and non-lease components in the determination of lease costs for its leases. The lease liability includes lease payments related to options to extend or renew the lease term only if the Company is reasonably certain to exercise those options.
The Company recognizes lease expense on a straight-line basis over the lease term. Included in selling, general and administrative expenses were operating lease costs of $166.4 million, including $12.9 million in variable lease payments, for the year ended December 31, 2019, under non-cancelable operating lease agreements.
There are no residual value guarantees that exist, and there are no restrictions or covenants imposed by leases. The Company rents or subleases excess office facilities and warehouse space to third parties. Sublease income is not material.
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
December 31, 2019
|
Weighted average remaining lease term (in years)
|
6.73
|
Weighted average discount rate
|
4.26
|
%
|
Supplemental cash flow and other information related to leases was as follows:
|
|
|
|
|
|
(In thousands)
|
Year ended
December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
Operating cash outflows from operating leases
|
$
|
116,811
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
$
|
70,075
|
|
Maturities of lease liabilities are as follows:
|
|
|
|
|
|
(In thousands)
|
|
2020
|
$
|
152,920
|
|
2021
|
136,219
|
|
2022
|
123,477
|
|
2023
|
109,053
|
|
2024
|
92,000
|
|
2025 and thereafter
|
209,492
|
|
Total lease payments
|
$
|
823,161
|
|
Less: Interest
|
116,626
|
|
Total present value of lease liabilities
|
$
|
706,535
|
|
|
|
As of December 31, 2019, the Company has additional operating lease obligations that have not yet commenced of approximately $350.2 million, which are not reflected in the table above. These relate to retail store lease obligations commencing in 2020, with lease terms up to 15 years, and primarily relate to a flagship store.
Supplemental Information for Comparative Periods
The following is a schedule of future minimum lease payments for non-cancelable real property and equipment operating leases as of December 31, 2018:
|
|
|
|
|
|
(In thousands)
|
|
2019
|
$
|
142,648
|
|
2020
|
148,171
|
|
2021
|
154,440
|
|
2022
|
141,276
|
|
2023
|
128,027
|
|
2024 and thereafter
|
699,262
|
|
Total future minimum lease payments
|
$
|
1,413,824
|
|
Included in selling, general and administrative expenses was rent expense of $152.7 million and $141.2 million for the years ended December 31, 2018 and 2017, respectively, under non-cancelable operating lease agreements. Included in these amounts was contingent rent expense of $14.2 million and $15.5 million for the years ended December 31, 2018 and 2017, respectively.
7. 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, PNC Bank, National Association, as syndication agent and the other lenders and arrangers party thereto (the "credit agreement"), amending and restating the Company's prior credit agreement. The credit agreement has a term of five years, maturing in March 2024, with permitted extensions under certain circumstances, and provides revolving credit commitments of up to $1.25 billion of borrowings, but no term loan borrowings, which were provided for under the prior credit agreement. As of December 31, 2019, there were no amounts outstanding under the revolving credit facility or the term loan. As of December 31, 2018, there were no amounts outstanding under the revolving credit facility and $136.3 million outstanding under the term loan.
At the Company's request and the lender's consent, revolving and or term loan borrowings may be increased by up to $300.0 million in aggregate, subject to certain conditions as set forth in the credit agreement, as amended. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time the Company seeks to incur such borrowings.
The borrowings under the revolving credit facility have maturities of less than one year. Up to $50.0 million of the facility may be used for the issuance of letters of credit. There were $5.0 million of letters of credit outstanding as of December 31, 2019.
The credit agreement contains negative covenants that, subject to significant exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. The Company is also required to maintain a ratio of consolidated EBITDA, as defined in the credit agreement, to consolidated interest expense of not less than 3.50 to 1.00 and is not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.00 ("consolidated leverage ratio"). As of December 31, 2019, the Company was in compliance with these ratios. In addition, the credit agreement contains events of default that are customary for a facility of this nature, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the credit agreement, will be considered an event of default under the credit agreement.
Borrowings under the credit agreement bear interest at a rate per annum equal to, at the Company’s option, either (a) an alternate base rate, or (b) a rate based on the rates applicable for deposits in the interbank market for U.S. Dollars or the applicable currency in which the loans are made (“adjusted LIBOR”), plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to a grid (the “Pricing Grid”) based on the consolidated leverage ratio and ranges between 1.00% to 1.25% for adjusted LIBOR loans and 0.00% to 0.25% for alternate base rate loans. The weighted average interest rate under the outstanding term loan was 3.2% during the year ended December 31, 2018. During the year ended December 31, 2019, there were no borrowings under the outstanding term loan. The weighted average interest rate under the revolving credit facility borrowings was 3.6% and 3.0% during the years ended December 31, 2019 and 2018, respectively. The Company pays a commitment fee on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit. As of December 31, 2019, the commitment fee was 15 basis points. Since inception, the Company incurred and deferred $3.4 million in financing costs in connection with the credit agreement.
3.250% Senior Notes
In June 2016, the Company issued $600.0 million aggregate principal amount of 3.250% senior unsecured notes due June 15, 2026 (the “Notes”). The proceeds were used to pay down amounts outstanding under the revolving credit facility. Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. Prior to March 15, 2026 (three months prior to the maturity date of the Notes), the Company may redeem some or all of the Notes at any time or from time to time at a redemption price equal to the greater of 100% of the principal amount of the Notes to be redeemed or a “make-whole” amount applicable to such Notes as described in the indenture governing the Notes, plus accrued and unpaid interest to, but excluding, the redemption date. On or after March 15, 2026 (three months prior to the maturity date of the Notes), the Company may redeem some or all of the Notes at any time or from time to time at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The indenture governing the Notes contains covenants, including limitations that restrict the Company’s ability and the ability of certain of its subsidiaries to create or incur secured indebtedness and enter into sale and leaseback transactions and the Company’s ability to consolidate, merge or transfer all or substantially all of its properties or assets to another person, in each case subject to material exceptions described in the indenture. The Company incurred and deferred $5.3 million in financing costs in connection with the Notes.
Other Long Term Debt
In December 2012, the Company entered into a $50.0 million recourse loan collateralized by the land, buildings and tenant improvements comprising the Company's corporate headquarters. In July 2018, this loan was paid in full, without penalties, using borrowings under the Company's revolving credit facility.
The following are the scheduled maturities of long term debt as of December 31, 2019:
|
|
|
|
|
|
(In thousands)
|
|
2020
|
$
|
—
|
|
2021
|
—
|
|
2022
|
—
|
|
2023
|
—
|
|
2024
|
—
|
|
2025 and thereafter
|
600,000
|
|
Total scheduled maturities of long term debt
|
$
|
600,000
|
|
|
|
Current maturities of long term debt
|
$
|
—
|
|
Interest expense, net was $21.2 million, $33.6 million, and $34.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. Interest expense includes the amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long term debt facilities. Amortization of deferred financing costs was $2.4 million, $1.5 million, and $1.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The Company monitors the financial health and stability of its lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets lenders could be negatively impacted in their ability to perform under these facilities.
8. Commitments and Contingencies
Sports Marketing and Other Commitments
Within the normal course of business, the Company enters into contractual commitments in order to promote the Company’s brand and products. These commitments include sponsorship agreements with teams and athletes on the collegiate and professional levels, official supplier agreements, athletic event sponsorships and other marketing commitments. The following is a schedule of the Company’s future minimum payments under its sponsorship and other marketing agreements as of December 31, 2019, as well as significant sponsorship and other marketing agreements entered into during the period after December 31, 2019 through the date of this report:
|
|
|
|
|
|
(In thousands)
|
|
2020
|
$
|
131,297
|
|
2021
|
114,407
|
|
2022
|
105,255
|
|
2023
|
99,260
|
|
2024
|
87,536
|
|
2025 and thereafter
|
141,354
|
|
Total future minimum sponsorship and other payments
|
$
|
679,109
|
|
The amounts listed above are the minimum compensation obligations and guaranteed royalty fees required to be paid under the Company’s sponsorship and other marketing agreements. The amounts listed above do not include additional performance incentives and product supply obligations provided under certain agreements. It is not possible to determine how much the Company will spend on product supply obligations on an annual basis as contracts generally do not stipulate specific cash amounts to be spent on products. The amount of product provided to the sponsorships depends on many factors including general playing conditions, the number of sporting events in which they participate and the Company’s decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers.
Other
In connection with various contracts and agreements, the Company has agreed to indemnify counterparties against certain third party claims relating to the infringement of intellectual property rights and other items. Generally, such indemnification obligations do not apply in situations in which the counterparties are grossly negligent, engage in willful misconduct, or act in bad faith. Based on the Company’s historical experience and the estimated probability of future loss, the Company has determined that the fair value of such indemnifications is not material to its consolidated financial position or results of operations.
From time to time, the Company is involved in litigation and other proceedings, including matters related to commercial and intellectual property disputes, as well as trade, regulatory and other claims related to its business. Other than as described below, the Company believes that all current proceedings are routine in nature and incidental to the conduct of its business, and that the ultimate resolution of any such proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
In re Under Armour Securities Litigation
On March 23, 2017, three separate securities cases previously filed against the Company in the United States District Court for the District of Maryland (the “District Court”) were consolidated under the caption In re Under Armour Securities Litigation, Case No. 17-cv-00388-RDB (the “Consolidated Action”). On August 4, 2017, the lead plaintiff in the Consolidated Action, North East Scotland Pension Fund, joined by named plaintiff Bucks County Employees Retirement Fund, filed a consolidated amended complaint (the “Amended Complaint”) against the Company, the Company’s then-Chief Executive Officer, Kevin Plank, and former Chief Financial Officers Lawrence Molloy and Brad Dickerson. The Amended Complaint alleges violations of Section 10(b) (and Rule 10b-5) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 20(a) control person liability under the Exchange Act against the officers named in the Amended Complaint, claiming that the defendants made material misstatements and omissions regarding, among other things, the Company's growth and consumer demand for certain of the Company's products. The class period identified in the Amended Complaint is September 16, 2015 through January 30, 2017. The Amended Complaint also asserts claims under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), in connection with the Company’s public offering of senior unsecured notes in June 2016. The Securities Act claims are asserted against the Company, the 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 alleges that the offering materials utilized in connection with the offering contained false and/or misleading statements and omissions regarding, among other things, the Company’s growth and consumer demand for certain of the Company’s products.
On November 9, 2017, the Company and the other defendants filed 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. The lead plaintiff 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 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 18, 2019, before briefing on the Appeal was complete, the lead plaintiff 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 the lead plaintiff to relief from the District Court’s final judgment. On January 22, 2020, the District Court granted the Rule 62.1 motion and indicated that it would grant a motion for relief from the final judgment and provide the lead plaintiff with the opportunity to file a third amended complaint if the Fourth Circuit remands for that purpose. The District Court further stated that it would, upon remand, consolidate the matter with Patel v. Under Armour, Inc. and Waronker v. Under Armour Inc., described below, and appoint the lead plaintiff of In re Under Armour Securities Litigation as the lead plaintiff over the consolidated cases.
The Company continues to believe that the claims 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.
Patel v. Under Armour, Inc. and Waronker v. Under Armour, Inc.
On November 6, 2019, a purported shareholder of the Company filed a securities case in the United States District Court for the District of Maryland against the Company and the Company’s then-Chief Executive Officer, Kevin Plank, Chief Financial Officer, David Bergman, and then-Chief Operating Officer, Patrik Frisk, as well as former Chief Financial Officer, Lawrence Molloy (captioned Patel v. Under Armour, Inc., No 1:19-cv-03209-RDB). The complaint alleges 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 complaint. The complaint claims 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 and the United States Securities and Exchange Commission since July 2017. The class period identified in the complaint is August 3, 2016 through November 1, 2019, inclusive.
On December 17, 2019, a purported shareholder of the Company filed a securities case in the United States District Court for the District of Maryland against the Company and Mr. Plank, Mr. Bergman and Mr. Frisk, as well as two former Chief Financial Officers of the Company (captioned Waronker v. Under Armour, Inc., No. 1:19-cv-03581-RDB). Like the Patel complaint, the Waronker complaint alleges 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 complaint. The complaint claims 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 and the United States Securities and Exchange Commission since July 2017. The class period identified in the complaint is September 16, 2015 through November 1, 2019, inclusive.
The Court has not consolidated these cases or appointed a lead plaintiff and the Company has no pending deadline to respond to the complaint in either of these actions. As described above, the Court indicated in a January 22, 2020 decision in the In re Under Armour Securities Litigation case that it anticipated consolidating that matter with these cases and appointing the lead plaintiff in In re Under Armour Securities Litigation as the lead plaintiff over the consolidated cases, in the event that the Fourth Circuit remands the In re Under Armour Securities Litigation case.
The Company believes that the claims are without merit and intends to defend the lawsuits 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 these matters.
Olin Derivative Complaint
On December 26, 2019, Dale Olin, a purported shareholder of the Company, filed a shareholder derivative lawsuit in state court in Baltimore, Maryland, captioned Olin v. Under Armour, Inc., et al., No. 24-C-19-006850 (Md. Cir. Ct.). The complaint was brought against Mr. Plank, Mr. Bergman and Mr. Frisk, and certain other members of the Company’s Board of Directors and names the Company as a nominal defendant. The complaint alleges that the defendants breached their fiduciary duties between August 2016 and November 2019 by (i) failing to disclose or take appropriate action regarding alleged shifting of sales between quarterly periods to appear healthier, (ii) failing
to “adhere to accepted accounting principles regarding revenue recognition, which resulted in materially false and misleading public statements by the Company,” (iii) failing to disclose that the Company was under investigation by and cooperating with the United States Department of Justice and the United States Securities and Exchange Commission, and (iv) exposing the Company to the aforementioned investigations and to a securities fraud class action. The Company has not yet responded to the complaint. On February 5, 2020, the parties filed a joint motion for assignment of the action to the Business & Technology Case Management Program and a stipulation setting forth a deadline of March 12, 2020 for the Company to respond to the complaint.
Prior to the filing of the derivative complaint in Olin v. Under Armour, Inc., et al., the purported stockholder did not make a demand that the Company pursue claims similar to the claims asserted in the complaint.
The Company believes that the claims 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.
Sagamore Derivative Complaints
In April 2018, two purported stockholders filed separate stockholder derivative complaints in the United States District Court for the District of Maryland. These were brought against Mr. Plank and certain other members of the Company’s Board of Directors and name the Company as a nominal defendant. The complaints make allegations related to the Company’s purchase of certain parcels of land from entities controlled by Mr. Plank (through Sagamore Development Company, LLC (“Sagamore”)), as well as other related party transactions.
Sagamore purchased these 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 20, 2019, these cases were consolidated under the caption In re Under Armour, Inc. Shareholder Derivative Litigation and a lead plaintiff was appointed by the court. On May 1, 2019, the lead plaintiff filed a consolidated derivative complaint asserting that Mr. Plank and the director defendants breached their fiduciary duties in connection with the purchase of the parcels and other related party transactions and that Sagamore aided and abetted the alleged breaches of fiduciary duty by the other defendants in connection with Sagamore’s alleged role in the sale of the parcels to the Company. The consolidated complaint also asserts an unjust enrichment claim against Mr. Plank and Sagamore. It seeks damages on behalf of the Company and certain corporate governance related actions. The Company and the defendants filed a motion to dismiss the consolidated complaint on July 2, 2019, which was fully briefed as of October 17, 2019 and is currently pending.
In June and July 2018, three additional purported stockholder derivative complaints were filed. Two of the complaints were filed in Maryland state court (in cases captioned Kenney v. Plank, et al. (filed June 29, 2018) and Luger v. Plank, et al. (filed July 26, 2018), respectively), and those cases were consolidated on October 19, 2018 under the caption Kenney v. Plank, et. al. The other complaint was filed in the United States District Court for the District of Maryland (in a case captioned Andersen v. Plank et al. (filed July 23, 2018)). The operative complaints in these cases name Mr. Plank, certain other members of the Company’s Board of Directors and certain former Company executives as defendants, and name the Company as a nominal defendant. The operative complaints include allegations similar to those in the In re Under Armour Securities Litigation matter discussed above that challenges, among other things, the Company’s disclosures related to growth and consumer demand for certain of the Company’s products and stock sales by certain individual defendants. The operative complaints in each of these cases assert breach of fiduciary duty and unjust enrichment claims against the individual defendants. The operative complaint in the Kenney matter also makes allegations similar to those in the consolidated complaint in the In re Under Armour, Inc. Shareholder Derivative Litigation matter discussed above regarding the Company’s purchase of parcels from entities controlled by Mr. Plank through Sagamore and asserts a claim of corporate waste against the individual defendants. These complaints seek similar remedies to the remedies sought in the In re Under Armour, Inc. Shareholder Derivative Litigation complaint.
The Andersen action was stayed between December 2018 and August 2019 pursuant to a court order. In September 2019, pursuant to an agreement between the parties, the court in the Andersen action entered an order staying that case pending the resolution of the Appeal in In re Under Armour Securities Litigation. 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 In re Under Armour Securities Litigation and the In re Under Armour, Inc. Shareholder Derivative Litigation matters.
Prior to the filing of the derivative complaints in In re Under Armour, Inc. Shareholder Derivative Litigation, Kenney v. Plank, et al., Luger v. Plank, et al., and Andersen v. Plank et al., each of the purported stockholders had sent the Company a letter demanding that the Company pursue claims similar to the claims asserted in the derivative complaints. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company and informed each of these purported stockholders of that determination. The Company believes that the claims asserted in the derivative complaints are without merit and intends to defend these matters vigorously. However, because of the inherent uncertainty as to the outcome of these proceedings, the Company is unable at this time to estimate the possible impact of the outcome of these matters.
Data Incident
In 2018, an unauthorized third party acquired data associated with the Company's Connected Fitness users' accounts for the Company's MyFitnessPal application and website. The Company has faced consumer class action lawsuits associated with this incident and has received inquiries regarding the incident from certain government regulators and agencies. The Company does not currently consider these matters to be material and believes its insurance coverage will provide coverage should any significant expense arise.
9. Stockholders’ Equity
The Company’s Class A Common Stock and Class B Convertible Common Stock have an authorized number of shares at December 31, 2019 of 400.0 million shares and 34.5 million shares, respectively, and each have a par value of $0.0003 1/3 per share. Holders of Class A Common Stock and Class B Convertible Common Stock have identical rights, including liquidation preferences, except that the holders of Class A Common Stock are entitled to one vote per share and holders of Class B Convertible Common Stock are entitled to 10 votes per share on all matters submitted to a stockholder vote. Class B Convertible Common Stock may only be held by Kevin Plank, the Company’s founder, Executive Chairman and Brand Chief, or a related party of Mr. Plank, as defined in the Company’s charter. As a result, Mr. Plank has a majority voting control over the Company. Upon the transfer of shares of Class B Convertible Stock to a person other than Mr. Plank or a related party of Mr. Plank, the shares automatically convert into shares of Class A Common Stock on a one-for-one basis. In addition, all of the outstanding shares of Class B Convertible Common Stock will automatically convert into shares of Class A Common Stock on a one-for-one basis upon the death or disability of Mr. Plank or on the record date for any stockholders’ meeting upon which the shares of Class A Common Stock and Class B Convertible Common Stock beneficially owned by Mr. Plank is less than 15% of the total shares of Class A Common Stock and Class B Convertible Common Stock outstanding or upon the other events specified in the Class C Articles Supplementary to the Company's charter as documented below. Holders of the Company’s common stock are entitled to receive dividends when and if authorized and declared out of assets legally available for the payment of dividends.
The Company's Class C Common Stock has an authorized number of shares at December 31, 2019 of 400.0 million shares and have a par value of $0.0003 1/3 per share. The terms of the Class C common stock are substantially identical to those of the Company's Class A common stock, except that the Class C common stock has no voting rights (except in limited circumstances), will automatically convert into Class A common stock under certain circumstances and includes provisions intended to ensure equal treatment of Class C common stock and Class B common stock in certain corporate transactions, such as mergers, consolidations, statutory share exchanges, conversions or negotiated tender offers, and including consideration incidental to these transactions.
10. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The fair value accounting guidance outlines a valuation framework, creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures, and prioritizes the inputs used in measuring fair value as follows:
|
|
|
|
|
|
Level 1:
|
Observable inputs such as quoted prices in active markets;
|
|
|
Level 2:
|
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Financial assets and (liabilities) measured at fair value are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Derivative foreign currency contracts (see Note 15)
|
|
—
|
|
|
(7,151)
|
|
|
—
|
|
|
—
|
|
|
19,531
|
|
|
—
|
|
Interest rate swap contracts (see Note 15)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,567
|
|
|
—
|
|
TOLI policies held by the Rabbi Trust
|
|
—
|
|
|
6,543
|
|
|
—
|
|
|
—
|
|
|
5,328
|
|
|
—
|
|
Deferred Compensation Plan obligations
|
|
—
|
|
|
(10,839)
|
|
|
—
|
|
|
—
|
|
|
(6,958)
|
|
|
—
|
|
Fair values of the financial assets and liabilities listed above are determined using inputs that use as their basis readily observable market data that are actively quoted and are validated through external sources, including third-party pricing services and brokers. The Company purchases marketable securities that are designated as available-for-sale. The foreign currency contracts represent gains and losses on derivative contracts, which is the net difference between the U.S. dollar value to be received or paid at the contracts’ settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current market exchange rate. The interest rate swap contracts represent gains and losses on the derivative contracts, which is the net difference between the fixed interest to be paid and variable interest to be received over the term of the contract based on current market rates. The fair value of the trust owned life insurance (“TOLI”) policies held by the Rabbi Trust is based on the cash-surrender value of the life insurance policies, which are invested primarily in mutual funds and a separately managed fixed income fund. These investments are initially made in the same funds and purchased in substantially the same amounts as the selected investments of participants in the Under Armour, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), which represent the underlying liabilities to participants in the Deferred Compensation Plan. Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments.
As of December 31, 2019 and 2018, the fair value of the Company's Senior Notes was $587.5 million and $500.1 million, respectively. The carrying value of the Company's other long term debt approximated its fair value as of December 31, 2019 and 2018. 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).
11. Provision for Income Taxes
Income (loss) before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(In thousands)
|
2019
|
|
2018
|
|
2017
|
Income (loss) before income taxes
|
|
|
|
|
|
United States
|
$
|
81,122
|
|
|
$
|
(121,396)
|
|
|
$
|
(131,475)
|
|
Foreign
|
128,720
|
|
|
53,608
|
|
|
121,166
|
|
Total
|
$
|
209,842
|
|
|
$
|
(67,788)
|
|
|
$
|
(10,309)
|
|
The components of the income tax expense (benefit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(In thousands)
|
2019
|
|
2018
|
|
2017
|
Current
|
|
|
|
|
|
Federal
|
$
|
7,232
|
|
|
$
|
(15,005)
|
|
|
$
|
(46,931)
|
|
State
|
771
|
|
|
3,253
|
|
|
(8,336)
|
|
Foreign
|
21,952
|
|
|
34,975
|
|
|
34,005
|
|
|
29,955
|
|
|
23,223
|
|
|
(21,262)
|
|
Deferred
|
|
|
|
|
|
Federal
|
12,750
|
|
|
(27,808)
|
|
|
51,447
|
|
State
|
25,508
|
|
|
(6,202)
|
|
|
12,080
|
|
Foreign
|
1,811
|
|
|
(9,765)
|
|
|
(4,314)
|
|
|
40,069
|
|
|
(43,775)
|
|
|
59,213
|
|
Income tax expense (benefit)
|
$
|
70,024
|
|
|
$
|
(20,552)
|
|
|
$
|
37,951
|
|
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
U.S. federal statutory income tax rate
|
$
|
44,067
|
|
21.0
|
%
|
|
$
|
(14,235)
|
|
21.0
|
%
|
|
$
|
(3,608)
|
|
35.0
|
%
|
State taxes, net of federal tax impact
|
4,620
|
|
2.2
|
%
|
|
(6,715)
|
|
9.9
|
%
|
|
(9,537)
|
|
92.5
|
%
|
Unrecognized tax benefits
|
(2,031)
|
|
(1.0)
|
%
|
|
(7,598)
|
|
11.2
|
%
|
|
1,178
|
|
(11.4)
|
%
|
Permanent tax benefits/nondeductible expenses
|
328
|
|
0.2
|
%
|
|
5,609
|
|
(8.2)
|
%
|
|
2,246
|
|
(21.8)
|
%
|
Intercompany asset sale
|
—
|
|
—
|
%
|
|
(18,834)
|
|
27.8
|
%
|
|
—
|
|
—
|
%
|
Goodwill impairment
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
|
8,522
|
|
(82.7)
|
%
|
Foreign rate differential
|
(10,494)
|
|
(5.0)
|
%
|
|
(12,294)
|
|
18.1
|
%
|
|
(25,563)
|
|
248.0
|
%
|
Valuation allowances
|
30,137
|
|
14.4
|
%
|
|
33,058
|
|
(48.8)
|
%
|
|
29,563
|
|
(286.8)
|
%
|
Impacts related to Tax Act
|
—
|
|
—
|
%
|
|
1,536
|
|
(2.3)
|
%
|
|
38,833
|
|
(376.7)
|
%
|
Other
|
3,397
|
|
1.6
|
%
|
|
(1,079)
|
|
1.6
|
%
|
|
(3,683)
|
|
35.7
|
%
|
Effective income tax rate
|
$
|
70,024
|
|
33.4
|
%
|
|
$
|
(20,552)
|
|
30.3
|
%
|
|
$
|
37,951
|
|
(368.2)
|
%
|
The Company's income tax expense (benefit) for 2019, as compared to 2018, was higher primarily due to pre-tax income in 2019 compared to pre-tax losses in 2018, increases in valuation allowances recorded for certain U.S. state jurisdictions, and the one-time benefit in 2018 for an intercompany intangible asset sale. These increases were partially offset by a decrease in valuation allowances recorded for certain foreign jurisdictions in 2019 compared to 2018.
Deferred tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
Deferred tax assets
|
|
|
|
|
Lease liability and deferred rent
|
|
140,673
|
|
|
17,555
|
|
Foreign net operating loss carry-forwards
|
|
31,524
|
|
|
23,164
|
|
Reserves and accrued liabilities
|
|
25,676
|
|
|
47,509
|
|
Tax basis inventory adjustment
|
|
25,620
|
|
|
20,165
|
|
U.S. state net operating loss carryforward
|
|
24,124
|
|
|
23,818
|
|
Allowance for doubtful accounts and sales return reserves
|
|
23,257
|
|
|
28,620
|
|
Intangible assets
|
|
20,041
|
|
|
21,886
|
|
Stock-based compensation
|
|
14,828
|
|
|
14,119
|
|
Foreign tax credit carry-forwards
|
|
11,807
|
|
|
10,274
|
|
State tax credits, net of federal impact
|
|
7,480
|
|
|
8,432
|
|
Inventory obsolescense reserves
|
|
6,589
|
|
|
8,529
|
|
Other
|
|
4,835
|
|
|
2,209
|
|
Total deferred tax assets
|
|
336,454
|
|
|
226,280
|
|
Less: valuation allowance
|
|
(101,997)
|
|
|
(72,710)
|
|
Total net deferred tax assets
|
|
234,457
|
|
|
153,570
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
Right-of-use asset
|
|
(118,917)
|
|
|
—
|
|
Property, plant and equipment
|
|
(16,956)
|
|
|
(27,480)
|
|
Prepaid expenses
|
|
(15,862)
|
|
|
(11,058)
|
|
Other
|
|
(1,717)
|
|
|
(4,041)
|
|
Total deferred tax liabilities
|
|
(153,452)
|
|
|
(42,579)
|
|
Total deferred tax assets, net
|
|
$
|
81,005
|
|
|
$
|
110,991
|
|
All deferred tax assets and liabilities are classified as non-current on the consolidated balance sheets as of December 31, 2019 and December 31, 2018. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and actual operating results in future years could differ from the current assumptions, judgments and estimates.
A significant portion of the Company’s deferred tax assets relate to U.S. federal and state taxing jurisdictions. Realization of these deferred tax assets is dependent on future U.S. pre-tax earnings. In evaluating the recoverability of these deferred tax assets at December 31, 2019, the Company has considered all available evidence, both positive and negative, including but not limited to the following:
Positive
•2019 pre-tax income plus tax permanent differences and taxable income in the U.S. federal and certain state jurisdictions;
•Three year cumulative pre-tax income plus tax permanent differences in the U.S. federal jurisdiction;
•Forecasted future pre-tax income plus tax permanent differences in the U.S. federal and certain state jurisdictions;
•No history of U.S. federal and state tax attributes expiring unused;
•Restructuring plans undertaken in 2017, 2018, and being assessed for 2020, which aim to improve future profitability;
•Available prudent and feasible tax planning strategies may exist;
•Reversal of deferred tax liabilities and timing thereof.
Negative
•Three year cumulative pre-tax losses plus tax permanent differences in certain state jurisdictions;
•Forecasted year over year U.S. revenue declines in 2020 which decrease profitability in the U.S. federal and certain state jurisdictions;
•Restructuring plans undertaken in 2017, 2018, and being assessed for 2020, which result in significant one-time charges, which reduce profitability in the U.S. federal and certain state jurisdictions;
•Inherent challenges in forecasting future pre-tax earnings which rely, in part, on improved profitability from restructuring efforts;
•The continued challenges in the U.S. consumer retail business environment.
The Company believes that the weight of the positive evidence outweighs the negative evidence regarding the realization of its U.S. federal deferred tax assets. The Company will continue to evaluate its ability to realize these assets on a quarterly basis.
The Company believes the weight of the negative evidence outweighs the positive evidence regarding the realization of the majority of the state deferred tax assets, including state net operating loss carryforwards, state tax credit carryforwards, and certain other state deferred tax assets, and has recorded valuation allowances of $54.5 million against these state deferred tax assets.
As of December 31, 2019, the Company had $24.1 million in deferred tax assets associated with $383.6 million in state net operating loss carryforwards and $7.5 million in deferred tax assets associated with state tax credits, net of federal benefit, the majority of which are definite lived. Certain of the definite lived state net operating losses and state tax credits will begin to expire within 1 to 5 years, and the majority will begin to expire within 5 to 20 years.
As of December 31, 2019, the Company had $31.5 million in deferred tax assets associated with approximately $124.8 million in foreign net operating loss carryforwards and $11.8 million in deferred tax assets associated with foreign tax credit carryforwards. While the majority of the foreign net operating loss carryforwards and foreign tax credit carryforwards have an indefinite carryforward period, certain are definite lived, with the majority to expire within 5 to 12 years. Additionally, as of December 31, 2019, the Company is not able to forecast the utilization of a majority of the deferred tax assets associated with foreign net operating loss carryforwards, foreign tax credit carryforwards and certain other foreign deferred tax assets and has recorded a valuation allowance of $47.5 million against these foreign deferred tax assets.
As of December 31, 2019, approximately $165.4 million of cash and cash equivalents was held by the Company's non-U.S. subsidiaries whose cumulative undistributed earnings total $765.5 million. The Tax Act imposed U.S. federal tax on all post-1986 foreign unrepatriated earnings accumulated through December 31, 2017. The portion of these earnings not subject to U.S. federal income tax as part of the one-time transition tax should, in general, not be subject to U.S. federal income tax. The Company will continue to permanently reinvest these earnings, as well as future earnings from our foreign subsidiaries, to fund international growth and operations. If the Company were to repatriate indefinitely reinvested foreign funds, the Company would still be required to accrue and pay certain taxes upon repatriation, including foreign withholding taxes and certain U.S. state taxes and record foreign exchange rate impacts. Determination of the unrecorded deferred tax liability that would be incurred if such amounts were repatriated is not practicable.
As of December 31, 2019 and 2018, the total liability for unrecognized tax benefits, including related interest and penalties, was approximately $44.3 million and $60.0 million, respectively. The following table represents a reconciliation of the Company's total unrecognized tax benefits balances, excluding interest and penalties, for the years ended December 31, 2019, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Beginning of year
|
|
$
|
55,855
|
|
|
$
|
51,815
|
|
|
$
|
64,359
|
|
Increases as a result of tax positions taken in a prior period
|
|
1,545
|
|
|
1,978
|
|
|
457
|
|
Decreases as a result of tax positions taken in a prior period
|
|
(11,005)
|
|
|
(1,600)
|
|
|
(40)
|
|
Increases as a result of tax positions taken during the current period
|
|
1,158
|
|
|
12,802
|
|
|
14,580
|
|
Decreases as a result of settlements during the current period
|
|
(6,359)
|
|
|
—
|
|
|
(13,885)
|
|
Reductions as a result of a lapse of statute of limitations during the current period
|
|
—
|
|
|
(9,140)
|
|
|
(13,656)
|
|
End of year
|
|
$
|
41,194
|
|
|
$
|
55,855
|
|
|
$
|
51,815
|
|
As of December 31, 2019, $32.8 million of unrecognized tax benefits, excluding interest and penalties, would impact the Company's effective tax rate if recognized.
As of December 31, 2019, 2018 and 2017, the liability for unrecognized tax benefits included $3.1 million, $4.2 million, and $3.5 million, respectively, for the accrual of interest and penalties. For each of the years ended December 31, 2019, 2018 and 2017, the Company recorded $2.0 million, $1.9 million, and $1.6 million, respectively, for the accrual of interest and penalties in its consolidated statements of operations. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the consolidated statements of operations.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is currently under audit by the U.S. Internal Revenue Service for the years 2015 through 2017 and by the Chilean Internal Revenue Service for the years 2015 through 2018. The majority of the Company's other returns for years before 2016 are no longer subject to U.S. federal, state and local or foreign income tax examinations by tax authorities.
The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, will change significantly during the next twelve months. However, changes in the occurrence, expected outcomes, and timing of such events could cause the Company's current estimate to change materially in the future.
12. Earnings per Share
The calculation of earnings per share for common stock shown below excludes the income attributable to outstanding restricted stock awards from the numerator and excludes the impact of these awards from the denominator. The following is a reconciliation of basic earnings per share to diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(In thousands, except per share amounts)
|
|
2019
|
|
2018
|
|
2017
|
Numerator
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
92,139
|
|
|
$
|
(46,302)
|
|
|
$
|
(48,260)
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
Weighted average common shares outstanding Class A, B and C
|
|
450,964
|
|
|
445,815
|
|
|
440,729
|
|
Effect of dilutive securities Class A, B and C
|
|
3,310
|
|
|
—
|
|
|
—
|
|
Weighted average common shares and dilutive securities outstanding Class A, B and C
|
|
454,274
|
|
|
445,815
|
|
|
440,729
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share of Class A, B and C common stock
|
|
$
|
0.20
|
|
|
$
|
(0.10)
|
|
|
$
|
(0.11)
|
|
Diluted net income (loss) per share of Class A, B and C common stock
|
|
$
|
0.20
|
|
|
$
|
(0.10)
|
|
|
$
|
(0.11)
|
|
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options, and restricted stock units representing 1.8 million, 3.3 million and 5.0 million shares of Class A and C common stock outstanding for the years ended December 31, 2019, 2018 and 2017, respectively, were excluded from the computation of diluted earnings per share because their effect would be anti-dilutive.
13. Stock-Based Compensation
Stock Compensation Plans
The Under Armour, Inc. Third Amended and Restated 2005 Omnibus Long-Term Incentive Plan as amended (the “2005 Plan”) provides for the issuance of stock options, restricted stock, restricted stock units and other equity awards to officers, directors, key employees and other persons. Stock options and restricted stock and restricted stock unit awards under the 2005 Plan generally vest ratably over a two to five year period. The contractual term for stock options is generally 10 years from the date of grant. The Company generally receives a tax deduction for any ordinary income recognized by a participant in respect to an award under the 2005 Plan. The
2005 Plan terminates in 2025. As of December 31, 2019, 9.0 million Class A shares and 27.4 million Class C shares are available for future grants of awards under the 2005 Plan.
Total stock-based compensation expense for the years ended December 31, 2019, 2018 and 2017 was $49.6 million, $41.8 million and $39.9 million, respectively. The related tax benefits were $9.1 million, $8.9 million, and $9.0 million for the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, the Company had $90.5 million of unrecognized compensation expense expected to be recognized over a weighted average period of 2.43 years. This unrecognized compensation expense does not include any expense related to performance-based restricted stock units and stock options for which the performance targets have not been deemed probable as of December 31, 2019. Refer to “Stock Options” and “Restricted Stock and Restricted Stock Units” below for further information on these awards.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (the “ESPP”) allows for the purchase of Class A Common Stock and Class C Common Stock by all eligible employees at a 15% discount from fair market value subject to certain limits as defined in the ESPP. As of December 31, 2019, 2.7 million Class A shares and 2.5 million Class C shares are available for future purchases under the ESPP. During the years ended December 31, 2019, 2018 and 2017, 329.1 thousand, 393.8 thousand and 563.9 thousand Class C shares were purchased under the ESPP, respectively.
Non-Employee Director Compensation Plan and Deferred Stock Unit Plan
The Company’s Non-Employee Director Compensation Plan (the “Director Compensation Plan”) provides for cash compensation and equity awards to non-employee directors of the Company under the 2005 Plan. Non-employee directors have the option to defer the value of their annual cash retainers as deferred stock units in accordance with the Under Armour, Inc. Non-Employee Deferred Stock Unit Plan (the “DSU Plan”). Each new non-employee director receives an award of restricted stock units upon the initial election to the Board of Directors, with the units covering stock valued at $100.0 thousand on the grant date and vesting in three equal annual installments. In addition, each non-employee director receives, following each annual stockholders’ meeting, a grant under the 2005 Plan of restricted stock units covering stock valued at $150.0 thousand on the grant date. Each award vests 100% on the date of the next annual stockholders’ meeting following the grant date.
The receipt of the shares otherwise deliverable upon vesting of the restricted stock units automatically defers into deferred stock units under the DSU Plan. Under the DSU Plan each deferred stock unit represents the Company’s obligation to issue one share of the Company’s Class A or Class C Common Stock with the shares delivered six months following the termination of the director’s service.
Stock Options
The weighted average fair value of a stock option granted for the years ended December 31, 2019, 2018 and 2017 was $19.39, $15.41 and $19.04, respectively. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Risk-free interest rate
|
2.5
|
%
|
|
2.8
|
%
|
|
2.1
|
%
|
Average expected life in years
|
6.50
|
|
6.50
|
|
6.50
|
Expected volatility
|
41.0
|
%
|
|
40.4
|
%
|
|
39.6
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
A summary of the Company’s stock options as of December 31, 2019, 2018 and 2017, and changes during the years then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
|
Number
of Stock
Options
|
|
Weighted
Average
Exercise
Price
|
|
Number
of Stock
Options
|
|
Weighted
Average
Exercise
Price
|
|
Number
of Stock
Options
|
|
Weighted
Average
Exercise
Price
|
Outstanding, beginning of year
|
|
2,732
|
|
|
$
|
12.98
|
|
|
3,782
|
|
|
$
|
12.71
|
|
|
4,265
|
|
|
$
|
9.63
|
|
Granted, at fair market value
|
|
460
|
|
|
19.39
|
|
|
579
|
|
|
15.41
|
|
|
734
|
|
|
19.04
|
|
Exercised
|
|
(733)
|
|
|
3.41
|
|
|
(1,262)
|
|
|
5.53
|
|
|
(1,046)
|
|
|
3.72
|
|
Expired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(490)
|
|
|
19.04
|
|
|
(367)
|
|
|
35.55
|
|
|
(171)
|
|
|
17.59
|
|
Outstanding, end of year
|
|
1,969
|
|
|
$
|
16.61
|
|
|
2,732
|
|
|
$
|
12.98
|
|
|
3,782
|
|
|
$
|
12.71
|
|
Options exercisable, end of year
|
|
913
|
|
|
$
|
15.45
|
|
|
1,366
|
|
|
$
|
7.70
|
|
|
2,512
|
|
|
$
|
5.85
|
|
Included in the table above are 0.2 million and 0.3 million performance-based stock options awarded to the Company’s Executive Chairman and Brand Chief under the 2005 Plan during the years ended December 31, 2019 and 2018, respectively. The performance-based stock options awarded in 2019 and 2018 have weighted average fair values of $19.39 and $15.41, respectively, and have vesting that is tied to the achievement of certain combined annual operating income targets.
The intrinsic value of stock options exercised during the years ended December 31, 2019, 2018 and 2017 was $12.4 million, $15.2 million and $16.3 million, respectively.
For the years ended December 31, 2019, 2018, and 2017 income tax benefits related to stock options exercised were $2.0 million, $3.0 million, and $5.8 million, respectively.
The following table summarizes information about stock options outstanding and exercisable as of December 31, 2019:
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Number of
Underlying
Shares
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Total
Intrinsic
Value
|
|
Number of
Underlying
Shares
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Total
Intrinsic
Value
|
1,969
|
|
|
$
|
16.61
|
|
|
6.19
|
|
$
|
9,379
|
|
|
913
|
|
|
$
|
15.45
|
|
|
3.66
|
|
$
|
7,725
|
|
Restricted Stock and Restricted Stock Units
A summary of the Company’s restricted stock and restricted stock units as of December 31, 2019, 2018 and 2017, and changes during the years then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2017
|
|
|
(In thousands, except per share amounts)
|
|
Number
of
Restricted
Shares
|
|
Weighted
Average
Grant Date Fair Value
|
|
Number
of
Restricted
Shares
|
|
Weighted
Average
Fair Value
|
|
Number
of
Restricted
Shares
|
|
Weighted
Average
Fair Value
|
Outstanding, beginning of year
|
|
8,284
|
|
|
$
|
18.03
|
|
|
9,923
|
|
|
$
|
24.41
|
|
|
6,771
|
|
|
$
|
19.68
|
|
Granted
|
|
3,501
|
|
|
19.32
|
|
|
5,165
|
|
|
15.57
|
|
|
7,630
|
|
|
18.84
|
|
Forfeited
|
|
(2,760)
|
|
|
18.56
|
|
|
(4,745)
|
|
|
27.43
|
|
|
(2,290)
|
|
|
28.71
|
|
Vested
|
|
(2,364)
|
|
|
20.24
|
|
|
(2,059)
|
|
|
24.95
|
|
|
(2,188)
|
|
|
24.78
|
|
Outstanding, end of year
|
|
6,661
|
|
|
$
|
18.02
|
|
|
8,284
|
|
|
$
|
18.03
|
|
|
9,923
|
|
|
$
|
24.41
|
|
Included in the table above are 0.6 million, 0.8 million and 1.9 million performance-based restricted stock units awarded to certain executives and key employees under the 2005 Plan during the years ended December 31, 2019, 2018 and 2017, respectively. The performance-based restricted stock units awarded in 2019, 2018 and 2017 have weighted average grant date fair values of $19.39, $15.60, and $18.76, respectively, and have vesting that is tied to the achievement of certain combined annual revenue and operating income targets.
During the year ended December 31, 2019, the Company deemed the achievement of certain revenue and operating income targets improbable for the performance-based stock options and restricted stock units granted in 2019, and recorded a reversal of expense of $1.5 million for the three months ended December 31, 2019. During the year ended December 31, 2017, the Company deemed the achievement of certain revenue and operating income targets improbable for the performance-based stock options and restricted stock units granted in 2017, and recorded a reversal of expense of $4.2 million for the three months ended December 31, 2017.
Warrants
The Company issued fully vested and non-forfeitable warrants to purchase 1.92 million shares of the Company's Class A Common Stock and 1.93 million shares of the Company’s Class C Common Stock to NFL Properties as partial consideration for footwear promotional rights which were recorded as an intangible asset in 2006. The warrants had a term of 12 years from the date of issuance and an exercise price of $4.66 per Class A share and $4.56 per Class C share. In August 2018, all of the warrants were exercised on a net exercise basis.
14. Other Employee Benefits
The Company offers a 401(k) Deferred Compensation Plan for the benefit of eligible employees. Employee contributions are voluntary and subject to Internal Revenue Service limitations. The Company matches a portion of the participant’s contribution and recorded expense of $7.5 million, $9.9 million and $7.4 million for the years ended December 31, 2019, 2018 and 2017, respectively. Shares of the Company’s Class A Common Stock and Class C common stock are not investment options in this plan.
In addition, the Company offers the Under Armour, Inc. Deferred Compensation Plan which allows a select group of management or highly compensated employees, as approved by the Compensation Committee, to make an annual base salary and/or bonus deferral for each year. As of December 31, 2019 and 2018, the Deferred Compensation Plan obligations were $10.8 million and $7.0 million, respectively, and were included in other long term liabilities on the consolidated balance sheets.
The Company established the Rabbi Trust to fund obligations to participants in the Deferred Compensation Plan. As of December 31, 2019 and 2018, the assets held in the Rabbi Trust were TOLI policies with cash-surrender values of $6.5 million and $5.3 million, respectively. These assets are consolidated and are included in other long term assets on the consolidated balance sheet. Refer to Note 10 for a discussion of the fair value measurements of the assets held in the Rabbi Trust and the Deferred Compensation Plan obligations.
15. Risk Management and Derivatives
Foreign Currency Risk Management
The Company is exposed to global market risks, including the effects of changes in foreign currency and interest rates. The Company uses derivative instruments to manage financial exposures that occur in the normal course of business and does not hold or issue derivatives for trading or speculative purposes.
The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to forecasted cash flows and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships.
The Company's foreign exchange risk management program consists of designated cash flow hedges and undesignated hedges. As of December 31, 2019, the Company has hedge instruments, primarily for British Pound/ U.S. Dollar, U.S. Dollar/Chinese Renminbi, U.S. Dollar/Canadian Dollar, Euro/U.S. Dollar, U.S. Dollar/Mexican Peso, and U.S. Dollar/Japanese Yen currency pairs. All derivatives are recognized on the consolidated balance sheets at fair value and classified based on the instrument’s maturity date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balance Sheet Classification
|
December 31, 2019
|
|
December 31, 2018
|
Derivatives designated as hedging instruments under ASC 815
|
|
|
|
|
Foreign currency contracts
|
Other current assets
|
|
$
|
4,040
|
|
|
$
|
19,731
|
|
Foreign currency contracts
|
Other long term assets
|
|
24
|
|
|
—
|
|
Interest rate swap contracts
|
Other long term assets
|
|
—
|
|
|
1,567
|
|
Total derivative assets designated as hedging instruments
|
|
$
|
4,064
|
|
|
$
|
21,298
|
|
|
|
|
|
|
Foreign currency contracts
|
Other current liabilities
|
|
$
|
8,772
|
|
|
$
|
228
|
|
Foreign currency contracts
|
Other long term liabilities
|
|
2,443
|
|
|
—
|
|
Total derivative liabilities designated as hedging instruments
|
|
$
|
11,215
|
|
|
$
|
228
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under ASC 815
|
|
|
|
|
Foreign currency contracts
|
Other current assets
|
|
$
|
2,337
|
|
|
$
|
1,097
|
|
Total derivative assets not designated as hedging instruments
|
|
$
|
2,337
|
|
|
$
|
1,097
|
|
|
|
|
|
|
Foreign currency contracts
|
Other current liabilities
|
|
$
|
9,510
|
|
|
$
|
2,307
|
|
Total derivative liabilities not designated as hedging instruments
|
|
$
|
9,510
|
|
|
$
|
2,307
|
|
The following table presents the amounts in the consolidated statements of operations in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
Total
|
Amount of Gain (Loss) on Cash Flow Hedge Activity
|
|
Total
|
Amount of Gain (Loss) on Cash Flow Hedge Activity
|
|
Total
|
Amount of Gain (Loss) on Cash Flow Hedge Activity
|
Net revenues
|
$
|
5,267,132
|
|
$
|
18,789
|
|
|
$
|
5,193,185
|
|
$
|
(1,748)
|
|
|
$
|
4,989,244
|
|
$
|
2,469
|
Cost of goods sold
|
2,796,599
|
|
4,703
|
|
|
2,852,714
|
|
(1,279)
|
|
|
2,737,830
|
|
380
|
|
Interest expense, net
|
(21,240)
|
|
1,598
|
|
|
(33,568)
|
|
386
|
|
|
(34,538)
|
|
(920)
|
|
Other expense, net
|
(5,688)
|
|
871
|
|
|
(9,203)
|
|
1,537
|
|
|
(3,614)
|
|
(5,716)
|
|
The following tables present the amounts affecting the statements of comprehensive income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balance as of
December 31, 2018
|
Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives
|
Amount of gain (loss) reclassified from other comprehensive income (loss) into income
|
Balance as of December 31, 2019
|
Derivatives designated as cash flow hedges
|
|
|
|
|
Foreign currency contracts
|
$
|
21,908
|
|
$
|
(3,550)
|
|
$
|
24,363
|
|
$
|
(6,005)
|
|
Interest rate swaps
|
954
|
|
67
|
|
1,598
|
|
(577)
|
|
Total designated as cash flow hedges
|
$
|
22,862
|
|
$
|
(3,483)
|
|
$
|
25,961
|
|
$
|
(6,582)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balance as of
December 31, 2017
|
Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives
|
Amount of gain (loss) reclassified from other comprehensive income (loss) into income
|
Balance as of
December 31, 2018
|
Derivatives designated as cash flow hedges
|
|
|
|
|
Foreign currency contracts
|
$
|
(8,312)
|
|
$
|
28,730
|
|
$
|
(1,490)
|
|
$
|
21,908
|
|
Interest rate swaps
|
438
|
|
902
|
|
386
|
|
954
|
|
Total designated as cash flow hedges
|
$
|
(7,874)
|
|
$
|
29,632
|
|
$
|
(1,104)
|
|
$
|
22,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balance as of
December 31, 2016
|
Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives
|
Amount of gain (loss) reclassified from other comprehensive income (loss) into income
|
Balance as of
December 31, 2017
|
Derivatives designated as cash flow hedges
|
|
|
|
|
Foreign currency contracts
|
$
|
15,524
|
|
$
|
(26,703)
|
|
$
|
(2,867)
|
|
$
|
(8,312)
|
|
Interest rate swaps
|
(1,107)
|
|
625
|
|
(920)
|
|
438
|
|
Total designated as cash flow hedges
|
$
|
14,417
|
|
$
|
(26,078)
|
|
$
|
(3,787)
|
|
$
|
(7,874)
|
|
The following table presents the amounts in the consolidated statements of operations in which the effects of undesignated derivative instruments are recorded and the effects of fair value hedge activity on these line items.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
Total
|
Amount of Gain (Loss) on Fair Value Hedge Activity
|
|
Total
|
Amount of Gain (Loss) on Fair Value Hedge Activity
|
|
Total
|
Amount of Gain (Loss) on Fair Value Hedge Activity
|
Other expense, net
|
$
|
(5,688)
|
|
$
|
(6,141)
|
|
|
$
|
(9,203)
|
|
$
|
(13,688)
|
|
|
$
|
(3,614)
|
|
$
|
129
|
|
Cash Flow Hedges
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions generated by its international subsidiaries in currencies other than their local currencies. These gains and losses are driven by non-functional currency generated revenue, non-functional currency inventory purchases, investments in U.S. Dollar denominated available-for-sale debt securities, and certain other intercompany transactions. The Company enters into foreign currency contracts to reduce the risk associated with the foreign currency exchange rate fluctuations on these transactions. Certain contracts are designated as cash flow hedges. As of December 31, 2019, the aggregate notional value of the Company's outstanding cash flow hedges was $879.8 million, with contract maturities ranging from one to twenty-four months.
The Company may enter into long term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of the Company's long term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations. The interest rate swap contracts are accounted for as cash flow hedges. Refer to Note 7 for a discussion of long term debt. As of December 31, 2019, the Company had no outstanding interest rate swap contracts.
For contracts designated as cash flow hedges, the changes in fair value are reported as other comprehensive income (loss) and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. Effective hedge results are classified in the consolidated statements of operations in the same manner as the underlying exposure.
Undesignated Derivative Instruments
The Company may elect to enter into foreign exchange forward contracts to mitigate the change in fair value of specific assets and liabilities on the consolidated balance sheets. These undesignated instruments are recorded at fair value as a derivative asset or liability on the consolidated balance sheets with their corresponding change in fair value recognized in other expense, net, together with the re-measurement gain or loss from the hedged balance sheet position. As of December 31, 2019, the total notional value of the Company's outstanding undesignated derivative instruments was $304.2 million.
Credit Risk
The Company enters into derivative contracts with major financial institutions with investment grade credit ratings and is exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the derivative contracts. However, the Company monitors the credit quality of these financial institutions and considers the risk of counterparty default to be minimal.
16. Related Party Transactions
The Company has an operating lease agreement with an entity controlled by the Company’s Executive Chairman and Brand Chief to lease an aircraft for business purposes. The Company paid $2.0 million in lease payments to the entity for its use of the aircraft during each of the years ended December 31, 2019, 2018 and 2017. No amounts were payable to this related party as of December 31, 2019 and 2018. The Company determined the lease payments were at fair market lease rates.
In June 2016, the Company purchased parcels of land from an entity controlled by the Company's Executive Chairman and Brand Chief, to be utilized to expand the Company’s corporate headquarters to accommodate its growth needs. The purchase price for these parcels totaled $70.3 million. The Company determined that the purchase price for the land represented the fair market value of the parcels and approximated the cost to the seller to purchase and develop the parcels, including costs related to the termination of a lease encumbering the parcels.
In connection with the purchase of these parcels, in September 2016, the parties entered into an agreement pursuant to which the parties will share the burden of any special taxes arising due to infrastructure projects in the surrounding area. The allocation to the Company is based on the expected benefits to the Company’s parcels from these projects. No obligations were owed by either party under this agreement as of December 31, 2019.
17. Segment Data and Disaggregated Revenue
The Company’s operating segments are based on how the Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. As such, the CODM receives discrete financial information for the Company's principal business by geographic region based on the Company’s strategy to become a global brand. These geographic regions include North America, Europe, the Middle East and Africa (“EMEA”), Asia-Pacific, and Latin America. Each geographic segment operates exclusively in one industry: the development, marketing and distribution of branded performance apparel, footwear and accessories. The CODM also receives discrete financial information for the Company's Connected Fitness business. Total expenditures for additions to long-lived assets are not disclosed as this information is not regularly provided to the CODM.
Effective January 1, 2019, the Company changed the way management internally analyzes the business and excludes certain corporate costs from its segment profitability measures. The Company reports these costs within Corporate Other, which is designed to provide increased transparency and comparability of the Company's operating segments performance. Prior year amounts have been recast to conform to the 2019 presentation. These changes have no impact on previously reported consolidated balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, or cash flows.
Corporate Other consists largely of general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain, innovation and other corporate support functions; costs related to the Company's global assets and global marketing, costs related to the Company’s headquarters; restructuring and restructuring related charges; and certain foreign currency hedge gains and losses.
Disposition of a Subsidiary
On October 1, 2018, the Company sold its Brazilian subsidiary within the Company's Latin America segment. In connection with this sale, the Company entered into a license and distribution agreement with the buyer who will continue to sell the Company's products in Brazil. The Company's Brazil business represented less than 1% of the Company’s net revenue and was not considered material to the Company's consolidated results of operations.
Segment Data
The net revenues and operating income (loss) associated with the Company's segments are summarized in the following tables. Net revenues represent sales to external customers for each segment. Intercompany balances were eliminated for separate disclosure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net revenues
|
|
|
|
|
|
|
North America
|
|
$
|
3,658,353
|
|
|
$
|
3,735,293
|
|
|
$
|
3,801,056
|
|
EMEA
|
|
621,137
|
|
|
591,057
|
|
|
471,560
|
|
Asia-Pacific
|
|
636,343
|
|
|
557,431
|
|
|
430,972
|
|
Latin America
|
|
196,132
|
|
|
190,795
|
|
|
181,317
|
|
Connected Fitness
|
|
136,378
|
|
|
120,357
|
|
|
101,870
|
|
Corporate Other (1)
|
|
18,789
|
|
|
(1,748)
|
|
|
2,469
|
|
Total net revenues
|
|
$
|
5,267,132
|
|
|
$
|
5,193,185
|
|
|
$
|
4,989,244
|
|
(1) Corporate Other revenues consist of foreign currency hedge gains and losses related to revenues generated by entities within the Company's operating segments, but managed through the Company's central foreign exchange risk management program.
Net revenues in the United States were $3,394.0 million, $3,464.0 million, and $3,626.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Operating income (loss)
|
|
|
|
|
|
|
North America
|
|
$
|
733,442
|
|
|
$
|
718,195
|
|
|
$
|
700,190
|
|
EMEA
|
|
53,739
|
|
|
30,388
|
|
|
26,042
|
|
Asia-Pacific
|
|
97,641
|
|
|
103,527
|
|
|
89,320
|
|
Latin America
|
|
(3,160)
|
|
|
(16,879)
|
|
|
(14,400)
|
|
Connected Fitness
|
|
17,140
|
|
|
5,948
|
|
|
(6,541)
|
|
Corporate Other
|
|
(662,032)
|
|
|
(866,196)
|
|
|
(766,768)
|
|
Total operating income (loss)
|
|
236,770
|
|
|
(25,017)
|
|
|
27,843
|
|
Interest expense, net
|
|
(21,240)
|
|
|
(33,568)
|
|
|
$
|
(34,538)
|
|
Other income (expense), net
|
|
(5,688)
|
|
|
(9,203)
|
|
|
$
|
(3,614)
|
|
Income (loss) before income taxes
|
|
$
|
209,842
|
|
|
$
|
(67,788)
|
|
|
$
|
(10,309)
|
|
The operating income (loss) information for Corporate Other presented above includes the impact of all restructuring, impairment and restructuring related charges related to the Company's 2018 and 2017 restructuring plans. These unallocated charges are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
Unallocated restructuring, impairment and restructuring related charges
|
|
|
|
North America related
|
$
|
115,687
|
|
|
$
|
56,103
|
|
EMEA related
|
34,699
|
|
|
1,855
|
|
Asia-Pacific related
|
1
|
|
|
112
|
|
Latin America related
|
27,107
|
|
|
13,903
|
|
Connected Fitness related
|
1,505
|
|
|
48,111
|
|
Corporate Other related
|
24,950
|
|
|
9,042
|
|
Total unallocated restructuring, impairment and restructuring related costs
|
$
|
203,949
|
|
|
$
|
129,126
|
|
There were no restructuring charges incurred during the year ended December 31, 2019.
Long-lived assets are primarily composed of Property and equipment, net and ROU assets. The Company's long-lived assets by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Year Ended December 31,
|
|
|
|
2019
|
|
2018
|
Long-lived assets
|
|
|
|
United States
|
$
|
1,051,089
|
|
|
$
|
705,776
|
|
Canada
|
23,268
|
|
|
11,669
|
|
Total North America
|
1,074,357
|
|
|
717,445
|
|
Other foreign countries
|
309,722
|
|
|
109,423
|
|
Total long lived assets
|
$
|
1,384,079
|
|
|
$
|
826,868
|
|
Disaggregation of Revenue
The following tables disaggregate the Company's net revenues into categories that depict how the nature, amount, timing, and uncertainty of net revenues and cash flows are affected by economic factors for the fiscal periods presented.
Net revenues by product category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Apparel
|
$
|
3,470,285
|
|
|
$
|
3,464,120
|
|
|
$
|
3,284,652
|
|
Footwear
|
1,086,551
|
|
|
1,063,175
|
|
|
1,037,840
|
|
Accessories
|
416,354
|
|
|
422,496
|
|
|
445,838
|
|
Net Sales
|
4,973,190
|
|
|
4,949,791
|
|
|
4,768,330
|
|
License revenues
|
138,775
|
|
|
124,785
|
|
|
116,575
|
|
Connected Fitness
|
136,378
|
|
|
120,357
|
|
|
101,870
|
|
Corporate Other (1)
|
18,789
|
|
|
(1,748)
|
|
|
2,469
|
|
Total net revenues
|
$
|
5,267,132
|
|
|
$
|
5,193,185
|
|
|
$
|
4,989,244
|
|
(1) Corporate Other revenues consist of foreign currency hedge gains and losses related to revenues generated by entities within the Company's operating segments, but managed through the Company's central foreign exchange risk management program.
Net revenues by distribution channel are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Wholesale
|
$
|
3,167,625
|
|
|
$
|
3,141,983
|
|
|
$
|
3,038,020
|
|
Direct to Consumer
|
1,805,565
|
|
|
1,807,808
|
|
|
1,730,310
|
|
Net Sales
|
4,973,190
|
|
|
4,949,791
|
|
|
4,768,330
|
|
License revenues
|
138,775
|
|
|
124,785
|
|
|
116,575
|
|
Connected Fitness
|
136,378
|
|
|
120,357
|
|
|
101,870
|
|
Corporate Other (1)
|
18,789
|
|
|
(1,748)
|
|
|
2,469
|
|
Total Net Revenues
|
$
|
5,267,132
|
|
|
$
|
5,193,185
|
|
|
$
|
4,989,244
|
|
(1) Corporate Other revenues consist of foreign currency hedge gains and losses related to revenues generated by entities within the Company's operating segments, but managed through the Company's central foreign exchange risk management program.
18. Unaudited Quarterly Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Quarter Ended (unaudited)
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,204,722
|
|
|
$
|
1,191,729
|
|
|
$
|
1,429,456
|
|
|
$
|
1,441,225
|
|
|
$
|
5,267,132
|
|
Gross profit
|
|
544,787
|
|
|
554,321
|
|
|
689,898
|
|
|
681,527
|
|
|
2,470,533
|
|
Income (loss) from operations
|
|
35,259
|
|
|
(11,482)
|
|
|
138,920
|
|
|
74,073
|
|
|
236,770
|
|
Net income (loss)
|
|
$
|
22,477
|
|
|
$
|
(17,349)
|
|
|
$
|
102,315
|
|
|
$
|
(15,304)
|
|
|
$
|
92,139
|
|
Basic net income (loss) per share of Class A, B and C common stock
|
|
$
|
0.05
|
|
|
$
|
(0.04)
|
|
|
$
|
0.23
|
|
|
$
|
(0.03)
|
|
|
$
|
0.20
|
|
Diluted net income (loss) per share of Class A, B and C common stock
|
|
$
|
0.05
|
|
|
$
|
(0.04)
|
|
|
$
|
0.23
|
|
|
$
|
(0.03)
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,185,370
|
|
|
$
|
1,174,859
|
|
|
$
|
1,442,976
|
|
|
$
|
1,389,980
|
|
|
$
|
5,193,185
|
|
Gross profit
|
|
523,453
|
|
|
526,584
|
|
|
665,207
|
|
|
625,227
|
|
|
2,340,471
|
|
Income (loss) from operations
|
|
(28,661)
|
|
|
(104,875)
|
|
|
118,966
|
|
|
(10,447)
|
|
|
(25,017)
|
|
Net income (loss)
|
|
$
|
(30,242)
|
|
|
$
|
(95,544)
|
|
|
$
|
75,266
|
|
|
$
|
4,218
|
|
|
$
|
(46,302)
|
|
Basic net income (loss) per share of Class A, B and C common stock
|
|
$
|
(0.07)
|
|
|
$
|
(0.21)
|
|
|
$
|
0.17
|
|
|
$
|
0.01
|
|
|
$
|
(0.10)
|
|
Diluted net income (loss) per share of Class A, B and C common stock
|
|
$
|
(0.07)
|
|
|
$
|
(0.21)
|
|
|
$
|
0.17
|
|
|
$
|
0.01
|
|
|
$
|
(0.10)
|
|
19. Subsequent Events
Acquisition
On February 20, 2020, the Company entered into an agreement to acquire Triple Pte. Ltd. ("Triple"), a distributor of the Company's products in Southeast Asia. The purchase price for the acquisition will be $30 million in cash, which will be adjusted to reflect that the acquisition will close on a debt free basis with Triple's transaction expenses borne by the sellers and subject to a working capital adjustment. In addition, the aggregate purchase price payable at the closing is subject to an upward adjustment to reflect the amount of net cash held by Triple at closing. The acquisition is currently expected to close during the first quarter of 2020, subject to the satisfaction of customary closing conditions. The acquisition is expected to be funded through cash on hand.