Under Armour(UAA) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, and specific financial line items Condensed Consolidated Balance Sheets | Metric (in thousands) | Sep 30, 2022 | Mar 31, 2022 | | :-------------------- | :----------- | :----------- | | Total Assets | $4,770,071 | $4,452,830 | | Total Liabilities | $2,953,738 | $2,723,870 | | Total Stockholders' Equity | $1,816,333 | $1,728,950 | | Cash and Cash Equivalents | $853,652 | $1,009,130 | | Accounts Receivable, net | $789,087 | $702,190 | | Inventories | $1,080,420 | $824,450 | Condensed Consolidated Statements of Operations | Metric (in thousands, except per share) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 6 Months Ended Sep 30, 2022 | 6 Months Ended Sep 30, 2021 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Revenues | $1,573,885 | $1,545,532 | $2,922,942 | $2,897,066 | | Gross Profit | $713,834 | $788,104 | $1,344,031 | $1,456,925 | | Income (loss) from operations | $119,410 | $172,064 | $153,893 | $293,269 | | Net Income (loss) | $86,925 | $113,444 | $94,607 | $172,651 | | Basic Net Income (loss) per share | $0.19 | $0.24 | $0.21 | $0.37 | | Diluted Net Income (loss) per share | $0.19 | $0.24 | $0.20 | $0.37 | Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 6 Months Ended Sep 30, 2022 | 6 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Income (loss) | $86,925 | $113,444 | $94,607 | $172,650 | | Foreign currency translation adjustment | $(16,974) | $(7,499) | $(40,499) | $(420) | | Unrealized gain (loss) on cash flow hedges, net of tax | $49,412 | $15,468 | $91,894 | $11,720 | | Total other comprehensive income (loss) | $16,428 | $5,674 | $21,851 | $11,650 | | Comprehensive income (loss) | $103,353 | $119,118 | $116,458 | $184,300 | Condensed Consolidated Statements of Stockholders' Equity | Metric (in thousands) | Balance as of Mar 31, 2022 | Balance as of Sep 30, 2022 | | :-------------------- | :------------------------- | :------------------------- | | Total Stockholders' Equity | $1,728,950 | $1,816,333 | | Additional Paid-in Capital | $1,046,961 | $1,118,093 | | Retained Earnings | $721,926 | $716,325 | | Accumulated other comprehensive income (loss) | $(40,086) | $(18,235) | - During the six months ended September 30, 2022, the company repurchased 9.9 million shares of Class C Common Stock, resulting in a $50 million reduction in equity[20][96] - Stock-based compensation expense for the six months ended September 30, 2022, was $19,708 thousand[20] Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | 6 Months Ended Sep 30, 2022 | 6 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | | Net cash provided by (used in) operating activities | $(2,499) | $360,456 | | Net cash provided by (used in) investing activities | $(58,864) | $(48,343) | | Net cash provided by (used in) financing activities | $(48,788) | $(413,999) | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | $(43,962) | $8,608 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $(154,113) | $(93,278) | | Cash, cash equivalents and restricted cash, End of period | $868,013 | $1,266,400 | Notes to the Condensed Consolidated Financial Statements NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION - Under Armour, Inc. is a global developer, marketer, and distributor of branded athletic performance apparel, footwear, and accessories[25] - The company changed its fiscal year end from December 31 to March 31, effective April 1, 2022, with the current fiscal year (Fiscal 2023) running from April 1, 2022, through March 31, 2023[26] NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS - The company is currently evaluating ASU 2022-04, "Liabilities - Supplier Finance Programs," which requires disclosure of key terms and obligations under such programs, effective for fiscal years beginning after December 15, 2022[32] NOTE 3. ALLOWANCE FOR DOUBTFUL ACCOUNTS | Metric (in thousands) | Mar 31, 2022 | Sep 30, 2022 | | :-------------------- | :----------- | :----------- | | Allowance for doubtful accounts - within accounts receivable, net | $7,113 | $6,401 | | Allowance for doubtful accounts - within prepaid expenses and other current assets | $7,029 | $7,029 | NOTE 4. PROPERTY AND EQUIPMENT, NET | Metric (in thousands) | Sep 30, 2022 | Mar 31, 2022 | | :-------------------- | :----------- | :----------- | | Property and equipment, net | $636,746 | $601,360 | | Construction in progress | $110,782 | $64,800 | - Depreciation expense for property and equipment was $33.2 million for the three months and $67.1 million for the six months ended September 30, 2022[34] NOTE 5. LEASES | Metric | Sep 30, 2022 | Mar 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Weighted average remaining lease term (in years) | 8.24 | 8.69 | | Weighted average discount rate | 4.26 % | 3.72 % | | Fiscal year ending March 31, | Future Minimum Lease Payments (in thousands) | | :--------------------------- | :------------------------------------------- | | 2023 (six months ending) | $79,425 | | 2024 | $165,195 | | 2025 | $145,072 | | 2026 | $113,355 | | 2027 | $95,046 | | 2028 and thereafter | $397,650 | | Total lease payments | $995,743 | | Less: Interest | $158,532 | | Total present value of lease liabilities | $837,211 | NOTE 6. GOODWILL | Segment (in thousands) | Mar 31, 2022 | Sep 30, 2022 | | :--------------------- | :----------- | :----------- | | North America | $301,371 | $301,371 | | EMEA | $105,053 | $90,858 | | Asia-Pacific | $85,084 | $76,103 | | Latin America | $0 | $0 | | Total | $491,508 | $468,332 | - The decrease in total goodwill was primarily due to a currency translation adjustment of $(23,176) thousand, affecting EMEA and Asia-Pacific segments[40] NOTE 7. INTANGIBLE ASSETS, NET | Metric (in thousands) | Sep 30, 2022 | Mar 31, 2022 | | :-------------------- | :----------- | :----------- | | Intangible assets subject to amortization | $5,094 | $6,360 | | Indefinite-lived intangible assets | $4,197 | $4,220 | | Intangible assets, net | $9,291 | $10,580 | - Amortization expense for intangible assets was $0.5 million for the three months and $0.9 million for the six months ended September 30, 2022[41] | Fiscal year ending March 31, | Estimated Amortization Expense (in thousands) | | :--------------------------- | :-------------------------------------------- | | 2023 (six months ending) | $949 | | 2024 | $1,443 | | 2025 | $1,404 | | 2026 | $1,289 | | 2027 | $9 | | 2028 and thereafter | $0 | | Total amortization expense of intangible assets | $5,094 | NOTE 8. CREDIT FACILITY AND OTHER LONG TERM DEBT | Debt Type (in thousands) | Sep 30, 2022 | Mar 31, 2022 | | :----------------------- | :----------- | :----------- | | 1.50% Convertible Senior Notes due 2024 | $80,919 | $80,919 | | 3.25% Senior Notes due 2026 | $600,000 | $600,000 | | Total amount outstanding | $673,382 | $672,286 | - The company has a $1.1 billion revolving credit facility with no amounts outstanding as of September 30, 2022, and was in compliance with all applicable covenants[44][49] - Interest expense, net, decreased by $5.7 million to $3.6 million for the three months ended September 30, 2022, primarily due to increased interest income and reduced interest expense from Convertible Senior Notes repurchases[67][181] | Fiscal year ending March 31, | Scheduled Maturities of Long Term Debt (in thousands) | | :--------------------------- | :---------------------------------------------------- | | 2023 (six months ending) | $0 | | 2024 | $0 | | 2025 | $80,919 | | 2026 | $0 | | 2027 | $600,000 | | 2028 and thereafter | $0 | | Total scheduled maturities of long term debt | $680,919 | NOTE 9. COMMITMENTS AND CONTINGENCIES - The company is involved in several legal proceedings, including the "In re Under Armour Securities Litigation" and various state and federal derivative complaints, alleging false statements, improper sales practices, and breaches of fiduciary duty[69][71][74][79][85][86] - As of September 30, 2022, the company has accrued $20 million for certain ongoing legal proceedings, with the timing and ultimate amount of loss being uncertain[89] NOTE 10. STOCKHOLDERS' EQUITY - The company has Class A Common Stock (one vote per share), Class B Convertible Common Stock (10 votes per share, primarily held by Kevin Plank), and Class C Common Stock (non-voting)[92][93] - The Board of Directors authorized a $500 million share repurchase program for Class C Common Stock in February 2022[94] - As of September 30, 2022, the company repurchased $350 million (26.1 million shares) of Class C Common Stock under its share repurchase program[98] NOTE 11. REVENUES | Product Category (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 6 Months Ended Sep 30, 2022 | 6 Months Ended Sep 30, 2021 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Apparel | $1,038,268 | $1,058,231 | $1,906,696 | $1,932,424 | | Footwear | $375,885 | $329,718 | $723,136 | $672,359 | | Accessories | $111,117 | $126,345 | $207,948 | $237,848 | | Net Sales | $1,525,270 | $1,514,294 | $2,837,780 | $2,842,631 | | License revenues | $33,123 | $31,099 | $61,258 | $54,360 | | Corporate Other | $15,492 | $139 | $23,904 | $75 | | Total net revenues | $1,573,885 | $1,545,532 | $2,922,942 | $2,897,066 | | Distribution Channel (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 6 Months Ended Sep 30, 2022 | 6 Months Ended Sep 30, 2021 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Wholesale | $948,154 | $910,655 | $1,739,840 | $1,678,266 | | Direct-to-consumer | $577,116 | $603,639 | $1,097,940 | $1,164,365 | | Net Sales | $1,525,270 | $1,514,294 | $2,837,780 | $2,842,631 | | License revenues | $33,123 | $31,099 | $61,258 | $54,360 | | Corporate Other | $15,492 | $139 | $23,904 | $75 | | Total net revenues | $1,573,885 | $1,545,532 | $2,922,942 | $2,897,066 | - Contract liabilities, primarily from digital fitness subscriptions and gift cards, were $29.7 million as of September 30, 2022, down from $35.3 million as of March 31, 2022[100] NOTE 12. RESTRUCTURING AND RELATED IMPAIRMENT CHARGES - The 2020 restructuring plan, designed to improve profitability and cash flow, concluded during the three months ended March 31, 2022[103] - No restructuring and impairment charges were recorded for the three and six months ended September 30, 2022[104] | Restructuring Reserve Activity (in thousands) | Mar 31, 2022 | Sep 30, 2022 | | :------------------------------------------ | :----------- | :----------- | | Employee Related Costs | $2,672 | $1,553 | | Contract Exit Costs | $78,237 | $3,079 | NOTE 13. OTHER EMPLOYEE BENEFITS - 401(k) matching expense was $2.6 million for the three months and $4.2 million for the six months ended September 30, 2022[106] - Deferred Compensation Plan obligations were $11.6 million as of September 30, 2022, with corresponding assets in a Rabbi Trust of $6.8 million[107][108] NOTE 14. STOCK BASED COMPENSATION - Total stock-based compensation expense for employees and non-employee directors was $8.3 million for the three months and $19.7 million for the six months ended September 30, 2022[111] - As of September 30, 2022, $84.9 million of unrecognized compensation expense related to these awards is expected to be recognized over a weighted average period of 2.28 years[111] - Under the Employee Stock Purchase Plan (ESPP), 171.6 thousand Class C shares were purchased during the three months and 293.0 thousand for the six months ended September 30, 2022[115] NOTE 15. FAIR VALUE MEASUREMENTS | Financial Instrument (in thousands) | Level 1 | Level 2 | Level 3 | | :---------------------------------- | :------ | :----------- | :------ | | Derivative foreign currency contracts (assets) | $0 | $104,954 | $0 | | TOLI policies held by the Rabbi Trust (assets) | $0 | $6,820 | $0 | | Deferred Compensation Plan obligations (liabilities) | $0 | $(11,649) | $0 | - The fair value of Convertible Senior Notes was $78.5 million and Senior Notes was $519.2 million as of September 30, 2022[122] NOTE 16. RISK MANAGEMENT AND DERIVATIVES - The company uses derivative instruments, primarily foreign currency contracts, to manage foreign currency exchange rate fluctuations, with an aggregate notional value of $1,262.5 million for cash flow hedges as of September 30, 2022[126][130] - Undesignated derivative instruments had a total notional value of $341.8 million as of September 30, 2022[134] | Derivative Instrument (in thousands) | Balance Sheet Classification | Sep 30, 2022 | | :----------------------------------- | :--------------------------- | :----------- | | Total derivative assets designated as hedging instruments | Other current assets / Other long term assets | $114,973 | | Total derivative liabilities designated as hedging instruments | Other current liabilities / Other long term liabilities | $3,643 | | Total derivative assets not designated as hedging instruments | Other current assets | $13,074 | | Total derivative liabilities not designated as hedging instruments | Other current liabilities | $1,797 | NOTE 17. PROVISION FOR INCOME TAXES - Effective tax rates were 20.2% for the three months ended September 30, 2022 (vs. 14.2% in 2021), and 22.4% for the six months ended September 30, 2022 (vs. 14.3% in 2021), primarily due to the proportion of foreign earnings subject to tax and related valuation allowances[137][138] - The company maintains a valuation allowance on United States federal and most state deferred tax assets, but forecasts suggest potential realizability and reversal of a portion of these allowances in the current fiscal year-end[140][141] NOTE 18. EARNINGS PER SHARE | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 6 Months Ended Sep 30, 2022 | 6 Months Ended Sep 30, 2021 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic net income (loss) per share | $0.19 | $0.24 | $0.21 | $0.37 | | Diluted net income (loss) per share | $0.19 | $0.24 | $0.20 | $0.37 | | Weighted average common shares outstanding - Basic | 454,322 | 470,002 | 456,357 | 464,831 | | Weighted average common shares and dilutive securities outstanding - Diluted | 464,141 | 473,116 | 466,143 | 467,730 | NOTE 19. SEGMENT DATA | Segment (in thousands) | Net Revenues (3 Months Ended Sep 30, 2022) | Net Revenues (3 Months Ended Sep 30, 2021) | Operating Income (Loss) (3 Months Ended Sep 30, 2022) | Operating Income (Loss) (3 Months Ended Sep 30, 2021) | | :--------------------- | :----------------------------------------- | :----------------------------------------- | :---------------------------------------------------- | :---------------------------------------------------- | | North America | $1,011,823 | $1,035,862 | $209,206 | $292,367 | | EMEA | $262,679 | $241,201 | $35,895 | $41,772 | | Asia-Pacific | $225,729 | $211,950 | $46,134 | $40,529 | | Latin America | $58,162 | $56,380 | $7,177 | $10,831 | | Corporate Other | $15,492 | $139 | $(179,002) | $(213,435) | | Segment (in thousands) | Net Revenues (6 Months Ended Sep 30, 2022) | Net Revenues (6 Months Ended Sep 30, 2021) | Operating Income (Loss) (6 Months Ended Sep 30, 2022) | Operating Income (Loss) (6 Months Ended Sep 30, 2021) | | :--------------------- | :----------------------------------------- | :----------------------------------------- | :---------------------------------------------------- | :---------------------------------------------------- | | North America | $1,921,179 | $1,941,355 | $399,130 | $518,136 | | EMEA | $467,860 | $448,425 | $54,076 | $81,664 | | Asia-Pacific | $402,394 | $404,319 | $66,079 | $64,575 | | Latin America | $107,605 | $102,892 | $13,411 | $16,832 | | Corporate Other | $23,904 | $75 | $(378,803) | $(387,938) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting key trends, challenges, and strategic initiatives, covering overall financial performance, segment-specific results, and liquidity management FORWARD-LOOKING STATEMENTS - The report contains forward-looking statements regarding future financial condition, growth strategies, impacts of COVID-19, inflation, and other global events, which are subject to risks, uncertainties, and changes in circumstances[148][149] OVERVIEW - Under Armour is a leading global developer, marketer, and distributor of athletic performance apparel, footwear, and accessories, focused on driving premium brand-right growth and improved profitability[153][154] - During the three months ended September 30, 2022, the company faced a challenging retail environment characterized by increased promotions, elevated freight expenses, ongoing COVID-19 impacts in China, and negative foreign currency rate changes[155] - COVID-19 continues to cause global logistical challenges, increased freight costs, and temporary store closures/restrictions, particularly in China, which are expected to negatively impact Fiscal 2023 results[157][158] - The company ceased shipping products for sale in Russia due to the Ukraine conflict, which is not expected to have a material impact on revenues[160] RESULTS OF OPERATIONS | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 6 Months Ended Sep 30, 2022 | 6 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Revenues | $1,573,885 | $1,545,532 | $2,922,942 | $2,897,066 | | Cost of goods sold | $860,051 | $757,428 | $1,578,911 | $1,440,141 | | Gross profit | $713,834 | $788,104 | $1,344,031 | $1,456,925 | | SG&A expenses | $594,424 | $599,384 | $1,190,138 | $1,144,387 | | Income (loss) from operations | $119,410 | $172,064 | $153,893 | $293,269 | | Net income (loss) | $86,925 | $113,444 | $94,607 | $172,651 | - Total net revenues increased 1.8% for the three months ended September 30, 2022, with wholesale revenue up 4.1% and direct-to-consumer revenue down 4.4%[160] - Gross margin decreased by 560 basis points to 45.4% for the three months ended September 30, 2022, primarily due to higher promotions and discounting (300 bps), elevated freight costs (100 bps), and negative foreign currency impacts (50 bps)[173] - Selling, general and administrative expenses decreased by 0.8% for the three months ended September 30, 2022, mainly due to a 14.1% decrease in marketing costs[176] SEGMENT RESULTS OF OPERATIONS | Segment (in thousands) | Net Revenues (3 Months Ended Sep 30, 2022) | Net Revenues (3 Months Ended Sep 30, 2021) | Operating Income (Loss) (3 Months Ended Sep 30, 2022) | Operating Income (Loss) (3 Months Ended Sep 30, 2021) | | :--------------------- | :----------------------------------------- | :----------------------------------------- | :---------------------------------------------------- | :---------------------------------------------------- | | North America | $1,011,823 | $1,035,862 | $209,206 | $292,367 | | EMEA | $262,679 | $241,201 | $35,895 | $41,772 | | Asia-Pacific | $225,729 | $211,950 | $46,134 | $40,529 | | Latin America | $58,162 | $56,380 | $7,177 | $10,831 | | Corporate Other | $15,492 | $139 | $(179,002) | $(213,435) | - North America net revenues decreased by 2.3% for the three months ended September 30, 2022, leading to a 28.4% decrease in operating income due to lower gross profit, higher promotions, and increased freight costs[194][195] - EMEA net revenues increased by 8.9%, but operating income decreased by 14.1% due to unfavorable channel mix and higher freight costs, partially offset by revenue growth[194][195] - Corporate Other net revenues significantly increased by $15.4 million, primarily driven by foreign currency hedge gains, which also contributed to a $34.4 million decrease in operating loss[194][195] LIQUIDITY AND CAPITAL RESOURCES - As of September 30, 2022, the company had $853.7 million in cash and cash equivalents and believes it has adequate liquidity for the next twelve months through cash from operations, existing credit facilities, and potential capital market access[203] - Cash flows used in operating activities increased by $363.0 million for the six months ended September 30, 2022, primarily due to a decrease in net income and a $252.9 million decrease from changes in working capital, driven by increases in inventories and accounts receivable[212] - Capital expenditures increased by $44.7 million to $93.9 million for the six months ended September 30, 2022, with future investments planned for direct-to-consumer, e-Commerce, IT systems, distribution centers, and a new global headquarters[214][215] - The company repurchased $50.0 million of Class C common shares through accelerated share repurchase programs during the six months ended September 30, 2022[216] CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS - The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that are inherently uncertain and unpredictable, and actual results could differ significantly from these estimates[242] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no significant changes to the company's market risk exposure since the last annual report - There have been no significant changes to the company's market risk since December 31, 2021[244] Item 4. Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures and confirms no material changes in internal controls over financial reporting during the quarter - Management, under the supervision of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[245] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter, despite the transition to a hybrid work environment[246] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section refers to the detailed discussion of legal proceedings provided in Note 9 to the Condensed Consolidated Financial Statements - The company is involved in various litigation and other proceedings, including commercial disputes and intellectual property matters, as detailed in Note 9 to the Condensed Consolidated Financial Statements[249] Item 1A. Risk Factors This section directs readers to the company's Annual Report on Form 10-K for Fiscal 2021 for a comprehensive discussion of potential risks and uncertainties affecting the business - Readers should carefully consider the risk factors discussed in Part I, Item 1A, "Risk Factors" in the company's Annual Report on Form 10-K for Fiscal 2021, as additional risks not currently known or deemed immaterial may also negatively impact the business[250] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's repurchases of Class C Common Stock under its authorized share repurchase program during the three months ended September 30, 2022 | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of a Publicly Announced Program | Approximately Dollar Value of Shares that May Yet be Purchased Under the Program (in millions) | | :---------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------------- | :--------------------------------------------------------------------------------------------- | | 07/01/2022 to 07/31/2022 | — | — | — | — | | 08/01/2022 to 08/31/2022 | 2,604,167 | $7.68 | 2,604,167 | $155.0 | | 09/01/2022 to 09/30/2022 | 640,100 | $7.42 | 640,100 | $150.0 | - As of September 30, 2022, approximately $150.0 million remained available under the $500 million Class C Common Stock share repurchase program authorized in February 2022[252] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including executive compensation plans, certifications, and XBRL documents - The report includes various exhibits such as executive severance plans, Section 302 and 906 certifications from the CEO and CFO, and XBRL instance, schema, calculation, definition, label, and presentation documents[253] SIGNATURES This section contains the required signatures, certifying the filing of the quarterly report - The report was duly signed on behalf of Under Armour, Inc. by David E. Bergman, Chief Financial Officer, on November 8, 2022[257]