SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☑||QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the quarterly period ended March 31, 2020
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the transition period from to
Commission File No. 001-33202
UNDER ARMOUR, INC.
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of|
incorporation or organization)
| ||(I.R.S. Employer|
1020 Hull Street
Baltimore, Maryland 21230
|(Address of principal executive offices) (Zip Code)|| ||(Registrant’s telephone number, including area code)|
Securities registered pursuant to Section 12(b) of the Act:
|Class A Common Stock||UAA||New York Stock Exchange|
|Class C Common Stock||UA||New York Stock Exchange|
|(Title of each class)||(Trading Symbols)||(Name of each exchange on which registered)|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||☑||Accelerated filer||☐|
|Non-accelerated filer||☐||Smaller reporting company||☐|
|Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of April 30, 2020 there were 188,452,489 shares of Class A Common Stock, 34,450,000 shares of Class B Convertible Common Stock and 231,191,334 Class C Common Stock outstanding.
UNDER ARMOUR, INC.
March 31, 2020
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Under Armour, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
(In thousands, except share data)
|Cash and cash equivalents||$||959,318 || ||$||788,072 || ||$||288,726 || |
|Accounts receivable, net||668,409 || ||708,714 || ||743,677 || |
|Inventories||940,236 || ||892,258 || ||875,252 || |
|Prepaid expenses and other current assets||300,044 || ||313,165 || ||299,053 || |
|Total current assets||2,868,007 || ||2,702,209 || ||2,206,708 || |
|Property and equipment, net||726,568 || ||792,148 || ||810,470 || |
|Operating lease right-of-use assets||583,418 || ||591,931 || ||590,984 || |
|Goodwill||485,672 || ||550,178 || ||548,735 || |
|Intangible assets, net||40,490 || ||36,345 || ||40,109 || |
|Deferred income taxes||39,576 || ||82,379 || ||114,705 || |
|Other long term assets||93,844 || ||88,341 || ||124,361 || |
|Total assets||$||4,837,575 || ||$||4,843,531 || ||$||4,436,072 || |
|Liabilities and Stockholders’ Equity|
|Revolving credit facility, current||$||600,000 || ||$||— || ||$||— || |
|Accounts payable||417,397 || ||618,194 || ||377,401 || |
|Accrued expenses||267,115 || ||374,694 || ||268,187 || |
|Customer refund liabilities||208,172 || ||219,424 || ||270,612 || |
|Operating lease liabilities||129,758 || ||125,900 || ||107,250 || |
|Other current liabilities||69,060 || ||83,797 || ||70,562 || |
|Total current liabilities||1,691,502 || ||1,422,009 || ||1,094,012 || |
|Long term debt, net of current maturities||593,281 || ||592,687 || ||590,431 || |
|Operating lease liabilities, non-current||913,754 || ||580,635 || ||594,613 || |
|Other long term liabilities||88,858 || ||98,113 || ||107,209 || |
|Total liabilities||3,287,395 || ||2,693,444 || ||2,386,265 || |
|Commitments and contingencies (See Note 8)|
Class A Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of March 31, 2020, December 31, 2019 and March 31, 2019; 188,450,989 shares issued and outstanding as of March 31, 2020, 188,289,680 shares issued and outstanding as of December 31, 2019, and 187,979,934 shares issued and outstanding as of March 31, 2019.
|62 || ||62 || ||62 || |
Class B Convertible Common Stock, $0.0003 1/3 par value; 34,450,000 shares authorized, issued and outstanding as of March 31, 2020, December 31, 2019 and March 31, 2019.
|11 || ||11 || ||11 || |
Class C Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of March 31, 2020, December 31, 2019 and March 31, 2019; 231,150,002 shares issued and outstanding as of March 31, 2020, 229,027,730 shares issued and outstanding as of December 31, 2019, and 228,488,635 shares issued and outstanding as of March 31, 2019.
|77 || ||76 || ||76 || |
|Additional paid-in capital||985,831 || ||973,717 || ||931,352 || |
|Retained earnings||634,452 || ||1,226,986 || ||1,158,482 || |
|Accumulated other comprehensive loss||(70,253)|| ||(50,765)|| ||(40,176)|| |
|Total stockholders’ equity||1,550,180 || ||2,150,087 || ||2,049,807 || |
|Total liabilities and stockholders’ equity||$||4,837,575 || ||$||4,843,531 || ||$||4,436,072 || |
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
(In thousands, except per share amounts)
| ||Three Months Ended March 31,|
|Net revenues||$||930,240 || ||$||1,204,722 || |
|Cost of goods sold||499,256 || ||659,935 || |
|Gross profit||430,984 || ||544,787 || |
|Selling, general and administrative expenses||552,701 || ||509,528 || |
|Restructuring and impairment charges||436,463 || ||— || |
|Income (loss) from operations||(558,180)|| ||35,259 || |
|Interest expense, net||(5,960)|| ||(4,238)|| |
|Other income (expense), net||1,534 || ||(667)|| |
|Income (loss) before income taxes||(562,606)|| ||30,354 || |
|Income tax expense||21,547 || ||8,131 || |
|Income (loss) from equity method investments||(5,528)|| ||254 || |
|Net income (loss)||$||(589,681)|| ||$||22,477 || |
|Basic net income (loss) per share of Class A, B and C common stock||$||(1.30)|| ||$||0.05 || |
|Diluted net income (loss) per share of Class A, B and C common stock||$||(1.30)|| ||$||0.05 || |
|Weighted average common shares outstanding Class A, B and C common stock|
|Basic||452,871 || ||449,749 || |
|Diluted||452,871 || ||453,230 || |
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income (Loss)
| ||Three Months Ended March 31,|
|Net income (loss)||$||(589,681)|| ||$||22,477 || |
|Other comprehensive income (loss):|
|Foreign currency translation adjustment||(47,679)|| ||5,990 || |
Unrealized gain (loss) on cash flow hedge, net of tax benefit (expense) of $11,435 and $2,600 for the three months ended March 31, 2020 and 2019, respectively
|32,545 || ||(9,100)|| |
|Gain (loss) on intra-entity foreign currency transactions||(4,354)|| ||1,921 || |
|Total other comprehensive income (loss)||(19,488)|| ||(1,189)|| |
|Comprehensive income (loss)||$||(609,169)|| ||$||21,288 || |
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Unaudited Consolidated Statements of Stockholders' Equity
|Accumulated Other Comprehensive Income (Loss)||Total|
|Balance as of December 31, 2018||187,710 || ||62 || ||34,450 || ||11 || ||226,422 || ||75 || ||916,628 || ||1,139,082 || ||(38,987)|| ||$||2,016,871 || |
|Exercise of stock options||154 || ||— || ||— || ||— || ||178 || ||— || ||846 || ||— || ||— || ||$||846 || |
|Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements||(10)|| ||— || ||— || ||— || ||(152)|| ||— || ||— || ||(3,077)|| ||— || ||$||(3,077)|| |
|Issuance of Class A Common Stock, net of forfeitures||126 || ||— || ||— || ||— || ||— || ||— || ||— || ||— || ||— || ||$||— || |
|Issuance of Class C Common Stock, net of forfeitures||— || ||— || ||— || ||— || ||2,041 || ||1 || ||1,387 || ||— || ||— || ||$||1,388 || |
|Stock-based compensation expense||— || ||— || ||— || ||— || ||— || ||— || ||12,491 || ||— || ||— || ||$||12,491 || |
|Comprehensive income (loss)||— || ||— || ||— || ||— || ||— || ||— || ||— || ||22,477 || ||(1,189)|| ||$||21,288 || |
|Balance as of March 31, 2019||187,980 || ||62 || ||34,450 || ||11 || ||228,489 || ||76 || ||931,352 || ||1,158,482 || ||(40,176)|| ||$||2,049,807 || |
|Balance as of December 31, 2019||188,290 || ||62 || ||34,450 || ||11 || ||229,028 || ||76 || ||973,717 || ||1,226,986 || ||(50,765)|| ||$||2,150,087 || |
|Exercise of stock options||143 || ||— || ||— || ||— || ||131 || ||— || ||484 || ||— || ||— || ||$||484 || |
|Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements||(1)|| ||— || ||— || ||— || ||(176)|| ||— || ||— || ||(2,853)|| ||— || ||$||(2,853)|| |
|Issuance of Class A Common Stock, net of forfeitures||19 || ||— || ||— || ||— || ||— || ||— || ||— || ||— || ||— || ||$||— || |
|Issuance of Class C Common Stock, net of forfeitures||— || ||— || ||— || ||— || ||2,167 || ||1 || ||1,165 || ||— || ||— || ||$||1,166 || |
|Stock-based compensation expense||— || ||— || ||— || ||— || ||— || ||— || ||10,465 || ||— || ||— || ||$||10,465 || |
|Comprehensive loss||— || ||— || ||— || ||— || ||— || ||— || ||— || ||(589,681)|| ||(19,488)|| ||(609,169)|| |
|Balance as of March 31, 2020||188,451 || ||62 || ||34,450 || ||11 || ||231,150 || ||77 || ||985,831 || ||634,452 || ||(70,253)|| ||$||1,550,180 || |
See accompanying notes.
Under Armour, Inc. and Subsidiaries`
Unaudited Consolidated Statements of Cash Flows
| ||Three Months Ended March 31,|
|Cash flows from operating activities|
|Net income (loss)||$||(589,681)|| ||$||22,477 || |
|Adjustments to reconcile net income (loss) to net cash used in operating activities|
|Depreciation and amortization||48,565 || ||46,464 || |
|Unrealized foreign currency exchange rate gain (loss)||12,976 || ||(1,725)|| |
|Loss on disposal of property and equipment||129 || ||1,008 || |
|Impairment charges||437,517 || ||— || |
|Amortization of bond premium||63 || ||63 || |
|Stock-based compensation||10,465 || ||12,493 || |
|Deferred income taxes||23,253 || ||(1,514)|| |
|Changes in reserves and allowances||10,130 || ||(9,655)|| |
|Changes in operating assets and liabilities:|
|Accounts receivable||27,596 || ||(87,042)|| |
|Inventories||(59,701)|| ||156,880 || |
|Prepaid expenses and other assets||27,153 || ||54,198 || |
|Other non-current assets||(336,357)|| ||21,594 || |
|Accounts payable||(192,651)|| ||(178,428)|| |
|Accrued expenses and other liabilities||226,315 || ||(99,505)|| |
|Customer refund liability||(8,334)|| ||(32,168)|| |
|Income taxes payable and receivable||(4,150)|| ||5,071 || |
|Net cash used in operating activities||(366,712)|| ||(89,789)|| |
|Cash flows from investing activities|
|Purchases of property and equipment||(31,498)|| ||(35,911)|| |
|Purchases of other assets||— || ||— || |
|Purchase of businesses||(37,343)|| ||— || |
|Net cash used in investing activities||(68,841)|| ||(35,911)|| |
|Cash flows from financing activities|
|Proceeds from long term debt and revolving credit facility||700,000 || ||25,000 || |
|Payments on long term debt and revolving credit facility||(100,000)|| ||(161,250)|| |
|Cash paid for hedge settlement||— || ||(1,566)|| |
|Employee taxes paid for shares withheld for income taxes||(2,732)|| ||(3,077)|| |
|Proceeds from exercise of stock options and other stock issuances||1,649 || ||2,232 || |
|Payments of debt financing costs||— || ||(3,024)|| |
|Other financing fees||35 || ||50 || |
|Net cash provided by (used in) financing activities||598,952 || ||(141,635)|| |
|Effect of exchange rate changes on cash, cash equivalents and restricted cash||8,761 || ||(569)|| |
|Net increase in (decrease in) cash, cash equivalents and restricted cash||172,160 || ||(267,904)|| |
|Cash, cash equivalents and restricted cash|
|Beginning of period||796,008 || ||566,060 || |
|End of period||$||968,168 || ||$||298,156 || |
|Non-cash investing and financing activities|
|Change in accrual for property and equipment||$||(13,081)|| ||$||(8,979)|| |
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
1. Description of the Business
Under Armour, Inc. and its wholly owned subsidiaries (the "Company") is a developer, marketer and distributor of branded athletic performance apparel, footwear, and accessories. The Company creates products engineered to solve problems and make athletes better, as well as digital health and fitness apps built to connect people and drive performance. The Company's products are made, sold and worn worldwide.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of the Company. Certain information in footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim consolidated financial statements. These consolidated financial statements are presented in U.S. Dollars. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement of the financial position and results of operations were included. Intercompany balances and transactions were eliminated upon consolidation. The consolidated balance sheet as of December 31, 2019 is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2019 (the “2019 Form 10-K”), which should be read in conjunction with these unaudited consolidated financial statements. The unaudited results for the three months ended March 31, 2020, are not necessarily indicative of the results to be expected for the year ending December 31, 2020, or any other portions thereof.
On March 2, 2020, the Company acquired, on a cash free, debt free basis, 100% of Triple Pte. Ltd. ("Triple"), a distributor of the Company's products in Southeast Asia. The results of operations of this acquisition have been consolidated with those of the Company beginning on March 2, 2020. Refer to Note 4 for a discussion of the acquisition.
In March 2020, a novel strain of coronavirus (COVID-19) was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures and orders to “shelter-in-place”. During this period, the Company is focused on protecting the health and safety of its teammates, athletes and consumers, working with its customers and suppliers to minimize potential disruptions and supporting the community to address challenges posed by the global pandemic, while managing the Company's business in response to a changing dynamic. The Company's business operations and financial performance for the three months ended March 31, 2020 were materially impacted by COVID-19. These impacts are discussed within these notes to the unaudited consolidated financial statements, including but not limited to discussions related to long-lived asset and goodwill impairment, long term debt, and income taxes.
Further, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act) was signed into law in the United States. The CARES Act includes modifications to income tax provisions, among other items. Refer to Note 12 for discussion of modifications to income tax provisions under the CARES Act. There were no other material impacts to the Company under the CARES Act for the three months ended March 31, 2020, however, the Company is continuing to evaluate the provisions of the CARES Act and how certain decisions may impact the Company's financial position, results of operations, and disclosures in future periods.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. The Company's restricted cash is reserved for payments related to claims for its captive insurance program, which is included in prepaid expenses and other current assets on the Company's unaudited consolidated balance sheets. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited consolidated balance sheets to the unaudited consolidated statements of cash flows.
|(In thousands)||March 31, 2020||December 31, 2019||March 31, 2019|
|Cash and cash equivalents||$||959,318 || ||$||788,072 || ||$||288,726 || |
|Restricted cash||8,850 || ||7,936 || ||9,430 || |
|Total Cash, cash equivalents and restricted cash||$||968,168 || ||$||796,008 || ||$||298,156 || |
Concentration of Credit Risk
Financial instruments that subject the Company to significant concentration of credit risk consist primarily of accounts receivable. The majority of the Company’s accounts receivable is due from large wholesale customers. None of the Company's customers accounted for more than 10% of accounts receivable as of March 31, 2020, December 31, 2019 and March 31, 2019, respectively. For the three months ended March 31, 2020 and 2019, no customer accounted for more than 10% of the Company's net revenues. Given the current U.S. and global economic environment and impacts of COVID-19, the Company continuously evaluates the credit risk of the large wholesale customers which make up the majority of the Company's accounts receivable. Refer to the "Credit Losses - Allowance for Doubtful Accounts" for a discussion of the evaluation of credit losses.
Sale of Accounts Receivable
The Company has agreements with two financial institutions to sell selected accounts receivable on a recurring, non-recourse basis. 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. Our abliity to utilize these agreements, however, may be limited by the credit ratings of our customers. Balances may remain outstanding at any point in time. The Company removes the sold accounts receivable from the unaudited consolidated balance sheets at the time of sale. The Company does not retain any interests in the sold accounts receivable. The Company acts as the collection agent for the outstanding accounts receivable on behalf of the financial institutions.
As of March 31, 2020, December 31, 2019 and March 31, 2019, no amounts remained outstanding under these agreements. The funding fee charged by the financial institutions is included in the other income (expense), net line item in the consolidated statement of operations.
Credit Losses - Allowance for Doubtful Accounts
Credit losses are the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit losses primarily through customer receivables associated with the sales of product within the Company's wholesale, licensing and Connected Fitness channels. Credit is extended to customers based on a credit review. The credit review considers each customer’s financial condition, including review of the customers established credit rating or the Company's assessment of the customer’s creditworthiness based on their financial statements absent a credit rating, local industry practices, and business strategy. A credit limit and terms are established for each customer based on the outcome of this review. The Company actively monitors ongoing credit exposure through review of customer balances against terms and payments against due dates. To mitigate credit risk, the Company may require customers to provide security in the form of guarantees, letters of credit, or prepayment. The Company is also exposed to credit losses through credit card receivables associated with the sales of products within the Company's direct to consumer channel.
The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of customer accounts. The Company makes ongoing estimates relating to the collectibility of accounts receivable and records an allowance for estimated losses resulting from the inability of its customers to make required payments. The Company establishes expected credit losses by evaluating historical levels of credit losses, current economic conditions that may affect a customer’s ability to pay, and creditworthiness of significant customers. These inputs are used to determine a range of expected credit losses and an allowance is recorded within the range. Accounts receivable are written off when there is no reasonable expectation of recovery.
As of March 31, 2020, and December 31, 2019, the allowance for doubtful accounts was $20.6 million and $15.1 million, respectively. The $5.5 million increase within the reserve is primarily due to the evaluation of certain customer account balances in connection with negative developments regarding their credit that represent a higher risk of credit default. Write-offs and recoveries reducing the reserve were not material for the quarter. The allowance for doubtful accounts was established with information available, including reasonable and supportable estimates of future risk, to the Company as of March 31, 2020. There may be further impacts due to COVID-19.
As of March 31, 2019, the allowance for doubtful accounts was $21.0 million.
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. The Company has provided extensions to standard payment terms for certain customers in connection with COVID-19. 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 these payments 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 March 31, 2020, December 31, 2019 and March 31, 2019, there were $208.2 million, $219.4 million and $270.6 million, respectively, in reserves for returns, allowances, markdowns and discounts within customer refund liability and $63.3 million, $61.1 million and $91.8 million, respectively, as the estimated value of inventory associated with the reserves for sales returns within prepaid expenses and other current assets on the unaudited consolidated balance sheet.
Contract liabilities are recorded when a customer pays consideration, or the Company has a right to an amount of consideration that is unconditional, before the transfer of a good or service to the customer, and thus represent the Company's obligation to transfer the good or service to the customer at a future date. The Company's contract liabilities primarily consist of payments received in advance of revenue recognition for subscriptions for the Company's Connected Fitness applications and royalty arrangements, included in other current liabilities, and gift cards, included in accrued expenses, on the Company's unaudited consolidated balance sheets. As of March 31, 2020, December 31, 2019, and March 31, 2019, contract liabilities were $58.5 million, $60.4 million and $55.6 million, respectively.
For the three months ended March 31, 2020, the Company recognized $20.3 million of revenue that was previously included in contract liabilities as of December 31, 2019. For the three months ended March 31, 2019, the Company recognized $19.2 million of revenue that was previously included in contract liabilities as of December 31, 2018. The change in the contract liabilities balance primarily results from the timing differences between the Company's satisfaction of performance obligations and the customer's payment. Commissions related to subscription revenue are capitalized and recognized over the subscription period.
Shipping and Handling Costs
The Company charges certain customers shipping and handling fees. These fees are recorded in net revenues. The Company incurs freight costs associated with shipping goods to customers. These costs are recorded as a component of cost of goods sold.
The Company also incurs outbound handling costs associated with preparing goods to ship to customers and certain costs to operate the Company’s distribution facilities. These costs are recorded as a component of selling, general and administrative expenses and were $14.9 million and $21.7 million for the three months ended March 31, 2020 and 2019, respectively,
Equity Method Investment
The Company has a common stock investment of 29.5% in Dome Corporation ("Dome"), the Company's Japanese licensee. The Company accounts for its investment in Dome under the equity method, given it has the ability to exercise significant influence, but not control, over Dome.
The Company performed a qualitative assessment of potential impairment indicators for its investment in Dome and determined that indicators of impairment exist due to impacts from COVID-19. 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 $3.7 million. The Company determined this decline in value to be other-than-temporary considering Dome's near and long-term financial forecast. As a result, the Company recorded a $3.7 million impairment of the Company's equity method investment in Dome for the three months ended March 31, 2020. The impairment charge was recorded within income (loss) from equity method investment on the unaudited consolidated statements of operations and as a reduction to the invested balance within other long term assets on the unaudited 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 three months ended March 31, 2020 and 2019, the Company recorded the allocable share of Dome’s net loss of $1.4 million and net income of $0.3 million, respectively, within income (loss) from equity method investment on the unaudited consolidated statements of operations and as an adjustment to the invested balance within other long term assets on the unaudited consolidated balance sheets. As of March 31, 2020, there was no
carrying value associated with the Company’s equity investment in Dome. As of March 31, 2019, the carrying value of the Company's equity investment in Dome was $53.1 million.
In addition to the investment in Dome, the Company has a license agreement with Dome. The Company recorded license revenues from Dome of $6.7 million and $6.5 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, December 31, 2019, and March 31, 2019, the Company had $7.0 million, $15.6 million, and $6.5 million, respectively, in licensing receivables outstanding, recorded in the prepaid expenses and other current assets line item within the Company's unaudited consolidated balance sheets.
On March 2, 2020, as part of the Company's acquisition of Triple, the Company assumed 49.5% of common stock ownership in UA Sports (Thailand) Co., Ltd. (“UA Sports Thailand”). The Company accounts for its investment in UA Sports Thailand under the equity method, given it has the ability to exercise significant influence, but not control, over UA Sports Thailand. For the three months ended March 31, 2020, the Company recorded the allocable share of UA Sports Thailand’s net loss of $0.4 million within income (loss) from equity method investment on the unaudited consolidated statements of operations and as an adjustment to the invested balance within other long term assets on the unaudited consolidated balance sheets. As of March 31, 2020, the carrying value of the Company’s total investment in UA Sports Thailand was $4.7 million. Refer to Note 4 for discussion of the acquisition.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Further, the full impact of COVID-19 cannot reasonably be estimated. The Company has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of the reporting date. The Company may experience further impacts based on long-term effects on the Company's customers and the countries in which the Company operates. As a result of these uncertainties, actual results could differ from those estimates and assumptions.
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board ("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, intraperiod tax allocation, interim period accounting, and accounting for ownership changes in investments, among other minor codification improvements. The guidance in this ASU becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and may be early adopted. The Company has elected to early adopt this standard as of January 1, 2020. The adoption of this ASU does not have a material impact on the unaudited consolidated financial statements or disclosures for the first quarter 2020. The aspect of this ASU which may have the most significant impact to the Company in future periods is the removal of a limit on the tax benefit recognized on pre-tax losses in interim periods that exceeds the anticipated tax benefit for the full year.
In June 2016, the 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 Company adopted this ASU on January 1, 2020 and there was no material impact to the consolidated financial statements as of the date of adoption. Results for reporting periods as of January 1, 2020 are presented under the new standard, while prior results continue to be reported under the previous standard.
3. Restructuring and Related Impairment Charges
On March 31, 2020, the Company's Board of Directors approved the previously announced restructuring plan ("2020 Restructuring") designed to rebalance the Company’s cost base to further improve profitability and cash flow generation. This restructuring plan was developed prior to assessing the potential impacts of the COVID-19 pandemic on the Company’s business and the Company continues to evaluate what actions may be necessary related to the pandemic.
In connection with the restructuring plan, the Company expects to incur total estimated pre-tax restructuring and related charges in the range of $475 million to $525 million during 2020 primarily consisting of up to approximately:
•$175 million of cash restructuring charges, comprised of up to: $55 million in facility and lease termination costs, $25 million in employee severance and benefit costs, and $95 million in contract termination and other restructuring costs; and
•$350 million of non-cash charges comprised of an impairment of $290 million related to the Company’s New York City flagship store and $60 million of intangibles and other asset related impairments.
The Company recorded $301.1 million of restructuring and related impairment charges as of March 31, 2020, including the right of use asset ("ROU") impairment related to its New York City flagship store. The summary of the costs recorded during the three months ended March 31, 2020, as well as the Company's current estimates of the amount expected to be incurred during the remainder of 2020 in connection with the 2020 restructuring plan is as follows:
|Restructuring and Related Impairment Charges Recorded ||Estimated Restructuring and Related Impairment Charges to be Incurred (1)|
|(In thousands)||Three Months Ended |
March 31, 2020
|Nine Months Ending December 31, 2020||Year Ending December 31, 2020|
|Costs recorded in cost of goods sold:|
|Contract-based royalties||$||— || ||$||11,000 || ||$||11,000 || |
|Total costs recorded in cost of goods sold||— || ||11,000 || ||11,000 || |
|Costs recorded in restructuring and related impairment charges:|
|Property and equipment impairment||7,094 || ||36,906 || ||44,000 || |
|ROU asset impairment||290,813 || ||— || ||290,813 || |
|Employee related costs||— || ||25,000 || ||25,000 || |
|Contract exit costs||— || ||115,000 || ||115,000 || |
|Other restructuring costs||3,182 || ||35,818 || ||39,000 || |
|Total costs recorded in restructuring and related impairment charges||301,089 || ||212,724 || ||513,813 || |
|Total restructuring and related impairment and restructuring related costs||$||301,089 || ||$||223,724 || ||$||524,813 || |
(1) Estimated restructuring and related impairment charges to be incurred reflect the high-end of the range of the estimated remaining charges expected to be taken by the Company during 2020 in connection with the restructuring plan.
All restructuring and related impairment charges are included in the Company's Corporate Other non-operating segment, of which $297.9 million are North America related for the three months ended March 31, 2020.
The lease for the Company's New York City flagship store commenced on March 1, 2020 and an operating lease ROU asset and corresponding operating lease liability of $344.8 million was recorded on the Company's unaudited consolidated balance sheet. As a part of the 2020 Restructuring, the Company made the strategic decision to forgo the opening of its New York City flagship store and the property is actively being marketed for sublease. The Company recognized a ROU asset impairment of $290.8 million for the three months ended March 31, 2020, reducing the carrying value of the lease asset to its estimated fair value. Fair value was estimated using an income-approach based on management's forecast of future cash flows expected to be derived from the property based on current sublease market rent. Rent expense or sublease income related to this lease will be recorded within other income (expense) on the unaudited consolidated statements of operations.
These charges require the Company to make certain judgements and estimates regarding the amount and timing of restructuring and related impairment charges or recoveries. The estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis,
the Company conducts an evaluation of the related liabilities and expenses and revises its assumptions and estimates as appropriate as new or updated information becomes available.
A summary of the activity in the restructuring reserve related to the Company's 2020, 2018 and 2017 restructuring plans is as follows:
|(In thousands)||Employee Related Costs||Contract Exit Costs||Other Restructuring Related Costs|
|Balance at January 1, 2020||$||462 || ||$||17,843 || ||$||— || |
|Additions charged to expense||— || ||— || ||3,182 || |
|Cash payments charged against reserve||— || ||(240)|| ||— || |
|Changes in reserve estimate||— || ||— || ||— || |
|Balance at March 31, 2020||$||462 || ||$||17,603 || ||$||3,182 || |
On March 2, 2020, the Company acquired, on a cash free, debt free basis, 100% of Triple Pte. Ltd. ("Triple"), a distributor of the Company's products in Southeast Asia. The purchase price for the acquisition was $32.9 million in cash, net of $8.9 million of cash acquired that was held by Triple at closing and settlement of $5.1 million in pre-existing trade receivables due from Triple prior to the acquisition. The results of operations of this acquisition have been consolidated with those of the Company beginning on March 2, 2020.
The Company recognized $0.7 million in acquisition related costs that were expensed during the three months ended March 31, 2020. These costs are included in selling, general and administrative expenses within the unaudited consolidated statement of operations. Pro forma results are not presented, as the acquisition was not considered material to the consolidated Company.
5. Long-Lived Asset and Goodwill Impairment
Long-Lived Asset Impairment
As a result of the impacts of COVID-19, the Company determined that sufficient indicators existed to trigger the performance of an interim long-lived asset impairment analysis as of March 31, 2020. Accordingly, the Company performed an undiscounted cash flow analyses on it's long-lived assets, including retail stores at an individual store level. Based on these undiscounted cash flow analyses, the Company determined that certain long-lived assets had net carrying values that exceeded their estimated undiscounted future cash flows. The Company estimates the fair values of these long-lived assets based on their discounted cash flows or market rent assessments. The Company compared these estimated fair values to the net carrying values. As a result, the Company recognized $83.8 million of long-lived asset impairment charges for the three months ended March 31, 2020. The long-lived impairment charge was recorded within restructuring and impairment charges on the unaudited consolidated statements of operations and as a reduction to the related asset balances on the unaudited consolidated balance sheets. The long-lived asset impairment charges are included within the Company's operating segments as follows: $43.4 million recorded in North America, $25.5 million recorded in Asia-Pacific, $12.8 million recorded in Latin America, and $2.1 million recorded in EMEA for the three months ended March 31, 2020.
The significant estimates, all of which are considered Level 3 inputs, used in the fair value methodology include: the Company's expectations for future operations and projected cash flows, including net revenue, gross profit and operating expenses and market conditions.
Additionally, the Company recognized $290.8 million of long-lived asset impairment charges related to the Company's New York City flagship store, which was recorded in connection with the Company's 2020 Restructuring Plan. Refer to Note 3 for further discussion of the restructuring and related impairment charges.
As a result of the impacts of COVID-19, the Company determined that sufficient indicators existed to trigger the performance of an interim goodwill impairment analysis for all of the Company’s reporting units as of March 31, 2020. The Company performed discounted cash flow analyses and determined that the estimated fair values of the Latin America reporting unit and the Canada reporting unit, within the North America operating segment, no longer exceeded its carrying value, resulting in an impairment of goodwill. The Company recognized goodwill impairment
charges of $51.6 million for these reporting units for the three months ended March 31, 2020. The goodwill impairment charge was recorded within restructuring and impairment charges on the unaudited consolidated statements of operations and as a reduction to the goodwill balance within goodwill on the unaudited consolidated balance sheets.
The determination of the Company’s reporting units' fair value includes assumptions that are subject to various risks and uncertainties. The significant estimates, all of which are considered Level 3 inputs, used in the discounted cash flow analyses include: the Company’s weighted average cost of capital, adjusted for the risk attributable to the geographic regions of the reporting unit's business, long-term rate of growth and profitability of the reporting unit's business, working capital effects, and changes in market conditions, consumer trends or strategy.
The fair value of each of the Company's other reporting units substantially exceeded its carrying value with the exception of the EMEA reporting unit. The fair value of the EMEA reporting unit exceeded its carrying value by 16%. Holding all other assumptions used in the fair value measurement of the EMEA reporting unit constant, a reduction in the growth rate of revenue by 1.5 percentage points or a reduction in the growth rate of net income by 2.3 percentage points would eliminate the headroom. No events occurred during the period ended March 31, 2020 that indicated it was more likely than not that goodwill was impaired for this reporting unit.
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, 2019||318,288 || ||106,066 || ||79,168 || ||46,656 || ||— || ||550,178 || |
|Effect of currency translation adjustment||(1,573)|| ||(4,354)|| ||3,422 || ||(10,426)|| ||— || ||(12,931)|| |
|Impairment||(15,345)|| ||— || ||— || ||(36,230)|| ||— || ||(51,575)|| |
|Balance as of March 31, 2020||$||301,370 || ||$||101,712 || ||$||82,590 || ||$||— || ||$||— || ||$||485,672 || |
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 quarter ended March 31, 2020.
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 $37.9 million and $37.1 million for the three months ended March 31, 2020 and 2019, respectively, including $2.0 million and $2.2 million in variable lease payments, for the three months ended March 31, 2020 and 2019, respectively, under non-cancelable operating lease agreements.
There are no residual value guarantees that exist, and there are no restrictions or covenants imposed by leases. The Company rents or subleases excess office facilities and warehouse space to third parties. Sublease income is not material.
Supplemental balance sheet information related to leases was as follows:
|Three months ended March 31, 2020||Three months ended March 31, 2019|
|Weighted average remaining lease term (in years)||9.64||7.35|
|Weighted average discount rate||3.99||4.30|
Supplemental cash flow and other information related to leases was as follows:
|(In thousands)||Three months ended March 31, 2020||Three months ended March 31, 2019|
|Cash paid for amounts included in the measurement of lease liabilities|
|Operating cash outflows from operating leases||$||36,547 || ||$||17,563 || |
|Leased assets obtained in exchange for new operating lease liabilities||$||72,963 || ||$||3,344 || |
Maturities of lease liabilities are as follows:
|2020||$||125,108 || |
|2021||169,446 || |
|2022||157,176 || |
|2023||138,031 || |
|2024||121,336 || |
|2025 and thereafter||560,783 || |
|Total lease payments||$||1,271,880 || |
|Less: Interest||228,368 || |
|Total present value of lease liabilities (1)||$||1,043,512 || |
(1) Amounts above reflect lease liabilities associated with the Company's New York City flagship store lease, which commenced on March 1, 2020. However, refer to Note 3 for discussion of the impairment of the associated ROU lease asset.
As of March 31, 2020, the Company has additional operating lease obligations that have not yet commenced of approximately $9.2 million which are not reflected in the table above.
7. Long Term Debt
In March 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. During the three months ended March 31, 2020, the Company borrowed up to $700 million under the credit agreement as a precautionary measure in order to increase its cash position and preserve liquidity given the ongoing uncertainty in global markets resulting from the COVID-19 outbreak. As of March 31, 2020, there was $600 million outstanding under the revolving credit facility. As of March 31, 2019, there were no amounts outstanding under the revolving credit facility. In April 2020, the Company borrowed an additional $100 million under the revolving credit facility.