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2017 Annual Report
Message from our Chairman and CEO
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o Our Shareholders, 2017 was one of the most challenging and opportunistic years in Under Armour’s history. It was a year that provided invaluable learning and will provide invaluable success. Following a sustained period of rapid growth and significant investments to gain global scale, a number of external and internal influences necessitated a shift in our strategy to better align our resources and operations into an organization capable of supporting the powerful brand that is Under Armour. Externally, disruption in our North American business driven by retail consolidation, bankruptcies and shifts from physical to digital consumption placed a great deal of variability into the marketplace. These dynamics, along with changes in consumer preference and intensified competition contributed to a highly promotional backdrop, putting pressure on our largest regional business throughout the year. Internally, our quick pace at obtaining global scale in innovation, product, sport categories and a larger international footprint generated operational inefficiencies including an inconsistent go-to-market process, changes associated with our shift toward categorymanagement and a cost structure built to support the expectation of being a larger company by now. The intersection of the external and internal factors provided an exceptional opportunity to transform our operations and further sharpen our strategy. In addition to a multi-year restructuring effort, we’ve made several strategic and proactive decisions to
advance our operating systems, reset our structure and recalibrate our leadership so that we can truly optimize our go-to-market and utilize the scale and infrastructure we’ve built to better serve our consumers and retail customers. Fundamental to this transformation is balancing financial and operational discipline, brand-forward design and storytelling, all while keeping our consumer athletes at the center of everything we do. As we drive forward into 2018, Under Armour is a great brand and a good company. We must become a great company befitting to our brand. To that effect we are clear-headed and well positioned to execute against our strategies and new mission to become better. We are the best at getting better. It’s in our DNA. By building on the strategic decisions and actions we took in 2017 and ones thus far in 2018, we are heads down and focused on doing just that. At Under Armour, we have the best team. I am so incredibly proud of the strength and resilience my teammates demonstrate each and every day, all around the world. With a high level of situational awareness, and the right strategy and leadership in place, we are confident in our ability to operate, fuel and innovate – emerging as a stronger and better Under Armour for our consumers, customers, and shareholders. Kevin A. Plank Chairman and Chief Executive Producer
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MISSION: UNDER ARMOUR MAKES YOU BETTER. Team Values
1. LOVE ATHLETES
Make things that make them legendary. 2. STAND FOR EQUALITY
United we win.
3. FIGHT ON TOGETHER
Adversity fuels victory.
4. CREATE FEARLESSLY
Dare to lead. Never follow. 5. ALWAYS CONNECT
Live at the center of the consumer’s life. 6. STAY TRUE
Completely honest. Perfectly imperfect. 7. THINK BEYOND
Better athletes in a better world. 8. CELEBRATE THE WINS
Take time to take pride.
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Table of Contents General Business Sales and Distribustion
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Competion
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Properties
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Highlights 13 Product design/development 13 Selected Financial Data
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Roster 16 Employees 17 Other Employee Benefits
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General Business General Our principal business activities are the development, marketing and distribution of branded performance apparel, footwear and accessories for men, women and youth. The brand’s performance apparel and footwear are engineered in many designs and styles for wear in nearly every climate to provide a performance alternative to traditional products. Our products are sold worldwide and are worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as by consumers with active lifestyles. Our net revenues are generated primarily from the wholesale sales of our products to national, regional, independent and specialty retailers and distributors. We also generate net revenue from the sale of our products through our direct to consumer sales channel, which includes our brand and factory house stores and websites, from product licensing and from digital platform
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licensing and subscriptions and digital advertising through our Connected Fitness business. A large majority of our products are sold in North America; however we believe that our products appeal to athletes and consumers with active lifestyles around the globe. Internationally, our net revenues are generated from a mix of wholesale sales to retailers and distributors and sales through our direct to consumer sales channels, and license revenue from sales by our third party licensees. We plan to continue to grow our business over the long term through increased sales of our apparel, footwear and accessories, expansion of our wholesale distribution, growth in our direct to consumer sales channel and expansion in international markets. Our digital strategy is focused on supporting these long term objectives, emphasizing connecting and engaging with our consumers through multiple digital touch points, including through our Connected Fitness business.
Sales and Distribution Stats and profiles of people served
Our primary business operates in four geographic segments: (1) North America, comprising the United States and Canada, (2) EMEA, (3) Asia-Pacific, and (4) Latin America. Each of these geographic segments operate predominantly in one industry: the design, development, marketing and distribution of performance apparel, footwear and accessories. We also operate our Connected Fitness business as a separate segment. The following table presents net revenues by segment for each of the years ending December 31, 2017 and 2016: 2017 In thousands North America EMEA Asai-Pacific Latin America Connected Fitness Intersegment Eliminations Total net revenues
Net Revenues % of Net Renvenues $3,802,406 76.5% 469,997 9.4 433,647 8.7 181,324 3.6 89,179 1.8 $4,976,553 100.0% 2016
In thousands North America EMEA Asai-Pacific Latin America Connected Fitness Intersegment Eliminations Total net revenues
Net Revenues % of Net Revenues $4,005,314 83.0% 330,584 6.9 268,607 5.6 141,793 2.9 80,447 1.6 (1,410) $4,825,335 100.0% 7
Competition
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The market for performance apparel, footwear and accessories is highly competitive and includes many new competitors as well as increased competition from established companies expanding their production and marketing of performance products. Many of the fabrics and technology used in manufacturing our products are not unique to us, and we own a limited number of fabric or process patents. Many of our competitors are large apparel and footwear companies with strong worldwide brand recognition and significantly greater resources than us, such as Nike and Adidas. We also compete with other manufacturers, including those specializing in performance apparel and footwear, and private label offerings of certain retailers, including some of our retail customers.In addition, we must compete with others for purchasing decisions, as well as limited floor space at retailers. We believe we have been successful in this area because of the relationships we have developed and as a result of the strong sales of our products. However, if retailers earn higher margins from our competitors’ products, they may favor the display and sale of those products. We believe we have been able to compete successfully because of our brand image and recognition, the performance and quality of our products and our selective distribution policies. We also believe our focused gear line merchandising story differentiates us from our competition. In the future we expect to compete for consumer preferences and expect that we may face greater competition on pricing. This may favor larger competitors
with lower production costs per unit that can spread the effect of price discounts across a larger array of products and across a larger customer base than ours. The purchasing decisions of consumers for our products often reflect highly subjective preferences that can be influenced by many factors, including advertising, media, product sponsorships, product improvements and changing styles.
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PROPERTIES The following includes a summary of the principal properties that we own or lease as of December 31, 2017.Our principal executive and administrative offices are located at an office complex in Baltimore, Maryland, which includes 400 thousand square feet of office space that we own and 126 thousand square feet that we are leasing. In 2016, we purchased buildings and parcels of land, including approximately 58 acres of land and 130 thousand square feet of office space located close to our corporate office complex, to be utilized to expand our corporate headquarters to accommodate our future growth needs. For our European headquarters, we lease an office in Amsterdam, the Netherlands, and we maintain an international management office in Panama. For our Greater China headquarters, we lease an office in Shanghai, China. Additionally, we lease space in Austin, Texas, Denver, Colorado, San Francisco, California and Copenhagen, Denmark for our Connected Fitness businesses. We lease our primary distribution facilities, which are located in Glen Burnie, Maryland, Mount Juliet, Tennessee and Rialto, California. Our Glen Burnie facilities include a total of 830 thousand square feet, with options to renew various portions of the facilities through September 2021. Our Mount Juliet facility is a 1.0 million square foot facility, with options to renew the lease term through December 2041. Our Rialto facility is a 1.2 million square foot facility with a lease term through May 2023. In 2016 we entered into a lease for a new 1.3 million square foot
distribution facility being developed for us in Baltimore, Maryland, which we expect to utilize beginning in 2019. The lease for this property includes options to renew through 2053. We believe our distribution facilities and space available through our third-party logistics providers will be adequate to meet our short term needs. In addition, as of December 31, 2017, we leased 295 brand and factory house stores located primarily in the United States, Brazil, Canada, China, Chile and Mexico with lease end dates in 2018 through 2033. We also lease additional office space for sales, quality assurance and sourcing, marketing, and administrative functions. We anticipate that we will be able to extend these leases that expire in the near future on satisfactory terms or relocate to other locations.
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High lights Products
Our product offerings consist of apparel, footwear and accessories for men, women and youth. We market our products at multiple price levels and provide consumers with products that we believe are a superior alternative to traditional athletic products. In 2017, sales of apparel, footwear and accessories represented 66%, 21% and 9% of net revenues, respectively. Licensing arrangements, primarily for the sale of our products, and revenue from our Connected Fitness business represented the remaining 4% of net revenues.
Apparel
Our apparel is offered in a variety of styles and fits intended to enhance comfort and mobility, regulate body temperature and improve performance regardless of weather conditions. Our apparel is engineered to replace traditional non-performance fabrics in the world of athletics and fitness with performance alternatives designed and merchandised along gearlines. Our three gearlines are marketed to tell a very simple story about our highly technical products and extend across the sporting goods, outdoor and active lifestyle markets. We market our apparel for consumers to choose HEATGEAR® when it is hot, COLDGEAR® when it is cold and ALLSEASONGEAR® between the extremes. Within each gearline our apparel comes in three primary fit types: compression (tight fit), fitted (athletic fit) and loose (relaxed).
Product Design and Development Our products are manufactured with technical fabrications produced by third parties and developed in collaboration with our product development teams. This approach enables us to select and create superior, technically advanced fabrics, produced to our specifications, while focusing our product development efforts on design, fit, climate and product end use. We seek to regularly upgrade and improve our products with the latest in innovative technology while broadening our product offerings. Our goal, to deliver superior performance in all our products, provides our developers and licensees with a clear, overarching direction for the brand and helps them identify new opportunities to create performance products that meet the changing needs of athletes. We design products with “visible technology,” utilizing color, texture and fabrication to enhance our customers’ perception and understanding of product use and benefits. Our product development team works closely with our sports marketing and sales teams as well as professional and collegiate athletes to identify product trends and determine market needs. For example, these teams worked closely to identify the opportunity and market for our COLDGEAR® Infrared product, which is a ceramic print technology on the inside of our garments.
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350 300
Dollars
250 200 150 100 50
Under Armour, INC. Class A S&P 500 Index S&P 500 Index Apparel, Accessories & Luxury Goods
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SELECTED FINANCIAL DATA The following selected financial data is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements, including the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K
(In thousands, except per share amounts) Net revenues Cost of goods sold Gross profit Selling, general expenses Restructing and impairment charges Income from operations Interest expense, net Other expense, net Income (loss) before income taxes Provisoin for income taxes Net income (loss) Adjustment payment to Class C Net income (loss) for stockholders
Assets Current assets Cash and cash equivalents Accounts receivable Inventories Prepaid expenses Total current assets Property and equipment Goodwill Intangible assets Deferred income taxes
2017 $4,976,553 2,737,830 2,238,723 2,086,831 124,049 27,843 (34,538) (3,614) (10,309) 37,951 (48,260) $ (48,260)
2016 $4,825,335 2,584,724 2,240,611 1,823,140 417,471 (26,434) (2,755) 388,282 131,303 256,979 59,000 $ 197,979
2017
2016
$ 312,483 609,670 1,158,548 256,978 2,337,679 885,774 555,674 46,995 82,801 97,444
$ 250,470 622,685 917,491 174,507 1,965,153 804,211 563,591 64,310 136,862 110,204
2015 $3,963,313 2,057,766 1,905,547 1,497,000 408,547 (14,628) (7,234) 386,685 154,112 232,573 $ 232,573
2014 $3,084,370 1,572,164 1,512,206 1,158,251 353,955 (5,335) (6,410) 342,210 134,168 208,042 $ 208,042
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Roster Kevin A. Plank-Chairman of the Board of Directors and Chief Executive Officer (principal executive officer) David E. Bergman-Chief Financial Officer (principal accounting and financial officer) George W. Bodenheimer-Director Douglas E. Coltharp-Director Jerri L. DeVard-Director Karen W. Katz-Director A.B. Krongard-Director William R. McDermott-Director Eric T. Olson-Director Harvey L. Sanders-Director
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Employees As of December 31, 2017, we had approximately 15,800 employees, including approximately 9,900 in our brand and factory house stores and approximately 1,500 at our distribution facilities. Approximately 6,900 of our employees were full-time. Most of our employees are located in the United States. None of our employees in the United States are currently covered by a collective bargaining agreement and there are no material collective bargaining agreements in effect in any of our international locations. We have had no labor-related work stoppages, and we believe our relations with our employees are good.
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 $7.4 million, $9.0 million and $7.0 million for the years ended December 31, 2017, 2016 and 2015, 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, 2017 and 2016, the Deferred Compensation Plan obligations were $8.0 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, 2017 and 2016, the assets held in the Rabbi Trust were TOLI policies with cash-surrender values of $5.8 million and $4.9 million, respectively. These assets are consolidated and are included in other long term assets . 17
Customer service: 1 (888) 727-6687 Headquarters: Baltimore, MD www.underarmour.com
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