Under Armour 2006 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    .... FOR OVER A DECADE, WE'VE PROVIDED THE WORLD WITH TECHNICALLY ADVANCED PRODUCTS ENGINEERED WITH OUR SUPERIOR FABRIC CONSTRUCTION, EXCLUSIVE MOISTURE MANAGEMENT, AND PROVEN INNOVATION. EVERY UNDER ARMOUR® PRODUCT IS DOING SOMETHING FOR YOU: IT'S MAKING YOU BETTER. THE LOGO IS OUR GUARANTEE. WWW...

  • Page 3
    ...of post-season Bowl Games. • We successfully implemented a new enterprise resource planning system, SAP, which we believe will support our growth over the long term. • We grew our apparel business 43 percent in 2006 compared to 35 percent growth in 2005. • We grew our global direct business 87...

  • Page 4
    ... APPAREL 59.4% women's 19.9% youth 7.4% men's 59.4% 19.9% 6.2% accessories 3.5% licensing revenues 3.6% footwear in thousands; years 2002-2006 $4,313 2 0 0 2 $9,953 2 0 0 3 $25,380 = ate R th row G l ua nn A nd ou p m Co .9% 90 2 0 0 4 $35,889 2 0 0 5 $57,277 INCOME FROM OPERATIONS...

  • Page 5
    ... Baltimore, Maryland 21230 (Address of principal executive offices) (Zip Code) (410) 454-6428 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Class A Common Stock New York Stock Exchange (Title of each class) (Name of each exchange...

  • Page 6
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  • Page 7
    ...Customers ...Product Licensing ...International Revenues ...Seasonality ...Product Design and Development ...Sourcing, Manufacturing and Quality Assurance ...Distribution and Inventory Management ...Intellectual Property ...Competition ...Employees ...Available Information ...Item 1A. Risk Factors...

  • Page 8
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  • Page 9
    ... and mobility and improve performance regardless of weather condition. Our products are offered globally in approximately 12,000 retail stores and can currently be purchased across the United States, Canada, Japan and Europe through large national and regional chains of retailers, as well as smaller...

  • Page 10
    ...available for sale in retail stores in June 2006, in time for the fall 2006 season. Consistent with our performance apparel marketing and pricing strategy, we offered our football cleats at various price levels, thereby enabling us to reach a broader consumer base. We also began shipping our line of...

  • Page 11
    ...Olympic soccer team and runs on cable and network television. We developed our first co-branded commercial in 2006 with retail partner Dick's Sporting Goods to promote Under Armour around the 2006 holiday season. Our ability to secure product placement in movies, television shows and video games has...

  • Page 12
    ... Direct business (website and catalog sales) at our manufacturer's suggested retail price, and sales through our retail outlet stores and by our sports marketing group for use by professional and collegiate athletes. Product Licensing In addition to generating revenues through wholesale distribution...

  • Page 13
    ... and growth in our business. We generally expect inventory, accounts payable and accrued expenses to be higher in the second and third quarters in preparation for the fall selling season. Product Design and Development Our products are manufactured with technical fabrications produced by third...

  • Page 14
    ... for the next several years. During the fourth quarter of 2006, we entered into a software licensing agreement for our distribution operations with a leading provider in our industry. We believe this warehouse management software will position us to be better able to service our business through the...

  • Page 15
    ... in the apparel industry, is to offer retail customers the right to return defective or improperly shipped merchandise. Because of the relatively long lead-times for production and design of our products, from time to time we commence production of new products before we receive any orders for those...

  • Page 16
    ... agreement. We have had no labor-related work stoppages, and we believe our relations with our employees are good. AVAILABLE INFORMATION We will make available free of charge on or through our website at www.underarmour.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current...

  • Page 17
    ... of that technology could harm our ability to effectively operate our business. Our ability to effectively manage and maintain our inventory and internal reports, and to ship products to customers and invoice them on a timely basis depends significantly on our enterprise resource planning system, or...

  • Page 18
    ... to retailers and consumers, which could cause our gross margin to decline if we are unable to offset price reductions with comparable reductions in our operating costs. If our gross margin declines and we fail to sufficiently reduce our cost of goods sold or grow our net revenues, our profitability...

  • Page 19
    ...extra cost. If industry-wide sales of performance products do not grow, our ability to continue to grow our business and our financial condition and results of operations could be materially adversely impacted. If we are unable to anticipate consumer preferences and successfully develop new products...

  • Page 20
    ... our cost of goods sold, results of operations and financial condition. Sponsorships and designations as an official supplier may become more expensive and this could impact the value of our brand image. A key element of our marketing strategy has been to create a link in the consumer market between...

  • Page 21
    ...our retail customers. Many of our competitors have significant competitive advantages, including longer operating histories, larger sales forces, bigger advertising budgets, better brand recognition among consumers, greater economies of scale and long-term relationships with our key retail customers...

  • Page 22
    ... in our net revenues and net income, which could adversely affect the price of our Class A Common Stock. We have experienced, and expect to continue to experience, seasonal and quarterly variations in our net revenues and net income. These variations are primarily related to increased sales of our...

  • Page 23
    ... net income, which could have a material adverse effect on our financial condition and liquidity. Our international operations and the operations of many of our manufacturers are subject to additional risks that are beyond our control and that could harm our business. In 2006, our apparel products...

  • Page 24
    ...our founder and Chief Executive Officer. The loss of the services of our senior management or other key employees could make it more difficult to successfully operate our business and achieve our business goals. We also may be unable to retain existing management, technical, sales and client support...

  • Page 25
    ... financial, distribution, marketing and other resources than we do, they may be able to manufacture and sell products based on our fabrics and manufacturing technology at lower prices than we can. If our competitors do sell similar products to ours at lower prices, our net revenues and profitability...

  • Page 26
    ... in Baltimore, Maryland. We believe that our current location and additional planned office space will be sufficient for the operation of our business over the next twelve months. We opened our primary distribution facility in Glen Burnie, Maryland in June 2004. In the fourth quarter of 2006, we...

  • Page 27
    ... the Board of Directors Executive Vice President and Chief Financial Officer Chief Supply Chain Officer Senior Vice President of Sourcing, Quality Assurance and Product Development Vice President, House Counsel, and Secretary Senior Vice President of Marketing Vice President of North American Sales...

  • Page 28
    ... Liz Claiborne Inc., United Retail Group Inc. and Mandee and Annie Sez Stores. Ryan S. Wood has been President of UA Europe BV since January 2006. Prior to becoming President of UA Europe BV, Mr. Wood served as Senior Vice President of Sales of Under Armour since 2005. Prior to that time, Mr. Wood...

  • Page 29
    ... our stockholders. See "Financial Position, Capital Resources and Liquidity" within Management's Discussion and Analysis for further discussion of our revolving credit facility. Stock Compensation Plans The following table contains certain information regarding our equity compensation plans. Number...

  • Page 30
    ...Note 9 to the Consolidated Financial Statements for a further discussion on the warrants). Recent Sales of Unregistered Equity Securities From November 2, 2006 through January 12, 2007, we issued 179,350 shares of Class A Common Stock upon the exercise of previously granted employee stock options to...

  • Page 31
    ...per share amounts) 2006 Year Ended December 31, 2005 2004 2003 2002 Statements of Income data: Net revenues ...Cost of goods sold ...Gross profit ...Operating expenses Selling, general and administrative expenses ...Income from operations ...Other income (expense), net ...Income before income taxes...

  • Page 32
    ... in sales of our men's, women's and youth products and the introduction of footwear. We plan to continue to increase our net revenues by building upon our relationships with existing customers and expanding our product offerings in new and existing retail stores. By December 31, 2006, our products...

  • Page 33
    ... and corporate facility costs, product creation costs and other company-wide administrative expenses. In recent years, our selling, general and administrative expenses have increased to support our growth and new sales initiatives. For 2006, we earned and recognized a new state income tax credit...

  • Page 34
    ... of net revenues) Year Ended December 31, 2006 2005 2004 Net revenues ...Cost of goods sold ...Gross profit ...Selling, general and administrative expenses ...Income from operations ...Other income (expense), net ...Income before income taxes ...Provision for income taxes ...Net income ... 100...

  • Page 35
    ... customer agreements which decreased discounts offsetting revenue while increasing targeted customer marketing expenditures recorded in selling, general and administrative expenses, accounting for an approximate 70 basis point increase; increased direct to consumer higher margin sales, accounting...

  • Page 36
    ... distribution facilities to support our growth; operate our seven new retail outlet stores; expand our Global Direct business; and continue to build our legal and compliance team. The increase was partially offset by lower bonus expense for 2006. As a percentage of net revenues, payroll and related...

  • Page 37
    ... line, which we began shipping in June 2006; we added personnel to our information technology team to support our Company-wide initiative to upgrade our information systems; we incurred equity compensation costs; we added personnel to operate our three new retail outlet stores; and we invested...

  • Page 38
    ...our in-store fixture program, improvements to our distribution and corporate facilities to support our growth, leasehold improvements to our new retail outlet stores and more recently, the investment in a Company-wide initiative to implement our ERP system, which became operational in April 2006. 30

  • Page 39
    ...tax assets due to increased state tax credits earned in 2006. In addition, depreciation and amortization increased period-over-period primarily due to the implementation of our new ERP system, acquisition of additional assets and retail outlet store leasehold improvements. Cash provided by operating...

  • Page 40
    ... be invested in information technology initiatives, expansion of our Global Direct business to include Canada and Europe, retail outlet store expansion and other general corporate needs. Financing Activities Cash provided by financing activities decreased $44.4 million to $12.6 million in 2006 from...

  • Page 41
    ...0.5%). The applicable margin is calculated quarterly and varies based on our pricing leverage ratio as defined in the agreement. The revolving credit facility also carries a line of credit fee equal to the available but unused borrowings which can vary from 0.1% to 0.5%. As of December 31, 2006, our...

  • Page 42
    ...the critical accounting policies that are necessary to understand and evaluate our reported financial results. Revenue Recognition Net revenues consist of both net sales and license revenues. Net sales are recognized upon transfer of ownership, including passage of title to the customer and transfer...

  • Page 43
    ... outstanding returns and allowances that have not yet been received by us. We record reductions to gross sales for certain customer-based incentives, which include volume-based discounts and certain cooperative advertising credits. We base our estimates for customer returns, allowances and discounts...

  • Page 44
    ...Deferred income tax assets are reduced by a valuation allowance if, in the judgment of our management, it is more likely than not that such assets will not be realized. Stock-Based Compensation Effective January 1, 2006, we adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, Share...

  • Page 45
    ...measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting SFAS 157 on our consolidated financial statements. In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB...

  • Page 46
    ...Qualitative Disclosure about Market Risk Foreign Exchange We currently generate a small amount of our net revenues in Canada and the United Kingdom. The reporting currency for our consolidated financial statements is U.S. dollars. To date, net revenues generated outside of the United States have not...

  • Page 47
    ... public accounting firm, has issued a report on management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, which is included herein. /S/ KEVIN A. PLANK Kevin A. Plank President, Chief Executive Officer, and Chairman of the Board Executive...

  • Page 48
    ... Under Armour, Inc.'s 2006 consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 and audits of its 2005 and 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States...

  • Page 49
    ... designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies...

  • Page 50
    ..., net of current maturities ...Deferred income taxes ...Other long term liabilities ...Total liabilities ...Commitments and contingencies (see Note 8) Stockholders' equity and comprehensive loss Class A Common Stock, $.0003 1/3 par value; 100,000,000 shares authorized as of December 31, 2006 and...

  • Page 51
    ...per share amounts) Year Ended December 31, 2006 2005 2004 Net revenues ...Cost of goods sold ...Gross profit ...Operating expenses Selling, general and administrative expenses ...Income from operations ...Other income (expense), net ...Income before income taxes ...Provision for income taxes ...Net...

  • Page 52
    ... of Class A Common Stock net of forfeitures ...270.3 Stock options granted ...- Amortization of unearned compensation ...- Excess tax benefits from stock-based compensation arrangements ...- Payments received on notes from stockholders ...- Interest earned on notes receivable from stockholders...

  • Page 53
    ...of SFAS 123R ...Exercise of stock-based compensation arrangements through stockholders' notes receivable ...Transfer of revolving credit facility to term debt ...Unpaid declared common stock dividends ...Other supplemental information Cash paid for income taxes ...Cash paid for interest ... $ 38,979...

  • Page 54
    ... to the Consolidated Financial Statements (amounts in thousands, except per share and share amounts) 1. Description of the Business Under Armour, Inc. is a developer, marketer and distributor of branded performance apparel, footwear and accessories. Sales are targeted to athletes and teams at the...

  • Page 55
    ... Notes to the Consolidated Financial Statements-(Continued) (amounts in thousands, except per share and share amounts) Accounts Receivable Accounts receivable are recorded at the invoice price net of an allowance for doubtful accounts, certain discounts, and reserve for returns, and do not...

  • Page 56
    ... on board ("FOB") shipping-point for most goods. In some instances, transfer of title and risk of loss takes place at the point of sale (e.g. at the Company's retail outlet stores). Net sales are recorded net of sales discounts and certain customer-based incentives along with a reserve for returns...

  • Page 57
    ... distribution center are recorded in selling, general and administrative expenses. For the years ended December 31, 2006, 2005 and 2004, total outbound shipping costs were $7,650, $3,590 and $1,667, respectively. Earnings per Share Basic earnings per common share is computed by dividing net income...

  • Page 58
    ...to employees and directors be measured at the fair value of the award and recognized as an expense in the financial statements. SFAS 123R also requires that excess tax benefits related to stock option exercises be reflected as financing cash flows instead of operating cash flows. The Company adopted...

  • Page 59
    ...table: Year Ended December 31, 2006 2005 2004 Net income, as reported ...Accretion of and cumulative preferred dividends on Series A Preferred Stock ...Net income available to common stockholders ...Add: stock-based compensation expense included in reported net income, net of taxes ...Deduct: stock...

  • Page 60
    .... SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS 157 on its consolidated financial statements. In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB...

  • Page 61
    ... all stock-based compensation to be recognized as an expense in the financial statements and that such costs be measured according to the fair value of the award. SFAS 123R became effective for the Company on January 1, 2006. Prior to January 1, 2006, the Company accounted for grants of stock rights...

  • Page 62
    ...software costs relative to systems not yet placed in use and in-store fixtures not yet placed in service. Depreciation and amortization expense related to property and equipment was $9,021, $6,224 and $3,165 for the years ended December 31, 2006, 2005 and 2004, respectively. 5. Intangible Asset, Net...

  • Page 63
    ... and the balance outstanding under the revolving credit facility of $12,200 with proceeds from the initial public offering (see Note 9). The term note portion of the financing agreement was then terminated and as such the Company expensed $265 of deferred financing costs. With the termination...

  • Page 64
    Under Armour, Inc. and Subsidiaries Notes to the Consolidated Financial Statements-(Continued) (amounts in thousands, except per share and share amounts) Prior to amending and restating the revolving credit facility in September 2005, the Company was party to a revolving credit facility that was to ...

  • Page 65
    ... Company's Class A Common Stock were sold by stockholders of the Company, including certain members of the Company's management, pursuant to an underwritten public offering registered on Form S-1. The Company did not receive any proceeds from the sale of the shares sold in the offering and expenses...

  • Page 66
    ... Company has recorded unearned compensation of $99 and recognized $49 and $37 in compensation expense for the years ended December 31, 2006 and 2005, respectively. Dividends-On December 31, 2004, cash dividends of $5,000 were declared, which approximated $0.14 per share on outstanding Class A Common...

  • Page 67
    ... shares of Series A Preferred Stock for $4,356 in cash proceeds net of $133 in stock issuance costs. Holders of the Series A Preferred Stock had limited voting rights and certain protective rights regarding major business decisions of the Company and the payment of dividends to common stockholders...

  • Page 68
    ..., 2006 a Company subsidiary has available a net operating loss that can be carried forward for nine years. 12. Stock Compensation Plans 2005 Stock Compensation Plan The Company's Board of Directors and stockholders approved the Under Armour, Inc. 2005 Omnibus Long-Term Incentive Plan (the "2005 Plan...

  • Page 69
    ...' meeting, a total of 4,202 restricted stock units were granted to the non-employee Directors of the Company pursuant to the 2006 Director Compensation Plan. The fair market value of each restricted stock unit was $35.70, which was the closing price of the Company's Class A Common Stock on the date...

  • Page 70
    Under Armour, Inc. and Subsidiaries Notes to the Consolidated Financial Statements-(Continued) (amounts in thousands, except per share and share amounts) Stock Options A summary of the Company's stock options as of December 31, 2006, 2005, and 2004, and changes during the years then ended is ...

  • Page 71
    ... performance. The Company operates exclusively in the consumer products industry in which the Company develops, markets, and distributes apparel, footwear and accessories. Based on the nature of the financial information that is received by the chief operating decision maker, the Company operates...

  • Page 72
    ... located in the United States. 16. Unaudited Quarterly Financial Data March 31, Quarter Ended (unaudited) June 30, September 30, December 31, Year Ended December 31, 2006 Net revenues ...Gross profit ...Income from operations ...Net income ...Net income available to common stockholders ...Earnings...

  • Page 73
    ... financial reporting. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this Item is incorporated herein by reference from the 2007 Proxy Statement, under the headings "NOMINEES FOR ELECTION AT THE ANNUAL MEETING...

  • Page 74
    ...Control Over Financial Reporting ...Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2006 and 2005 ...Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004 ...Consolidated Statements of Stockholders' Equity and...

  • Page 75
    ... 8-K filed August 7, 2006). Registration Rights Agreement between the Company and NFL Properties LLC dated as of August 3, 2006 (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K filed August 7, 2006). Under Armour, Inc. 2005 Omnibus Long-Term Incentive Plan (incorporated by...

  • Page 76
    ... that are party thereto and the Company dated December 22, 2006 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on December 28, 2006). Second Amended and Restated Financing Agreement among CIT Group/Commercial Services, Inc., as Agent, Wachovia Bank, National...

  • Page 77
    ... of Board of Director Restricted Stock Grant Agreement under the 2000 Stock Option Plan (incorporated by reference to Exhibit 10.27 of the 2005 10-K.* Under Armour, Inc. 2006 Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed...

  • Page 78
    ... 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNDER ARMOUR, INC. By: /s/ KEVIN A. PLANK Kevin A. Plank President, Chief Executive Officer, and Chairman of the Board of Directors Dated: February 28, 2007 Pursuant to the...

  • Page 79
    ... to Costs and Expenses Write-Offs Net of Recoveries Balance at End of Year Description Inventory obsolescence reserve For the year ended December 31, 2006 ...For the year ended December 31, 2005 ...For the year ended December 31, 2004 ...Allowance for doubtful accounts For the year ended December...

  • Page 80
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  • Page 81
    ...initial public offering price of $13.00. In connection with Under Armour, Inc.'s listing application to list its shares of Class A Common Stock on the New York Stock Exchange (NYSE), on November 16, 2006 Under Armour filed with the NYSE the Annual CEO Certification as required by the NYSE corporate...

  • Page 82

  • Page 83
    ...SUPPLY CHAIN OFFICER BRADLEY J. DICKERSON VICE PRESIDENT OF ACCOUNTING AND FINANCE WILLIAM R. MCDERMOTT PRESIDENT AND CHIEF EXECUTIVE OFFICER SAP AMERICAS MICHAEL F. FAFAUL, SR. VICE PRESIDENT OF OPERATIONS KIP J. FULKS SENIOR VICE PRESIDENT OF SOURCING, QUALITY ASSURANCE AND PRODUCT DEVELOPMENT...

  • Page 84
    UNDER ARMOUR, INC. 1020 HULL STREET BALTIMORE, MARYLAND 21230 WWW.UNDERARMOUR.COM 1.888.4ARMOUR