# Under Armour, Inc. (UA) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Under Armour, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1336917/000133691722000010/ua-20211231.htm
Accession: 0001336917-22-000010
Filing date: 2022-02-23
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/UA/
All MD&A years: /company/UA/mda/
Next year: /company/UA/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help readers understand our results of operations and financial condition, and is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes to our Consolidated Financial Statements under Part II, Item 8 and the information contained elsewhere in this Annual Report on Form 10-K under the captions “Risk Factors" and “Business.”

This Annual Report on Form 10-K, including this MD&A, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the U.S. Securities Act of 1933, as amended ("the Securities Act"), and is subject to the safe harbors created by those sections. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. See "Forward Looking Statements."

All dollar and percentage comparisons made herein refer to Fiscal 2021 compared with Fiscal 2020, unless otherwise noted. Please refer to Part II, Item 7 of our Annual Report on Form 10-K for Fiscal 2020, filed with the Securities Exchange Commission ("SEC") on February 24, 2021, for a comparative discussion of our Fiscal 2020 financial results as compared to Fiscal 2019.

OVERVIEW

We are a leading developer, marketer, and distributor of branded performance apparel, footwear, and accessories. Our brand’s moisture-wicking fabrications are engineered in various designs and styles for wear in nearly every climate to provide a performance alternative to traditional products. Our products are sold worldwide and worn by athletes at all levels, from youth to professional, on playing fields around the globe, and by consumers with active lifestyles.

During Fiscal 2021, we realized better than expected wholesale and direct-to-consumer sales based on better sell through and demand for Under Armour products in North America, Asia-Pacific, and EMEA. Throughout Fiscal 2021, we remained focused on the quality of our sales driven by four main strategies, particularly in our North America business: reducing our promotional activities; constraining supply against demand; exiting undifferentiated retail; and maintaining an appropriate level of liquidation sales within our wholesale channel. Strategically and operationally, we remain focused on driving premium brand-right growth and improved profitability. Over the long term, our growth strategy is predicated on delivering industry-leading product innovation; return-driven investments focused on connecting with our consumers through marketing activations and premium experiences; and the expansion of our direct-to-consumer and international businesses.

Fiscal 2021 Performance

Financial highlights for Fiscal 2021 as compared to Fiscal 2020 include:

•Total net revenues increased 27.0%.

•Within our channels, wholesale revenue increased 36.2% and direct-to-consumer revenue increased 25.6%.

•Within our product categories, apparel revenue increased 33.3%, footwear revenue increased 35.3%, and accessories revenue increased 11.5%.

•Net revenue in our North America, EMEA, Asia-Pacific, and Latin-America segments increased 29.4%, 40.8%, 32.3%, and 18.5%, respectively.

•Net revenues from Corporate Other decreased 97.4% primarily due to the sale of the MyFitnessPal platform in December 2020.

•Gross margin increased 200 basis points to 50.3%.

•Selling, general and administrative expenses increased 7.5%.

•Restructuring and impairment charges, net decreased 93.3% from $601.6 million during Fiscal 2020 to $40.5 million during Fiscal 2021.

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COVID-19 Update

The COVID-19 pandemic has caused, and we expect will continue to cause, disruption and volatility in our business and in the businesses of our wholesale customers, licensing partners, suppliers, logistics providers and vendors.

For instance, during Fiscal 2021 the pandemic caused manufacturing challenges, with temporary closures or other restrictions placed on factories, in key sourcing countries in Southeast Asia, including Vietnam, where we source approximately one third of our products, and certain partners continue to operate at reduced capacity. Additionally, the COVID-19 pandemic has caused global logistical challenges, including shipping container shortages, transportation delays, labor shortages and port congestion. These challenges have disrupted some of our normal inbound and outbound inventory flow, which has required us to incur increased freight costs, and are impacting the timing of sales to some of our customers as we work to manage product availability and inventory levels and in certain cases adjust orders and shipping with our factory partners and logistic suppliers. Simultaneously, freight and logistics costs have significantly increased throughout global supply chains. We expect that these manufacturing and sourcing challenges will continue into the next few quarters and will negatively impact our financial results, resulting in delayed sales to certain of our wholesale customers as well as unfulfilled demand or cancelled sales. We also expect gross margin to be negatively impacted due to increased freight costs and logistics costs over the next few quarters.

Moreover, governments worldwide continue to periodically impose preventative and protective actions, such as temporary travel bans, forced business closures, and stay-at-home orders, all in an effort to reduce the spread of the virus. However, such government measures are not implemented consistently or simultaneously around the world, thus making our business susceptible to volatility on a global and regional basis. We believe we may continue to experience varying degrees of volatility, business disruptions and periods of closure of our stores, distribution centers and corporate facilities, although, as of December 31, 2021, substantially all of our Brand and Factory House stores and the stores of our wholesale customers were open. Where reopening has been permitted, some of these retail stores are operating with restrictive and precautionary measures in place such as reduced operating hours, physical distancing, enhanced cleaning and sanitation, and limited occupancy levels.

The COVID-19 pandemic and related disruptions across the global supply chain and retail environment, remains a risk that could have material adverse impacts to our future revenue growth as well as to our overall profitability. The extent of the impact of the COVID-19 pandemic on our operational and financial performance depends on future developments that are outside of our control. For a more complete discussion of the COVID-19 related risks facing our business, refer to our "Risk Factors" section included in Item 1A of this Annual Report on Form 10-K.

In connection with global legislation, including the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, we recognized certain incentives totaling $2.5 million for Fiscal 2021, and $9.0 million for Fiscal 2020. The incentives were recorded as a reduction of the associated costs which we incurred within selling, general and administrative expenses in the Consolidated Statements of Operations.

Effects of Inflation

Despite recent heightened inflation in key global markets, including the United States, we do not believe that inflation had a material impact on our results of operations in Fiscal 2021 or Fiscal 2020. However, our business could be impacted by continued or increasing inflation in future periods. See "Risk Factors—Economic and Industry Risks—Our business depends on consumer purchases of discretionary items, which can be negatively impacted during an economic downturn or periods of inflation. This could materially harm our sales, profitability and financial condition" and "—Fluctuations in the cost of raw materials and commodities we use in our products and costs related to our supply chain could negatively affect our operating results" included in Item 1A of this Annual Report on Form 10-K.

Segment Presentation and Marketing

As previously disclosed, effective January 1, 2021, we no longer report Connected Fitness as a discrete reportable operating segment. Corporate Other now includes the remaining Connected Fitness business consisting of our MapMyRun and MapMyRide platforms (collectively "MMR") for Fiscal 2021 and the entire Connected Fitness business for Fiscal 2020. Please refer to Note 1 to our Consolidated Financial Statements for a basis of our presentation and to Note 19 to our Consolidated Financial Statements for a complete presentation of the segment data. All prior period balances have been recast to conform to current period presentation.

Corporate Other consists primarily of revenue and costs related to our MMR platforms, as well as general and administrative expenses not allocated to an operating segment, including expenses associated with centrally

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managed departments such as global marketing, global IT, global supply chain, innovation, and other corporate support functions; costs related to our global assets and global marketing, costs related to our headquarters; restructuring and impairment related charges; and certain foreign currency hedge gains and losses.

Fiscal Year End Change

During the first quarter of Fiscal 2021, our Board of Directors approved a change in our fiscal year end from December 31 to March 31, effective for the fiscal year beginning April 1, 2022. Because our largest quarters are currently realized in the period from July 1 through December 31, we believe that this change will provide greater alignment with our business cycle and financial reporting. There was no change to Fiscal 2021, which ended on December 31, 2021. Following a three month-transition period (January 1, 2022 - March 31, 2022), our Fiscal 2023 will run from April 1, 2022 through March 31, 2023. Consequently, there will be no Fiscal 2022.

2020 Restructuring

During Fiscal 2020, our Board of Directors approved a restructuring plan ranging between $550.0 million to $600.0 million in costs (the "2020 restructuring plan") designed to rebalance our cost base to further improve profitability and cash flow generation.

Restructuring and related impairment charges and recoveries require us to make certain judgments and estimates regarding the amount and timing as to when these charges or recoveries occur. The estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, we conduct an evaluation of the related liabilities and expenses and may revise our assumptions and estimates as appropriate, as new or updated information becomes available. As of December 31, 2021, we currently estimate total restructuring and related charges associated with the 2020 restructuring plan will range between $525.0 million to $550.0 million.

The restructuring and related charges primarily consist of up to approximately:

•$172.0 million of cash restructuring charges, of which approximately $26.0 million relates to employee severance and benefit costs, $14.0 million relates to facility and lease termination costs and $132.0 million relates to contract termination and other restructuring costs; and

•$378.0 million of non-cash charges, of which approximately $293.0 million relates to an impairment charge on our New York City flagship store and $85.0 million relates to intangibles and other asset related impairments.

We recorded $41.0 million of restructuring and related impairment charges for Fiscal 2021 and $472.7 million for Fiscal 2020, under the 2020 restructuring plan. For more details on the 2020 restructuring plan, see Note 12 to our Consolidated Financial Statements.

We expect to recognize any remaining charges related to this plan by the end of the first quarter of Fiscal 2023.

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RESULTS OF OPERATIONS

The following tables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(In thousands)","2021","","2020","","2019"],["Net revenues","$","5,683,466","","","$","4,474,667","","","$","5,267,132"],["Cost of goods sold","2,821,967","","","2,314,572","","","2,796,599"],["Gross profit","2,861,499","","","2,160,095","","","2,470,533"],["Selling, general and administrative expenses","2,334,691","","","2,171,934","","","2,233,763"],["Restructuring and impairment charges","40,518","","","601,599","","","\u2014"],["Income (loss) from operations","486,290","","","(613,438)","","","236,770"],["Interest income (expense), net","(44,300)","","","(47,259)","","","(21,240)"],["Other income (expense), net","(51,113)","","","168,153","","","(5,688)"],["Income (loss) before income taxes","390,877","","","(492,544)","","","209,842"],["Income tax expense (benefit)","32,072","","","49,387","","","70,024"],["Income (loss) from equity method investments","1,255","","","$","(7,246)","","","$","(47,679)"],["Net income (loss)","$","360,060","","","$","(549,177)","","","$","92,139"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(As a percentage of net revenues)","2021","","2020","","2019"],["Net revenues","100.0","%","","100.0","%","","100.0","%"],["Cost of goods sold","49.7","%","","51.7","%","","53.1","%"],["Gross profit","50.3","%","","48.3","%","","46.9","%"],["Selling, general and administrative expenses","41.1","%","","48.5","%","","42.4","%"],["Restructuring and impairment charges","0.7","%","","13.4","%","","\u2014","%"],["Income (loss) from operations","8.6","%","","(13.7)","%","","4.5","%"],["Interest income (expense), net","(0.8)","%","","(1.1)","%","","(0.4)","%"],["Other income (expense), net","(0.9)","%","","3.8","%","","(0.1)","%"],["Income (loss) before income taxes","6.9","%","","(11.0)","%","","4.0","%"],["Income tax expense (benefit)","0.6","%","","1.1","%","","1.3","%"],["Loss from equity method investment","\u2014","%","","(0.2)","%","","(0.9)","%"],["Net income (loss)","6.3","%","","(12.3)","%","","1.7","%"]]
[[/GREPCENT_TABLE]]

Revenues:

Net revenues consist of net sales, license revenues, and revenues from digital subscriptions, sale of digital assets and advertising. Net sales consist of sales from apparel, footwear and accessories products. Our license revenues primarily consist of fees paid to us by licensees in exchange for the use of our trademarks on their products. Net revenues by product category are summarized below for the periods indicated:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(In thousands)","2021","","2020","","$ Change","","% Change","","2019","","$ Change","","% Change"],["Apparel","$","3,841,249","","","$","2,882,562","","","$","958,687","","","33.3","%","","$","3,470,285","","","$","(587,723)","","","(16.9)","%"],["Footwear","1,264,127","","","934,333","","","329,794","","","35.3","%","","1,086,551","","","(152,218)","","","(14.0)","%"],["Accessories","461,894","","","414,082","","","47,812","","","11.5","%","","416,354","","","(2,272)","","","(0.5)","%"],["Net Sales","5,567,270","","","4,230,977","","","1,336,293","","","31.6","%","","4,973,190","","","(742,213)","","","(14.9)","%"],["License revenues","112,623","","","105,779","","","6,844","","","6.5","%","","138,775","","","(32,996)","","","(23.8)","%"],["Corporate Other (1)","3,573","","","137,911","","","(134,338)","","","(97.4)","%","","155,167","","","(17,256)","","","(11.1)","%"],["Total net revenues","$","5,683,466","","","$","4,474,667","","","$","1,208,799","","","27.0","%","","$","5,267,132","","","$","(792,465)","","","(15.0)","%"]]
[[/GREPCENT_TABLE]]

(1) Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program. Effective January 1, 2021, included within Corporate

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Other is the operating results of the remaining Connected Fitness business consisting of MMR for Fiscal 2021 and the entire Connected Fitness for Fiscal 2020 and Fiscal 2019. All prior periods were recast to conform to the current period presentation. Such reclassifications did not affect total consolidated revenues, consolidated income from operations or consolidated net income (see Note 1 to our Consolidated Financial Statements).

Net sales

Net sales increased by $1,336.3 million, or 31.6%, to $5,567.3 million in Fiscal 2021 from $4,231.0 million in Fiscal 2020, primarily driven by increased unit sales across all our product categories. These increases as compared to Fiscal 2020 were primarily due to the significant COVID-19 disruptions we experienced during Fiscal 2020, including cancellations of orders by our wholesale partners and closures of retail stores. Net sales growth for Fiscal 2021 was also impacted by previously disclosed changes to customer order flow and supply chain timing resulting in sales shifting from the fourth quarter of Fiscal 2020 to the first quarter of Fiscal 2021. Net sales for Fiscal 2021 increased 12% compared to Fiscal 2019.

License revenues

License revenues increased by $6.8 million, or 6.5%, to $112.6 million in Fiscal 2021, from $105.8 million in Fiscal 2020, driven by higher demand and improved business and financial conditions of our licensees. The increased revenue was primarily from our licensing partners in North America, as this region continues to recover from the impacts of COVID-19.

Corporate Other revenues

Revenues from Corporate Other decreased by $134.3 million in Fiscal 2021, primarily due to the sale of MyFitnessPal in December 2020. See Note 1 to our Consolidated Financial Statements for more details.

Gross Profit

Cost of goods sold consists primarily of product costs, inbound freight and duty costs, outbound freight costs, handling costs to make products floor-ready to customer specifications, royalty payments to endorsers based on a predetermined percentage of sales of selected products, and write downs for inventory obsolescence. In general, as a percentage of net revenues, we expect cost of goods sold associated with our apparel and accessories to be lower than that of our footwear. A limited portion of cost of goods sold is associated with digital subscription and advertising revenues, primarily website hosting costs, and no cost of goods sold is associated with our license revenues.

We include outbound freight costs associated with shipping goods to customers as cost of goods sold; however, we include the majority of outbound handling costs as a component of selling, general and administrative expenses. As a result, our gross profit may not be comparable to that of other companies that include outbound handling costs in their cost of goods sold. Outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate our distribution facilities. These costs were $82.9 million and $80.5 million for Fiscal 2021 and Fiscal 2020, respectively.

Gross profit increased by $701.4 million to $2,861.5 million in Fiscal 2021, as compared to $2,160.1 million in Fiscal 2020. Gross profit as a percentage of net revenues, or gross margin, increased 210 basis points to 50.3%, compared to 48.3% in Fiscal 2020.

This increase in gross margin was primarily driven by the following benefits:

•approximately 360 basis points of pricing improvements driven by lower promotional activity within our direct-to-consumer channel, favorable pricing related to liquidation sales and lower promotions and markdowns across our wholesale channel; and

•approximately 40 basis points from changes in foreign currency.

These benefits were partially offset by the following negative impacts:

•approximately 110 basis points related to the absence of MyFitnessPal, which was sold in December 2020;

•approximately 50 basis points related to supply chain impacts as benefits in product costs were more than offset by higher inbound freight and logistics costs due to COVID-19-related supply chain pressures; and

•approximately 30 basis points related to channel mix as benefits of lower liquidation sales were more than offset by lower e-commerce and a higher distributor sales.

We expect freight costs to continue negatively impacting our gross margin for the next few quarters.

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Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist of costs related to marketing, selling, product innovation and supply chain, and corporate services. We consolidate our selling, general and administrative expenses into two primary categories: marketing and other. The other category is the sum of our selling, product innovation and supply chain, and corporate services categories. The marketing category consists primarily of sports and brand marketing, media, and retail presentation. Sports and brand marketing includes professional, club and collegiate sponsorship agreements, individual athlete and influencer agreements, and providing and selling products directly to teams and individual athletes. Media includes digital, broadcast, and print media outlets, including social and mobile media. Retail presentation includes sales displays and concept shops and depreciation expense specific to our in-store fixture programs. Our marketing costs are an important driver of our growth.

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(In thousands)","2021","","2020","","$ Change","","% Change","","2019","","$ Change","","% Change"],["Selling, General and Administrative Expenses","$","2,334,691","","","$","2,171,934","","","$","162,757","","","7.5","%","","$","2,233,763","","","$","(61,829)","","","(2.8)","%"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expenses increased by $162.8 million, or 7.5%, to $2,334.7 million in Fiscal 2021, as compared to $2,171.9 million in Fiscal 2020. Within selling, general and administrative expense:

•Marketing costs increased $98.8 million or 18.0%, primarily due to reduced marketing activity in the prior fiscal year due to the COVID-19 pandemic. This increase was partially offset by reductions in fees associated with sports marketing assets. As a percentage of net revenues, marketing costs decreased to 11.4% from 12.3% in Fiscal 2020.

•Other costs increased $64.0 million or 3.9%, primarily driven by higher incentive compensation, non salaried wages, retail facility expenses, and a general increase in business activities in Fiscal 2021, as compared to Fiscal 2020, which was more severely impacted by COVID-19. These increases were partially offset by lower legal and depreciation expense. As a percentage of net revenues, other costs decreased to 29.7% from 36.2% in Fiscal 2020.

As a percentage of net revenues, selling, general and administrative expenses decreased to 41.1% as compared to 48.5% in Fiscal 2020.

Restructuring and Impairment Charges

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(In thousands)","2021","","2020","","$ Change","","% Change","","2019","","$ Change","","% Change"],["Restructuring and Impairment Charges","$","40,518","","","$","601,599","","","$","(561,081)","","","(93.3)","%","","$","\u2014","","","$","601,599","","","N/A"]]
[[/GREPCENT_TABLE]]

Restructuring and impairment charges within our operating expenses were $40.5 million and $601.6 million in Fiscal 2021 and Fiscal 2020, respectively. Included in the prior fiscal year was $141.2 million of long-lived asset and goodwill impairment charges, as well as a right of use asset impairment charge of $290.8 million relating to our flagship store in New York City.

Income (Loss) from Operations

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(In thousands)","2021","","2020","","$ Change","","% Change","","2019","","$ Change","","% Change"],["Income (loss) from Operations","$","486,290","","","$","(613,438)","","","$","1,099,728","","","(179.3)","%","","$","236,770","","","$","(850,208)","","","(359.1)%"]]
[[/GREPCENT_TABLE]]

Income from operations increased by $1,099.7 million to $486.3 million in Fiscal 2021. The increase in income from operations was driven primarily by increased revenues along with significantly lower restructuring and impairment charges compared to the prior fiscal year.

Interest Expense, Net

Interest expense, net is primarily comprised of interest incurred on our debt facilities, offset by interest income earned on our cash and cash equivalents.

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[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(In thousands)","2021","","2020","","$ Change","","% Change","","2019","","$ Change","","% Change"],["Interest expense, net","$","44,300","","","$","47,259","","","$","(2,959)","","","(6.3)","%","","$","21,240","","","$","26,019","","","122.5%"]]
[[/GREPCENT_TABLE]]

Interest expense, net decreased by $3.0 million to $44.3 million in Fiscal 2021, as compared to $47.3 million in Fiscal 2020. The decrease was primarily due to a reduction in interest expense related to borrowings on our revolving credit facility which were drawn on in the prior fiscal year, and a reduction in interest expense on our Convertible Senior Notes as a result of our repurchase of approximately $419.1 million in aggregate principal amount during Fiscal 2021, partially offset by higher interest expense on our Convertible Senior Notes resulting from the full year impact of interest expense associated with our Convertible Senior Notes issued in May 2020. See Note 8 to our Consolidated Financial Statements.

Other Income (Expense)

Other income (expense), net primarily consists of unrealized and realized gains and losses on our foreign currency derivative financial instruments, and unrealized and realized gains and losses on adjustments that arise from fluctuations in foreign currency exchange rates relating to transactions generated by our international subsidiaries. Other income (expense), net also includes rent expense relating to lease assets held solely for sublet purposes, primarily the lease related to our New York City flagship store.

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(In thousands)","2021","","2020","","$ Change","","% Change","","2019","","$ Change","","% Change"],["Other income (expense), net","$","(51,113)","","","$","168,153","","","$","(219,266)","","","(130.4)","%","","$","(5,688)","","","$","173,841","","","(3056.3)%"]]
[[/GREPCENT_TABLE]]

Other income (expense), net decreased by $219.3 million in Fiscal 2021 as compared to Fiscal 2020. This was primarily due to a gain of $179.3 million on the sale of MyFitnessPal platform in Fiscal 2020. In addition, we recognized a $58.5 million loss upon the extinguishment of an aggregate $419.1 million in principal amount of our Convertible Senior Notes in Fiscal 2021 and a loss of $10.7 million associated with changes in foreign exchange rates. These were partially offset by a $35 million earn out recorded in connection with the sale of the MyFitnessPal platform.

Income Tax Expense

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(In thousands)","2021","","2020","","$ Change","","% Change","","2019","","$ Change","","% Change"],["Income tax expense","$","32,072","","","$","49,387","","","$","(17,315)","","","(35.1)","%","","$","70,024","","","$","(20,637)","","","(29.5)%"]]
[[/GREPCENT_TABLE]]

Income tax expense decreased by $17.3 million to $32.1 million in Fiscal 2021 as compared to $49.4 million in Fiscal 2020. We recorded 2021 income tax expense on pretax earnings, inclusive of benefits for the reduction in U.S. valuation allowances, compared to 2020 income tax expense on pretax losses, which included the impact of recording valuation allowances for previously recognized deferred tax assets in the U.S. and China.

Income (Loss) from Equity Method Investments

Income from equity method investment increased by $8.5 million to $1.3 million in Fiscal 2021, as compared to a loss of $7.2 million in Fiscal 2020, which was impacted by a $8.6 million impairment of our equity method investment in our Japanese licensee.

SEGMENT RESULTS OF OPERATIONS

Our operating segments are based on how our Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. Our segments are defined by geographic regions, including North America, EMEA, Asia-Pacific, and Latin America.

Prior to the sale of MyFitnessPal in December 2020, our CODM also received discrete financial information for our Connected Fitness Segment. However, beginning January 1, 2021, we no longer report Connected Fitness as a discrete reportable operating segment. All prior period balances have been recast to conform to current period presentation. Such reclassifications did not affect total consolidated revenues, consolidated income from operations or consolidated net income. See Note 1 to our Consolidated Financial Statements.

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We exclude certain corporate costs from our segment profitability measures. We report these costs within Corporate Other, which is designed to provide increased transparency and comparability of our operating segments performance. The costs included within Corporate Other consists largely of revenue and costs related to our MMR platforms and other digital business opportunities, as well as general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain and innovation, and other corporate support functions; costs related to our global assets and global marketing; costs related to our headquarters; restructuring and restructuring related charges; and certain foreign currency hedge gains and losses.

The net revenues and operating income (loss) associated with our segments are summarized in the following tables.

Net revenues by segment and Corporate Other:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(In thousands)","2021","","2020","","$ Change","","% Change","","2019","","$ Change","","% Change"],["North America","$","3,810,372","","","$","2,944,978","","","$","865,394","","","29.4","%","","$","3,658,353","","","$","(713,375)","","","(19.5)","%"],["EMEA","842,511","","","598,296","","","244,215","","","40.8","%","","621,137","","","(22,841)","","","(3.7)","%"],["Asia-Pacific","831,762","","","628,657","","","203,105","","","32.3","%","","636,343","","","(7,686)","","","(1.2)","%"],["Latin America","195,248","","","164,825","","","30,423","","","18.5","%","","196,132","","","(31,307)","","","(16.0)","%"],["Corporate Other (1)","3,573","","","137,911","","","(134,338)","","","(97.4)","%","","155,167","","","(17,256)","","","(11.1)","%"],["Total net revenues","$","5,683,466","","","$","4,474,667","","","$","1,208,799","","","27.0","%","","$","5,267,132","","","$","(792,465)","","","(15.0)","%"]]
[[/GREPCENT_TABLE]]

(1) Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program. Effective January 1, 2021, included within Corporate Other is the operating results of the remaining Connected Fitness business consisting of our MMR platforms for Fiscal 2021 and the entire Connected Fitness business for Fiscal 2020. All prior period balances were recast to conform to the current period presentation. Such reclassifications did not affect total consolidated revenues, consolidated income from operations or consolidated net income. See Note 1 to our Consolidated Financial Statements.

Net revenues increased across each of our regional operating segments primarily due to increased sales, as compared to Fiscal 2020, as we experienced significant disruptions in Fiscal 2020 related to COVID-19. The increase in total net revenues for Fiscal 2021, compared to Fiscal 2020, was driven by the following:

•Net revenues in our North America region increased $865.4 million, or 29.4%, to $3,810.4 million for Fiscal 2021, as compared to $2,945.0 million during Fiscal 2020. This increase was driven by growth within our wholesale and direct-to-consumer channels. When compared to Fiscal 2019, net revenues in our North America region increased by 4.2%.

•Net revenues in our EMEA region increased $244.2 million, or 40.8%, to $842.5 million for Fiscal 2021, as compared to $598.3 million in Fiscal 2020. This increase was primarily driven by growth within our wholesale, distributor and direct-to-consumer channels. The increase in sales was also due to timing shifts related to changes in customer order flow and supply chain timing from the fourth quarter of Fiscal 2020 to the first quarter of Fiscal 2021. When compared to Fiscal 2019, net revenues in our EMEA region increased by 35.6%.

•Net revenues in our Asia-Pacific region increased $203.1 million, or 32.3%, to $831.8 million for Fiscal 2021, as compared to $628.7 million during Fiscal 2020. This increase was primarily driven by growth within our wholesale and direct-to-consumer channels. The increase in sales was also due to timing shifts related to changes in customer order flow and supply chain timing from the fourth quarter of Fiscal 2020 to the first quarter of Fiscal 2021. When compared to Fiscal 2019, net revenues in our Asia-Pacific region increased by 30.7%.

•Net revenues in our Latin America region increased $30.4 million, or 18.5%, to $195.2 million for Fiscal 2021, as compared to $164.8 million in Fiscal 2020. This increase was primarily driven by growth within our wholesale and distributor channel partially offset by a decrease in our direct-to-consumer channel as we have moved to a distributor operating model for certain countries within this region. When compared to Fiscal 2019, net revenues in our Latin America region decreased by 0.5%.

•The decrease in Corporate Other for Fiscal 2021, as compared to Fiscal 2020 is primarily due to the sale of MyFitnessPal in December 2020.

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Operating income (loss) by segment and Corporate Other:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(In thousands)","2021","","2020","","$ Change","","% Change (1)","","2019","","$ Change","","% Change (1)"],["North America","$","972,093","","","$","474,584","","","$","497,509","","","104.8","%","","$","733,442","","","$","(258,858)","","","(35.3)","%"],["EMEA","132,602","","","60,592","","","72,010","","","118.8","%","","53,739","","","6,853","","","12.8","%"],["Asia-Pacific","132,911","","","2","","","132,909","","","N/M","","97,641","","","(97,639)","","","(100.0)","%"],["Latin America","22,388","","","(42,790)","","","65,178","","","152.3","%","","(3,160)","","","(39,630)","","","N/M"],["Corporate Other (2)","(773,704)","","","(1,105,826)","","","332,122","","","30.0","%","","(644,892)","","","(460,934)","","","71.5","%"],["Total operating income (loss)","$","486,290","","","$","(613,438)","","","$","1,099,728","","","179.3","%","","$","236,770","","","$","(850,208)","","","(359.1)","%"]]
[[/GREPCENT_TABLE]]

(1) "N/M" = not meaningful

(2) Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program. Effective January 1, 2021, included within Corporate Other is the operating results of the remaining Connected Fitness business consisting of our MMR platforms for Fiscal 2021 and the entire Connected Fitness business for Fiscal 2020. All prior period balances were recast to conform to the current period presentation. Such reclassifications did not affect total consolidated revenues, consolidated income from operations or consolidated net income. See Note 1 to our Consolidated Financial Statements.

The increase in total operating income was driven by the following:

•Operating income in our North America region increased $497.5 million to $972.1 million for the Fiscal 2021, as compared to $474.6 million in Fiscal 2020. This was due to the increases in net revenues discussed above and improvements in gross margin due to pricing improvements, including lower promotional activity and markdowns, as well as improved sales mix due to lower liquidations. Additionally, North America incurred lower bad debt expense and lower long lived asset impairment charges. These decreases were partially offset by increased incentive compensation expense, non-salaried wages and increased marketing-related expenses.

•Operating income in our EMEA region increased $72.0 million to $132.6 million for Fiscal 2021, as compared to $60.6 million in Fiscal 2020. This was due to the increases in net revenues discussed above, improved gross margins due to lower discounts and markdowns and lower selling expenses. These improvements were partially offset by an increase in marketing-related expenses, increased incentive compensation expense, non-salaried wages as well as increased distribution related expenses.

•Operating income in our Asia-Pacific region increased $132.9 million to $132.9 million for Fiscal 2021, as compared to $2.0 thousand in Fiscal 2020. This was due to the increases in net revenues discussed above, and improvements in gross margin due to pricing improvements driven primarily by lower discounts to franchise partners and promotional activity. Additionally, operating income in our Asia-Pacific region was impacted by lower long-lived asset impairment charges. These improvements were partially offset by an increase in marketing and facility related expenses.

•Operating income in our Latin America region increased $65.2 million to $22.4 million for Fiscal 2021, as compared to a loss of $42.8 million in Fiscal 2020. This was due to the increases in net revenues discussed above, lower long-lived asset impairment charges, as well as a reduction in operational costs related to our changing to a distributor model in certain countries within this region.

•Operating loss in our Corporate Other non-operating segment decreased $332.1 million to $773.7 million for Fiscal 2021, as compared to $1,105.8 million in Fiscal 2020. The decrease in operating loss was primarily due to lower restructuring and impairment charges incurred in Fiscal 2021 as compared to Fiscal 2020, partially offset by the sale of MyFitnessPal in December 2020.

LIQUIDITY AND CAPITAL RESOURCES

Our cash requirements have principally been for working capital and capital expenditures. We fund our working capital, primarily inventory, and capital investments from cash flows from operating activities, cash and cash equivalents on hand, and borrowings available under our credit and long term debt facilities. Our working capital requirements generally reflect the seasonality in our business as we historically recognize the majority of our net revenues in the last two quarters of the calendar year. Our capital investments have generally included expanding our in-store fixture and branded concept shop program, improvements and expansion of our distribution and

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corporate facilities, leasehold improvements to our Brand and Factory House stores, and investment and improvements in information technology systems. Our inventory strategy is focused on continuing to meet consumer demand while improving our inventory efficiency over the long term by putting systems and processes in place to improve our inventory management. These systems and processes are designed to improve our forecasting and supply planning capabilities. In addition to systems and processes, key areas of focus that we believe enhance inventory performance are added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our Factory House stores and other liquidation channels.

As of December 31, 2021, we had $1.7 billion of cash and cash equivalents. We believe our cash and cash equivalents on hand, cash from operations, our ability to reduce our expenditures as needed, borrowings available to us under our amended credit agreement, our ability to access the capital markets, and other financing alternatives are adequate to meet our liquidity needs and capital expenditure requirements for at least the next twelve months. In addition, from time to time, based on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors and subject to compliance with applicable laws and regulations, we may seek to utilize cash on hand, borrowings or raise capital to retire, repurchase or redeem our debt securities, repay debt, repurchase shares of our common stock or otherwise enter into similar transactions to support our capital structure and business or utilize excess cash flow on a strategic basis. For example, in May 2021 and August 2021, we entered in Exchange Agreements pursuant to which we repurchased $250 million and $169.1 million, respectively, aggregate principal amount of our Convertible Senior Notes in exchange for a combination of cash and shares for our Class C Common Stock.

As discussed above, COVID-19 has continued to create supply chain challenges that will impact the availability of inventory over the next few quarters. If there are unexpected material impacts to our business in future periods from COVID-19 and we need to raise or conserve additional cash to fund our operations, we may consider additional alternatives similar to those we used in Fiscal 2020, including further reducing our expenditures, changing our investment strategies, negotiating payment terms with our customers and vendors, reductions in compensation costs, including through temporary reductions in pay and layoffs, and limiting certain marketing and capital expenditures. In addition, we may seek alternative sources of liquidity, including but not limited to, accessing the capital markets, sale leaseback transactions or other sales of assets, or other alternative financing measures. However, instability in, or tightening of the capital markets, could adversely affect our ability to access the capital markets on terms acceptable to us or at all. Although we believe we have adequate sources of liquidity over the long term, a prolonged or more severe economic recession, inflationary pressure, or a slow recovery could adversely affect our business and liquidity.

Refer to our “Risk Factors” section included in Item 1A in this Annual Report on Form 10-K.

At December 31, 2021, $612.2 million or approximately 37%, of cash and cash equivalents was held by our foreign subsidiaries. Based on the capital and liquidity needs of our foreign operations, we intend to indefinitely reinvest these funds outside the United States. In addition, our United States operations do not require the repatriation of these funds to meet our currently projected liquidity needs. Should we require additional capital in the United States, we may elect to repatriate indefinitely reinvested foreign funds or raise capital in the United States.

The Company will continue to permanently reinvest these earnings, as well as future earnings from our foreign subsidiaries, to fund international growth and operations. If we were to repatriate indefinitely reinvested foreign funds, we would be required to accrue and pay certain taxes upon repatriation, including foreign withholding taxes and certain U.S. state taxes and record foreign exchange rate impacts. Determination of the unrecorded deferred tax liability that would be incurred if such amounts were repatriated is not practicable.

Contractual Commitments

We lease warehouse space, office facilities, space for our Brand and Factory House stores and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2035, excluding extensions at our option, and include provisions for rental adjustments. In addition, this table includes executed lease agreements for Brand and Factory House stores that we did not yet occupy as of December 31, 2021. The operating leases generally contain renewal provisions for varying periods of time. Our significant contractual obligations and commitments as of December 31, 2021 are summarized in the following table:

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[[GREPCENT_TABLE]]
[["","Payments Due by Period"],["(In thousands)","Total","","Less Than 1 Year","","1 to 3 years","","3 to 5 Years","","More Than 5 Years"],["Long term debt obligations (1)","$","771,704","","","$","20,714","","","$","121,740","","","$","629,250","","","$","\u2014"],["Operating Lease obligations (2)","993,616","","","169,994","","","273,198","","","171,291","","","379,133"],["Product purchase obligations (3)","1,475,814","","","1,475,814","","","\u2014","","","\u2014","","","\u2014"],["Sponsorships and other (4)","287,556","","","98,726","","","139,172","","","45,313","","","4,345"],["Total future minimum payments","$","3,528,690","","","$","1,765,248","","","$","534,110","","","$","845,854","","","$","383,478"]]
[[/GREPCENT_TABLE]]

(1) Includes estimated interest payments based on applicable fixed interest rates as of December 31, 2021, timing of scheduled payments, and the term of the debt obligations.

(2) Includes the minimum payments for lease obligations. The lease obligations do not include any contingent rent expense we may incur at our Brand and Factory house stores based on future sales above a specified minimum or payments made for maintenance, insurance and real estate taxes. Contingent rent expense was $16.1 million for Fiscal 2021.

(3) We generally place orders with our manufacturers at least three to four months in advance of expected future sales. The amounts listed for product purchase obligations primarily represent our open production purchase orders with our manufacturers for our apparel, footwear and accessories, including expected inbound freight, duties and other costs. These open purchase orders specify fixed or minimum quantities of products at determinable prices. The product purchase obligations also includes fabric commitments with our suppliers, which secure a portion of our material needs for future seasons. The reported amounts exclude product purchase liabilities included in accounts payable as of December 31, 2021.

(4) Includes sponsorships with professional teams, professional leagues, colleges and universities, individual athletes, athletic events and other marketing commitments in order to promote our brand. Some of these sponsorship agreements provide for additional performance incentives and product supply obligations. It is not possible to determine how much we will spend on product supply obligations on an annual basis as contracts generally do not stipulate specific cash amounts to be spent on products. The amount of product provided to these sponsorships depends on many factors including general playing conditions, the number of sporting events in which they participate and our decisions regarding product and marketing initiatives. In addition, it is not possible to determine the performance incentive amounts we may be required to pay under these agreements as they are primarily subject to certain performance based and other variables. The amounts listed above are the fixed minimum amounts required to be paid under these sponsorship agreements. Additionally, these amounts include minimum guaranteed royalty payments to endorsers and licensors based upon a predetermined percent of sales of particular products.

The table above excludes a liability of $38.9 million for uncertain tax positions, including the related interest and penalties, recorded in accord with applicable accounting guidance, as we are unable to reasonable estimate the timing of settlement. Refer to Note 17 to the Consolidated Financial Statements for a further discussion of our uncertain tax positions.

Cash Flows

The following table presents the major components of our cash flows provided by and used in operating, investing and financing activities for the periods presented:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(In thousands)","2021","","2020","","$ Change","","2019","","$ Change"],["Net cash provided by (used in):"],["Operating activities","$","664,829","","","$","212,864","","","$","451,965","","","$","509,031","","","$","(296,167)"],["Investing activities","(68,346)","","","66,345","","","(134,691)","","","(147,113)","","","213,458"],["Financing activities","(418,737)","","","436,853","","","(855,590)","","","(137,070)","","","573,923"],["Effect of exchange rate changes on cash and cash equivalents","(23,391)","","","16,445","","","(39,836)","","","5,100","","","11,345"],["Net increase (decrease) in cash and cash equivalents","$","154,355","","","$","732,507","","","$","(578,152)","","","$","229,948","","","$","502,559"]]
[[/GREPCENT_TABLE]]

Operating Activities

Cash flows provided by operating activities increased by $452.0 million, as compared to Fiscal 2020, primarily driven by an increase in net income, before the impact of non-cash items, of $632.3 million, partially offset by a decrease from changes in working capital of $180.4 million.

The changes in working capital were primarily due to decreases of:

•$433.3 million resulting from changes in accrued expenses and other liabilities, primarily due to the commencement of the operating lease relating to our New York City flagship store which was included in Fiscal 2020;

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•$198.8 million resulting from changes in accounts receivable primarily due to our previously disclosed changes to customer order flow and supply chain timing from the fourth quarter of Fiscal 2020 to the first quarter of Fiscal 2021, and an increase in net revenues of $1,208.8 million; and

•$19.6 million resulting from changes in customer refund liability.

These decreases in working capital were partially offset by increases in working capital of:

•$339.5 million resulting from changes in other non-current assets, primarily due to the commencement of our New York City flagship store and the related operating lease ROU asset which was included in Fiscal 2020;

•$78.0 million resulting from changes in inventories on account of better inventory management and demand constraints; and

•$66.7 million resulting from changes in accounts payable.

Investing Activities

Cash flows used in investing activities decreased by $134.7 million, as compared to Fiscal 2020, primarily due to proceeds from the sale of MyFitnessPal of $198.9 million in Fiscal 2020.

Total capital expenditures in Fiscal 2021 were $69.8 million, or approximately 1% of net revenues, representing a $22.5 million decline from $92.3 million in Fiscal 2020. In Fiscal 2020 and Fiscal 2021, we reduced capital expenditures in response to ongoing uncertainty related to COVID-19 and to preserve working capital. Moving forward, we anticipate capital expenditures to normalize back towards our long-term operating principle of between 3% and 5% of annual net revenues as we invest in our global direct-to-consumer, e-Commerce and digital businesses, informational technology systems, distribution centers and our global offices. With regard to our new corporate headquarters, in April 2021, we unveiled plans to construct a new global headquarters in the Port Covington area of Baltimore, Maryland. We are designing our new headquarters in line with our long-term sustainability strategy, which includes a commitment to reduce greenhouse gas emissions and increase sourcing of renewable electricity in our owned and operated facilities. We expect a portion of our capital expenditures over the short term to include investments incorporating sustainable and intelligent building design features into this facility.

Financing Activities

Cash flows used in financing activities increased by $855.6 million, as compared to Fiscal 2020. During Fiscal 2021, we used $418.7 million of cash for financing activities, whereas during Fiscal 2020, we had cash inflow of $436.9 million from financing activities. The cash outflow of $418.7 million was primarily related to approximately $506.3 million paid to certain holders for the exchange of $419.1 million in aggregate principal amount of our 1.50% convertible senior notes (the "Convertible Senior Notes"). Concurrently with these exchanges we entered into agreements to terminate a portion of the capped call transactions previously entered into in connection with our initial offering of the Convertible Senior Notes and received approximately $91.7 million from the option counterparties in connection with such termination agreements. For more details, see discussion below under "1.50% Convertible Senior Notes".

Capital Resources

Credit Facility

On March 8, 2019, we entered into an amended and restated credit agreement by and among us, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and arrangers party thereto (the “credit agreement”). In May 2020, we entered into an amendment to the credit agreement (the “first amendment”), pursuant to which the prior revolving credit commitments were reduced from $1.25 billion to $1.1 billion of borrowings. Subsequently, in May 2021, we entered into a second amendment to the credit agreement (the "second amendment"), which provides for certain changes to our covenants and decreases to certain applicable rates effected by the first amendment. In December 2021, we entered into a third amendment to the credit agreement (the "third amendment" and, the credit agreement as amended by the first amendment, the second amendment and the third amendment, the "amended credit agreement" or the "revolving credit facility"), which extends the term of the credit agreement from March 8, 2024 to December 3, 2026, with permitted extension under certain circumstances. As of December 31, 2021 and December 31, 2020, there were no amounts outstanding under the revolving credit facility.

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Where the first amendment previously provided for suspensions of and adjustments to our existing interest coverage covenant and leverage covenant (each as defined below), and further required us to maintain a specific amount of minimum liquidity during certain quarters, the second amendment provided that these financial covenants became effective again as of March 31, 2021 and removed the minimum liquidity covenant. The second amendment also (i) decreases the interest rate margins that were previously provided for under the first amendment; (ii) reverses limitations effected by the first amendment on expansions of and extensions of the maturity of the revolving credit facility during the covenant suspension period; and (iii) removes additional limitations on the availability of certain exceptions to the negative covenants, including the restricted payments covenant, that were imposed during the covenant suspension period.

The third amendment also (i) decreases the applicable margins for borrowings and undrawn commitment fees; (ii) provides for the fall away of collateral and guarantee requirements following an investment-grade rating from two rating agencies; (iii) implements SOFR as the replacement of LIBOR as a benchmark interest rate for U.S. dollar borrowings (and analogous benchmark rate replacements for borrowings in Yen, Canadian Dollars, Pound Sterling and Euro); and (iv) amends certain affirmative and negative covenants and related definitions.

At our request and a lender's consent, commitments under the amended credit agreement may be increased by up to $300.0 million in aggregate, subject to certain conditions as set forth in the amended credit agreement. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time we seek to incur such borrowings.

Borrowings, if any, under the revolving credit facility have maturities of less than one year. Up to $50.0 million of the facility may be used for the issuance of letters of credit. As of December 31, 2021, there was $4.3 million of letters of credit outstanding (December 31, 2020 had $4.3 million letters of credit outstanding).

Our obligations under the amended credit agreement are guaranteed by certain domestic significant subsidiaries of Under Armour, Inc., subject to customary exceptions (the “subsidiary guarantors”) and primarily secured by a first-priority security interest in substantially all of the assets of Under Armour, Inc. and the subsidiary guarantors, excluding real property, capital stock in and debt of subsidiaries of Under Armour, Inc. holding certain real property and other customary exceptions. However, the third amendment provides for the permanent fall away of guarantees and collateral upon our achievement of investment grade rating from two rating agencies.

The amended credit agreement contains negative covenants that, subject to significant exceptions, limit our ability to, among other things: incur additional secured and unsecured indebtedness; pledge the assets as security; make investments, loans, advances, guarantees and acquisitions, (including investments in and loans to non-guarantor subsidiaries); undergo fundamental changes; sell assets outside the ordinary course of business; enter into transactions with affiliates; and make restricted payments.

We are also required to maintain a ratio of consolidated EBITDA, to consolidated interest expense of not less than 3.50 to 1.0 (the "interest coverage covenant") and we are not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.0 (the "leverage covenant"), as described in more detail in the amended credit agreement.

As of December 31, 2021, we were in compliance with the applicable covenants.

In addition, the amended credit agreement contains events of default that are customary for a facility of this nature, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the amended credit agreement, will be considered an event of default under the amended credit agreement.

Borrowings under the amended credit agreement bear interest at a rate per annum equal to, at our option, either (a) an alternate base rate (for borrowings in U.S. dollars), (b) a term rate (for borrowings in U.S. dollars, Euros, Japanese Yen or Canadian Dollars) or (c) a "risk free" rate (for borrowings in U.S. dollars or Pounds Sterling), plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to a grid (the “pricing grid”) based on the leverage ratio of consolidated total indebtedness to consolidated EBITDA and ranges between 1.00% to 1.75% (or, in the case of alternate base rate loans 0.00% to 0.75%). We will also pay a commitment fee determined in accordance with the pricing grid on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit.

The weighted average interest rate under the revolving credit facility borrowings was 2.3% during Fiscal 2020. There were no borrowings outstanding during Fiscal 2021. As of December 31, 2021, the commitment fee was 15 basis points.

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1.50% Convertible Senior Notes

In May 2020, we issued $500.0 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at the rate of 1.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The Convertible Senior Notes will mature on June 1, 2024, unless earlier converted in accordance with their terms, redeemed in accordance with their terms or repurchased.

The net proceeds from the offering (including the net proceeds from the exercise of the over-allotment option) were $488.8 million, after deducting the initial purchasers’ discount and estimated offering expenses that we paid, of which we used $47.9 million to pay the cost of the capped call transactions described below. We utilized $439.9 million to repay indebtedness that was outstanding under our revolving credit facility at the time, and to pay related fees and expenses.

The Convertible Senior Notes are not secured and are not guaranteed by any of our subsidiaries. The indenture governing the Convertible Senior Notes does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.

In May 2021, we entered into exchange agreements with certain holders of the Convertible Senior Notes (the "first exchanging holders"), who agreed to exchange $250.0 million in aggregate principal amount of the Convertible Senior Notes for cash and/or shares of our Class C Common Stock, plus payment for accrued and unpaid interest (the "First Exchange"). In connection with the First Exchange, we paid approximately $300.0 million cash and issued approximately 11.1 million shares of the Company's Class C Common Stock to the first exchanging holders. In August 2021, we entered into additional exchange agreements with certain holders of the Convertible Senior Notes (the "second exchanging holders"), who agreed to exchange approximately $169.1 million in aggregate principal amount of the Convertible Senior Notes for cash and/or shares of our Class C Common Stock, plus payment for accrued and unpaid interest (the "Second Exchange" and, together with the First Exchange, the "Exchanges"). In connection with the Second Exchange, we paid approximately $207.0 million cash and issued approximately 7.7 million shares of our Class C Common Stock to the second exchanging holders. In connection with the Exchanges, we recognized a loss on debt extinguishment of approximately $58.5 million for Fiscal 2021, which has been recorded within Other Income (Expense), net on our Consolidated Statement of Operations. Following the Exchanges, approximately $80.9 million aggregate principal amount of the Convertible Senior Notes remain outstanding.

The Convertible Senior Notes are convertible into cash, shares of our Class C Common Stock or a combination of cash and shares of Class C Common Stock, at our election, as described further below. The initial conversion rate is 101.8589 shares of our Class C Common Stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $9.82 per share of Class C Common Stock), subject to adjustment if certain events occur. Prior to the close of business on the business day immediately preceding January 1, 2024, holders may (at their option) convert their Convertible Senior Notes only upon satisfaction of one or more of the following conditions:

•during any calendar quarter commencing after the calendar quarter ended on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our Class C Common Stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

•during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our Class C Common Stock and the conversion rate on each such trading day;

•upon the occurrence of specified corporate events or distributions on our Class C Common Stock; or

•if we call any Convertible Senior Notes for redemption prior to the close of business on the business day immediately preceding January 1, 2024.

On or after January 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Senior Notes at the conversion rate at any time irrespective of the foregoing conditions.

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On or after December 6, 2022, we may redeem for cash all or any part of the Convertible Senior Notes, at our option, if the last reported sale price of our Class C Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

If we undergo a fundamental change (as defined in the indenture governing the Convertible Senior Notes) prior to the maturity date, subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Convertible Senior Notes in principal amounts of $1,000 or an integral multiple thereof at a price which will be equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Concurrently with the offering of the Convertible Senior Notes, we entered into privately negotiated capped call transactions with JPMorgan Chase Bank, National Association, HSBC Bank USA, National Association, and Citibank, N.A. (the “option counterparties”). The capped call transactions are expected generally to reduce potential dilution to our Class C Common Stock upon any conversion of Convertible Senior Notes and/or offset any cash payments we are required to make in excess of the aggregate principal amount of converted Convertible Senior Notes upon any conversion thereof, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactions is initially $13.4750 per share of our Class C Common Stock, representing a premium of 75% above the last reported sale price of our Class C Common Stock on May 21, 2020, and is subject to certain adjustments under the terms of the capped call transactions.

In May 2021 and August 2021, concurrently with the Exchanges, we entered into, with each of the option counterparties, termination agreements relating to a number of options corresponding to the number of Convertible Senior Notes exchanged. Pursuant to such termination agreements, each of the option counterparties paid us a cash settlement amount in respect of the portion of capped call transactions being terminated. We received approximately $53.0 million and $38.6 million in connection with such termination agreements related to the First Exchange and the Second Exchange, respectively.

The Convertible Senior Notes contain a cash conversion feature, and as a result, we have separated it into liability and equity components. We valued the liability component based on our borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which is recognized as a debt discount, was valued as the difference between the face value of the Convertible Senior Notes and the fair value of the liability component.

In connection with the Convertible Senior Notes issuance, we incurred deferred financing costs of $12.3 million, primarily related to fees paid to the initial purchasers of the offering, as well as legal and accounting fees. These costs were allocated on a pro rata basis, with $10.0 million allocated to the debt component and $2.2 million allocated to the equity component. As of December 31, 2021, the equity component, net of issuance costs was $88.7 million.

The debt discount and the debt portion of the deferred financing costs are being amortized to interest expense over the term of the Convertible Senior Notes using the effective interest rate method. The effective interest rate for the three months ended December 31, 2021 was 6.8%.

3.250% Senior Notes

In June 2016, we issued $600.0 million aggregate principal amount of 3.250% senior unsecured notes due June 15, 2026 (the “Senior Notes”). The proceeds were used to pay down amounts outstanding under the revolving credit facility, at the time. Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. Prior to March 15, 2026 (three months prior to the maturity date of the Notes), we may redeem some or all of the Senior Notes at any time or from time to time at a redemption price equal to the greater of 100% of the principal amount of the Senior Notes to be redeemed or a "make-whole" amount applicable to such Senior Notes as described in the indenture governing the Senior Notes, plus accrued and unpaid interest to, but excluding, the redemption date.

The indenture governing the Senior Notes contains covenants, including limitations that restrict our ability and the ability of certain of our subsidiaries to create or incur secured indebtedness and enter into sale and leaseback transactions and our ability to consolidate, merge or transfer all or substantially all of our properties or assets to another person, in each case subject to material exceptions described in the indenture.

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CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

Our Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities. Our estimates are often based on complex judgments, probabilities and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. Actual results could be significantly different from these estimates. We believe the following addresses the critical accounting estimates and assumptions that are necessary to understand and evaluate our reported financial results.

Revenue Recognition

We recognize revenue pursuant to Accounting Standards Codification 606 ("ASC 606"). The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that we ultimately expect 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.

We record reductions to revenue at the time of the transaction for estimated customer returns, allowances, markdowns and discounts. We base these 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 us. The actual amount of customer returns and allowances, which are inherently uncertain, may differ from our estimates. If we determine that actual or expected returns or allowances are significantly higher or lower than the reserves we established, we would record a reduction or increase, as appropriate, to net sales in the period in which we make such a determination. Provisions for customer specific discounts are based on contractual obligations 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 Sheets. As of December 31, 2021 and 2020, there were $164.3 million and $203.4 million, respectively, in reserves for returns, allowances, markdowns and discounts within customer refund liability and $47.6 million and $57.9 million, respectively, as the estimated value of inventory associated with the reserves for sales returns within prepaid expenses and other current assets on the Consolidated Balance Sheets.

Allowance for Doubtful Accounts

We make ongoing estimates relating to the collectability of accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the reserve, we consider historical levels of credit losses and significant economic developments within the retail environment that could impact the ability of our customers to pay outstanding balances and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from estimates. If the financial condition of customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determine a smaller or larger reserve is appropriate, we would record a benefit or charge to selling, general and administrative expense in the period in which such a determination was made. As of December 31, 2021 and 2020, the allowance for doubtful accounts was $7.1 million and $20.4 million, respectively.

Inventory Valuation and Reserves

Inventories consist primarily of finished goods. Costs of finished goods inventories include all costs incurred to bring inventory to its current condition, including inbound freight, duties and other costs. We value our inventory at standard cost which approximates landed cost, using the first-in, first-out method of cost determination. Net realizable value is estimated based upon assumptions made about future demand and retail market conditions. If we determine that the estimated net realizable value of our inventory is less than the carrying value of such inventory, we record a charge to cost of goods sold to reflect the lower of cost or net realizable value. If actual market conditions are less favorable than those that we projected, further adjustments may be required that would increase the cost of goods sold in the period in which such a determination was made. As of December 31, 2021 and 2020, the inventory reserve was $32.0 million and $44.6 million, respectively.

Goodwill, Intangible Assets and Long-Lived Assets

Goodwill and intangible assets are recorded at their estimated fair values at the date of acquisition and are allocated to the reporting units that are expected to receive the related benefits. Goodwill and indefinite lived

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intangible assets are not amortized and are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. In conducting an annual impairment test, we first review qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If factors indicate that is the case, we perform the goodwill impairment test. We compare the fair value of the reporting unit with its carrying amount. We estimate fair value using the discounted cash flows model, under the income approach, which indicates the fair value of the reporting unit based on the present value of the cash flows that we expect the reporting unit to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital, long-term rate of growth and profitability of the reporting unit's business, and working capital effects. If the carrying amount of a reporting unit exceeds its fair value, goodwill is impaired to the extent that the carrying value exceeds the fair value of the reporting unit.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary. The Company has made the policy election to record any liability associated with Global Intangible Low Taxed Income (“GILTI”) in the period in which it is incurred.

Income taxes include the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions or obtaining new information on particular tax positions may cause a change to the effective tax rate. We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the Consolidated Statement of Operations.

Assessing whether deferred tax assets are realizable requires significant judgment. We consider all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent we believe it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against our deferred tax assets, which increase income tax expense in the period when such a determination is made.

A significant portion of our deferred tax assets relate to U.S. federal and state taxing jurisdictions. Realization of these deferred tax assets is dependent on future U.S. pre-tax earnings. In evaluating the recoverability of these deferred tax assets as of December 31, 2021, the Company has considered all available evidence, both positive and negative, including but not limited to the following:

Positive

•Current year pre-tax earnings.

•Restructuring plans undertaken in 2017, 2018, and 2020, which aim to improve future profitability.

•No history of U.S. federal and state tax attributes expiring unused.

•Existing sources of taxable income.

•Available prudent and feasible tax planning strategies.

Negative

•Restructuring plan undertaken in Fiscal 2020 resulting in significant charges in pre-tax income, reducing profitability in the United States.

•The negative economic impact and uncertainty resulting from the COVID-19 pandemic.

•Cumulative pre-tax losses in recent years in the United States.

•Inherent challenges in forecasting future pre-tax earnings which rely, in part, on improved profitability from our restructuring efforts.

As of December 31, 2021, we believe that the weight of the negative evidence outweighs the positive evidence regarding the realization of our U.S. deferred tax assets and have recorded a valuation allowance against the U.S. deferred tax assets.

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As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of DTAs. Our current forecasts for the United States indicate that it is probable that additional deferred taxes could be realizable based on near term trend towards three-year cumulative taxable earnings. The actualization of these forecasted results may potentially outweigh the negative evidence, resulting in a reversal of all or a portion of previously recorded valuation allowances in the United States. The release of valuation allowances would result in a benefit to income tax expense in the period the release is recorded, which could have a material impact on net income. The timing and amount of the potential valuation allowance release are subject to significant management judgment, as well as prospective pre-tax earnings in the United States. We will continue to evaluate our ability to realize our net deferred tax assets on a quarterly basis.

Stock-Based Compensation

The assumptions used in calculating the fair value of stock-based compensation awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. In addition, compensation expense for performance-based awards is recorded over the related service period when achievement of the performance targets is deemed probable, which requires management judgment.

Summary of Significant Account Policies

Refer to Note 2 of our Consolidated Financial Statements, included in this Annual Report on Form 10-K, for a summary of our significant accounting policies and our assessment of recently issued accounting standards.