UA-6.30.2014-10Q*
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
Form 10-Q
______________________________________
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 001-33202
______________________________________
UNDER ARMOUR, INC.
(Exact name of registrant as specified in its charter)
______________________________________
Maryland
 
52-1990078
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1020 Hull Street
Baltimore, Maryland 21230
 
(410) 454-6428
(Address of principal executive offices) (Zip Code)
 
(Registrant’s telephone number, including area code)
 ______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
As of June 30, 2014 there were 174,528,423 shares of Class A Common Stock and 38,750,000 shares of Class B Convertible Common Stock outstanding.

Table of Contents

UNDER ARMOUR, INC.
June 30, 2014
INDEX TO FORM 10-Q
 
 
 
 
PART I.
 
 
 
 
Item 1.
 
 
Unaudited Consolidated Balance Sheets as of June 30, 2014, December 31, 2013 and June 30, 2013

 
Unaudited Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and 2013

 
Unaudited Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and 2013

 
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

 
Item 2.
Item 3.
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1A.
Item 6.
 
 

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Under Armour, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
(In thousands, except share data)
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
300,434

 
$
347,489

 
$
223,842

Accounts receivable, net
269,133

 
209,952

 
212,836

Inventories
662,388

 
469,006

 
490,943

Prepaid expenses and other current assets
97,190

 
63,987

 
52,291

Deferred income taxes
39,174

 
38,377

 
32,043

Total current assets
1,368,319

 
1,128,811

 
1,011,955

Property and equipment, net
255,018

 
223,952

 
190,924

Goodwill
123,395

 
122,244

 
—

Intangible assets, net
30,776

 
24,097

 
3,798

Deferred income taxes
37,706

 
31,094

 
26,642

Other long term assets
48,731

 
47,543

 
42,069

Total assets
$
1,863,945

 
$
1,577,741

 
$
1,275,388

Liabilities and Stockholders’ Equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Revolving credit facility
$
—

 
$
100,000

 
$
—

Accounts payable
334,001

 
165,456

 
217,925

Accrued expenses
110,649

 
133,729

 
77,935

Current maturities of long term debt
19,650

 
4,972

 
5,112

Other current liabilities
15,945

 
22,473

 
2,923

Total current liabilities
480,245

 
426,630

 
303,895

Long term debt, net of current maturities
176,987

 
47,951

 
50,387

Other long term liabilities
65,954

 
49,806

 
44,099

Total liabilities
723,186

 
524,387

 
398,381

Commitments and contingencies (see Note 4)

 

 

Stockholders’ equity
 
 
 
 
 
Class A Common Stock, $0.0003 1/3 par value; 400,000,000 shares authorized as of June 30, 2014, December 31, 2013 and June 30, 2013; 174,528,423 shares issued and outstanding as of June 30, 2014, 171,628,708 shares issued and outstanding as of December 31, 2013 and 169,488,162 shares issued and outstanding as of June 30, 2013
58

 
57

 
56

Class B Convertible Common Stock, $0.0003 1/3 par value; 38,750,000 shares authorized, issued and outstanding as of June 30, 2014, 40,000,000 shares authorized, issued and outstanding as of December 31, 2013 and 41,300,000 shares authorized, issued and outstanding as of June 30, 2013
13

 
13

 
14

Additional paid-in capital
458,854

 
397,248

 
359,369

Retained earnings
681,380

 
653,842

 
517,798

Accumulated other comprehensive income
454

 
2,194

 
(230
)
Total stockholders’ equity
1,140,759

 
1,053,354

 
877,007

Total liabilities and stockholders’ equity
$
1,863,945

 
$
1,577,741

 
$
1,275,388

See accompanying notes.

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Table of Contents

Under Armour, Inc. and Subsidiaries
Unaudited Consolidated Statements of Income
(In thousands, except per share amounts)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net revenues
$
609,654

 
$
454,541

 
$
1,251,261

 
$
926,149

Cost of goods sold
309,702

 
234,910

 
650,619

 
489,967

Gross profit
299,952

 
219,631

 
600,642

 
436,182

Selling, general and administrative expenses
265,258

 
187,321

 
539,092

 
390,380

Income from operations
34,694

 
32,310

 
61,550

 
45,802

Interest expense, net
(1,227
)
 
(711
)
 
(2,073
)
 
(1,436
)
Other income (expense), net
247

 
(797
)
 
(627
)
 
(557
)
Income before income taxes
33,714

 
30,802

 
58,850

 
43,809

Provision for income taxes
16,024

 
13,236

 
27,622

 
18,429

Net income
$
17,690

 
$
17,566

 
$
31,228

 
$
25,380

Net income available per common share
 
 
 
 
 
 
 
Basic
$
0.08

 
$
0.08

 
$
0.15

 
$
0.12

Diluted
$
0.08

 
$
0.08

 
$
0.14

 
$
0.12

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
213,188

 
210,530

 
212,788

 
210,162

Diluted
217,294

 
214,834

 
217,134

 
214,512

See accompanying notes.

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Under Armour, Inc. and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income
(In thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
17,690

 
$
17,566

 
$
31,228

 
$
25,380

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
359

 
(662
)
 
(1,218
)
 
(3,102
)
Unrealized gain (loss) on cash flow hedge, net of tax of ($287) and $287 for the three months ended June 30, 2014 and 2013, respectively, and ($365) and $345 for the six months ended June 30, 2014 and 2013, respectively
(409
)
 
408

 
(522
)
 
504

Total other comprehensive loss
(50
)
 
(254
)
 
(1,740
)
 
(2,598
)
Comprehensive income
$
17,640

 
$
17,312

 
$
29,488

 
$
22,782

See accompanying notes.

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Under Armour, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
(In thousands)
 
 
Six Months Ended June 30,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
31,228

 
$
25,380

Adjustments to reconcile net income to net cash used in operating activities
 
 
 
Depreciation and amortization
34,347

 
23,618

Unrealized foreign currency exchange rate (gains) losses
(100
)
 
1,617

Loss on disposal of property and equipment
73

 
466

Stock-based compensation
23,860

 
18,878

Deferred income taxes
(7,388
)
 
(13,228
)
Changes in reserves and allowances
1

 
932

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(53,090
)
 
(37,594
)
Inventories
(195,406
)
 
(175,549
)
Prepaid expenses and other assets
(16,514
)
 
(4,066
)
Accounts payable
175,674

 
77,644

Accrued expenses and other liabilities
(14,286
)
 
2,812

Income taxes payable and receivable
(24,065
)
 
(11,386
)
Net cash used in operating activities
(45,666
)
 
(90,476
)
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(68,901
)
 
(39,696
)
Purchase of business
(10,924
)
 
—

Purchases of other assets
(260
)
 
(475
)
Change in loans receivable
—

 
(1,700
)
Net cash used in investing activities
(80,085
)
 
(41,871
)
Cash flows from financing activities
 
 
 
Payments on revolving credit facility
(100,000
)
 
—

Proceeds from term loan
150,000

 
—

Payments on long term debt
(6,286
)
 
(2,895
)
Excess tax benefits from stock-based compensation arrangements
26,301

 
9,455

Proceeds from exercise of stock options and other stock issuances
10,196

 
9,738

Payments of debt financing costs
(1,714
)
 
—

Net cash provided by financing activities
78,497

 
16,298

Effect of exchange rate changes on cash and cash equivalents
199

 
(1,950
)
Net decrease in cash and cash equivalents
(47,055
)
 
(117,999
)
Cash and cash equivalents
 
 
 
Beginning of period
347,489

 
341,841

End of period
$
300,434

 
$
223,842

 
 
 
 
Non-cash investing and financing activities
 
 
 
Decrease in accrual for property and equipment
$
(9,100
)
 
$
(7,200
)
Non-cash acquisition of business
11,233

 
—

See accompanying notes.

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Under Armour, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements

1. Description of the Business
Under Armour, Inc. is a developer, marketer and distributor of branded performance apparel, footwear and accessories. These products are sold worldwide and worn by athletes at all levels, from youth to professional on playing fields around the globe, as well as by consumers with active lifestyles.

2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Under Armour, Inc. and its wholly owned subsidiaries (the “Company”). Certain information in footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accounting principles generally accepted in the United States of America for interim consolidated financial statements. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement of the financial position and results of operations were included. All intercompany balances and transactions were eliminated. The consolidated balance sheet as of December 31, 2013 is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2013 (the “2013 Form 10-K”), which should be read in conjunction with these consolidated financial statements. The results for the six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or any other portions thereof.
On December 6, 2013, the Company acquired 100% of the outstanding equity of MapMyFitness, Inc. ("MapMyFitness"), a digital connected fitness platform, for $150.0 million. During the three months ended March 31, 2014, the Company finalized its valuation of the assets acquired and liabilities assumed as of the acquisition date and no adjustments were made to the preliminary purchase price allocation.
On March 17, 2014 the Board of Directors declared a two-for-one stock split of the Company’s Class A and Class B common stock, which was effected in the form of a 100% common stock dividend distributed on April 14, 2014. Stockholders' equity and all references to share and per share amounts in the accompanying consolidated financial statements have been retroactively adjusted to reflect the two-for-one stock split for all periods presented.
Concentration of Credit Risk
Financial instruments that subject the Company to a significant concentration of credit risk consist primarily of accounts receivable. The majority of the Company’s accounts receivable are due from large sporting goods retailers. Credit is extended based on an evaluation of the customer’s financial condition and collateral is generally not required. The most significant customers that accounted for a large portion of net revenues and accounts receivable were as follows:
 
 
Customer
A
 
Customer
B
 
Customer
C
Net revenues
 
 
 
 
 
Six months ended June 30, 2014
15.5
%
 
4.9
%
 
5.0
%
Six months ended June 30, 2013
16.9
%
 
5.8
%
 
5.5
%
Accounts receivable
 
 
 
 
 
As of June 30, 2014
25.5
%
 
7.7
%
 
6.4
%
As of December 31, 2013
27.1
%
 
9.1
%
 
5.1
%
As of June 30, 2013
26.3
%
 
9.9
%
 
7.5
%
Allowance for Doubtful Accounts
As of June 30, 2014, December 31, 2013 and June 30, 2013, the allowance for doubtful accounts was $3.3 million, $2.9 million and $3.3 million, respectively.



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Shipping and Handling Costs
The Company charges certain customers shipping and handling fees. These fees are recorded in net revenues. The Company includes the majority of outbound handling costs as a component of selling, general and administrative expenses. Outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate the Company’s distribution facilities. These costs, included within selling, general and administrative expenses, were $11.7 million and $10.4 million for the three months ended June 30, 2014 and 2013, respectively, and $23.0 million and $19.4 million for the six months ended June 30, 2014 and 2013, respectively. The Company includes outbound freight costs associated with shipping goods to customers as a component of cost of goods sold.

Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update which supersedes the most current revenue recognition requirements. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption not permitted. We are currently evaluating the standard to determine the impact of its adoption on our consolidated financial statements.
Recently Adopted Accounting Standards
In July 2013, the FASB issued an Accounting Standards Update which requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions. This guidance is effective for annual and interim reporting periods beginning after December 15, 2013. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements.

3. Credit Facility and Other Long Term Debt
Credit Facility
In May 2014, the Company entered into a new unsecured $650.0 million credit facility and terminated its prior $325.0 million secured revolving credit facility. The credit agreement has a term of five years through May 2019, with permitted extensions under certain circumstances. The credit agreement provides for a committed revolving credit facility of $400.0 million, in addition to an aggregate term loan commitment of $250.0 million, consisting of a $150.0 million initial term loan, which was drawn in full at the closing of the credit agreement, and $100.0 million of delayed draw term loans available to be borrowed prior to November 28, 2014. At the Company's request and the lenders' consent, the revolving credit facility or term loans may be increased by up to an additional $150.0 million. Borrowings under the revolving credit facility may be made in U.S. Dollars, Euros, Pounds Sterling, Japanese Yen and Canadian Dollars. Up to $50.0 million of the facility may be used for the issuance of letters of credit and up to $50.0 million of the revolving credit facility may be used for the issuance of swingline loans. There were no letters of credit or swingline loans outstanding as of June 30, 2014.
The credit agreement contains negative covenants that, subject to significant exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. The Company is also required to maintain a ratio of consolidated EBITDA, as defined in the credit agreement, to consolidated interest expense of not less than 3.50 to 1.00 and is not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.00 ("consolidated leverage ratio"). As of June 30, 2014, the Company was in compliance with these ratios. In addition, the 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 credit agreement, will be considered an event of default under the credit agreement.
Borrowings under the credit agreement bear interest at a rate per annum equal to, at the Company’s option, either (a) an alternate base rate, or (b) a rate based on the rates applicable for deposits in the interbank market for U.S. Dollars or the applicable currency in which the loans are made (“adjusted LIBOR”), plus in each case an applicable margin. The applicable

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margin for loans will be adjusted by reference to a grid (the “Pricing Grid”) based on the consolidated leverage ratio and ranges between 1.00% to 1.25% for adjusted LIBOR loans and 0.00% to 0.25% for alternate base rate loans. The interest rate under the initial term loan was 1.2% during the three months ended June 30, 2014. No balance was outstanding under the Company’s revolving credit facility as of June 30, 2014. Additionally, the Company pays a commitment fee on the average daily unused amount of the revolving credit facility, a ticking fee on the undrawn amounts under the delayed draw term loan and certain fees with respect to letters of credit. As of June 30, 2014, the commitment fee was 12.5 basis points.
The Company used $100.0 million of the proceeds from the initial term loan to repay the $100.0 million outstanding under the Company's prior revolving credit facility. The Company incurred and capitalized $1.7 million in deferred financing costs in connection with the credit facility. No penalties or other early termination fees were incurred in connection with the termination of the prior revolving credit facility.
Other Long Term Debt
The Company has long term debt agreements with various lenders to finance the acquisition or lease of qualifying capital investments. Loans under these agreements are collateralized by a first lien on the related assets acquired. As these agreements are not committed facilities, each advance is subject to approval by the lenders. Additionally, these agreements include a cross default provision whereby an event of default under other debt obligations, including the Company’s credit facility, will be considered an event of default under these agreements. These agreements require a prepayment fee if the Company pays outstanding amounts ahead of the scheduled terms. At June 30, 2014, December 31, 2013 and June 30, 2013, the outstanding principal balance under these agreements was $3.4 million, $4.9 million and $6.5 million, respectively. Currently, advances under these agreements bear interest rates which are fixed at the time of each advance. The weighted average interest rates on outstanding borrowings were 3.1% and 2.5% for the three months ended June 30, 2014 and 2013, respectively, and 3.2% and 2.4% for the six months ended June 30, 2014 and 2013, respectively.
In December 2012, the Company entered into a $50.0 million recourse loan collateralized by the land, buildings and tenant improvements comprising the Company's corporate headquarters. The loan has a seven year term and maturity date of December 2019. The loan bears interest at one month LIBOR plus a margin of 1.50%, and allows for prepayment without penalty. The loan includes covenants and events of default substantially consistent with the new credit agreement discussed above. The loan also requires prior approval of the lender for certain matters related to the property, including transfers of any interest in the property. As of June 30, 2014, December 31, 2013 and June 30, 2013, the outstanding balance on the loan was $47.0 million, $48.0 million and $49.0 million, respectively. The weighted average interest rate on the loan was 1.7% for the three and six months ended June 30, 2014 and 2013.
Interest expense, net was $1.2 million and $0.7 million for the three months ended June 30, 2014 and 2013, respectively, and $2.1 million and $1.4 million for the six months ended June 30, 2014 and 2013, respectively. Interest expense includes the amortization of deferred financing costs and interest expense under the credit and other long term debt facilities.
The Company monitors the financial health and stability of its lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets lenders could be negatively impacted in their ability to perform under these facilities.

4. Commitments and Contingencies
There were no significant changes to the contractual obligations reported in the 2013 Form 10-K other than those which occur in the normal course of business.
From time to time, the Company is involved in litigation and other proceedings, including matters related to commercial disputes and intellectual property, as well as trade, regulatory and other claims related to its business. The Company believes that all current proceedings are routine in nature and incidental to the conduct of its business, and that the ultimate resolution of any such proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.

5. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The fair value accounting guidance outlines a valuation framework, creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures, and prioritizes the inputs used in measuring fair value as follows:

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Level 1:
Observable inputs such as quoted prices in active markets;
 
 
Level 2:
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
 
 
Level 3:
Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

Financial assets and (liabilities) measured at fair value are set forth in the table below:
 
 
June 30, 2014
 
June 30, 2013
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Derivative foreign currency forward contracts (see Note 7)
 
$
—

 
$
(531
)
 
$
—

 
$
—

 
$
(22
)
 
$
—

Interest rate swap contracts (see Note 7)
 
—

 
201

 
—

 
—

 
947

 
—

TOLI policies held by the Rabbi Trust
 
—

 
4,751

 
—

 
—

 
4,349

 
—

Deferred Compensation Plan obligations
 
—

 
(4,298
)
 
—

 
—

 
(2,882
)
 
—

Fair values of the financial assets and liabilities listed above are determined using inputs that use as their basis readily observable market data that are actively quoted and are validated through external sources, including third-party pricing services and brokers. The foreign currency forward contracts represent gains and losses on derivative contracts, which is the net difference between the U.S. dollar value to be received or paid at the contracts’ settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current forward exchange rate. The interest rate swap contracts represent gains and losses on the derivative contracts, which is the net difference between the fixed interest to be paid and variable interest to be received over the term of the contract based on current market rates. The fair value of the trust owned life insurance (“TOLI”) policies held by the Rabbi Trust is based on the cash-surrender value of the life insurance policies, which are invested primarily in mutual funds and a separately managed fixed income fund. These investments are initially made in the same funds and purchased in substantially the same amounts as the selected investments of participants in the Under Armour, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), which represent the underlying liabilities to participants in the Deferred Compensation Plan. Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments.
The carrying value of the Company's long term debt approximated its fair value as of June 30, 2014 and 2013. The fair value of the Company's long term debt was estimated based upon quoted prices for similar instruments (Level 2 input).

6. Stock-Based Compensation
During the six months ended June 30, 2014, 0.9 million performance-based restricted stock units were awarded to certain officers and key employees under the Company's Amended and Restated 2005 Omnibus Long-Term Incentive Plan. The awards have vesting conditions tied to the achievement of certain combined annual operating income targets for 2014 and 2015. Upon the achievement of the targets, one third of the restricted stock units will vest each in February 2016, February 2017 and February 2018. If certain lower levels of combined operating income for 2014 and 2015 are achieved, fewer or no restricted stock units will vest and the remaining restricted stock units will be forfeited. The Company deemed the achievement of certain combined operating income targets for 2014 and 2015 probable during the three months ended March 31, 2014. The Company assesses the probability of the achievement of the remaining operating income targets at the end of each reporting period. If it becomes probable that any remaining performance targets related to these performance-based restricted stock units will be achieved, a cumulative adjustment will be recorded as if ratable stock-based compensation expense had been recorded since the grant date. Additional stock based compensation of up to $3.3 million would have been recorded during the six months ended June 30, 2014, for these performance-based restricted stock units had the achievement of the remaining operating income targets been deemed probable.
During 2012 and 2013, the Company granted performance-based restricted stock units with vesting conditions tied to the achievement of certain combined annual operating income targets for 2013 and 2014. During the three months ended March 31, 2013, the Company deemed the achievement of certain combined operating income targets for 2013 and 2014 probable and recorded a cumulative adjustment of $4.8 million. During the three months ended March 31, 2014, the Company deemed the achievement of the remaining combined operating income targets for 2013 and 2014 probable and recorded a cumulative adjustment of $6.6 million.
During 2011, the Company granted performance-based restricted stock units with vesting conditions tied to the achievement of certain combined annual operating income targets for 2012 and 2013. During the three months ended March 31, 2013, the Company deemed the achievement of certain combined operating income targets for 2012 and 2013 probable and recorded a cumulative adjustment of $4.6 million for a portion of these awards.

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7. Risk Management and Derivatives
Foreign Currency Risk Management
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions generated by its international subsidiaries in currencies other than their local currencies. These gains and losses are primarily driven by intercompany transactions. From time to time, the Company may elect to enter into foreign currency forward contracts to reduce the risk associated with foreign currency exchange rate fluctuations on intercompany transactions and projected inventory purchases for its international subsidiaries. As the Company expands its international business, it may expand the current hedging program to include additional currency pairs and instruments.
As of June 30, 2014, the aggregate notional value of the Company's outstanding foreign currency forward contracts was $32.7 million, which was comprised of Canadian Dollar/U.S. Dollar, Euro/U.S. Dollar, and Pound Sterling/Euro currency pairs with contract maturities of one month. The majority of the Company's foreign currency forward contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are recorded in earnings. In May 2014, the Company began entering into foreign currency forward contracts designated as cash flow hedges. For foreign currency forward contracts designated as cash flow hedges, changes in fair value, excluding any ineffective portion, are recorded in other comprehensive income until net income is affected by the variability in cash flows of the hedged transaction. The effective portion is generally released to net income after the maturity of the related derivative and is classified in the same manner as the underlying exposure. No amounts related to foreign currency forward contracts designated as cash flow hedges were reclassified from other comprehensive income to income during the three months ended June 30, 2014. The fair values of the Company's foreign currency forward contracts were liabilities of $531.4 thousand and $21.6 thousand as of June 30, 2014 and 2013, respectively, and were included in accrued expenses on the consolidated balance sheet. The fair values of the Company's foreign currency forward contracts were assets of $12.1 thousand as of December 31, 2013, and were included in prepaid expenses and other current assets on the consolidated balance sheet. Refer to Note 5 for a discussion of the fair value measurements. Included in other income (expense), net were the following amounts related to changes in foreign currency exchange rates and derivative foreign currency forward contracts:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Unrealized foreign currency exchange rate gains (losses)
$
755

 
$
(1,011
)
 
$
100

 
$
(1,617
)
Realized foreign currency exchange rate gains (losses)
(229
)
 
388

 
222

 
(206
)
Unrealized derivative gains (losses)
(88
)
 
(5
)
 
(18
)
 
(26
)
Realized derivative gains (losses)
(191
)
 
(169
)
 
(931
)
 
1,292

Interest Rate Risk Management
In order to maintain liquidity and fund business operations, the Company enters into long term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of the Company's long-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations. The Company utilizes interest rate swap contracts to convert a portion of variable rate debt to fixed rate debt. The contracts pay fixed and receive variable rates of interest. The interest rate swap contracts are accounted for as cash flow hedges and accordingly, the effective portion of the changes in their fair value are recorded in other comprehensive income and reclassified into interest expense over the life of the underlying debt obligation. Refer to Note 3 for a discussion of long term debt.
As of June 30, 2014, the notional value of the Company's outstanding interest rate swap contracts was $171.3 million. During the three months ended June 30, 2014 and 2013, the Company recorded a $286.7 thousand and $89.5 thousand increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. During the six months ended June 30, 2014 and 2013, the Company recorded a $355.6 thousand and $155.9 thousand increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. The fair value of the interest rate swap contracts was an asset of $0.2 million, $1.1 million and $0.9 million as of June 30, 2014, December 31, 2013 and June 30, 2013, respectively, and was included in other long term assets on the consolidated balance sheets.
The Company enters into derivative contracts with major financial institutions with investment grade credit ratings and is exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the foreign currency forward contracts. However, the Company monitors the credit quality of these financial institutions and considers the risk of counterparty default to be minimal.

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8. Provision for Income Taxes
The effective rates for income taxes were 46.9% and 42.1% for the six months ended June 30, 2014 and 2013, respectively. The effective tax rate for the six months ended June 30, 2014 was higher than the effective tax rate for the six months ended June 30, 2013 primarily due to a research and development tax credit recorded in the first quarter of 2013, along with increased international investments in 2014 primarily associated with our market entries in Brazil and Chile. The Company’s annual 2014 effective tax rate is expected to be approximately 40.5%.

9. Earnings per Share
The following represents a reconciliation from basic earnings per share to diluted earnings per share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands, except per share amounts)
2014
 
2013
 
2014
 
2013
Numerator
 
 
 
 
 
 
 
Net income
$
17,690

 
$
17,566

 
$
31,228

 
$
25,380

Denominator
 
 
 
 
 
 
 
Weighted average common shares outstanding
213,188

 
210,530

 
212,788

 
210,162

Effect of dilutive securities
4,106

 
4,304

 
4,346

 
4,350

Weighted average common shares and dilutive securities outstanding
217,294

 
214,834

 
217,134

 
214,512

Earnings per share - basic
$
0.08

 
$
0.08

 
$
0.15

 
$
0.12

Earnings per share - diluted
$
0.08

 
$
0.08

 
$
0.14

 
$
0.12


Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options and restricted stock units representing 48.6 thousand and 101.6 thousand shares of common stock outstanding for the three months ended June 30, 2014 and 2013, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Stock options and restricted stock units representing 86.2 thousand and 174.8 thousand shares of common stock outstanding for the six months ended June 30, 2014 and 2013, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.

10. Segment Data and Related Information
The Company’s operating segments are based on how the Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. As such, the CODM receives discrete financial information for the Company's principal business by geographic region based on the Company’s strategy to become a global brand. These geographic regions include North America; Latin America; Europe, the Middle East and Africa (“EMEA”); and Asia-Pacific. Each geographic segment operates exclusively in one industry: the development, marketing and distribution of branded performance apparel, footwear and accessories. Beginning in the fourth quarter of 2013, the CODM also receives discrete financial information for the Company's acquired MapMyFitness business. Due to the insignificance of the Latin America, EMEA, Asia-Pacific and MapMyFitness operating segments, they have been combined into other foreign countries and businesses for disclosure purposes.
The net revenues and operating income (loss) associated with the Company's segments are summarized in the following tables. Net revenues represent sales to external customers for each segment. In addition to net revenues, operating income (loss) is a primary financial measure used by the Company to evaluate performance of each segment. Intercompany balances were eliminated for separate disclosure. The majority of corporate services costs within North America have not been allocated to other foreign countries and businesses; however, certain corporate services costs, included within North America in the prior period, have been allocated to other foreign countries and businesses in the current period. Prior period segment data has been recast within the tables below to conform to current period presentation.

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Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Net revenues
 
 
 
 
 
 
 
North America
$
558,041

 
$
428,859

 
$
1,140,593

 
$
869,727

Other foreign countries and businesses
51,613

 
25,682

 
110,668

 
56,422

Total net revenues
$
609,654

 
$
454,541

 
$
1,251,261

 
$
926,149

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Operating income (loss)
 
 
 
 
 
 
 
North America
$
44,232

 
$
35,405

 
$
75,377

 
$
50,072

Other foreign countries and businesses
(9,538
)
 
(3,095
)
 
(13,827
)
 
(4,270
)
    Total operating income
34,694

 
32,310

 
61,550

 
45,802

Interest expense, net
(1,227
)
 
(711
)
 
(2,073
)
 
(1,436
)
Other income (expense), net
247

 
(797
)
 
(627
)
 
(557
)
    Income before income taxes
$
33,714

 
$
30,802

 
$
58,850

 
$
43,809

 
Net revenues by product category are as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Apparel
$
420,028

 
$
310,221

 
$
879,277

 
$
655,747

Footwear
109,536

 
81,651

 
223,580

 
162,434

Accessories
59,932

 
51,024

 
111,485

 
87,106

    Total net sales
589,496

 
442,896

 
1,214,342

 
905,287

License and other revenues
20,158

 
11,645

 
36,919

 
20,862

    Total net revenues
$
609,654

 
$
454,541

 
$
1,251,261

 
$
926,149



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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
Some of the statements contained in this Form 10-Q constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “outlook,” “potential” or the negative of these terms or other comparable terminology.
The forward-looking statements contained in this Form 10-Q reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by these forward-looking statements, including, but not limited to, those factors described in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (“SEC”) (our “2013 Form 10-K”) or in this Form 10-Q under “Risk Factors”, if included herein, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”). These factors include without limitation:
•
changes in general economic or market conditions that could affect consumer spending and the financial health of our retail customers;
•
our ability to effectively manage our growth and a more complex global business;
•
our ability to effectively develop and launch new, innovative and updated products;
•
our ability to accurately forecast consumer demand for our products and manage our inventory in response to changing demands;
•
increased competition causing us to lose market share or reduce the prices of our products or to increase significantly our marketing efforts;
•
fluctuations in the costs of our products;
•
loss of key suppliers or manufacturers or failure of our suppliers or manufacturers to produce or deliver our products in a timely or cost-effective manner;
•
our ability to further expand our business globally and to drive brand awareness and consumer acceptance of our products in other countries;
•
our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;
•
our ability to effectively market and maintain a positive brand image;
•
our ability to comply with trade and other regulations;
•
the availability, integration and effective operation of management information systems and other technology;
•
our ability to effectively integrate new businesses and investments into our company;
•
our potential exposure to litigation and other proceedings; and
•
our ability to attract and retain the services of our senior management and key employees.
The forward-looking statements contained in this Form 10-Q reflect our views and assumptions only as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Overview
We are a leading developer, marketer and distributor of branded performance apparel, footwear and accessories. The brand’s moisture-wicking fabrications are engineered in many different designs and styles for wear in nearly every climate to

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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, as well as by consumers with active lifestyles.
Our net revenues grew to $2,332.1 million in 2013 from $856.4 million in 2009. We reported net revenues of $1,251.3 million for the first six months of 2014, which represented a 35.1% increase from the first six months of 2013. We believe that our growth in net revenues has been driven by a growing interest in performance products and the strength of the Under Armour brand in the marketplace. We plan to continue to increase our net revenues over the long term by increased sales of our apparel, footwear and accessories, expansion of our wholesale distribution sales channel, growth in our direct to consumer sales channel and expansion in international markets. Our direct to consumer sales channel includes our brand and factory house stores and websites. New product offerings for 2014 include ArmourVent® apparel and the SpeedFormTM Apollo running shoe.
Our operating segments include North America; Latin America; Europe, the Middle East and Africa (“EMEA”); Asia-Pacific; and MapMyFitness. We acquired the MapMyFitness business in December 2013. Due to the insignificance of the Latin America, EMEA, Asia-Pacific and MapMyFitness operating segments, they have been combined into other foreign countries and businesses for disclosure purposes.
Segment operating income consists of the revenues generated by that segment, less the cost of goods sold and selling, general and administrative costs that are incurred directly by that segment, as well as an allocation of certain centrally managed costs. Corporate services costs, which are generally included in our North America operating segment, include company-wide administrative costs. 

General
Net revenues comprise both net sales and license and other revenues. Net sales comprise sales from our primary product categories, which are apparel, footwear and accessories. Our license and other revenues primarily consist of fees paid to us by our licensees in exchange for the use of our trademarks on core products, such as socks, team uniforms, baby and kids’ apparel, eyewear, inflatable footballs and basketballs, as well as the distribution of our products in Japan. Beginning in December 2013, license and other revenues includes platform license, subscription and digital advertising revenues generated from our MapMyFitness business.
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. The fabrics in many of our products are made primarily of petroleum-based synthetic materials. Therefore our product costs, as well as our inbound and outbound freight costs, could be affected by long term pricing trends of oil. 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 license and other revenues, primarily website hosting and other costs related to our MapMyFitness business.
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 $11.7 million and $10.4 million for the three months ended June 30, 2014 and 2013, respectively, and $23.0 million and $19.4 million for the six months ended June 30, 2014 and 2013, respectively.
Our selling, general and administrative expenses consist of costs related to marketing, selling, product innovation and supply chain and corporate services. Personnel costs are included in these categories based on the employees’ function. Personnel costs include salaries, benefits and incentive and stock-based compensation related to our employees. Our marketing costs are an important driver of our growth. Marketing costs consist primarily of commercials, print ads, league, team, player and event sponsorships and depreciation expense specific to our in-store fixture program for our concept shops. Selling costs consist primarily of costs relating to sales through our wholesale channel, commissions paid to third parties and the majority of our direct to consumer sales channel costs, including the cost of brand and factory house store leases. Product innovation and supply chain costs include development and innovation costs associated with our apparel, footwear and accessories products and our MapMyFitness business, along with our sourcing and distribution facility operating costs. Costs relating to our Jakarta, Indonesia and Hong Kong and Guangzhou, China offices which help support product design, manufacturing, quality assurance and sourcing efforts are also included in product innovation and supply chain costs. Corporate services costs primarily consist of company-wide administrative expenses.

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Other income (expense), net consists of unrealized and realized gains and losses on our foreign currency derivative financial instruments not designated as cash flow hedges and unrealized and realized gains and losses that arise from fluctuations in foreign currency exchange rates relating to transactions generated by our international subsidiaries.

Results of Operations
The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Net revenues
$
609,654

 
$
454,541

 
$
1,251,261

 
$
926,149

Cost of goods sold
309,702

 
234,910

 
650,619

 
489,967

Gross profit
299,952

 
219,631

 
600,642

 
436,182

Selling, general and administrative expenses
265,258

 
187,321

 
539,092

 
390,380

Income from operations
34,694

 
32,310

 
61,550

 
45,802

Interest expense, net
(1,227
)
 
(711
)
 
(2,073
)
 
(1,436
)
Other income (expense), net
247

 
(797
)
 
(627
)
 
(557
)
Income before income taxes
33,714

 
30,802

 
58,850

 
43,809

Provision for income taxes
16,024

 
13,236

 
27,622

 
18,429

Net income
$
17,690

 
$
17,566

 
$
31,228

 
$
25,380

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(As a percentage of net revenues)
2014
 
2013
 
2014
 
2013
Net revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
50.8
 %
 
51.7
 %
 
52.0
 %
 
52.9
 %
Gross profit
49.2
 %
 
48.3
 %
 
48.0
 %
 
47.1
 %
Selling, general and administrative expenses
43.5
 %
 
41.2
 %
 
43.1
 %
 
42.2
 %
Income from operations
5.7
 %
 
7.1
 %
 
4.9
 %
 
4.9
 %
Interest expense, net
(0.2
)%
 
(0.1
)%
 
(0.2
)%
 
(0.1
)%
Other income (expense), net
—
 %
 
(0.2
)%
 
—
 %
 
(0.1
)%
Income before income taxes
5.5
 %
 
6.8
 %
 
4.7
 %
 
4.7
 %
Provision for income taxes
2.6
 %
 
2.9
 %
 
2.2
 %
 
2.0
 %
Net income
2.9
 %
 
3.9
 %
 
2.5
 %
 
2.7
 %
Consolidated Results of Operations
Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013
Net revenues increased $155.2 million, or 34.1%, to $609.7 million for the three months ended June 30, 2014 from $454.5 million for the same period in 2013. Net revenues by product category are summarized below: 
 
Three Months Ended June 30,
(In thousands)
2014
 
2013
 
$ Change
 
% Change
Apparel
$
420,028

 
$
310,221

 
$
109,807

 
35.4
%
Footwear
109,536

 
81,651

 
27,885

 
34.2
%
Accessories
59,932

 
51,024

 
8,908

 
17.5
%
    Total net sales
589,496

 
442,896

 
146,600

 
33.1
%
License and other revenues
20,158

 
11,645

 
8,513

 
73.1
%
    Total net revenues
$
609,654

 
$
454,541

 
$
155,113

 
34.1
%

Net sales increased $146.6 million, or 33.1%, to $589.5 million for the three months ended June 30, 2014 from $442.9 million during the same period in 2013. The increase in net sales primarily reflects:

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•
$51.9 million, or 38.0%, increase in direct to consumer sales, which includes 21 additional retail stores or 18.6% growth since June 2013, and continued growth in our e-commerce business;
•
$19.2 million, or 88.4% increase in net sales in other foreign countries, led by increased distribution and unit volume growth in our Asia-Pacific and EMEA operating segments;
•
unit growth driven by increased distribution and new offerings in multiple product categories, including continued growth of our training, golf and outdoor apparel product lines, including new ArmourVentTM, and a broader assortment of running footwear, including the new UA SpeedFormTM Apollo; and
•
increased average selling prices primarily due to increased sales of our higher priced training apparel products and cleated footwear.
License and other revenues increased $8.6 million, or 73.1%, to $20.2 million for the three months ended June 30, 2014 from $11.6 million during the same period in 2013. This increase in license and other revenues was primarily due to $5.4 million of revenues generated through our MapMyFitness business, which was acquired in December 2013, along with increased distribution and unit volume growth of our licensed products.
Gross profit increased $80.4 million to $300.0 million for the three months ended June 30, 2014 from $219.6 million for the same period in 2013. Gross profit as a percentage of net revenues, or gross margin, increased 90 basis points to 49.2% for the three months ended June 30, 2014 compared to 48.3% during the same period in 2013. The increase in gross margin percentage was primarily driven by the following:
•
approximate 40 basis point increase driven by decreased liquidation sales of excess footwear. We do not expect this favorable footwear liquidation sales impact to continue through the remainder of 2014;
•
approximate 30 basis point increase driven primarily by improved North American footwear product margins. We expect the North American footwear product margin favorability to continue through the remainder of 2014, but on a more limited basis; and
•
approximate 20 basis point increase driven by lower outbound freight to our customers. We do not expect this year over year favorability to continue through the remainder of 2014.
Selling, general and administrative expenses increased $78.0 million to $265.3 million for the three months ended June 30, 2014 from $187.3 million for the same period in 2013. As a percentage of net revenues, selling, general and administrative expenses increased to 43.5% for the three months ended June 30, 2014 compared to 41.2% for the same period in 2013. These changes were primarily attributable to the following:
•
Marketing costs increased $21.9 million to $70.9 million for the three months ended June 30, 2014 from $49.0 million for the same period in 2013 primarily due to increased sponsorship of collegiate and professional teams and athletes in North America and other foreign countries. As a percentage of net revenues, marketing costs increased to 11.6% for the three months ended June 30, 2014 from 10.7% for the same period in 2013 primarily due to the items noted above.
•
Selling costs increased $18.8 million to $70.2 million for the three months ended June 30, 2014 from $51.4 million for the same period in 2013. This increase was primarily due to higher personnel and other costs incurred for the continued expansion of our direct to consumer distribution channel, including increased investment in our Factory House and Brand House store strategies. As a percentage of net revenues, selling costs increased to 11.5% for the three months ended June 30, 2014 from 11.3% for the same period in 2013.
•
Product innovation and supply chain costs increased $23.5 million to $69.6 million for the three months ended June 30, 2014 from $46.1 million for the same period in 2013 primarily due to higher personnel costs to support our growth in net revenues, along with costs related to our MapMyFitness business. As a percentage of net revenues, product innovation and supply chain costs increased to 11.4% for the three months ended June 30, 2014 compared to 10.2% for the same period in 2013 primarily due to the items noted above.
•
Corporate services costs increased $13.8 million to $54.6 million for the three months ended June 30, 2014 from $40.8 million for the same period in 2013. This increase was primarily attributable to higher personnel costs and other administrative costs necessary to support our growth. As a percentage of net revenues, corporate services costs remained unchanged at 9.0% for the three months ended June 30, 2014 and 2013.
Income from operations increased $2.4 million, or 7.4%, to $34.7 million for the three months ended June 30, 2014 from $32.3 million for the same period in 2013. Income from operations as a percentage of net revenues decreased to 5.7% for the three months ended June 30, 2014 from 7.1% for the same period in 2013. This decrease was primarily driven by the increased investments in product innovation and marketing discussed above.

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Table of Contents

Interest expense, net increased $0.5 million to $1.2 million for the three months ended June 30, 2014 from $0.7 million for the same period in 2013. This increase was primarily due to interest on the $100 million of debt outstanding under the former revolving credit facility and interest on the new $150 million term loan during the three months ended June 30, 2014.
Other income (expense), net increased $1.0 million to $0.2 million for the three months ended June 30, 2014 from $(0.8) million for the same period in 2013. This increase was due to gains on the combined foreign currency exchange rate changes on transactions denominated in foreign currencies and our derivative financial instruments as compared to losses in the prior period.
Provision for income taxes increased $2.8 million to $16.0 million during the three months ended June 30, 2014 from $13.2 million during the same period in 2013. For the three months ended June 30, 2014, our effective tax rate was 47.5% compared to 43.0% for the same period in 2013. The effective rate for the three months ended June 30, 2014 was higher than the effective rate for the three months ended June 30, 2013 due to increased international investments in 2014 primarily associated with our market entries in Brazil and Chile. Our annual 2014 effective tax rate is expected to be approximately 40.5%.
Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013
Net revenues increased $325.2 million, or 35.1%, to $1,251.3 million for the six months ended June 30, 2014 from $926.1 million for the same period in 2013. Net revenues by product category are summarized below: 
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
$ Change
 
% Change
Apparel
$
879,277

 
$
655,747

 
$
223,530

 
34.1
%
Footwear
223,580

 
162,434

 
61,146

 
37.6
%
Accessories
111,485

 
87,106

 
24,379

 
28.0
%
    Total net sales
1,214,342

 
905,287

 
309,055

 
34.1
%
License and other revenues
36,919

 
20,862

 
16,057

 
77.0
%
    Total net revenues
$
1,251,261

 
$
926,149

 
$
325,112

 
35.1
%

Net sales increased $309.0 million, or 34.1%, to $1,214.3 million for the six months ended June 30, 2014 from $905.3 million during the same period in 2013. The increase in net sales primarily reflects:
•
$93.4 million, or 35.8%, increase in direct to consumer sales, which includes 21 additional retail stores or 18.6% growth since June 2013, and continued growth in our e-commerce business;
•
$42.3 million, or 84.3% increase in net sales in other foreign countries, led by increased distribution and unit volume growth in our EMEA and Asia-Pacific operating segments;
•
unit growth driven by increased distribution and new offerings in multiple product categories, including continued growth of our training, golf and outdoor apparel product lines, including new ArmourVentTM, and a broader assortment of running footwear, including the new UA SpeedFormTM Apollo; and
•
increased average selling prices primarily due to increased sales of our higher priced training apparel products.
License revenues increased $16.0 million, or 77.0%, to $36.9 million for six months ended June 30, 2014 from $20.9 million during the same period in 2013. This increase in license and other revenues was primarily due to $9.4 million of revenues generated through our MapMyFitness business, which was acquired in December 2013, along with increased distribution and unit volume growth of our licensed products.
Gross profit increased $164.4 million to $600.6 million for the six months ended June 30, 2014 from $436.2 million for the same period in 2013. Gross profit as a percentage of net revenues, or gross margin, increased 90 basis points to 48.0% for the six months ended June 30, 2014 compared to 47.1% during the same period in 2013. The increase in gross margin percentage was primarily driven by the following:
•
approximate 30 basis point increase driven by lower inbound airfreight and outbound freight costs, partially due to improvements in our supply chain and carrier rates. We do not expect this year over year freight cost favorability to continue through the remainder of 2014;
•
approximate 20 basis point increase driven primarily by decreased sales mix of excess inventory through our factory house outlet stores. We do not expect the favorable factory house outlet store sales mix impact to continue through the remainder of 2014;

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•
approximate 20 basis point increase driven primarily by higher North American footwear and accessories product margins. We expect the North American footwear product margin favorability to continue during the remainder of 2014, but on a more limited basis; and
•
approximate 20 basis point increase driven by decreased liquidation sales of excess footwear during the second quarter of 2014. We do not expect this favorable footwear liquidation sales impact to continue through the remainder of 2014.
Selling, general and administrative expenses increased $148.7 million to $539.1 million for the six months ended June 30, 2014 from $390.4 million for the same period in 2013. As a percentage of net revenues, selling, general and administrative expenses increased to 43.1% for the six months ended June 30, 2014 compared to 42.2% for the same period in 2013. These changes were primarily attributable to the following:
•
Marketing costs increased $47.0 million to $158.8 million for the six months ended June 30, 2014 from $111.8 million for the same period in 2013 primarily due to increased sponsorship of collegiate and professional teams and athletes along with higher personnel costs. As a percentage of net revenues, marketing costs increased to 12.7% for the six months ended June 30, 2014 from 12.1% for the same period in 2013.
•
Selling costs increased $37.2 million to $139.2 million for the six months ended June 30, 2014 from $102.0 million for the same period in 2013. This increase was primarily due to higher personnel and other costs incurred for the continued expansion of our direct to consumer distribution channel, including increased investment in our Factory House and Brand House store strategies. As a percentage of net revenues, selling costs increased slightly to 11.1% for the six months ended June 30, 2014 from 11.0% for the same period in 2013 primarily due to the items noted above.
•
Product innovation and supply chain costs increased $40.7 million to $135.9 million for the six months ended June 30, 2014 from $95.2 million for the same period in 2013 primarily due to higher personnel costs to support our growth in net revenues, along with costs related to our MapMyFitness business. As a percentage of net revenues, product innovation and supply chain costs increased to 10.9% for the six months ended June 30, 2014 compared to 10.3% for the same period in 2013 primarily due to the items noted above.
•
Corporate services costs increased $23.8 million to $105.2 million for the six months ended June 30, 2014 from $81.4 million for the same period in 2013 primarily due to higher personnel and other administrative costs necessary to support our growth. As a percentage of net revenues, corporate services costs decreased to 8.4% for the six months ended June 30, 2014 compared to 8.8% for the same period in 2013.
Income from operations increased $15.8 million, or 34.4%, to $61.6 million for the six months ended June 30, 2014 from $45.8 million for the same period in 2013. Income from operations as a percentage of net revenues remained unchanged at 4.9% for the six months ended June 30, 2014 and 2013.
Interest expense, net increased $0.7 million to $2.1 million for the six months ended June 30, 2014 from $1.4 million for the same period in 2013. This increase was primarily due to interest on the $100 million of debt outstanding under the former revolving credit facility and interest on the new $150 million term loan during the six months ended June 30, 2014.
Other income (expense), net remained unchanged at $(0.6) million for the six months ended June 30, 2014 and 2013.
Provision for income taxes increased $9.2 million to $27.6 million during the six months ended June 30, 2014 from $18.4 million during the same period in 2013. For the six months ended June 30, 2014, our effective tax rate was 46.9% compared to 42.1% for the same period in 2013. The effective rate for the six months ended June 30, 2014 was higher than the effective rate for the six months ended June 30, 2013 primarily due to a research and development tax credit, recorded in the first quarter of 2013, along with increased international investments in 2014 primarily associated with our market entries in Brazil and Chile. Our annual 2014 effective tax rate is expected to be approximately 40.5%.
Segment Results of Operations
The net revenues and operating income (loss) associated with our segments are summarized in the following tables. The majority of corporate services costs within North America have not been allocated to other foreign countries and businesses; however, certain corporate services costs, included within North America in the prior period, have been allocated to other foreign countries and businesses in the current period. Prior period segment data has been recast within the tables to conform to the current period presentation.




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Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013
Net revenues by segment are summarized below: 
 
Three Months Ended June 30,
(In thousands)
2014
 
2013
 
$ Change
 
% Change
North America
$
558,041

 
$
428,859

 
$
129,182

 
30.1
%
Other foreign countries and businesses
51,613

 
25,682

 
25,931

 
101.0
%
Total net revenues
$
609,654

 
$
454,541

 
$
155,113

 
34.1
%
Net revenues in our North America operating segment increased $129.1 million to $558.0 million for the three months ended June 30, 2014 from $428.9 million for the same period in 2013 primarily due to the items discussed above in the Consolidated Results of Operations. Net revenues in other foreign countries and businesses increased $25.9 million to $51.6 million for the three months ended June 30, 2014 from $25.7 million for the same period in 2013 primarily due to unit sales growth in our Asia-Pacific and EMEA operating segments. Our Latin America, EMEA and Asia-Pacific operating segments in aggregate increased $20.5 million, or 79.7%, to $46.1 million for the three months ended June 30, 2014, as compared to the same period in 2013.
Operating income (loss) by segment is summarized below: 
 
Three Months Ended June 30,
(In thousands)
2014
 
2013
 
$ Change
 
% Change
North America
$
44,232

 
$
35,405

 
$
8,827

 
24.9
%
Other foreign countries and businesses
(9,538
)
 
(3,095
)
 
(6,443
)
 
208.2
%
Total operating income
$
34,694

 
$
32,310

 
$
2,384

 
7.4
%
Operating income in our North America operating segment increased $8.8 million to $44.2 million for the three months ended June 30, 2014 from $35.4 million for the same period in 2013 primarily due to the items discussed above in the Consolidated Results of Operations. Operating loss in other foreign countries and businesses increased $6.4 million to $9.5 million for the three months ended June 30, 2014 from $3.1 million for the same period in 2013 primarily due to investments to support growth in our Latin America and MapMyFitness operating segments.
Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013
Net revenues by segment are summarized below: 
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
$ Change
 
% Change
North America
$
1,140,593

 
$
869,727

 
$
270,866

 
31.1
%
Other foreign countries and businesses
110,668

 
56,422

 
$
54,246

 
96.1
%
Total net revenues
$
1,251,261

 
$
926,149

 
$
325,112

 
35.1
%
Net revenues in our North America operating segment increased $270.9 million to $1,140.6 million for the six months ended June 30, 2014 from $869.7 million for the same period in 2013 primarily due to the items discussed above in the Consolidated Results of Operations. Net revenues in other foreign countries and businesses increased $54.3 million to $110.7 million for the six months ended June 30, 2014 from $56.4 million for the same period in 2013 primarily due to unit sales growth in our Asia-Pacific and EMEA operating segments. Our Latin America, EMEA and Asia-Pacific operating segments in aggregate increased $44.8 million, or 79.4%, to $101.2 million for the six months ended June 30, 2014, as compared to the same period in 2013.
Operating income (loss) by segment is summarized below: 
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
$ Change
 
% Change
North America
$
75,377

 
$
50,072

 
$
25,305

 
50.5
%
Other foreign countries and businesses
(13,827
)
 
(4,270
)
 
(9,557
)
 
223.8
%
Total operating income
$
61,550

 
$
45,802

 
$
15,748

 
34.4
%

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Operating income in our North America operating segment increased $25.3 million to $75.4 million for the six months ended June 30, 2014 from $50.1 million for the same period in 2013 primarily due to the items discussed above in the Consolidated Results of Operations. Operating loss in other foreign countries and businesses increased $9.5 million to $13.8 million for the six months ended June 30, 2014 from $4.3 million for the same period in 2013 primarily due to investments to support growth in our Latin America and MapMyFitness operating segments.

Seasonality
Historically, we have recognized a majority of our net revenues and a significant portion of our income from operations in the last two quarters of the year, driven primarily by increased sales volume of our products during the fall selling season, including our higher priced cold weather products, along with a larger proportion of higher margin direct to consumer sales. The level of our working capital generally reflects the seasonality and growth in our business.

Financial Position, Capital Resources and Liquidity
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 and growth in our business as we recognize the majority of our net revenues in the last two quarters of the year. Our capital investments have included expanding our in-store fixture and branded concept shop program, improvements and expansion of our distribution and corporate facilities to support our growth, 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 will 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.
In December 2013, we completed our acquisition of MapMyFitness. The purchase price was initially funded through $50.0 million cash on hand and $100.0 million in debt under our prior revolving credit facility. In May 2014, we repaid the $100.0 million with a portion of the $150.0 million proceeds from the initial term loan under our new credit facility.
We believe our cash and cash equivalents on hand, cash from operations and borrowings available to us under our credit agreement and other financing instruments are adequate to meet our liquidity needs and capital expenditure requirements for at least the next twelve months. Although we believe we have adequate sources of liquidity over the long term, an economic recession or a slow recovery could adversely affect our business and liquidity. In addition, instability in or tightening of the capital markets could adversely affect our ability to obtain additional capital to grow our business and will affect the cost and terms of such capital.

Cash Flows
The following table presents the major components of net cash flows provided by and used in operating, investing and financing activities for the periods presented:
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
Net cash provided by (used in):
 
 
 
Operating activities
$
(45,666
)
 
$
(90,476
)
Investing activities
(80,085
)
 
(41,871
)
Financing activities
78,497

 
16,298

Effect of exchange rate changes on cash and cash equivalents
199

 
(1,950
)
Net decrease in cash and cash equivalents
$
(47,055
)
 
$
(117,999
)
Operating Activities
Operating activities consist primarily of net income adjusted for certain non-cash items. Adjustments to net income for non-cash items include depreciation and amortization, unrealized foreign currency exchange rate gains and losses, losses on disposals of property and equipment, stock-based compensation, deferred income taxes and changes in reserves and allowances. In addition, operating cash flows include the effect of changes in operating assets and liabilities, principally

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inventories, accounts receivable, income taxes payable and receivable, prepaid expenses and other assets, accounts payable and accrued expenses.
Cash used in operating activities decreased $44.8 million to $45.7 million for the six months ended June 30, 2014 from $90.5 million during the same period in 2013. The decrease in cash used in operating activities was due to a decrease in net cash outflows from operating assets and liabilities of $20.5 million, an increase in adjustments to net income for non-cash items of $18.5 million, and an increase in net income of $5.8 million . The decrease in cash outflows related to changes in operating assets and liabilities period over period was primarily driven by the following:
•
a larger increase in accounts payable of $98.0 million in the current period as compared to the prior period, partially offset by a larger increase in inventory investments of $19.9 million, due to the timing of payments;
•
a larger decrease in accrued expenses and other liabilities of $17.1 million in the current period compared to the prior period, primarily due to lower accruals for our performance incentive plan as compared to the prior period; and
•
a larger increase in accounts receivable of $15.5 million in the current period as compared to the prior period primarily due to a 34.1% increase in net sales during the first six months of 2014.
Adjustments to net income for non-cash items increased in the six months ended June 30, 2014 as compared to the same period in 2013 primarily due to increased depreciation and amortization expense in the current period as compared to the prior period related to the expansion of our distribution and corporate facilities.
Investing Activities
Cash used in investing activities increased $38.2 million to $80.1 million for the six months ended June 30, 2014 from $41.9 million for the same period in 2013, primarily due to increased costs to improve and expand our distribution facilities, along with brand and factory house openings and expansions and the acquisition of certain assets of our former distributor in Mexico during the first quarter of 2014.
Capital expenditures for the full year 2014 are expected to be approximately $150 million.
Financing Activities
Cash provided by financing activities increased $62.2 million to $78.5 million for the six months ended June 30, 2014 from $16.3 million for the same period in 2013. This increase was primarily due to the $150.0 million proceeds from our new term loan, partially offset by the payment of the $100.0 million outstanding under our prior revolving credit facility.

Credit Facility
In May 2014 we entered into a new unsecured $650.0 million credit agreement and terminated our prior $325.0 million revolving credit facility. The credit agreement has a term of five years through May 2019, with permitted extensions under certain circumstances. The credit agreement provides for a committed revolving credit facility of $400.0 million, in addition to an aggregate term loan commitment of $250.0 million, consisting of a $150.0 million initial term loan, which was drawn in full at the closing of the credit agreement, and $100.0 million of delayed draw term loans available to be borrowed prior to November 28, 2014. At our request and the lenders’ consent, the revolving credit facility or term loans may be increased by up to an additional $150.0 million. Borrowings under the revolving credit facility may be made in U.S. Dollars, Euros, Pounds Sterling, Japanese Yen and Canadian Dollars. Up to $50.0 million of the facility may be used to support letters of credit and up to $50.0 million of the facility may be used to support swingline loans. There were no letters of credit or swingline loans outstanding as of June 30, 2014.
The credit agreement contains negative covenants that, subject to significant exceptions, limit our ability to, among other things, incur additional indebtedness, make restricted payments, pledge our assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. We are also required to maintain a ratio of consolidated EBITDA, as defined in the credit agreement, to consolidated interest expense of not less than 3.50 to 1.00 and we are not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.00. As of June 30, 2014, we were in compliance with these ratios. In addition, the 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 credit agreement, will be considered an event of default under the credit agreement.
Borrowings under the credit agreement bear interest at a rate per annum equal to, at our option, either (a) an alternate base rate, or (b) the adjusted LIBOR rate, plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to the Pricing Grid based on the consolidated leverage ratio and ranges between 1.00% to 1.25% for adjusted LIBOR rate loans and 0.00% to 0.25% for alternate base rate loans. The interest rate under the initial term loan was

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1.2% during the three months ended June 30, 2014. No balance was outstanding under our revolving credit facility as of June 30, 2014. Additionally, we pay a commitment fee on the average daily unused amount of the revolving credit facility, a ticking fee on the undrawn amounts under the delayed draw term loan and certain fees with respect to letters of credit. As of June 30, 2014, the commitment fee was 12.5 basis points.
We used $100.0 million of the proceeds from the initial term loan to repay the $100.0 million outstanding under our prior revolving credit facility. We incurred and capitalized $1.7 million in deferred financing costs in connection with the credit facility. No penalties or other early termination fees were incurred in connection with the termination of the prior revolving credit facility.

Other Long Term Debt
We have long term debt agreements with various lenders to finance the acquisition or lease of qualifying capital investments. Loans under these agreements are collateralized by a first lien on the related assets acquired. As these agreements are not committed facilities, each advance is subject to approval by the lenders. Additionally, these agreements include a cross default provision whereby an event of default under other debt obligations, including our credit facility, will be considered an event of default under these agreements. These agreements require a prepayment fee if we pay outstanding amounts ahead of the scheduled terms. At June 30, 2014, December 31, 2013 and June 30, 2013, the outstanding principal balance under these agreements was $3.4 million, $4.9 million and $6.5 million, respectively. Currently, advances under these agreements bear interest rates which are fixed at the time of each advance. The weighted average interest rates on outstanding borrowings were 3.1% and 2.5% for the three months ended June 30, 2014 and 2013, respectively, and 3.2% and 2.4% for the six months ended June 30, 2014 and 2013, respectively.
In December 2012, we entered into a $50.0 million recourse loan collateralized by the land, buildings and tenant improvements comprising our corporate headquarters. The loan has a seven year term and maturity date of December 2019. The loan bears interest at one month LIBOR plus a margin of 1.50%, and allows for prepayment without penalty. The loan includes covenants and events of default substantially consistent with the new credit agreement discussed above. The loan also requires prior approval of the lender for certain matters related to the property, including transfers of any interest in the property. As of June 30, 2014, December 31, 2013 and June 30, 2013, the outstanding balance on the loan was $47.0 million, $48.0 million and $49.0 million, respectively. The weighted average interest rate on the loan was 1.7% for the three and six months ended June 30, 2014 and 2013.
Interest expense, net was $1.2 million and $0.7 million for the three months ended June 30, 2014 and 2013, respectively, and $2.1 million and $1.4 million for the six months ended June 30, 2014 and 2013, respectively. Interest expense includes the amortization of deferred financing costs and interest expense under the credit and long term debt facilities.
We monitor the financial health and stability of our lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets lenders could be negatively impacted in their ability to perform under these facilities.

Contractual Commitments and Contingencies
There were no significant changes to the contractual obligations reported in our 2013 Form 10-K other than those which occur in the normal course of business.

Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. 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. Actual results could be significantly different from these estimates. We believe the following addresses the critical accounting policies that are necessary to understand and evaluate our reported financial results.
Our significant accounting policies are described in Note 2 of the audited consolidated financial statements included in our 2013 Form 10-K. The SEC suggests companies provide additional disclosure on those accounting policies considered most critical. The SEC considers an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant judgments and estimates on the part of management in its application. 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. For a complete discussion of our critical accounting policies, see the “Critical Accounting Policies” section of the MD&A in our 2013 Form 10-K. There were no significant changes to our critical accounting policies during the six months ended June 30, 2014.

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Recently Issued Accounting Standards
In May 2014, the FASB issued an Accounting Standards Update which supersedes the most current revenue recognition requirements. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption not permitted. We are currently evaluating the standard to determine the impact of its adoption on our consolidated financial statements.
Recently Adopted Accounting Standards
In July 2013, the FASB issued an Accounting Standards Update which requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions. This guidance is effective for annual and interim reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
We currently generate a majority of our consolidated net revenues in the United States, and the reporting currency for our consolidated financial statements is the U.S. dollar. As our net revenues and certain expenses generated outside of the United States increase, our results of operations could be adversely impacted by changes in foreign currency exchange rates. For example, as we recognize foreign revenues in local foreign currencies and if the U.S. dollar strengthens, it could have a negative impact on our foreign revenues upon translation of those results into the U.S. dollar upon consolidation of our financial statements. In addition, we are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates on transactions generated by our foreign subsidiaries in currencies other than their local currencies. These gains and losses are primarily driven by intercompany transactions. These exposures are included in other expense, net on the consolidated statements of income.
From time to time, we may elect to use foreign currency forward contracts to reduce the risk from exchange rate fluctuations primarily on intercompany transactions and projected inventory purchases for our international subsidiaries. As we expand our international business, we anticipate expanding our current hedging program to include additional currency pairs and instruments. We do not enter into derivative financial instruments for speculative or trading purposes.
As of June 30, 2014, the aggregate notional value of our outstanding foreign currency forward contracts was $32.7 million, which was comprised of Canadian Dollar/U.S. Dollar, Euro/U.S. Dollar, and Pound Sterling/Euro currency pairs with contract maturities of one month. The foreign currency forward contracts outstanding as of June 30, 2014 have weighted average contractual forward foreign currency exchange rates of 1.10 CAD per $1.00, €0.73 per $1.00 and £0.80 per €1.00. The majority of our foreign currency forward contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are recorded in earnings. During the second quarter of 2014, we began entering into foreign currency forward contracts designated as cash flow hedges. For foreign currency forward contracts designated as cash flow hedges, changes in fair value, excluding any ineffective portion, is recorded in other comprehensive income until net income is affected by the variability in cash flows of the hedged transaction. The effective portion is generally released to net income after the maturity of the related derivative and is classified in the same manner as the underlying exposure. No amounts related to foreign currency forward contracts designated as cash flow hedges were reclassified from other comprehensive income to income during the three months ended June 30, 2014. The fair values of the Company’s foreign currency forward contracts were liabilities of $531.4 thousand and $21.6 thousand as of June 30, 2014 and 2013, respectively, and were included in accrued expenses on the consolidated balance sheet. The fair values of the Company's foreign currency forward contracts were assets of $12.1 thousand as of December 31, 2013, and were included in prepaid expenses and other current assets on the consolidated balance sheet. Refer to Note 5 to the Consolidated Financial Statements for a discussion of the fair value measurements. Included in other income, net were the following amounts related to changes in foreign currency exchange rates and derivative foreign currency forward contracts:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Unrealized foreign currency exchange rate gains (losses)
$
755

 
$
(1,011
)
 
$
100

 
$
(1,617
)
Realized foreign currency exchange rate gains (losses)
(229
)
 
388

 
222

 
(206
)
Unrealized derivative gains (losses)
(88
)
 
(5
)
 
(18
)
 
(26
)
Realized derivative gains (losses)
(191
)
 
(169
)
 
(931
)
 
1,292

We enter into foreign currency forward contracts with major financial institutions with investment grade credit ratings and are exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the foreign currency forward contracts. However, we monitor the credit quality of these financial institutions and consider the risk of counterparty default to be minimal. Although we have entered into foreign currency forward contracts to minimize some of the impact of foreign currency exchange rate fluctuations on future cash flows, we cannot be assured that foreign currency exchange rate fluctuations will not have a material adverse impact on our financial condition and results of operations.
Interest Rate Risk
In order to maintain liquidity and fund business operations, we enter into long term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of our long-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. We may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations. We utilize interest rate swap contracts to convert a portion of variable rate debt to fixed rate debt. The contracts pay fixed and receive variable rates of interest. The interest rate

23
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swap contracts are accounted for as cash flow hedges and accordingly, the effective portion of the changes in fair value are recorded in other comprehensive income and reclassified into interest expense over the life of the underlying debt obligation.
As of June 30, 2014, the notional value of our outstanding interest rate swap contracts was $171.3 million. During the three months ended June 30, 2014 and 2013, we recorded a $286.7 thousand and $89.5 thousand increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. During the six months ended June 30, 2014 and 2013, we recorded a $355.6 thousand and $155.9 thousand increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. The fair value of the interest rate swap contracts was an asset of $0.2 million, $1.1 million and $0.9 million as of June 30, 2014, December 31, 2013 and June 30, 2013, respectively, and was included in other long term assets on the consolidated balance sheets.
Credit Risk
We are exposed to credit risk primarily on our accounts receivable. We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. We believe that our exposure to concentrations of credit risk with respect to trade receivables is largely mitigated by our customer base. We believe that our allowance for doubtful accounts is sufficient to cover customer credit risks as of June 30, 2014.
Inflation
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations in recent periods, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.

ITEM 4. CONTROLS AND PROCEDURES
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or that is reasonably likely to materially affect our internal control over financial reporting.


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PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS
The Risk Factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2013 have not materially changed.

ITEM 6. EXHIBITS
 
Exhibit
No.
  
 
 
10.01
Credit Agreement, dated May 29, 2014, by and among Under Armour, Inc., as borrower, JP Morgan Chase Bank, N.A., as administrative agent, PNC Bank, National Association, as Syndication Agent, Bank of America, N.A., Sun Trust Bank and Wells Fargo Bank, National Association as Co-Documentation Agents and the other lenders and arrangers party thereto (incorporated by reference to Exhibit 10.01 of the Company's Current Report on Form 8-K filed on June 2, 2014).
 
 
31.01
Section 302 Chief Executive Officer Certification.
 
 
31.02
Section 302 Chief Financial Officer Certification.
 
 
32.01
Section 906 Chief Executive Officer Certification.
 
 
32.02
Section 906 Chief Financial Officer Certification.
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


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Table of Contents

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 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/ BRAD DICKERSON
 
 
Brad Dickerson
 
 
Chief Financial Officer
Date: August 4, 2014

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