UAA

Under Armour, Inc. 10-Q Summary: Period Ended June 30, 2006

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2006, and the six-month period ended on that date. Under Armour, Inc. is a developer, marketer, and distributor of branded performance apparel, footwear, and accessories. The company operates within a single reportable segment. During this period, the company launched its footwear line (football cleats and slides) and expanded its international presence, including opening a European headquarters in Amsterdam.

Key Financial Metrics

Note: Total debt includes $2,590 in current maturities of long-term debt, $3,225 in long-term debt, and $2,437 in capital lease obligations. The company has a $75 million revolving credit facility with no outstanding balance as of June 30, 2006.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 56.5% year-over-year for the six months ended June 30, 2006. This was driven by a 56.3% increase in net sales and a 61.3% increase in license revenues.
• Product Mix: The introduction of footwear contributed $15.6 million in sales during the period. While footwear margins are lower than apparel, overall gross margin improved to 49.2% (from 47.0%) due to supplier discounts, lower close-out sales, and higher-margin direct retail sales.
• Profitability: Net income surged 157.2% to $11.2 million for the six-month period. Operating income increased 105.4% to $17.5 million.
• Cash Flow: Operating cash flow turned negative ($18.4 million used) compared to positive $7.2 million in the prior year. This was primarily due to a $17.1 million increase in receivables and a $26.6 million increase in inventory to support anticipated fall season growth and new European operations.
• Accounting Changes: The company adopted SFAS 123R (Share-Based Payment) effective January 1, 2006, recognizing stock-based compensation expense of $480,000 for the six-month period.

Guidance, Outlook, and Risks

• Outlook: Management expects the 2006 annual effective tax rate to approximate 2005 levels. The company anticipates continued growth in women's and youth categories exceeding men's growth. New product launches planned for 2007 include baseball cleats.
• Capital Expenditures: Anticipated capital investments for 2006 are approximately $15.0 to $16.0 million, covering in-store fixtures, ERP system enhancements, retail outlet stores, and distribution facility improvements.
• Liquidity: The company believes cash flows from operations and available borrowings under its credit facilities will be adequate for the next 12 months. It maintains a $75 million revolving credit facility (expandable to $100 million) with no current draw.
• Risks:
  • Seasonality: Approximately 62-66% of net revenues are generated in the last two quarters of the year.
  • IT Systems: The company recently implemented a new SAP ERP system (operational April 2006); failure or security lapses could disrupt operations.
  • Credit Facility Covenants: The senior secured credit facility contains financial covenants and restrictions on dividends, acquisitions, and additional debt. Failure to comply could result in default.
  • Customer Concentration: Three major customers accounted for 41.9% of net revenues for the six months ended June 30, 2006.

Investor Verification Checklist

• Verify the sustainability of the 56.5% revenue growth rate, particularly the contribution from the new footwear line versus core apparel.
• Monitor the negative operating cash flow trend ($18.4M used) to ensure inventory build-up aligns with actual sales velocity in the upcoming fall season.
• Review the impact of the new ERP system on operational efficiency and internal controls over financial reporting.
• Assess the concentration risk associated with the top three customers, who represent over 40% of revenue.
• Confirm compliance with financial covenants under the $75 million revolving credit facility, specifically regarding minimum borrowing availability.