UAA

Under Armour, Inc. 10-Q Summary: Period Ended September 30, 2008

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Under Armour, Inc., covering the three and nine months ended September 30, 2008. The Company is a developer, marketer, and distributor of branded performance apparel, footwear, and accessories. It operates within a single reportable segment. As of September 30, 2008, the Company had 36,785,067 shares of Class A Common Stock and 12,500,000 shares of Class B Convertible Common Stock outstanding.

Key Financial Metrics

Note: Total Debt includes $15,000 revolving credit facility, $7,192 current maturities of long-term debt, and $14,805 long-term debt.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 24.1% ($45.1 million) for the quarter and 26.5% ($114.2 million) for the nine months compared to the prior year periods. This was driven by a 505.4% increase in footwear sales (due to the Q2 2008 launch of performance training footwear) and growth in men's, women's, and youth apparel.
• Profitability: While quarterly operating income increased 37.5% to $46.5 million, nine-month operating income decreased 6.8% to $54.1 million. The nine-month decline was due to a 120 basis point decrease in gross margin (driven by lower-margin footwear mix) and a significant increase in selling, general, and administrative (SG&A) expenses, particularly marketing costs.
• Cash Flow: Operating cash flow improved significantly, turning from a use of $46.9 million in the prior year nine-month period to a provision of $6.6 million in the current period. This was primarily due to improved inventory management reducing cash outflows.
• Debt: The Company utilized its revolving credit facility, with $15.0 million outstanding as of September 30, 2008, compared to zero in the prior year. Long-term debt principal increased to $22.0 million from $13.4 million.

Guidance, Outlook, and Risks

• Marketing Investment: Management expects to invest in marketing at the high end of the 12% to 13% range of net revenues for the full year 2008, up from the historical 10% to 12% range.
• Tax Rate: The expected annual effective tax rate for 2008 is 42.7%, an increase from 41.0% in 2007, primarily due to an increase in the Maryland state income tax rate.
• Capital Expenditures: Full-year 2008 capital investments are anticipated to be approximately $44.0 million, focused on branded concept shops, in-store fixtures, IT infrastructure (ERP), and distribution facilities.
• Liquidity: The Company believes cash on hand, operating cash flows, and available borrowings ($85.0 million net availability on the revolving credit facility) are adequate for the next 12 months. However, management notes that instability in credit markets could adversely affect the ability to obtain capital.
• Risks: Key risks include the ability to forecast consumer demand, competition, changes in economic conditions affecting retail customers, and reliance on large sporting goods retailers (Customer A accounted for 20.0% of nine-month revenues).

Investor Verification Checklist

• Footwear Margin Impact: Verify the long-term margin profile of the new footwear category, which significantly diluted gross margins in the nine-month period.
• Inventory Efficiency: Confirm that the improved operating cash flow is sustainable and not a one-time benefit from inventory drawdowns, given the Company's plan to increase inventory levels for the fall season.
• Marketing ROI: Assess the return on the increased marketing spend (12-13% of revenue) and its impact on future revenue growth versus profitability.
• Credit Facility Usage: Monitor the utilization of the $100 million revolving credit facility and the Company's leverage ratios, especially given the noted instability in credit markets.
• Customer Concentration: Review the financial health of the top three customers, which collectively accounted for approximately 38% of nine-month revenues.