UAA

Under Armour, Inc. 2005 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2005. Under Armour, Inc. designs, develops, markets, and distributes technologically advanced performance apparel and accessories for men, women, and youth. The company focuses on synthetic microfiber fabrications designed to wick perspiration and regulate body temperature. In November 2005, the company completed its Initial Public Offering (IPO) and began trading on the NASDAQ National Market under the symbol "UARM."

Key Financial Metrics

Note: Net income available to common stockholders was $14.4 million in 2005 due to preferred stock accretion.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 37% to $281.1 million, driven by a 35% increase in net sales and a 127% increase in license revenues. Women's product sales grew 87% and Youth sales grew 48%.
• Profitability: Operating income increased 41% to $35.9 million. Gross margin improved by 180 basis points to 48.3%, aided by higher license revenue mix and lower product costs due to volume discounts.
• Liquidity Transformation: Cash and cash equivalents surged from $1.1 million to $63.0 million following the November 2005 IPO, which generated approximately $112.7 million in net proceeds.
• Debt Reduction: Total debt decreased significantly from $45.1 million to $8.4 million. IPO proceeds were used to repay a $25.0 million term note, the $12.2 million balance on the revolving credit facility, and redeem $12.0 million of Series A Preferred Stock.
• Expense Increases: Selling, general, and administrative (SG&A) expenses rose 43% to $100.0 million, primarily due to increased marketing costs ($30.5 million), sales force expansion, and costs associated with becoming a public company.

Guidance, Outlook, and Risks

Outlook and Strategy: Management plans to expand domestic revenues by deepening relationships with existing customers and increasing floor space. Internationally, the company aims to grow through its Japanese licensee and expanded distribution in Canada and Europe. New product introductions for 2006 include football and baseball cleats.

Risks and Contingencies:

• Customer Concentration: Two customers (Dick's Sporting Goods and The Sports Authority) accounted for approximately 36% of net revenues in 2005. Loss of these customers would materially impact results.
• Seasonality: The business is highly seasonal, with approximately 62% of 2005 revenues generated in the third and fourth quarters.
• Supply Chain: The company relies on unaffiliated manufacturers in 19 countries. Disruptions in fabric supply (particularly petroleum-based synthetics) or manufacturing capacity could adversely affect operations.
• Competition: The market is highly competitive with larger rivals (e.g., Nike, Adidas) possessing greater resources. The company holds no fabric or process patents, making it vulnerable to imitation.
• Internal Controls: As a new public company, Under Armour is working to achieve compliance with Section 404 of the Sarbanes-Oxley Act by December 31, 2006.

Investor Verification Checklist

• Customer Concentration: Verify the stability of relationships with Dick's Sporting Goods and The Sports Authority, which represent over one-third of revenue.
• Inventory Management: Monitor inventory levels ($53.6 million) relative to sales velocity to assess risk of obsolescence or write-downs, given the long lead times for production.
• Margin Sustainability: Assess whether the 48.3% gross margin is sustainable as the company scales and faces potential pricing pressure from competitors.
• Capital Allocation: Track the deployment of the $63.5 million in remaining IPO proceeds intended for general corporate purposes and capital investments.
• Product Expansion: Evaluate the market reception of new product categories, specifically the planned entry into footwear (cleats) in 2006 and 2007.