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Form 8-K Under Armour, Inc. For: Jul 23

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July 23, 2015 8:19 AM EDT


 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ________________________________________________________________________________ 
FORM 8-K
 ________________________________________________________________________________ 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 23, 2015
________________________________________________________________________________  
UNDER ARMOUR, INC.
 ________________________________________________________________________________ 
Maryland
 
001-33202
 
52-1990078
(State or other jurisdiction of
incorporation or organization)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification No.)
 
 
1020 Hull Street, Baltimore, Maryland
 
21230
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (410) 454-6428
(Former name or former address, if changed since last report)
 ________________________________________________ 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 
 
 
 
 





Item 2.02. Results of Operations and Financial Condition.
On July 23, 2015, Under Armour, Inc. issued a press release announcing its financial results for the second quarter ended June 30, 2015. A copy of Under Armour’s press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference. Under Armour has scheduled a conference call for 8:30 a.m. ET on July 23, 2015 to discuss its financial results, and a portion of the script for that call is attached hereto as Exhibit 99.2 and is incorporated herein by reference.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
Exhibit 99.1: Under Armour, Inc. press release announcing financial results for the second quarter ended June 30, 2015.
Exhibit 99.2: Portion of conference call script for July 23, 2015 conference call.




SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
UNDER ARMOUR, INC.
 
 
 
 
Date: July 23, 2015
 
By:
 
/s/ BRAD DICKERSON
 
 
 
 
Brad Dickerson
 
 
 
 
Chief Operating Officer and Chief Financial Officer




Exhibit 99.1
Under Armour, Inc.
 
1020 Hull Street
 
Baltimore, MD 21230
 
 
CONTACTS
 
Investors:
 
Tom Shaw, CFA
 
Under Armour, Inc.
 
Tel: 410.843.7676
 
 
Media:
 
Diane Pelkey
 
Under Armour, Inc.
 
Tel: 410.246.5927
 
FOR IMMEDIATE RELEASE
 
 
 
UNDER ARMOUR REPORTS SECOND QUARTER NET REVENUES GROWTH OF 29%;
RAISES FULL YEAR OUTLOOK

•
Second Quarter Net Revenues Increased 29% to $784 Million
•
Raises 2015 Net Revenues Outlook to Approximately $3.84 Billion (+25%)
•
Updates 2015 Operating Income Outlook to a Range of $405 Million to $408 Million (+14% to +15%), Inclusive of the Impact of the Connected Fitness Acquisitions

Baltimore, MD (July 23, 2015) - Under Armour, Inc. (NYSE: UA) today announced financial results for the second quarter ended June 30, 2015. Net revenues increased 29% in the second quarter of 2015 to $784 million compared with net revenues of $610 million in the prior year's period. On a currency neutral basis, net revenues increased 31% compared with the prior year's period. Net income decreased 17% in the second quarter of 2015 to $15 million compared with $18 million in the prior year's period and diluted earnings per share for the second quarter of 2015 were $0.07 compared with $0.08 per share in the prior year's period, inclusive of the impacts of the Endomondo and MyFitnessPal acquisitions.
    
Second quarter apparel net revenues increased 23% to $515 million compared with $420 million in the same period of the prior year, driven primarily by enhanced product offerings in baselayer and training. Second quarter footwear net revenues increased 40% to $154 million from $110 million in the prior year's period, primarily reflecting continued product expansion across the running category and ongoing excitement around Stephen Curry signature product. Second quarter accessories net revenues increased 39% to $83 million from $60 million in the prior year's period, driven primarily by new introductions across the bags category. Direct-to-Consumer net revenues, which represented 32% of total net revenues for the second quarter, grew 33% year-over-year. International net revenues, which represented 11% of total net revenues for the second quarter, grew 93% year-over-year.

Kevin Plank, Chairman and CEO of Under Armour, Inc., stated, "More than ever before, this year has highlighted that the right investments are key to not only driving near-term results, but building the foundation for the unlimited potential of the Under Armour Brand. In the second quarter of 2015, we witnessed historic performances and accolades from our incredible portfolio of athletes including the NBA's MVP and World Champion Stephen Curry, PGA Tour pro Jordan Spieth who won this year's Masters & U.S. Open and the American Ballet Theatre's first-ever African American female principal dancer Misty Copeland. Leveraging these unprecedented successes for our Brand remain critical as we continue to align our strategy to attack key growth categories and drive deeper connections with the athlete. Some of these powerful connections are already evident across our distribution, where we are investing in expanded relationships with our key sporting goods and mall partners, as well as supporting our own direct-to-consumer capabilities including new Brand House openings across both the U.S. and our International markets. It also means continuing to build one of our key foundations for future growth with Connected Fitness. With our Connected Fitness




community now totaling more than 140 million unique registered users and adding on average more than 100,000 new athletes each day, we are pleased with our progress and believe we are still in the early stages of uncovering the potential of what the world's largest digital health and fitness community can do to build consumer engagement and drive healthier lifestyles."

Gross margin for the second quarter of 2015 was 48.4% compared with 49.2% in the prior year's period, primarily reflecting the impacts of foreign exchange rates and planned air freight expenses. Selling, general and administrative expenses as a percentage of net revenues were 44.3% in the second quarter of 2015 compared with 43.5% in the prior year's period, primarily reflecting investments to support Connected Fitness and the opening of global Brand House stores in the quarter. Second quarter operating income decreased 8% to $32 million compared with $35 million in the prior year's period.
  
Balance Sheet Highlights
Cash and cash equivalents decreased 43% to $171 million at June 30, 2015 compared with $300 million at June 30, 2014. Inventory at June 30, 2015 increased 26% to $837 million compared with $662 million at June 30, 2014. Total debt increased to $716 million at June 30, 2015 compared with $197 million at June 30, 2014, primarily reflecting borrowing to fund the two Connected Fitness acquisitions.

Updated 2015 Outlook
The Company had previously anticipated 2015 net revenues of approximately $3.78 billion, representing growth of 23% over 2014, and 2015 operating income in the range of $400 million to $408 million, representing growth of 13% to 15% over 2014. Based on current visibility, the Company expects 2015 net revenues of approximately $3.84 billion, representing growth of 25% over 2014 and 2015 operating income in the range of $405 million to $408 million, representing growth of 14% to 15% over 2014. The 2015 guidance continues to reflect the net dilutive impact from the Connected Fitness acquisitions, as well as the impact of the strong dollar negatively impacting our operating margin within our international businesses.

Brad Dickerson, COO/CFO of Under Armour, Inc., stated, "The ongoing strength of our Brand and execution of our business plan give us confidence in raising our full year top line outlook. In addition, the confluence of our sports marketing success stories has provided a unique opportunity to drive investment toward areas that we see are key to long-term sustainable growth and we plan to take advantage of this dynamic in the back half of 2015. At the same time, we are increasing our focus on developing sustainable business process improvements and better connecting the components of our value chain to more fully capitalize on our Brand's momentum each season going forward. We look forward to discussing these initiatives and our longer-term business plan in greater detail at our Investor Day on September 16th."

Conference Call and Webcast
The Company will provide additional commentary regarding its second quarter results as well as its updated 2015 outlook during its earnings conference call today, July 23rd, at 8:30 a.m. ET. The call will be webcast live at http://investor.underarmour.com/events.cfm and will be archived and available for replay approximately three hours after the live event. Additional supporting materials related to the call will also be available at http://investor.underarmour.com. The Company's financial results are also available online at http://investor.underarmour.com/results.cfm.

Non-GAAP Financial Information
The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”).  However, this press release refers to certain “currency neutral” financial information, which is a non-GAAP financial measure.  The Company provides a reconciliation of this non-GAAP measure to the most directly comparable financial measure calculated in accordance with GAAP.  See the end of this press release for this reconciliation.

Currency neutral financial information is calculated to exclude foreign exchange impact.  Management believes this information is useful to investors to facilitate a comparison of the Company's results of operations period-over-period.  This non-GAAP financial measure should not be considered in isolation and should be viewed in addition to, and not




as an alternative for, the Company's reported results prepared in accordance with GAAP.  In addition, the Company's non-GAAP financial information may not be comparable to similarly titled measures reported by other companies. 

About Under Armour, Inc.
Under Armour (NYSE: UA), the originator of performance footwear, apparel and equipment, revolutionized how athletes across the world dress. Designed to make all athletes better, the brand's innovative products are sold worldwide to athletes at all levels. The Under Armour Connected Fitness™ platform powers the world’s largest digital health and fitness community through a suite of applications: UA Record, MapMyFitness, Endomondo and MyFitnessPal. The Under Armour global headquarters is in Baltimore, Maryland. For further information, please visit the Company's website at www.uabiz.com.


Forward Looking Statements
Some of the statements contained in this press release 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 implementation of our marketing and branding strategies, and the future benefits and opportunities from acquisitions. 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 press release 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 the forward-looking statements, including, but not limited to: 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 successfully manage or realize expected results from acquisitions and other significant investments; 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, including due to port disruptions; 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; risks related to foreign currency exchange rate fluctuations; 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 information systems and other technology, as well as any potential interruption in such systems or technology; risks related to data security or privacy breaches; 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 press release reflect our views and assumptions only as of the date of this press release. 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.

(Tables Follow)




Under Armour, Inc.
For the Quarter and Six Months Ended June 30, 2015 and 2014
(Unaudited; in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF INCOME
 

Quarter Ended
June 30,

Six Months Ended
June 30,
 

2015

% of Net
Revenues

2014

% of Net
Revenues

2015

% of Net
Revenues

2014

% of Net
Revenues
Net revenues

$
783,577


100.0
 %

$
609,654


100.0
 %

$
1,588,518


100.0
 %

$
1,251,261


100.0
 %
Cost of goods sold

404,524


51.6
 %

309,702


50.8
 %

831,801


52.4
 %

650,619


52.0
 %
Gross profit

379,053


48.4
 %

299,952


49.2
 %

756,717


47.6
 %

600,642


48.0
 %
Selling, general and administrative expenses

347,152


44.3
 %

265,258


43.5
 %

697,149


43.9
 %

539,092


43.1
 %
Income from operations

31,901


4.1
 %

34,694


5.7
 %

59,568


3.7
 %

61,550


4.9
 %
Interest expense, net

(4,262
)

(0.6
)%

(1,227
)

(0.2
)%

(6,472
)

(0.4
)%

(2,073
)

(0.2
)%
Other expense, net

41


—
 %

247


—
 %

(1,799
)

(0.1
)%

(627
)

—
 %
Income before income taxes

27,680


3.5
 %

33,714


5.5
 %

51,297


3.2
 %

58,850


4.7
 %
Provision for income taxes

12,914


1.6
 %

16,024


2.6
 %

24,803


1.5
 %

27,622


2.2
 %
Net income

$
14,766


1.9
 %

$
17,690


2.9
 %

$
26,494


1.7
 %

$
31,228


2.5
 %
Net income available per common share












Basic

$
0.07




$
0.08




$
0.12




$
0.15



Diluted

$
0.07




$
0.08




$
0.12




$
0.14



Weighted average common shares outstanding












Basic

215,590




213,188




215,146




212,788



Diluted

219,921




217,294




219,721




217,134







Under Armour, Inc.
For the Quarter and Six Months Ended June 30, 2015 and 2014
(Unaudited; in thousands)
NET REVENUES BY PRODUCT CATEGORY
 
 
Quarter Ended
June 30,
 
Six Months Ended
June 30,
 
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
Apparel
 
$
515,252

 
$
420,028

 
22.7
%
 
$
1,070,707

 
$
879,277

 
21.8
%
Footwear
 
153,619

 
109,536

 
40.2
%
 
314,585

 
223,580

 
40.7
%
Accessories
 
83,040

 
59,932

 
38.6
%
 
146,191

 
111,470

 
31.1
%
Total net sales
 
751,911

 
589,496

 
27.6
%
 
1,531,483

 
1,214,327

 
26.1
%
Licensing revenues
 
18,104

 
14,684

 
23.3
%
 
35,042

 
27,493

 
27.5
%
Connected Fitness
 
13,562

 
5,474

 
147.8
%
 
21,993

 
9,441

 
133.0
%
Total net revenues
 
$
783,577

 
$
609,654

 
28.5
%
 
$
1,588,518

 
$
1,251,261

 
27.0
%
NET REVENUES BY SEGMENT
 
 
Quarter Ended
June 30,
 
Six Months Ended
June 30,
 
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
North America
 
$
680,776

 
$
558,041

 
22.0
%
 
$
1,381,288

 
$
1,140,578

 
21.1
%
Other foreign countries
 
89,239

 
46,139

 
93.4
%
 
185,237

 
101,242

 
83.0
%
Connected Fitness
 
13,562

 
5,474

 
147.8
%
 
21,993

 
9,441

 
133.0
%
Total net revenues
 
$
783,577

 
$
609,654

 
28.5
%
 
$
1,588,518

 
$
1,251,261

 
27.0
%
OPERATING INCOME BY SEGMENT
 
 
Quarter Ended
June 30,
 
Six Months Ended
June 30,
 
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
North America
 
$
52,352

 
$
46,616

 
12.3
 %
 
$
90,721

 
$
79,536

 
14.1
 %
Other foreign countries
 
(4,388
)
 
(7,074
)
 
38.0
 %
 
(54
)
 
(7,727
)
 
99.3
 %
Connected Fitness
 
(16,063
)
 
(4,848
)
 
(231.3
)%
 
(31,099
)
 
(10,259
)
 
(203.1
)%
Total operating income
 
$
31,901

 
$
34,694

 
(8.1
)%
 
$
59,568

 
$
61,550

 
(3.2
)%




Under Armour, Inc.
As of June 30, 2015, December 31, 2014 and June 30, 2014
(Unaudited; in thousands)
CONDENSED CONSOLIDATED BALANCE SHEETS


As of
6/30/15

As of
12/31/14

As of
6/30/14
Assets






Cash and cash equivalents

$
171,236


$
593,175


$
300,434

Accounts receivable, net

353,406


279,835


269,133

Inventories

836,605


536,714


662,388

Prepaid expenses and other current assets

125,130


87,177


97,190

Deferred income taxes

71,559


52,498


39,174

Total current assets

1,557,936


1,549,399


1,368,319

Property and equipment, net

430,536


305,564


255,018

Goodwill
 
591,771

 
123,256

 
123,395

Intangible assets, net
 
83,746

 
26,230

 
30,776

Deferred income taxes

33,742


33,570


37,706

Other long term assets

65,882


57,064


48,731

Total assets

$
2,763,613


$
2,095,083


$
1,863,945

Liabilities and Stockholders’ Equity

 




Accounts payable

$
375,431


$
210,432


$
334,001

Accrued expenses

150,824


147,681


110,649

Current maturities of long term debt

42,737


28,951


19,650

Other current liabilities

22,303


34,563


15,945

Total current liabilities

591,295


421,627


480,245

Long term debt, net of current maturities

373,003


255,250


176,987

Revolving credit facility, long term
 
300,000

 
—

 
—

Other long term liabilities

83,735


67,906


65,954

Total liabilities

1,348,033


744,783


723,186

Total stockholders’ equity

1,415,580


1,350,300


1,140,759

Total liabilities and stockholders’ equity

$
2,763,613


$
2,095,083


$
1,863,945





Under Armour, Inc.
For the Six Months Ended June 30, 2015 and 2014
(Unaudited; in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended
June 30,


2015

2014
Cash flows from operating activities




Net income

$
26,494


$
31,228

Adjustments to reconcile net income to net cash used in operating activities




Depreciation and amortization

46,064


34,347

Unrealized foreign currency exchange rate (gains) losses

19,223


(100
)
Loss on disposal of property and equipment

260


73

Stock-based compensation

21,296


23,860

Deferred income taxes

(15,539
)

(7,388
)
Changes in reserves and allowances

10,710


1

Changes in operating assets and liabilities, net of effects of acquisitions:




Accounts receivable

(85,104
)

(53,090
)
Inventories

(312,745
)

(195,406
)
Prepaid expenses and other assets

(21,082
)

(16,514
)
Accounts payable

170,131


175,674

Accrued expenses and other liabilities

643


(14,286
)
Income taxes payable and receivable

(40,264
)

(24,065
)
Net cash used in operating activities
 
(179,913
)
 
(45,666
)
Cash flows from investing activities




Purchases of property and equipment

(165,485
)

(68,901
)
Purchase of businesses, net of cash acquired
 
(539,460
)
 
(10,924
)
Purchases of other assets

(2,321
)

(260
)
Net cash used in investing activities

(707,266
)

(80,085
)
Cash flows from financing activities




Proceeds from revolving credit facility

300,000


—

Payments on revolving credit facility

—


(100,000
)
Proceeds from term loan

150,000


150,000

Payments on long term debt

(18,461
)

(6,286
)
Excess tax benefits from stock-based compensation arrangements

37,672


26,301

Proceeds from exercise of stock options and other stock issuances

4,944


10,196

Payments of debt financing costs
 
(947
)
 
(1,714
)
Net cash provided by financing activities

473,208


78,497

Effect of exchange rate changes on cash and cash equivalents

(7,968
)

199

Net decrease in cash and cash equivalents

(421,939
)

(47,055
)
Cash and cash equivalents




Beginning of period

593,175


347,489

End of period

$
171,236


$
300,434






Non-cash investing and financing activities




Decrease in accrual for property and equipment

$
(5,693
)

$
(9,100
)
Property and equipment acquired under build-to-suit leases
 
$
5,631

 
$
—

Non-cash acquisition of business
 
$
—

 
$
11,233





Under Armour, Inc.
For the Quarter Ended June 30, 2015 and 2014
(Unaudited)
The table below presents the reconciliation of non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP. See "Non-GAAP Financial Information" above for further information regarding the Company's use of non-GAAP financial measures.
CURRENCY NEUTRAL NET REVENUE GROWTH RECONCILIATION
 
 
Quarter Ended
June 30,
Total Net Revenue
 
2015
Currency neutral net revenue growth - Non-GAAP
 
30.9
 %
Foreign exchange impact
 
(2.4
)%
Net revenue growth - GAAP
 
28.5
 %
 
 
 
North America
 
 
Currency neutral net revenue growth - Non-GAAP
 
23.0
 %
Foreign exchange impact
 
(1.0
)%
Net revenue growth - GAAP
 
22.0
 %
 
 
 
Other foreign countries
 
 
Currency neutral net revenue growth - Non-GAAP
 
111.8
 %
Foreign exchange impact
 
(18.4
)%
Net revenue growth - GAAP
 
93.4
 %

BRAND HOUSE AND FACTORY HOUSE DOOR COUNT
 
 
As of
June 30,
 
 
2015
 
2014
Factory House
 
131
 
119
Brand House
 
9
 
5
   North America total
 
140
 
124
 
 
 
 
 
Factory House
 
8
 
6
Brand House
 
12
 
5
   Other foreign countries total
 
20
 
11
 
 
 
 
 
Factory House
 
139
 
125
Brand House
 
21
 
10
   Total Doors
 
160
 
135



Exhibit 99.2
Under Armour: 2Q15 Earnings Call, July 23, 2015 (Brad Dickerson)

Thanks, Kevin. I would now like to spend some time discussing our second quarter results followed by our updated outlook for 2015.

Our net revenues for the second quarter of 2015 increased 29% to $784 million. On a currency neutral basis, net revenues increased 31% for the period.
 
Within our product categories, we grew Apparel net revenues 23% to $515 million compared to $420 million in the prior year's quarter. Many of the same growth drivers that drove our first quarter Apparel business continued during the second quarter including our new Armour baselayer, updated training products, and expanded Golf and Hunting lines.

Second quarter Footwear net revenues increased 40% to $154 million from $110 million in the prior year. We continue to gain significant traction across multiple Footwear categories, most notably within the larger markets of Running and Basketball. SpeedForm remains a key growth story for our Brand and we are beginning to introduce this innovation across a wider range of styles and categories this year. And as Kevin mentioned, we capitalized on the incredible success of Stephen Curry in basketball with new colorways quickly selling out during his MVP and Championship run with the Warriors.

Our Accessories net revenues during the second quarter increased 39% to $83 million from $60 million last year, primarily driven by strong consumer demand for our line of bags.

Our global Direct-to-Consumer net revenues increased 33% for the quarter, representing approximately 32% of net revenues. We continue to be encouraged with our recent Brand House openings, including the first full quarter of results for our Chicago and Mall of America stores, as well as the new second quarter openings in Indianapolis and Orlando. From a global standpoint, we ended the second quarter with 160 owned stores including 139 Factory House stores and 21 Brand House stores.

Our E-Commerce business had a standout quarter and we are seeing the return on our investment in mobile optimization across our expanding list of global sites. While an ongoing focus on mobile is key, we were also able to drive strong traffic gains through more effective e-mail communications as well as by leveraging the incredible success of our athletes during the period.

1


Looking at our regions, North America net revenues increased 22% to $681 million in the second quarter compared to $558 million in the prior year's quarter. On a currency neutral basis, North America net revenues increased 23% based primarily on the drivers I just highlighted. International net revenues increased 93% to $89 million in the second quarter and represented 11% of total net revenues. On a currency neutral basis, International net revenues increased 112% for the period.
•
In the EMEA region, we continue to focus on the three core markets of the U.K., Germany, and France, while also developing distributor agreements in the region including the Middle East.
•
In Asia-Pacific, our partner store expansion and E-Commerce growth in China remain key stories and we also benefited from the roll out of our distributor agreement in Southeast Asia.
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And in Latin America, we are seeing balanced growth throughout the region following our market entry into many of these countries during 2014.

Moving on to margins, second quarter gross margins contracted 80 basis points to 48.4% compared to 49.2% in the prior year's period. The following factors were the primary drivers during the quarter.
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First, as we previously outlined, the continued strength of the US Dollar negatively impacted gross margins by approximately 60 basis points in the second quarter versus the prior year.
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Second, we incurred higher air freight expense in the second quarter primarily due to our efforts to normalize product flow from the West Coast port disruption and better service the Back-to-School selling season, which negatively impacted gross margins by approximately 50 basis points.
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Partially offsetting this margin pressure, better margins in our factory house business combined with our higher margin Connected Fitness revenues benefited gross margins by approximately 20 basis points in the second quarter.

Selling, general and administrative expenses as a percentage of net revenues deleveraged 80 basis points to 44.3% in the second quarter of 2015 from 43.5% in the prior year's period. As a reminder, starting last quarter, in an effort to simplify and streamline our conversation, we consolidated our SG&A detail into two primary buckets: Marketing and Other SG&A. SG&A details for the second quarter are as follows:

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Marketing costs decreased to 11.4% of net revenues for the quarter from 11.6% in the prior year period with the modest leverage driven primarily by the strong net revenues growth during the quarter.
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Other SG&A costs increased to 32.9% of net revenues for the quarter from 31.9% in the prior year, driven primarily by our Connected Fitness acquisitions and investments in our Brand House strategy.


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Operating income for the second quarter decreased 8% to $32 million compared with $35 million in the prior year period.

Interest and other expense for the second quarter increased to $4 million compared with $1 million in the prior year period, primarily reflecting increased interest expense associated with the financing of our Connected Fitness acquisitions. Our second quarter tax rate of 46.7% was favorable to the 47.5% rate last year, primarily due to certain tax planning strategies.

Our second quarter net income decreased 17% to $15 million compared to $18 million in the prior year period, while our diluted earnings per share decreased to $0.07 from $0.08 in the prior year's period.

On the balance sheet, total cash and cash equivalents for the quarter decreased 43% to $171 million compared with $300 million at June 30, 2014. Inventory for the quarter increased 26% to $837 million compared to $662 million at June 30, 2014. Total debt increased to $716 million as compared to $197 million at June 30, 2014, primarily reflecting the financing of our Connected Fitness acquisitions.

Looking at our cash flows, our investment in capital expenditures was $91 million for the second quarter compared to $29 million in the prior year's period, driven primarily by our investments in our SAP platform and our global Retail strategy.

Now moving onto our updated 2015 guidance. Based on current visibility, we expect 2015 net revenues of approximately $3.84 billion, representing growth of 25%, and 2015 operating income in a range of $405 million to $408 million, representing growth of 14% to 15%. We have long stated that we would be opportunistic with our investment levels if and when the right situations present themselves. In a period where we have seen unprecedented success from our athletes on a global stage, we believe we have a unique opportunity to position ourselves more aggressively in key, long-term growth categories such as Basketball and Golf, which we believe can create Brand halos across the Under Armour portfolio. As a result, we expect to spend more than originally planned in Marketing throughout the remainder of the year, and this is the primary reason we are raising our full year net revenues guidance while maintaining the upper end of our previous operating income guidance. We believe this will better position our Brand in delivering long-term sustainable growth.


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As a reminder, our operating income guidance includes the dilutive impact of the Connected Fitness acquisitions consisting of one-time transaction costs in the first quarter, operating losses from these businesses, and non-cash amortization charges of the intangible assets generated from the acquisitions.

Below operating results, we continue to expect a full year effective tax rate of approximately 41% compared to 39.2% in the prior year, primarily given the strengthening of the U.S. dollar which continues to negatively impact our international profitability.

Now I would also like to provide additional color on several items.

Starting with Revenues. We expect the growth rate in Footwear to continue outpacing the growth rate for our overall business during the second half of the year. International growth is expected to ease from the growth rate achieved in the first half of 2015, as we begin to cycle through our entry into Latin America as well as new distributor partnerships launched during the second half of 2014. From a cadence standpoint, we expect relatively consistent net revenue growth rates during the third and fourth quarters.

Now looking at Gross Margins. We continue to expect our full year gross margin will be roughly in line with last year's 49% rate. During the third quarter we continue to expect an approximate 50 basis point contraction, primarily due to the negative impact of the stronger U.S. dollar.

In SG&A , we expect the combined impact of higher planned Marketing spending, which I just discussed, and ongoing other SG&A expense pressure will result in a similar year-over-year growth rate in third quarter SG&A as experienced during the first half of the year.

Finally, a quick look at our planned Capital Expenditures. We continue to plan 2015 capital expenditures in the range of $330 million to $340 million. Consistent with our prior guidance, approximately $140 million of this total is allocated across three large areas to support long-term growth including our new domestic distribution center, the expansion of our corporate headquarters in Baltimore, and a new and expanded SAP platform. We have also accelerated our investments in key areas that will drive revenue growth including the roll outs of our global Retail strategy and new E-Commerce sites.





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Forward Looking Statements
Some of the statements contained in this script 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 implementation of our marketing and branding strategies, and the future benefits and opportunities from acquisitions. 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 script 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 the forward-looking statements, including, but not limited to: 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 successfully manage or realize expected results from acquisitions and other significant investments; 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, including due to port disruptions; 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; risks related to foreign currency exchange rate fluctuations; 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 information systems and other technology, as well as any potential interruption in such systems or technology; risks related to data security or privacy breaches; 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 script reflect our views and assumptions only as of the date of this script. 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.

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