UNDER ARMOUR, INC.
`
`FORM 10-K
`
`(Annual Report)
`
`Filed 02/21/14 for the Period Ending 12/31/13
`
`
`Address
`1020 HULL STREET
`3RD FLOOR
`BALTIMORE, MD 21230
`410-454-6758
`Telephone
`CIK 0001336917
`Symbol UA
`2300 - Apparel & Other Finishd Prods of Fabrics & Similar Matl
`SIC Code
`Industry Apparel/Accessories
`Sector Consumer Cyclical
`Fiscal Year
`12/31
`
`http://www.edgar-online.com
`© Copyright 2014, EDGAR Online, Inc. All Rights Reserved.
`Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.
`
`Patent Owner adidas AG
`Exhibit 2008 - Page 1 of 151
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`

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`Table of Contents
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`(Mark One)
`
`UNITED STATES
`SECURITIES AND EXCHANGE COMMISSION
`Washington, D.C. 20549
`______________________________________________
`Form 10-K
` ______________________________________________
`
`(cid:1)
`
`
`
`ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
`For the fiscal year ended December 31, 2013
`
`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
`(State or other jurisdiction of
`incorporation or organization)
`1020 Hull Street
`
`Baltimore, Maryland 21230
`(410) 454-6428
`(Address of principal executive offices) (Zip Code)
`(Registrant’s Telephone Number, Including Area Code)
`
`Securities registered pursuant to Section 12(b) of the Act:
`
`52-1990078
`(I.R.S. Employer
`Identification No.)
`
`
`
`
`
`Class A Common Stock
`(Title of each class)
`
`New York Stock Exchange
`
`(Name of each exchange on which registered)
`
`Securities registered pursuant to Section 12(g) of the Act:
`None
`Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1) No 
`
`Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No (cid:1)
`
`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 (cid:1) 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 (§229.405 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 (cid:1) No 
`
`Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 or Regulation S-K (§229.405 of this chapter) is not contained herein, and
`will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
`or any amendment to this Form 10-K. (cid:1)
`
`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 (cid:1)
`Non-accelerated filer  (Do not check if a smaller reporting company)
`
`Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No (cid:1)
`
`As of June 30, 2013 , the last business day of our most recently completed second fiscal quarter, the aggregate market value of the registrant’s Class A
`Common Stock held by non-affiliates was $ 5,022,472,095 .
`
`As of January 31, 2014 , there were 85,828,707 shares of Class A Common Stock and 20,000,000 shares of Class B Convertible Common Stock
`outstanding.
`
`Accelerated filer 
`Smaller reporting company 
`
`DOCUMENTS INCORPORATED BY REFERENCE
`Portions of Under Armour, Inc.’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 13, 2014 are incorporated by reference in Part
`III of this Form 10-K.
`
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`Patent Owner adidas AG
`Exhibit 2008 - Page 2 of 151
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`Table of Contents
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`
`UNDER ARMOUR, INC.
`ANNUAL REPORT ON FORM 10-K
`TABLE OF CONTENTS
`
`
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`PART I.
`Item 1.
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`Item 1A.
`Item 1B.
`Item 2.
`Item 3.
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`Item 4.
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`PART II.
`Item 5.
`Item 6.
`Item 7.
`Item 7A.
`Item 8.
`Item 9.
`Item 9A.
`Item 9B.
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`PART III.
`Item 10.
`Item 11.
`Item 12.
`Item 13.
`Item 14.
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`PART IV.
`Item 15.
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`SIGNATURES
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` Business
`General
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`Products
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`Marketing and Promotion
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`Sales and Distribution
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`Seasonality
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`Product Design and Development
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`Sourcing, Manufacturing and Quality Assurance
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`Inventory Management
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`Intellectual Property
`
`Competition
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`Employees
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`Available Information
`
` Risk Factors
` Unresolved Staff Comments
` Properties
` Legal Proceedings
` Executive Officers of the Registrant
` Mine Safety Disclosures
`
`
` Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
` Selected Financial Data
` Management’s Discussion and Analysis of Financial Condition and Results of Operations
` Quantitative and Qualitative Disclosures About Market Risk
` Financial Statements and Supplementary Data
` Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
` Controls and Procedures
` Other Information
`
`
` Directors, Executive Officers and Corporate Governance
` Executive Compensation
` Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
` Certain Relationships and Related Transactions, and Director Independence
` Principal Accountant Fees and Services
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` Exhibits and Financial Statement Schedules
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`1
`1
`2
`3
`5
`5
`5
`6
`6
`6
`7
`7
`8
`17
`18
`18
`19
`20
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`21
`23
`24
`37
`39
`66
`66
`66
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`67
`67
`67
`67
`67
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`68
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`71
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`Patent Owner adidas AG
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`ITEM 1.
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`BUSINESS
`
`General
`
`PART I
`
`Our principal business activities are the development, marketing and distribution of branded performance apparel, footwear and
`accessories for men, women and youth. The brand’s moisture-wicking fabrications are engineered in many designs and styles for wear in nearly
`every climate to provide a performance alternative to traditional products. Our products are sold worldwide and are 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 are generated primarily from the wholesale sales of our products to national, regional, independent and specialty retailers.
`We also generate net revenue from the sale of our products through our direct to consumer sales channel, which includes our brand and factory
`house stores and websites, and from product licensing. A large majority of our products are sold in North America; however we believe that our
`products appeal to athletes and consumers with active lifestyles around the globe. Internationally, our net revenues are generated from a mix of
`wholesale sales to retailers, sales to distributors and sales through our direct to consumer sales channels in over fifteen countries in Europe, Latin
`America, and Asia. In addition, a third party licensee sells our products in Japan and Korea. We plan to continue to grow our business over the
`long term through increased sales of our apparel, footwear and accessories, expansion of our wholesale distribution, growth in our direct to
`consumer sales channel and expansion in international markets. Virtually all of our products are manufactured by unaffiliated manufacturers
`operating primarily in 19 countries outside of the United States.
`
`In December 2013, we acquired MapMyFitness, Inc. (“MapMyFitness”), a digital connected fitness platform with a community of over 20
`million registered users. We plan to engage and grow this community through the development of innovative digital products that enable users to
`lead healthier lifestyles. We also believe this platform and community will increase awareness and sales of our existing product offerings
`through our North American wholesale and direct to consumer channels.
`
`We were incorporated as a Maryland corporation in 1996. As used in this report, the terms “we,” “our,” “us,” “Under Armour” and the
`“Company” refer to Under Armour, Inc. and its subsidiaries unless the context indicates otherwise. We have registered trademarks around the
`globe, including UNDER ARMOUR ® , HEATGEAR ® , COLDGEAR ® , ALLSEASONGEAR ® and the Under Armour UA Logo, and we have
`applied to register many other trademarks. This Annual Report on Form 10-K also contains additional trademarks and tradenames of our
`Company and our subsidiaries. All trademarks and tradenames appearing in this Annual Report on Form 10-K are the property of their
`respective holders.
`
`Products
`Our product offerings consist of apparel, footwear and accessories for men, women and youth. We market our products at multiple price
`levels and provide consumers with products that we believe are a superior alternative to traditional athletic products. In 2013 , sales of apparel,
`footwear and accessories represented 76% , 13% and 9% of net revenues, respectively. Licensing arrangements, primarily for the sale of our
`products, represented the remaining 2% of net revenues. Refer to Note 16 to the Consolidated Financial Statements for net revenues by product.
`
`Apparel
`Our apparel is offered in a variety of styles and fits intended to enhance comfort and mobility, regulate body temperature and improve
`performance regardless of weather conditions. Our apparel is engineered to replace traditional non-performance fabrics in the world of athletics
`and fitness with performance alternatives designed and merchandised along gearlines. Our three gearlines are marketed to tell a very simple story
`about our highly technical products and extend across the sporting goods, outdoor and active lifestyle markets. We market our apparel for
`consumers to choose HEATGEAR ® when it is hot, COLDGEAR ® when it is cold and ALLSEASONGEAR ® between the extremes. Within
`each gearline our apparel comes in three primary fit types: compression (tight fit), fitted (athletic fit) and loose (relaxed).
`
`HEATGEAR ® is designed to be worn in warm to hot temperatures under equipment or as a single layer. While a sweat-soaked traditional
`non-performance T-shirt can weigh two to three pounds, HEATGEAR ® is engineered with a microfiber blend designed to wick moisture from
`the body which helps the body stay cool, dry and light. We offer HEATGEAR ® in a variety of tops and bottoms in a broad array of colors and
`styles for wear in the gym or outside in warm weather.
`
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`1
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`COLDGEAR ® is designed to wick moisture from the body while circulating body heat from hot spots to help maintain core body
`temperature. Our COLDGEAR ® apparel provides both dryness and warmth in a single light layer that can be worn beneath a jersey, uniform,
`protective gear or ski-vest, and our COLDGEAR ® outerwear products protect the athlete, as well as the coach and the fan from the outside in.
`Our COLDGEAR ® products generally sell at higher prices than our other gearlines.
`
`ALLSEASONGEAR ® is designed to be worn in between extreme temperatures and uses technical fabrics to keep the wearer cool and dry
`in warmer temperatures while preventing a chill in cooler temperatures.
`
`Footwear
`We began offering footwear for men, women and youth in 2006, and each year we have expanded our footwear offerings. Our footwear
`offerings include football, baseball, lacrosse, softball and soccer cleats, slides, performance training footwear, running footwear, basketball
`footwear and hunting boots. Our footwear is light, breathable and built with performance attributes for athletes. Our footwear is designed with
`innovative technologies which provide stabilization, directional cushioning and moisture management engineered to maximize the athlete’s
`comfort and control.
`
`Accessories
`Accessories primarily includes the sale of headwear, bags and gloves. Our accessories include HEATGEAR® and COLDGEAR®
`technologies and are designed with advanced fabrications to provide the same level of performance as our other products.
`
`License and Other
`
`We also have agreements with our licensees to develop Under Armour apparel and accessories. Our product, marketing and sales teams are
`actively involved in all steps of the design process in order to maintain brand standards and consistency. During 2013 , our licensees offered
`socks, team uniforms, baby and kids’ apparel, eyewear and inflatable footballs and basketballs that feature performance advantages and
`functionality similar to our other product offerings.
`
`In December 2013, we acquired MapMyFitness, which offers digital fitness platform licenses and subscriptions, along with digital
`advertising. License revenues generated from the sale of apparel and accessories and the use of the MapMyFitness platform are included in our
`net revenues.
`
`Marketing and Promotion
`We currently focus on marketing and selling our products to consumers primarily for use in athletics, fitness, training and outdoor
`activities. We seek to drive consumer demand by building brand equity and awareness that our products deliver advantages that help athletes
`perform better.
`
`Sports Marketing
`Our marketing and promotion strategy begins with providing and selling our products to high-performing athletes and teams on the high
`school, collegiate and professional levels. We execute this strategy through outfitting agreements, professional and collegiate sponsorships,
`individual athlete agreements and by providing and selling our products directly to team equipment managers and to individual athletes. As a
`result, our products are seen on the field, giving them exposure to various consumer audiences through the internet, television, magazines and
`live at sporting events. This exposure to consumers helps us establish on-field authenticity as consumers can see our products being worn by
`high-performing athletes.
`
`We are the official outfitter of athletic teams in several high-profile collegiate conferences. We are an official supplier of footwear and
`gloves to the National Football League (“NFL”) and we are the official combine scouting partner to the NFL with the right to sell combine
`training apparel beginning in 2012. In addition, in 2011 we became the Official Performance Footwear Supplier of Major League Baseball and
`became a partner with the National Basketball Association (“NBA”) which allows us to market our NBA athletes in game uniforms in
`connection with our basketball footwear.
`
`Internationally, we are providing and selling our products to European soccer and rugby teams. Beginning with the 2012 season, we
`provide the Tottenham Hotspur Football Club with performance apparel, including training wear and playing kit for the Club’s First and
`Academy teams, together with replica product for the Club’s supporters around the world. We are the official technical kit supplier to the Welsh
`Rugby Union and have exclusive retail rights on the replica products. Beginning in 2014, we became the official kit supplier of the Chilean
`football club, Corporación Club Social y Deportivo Colo-Colo.
`
`We also seek to sponsor events to drive awareness and brand authenticity from a grassroots level. We host combines, camps and clinics for
`many sports at regional sites across the country for male and female athletes. These events, along with the
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`products we make, are designed to help young athletes improve their training methods and their overall performance. We are also the title
`sponsor of a collection of high school All-America Games that create significant on-field product and brand exposure that contributes to our on-
`field authenticity.
`
`Media
`We feature our products in a variety of national digital, broadcast, and print media outlets. We also utilize social marketing to engage
`consumers and promote conversation around our brand and our products.
`
`Retail Presentation
`The primary component of our retail marketing strategy is to increase and brand floor space dedicated to our products within our major
`retail accounts. The design and funding of Under Armour concept shops within our major retail accounts has been a key initiative for securing
`prime floor space, educating the consumer and creating an exciting environment for the consumer to experience our brand. Under Armour
`concept shops enhance our brand’s presentation within our major retail accounts with a shop-in-shop approach, using dedicated floor space
`exclusively for our products, including flooring, lighting, walls, displays and images.
`
`Sales and Distribution
`The majority of our sales are generated through wholesale channels, which include national and regional sporting goods chains,
`independent and specialty retailers, department store chains, institutional athletic departments and leagues and teams. In addition, we sell our
`products to independent distributors in various countries where we generally do not have direct sales operations and through licensees.
`
`We also sell our products directly to consumers through our own network of brand and factory house stores in our North America and Asia
`operating segments, and through our website operations in North America and certain countries in Europe. These factory house stores serve an
`important role in our overall inventory management by allowing us to sell a significant portion of excess, discontinued and out-of-season
`products while maintaining the pricing integrity of our brand in our other distribution channels. Through our brand house stores, consumers
`experience our brand first-hand and have broader access to our performance products. In 2013 , sales through our wholesale, direct to consumer
`and licensing channels represented 68% , 30% and 2% of net revenues, respectively.
`We believe the trend toward performance products is global and plan to continue to introduce our products and simple merchandising story
`to athletes throughout the world. We are introducing our performance apparel, footwear and accessories outside of North America in a manner
`consistent with our past brand-building strategy, including selling our products directly to teams and individual athletes in these markets, thereby
`providing us with product exposure to broad audiences of potential consumers.
`
`Our primary business operates in four geographic segments: (1) North America, comprising the United States and Canada, (2) Europe, the
`Middle East and Africa (“EMEA”), (3) Asia, and (4) Latin America. Each of these geographic segments operate predominantly in one industry:
`the design, development, marketing and distribution of performance apparel, footwear and accessories. Beginning in December 2013, we also
`operate our acquired MapMyFitness business as a separate segment. As our international and MapMyFitness operating segments are currently
`not material, we combine them into other foreign countries and businesses for reporting purposes. The following table presents net revenues by
`segment for each of the years ending December 31, 2013 , 2012 and 2011 :
`
`
`
`
`
`2013
`
`
`
`2012
`
`
`
`2011
`
`Year ended December 31,
`
`(In thousands)
`North America
`Other foreign countries and businesses
`Total net revenues
`
`
`Net Revenues
`$ 2,193,739
`138,312
`$ 2,332,051
`
`% of
`
` Net Revenues
`Net Revenues
`94.1 % $ 1,726,733
`5.9
`108,188
`
`100.0 % $ 1,834,921
`
`% of
`
` Net Revenues
`Net Revenues
`94.1 % $ 1,383,346
`5.9
`89,338
`
`100.0 % $ 1,472,684
`
`% of
`Net Revenues
`93.9 %
`6.1
`100.0 %
`
`North America
`North America accounted for 94% of our net revenues for 2013 . We sell our branded apparel, footwear and accessories in North America
`through our wholesale and direct to consumer channels. Net revenues generated from the sales of our products in United States were $ 2,082.5
`million , $ 1,650.4 million and $ 1,325.8 million for the years ended December 31, 2013 , 2012 and 2011 , respectively, and substantially all of
`our long-lived assets were located in the United States. In 2013 , our two largest
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`Patent Owner adidas AG
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`customers were, in alphabetical order, Dick’s Sporting Goods and The Sports Authority. These two customers accounted for a total of 22% of
`our total net revenues in 2013 , and one of these customers individually accounted for at least 10% of our net revenues in 2013 .
`
`Our direct to consumer sales are generated primarily through our brand and factory house stores and websites. As of December 31, 2013 ,
`we had 117 factory house stores in North America, of which the majority is located in outlet centers throughout the United States. As of
`December 31, 2013 , we had 6 brand house stores in North America. Consumers can purchase our products directly from our e-commerce
`website, www.underarmour.com.
`
`In addition, we earn licensing income in North America based on our licensees’ sale of socks, team uniforms, baby and kids’ apparel,
`eyewear and inflatable footballs and basketballs, as well as the distribution of our products to college bookstores and golf pro shops. In order to
`maintain consistent quality and performance, we pre-approve all products manufactured and sold by our licensees, and our quality assurance
`team strives to ensure that the products meet the same quality and compliance standards as the products that we sell directly.
`
`We distribute the majority of our products sold to our North American wholesale customers and our brand and factory house stores from
`distribution facilities we lease and operate in California and Maryland. In addition, we distribute our products in North America through third-
`party logistics providers with primary locations in Canada, New Jersey and Florida. In some instances, we arrange to have products shipped from
`the independent factories that manufacture our products directly to customer-designated facilities.
`
`Other Foreign Countries and Businesses
`Approximately 6% of our net revenues were generated outside of North America and though our acquired MapMyFitness business. We
`plan to continue to grow our business over the long term in part through expansion in international markets.
`
`EMEA
`We sell our apparel, footwear and accessories through retailers and our websites in certain European countries. We also sell our apparel,
`footwear and accessories to independent distributors in various European countries where we do not have direct sales operations. In addition, we
`sell our branded products to various sports clubs and teams in Europe. In 2012, we began selling the United Kingdom's Tottenham Hotspur
`Football Club replica product for the Club’s supporters around the world.
`
`We generally distribute our products to our retail customers and e-commerce consumers in EMEA through a third-party logistics provider
`based out of Venlo, The Netherlands. This agreement continues until 2015.
`
`Asia
`
`Since 2002 we have had a license agreement with Dome Corporation, which produces, markets and sells our branded apparel, footwear
`and accessories in Japan and Korea. We are actively involved with this licensee to develop variations of our products for the different sizes,
`sports interests and preferences of Japanese and Korean consumers. Our branded products are sold in Japan and Korea to independent specialty
`stores and large sporting goods retailers and to professional sports teams. We made a cost-based minority investment in Dome Corporation in
`January 2011.
`
`We also sell our apparel, footwear and accessories to independent distributors in Australia, New Zealand and Taiwan where we do not
`have direct sales operations.
`
`We sell our products in China through a limited number of brand and factory house stores we directly operate and stores operated by our
`franchise partners, primarily located in Shanghai and Beijing, China. We also distribute our products to our retail customers in Asia through a
`third-party logistics provider based out of Hong Kong.
`
`Latin America
`We sell to Latin American consumers through independent distributors in Latin American countries where we do not have direct sales
`operations. We generally distribute our products in this region through our distribution facilities in the United States.
`In June 2013, we signed an agreement to acquire certain assets of our distributor in Mexico. Following the close of the acquisition in
`January 2014, we began selling our products in Mexico directly rather than through a distributor. In 2014, we will begin selling our products
`directly in Brazil and Chile.
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`Patent Owner adidas AG
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`MapMyFitness
`In December 2013, we acquired MapMyFitness, which offers digital fitness platform licenses and subscriptions, along with digital
`advertising.
`
`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. We generally expect inventory, accounts payable and certain accrued expenses to be higher in the
`second and third quarters in preparation for the fall selling season.
`
`Product Design and Development
`Our products are manufactured with technical fabrications produced by third parties and developed in collaboration with our product
`development team. This approach enables us to select and create superior, technically advanced fabrics, produced to our specifications, while
`focusing our product development efforts on design, fit, climate and product end use.
`
`We seek to regularly upgrade and improve our products with the latest in innovative technology while broadening our product offerings.
`Our goal, to deliver superior performance in all our products, provides our developers and licensees with a clear, overarching direction for the
`brand and helps them identify new opportunities to create performance products that meet the changing needs of athletes. We design products
`with “visible technology,” utilizing color, texture and fabrication to enhance our customers’ perception and understanding of product use and
`benefits.
`
`Our product development team works closely with our sports marketing and sales teams as well as professional and collegiate athletes to
`identify product trends and deter mine market needs. For example, these teams worked closely to identify the opportunity and market for our
`CHARGED COTTON ® products, which are made from natural cotton but perform like our synthetic products, drying faster and wicking away
`moisture from the body, and our Storm Fleece products with a unique, water-resistant finish that repels water, without stifling airflow. In 2013,
`we introduced ColdGear® Infrared, a ceramic print technology on the inside of our garments that provides athletes with lightweight warmth.
`
`Sourcing, Manufacturing and Quality Assurance
`Many of the specialty fabrics and other raw materials used in our products are technically advanced products developed by third parties
`and may be available, in the short term, from a limited number of sources. The fabric and other raw materials used to manufacture our products
`are sourced by our manufacturers from a limited number of suppliers pre-approved by us. In 2013 , approximately 50% to 55% of the fabric used
`in our products came from six suppliers. These fabric suppliers have primary locations in China, Malaysia, Mexico, Taiwan and Vietnam . We
`strengthened our relations with key strategic suppliers in 2013, while also continuing to seek new suppliers to diversify our source base. The
`fabrics used by our suppliers and manufacturers are primarily synthetic fabrics and involve raw materials, including petroleum based products
`that may be subject to price fluctuations and shortages. CHARGED COTTON ® products that we introduced in 2011 continue to perform
`strongly in the market. This product primarily uses cotton fabrics that may also be subject to commodity price fluctuations and shortages.
`
`Substantially all of our products are manufactured by unaffiliated manufacturers and, in 2013 , fourteen manufacturers produced
`approximately 65% of our products, with primary locations in Jordan, Philippines, China, Nicaragua. Malaysia, Cambodia, Indonesia, Vietnam,
`Mexico, El Salvador and Honduras. In 2013 , our products were manufactured by 26 primary manufacturers, operating in 19 countries, with
`approximately 66% of our products manufactured in Asia , 14% in Central and South America , 15% in the Middle East and 5% in Mexico . All
`manufacturers are evaluated for quality systems, social compliance and financial strength by our quality assurance team prior to being selected
`and on an ongoing basis. Where appropriate, we strive to qualify multiple manufacturers for particular product types and fabrications. We also
`seek out vendors that can perform multiple manufacturing stages, such as procuring raw materials and providing finished products, which helps
`us to control our cost of goods sold. We enter into a variety of agreements with our manufacturers, including non-disclosure and confidentiality
`agreements, and we require that all of our manufacturers adhere to a code of conduct regarding quality of manufacturing and working conditions
`and other social concerns. We do not, however, have any long term agreements requiring us to utilize any manufacturer, and no manufacturer is
`required to produce our products in the long term. We have a subsidiary in Hong Kong to support our manufacturing, quality assurance and
`sourcing efforts for apparel and a subsidiary in
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`Patent Owner adidas AG
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`Guangzhou, China to support our manufacturing, quality assurance and sourcing efforts for footwear and accessories. We also manufacture a
`limited number of apparel products, primarily for high-profile athletes and teams, on-premises in our quick turn, Special Make-Up Shop located
`at one of our distribution facilities in Maryland.
`
`Inventory Management
`Inventory management is important to the financial condition and operating results of our business. We manage our inventory levels based
`on existing orders, anticipated sales and the rapid-delivery requirements of our customers. 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.
`
`Our practice, and the general practice in the apparel, footwear and accessory industries, is to offer retail customers the right to return
`defective or improperly shipped merchandise. As it relates to new product introductions, which can