Edgar Filing: Under Armour, Inc.

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

¨	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. 000-51626

UNDER ARMOUR, INC.

(Exact name of registrant as specified in its charter)

Maryland

52-1990078

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1020 Hull Street, 3^rd Floor

Baltimore, Maryland 21230

(410) 454-6428

(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code)

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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.


Large accelerated filer ¨		Accelerated filer ¨		Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Class A Common Stock, $.0003¹/3 par value, 34,387,965 shares outstanding as of October 30, 2006 and Class B Convertible Common Stock, $.0003¹/3 par value, 13,250,000 shares outstanding as of October 30, 2006.

UNDER ARMOUR, INC.

SEPTEMBER 30, 2006

INDEX TO FORM 10-Q


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:
	Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2006 (unaudited) and 2005 (unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 (unaudited) and 2005 (unaudited)	5
	Notes to the Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 4.	Controls and Procedures	35

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 5.	Other Information	37
Item 6.	Exhibits	37

SIGNATURES		38

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Under Armour, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)


	September 30, 2006			December 31, 2005
	*(unaudited)*
Assets
Current assets
Cash and cash equivalents	$	44,257		$	62,977
Accounts receivable, net of allowance for doubtful accounts of $1,063 and $521 as of September 30, 2006 and December 31, 2005, respectively		89,667			53,132
Inventories		74,972			53,607
Income taxes receivable		217			—
Prepaid expenses and other current assets		7,888			5,252
Deferred income taxes		12,774			6,822

Total current assets		229,775			181,790
Property and equipment, net		25,804			20,865
Intangible asset, net of amortization		8,250			—
Deferred income taxes		192			—
Other non-current assets		948			1,032

Total assets	$	264,969		$	203,687

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	38,302		$	31,699
Accrued expenses		22,639			11,449
Income taxes payable		—			716
Current maturities of long term debt		2,631			1,967
Current maturities of capital lease obligations		995			1,841

Total current liabilities		64,567			47,672
Long term debt, net of current maturities		2,552			2,868
Capital lease obligations, net of current maturities		1,041			1,715
Deferred income taxes		—			330
Other long term liabilities		396			272

Total liabilities		68,556			52,857

Commitments and contingencies (see Note 5)
Stockholders’ equity and comprehensive loss
Class A Common Stock, $.0003¹/3 par value; 100,000,000 shares authorized as of September 30, 2006 and December 31, 2005, 34,335,565 shares issued and outstanding as of September 30, 2006; 31,223,351 shares issued and outstanding as of December 31, 2005		11			10
Class B Convertible Common Stock, $.0003¹/3 par value; 16,200,000 shares authorized as of September 30, 2006 and December 31, 2005, 13,250,000 shares issued and outstanding as of September 30, 2006; 15,200,000 shares issued and outstanding as of December 31, 2005		4			5
Additional paid-in capital		142,537			124,803
Retained earnings		54,525			28,067
Unearned compensation		(586	)		(1,889	)
Notes receivable from stockholders		(55	)		(163	)
Accumulated other comprehensive loss		(23	)		(3	)

Total stockholders’ equity		196,413			150,830

Total liabilities and stockholders’ equity	$	264,969		$	203,687

See accompanying notes.

Under Armour, Inc. and Subsidiaries

Consolidated Statements of Income

(in thousands, except per share amounts)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2006		2005			2006		2005
	*(unaudited)*		*(unaudited)*			*(unaudited)*		*(unaudited)*
Net revenues	$	127,745	$	86,606		$	295,406	$	193,750
Cost of goods sold		63,070		43,641			148,212		100,396

Gross profit		64,675		42,965			147,194		93,354
Operating expenses
Selling, general and administrative expenses		42,692		28,482			107,662		70,329

Income from operations		21,983		14,483			39,532		23,025

Other income (expense)
Interest income (expense), net		177		(836	)		1,058		(2,124	)

Income before income taxes		22,160		13,647			40,590		20,901
Provision for income taxes		6,190		5,261			13,462		8,176

Net income		15,970		8,386			27,128		12,725
Accretion of and cumulative preferred dividends on Series A Preferred Stock		—		599			—		1,796

Net income available to common stockholders	$	15,970	$	7,787		$	27,128	$	10,929

Net income available per common share
Basic	$	0.34	$	0.21		$	0.58	$	0.30
Diluted	$	0.32	$	0.20		$	0.55	$	0.29

Weighted average common shares outstanding
Basic		47,164		36,571			46,848		35,871
Diluted		49,599		39,324			49,512		38,064

See accompanying notes.

Under Armour, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)


	Nine Months Ended September 30,
	2006			2005
	*(unaudited)*			*(unaudited)*
Cash flows from operating activities
Net income	$	27,128		$	12,725
Adjustments to reconcile net income to net cash (used in) provided by operating activities
Depreciation and amortization		6,774			4,382
Unrealized foreign exchange rate gain		(200	)		—
Gain on disposal of fixed assets		—			(20	)
Stock-based compensation		1,292			494
Deferred income taxes		(6,445	)		(1,448	)
Changes in reserves for doubtful accounts, returns, discounts and inventories		5,063			967
Changes in operating assets and liabilities:
Accounts receivable		(38,380	)		(20,925	)
Inventories		(21,804	)		(2,339	)
Prepaid expenses and other current assets		(2,624	)		(2,640	)
Other non-current assets		(48	)		(754	)
Accounts payable		6,574			8,373
Accrued expenses and other liabilities		7,746			1,744
Income taxes payable and receivable		(932	)		1,938

Net cash (used in) provided by operating activities		(15,856	)		2,497

Cash flows from investing activities
Purchase of property and equipment		(10,957	)		(8,281	)
Proceeds from sale of property and equipment		—			54
Purchases of short-term investments		(64,650	)		—
Proceeds from sales of short-term investments		64,650			—

Net cash used in investing activities		(10,957	)		(8,227	)

Cash flows from financing activities
Proceeds from long-term debt		2,119			2,838
Payments on long-term debt		(1,771	)		(1,121	)
Payments on capital lease obligations		(1,520	)		(1,764	)
Net proceeds from revolving credit facility		—			9,353
Book overdraft		—			585
Payments of common stock dividends		—			(5,000	)
Excess tax benefits from stock-based compensation arrangements		6,521			—
Proceeds from stock-based compensation arrangements		2,789			438
Proceeds from sale of restricted Class A Common Stock		—			498
Payments of debt financing costs		—			(919	)
Payments received on notes from stockholders		114			106

Net cash provided by financing activities		8,252			5,014
Effect of exchange rate changes on cash and cash equivalents		(159	)		(45	)

Net decrease in cash and cash equivalents		(18,720	)		(761	)
Cash and cash equivalents
Beginning of period		62,977			1,085

End of period	$	44,257		$	324

Non-cash financing and investing activities
Fair market value of shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements	$	734		$	—
Accretion of and cumulative preferred dividends on Series A Preferred Stock		—			1,796
Purchase of equipment through capital leases and subordinated debt		—			2,103
Interest earned on notes receivable from stockholders		5			8
Reversal of unearned compensation and additional paid in capital due to adoption of SFAS 123R		715			—
Conversion of Class B Convertible Common Stock to Class A Common Stock		1			—
Exercise of stock-based compensation arrangements through stockholders’ notes receivable		—			262
Fair market value of warrants granted in partial consideration of intangible asset		8,500			—
Transfer of revolving credit facility to term debt		—			25,000

See accompanying notes.

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share and share amounts)

1. Description of the Business

Under Armour, Inc. is a developer, marketer and distributor of branded performance apparel, footwear and accessories. Sales are targeted to athletes and teams at the collegiate and professional level as well as consumers with active lifestyles throughout the world.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Under Armour, Inc. and its wholly owned subsidiaries (the “Company”). All inter-company balances and transactions have been eliminated. The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.

Interim Financial Data

The unaudited interim consolidated financial statements as of September 30, 2006 and for the three and nine months ended September 30, 2006 and 2005 have been prepared in accordance with generally accepted accounting principles for interim information. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments, consisting of normal, recurring adjustments considered necessary for a fair presentation of the financial position and results of operations have been included.

The results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006 or any other portions thereof. Certain information in footnote disclosures normally included in annual financial statements has been condensed or omitted for the interim periods presented, in accordance with the rules and regulation of the Securities and Exchange Commission (the “SEC”) for interim consolidated financial statements.

The consolidated balance sheet as of December 31, 2005 is derived from the audited financial statements included in our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2005 (the “2005 Form 10-K”), which should be read in conjunction with these consolidated financial statements.

Concentration of Credit Risk

Financial instruments that subject the Company to significant concentration of credit risk consist primarily of accounts receivable. The majority of the Company’s accounts receivable is due from large sporting good retailers. Credit is extended based on an evaluation of the customer’s financial condition and collateral is not required. The most significant customers that accounted for a large portion of net revenues and accounts receivable are as follows:


	Customer A		Customer B		Customer C
Net revenues
Nine months ended September 30, 2006	20.9	%	15.1	%	3.6	%
Nine months ended September 30, 2005	16.8	%	15.7	%	3.1	%

Accounts receivable
As of September 30, 2006	25.0	%	17.7	%	5.1	%
As of September 30, 2005	27.0	%	20.4	%	3.9	%

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—(Continued)

(unaudited)

(amounts in thousands, except per share and share amounts)

Short-Term Investments

Beginning in the second quarter of 2006, the Company purchased and sold short-term investments consisting of auction rate municipal bonds. All of these short-term investments are classified as available-for-sale securities. These auction rate securities are recorded at cost, which approximates fair market value due to their variable interest rates, which typically reset at the regular auctions every 7 to 35 days. Despite the long-term nature of their stated contractual maturities, the Company has the ability to liquidate these securities primarily through the auction process. As a result, the Company had no unrealized gains or losses from its investments in these securities. All income generated from these short-term investments is tax exempt and recorded as interest income. These securities were sold prior to September 30, 2006. Proceeds were invested in highly liquid investments with an original maturity of three months or less.

Accounts Receivable

Accounts receivable are recorded at the invoice price net of an allowance for doubtful accounts, certain discounts, and reserve for returns, and do not bear interest. Beginning in the first quarter of 2006, the majority of discounts earned by customers in the period are recorded as liabilities within accrued expenses as opposed to an offset to accounts receivable as in prior years. These specific 2006 customer agreements stipulate settlements to be made through Company cash disbursements as opposed to the issuance of customer credit which had been the historical practice of the Company. Therefore, as of September 30, 2006, there were $6,217 in customer discounts recorded within accrued expenses and only $863 recorded as an offset to accounts receivable. As of December 31, 2005, there were no customer discounts recorded within accrued expenses and $7,391 recorded as an offset to accounts receivable. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in accounts receivable. The Company reviews the allowance for doubtful accounts monthly. Receivable balances are written off against the allowance when management believes it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its customers.

Inventories

Inventories consist of finished goods, raw materials and work-in-process, and are valued at standard costs which approximate the lower of cost or market, using the first-in, first-out (“FIFO”) method of cost determination. Costs of finished goods inventories include all costs incurred to bring inventory to its current condition, including freight-in, duties and other costs. The Company does not include certain costs incurred to operate its distribution center in cost of goods sold. Historically, such costs would not have had a material impact on inventories, cost of goods sold, or gross profit.

The Company periodically reviews its inventories and makes provisions as necessary for estimated obsolescence or damaged goods. The amount of such markdowns is equal to the difference between cost of inventory and the estimated market value based upon assumptions about future demands, selling prices, and market conditions.

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—(Continued)

(unaudited)

(amounts in thousands, except per share and share amounts)

Inventories consist of the following:


	September 30, 2006			December 31, 2005
Finished goods	$	78,464		$	57,020
Raw materials		1,718			1,379
Work-in-process		157			95

Subtotal inventories		80,339			58,494
Inventories reserve		(5,367	)		(4,887	)

Total inventories	$	74,972		$	53,607

Intangible Asset

The intangible asset, consisting of footwear promotional rights, is amortized using the straight-line method over its estimated useful life through March 2012 (see Note 3 for further details on the intangible asset). The Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated useful life of the intangible asset may warrant revision or that the remaining balance may not be recoverable. When factors indicate that the intangible asset should be evaluated for possible impairment, the Company reviews the intangible asset to assess recoverability from future operations using undiscounted cash flows. Impairments are recognized in earnings to the extent that the carrying value exceeds fair value.

Income Taxes

The Company recorded $6,190 and $5,261 of income tax expense for the three months ended September 30, 2006 and 2005, respectively, and $13,462 and $8,176 for the nine months ended September 30, 2006 and 2005, respectively. The effective rate for income taxes was 33.2% and 39.1% for the nine months ended September 30, 2006 and 2005, respectively. During the three months ended September 30, 2006, the Company adjusted its projected annual effective tax rate for the year downward to reflect the impact of a new state tax credit earned. As a result, the Company’s effective tax rate was 27.9% for the three months ended September 30, 2006 compared to the 38.6% for the same period in the prior year. The Company’s 2006 effective tax rate is expected to be lower than 2005 primarily due to the state tax credit earned in 2006.

Currency Translation

The functional currency for the Company’s wholly owned foreign subsidiaries is the applicable local currency. The translation of the foreign currency into U.S. dollars is performed for assets and liabilities using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. Capital accounts are translated at historical exchange rates. Unrealized translation gains and losses are included in stockholders’ equity as a component of accumulated other comprehensive income or loss. Adjustments that arise from exchange rate changes on transactions denominated in a currency other than the local currency are included in selling, general and administrative expenses.

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—(Continued)

(unaudited)

(amounts in thousands, except per share and share amounts)

Revenue Recognition

The Company recognizes revenue pursuant to applicable accounting standards, including the SEC Staff Accounting Bulletin No. 104, Revenue Recognition, which summarizes certain of the SEC staff’s views in applying generally accepted accounting principles to revenue recognition in financial statements and provides guidance on revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a specific industry.

Net revenues consist of both net sales and license revenues. Net sales are recognized upon transfer of ownership, including passage of title to the customer and transfer of risk of loss related to those goods. Transfer of title and risk of loss is based upon shipment under free on board (“FOB”) shipping-point for most goods. In some instances, transfer of title and risk of loss takes place at the point of sale (e.g. at the Company’s retail outlet stores). Net sales are recorded net of sales discounts and certain customer-based incentives along with a reserve for returns, if applicable. Provisions for customer-based incentives such as cooperative advertising, included in selling, general and administrative expenses, are based on contractual obligations with certain major customers. Returns are estimated at the time of sale based primarily on historical experience. License revenues are recognized based upon shipment of licensed products sold by our licensees.

Earnings per Share

Basic earnings per common share is computed by dividing net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income available to common stockholders for the period by the diluted weighted average common shares outstanding during the period. Diluted earnings per share reflects the potential dilution from common shares issuable through stock options, restricted stock and other equity awards. In accordance with Emerging Issues Task Force (“EITF”) Issue No. 03-6: Participating Securities and the Two Class Method Under FASB Statement No. 128, the Convertible Common Stock outstanding prior to our initial public offering has been included in the basic and diluted earnings per share for the three and nine months ended September 30, 2005, as if the shares were converted into Class A Common Stock on a three for one basis. The following represents a reconciliation from basic earnings per share to diluted earnings per share:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Numerator
Net income, as reported	$	15,970	$	8,386	$	27,128	$	12,725
Accretion of and cumulative preferred dividends on Series A Preferred Stock		—		599		—		1,796

Net income available to common stockholders	$	15,970	$	7,787	$	27,128	$	10,929

Denominator
Weighted average common shares outstanding		47,164		36,571		46,848		35,871
Effect of dilutive securities		2,435		2,753		2,664		2,193

Weighted average common shares and dilutive securities outstanding		49,599		39,324		49,512		38,064

Earnings per share - basic	$	0.34	$	0.21	$	0.58	$	0.30
Earnings per share - diluted	$	0.32	$	0.20	$	0.55	$	0.29

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—(Continued)

(unaudited)

(amounts in thousands, except per share and share amounts)

Stock-Based Compensation

The Company has two equity incentive plans under which it has granted or may grant non-qualified stock options, incentive stock options, restricted stock, restricted stock units and other equity awards, collectively “stock rights” (see Note 8 for further details on these plans).

The Company has historically accounted for grants of stock rights to non-employees at fair value in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) and Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (“EITF 96-18”). For the three and nine months ended September 30, 2005, the Company recognized $33 and $43, respectively, in stock-based compensation expense relating to fully vested stock rights granted to non-employees. No expense was recognized in 2006 relating to stock rights granted to non-employees.

Prior to January 1, 2006, the Company accounted for grants of stock rights to employees and directors using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“ABP 25”), and related interpretations. Under the intrinsic value method, unearned compensation was recorded equal to the fair market value on the date of grant less any exercise price. Compensation expense was amortized over the vesting period in accordance with Financial Interpretation Number (“FIN”) 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (“FIN 28”).

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R, Share-Based Payment (revised 2004) (“SFAS 123R”). SFAS 123R revises SFAS 123 and supersedes APB 25. SFAS 123R requires that all stock rights granted to employees and directors be measured at the fair value of the award and recognized as an expense in the financial statements. SFAS 123R also requires that excess tax benefits related to stock option exercises be reflected as financing cash flows instead of operating cash flows.

The Company adopted SFAS 123R using the modified prospective method of application, which requires the Company to recognize compensation expense for grants of stock rights to employees and directors on a prospective basis; therefore, prior period financial statements have not been restated. The compensation expense to be recognized includes the expense of stock rights granted subsequent to January 1, 2006 and the expense for the remaining vesting term of stock rights granted subsequent to the Company’s initial filing of the S-1 Registration Statement with the SEC on August 26, 2005. Stock rights granted to employees and directors prior to the Company’s initial filing of the S-1 Registration Statement are specifically excluded from SFAS 123R and will continue to be accounted for in accordance with APB 25 and FIN 28 until unearned compensation of $586 as of September 30, 2006 is fully amortized through 2010. In addition, as of the January 1, 2006 adoption date, the Company reversed $715 in unearned compensation and the related additional paid in capital due to unvested equity awards granted between the initial filing of the Company’s S-1 Registration Statement and the January 1, 2006 SFAS 123R adoption date. For the three months ended September 30, 2006 and 2005, the Company recognized $113 and $286, respectively, and for the nine months ended September 30, 2006 and 2005, the Company recognized $317 and $451, respectively, in amortization of unearned compensation in accordance with APB 25 and FIN 28.

Consistent with the valuation method used for the disclosure only provisions of SFAS 123, the Company is using the Black-Scholes option-pricing model to value compensation expense under SFAS 123R. As permitted by Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment (“SAB 107”), the expected life of options

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—(Continued)

(unaudited)

(amounts in thousands, except per share and share amounts)

granted is calculated using an expected life equal to the time from grant to the midpoint between the vesting date and the contractual term, while considering the vesting tranches. The risk-free interest rate is based on the yield for the U.S. Treasury bill with a maturity equal to the expected option life. Expected volatility is based on an average for a peer group of companies similar in terms of type of business, industry, stage of life cycle and size. Compensation expense is recognized on a straight-line basis over the total vesting period, which is the implied requisite service period and net of forfeitures which are estimated at the date of grant based on historical rates. Under the provisions of SFAS 123R, as of September 30, 2006, the Company had $5,582 of unrecognized compensation expense expected to be recognized over a weighted average period of 4.0 years. The Company recognized $495 and $975 in stock-based compensation expense in selling, general and administrative expenses for the three and nine months ended September 30, 2006, respectively, in accordance with SFAS 123R.

Had the Company elected to account for all stock rights to employees and directors at fair value in accordance with SFAS 123 as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure (“SFAS 148”), net income and earnings per share for the three and nine months ended September 30, 2006 and 2005 would have been reported as set forth in the following table:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Net income, as reported	$	15,970		$	8,386		$	27,128		$	12,725
Accretion of and cumulative preferred dividends on Series A Preferred Stock		—			599			—			1,796

Net income available to common stockholders		15,970			7,787			27,128			10,929
Add: stock-based compensation expense included in reported net income, net of taxes		439			197			864			302
Deduct: stock-based compensation expense determined under fair value based methods for all awards, net of taxes		(459	)		(176	)		(935	)		(266	)

Pro forma net income	$	15,950		$	7,808		$	27,057		$	10,965

Earnings per share including SFAS 123 compensation expense
Basic, pro forma	$	0.34		$	0.21		$	0.58		$	0.31
Diluted, pro forma	$	0.32		$	0.20		$	0.55		$	0.29

Basic, as reported	$	0.34		$	0.21		$	0.58		$	0.30
Diluted, as reported	$	0.32		$	0.20		$	0.55		$	0.29

The weighted average fair value of an option granted during the nine months ended September 30, 2006 and 2005 was $16.12 and $0.58, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:


	Nine Months Ended September 30,
	2006		2005
Risk-free interest rate	4.6% - 5.0	%	3.86% - 4.29	%
Average expected life in years	5.5 - 6.5		5
Expected volatility	44.6% - 46.1	%	0	%
Expected dividend yield	0	%	0	%

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—(Continued)

(unaudited)

(amounts in thousands, except per share and share amounts)

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Recently Issued Accounting Standards

In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 requires financial statement errors to be quantified using both balance sheet and income statement approaches and an evaluation on whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company is currently evaluating the impact of adopting SAB 108 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS 157 on its consolidated financial statements.

In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”), which provides additional guidance and clarifies the accounting for uncertainty in income tax positions. FIN 48 defines the threshold for recognizing tax return positions in the financial statements as “more likely than not” that the position is sustainable, based on its technical merits. FIN 48 also provides guidance on the measurement, classification and disclosure of tax return positions in the financial statements. FIN 48 is effective for the first reporting period beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to the beginning balance of retained earnings in the period of adoption. The Company is currently evaluating the impact of adopting FIN 48 on its consolidated financial statements.

In June 2006, the EITF reached a consensus on Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (“EITF 06-3”). EITF 06-3 requires the disclosure of the Company’s accounting policy regarding its gross or net presentation of externally imposed taxes on revenue-producing transactions in the notes to the consolidated financial statements. EITF 06-3 is effective for the first annual or interim reporting period beginning after December 15, 2006. The Company is currently evaluating the impact of adopting EITF 06-3 on its consolidated financial statement disclosures.

In October 2005, the FASB issued Staff Position No. (“FSP”) SFAS 13-1, Accounting for Rental Costs Incurred during a Construction Period (“FSP SFAS 13-1”). FSP SFAS 13-1 concludes that there is no distinction between the right to use a leased asset during and after the construction period; therefore rental costs

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—(Continued)

(unaudited)

(amounts in thousands, except per share and share amounts)

incurred during the construction period should be recognized as rental expense and deducted from income from continuing operations. FSP SFAS 13-1 is effective for the first reporting period beginning after December 15, 2005, although early adoption is permitted. The adoption of FSP SFAS 13-1 in the first quarter of 2006 did not have a material effect on the Company’s consolidated financial statements.

In June 2005, the EITF reached a consensus on Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination (“EITF 05-6”). EITF 05-6 addresses the amortization period for leasehold improvements in operating leases that are either (a) placed in service significantly after and not contemplated at or near the beginning of the initial lease term or (b) acquired in a business combination. Leasehold improvements that are placed in service significantly after and not contemplated at or near the beginning of the lease term should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date the leasehold improvements are purchased. Leasehold improvements acquired in a business combination should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date of acquisition. This Issue was applied to leasehold improvements that were purchased or acquired in reporting periods after June 29, 2005. The application of EITF 05-6 did not have a material impact on the Company’s consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, (“SFAS 154”) which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 applies to all voluntary changes in accounting principle and requires retrospective application (a term defined by the statement) to prior periods’ financial statements, unless it is impracticable to determine the effect of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 in 2006 had no effect on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS 123R, which revises SFAS 123, and supersedes APB 25. SFAS 123R requires all stock-based compensation to be recognized as an expense in the financial statements and that such costs be measured according to the fair value of the award. SFAS 123R became effective for the Company on January 1, 2006. Prior to January 1, 2006, the Company accounted for grants of stock rights in accordance with APB 25 and provided pro forma effects of SFAS 123 in accordance with SFAS 148 as discussed in “Stock-Based Compensation” above. In March 2005, SAB 107 was issued to provide guidance from the SEC to simplify some of the implementation challenges of SFAS 123R as this statement relates to the valuation of the share-based payment arrangements for public companies. The Company applied the principles of SAB 107 in connection with the adoption of SFAS 123R. As a result of adopting SFAS 123R, the Company recorded $495 and $975 in stock-based compensation expense during the three and nine months ended September 30, 2006, respectively.

In November 2004, FASB issued SFAS No. 151, Inventory Costs (“SFAS 151”) which is an amendment of Accounting Research Bulletin No. 43, Inventory Pricing. SFAS 151 requires all companies to recognize a current-period charge for abnormal amounts of idle facility expenses, freight, handling costs and wasted materials. This statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The adoption of SFAS 151 in the first quarter of 2006 had no effect on the Company’s consolidated financial statements.

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—(Continued)

(unaudited)

(amounts in thousands, except per share and share amounts)

3. Intangible Asset, Net of Amortization

In August 2006, the Company and NFL Properties LLC (“NFL Properties”) entered into a Promotional Rights Agreement (the “NFL Agreement”) in which the Company became an authorized supplier of footwear to the National Football League. As partial consideration for the NFL Agreement which expires in March 2012, the Company issued to NFL Properties fully vested and non-forfeitable warrants to purchase 480,000 shares of the Company’s Class A Common Stock. The resulting $8,500 intangible asset was determined based on the fair value of the warrants as established by an independent third party valuation. The intangible asset is amortized using the straight-line method over the term of the NFL Agreement.

As of September 30, 2006, the carrying amount of the intangible asset was $8,250, which comprises the original fair value, net of $250 in accumulated amortization. Amortization expense, which is included in selling, general and administrative expenses, was $250 for the three and nine months ended September 30, 2006. The estimated amortization expense of the intangible asset is $625 for the year ended December 31, 2006 and $1,500 for each of the years ended December 31, 2007 through December 31, 2010.

4. Revolving Credit Facility and Long Term Debt

In September 2005, the Company and a lending institution entered into an amended and restated financing agreement that terminates in 2010. Under this financing agreement, the Company is required to maintain certain financial covenants as defined in the agreement. This financing agreement is collateralized by substantially all of the assets of the Company. The Company paid and recorded $1,061 in deferred financing costs as part of the financing agreement, which was comprised of a $25,000 term note and a $75,000 revolving credit facility.

In November 2005, the Company repaid the $25,000 term note plus interest with proceeds from the initial public offering (see Note 6). The term note portion of the financing agreement was then terminated and as such the Company expensed $265 of deferred financing costs during the fourth quarter of 2005. With the termination of the term note, the Company’s trademarks and other intellectual property were released as a component of the collateral.

The Company has available borrowings under the revolving credit facility up to $75,000 based on the Company’s eligible inventory and accounts receivable balances. The Company has the option to increase the borrowings under the revolving credit facility up to $100,000 if certain conditions are satisfied. With proceeds from the initial public offering in November 2005, the Company paid the $12,200 balance outstanding under the revolving credit facility. As of September 30, 2006, the Company’s available borrowings under the revolving credit facility were $75,000 based on the Company’s eligible inventory and accounts receivable balances. Any balance on the revolving credit facility must be repaid in full in 2010.

Prior to amending and restating the revolving credit facility in September 2005, the Company was party to a revolving credit facility that was to expire in April 2007. From January 2004 through September 2005, this agreement was periodically amended to increase the available borrowings based on eligible inventory and accounts receivable not to exceed $60,000. Covenants under these superseded revolving credit facilities were similar to the covenants described above.

In March 2005, the Company entered into a loan and security agreement with a lending institution to finance the acquisition of up to $17,000 of qualifying capital investments. This agreement is collateralized by a first lien on these assets and is otherwise subordinate to the revolving credit facility. Through September 30, 2006, the Company has financed $7,915 of capital investments under this agreement. Interest on outstanding borrowings accrues at an average annual rate of 6.5%. At September 30, 2006, the outstanding principal balance was $5,183.

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—(Continued)

(unaudited)

(amounts in thousands, except per share and share amounts)

In December 2003, the Company entered into a master loan and security agreement with a lending institution which was subordinate to the revolving credit facility. Under this agreement, the Company borrowed $1,300 for the purchase of qualifying furniture and fixtures. The interest rate was 7.0% annually, and principal and interest payments were due monthly through February 2006. The outstanding principal balance was repaid during February 2006.

Interest expense for all debt, which includes the amortization of deferred financing costs, was $204 and $841 for the three months ended September 30, 2006 and 2005, respectively, and $594 and $2,132 for the nine months ended September 30, 2006 and 2005, respectively.

5. Commitments and Contingencies

The Company is, from time to time, involved in routine legal matters incidental to its business. Management believes that the ultimate resolution of such proceedings will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

In addition, within the normal course of business, the Company enters into contractual commitments, such as collegiate sponsorship agreements and official supplier agreements, in order to promote the Company’s brand and products. These agreements include scheduled sponsorship fee payments or rights fee payments, along with other purchase or product supply obligations over the terms of the agreements.

6. Stockholders’ Equity

On August 3, 2006, the Company issued fully vested and non-forfeitable warrants to purchase 480,000 shares of the Company’s Class A Common Stock to NFL Properties as partial consideration for footwear promotional rights which are recorded as an intangible asset (see Note 3). The warrants have a term of 12 years from the date of issuance and an exercise price of $36.99 per share, which was the closing price on the NASDAQ Global Market of the Company’s Class A Common Stock on August 2, 2006. None of the warrants may be exercised until one year from the issue date, at which time 240,000 warrants may be exercised, with the remaining 240,000 warrants becoming exercisable three years from the issue date. The fair value of the warrants was determined using an independent third party valuation.

In June 2006, 8,352,639 shares of the Company’s Class A Common Stock were sold by stockholders of the Company, including certain members of the Company’s management, pursuant to an underwritten public offering registered on Form S-1. The Company did not receive any proceeds from the sale of the shares sold in the offering and expenses incurred from the offering were paid by the selling stockholders. In connection with the offering, 1,950,000 shares of Class B Convertible Common Stock were converted into shares of Class A Common Stock on a one-for-one basis.

In November 2005, the Company completed an initial public offering and issued an additional 9,500,000 shares of Class A Common Stock. As part of the initial public offering, 1,208,055 outstanding shares of Convertible Common Stock outstanding prior to our initial public offering were converted to Class A Common Stock on a three-for-one basis. The Company received proceeds of $112,676 net of $10,824 in stock issue costs, which it used to repay the $25,000 term note, the balance outstanding under the revolving credit facility of $12,200, and the mandatorily redeemable Series A Preferred Stock of $12,000.

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—(Continued)

(unaudited)

(amounts in thousands, except per share and share amounts)

As part of a recapitalization in connection with the initial public offering, the Company’s stockholders approved an amended and restated charter that provides for the issuance of up to 100,000,000 shares of Class A Common Stock, par value $0.0003 1/3 per share and 16,200,000 shares of Class B Convertible Common Stock, par value $0.0003 1/3 per share, and permits amendments to the charter without stockholder approval to increase or decrease the aggregate number of shares of stock authorized, or the number of shares of stock of any class or series of stock authorized, and to classify or reclassify unissued shares of stock.

The amended and restated charter divides the Company’s common stock into two classes, Class A Common Stock and Class B Convertible Common Stock. Holders of Class A Common Stock and Class B Convertible Common Stock have identical rights, except that the holders of Class A Common Stock are entitled to one vote per share and holders of Class B Convertible Common Stock are entitled to 10 votes per share on all matters submitted to stockholder vote. Class B Convertible Common Stock may only be held by our Chief Executive Officer (“CEO”), or a related party of our CEO, as defined in the amended and restated charter. Shares not held by our CEO, or a related party of our CEO, as defined in the amended and restated charter, automatically convert into shares of Class A Common Stock on a one-to-one basis. Holders of our common stock are entitled to receive dividends when and if authorized and declared out of assets legally available for the payment of dividends.

All Class A Common Stock shares presented in the consolidated financial statements and the notes to the consolidated financial statements reflect a three-for-one stock split effective in May, 2005.

7. Mandatorily Redeemable Series A Preferred Stock

On September 30, 2003, the Company issued 1,200,000 shares of Series A Preferred Stock for $4,356 in cash proceeds net of $133 in stock issuance costs. Holders of the Series A Preferred Stock had limited voting rights and certain protective rights regarding major business decisions of the Company and the payment of dividends to common stockholders. Holders of the Series A Preferred Stock had the ability to appoint one member to the Company’s Board of Directors.

The holders of the Series A Preferred Stock were entitled to receive cumulative preferential dividends at 8% of the stated redemption value of $10 per share compounded annually if declared by the Board of Directors. The Series A Preferred Stock was redeemable at the option of the holders in September 2008 at a redemption price of $10 per share, plus 125% of accrued but unpaid dividends plus 25% of any previously declared dividends that were not paid within 120 days after the respective year end (the “Redemption Price”). The Series A Preferred Stock also carried a liquidation preference equal to its stated Redemption Price and could be redeemed by the Company at any time at the then stated Redemption Price. The amount of the Redemption Price, including issuance costs, was being accreted to the value of the Series A Preferred Stock each year. For the nine months ended September 30, 2005, $1,796 had been accreted to the Redemption Price of the Series A Preferred Stock during the period. As required, the Series A Preferred Stock was redeemed at the $10 stated value per share, or $12,000, upon the consummation of the Company’s initial public offering.

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—(Continued)

(unaudited)

(amounts in thousands, except per share and share amounts)

8. Stock Compensation Plans

2005 Stock Compensation Plan

The Company’s Board of Directors and stockholders approved the Under Armour, Inc. 2005 Omnibus Long-Term Incentive Plan (the “2005 Plan”) in November 2005. The 2005 Plan provides for the issuance of stock options, restricted stock, restricted stock units and other equity awards to officers, directors, key employees and other persons. The maximum number of shares available for issuance under the 2005 Plan is 2,700,000 shares.

Stock options and restricted stock awards under the 2005 Plan generally vest ratably over a two to five year period. The exercise period for stock options is generally ten years from the date of grant. The Company generally receives a tax deduction for any ordinary income recognized by a participant in respect to an award under the 2005 Plan.

The 2005 Plan terminates as of the Company’s 2009 annual meeting of stockholders unless it is approved by stockholders prior to such meeting. If the 2005 Plan is approved by stockholders during this time period, it terminates in 2015. As of September 30, 2006, 2,212,496 shares are available for future grants of awards under the 2005 Plan.

2000 Stock Compensation Plan

The Company’s 2000 Stock Option Plan (the “2000 Plan”) provided for the issuance of stock options, restricted stock and other equity awards to officers, directors, key employees and other persons. The 2000 Plan was terminated and superseded by the 2005 Plan upon the Company’s initial public offering in November 2005. No further awards may be granted under the 2000 Plan.

Stock options and restricted stock awards under the 2000 Plan generally vest ratably over a two to five year period. The exercise period for stock options generally does not exceed five years from the date of grant. The Company generally receives a tax deduction for any ordinary income recognized by a participant in respect to an award under the 2000 Plan.

2006 Non-Employee Director Compensation Plan and Deferred Stock Unit Plan

In April 2006, the Board of Directors adopted the Under Armour, Inc. 2006 Non-Employee Director Compensation Plan (the “2006 Director Compensation Plan”) and the Under Armour, Inc. 2006 Non-Employee Director Deferred Stock Unit Plan (the “2006 DSU Plan”), each effective May 31, 2006. The 2006 Director Compensation Plan provides for cash compensation and awards of stock options and restricted stock units to non-employee Directors of the Company under the 2005 Plan. Non-employee Directors have the option to defer the value of their annual cash retainers as deferred stock units in accordance with the 2006 DSU Plan. Each new non-employee Director will receive an award of restricted stock units upon the initial election to the Board, with the units vesting in three equal annual installments. In addition, each non-employee Director will receive an annual grant of stock options under the 2005 Plan and an annual award of restricted stock units following each annual stockholders’ meeting, vesting 100% on the date of the next annual stockholders’ meeting following the grant date.

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—(Continued)

(unaudited)

(amounts in thousands, except per share and share amounts)

The receipt of the shares otherwise deliverable upon vesting of the restricted stock units will automatically defer into deferred stock units under the 2006 DSU Plan. Under the 2006 DSU Plan each deferred stock unit represents the Company’s obligation to issue one share of the Company’s Class A Common Stock with the shares delivered six months following the termination of the Director’s Board service.

On May 31, 2006 following the Company’s 2006 annual stockholders’ meeting, a total of 4,202 restricted stock units were granted to all non-employee Directors of the Company pursuant to the 2006 Director Compensation Plan. The fair market value of each restricted stock unit was $35.70, which was the closing price of the Company’s Class A Common Stock on the date of grant. One hundred percent of the restricted stock units vest on the date of the next annual stockholders’ meeting following the grant date. Upon vesting, the restricted stock units will automatically convert to deferred stock units on a one-for-one basis.

A summary of the Company’s stock awards outstanding as of September 30, 2006, and changes during the nine months then ended are presented below:


	Stock Options				Restricted Stock
	Number of Stock Options		Weighted Average Exercise Price		Number of Restricted Shares		Weighted Average FMV
Outstanding, beginning of period	4,215,124		$	3.42	125,200		$	7.79
Granted	181,425			35.48	69,600			37.36
Exercised	(1,112,159	)		2.18	—			—
Forfeited	(355,775	)		4.14	(6,300	)		18.61

Outstanding, end of period	2,928,615		$	5.79	188,500		$	18.35

Options exercisable at period-end	805,433		$	1.99

In addition to the 188,500 shares of restricted stock shown above as of September 30, 2006, there were an additional 131,070 shares of restricted stock outstanding that were purchased by members of the Board of Directors. These shares of restricted stock vest through September 2007.

The following table summarizes information about stock options outstanding and exercisable as of September 30, 2006:


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Underlying Shares	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (Years)	Total Intrinsic Value		Number of Underlying Shares	Weighted- Average Exercise Price Per Share		Total Intrinsic Value
$0.17	391,300	$	0.17	4.8	$	15,595	391,300	$	0.17	$	15,595
$0.75 - $0.83	82,500		0.78	5.5		3,237	82,500		0.78		3,237
$1.77 - $2.65	1,694,280		2.28	4.2		63,937	249,381		2.23		9,424
$10.77 - $13.00	583,010		11.43	4.3		16,667	82,252		11.18		2,372
$28.65 - $38.85	177,525	$	35.41	9.5		819	—	$	—		—

	2,928,615				$	100,255	805,433			$	30,628

Under Armour, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—(Continued)

(unaudited)

(amounts in thousands, except per share and share amounts)

9. Segment Data and Related Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company operates exclusively in the consumer products industry in which the Company develops, markets, and distributes apparel, footwear and accessories. Based on the nature of the financial information that is received by the chief operating decision maker, the Company operates within a single operating and reportable segment. Although the Company operates within one reportable segment, it has several product categories within the segment, for which the net revenues attributable to each product category are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Mens	$	79,233	$	57,476	$	173,620	$	129,545
Womens		26,513		18,067		59,586		36,770
Youth		10,980		6,783		22,095		13,241

Apparel		116,726		82,326		255,301		179,556
Footwear		2,001		—		17,585		—
Accessories		3,794		1,050		11,481		7,359

Total net sales		122,521		83,376		284,367		186,915
License revenues		5,224		3,230		11,039		6,835

Total net revenues	$	127,745	$	86,606	$	295,406	$	193,750

The table below summarizes product net revenues by geographic regions based on customer location:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005

U.S. and Canada	$	123,567	$	85,409	$	288,812	$	189,837
Other foreign countries		4,178		1,197		6,594		3,913

Total net revenues	$	127,745	$	86,606	$	295,406	$	193,750

During the nine months ended September 30, 2006 and 2005, substantially all of the Company’s long-lived assets were located in the United States.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Some of the statements contained in this report 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 development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential” or the negative of these terms or other comparable terminology.

The forward-looking statements contained in this report 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, those factors described in our 2005 Form 10-K, as updated in subsequent Forms 10-Q, under “Risk Factors” and in “Qualitative and Quantitative Disclosures About Market Risk.” These factors include, without limitation:

•

our ability to manage our growth effectively;

•

our ability to maintain effective internal controls;

•

the availability, integration and effective operation of management information systems and other technology;

•

increased competition causing us to reduce the prices of our products or to increase significantly our marketing efforts in order to avoid losing market share;

•

changes in consumer preferences or the reduction in demand for performance apparel and other products;

•

our ability to accurately forecast consumer demand for our products;

•

reduced demand for sporting goods and apparel generally;

•

failure of our suppliers or manufacturers to produce or deliver our products in a timely or cost-effective manner;

•

our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;

•

our ability to effectively market and maintain a positive brand image;

•

our ability to attract and maintain the services of our senior management and key employees; and

•

changes in general economic or market conditions, including as a result of political or military unrest or terrorist attacks.

The forward-looking statements contained in this report reflect our views and assumptions only as of the date of this report. 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.

Overview

We are a leading developer, marketer and distributor of branded performance apparel, footwear and accessories. Since our founding in 1995, we have grown and reinforced our brand name and image through sales to athletes and teams at the collegiate and professional level, as well as sales to consumers with active lifestyles. We believe that Under Armour is a widely recognized athletic brand known for its performance and authenticity and is uniquely positioned as a performance alternative to traditional natural fiber products and non-performance apparel and footwear.

We reported net revenues of $295.4 million for the first nine months of 2006, which represented a 52.5% increase from the same period of 2005. We believe that our growth in net revenues has been driven by a growing interest in performance products and the strength of the Under Armour brand in the marketplace relative to our competitors, as evidenced by the increase in sales of our mens, womens and youth products and the introduction of footwear.

We plan to continue to increase our net revenues by building upon our relationships with existing customers and expanding our product offerings in new and existing retail stores. By September 30, 2006, our products were offered primarily in the United States, Canada and Japan, as well as in France, Germany, the United Kingdom and the Netherlands, in over 10,000 retail stores, up from approximately 500 retail stores in 2000. In June 2006, we launched our new footwear products with the introduction of football cleats and slides. New product offerings in 2007 will include baseball cleats, which we will begin shipping in the fourth quarter of 2006. In addition, we plan to expand our product offerings to include additional men’s and women’s performance products as well as expand further into off-field outdoor sports, including hunting, fishing, running, mountain sports, skiing and golf. As we expand into new product lines, sales of our existing product lines continue to grow.

To date, a large majority of our products have been sold in the United States. We believe that our products appeal to athletes and consumers with active lifestyles around the globe. As early as 1999, the Under Armour brand has been sold in the Japanese market place through a licensee. We began selling our products in Canada during 2003 and in the United Kingdom through independent sales agents in 2005. We plan to increase net revenues internationally by adding product offerings through our Japanese licensee and expanding our Canadian and European distribution, including France and Germany. In order to support this initiative, during the first quarter of 2006 we opened a new European Headquarters in Amsterdam, Netherlands that houses our European sales, marketing and logistics functions.

During the first nine months of 2006, we reported license revenues of $11.0 million which represented a 61.5% increase from the same period of 2005. We have entered into licensing agreements with established, high-quality manufacturers to produce and distribute Under Armour branded products to further reinforce our brand identity and increase our net revenues and gross profit. In exchange for the use of our trademarks, our licensees pay us license revenues based on their net sales of core products of socks, hats, bags and other accessories. During 2006 we entered into new licensing agreements, including distribution of products to college bookstores and golf pro shops. We seek to continue to grow our license revenues by working with our existing licensees to offer additional products and increase their distribution, and by selectively entering into new licensing agreements.

Internal Controls

Since 2004, we have invested significant resources to comprehensively document and analyze our system of internal controls over financial reporting. This included the hiring of a Director of Internal Audit and the formation of an Internal Audit Department, along with the initiation of a Company-wide internal controls improvement project. The focus of the improvement project, and the steering committee founded to oversee the project, has been to design, implement and maintain a system of internal controls sufficient to satisfy our reporting obligations as a public company. Throughout 2005 and the first nine months of 2006, we documented significant processes and identified areas requiring improvement. We are designing enhanced processes and

controls to address those areas. We are continuing these initiatives, as well as preparing for our first management report on internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”), for the year ending December 31, 2006. During 2006, one of the major public accounting firms has been assisting us with these efforts. We believe this added expertise and experience, under the direction of our Director of Internal Audit, will be adequate to complete the project. We intend to continue working closely with our independent registered public accounting firm and the Audit Committee of the Board of Directors during this process.

General

Net revenues comprise both net sales and license revenues. Net sales comprise our five primary product categories, which are mens, womens and youth apparel, accessories and our new footwear products introduced in the second quarter of 2006.

Cost of goods sold consists primarily of product costs, inbound freight and duty costs, handling costs to make products floor-ready to customer specifications, write downs for inventory obsolescence and overhead costs associated with our quick turn, Special Make-Up Shop. No cost of goods sold is associated with license revenues. We do not include our distribution facility costs in the calculation of the cost of goods sold, but rather include these costs as a component of our selling, general and administrative expenses. As a result, our gross profit may not be comparable to that of other companies that include distribution facility costs in the calculation of their cost of goods sold. We believe, however, that our distribution facility costs have not been of a sufficient magnitude to materially affect our gross margin for purposes of comparison.

Our selling, general and administrative expenses consist of marketing costs, selling costs, payroll and related costs (excluding those specifically related to marketing and selling) and other corporate costs. Our marketing costs are an important driver of our growth and we strive to manage our marketing costs to be within 10-12% of net revenues on an annual basis. Marketing costs include payroll costs specific to marketing, commercials, print ads, league and player sponsorships and depreciation expense specific to our in-store fixture program. Selling costs consist primarily of payroll costs specific to selling and commissions paid to third parties. Other corporate costs consist primarily of distribution and corporate facility costs and other company-wide administrative expenses. Historically, our selling, general and administrative expenses have increased proportionately to support our growth and new sales initiatives.

Results of Operations

The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues.


	Three Months Ended September 30,						Nine Months Ended September 30,
*(In thousands)*	2006			2005			2006			2005
Net revenues	$	127,745		$	86,606		$	295,406		$	193,750
Cost of goods sold		63,070			43,641			148,212			100,396

Gross profit		64,675			42,965			147,194			93,354
Selling, general and administrative expenses		42,692			28,482			107,662			70,329

Income from operations		21,983			14,483			39,532			23,025
Interest income (expense), net		177			(836	)		1,058			(2,124	)

Income before income taxes		22,160			13,647			40,590			20,901
Provision for income taxes		6,190			5,261			13,462			8,176

Net income	$	15,970		$	8,386		$	27,128		$	12,725


	Three Months Ended September 30,						Nine Months Ended September 30,
*(As a percentage of net revenues)*	2006			2005			2006			2005
Net revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		49.4	%		50.4	%		50.2	%		51.8	%

Gross profit		50.6	%		49.6	%		49.8	%		48.2	%
Selling, general and administrative expenses		33.4	%		32.9	%		36.4	%		36.3	%

Income from operations		17.2	%		16.7	%		13.4	%		11.9	%
Interest income (expense), net		0.1	%		(0.9	%)		0.3	%		(1.1	%)

Income before income taxes		17.3	%		15.8	%		13.7	%		10.8	%
Provision for income taxes		4.8	%		6.1	%		4.5	%		4.2	%

Net income		12.5	%		9.7	%		9.2	%		6.6	%

Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005

Net revenues increased $41.1 million, or 47.5%, to $127.7 million for the three months ended September 30, 2006 from $86.6 million for the same period in 2005. This increase was the result of increases in both our net sales and license revenues as reflected in the product category table below.


	Three Months Ended September 30,
*(In thousands)*	2006		2005		$ Change		% Change
Mens	$	79,233	$	57,476	$	21,757	37.9	%
Womens		26,513		18,067		8,446	46.8	%
Youth		10,980		6,783		4,197	61.9	%

Apparel		116,726		82,326		34,400	41.8	%
Footwear		2,001		—		2,001	—
Accessories		3,794		1,050		2,744	261.3	%

Total net sales		122,521		83,376		39,145	47.0	%
License revenues		5,224		3,230		1,994	61.7	%

Total net revenues	$	127,745	$	86,606	$	41,139	47.5	%

Net sales increased $39.1 million, or 47.0%, to $122.5 million for the three months ended September 30, 2006 from $83.4 million during the same period in 2005 as noted in the table above. The increase in net sales primarily reflects:

•

continued unit volume growth of our existing apparel products, such as ColdGear^® compression products, primarily sold to existing retail customers due to additional retail stores and expanded floor space, while pricing of existing apparel products remained relatively unchanged;

•

increased womens and youth market penetration by leveraging current customer relationships; and

•

new products introduced subsequent to September 30, 2005 within all product categories, most significantly in our compression and training categories.

License revenues increased $2.0 million, or 61.7%, to $5.2 million for the three months ended September 30, 2006 from $3.2 million during the same period in 2005. This increase in license revenues was a result of increased sales by our licensees due to increased distribution, continued unit volume growth, new product offerings and new licensing agreements, which now includes distribution of products to college bookstores and golf pro shops.

Gross profit increased $21.7 million to $64.7 million for the three months ended September 30, 2006 from $43.0 million for the same period in 2005. Gross profit as a percentage of net revenues, or gross margin, increased approximately 100 basis points to 50.6% for the three months ended September 30, 2006 from 49.6% during the same period in 2005. This increase in gross margin was primarily driven by the following:

•

lower product costs as a result of greater supplier discounts for increased volume and lower cost sourcing arrangements, accounting for an approximate 170 basis point increase;

•

increased direct to consumer higher margin sales, along with increased license revenues, accounting for an approximate 80 basis point increase; partially offset by

•

increased sales returns and allowances, along with inventory reserves, partially offset by lower customer incentives as a percentage of net revenues, accounting for an approximate 100 basis point decrease; and

•

lower gross margin attributable to the introduction of our footwear products which have lower profit margins than our current apparel products, accounting for an approximate 50 basis point decrease.

Selling, general and administrative expenses increased $14.2 million to $42.7 million for the three months ended September 30, 2006 from $28.5 million for the same period in 2005. As a percentage of net revenues, selling, general and administrative expenses increased to 33.4% for the three months ended September 30, 2006 from 32.9% for the same period in 2005. These changes were primarily attributable to the following:

•

Marketing costs increased $2.7 million to $12.8 million for the three months ended September 30, 2006 from $10.1 million during the same period in 2005 primarily due to the new footwear promotional rights agreement with NFL Properties, LLC (the “NFL Agreement”), sponsorship of new teams on the collegiate level, increased in-store marketing signage and fixtures, and marketing salaries. These increases are partially offset by lower film advertising campaign expenditures in the third quarter of 2006 compared to the same period in the prior year. As a percentage of net revenues, marketing costs decreased to 10.0% for the three months ended September 30, 2006 from 11.7% during the same period in 2005 primarily due to the timing of our advertising campaigns.

•

Selling costs increased $2.4 million to $6.5 million for the three months ended September 30, 2006 from $4.1 million during the same period in 2005. This increase was primarily due to continued investment in our international growth initiatives, including the further development of our European business, increased headcount in our sales force and cooperative advertising with our customers. As a percentage of net revenues, selling costs increased to 5.2% during the three months ended September 30, 2006 from 4.8% in 2005 primarily due to our international growth initiatives.

•

Payroll and related costs (excluding those specifically related to marketing and selling) increased $2.9 million to $10.4 million during the three months ended September 30, 2006 from $7.5 million during the same period in 2005. The increase during the third quarter of 2006 was due primarily to the following initiatives: we continued to build our team to design and source our expanding apparel and footwear lines; we added personnel to our information technology team to support our enterprise resource planning (“ERP”) system; we added distribution facility personnel to support our growth; we added personnel to operate our seven new retail outlet stores; and we added personnel to our legal and compliance team. As a percentage of net revenues, payroll and related costs (excluding those specifically related to marketing and selling) decreased to 8.2% during the three months ended September 30, 2006 from 8.6% during the same period in 2005 due to the continued increase in net revenues period-over-period.

•

Other corporate costs, excluding payroll and related costs, increased $6.1 million to $12.9 million during the three months ended September 30, 2006 from $6.8 million during the same period in 2005. This increase was attributable primarily to the expansion of our leased corporate office space, additional distribution facility operating costs to support our growth, additional retail outlet store leases and operating costs, increased costs relating to further development of our Global Direct (website and catalog sales) program, post-implementation consulting costs and depreciation expense related to our new ERP system, and increased audit fees and SOX compliance costs. As a percentage of net revenues, other corporate costs increased to 10.1% during the three months ended September 30, 2006 from 7.8% during the same period in 2005 primarily due to the items noted above.

Income from operations increased $7.5 million, or 51.8%, to $22.0 million during the three months ended September 30, 2006 from $14.5 million during the same period in 2005. Income from operations as a percentage of net revenues increased to 17.2% during the three months ended September 30, 2006 from 16.7% during the same period in 2005. This increase was primarily a result of the increase in gross margin noted above, partially offset by an increase in selling, general and administrative expenses.

Interest income (expense), net increased $1.0 million to $0.2 million in net interest income during the three months ended September 30, 2006 from $0.8 million in net interest expense during the same period in 2005. This increase primarily was due to the repayment of our revolving credit facility in November 2005, along with interest income earned on a portion of the proceeds from our initial public offering.

Provision for income taxes increased $0.9 million to $6.2 million during the three months ended September 30, 2006 from $5.3 million during the same period in 2005. During the three months ended September 30, 2006, we adjusted our projected annual effective tax rate for the year downward to reflect the impact of a new state tax credit earned. As a result, our effective tax rate was 27.9% for the three months ended September 30, 2006 compared to 38.6% during the same period in 2005. The Company’s 2006 annual effective tax rate is expected to approximate 33.6% primarily due to the state tax credit earned in 2006.

Net income increased $7.6 million, or 90.4%, to $16.0 million during the three months ended September 30, 2006 from $8.4 million during the same period in 2005, as a result of the factors described above.

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005

Net revenues increased $101.6 million, or 52.5%, to $295.4 million for the nine months ended September 30, 2006 from $193.8 million for the same period in 2005. This increase was the result of increases in both our net sales and license revenues as reflected in the product category table below.


	Nine Months Ended September 30,
*(In thousands)*	2006		2005		$ Change		% Change
Mens	$	173,620	$	129,545	$	44,075	34.0	%
Womens		59,586		36,770		22,816	62.1	%
Youth		22,095		13,241		8,854	66.9	%

Apparel		255,301		179,556		75,745	42.2	%
Footwear		17,585		—		17,585	—
Accessories		11,481		7,359		4,122	56.0	%

Total net sales		284,367		186,915		97,452	52.1	%
License revenues		11,039		6,835		4,204	61.5	%

Total net revenues	$	295,406	$	193,750	$	101,656	52.5	%

Net sales increased $97.5 million, or 52.1%, to $284.4 million for the nine months ended September 30, 2006 from $186.9 million during the same period in 2005 as noted in the table above. The increase in net sales primarily reflects:

•

$17.6 million of new footwear product sales, primarily football cleats, which were introduced in the second quarter of 2006;

•

continued unit volume growth of our existing products, such as ColdGear^® compression products, primarily sold to existing retail customers due to additional retail stores and expanded floor space, while pricing of existing products remained relatively unchanged;

•

increased womens and youth market penetration by leveraging current customer relationships; and

•

new products introduced subsequent to September 30, 2005 within all product categories, most significantly in our compression and training categories.

License revenues increased $4.2 million, or 61.5%, to $11.0 million for the nine months ended September 30, 2006 from $6.8 million during the same period in 2005. This increase in license revenues was a result of increased sales by our licensees due to increased distribution, continued unit volume growth, new product offerings and new licensing agreements, which now includes distribution of products to college bookstores and golf pro shops.

Gross profit increased $53.8 million to $147.2 million for the nine months ended September 30, 2006 from $93.4 million for the same period in 2005. Gross profit as a percentage of net revenues, or gross margin, increased approximately 160 basis points to 49.8% for the nine month period ending September 30, 2006 from 48.2% during the same period in 2005. This increase in gross margin was primarily driven by the following:

•

lower product costs as a result of greater supplier discounts for increased volume and lower cost sourcing arrangements, accounting for an approximate 240 basis point increase;

•

decreased close-out sales in the 2006 period, accounting for an approximate 70 basis point increase;

•

increased direct to consumer higher margin sales, along with increased license revenues, accounting for an approximate 40 basis point increase; partially offset by

•

lower gross margin attributable to the introduction of our footwear products which have lower profit margins than our current apparel products, accounting for an approximate 100 basis point decrease; and

•

increased sales returns and allowances, partially offset by lower customer incentives as a percentage of net revenues, accounting for an approximate 90 basis point decrease.

Selling, general and administrative expenses increased $37.4 million to $107.7 million for the nine months ended September 30, 2006 from $70.3 million for the same period in 2005. As a percentage of net revenues, selling, general and administrative expenses increased to 36.4% for the nine months ended September 30, 2006 from 36.3% for the same period in 2005. These changes were primarily attributable to the following:

•

Marketing costs increased $7.9 million to $30.9 million for the nine months ended September 30, 2006 from $23.0 million during the same period in 2005 primarily due to the NFL Agreement, sponsorship of new teams on the collegiate level, increased in-store marketing signage and fixtures and marketing salaries. As a percentage of net revenues, marketing costs decreased to 10.5% for the nine months ended September 30, 2006 from 11.9% during the same period in 2005 due primarily to the to the timing of our advertising campaigns.

•

Selling costs increased $7.2 million to $18.6 million for the nine months ended September 30, 2006 from $11.4 million during the same period in 2005. This increase was primarily due to startup costs and continued investment in our international growth initiatives, including the establishment of our European business, and increased headcount in our domestic and international sales force. As a percentage of net revenues, selling costs increased to 6.3% during the nine months ended September 30, 2006 from 5.9% in 2005 primarily due to our international growth initiatives.

•

Payroll and related costs (excluding those specifically related to marketing and selling) increased $8.9 million to $28.1 million during the nine months ended September 30, 2006 from $19.2 million during the same period in 2005. The increase during the nine months ended September 30, 2006 was primarily due to the following initiatives: we continued to build our team to design and source our expanding apparel and footwear lines; we added personnel to our information technology team to support our ERP system; we added distribution facility personnel to support our growth; we added personnel to operate our seven new retail outlet stores; we added personnel to support our expanding Global Direct program; and we added personnel to our legal and compliance team. As a percentage of net revenues, payroll and related costs (excluding those specifically related to marketing and selling) decreased to 9.5% during the nine months ended September 30, 2006 from 9.9% during the same period in 2005 due to the continued increase in net revenues period-over-period.

•

Other corporate costs, excluding payroll and related costs, increased $13.4 million to $30.1 million during the nine months ended September 30, 2006 from $16.7 million during the same period in 2005. This increase was primarily attributable to additional distribution facility operating costs, additional retail outlet store leases and operating costs, increased costs relating to further development of our Global Direct program, litigation reserves incidental to our business, post-implementation consulting costs and depreciation expense related to our new ERP system along with necessary costs associated with being a public company, including increased audit fees, insurance and SOX compliance costs. As a percentage of net revenues, other corporate costs increased to 10.2% during the nine months ended September 30, 2006 from 8.6% during the same period in 2005 due to the items noted above.

Income from operations increased $16.5 million, or 71.7%, to $39.5 million during the nine months ended September 30, 2006 from $23.0 million during the same period in 2005. Income from operations as a percentage of net revenues increased to 13.4% during the nine months ended September 30, 2006 from 11.9% during the same period in 2005. This increase was primarily a result of increases in gross margin.

Interest income (expense), net increased $3.2 million to $1.1 million in net interest income during the nine months ended September 30, 2006 from $2.1 million in net interest expense during the same period in 2005. This increase was due to the repayment of our revolving credit facility in November 2005, along with interest income earned on a portion of the proceeds from our initial public offering.

Provision for income taxes increased $5.3 million to $13.5 million during the nine months ended September 30, 2006 from $8.2 million during the same period in 2005. During the three months ended September 30, 2006, we adjusted our projected annual effective tax rate for the year downward to reflect the impact of a new state tax credit earned. As a result, our effective tax rate was 33.2% for the nine months ended September 30, 2006 compared to 39.1% during the same period in 2005. The Company’s 2006 annual effective tax rate is expected to approximate 33.6% primarily due to the state tax credit earned in 2006.

Net income increased $14.4 million, or 113.2%, to $27.1 million during the nine months ended September 30, 2006 from $12.7 million during the same period in 2005, as a result of the factors described above.

Seasonality

During 2005 and 2004, we recognized approximately 76% and 79%, respectively, of our income from operations in the last six months of the year, driven by increased sales volume of our products during the fall selling season, reflecting our historical strength in fall sports, and the seasonality of our higher priced ColdGear^® line. Approximately 62% and 66% of our net revenues were generated during the last two quarters of 2005 and 2004, respectively. The level of our working capital reflects the seasonality and growth in our business. We generally expect inventory, accounts payable and accrued expenses to be higher in the second and third quarters in preparation for the fall selling season.

Financial Position, Capital Resources and Liquidity

Our cash requirements have principally been for working capital and capital expenditures. Working capital has historically been funded from available revolving credit facilities. Our working capital requirements reflect the seasonality and growth in our business as we recognize a significant increase in sales during the fall selling season. Cash requirements for capital investments needed to grow our business have historically been funded through subordinated debt and capital lease obligations. Our capital investments have included expanding our in-store fixture program, improvements to our distribution and corporate facilities to support our growth, build-out of our new retail outlet stores and more recently, the investment in a Company-wide initiative to implement our ERP system, which became operational in April 2006.

We believe that our cash from operations and borrowings available to us under our senior and subordinated debt facilities, together with cash and cash equivalents on hand will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months.

The following table presents the major components of net cash flows provided by and used in operating, investing and financing activities for the periods stated:


	Nine Months Ended September 30,
*(in thousands)*	2006			2005
Net cash (used in) provided by:
Operating activities	$	(15,856	)	$	2,497
Investing activities		(10,957	)		(8,227	)
Financing activities		8,252			5,014
Effect of exchange rate changes on cash and cash equivalents		(159	)		(45	)

Net decrease in cash and cash equivalents	$	(18,720	)	$	(761	)

Operating Activities

Operating activities consist primarily of net income adjusted for certain non-cash items, including depreciation, deferred income taxes, changes in reserves for doubtful accounts, returns, discounts and inventories and the effect of changes in operating assets and liabilities, principally accounts receivable, inventories, accounts payable and accrued expenses.

Cash used in operating activities was $15.9 million during the nine months ended September 30, 2006 compared to cash provided by operating activities of $2.5 million during the same period in 2005. This $18.4 million additional net use of cash in operating activities was primarily due to the following:

•

Higher investment in receivables of approximately $17.5 million period-over-period. The increase is partially attributable to the increase in net sales of 47.0% in the third quarter of 2006 as compared to the same period last year, as well as a higher concentration of net sales and receivables from our larger sporting goods customers which generally are extended more favorable payment terms compared to our other customers.

•

Building inventory levels during the first nine months of 2006 to support our anticipated sales growth, along with our initial inventory build-up to service our new European business.

The reductions in positive cash flows noted above were partially offset by an increase in net income of $14.4 million period-over-period, along with lower cash outflows related to the timing of cash outflows related to certain accrued expenses.

Beginning in 2006, the majority of incentives earned by our customers requires us to make a cash disbursement to such customers and are recorded as liabilities within accrued expenses. Historically, however, we did not typically make cash disbursements in connection with customer incentives but rather credited these customers’ accounts and accounted for such incentives as an offset to accounts receivable. As a result, as of September 30, 2006, there were $6.2 million in customer discounts recorded within accrued expenses and only $0.9 million recorded as an offset to accounts receivable. However, as of December 31, 2005, there were no customer discounts recorded within accrued expenses and $7.4 million recorded as an offset to accounts receivable. This 2006 change in customer agreements and the related accounting impact will contribute to higher net accounts receivable balances and accrued expenses in 2006 and future periods as compared to 2005 and prior periods.

Investing Activities

Cash used in investing activities, which primarily represents capital expenditures, increased $2.8 million to $11.0 million during the nine months ended September 30, 2006 from $8.2 million during the same period in 2005. This increase in cash used in investing activities primarily represents the additional costs to implement our new ERP system, expanding our in-store fixture program and the build-out of our new retail outlet stores. The new ERP system became operational in April 2006. Our total capital investment in connection with the initial implementation and ongoing upgrades of the ERP system and increased functionality is expected to be approximately $10.5 million over a five-year period.

In April 2006, we began investing a portion of our available cash and cash equivalents in short-term investments, which consist of auction rate municipal bonds. These investments have stated maturities of 14 to 42 years and have variable interest rates, which typically reset at regular auctions every 7 to 35 days. Despite the long-term nature of their stated contractual maturities, we have the ability to liquidate these securities primarily through the auction process. The income generated from these short-term investments is tax exempt and recorded as interest income. All investments in these securities were sold prior to September 30, 2006. Proceeds were invested in highly liquid investments with an original maturity of three months or less.

Anticipated capital investments for all of 2006 are approximately $15.0 to $16.0 million representing approximately $6.5 million in our in-store fixture program, approximately $3.0 million for our information technology initiatives including our newly implemented ERP system, approximately $2.5 million in improvements to our distribution facility, approximately $2.4 million in additional investments in our retail outlet stores and other general corporate needs.

Financing Activities

Cash provided by financing activities increased $3.3 million to $8.3 million during the nine months ended September 30, 2006 compared to cash provided by financing activities of $5.0 million during the same period in 2005. This increase period-over-period was primarily due to proceeds and excess tax benefits received from our stock-based compensation arrangements, coupled with the impact of not declaring or paying dividends in the 2006 period. The 2005 period includes the receipt of proceeds from the revolving credit facility.

Revolving Credit Facility Agreement

In November 2005, we repaid the $25.0 million term note plus interest with proceeds from the initial public offering (see Note 6 of the consolidated financial statements). The term note portion of the financing agreement was then terminated and as such we expensed $0.3 million of deferred financing costs during the fourth quarter of 2005. With the termination of the term note, our trademarks and other intellectual property were released as a component of the collateral.

We currently have available borrowings of up to $75.0 million through 2010 under the revolving credit facility based on our eligible inventory and accounts receivable balances. We have the option to increase the size of the revolving credit facility up to $100.0 million if certain conditions are satisfied. The revolving credit facility bears interest based on the monthly average daily balance outstanding at, our option, either LIBOR plus an applicable margin (varying from 1.75% to 3.00%) or JP Morgan Chase Bank’s prime rate plus an applicable margin (varying from -0.75% to 0.50%). The applicable margin is calculated quarterly and varies based on certain financial ratios as defined in the agreement. The revolving credit facility also carries a line of credit fee for available but unused borrowings which can vary from 0.13% to 0.63% based on certain ratios as defined in the agreement.

This agreement contains a number of restrictions that limit our ability, among other things, to borrow money; pledge our accounts receivable, inventory, intellectual property and most of our other assets as security in our borrowings or transactions; pay dividends on stock; redeem or acquire any of our securities; sell certain assets; make certain investments; guaranty certain obligations of third parties; undergo a merger or consolidation; or engage in any activity materially different from those presently conducted by us.

This agreement also provides the lenders with the ability to reduce the valuation of our inventory and receivables and thereby reduce our ability to borrow under the revolving credit facility even if we are in compliance with all conditions of the agreement. In addition, we are required to comply with certain financial covenants in the event we fail to maintain a minimum borrowing availability of $15.0 million. These covenants may restrict our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants under our revolving credit facility could result in a default under the facility. This could cause the lenders to accelerate the timing of payments and exercise their lien on essentially all of our assets, which would have a material adverse effect on our business, operations, financial condition and liquidity. In addition, because our revolving credit facility bears interest at variable interest rates, which we do not anticipate hedging against, increases in interest rates would increase our cost of borrowing, resulting in a decline in our net income and cash flow. As of September 30, 2006 there were no amounts outstanding under the revolving credit facility, and we were in compliance with these covenants.

Subordinated Debt and Lease Obligations

In March 2005, we entered into a loan and security agreement with SunTrust Bank to finance the acquisition of up to $17.0 million of qualifying capital investments. This agreement is collateralized by a first lien on these assets, but is otherwise subordinate to the revolving credit facility. Through September 30, 2006, we have financed $7.9 million of capital investments under this agreement. Interest on outstanding borrowings accrues at an average annual rate of 6.5%. At September 30, 2006, the outstanding principal balance was $5.2 million.

In December 2003, we entered into a master loan and security agreement with Wachovia Bank, National Association, which was subordinate to the revolving credit facility. Under this agreement, we borrowed $1.3 million for the purchase of qualifying furniture and fixtures. The interest rate was 7.0% annually, and principal and interest payments were due monthly through February 2006. The outstanding principal balance was repaid during February 2006.

We lease warehouse space, office facilities, space for our retail outlet stores and certain equipment under non-cancelable operating and capital leases.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. To prepare these consolidated financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect our reported revenues and expenses. Judgments must be made about the disclosure of contingent liabilities as well. Actual results could be significantly different from these estimates. We believe that the following discussion addresses the critical accounting policies that are necessary to understand and evaluate our reported consolidated financial results.

Revenue Recognition

Net revenues consist of both net sales and license revenues. Net sales are recognized upon transfer of ownership, including passage of title to the customer and transfer of risk of loss related to those goods. Transfer of title and risk of loss is based upon shipment under free on board (“FOB”) shipping-point for most goods. In some instances, transfer of title and risk of loss takes place at the point of sale (e.g. at our retail outlet stores). Net sales are recorded net of sales discounts and certain customer-based incentives along with the reserve for returns. Provisions for sales discounts and customer-based incentives are based on contractual obligations with certain major customers. Returns are estimated at the time of sale based primarily on historical experience. License revenues are recognized based upon shipment of licensed products sold by our licensees.

Sales Returns, Allowances and Discounts

We record reductions to revenue for estimated customer returns, allowances and discounts. We base our estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns and allowances that have not yet been received by us. We record reductions to gross sales for certain customer-based incentives, which include volume-based discounts and certain cooperative advertising credits. We base our estimates for customer returns, allowances and discounts primarily on anticipated sales volume throughout the year. The actual amount of customer returns, allowances and discounts, which is inherently uncertain, may differ from our estimates. If we determined that actual or expected returns, allowances or discounts were significantly greater or lower than the reserves we had established, we would record a reduction or increase, as appropriate, to net sales in the period in which we made such a determination.

Reserve for Uncollectible Accounts Receivable

We make ongoing estimates relating to the collectibility of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the reserve, we consider our historical level of credit losses and make judgments about the

creditworthiness of significant customers based on ongoing credit evaluations. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determined that a smaller or larger reserve was appropriate, we would record a benefit or charge to selling, general and administrative expense in the period in which we made such a determination. The risk associated with uncollectible accounts receivable may be partially mitigated by our Credit Approved Receivables Agreement. Under this agreement, we have the ability to transfer credit risk for certain customers approved by the lender. Within these customers, we specifically identify individual invoices (“Approved Receivables”), up to a customer-specific maximum amount, for credit risk coverage. We incur a fee for the amount of Approved Receivables to be covered. Only upon the financial inability of a covered customer to pay such invoices, and subject to us maintaining certain collection and reporting procedures, will the credit risk associated with the Approved Receivables be transferred to the lender. Historically, we have not transferred such credit risk on any Approved Receivables, and no transactions have ever been consummated under the Credit Approved Receivables Agreement. Due to our growing sales concentration with lower risk, larger sporting good retailers, and our historical low level of credit losses, at September 30, 2006 we elected not to utilize our credit risk coverage.

Inventory Valuation and Reserves

We value our inventory at standard costs which approximates the lower of cost or market, using the first-in, first-out method of cost determination. Market value is estimated based upon assumptions made about future demand and retail market conditions. If we determine that the estimated market value of our inventory is less than the carrying value of such inventory, we provide a reserve for such difference as a charge to cost of goods sold. If actual market conditions are less favorable than those projected by us, further adjustments may be required that would increase our cost of goods sold in the period in which the adjustments were recorded.

Long-Lived Assets

The acquisition of long-lived assets, including furniture and fixtures, office equipment, plant equipment, leasehold improvements, computer hardware and software and in-store fixtures, is recorded at cost and this cost is depreciated over the asset’s estimated useful life. We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable. These factors may include a significant deterioration of operating results, changes in business plans or changes in anticipated cash flows. When factors indicate that an asset should be evaluated for possible impairment, we review long-lived assets to assess recoverability from future operations using undiscounted cash flows. Impairments are recognized in earnings to the extent that the carrying value exceeds fair value.

Intangible Asset

An intangible asset that is determined to have a definite life is amortized over the asset’s estimated useful life and is evaluated and measured for impairment in accordance with our Long-Lived Assets critical accounting policy discussed above.

Income Tax Provision

We estimate our effective tax rate for the full year and record a quarterly income tax provision in accordance with the expected effective annual tax rate. As the year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This process may result in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision equals the expected effective annual tax rate.

Stock-Based Compensation Expense

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment (revised 2004) (“SFAS 123R”), which revises SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) and supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). SFAS 123R requires that all stock-based compensation be recognized as an expense in the consolidated financial statements and that such expense be measured at the fair value of the award. SFAS 123R also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows within the statement of cash flows.

We adopted SFAS 123R using the modified prospective method of application, which requires the recognition of compensation expense on a prospective basis; therefore, prior period consolidated financial statements have not been restated. Compensation expense recognized includes the expense of stock rights granted on and subsequent to January 1, 2006 and the expense for the remaining vesting term of stock rights subsequent to our initial filing of the S-1 Registration Statement with the SEC on August 26, 2005. Stock rights granted prior to our initial filing of the S-1 Registration Statement are specifically excluded from SFAS 123R and will continue to be accounted for in accordance with APB 25 and Financial Interpretation (“FIN”) No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, until fully amortized through 2010.

Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the input of highly subjective assumptions, including the expected life of the stock-based payment awards and stock price volatility. We use the Black-Scholes option-pricing model to value compensation expense. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future (see Note 2 to the Consolidated Financial Statements for a further discussion on stock-based compensation).

New Accounting Pronouncements

In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 requires financial statement errors to be quantified using both balance sheet and income statement approaches and an evaluation on whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for fiscal years ending after November 15, 2006. We are currently evaluating the impact of adopting SAB 108 on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting SFAS 157 on our consolidated financial statements.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FIN No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”), which provides additional guidance and clarifies the accounting for uncertainty in income tax positions. FIN 48 defines the threshold for recognizing tax return positions in the financial statements as “more likely than not” that the position is sustainable, based on its technical merits. FIN 48 also provides guidance on the measurement, classification and disclosure of tax return positions in the financial statements. FIN 48 is effective for the first reporting period beginning after December 15, 2005, with the cumulative effect of the change in accounting principle recorded as an adjustment to the beginning balance of retained earnings in the period of adoption. We are currently evaluating the impact of adopting FIN 48 on our consolidated financial statements.

In June 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (“EITF 06-3”). EITF 06-3 requires the disclosure of our accounting policy regarding its gross or net presentation of externally imposed taxes on revenue-producing transactions in the notes to the consolidated financial statements. EITF 06-3 is effective for the first annual or interim reporting period beginning after December 15, 2006. We are currently evaluating the impact of adopting EITF 06-3 on our consolidated financial statement disclosures.

In October 2005, the FASB issued Staff Position No. SFAS 13-1, Accounting for Rental Costs Incurred during a Construction Period (“FSP SFAS 13-1”). FSP SFAS 13-1 concludes that there is no distinction between the right to use a leased asset during and after the construction period; therefore rental costs incurred during the construction period should be recognized as rental expense and deducted from income from continuing operations. FSP SFAS 13-1 is effective for the first reporting period beginning after December 15, 2005, although early adoption is permitted. The adoption of FSP SFAS 13-1 in 2006 had no material effect on our consolidated financial statements.

In December 2004, the FASB issued SFAS 123R, which revises SFAS 123, and supersedes APB 25. SFAS 123R requires all stock-based compensation to be recognized as an expense in the financial statements and that such costs be measured according to the fair value of the award. SFAS 123R became effective for us on January 1, 2006. Prior to January 1, 2006, we accounted for grants of stock rights in accordance with APB 25 and provides pro forma effects of SFAS 123 in accordance with SFAS 148 as discussed in Note 2 of the consolidated financial statements. In March 2005, Staff Accounting Bulletin No. 107, Share-Based Payment, (“SAB 107”) was issued to provide guidance from the SEC to simplify some of the implementation challenges of SFAS 123R as this statement relates to the valuation of the share-based payment arrangements for public companies. We applied the principles of SAB 107 in connection with the adoption of SFAS 123R. As a result of adopting SFAS 123R we recorded $0.5 million and $1.0 million in stock-based compensation in selling, general and administrative expenses during the three and nine months ended September 30, 2006, respectively.

materials. This statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The adoption of SFAS 151 in 2006 had no effect on our consolidated financial statements.

ITEM 4. CONTROLS AND PROCEDURES

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2006, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

We are in the process of implementing an enterprise resource planning (“ERP”) system, developed by SAP, to replace our legacy computer system. This system became operational in April 2006 and we are making appropriate changes to internal controls and procedures as the implementation progresses. Other than the changes required by the implementation of the SAP ERP system, none of which materially impaired or significantly altered the effectiveness of our internal controls over financial reporting, there were no material changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the effectiveness of our internal controls over financial reporting.

We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 by our year ending December 31, 2006. The evidence of such compliance is due no later than the time we file our annual report for the year ending December 31, 2006. We believe adequate resources and expertise, both internal and external have been put in place to meet this requirement.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

The Risk Factors included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as updated on the Company’s Form 10-Q for the quarter ended June 30, 2006, have not materially changed.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

From July 20, 2006 through October 10, 2006, we issued 185,016 shares of Class A Common Stock upon the exercise of previously granted employee stock options to employees at a weighted average exercise price of $3.80 per share, for an aggregate amount of consideration of $702,988. The following issuances of Class A Common Stock were made on the date indicated at exercise prices totaling the aggregate amount of consideration set forth in the following table:


Date	Number of Shares Issued	Aggregate Amount of Exercise Price
July 26, 2006	3,500	$	2,527
July 31, 2006	8,775		21,958
August 1, 2006	16,500		15,225
August 2, 2006	13,125		16,157
August 3, 2006	7,250		6,796
August 4, 2006	1,000		2,110
August 7, 2006	4,500		11,925
August 8, 2006	2,450		6,493
August 9, 2006	500		83
August 10, 2006	11,600		13,788
August 11, 2006	1,000		1,138
August 14, 2006	2,000		1,607
August 15, 2006	1,700		1,449
August 18, 2006	10,600		113,350
August 22, 2006	3,000		21,707
August 24, 2006	1,500		16,155
August 25,2006	5,000		29,285
August 28, 2006	7,925		69,721
August 30, 2006	5,891		10,487
August 31, 2006	3,000		24,190
September 1, 2006	4,700		8,190
September 5, 2006	8,000		45,690
September 8, 2006	4,000		666
September 11, 2006	9,500		67,147
September 18, 2006	12,500		90,797
September 25, 2006	12,500		90,797
October 2, 2006	4,500		4,636
October 5, 2006	500		83
October 9, 2006	5,500		6,747
October 10, 2006	12,500		2,084

TOTAL	185,016	$	702,988

The issuances of securities described above were made in reliance upon Section 4(2) under the Securities Act in that any issuance did not involve a public offering or under Rule 701 promulgated under the Securities Act, in that they were offered and sold either pursuant to written compensatory plans or pursuant to a written contract relating to compensation, as provided by Rule 701.

ITEM 5. OTHER INFORMATION

On October 19, 2006, the Company entered into an Industrial Lease Agreement with Marley Neck 3R, LLC to lease an additional distribution facility. The lease commences on November 1, 2006 and ends on April 30, 2013, with one option to extend the lease term for an additional five years. The leased space is 100,000 square feet with obligations to increase to 308,000 square feet by May 1, 2009. A copy of this agreement is filed as Exhibit 10.1 to this Form 10-Q.

ITEM 6. EXHIBITS


Exhibit No.
10.1		Industrial Lease Agreement between the Company and Marley Neck 3R, LLC dated October 19, 2006 (portions of this exhibit have been omitted pursuant to a request for confidential treatment)

31.1		Section 302 Chief Executive Officer Certification

31.2		Section 302 Chief Financial Officer Certification

32.1		Section 906 Chief Executive Officer Certification

32.2		Section 906 Chief Financial Officer Certification

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


UNDER ARMOUR, INC.

By:		/s/ WAYNE A. MARINO
		Wayne A. Marino
		Executive Vice President and Chief Financial Officer

Dated: November 7, 2006

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