8-K: Under Armour Reaches $434 Million Settlement in Securities Class Action Lawsuit

Under Armour has agreed to a $434 million settlement to resolve a securities class action lawsuit related to disclosures and accounting practices between 2015 and 2016.

Summary

• Under Armour has reached a settlement agreement in a securities class action lawsuit dating back to 2017.
• The lawsuit concerned the company's disclosures and accounting practices related to sales between the third quarter of 2015 and the fourth quarter of 2016.
• The settlement involves a payment of $434 million to the class members, who purchased Under Armour stock between September 16, 2015, and November 1, 2019.
• The company will also maintain the separation of the Chair and CEO roles for at least three years.
• Additionally, restricted stock grants to key executives will include performance-based vesting conditions during this three-year period.
• Under Armour expects to fund the settlement using cash on hand and/or borrowings from its revolving credit facility.
• The company anticipates that less than 20% of the settlement amount will be offset by director and officer liability insurance policies.
• As of March 31, 2024, Under Armour had $858.7 million in cash and cash equivalents and no drawings on its $1.1 billion revolving credit facility.
• The company had previously accrued $100 million for this matter, and expects to increase the total accrual to $434 million in the first quarter of fiscal year 2025.

Sentiment

Score: 4

Explanation: The settlement is a significant financial burden and indicates past issues, but it resolves a long-standing legal matter. The company has the resources to cover the settlement, but the overall impact is negative.

Positives

• The settlement resolves a long-standing legal issue, removing uncertainty for the company.
• The company has sufficient cash and access to a credit facility to cover the settlement costs.
• The agreement includes non-monetary provisions that may improve corporate governance.
• The company expects a portion of the settlement to be covered by insurance.

Negatives

• The settlement will cost the company $434 million, a significant financial outlay.
• The company will need to increase its accrual for this matter by $334 million in the next quarter.
• There is no guarantee that the litigation with insurance carriers will be resolved in the company's favor.
• The settlement is not an admission of fault or wrongdoing, but it does indicate past issues with disclosures and accounting practices.

Risks

• The settlement amount could impact the company's financial performance in the short term.
• The ongoing litigation with insurance carriers could result in additional costs if not resolved favorably.
• The company's ability to fund the settlement using cash and/or borrowings could affect its financial flexibility.
• There is a risk that the court may not approve the settlement.

Future Outlook

The company expects to finalize the settlement agreement and obtain court approval. They anticipate funding the settlement with cash and/or borrowings, with a portion offset by insurance. The company also expects to continue separating the roles of Chair and CEO for at least three years and implement performance-based vesting for key executives.

Management Comments

• The settlement is not an admission of fault or wrongdoing by the Company or Mr. Plank.
• The company believes the expectations reflected in the forward-looking statements are reasonable, but cannot guarantee future events.

Industry Context

This settlement is a significant event for Under Armour, resolving a long-standing legal issue. It is not uncommon for companies to face securities class action lawsuits, particularly those related to accounting practices and disclosures. The settlement amount is substantial and will likely be closely watched by investors and competitors.

Comparison to Industry Standards

• The $434 million settlement is a significant amount, but not unprecedented in securities class action litigation.
• Comparable companies such as Nike and Adidas have faced similar lawsuits, though the specific details and settlement amounts vary.
• The requirement to separate the Chair and CEO roles and implement performance-based vesting is becoming more common in corporate governance practices.
• The use of cash and credit facilities to fund settlements is a standard practice for large corporations.

Corporate Governance

Legal Proceedings

• The company has been engaged in securities class action litigation since early 2017.
• The company is also in ongoing litigation with certain of its insurance carriers regarding this matter.

Stakeholder Impact

• Shareholders will be impacted by the settlement cost and the potential dilution of equity.
• Employees may be affected by the changes in executive compensation and corporate governance.
• Customers and suppliers are unlikely to be directly impacted by this settlement.

Next Steps

• The parties will prepare a formal stipulation of settlement.
• The proposed settlement will be presented to the District Court for preliminary approval.
• Following preliminary approval, there will be a notice and review period for Class members.
• Plaintiffs will seek final approval of the proposed settlement from the District Court.

Key Dates

Keywords

settlement, securities litigation, class action, Under Armour, accounting practices, disclosures, legal, financial, lawsuit