Wolverine World Wide, Inc. — Form 10-K
Reporting period: Fiscal year ended December 28, 2019 (52 weeks), with prior-year comparisons. Although the request references 2018 Q4, this filing reports fiscal 2019; it also gives unaudited fourth-quarter results.
Business context
Wolverine designs, markets and licenses footwear, apparel and accessories across brands including Merrell, Cat, Wolverine, Sperry, Saucony and Keds. It sells in about 170 countries through wholesale, licensing and distribution partners, and consumer-direct stores and eCommerce. Its reportable segments are Wolverine Michigan Group and Wolverine Boston Group.
Financial performance and liquidity
- Revenue: $2,273.7 million, up 1.5% from $2,239.2 million. Foreign exchange reduced 2019 revenue by $16.7 million.
- Profit and margins: Gross profit was $923.8 million; gross margin declined 50 basis points to 40.6%. Operating profit fell 32.1% to $171.0 million. Net earnings attributable to Wolverine were $128.5 million, down from $200.1 million; diluted EPS was $1.44 versus $2.05.
- Fourth quarter: Revenue was $607.4 million and net loss attributable to Wolverine was $0.9 million, or a diluted loss of $0.01 per share.
- Cash flow: Operating cash flow was $222.6 million, compared with $97.5 million in 2018. Investing used $61.5 million and financing used $124.6 million. Capital expenditures were $34.4 million.
- Cash, debt and liquidity: Cash was $180.6 million at year-end; debt was $798.4 million, up from $570.5 million. Available capacity under the revolving credit facility was $434.3 million. The company reported compliance with credit agreement covenants.
- Shareholder returns: The company repurchased $319.2 million of shares and paid $33.6 million in dividends during 2019. Dividends declared were $0.40 per share, versus $0.32 in 2018.
Material changes versus 2018
- Revenue rose modestly, with Michigan Group revenue up 2.2% and Boston Group revenue up 1.7%. Segment operating profit declined 5.0% and 2.3%, respectively.
- Net earnings decreased substantially, largely alongside a sharp increase in environmental and other related costs: $83.5 million in 2019 versus $15.3 million in 2018. Operating profit also reflected increased corporate expenses.
- Debt increased by $227.9 million, while share repurchases rose from $174.7 million to $319.2 million. Operating cash flow improved from $97.5 million.
- The company acquired the Saucony distributor in Italy for total consideration of $25.2 million and realigned brands into its Michigan and Boston reporting groups.
- Adoption of the new lease standard resulted in recognition of lease right-of-use assets and liabilities; the company reported no material impact on results or cash flows.
Outlook, risks and unusual items
- The filing provides no specific fiscal 2020 revenue or earnings guidance. Management said operating cash flow and, if needed, revolver borrowings were expected to meet working-capital needs for the foreseeable future. The company expected comparable cash dividends in 2020.
- Order backlog was $974 million at February 22, 2020, versus $964 million a year earlier; substantially all related to expected 2020 shipments. Orders can be canceled or changed, and backlog may not predict actual sales.
- Environmental contingency: The year-end remediation reserve was $124.4 million, including $41.5 million expected within 12 months and $82.9 million expected over up to 25 years. A consent decree requires, among other actions, extending municipal water service, with the specified water-system work subject to a $69.5 million cap. A settlement with 3M provides a $55.0 million payment in 2020, recognized as a recovery against 2019 environmental costs. Related individual and class-action claims remained unresolved; the company had not reserved for those claims because it could not conclude losses were probable.
- Key risks include consumer demand and competition, inventory management, foreign sourcing and tariffs, currency and interest rates, wholesale and retail channel changes, the coronavirus outbreak’s potential effect on supply and sales, and litigation and remediation costs. The filing states that future environmental cost estimates may change materially.
Important facts for investors to verify
- Whether the $55.0 million 3M recovery is received in 2020 as anticipated, and how remediation spending compares with the $124.4 million reserve.
- Potential additional exposure from unresolved PFAS-related lawsuits, regulatory requirements and environmental remediation beyond recorded reserves.
- Whether revenue growth can translate into improved margins and earnings after the 2019 increase in environmental costs and the decline in segment operating profit.
- Debt levels, revolver availability and covenant headroom after substantial share repurchases; confirm the effect of debt maturities and interest-rate exposure.
- Whether the reported backlog converts to shipments and revenue, given cancellation rights and the filing’s stated risks to demand and supply chains.