WOLVERINE WORLD WIDE INC quarterly report, Q2 FY2017

Wolverine World Wide, Inc. — Form 10-Q Summary

Reporting period: Fiscal second quarter and first half ended June 30, 2018; comparative periods ended July 1, 2017. Unaudited. The filing covers 2018 results despite the request metadata identifying 2017 Q2.

Business context

Wolverine designs, markets and licenses footwear, apparel and accessories through its brand portfolio, wholesale and consumer-direct channels, and leather and sourcing operations. Its brands were marketed in about 200 countries and territories. During the quarter it operated 80 retail stores in the U.S. and Canada and 41 consumer-direct websites.

Financial performance

Quarterly revenue decline reflected lower Boston Group revenue, including the Stride Rite business-model transition, store closures and lower Saucony demand. Outdoor & Lifestyle revenue rose 4.6%; Heritage revenue was down 0.5%. Management cited strong Merrell momentum, particularly in hiking and work, while Saucony was weaker in the U.S. and Canada. For the first half, Outdoor & Lifestyle revenue was nearly flat, Boston was down 15.8%, and Heritage was down 2.0%.

Gross-margin improvement reflected product mix, lower product costs, business-model changes, lower restructuring costs and lower inventory reserves. Operating expenses fell, largely because prior-year restructuring and transformation costs were lower and stores had closed. Higher incentive compensation and environmental costs partly offset those savings. Quarter earnings also benefited from $5.3 million of other income, including a $5.9 million foreign-currency remeasurement gain; the prior-year quarter had $3.3 million of other expense.

Cash, debt and liquidity

At June 30, cash was $354.9 million, total debt was $661.9 million, and available revolving-credit capacity was $597.5 million. Cash declined $126.1 million from fiscal year-end. First-half financing used $176.7 million, including $122.6 million of long-term debt payments and $49.9 million of treasury-share purchases. The company made a voluntary $100 million Term Loan A payment and scheduled principal payments; debt was down from $782.6 million at year-end. Operating cash flow was lower year over year, with working-capital increases using $49.7 million. Capital expenditures were $8.3 million. Management said operating cash flow and, if needed, revolver borrowings should meet foreseeable working-capital needs. The company was in compliance with credit-agreement covenants.

Material changes, outlook and risks

• Revenue was reduced by store closures ($18.4 million in the quarter; $52.2 million year to date), the Stride Rite transition to licensing ($22.7 million; $42.1 million), the Sebago divestiture ($5.5 million; $12.5 million), and the exit of Bates’ Department of Defense business ($6.6 million; $12.9 million). Foreign exchange added approximately $3.4 million to quarterly revenue and $11.5 million year to date.
• The effective tax rate increased to 18.1% for the quarter and 16.8% year to date, from 7.0% and 13.7%, respectively. Management attributed the increase mainly to changes in the geographic mix of earnings, partly offset by the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act.
• No specific revenue or earnings guidance is provided in the supplied filing text. Management expects cash resources to support working capital and intends to use excess cash for growth, debt reduction, dividends, repurchases and acquisitions.
• Environmental matters are a significant contingency. The company is responding to EPA and Michigan actions concerning PFAS at former tannery and disposal sites. The recorded remediation reserve was $26.0 million ($11.9 million expected within 12 months); costs and estimates may change. No amounts were reserved for individual or putative class-action claims because the company could not conclude adverse verdicts were probable and potential liability was difficult to assess.
• The Sperry trade name had a $518.2 million carrying value at June 30, following a $68.6 million impairment in 2017. Further impairment could be required if results fall below projections. Other risks include consumer demand, competition, inventory management, currency, sourcing, seasonality, customer relationships, and legal and regulatory matters.
• The company declared a quarterly dividend of $0.08 per share. It reported $152.4 million remaining under its share-repurchase authorization, which expires in 2020. A $58.1 million tax liability related to unremitted foreign earnings is payable over eight years; management did not expect a material liquidity impact.

Key facts for investors to verify

• Whether Boston Group and Saucony revenue trends improve, and how much of the reported sales decline reflects portfolio changes versus underlying demand.
• Whether margin improvement and lower restructuring-related costs are sustainable, given the quarter’s foreign-currency gain and environmental expense.
• How operating cash flow and working capital develop, alongside the planned debt repayments, repurchases and dividend payments.
• Whether PFAS remediation costs or litigation exposure exceed the $26.0 million recorded reserve; the filing does not provide a clear estimate of potential losses on the lawsuits.
• Whether Sperry performance supports the recorded intangible-asset value and avoids additional impairment.