Wolverine World Wide, Inc. — Form 10-K Summary
Period note: The metadata identifies “2011 Q4,” but this filing is for the fiscal year ended December 29, 2012. Fiscal 2012 and 2011 were each 52 weeks; each fourth quarter was 16 weeks.
Business context
Wolverine designs, sources, markets and sells footwear, apparel and accessories through wholesale, licensing and consumer-direct channels. On October 9, 2012, it acquired Collective Brands’ Performance + Lifestyle Group (PLG), adding Sperry Top-Sider, Saucony, Stride Rite and Keds. The filing includes PLG results only from the acquisition date.
Key financial results
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Revenue | $1,640.8 million | $1,409.1 million |
| Gross profit / margin | $628.2 million / 38.3% | $556.8 million / 39.5% |
| Operating profit | $113.7 million | $170.2 million |
| Net earnings attributable to Wolverine | $80.7 million | $123.3 million |
| Diluted EPS | $1.63 | $2.48 |
| Cash from operating activities | $91.6 million | $78.8 million |
| Cash and cash equivalents at year-end | $171.4 million | $140.0 million |
| Interest-bearing debt at year-end | $1,250.0 million | $11.5 million |
- Revenue rose 16.4%; PLG contributed $219.4 million from the acquisition date. Foreign exchange reduced reported revenue by $10.9 million.
- Gross margin fell 120 basis points, reflecting product mix, acquisition inventory and severance costs, and higher product costs, partly offset by price increases.
- Operating expenses increased to $514.4 million, including $32.5 million of non-recurring PLG transaction and integration costs. Interest expense also increased substantially following acquisition financing.
- Operating cash flow improved by $12.8 million year over year. Investing cash outflow was $1,246.1 million, primarily due to the $1,225.9 million net cash acquisition outflow; financing provided $1,183.4 million.
- Year-end current assets were $1,074.9 million and current liabilities $319.3 million. The company reported $198.1 million of available revolving credit capacity, net of letters of credit.
- Fiscal 2012 dividends were $0.48 per share, unchanged from 2011.
Material changes and unusual items
- PLG was acquired for approximately $1,249.5 million in cash. It contributed $219.4 million of revenue and a reported $2.4 million net loss for the post-acquisition period.
- Acquisition financing included $550 million Term Loan A, $325 million Term Loan B at year-end after a voluntary repayment, and $375 million of 6.125% senior notes due 2020. The company had $875 million of variable-rate debt and an interest-rate swap covering $462.2 million; a one-percentage-point rate increase was estimated to add about $8.8 million to annual pretax interest expense.
- The effective tax rate was 14.2%, versus 27.0% in 2011, reflecting a favorable foreign tax court decision and acquisition-related deductions. Management cautioned that the lower rate included non-recurring benefits.
- Fourth-quarter revenue was $652.2 million, but the company reported a $3.7 million attributable net loss and diluted loss per share of $0.08. The filing does not provide a single clearly stated explanation for the full quarterly loss; acquisition costs, financing and integration effects are discussed in the annual results.
- The PLG purchase-price allocation was preliminary. It included $419.6 million of goodwill and $820.6 million of intangible assets; valuation and related tax and pension matters remained under review.
Outlook, risks and contingencies
- For fiscal 2013, management forecast revenue of approximately $2.7–$2.8 billion, diluted EPS of $2.10–$2.25 and an effective tax rate of 21%–23%. It expected modest gross-margin improvement, alongside higher integration spending, pension expense, incentive compensation and brand investment.
- Key risks include successful PLG integration and realization of expected benefits; substantially higher debt and restrictive covenants; weak consumer demand and challenging European conditions; changing weather and seasonal demand; inventory and discounting; competition and brand relevance; foreign exchange and interest-rate exposure; and reliance on foreign suppliers and third-party manufacturing.
- Other disclosed exposures include customer order cancellations and credit risk, potential changes to government footwear contracts, pension funding and expense, tax examinations and unprovided potential U.S. tax on foreign earnings intended to remain permanently reinvested.
- The company reported $396.6 million of purchase obligations, primarily inventory and capital expenditure commitments, and $285.6 million of operating lease commitments. Environmental remediation claims and routine litigation were disclosed; management did not expect the matters to materially adversely affect results, financial position or cash flows.
- Management and the auditor reported effective internal control over financial reporting for the company, but the assessment excluded PLG, which represented 66% of year-end assets and 13% of fiscal-year revenue. The financial statement audit opinion was unqualified.
Important facts for investors to verify
- Progress on PLG integration, synergies, brand performance and final purchase-price allocation, including any additional integration costs.
- Debt repayment, covenant headroom, refinancing exposure and the sensitivity of interest costs to rates.
- Whether the 2013 revenue, EPS, tax-rate and margin outlook was achieved, especially given the non-recurring tax benefit in 2012.
- Inventory quality, closeout activity, cash conversion and working-capital needs following the acquisition.
- Controls and reporting at PLG after its exclusion from the 2012 internal-control assessment, as well as the status and potential cost of environmental and tax matters.