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Business Context and Reporting Period

Company: Wolverine World Wide, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 23, 2002 (12 weeks)
Business Overview: The Company manufactures and markets branded footwear (including Wolverine, Hush Puppies, CAT, Merrell, and Harley-Davidson) to the retail sector. It operates through one reportable segment (Branded Footwear) and other business units including retail, apparel licensing, and tannery operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 12.0% ($19.1 million) year-over-year. Approximately 10% of this increase is attributed to European acquisitions (CAT Europe and Merrell Europe).
• Segment Performance:
  • Performance Footwear Group (CAT/Merrell): Reported a $23.9 million increase in sales, driven largely by the CAT Europe acquisition and strong Merrell orders.
  • Hush Puppies: U.S. sales declined due to a weak retail environment and cautious reordering, though U.K. and Canada sales increased.
  • Wolverine Footwear Group: Sales decreased slightly due to the closure of the Coleman U.S. business, offset by growth in Harley-Davidson footwear.
• Profitability: Gross margin percentage improved to 35.0% from 33.7%, reflecting a higher mix of high-margin Merrell and Harley-Davidson sales. Operating income rose 6.0% despite an 18.8% increase in selling and administrative expenses ($50.9 million vs. $42.7 million), largely due to costs associated with new European entities and brand growth support.
• Liquidity: Cash and cash equivalents decreased significantly from $35.8 million at year-end 2001 to $6.2 million at March 23, 2002, primarily due to $25.8 million in cash used for business acquisitions.

Guidance, Outlook, and Risks

• Acquisitions: The Company acquired the European CAT footwear business (Wolverine Europe Limited) in January 2002 for approximately $26.2 million and expanded Merrell operations in Europe in late 2001. Management expects these to positively impact future sales.
• Capital Allocation: The Company maintains a $150 million revolving credit facility. Excess cash flows are expected to be used to pay down debt, fund growth, or repurchase stock. A stock repurchase program is active, with 151,000 shares repurchased in Q1 2002.
• Dividends: A quarterly dividend of $0.045 per share was declared, a 12.5% increase over the prior year.
• Risks and Contingencies:
  • Economic Conditions: The filing highlights risks related to the slowdown in the U.S. economy, consumer spending patterns, and the impact of the September 11 terrorist attacks on global trade and consumer demand.
  • Market Risks: Exposure to foreign currency fluctuations and interest rate changes. The Company uses limited foreign currency forward contracts to manage volatility.
  • Accounting Changes: Adoption of SFAS No. 142 (Goodwill) in 2002 eliminated goodwill amortization, which previously reduced net earnings by approximately $253,000 in Q1 2001.

Investor Verification Checklist

• Acquisition Integration: Verify the financial performance and integration progress of the newly acquired CAT Europe and Merrell Europe operations.
• Cash Position: Monitor the significant drawdown in cash reserves ($29.6 million decrease in Q1) and reliance on the revolving credit facility for working capital.
• Inventory Levels: Review inventory balances, which increased 17.2% year-over-year to $179.6 million, to assess potential obsolescence or markdown risks in a weak retail environment.
• Brand Mix: Track the sales mix between high-margin performance brands (Merrell, CAT) and traditional brands (Hush Puppies, Wolverine) to understand margin sustainability.
• Pension Costs: Note the anticipated increase in pre-tax, non-cash pension charges of approximately $3.8 million for the full year 2002 due to declining interest rates.