Wolverine World Wide, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the Form 10-K for fiscal 2021, ended January 1, 2022—not a 2020 Q4 filing. Fiscal 2020 ended January 2, 2021 and included 53 weeks; fiscal 2021 included 52 weeks. Unless noted, figures are in U.S. dollars.
Business context and reporting period
Wolverine designs, markets and licenses footwear, apparel and accessories across brands including Merrell, Saucony, Sperry, Wolverine and Sweaty Betty. Products are sold in about 170 countries through wholesale, licensing, distribution, retail and e-commerce channels. Reportable segments are Wolverine Michigan Group and Wolverine Boston Group; Sweaty Betty and certain other activities are reported in “Other.”
On August 2, 2021, the company acquired the Sweaty Betty activewear business for $417.4 million, net of acquired cash. The acquisition was funded with cash and revolving-credit borrowings.
Key financial metrics
| Metric | Fiscal 2021 | Fiscal 2020 |
|---|---|---|
| Revenue | $2,414.9 million | $1,791.1 million |
| Gross margin | 42.6% | 41.1% |
| Operating profit (loss) | $155.7 million | $(137.1) million |
| Net earnings (loss) attributable to Wolverine | $68.6 million | $(136.9) million |
| Diluted earnings (loss) per share | $0.81 | $(1.70) |
| Effective tax rate | 16.6% | 24.7% |
| Operating cash flow | $86.8 million | $309.1 million |
| Cash and cash equivalents at year-end | $161.7 million | $347.4 million |
| Total debt at year-end | $966.8 million | $722.5 million |
| Inventory at year-end | $365.5 million | $243.1 million |
Available borrowing capacity under the Revolving Facility was $769.2 million at year-end. The company paid dividends of $0.40 per share in fiscal 2021 and repurchased $39.6 million of shares.
Material changes versus fiscal 2020
- Revenue rose 34.8%. Growth reflected recovery from pandemic-related disruption in 2020, contributions from Sweaty Betty ($117.3 million in the year-over-year overview), and a $25.3 million favorable foreign-exchange effect. Owned e-commerce revenue increased 39.7%.
- Both reportable groups grew: Michigan Group revenue increased 23.6% and Boston Group revenue increased 34.5%. Sweaty Betty contributed to the increase reported in “Other.”
- Gross margin expanded 150 basis points, helped by channel and product mix and Sweaty Betty, partly offset by higher air-freight costs.
- The company returned to operating and net profitability. Fiscal 2020 included a $222.2 million Sperry trade-name impairment; no intangible impairment was recorded in 2021.
- Operating cash flow fell to $86.8 million from $309.1 million, principally as working capital used $88.4 million of cash. Inventory increased $122.4 million year over year.
- Debt increased by $244.3 million, primarily reflecting borrowing to fund the Sweaty Betty acquisition. The company issued $550 million of 4.000% senior notes due 2029 and refinanced existing notes; debt-extinguishment costs were $34.3 million.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no numerical fiscal 2022 revenue or earnings guidance. Management expected pandemic-related factory and global shipping disruption to continue and potentially affect fiscal 2022 revenue growth and profitability. It stated operating cash flow should meet working-capital needs for the foreseeable future.
- Supply chain and costs: COVID-related shutdowns in Vietnam and other Asia-Pacific locations constrained production; port congestion, freight capacity and labor constraints delayed shipments. Fiscal 2021 pandemic-related costs included $26.1 million, primarily incremental air freight.
- Environmental matters: The company reported an $85.7 million environmental-remediation reserve, including $24.5 million expected within 12 months. It also accrued $50.7 million for certain litigation matters, with related payments of $0.6 million during the year. Outcomes and additional costs remain uncertain; the filing describes PFAS-related claims and settlements in progress.
- Acquisition and valuation: Sweaty Betty contributed $117.4 million of revenue and $9.7 million of earnings from acquisition through year-end. Its preliminary purchase accounting included a $346.4 million indefinite-lived trademark and $118.9 million of goodwill. The auditor identified valuation of both the acquired trademark and the Sperry trade name as critical audit matters.
- Debt and interest exposure: The company reported compliance with credit-facility covenants at year-end. Variable-rate debt was $425.0 million; management estimated a 100-basis-point rate increase would raise annual pre-tax interest expense by about $4.7 million, after the interest-rate swap.
- Other risks: Principal risks include consumer-demand and brand-trend shifts, inventory management, foreign sourcing and freight disruptions, inflation in materials and labor, customer concentration and credit, currency movements, cybersecurity, and environmental litigation. No customer accounted for more than 10% of revenue.
Important facts for investors to verify
- Whether production and shipping constraints eased, and whether elevated inventory converted into sales without material discounting.
- Sweaty Betty’s subsequent growth, margins, integration, and final purchase-price allocation; the 2021 allocation was preliminary.
- Changes in environmental reserves, PFAS litigation and settlement status, insurance recoveries, and related cash payments.
- Debt reduction, revolving-facility usage, covenant headroom, and interest-rate exposure after refinancing.
- Whether the Sperry trade name’s assumptions remain supportable given its $296.0 million carrying value and prior impairment.
Audit and controls: Ernst & Young issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting. The acquired Sweaty Betty business was excluded from the year-end internal-control assessment.