Wolverine World Wide, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 28, 2020, not 2019 Q1 as stated in the request metadata. Comparisons are with the quarter ended March 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and reporting period
Wolverine designs, markets, and licenses footwear, apparel, and accessories through brands including Merrell, Saucony, Sperry, Wolverine, and Keds. It sells through wholesale, consumer-direct, licensing, and distribution channels. The quarter’s results were affected by the onset of COVID-19, including retail closures and weaker demand.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $439.3 | $523.4 |
| Gross profit / gross margin | $181.8 / 41.4% | $220.2 / 42.1% |
| Operating profit | $16.9 | $52.4 |
| Net earnings attributable to Wolverine | $13.0 | $40.5 |
| Diluted EPS | $0.16 | $0.43 |
| Net cash used in operating activities | $(76.6) | $(132.4) |
- Revenue fell 16.1%; Michigan Group revenue declined 18.1% and Boston Group revenue declined 11.1%. Foreign exchange added $2.6 to 2020 revenue.
- Gross margin decreased 0.7 percentage points, primarily due to increased tariffs on China-sourced inventory.
- Operating expenses were $164.9, down $2.9 overall; lower incentive compensation and discretionary spending were partly offset by increased environmental and general and administrative costs. Environmental and other related costs were $8.8 versus $3.8.
- Net interest expense rose to $7.8 from $6.9, reflecting higher average debt. The effective tax rate was (32.3)% versus 13.2%, with the 2020 rate benefiting from stock-compensation tax items and a foreign tax audit settlement.
- Operating cash use improved year over year, but working capital used $144.8, including $61.0 for higher inventories and $64.0 from lower accounts payable. The cash-flow statement includes a $49.6 favorable adjustment for environmental costs, net of payments and recoveries.
- Cash was $472.6 at March 28, 2020. Total debt was $1,226.1, including $790.0 drawn on the revolving facility; only $4.3 of revolving capacity remained available. Debt was $798.4 at December 28, 2019. The company reported compliance with credit covenants.
- Capital expenditures were $3.6. The company declared a $0.10 per-share dividend and repurchased $21.0 of shares before suspending further repurchases.
Material changes, outlook, and risks
- COVID-19 and outlook: The pandemic had negatively affected results, and management expected a material adverse impact but could not reasonably estimate its full extent or duration. The company withdrew its previously issued 2020 guidance. U.S. and Canadian retail stores had closed on March 17; eCommerce and distribution operations continued. Management said operating cash flow was expected to meet working-capital needs for the foreseeable future, while noting it could seek additional liquidity, including debt financing.
- Liquidity actions: The company fully drew the remaining capacity under its $800.0 revolving line, delayed most capital projects, suspended share repurchases, implemented furloughs and compensation changes, and reduced or canceled certain product purchases and discretionary spending.
- Environmental matters: A settlement with 3M generated a $55.0 payment to the company in Q1. Under an approved consent decree, Wolverine must fund water-system extensions, subject to a $69.5 aggregate cap, and continue filters, testing, remediation, and monitoring. The environmental reserve was $116.4, of which $39.0 was expected to be paid within 12 months. Related individual and consolidated putative class action claims had no recorded reserve because the company said adverse verdicts were not considered probable and potential liability was difficult to assess. Further changes in remediation estimates could be material.
- Asset impairment and other uncertainties: No triggering event for goodwill or indefinite-lived intangible impairment was identified at quarter-end. Management warned that further deterioration, including weaker Sperry results or COVID-related macroeconomic effects, could lead to a non-cash impairment charge. Other risks include consumer demand, wholesale customer health, inventory, foreign exchange, tariffs, sourcing, and litigation.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter sales, store operations, customer orders, inventory, and cash flows; the filing provides no updated 2020 guidance.
- Availability and terms of liquidity after the revolving facility was almost fully drawn, and the company’s ability to remain within debt covenants.
- Whether the $116.4 environmental reserve and the consent decree’s capped obligations adequately reflect future remediation costs; the filing notes significant estimation uncertainty.
- Developments in PFAS-related litigation, insurance recovery efforts, and any potential impairment indicators for goodwill or trade names.
- Whether reported tax benefits and the Q1 cash-flow effects of environmental costs are repeatable; the filing describes the tax benefits as favorable discrete items.