Wolverine World Wide, Inc. — Form 10-Q Summary
Reporting period: Third fiscal quarter, a 12-week period ended September 7, 2013. The filing also reports year-to-date results for the 36 weeks ended September 7, 2013. Comparisons are with the corresponding periods ended September 8, 2012. Dollar amounts are in millions unless otherwise stated.
Business context
Wolverine designs, sources, markets and distributes footwear, apparel and accessories through a portfolio of 16 owned and licensed brands. The October 2012 acquisition of Performance + Lifestyle Group (PLG), for approximately $1.25 billion, materially changed the company’s scale and comparability with the prior year. PLG results are included in fiscal 2013 but not in the comparable 2012 periods. At September 7, 2013, the company operated 454 retail stores and 63 consumer-direct websites.
Key financial results
| Metric | 12 weeks ended Sep. 7, 2013 | 12 weeks ended Sep. 8, 2012 | 36 weeks ended Sep. 7, 2013 | 36 weeks ended Sep. 8, 2012 |
|---|---|---|---|---|
| Revenue | $716.6 | $353.1 | $1,950.3 | $988.6 |
| Gross profit | $286.0 | $138.6 | $789.1 | $388.8 |
| Gross margin | 39.9% | 39.2% | 40.5% | 39.3% |
| Operating profit | $86.3 | $46.3 | $174.3 | $106.1 |
| Net earnings attributable to Wolverine | $54.4 | $32.7 | $102.1 | $84.4 |
| Diluted earnings per share | $0.54 | $0.33 | $1.02 | $0.86 |
| Net interest expense | $11.9 | $0.3 | $37.3 | $1.0 |
Quarterly operating profit margin was approximately 12.0% versus 13.1% a year earlier; year-to-date margin was approximately 8.9% versus 10.7%. Revenue rose 102.9% in the quarter and 97.3% year to date, primarily from PLG. Management attributed the quarterly gross-margin improvement to favorable channel mix and higher selling prices, partly offset by higher product costs and foreign-exchange contracts.
Cash flow, debt and liquidity
- For the first 36 weeks, operating cash flow was $125.4, compared with $8.6 in the prior-year period. Capital expenditures were $29.2 versus $8.3; operating cash flow less capital expenditures was therefore approximately $96.2 versus $0.3.
- Cash declined to $147.8 at September 7, 2013, from $171.4 at December 29, 2012. The company had $196.9 of availability under its revolving facility, net of letters of credit.
- Interest-bearing debt was $1,142.1, down from $1,250.0 at December 29, 2012, but substantially above $27.0 at September 8, 2012, reflecting PLG acquisition financing. The company made $107.9 of debt payments year to date, including $85.0 of voluntary Term Loan B payments. It reported compliance with credit-agreement covenants.
- The current ratio was approximately 3.1, based on current assets of $1,150.1 and current liabilities of $375.1. Approximately $138.0 of the $147.8 cash balance was held outside the United States and intended to remain permanently reinvested abroad.
Material changes and management commentary
- Quarterly revenue increased $363.5 and year-to-date revenue increased $961.7, principally due to PLG. Lifestyle Group revenue was $295.8 in the quarter and $821.3 year to date; Performance Group revenue was $254.1 and $694.5, respectively. Heritage Group revenue was approximately flat year over year.
- Quarterly operating expenses, including acquisition-related costs, were $199.7 versus $92.3. Drivers included PLG operating costs, integration expenses, incremental amortization, compensation, pension expense and brand-building investment.
- Acquisition-related transaction and integration costs were $7.4 for the quarter and $30.5 year to date. Higher debt following the acquisition drove the substantial increase in interest expense.
- The quarterly effective tax rate was 25.9% versus 27.1%; the year-to-date rate was 24.2% versus 17.7%. The filing attributes the quarterly decrease to the tax deductibility of acquisition costs, and the year-to-date increase to a favorable foreign tax court decision in the prior year.
- The Board approved a two-for-one stock split, payable November 1, 2013. Per-share figures in the filing have been adjusted for the split. The quarterly dividend was $0.06 per share on that adjusted basis.
Outlook, subsequent events and risks
- The filing does not provide formal revenue or earnings guidance. Management expects operating cash flows, with revolving-credit availability if needed, to meet working-capital needs for the foreseeable future. Excess cash may be used for capital expenditures, debt reduction, growth, dividends or repurchases.
- On October 10, 2013, after quarter-end, the company amended its credit agreement, repaid Term Loan B and increased Term Loan A to $775.0. The amendment reduced applicable interest rates and extended Term Loan A and revolver maturities to October 10, 2018. The company estimated $13–$14 of debt-extinguishment costs, mostly non-cash, to be expensed in fiscal Q4 2013, and estimated fiscal 2014 interest expense reductions of $7–$8, including $4–$5 of cash savings.
- A restructuring plan approved October 4, 2013 calls for closing one Dominican Republic manufacturing facility and evaluating alternatives for a second. Estimated charges are $7.0–$10.4, mostly expected in fiscal Q4 2013; completion is expected in fiscal 2014.
- Management said environmental and other legal matters were not expected to have a material adverse effect, though outcomes cannot be predicted with certainty. Other risks include consumer demand and weather, foreign exchange, interest rates, supply-chain interruptions, customer and contract concentration, acquisition integration and increased indebtedness. The filing specifically added risks from a U.S. federal government shutdown, including import delays and reduced military purchasing.
- The PLG purchase-price allocation remained preliminary; valuation work on intangible assets, deferred taxes, pension liabilities and related goodwill was expected to be finalized by the end of the fourth quarter of fiscal 2013.
Investor verification priorities
- Separate PLG’s acquired revenue and earnings contribution from organic growth, particularly in Lifestyle and Performance.
- Track whether gross-margin gains persist and whether higher operating expenses and integration costs moderate.
- Monitor debt paydown, covenant headroom, refinancing savings and the effect of the planned Q4 debt-extinguishment charge.
- Assess working-capital demands, especially receivables, and the location and accessibility of foreign cash.
- Verify final PLG purchase-accounting adjustments and actual costs and timing for the Dominican Republic restructuring.