Wolverine World Wide, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended January 1, 2011 (52 weeks). The fourth quarter was 16 weeks; quarterly figures are identified separately below. Amounts are in U.S. dollars.
Business context
Wolverine designs, sources, markets, licenses and distributes branded footwear, apparel and accessories, including Merrell, Wolverine, Hush Puppies, Cat, Bates and Sebago. Products were sold in approximately 190 countries and territories. The company reports one primary segment—branded footwear, apparel and licensing—and also operates consumer-direct retail and leather businesses. It sold substantially all assets of its pigskin procurement subsidiary on December 29, 2010.
Financial performance and liquidity
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Revenue | $1,248.5 million | $1,101.1 million | +13.4% |
| Gross profit / gross margin | $492.6 million / 39.5% | $431.7 million / 39.2% | +30 basis points in margin |
| Operating profit | $142.2 million | $85.6 million | +66.1% |
| Net earnings | $104.5 million | $61.9 million | +68.8% |
| Diluted EPS | $2.11 | $1.24 | +$0.87 |
| Operating cash flow | $67.9 million | $168.6 million | -$100.7 million |
| Cash and cash equivalents at year-end | $150.4 million | $160.4 million | -$10.0 million |
| Interest-bearing debt at year-end | $1.0 million | $1.6 million | -$0.6 million |
Gross-margin improvement reflected lower restructuring costs in cost of sales, favorable product mix and selected price increases, partly offset by higher product and freight costs and a LIFO adjustment. The effective tax rate was 27.1%, versus 27.8% in FY2009. SG&A was $347.5 million, up 9.8%, while restructuring and transition costs fell to $4.2 million from $35.6 million.
Working capital increased materially: accounts receivable rose 20.0% to $196.5 million, while inventory rose 32.0% to $208.7 million. Management attributed inventory growth to the expected strong first half of 2011 and advance purchases ahead of supplier price increases. Receivables growth accompanied fourth-quarter revenue growth of 23.2%; days sales outstanding improved to 60.5 from 63.3.
Operating cash flow declined despite stronger earnings, principally because of working-capital investment and timing of tax and operating-expense payments. Capital expenditures were $16.4 million. The company had no revolver borrowings, access to a $150 million revolving facility (with potential capacity increases under specified conditions), and reported compliance with its debt covenants. Total assets were $786.6 million, compared with $712.1 million a year earlier.
FY2010 dividends were $0.44 per share. The company repurchased approximately 1.795 million shares for about $51.2 million. A quarterly dividend of $0.12 per share was declared for FY2011.
Material changes and quarterly context
- Revenue increased across all four principal footwear groups; branded footwear, apparel and licensing revenue rose 12.8%, and other business-unit revenue rose 19.1%. Every significant region reported double-digit growth in the branded business.
- International revenue was 38.4% of total revenue, compared with 37.3% in FY2009. Foreign-exchange movements added $4.3 million to reported FY2010 revenue.
- Fourth-quarter revenue was $385.0 million versus $312.5 million in the prior-year quarter; net earnings were $25.6 million versus $16.7 million; diluted EPS was $0.52 versus $0.33.
- Compared with FY2008, FY2009 revenue had fallen 9.8% and diluted EPS had fallen 34.7%; FY2010 results therefore reflect a recovery from the prior-year downturn.
- The 2009 strategic restructuring plan was substantially completed by June 19, 2010, with certain cash payments remaining. FY2010 restructuring and transition costs were $4.2 million, or $0.06 per diluted share, versus $35.6 million, or $0.53 per diluted share, in FY2009.
Outlook, risks and contingencies
Management expected FY2011 revenue growth in the high-single digits to low-teens, citing positive momentum across brands. It expected gross margin to approximate FY2010’s 39.5%, as strategic price increases and favorable mix were expected to offset higher product costs; modest operating-expense leverage; a 29.0% effective tax rate; and diluted EPS growth in the high-single digits to mid-teens. These are forward-looking expectations, not guarantees.
Order backlog at February 19, 2011 was approximately $628 million, versus $424 million a year earlier, for products expected to ship in 2011. Orders may be canceled or changed, and management cautioned that backlog comparisons may not predict actual shipments.
- Key operating exposures include consumer demand and fashion shifts, competition, inventory management, customer credit and concentration, and reliance on overseas contract manufacturers—approximately 94% of footwear pairs were sourced from unrelated suppliers, primarily in Asia-Pacific.
- Raw-material, labor, freight and supplier-cost increases could pressure margins. The company also cited currency movements, trade restrictions, sourcing disruption and port interruptions. EU anti-dumping duties on certain footwear from China and Vietnam had pressured EU sales and margins; the duties were scheduled to end March 31, 2011.
- The defined-benefit pension plans and SERP had a reported funded deficit of $85.7 million at year-end. The company expected 2011 contributions of $31.8 million to qualified plans and $2.0 million to the SERP.
- The company reported $10.7 million of unrecognized tax benefits; it said tax audits could change those amounts, but no significant payment was expected. Various environmental and other legal matters were described as routine or unresolved; management did not expect their outcomes to materially adversely affect results, financial position or cash flows.
- The pigskin business depended on a single domestic supplier. The asset sale generated a reported $1.1 million gain. The company reported no off-balance-sheet arrangements and no impairment of goodwill or indefinite-lived intangibles.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Whether FY2011 revenue and EPS guidance was achieved, and whether price increases and mix offset higher sourcing costs as forecast.
- Whether the substantial inventory build converted into shipments and cash without markdowns, obsolescence or margin deterioration.
- Whether operating cash flow recovered from FY2010’s decline and how working-capital needs affected liquidity.
- Whether the $628 million backlog converted to revenue, recognizing its cancellation and rescheduling risk.
- The actual pension contributions and the sensitivity of pension obligations to discount rates and investment returns.
- Developments in foreign tax audits, unrecognized tax benefits, and the scheduled expiration of EU anti-dumping duties.