Wolverine World Wide, Inc. — Form 10-Q Summary
Reporting period: The filing covers the first 12 weeks of fiscal 2013, ended March 23, 2013, and was filed May 2, 2013. The request metadata says “2012 Q1,” but the filing itself identifies the period as 2013 Q1. Unless otherwise noted, financial figures are in USD millions; comparisons are with the 12 weeks ended March 24, 2012.
Business context and results
The company designs, markets and distributes footwear, apparel and accessories across a portfolio of brands. Results include the Performance + Lifestyle Group (PLG), acquired in October 2012; the acquisition materially expanded the business and changed its reporting segments.
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Revenue | $645.9 | $322.8 | Up 100.1%, primarily due to PLG |
| Gross profit / margin | $262.1 / 40.6% | $132.2 / 41.0% | Margin down 0.4 percentage points |
| Operating profit / margin | $50.9 / 7.9% | $37.0 / 11.5% | Profit up 37.6%; margin lower |
| Net earnings | $29.8 | $31.2 | Down 4.5% |
| Diluted EPS | $0.60 | $0.64 | Down 6.3% |
| Net interest expense | $12.9 | $0.4 | Higher following acquisition financing |
| Cash used in operating activities | $89.3 | $64.4 | Greater working-capital use |
Gross margin was pressured by foreign exchange (40 basis points), product costs (180 bps) and inventory reserve adjustments (90 bps), partly offset by selling prices (150 bps) and channel mix (120 bps). Operating expenses were $211.2, including $15.2 of PLG acquisition-related transaction and integration costs. The effective tax rate rose to 20.9% from 12.4%; the prior-year rate benefited from a favorable foreign tax court ruling.
Segments and material changes
- Lifestyle Group: Revenue $270.2 and operating profit $46.1; the year-over-year increase mainly reflects acquired Sperry Top-Sider, Stride Rite and Keds brands.
- Performance Group: Revenue $240.5 and operating profit $50.9; revenue growth reflected acquired Saucony and growth in Merrell.
- Heritage Group: Revenue $118.6 and operating profit $15.3; revenue was down 0.5%. Wolverine and Harley-Davidson footwear grew, while Cat declined.
- Total assets were $2,637.1 versus $906.6 a year earlier, reflecting the acquisition. Goodwill and indefinite-lived intangibles totaled $1,135.9. PLG’s purchase-price allocation remained preliminary, with finalization expected by the third quarter of fiscal 2013.
Cash, debt and liquidity
- At March 23, 2013, cash was $82.0, interest-bearing debt was $1,258.3, and $157.1 was available under the revolving credit facility. The company reported $41.0 drawn on the revolver.
- Operating cash use was driven principally by increases in accounts receivable ($120.3) and inventory ($23.3). Investing cash use was $3.1, including $5.3 of capital additions and $2.8 proceeds from sale of an acquired distribution facility. Financing provided $4.4.
- Debt comprised Term Loan A ($543.1), Term Loan B ($299.2), senior notes ($375.0, 6.125%, due 2020) and revolver borrowings ($41.0). The company made $32.7 in long-term debt payments, including a voluntary $25.0 Term Loan B payment.
- A $462.2 interest-rate swap hedged part of variable-rate debt. The company said it was in compliance with credit-agreement covenants and expected operating cash flow, with revolver access if needed, to cover working-capital needs for the foreseeable future.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management described the company’s diversified brand portfolio and broad geographic reach as positioning it for continued organic growth, and said excess operating cash may support capital spending, debt reduction, growth initiatives, dividends or repurchases.
- Key risks include integration and realization of PLG acquisition benefits, increased indebtedness and interest-rate exposure, economic and consumer-demand changes, currency movements, seasonality and weather, customer/order changes, supply-chain and raw-material issues, and legal, regulatory and intellectual-property matters.
- Environmental remediation claims and routine litigation were disclosed; management did not expect them to have a material adverse effect, though remediation liabilities were not yet fixed. Foreign earnings are intended to remain reinvested abroad; repatriation could create material additional U.S. tax liability.
- The company corrected an immaterial prior-year disclosure of accounts-receivable allowances; it said there was no effect on prior-year earnings, cash flows or the receivable balance. PLG integration costs were $15.2. No shares were repurchased under the public program during the quarter; the quarterly dividend declared was $0.12 per share.
Important facts for investors to verify
- How much of reported growth and segment performance is attributable to PLG versus organic growth, and whether anticipated integration benefits are being realized.
- Progress on debt repayment, variable-rate exposure, covenant headroom and liquidity, particularly given operating cash outflow and working-capital needs.
- Whether gross-margin pressures, acquisition-related costs and the higher interest burden persist, and how these affect earnings and cash generation.
- Final PLG purchase accounting, including intangible assets, deferred taxes, pension liabilities and goodwill, and any resulting adjustments.
- Developments in foreign tax audits or potential repatriation, environmental claims and other contingencies; the filing does not provide a clear quantified maximum exposure for these matters.