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Wolverine World Wide, Inc. - 10-K Summary (Fiscal Year Ended Dec 28, 2002)

Business Context and Reporting Period

This report covers the fiscal year ended December 28, 2002. Wolverine World Wide, Inc. is a leading designer, manufacturer, and marketer of casual, work, and outdoor footwear. The company operates through five primary branded footwear divisions: Wolverine Footwear Group, Merrell Performance Footwear Group, CAT Footwear Group, The Hush Puppies Company, and the Wolverine Slipper Group. It also maintains "Other Businesses" including a pigskin tannery, retail stores, and licensing operations. The company sold over 37 million pairs of branded footwear globally in 2002.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 14.9% to $827.1 million. Approximately 10% of this revenue was attributable to European acquisitions (specifically the CAT footwear business in Europe).
• Segment Performance:
  • CAT Footwear Group: Revenue surged 130.8% ($61.9 million increase) primarily due to the January 2002 acquisition of the European CAT business.
  • Merrell Performance: Revenue grew 33.3% ($45.0 million increase), marking the sixth consecutive year of double-digit growth.
  • Wolverine Footwear Group: Revenue declined slightly (0.9%) due to a planned exit of underperforming lines and softness in the industrial work boot market, offset by gains in Harley-Davidson and Bates brands.
  • Hush Puppies: Revenue increased 1.7%, driven by international growth, while U.S. revenue declined in the first half before recovering in the second half.
• Margin Pressure: Gross margin percentage dipped slightly to 35.6% from 35.7%, largely due to inventory liquidation costs associated with newly acquired European businesses. Excluding these acquisitions, margins improved by 50 basis points.
• Debt Reduction: Total long-term debt decreased by $17.9 million to $72.9 million, resulting from principal payments on senior notes and reduced revolving credit borrowings.

Guidance, Outlook, and Risks

Management Commentary: Management expects the seasonal sales pattern to continue. The company is focused on asset management programs to improve inventory turns and is executing brand repositioning strategies, particularly for Hush Puppies in the U.S. and CAT in the U.S. lifestyle market.

Capital Allocation: The company repurchased 2.15 million shares of common stock in 2002 for approximately $33.6 million. A new stock repurchase program authorizing an additional 2.0 million shares was approved in August 2002. Dividends were increased to $0.055 per share in Q1 2003.

Risks and Contingencies:

• Pension Obligations: The company's qualified pension plans were underfunded by $17.6 million in 2002 (compared to overfunded in 2001). Management estimates pre-tax pension charges will increase by $7.1 million in fiscal 2003 due to declining interest rates and asset values.
• Market Risks: Significant exposure to foreign currency fluctuations, particularly the Euro and British Pound. The company uses forward contracts to hedge inventory purchases but does not hedge net investments in foreign subsidiaries.
• Operational Risks: Dependence on contract manufacturers in foreign countries, potential supply chain disruptions, and changes in consumer preferences.

Investor Verification Checklist

• Acquisition Integration: Verify the performance of the newly acquired European CAT business and the success of inventory liquidation strategies.
• Pension Funding: Monitor the impact of the $17.6 million underfunded pension status and the projected $7.1 million increase in pension charges for 2003.
• Brand Repositioning: Assess the effectiveness of the Hush Puppies U.S. repositioning and the CAT U.S. lifestyle strategy in driving organic growth.
• Inventory Levels: Review inventory turns (2.9x in 2002) to ensure the asset management program continues to reduce excess stock without impacting sales.
• Debt Covenants: Confirm compliance with financial ratios required by the $150 million revolving credit facility.