Wolverine World Wide, Inc. — Form 10-Q summary
Period discrepancy: The request identifies 2017 Q3, but the supplied filing is for the quarter ended September 29, 2018, with comparative results for the quarter ended September 30, 2017. This summary covers the 2018 filing.
Business context and reporting period
Wolverine designs, markets and licenses footwear, apparel and accessories through global brands including Merrell, Saucony, Sperry and Wolverine. It also operates consumer-direct and leather businesses. The filing reports the 13-week third quarter and year-to-date results for the first three fiscal quarters of 2018.
Financial performance
| Metric | Q3 2018 | Q3 2017 | YTD 2018 | YTD 2017 |
|---|---|---|---|---|
| Revenue | $558.6m | $581.3m | $1,659.6m | $1,771.4m |
| Gross profit / margin | $232.1m / 41.6% | $230.7m / 39.7% | $694.2m / 41.8% | $692.3m / 39.1% |
| Operating profit | $68.4m | $37.2m | $198.0m | $102.9m |
| Net earnings attributable to Wolverine | $58.8m | $23.2m | $160.8m | $60.6m |
| Diluted EPS | $0.60 | $0.24 | $1.65 | $0.62 |
| Effective tax rate | 7.8% | 15.9% | 13.7% | 14.6% |
Q3 revenue fell 3.9%; YTD revenue fell 6.3%. Gross margin improved, while operating profit and earnings increased substantially. The prior-year comparison included restructuring and related costs of $23.0m in Q3 and $65.6m YTD; 2018 reported none in those lines. Current-period environmental and other related costs were $2.1m in Q3 and $7.6m YTD.
YTD operating cash flow was negative $34.0m, versus positive $49.5m in 2017. Investing cash flow was negative $14.8m and financing cash flow was negative $197.4m. Operating cash use reflected, among other items, $60.7m of pension contributions and working-capital outflows, including higher receivables and inventory and lower payables.
At September 29, 2018, cash was $228.1m, total debt was $662.5m, and available revolving-credit capacity was $597.5m. Debt was down from $782.6m at December 30, 2017, principally following a voluntary $100.0m Term Loan A payment and scheduled repayments. The company reported compliance with its debt covenants. Current assets were $948.7m and current liabilities $357.6m.
Material changes and management commentary
- Q3 revenue declines included the effects of retail store closures ($7.5m), the Stride Rite shift from wholesale to licensing ($3.8m), the Sebago divestiture ($6.9m), and the exit of the Department of Defense business ($7.2m). Foreign exchange reduced Q3 revenue by $3.2m. Growth in e-commerce and certain U.S. wholesale brands partly offset these impacts.
- YTD revenue was pressured by store closures, Stride Rite’s business-model transition, the Sebago divestiture and the Department of Defense business exit. The Outdoor & Lifestyle segment was essentially flat YTD; Boston revenue declined 12.3%, Heritage declined 3.4%, and Other declined 15.5%.
- Management attributed margin improvement to product mix, lower product costs, business-model changes, lower restructuring costs and lower inventory reserves. Lower average debt and higher interest income reduced net interest expense.
- The lower 2018 tax rates principally reflected discrete tax benefits associated with voluntary pension contributions and the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act. Management notes these benefits were partly offset by changes in the mix of income across tax jurisdictions.
- Management expects operating cash flow, together with revolver borrowings if needed, to fund working-capital needs for the foreseeable future. Excess cash may be directed to growth initiatives, debt reduction, dividends, repurchases and acquisitions. No specific earnings or revenue guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- Environmental/PFAS: Wolverine faces regulatory actions and individual and putative class-action lawsuits related to PFAS at and around its former tannery and disposal sites. The company had a $23.4m remediation reserve, including $11.5m expected to be paid within 12 months. It said remediation is in early stages and costs may change materially; it could not estimate costs above the reserve. No amounts were reserved for the individual and class-action claims because adverse verdicts were not considered probable.
- Impairment exposure: The Sperry trade name had a carrying value of $518.2m. After a $68.6m impairment charge in 2017, the company warned that weaker-than-projected Sperry results could require another non-cash impairment.
- Other risks: Management identifies consumer demand, competition, brand relevance, inventory management, tariffs and sourcing, foreign exchange, key customer relationships, seasonality, consumer-direct investment, litigation and environmental regulation among risks. The filing reports no material changes to the risk-factor assessment in the 2017 Form 10-K.
- The company repurchased $69.9m of shares YTD and declared a Q3 dividend of $0.08 per share, up from $0.06. It had $132.4m remaining under its repurchase authorization.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied document is 2018 Q3, not 2017 Q3.
- Track whether sales declines and brand-level trends—particularly Boston, Sperry and Saucony—stabilize, and how much of the revenue change reflects portfolio and channel transitions.
- Assess whether improved gross margin and operating profit persist after the absence of prior-year restructuring charges and the effects of tax benefits.
- Monitor operating cash conversion, receivables and inventory, pension funding, debt repayments and remaining revolver availability.
- Follow PFAS investigation and litigation developments, remediation spending versus the $23.4m reserve, and any potential additional environmental liability.
- Evaluate Sperry performance against the assumptions supporting its $518.2m indefinite-lived trade-name carrying value.