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Wolverine World Wide, Inc. - 10-Q Summary

Business Context and Reporting Period

This report covers the second twelve-week accounting period ended June 14, 2003, and the twenty-four weeks ended on that date. Wolverine World Wide, Inc. is engaged in the manufacture and marketing of branded footwear, including casual shoes, boots, and performance outdoor footwear. The company operates through one reportable segment (Branded Footwear) and other business units including retail, apparel licensing, and tannery operations. As of July 25, 2003, there were 46,440,780 shares of Common Stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 8.7% in the quarter and 8.4% year-to-date compared to 2002. Currency gains contributed approximately 2.1% to the quarterly increase.
• Segment Performance: The Branded Footwear segment drove growth with a 10.9% quarterly increase, led by strong performance in Merrell Performance Footwear (+13.5%), Bates (+upper-teens), and Harley-Davidson (+mid-teens). Conversely, Wolverine Boots and Shoes saw declines due to soft retail conditions and a shift to lower-priced products.
• Margins: Gross margin percentage decreased slightly to 35.7% in the quarter (from 36.4%) due to a higher mix of lower-margin Bates and Wolverine Slipper shipments and costs associated with consolidating Mexican manufacturing operations into the Dominican Republic.
• Expenses: Selling and administrative expenses increased 9.2% in the quarter, partly due to a $1.6 million increase in pension expense and currency translation impacts. Excluding these factors, core expenses as a percentage of revenue would have decreased.
• Liquidity: Cash and cash equivalents increased to $40.1 million from $26.8 million in the prior year. Accounts receivable days sales outstanding improved to 68.6 days from 76.9 days.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects proceeds from credit facilities and operating cash flows to be sufficient for working capital needs. Excess cash is intended for capital expenditures, debt reduction, growth initiatives, dividends, and stock repurchases.
• Acquisitions: On July 24, 2003, the company entered a letter of intent to acquire Sebago, Inc., expected to close in October 2003.
• Stock Repurchases: The company repurchased 78,700 shares in the quarter. Cumulative repurchases under the current program total 1,010,300 shares.
• Dividends: A quarterly dividend of $0.055 per share was declared, a 22.2% increase over the prior year.
• Risks and Contingencies:
  • Strike: On July 17, 2003, 153 tannery employees voted to strike. Management does not expect a significant impact on operations.
  • Pension Costs: Pre-tax pension charges are estimated to increase by $7.1 million in fiscal 2003 due to declining interest rates and asset values.
  • Market Risks: Significant exposure to foreign currency fluctuations (hedged via forward contracts) and interest rate changes. Global economic uncertainty, terrorism, and the war in Iraq are cited as potential risks to consumer demand and supply chains.

Investor Verification Checklist

• Inventory Management: Verify the effectiveness of the asset management program reducing inventory levels by 5.3% year-over-year and the impact on future sales availability.
• Pension Liability Impact: Confirm the projected $7.1 million increase in pension charges for fiscal 2003 and its effect on full-year earnings guidance.
• Acquisition Integration: Monitor the progress and financial terms of the pending Sebago, Inc. acquisition.
• Strike Resolution: Track the duration and resolution of the tannery employee strike to assess potential supply chain disruptions.
• Currency Hedging: Review the effectiveness of foreign currency hedges given the volatility in the Euro and British Pound, which significantly impact European operations.