Wolverine World Wide, Inc. — FY2018 Form 10-K
Period clarification: The supplied filing is the annual report for the 52-week fiscal year ended December 29, 2018—not a 2017 Q4 filing. It also provides unaudited quarterly results, including Q4 2018.
Business context
Wolverine designs, markets and licenses footwear, apparel and accessories through brands including Merrell, Saucony, Sperry, Wolverine, Hush Puppies and Cat. It sells in approximately 200 countries and territories, primarily using third-party manufacturers in Asia Pacific. Its reportable groups are Outdoor & Lifestyle, Boston, and Heritage; multi-brand consumer-direct stores and leather operations are included in “Other.”
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $2,239.2 million | $2,350.0 million |
| Gross profit / margin | $921.3 million / 41.1% | $914.4 million / 38.9% |
| Operating profit | $251.9 million | $31.6 million |
| Net earnings attributable to Wolverine | $200.1 million | $0.3 million |
| Diluted EPS | $2.05 | Less than $0.01, reported as — |
| Net cash from operating activities | $97.5 million | $202.7 million |
| Cash and cash equivalents at year-end | $143.1 million | $481.0 million |
| Total debt, including capital leases | $570.5 million | $782.6 million |
Revenue declined 4.7%, while gross margin rose 220 basis points. Operating profit and earnings rebounded sharply from FY2017, which included substantial restructuring, impairment, environmental and transformation costs, as well as a tax benefit that made the prior-year effective tax rate unusually high. FY2018’s effective tax rate was 11.9%, versus 93.7% in FY2017; management cited discrete tax items, including the lower U.S. corporate tax rate and a $60.0 million voluntary pension contribution.
Operating cash flow fell by $105.2 million. The filing attributes the decline principally to ending the accounts-receivable financing program, increased inventory to support growth, higher pension contributions and working-capital use. Capital expenditures were $21.7 million. Cash declined primarily due to debt payments, $174.7 million of share repurchases and capital spending. The company reported $672.5 million of available revolving-credit capacity and said operating cash flow and available borrowings should meet foreseeable working-capital needs.
Material changes and segment performance
- Revenue fell $110.8 million year over year, reflecting store closures, the Stride Rite licensing-model transition, the Sebago divestiture and sale of Bates’ Department of Defense contract business; eCommerce growth partly offset the decline.
- Outdoor & Lifestyle revenue increased 1.3% to $951.9 million, supported by Merrell and Cat. Boston revenue decreased 9.4% to $895.5 million, led by the Stride Rite transition, store closures and weaker Saucony demand. Heritage revenue declined 2.3% to $320.3 million, partly due to the contract-business sale.
- Operating profit improved in all three reportable groups. Corporate expenses were substantially lower, particularly because FY2018 had no comparable restructuring or intangible-impairment charges and had lower transformation and environmental costs.
- FY2018 Q4 revenue was $579.6 million versus $578.6 million in Q4 FY2017. Attributable net earnings were $39.3 million versus a $60.3 million loss, with the prior-year quarter affected by significant charges.
Outlook, risks and unusual items
- The filing gives no specific FY2019 revenue or earnings guidance. Management stated that cash resources and operating cash flow were expected to support foreseeable working-capital needs. Backlog at February 17, 2019 was approximately $971 million, versus $913 million a year earlier; substantially all related to FY2019 shipments, but orders can be cancelled or changed and backlog may not predict shipments.
- The board authorized an additional $400 million share-repurchase program in February 2019, on top of $27.6 million remaining under the previous program. A $0.10-per-share quarterly dividend was declared, and the company expected comparable dividends in FY2019.
- Environmental exposure is a significant contingency. Wolverine is responding to Michigan and EPA actions concerning PFAS at the former tannery, House Street site and other locations, and faces individual and putative class-action lawsuits. The company recorded a $22.6 million remediation reserve, but stated it could not estimate potential losses above the reserve; no amounts were reserved for the lawsuits because an adverse outcome was not considered probable. It is pursuing cost recovery from 3M and participation from historic insurers.
- Other key risks include consumer demand and fashion shifts, inventory and wholesale-customer risks, foreign sourcing and trade restrictions, currency movements, consumer-direct execution, cybersecurity and privacy, and debt covenants. The company reported compliance with credit-agreement covenants at year-end.
- FY2018 included a $7.2 million pension settlement loss associated with an annuity purchase and a $4.6 million benefit to cost of goods sold from a LIFO inventory liquidation. The company reported no FY2018 goodwill or intangible impairment; the Sperry trade name had a $518.2 million carrying value following a $68.6 million impairment in FY2017.
Important facts for investors to verify
- Confirm the intended reporting period: the source is FY2018, despite the request metadata referring to 2017 Q4.
- Monitor whether revenue and operating cash flow recover, particularly as receivables and inventory increased and the receivables-sale program ended.
- Assess the possible range and timing of PFAS remediation and litigation costs beyond the recorded $22.6 million reserve.
- Track Boston Group and key-brand performance, including Saucony and Sperry, and any future impairment indicators.
- Review debt maturities, covenant headroom, capital returns and the execution of the new repurchase authorization.