WOLVERINE WORLD WIDE INC annual report, FY2013

Business context and reporting period

Wolverine World Wide, Inc. designs, sources, markets and distributes footwear, apparel and accessories through a portfolio of brands including Merrell, Saucony, Sperry Top-Sider, Wolverine and Keds. This Form 10-K covers fiscal 2014, ended January 3, 2015; it is not a report for fiscal 2013. Fiscal 2014 comprised 53 weeks. The fourth quarter comprised 17 weeks, versus 16 weeks in the prior-year quarter.

Financial performance and position

• Revenue increased 2.6%; operating profit rose 19.6%, and attributable net earnings increased 32.6%. Gross margin declined 30 basis points. Operating expenses fell to 31.0% of revenue from 32.4%.
• Operating cash flow less capital expenditures was approximately $284.6 million, calculated from reported cash flow of $314.6 million and capital expenditures of $30.0 million.
• Current assets were $1,042.2 million and current liabilities were $340.7 million. The company reported $196.4 million available under its revolving credit facility.
• Fiscal 2014 segment revenue: Lifestyle $1,059.3 million, down 2.5%; Performance $990.7 million, up 4.7%; Heritage $607.0 million, up 7.0%.
• Cash dividends declared were $0.24 per share for the year. The company reported $208.1 million of cash held in foreign jurisdictions and intended to reinvest it permanently outside the U.S.

Material changes versus the prior comparable period

• Performance and Heritage growth was partly offset by Lifestyle’s decline. Lifestyle operating profit fell 22.6% to $130.2 million, while Performance operating profit increased 9.9% to $197.6 million and Heritage operating profit increased 11.3% to $95.4 million.
• Gross margin pressure reflected higher product costs, adverse international mix, LIFO expense, store close-out activity and foreign exchange; selected price increases partly offset these factors.
• Operating expenses benefited from lower PLG integration costs, pension expense and incentive compensation, offset in part by restructuring, selling and brand-building costs. Acquisition-related integration expense remained $15.2 million.
• The effective tax rate increased to 26.2% from 20.9%, primarily because a greater share of income arose in higher-tax jurisdictions. Net interest expense decreased to $45.4 million from $52.0 million.
• Accounts receivable decreased 21.5%, aided by a new nonrecourse receivables-sale program. The program generated $65.5 million of cash proceeds during the year; receivables sold reduced the year-end balance by $60.9 million.
• The company made $249.8 million of debt payments, including $200.0 million of voluntary payments. It made an additional $58.0 million voluntary payment after year-end.

Outlook, commentary, risks and unusual items

• Management did not provide quantified fiscal 2015 revenue or earnings guidance in the supplied filing text. It stated that operating cash flow, with revolver borrowings if needed, was expected to meet working-capital needs for the foreseeable future; excess cash was expected to support debt reduction, growth, capital expenditures, dividends or repurchases.
• Order backlog was approximately $1.17 billion at February 14, 2015, compared with $1.005 billion a year earlier. Most related to anticipated fiscal 2015 shipments; orders may be canceled or changed, and management cautioned that backlog is not necessarily predictive of shipments.
• The 2014 consumer-direct realignment planned closure of up to 140 stores by the end of fiscal 2015. Fifty-eight stores were closed in fiscal 2014. Estimated pretax charges were $26.6–$32.0 million, with expected annual pretax benefits of approximately $11.0 million after implementation; outcomes and timing were not assured.
• Fiscal 2014 included $26.0 million in restructuring costs within selling, general and administrative expenses, $1.0 million of restructuring costs in cost of goods sold, and $1.3 million of debt-extinguishment costs. The filing also identifies $4.8 million of other impairment, receivable-reserve and exit costs, of which $1.4 million was cash-related.
• Key risks include consumer demand and fashion shifts, inventory markdowns, seasonal weather, intense competition, reliance on overseas third-party sourcing, currency and trade exposure, customer order cancellations, consumer-direct execution, data-security and technology disruption, and debt covenants. About 99% of footwear was sourced from third-party suppliers, primarily in Asia Pacific; all apparel and accessories were externally sourced.
• Debt agreements contain restrictive covenants and financial tests. The company reported compliance at year-end. Litigation and environmental matters were described as routine or unresolved, and management did not expect their resolution to materially affect financial position, results or cash flows.
• Goodwill and indefinite-lived intangible assets totaled approximately $1.129 billion. No impairment was recorded in fiscal 2014; future impairment remains a risk if projected performance or valuation assumptions weaken.

Important facts for investors to verify

• Whether fiscal 2015 sales and earnings growth can continue, particularly given Lifestyle’s revenue and profit declines and the longer fiscal 2014 reporting year.
• Actual store closures, total restructuring charges, and realized savings compared with the plan’s approximately $11.0 million annual benefit estimate.
• The sustainability of operating cash flow and the extent to which receivables sales, rather than underlying collections and earnings, contributed to the cash-flow increase.
• Debt repayment progress, covenant headroom, interest-rate exposure and the availability of revolving credit; the filing reports $525.2 million of variable-rate debt, partly hedged by a $405.4 million interest-rate swap.
• International earnings and cash repatriation implications, including the $380.3 million of foreign unremitted earnings for which no U.S. deferred tax liability was recorded.
• Whether the backlog converts to shipments and whether supply-chain, port, consumer-direct and brand-demand risks affect delivery, margins or inventory.