Wolverine World Wide, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 12 weeks ended June 15, 2013 and the first 24 weeks of fiscal 2013, compared with the corresponding 2012 periods. Although the request metadata says 2012 Q2, the filing itself is for fiscal 2013 Q2.
Business context and financial performance
Wolverine designs, sources, markets and distributes branded footwear, apparel and accessories. Its portfolio includes 16 brands, sold in approximately 200 countries and territories. Fiscal 2013 results include Performance + Lifestyle Group (PLG), acquired in October 2012; therefore, year-over-year revenue comparisons are substantially affected by the acquisition.
| Metric | 12 weeks ended June 15, 2013 | Prior-year period | 24 weeks ended June 15, 2013 | Prior-year period |
|---|---|---|---|---|
| Revenue | $587.8 million | $312.7 million | $1,233.7 million | $635.5 million |
| Gross margin | 41.0% | 37.8% | 40.8% | 39.4% |
| Operating profit | $37.0 million | $22.8 million | $88.0 million | $59.8 million |
| Net earnings attributable to Wolverine | $17.9 million | $20.5 million | $47.7 million | $51.7 million |
| Diluted EPS | $0.36 | $0.42 | $0.95 | $1.05 |
| Net cash from operating activities | Not separately presented for the quarter | $87.5 million | $15.5 million |
Revenue rose 88.0% for the quarter and 94.1% year to date, primarily from PLG. Gross margin improved 320 basis points in the quarter and 140 basis points year to date. Management attributed the quarterly improvement to favorable product mix and higher selling prices, partly offset by higher product costs. Operating profit increased, but net earnings and EPS declined as acquisition-related costs, higher operating expenses, interest expense and taxes weighed on results. The quarterly effective tax rate was 24.2%, versus 7.0% a year earlier; year-to-date rates were 22.2% and 10.4%.
Segments and material changes
- Lifestyle Group: Quarterly revenue was $255.2 million versus $28.5 million, and operating profit was $45.8 million versus $5.6 million; the large increases chiefly reflect acquired brands.
- Performance Group: Quarterly revenue increased 33.8% to $199.7 million, partly from acquired Saucony. Management cited a low-teens decline at Merrell, associated with European market challenges, lower U.S. discount-channel sales, softness in outdoor footwear and distributor shipment timing.
- Heritage Group: Quarterly revenue declined 0.8% to $110.6 million. Year-to-date revenue declined 0.7%.
- Quarterly acquisition-related transaction and integration costs were $7.9 million, versus $4.9 million; year-to-date costs were $23.1 million, versus $4.9 million. Corporate operating loss widened to $56.0 million for the quarter, including acquired-business costs and integration expense.
Cash, debt and liquidity
- At June 15, 2013, cash and cash equivalents were $171.0 million, versus $171.4 million at December 29, 2012. Current assets were $1,122.7 million and current liabilities $365.6 million.
- Interest-bearing debt was $1,184.7 million, down from $1,250.0 million at year-end 2012. Debt included Term Loan A of $536.3 million, Term Loan B of $273.4 million and $375.0 million of 6.125% senior notes due 2020. No revolving-facility borrowings were outstanding; approximately $198.1 million remained available, net of letters of credit.
- Operating cash flow of $87.5 million was partly offset by $14.7 million of investing outflows and $71.4 million of financing outflows. The company paid $65.3 million of long-term debt, including $50.0 million in voluntary Term Loan B repayments, and $11.8 million in dividends.
- Working capital movements used $11.9 million of cash year to date, including increases in receivables of $45.3 million and inventories of $18.9 million, partly offset by higher accounts payable and lower other operating assets.
- The company reported compliance with its credit-agreement financial covenants. It had a $462.2 million interest-rate swap to reduce exposure to variable-rate debt.
Outlook, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management said operating cash flow, together with potential revolving-credit borrowings, should meet working-capital needs for the foreseeable future. Excess cash may be used for capital expenditures, debt reduction, growth initiatives, dividends or share repurchases.
Key stated risks include economic and consumer-demand changes, currency movements, seasonality and weather, customer or order losses, competition, supply-chain and input-cost issues, legal and regulatory matters, and challenges realizing and integrating PLG acquisition benefits, including the resulting higher indebtedness. The PLG purchase-price allocation remained preliminary at June 15, 2013, with certain valuation and tax matters still under review. Management said pending litigation and environmental claims were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty. Foreign earnings are intended to be permanently reinvested; repatriation could create additional U.S. tax liability.
As a subsequent event, the board approved a two-for-one stock split, payable November 1, 2013 to shareholders of record October 1, 2013. The filing also corrected an immaterial prior-year disclosure of accounts-receivable allowances, with no effect on prior-year earnings, cash flows or net receivables.
Most important facts for investors to verify
- How much reported growth and future performance depend on PLG versus organic growth, especially given Merrell’s disclosed weakness.
- Whether integration spending and other acquired-business costs decline, and whether PLG synergies and operating benefits are realized.
- Debt repayment capacity, variable-rate exposure, covenant headroom and the effect of interest expense on earnings.
- Receivables and inventory growth relative to sales, and whether operating cash generation remains sustainable.
- Final PLG purchase-price allocation and any resulting changes to goodwill, intangible assets, deferred taxes or pension liabilities.
- Tax exposure if foreign earnings are repatriated, as well as developments in environmental, legal and other contingencies.