Wolverine World Wide, Inc. — Form 10-Q Summary
Reporting period: Second 12-week accounting period ended June 18, 2011; year-to-date figures cover 24 weeks. Comparative periods ended June 19, 2010. Financial statement amounts below are in millions unless otherwise noted.
Business context
Wolverine designs, sources, manufactures, markets, licenses and distributes footwear, apparel and accessories through a portfolio of 12 brands, including Merrell, Wolverine, Cat, Bates, Hush Puppies and Sebago. Its brands were marketed in approximately 190 countries and territories. The company also operates consumer-direct retail and e-commerce businesses and a leather business.
Financial performance and position
| Metric | Second quarter 2011 | Second quarter 2010 | First 24 weeks 2011 | First 24 weeks 2010 |
|---|---|---|---|---|
| Revenue | $310.1 | $258.2 | $641.0 | $543.1 |
| Gross profit / margin | $122.1 / 39.4% | $103.7 / 40.2% | $259.9 / 40.5% | $221.3 / 40.7% |
| Operating profit | $33.4 | $24.7 | $82.8 | $63.2 |
| Net earnings | $24.0 | $17.2 | $59.8 | $44.7 |
| Diluted earnings per share | $0.48 | $0.35 | $1.20 | $0.89 |
Second-quarter revenue rose 20.1%, net earnings 39.5% and diluted EPS 37.1%. For the first 24 weeks, revenue increased 18.0%, net earnings 33.8% and diluted EPS 34.8%. Second-quarter SG&A was $88.8 million, or 28.6% of revenue, versus $76.7 million, or 29.7%; the prior-year comparison included $2.3 million of restructuring and transition costs. The first-half effective tax rate was 27.1%, compared with 29.0%.
Growth was led by the Outdoor Group, whose second-quarter revenue rose 30.0% to $127.2 million; Heritage revenue rose 15.1% to $102.9 million; and Lifestyle revenue rose 17.6% to $41.5 million. International sales represented 39.8% of second-quarter revenue, up from 34.7% a year earlier.
At June 18, cash and cash equivalents were $118.5 million; current assets were $621.1 million and current liabilities $162.5 million. Interest-bearing debt was $20.5 million, including $20.0 million drawn on the revolving credit facility. The facility provides an initial $150 million of capacity, potentially expandable to $225 million; the company reported compliance with its debt covenants.
For the first 24 weeks, operating activities used $19.7 million of cash, compared with $10.3 million provided in the prior-year period. Investing activities used $10.6 million, including $9.2 million of capital expenditures. Financing activities used $5.0 million; the company paid $11.2 million in dividends and repurchased $23.1 million of stock. Cash declined $31.9 million from the fiscal-year start to $118.5 million.
Material changes and notable items
- Second-quarter gross margin fell 80 basis points year over year. Management attributed the decrease primarily to temporary production issues at company-owned manufacturing operations and a reserve related to a Bates U.S. military boot program. Higher product and input costs and unfavorable mix were largely offset by pricing and foreign exchange benefits.
- Inventory reached $249.9 million, up $79.1 million, or 46.3%, from June 2010. Management cited advance purchases ahead of supplier price increases, new collections, higher product costs, currency effects and expected demand. Accounts receivable was $226.7 million, up $43.5 million year over year.
- The first-half operating cash outflow reflected a $31.8 million pension contribution, increased working-capital investment and other timing effects, despite stronger earnings. The filing says increased pension contributions and working capital more than offset improved earnings and lower restructuring payments.
- The effective tax rate benefited from a state tax audit settlement, income mix among tax jurisdictions and the U.S. research and development tax credit, which was not in effect in the first two quarters of 2010.
- The company repurchased approximately 479,000 shares for $18.1 million in the second quarter and declared a $0.12 per-share dividend, up from $0.11 a year earlier. $131.0 million remained under the $200 million repurchase authorization at quarter-end.
- The prior restructuring plan was substantially completed in 2010; no restructuring or transition costs were recorded in the first half of 2011. A $0.6 million restructuring reserve remained at June 18, primarily for facility-exit costs.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or margin guidance. Management described a solid outlook for the balance of the fiscal year and expected cash, operating cash flows and revolving-credit access to meet foreseeable working-capital needs. This outlook is subject to seasonal fluctuations and execution risks.
Key disclosed risks include economic and consumer-demand changes, foreign-exchange and interest-rate movements, input and labor costs, shipping interruptions, supplier and customer relationships, competition, and the ability to execute growth initiatives. The company uses foreign-currency forward contracts to hedge certain U.S.-dollar inventory purchases; contracts outstanding at June 18 had a notional value of $113.4 million and maturities up to 336 days. Management stated that environmental claims and other routine litigation were not expected to have a material adverse effect, while noting that outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether elevated inventory and receivables convert to sales and cash without markdowns, cancellations or collection issues.
- Whether production disruptions and the Bates program reserve are temporary, and how margins respond to input costs, pricing and product mix.
- How working-capital needs and pension contributions affect cash generation, revolver use and liquidity through the remainder of the year.
- Whether strong brand and international growth persists, particularly given seasonal demand and the weak second-quarter sandal season noted by management.
- The nature and potential financial exposure of environmental, legal and military-contract contingencies, including developments in the Bates program.
- Whether the favorable tax items recur; the filing does not establish that the audit settlement or tax-credit benefit will continue.