Wolverine World Wide, Inc. — Form 10-Q Summary
Reporting period: The filing covers the third 12-week accounting period ended September 8, 2012, and the first 36 weeks of fiscal 2012, compared with corresponding 2011 periods. The request metadata says “2011 Q3,” but the filing itself is for 2012 Q3.
Business context and financial performance
Wolverine designs, sources, markets, licenses, and distributes branded footwear, apparel, and accessories. Its portfolio included 12 brands marketed in more than 190 countries and territories; it also operated 100 stores and 38 consumer-direct websites. The company reports one principal segment, branded footwear, apparel, and licensing.
| Metric | Third quarter 2012 | Third quarter 2011 | First 36 weeks 2012 | First 36 weeks 2011 |
|---|---|---|---|---|
| Revenue | $353.1 million | $361.6 million | $988.6 million | $1,002.6 million |
| Gross profit / margin | $138.6 million / 39.3% | $146.7 million / 40.6% | $388.8 million / 39.3% | $406.6 million / 40.6% |
| Operating profit | $46.3 million | $56.4 million | $106.1 million | $139.3 million |
| Net earnings attributable to Wolverine | $32.7 million | $40.4 million | $84.4 million | $100.3 million |
| Diluted EPS | $0.66 | $0.82 | $1.71 | $2.01 |
- Third-quarter revenue fell 2.4%; branded footwear, apparel, and licensing revenue declined 4.3%, partly offset by 20.4% growth in other business units. For the first 36 weeks, revenue decreased 1.4%.
- Gross margin fell 140 basis points in the quarter. Management attributed the decline to product-cost increases exceeding selling-price increases and a shift toward lower-margin closeout sales.
- Quarterly SG&A rose 2.2% to $92.2 million; as a share of revenue, it increased to 26.1% from 24.9%. YTD SG&A increased 5.8% to $282.7 million.
- Quarterly net earnings declined 19.1% and diluted EPS fell 19.5%. YTD net earnings declined 15.9% and diluted EPS fell 14.9%.
- The effective tax rate was 27.1% for the quarter and 17.7% YTD, versus 28.3% and 27.6% in 2011. The YTD rate benefited from a favorable foreign tax court decision, reducing tax expense by $9.0 million.
Cash flow, liquidity, and debt
- For the first 36 weeks, operating cash flow was $8.6 million, versus cash used of $39.1 million in the prior-year period. Lower working-capital investment and pension contributions more than offset lower earnings.
- Cash was $144.3 million at September 8, 2012. Current assets were $727.4 million and current liabilities $171.0 million. Inventory was $269.7 million, up $38.0 million from year-end but down $5.5 million year over year.
- At quarter-end, $27.0 million was drawn under the former revolving credit facility; the company reported compliance with its covenants. Capital expenditures were $8.3 million YTD, and cash dividends paid were $17.6 million.
- After quarter-end, Wolverine closed its approximately $1.237 billion cash acquisition of Performance + Lifestyle Group (PLG). It financed the acquisition using cash and new borrowing. The new secured credit facility provides up to $1.1 billion, including term facilities and a $200 million revolver; Wolverine also issued $375 million of 6.125% senior notes due 2020. As of October 9, $900 million was outstanding on the new term loans, with no borrowing under the new revolver.
Changes, outlook, risks, and unusual items
- Management said Europe’s weak macroeconomic environment was expected to persist through the remainder of fiscal 2012. No numerical full-year earnings or revenue guidance is provided in the filing text.
- Europe and Canada were principal sources of weakness; foreign-exchange movements reduced reported revenue by $5.4 million in the quarter and $11.3 million YTD. Consumer-direct sales grew at a low-teens rate in the quarter and a mid-teens rate YTD.
- PLG acquisition-related costs were $4.4 million in the quarter and $9.4 million since the agreement was announced; the quarter included $1.4 million of non-capitalizable financing costs. Management reported a $0.06 per-share impact from acquisition-related costs in Q3.
- YTD pension expense increased to $19.4 million from $12.1 million; pension contributions were $26.7 million, compared with $31.8 million in the prior period. Higher pension expense and brand-building investment contributed to SG&A growth.
- Key risks include integration and realization of PLG benefits, substantially higher post-acquisition debt and restrictive covenants, continued European weakness, product-cost and closeout-margin pressure, currency movements, seasonal inventory and weather exposure, supplier and distribution disruptions, and changes in tax outcomes. Foreign earnings treated as permanently reinvested could create material U.S. tax expense if repatriated.
- Environmental and other routine legal matters were not expected by management to materially affect financial position, results, or cash flows. The merger-related shareholder litigation had a proposed settlement process requiring court approval; the filing said the contemplated settlement was not expected to have a material adverse effect.
Investor facts to verify
- Confirm PLG’s final purchase-price adjustments, acquired assets and liabilities, integration costs, and realized synergies.
- Review post-acquisition debt balances, interest-rate exposure and hedging, covenant headroom, and the company’s debt-repayment capacity.
- Track whether European and Canadian demand stabilizes and whether margin pressure from product costs and closeout sales eases.
- Assess the sustainability of the favorable tax benefit and the potential tax consequences of any foreign-earnings repatriation.
- Monitor working-capital conversion, inventory levels, pension funding, and operating cash flow following the acquisition.