Wolverine World Wide, Inc. — FY2013 Form 10-K
Period note: The request identifies “2012 Q4,” but this filing is the annual report for the fiscal year ended December 28, 2013. Fiscal 2013 comprised 52 weeks; its fourth quarter comprised 16 weeks.
Business context and reporting period
Wolverine designs, sources, markets and distributes footwear, apparel and accessories through a portfolio of owned and licensed brands. Its reportable segments are Lifestyle, Performance and Heritage. Fiscal 2013 included the acquired Performance + Lifestyle Group (PLG) for a full year, versus only part of the fourth quarter in fiscal 2012, making year-over-year comparisons materially acquisition-driven. The company reorganized its segments in 2013 and restated prior-period segment results.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $2,691.1 million | $1,640.8 million |
| Gross margin | 39.6% | 38.3% |
| Operating profit | $192.3 million | $113.7 million |
| Net earnings attributable to Wolverine | $100.4 million | $80.7 million |
| Diluted EPS | $0.99 | $0.81 |
| Cash provided by operating activities | $202.3 million | $91.6 million |
| Capital expenditures | $41.7 million | $14.9 million |
| Interest-bearing debt at year-end | $1,150.0 million | $1,250.0 million |
Revenue rose 64.0%, primarily from the full-year inclusion of PLG. Gross margin expanded 130 basis points, helped by channel mix and selling prices, partly offset by product costs, restructuring costs and currency-contract variances. Operating expenses rose to 32.4% of revenue from 31.4%, reflecting the larger business, acquisition integration and amortization, pension and incentive costs, and brand investment. The effective tax rate increased to 20.9% from 14.2%; the prior year benefited from a non-recurring favorable foreign tax court decision.
Cash and cash equivalents were $214.2 million, and $196.5 million was available under the revolving credit facility. Current assets were $1,118.0 million and current liabilities $329.3 million. The company reported $1,150.0 million of debt, including a $775.0 million Term Loan A and $375.0 million of 6.125% senior notes due 2020. It repaid $100 million net of borrowings during 2013, including $85 million of voluntary term-loan payments. The company said it was in compliance with its debt covenants. Of year-end cash, $180.2 million was held abroad and intended to remain permanently reinvested.
Segment revenue and operating profit were: Lifestyle $1,086.6 million and $168.2 million; Performance $945.8 million and $179.8 million; Heritage $567.4 million and $85.7 million. Corporate expenses were $241.6 million, up from $141.7 million, including full-year acquired costs and integration, restructuring, pension and incentive expenses.
Material changes and unusual items
- Fiscal 2013 net earnings improved year over year, but remained below fiscal 2011’s $123.3 million; the 2013 comparison reflects PLG inclusion and higher financing costs.
- Fourth-quarter 2013 revenue was $740.8 million and gross profit was $275.3 million, but the company recorded a $1.7 million attributable net loss, or diluted loss per share of $0.02. The fourth-quarter period was 16 weeks.
- The October 2013 debt refinancing lowered the effective term-loan interest rate and extended the Term Loan A and revolver by one year. The company recorded $13.1 million of debt-extinguishment costs, representing previously capitalized financing fees.
- The Dominican Republic manufacturing restructuring was substantially completed: one facility was sold and another closed. Fiscal 2013 restructuring costs were $7.6 million; expected total cost was approximately $8.0 million.
- The company recorded a $0.7 million impairment of certain consumer-direct store assets. It reported no goodwill or indefinite-lived intangible impairment for 2011–2013. Goodwill and indefinite-lived intangibles totaled approximately $1.136 billion at year-end.
- The reported pension-plan and SERP funded deficit improved to $75.8 million from $167.9 million, substantially reflecting actuarial gains; company pension expense nevertheless increased to $37.3 million from $27.9 million.
Outlook, risks and contingencies
For fiscal 2014, management forecast revenue of $2.775–$2.850 billion, 3%–6% growth; slight gross-margin expansion; modest operating-expense leverage; net interest expense of approximately $47 million; an effective tax rate of approximately 28%; and diluted EPS of $1.52–$1.58. Management cited pricing, product mix, operational efficiencies, acquisition synergies and lower pension expense as supports, partly offset by brand-building investment and higher incentive compensation. The company expected operating cash flow and revolver access to meet foreseeable working-capital needs.
Key risks include consumer demand and fashion or weather shifts; competition and inventory management; dependence on third-party sourcing, particularly in Asia; foreign exchange, tariffs and raw-material costs; customer cancellations and credit risk; military-contract uncertainty; consumer-direct investment and execution; and the ability to integrate PLG and realize synergies. Elevated debt and restrictive covenants may constrain financial flexibility. The company also highlighted potential goodwill or intangible impairment, pension and tax uncertainty, foreign earnings repatriation costs, cybersecurity and distribution disruption, and risks associated with licensed brands and suppliers.
The filing describes routine litigation and environmental remediation matters, including sites where the company has been identified as a potentially responsible party; management did not expect their resolution to materially affect financial position, results or cash flows. Contractual obligations totaled $2.142 billion, including $1.363 billion of debt obligations, $278.7 million of operating leases and $409.6 million of purchase obligations. The company disclosed $8.6 million of unrecognized tax benefits, for which payment timing was uncertain. No off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- How much of reported growth and segment performance reflects PLG acquisition scope versus organic demand, and whether expected synergies are being realized.
- Debt repayment, interest expense, covenant headroom and the effect of the refinancing; also the geographic availability of cash held overseas.
- Progress against 2014 revenue, margin, tax-rate and EPS guidance, including the assumptions behind expected cost leverage.
- Whether the $1.136 billion goodwill and indefinite-lived intangible balance remains supportable if brand or cash-flow forecasts weaken.
- Developments in pension funding, foreign tax matters, environmental claims and other contingencies, as well as the costs and benefits of the Dominican Republic restructuring.