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WOLVERINE WORLD WIDE INC /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) OVERVIEW BUSINESS OVERVIEW The Company is a leading global designer, manufacturer and marketer of branded footwear, apparel and accessories. The Company's stated vision is "To build a family of the most admired performance and lifestyle brands on earth." The Company seeks to fulfill this vision by offering innovative products and compelling brand propositions; complementing its footwear brands with strong apparel and accessories offerings; expanding its global consumer-direct footprint; and delivering supply chain excellence. The Company's portfolio consists of 16 brands that were marketed in approximately 200 countries and territories at June 14, 2014. The Company believes that this diverse brand portfolio and broad geographic reach position it for continued strong organic growth. The Company's brands are distributed into the marketplace via owned operations in the United States, Canada, the United Kingdom and certain countries in continental Europe. In other regions (Asia Pacific, Latin America, the Middle East, Africa and certain countries in continental Europe), the Company relies on a network of third-party distributors, licensees and joint ventures. At June 14, 2014, the Company operated 465 retail stores in the United States, Canada and the United Kingdom and 64 consumer-direct websites. 2014 FINANCIAL OVERVIEW • Revenue for the second quarter of fiscal 2014 was $613.5 million, an increase of 4.4% compared to the second quarter of fiscal 2013. Each of the Company's three operating groups contributed to the quarter's solid revenue performance. • Gross margin for the second quarter of fiscal 2014 was 40.1%, a decrease of 90 basis points from the second quarter of fiscal 2013. • Operating expenses as a percentage of revenue decreased to 32.1% for the second quarter of fiscal 2014 compared to 34.7% for the second quarter of fiscal 2013. The year-over-year decrease was due primarily to lower acquisition-related integration costs, pension expense and incentive compensation expense. • The effective tax rate in the second quarter of fiscal 2014 was 28.2% compared to 24.2% in the second quarter of fiscal 2013. • Diluted earnings per share for the second quarter of fiscal 2014 were $0.27 compared to $0.18 per share for the second quarter of fiscal 2013. • The Company declared cash dividends of $0.06 per share in both the second quarter of fiscal 2014 and the second quarter of fiscal 2013. RECENT DEVELOPMENTS On July 9, 2014, the Board of Directors of the Company approved a realignment of the Company's consumer-direct operations. As a part of the Plan, the Company intends to close up to approximately 140 retail stores over the next 18 months, consolidate certain consumer-direct support functions and implement certain other organizational changes. For additional information on the restructuring plan, please see Note 15. 33-------------------------------------------------------------------------------- Table of Contents The following is a discussion of the Company's results of operations and liquidity and capital resources. This section should be read in conjunction with the Company's consolidated condensed financial statements and related notes included elsewhere in this Quarterly Report. RESULTS OF OPERATIONS 12 Weeks Ended 24 Weeks Ended (In millions, except per share June 14, June 15, Percent June 14, June 15, Percent data) 2014 2013 Change 2014 2013 Change Revenue $ 613.5 $ 587.8 4.4 % $ 1,241.1 $ 1,233.7 0.6 % Cost of goods sold 367.7 346.7 6.1 739.1 730.6 1.2 Restructuring costs 0.1 - - 0.5 - - Gross profit 245.7 241.1 1.9 501.5 503.1 (0.3 ) Selling, general and administrative expenses 190.8 196.2 (2.8 ) 381.3 392.0 (2.7 ) Acquisition-related integration costs 2.5 7.9 (68.4 ) 4.1 23.1 (82.3 ) Restructuring costs 3.4 - - 3.4 - - Operating profit 49.0 37.0 32.4 112.7 88.0 28.1 Interest expense, net 10.5 12.5 (16.0 ) 21.4 25.4 (15.7 ) Other expense, net - 0.6 (100.0 ) 0.8 1.0 (20.0 ) Earnings before income taxes 38.5 23.9 61.1 90.5 61.6 46.9 Income taxes 10.9 5.8 87.9 25.7 13.7 87.6 Net earnings 27.6 18.1 52.5 64.8 47.9 35.3 Less: net earnings attributable to non-controlling interest 0.1 0.2 (50.0 ) 0.2 0.2 - Net earnings attributable to Wolverine World Wide, Inc. $ 27.5 $ 17.9 53.6 % $ 64.6 $ 47.7 35.4 % Diluted earnings per share $ 0.27 $ 0.18 50.0 % $ 0.64 $ 0.48 33.3 % REVENUE Revenue was $613.5 million for the second quarter of fiscal 2014, an increase of 4.4% from the second quarter of fiscal 2013. Changes in foreign exchange rates increased reported revenues by approximately $0.7 million for the second quarter of fiscal 2014. Revenue for the first two quarters of fiscal 2014 was $1,241.1 million, an increase of 0.6% from the first two quarters of fiscal 2013. Changes in foreign exchange rates decreased reported revenues by approximately $0.8 million for the first two quarters of fiscal 2014. GROSS MARGIN Gross margin was 40.1% for the second quarter of fiscal 2014 compared to 41.0% in the second quarter of fiscal 2013. The lower gross margin was a result of increased promotional activity in the Company's retail stores (which contributed 40 basis points to the decline in gross margin) and higher product costs (which, when partially offset by higher average selling prices, contributed 50 basis points to the decline in gross margin). Gross margin was 40.4% for the first two quarters of fiscal 2014 compared to 40.8% in the first two quarters of fiscal 2013. The lower gross margin was a result of increased promotional activity in the Company's retail stores (which contributed 20 basis points to the decline in gross margin) and higher product costs (which, when partially offset by higher average selling prices, contributed 20 basis points to the decline in gross margin). OPERATING EXPENSES Operating expenses decreased $7.4 million, from $204.1 million in the second quarter of fiscal 2013 to $196.7 million in the second quarter of fiscal 2014. The decrease was driven by $5.4 million of lower acquisition-related integration costs associated with the acquisition of PLG, $5.7 million of lower pension expense and $2.1 million of lower incentive compensation expense. These decreases were partially offset by a $3.4 million non-cash charge related to the Company's international operations and $3.1 million of higher selling costs related to incremental new retail store openings. 34-------------------------------------------------------------------------------- Table of Contents Operating expenses decreased $26.3 million, from $415.1 million in the first two quarters of fiscal 2013 to $388.8 million in the first two quarters of fiscal 2014. The decrease was driven by $19.0 million of lower acquisition-related integration costs associated with the acquisition of PLG, $11.3 million of lower pension expense and $5.0 million of lower incentive compensation expense. These decreases were partially offset by a $3.4 million non-cash charge related to the Company's international operations and $4.0 million of higher selling costs related to incremental new retail store openings. INTEREST, OTHER AND TAXES Net interest expense was $10.5 million in the second quarter of fiscal 2014 compared to $12.5 million in the second quarter of fiscal 2013. Net interest expense was $21.4 million for the first two quarters of fiscal 2014 compared to $25.4 million in the first two quarters of fiscal 2013. The decreases in both periods reflect the benefits of the amendment to the Credit Agreement executed in the fourth quarter of fiscal 2013 and lower average principal balances. The Company's effective tax rate was 28.2% in the second quarter of fiscal 2014, compared to 24.2% in the second quarter of fiscal 2013. The Company's effective tax rate was 28.4% in the first two quarters of fiscal 2014, compared to 22.2% in the first two quarters of fiscal 2013. The lower effective tax rate in the prior year periods reflects the benefit from the deductibility of higher acquisition-related integration costs in high statutory tax rate jurisdictions and the benefit of a retroactive reinstatement of the research and development federal tax credit for 2012 and extension of the credit through 2013. The research and development federal tax credit has now expired and is not available for 2014. The Company maintains certain strategic management and operational activities in overseas subsidiaries, and its foreign earnings are taxed at rates that are generally lower than the U.S. federal statutory income tax rate. A significant amount of the Company's earnings are generated by its Canadian, European and Asia Pacific subsidiaries and, to a lesser extent, in other foreign jurisdictions that are not subject to income tax. The Company has not provided for U.S. taxes for earnings generated in foreign jurisdictions because it plans to reinvest these earnings indefinitely outside the U.S. However, if certain foreign earnings previously treated as permanently reinvested are repatriated, the additional U.S. tax liability could have a material adverse effect on the Company's after-tax results of operations and financial position. REPORTABLE OPERATING SEGMENTS The Company has three reportable operating segments. The Company's operating segments are determined based on how the Company internally reports and evaluates financial information used to make operating decisions. The Company's reportable operating segments are: • Lifestyle Group, consisting of Sperry Top-Sider® footwear and apparel, Stride Rite® footwear and apparel, Hush Puppies® footwear and apparel, Keds® footwear and apparel and Soft Style® footwear; • Performance Group, consisting of Merrell® footwear and apparel, Saucony® footwear and apparel, Chaco® footwear, Patagonia® footwear and Cushe® footwear; and • Heritage Group, consisting of Wolverine® footwear and apparel, Cat® footwear, Bates® uniform footwear, Sebago® footwear and apparel, Harley-Davidson® footwear and HyTest® safety footwear. The Company also reports Other and Corporate categories. The Other category consists of the Company's multi-brand consumer-direct business, leather marketing operations and sourcing operations that include third-party commission revenues. The Corporate category consists of unallocated corporate expenses, including acquisition-related integration costs, restructuring costs and impairment costs. The current quarter and prior year reportable operating segment results are as follows: 12 Weeks Ended 24 Weeks Ended June 14, June 15, Percent June 14, June 15, Percent (In millions) 2014 2013 Change Change 2014 2013 Change Change Revenue: Lifestyle Group $ 264.1 $ 255.2 $ 8.9 3.5 % $ 502.1 $ 525.5 $ (23.4 ) (4.5 )% Performance Group 211.2 199.7 11.5 5.8 460.0 440.2 19.8 4.5 Heritage Group 113.5 110.6 2.9 2.6 234.2 229.1 5.1 2.2 Other 24.7 22.3 2.4 10.8 44.8 38.9 5.9 15.2 Total $ 613.5 $ 587.8 $ 25.7 4.4 % $ 1,241.1 $ 1,233.7 $ 7.4 0.6 % 35-------------------------------------------------------------------------------- Table of Contents 12 Weeks Ended 24 Weeks Ended June 14, June 15, Percent June 14, June 15, Percent (In millions) 2014 2013 Change Change 2014 2013 Change Change Operating profit (loss): Lifestyle Group $ 39.1 $ 45.8 $ (6.7 ) (14.6 )% $ 64.1 $ 91.9 $ (27.8 ) (30.3 )% Performance Group 37.6 30.5 7.1 23.3 95.6 81.4 14.2 17.4 Heritage Group 14.5 16.1 (1.6 ) (9.9 ) 32.2 31.5 0.7 2.2 Other 0.1 0.6 (0.5 ) (83.3 ) (1.3 ) (0.4 ) (0.9 ) (225.0 ) Corporate (42.3 ) (56.0 ) 13.7 24.5 (77.9 ) (116.4 ) 38.5 33.1 Total $ 49.0 $ 37.0 $ 12.0 32.4 % $ 112.7 $ 88.0 $ 24.7 28.1 % Further information regarding the reportable operating segments can be found in Note 12 to the consolidated condensed financial statements. Lifestyle Group The Lifestyle Group's revenue increased $8.9 million, or 3.5%, in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. The increase was driven by Keds®, with growth in the mid thirties, and Stride Rite®, with growth in the mid single digits. The Keds® revenue increase was due to higher volumes of its core Lifestyle products, driven by continued marketing investment to support the brand. The Stride Rite® revenue increase was primarily attributable to the shift of the Easter holiday business to the second quarter of fiscal 2014 from the first quarter of the prior year, partially offset by reduced store traffic. These increases were partially offset by the Hush Puppies® revenue decline in the high single digits driven by weaker demand in the department store channel for casual products. The Lifestyle Group's revenue decreased $23.4 million, or 4.5%, in the first two quarters of fiscal 2014 compared to the first two quarters of fiscal 2013. The decrease was driven by Sperry Top-Sider®, with a revenue decline in the high single digits, and Stride Rite®, with a revenue decline in the mid single digits. The Sperry Top-Sider® decline was due to a decline in the boat shoe category and a distribution realignment in the family channel, while the Stride Rite® decline was attributable to negative weather trends and lower store traffic. These declines were partially offset by a growth rate in the mid twenties for Keds® due to higher volumes, driven by continued marketing investment to support the brand. The Lifestyle Group's operating profit decreased $6.7 million, or 14.6%, in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. The operating profit decrease is due primarily to lower gross margins for Sperry Top-Sider® and Stride Rite®. The Sperry Top-Sider® lower gross margin was driven by negative product mix and higher promotional activity in its consumer-direct channel. The decrease in the Stride Rite® gross margin is due primarily to higher promotional activity in its consumer-direct channel. The operating profit declines for Sperry Top-Sider® and Stride Rite® were partially offset by higher operating profit for Keds® due to higher revenues. For the first two quarters of fiscal 2014, the Lifestyle Group's operating profit decreased $27.8 million, or 30.3%, compared to the first two quarters of fiscal 2013. The operating profit decrease is due primarily to the revenue declines and a gross margin decrease for Sperry Top-Sider® and Stride Rite®. The lower gross margin is due primarily to higher promotional activity for both Sperry Top-Sider® and Stride Rite® and negative product mix for Sperry Top-Sider®. The operating profit declines for Sperry Top-Sider® and Stride Rite® were partially offset by higher operating profit for Keds® due to higher revenue. Performance Group The Performance Group's revenue increased $11.5 million, or 5.8%, in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. The increase was driven by growth from Saucony® in the low teens and Chaco® in the high twenties. The Performance Group's revenue increased $19.8 million, or 4.5%, in the first two quarters of fiscal 2014 compared to the first two quarters of fiscal 2013. The year to date increase was driven by growth from Saucony® in the high single digits and Chaco® in the mid twenties. In both periods, Saucony® benefited from growth in its franchise model products and the more lifestyle-oriented Originals product, while Chaco® experienced increased demand for its sandals product which contributed to strong at-once shipments. The Performance Group's operating profit increased $7.1 million, or 23.3%, in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. The improvement was driven by revenue growth from Saucony® and Chaco®, and a mid single digit reduction in selling, general and administrative expenses for Merrell®, due primarily to lower advertising expenses. The Performance Group's operating profit increased $14.2 million, or 17.4%, in the first two quarters of fiscal 2014 compared to the first two quarters of fiscal 2013. The improvement was driven by revenue growth from Saucony® and Chaco®. Operating profit 36-------------------------------------------------------------------------------- Table of Contents also benefited from a mid single digit reduction in selling, general and administrative expenses for Merrell® and Saucony®, due primarily to lower advertising expenses. Heritage Group The Heritage Group's revenue increased $2.9 million in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. The Heritage Group's operating profit decreased $1.6 million during the same period, driven by a high single digit increase in selling, general and administrative expenses. The Heritage Group's revenue increased $5.1 million for the first two quarters of fiscal 2014 compared to the first two quarters of fiscal 2013. During the same period, the Heritage Group's operating profit increased $0.7 million, due primarily to the higher revenues partially offset by a mid single digit increase in selling, general and administrative expenses. Corporate Corporate expenses were $42.3 million in the second quarter of fiscal 2014 compared to $56.0 million in the second quarter of fiscal 2013. The $13.7 million decrease was driven by lower acquisition-related integration costs ($5.4 million), pension expense ($5.7 million) and incentive compensation expense ($2.1 million), which were partially offset by a $3.4 million non-cash charge related to the Company's international operations. Corporate expenses were $77.9 million for the first two quarters of fiscal 2014 compared to $116.4 million for the first two quarters of fiscal 2013. The $38.5 million decrease was driven by lower acquisition-related integration costs ($19.0 million), pension expense ($11.3 million) and incentive compensation expense ($5.0 million), which were partially offset by a $3.4 million non-cash charge related to the Company's international operations. LIQUIDITY AND CAPITAL RESOURCES (In millions) June 14, 2014 December 28, 2013 June 15, 2013 Cash and cash equivalents $ 232.4 $ 214.2 $ 171.0 Interest-bearing debt 1,131.3 1,150.0 1,184.7 Available revolving credit facility (1) 196.7 196.5 198.1 (1) Amounts shown are net of outstanding letters of credit, which reduce availability under the Revolving Credit Facility. 24 Weeks Ended June 14, June 15, (In millions) 2014 2013 Net cash provided by operating activities $ 65.6 $ 87.5 Net cash used in investing activities (14.8 ) (14.7 ) Net cash used in financing activities (33.3 ) (71.4 ) Additions to property, plant and equipment 12.5 14.7 Depreciation and amortization 25.0 25.6 Liquidity Cash and cash equivalents of $232.4 million as of June 14, 2014 were $61.4 million higher compared to June 15, 2013. In addition, the Company had $196.7 million of borrowing capacity available under the Revolving Credit Facility as of June 14, 2014. Operating Activities The principal source of the Company's operating cash flow is net earnings, including cash receipts from the sale of the Company's products, net of costs of goods sold. Through the first two quarters of fiscal 2014, an increase in net working capital represented a use of cash of $42.6 million. Working capital balances were negatively impacted by an increase in accounts receivable of $37.8 million, an increase in inventories of $32.9 million and a decrease in other operating liabilities of $12.4 million. This was partially offset by an increase in accounts payable of $31.0 million and a decrease in other operating assets of $9.5 million. These changes in working capital balances reflect the seasonality of the Company's business. Through the first two quarters of fiscal 2013, an increase in net working capital represented a use of cash of $11.9 million. Working capital balances were negatively impacted by an increase in accounts receivable of $45.3 million and an increase in inventories 37-------------------------------------------------------------------------------- Table of Contents of $18.9 million. These amounts were partially offset by an increase in accounts payable of $31.3 million and a decrease in other operating assets of $14.6 million. These changes in working capital balances reflect the seasonality of the Company's business. Investing Activities The Company made capital expenditures of $12.5 million in the first two quarters of fiscal 2014 compared to $14.7 million in the first two quarters of fiscal 2013. The majority of the capital expenditures were for information system enhancements, building improvements and new retail store openings. Included in investing activities in the first two quarters of fiscal 2013 were net cash proceeds of $2.8 million from the sale of a distribution facility acquired as part of the PLG acquisition. Financing Activities On October 10, 2013, the Company amended the Credit Agreement resulting in the payoff of the Term Loan B Facility while establishing a principal balance of $775.0 million for the Term Loan A Facility. The Amendment provided for a lower effective interest rate on term loan debt, and a one-year extension on both the Term Loan A Facility and Revolving Credit Facility, both of which are now due October 10, 2018. In addition, the Amendment provided for increased maximum debt capacity (including outstanding term loan principal and Revolving Credit Facility commitment amounts in addition to permitted incremental debt) not to exceed $1,350.0 million. As of June 14, 2014, the Company was in compliance with all covenants and performance ratios under the Credit Agreement and expects to continue to be in compliance in future periods. The Company has outstanding a total of $375.0 million in Public Bonds that are due on October 15, 2020. The Public Bonds bear interest at 6.125% with the related interest payments due semi-annually. The Public Bonds are guaranteed by substantially all of the Company's domestic subsidiaries. Interest-bearing debt at June 14, 2014 was $1,131.3 million compared to $1,150.0 million at December 28, 2013. The decrease in interest-bearing debt was the result of principal payments on the Term Loan A Facility. As of June 14, 2014, the Company had outstanding standby letters of credit under the Revolving Credit Facility totaling $3.3 million. At June 14, 2014, the Company had cash and cash equivalents of $232.4 million, of which $199.0 million was located in foreign jurisdictions. The Company intends to permanently reinvest cash in foreign locations. Cash flow from operating activities, along with borrowings on the Revolving Credit Facility, if any, are expected to be sufficient to meet the Company's working capital needs for the foreseeable future. Any excess cash flows from operating activities are expected to be used to reduce debt, fund internal and external growth initiatives, purchase property, plant and equipment, pay dividends or repurchase the Company's common stock. On February 12, 2014, the Company's Board of Directors approved a common stock repurchase program that authorizes the repurchase of up to $200.0 million in common stock in the open market over a four-year period. The Company did not repurchase any shares in the open market in the first two quarters of fiscal 2014 or fiscal 2013 pursuant to this stock repurchase program. The Company acquired 338,019 shares for $9.4 million in the first two quarters of fiscal 2014 in connection with employee transactions related to stock incentive plans. The Company declared cash dividends of $0.06 per share, or $5.9 million for the second quarters of fiscal 2014 and fiscal 2013. The 2014 dividend is payable on August 1, 2014 to shareholders of record on July 1, 2014. CRITICAL ACCOUNTING POLICIES The preparation of the Company's consolidated financial statements, which have been prepared in accordance with U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from the Company's estimates. However, actual results may differ materially from these estimates under different assumptions or conditions. The Company has identified the critical accounting policies used in determining estimates and assumptions in the amounts reported in its Management Discussion and Analysis of Financial Conditions and Results of Operations in its Annual Report on Form 10-K for the fiscal year ended December 28, 2013. Management believes there have been no material changes in those critical accounting policies. 38-------------------------------------------------------------------------------- Table of Contents |