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(Registrant’s Telephone Number, Including Area Code)
________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated
filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
There were 101,472,686 shares of common stock, $1 par value, outstanding as of July 8, 2014.
This document contains “forward-looking statements,” which are statements relating to future, not past, events. In this context, forward-looking statements often address management’s current beliefs, assumptions, expectations, estimates and projections about future business and financial performance, national, regional or global political, economic and market conditions, and the Company itself. Such statements often contain words such as “anticipates,”“believes,”“estimates,”“expects,”“forecasts,”“intends,”“is likely,”“plans,”“predicts,”“projects,”“should,”“will,” variations of such words, and similar expressions. Forward-looking statements, by their
nature, address matters that are, to varying degrees, uncertain. Uncertainties that could cause the Company’s performance to differ materially from what is expressed in forward-looking statements include, but are not limited to, the following:
•
changes in national, regional or global economic and market conditions;
•
the impact of financial and credit markets on the Company,
its suppliers and customers;
•
changes in interest rates, tax laws, duties, tariffs, quotas or applicable assessments in countries of import and export;
•
the impact of regulation, regulatory and legal proceedings and legal compliance risks;
•
currency fluctuations;
•
currency
restrictions;
•
changes in future pension funding requirements and pension expenses;
•
the risk of impairment to goodwill and other acquired intangibles;
•
the risks of doing business in developing countries, and politically or economically volatile areas;
•
the
ability to secure and protect owned intellectual property or use licensed intellectual property;
•
changes in consumer preferences, spending patterns, buying patterns, price sensitivity or demand for the Company’s products;
•
risks related to the significant investment in, and performance of, the Company’s consumer-direct business;
•
the
impact of seasonality and unpredictable weather conditions;
•
changes in relationships with, including the loss of, significant customers;
•
the cancellation of orders for future delivery;
•
the failure of the U.S. Department of Defense to exercise future purchase options or award new contracts,
or the cancellation or modification of existing contracts by the Department of Defense or other military purchasers;
•
matters relating to the Company’s 2012 acquisition of the Performance + Lifestyle Group business of Collective Brands, Inc. (“PLG” or “the PLG acquisition”), including the Company’s ability to continue to integrate and realize the benefits of the PLG acquisition or to do so on a timely basis;
•
the
cost, availability and management of raw materials, inventories, services and labor for owned and contract manufacturers;
•
problems affecting the Company’s distribution system, including service interruptions at shipping and receiving ports;
•
the potential breach of the
Company’s databases, or those of its vendors, which contain certain personal information or payment card data;
•
the inability for any reason to effectively compete in global footwear, apparel and consumer-direct markets;
•
strategic actions, including new initiatives and ventures, acquisitions and dispositions, and the Company’s success in integrating acquired businesses and implementing new initiatives and ventures; and
•
the
success of the Company’s consumer-direct realignment initiatives.
These uncertainties could cause a material difference between an actual outcome and a forward-looking statement. The uncertainties included here are not exhaustive and are described in more detail in Part I, Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013 (the “2013 Form 10-K”), and any information regarding such Risk Factors included in the Company’s subsequent filings with the Securities and Exchange Commission, including
Part II, Item 1A of this Quarterly Report on Form 10-Q. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company does not undertake an obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.
Wolverine
World Wide, Inc. is a leading designer, manufacturer and marketer of a broad range of quality casual footwear and apparel; performance outdoor and athletic footwear and apparel; children’s footwear; industrial work shoes, boots and apparel; and uniform shoes and boots. The Company’s portfolio of owned and licensed brands includes: Bates®, Cat® Footwear, Chaco®, Cushe®, Harley-Davidson® Footwear, Hush Puppies®,
HyTest®, Keds®, Merrell®, Patagonia® Footwear, Saucony®, Sebago®, Soft Style®, Sperry Top-Sider®, Stride Rite® and Wolverine®. Licensing and distribution
arrangements with third parties extend the global reach of the Company’s brand portfolio. The Company also operates a consumer-direct division to market both its own brands and branded footwear and apparel from other manufacturers, as well as a leathers division that markets Wolverine Performance Leathers™.
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by U.S. GAAP for a complete presentation of the financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included in the accompanying financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013.
Revenue Recognition
Revenue is recognized on the sale of products manufactured or sourced by the Company when the related goods
have been shipped, legal title has passed to the customer and collectability is reasonably assured. Revenue generated from licensees and distributors involving products bearing the Company’s trademarks is recognized as earned according to stated contractual terms upon either the purchase or shipment of branded products by licensees and distributors. Retail store revenue is recognized at time of sale.
The Company records provisions for estimated sales returns and allowances at the time of sale based on historical rates of returns and allowances and specific identification of outstanding returns not yet received from customers. However, estimates of actual returns and allowances in any future period are inherently uncertain and actual returns and allowances may
differ from these estimates. If actual or expected future returns and allowances were significantly greater or lower than established reserves, a reduction or increase to net revenues would be recorded in the period this determination was made.
Cost of Goods Sold
Cost of goods sold includes the actual product costs, including inbound and certain outbound freight charges, purchasing, sourcing, inspection and receiving costs. Warehousing costs are included in selling, general and administrative expenses with the exception of certain consumer-direct warehousing costs that are included in cost of goods sold.
Seasonality
The Company’s business is subject to seasonal influences and the
Company’s fiscal year has 12 weeks in each of the first three fiscal quarters and, depending on the fiscal calendar, 16 or 17 weeks in the fourth fiscal quarter. Both of these factors can cause significant differences in revenue, earnings and cash flows from quarter to quarter; however, the differences have followed a consistent pattern in previous years.
2.
NEW ACCOUNTING STANDARDS
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss,
or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. ASU 2013-11 is effective prospectively for reporting periods beginning after December 15, 2013. The Company adopted ASU 2013-11 in the first quarter of fiscal 2014, and the adoption did not affect the Company’s consolidated financial position, results of operations or cash flows.
In April 2014, FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”) that amends the requirements for reporting discontinued operations. ASU 2014-08 requires the disposal of a component of an entity or a group of components of an entity to be reported in discontinued operations if the disposal represents a strategic shift that will have a major effect on the entity’s operations and financial results. ASU 2014-08 also requires additional disclosures about discontinued operations and disclosures about the disposal of a significant component of an entity that does not qualify as a discontinued operation. ASU 2014-08 is effective prospectively for reporting periods beginning after December 15, 2014, with early adoption permitted.
The Company is evaluating the potential impacts of the new standard.
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) that updates the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also amends the required disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the potential impacts of the new standard on its existing revenue recognition policies and procedures.
In June 2014, FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date
fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company is evaluating the potential impacts of the new standard on its existing stock-based compensation plans.
3.
EARNINGS PER SHARE
The Company calculates earnings per share in accordance with FASB Accounting Standards Codification (“ASC”) Topic 260, Earnings
Per Share (“ASC 260”). ASC 260 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. Under the guidance in ASC 260, the Company’s unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and must be included in the computation of earnings per share pursuant to the two-class method.
On July 11, 2013, the Company’s Board of Directors approved a two-for-one stock split in the form of a stock
dividend that was paid on November 1, 2013 to stockholders of record on October 1, 2013. On April 24, 2014, the Company amended its Restated Certificate of Incorporation to increase the number of shares of the Company’s authorized common stock from 160,000,000 shares to 320,000,000 shares. All share and per share data in this Quarterly Report on Form 10-Q has been presented to reflect the split and increase in authorized shares.
Net
earnings attributable to Wolverine World Wide, Inc.
$
27.5
$
17.9
$
64.6
$
47.7
Adjustment
for earnings allocated to non-vested restricted common stock
(0.5
)
(0.3
)
(1.2
)
(0.9
)
Net earnings used in calculating basic earnings per share
27.0
17.6
63.4
46.8
Adjustment
for earnings reallocated from non-vested restricted common stock
0.1
—
0.1
—
Net earnings used in calculating diluted earnings per share
$
27.1
$
17.6
$
63.5
$
46.8
Denominator:
Weighted
average shares outstanding
101,435,465
100,327,444
101,198,265
99,894,398
Adjustment for non-vested restricted common stock
(3,284,621
)
(3,527,798
)
(3,213,033)
(3,224,326)
Shares
used in calculating basic earnings per share
98,150,844
96,799,646
97,985,232
96,670,072
Effect of dilutive stock options
1,855,864
1,836,348
1,957,294
1,737,882
Shares
used in calculating diluted earnings per share
100,006,708
98,635,994
99,942,526
98,407,954
Net earnings per share:
Basic
$
0.28
$
0.18
$
0.65
$
0.48
Diluted
$
0.27
$
0.18
$
0.64
$
0.48
For
the 12 and 24 weeks ended June 14, 2014, options relating to 1,268,136 and 914,886 shares of common stock outstanding, respectively, have not been included in the denominator for the computation of diluted earnings per share because they were anti-dilutive.
For the 12 and 24 weeks ended June 15, 2013, options relating to 1,461,470 and 1,374,262 shares of common stock outstanding, respectively, have not been included in the denominator for the computation of diluted earnings per share because they were anti-dilutive.
4.
GOODWILL
AND INDEFINITE-LIVED INTANGIBLES
The changes in the carrying amount of goodwill and indefinite-lived intangibles are as follows:
The
Company’s credit agreement (the “Credit Agreement”) originally provided the Company with two term loans (a “Term Loan A Facility” and a “Term Loan B Facility”) and a revolving credit agreement (“Revolving Credit Facility”). On October 10, 2013, the Company amended its Credit Agreement (the “Amendment”) 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 the term loan debt, and a one-year extension on both the Term Loan A Facility and the 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.
The interest rates applicable to amounts outstanding under the Term Loan A Facility and to U.S. dollar denominated amounts outstanding under the Revolving Credit Facility will be, at the Company’s option, either (1) the Alternate Base Rate plus an Applicable Margin as determined by the Company’s Consolidated Leverage Ratio, within a range of 0.375% to 1.25%, or (2) the Eurocurrency
Rate plus an Applicable Margin as determined by the Company’s Consolidated Leverage Ratio, within a range of 1.375% to 2.25% (all capitalized terms used in this sentence are as defined in the Credit Agreement). As required by the Credit Agreement, the Company has an interest rate swap arrangement that reduces the Company’s exposure to fluctuations in interest rates on its variable rate debt.
The Revolving Credit Facility allows the Company to borrow up to an aggregate amount of $200.0
million and includes a $100.0 million foreign currency subfacility under which borrowings may be made, subject to certain conditions, in Canadian dollars, British pounds, euros, Hong Kong dollars, Swedish kronor, Swiss francs and such additional currencies as are determined in accordance with the Credit Agreement. The Revolving Credit Facility also includes a $50.0 million swingline subfacility and a $50.0 million letter of credit subfacility.
The Company had outstanding letters of credit under the Revolving Credit Facility of $3.3 million, $3.5 million and $1.9 million
as of June 14, 2014, December 28, 2013 and June 15, 2013, respectively. These outstanding letters of credit reduce the borrowing capacity under the Revolving Credit Facility.
The obligations of the Company pursuant to the Credit Agreement are guaranteed by substantially all of the Company’s material domestic subsidiaries and secured by substantially all of the personal and real property of the
Company and its material domestic subsidiaries, subject to certain exceptions.
The Credit Agreement also contains certain affirmative and negative covenants, including covenants that limit the ability of the Company and its Restricted Subsidiaries to, among other things: incur or guarantee indebtedness; incur liens; pay dividends or repurchase stock; enter into transactions with affiliates; consummate asset sales, acquisitions or mergers; prepay certain other indebtedness; or make investments, as well as covenants restricting the activities of certain foreign subsidiaries
of the Company that hold intellectual property related assets. Further, the Credit Agreement requires compliance with the following financial covenants: a maximum Consolidated Leverage Ratio; a maximum Consolidated Secured Leverage Ratio; and a minimum Consolidated Interest Coverage Ratio (all capitalized terms used in this paragraph are as defined in the Credit Agreement). As of June 14, 2014, the Company was in compliance with all covenants expects to continue to be in compliance in future periods.
The Company has outstanding a total of $375.0 million
in senior notes that may be traded in the public market (the “Public Bonds”) which 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.
During the second quarter of fiscal 2014, the Company recorded a capital lease obligation. The lease commenced during June 2014 and payments are scheduled to continue through February 2022.
The Company included in interest expense the amortization of deferred financing costs of approximately $0.9 million and $1.9 million for the 12 and 24 weeks ended June 14, 2014, respectively. The Company included in interest expense the amortization of deferred financing costs of approximately $1.6 million and $3.1 million for the 12 and 24 weeks ended June 15, 2013,
respectively.
Cash flows 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.
6.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated
other comprehensive income (loss) represents net earnings and any revenue, expenses, gains and losses that, under U.S. GAAP, are excluded from net earnings and recognized directly as a component of stockholders’ equity.
The change in accumulated other comprehensive income (loss) during the 12 weeks ended June 14, 2014 and June 15, 2013 is as follows:
Balance
of accumulated other comprehensive income (loss) as of December 29, 2012
$
5.9
$
(1.7
)
$
(1.0
)
$
(90.7
)
$
(87.5
)
Other
comprehensive income (loss) before reclassifications
(4.7
)
(0.9
)
1.0
—
(4.6
)
Amounts
reclassified from accumulated other comprehensive income (loss)
—
0.9
(1)
—
14.0
(2)
14.9
Income
tax expense (benefit)
—
(0.3
)
—
(4.9
)
(5.2
)
Net
reclassifications
—
0.6
—
9.1
9.7
Net
current-period other comprehensive income (loss)
(4.7
)
(0.3
)
1.0
9.1
5.1
Balance
of accumulated other comprehensive income (loss) as of June 15, 2013
$
1.2
$
(2.0
)
$
—
$
(81.6
)
$
(82.4
)
Balance
of accumulated other comprehensive income (loss) as of December 28, 2013
$
0.5
$
(0.8
)
$
0.6
$
(9.5
)
$
(9.2
)
Other
comprehensive income (loss) before reclassifications
(0.2
)
0.8
(0.4
)
—
0.2
Amounts
reclassified from accumulated other comprehensive income (loss)
—
0.8
(1)
—
3.5
(2)
4.3
Income
tax expense (benefit)
—
(0.3
)
—
(1.3
)
(1.6
)
Net
reclassifications
—
0.5
—
2.2
2.7
Net
current-period other comprehensive income (loss)
(0.2
)
1.3
(0.4
)
2.2
2.9
Balance
of accumulated other comprehensive income (loss) as of June 14, 2014
$
0.3
$
0.5
$
0.2
$
(7.3
)
$
(6.3
)
(1)
Amounts
reclassified are included in cost of goods sold.
(2)
Amounts reclassified are included in the computation of net pension expense.
7.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company follows FASB ASC Topic 820, Fair Value Measurements and
Disclosures (“ASC 820”), which provides a consistent definition of fair value, focuses on exit price, prioritizes the use of market-based inputs over entity-specific inputs for measuring fair value and establishes a three-tier hierarchy for fair value measurements. ASC 820 requires fair value measurements to be classified and disclosed in one of the following three categories:
Level 1:
Fair value is measured using quoted prices (unadjusted) in active markets for identical assets and liabilities.
Level 2:
Fair
value is measured using either direct or indirect inputs, other than quoted prices included within Level 1, which are observable for similar assets or liabilities.
Level 3:
Fair value is measured using valuation techniques in which one or more significant inputs are unobservable.
The Company’s financial instruments consist of cash and cash equivalents, accounts and notes receivable, accounts payable, foreign currency forward
exchange contracts, an interest rate swap arrangement, borrowings under the Revolving Credit Facility and interest-bearing debt. The carrying amount of the Company’s financial instruments is historical cost, which approximates fair value, except for the interest rate swap and foreign currency forward exchange contracts, which are carried at fair value. The carrying value and the fair value of the Company’s debt, excluding capital leases, are as follows:
The fair value of the fixed-rate debt was based on third-party quotes
(Level 2). The fair value of the variable-rate debt was calculated by discounting the future cash flows to its present value using a discount rate based on the risk-free rate of the same maturity (Level 3).
The Company follows FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”), which is intended to improve transparency in financial reporting and requires that all derivative instruments be recorded on the consolidated condensed balance sheets at fair value by establishing criteria for designation and effectiveness of hedging relationships. The Company utilizes foreign currency forward exchange contracts to manage
the volatility associated with U.S. dollar inventory purchases made by non-U.S. wholesale operations in the normal course of business.
The Company has one interest rate swap arrangement which exchanges floating rate for fixed rate interest payments over the life of the agreement without the exchange of the underlying notional amounts. This derivative instrument, which, unless otherwise terminated, will mature on October 6, 2017, has been designated as a cash flow hedge of the debt. The notional amounts of the interest rate swap arrangement are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The
Company does not hold or issue financial instruments for trading purposes.
The notional amounts of the Company’s derivative instruments are as follows:
The following table sets forth financial assets and liabilities measured at fair value in the consolidated condensed balance
sheets and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy.
Fair Value Measurements
Quoted Prices With Other Observable Inputs (Level 2)
The fair value of the foreign currency forward exchange contracts represents the estimated receipts or payments necessary to terminate the contracts.
Hedge effectiveness is evaluated by the hypothetical derivative method. Any hedge ineffectiveness is reported within the Cost of goods sold line item in the consolidated condensed statements of operations and comprehensive income. Hedge ineffectiveness was not material to the Company’s consolidated financial statements for the 24 weeks ended June 14, 2014 and June 15, 2013. If, in the future, the foreign exchange contracts are determined to be ineffective hedges or terminated before their contractual termination dates, the
Company would be required to reclassify into earnings all or a portion of the unrealized amounts related to the cash flow hedges that are currently included in accumulated other comprehensive loss within stockholders’ equity.
The differential paid or received on the interest rate swap arrangement is recognized as interest expense. In accordance with ASC 815, the Company formally documented the relationship between the interest rate swap and the variable rate borrowings, as well as its risk management objective and strategy for undertaking the hedge transaction. This process included linking the derivative to the specific liability or asset on the balance sheet. The Company also assessed at the hedge’s inception, and continues to assess on an ongoing basis,
whether the derivative used in the hedging transaction is highly effective in offsetting changes in the cash flows of the hedged item. The effective portion of unrealized gains (losses) is deferred as a component of accumulated other comprehensive loss and will be recognized in earnings at the time the hedged item affects earnings. Any ineffective portion of the change in fair value will be immediately recognized in earnings.
The
Company accounts for stock-based compensation in accordance with the fair value recognition provisions of FASB ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). The Company recognized compensation expense of $6.6 million and $11.2 million, and related income tax benefits of $2.1 million and $3.6 million, for grants under its stock-based compensation plans for the 12 and 24 weeks ended June 14, 2014, respectively.
The
Company recognized compensation expense of $6.5 million and $13.7 million, and related income tax benefits of $2.1 million and $4.5 million, for grants under its stock-based compensation plans for the 12 and 24 weeks ended June 15, 2013, respectively.
Stock-based compensation expense recognized in the consolidated condensed statements of operations and comprehensive income is based on awards ultimately expected to vest and, as such, has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Forfeitures were estimated based on historical experience.
The Company estimated the fair value of employee stock options on the date of grant using the Black-Scholes model. The estimated weighted-average fair value for each option granted during the 24 weeks ended June 14, 2014 and June 15, 2013 was $6.21 and $5.21, respectively, with the following weighted-average assumptions:
Based on historical volatility of the Company’s common stock. The expected volatility is based on the daily percentage change in the price of the stock over the four years prior to the grant.
(2)
Represents
the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant.
(3)
Represents the Company’s cash dividend yield for the expected term.
(4)
Represents the period of time that options granted are expected to be outstanding. As part of the determination of the expected term, the
Company concluded that all employee groups exhibit similar exercise and post-vesting termination behavior.
The Company issued 132,373 and 302,394 shares of common stock in connection with new restricted stock grants made and the exercise of stock options during the 12 weeks ended June 14, 2014 and June 15, 2013, respectively. During the 12 weeks ended June 14, 2014 and June 15,
2013, the Company canceled 30,309 and 99,952 shares, respectively, of common stock issued under restricted stock awards as a result of forfeitures.
The Company issued 1,360,024 and 1,904,564 shares of common stock in connection with new restricted stock grants made and the exercise of stock options during the 24 weeks ended June 14, 2014 and June 15,
2013, respectively. During the 24 weeks ended June 14, 2014 and June 15, 2013, the Company canceled 282,522 and 111,640 shares, respectively, of common stock issued under restricted stock awards as a result of forfeitures.
9.
RETIREMENT PLANS
A
summary of net pension and Supplemental Executive Retirement Plan expense recognized by the Company is as follows:
The Company’s effective tax rate for the 12 weeks ended June 14, 2014 and June 15, 2013 was 28.2% and 24.2%, respectively. For the 24 weeks ended June 14, 2014
and June 15, 2013, the Company’s effective tax rate was 28.4% and 22.2%, respectively. 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, financial position and cash flows.
The Company is subject to periodic audits by domestic and foreign tax authorities. Currently, the Company is undergoing routine periodic audits in both domestic and foreign tax jurisdictions. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next 12 months as a result of the audits; however, any payment of tax is not expected to be significant to the consolidated financial statements.
For the majority of tax jurisdictions, the
Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2009.
11.
LITIGATION AND CONTINGENCIES
The Company is involved in various environmental claims and other legal actions arising in the normal course of business. The environmental claims include sites where the U.S. Environmental Protection Agency has notified the Company that it is a potentially responsible party with respect to environmental
remediation. These remediation claims are subject to ongoing environmental impact studies, assessment of remediation alternatives, allocation of costs between responsible parties and concurrence by regulatory authorities and have not yet advanced to a stage where the Company’s liability is fixed. However, after taking into consideration legal counsel’s evaluation of all actions and claims against the Company, it is management’s opinion that the outcome of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
The
Company is involved in routine litigation incidental to its business and is a party to legal actions and claims, including, but not limited to, those related to employment and intellectual property. Some of the legal proceedings include claims for compensatory as well as punitive damages. While the final outcome of these matters cannot be predicted with certainty, considering, among other things, the meritorious legal defenses available and liabilities that have been recorded along with applicable insurance, it is management’s opinion that the outcome of these items will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
The Company has future minimum royalty and advertising obligations
due under the terms of certain licenses held by the Company. These minimum future obligations are as follows:
(In millions)
2014
2015
2016
2017
2018
Thereafter
Minimum
royalties
$
0.6
$
1.9
$
—
$
—
$
—
$
—
Minimum
advertising
4.1
8.7
2.7
2.8
2.9
6.1
Minimum
royalties are based on both fixed obligations and assumptions regarding the Consumer Price Index. Royalty obligations in excess of minimum requirements are based upon future sales levels. In accordance with these agreements, the Company incurred royalty expense of $0.5 million and $0.4 million for the 12 weeks ended June 14, 2014 and June 15, 2013, respectively. For the 24 weeks ended June 14, 2014 and June 15,
2013, the Company incurred royalty expense, in accordance with these agreements, of $1.1 million and $0.8 million, respectively.
The terms of certain license agreements also require the Company to make advertising expenditures based on the level of sales of the licensed products. In accordance with these agreements, the Company incurred advertising expense of $1.1 million and $1.0 million for the 12 weeks ended June 14,
2014 and June 15, 2013, respectively. For the 24 weeks ended June 14, 2014 and June 15, 2013, the Company incurred advertising expense, in accordance with these agreements, of $2.2 million and $2.1 million, respectively,
The Company’s portfolio of 16 brands is organized into the following three operating segments, which the Company has determined are reportable operating segments.
•
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 reportable segments are engaged in designing, manufacturing, sourcing, marketing, licensing and distributing branded footwear, apparel and accessories. Reported revenue of the reportable operating segments includes revenue from the sale of branded footwear, apparel and accessories to third-party customers; income from a network of third-party licensees and distributors; and revenue from the
Company’s mono-branded consumer-direct business.
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 Company’s operating segments are determined based on how the Company internally reports and evaluates financial information used to make operating
decisions.
Company management uses various financial measures to evaluate the performance of the reportable operating segments. The following is a summary of certain key financial measures for the respective fiscal periods indicated.
On October 9, 2012, the Company acquired all of the outstanding equity interests of PLG as well as certain other assets. Consideration paid to acquire PLG was approximately $1,249.5 million in cash. PLG marketed casual and athletic footwear, apparel and related accessories for adults and children under well-known brand names including Sperry Top-Sider®, Saucony®, Stride Rite® and Keds®. The acquisition
was accounted for under the acquisition method of accounting. The related assets acquired and liabilities assumed were recorded at fair value on the acquisition date. The operating results for PLG are included in the Company’s consolidated results of operations beginning October 9, 2012.
The Company funded the transaction using a combination of approximately $88.8 million of cash on hand and new borrowings. The Company’s debt financing included net proceeds from the term loan debt associated with the Credit Agreement and net proceeds from the Public Bonds.
For
the 12 weeks ended June 14, 2014, the Company incurred $2.5 million of acquisition-related integration costs. These costs include compensation expenses ($1.0 million) and other integration costs ($1.5 million). For the 12 weeks ended June 15, 2013, the Company incurred $7.9 million of acquisition-related integration costs. These costs include compensation expense ($5.4 million), other purchased services ($2.0 million) and professional
and legal fees ($0.5 million).
For the 24 weeks ended June 14, 2014, the Company incurred $4.1 million of acquisition-related integration costs. These costs include compensation expenses ($1.8 million) and other integration costs ($2.3 million). For the 24 weeks ended June 15, 2013, the Company incurred $23.1 million of acquisition-related integration costs. These costs include compensation expense ($15.7 million),
other purchased services ($3.7 million), amortization related to short-lived intangible assets ($2.4 million), and professional and legal fees ($1.3 million).
The following table summarizes the final fair values of the assets acquired and liabilities assumed in connection with the PLG acquisition.
(In
millions)
Cash
$
23.6
Accounts receivable
151.2
Inventories
203.5
Deferred income taxes
13.6
Other
current assets
13.2
Property, plant and equipment
77.1
Goodwill
408.8
Intangible assets
821.8
Other
11.2
Total
assets acquired
1,724.0
Accounts payable
97.4
Other accrued liabilities
42.2
Deferred income taxes
287.2
Accrued pension liabilities
37.7
Other
liabilities
10.0
Total liabilities assumed
474.5
Net assets acquired
$
1,249.5
The excess of the purchase price over the fair value of net assets acquired of $408.8 million was recorded as goodwill in the consolidated condensed balance sheets
and has been assigned to the Performance Group and Lifestyle Group reportable operating segments as follows:
(In millions)
Performance Group
$
82.5
Lifestyle Group
326.3
Total
$
408.8
The
goodwill recognized is attributable primarily to expected synergies and the assembled workforce of PLG. Substantially all of the goodwill is not amortizable for income tax purposes.
Intangible assets acquired in the PLG acquisition were valued as follows:
(In millions)
Intangible asset
Useful life
Trade names and trademarks
$
671.8
Indefinite
Customer
lists
100.5
3-20 years
Licensing agreements
28.8
4-5 years
Developed product technology
14.9
3-5
years
Backlog
5.2
6 months
Net favorable leases
0.6
10 years
Total intangible assets acquired
$
821.8
The
Company assigned fair values to the identifiable intangible assets through a combination of the relief from royalty and the excess earnings methods.
At the time of the acquisition, a step-up in the value of inventory of $4.0 million was recorded in the allocation of the purchase price based on valuation estimates, all of which was charged to cost of sales in the fourth quarter of fiscal 2012 as the inventory was deemed sold. In addition, fixed assets were written up by approximately $18.8 million to their estimated fair market value based on a valuation method that included both cost and market approaches. This additional step-up in value is being depreciated over the estimated remaining useful lives of the assets.
On October 4, 2013, the Board of Directors of the Company approved a plan to restructure the Company’s Dominican Republic manufacturing operations in a manner intended to lower the Company’s cost of goods sold, as described below (the “Restructuring Plan”). During the fourth quarter of fiscal 2013, the
Company sold a manufacturing facility in the Dominican Republic and closed a second manufacturing facility. The Company no longer maintains any Company-owned manufacturing operations in the Dominican Republic. The Company recognized $7.6 million of restructuring costs in fiscal 2013 and restructuring costs of $0.5 million for the 24 weeks ended June 14, 2014. The Company does not expect to recognize any further significant costs for the Restructuring Plan. All costs incurred have been
recognized in the Company’s Corporate category and are included in the Restructuring costs line item as a component of cost of goods sold in the consolidated condensed statements of operations and comprehensive income.
The following is a summary of the activity with respect to a reserve established by the Company in connection with the Restructuring Plan, by category of costs.
During
the second quarter of fiscal 2014, the Company recorded an impairment of an equity method investment and reserved certain receivables within the Company’s international operations. The impairment and asset charge were determined to be other-than-temporary and the Company recorded a non-cash charge of $3.4 million within its corporate category included in the Restructuring costs line item as a component of selling, general and administrative expenses in the consolidated condensed statements of operations and comprehensive income.
15.
SUBSEQUENT
EVENT
On July 9, 2014, the Board of Directors of the Company approved a realignment of the Company’s consumer-direct operations (“the Plan”). 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. The Company estimates pretax charges related to the Plan will range from $26.6 million
to $32.0 million. The Company will record these charges throughout the remainder of fiscal 2014 and fiscal 2015 as it executes specific components. Approximately $9.6 million to $11.6 million of this estimate represents non-cash charges. When fully implemented, the Company expects annual pretax benefits of approximately $11.0 million.
The expected range of pretax charges by major category in connection with the Plan are summarized in the following table:
Estimated
Range
(In millions)
Low
High
Non-cash charges related to impairment of property and equipment
$
6.1
$
8.2
Facility
exit costs
11.3
12.4
Severance and employee-related costs
8.6
10.0
Charges against assets
0.6
1.4
Total
$
26.6
$
32.0
16.
SUBSIDIARY
GUARANTORS OF THE PUBLIC BONDS
The following tables present consolidated condensed financial information for (a) the Company (for purposes of this discussion and table, “Parent”); (b) the guarantors of the Public Bonds, which include substantially all of the domestic, 100% owned subsidiaries of the Parent (“Subsidiary Guarantors”); and (c) the wholly- and partially-owned foreign subsidiaries of the Parent, which do not guarantee the Public Bonds (“Non-Guarantor Subsidiaries”). Separate financial
statements of the Subsidiary Guarantors are not presented because they are fully and unconditionally, jointly and severally liable under the guarantees, except for normal and customary release provisions.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
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.
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.
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:
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
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.
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
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.
The Company faces market risk to the extent that changes in foreign currency exchange rates affect the Company’s foreign assets, liabilities and inventory purchase commitments. The Company manages these risks by attempting to denominate contractual and other foreign arrangements in U.S. dollars. The Company does not believe that there has been
a material change in the nature of the Company’s primary market risk exposures, including the categories of market risk to which the Company is exposed and the particular markets that present the primary risk of loss to the Company. As of the date of this Quarterly Report on Form 10-Q, the Company does not know of or expect there to be any material change in the near-term in the general nature of its primary market risk exposure.
Under the provisions of FASB ASC Topic 815, Derivatives and Hedging, the
Company is required to recognize all derivatives on the balance sheet at fair value. Derivatives that are not qualifying hedges must be adjusted to fair value through earnings. If a derivative is a qualifying hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings.
The Company conducts wholesale operations outside of the United States in the United Kingdom, continental Europe and Canada where the functional currencies are primarily the British pound, euro and Canadian dollar, respectively. The Company
utilizes foreign currency forward exchange contracts to manage the volatility associated with U.S. dollar inventory purchases made by non-U.S. wholesale operations in the normal course of business. At June 14, 2014 and June 15, 2013, the Company had outstanding forward currency exchange contracts to purchase U.S. dollars in the amounts of $162.2 million and $106.9 million, with maturities ranging up to 336
days. The Company also utilizes foreign currency forward exchange contracts to manage volatility associated with euro denominated expenses in the normal course of business.
The Company also has sourcing locations in Asia, where financial statements reflect the U.S. dollar as the functional currency. However, operating costs are paid in the local currency. Royalty revenue generated by the Company from third-party foreign licensees is calculated in the licensees’ local currencies, but paid in U.S. dollars. Accordingly, the
Company’s reported results are subject to foreign currency exposure for this stream of revenue and expenses.
Assets and liabilities outside the United States are primarily located in the United Kingdom, Canada and the Netherlands. The Company’s investments in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term. Accordingly, the Company currently does not hedge these net investments. At June 14, 2014, a stronger U.S. dollar compared to foreign currencies decreased the value of these investments in net assets by $0.2
million from their value at December 28, 2013. At June 15, 2013, a stronger U.S. dollar compared to foreign currencies decreased the value of these investments in net assets by $4.7 million from their value at December 29, 2012. These changes resulted in cumulative foreign currency translation adjustments at June 14, 2014 and June 15, 2013 of accumulated other comprehensive income of $0.3 million
and $1.2 million, respectively.
Because the Company markets, sells and licenses its products throughout the world, it could be affected by weak economic conditions in foreign markets that could reduce demand for its products.
The Company is exposed to changes in interest rates primarily as a result of its borrowing under the Credit Agreement. As of June 14, 2014, the Company had no outstanding borrowings and outstanding letters of credit of $3.3 million
under the Revolving Credit Facility. At June 14, 2014 and December 28, 2013, the Company had $755.6 million and $775.0 million, respectively, of variable rate debt outstanding under the Term Loan A Facility. As of June 14, 2014 and December 28, 2013, the Company held one interest rate swap arrangement denominated in U.S. dollars that
effectively converted $430.9 million and $455.5 million, respectively, of its variable-rate debt to fixed-rate debt.
The Company does not enter into contracts for speculative or trading purposes, nor is it a party to any leveraged derivative instruments.
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on, and as of the time of such evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures, as defined
in Securities Exchange Act Rule 13a-15(e), were effective as of the end of the period covered by this report. There have been no changes during the quarter ended June 14, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II.
OTHER INFORMATION
ITEM
1A.
Risk Factors
Set forth below are updates to the Company’s risk factors set forth in Part I, Item 1A of the 2013 Form 10-K, which should be read in conjunction with such risk factors, as updated herein.
The Company has replaced the risk factor with the heading “Failure to maintain the security of personally identifiable and other information of the Company’s customers and employees could negatively impact its business” that was included in the 2013 Form 10-K with the following risk factor:
The
Company’s and its vendors’ databases containing personal information and payment card data of the Company’s retail store and eCommerce customers, employees and other third parties, could be breached, which could subject the Company to adverse publicity, litigation, fines and expenses. If the Company is unable to comply with bank and payment card industry standards, its operations could be adversely affected.
The Company relies on its networks, databases, systems and processes, as well as those of third parties such as vendors, to protect its proprietary information and information about
its customers, employees and vendors. If unauthorized parties gain access to these networks or databases, they may be able to steal, publish, delete or modify the Company’s private and sensitive third-party information. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of personal or confidential information. In such circumstances, the Company could be held liable to its customers, other parties or employees, be subject to regulatory or other actions for breaching privacy laws or failing to adequately protect such information or respond to a breach. This could result in costly investigations and litigation, civil or criminal penalties, operational changes and negative publicity that could adversely affect the
Company’s reputation and its results of operations and financial position. In addition, if the Company is unable to comply with bank and payment card industry security standards, it may be subject to fines, restrictions and expulsion from card acceptance programs, which could adversely affect the Company’s consumer direct operations.
The Company has added the following risk factor:
There is no assurance that the Company will be able to successfully implement the recently-announced realignment plan.
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 certain retail stores over the next 18 months, consolidate certain consumer-direct support functions and implement certain other organizational changes. There can be no assurance that the Company will successfully implement the Plan within the estimated range of charges, within the estimated timeframe, or otherwise or that the Company will realize some or all of the estimated profitability
improvements or other benefits from the Plan. There is also no assurance that the Company will be able to re-invest any future cost savings generated from the Plan into other initiatives or that any such investment will improve the Company’s operations.
The Company has deleted the risk factor with the heading “A U.S. federal government shutdown could adversely affect the Company’s business.” that was included in the 2013 Form 10-K.
On
February 12, 2014, the Company’s Board of Directors approved a common stock repurchase program that authorizes the repurchase of up to $200 million in common stock over a four-year period. There were no shares repurchased during the period covered by this Quarterly Report on Form 10-Q, other than repurchases pursuant to the “Employee Transactions” set forth above.
(2)
Employee transactions include: (1) shares delivered or attested in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options who exercised options, and (2) restricted
shares withheld to offset statutory minimum tax withholding that occurs upon vesting of restricted shares. The Company’s employee stock compensation plans provide that the shares delivered or attested to, or withheld, shall be valued at the closing price of the Company’s common stock on the date the relevant transaction occurs.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.