WOLVERINE WORLD WIDE, INC. OVERVIEW
BUSINESS OVERVIEW The Company is a leading global designer, marketer and licensor of branded footwear, apparel and accessories. The Company's vision statement is "to build a family of the most admired performance and lifestyle brands on earth" and 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 brands are marketed in approximately 170 countries and territories atDecember 28, 2019 , including through owned operations in theU.S. ,Canada , theUnited Kingdom and certain countries in continentalEurope andAsia Pacific . In other regions (Latin America , portions ofEurope andAsia Pacific , theMiddle East andAfrica ), the Company relies on a network of third-party distributors, licensees and joint ventures. AtDecember 28, 2019 , the Company operated 96 retail stores in theU.S. andCanada and 41 consumer-direct eCommerce sites. 2019 FINANCIAL OVERVIEW • Revenue was$2,273.7 million for fiscal 2019, representing an increase of
1.5% compared to the prior year's revenue of
reflects a 2.2% increase from the
the
• Gross margin for fiscal 2019 was 40.6%, a decrease of 50 basis points from
fiscal 2018.
• The effective tax rate in fiscal 2019 was 11.7%, compared to 11.9% in fiscal
2018.
• Diluted earnings per share for fiscal 2019 was
fiscal 2018.
• The Company declared cash dividends of
• Net cash provided by operating activities was
• The Company executed
an average price of $29.24 per share.
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RESULTS OF OPERATIONS
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 financial statements and related notes, which are
included in Item 8 of this Annual Report on Form 10-K.
Fiscal Year Percent Change vs. Prior Year
(In millions, except per share
data) 2019 2018 2017 2019 2018
Revenue $ 2,273.7 $ 2,239.2 $ 2,350.0 1.5 % (4.7 )%
Cost of goods sold 1,349.9 1,317.9 1,426.6 2.4 (7.6 )
Restructuring costs - - 9.0 - (100.0 )
Gross profit 923.8 921.3 914.4 0.3 0.8
Selling, general and
administrative expenses 669.3 654.1 706.0 2.3 (7.4 )
Restructuring and other related
costs - - 72.9 - (100.0 )
Impairment of intangible assets - - 68.6 - (100.0 )
Environmental and other related
costs 83.5 15.3 35.3 445.8 (56.7 )
Operating profit 171.0 251.9 31.6 (32.1 ) 697.2
Interest expense, net 30.0 24.5 32.1 22.4 (23.7 )
Debt extinguishment and other
costs - 0.6 - (100.0 ) -
Other expense (income), net (4.9 ) (0.6 ) 10.1 716.7 (105.9 )
Earnings (loss) before income
taxes 145.9 227.4 (10.6 ) (35.8 ) *
Income tax expense (benefit) 17.0 27.1 (9.9 )
(37.3 ) (373.7 )
Net earnings (loss) 128.9 200.3 (0.7 ) (35.6 ) *
Less: net earnings (loss)
attributable to noncontrolling
interests 0.4 0.2 (1.0 ) 100.0 (120.0 )
Net earnings attributable to
Wolverine World Wide, Inc. $ 128.5 $ 200.1 $ 0.3 (35.8 )% *
Diluted earnings per share $ 1.44 $ 2.05 $ - (29.8 )% - %
*Percentage change not meaningful
REVENUE
Revenue was $2,273.7 million for fiscal 2019, representing an increase of 1.5%
compared to the prior year's revenue of $2,239.2 million . The increase reflected
a 2.2% increase from the Michigan Group and a 1.7% increase from the Boston
Group . The Michigan Group's revenue increase was driven by a high-single digit
increase from Merrell® and a low-teens increase from Cat®, partially offset by
low-teens decreases from Chaco® and Hush Puppies®. The Boston Group's revenue
increase was due to a mid-single digit increase for Sperry® and a low-teens
increase from Keds®, partially offset by a mid-single digit decline for
Saucony®. International revenue represented 33.7%, 32.8% and 31.5% of total
reported revenues in fiscal years 2019, 2018 and 2017, respectively. Changes in
foreign exchange rates decreased revenue by $16.7 million during fiscal 2019.
Revenue was $2,239.2 million for fiscal 2018, representing a decrease of 4.7%
compared $2,350.0 million in fiscal 2017. The decrease reflects the closure of
retail stores ($66.0 million ), the change in business model for Stride Rite®
($47.5 million ), the divestiture of the Sebago® brand ($26.0 million ) and the
sale of the Department of Defense contract business for Bates® ($26.1 million ),
partially offset by significant growth in eCommerce across all brands ($43.0
million ). Changes in foreign exchange rates increased revenues by $4.1 million
in fiscal 2018.
GROSS MARGIN
For fiscal 2019, the Company's gross margin was 40.6%, compared to 41.1% in
fiscal 2018. The gross margin decrease was driven by unfavorable product mix (35
basis points), business model changes for certain international wholesale
customers (60 basis points) and additional close-out sales (35 basis points),
partially offset by the acquisition of the Saucony® distributor in Italy (35
basis points), a higher mix of higher gross margin consumer-direct revenue (35
basis points) and reduced markdowns (15 basis points).
For fiscal 2018, the Company's gross margin was 41.1%, compared to 38.9% in
fiscal 2017. The gross margin increase was driven by favorable product mix (70
basis points), divestitures and portfolio changes (75 basis points), store
closures (20 basis points), lower restructuring and other related costs (40
basis points) and the favorable impact of foreign exchange (15 basis points).
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OPERATING EXPENSES Operating expenses increased$83.4 million in fiscal 2019, to$752.8 million . The increase was driven by higher environmental and other related costs ($68.2 million ), higher general and administration costs ($15.7 million ), higher distribution costs ($7.5 million ), higher reorganization costs ($7.1 million ) and higher selling expenses ($4.6 million ). These increases were partially offset by lower incentive compensation costs of$16.7 million . Operating expenses decreased$213.4 million in fiscal 2018, to$669.4 million . The decrease was driven by lower restructuring and other related costs ($72.9 million ), lower impairment of intangible assets ($68.6 million ), lower environmental and other related costs ($20.0 million ), lower transformation costs ($37.7 million ) and lower selling expenses ($29.1 million ) due to the closure of certain retail stores in fiscal 2017, partially offset by a higher investment in advertising ($13.7 million ) as part of the Company's growth agenda. INTEREST, OTHER AND TAXES Net interest expense was$30.0 million in fiscal 2019 compared to$24.5 million in fiscal 2018. The increase was driven by higher average debt principal balances due primarily to repurchases of the Company's stock and lower interest income. Net interest expense decreased from$32.1 million in fiscal 2017 to$24.5 million in fiscal 2018 due to a lower effective interest rate on the Company's debt, lower average debt principal balances and higher interest income. The Company incurred$0.6 million of debt extinguishment and other costs in connection with the refinancing of the Company's debt in the fourth quarter of fiscal 2018. The effective tax rate in fiscal 2019 was 11.7%, compared to 11.9% in fiscal 2018. The lower effective tax rate in fiscal 2019 reflects the positive net impact from one-time discrete items combined with a shift in income between tax jurisdictions with differing tax rates, primarily associated with a decrease inU.S. income compared to the prior year due primarily to higher reorganization costs and environmental and other related costs. The effective tax rate in fiscal 2018 was 11.9%, compared to 93.7% in fiscal 2017. The lower effective tax rate in fiscal 2018 reflects the positive net impact from one-time discrete items, primarily a voluntary pension contribution of$60.0 million and a lowerU.S. corporate tax rate following enactment of the Tax Cuts and Jobs Act ("TCJA"). These benefits were partially offset by a shift in income between tax jurisdictions with differing tax rates, primarily associated with an increase inU.S. income compared to the prior year due primarily to lower restructuring and other related costs, impairment of intangible assets and organizational transformation costs. Other income was$4.9 million in fiscal 2019 compared to$0.6 million in fiscal 2018. The increase was driven by the inclusion of sublease income in 2019 due to the implementation of ASU 2016-02 during the first quarter of 2019 ($4.0 million ), the reclassification of the ineffective portion of unrealized gains on foreign currency hedges ($1.2 million ) in fiscal 2019 and a pension settlement loss recognized in fiscal 2018 ($7.2 million ), partially offset by a foreign currency remeasurement gain in fiscal 2018 ($5.9 million ). REPORTABLE OPERATING SEGMENTS The Company's portfolio of brands is organized into the following two operating segments, which the Company has determined to be reportable operating segments. During the first quarter of 2019, the brands that were formerly aligned with theWolverine Outdoor & Lifestyle Group andWolverine Heritage Group were realigned into a new operating segment, theWolverine Michigan Group . The change was to align our brands under key leadership to best support innovation and efficiency. All prior period disclosures have been retrospectively adjusted to reflect these new reportable operating segments. •Wolverine Michigan Group , consisting of Merrell® footwear and apparel,
Cat® footwear, Wolverine® footwear and apparel, Chaco® footwear, Hush
Puppies® footwear and apparel, Bates® uniform footwear, Harley-Davidson®
footwear and Hytest® safety footwear; and
•
Saucony® footwear and apparel, Keds® footwear and apparel, and the Kids
footwear business, which includes the Stride Rite® licensed business, as
well as kids' footwear offerings from Saucony®, Sperry®, Keds®, Merrell®,
Hush Puppies® and Cat®.
The Company also reports "Other" and "Corporate" categories. The Other category
consists of the Company's leather marketing operations, sourcing operations and
multi-branded consumer-direct retail stores. The Corporate category consists of
unallocated corporate expenses, organizational transformation costs,
reorganization costs, restructuring and other related costs, impairment of
intangible assets, environmental and other related costs, a foreign currency
remeasurement gain recorded in the second quarter of fiscal 2018 and a pension
settlement loss related to the Company's purchase of pension annuity contracts
in the fourth quarter of fiscal 2018.
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The reportable operating segment results for fiscal years 2019, 2018 and 2017 are as follows:
Fiscal Year Fiscal Year
(In millions) 2019 2018 Change Percent
Change 2018 2017 Change
2.2 % $ 1,272.2 $ 1,267.8 $ 4.4 0.3 %
Wolverine Boston Group 910.9 895.5 15.4 1.7 % 895.5 988.8 (93.3 ) (9.4 )%
Other 63.1 71.5 (8.4 ) (11.7 )% 71.5 93.4 (21.9 ) (23.4 )%
Total $ 2,273.7 $ 2,239.2 $ 34.5 1.5 % $ 2,239.2 $ 2,350.0 $ (110.8 ) (4.7 )%
OPERATING PROFIT (LOSS)
Wolverine Michigan Group $ 244.8 $ 257.6 $ (12.8 ) (5.0 )% $ 257.6 $ 243.7 $ 13.9 5.7 %
Wolverine Boston Group 153.8 157.5 (3.7 ) (2.3 )% 157.5 153.6 3.9 2.5 %
Other 2.9 3.1 (0.2 ) (6.5 )% 3.1 5.2 (2.1 ) (40.4 )%
Corporate (230.5 ) (166.3 ) (64.2 ) 38.6 % (166.3 ) (370.9 ) 204.6 (55.2 )%
Total $ 171.0 $ 251.9 $ (80.9 ) (32.1 )% $ 251.9 $ 31.6 $ 220.3 697.2 %
Further information regarding the reportable operating segments can be found in
Note 18 to the consolidated financial statements.
Wolverine Michigan Group
The Michigan Group's revenue increased $27.5 million , or 2.2%, in fiscal 2019
compared to fiscal 2018. The increase was due to a high-single digit increase
from Merrell® and a low-teens increase from Cat®, partially offset by low-teens
decreases from Chaco® and Hush Puppies®. The Merrell® increase was due to growth
in Asia Pacific , Europe and Latin America and strong eCommerce growth in the
mid-twenties. The Cat® increase was due to strength in the Work category and
business model changes for certain international customers. The Chaco® decline
was due to high inventory levels at retailers and competitive pricing pressure
on certain key sandal offerings. The Hush Puppies® decline was due to late
deliveries of product and lower demand in the U.S. due to slow sell through at
retail and declines in Canada , Europe and Latin America .
The Michigan Group's operating profit decreased $12.8 million , or 5.0%, in
fiscal 2019 compared to fiscal 2018. The decrease was due to a 140 basis point
decline in gross margin and a $6.5 million increase in selling, general and
administrative costs. The gross margin decline was due to the bankruptcy of an
international distributor, product mix, higher close-out sales and business
model changes for certain international distributors. The increase in selling,
general and administrative expenses was due to investments in eCommerce growth
and new Merrell® stores.
The Michigan Group's revenue increased $4.4 million , or 0.3%, in fiscal 2018
compared to fiscal 2017. The increase was due to mid-single digit growth in
Merrell®, high-single digit growth from Wolverine® and mid-single digit growth
in Cat®, partially offset by the divestiture of the Sebago® brand ($26.0
million ) and the sale of the Department of Defense contract business ($26.1
million ). The Merrell® revenue increase is the result of new product
introductions, a strong at-once business, strength in the Hike, Work and Outdoor
Life categories, and strong eCommerce growth that was partially offset by a $9.2
million decline due to store closures in 2017. The Wolverine® increase was
driven by a mid-forties increase in eCommerce and a mid-single digit increase in
U.S. wholesale channel resulting from strength in the Work category. The Cat®
increase is due to a business model change in certain international markets, as
well as growth in the U.S.
The Michigan Group's operating profit increased $13.9 million , or 5.7%, in
fiscal 2018 compared to fiscal 2017. The operating profit increase was due to
the revenue growth and improved operating margin from Merrell®, Wolverine® and
Cat®. The Merrell® improvement resulted from better product mix and retail store
closures in 2017, partially offset by planned investments in growth. The
Wolverine® and Cat® improvements are due to lower product costs.
Wolverine Boston Group
The Boston Group's revenue increased $15.4 million , or 1.7%, in fiscal 2019
compared to fiscal 2018. The increase was driven by a mid-single digit increase
for Sperry® and a low-teens increase from Keds®, partially offset by a
mid-single digit decline for Saucony®. The Sperry® increase was due to strong
low-twenties eCommerce growth and new retail store openings, partially offset by
a low-single digit decline in the U.S. wholesale market due to a decline in the
Boat shoe category partially offset by increases in the Boot category. The Keds®
increase was due to growth in the U.S. wholesale business and strong eCommerce
growth in the thirties. The decrease for Saucony® was due to lower demand for
products in the U.S. wholesale channel and in certain international third-party
markets, partially offset by the acquisition of the Saucony® distributor in
Italy and strong thirties eCommerce growth.
The Boston Group's operating profit decreased $3.7 million , or 2.3%, in fiscal
2019 compared to fiscal 2018. The decrease was due to higher selling, general
and administrative expense of $13.5 million due to the acquisition of the
Saucony® distributor in
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Italy , new Sperry® stores and higher distribution and advertising costs related to eCommerce, partially offset by the group's higher revenue and gross margin improvement of 40 basis points. TheBoston Group's revenue decreased$93.3 million , or 9.4%, in fiscal 2018 compared to fiscal 2017. The decrease was driven by the transition of the Stride Rite® brand to a licensing model ($47.5 million ) and the closure of retail stores ($47.5 million ) and a high-single digit decline for Saucony®. This was partially offset by a low-single digit increase for Sperry® wholesale and eCommerce channels and a mid-single digit increase for Keds® due to eCommerce growth. The Saucony® decrease was due to lower demand for products in theU.S. wholesale channel, partially offset by growth inEurope . TheBoston Group's operating profit increased$3.9 million , or 2.5%, in fiscal 2018 compared to fiscal 2017. The increase was due to the closure of retail stores, higher operating profit for Keds® due to the higher revenue and higher gross margin and higher operating profit for Sperry® due to higher wholesale revenue. This was partially offset by lower operating profit from Saucony® due to lower revenues. Other The Other category's revenue decreased$8.4 million , or 11.7%, in fiscal 2019 compared to fiscal 2018. The revenue decrease is due to lower third-party sourcing commission revenue, a high-twenties decline in multi-brand retail stores revenue due to conversions to a mono-brand format and a low-single digit decline in the performance leathers business. The Other category's revenue decreased$21.9 million , or 23.4%, in fiscal 2018 compared to fiscal 2017. The revenue decrease is due to a high-teens decline in the performance leathers business due to lower demand and the closure of multi-brand retail stores ($9.3 million ). The Other category's operating profit decreased$2.1 million , or 40.4%, in fiscal 2018 compared to fiscal 2017, due to the performance leathers revenue decline. Corporate Corporate expenses increased$64.2 million in fiscal 2019 compared to fiscal 2018 due to higher environmental and other related costs ($68.2 million ) and reorganization costs ($7.1 million ), partially offset by lower incentive compensation costs ($16.7 million ). Corporate expenses decreased$204.6 million in fiscal 2018 compared to fiscal 2017. Corporate expenses were impacted by the decrease in restructuring and other related costs ($72.9 million ), lower impairment of intangible assets ($68.6 million ), lower organizational transformation costs ($37.7 million ) and lower environmental and other related costs ($20.0 million ). LIQUIDITY AND CAPITAL RESOURCES Fiscal Year (In millions) 2019 2018 2017 Cash and cash equivalents$ 180.6 $ 143.1 $ 481.0 Debt (1) 798.4 570.5 782.6 Available Revolving Credit Facility (2) 434.3 672.5 597.5 Net cash provided by operating activities 222.6 97.5 202.7 Net cash used in investing activities (61.5 ) (22.2 ) (1.0 ) Net cash used in financing activities (124.6 ) (404.5 ) (98.0 ) Additions to property, plant and equipment 34.4 21.7 32.4 Depreciation and amortization 32.7 31.5 37.2 (1) Prior to 2019, Debt included capital lease obligations.
(2) Amounts are net of both borrowings, if any, and outstanding standby letters
of credit issued in accordance with the terms of the Revolving Credit
Facility.
Liquidity
Cash and cash equivalents of$180.6 million as ofDecember 28, 2019 were$37.5 million higher compared toDecember 29, 2018 . The increase is due primarily to increased net borrowings under the Credit Agreement of$227.5 million and cash provided by operating activities of$222.6 million , partially offset by share repurchases of$319.2 million , capital expenditures of$34.4 million , cash dividends paid of$33.6 million , a business acquisition of$15.1 million , and investments in joint ventures of$8.5 million . The Company had$434.3 million of borrowing capacity available under the Revolving Credit Facility as ofDecember 28, 2019 . Cash and cash equivalents located in foreign jurisdictions totaled$113.0 million as ofDecember 28, 2019 . 28
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Cash flow from operating activities, along with additional 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 flow from operating activities is expected to be used to fund organic growth initiatives, reduce debt, pay dividends, repurchase the Company's common stock and pursue acquisitions. A detailed discussion of environmental remediation costs is found in Note 17 to our Consolidated Financial Statements. The Company has established a reserve for estimated environmental remediation costs based upon an evaluation of currently available facts, including the Consent Decree approved onFebruary 19, 2020 discussed in Note 17, with respect to each individual site. As ofDecember 28, 2019 , the Company has a reserve of$124.4 million , of which$41.5 million is expected to be paid in the next 12 months and is recorded as a current obligation in other accrued liabilities, with the remaining$82.9 million recorded in other liabilities and expected to be paid over the course of up to 25 years. Separately, as result of a settlement with 3M Company, the Company will receive a$55.0 million payment from 3M Company in fiscal 2020 as a partial recovery of these costs. The Company's remediation activity at its former Tannery site and sites where the Company disposed of Tannery byproducts is ongoing. It is difficult to estimate the cost of environmental compliance and remediation given the uncertainties regarding the interpretation and enforcement of applicable environmental laws and regulations, the extent of environmental contamination and the existence of alternative cleanup methods. Future developments may occur that could materially change the Company's current cost estimates. The Company adjusts recorded liabilities as further information develops or circumstances change. 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. Cash from operations during fiscal 2019 was higher compared to fiscal 2018, due primarily to lower contributions to the Company's pension plans and increased collections of receivable accounts, offset partially by increased inventory investments during 2019 to support organic sales growth. During 2019, working capital drove a source of cash of$2.7 million , which was driven by a decrease in accounts receivable of$30.7 million and an increase in income taxes payable of$3.6 million , partially offset by increases in inventories of$23.8 million and other operating assets of$5.4 million and a decrease in other operating liabilities of$2.4 million . Cash from operations during fiscal 2018 was lower compared to fiscal 2017, due primarily to the wind-down of an accounts receivable financing program, inventory investments at the end of 2018 to support organic sales growth and an increase in contributions to its pension plans. The Company made contributions to its pension plans of$60.7 million and$11.3 million in fiscal years 2018 and 2017 respectively. During 2018, working capital drove a use of cash of$137.9 million , which was driven by increases in accounts receivable of$95.0 million , inventories of$44.5 million and other operating assets of$17.8 million and a decrease in other operating liabilities of$19.3 million . These changes were partially offset by an increase in accounts payable of$40.6 million . Investing Activities The Company made capital expenditures of$34.4 million ,$21.7 million and$32.4 million in fiscal years 2019, 2018 and 2017, respectively. The increase in capital expenditures during fiscal 2019 compared to fiscal 2018 were due to office enhancements and new retail stores. During fiscal 2019, the Company paid$15.1 million related to a business acquisition and$8.5 million related to investments in joint ventures. See Note 19 to our Consolidated Financial Statements for additional information regarding the acquisition. During fiscal 2017, the Company received proceeds of$38.6 million related to the sale of a business and other assets. Financing Activities OnDecember 6, 2018 , the Company amended its credit agreement (as amended, the "Credit Agreement"). The Credit Agreement includes a$200.0 million term loan facility ("Term Loan A") and a$800.0 million Revolving Credit Facility, both with maturity dates ofDecember 6, 2023 . The Credit Agreement's debt capacity is limited to an aggregate debt amount (including outstanding term loan principal and revolver commitment amounts in addition to permitted incremental debt) not to exceed$1,750.0 million , unless certain specified conditions set forth in the Credit Agreement are met. Term Loan A requires quarterly principal payments with a balloon payment due onDecember 6, 2023 . The Revolving Credit Facility allows the Company to borrow up to an aggregate amount of$800.0 million , which includes a$200.0 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 borrowings under the Revolving Credit Facility of$360.0 29
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million and outstanding letters of credit under the Revolving Credit Facility of$5.7 million as ofDecember 28, 2019 . The outstanding letters of credit reduce the borrowing capacity under the Revolving Credit Facility. As ofDecember 28, 2019 , the Company was in compliance with all covenants and performance ratios under the Credit Agreement. The Company has$250.0 million of senior notes outstanding that are due onSeptember 1, 2026 (the "Senior Notes"). The Senior Notes bear interest at 5.00% with the related interest payments due semi-annually. The Senior Notes are guaranteed by substantially all of the Company's domestic subsidiaries. The Company's debt atDecember 28, 2019 totaled$798.4 million , compared to$570.5 million atDecember 29, 2018 . The increase was due to borrowings on the Revolving Credit Facility of$235.0 million less scheduled principal payments on Term Loan A of$7.5 million . The Company has a foreign revolving credit facility with aggregate available borrowings of$4.0 million that are uncommitted and, therefore, each borrowing against the applicable facility is subject to approval by the lender. There were no borrowings against this facility atDecember 28, 2019 . The Company repurchased$319.2 million ,$174.7 million and$42.3 million of Company common stock in fiscal years 2019, 2018 and 2017, respectively, under stock repurchase plans. OnSeptember 11, 2019 , the Company's Board of Directors approved a common stock repurchase program that authorized the repurchase of an additional$400.0 million of common stock over a four year period. The Company has$513.4 million available under its common stock repurchase program atDecember 28, 2019 . In addition to the stock repurchase program activity, the Company acquired$16.9 million ,$8.8 million and$5.5 million of shares in fiscal years 2019, 2018 and 2017, respectively, in connection with shares or units withheld to pay employee taxes related to stock-based compensation plans. The Company declared cash dividends of$0.40 per share,$0.32 per share, and$0.24 per share in fiscal years 2019, 2018 and 2017 respectively. Dividends paid totaled$33.6 million ,$28.6 million and$23.0 million , for fiscal years 2019, 2018 and 2017, respectively. A quarterly dividend of$0.10 per share was declared onFebruary 5, 2020 to shareholders of record onApril 1, 2020 . NEW ACCOUNTING STANDARDS See Note 2 to our Consolidated Financial Statements for information related to new accounting standards. CRITICAL ACCOUNTING POLICIES The preparation of the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in theU.S. ("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 following critical accounting policies used in determining estimates and assumptions in the amounts reported. Management believes that an understanding of these policies is important to an overall understanding of the Company's consolidated financial statements. Revenue Recognition and Performance Obligations Revenue is recognized upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration to be received in exchange for those goods or services. The Company identifies the performance obligation in the contract, determines the transaction price, allocates the transaction price to the performance obligations, and recognizes revenue upon completion of the performance obligation. Revenue is recognized net of variable consideration and any taxes collected from customers, which are subsequently remitted to governmental authorities. Control of the Company's goods and services, and associated fixed revenue, are transferred to customers at a point in time. The Company's contract revenue consist of wholesale revenue and consumer-direct revenue. Wholesale revenue is recognized for products sourced by the Company when control transfers to the customer generally occurring upon the purchase, shipment or delivery of branded products by or to the customer. Consumer-direct includes eCommerce revenue that is recognized for products sourced by the Company when control transfers to the customer once the related goods have been shipped and retail store revenue recognized at time of sale. The point of purchase or shipment was evaluated to best represent when control transfers based on the Company's right of payment for the goods, the customer's legal title to the asset, the transfer of physical possession and the 30
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customer having the risks and rewards of the goods. Payment terms for the
Company's revenue vary by sales channel. Standard credit terms apply to the
Company's wholesale receivables, while payment is rendered at the time of sale
within the consumer-direct channel.
Revenue is recorded at the net sales price ("transaction price"), which includes
estimates of variable consideration for which reserves are established.
Components of variable consideration include trade discounts and allowances,
product returns, customer markdowns, customer rebates and other sales incentives
relating to the sale of the Company's products. These reserves are based on the
amounts earned, or to be claimed on the related sales. These estimates take into
consideration a range of possible outcomes, which are probability-weighted in
accordance with the expected value method for relevant factors such as current
contractual and statutory requirements, specific known market events and trends,
industry data and forecasted customer buying and payment patterns. Overall,
these reserves reflect the Company's best estimates of the amount of
consideration to which it is entitled based on the terms of the respective
underlying contracts. Revenue recognized during the fiscal year ended
December 28, 2019 , related to the Company's contract liabilities, was nominal.
Allowance for Uncollectible Accounts
The Company maintains an allowance for uncollectible accounts receivable for
estimated losses resulting from its customers' failure to make required
payments. Company management evaluates the allowance for uncollectible accounts
receivable based on a review of current customer status and historical
collection experience.
Inventory
The Company values its inventory at the lower of cost or net realizable value.
Cost is determined by the last-in, first out ("LIFO") method for certain
domestic finished goods inventories. Cost is determined using the first-in,
first-out ("FIFO") method for all raw materials, work-in-process and finished
goods inventories in foreign countries and certain domestic finished goods
inventories. The average cost of inventory is used for finished goods
inventories of the Company's consumer-direct business. The Company has applied
these inventory cost valuation methods consistently from year to year.
The Company reduces the carrying value of its inventories to the lower of cost
or net realizable value for excess or obsolete inventories based upon
assumptions about future demand and market conditions. If the Company were to
determine that the estimated realizable value of its inventory is less than the
carrying value of such inventory, the Company would provide a reserve for such
difference as a charge to cost of sales. If actual market conditions are
different from those projected, adjustments to those inventory reserves may be
required. The adjustments would increase or decrease the Company's cost of sales
and net income in the period in which they were realized or recorded. Inventory
quantities are verified at various times throughout the year by performing
physical inventory counts and subsequently comparing those results to perpetual
inventory balances. If the Company determines that adjustments to the inventory
quantities are appropriate, an adjustment to the Company's cost of goods sold
and inventory is recorded in the period in which such determination was made.
Goodwill and Indefinite-Lived Intangibles
Goodwill and intangible assets deemed to have indefinite lives are not
amortized, but are subject to impairment tests at least annually. The Company
reviews the carrying amounts of goodwill and indefinite-lived intangible assets
by reporting unit at least annually, or when indicators of impairment are
present, to determine if such assets may be impaired. If the carrying amounts of
these assets are not recoverable based upon discounted cash flow and market
approach analyses, the carrying amounts of such assets are reduced by the
estimated difference between the carrying values and estimated fair values. The
Company includes assumptions about expected future operating performance as part
of a discounted cash flow analysis to estimate fair value.
For goodwill, if the estimated fair value of the reporting unit exceeds its
carrying value, no further review is required. However, if the estimated fair
value of the reporting unit is less than its carrying value, the Company
performs the second step of the goodwill impairment test to determine the
impairment charge, if any. The second step involves a hypothetical allocation of
the estimated fair value of the reporting unit to its net tangible and
intangible assets (excluding goodwill) as if the reporting unit were newly
acquired, which results in an implied fair value of the goodwill. The amount of
the impairment charge is the excess of the recorded goodwill over the implied
fair value of the goodwill.
The Company may first assess qualitative factors to determine whether it is more
likely than not that the fair value of an indefinite-lived intangible asset is
less than its carrying value. The Company would not be required to
quantitatively determine the fair value of the indefinite-lived intangible
unless the Company determines, based on the qualitative assessment, that it is
more likely than not that its fair value is less than the carrying value. The
Company may skip the qualitative assessment and quantitatively test
indefinite-lived intangibles by comparison of the individual carrying values to
the fair value. Future cash flows of the individual indefinite-lived intangible
assets are used to measure their fair value after consideration by management of
certain assumptions, such as forecasted growth rates and cost of capital, which
are derived from internal projections and operating plans.
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The Company performs its annual testing for goodwill and indefinite-lived intangible asset impairment at the beginning of the fourth quarter of the fiscal year for all reporting units. The Company did not recognize any impairment charges for goodwill during fiscal years 2019, 2018 and 2017. No impairment charges were recognized for the Company's intangible assets during fiscal years 2019 and 2018. In the fourth quarter of fiscal 2017, as a result of its annual impairment testing, the Company recorded a$68.8 million impairment charge for the Sperry® trade name. Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or an asset group may not be recoverable. Each impairment test is based on a comparison of the carrying amount of the asset or asset group to the future undiscounted net cash flows expected to be generated by the asset or asset group. If such assets are considered to be impaired, the impairment amount to be recognized is the amount by which the carrying value of the assets exceeds their fair value. No impairment charges were recognized for the Company's long-lived assets during fiscal years 2019 and 2018. The Company recorded impairment charges of$12.2 million during fiscal 2017, related to certain retail store assets where the estimated future cash flows did not support the net book value of the assets. Environmental The Company establishes a reserve for estimated environmental remediation costs based upon the evaluation of currently-available facts with respect to each individual site. The costs are recorded on an undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of feasibility studies, the Company's commitment to a plan of action, or approval by regulatory agencies. Liabilities for estimated costs of environmental remediation are based primarily upon third-party environmental studies, other internal analysis and the extent of the contamination and the nature of required remedial actions at each site. The Company records adjustments to the estimated costs if there are changes in the scope of the required remediation activity, extent of contamination, governmental regulations or remediation technologies. Environmental costs relating to existing conditions caused by past operations that do not contribute to current or future revenues are expensed as incurred. Assets related to potential recoveries from other responsible parties are recognized when a definitive agreement is reached and collection of cash is reasonably certain. Recoveries of covered losses under insurance policies are recognized only when realization of the claim is deemed probable. Retirement Benefits The determination of the obligation and expense for retirement benefits depends upon the selection of certain actuarial assumptions used in calculating such amounts. These assumptions include, among others, the discount rate, expected long-term rate of return on plan assets, mortality rates and rates of increase in compensation. These assumptions are reviewed with the Company's actuaries and updated annually based on relevant external and internal factors and information, including, but not limited to, long-term expected asset returns, rates of termination, regulatory requirements and plan changes. The Company utilizes a bond matching calculation to determine the discount rate used to calculate its year-end pension liability and subsequent fiscal year pension expense. A hypothetical bond portfolio is created based on a presumed purchase of individual bonds to settle the plans' expected future benefit payments. The discount rate is the resulting yield of the hypothetical bond portfolio. The bonds selected are listed as high grade by at least two recognized ratings agency and are non-callable, currently purchasable and non-prepayable. The calculated discount rate was 3.60% atDecember 28, 2019 , compared to 4.46% atDecember 29, 2018 . Pension expense is also impacted by the expected long-term rate of return on plan assets, which the Company has determined to be 6.75% for fiscal 2020. This rate is based on both actual historical rates of return experienced by the pension assets and the long-term rate of return of a composite portfolio of equity and fixed income securities that reflects the approximate diversification of the pension assets. Income Taxes The Company maintains certain strategic management and operational activities in overseas subsidiaries, and its foreign earnings are taxed at rates that have generally been lower than theU.S. federal statutory income tax rate. A significant amount of the Company's earnings are generated by its Canadian, European and Asian subsidiaries and, to a lesser extent, in jurisdictions that are not subject to income tax. Income tax audits associated with the allocation of this income and other complex issues may require an extended period of time to resolve and may result in income tax adjustments if changes to the income allocation are required between jurisdictions with different income tax rates. Because income tax adjustments in certain jurisdictions can be significant, the Company records accruals representing management's best estimate of the resolution of these matters. To the extent additional information becomes available, such accruals are adjusted to reflect the revised estimated outcome. The carrying value of the Company's deferred tax assets assumes that the Company will be able to generate sufficient taxable income in future years to utilize these deferred tax assets. If these assumptions change, the Company may be required to record valuation allowances against its gross deferred tax assets in future years, which would cause the Company to record additional income tax expense in its 32
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consolidated statements of operations. Management evaluates the potential that the Company will be able to realize its gross deferred tax assets and assesses the need for valuation allowances on a quarterly basis. On a periodic basis, the Company estimates the full year effective tax rate and records a quarterly income tax provision in accordance with the projected full year rate. As the fiscal year progresses, that estimate is refined based upon actual events and the distribution of earnings in each tax jurisdiction during the year. This continual estimation process periodically results in a change to the expected effective tax rate for the fiscal year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the revised anticipated annual rate. As a result of the TCJA, the Company now intends to repatriate cash held in foreign jurisdictions and has recorded a deferred tax liability related to estimated state taxes and foreign withholding taxes on the future dividends received in theU.S. from the foreign subsidiaries. The Company intends to permanently reinvest all non-cash undistributed earnings outside of theU.S. and has, therefore not established a deferred tax liability on that amount of foreign unremitted earnings. However, if these non-cash undistributed earnings were repatriated, the Company would be required to accrue and pay applicableU.S. taxes and withholding taxes payable to various countries. It is not practicable to estimate the amount of the deferred tax liability associated with these non-cash unremitted earnings due to the complexity of the hypothetical calculation. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements as ofDecember 28, 2019 . CONTRACTUAL OBLIGATIONS As ofDecember 28, 2019 , the Company had the following payments under contractual obligations due by period: Less than More than (In millions) Total 1 year 1-3 years 3-5 years 5 years Long-term debt obligations (1)$ 929.1 $ 400.7 $ 66.6 $ 191.0 $ 270.8 Operating lease obligations 235.3 34.1 57.9 38.2 105.1 Purchase obligations (2) 367.8 367.8 - - - Supplemental Executive Retirement Plan 42.0 3.7 7.9 8.3 22.1 Deferred compensation 1.8 0.4 0.8 0.4 0.2 Dividends declared 9.0 9.0 - - - Municipal water improvements (3) 69.5 21.5 39.3 8.7 - TCJA transition obligation 27.9 - 7.1 20.8 - Minimum royalties 5.0 1.5 3.5 - - Minimum advertising 17.0 3.2 6.7 7.1 - Total (4)$ 1,704.4 $ 841.9 $ 189.8 $ 274.5 $ 398.2
(1) Includes principal and interest payments on the Company's long-term debt,
net of the impact of interest rate swaps. Estimated future interest payments
on outstanding debt obligations are based on interest rates as of
December 28, 2019 . Actual cash outflows may differ significantly due to
changes in underlying interest rates. See Note 11 to our ConsolidatedFinancial Statements for additional information on the Company's interest
rate swaps.
(2) Purchase obligations related primarily to inventory and capital expenditure
commitments.
(3) Under the terms of the approved Consent Decree, the Company is obligated to
contribute towards the costs of extending municipal water lines, developing
a replacement wellfield and making certain improvements to
Township's existing water treatment plant, all subject to an aggregate cap
of
to the Company's other environmental remediation costs, they have been
excluded from this table. See Note 17 to our Consolidated Financial
Statements for additional information.
(4) The total amount of unrecognized tax benefits on the consolidated balance
sheet at
unable to make a reasonably reliable estimate of the timing of payments in
individual years beyond 12 months due to uncertainties in the timing of tax
audit outcomes. As a result, this amount is not included in the table above.
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