WOLVERINE WORLD WIDE, INC. 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. 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 atJune 27, 2020 , 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. AtJune 27, 2020 , the Company operated 92 retail stores in theU.S. andCanada and 36 consumer-direct eCommerce sites. COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic. COVID-19 has had a negative effect on the global economy and on the Company's 2020 operating and financial results to date. The full financial effects of the COVID-19 pandemic cannot be reasonably estimated at this time due to uncertainty as to its severity and duration. The Company has taken the following proactive and precautionary measures to mitigate known areas of risk and navigate the future environment: •To increase liquidity and flexibility of the Company's capital structure, the Company borrowed$171 million in incremental 364-day term loan under its senior credit facility and sold$300 million of 6.375% Senior Notes (refer to Note 7, "Debt"), delayed most capital projects, suspended share repurchases, implemented select employee furloughs and organizational changes, compensation changes for the Company's management team and Board of Directors, delayed or canceled certain future product purchases across its portfolio of brands, initiated conversations with landlords to seek lease concessions, and took additional steps to reduce discretionary spending and other expenditures. •The Company temporarily closed allU.S. andCanada retail stores onMarch 17, 2020 . Stores began reopening in May under a phased approach and as of the end of the second quarter all stores had reopened with newly instituted health and safety protocols for customers and employees following regulatory guidance and protocols promulgated and health authorities and government officials. During the period stores were closed, the Company's distribution centers remained open and the Company's direct on-line channels continued to serve customer demand. The COVID-19 pandemic has had, and is expected to continue to have, a material adverse impact on the Company's financial results. The full nature and extent of the impact will depend on future developments, including, among other things; the continued spread and duration of the pandemic; the negative impact on global and regional economies and economic activity; actions governments, businesses and individuals take in response to the pandemic; the effects of the pandemic, including all of the foregoing, on the Company's manufacturers, distributors, suppliers, joint venture partners, wholesale customers and other counterparties, and how quickly the global economy and demand for the Company's products recovers after the pandemic subsides. The Company continues to monitor the situation closely. 2020 FINANCIAL OVERVIEW •Revenue was$349.1 million for the second quarter of 2020, representing a decline of 38.6% compared to the second quarter of 2019. The change in revenue reflected a 31.7% decline from theMichigan Group and a 46.9% decline from theBoston Group . Changes in foreign exchange rates decreased revenue by$2.0 million during the second quarter of 2020. Owned eCommerce revenue increased during the second quarter of 2020 by 96.0% compared to the second quarter of 2019. •Gross margin was 42.2% in the second quarter of 2020 compared to 40.5% in the second quarter of 2019. •The effective tax rates in the second quarters of 2020 and 2019 were (28.3)% and 19.4%, respectively. •Diluted earnings (loss) per share for the second quarters of 2020 and 2019 were$(0.02) per share and$0.45 per share, respectively. •The Company declared cash dividends of$0.10 per share in both the second quarters of 2020 and 2019. 27 -------------------------------------------------------------------------------- Table of Contents •Cash flow provided by operating activities was$39.0 million and$3.9 million for the first two quarters of 2020 and 2019, respectively, and was$115.6 million and$136.3 million for the second quarter of 2020 and 2019, respectively. •Compared to the second quarter of 2019, inventory decreased$20.0 million , or 4.9%. RESULTS OF OPERATIONS Quarter Ended Year-To-Date Ended June 27, June 29, Percent June 27, June 29, Percent (In millions, except per share data) 2020 2019 Change 2020 2019 Change Revenue$ 349.1 $ 568.6 (38.6) %$ 788.4 $ 1,092.0 (27.8) % Cost of goods sold 201.9 338.2 (40.3) 459.4 641.4 (28.4) Gross profit 147.2 230.4 (36.1) 329.0 450.6 (27.0) Selling, general and administrative expenses 143.6 168.7 (14.9) 299.7 332.7 (9.9) Environmental and other related costs, net of recoveries (3.9) 6.2 (162.9) 4.9 10.0 (51.0) Operating profit 7.5 55.5 (86.5) 24.4 107.9 (77.4) Interest expense, net 10.5 6.7 56.7 18.3 13.6 34.6 Debt extinguishment and other costs 0.2 - - 0.2 - - Other income, net (1.7) (1.0) (70.0) (2.3) (2.3) - Earnings (loss) before income taxes (1.5) 49.8 (103.0) 8.2 96.6 (91.5) Income tax expense (benefit) 0.4 9.6 (95.8) (2.7) 15.8 (117.1) Net earnings (loss) (1.9) 40.2 (104.7) 10.9 80.8 (86.5) Less: net earnings (loss) attributable to noncontrolling interests (0.3) - - (0.5) 0.1 (600.0) Net earnings (loss) attributable to Wolverine World Wide, Inc.$ (1.6) $ 40.2 (104.0) %$ 11.4 $ 80.7 (85.9) % Diluted earnings (loss) per share$ (0.02) $ 0.45 (104.4) %$ 0.14 $ 0.88 (84.1) %
REVENUE
Revenue was$349.1 million for the second quarter of 2020, representing a decline of 38.6% compared to the second quarter of 2019. The change in revenue reflected a 31.7% decline from theMichigan Group and a 46.9% decline from theBoston Group .The Michigan Group's revenue decline was driven by low-thirties decline from Merrell®, high-thirties decline from Cat®, high-twenties decline from Wolverine®, mid-teens decline from Chaco®, and a high-forties decline from Hush Puppies®. TheBoston Group's revenue decline was driven by low-sixties decline from Sperry®, high-twenties decline from Saucony®, high-forties decline from Keds®, and a low-fifties decline from Kids'. Changes in foreign exchange rates decreased revenue by$2.0 million during the second quarter of 2020. Owned eCommerce revenue increased during the second quarter of 2020 by 96.0% compared to the second quarter of 2019. Revenue was$788.4 million for the first two quarters of 2020, representing a decline of 27.8% compared to the first two quarters of 2019. The change in revenue reflected a 25.1% decline from theMichigan Group and a 30.1% decline from theBoston Group .The Michigan Group's revenue decline was driven by low-twenties decline from Merrell®, mid-thirties decline from Cat®, low-twenties decline from Wolverine®, mid-twenties decline from Chaco®, and a high-thirties decline from Hush Puppies®. TheBoston Group's revenue decline was driven by low-forties decline from Sperry®, low-teens decline from Saucony®, high-twenties decline from Keds®, and a mid-thirties decline from Kids'. Changes in foreign exchange rates decreased revenue by$4.9 million during the first two quarters of 2020. Owned eCommerce revenue increased during the first two quarters of 2020 by 61.8% compared to the first two quarters of 2019. GROSS MARGIN Gross margin was 42.2% in the second quarter of 2020 compared to 40.5% in the second quarter of 2019. Gross margin was 41.7% in the first two quarters of 2020 compared to 41.3% during the first two quarters of 2019. The gross margin increase in the current year periods resulted from a favorable sales channel shift to higher margin eCommerce and favorable wholesale product mix, partially offset by increased tariffs on inventory sourced fromChina . 28 -------------------------------------------------------------------------------- Table of Contents OPERATING EXPENSES Operating expenses decreased$35.2 million , from$174.9 million in the second quarter of 2019 to$139.7 million in the second quarter of 2020. The decrease was driven by lower selling costs ($20.1 million ), lower product development costs ($4.0 million ), lower distribution costs ($2.4 million ), lower general and administrative costs ($13.4 million ), and lower environmental and other related costs, net of insurance recoveries ($10.1 million ), partially offset by higher advertising ($1.0 million ), higher incentive compensation ($1.2 million ), and higher non-operating costs incurred due to COVID-19 ($12.7 million ). Operating expenses decreased$38.1 million , from$342.7 million in the first two quarters of 2019 to$304.6 million in the first two quarters of 2020. The decrease was driven by lower selling costs ($20.4 million ), lower product development costs ($5.8 million ), lower distribution costs ($3.9 million ), lower incentive compensation ($7.5 million ), lower general and administrative costs ($11.5 million ), and lower environmental and other related costs, net of insurance recoveries ($5.1 million ), partially offset by higher non-operating costs incurred due to COVID-19 ($16.2 million ). INTEREST, OTHER AND INCOME TAXES Net interest expense was$10.5 million in the second quarter of 2020 compared to$6.7 million in the second quarter of 2019. Net interest expense was$18.3 million in the first two quarters of 2020 compared to$13.6 million in the first two quarters of 2019. Interest expense increased in the current year periods due to higher average debt balances in 2020. Other income was$1.7 million in the second quarter of 2020, compared to$1.0 million in the second quarter of 2019. The increase was driven by foreign exchange derivative gains reclassified from AOCI ($1.3 million ), partially offset by higher non-service pension costs ($0.5 million ). Other income was$2.3 million in the first two quarter of 2020, compared to$2.3 million in the first two quarters of 2019. Other income in the current period included higher non-service pension costs ($1.0 million ) and gains on foreign exchange derivatives reclassified from AOCI ($1.3 million ). The effective tax rates in the second quarter of 2020 and 2019 were (28.3)% and 19.4%, respectively. The effective tax rates in the first two quarters of 2020 and 2019 were (33.0)% and 16.4%, respectively. The change in effective tax rate is driven by a decrease of pretax book income in the Company's material tax jurisdictions as a result of the global COVID-19 pandemic. REPORTABLE SEGMENTS The Company's portfolio of brands is organized into the following two operating segments, which the Company has determined to be reportable segments. •Wolverine Michigan Group, consisting of Merrell® footwear and apparel, Cat® footwear, Wolverine® footwear and apparel, Chaco® footwear, Hush Puppies® footwear and apparel, Bates® uniform footwear, Harley-Davidson® footwear and Hytest® safety footwear; and •Wolverine Boston Group, consisting of Sperry® footwear and apparel, Saucony® footwear and apparel, Keds® footwear and apparel, and the Kids' footwear business, which includes the Stride Rite® licensed business, as well as kids' footwear offerings from Saucony®, Sperry®, Keds®, Merrell®, Hush Puppies® and Cat®. The Company also reports "Other" and "Corporate" categories. The Other category consists of the Company's leather marketing operations, sourcing operations that include third-party commission revenues and multi-branded consumer-direct retail stores. The Corporate category consists of unallocated corporate expenses, such as environmental and other related costs. 29 -------------------------------------------------------------------------------- Table of Contents The reportable segment results are as follows: Quarter Ended Year-To-Date Ended June 27, June 29, Percent June 27, June 29, Percent (In millions) 2020 2019 Change Change 2020 2019 Change Change
REVENUE
(31.7) %$ 465.2 $ 620.9 $ (155.7) (25.1) % Wolverine Boston Group 122.5 230.7 (108.2) (46.9) 304.6 435.5 (130.9) (30.1) Other 9.2 19.7 (10.5) (53.3) 18.6 35.6 (17.0) (47.8) Total$ 349.1 $ 568.6 $ (219.5) (38.6) %$ 788.4 $ 1,092.0 $ (303.6) (27.8) % Quarter Ended Year-To-Date Ended June 27, June 29, Percent June 27, June 29, Percent (In millions) 2020 2019 Change Change 2020 2019 Change Change OPERATING PROFIT (LOSS) Wolverine Michigan Group$ 38.4 $ 59.3 $ (20.9)
(35.2) %
(30.8) % Wolverine Boston Group 8.6 37.2 (28.6) (76.9) 27.4 69.2 (41.8) (60.4) Other 0.4 1.5 (1.1) (73.3) 0.3 2.3 (2.0) (87.0) Corporate (39.9) (42.5) 2.6 6.1 (84.8) (81.4) (3.4) (4.2) Total$ 7.5 $ 55.5 $ (48.0) (86.5) %$ 24.4 $ 107.9 $ (83.5) (77.4) % Further information regarding the reportable segments can be found in Note 16 to the consolidated condensed financial statements.Wolverine Michigan Group The Michigan Group's revenue decreased$100.8 million , or 31.7%, in the second quarter of 2020 compared to the second quarter of 2019. The revenue decline included low-thirties decline from Merrell®, high-thirties decline from Cat®, high-twenties decline from Wolverine®, mid-teens decline from Chaco®, and a high-forties decline from Hush Puppies®.The Michigan Group's revenue decreased$155.7 million , or 25.1% in the first two quarters of 2020 compared to the first two quarters of 2019. The revenue decline was driven by low-twenties decline from Merrell®, mid-thirties decline from Cat®, low-twenties decline from Wolverine®, mid-twenties decline from Chaco®, and a high-thirties decline from Hush Puppies®. The decline across all brands is due to the COVID-19 pandemic, partially offset by eCommerce growth. The closure of Merrell® owned retail stores due to the COVID-19 pandemic also contributed to the revenue decline.The Michigan Group's operating profit decreased$20.9 million in the second quarter of 2020 compared to the second quarter of 2019. The operating profit decline was due to the revenue declines, partially offset by a$17.4 million decrease in selling, general and administrative costs.The Michigan Group's operating profit decreased$36.3 million in the first two quarters of 2020 compared to the first two quarters of 2019. The operating profit decline was due to the revenue declines, partially offset by a$25.5 million decrease in selling, general and administrative costs. The decrease in selling, general and administrative expenses in the current year periods was due to declines in distribution, advertising and reductions in employee costs and other discretionary spending. WolverineBoston Group TheBoston Group's revenue decreased$108.2 million , or 46.9%, during the second quarter of 2020 compared to the second quarter of 2019. The revenue decline included low-sixties decline for Sperry®, high-twenties decline for Saucony®, high-forties decline for Keds®, and a low-fifties decline for Kids'. TheBoston Group's revenue decreased by$130.9 million , or 30.1%, during the first two quarters of 2020 compared to the first two quarters of 2019. The revenue decline included low-forties decline for Sperry®, low-teens decline for Saucony®, high-twenties decline for Keds®, and a mid-thirties decline for Kids'. The decline across all brands is due to the COVID-19 pandemic, partially offset by eCommerce growth. The closure of Sperry® owned retail stores due to the COVID-19 pandemic also contributed to the revenue decline. TheBoston Group's operating profit decreased$28.6 million in the second quarter of 2020 compared to the second quarter of 2019. The operating profit decline was due to the revenue declines, partially offset by a$13.5 million decrease in selling, general and administrative costs. TheBoston Group's operating profit decreased$41.8 million in the first two quarters of 2020 compared to the first two quarters of 2019. The operating profit decline was due to the revenue declines, partially offset by a$10.0 million decrease in selling, general and administrative costs. The decrease in selling, general and administrative expenses 30 -------------------------------------------------------------------------------- Table of Contents in the current year periods was due to declines in distribution, advertising and reductions in employee costs and other discretionary spending. Other The Other category's revenue decreased$10.5 million , or 53.3%, in the second quarter of 2020 compared to the second quarter of 2019. The Other category's revenue decreased$17.0 million , or 47.8%, during the first two quarters of 2020 compared to the first two quarters of 2019. The decrease in the current year periods was due to a decline in the performance leathers business as a result of lower demand and lower revenue from multi-branded stores and third-party sourcing commission revenue resulting from the COVID-19 pandemic. LIQUIDITY AND CAPITAL RESOURCES June 27, December 28, June 29, (In millions) 2020 2019 2019 Cash and cash equivalents$ 422.6 $ 180.6 $ 116.5 Debt 1,024.4 798.4 811.0 Available revolving credit facility (1) 669.2 434.3
428.1
(1)Amounts are net of both borrowings, if any, and outstanding standby letters of credit in accordance with the terms of the Revolving Credit Facility.
Year-To-Date Ended
June 27, June 29,
(In millions) 2020 2019
Net cash provided by operating activities $ 39.0 $ 3.9
Net cash provided by (used in) investing activities 9.2 (42.4)
Net cash provided by financing activities 195.1
11.0
Additions to property, plant and equipment 6.6 18.3 Depreciation and amortization 15.4 15.0 Liquidity Cash and cash equivalents of$422.6 million as ofJune 27, 2020 were$306.1 million higher compared toJune 29, 2019 . The increase is due primarily to the issuance of$300.0 million Senior Notes onMay 11, 2020 and cash provided by operating activities during the previous four quarters of$257.7 million , partially offset by share repurchases of$132.8 million , net repayments under the Amended Senior Credit Facility of$82.0 million , increased investing activity of$9.9 million and cash dividends paid of$33.8 million . The Company had$669.2 million of borrowing capacity available under the Revolving Credit Facility as ofJune 27, 2020 . Cash and cash equivalents located in foreign jurisdictions totaled$105.0 million as ofJune 27, 2020 . Cash flow from operating activities is 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 reduce debt. A detailed discussion of environmental remediation costs is found in Note 15 to the consolidated condensed financial statements. The Company has established a reserve for estimated environmental remediation costs based upon an evaluation of currently available facts with respect to each individual site. As ofJune 27, 2020 , the Company had a reserve of$106.7 million , of which$34.5 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$72.2 million recorded in other liabilities expected to be paid over the course of up to 25 years. 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. 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. There is significant uncertainty regarding the future impact of the COVID-19 pandemic on the Company's statement of operations and cash flows. The actions the Company has taken and continues to take to improve the Company's liquidity are discussed above in this Item 2. Operating Activities 31 -------------------------------------------------------------------------------- Table of Contents 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. For the first two quarters of 2020, an increase in net working capital represented a use of cash of$27.1 million . Working capital balances were unfavorably impacted by a decrease in accounts payable of$45.9 million , an increase in inventories of$41.0 million , and a decrease in other operating liabilities of$14.5 million , partially offset by a decrease in accounts receivable of$64.5 million , a decrease in other operating assets of$6.3 million , and an increase in income taxes payable of$3.5 million . Operating cash flows were favorably impacted by Environmental and other related costs, net of cash payments and recoveries received of$34.2 million , which are inclusive of a lump sum amount of$55.0 million from 3M Company during the first quarter of 2020. See Note 15 for additional information regarding this settlement. Investing Activities The Company made capital expenditures of$6.6 million and$18.3 million in the first two quarters of 2020 and 2019, respectively, for building improvements, new retail stores and information system enhancements. During the second quarter of 2020, the Company made a cash investment of$3.5 million in joint ventures. During the first quarter of 2020, the Company made a contingent consideration payment of$5.5 million related to the Saucony®Italy distributor acquisition. See Note 17 for additional information regarding the acquisition. During the second quarter of 2020, the Company received proceeds of$25.6 million from company-owned life insurance policy liquidations. Financing Activities OnMay 5, 2020 , the Company entered into a Second Amendment to its senior credit facility. In connection with the Second Amendment, the Company borrowed an incremental$171.0 million in aggregate principal in Incremental Term Loan. The Incremental Term Loan will mature onMay 4, 2021 and bear interest at a rate equal either to (i) the applicable base rate plus 1.250% or (ii) LIBOR plus 2.250%. The Amended Senior Credit Facility also includes a$200.0 million term loan facility and an$800.0 million Revolving Credit Facility, both with maturity dates ofDecember 6, 2023 , that remain unchanged as a result of the Second Amendment. The Amended Senior Credit Facility'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 Amended Senior Credit Facility are met. Term Loan A requires quarterly principal payments with a balloon payment due onDecember 6, 2023 . OnMay 11, 2020 , the Company issued$300.0 million aggregate principal amount of 6.375% Senior Notes due onMay 15, 2025 with related interest payments due semi-annually beginning onNovember 15, 2020 . These senior notes are guaranteed by substantially all of the Company's domestic subsidiaries. As ofJune 27, 2020 , the Company was in compliance with all covenants and performance ratios under the Senior Credit Facility. The Company's debt atJune 27, 2020 totaled$1,024.4 million compared to$798.4 million atDecember 28, 2019 . The Company expects to use the increased borrowings for working capital and general corporate purposes. The increased cash position resulted from net incremental borrowings under the Amended Senior Credit Facility and theMay 11, 2020 Senior Notes allow for greater financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. The Company repurchased$21.0 million and$207.4 million of shares in the first two quarters of 2020 and 2019, respectively. The Company may purchase up to an additional$487.4 million of shares under its existing common stock repurchase program which expires in 2023. As part of its strategy to increase liquidity and flexibility of Company's capital structure as result of the COVID-19 pandemic, the Company suspended share repurchases inMarch 2020 . The Company also paid$19.9 million in the first two quarters of 2020 in connection with shares or units withheld to pay employee taxes related to awards under stock incentive plans and received$24.5 million in connection with company-owned life insurance policies. The Company declared a cash dividend of$0.10 per share in the second quarter of 2020 and 2019, respectively, or$8.2 million and$8.6 million , respectively. A quarterly dividend of$0.10 per share was declared onApril 29, 2020 to shareholders of record onJuly 1, 2020 . CRITICAL ACCOUNTING POLICIES The preparation of the Company's consolidated condensed financial statements, which have been prepared in accordance withU.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 32 -------------------------------------------------------------------------------- Table of Contents 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 and for information regarding our critical accounting policies refer to Management Discussion and Analysis of Financial Conditions and Results of Operations in the 2019 Form 10-K and Note 5,Goodwill and indefinite-lived intangibles for discussion regarding the valuation of goodwill and indefinite-lived intangible assets. Management believes there have been no material changes in those critical accounting policies. 33
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