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 atApril 2, 2022 , 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. AtApril 2, 2022 , the Company operated 142 retail stores in theU.S. ,Europe andCanada and 64 consumer-direct eCommerce sites. OnJuly 31, 2021 , the Company entered into a definitive agreement to acquire 100% of the outstanding shares ofLady Leisure InvestCo Limited (the "Acquired Company "). The acquisition was completed onAugust 2, 2021 for$417.4 million , which is net of acquired cash of$7.4 million .The Acquired Company owns the Sweaty Betty® brand and activewear business, a premium women's activewear brand. The acquisition was funded with cash on hand and borrowings under the Company's revolving credit facility.
Known Trends Impacting Our Business
The COVID-19 pandemic has had a material adverse impact, and is expected to continue to have an impact, on the Company's financial results. Disruption in the global supply chain due to vessel shortages, labor and container shortages, andU.S. port congestion resulted in transportation delays that interrupted the flow of the Company's inventory and caused delays of shipments to wholesale partners during the first quarter of 2022. Supply chain disruptions resulted in the Company not being able to fulfill all orders received from customers during the quarter. The Company also incurred higher logistics costs, including freight and labor costs, during the first quarter of 2022 as a result of the supply chain disruption. The Company expects certain aspects of the disruption in the global supply chain to continue into future periods. The Company will continue to monitor delays and other disruptions in the supply chain and will implement measures intended to mitigate the effects of such delays and disruptions as needed. The Company continues to monitor the ongoing impacts of the COVID-19 pandemic as well as guidance from international and domestic governmental authorities, including developments that are outside the Company's control. These developments and other potential impacts of the COVID-19 pandemic, such as new or prolonged factory closures and other adverse impacts on the global supply chain effecting the planned delivery of inventory, could materially adversely impact revenue growth as well as profitability in future periods.
In
2022 FINANCIAL OVERVIEW
•Revenue was
•Gross margin was 42.5% in the first quarter of 2022 compared to 43.5% in the first quarter of 2021.
•The effective tax rates in the first quarters of 2022 and 2021 were 30.4% and 16.0%, respectively.
•Diluted earnings per share for the first quarter of 2022 was$0.12 per share compared to diluted earnings per share of$0.45 per share for the first quarter of 2021.
•The Company declared cash dividends of
•Cash flow used by operating activities was$92.5 million for the first quarter of 2022 compared to cash flow provided by operating activities of$26.3 million for the first quarter of 2021. 21 -------------------------------------------------------------------------------- Table of Contents •Compared to the first quarter of 2021, inventory increased$162.4 million , or 50.6%. Sweaty Betty contributed 14.5% to the increase versus the prior year. RESULTS OF OPERATIONS Quarter Ended April 2, April 3, Percent (In millions, except per share data) 2022 2021 Change Revenue$ 614.8 $ 510.7 20.4 % Cost of goods sold 353.5 288.4 22.6 Gross profit 261.3 222.3 17.5 Selling, general and administrative expenses 211.3 174.4 21.2 Environmental and other related costs, net of recoveries 30.4 (10.2) 398.0 Operating profit 19.6 58.1 (66.3) Interest expense, net 8.7 9.6 (9.4) Other expense (income), net (1.1) 2.8 (139.3) Earnings before income taxes 12.0 45.7 (73.7) Income tax expense 3.6 7.3 (50.7) Net earnings 8.4 38.4 (78.1) Less: net loss attributable to noncontrolling interests (1.3) (0.1) - Net earnings attributable to Wolverine World Wide, Inc.$ 9.7 $ 38.5 (74.8) % Diluted earnings per share$ 0.12 $ 0.45 (73.3) % REVENUE Revenue was$614.8 million for the first quarter of 2022, representing an increase of 20.4% compared to the first quarter of 2021. The change in revenue reflected a 10.6% increase from theMichigan Group , a 5.7% increase from theBoston Group and a 10.5% contribution from Sweaty Betty® revenue of$53.6 million .The Michigan Group's revenue increase was driven by high-thirties increase from Cat®, low-teens increase from Wolverine®, and mid-forties increase from Chaco®.The Boston Group's revenue increase was driven by high-teens increase from Sperry® and mid-single digit increase from Saucony®, partially offset by high-teens decline from Keds®. Changes in foreign exchange rates decreased revenue by$3.9 million during the first quarter of 2022. Direct-to-consumer revenue increased during the first quarter of 2022 by 23.7% compared to the first quarter of 2021, including a 38.0% contribution from the Sweaty Betty® acquisition. GROSS MARGIN Gross margin was 42.5% in the first quarter of 2022 compared to 43.5% in the first quarter of 2021. The gross margin decrease in the first quarter was driven by an unfavorable mix shift to the international third-party channel (100 basis points), unfavorable volume and outbound freight costs in the Company's direct to consumer channel (70 basis points), and higher cost of products from inbound freight, labor and materials costs, in part offset by price increases (60 basis points), partially offset by the contribution from the Sweaty Betty® acquisition (100 basis points). OPERATING EXPENSES Operating expenses increased$77.5 million , from$164.2 million in the first quarter of 2021 to$241.7 million in the first quarter of 2022. The increase was primarily driven by higher environmental and other related costs, net of insurance recoveries ($40.6 million ), an increase due to the contribution from Sweaty Betty® operating expenses ($29.9 million ), higher selling costs ($3.9 million ), higher general and administrative costs ($3.0 million ), higher distribution costs ($2.2 million ), higher product development costs ($0.7 million ), partially offset by lower advertising costs ($2.1 million ) and lower incentive compensation costs ($0.7 million ). Environmental and other related costs were$40.4 million and$5.5 million in the first quarters of 2022 and 2021, respectively.
INTEREST, OTHER AND INCOME TAXES
Net interest expense was$8.7 million in the first quarter of 2022 compared to$9.6 million in the first quarter of 2021. Reduction in interest expense is due to the lower average interest rates on the Company's outstanding debt. The Company redeemed and replaced the 6.375% senior notes due in 2025 and the 5.000% senior notes due in 2026 with the 4.000% senior notes inAugust 2021 . 22 -------------------------------------------------------------------------------- Table of Contents Other income was$1.1 million in the first quarter of 2022, compared to other expense of$2.8 million in the first quarter of 2021. The effective tax rates in the first quarter of 2022 and 2021 were 30.4% and 16.0%, respectively. The change in the effective tax rates between the periods is due to lower pre-tax earnings in the current year causing discrete adjustments recorded in the current year to have a larger effect on the effective rate. The Company recognized discrete tax expenses in 2022 which increased tax expense. In 2021, the Company recognized discrete tax benefits which reduced tax expense, resulting in a lower effective tax rate.
REPORTABLE SEGMENTS
The Company's brands are 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, Saucony® footwear and apparel, Keds® footwear, 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 Sweaty Betty® activewear business, 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 corporate employee costs, costs related the COVID-19 pandemic and environmental and other related costs.
The reportable segment results are as follows:
Quarter Ended
April 2, April 3,
(In millions) 2022 2021 Change Percent Change
REVENUE
Wolverine Michigan Group $ 329.3 $ 297.7 $ 31.6 10.6 %
Wolverine Boston Group 212.3 200.9 11.4 5.7 %
Other 73.2 12.1 61.1 505.0 %
Total $ 614.8 $ 510.7 $ 104.1 20.4 %
OPERATING PROFIT (LOSS)
Wolverine Michigan Group $ 65.1 $ 59.2 $ 5.9 10.0 %
Wolverine Boston Group 29.2 34.1 (4.9) (14.4) %
Other 0.1 0.3 (0.2) (66.7) %
Corporate (74.8) (35.5) (39.3) (110.7) %
Total $ 19.6 $ 58.1 $ (38.5) (66.3) %
Further information regarding the reportable segments can be found in Note 15 to the consolidated condensed financial statements.
The Michigan Group's revenue increased$31.6 million , or 10.6%, in the first quarter of 2022, compared to the first quarter of 2021. The revenue increase was driven by high-thirties increase from Cat®, low-teens increase from Wolverine®, and mid-forties increase from Chaco®. The Cat® increase was due to the strength of the work product category and timing of shipments between quarters. The Wolverine® increase was due to strong performance of its core franchises which includes Raider and Rancher, strength of the work product category, and expanded work footwear products. The Chaco® increase is the result of improved inventory positions in the current period versus the prior period which was negatively impacted by supply chain constraints.The Michigan Group's operating profit increased$5.9 million in the first quarter of 2022, compared to the first quarter of 2021. The operating profit increase was due to revenue increases, partially offset by a 140 basis point decrease in gross margin and a$3.4 million increase in selling, general and administrative costs. The decrease in gross margin in the current year period was due to an unfavorable mix shift to the international third-party channel, higher costs of products from inbound freight, labor and materials costs partially offset by price increases and unfavorable volume and outbound freight costs in the Company's direct to 23
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consumer channel. The increase in selling, general and administrative expenses in the current year period was primarily due to higher labor and distribution costs.Wolverine Boston Group The Boston Group's revenue increased$11.4 million , or 5.7%, during the first quarter of 2022, compared to the first quarter of 2021. The revenue increase was driven by high-teens increase from Sperry® and mid-single digit increase from Saucony®, partially offset by high-teens decline from Keds®. The Sperry® increase was driven by strongU.S. and international wholesale channel performance. The Saucony® increase was driven by the strength and expanded sales of core technical product franchises which include the Ride, Guide, Kinvara, Triumph, Peregrine and Endorphin series. The Keds® decline is due to logistics delays limiting the amount of inventory available for sale during the period.The Boston Group's operating profit decreased$4.9 million in the first quarter of 2022 compared to the first quarter of 2021. The operating profit decrease was due to a 230 basis point decrease in gross margin and a$5.3 million increase in selling, general and administrative costs. The decrease in gross margin in the current year period was due to higher costs of products from inbound freight, labor and materials costs partially offset by price increases and unfavorable volume and outbound freight costs in the Company's direct to consumer channel. The increase in selling, general and administrative expenses in the current year period was primarily due to higher labor and distribution costs.
Other
The Other category's revenue increased$61.1 million , or 505.0%, in the first quarter of 2022 compared to the first quarter of 2021. The revenue increase was driven by low-eighties increase in the performance leathers business and a$53.6 million contribution from the Sweaty Betty® acquisition.
Corporate
Corporate expenses increased$39.3 million in the first quarter of 2022 compared to the first quarter of 2021, primarily due to higher environmental and other related costs, net of insurance recoveries ($40.6 million ).
LIQUIDITY AND CAPITAL RESOURCES
April 2, January 1, April 3,
(In millions) 2022 2022 2021
Cash and cash equivalents $ 149.6 $ 161.7 $ 364.8
Debt 1,094.6 966.8 720.4
Available revolving credit facility (1) 639.0 769.2 793.9
(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.
Liquidity
Cash and cash equivalents of$149.6 million as ofApril 2, 2022 were$215.2 million lower compared toApril 3, 2021 . The decrease is due primarily to a business acquisition of$417.4 million , share repurchases of$73.4 million , cash dividends paid of$33.4 million , cash used by operating activities of$32.0 million , and additions to property, plant and equipment of$22.9 million , partially offset by borrowings less repayments of debt of$375.0 million . The Company had$639.0 million of borrowing capacity available under the Revolving Credit Facility as ofApril 2, 2022 . Cash and cash equivalents located in foreign jurisdictions totaled$131.3 million as ofApril 2, 2022 .
The Company funded the purchase price for the Sweaty Betty® acquisition through a combination of cash on hand and borrowings on the revolving credit facility.
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 fund organic growth initiatives, reduce debt, pay dividends, pursue acquisitions and for general corporate purposes. The Company may purchase up to an additional$412.9 million of shares under its existing common stock repurchase program which expires in 2023. The common stock repurchase program does not obligate the Company to acquire any particular amount of shares and may be suspended at any time. The Company repurchased$33.8 million of shares in the first quarter of 2022. There were no repurchases of Company shares during the first quarter of 2021. A detailed discussion of environmental remediation costs is found in Note 14 to the consolidated condensed financial statements. The Company has established a reserve for estimated environmental remediation costs based upon an evaluation of 24 -------------------------------------------------------------------------------- Table of Contents currently available facts with respect to each individual site. As ofApril 2, 2022 , the Company had a reserve of$75.2 million , of which$21.6 million is expected to be paid in the next 12 months and is recorded as a current obligation in other accrued liabilities and the remaining$53.6 million is 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. Note 14 to the consolidated condensed financial statements also includes a detailed discussion of environmental litigation matters. The Company increased its accrual by$37.8 million sinceJanuary 1, 2022 and made related payments of$1.5 million with respect to certain of these matters, as discussed in Note 14.
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.
The future impact of the COVID-19 pandemic on the Company's statement of operations and cash flows remains uncertain. The actions the Company has taken and continues to take to improve the Company's liquidity are discussed above in this Item 2 and below under "Financing Arrangements."
Financing Arrangements
OnOctober 21, 2021 , the Company entered into a 2021 Replacement Facility Amendment and Reaffirmation Agreement (the "Amendment") of its existing credit facility (as amended and restated, the "Credit Agreement"). The Amendment amended and restated the prior credit agreement to, among other things: (i) provide for a term loan A facility (the "Term Facility") in an aggregate principal amount of$200.0 million , which replaced the existing term loan A; (ii) provide for an increased revolving credit facility (the "Revolving Facility" and, together with the Term Facility, the "Senior Credit Facilities") with total commitments of$1.0 billion , an increase of$200.0 million from the existing Revolving Facility; and (iii) set the LIBOR floor to 0.000%, a decrease of 0.750% from the existing Senior Credit Facilities. The maturity date of the loans under the Senior Credit Facilities was extended toOctober 21, 2026 . The Amendment provides for a debt capacity of up to an aggregate debt amount (including outstanding term loan principal and revolver commitment amounts in addition to permitted incremental debt) not to exceed$2.0 billion unless certain specified conditions set forth in the Credit Agreement are met. The Term Facility requires quarterly principal payments with a balloon payment due onOctober 21, 2026 . OnAugust 26, 2021 , the Company issued$550.0 million aggregate principal debt amount of 4.000% senior notes due onAugust 15, 2029 . Related interest payments are due semi-annually beginningFebruary 15, 2022 . The senior notes are guaranteed by substantially all of the Company's domestic subsidiaries. The proceeds from the senior notes were used to extinguish the Company's$250.0 million senior notes due onSeptember 1, 2026 and$300.0 million senior notes due onMay 15, 2025 .
As of
The Company's debt atApril 2, 2022 totaled$1,094.6 million compared to$966.8 million atJanuary 1, 2022 . The Company expects to use the current borrowings to fund organic growth initiatives, reduce debt, pay dividends, pursue acquisitions and for general corporate purposes. The increased debt position resulted from borrowings under the Revolving Facility to fund operating activities and share repurchases. Cash Flows
The following table summarizes cash flow activities:
Quarter Ended
April 2 , April 3,
(In millions) 2022 2021
Net cash provided by (used in) operating activities
(3.8) (2.7)
Net cash provided by (used in) financing activities 86.0 (4.9) Additions to property, plant and equipment
7.5 2.2
Depreciation and amortization 8.5 7.2
25-------------------------------------------------------------------------------- Table of Contents 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.
For the first quarter of 2022, an increase in net working capital represented a use of cash of$131.5 million . Working capital balances were unfavorably impacted by an increase in inventories of$122.8 million and an increase in accounts receivable of$52.2 million , a decrease in other operating liabilities of$31.0 million and an increase in other operating assets of$8.1 million , partially offset by an increase in accounts payable of$74.4 million and an increase in income taxes payable of$8.2 million . Operating cash flows were favorably impacted by stock-based compensation expense of$10.3 million , depreciation and amortization expense of$8.5 million , pension expense of$2.3 million and environmental and other related costs of$14.1 million .
Investing Activities
The Company made capital expenditures of$7.5 million and$2.2 million in the first quarter of 2022 and 2021, respectively, for building improvements, new retail stores, distribution operations improvements and information system enhancements.
Financing Activities
The current year activity includes net borrowings under the Revolving Facility of$130.0 million . The Company paid$2.5 million in principal payments associated with its financing arrangements during the first quarter of 2022 and 2021, respectively. The Company also paid$7.1 million and$9.2 million in the first quarters of 2022 and 2021, respectively, in connection with shares or units withheld to pay employee taxes related to awards under stock incentive plans and received$0.8 million and$10.5 million in proceeds from the exercise of stock options in the first quarters of 2022 and 2021, respectively. The Company also settled repurchases in cash for$33.8 million of its common stock during the first quarter of 2022. There were no repurchases of the Company's common stock during the first quarter of 2021. The Company received$7.0 million and$4.8 million in the first quarters of 2022 and 2021, respectively, from noncontrolling owners of the Company'sChina joint venture to support the growth of the joint venture. The Company declared cash dividends of$0.10 per share in the first quarters of 2022 and 2021. Dividends paid in the first quarters of 2022 and 2021 totaled$8.4 million and$8.5 million , respectively. A quarterly dividend of$0.10 per share was declared onMay 3, 2022 to shareholders of record onJuly 1, 2022 .
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 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. For information regarding our critical accounting policies refer to Part II, Item 7: "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in the Company's 2021 Form 10-K. Management believes there have been no material changes in those critical accounting policies. 26
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