SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the third twelve week accounting period ended September 12, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 1-6024
WOLVERINE WORLD WIDE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 38-1185150
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
9341 COURTLAND DRIVE, ROCKFORD, MICHIGAN 49351
(Address of Principal Executive Offices) (Zip Code)
(616) 866-5500
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
There were 43,814,655 shares of Common Stock, $1 par value,
outstanding as of October 26, 1998, of which 3,060,747 shares are
held as Treasury Stock.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
SEPTEMBER 12, JANUARY 3, SEPTEMBER 6,
1998 1998 1997
(UNAUDITED) (AUDITED) (UNAUDITED)
------------- ---------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,853 $ 5,768 $ 5,825
Accounts receivable, less allowances
September 12, 1998 - $8,621
January 3, 1998 - $7,292
September 6, 1997 - $5,499 159,100 138,066 128,965
Inventories:
Finished products 131,467 100,272 127,173
Raw materials and work in process 46,067 43,562 48,412
-------- -------- --------
177,534 143,834 175,585
Other current assets 10,381 16,193 14,318
-------- -------- --------
TOTAL CURRENT ASSETS 355,868 303,861 324,693
PROPERTY, PLANT & EQUIPMENT
Gross cost 184,594 163,381 149,182
Less accumulated depreciation 80,274 73,050 71,237
-------- -------- --------
104,320 90,331 77,945
OTHER ASSETS 60,881 55,471 38,824
-------- -------- --------
2
TOTAL ASSETS $521,069 $449,663 $441,462
======== ======== ========
See notes to consolidated condensed financial statements.
3
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS CONTINUED
(THOUSANDS OF DOLLARS)
SEPTEMBER 12, JANUARY 3, SEPTEMBER 6,
1998 1998 1997
(UNAUDITED) (AUDITED) (UNAUDITED)
------------- ---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 7,896 $ 3,251 $ 2,918
Accounts payable and other accrued liabilities 47,018 57,227 59,877
Current maturities of long-term debt 4,417 4,417 135
-------- -------- --------
TOTAL CURRENT LIABILITIES 59,331 64,895 62,930
LONG-TERM DEBT (less current maturities) 153,505 89,847 107,231
OTHER NONCURRENT LIABILITIES 11,904 12,491 11,002
STOCKHOLDERS' EQUITY
Common Stock - par value $1, authorized
80,000,000 shares; shares issued
(including shares in treasury):
September 12, 1998 - 43,802,049 shares
January 3, 1998 - 43,310,718 shares
September 6, 1997 - 43,109,329 shares 43,802 43,311 43,109
Additional paid-in capital 71,324 64,912 60,508
Retained earnings 213,668 190,799 171,990
Accumulated translation adjustments (156) (68) (491)
Unearned compensation (7,708) (4,285) (4,868)
Cost of shares in treasury:
September 12, 1998 1,829,147 shares
January 3, 1998 758,113 shares
September 6, 1997 742,226 shares (24,601) (12,239) (9,949)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 296,329 282,430 260,299
-------- -------- --------
4
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $521,069 $449,663 $441,462
======== ======== ========
( ) - Denotes deduction.
See notes to consolidated condensed financial statements.
5
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT SHARES AND PER SHARE DATA)
(UNAUDITED)
12 WEEKS ENDED 36 WEEKS ENDED
------------------------------- ------------------------------
SEPTEMBER 12, SEPTEMBER 6, SEPTEMBER 12, SEPTEMBER 6,
1998 1997 1998 1997
------------- ------------ ------------- ------------
NET SALES AND OTHER
OPERATING INCOME $ 164,486 $ 162,246 $ 455,002 $ 419,336
Cost of products sold 112,766 114,336 309,653 292,220
----------- ----------- ----------- -----------
GROSS MARGIN 51,720 47,910 145,349 127,116
Selling and administrative expenses 33,324 31,468 100,384 90,807
----------- ----------- ----------- -----------
OPERATING INCOME 18,396 16,442 44,965 36,309
OTHER EXPENSES (INCOME):
Interest expense 2,231 932 5,953 3,195
Interest income (92) 116 (622) (175)
Restructuring charge 2,000 2,000
Other - net 27 (135) 27 24
----------- ----------- ----------- -----------
2,166 2,913 5,358 5,044
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 16,230 13,529 39,607 31,265
Income taxes 5,399 4,330 13,233 10,005
----------- ----------- ----------- -----------
NET EARNINGS $ 10,831 $ 9,199 $ 26,374 $ 21,260
=========== =========== =========== ===========
6
EARNINGS PER SHARE:
Basic $ .26 $ .22 $ .63 $ .51
=========== =========== =========== ===========
Diluted $ .25 $ .21 $ .61 $ .49
=========== =========== =========== ===========
CASH DIVIDENDS PER SHARE $ .0275 $ .0217 $ .0825 $ .0651
=========== =========== =========== ===========
SHARES USED FOR NET EARNINGS
PER SHARE COMPUTATION:
Basic 42,069,486 41,617,603 42,039,921 41,381,839
=========== =========== =========== ===========
Diluted 43,346,374 43,569,020 43,581,795 43,474,576
=========== =========== =========== ===========
See notes to consolidated condensed financial statements.
7
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
36 WEEKS ENDED
-------------------------------
SEPTEMBER 12, SEPTEMBER 6,
1998 1997
------------- ------------
OPERATING ACTIVITIES
Net earnings $ 26,374 $ 21,260
Depreciation, amortization and other non-cash items 2,746 2,987
Unearned compensation (3,423) (1,960)
Restructuring charge 2,000
Changes in operating assets and liabilities:
Accounts receivable (21,034) (2,966)
Inventories (33,700) (58,158)
Other current assets 5,812 (1,650)
Accounts payable and other accrued liabilities (10,209) (10,831)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (33,434) (49,318)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 85,429 85,094
Payments of long-term borrowings (21,771) (19,037)
Proceeds from short-term borrowings 11,734 5,421
Payments of short-term borrowings (7,089) (3,529)
Cash dividends (3,500) (2,745)
Purchase of common stock for treasury (10,432) (2,935)
Proceeds from shares issued under employee stock plans 4,973 7,957
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 59,344 70,226
INVESTING ACTIVITIES
Additions to property, plant and equipment (21,788) (20,712)
Net increase in notes receivable (282) (1,014)
Other (755) (1,891)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (22,825) (23,617)
-------- --------
8
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,085 (2,709)
Cash and cash equivalents at beginning of the year 5,768 8,534
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE
PERIOD $ 8,853 $ 5,825
======== ========
( ) - Denotes reduction in cash and cash equivalents.
See notes to consolidated condensed financial statements.
9
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 12, 1998 AND SEPTEMBER 6, 1997
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting solely of
normal recurring accruals) considered necessary for fair presentation
have been included. For further information, refer to the consolidated
financial statements and footnotes included in the Company's Annual
Report on Form 10-K for the fiscal year ended January 3, 1998.
NOTE B - FLUCTUATIONS
The Company's sales are seasonal, particularly in its major divisions,
The Hush Puppies Company, the Wolverine Footwear Group, the
Caterpillar Footwear Group, the Wolverine Slipper Group and the
Wolverine Leathers Division. Seasonal sales patterns and the fact that
the fourth quarter has sixteen or seventeen weeks as compared to
twelve weeks in each of the first three quarters cause significant
differences in sales and earnings from quarter to quarter. These
differences, however, have followed a consistent pattern each year.
NOTE C - EARNINGS PER SHARE
The following table sets forth the reconciliation of weighted average
shares used in the computation of basic and diluted earnings per
share:
10
QUARTER ENDED YEAR-TO-DATE ENDED
-------------------------- ---------------------------
SEPT 12, SEPT 6, SEPT 12, SEPT 6,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Weighted average shares outstanding 42,777,021 42,246,236 42,754,646 42,087,806
Adjustment for nonvested common stock (707,535) (628,633) (714,725) (705,967)
----------- ----------- ----------- -----------
Denominator for basic earnings per share 42,069,486 41,617,603 42,039,921 41,381,839
Effect of dilutive stock options 569,353 1,322,784 827,149 1,386,770
Adjustment for nonvested common stock 707,535 628,633 714,725 705,967
----------- ----------- ----------- -----------
Denominator for diluted earnings per share 43,346,374 43,569,020 43,581,795 43,474,576
=========== =========== =========== ===========
NOTE D - COMPREHENSIVE INCOME
At the beginning of fiscal 1998, the Company adopted Statement of
Financial Accounting Standard ("SFAS") No. 130, "REPORTING
COMPREHENSIVE INCOME." SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of SFAS No. 130 had no impact on the Company's
net earnings or stockholders' equity. SFAS No. 130 requires any
revenues, expenses, gains or losses that, prior to adoption, were
reported separately in stockholders' equity and excluded from net
earnings, to be included in other comprehensive income.
Total comprehensive income totaled $10,775,000 and $26,286,000 for the
third quarter and year-to-date of 1998, respectively, and $9,041,000
and $20,690,000 for the third quarter and year-to-date of 1997,
respectively. In addition to net earnings, comprehensive income
included foreign currency translation losses of $56,000 and $88,000
for the third quarter and year-to-date of 1998, respectively, and
$158,000 and $570,000 for the third quarter and year-to-date of 1997,
respectively.
NOTE E - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which is required to be adopted by the Company in 2000. Because of the
Company's minimal use of derivatives, management does not anticipate
that the adoption of SFAS No. 133 will have a significant effect on
the results of operations or the financial position of the Company.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - COMPARISONS OF THIRD QUARTER 1998 TO THIRD
QUARTER 1997
Third quarter net sales and other operating income of $164.5 million
for 1998 exceeded the 1997 level of $162.2 million by $2.3 million
(1.4%) and 1998 year-to-date net sales and other operating income of
$455.0 million exceeded the 1997 year-to-date level of $419.3 million
by $35.7 million (8.5%). The Hush Puppies Company reported a net sales
and other operating income decrease of $2.5 million (3.5%) in the
third quarter of 1998 and a $0.8 million (0.4%) decrease for the year-
to-date 1998 when compared to the same periods in the prior year. The
Wolverine Footwear Group recorded a net sales and other operating
income increase of $10.4 million (18.7%) for the third quarter of 1998
and $35.6 million (23.3%) for the year-to-date 1998 over the
comparable periods of 1997. The Caterpillar Footwear Group continued
its growth and reported an increase in net sales and other operating
income of $1.5 million (10.8%) for the third quarter of 1998 and $4.1
million (10.7%) for the year-to-date 1998 over the comparable periods
in 1997. The Wolverine Leathers Division reported a $4.6 million
(48.7%) decrease in net sales and other operating income from the
third quarter of 1997 and a $6.3 million (21.1%) decrease in net sales
and other operating income from year-to-date 1997. The Wolverine
Slipper Group recognized a $4.6 million (38.4%) net sales and other
operating income decline for the third quarter of 1998 and a $5.7
million (38.7%) decrease in net sales and other operating income for
the year-to-date 1998 when compared to the same periods in the prior
year.
The Hush Puppies North American wholesale operations' third quarter
1998 net sales and other operating income increased $1.4 million
(3.7%) over the 1997 third quarter level and year-to-date 1998 net
sales and other operating income increased $1.3 million (1.3%) over
the year-to-date 1997 level. As a result of a planned change in strategic
focus, the Hush Puppies U.K., Ltd. third quarter net sales and other
operating income decreased $6.1 million (30.3%) from the 1997 third
quarter level and 1998 year-to-date net sales and other operating income
decreased $9.7 million (20.8%) compared to the same period of 1997.
Other operating income from the Hush Puppies licensing operations
increased $0.9 million (11.0%) for the year-to-date 1998 over the same
period in 1997, reflecting continued strong global demand for the
brand. The Hush Puppies Retail Division's 1998 third quarter net
sales and other operating income increased $0.6 million (6.3%) over
the third quarter 1997 level and 1998 year-to-date net sales and other
operating income increased $1.5 million (6.6%) over the same period of
12
1997. This increase is a result of additional retail locations when
compared to the prior year partially offset by a 2.8% decrease in
year-to-date store for store sales.
The Wolverine Boots and Shoes Division reported a decrease in net
sales and other operating income for the third quarter and year-to-
date in 1998 of $0.7 million (1.9%) and $4.8 million (5.3%) from the
1997 third quarter and year-to-date levels, respectively. Hy-Test
Boots and Shoes reported a $1.7 million (23.4%) and $4.1 million
(17.3%) decrease in net sales and other operating income for the third
quarter and year-to-date of 1998 when compared to the same periods in
1997, respectively. This was a result of the sale of three Company-
owned retail and wholesale distribution groups since the third quarter
of 1997. Net sales and other operating income for the Bates Footwear
Division, including the Department of Defense contract business,
improved $2.2 million (16.4%) for third quarter of 1998 and $5.9
million (16.1%) for the year-to-date of 1998 over respective prior
year levels, reflecting increased penetration into military, uniform
and export markets. The newly formed Wolverine Outdoor Division,
comprised of Coleman[REGISTERED] and Merrell[REGISTERED] branded
footwear, reported net sales and other operating income of $9.2
million for the third quarter of 1998 and $27.7 million for year-to-
date 1998. The Merrell brand was acquired in the fourth quarter of
1997 and the Company's license for the Coleman brand was expanded to a
worldwide license in the third quarter of 1997.
The Caterpillar Footwear Group recognized a $1.5 million (10.8%) and
$4.1 million (10.7%) increase in net sales and other operating income
for the third quarter and year-to-date of 1998, respectively, as
compared to the same periods of 1997. Gains in net sales and other
operating income were achieved both domestically and internationally.
The Wolverine Slipper Group showed a decrease in net sales and other
operating income of $4.6 million (38.4%) and $5.7 million (36.7%) for
third quarter and year-to-date 1998, respectively, compared to the
same periods in 1997, primarily as a result of retail customers
requesting shipments closer to the selling season.
The Wolverine Leathers Division recorded a decrease in net sales and
other operating income of $4.6 million (48.7%) for the third quarter
of 1998 and $6.3 million (21.1%) for the year-to-date 1998 as compared
to 1997. This decrease was primarily as a result of the slow down in
demand for the domestic Hush Puppies sueded Classics line plus
increased competition from cowhide split leather which has experienced
a 25% drop in market prices.
Gross margin as a percentage of net sales and other operating income
for the third quarter of 1998 was 31.4% compared to the prior year's
13
third quarter level of 29.5%. Year-to-date gross margin was 31.9% for
1998 compared to 30.3% for the same period in 1997. The improvement in
gross margin was primarily a result of higher initial margins and the
1997 closures of three Arkansas women's shoe factories and a New York
slipper factory. The Hush Puppies Company's gross margin increased 0.3
percentage points for the year-to-date 1998 as compared to the same period
in 1997. Hush Puppies UK, Ltd. reported a 6.7 percentage point increase
in gross margin for year-to-date 1998 as compared to 1997 as a result of
a shift in business from lower margin concept stores to higher margin
department and shoe stores. The Wolverine Footwear Group experienced a 1.3
percentage point drop in gross margin for year-to-date 1998 as
compared to the same period of 1997 due to initial product development
investments required to position recent acquisition of the
Merrell[REGISTERED] brand and license of the Harley Davidson[REGISTERED]
footwear brand and new Wolverine product launches. The Caterpillar Footwear
Group recognized a 1.9 percentage point increase in gross margin for
year-to-date 1998 when compared to the 1997 level resulting primarily from
higher initial margins in its domestic wholesale operations. A year-to-date
gross margin gain of 4.5 percentage points was recognized in the
Wolverine Leathers Division, which was offset by lower gross margins
experienced by the Wolverine Slipper Group.
Selling and administrative expenses of $33.3 million for the third
quarter of 1998 increased $1.8 million over the 1997 third quarter
level of $31.5 million and, as a percentage of net sales and other
operating income, increased to 20.3% compared to the 19.4% in the
third quarter of 1997. Year-to-date selling and administrative
expenses for 1998 increased $9.6 million to $100.4 million in 1998
from $90.8 million for the same period of 1997 and, as a percentage of
net sales and other operating income, increased to 22.1% in 1998
compared to 21.7% for 1997. The increase in selling and administrative
expenses for the third quarter as a percentage of net sales and other
operating income was primarily the result of expected inefficiencies
related to the Howard City distribution center which opened in the
third quarter of 1997 and investments in marketing and development for
the new Harley-Davidson[REGISTERED] footwear brand, the new worldwide
programs for Merrell[REGISTERED] and Coleman[REGISTERED] brand footwear
and sales and distribution programs in Russia.
Interest expense for the third quarter of 1998 was $2.1 million, compared
to $1.0 million for the same period in 1997. Year-to-date interest expense
for 1998 and 1997 was $5.3 million and $3.0 million, respectively. The
increase in interest expense reflects additional borrowings on the
Company's revolving credit facility related to the stock repurchase
program discussed below, the 1997 fourth quarter acquisition of the Merrell
outdoor footwear business and increased working capital requirements
associated with higher sales volume. Capitalized interest of $0.4 million
in the third quarter of 1997 contributed to the difference.
14
The year-to-date effective tax rate of 33.4% for 1998 increased from
32.0% for the same period in 1997 as a result of earnings from certain
foreign subsidiaries, which are taxed generally at lower rates,
becoming a smaller percentage of total consolidated earnings.
Net earnings of $10.8 million for the twelve weeks ended September 12,
1998 compared favorably to net earnings of $9.2 million for the same
period in 1997 (a 17.7% increase). Year-to-date net earnings increased
to $26.4 million in 1998 from $21.3 million for the same period in
1997 (a 24.1% increase). Diluted earnings per share were $0.25 for the
third quarter of 1998 compared to $0.21 for the same period of 1997.
Year-to-date diluted earnings per share for 1998 $0.61 compared to
$0.49 for the same period in 1997. Increased net earnings are
primarily a result of the items noted above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $33.4 million for year-to-
date in 1998 compared to $49.3 million for the same period in 1997.
Cash of $59.1 million for 1998 and $73.6 million for 1997 was used to
fund working capital requirements. Accounts receivable of $159.1
million at September 12, 1998 reflect an increase of $30.1 million
(23.4%) over the balance at September 6, 1997 and an increase of $21.0
million (15.2%) from the January 3, 1998 balance. The increase in
accounts receivable related primarily to the increase in net sales and
other operating income, the acquisition of the Merrell outdoor
footwear business, and shipments made to the Company's Russian
distributor. Inventories of $177.5 million at September 12, 1998
reflect an increase of $1.9 million (1.1%) compared to the balance at
September 6, 1997 and an increase of $33.7 million (23.4%) over the
balance at January 3, 1998. Accounts payable and other accrued
liabilities of $47.0 million at September 12, 1998 reflect a $12.9
million (21.5%) decrease from the $59.9 million balance at September
6, 1997 and a $10.2 million (17.8%) decrease from the $57.2 million
balance at January 3, 1998.
Additions to property, plant and equipment of $21.8 million for year-
to-date 1998 compares to $20.7 million reported during the same period
in 1997. The majority of these expenditures are related to the
replacement of legacy information systems, expansion of warehouse
facilities and purchases of manufacturing equipment necessary to
upgrade the Company's footwear and leather manufacturing facilities.
Depreciation and amortization of $8.7 million for the year-to-date
1998 compares to $6.2 million in the comparable period of 1997. This
15
increase was a result of the capital investments noted above and the
amortization of goodwill related to the 1997 and 1996 acquisitions
discussed below.
The Company maintains short-term borrowing and commercial letter-of-
credit facilities of $68.4 million, of which $27.0 million, $39.3
million and $36.0 million were outstanding at September 12, 1998,
January 3, 1998 and September 6, 1997, respectively. Long-term debt,
excluding current maturities, of $153.5 million at September 12, 1998
compares to $107.2 million and $89.8 million at September 6, 1997 and
January 3, 1998, respectively. The increase in debt since January 3,
1998 was a result of the seasonal working capital requirements of the
Company, the acquisition of Merrell and the repurchase of Company
stock as discussed below.
Effective August 20, 1998, the Company's Board of Directors approved a
common stock repurchase program authorizing the repurchase of up to
2.2 million shares of common stock. The primary purpose of this stock
repurchase program is to increase stockholder value. During the third
quarter of 1998, the Company repurchased 1,005,000 shares of common
stock at a cost of $10,432,000 under the program. Total cumulative common
shares repurchased under the program were 2,136,600 as of October 26, 1998.
The Company intends to continue to repurchase shares of its common
stock in open market transactions, from time to time, depending upon
the price of the stock.
It is expected that continued growth of the Company will require
increases in capital funding over the next several years. The
combination of cash flows from operations and available credit
facilities are expected to be sufficient to meet future capital needs.
The Company is currently evaluating the debt components of its overall
capital structure and changes may be made in that structure to
maximize current interest rate conditions and improve financing
flexibility.
The dividend declared in the 1998 third quarter of $.0275 per share of
common stock represents approximately a 26.7% increase over the
dividend declared in the third quarter of 1997 of $.0217 per share.
The dividend is payable November 2, 1998 to stockholders of record on
16
October 1, 1998. Additionally, shares issued under stock incentive
plans provided cash of $5.0 million in 1998 compared to $8.0 million
in 1997.
On October 17, 1997, the Company completed the purchase of
substantially all of the assets of the Merrell outdoor footwear
business from the Outdoor Division of Sports Holdings Corp. The
purchase price of this acquisition was $16.3 million, of which $15.8
million was paid in cash in 1997.
During 1996, the Company completed two acquisitions, the work, safety
and occupational footwear business of Hy-Test, Inc. from The Florsheim
Shoe Company and the rights to and certain assets of the Hush
Puppies[REGISTERED] wholesale footwear business in the United Kingdom
and Ireland from British Shoe Corporation, a subsidiary of Sears Plc.
The combined purchase price of these acquisitions was $31.5 million,
of which $29.2 million was paid in cash in 1996. The Company has an
active program to evaluate strategic business acquisitions on a global
basis and may, from time to time, make additional acquisitions.
The current ratio for the third quarter in 1998 was 6.0 to 1.0 in 1998
compared with 5.2 to 1.0 for the same period in 1997. The Company's
total debt to total capital ratio increased to .36 to 1.0 in 1998 from
.30 to 1.0 in 1997.
YEAR 2000 READINESS DISCLOSURE
The Company is currently in the process of addressing a problem that
is facing all users of automated information systems. The "Year 2000
Issue" is the result of computer programs that use two digits rather
than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This
situation could result in system failures or miscalculations causing
disruptions to operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar
normal business activities.
The Company has and continues to modify or replace portions of its
software so that its computer systems and equipment will function
properly with respect to dates in the year 2000 and thereafter. This
modification and replacement process is being implemented by the
Company's Information Systems Team and is being supervised primarily
by an Executive Oversight Committee, consisting of the Chief
Information Officer, internal executive management, a member of the
Board of Directors and various other third parties. The Company
presently believes that with planned modifications to existing
17
software and conversions to new software, the Year 2000 Issue will not
pose significant operational problems for its computer systems.
However, if the Company fails to complete modifications required to
obtain Year 2000 compliance in a timely manner or if significant
suppliers or customers experience Year 2000 problems, the Year 2000
Issue could have a material adverse impact on the operations and
financial condition of the Company.
The Company has completed a thorough assessment of all its existing
information systems. A significant portion of the Company's Year 2000
Issues will be resolved by the installation of Year 2000 compliant
information systems. The new systems are designed to handle the
Company's information systems for order processing, warehousing and
finance on a fully integrated enterprise-wide basis (the "Base
System"). Implementation of the Base System began in 1997 primarily
in response to business demand and growth, although implementation of
the Base System will replace software that is not Year 2000 compliant
as an ancillary benefit. Year 2000 compliance for information systems
not replaced by the Base System will be addressed through a
combination of reprogramming and replacement. The Company is
utilizing both internal and external resources to replace, reprogram
and test its information systems for Year 2000 modifications. The
Company anticipates completing substantially all of the modifications
required for Year 2000 compliance in its information systems by mid
1999, which is prior to any anticipated impact on its operating
systems, with the balance of modifications to be completed on less
critical systems during the third or fourth quarters of 1999.
The Company has additionally completed a thorough assessment of all
operating systems and equipment containing computer microchips that
may be Year 2000 sensitive (commonly referred to as "embedded chips").
The Company is currently reviewing the assessment to identify the
operating systems and equipment that is necessary or critical for
continued operations. With priority given to critical items, the
Company intends to test operating systems and equipment containing
embedded chips for Year 2000 compliance and to reprogram or replace
such equipment as appropriate. The Company's owned manufacturing
systems are generally Year 2000 compliant and will not require
significant reprogramming or replacement. It is intended that Year
2000 modifications for critical operating systems and equipment will
be completed by mid-1999, with the modification or elimination of
lower priority systems and equipment to be completed during the third
or fourth quarters of 1999.
The Company has initiated formal communications with significant
suppliers and vendors to determine the extent to which the Company may
be vulnerable to a failure by any of these third parties to remediate
18
their own Year 2000 Issues. The Company has additionally received
Year 2000 communications from substantially all its material customers
indicating formal attention to Year 2000 compliance. Although the Company
has not received any specific indications that any significant suppliers,
vendors or customers will not be Year 2000 compliant, other companies
are widely resistant to providing any written or binding assurances that
they will be Year 2000 compliant given the scope and uncertainties relating
to Year 2000 Issues. For this reason, the Company can provide no
assurance that the systems of suppliers, vendors or significant
customers will be Year 2000 compliant or that the lack of Year 2000
compliance among suppliers, vendors or significant customers could not
have an adverse effect on the Company's operations or sales.
To date, the Company has spent approximately $11 million for
implementation of the new Base System and estimates that total costs
for implementing the new Base System will approximate $20 million. To
date, the Company has spent approximately $500,000 for additional
assessment, reprogramming, replacement and other Year 2000 compliance
issues not covered by implementation of the Base System and estimates
that total costs for such items will approximate $2.5 million. To the
extent these costs represent investment in new or upgraded technology
with definable value lasting beyond 2000 and Year 2000 compliance is
merely an ancillary benefit, the Company will capitalize and
depreciate such assets over their estimated useful lives. To the
extent that Year 2000 costs do not qualify as capital investments, the
Company will expense such costs as incurred.
The Company has given consideration to the most reasonably likely
worst-case Year 2000 scenarios and contingency planning to address
such scenarios. Year 2000 problems may involve temporary delays in
the delivery to Wolverine of footwear or raw materials used by
Wolverine in manufacturing. Wolverine sources footwear from numerous
vendors located in 22 countries and sources raw materials, principally
leather and footwear soles, from a select group of domestic and
international suppliers. The possibility that Year 2000 problems
could cause the temporary failure in basic utilities, delays in
transportation, interruption of electronic communications or the
interruption of banking and commercial payment systems in various
parts of the world is beyond the reasonable ability of the Company to
assess or control. Any such events could disrupt suppliers' ability
to make timely deliveries to the Company and could disrupt the
Company's own operations. Although there is also the risk that
suppliers may fail to completely remediate their own internal Year
2000 problems, Wolverine believes this risk is mitigated by the fact
that the bulk of goods supplied to Wolverine, such as pigskins for
tanning or leather footwear uppers stitched offshore, involve
19
relatively lower levels of technology that is less susceptible to Year
2000 problems. To the extent Year 2000 problems affect vendors and
suppliers, Wolverine could experience delays which in turn could
adversely affect the Company's ability to fill customer orders in a
timely manner resulting in a reduction or delay in Company sales and
earnings.
The Company believes that any supply delays will generally be
temporary in nature and that the Company can address any material
delays in supply through the diversity of the Company's supplier base
and Company-owned manufacturing facilities. Because the Company
sources finished footwear and stitched uppers from numerous vendors
throughout the world, and because this work is to a large degree
interchangeable, Wolverine believes it can address any serious
supplier problems by shifting orders to suppliers not experiencing
significant Year 2000 problems or shifting production to Company-owned
facilities as may be required. To the extent any important suppliers
are unable to provide reasonable assurances of continued performance
during the year 2000, Wolverine may elect to stockpile reasonable
advance inventories or, because Wolverine is not dependant upon any
single supplier for footwear or raw materials, may identify
alternative suppliers for the goods in question.
The Company's customers consist primarily of mass merchants and
footwear retailers. Although the Company's customers are subject to
the general risks associated with the Year 2000, these risks may be
mitigated because the Company's footwear products are not vulnerable
to Year 2000 problems and because the Company's customers sell
footwear in retail stores and have a relatively low degree of direct
dependance upon technology that is vulnerable to Year 2000 problems.
Year 2000 problems among customers could adversely affect the
Company's sales and earnings. Customers are not under an obligation
to purchase Company products and an inability of customers to purchase
Company products arising from Year 2000 problems is beyond the ability
of the Company to correct or control.
Internally, an unforseen delay in implementation of the Company's new
Base System could adversely affect the Company's operations and sales
and would have to be addressed by the parallel remediation of legacy
information systems to support continuing operations until completion
of the Base System. The Company does not believe this risk is likely
because implementation of the Base System is fully on schedule to date
and the Base System is scheduled for completion prior to the year
2000.
The costs and anticipated completion dates for Year 2000 modifications
and the estimated impact of Year 2000 issues are based on management's
20
best estimates, which were derived utilizing numerous assumptions of
future events, including the continued availability of certain
resources, third party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer
codes, the level of Year 2000 disruptions experienced by the Company's
suppliers and customers and the success of any required contingency
actions, and similar uncertainties.
INFLATION
Inflation has not had a significant impact on the Company over the
past three years nor is it expected to have a significant impact in
the foreseeable future. The Company continuously attempts to minimize
the effect of inflation through cost reductions and improved
productivity.
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results of
operations, and other sections of this report, contain forward-looking
statements that are based on management's beliefs, assumptions,
current expectations, estimates and projections about the footwear
industry, the economy, and about the Company itself. Words such as
"anticipates," "believes," "estimates," "expects," "forecasts,"
"intends," "is likely," "plans," "predicts," "projects," variations of
such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and
assumptions ("Future Factors") that are difficult to predict with
regard to timing, extent, likelihood and degree of occurrence.
Therefore, actual results and outcomes may materially differ from what
may be expressed or forecasted in such forward-looking statements.
Future Factors include, but are not limited to, uncertainties relating
to changes in demand for the Company's products; changes in consumer
preferences or spending patterns; the cost and availability of
inventories, services, labor and equipment furnished to the Company;
the degree of competition by the Company's competitors; changes in
government and regulatory policies; changes in trading policies or
import and export regulations; changes in interest rates, tax laws,
duties or applicable assessments; technological developments; disruptions
due to year 2000 problems experienced by the Company and/or its suppliers
or customers; and changes in domestic or international economic conditions.
21
These matters are representative of the Future Factors that could cause a
difference between an ultimate actual outcome and a forward-looking
statement. Historical operating results are not necessarily indicative
of the results that may be expected in the future. Furthermore, the Company
undertakes no obligation to update, amend or clarify forward-looking
statements, whether as a result of new information, future events or
otherwise.
22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following documents are filed as exhibits to this report
on Form 10-Q:
EXHIBIT
NUMBER DOCUMENT
3.1 Certificate of Incorporation, as amended. Previously filed as
Exhibit 3.1 to the Company's Quarterly Report of Form 10-Q for the
period ended June 14, 1997. Here incorporated by reference.
3.2 Amended and Restated Bylaws. Previously filed as Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 30, 1995. Here incorporated by reference.
4.1 Certificate of Incorporation, as amended. See Exhibit 3.1 above.
4.2 Rights Agreement dated as of April 17, 1997. Previously filed
with the Company's Form 8-A filed April 12, 1997. Here
incorporated by reference.
4.3 Credit Agreement dated as of October 11, 1996 with NBD Bank,
N.A. as Agent. Previously filed as Exhibit 4.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1996. Here incorporated by reference.
4.4 Note Agreement dated as of August 1, 1994 relating to 7.81%
Senior Notes. Previously filed as Exhibit 4(d) to the
Company's Quarterly Report on Form 10-Q for the period ended
September 10, 1994. Here incorporated by reference.
4.5 The Registrant has several classes of long-term debt instruments
outstanding in addition to those described in Exhibit 4.4 above.
The amount of none of these classes of debt outstanding on
September 12, 1998 exceeds 10% of the Company's total consolidated
assets. The Company agrees to furnish copies of any agreement
defining the rights of holders of any such long-term indebtedness
to the Securities and Exchange Commission upon request.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K. The Company filed a report on Form 8-K on
August 21, 1998 to report under Item 5, "Other Events", that on August 20,
1998, the Company's Board of Directors authorized the repurchase by the
Company of up to 2,200,000 shares of the Company's common stock within the
next eighteen months.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WOLVERINE WORLD WIDE, INC.
AND SUBSIDIARIES
OCTOBER 27,1998 /S/ GEOFFREY B. BLOOM
Date Geoffrey B. Bloom
Chairman and Chief Executive Officer
(Duly Authorized Signatory for
Registrant)
OCTOBER 27, 1998 /S/ STEPHEN L. GULIS, JR.
Date Stephen L. Gulis, Jr.
Executive Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer and Duly
Authorized Signatory for Registrant)
24
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
3.1 Certificate of Incorporation, as amended. Previously filed as
Exhibit 3.1 to the Company's Quarterly Report of Form 10-Q for
the period ended June 14, 1997. Here incorporated by
reference.
3.2 Amended and Restated Bylaws. Previously filed as Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 30, 1995. Here incorporated by reference.
4.1 Certificate of Incorporation, as amended. See Exhibit 3.1
above.
4.2 Rights Agreement dated as of April 17, 1997. Previously filed
with the Company's Form 8-A filed April 12, 1997. Here
incorporated by reference.
4.3 Credit Agreement dated as of October 11, 1996 with NBD Bank,
N.A. as Agent. Previously filed as Exhibit 4.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1996. Here incorporated by reference.
4.4 Note Agreement dated as of August 1, 1994 relating to 7.81%
Senior Notes. Previously filed as Exhibit 4(d) to the
Company's Quarterly Report on Form 10-Q for the period ended
September 10, 1994. Here incorporated by reference.
4.5 The Registrant has several classes of long-term debt
instruments outstanding in addition to those described in
Exhibit 4.4 above. The amount of none of these classes of
debt outstanding on September 12, 1998 exceeds 10% of the
Company's total consolidated assets. The Company agrees to
furnish copies of any agreement defining the rights of holders
of any such long-term indebtedness to the Securities and Exchange
Commission upon request.
27 Financial Data Schedule.
5
1,000
OTHER
JAN-2-1999
JAN-4-1998
SEP-12-1998
8,853
0
159,100
8,621
177,534
355,868
184,594
80,274
521,069
59,331
153,505
43,802
0
0
252,527
521,069
455,002
455,002
309,653
309,653
0
0
5,953
39,607
13,233
26,374
0
0
0
26,374
.63
.61
