SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|þ||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2022
|☐||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 001-06024
WOLVERINE WORLD WIDE, INC.
(Exact name of registrant as specified in its charter)
|State or other jurisdiction of|
incorporation or organization
| ||(I.R.S. Employer|
|9341 Courtland Drive N.E.|| |
|(Address of principal executive offices)|| ||(Zip Code)|
Registrant’s telephone number, including area code (616) 866-5500
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol(s)||Name of each exchange on which registered|
|Common Stock, $1 Par Value||WWW||New York Stock Exchange|
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||þ||Accelerated filer||☐|
|Smaller reporting company||☐|
|Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No þ
The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant based on the closing price on the New York Stock Exchange on July 1, 2022, the last business day of the registrant’s most recently completed second fiscal quarter: $1,520,484,722. Number of shares outstanding of the registrant’s Common Stock, $1 par value as of February 10, 2023: 78,933,602.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the registrant’s annual stockholders’ meeting expected to be held May 3, 2023 are incorporated by reference into Part III of this report.
Table of Contents
This document contains “forward-looking statements,” which are statements relating to future, not past, events. In this context, forward-looking statements often address management’s current beliefs, assumptions, expectations, estimates and projections about future business and financial performance, national, regional or global political, economic and market conditions, and the Company itself. Such statements often contain words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “should,” “will,” variations of such words, and similar expressions. Forward-looking statements, by their nature, address matters that are, to varying degrees, uncertain. Uncertainties that could cause the Company’s performance to differ materially from what is expressed in forward-looking statements include, but are not limited to, the following:
•changes in general economic conditions, employment rates, business conditions, interest rates, tax policies and other factors affecting consumer spending in the markets and regions in which the Company’s products are sold;
•the inability for any reason to effectively compete in global footwear, apparel and direct-to-consumer markets;
•the inability to maintain positive brand images and anticipate, understand and respond to changing footwear and apparel trends and consumer preferences;
•the inability to effectively manage inventory levels;
•increases or changes in duties, tariffs, quotas or applicable assessments in countries of import and export;
•foreign currency exchange rate fluctuations;
•supply chain and capacity constraints, production disruptions, including reduction in operating hours, labor shortages, and facility closures resulting in production delays at the Company’s manufacturers due to disruption from the effects of the COVID-19 pandemic, quality issues, price increases or other risks associated with foreign sourcing;
•the cost, including the effect of inflationary pressures and availability of raw materials, inventories, services and labor for contract manufacturers;
•changes in relationships with, including the loss of, significant wholesale customers;
•risks related to the significant investment in, and performance of, the Company’s direct-to-consumer operations;
•risks related to expansion into new markets and complementary product categories as well as direct-to-consumer operations;
•the impact of seasonality and unpredictable weather conditions;
•the impact of changes in general economic conditions and/or the credit markets on the Company’s manufacturers, distributors, suppliers, joint venture partners and wholesale customers;
•changes in the Company’s effective tax rates;
•failure of licensees or distributors to meet planned annual sales goals or to make timely payments to the Company;
•the risks of doing business in developing countries and politically or economically volatile areas;
•the ability to secure and protect owned intellectual property or use licensed intellectual property;
•the impact of regulation, regulatory and legal proceedings and legal compliance risks, including compliance with federal, state and local laws and regulations relating to the protection of the environment, environmental remediation and other related costs, and litigation or other legal proceedings relating to the protection of the environment or environmental effects on human health;
•risks of breach of the Company’s databases or other systems, or those of its vendors, which contain certain personal information, payment card data or proprietary information, due to cyberattack or other similar events;
•problems affecting the Company's supply chain and distribution system, including service interruptions at shipping and receiving ports;
•strategic actions, including new initiatives and ventures, acquisitions and dispositions, and the Company’s success in integrating acquired businesses, including Sweaty Betty®, and implementing new initiatives and ventures;
•risks related to stockholder activism;
•the potential effects of the COVID-19 pandemic or future health crises on the Company’s business, operations, financial results and liquidity;
•the risk of impairment to goodwill and other intangibles;
•the success of the Company’s restructuring and realignment initiatives undertaken from time to time; and
•changes in future pension funding requirements and pension expenses.
These or other uncertainties could cause a material difference between an actual outcome and a forward-looking statement. The uncertainties included here are not exhaustive and are described in more detail in Part I, Item 1A: “Risk Factors” of this Annual Report on Form 10-K. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company does not undertake an obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. Any standards of measurement and performance made in reference to our environmental, social, governance and other sustainability plans and goals are developing and based on assumptions, and no assurance can be given that any such plan, initiative, projection, goal, commitment, expectation or prospect can or will be achieved.
Item 1. Business
Wolverine World Wide, Inc. (the “Company”) is a leading designer, marketer and licensor of a broad range of quality casual footwear and apparel, performance outdoor and athletic footwear and apparel, kids' footwear, industrial work boots and apparel, and uniform shoes and boots. The Company’s products are marketed worldwide in approximately 170 countries and territories through owned operations in the United States ("U.S."), Canada, the United Kingdom and certain countries in continental Europe and Asia Pacific. In other regions (Latin America, portions of Europe and Asia Pacific, the Middle East and Africa), the Company relies on a network of third-party distributors, licensees and joint ventures.
Today, the Company sources and markets a broad range of footwear and apparel styles, including shoes, boots and sandals under many recognizable brand names, including Bates®, Cat®, Chaco®, Harley-Davidson®, Hush Puppies®, HYTEST®, Merrell®, Saucony®, Sperry®, Sweaty Betty® and Wolverine®. The Company licenses its Stride Rite® brand under a global license arrangement. The Company also markets Merrell® and Wolverine® brand apparel and accessories and licenses some of its brands for use on non-footwear products, including Hush Puppies® apparel, eyewear, watches, socks, handbags and plush toys; Wolverine® eyewear and gloves; Saucony® apparel and Sperry® apparel. Cat® is a registered trademark of Caterpillar Inc. and Harley-Davidson® is a registered trademark of H-D U.S.A., LLC.
The Company’s products generally feature contemporary styling with proprietary technologies designed to provide maximum comfort and performance. The Company believes that its primary competitive advantages are its well-recognized brand names, patented proprietary designs, diverse product offerings and comfort technologies, wide range of distribution channels and diversified manufacturing and sourcing base. The Company combines quality materials and skilled workmanship to produce footwear according to its specifications at both Company-owned and third-party manufacturing facilities. The Company’s products are sold at various price points targeting a wide range of consumers of casual, work, outdoor and athletic footwear and apparel.
During the 2022 fiscal year, the Company’s portfolio of brands was organized into the following three reportable segments.
•Active Group, consisting of Merrell® footwear and apparel, Saucony® footwear and apparel, Sweaty Betty® activewear, and Chaco® footwear;
•Work Group, consisting of Wolverine® footwear and apparel, Cat® footwear, Bates® uniform footwear, Harley-Davidson® footwear and HYTEST® safety footwear; and
•Lifestyle Group, consisting of Sperry® footwear, Keds® footwear, and Hush Puppies® footwear and apparel.
Kids' footwear offerings from Saucony®, Sperry®, Keds®, Merrell®, Hush Puppies® and Cat® are included with the applicable brand.
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, multi-branded direct-to-consumer retail stores and the Stride Rite® licensed business. The Corporate category consists of the gain on the sale of the Champion trademarks in 2022 and unallocated corporate expenses, such as corporate employee costs, costs related to the COVID-19 pandemic, impairment of intangible assets and goodwill, reorganization activities, and environmental and other related costs.
The reportable segments are engaged in designing, manufacturing, sourcing, marketing, licensing and distributing branded footwear, apparel and accessories. Revenue for the reportable segments includes revenue from the sale of branded footwear, apparel and accessories to third-party customers; revenue from third-party distributors, licensees and joint ventures; and revenue from the Company’s direct-to-consumer businesses. The Company’s reportable segments are determined based on how the Company internally reports and evaluates financial information used to make operating decisions.
The Company's reportable segments and related brands are described in more detail below.
Merrell®: Merrell® believes in sharing the simple power of being outside – no matter who you are, where you come from, who you love, or how you move. With a persistent focus on innovation, thoughtful design and rigorous testing, Merrell® has become a global leader in hiking footwear, with a rapidly growing following in trail running and lifestyle. All of this is fueled by a desire to build a world where everyone can safely enjoy the benefits of being outdoors. Merrell® can be found across the globe, on Merrell.com, in key outdoor and sporting goods retail stores and in Company owned Merrell® stores.
Saucony®: Saucony® is a purpose driven performance running brand with roots dating back to 1898. Saucony® targets both elite and casual runners through award winning design, innovation and performance technology. The brand is focused on meeting the functional biomechanical needs of runners while delivering on their emotional style needs as well. Saucony innovations include Powerrun+, a cushioning technology system; PWRFOAM midsole, PWRTRAC outsole, and FormFit, an adaptive fit system. Saucony® offers five categories of performance footwear products; Competition, Road, Trail, Train and Walking; as well as the Originals lifestyle footwear inspired by Saucony® products of the 1970's to 2000's. Saucony® also offers a complete line of performance running apparel and select lifestyle apparel pieces. Through Saucony's® Run For Good brand platform and charitable foundation, Saucony® is strengthening connections with consumers and elevating the positioning of the brand. The brand’s products are distributed primarily through leading run specialty and sporting goods retailers, as well as in Company owned Saucony® retail stores and an eCommerce site.
Sweaty Betty®: Sweaty Betty® is a global women’s activewear and lifestyle brand that has been on a mission to empower women through fitness and beyond since 1998. Famous for its “bum-sculpting” leggings and innovative designs, Sweaty Betty® fuses performance and style with technical, high-performance fabrics and responsibly sourced materials. The brand services its loyal, fast-growing community worldwide through SweatyBetty.com, complemented by retail locations across the United Kingdom, Europe and Asia and the world’s best luxury retailers, including Selfridges, Harrods, Neiman Marcus and Nordstrom. Through the Sweaty Betty Foundation, the brand aims to give more girls access to activities they love, helping the next generation get and stay active for life.
Chaco®: Chaco® has a rich, 30+ year history of creating footwear that’s “Fit For Adventure” of any kind, whether that’s exploring rivers, trails or swerving city streets. Originating as an innovation in the whitewater rafting world, Chaco® now designs footwear for all walks of life in the outdoor and lifestyle communities. The brand's mission is to help people find their way, providing access to new people, places, and experiences that make them more confident in who they are and where they’re headed. That’s why Chaco® creates footwear that comes with all-terrain versatility, a unique 360° fit, unmatched durability and signature LUVSEAT™ footbed arch support. The MyChacos custom sandal program provides customers an opportunity to express their funky individuality, while the ReChaco program helps reduce their impact on the places they explore by repairing used sandals. Chaco® products are distributed primarily through specialty footwear retailers, the Chaco® eCommerce site, and other leading online and brick and mortar retailers.
Wolverine®: For more than 135 years, Wolverine® has existed to support people who forge their own path: men and women who stop at nothing to build the future they want. Wolverine® designs and creates footwear, apparel and accessories across three strategic territories: Work, Outdoor and Casual. The brand is best known for DuraShocks and Ultraspring comfort technology, as well as the Wolverine® 1000 Mile collection of premium lifestyle boots handcrafted in the USA from archival patterns. Wolverine® products can be found online at Wolverine.com and across a variety of retail channels including online retail, farm & fleet, work specialty, outdoor specialty, department stores and national family stores.
Cat® Footwear: Cat® Footwear is driven by the belief that generations of builders, makers and creators can turn challenge into enduring greatness. The Company is the exclusive global footwear licensee of Caterpillar Inc., and for over two decades, Cat® Footwear has been living up to the hardworking spirit of both the Caterpillar® trademark and the millions of consumers who trust the brand. Cat® Footwear originally created a small collection of rugged work boots designed to provide workers with the comfort and durability that met the challenges of the worksite. Today, Cat® Footwear offers a wide range of footwear, including work boots and casual shoes for men, women and children, sold through a global distribution network. CAT®, CATERPILLAR, their respective logos, "Caterpillar Corporate Yellow", as well as corporate product identity used herein, are registered trademarks of Caterpillar Inc.
Bates®: Bates® Footwear is a leading supplier of tactical and uniform footwear for first responders, U.S. Military members and military members of several foreign countries. Civilian uniform users include police officers, fire fighters, security and emergency medical services workers, and others in light industrial occupations. Bates® products are distributed through sporting goods chains, department stores, uniform specialty retailers, catalog retailers and online retailers.
Harley-Davidson® Footwear: Pursuant to a license arrangement with the Harley-Davidson Motor Company, Inc., the Company has footwear marketing and distribution rights for Harley-Davidson® branded footwear. Harley-Davidson® branded footwear products include motorcycle, casual, fashion, work and western footwear for men, women and kids.
Harley-Davidson® footwear is sold globally through a network of independent Harley-Davidson® dealerships and other retail outlets. Harley-Davidson® is a registered trademark of H-D U.S.A., LLC.
HYTEST® Safety Footwear: The HYTEST® product line consists of high-quality work boots and shoes that incorporate various specialty safety features designed to protect against hazards of the workplace, including steel toe, composite toe, nano toe, metatarsal guards, electrical hazard protection, static dissipating and conductive footwear. HYTEST® footwear is distributed primarily through a network of independently-owned Shoemobile® mobile truck retail outlets providing direct sales of the Company’s occupational and work footwear brands to workers at industrial facilities and also through direct sales arrangements with large industrial customers.
Sperry®: Sperry® was founded in 1935 by avid sailor, inventor and intrepid explorer Paul Sperry. The brand is fully rooted in the history of American style and continues to craft the tools for life’s memorable experiences on, off and by the water. From the invention of the world's first boat shoe, Sperry® is a market leader in both boat shoes and wet weather boots, and has expanded its business into casuals and sneakers. The brand is primarily distributed through Sperry.com and in Company owned Sperry® retail stores, as well as leading premium and better lifestyle retailers.
Keds®: For over 100 years, Keds® has been making timeless, comfortable, accessible footwear for consumers to step out into the world their way. Ever since the creation of the iconic Keds® Champion "sneaker" back in 1916, Keds® has held the belief that when we feel comfortable inside and out, we can leap forward and make our marks on the world. This belief continues to inspire and drive us every day. Keds® designs every product to support everyone—to give them the versatility, comfort, and style they need to confidently live as their truest selves. Keds® is focused on driving unique marketing and product stories through Keds.com and distributing footwear at leading footwear retailers worldwide. Effective February 4, 2023 the Company sold the global Keds® business to Designer Brands, Inc. (the "Buyer") pursuant to an Asset Purchase Agreement between the Company and the Buyer dated February 7, 2023.
Hush Puppies®: Launched in 1958, Hush Puppies® has a history of bringing color and optimism to a boring, brown shoe category. Today, Hush Puppies® exists to inspire consumers to live life on the bright side. The Company believes that optimism is contagious and that by encouraging positivity it can help shape a better world. Hush Puppies® footwear is distributed through wholesale and licensed channels, and through eCommerce sites. In addition, the Hush Puppies® brand is licensed to third parties engaged in the manufacturing, marketing and distribution of apparel, handbags, eyewear, socks, watches and plush toys sold around the world. Hush Puppies®, with its basset hound icon, is one of the most well-known and loved brands worldwide.
In addition to its reportable segments, the Company operates a performance leather business, sourcing operations, a multi-brand direct-to-consumer business, and the licensing of its Stride Rite® brand.
Wolverine Leathers Division: The Wolverine Leathers Division markets pigskin leather for use primarily in the footwear industry. The Company believes pigskin leather offers superior performance and other advantages over cowhide leather. The Company’s waterproof and stain resistant leathers are featured in some of the Company’s footwear lines and also sold to external footwear brands.
Sourcing Division: The sourcing division earns third-party commission revenue by providing consulting services related to product development, production control, quality assurance, materials procurement, compliance and other services.
Multi-brand Direct-to-Consumer Division: The multi-brand direct-to-consumer division includes retail stores that sell footwear and apparel from the Company's brand portfolio and other brands.
Stride Rite® Licensed Business: With a history dating back to 1919, Stride Rite® is an industry leader in kids' footwear. The Company signed a multi-year license agreement in 2017 to license the Stride Rite® brand.
The Company’s marketing strategy is to develop brand-specific plans and related promotional materials that foster a consistent message for each of the Company’s brands across the globe. Marketing campaigns and strategies vary by brand and are generally designed to target consumers in order to increase awareness of, and affinity for, the Company’s brands. The Company’s marketing typically emphasizes compelling brand stories and brand recognition associated with new and existing products, the performance, comfort and quality features and styles of our products within each of the Company’s brands, as well as raising global brand relevance and awareness. The Company’s brand marketing has an omni-channel approach and
includes various means of delivery, such as print and radio advertising, search engine optimization, social networking sites, event sponsorships, in-store point-of-purchase displays, promotional materials and sales and technical assistance.
The Company operates branded eCommerce sites that the Company believes are effective marketing tools to consumers. The Company maintains an active presence on a variety of global social media platforms, and the Company’s digital marketing seeks to create demand among new consumers as well as connecting consumers to brand content and products.
In addition to the Company’s internal marketing efforts, each brand provides its third-party licensees and distributors with creative direction, brand images and other materials to convey globally consistent brand messaging. The Company believes its brand names represent a competitive advantage, and the Company, its licensees and its distributors make significant marketing investments to promote and enhance the market positions of its products and drive brand awareness.
Domestic Sales and Distribution
The Company uses a variety of means to support sales to a variety of domestic distribution channels:
•The Company uses a dedicated sales force and customer service team, third party sales representatives and point-of-purchase materials to support domestic sales.
•The Company maintains core in-stock inventories to service department stores, national chains, specialty retailers, catalog retailers, independent retailers, uniform outlets and its own direct-to-consumer business.
•The Company uses volume direct programs to ship products to retail customers and to provide products at competitive prices to service major retail, catalog, mass merchant and government customers.
•The Company also operates brick and mortar retail stores and eCommerce sites.
International Operations and Global Licensing
The Company’s foreign-sourced revenue is generated from a combination of (i) sales of branded footwear and apparel through the Company’s owned operations in Canada, the United Kingdom and certain countries in continental Europe and Asia-Pacific; (ii) revenue from third-party distributors for certain markets and businesses; (iii) revenue from a network of third-party licensees; and (iv) revenue and income from joint ventures that market the Company’s branded products in Mexico and China. The Company’s international owned operations are located in markets where the Company believes it can gain a strategic advantage by directly controlling the sale of its products into retail accounts. License and distribution arrangements enable the Company to generate sales in other markets without the capital commitment required to maintain related foreign operations, employees, inventories or localized marketing programs. The Company believes that joint ventures provide it with a more meaningful ownership stake and near-term brand impact in fast-growing markets than its traditional licensee and distributor arrangements.
The Company continues to develop its international network of third-party licensees and distributors to market its branded products. The Company assists its licensees in designing products that are appropriate to each foreign market, yet consistent with global brand positioning. Pursuant to license or distribution agreements, third-party licensees and distributors either purchase goods directly from the Company and authorized third-party manufacturers or manufacture branded products themselves, consistent with Company standards. Distributors and licensees are responsible for independently marketing and distributing the Company’s branded products in their respective territories, with product and marketing support from the Company.
Manufacturing and Sourcing
The Company directly controls the majority of the units of footwear and apparel sourced under the Company’s brand names. The Company’s licensees directly control the balance. Substantially all of the units sourced by the Company are procured from numerous third-party manufacturers in the Asia Pacific region. The Company maintains offices in the Asia Pacific region to develop and facilitate sourcing strategies. The Company has established guidelines for each of its third-party manufacturers in order to monitor product quality, labor practices and financial viability. The Company has adopted “Engagement Criteria for Partners and Sources,” a policy that requires the Company’s domestic and foreign manufacturers, licensees and distributors to use ethical business standards, comply with all applicable health and safety laws and regulations, commit to use environmentally safe practices, treat employees fairly with respect to wages, benefits and working conditions and not use child or prison labor. The Company’s third-party sourcing strategy allows the Company to (i) benefit from lower manufacturing costs and state-of-the-art manufacturing facilities; (ii) source high quality raw materials from around the world; and (iii) avoid capital expenditures necessary for additional owned factories. The Company believes that its overall global manufacturing strategy provides the flexibility to properly balance the need for timely shipments, high quality products and competitive pricing.
The Company’s principal raw material is quality leather, which it purchases from a select group of domestic and foreign suppliers. The widespread availability of common upper materials and specialty leathers eliminates reliance by the Company on a single supplier.
The Company has a diversified supply base of raw pigskins and currently purchases a majority of the raw pigskins used for its Wolverine Leathers Division from one domestic source, which has been a reliable and consistent supplier to the Company for over 50 years. The Company purchases all of its other raw materials and component parts from a variety of sources and does not believe that any of these sources are a dominant supplier.
Trademarks, Licenses and Patents
The Company holds a significant portfolio of registered and common law trademarks that identify its branded products and technologies. The Company’s owned trademarks include Hush Puppies®, Wolverine®, Bates®, Bounce®, Chaco®, HYTEST®, Merrell®, Sperry®, Saucony®, Stride Rite®, Sweaty Betty®, and related logos and design marks. The Company’s Wolverine Leathers Division markets its pigskin leathers under trademarks such as Silkee® and Weather-Tight®. The Company has footwear marketing and distribution rights under the Cat® and Harley-Davidson® trademarks pursuant to license arrangements with the respective trademark owners. The Cat® license was recently renewed and the license term runs through December 31, 2028 and the Harley-Davidson® license term runs through December 31, 2023. Both licenses are subject to early termination for breach.
The Company believes that consumers identify its products by the Company’s trademarks and that its trademarks are valuable assets. The Company has a policy of registering its primary trademarks and vigorously defending its trademarks against infringement or other threats whenever practicable. The Company also holds many design and utility patents, copyrights and various other proprietary rights. The Company protects its proprietary rights under applicable laws.
The Company experiences moderate fluctuations in sales volume during the year, as reflected in quarterly revenue. The Company expects current seasonal sales patterns to continue in future years. The Company also experiences some fluctuation in its levels of working capital, typically reflecting an increase in net working capital requirements near the end of the first and third fiscal quarters as the Company builds inventory to support peak shipping periods. Historically, cash provided by operating activities is higher in the second half of the fiscal year due to collection of wholesale channel receivables and higher direct-to-consumer sales during the holiday season. The Company meets its working capital requirements through internal operating cash flows and, as needed, borrowings under its revolving credit facility, as discussed in more detail under the caption "Liquidity and Capital Resources" in Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company's working capital could also be impacted by other events, including pandemics.
The Company markets its footwear and apparel lines in a highly competitive and fragmented environment. The Company competes with numerous domestic and international footwear and apparel designers and marketers, some of whom are larger and have greater resources than the Company. Product performance and quality, including technological improvements, product identity, competitive pricing, ability to control costs and ability to adapt to style changes are all important elements of competition in the footwear and apparel markets served by the Company. The footwear and apparel industries are subject to changes in consumer preferences. The Company strives to maintain its competitive position through promotions designed to increase brand awareness, manufacturing and sourcing efficiencies, and the style, comfort and value of its products. Future sales by the Company will be affected by its continued ability to sell its products at competitive prices and to meet shifts in consumer preferences.
Because of the lack of reliable published statistics, the Company is unable to state with certainty its competitive position in the overall footwear and apparel industries. The non-athletic footwear and apparel markets are highly fragmented and no one company has a dominant market position.
The Company uses and generates certain substances and wastes that are regulated or may be deemed hazardous to the environment under certain federal, state and local regulations. The Company works with foreign and domestic federal, state and local agencies from time to time to resolve cleanup issues at various affected sites and other regulatory issues. Financial information regarding the Company’s environmental remediation activities is found in Note 17 to the Company's Consolidated Financial Statements.
Human Capital Resources
Employee Profile: As of December 31, 2022, the Company had approximately 4,300 domestic and foreign production, office and sales employees. One of the Company's Core Values is "Our People Are the Difference," and the Company works to maximize the engagement and contribution of its current workforce and to attract the best talent available from outside the organization when needed.
Talent Recruitment, Retention and Development: The Company's talent strategy is focused on attracting top talent and continually developing, engaging, investing in and retaining top employees through a variety of retention and development efforts and world class corporate amenities. We strive to hire world class talent, while ensuring opportunities for growth and development for team members. We maintain an engaging modern recruitment marketing website to tell the Company's compelling story of opportunity and inclusion. Development starts on day one with an enriching day one experience designed to help employees start off on the right foot from the moment they begin their career with the Company. The Company strives to be one of the best places to work.
The Company seeks to maximize engagement and contribution of team members and the Company stays connected with team members across many experience touchpoints throughout the employee lifecycle, including a day one survey, a survey 90 days after they begin their career at the Company, regular pulse and check in surveys, and exit surveys. Insights from these surveys have been especially valuable as the COVID-19 pandemic evolves to understand employees' needs and to develop solutions to maintain a positive employee well-being. The Company's annual talent planning process provides invaluable data to help retain top talent through career planning and leadership continuity by using that data to identify and mitigate succession gaps through hiring and development.
The Company benchmarks its benefits regularly and keeps abreast of the most up-to-date and effective strategies in order to offer a comprehensive and competitive compensation and benefits package that is specific to the Company's employees’ respective geographic region of employment including annual incentive programs, long-term incentive programs and health and wellness benefits, such as the corporate headquarters' on-site, state-of-the-art fitness center, child care, and doggie day care facilities for employees.
The Company believes that leaders should be developed at every stage of their career, from new managers to executives. We have a global leadership development program for all people leaders in which we partner with top educational institutions. This program focuses on sharpening participants' business leadership capabilities needed to grow the Company's businesses and people leadership capabilities needed to build, retain, and inspire top performing teams. As we continue to evolve and transform, the continued development of leaders is critical to our future success. To enhance employees career development, the Company offers a wide variety of virtual learning courses, instructor led classes, video libraries, and quick reference documents and provides tuition reimbursement to help employees achieve higher education goals.
Diversity, Equity, and Inclusion: The Company's commitment to a diverse and inclusive workforce is reflected in the wide range of cultures, religions, ethnicities and nationalities, as well as varied professional and educational backgrounds currently represented in the Company's workforce. Because the Company believes in cultivating a well-rounded, diverse workforce, the Company continuously seeks out individuals who reflect and support this goal. We have further prioritized diversity and inclusion by hiring an expert partner to help us build a framework to promote an inclusive environment today and into the future in order to make the Company an even greater place to work. Over the past two years, the Company's major development focus has been implementing a comprehensive diversity, equity, and inclusion learning program which includes learning on inclusive teams, inclusive leadership, and inclusive selection.
Health and Safety: The health and safety of the Company's employees is one of its highest priorities. The Company has developed safety protocols to enhance the health and safety of all employees. The Environmental, Health, & Safety Council is composed of representatives from across the Company and coordinates health and safety matters on a real time basis. The Company's focus on the health and safety of its workforce is also evidenced by the actions it has taken in response to the COVID-19 pandemic around the globe, including:
•Increasing employees' work from home flexibility;
•Adjusting attendance policies to encourage those who are sick to stay home; and
•Increasing cleaning protocols.
Information about the Company, including the Company’s Code of Business Conduct, Corporate Governance Guidelines, Director Independence Standards, Accounting and Finance Code of Ethics, Audit Committee Charter, Compensation Committee Charter and Governance Committee Charter, is available at its website at www.wolverineworldwide.com/investor-
relations/corporate-governance. Printed copies of the documents listed above are available upon request, without charge, by writing to the Company at 9341 Courtland Drive, N.E., Rockford, Michigan 49351, Attention: General Counsel.
The Company also makes available on or through its website at www.wolverineworldwide.com/investor-relations, free of charge, the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports (along with certain other Company filings with the Securities and Exchange Commission (“SEC”)), as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. These materials are also accessible on the SEC’s website at www.sec.gov.
Item 1A. Risk Factors
Business and Operational Risks
The Company’s operating results could be adversely affected if it is unable to maintain its brands’ positive images with consumers or anticipate, understand and respond to changing footwear and apparel trends and consumer preferences.
Consumer preferences and, as a result, the popularity of particular designs and categories of footwear and apparel, generally change over time. The Company’s success depends in part on its ability to maintain its brands’ positive images, and the ability to anticipate, understand and respond to changing footwear and apparel trends and consumer preferences in a timely manner. The Company’s efforts to maintain and improve its competitive position by monitoring and timely and appropriately responding to changes in consumer preferences, increasing brand awareness and enhancing the style, comfort and perceived value of its products may not be successful. If the Company is unable to maintain or enhance the images of its brands or if it is unable to timely and appropriately respond to new competition, changing consumer preferences and evolving footwear and apparel trends, consumers may consider its brands’ images to be outdated and associate its brands with styles that are no longer popular, which would decrease demand for its products. Such failures could result in loss of market share, reduced sales, excess inventory, trade name impairments, lower gross margin and other adverse impacts on the Company’s operating results.
Significant capacity constraints, production disruptions, inventory management, quality issues, price increases and other risks associated with foreign sourcing could increase the Company’s operating costs and adversely impact the Company’s business and reputation.
The Company currently sources a substantial majority of its products from third-party manufacturers in foreign countries, predominantly in the Asia Pacific region. As is common in the footwear and apparel industry, the Company does not have long-term contracts with its third-party manufacturers. The Company may experience difficulties with such manufacturers, including reductions in the availability of production capacity, failures to meet production deadlines, inventory management, failure to make products that meet applicable quality standards, or increases in labor and other manufacturing costs. The Company’s future results depend partly on its ability to maintain its relationships with third-party manufacturers.
Foreign manufacturing is subject to a number of risks, including work stoppages, transportation delays and interruptions, political instability, foreign currency exchange rate fluctuations, changing economic conditions, expropriation, nationalization, the imposition of tariffs, import and export controls and other non-tariff barriers and changes in governmental policies. Various factors could significantly interfere with the Company’s ability to source its products, including adverse developments in trade or political relations with China or other countries where it sources its products, or a shift in these countries' manufacturing capacities away from footwear and apparel to other industries. Other adverse developments, such as pandemics or other health crises, could cause significant production and shipping delays. Any of these events could have an adverse effect on the Company’s business, results of operations and financial position and, in particular, on the Company’s ability to meet customer demands and produce its products in a cost-effective manner.
The Company’s ability to import products in a timely and cost-effective manner may also be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as fluctuations in freight costs, port and shipping capacity, labor disputes or severe weather due to climate change. These issues have in the past and may in the future delay importation of products or require the Company to locate alternative ports or warehousing providers to avoid disruption to customers. These alternatives may not be available on short notice or could result in higher costs, which could have an adverse impact on the Company’s business and financial condition.
Infectious disease outbreaks that are considered pandemics, such as the COVID-19 pandemic, have had and could continue to have a material adverse effect on the company's business.
The Company's business could be adversely affected by infectious disease outbreaks, such as the COVID-19 pandemic. The COVID-19 pandemic has negatively affected the global economy, disrupted consumer spending and global supply chains, and significantly increased the volatility and disruption of financial markets both globally and in the U.S. These conditions following the onset of the COVID-19 pandemic led to a decline in discretionary spending by consumers that had a negative
effect on the Company's financial condition and results of operations in 2020. There can be no assurance that these conditions will not recur and negatively affect the Company's financial condition and results of operations in future periods. The extent to which the COVID-19 pandemic, or other health crises impacts the Company’s business, operations and financial results, including the duration and magnitude of such effects, will depend on numerous factors outside of the Company's control, such as, the duration and scope of the pandemic or other health crisis and effectiveness of containment efforts; the negative impact on global and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates, consumer discretionary spending and levels of consumer confidence; and actions governments, businesses and individuals may take in response to the pandemic or other health crisis. Potential impacts to the Company’s business can be materially adversely affected by several factors related to the COVID-19 pandemic or another health crisis, including, but not limited to:
•The inability of employees, suppliers and other business providers to carry out tasks at ordinary levels of performance as a result of safety measures taken to limit the spread of infectious disease outbreaks.
•Outbreaks requiring the closure of retail stores operated by the Company or the Company's wholesale customers;
•Decreased retail traffic resulting from social distancing measures, store closures, reduced operating hours, and/or changes in consumer behavior.
•Negative effects on consumer spending due to general macroeconomic conditions, decreased disposable income and increased unemployment.
•Wholesale and distributor customer order cancellations due to lower consumer demand.
•Decline in the performance or financial condition of the Company’s major wholesale customers as a result of retail store closures, bankruptcy or liquidation.
•Consumer demand for our products may be adversely impacted by economic conditions.
•Disruption to the operations of the Company’s distribution centers and its third-party manufacturers because of facility closures, reductions in operating hours, labor or material shortages, travel limitations or mass transit disruptions.
•Additional expenses related to mitigating the pandemic’s impact on regular operations.
•Supply chain disruption effecting the Company's ability to receive and distribute goods as well as increases in supply chain costs. Disruptions in the supply chain related to the COVID-19 pandemic have had an adverse effect and may continue to have an adverse effect on the Company's ability to meet consumer demand and financial results.
•Increased cyber security risk due to the increase in the number of employees working remotely.
•Volatility in the availability and prices for commodities for raw materials used in the Company's products and related inflationary pressures.
The COVID-19 pandemic or another health crisis may also affect the Company's operating and financial results in a manner that is not presently known to the Company or that the Company does not currently believe presents significant risks to its operations.
Labor disruptions could adversely affect the Company’s business.
The Company’s business depends on its ability to source and distribute products in a timely and cost-effective manner. Labor disputes at or that affect independent factories where the Company’s goods are produced, shipping ports, tanneries, transportation carriers, retail stores or distribution centers create significant risks for the Company’s business, particularly if these disputes result in work slowdowns, stoppages, lockouts, strikes or other disruptions. Any such disruption may have an adverse effect on the Company’s business by potentially resulting in inventory shortages, delayed or canceled orders by customers and unanticipated inventory accumulation, and may negatively impact the Company’s results of operations and financial position.
If the Company is unable to hire qualified persons for, or retain and continue to develop, its workforce, its results of operations could be adversely affected.
The future success of the Company also depends on its ability to attract and retain qualified personnel, including in its product, eCommerce, and leadership teams. Competition for such personnel in the Company's industry is intense. If the Company fails to attract and retain such employees, it may not be successful in developing and implementing its business strategies. The Company’s ability to hire and retain qualified personnel may be affected by a number of factors, including: the ability to attract and motivate employees; the competition the Company faces from other companies in hiring and retaining qualified personnel; and the Company’s ability to offer employees remote work opportunities. If the Company is unable to hire and retain employees capable of performing at a high level, its business, including cash flows, results of operations, employee satisfaction, and reputation, could be adversely affected.
A significant reduction in wholesale customer purchases of the Company’s products, wholesale customers seeking more favorable terms or canceling orders, or the failure of wholesale customers to pay for the Company’s products in a timely manner could adversely affect the Company’s business.
The Company’s financial success depends on its wholesale customers continuing to purchase its products. The Company does not typically have long-term contracts with its wholesale customers. Sales to the Company’s wholesale customers are generally on an order-to-order basis and are subject to rights of cancellation and rescheduling by the wholesale customers. In fiscal 2022, the Company experienced a higher rate of wholesale customer cancellatinos as retail customers sought to manage higher inventory levels and supply chain disruption. Failure to fill wholesale customers’ orders in a timely manner could harm the Company’s relationships with its wholesale customers. Furthermore, if any of the Company’s major wholesale customers experiences a significant downturn in its business, or fails to remain committed to the Company’s products or brands, these wholesale customers may reduce or discontinue purchases from the Company, which could have an adverse effect on the Company’s results of operations and financial position.
The Company sells its products to wholesale customers and extends credit based on an evaluation of each wholesale customer’s financial condition. The financial difficulties of a wholesale customer could cause the Company to stop doing business with that wholesale customer or reduce its business with that wholesale customer. The Company’s inability to collect from its wholesale customers or a cessation or reduction of sales to certain wholesale customers because of credit concerns could have an adverse effect on the Company’s business, results of operations and financial position.
Retail consolidation could lead to fewer wholesale customers, wholesale customers seeking more favorable price, payment or other terms from the Company and a decrease in the number of stores that carry the Company’s products. In addition, changes in the channels of distribution, such as the continued growth of eCommerce and related competitive pressures, and the sale of private label products by major retailers, could have an adverse effect on the Company’s results of operations and financial position.
The Company’s direct-to-consumer operations continue to require substantial investment and commitment of resources and are subject to numerous risks and uncertainties.
The Company’s direct-to-consumer operations, including its brick and mortar locations as well as its eCommerce and mobile channels, require substantial fixed investment in equipment and leasehold improvements, information systems, cyber-security infrastructure, inventory and personnel. The Company also has substantial operating lease commitments for retail space. Due to the high fixed-cost structure associated with the Company’s brick and mortar direct-to-consumer operations, a decline in sales or the closure or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs. The success of its direct-to-consumer operations also depends on the Company’s ability to identify and adapt to changes in consumer spending patterns and retail shopping preferences, including the shift from brick and mortar to eCommerce and mobile channels, reductions in mall traffic and the Company’s ability to effectively develop its eCommerce and mobile channels. The Company has made and will continue to make significant investments in building technologies and digital capabilities. As omni-channel retailing continues to evolve, the Company’s customers are increasingly more likely to shop across multiple channels that work in tandem to meet their needs. The Company’s failure to successfully respond to these factors could adversely affect the Company’s direct-to-consumer business, as well as limit the Company's ability to successfully develop and expand the omni-channel experience for customers, damage its reputation and brands, and have an adverse effect on the Company’s results of operations and financial position.
The Company’s reputation and competitive position depend on its third-party manufacturers, distributors, licensees and others complying with applicable laws and ethical standards.
The Company cannot ensure that its independent contract manufacturers, third-party distributors, third-party licensees and others with which it does business comply with all applicable laws and ethical standards relating to working conditions and other matters. If a party with which the Company does business is found to have violated applicable laws or ethical standards, the Company could be subject to negative publicity that could damage its reputation, negatively affect the value of its brands and subject the Company to legal risks.
In addition, the Company relies on its third-party licensees to help preserve the value of the Company’s brands. The Company’s attempts to protect its brands through approval rights over design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of its licensed products may not be successful as the Company cannot completely control the use by its licensees of its licensed brands. The misuse of a brand by a licensee could adversely affect the value of such brand.
Disruption of the Company’s eCommerce platform or other information technology systems could adversely affect the Company’s business.
The Company’s information technology systems, including its eCommerce platform, are critical to the operations of its business. Any future material interruption, unauthorized access, impairment or loss of data integrity or malfunction of these systems could severely impact the Company’s business, including delays in product fulfillment and reduced efficiency in operations. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems, or with maintenance or adequate support of existing systems, could disrupt or reduce the efficiency of the Company’s operations. Disruption to the Company’s information technology systems may be caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, denial-of-service attacks, computer viruses, physical or electronic break-ins, or similar events or disruptions. System redundancy may be ineffective or inadequate, and the Company’s disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions could prevent access to the Company’s online services and preclude store transactions. System failures and disruptions could also impede the manufacturing and shipping of products, transactions processing and financial reporting. Additionally, the Company may be adversely affected if it is unable to improve, upgrade, maintain, and expand its technology systems.
If the Company encounters problems affecting its logistics and distribution systems, its ability to deliver its products to the market could be adversely affected.
The Company relies on owned or independently operated distribution facilities to transport, warehouse and ship products to its customers. The Company’s logistics and distribution systems include computer-controlled and automated equipment, which are subject to a number of risks related to computer system upgrades, data accuracy, security or computer viruses, the proper operation of software and hardware, power interruptions or other system failures. Substantially all of the Company’s products are distributed from a relatively small number of locations. These operations could be interrupted by earthquakes, floods, fires or other natural disasters near its distribution centers or other events over which the Company has no control, such as pandemics. The Company’s business interruption insurance may not adequately protect the Company from the adverse effects that could be caused by significant disruptions affecting its distribution facilities, such as the long-term loss of customers or an erosion of brand image. In addition, the Company’s distribution capacity depends upon the timely performance of services by third parties, including the transportation of products to and from the Company’s distribution facilities. If the Company encounters problems affecting its distribution system, its results of operations and its ability to meet customer expectations, manage inventory, complete sales and achieve operating efficiencies could be adversely affected.
The Company faces risks associated with its growth strategies including acquiring and disposing of businesses.
The Company has expanded its products and markets in part through strategic acquisitions, including the acquisition of the Sweaty Betty® brand in the third quarter of fiscal 2021, and it may continue to do so in the future, depending on its ability to identify and successfully pursue suitable acquisition candidates. Acquisitions involve numerous risks, including risks inherent in entering new markets in which the Company may not have prior experience; potential loss of significant customers or key personnel of the acquired business; not obtaining the expected benefits of the acquisition on a timely basis or at all; managing geographically-remote operations; and potential diversion of management’s attention from other aspects of the Company’s business operations. Acquisitions may also cause the Company to incur debt or result in dilutive issuances of its equity securities, write-offs of goodwill and substantial amortization expenses associated with other intangible assets. The Company may not be able to obtain financing for future acquisitions on favorable terms, making any such acquisitions more expensive. Any such financing may have terms that restrict the Company’s operations. The Company may not be able to successfully integrate the operations of any acquired businesses into its operations and achieve the expected benefits of any acquisitions. In addition, the Company may not consummate a potential acquisition for a variety of reasons, but still incur material costs in connection with an acquisition that it cannot recover. The failure to successfully integrate newly acquired businesses or achieve the expected benefits of strategic acquisitions in the future, or consummate a potential acquisition after incurring material costs, could have an adverse effect on the Company’s business, results of operations and financial position.
From time to time, the Company may seek to sell one or more businesses, or sell or license one or more brands. As part of the Company’s strategy to ensure that it is investing in parts of its business that offer the greatest opportunities to achieve growth, the Company is currently seeking to sell its Wolverine Leathers Division, and the Company on February 7, 2023 closed the sale of the Keds® business. These transactions may involve challenges and risks. There can be no assurance that future divestitures will occur, or if a transaction does occur, there can be no assurance as to the potential value created by the transaction. The process of exploring strategic alternatives or selling a business could cause uncertainty and negatively impact our ability to attract, retain and motivate key employees. In addition, the Company expends costs and management resources to complete divestitures and manage post-closing arrangements. Any failures or delays in completing divestitures could have an adverse effect on the Company’s financial results and ability to execute its strategy.
The Company’s international operations may be affected by legal, regulatory, political and economic risks.
The Company’s ability to conduct business in new and existing international markets is subject to legal, regulatory, political and economic risks. These include:
•the burdens of complying with foreign laws and regulations, including trade and labor restrictions;
•compliance with U.S. and other countries’ laws relating to foreign operations, including the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits U.S. companies from making improper payments to foreign officials for the purpose of obtaining or retaining business;
•unexpected changes in regulatory requirements; and
•new tariffs or other barriers in some international markets, including China.
The Company is also subject to general political and economic risks in connection with its international operations, including:
•political instability, war and terrorist attacks;
•differences in business culture;
•different laws governing relationships with employees and business partners;
•changes in diplomatic and trade relationships, including with China; and
•general economic fluctuations in specific countries or markets.
The Company cannot predict whether quotas, duties, taxes, or other similar restrictions will be imposed by the U.S. or foreign countries upon the import or export of the Company's products in the future, or what effect any of these actions would have, if any, on the Company’s business, financial condition or results of operations. Changes in regulatory, geopolitical, social or economic policies and other factors may have an adverse effect on the Company’s business in the future or may require the Company to exit a particular market or significantly modify the Company's current business practices.
Foreign currency exchange rate fluctuations could adversely impact the Company’s business.
Foreign currency exchange rate fluctuations affect the Company’s revenue and profitability. Changes in foreign currency exchange rates may impact the Company’s financial results positively or negatively in any given period, which may make it difficult to compare the Company’s operating results from different periods. Foreign currency exchange rate fluctuations may also adversely impact third parties that manufacture the Company’s products by increasing their costs of production and raw materials and making such costs more difficult to finance, thereby raising prices for the Company, its distributors and its licensees. The Company’s hedging strategy may not successfully mitigate the Company’s foreign currency exchange rate risk. For a more detailed discussion of the risks related to foreign currency exchange rate fluctuations, see Item 7A: “Quantitative and Qualitative Disclosures About Market Risk.”
In addition, the Company's foreign subsidiaries purchase products in U.S. dollars and the cost of those products will vary depending on the applicable foreign currency exchange rate, which will impact the price charged to customers. The Company’s foreign distributors also purchase products in U.S. dollars and sell in local currencies, which impacts the price to foreign consumers and in turn, impacts the amount of royalties paid to the Company in U.S. dollars. When the U.S. dollar strengthens relative to foreign currencies, the Company's revenues and profits denominated in foreign currencies are reduced when converted into U.S. dollars and the Company's margins may be negatively impacted by the increase in product costs. The Company may seek to mitigate the negative impacts of foreign currency exchange rate fluctuations through price increases and further actions to reduce costs, but the Company may not be able to fully offset the impact, if at all. The Company’s success depends, in part, on its ability to manage these various foreign currency impacts as changes in the value of the U.S. dollar relative to other currencies could have an adverse effect on the Company’s business and results of operations.
The Company’s quarterly sales and earnings may fluctuate, and the Company or securities analysts may not accurately estimate the Company’s financial results, which may result in volatility in, or a decline in, the Company's stock price. Decreases in the returns provided to our stockholders may ultimately adversely affect our business, results of operations and financial condition.
The Company’s quarterly sales and earnings can vary due to a number of factors, many of which are beyond the Company’s control, including the following:
•In the wholesale business, sales of footwear depend on orders from major customers, who may change delivery schedules, change the mix of products they order or cancel orders without penalty.
•Changes to the Company's estimated annual tax rate which is based on projections of its domestic and international operating results for the year, which the Company reviews and revises as necessary each quarter.
•The Company's earnings are also sensitive to a number of factors that are beyond the Company’s control, including certain manufacturing and transportation costs, changes in product sales mix, geographic sales trends, weather conditions, customer demand, consumer sentiment and currency exchange rate fluctuations.
As a result of these specific and other general factors, the Company’s operating results will vary from quarter to quarter and the results for any particular quarter may not be indicative of results for the full year. In addition, various securities analysts follow the Company’s financial results and issue reports. These reports include information about the Company’s historical financial results as well as the analysts’ estimates of future performance. The analysts’ estimates are based upon their own opinions and are often different from the Company’s estimates or expectations. Any shortfall in sales or earnings from the levels expected by investors or securities analysts could cause a decrease in the trading price of the Company’s common stock.
Decreases in the trading price of our stock may adversely affect the returns our stockholders realize from ownership of our stock. Such adverse effects, as well as other factors, may cause stockholders to take actions to involve themselves in the strategic direction and governance of the Company, including through private engagement, publicity campaigns, stockholder proposals and proxy contests. Responding to these actions can be costly and time-consuming and could divert the attention of our board and senior management from managing our operations and pursuing our business strategies.
Changes in general economic conditions and other factors affecting consumer spending could adversely affect the Company’s sales, costs, operating results or financial position.
The Company’s results of operations depend on factors affecting consumer disposable income and spending patterns. These factors include general economic conditions, employment rates, business conditions, interest rates and tax policy in each of the markets and regions in which the Company or its third-party distributors and licensees operates. Customers may defer or cancel purchases of the Company’s products due to uncertainty about global, regional or local economic conditions, and how such conditions may impact them. Disposable income and consumer spending may decline due to inflation, recessionary economic cycles, high interest rates on consumer or business borrowings, restricted credit availability, high levels of unemployment or consumer debt, high tax rates, declines in consumer confidence or other factors. A decline in disposable income and consumer spending has adversely affected demand for the Company’s products, and could further adversely affect demand and Company's results of operations.
The Company operates in competitive industries and markets.
The Company competes with a large number of wholesalers, and retailers of footwear and apparel, and direct-to-consumer footwear and apparel companies. Many of the Company’s competitors have greater resources and larger customer and consumer bases, are able, or elect, to sell their products at lower prices, or have greater financial, technical or marketing resources than the Company, particularly its competitors in the apparel and direct-to-consumer businesses. The Company’s competitors may own or license brands with greater name recognition; implement more effective marketing campaigns; adopt more aggressive pricing policies; make more attractive offers to potential employees, distribution partners and manufacturers; or respond more quickly to changes in consumer preferences. The Company’s continued ability to sell its products at competitive prices and to meet shifts in consumer preferences quickly will affect its future sales. If the Company is unable to respond effectively to competitive pressures, its results of operations and financial position may be adversely affected.
Unseasonable or extreme weather conditions could adversely affect the Company’s results of operations.
The Company markets and sells footwear and apparel suited for specific seasons, such as sandals and flats for the summer season and boots for the winter season. If the weather conditions for a particular season vary significantly from those typical for that season, such as an unusually cold and rainy summer or an unusually warm and dry winter, consumer demand for seasonally appropriate products could be adversely affected. Lower demand for seasonally appropriate products may result in excess inventory, forcing the Company to sell these products at significantly discounted prices, which would adversely affect the Company’s results of operations. Conversely, if weather conditions permit the Company to sell seasonal products early in the season, this may reduce inventory levels needed to meet customers’ needs later in that same season. Consequently, the Company’s results of operations are dependent on future weather conditions and its ability to react to changes in weather conditions.
Extreme weather conditions can also adversely impact the Company’s business, results of operations and financial position. If extreme weather events forced closures of, or disrupted operations at, distribution centers maintained by the Company or third parties, the Company could incur higher costs and experience longer lead times to distribute its products on a timely basis to the Company’s retail stores, wholesale customers or eCommerce consumers. In addition, consumer traffic may be reduced as a result of extreme weather conditions and a decrease in shopping traffic could have an adverse effect on the Company’s results of operations and financial position.
Changes in general economic conditions and/or the credit markets affecting the Company's distributors, suppliers and retailers could adversely affect the Company’s results of operations and financial position.
Changes in general economic conditions and/or the credit markets could have an adverse impact on the Company’s future results of operations and financial position. Negative trends in global economic conditions may adversely impact the Company's third-party distributors’, suppliers’ and retailers’ ability to meet their obligations to provide the Company with the materials and services it needs at the prices, terms or levels as such third-parties have historically, which could adversely impact the Company’s ability to meet consumers’ demands and, in turn, the Company's results of operations and financial position.
In addition, if the Company’s third-party distributors, suppliers and retailers are not able to obtain financing on favorable terms, or at all, they may delay or cancel orders for the Company’s products or fail to meet their obligations to the Company in a timely manner, either of which could adversely impact the Company’s sales, cash flow and operating results.
Global political and economic uncertainty could adversely impact the Company’s business.
The Company’s products are marketed in approximately 170 countries and territories, and the Company sources a substantial majority of its products from foreign countries. Concerns regarding acts of terrorism or regional and international conflicts and concerns regarding public health threats, such as the COVID-19 pandemic, have created and may in the future create significant global economic and political uncertainties that may have adverse effects on consumer demand, acceptance of U.S. brands in international markets, foreign sourcing of products, shipping and transportation, product imports and exports and the sale of products in foreign markets, any of which could adversely affect the Company’s ability to source, manufacture, distribute and sell its products.
In addition, an economic downturn, whether actual or perceived, a further decrease in economic growth rates or an otherwise uncertain economic outlook in markets in which the Company operates could have an adverse effect on the Company. The Company cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, in markets in which the Company operates, or in its industry.
The Company is also subject to risks related to doing business in developing countries and economically volatile areas. These risks include social, political and economic instability; nationalization by local governmental authorities of the Company’s, its distributors’, or its licensees’ assets and operations; slower payment of invoices; and restrictions on the Company’s ability to repatriate foreign currency or receive payment of amounts owed by third-party distributors and licensees. In addition, commercial laws in these areas may not be well developed or consistently administered, and new unfavorable laws may be retroactively applied. Any of these risks could have an adverse impact on the Company’s prospects and results of operations in these areas.
The Company’s operating results depend on effectively managing inventory levels.
The Company’s ability to effectively manage its inventories and accurately forecast demand are important factors in its operations. Inventory shortages can impede the Company’s ability to meet demand, adversely affect the timing of shipments to customers and, consequently, adversely affect business relationships with retail customers, diminish brand loyalty and decrease sales.
Conversely, excess inventory can result in lower gross margins if the Company lowers prices in order to liquidate inventory. In addition, inventory may become obsolete as a result of changes in consumer preferences over time. The Company’s business, results of operations and financial position could be adversely affected if it is unable to effectively manage its inventory.
Increases or changes in duties, quotas, tariffs and other trade restrictions could adversely impact the Company’s sales and profitability.
All of the Company’s products manufactured overseas and imported into the U.S., Canada, the European Union and other countries are subject to customs duties collected by customs authorities. The customs information submitted by the Company is routinely subject to review by customs authorities and any such review might result in the assessment of additional duties or penalties. Additional U.S. or foreign customs duties, quotas, tariffs, anti-dumping duties, safeguard measures, cargo restrictions, the loss of most favored nation trading status or other trade restrictions, including those due to changes in trade relations between the U.S. and other countries, may be imposed on the importation of the Company’s products in the future. The imposition of such costs or restrictions in countries where the Company operates, as well as in countries where its third-party distributors and licensees operate, could result in increases in the cost of the Company’s products generally and adversely affect its sales and profitability.
Increases in the cost of raw materials, labor and services could adversely affect the Company’s results of operations.
The Company’s ability to competitively price its products depends on the prices of commodities, such as cotton, leather, rubber, petroleum, cattle, pigskin hides, and other raw materials, used to make and transport its products, as well as the prices of equipment, labor, transportation and shipping, insurance and health care. The cost of commodities, equipment, services and materials is subject to change based on availability and general economic and market conditions that are difficult to predict. Various conditions, such as diseases affecting the availability of leather, affect the cost of the footwear marketed by the Company. Increases in costs for commodities, equipment, services and materials used in production could have a negative impact on the Company’s results of operations and financial position.
The Company purchases a majority of the pigskin hides used in its leathers operations from a single domestic source pursuant to short-term contracts. If this source fails to continue to supply the Company with raw pigskin or supplies the Company with raw pigskin on less favorable terms, the Company’s cost of raw materials for its leathers operations could increase and, as a result, have a negative impact on the Company’s results of operations and financial position.
An increase in the Company’s effective tax rate or negative determinations by domestic or foreign tax authorities could have an adverse effect on the Company’s results of operations and financial position.
A significant amount of the Company’s earnings are generated by its Canadian, European and Asia Pacific subsidiaries and, to a lesser extent, in jurisdictions that are not subject to income tax. As a result, the Company’s income tax expense has historically differed from the tax computed at the U.S. statutory income tax rate due to discrete items and because the Company did not provide for U.S. taxes on non-cash undistributed earnings that it intends to permanently reinvest in foreign operations. The Company’s future effective tax rates could be unfavorably affected by a number of factors, including, but not limited to, changes in the tax rates in jurisdictions in which the Company generates income; changes in, or in the interpretation of, tax rules and regulations in the jurisdictions in which the Company does business; or decreases in the amount of earnings in countries with low statutory tax rates. An increase in the Company’s effective tax rate could have an adverse effect on its results of operations and financial position.
In addition, the Company’s income tax returns are subject to examination by the Internal Revenue Service and other domestic and foreign tax authorities. The Company regularly assesses the likelihood of outcomes resulting from these examinations to determine the adequacy of its provision for income taxes and establishes reserves for potential adjustments that may result from these examinations. The final determination of any of these examinations could have an adverse effect on the Company’s results of operations and financial position.
An impairment of goodwill or other intangibles could have an adverse impact to the Company’s results of operations.
The carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of other intangibles represents the fair value of trade names and other acquired intangibles as of the acquisition date. Goodwill and other acquired intangibles expected to contribute indefinitely to the Company’s cash flows are not amortized but must be evaluated by the Company at least annually for impairment. If the carrying amounts of one or more of these assets are not recoverable based upon discounted cash flow and market-approach analyses, the carrying amounts of such assets are impaired by the estimated difference between the carrying value and estimated fair value. An impairment charge could adversely affect the Company’s results of operations, such as the impairments recorded associated with the Sweaty Betty® trade name and goodwill in fiscal 2022 and the Sperry® trade name in fiscal 2022 and 2020.
The Company’s current level of indebtedness could adversely affect the Company by decreasing business flexibility and increasing borrowing costs.
The Company’s current level of indebtedness could adversely affect the Company by decreasing its business flexibility and increasing its borrowing costs. The Company has debt outstanding under a senior secured credit agreement (“Credit Agreement”) and senior notes. The Credit Agreement and the indenture governing the senior notes contain customary restrictive covenants imposing operating and financial restrictions on the Company, including restrictions that may limit the Company’s ability to engage in acts that may be in its long-term best interests. These covenants restrict the ability of the Company and certain of its subsidiaries to, among other things: incur or guarantee indebtedness; incur liens; pay dividends or repurchase stock; enter into transactions with affiliates; consummate asset sales, acquisitions or mergers; prepay certain other indebtedness; or make investments. In addition, the restrictive covenants in the Credit Agreement require the Company to maintain specified financial ratios and satisfy other financial condition tests.
These restrictive covenants may limit the Company’s ability to finance future operations or capital needs or to engage in other business activities. The Company’s ability to comply with any financial covenants could be materially affected by events beyond its control and the Company may be unable to satisfy any such requirements. If the Company fails to comply with these covenants, it may need to seek waivers or amendments of such covenants, seek alternative or additional sources of financing or
reduce its expenditures. The Company may be unable to obtain such waivers, amendments or alternative or additional financing on favorable terms or at all.
Legal and Regulatory Risks
If the Company is unsuccessful in establishing and protecting its intellectual property, the value of its brands could be adversely affected.
The Company’s ability to remain competitive depends upon its continued ability to secure and protect trademarks, patents and other intellectual property rights in the U.S. and internationally for all of the Company’s lines of business. The Company relies on a combination of trade secret, patent, trademark, copyright and other laws, license agreements and other contractual provisions and technical measures to protect its intellectual property rights; however, some countries’ laws do not protect intellectual property rights to the same extent U.S. laws do.
The Company’s business could be significantly harmed if it is not able to protect its intellectual property or if a court found it to be infringing on other persons’ intellectual property rights. Any intellectual property lawsuits or threatened lawsuits in which the Company is involved, either as a plaintiff or as a defendant, could cost the Company a significant amount of time and money and distract management’s attention from operating the Company’s business. If the Company does not prevail on any intellectual property claims, then the Company may have to change its manufacturing processes, products or trade names, any of which could reduce its profitability.
In addition, some of the Company’s branded footwear operations are operated pursuant to licensing agreements with third-party trademark owners. These agreements are subject to early termination for breach. These agreements also expire by their terms and as the agreements expire, the Company may be forced to stop selling the related products. Expiration or early termination by the licensor of any of these license agreements could have an adverse effect on the Company’s business, results of operations and financial position.
Changes in employment laws and regulations and other related changes may lead to higher employment and pension costs for the Company.
Changes in employment laws and regulations in the countries and territories in which the Company operates and other factors could increase the Company’s overall employment costs. The Company’s employment costs include costs relating to health care and retirement benefits, including U.S.-based defined benefit pension plans. The annual cost of benefits can vary significantly depending on a number of factors, including changes in the assumed or actual rate of return on pension plan assets, a change in the discount rate or mortality assumptions used to determine the annual service cost related to the defined benefit plans, a change in the method or timing of meeting pension funding obligations and the rate of health care cost inflation. Increases in the Company’s overall employment and pension costs could have an adverse effect on the Company’s business, results of operations and financial position.
Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to the Company’s environmental, social and governance (“ESG”) practices may impose additional costs on the Company or expose it to new or additional risks.
Companies are facing increasing and frequently evolving scrutiny globally from customers, regulators, investors, employees and other stakeholders related to their ESG practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, board and workforce diversity, labor conditions, human rights, and cybersecurity and data privacy. Third parties have also developed proprietary ratings or analyses of companies based on certain ESG metrics. Increased ESG-related compliance costs could result in increases to the Company’s overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or other stakeholder expectations and standards could negatively impact the Company’s reputation, ability to do business with certain partners, and stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure. The Company’s ESG initiatives and goals may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve and assumptions that are subject to change in the future. As we report on our ESG initiatives or goals, we may be subject to heightened reputational and operational risk and compliance costs related to these matters. Complying with increased regulations could increase the Company’s costs and adversely impact results of operations. The Company’s inability or failure to meet, or the perceived failure to meet, such stakeholders’ expectations, as well as adverse incidents, could negatively impact the Company’s stock price, results of operations, or reputation and increase the cost of capital.
The Company’s and its vendors’ databases containing personal information and payment card data of the Company’s customers, employees and other third parties could be breached, which could subject the Company to adverse publicity, litigation, fines and expenses. If the Company is unable to comply with bank and payment card industry standards, its operations could be adversely affected.
The protection of the Company’s customer, associate and Company data is critically important to the Company. The Company relies on its networks, databases, systems and processes, as well as those of third parties such as vendors, to protect its proprietary information and information about its customers, employees and vendors. The Company’s customers and associates have a high expectation that the Company will adequately safeguard and protect their sensitive personal information. The Company's operations have become increasingly centralized and dependent upon automated information technology processes. In addition, a portion of the Company’s business operations is conducted electronically, increasing the risk of attack or interception that could cause loss or misuse of data, system failures or disruption of operations. If unauthorized parties gain access to these networks or databases, they may be able to steal, publish, delete or modify the Company’s private and sensitive third-party or employee information. Improper activities by third parties, exploitation of encryption technology, new data-hacking tools and discoveries and other events or developments may result in a future compromise or breach of the Company’s networks, payment card terminals or other payment systems. In particular, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not recognized until launched against a target; accordingly, the Company may be unable to anticipate these techniques or implement adequate preventative measures. Any failure to maintain the security of the Company’s customers’ sensitive information, or data belonging to it or its suppliers, could put it at a competitive disadvantage, result in deterioration of its customers’ confidence in it, and subject it to potential litigation, liability, fines and penalties, resulting in a possible adverse impact on its financial condition and results of operations. The Company's insurance coverage may be insufficient to cover all losses and would not remedy damage to the Company's reputation. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of personal or confidential information. In such circumstances, the Company could be held liable to its customers, other parties or employees, be subject to regulatory or other actions for breaching privacy laws or failing to adequately protect such information or respond to a breach. This could result in costly investigations and litigation, civil or criminal penalties, operational changes and negative publicity that could adversely affect the Company’s reputation and its results of operations and financial position. In addition, if the Company is unable to comply with bank and PCI security standards, it may be subject to fines, restrictions and expulsion from card acceptance programs, which could adversely affect the Company’s direct-to-consumer operations.
The Company’s operations are subject to environmental and workplace safety laws and regulations, and costs or claims related to these requirements could adversely affect the Company’s business.
The Company’s operations are subject to various federal, state and local laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air, soil and water, the management and disposal of solid and hazardous materials and wastes, employee exposure to hazards in the workplace, and the investigation and remediation of contamination resulting from releases of hazardous materials. Failure to comply with legal requirements could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. Various third parties have brought, and in the future could bring actions against the Company alleging health-related or other harm arising from non-compliance. The Company may incur investigation, remediation or other costs related to releases of hazardous materials or other environmental conditions at its currently or formerly owned or operated properties, regardless of whether such environmental conditions were created by the Company or a third-party, such as a prior owner or tenant. The Company has incurred, and continues to incur, costs to address soil and groundwater contamination at some locations. If such issues become more expensive to address, or if new issues arise, they could increase the Company’s expenses, generate negative publicity, or otherwise adversely affect the Company.
The disruption, expense and potential liability associated with existing and future litigation against the Company could adversely affect its reputation, financial position or results of operations.
The Company may be named as a defendant from time to time in lawsuits and regulatory actions relating to its business. For example, regulatory actions, punitive class actions lawsuits and individual lawsuits have been filed against the Company alleging claims relating to property damage, remediation and human health effects, among other claims, arising from the Company’s operations, including its handling, storage, treatment, transportation and/or disposal of waste. These claims are discussed in more detail in Note 17 to the Company's Consolidated Financial Statements. Due to the inherent uncertainties of litigation and regulatory proceedings, the Company cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have an adverse impact on the Company’s business, results of operations and financial position. In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings are expensive and may require that the Company devote substantial resources and executive time to the defense of such proceedings.
Provisions of Delaware law and the Company’s certificate of incorporation and bylaws could prevent or delay a change in control or change in management that could be beneficial to the Company’s stockholders.
Provisions of the Delaware General Corporation Law, as well as the Company’s certificate of incorporation and bylaws, could discourage, delay or prevent a merger, acquisition or other change in control of the Company that might benefit the Company's stockholders. These provisions are intended to provide the Company’s Board of Directors with continuity and also serve to encourage negotiations between the Company’s Board of Directors and any potential acquirer. Such provisions include a Board of Directors that is classified so that only one-third of directors stand for election each year. These provisions could also discourage proxy contests and make it more difficult for stockholders to replace the majority of the Company's directors and take other corporate actions that may be beneficial to the Company’s stockholders.
The Company’s marketing programs, eCommerce initiatives and use of consumer information are governed by an evolving set of laws, industry standards and enforcement trends and unfavorable changes in those laws, standards or trends, or the Company’s failure to comply with existing or future laws, could negatively impact the Company’s business and results of operations.
The Company collects, maintains and uses data provided to it through its online activities and other consumer interactions in its business. The Company’s current and future marketing programs depend on its ability to collect, maintain and use this information, and its ability to do so is subject to certain contractual restrictions in third party contracts as well as evolving international, federal and state laws, industry standards and enforcement trends. The Company is subject to a broad array of applicable laws and other legal obligations relating to privacy, data protection and consumer protection, including those relating to the use of data for marketing purposes. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another, may conflict with other rules or may conflict with the Company’s practices. If the Company is not able to comply with any applicable requirements, the Company's reputation could be negatively impacted and the Company may be subject to proceedings or actions against it by governmental entities or others.
In addition, as data privacy and marketing laws change, the Company may incur additional costs to remain in compliance. If applicable data privacy and marketing laws become more restrictive at the federal or state level, the Company’s compliance costs may increase, and the Company’s ability to effectively engage customers via personalized marketing may decrease which could potentially impact growth.
Because the Company processes and transmits payment card information, the Company is subject to the Payment Card Industry (“PCI”) Data Security Standard (the “Standard”), and card brand operating rules (“Card Rules”). The Standard is a comprehensive set of requirements for enhancing payment account data security that was developed by the PCI Security Standards Council to help facilitate the broad adoption of consistent data security measures. The Company is required by payment card network rules to comply with the Standard, and the Company’s failure to do so may result in fines or restrictions on its ability to accept payment cards. Under certain circumstances specified in the payment card network rules, the Company may be required to submit to periodic audits, self-assessments or other assessments of its compliance with the Standard. Such activities may reveal that the Company has failed to comply with the Standard. If an audit, self-assessment or other test determines that the Company needs to take steps to remediate any deficiencies, the Company may be required to undertake remediation efforts, which may be costly or could result in periods of time during which the Company cannot accept payment cards. In addition, even if the Company complies with the Standard, there is no assurance that it will be protected from a security breach. Further, changes in technology and processing procedures may result in changes in the Card Rules. Such changes may require the Company to make significant investments in operating systems and technology that may impact business. Failure to keep up with changes in technology could impact growth opportunities. Failure to comply with the Standard or Card Rules could result in losing certification under the PCI standards and an inability to process payments.
The Company is also subject to U.S. and international data privacy and cybersecurity laws and regulations, which may impose fines and penalties for noncompliance and may have an adverse effect on the Company's operations. For example, the General Data Protection Regulation ("GDPR"), which applies in all European Union member states, introduced new data protection requirements in the European Union and substantial fines for breaches of the data protection rules. GDPR increases our responsibility and potential liability in relation to personal data that we collect, process and transfer, and we have put in place additional mechanisms designed to ensure compliance with the new data protection rules. Any failure to comply with these rules and related national laws of European Union member states, could lead to government enforcement actions and significant penalties against us, and could adversely affect our business, financial condition, cash flows and results of operations. In addition, the California Consumer Privacy Act (“CCPA”) limits how we may collect and use personal data. The effects of the CCPA governs the Company's data processing practices and policies. Additionally, other states have adopted, or are considering enacting, similar laws that may affect the Company's data processing practices and policies.
The Company operates in many different international markets and could be adversely affected by violations of the FCPA and similar worldwide anti-corruption laws.
The FCPA and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. The Company’s internal policies mandate compliance with these anti-corruption laws. Despite training and compliance programs, the Company's internal control policies and procedures may not protect it from reckless or criminal acts committed by its employees or agents.
The Company’s continued expansion internationally, including in developing countries, could increase the risk of FCPA violations in the future. Violations of these laws, or allegations of such violations, could disrupt the Company’s business and result in an adverse effect on the results of operations or financial condition.
Item 1B. Unresolved Staff Comments
Item 2. Properties
The Company operates its domestic administration, sales and marketing operations primarily from an owned facility of approximately 307,000 square feet in Rockford, Michigan, as well as leased facilities of approximately 102,000 square feet in Waltham, Massachusetts and 80,000 square feet in the United Kingdom. The Company operates its distribution operations primarily through a leased distribution facility of approximately 720,000 square feet in Beaumont, California; an owned distribution facility of approximately 520,000 square feet in Louisville, Kentucky; a leased distribution center of approximately 468,000 square feet in Howard City, Michigan; a leased distribution center of approximately 242,000 square feet in Ontario, Canada and a leased distribution center of approximately 125,000 square feet in Heerhugowaard, Netherlands.
The Company also leases or owns offices, showrooms and other facilities throughout the U.S., Canada, the United Kingdom, continental Europe, Hong Kong and China to meet its operational requirements. In addition, the Company operates 154 retail stores primarily through leases with various third-party landlords in the U.S., United Kingdom, and Canada that collectively occupy approximately 350,000 square feet. The Company believes that its current facilities are suitable and adequate to meet its current needs.
Item 3. Legal Proceedings
The Company is involved in litigation and various legal matters arising in the normal course of business, including certain environmental compliance activities. For a discussion of legal matters, see Note 17 to the Company's Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
Supplemental Item. Information about our Executive Officers
The following table lists the names and ages of the Executive Officers of the Company and their positions held with the Company as of January 31, 2023. The information provided below the table lists the business experience of each such Executive Officer for at least the past five years. All Executive Officers serve at the pleasure of the Board of Directors of the Company, or, if not appointed by the Board of Directors, at the pleasure of management.
|Name||Age||Positions held with the Company|
|Brendan L. Hoffman||54||President and Chief Executive Officer|
|Christopher E. Hufnagel||50||President, Active Group|
|Amy M. Klimek||49||Executive Vice President, Global Human Resources|
|Reginald M. Rasch||52||Senior Vice President, General Counsel and Secretary|
|Isabel Soriano||52||President, International|
|Michael D. Stornant||56||Executive Vice President, Chief Financial Officer and Treasurer|
|James D. Zwiers||55||Executive Vice President and President, Global Operations Group|
Brendan L. Hoffman has served the Company as Chief Executive Officer since January 2022 and as President since September 2020. From October 2015 through August 2020, he was the Chief Executive Officer and President of Vince Holding Corp., a publicly-traded global apparel brand and retailer.
Christopher E. Hufnagel has served the Company as President, Active Group since November 2022, and has served as President of the Merrell brand since September 2019. From July 2018 through September 2019, he served as President, CAT Footwear. From January 2013 through July 2018, he served as Senior Vice President and Head of Corporate Strategy.
Amy M. Klimek has served the Company as Executive Vice President, Global Human Resources since May 2016. From October 2014 to May 2016, she served as Vice President of Human Resources.
Reginald M. Rasch has served the Company as Senior Vice President, General Counsel and Secretary since January 2023. From May 2021 through November 2022, he was the Chief Legal Officer and Corporate Secretary of Party City Holdco Inc., a publicly traded party goods company in North America. Mr. Rasch was employed by Rakuten, a global technology conglomerate that focuses heavily on eCommerce, digital advertising and data intelligence, from 2005 to May 2021, where he held positions of increasing responsibilities in Rakuten Americas including Head of Legal and Secretary from 2016 to May 2021.
Isabel Soriano has served the Company as President, International since June 2021. From June 2018 to May 2021, she served as Vice President and Managing Director of EMEA. From April 2014 to June 2018, she served as Vice President and General Manager for Vans, Timberland and Kipling in South America at VF Corporation, a publicly traded footwear and apparel retailer.
Michael D. Stornant has served the Company as Executive Vice President, Chief Financial Officer and Treasurer since June 2015. From January 2013 through June 2015, he served as Vice President, Corporate Finance.
James D. Zwiers has served the Company as Executive Vice President since February 2017 and President, Global Operations Group since January 2021. From February 2016 through February 2017, he served as President, Wolverine Outdoor & Lifestyle Group. From June 2014 through February 2016, he served as Senior Vice President and President, International Group.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on the New York Stock Exchange under the symbol “WWW.” The number of stockholders of record on February 10, 2023, was 673.
A quarterly dividend of $0.10 per share was declared on February 8, 2023. The Company currently expects that comparable cash dividends will be paid in future quarters in fiscal 2023.
Stock Performance Graph
The following graph compares the five-year cumulative total stockholder return on the Company’s common stock to the Standard & Poor’s 1500 Index and the Standard & Poor’s 1500 Consumer Durables & Apparel Index, assuming an investment of $100 at the beginning of the period indicated. The Company is part of both the Standard & Poor’s 1500 Index and the Standard & Poor’s 1500 Consumer Durables & Apparel Index. This Stock Performance Graph shall not be deemed to be incorporated by reference into the Company’s SEC filings and shall not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
Five-Year Cumulative Total Return Summary
The following table provides information regarding the Company’s purchases of its own common stock during the fourth quarter of fiscal 2022.
Issuer Purchases of Equity Securities
|Period||Total Number of Shares Purchased||Average Price Paid per Share||Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs||Maximum Dollar Amount that May Yet Be Purchased Under the Plans or Programs|
|Period 10 (October 2, 2022 to November 5, 2022)|
Common Stock Repurchase Program (1)
|— ||$||— ||— ||$||366,524,492 |
Employee Transactions (2)
|16,581 ||$||17.18 |
|Period 11 (November 6, 2022 to December 3, 2022)|
Common Stock Repurchase Program (1)
|— ||$||— ||— ||$||366,524,492|
Employee Transactions (2)
|Period 12 (December 4, 2022 to December 31, 2022)|
Common Stock Repurchase Program (1)
|— ||$||— ||— ||$||366,524,492 |
Employee Transactions (2)
|3,424 ||$||10.74 |
|Total for the Fourth Quarter Ended December 31, 2022|
Common Stock Repurchase Program (1)
|— ||$||— ||— ||$||366,524,492 |
Employee Transactions (2)
|20,198 ||$||16.03 |
(1)On September 11, 2019, the Company’s Board of Directors approved a common stock repurchase program that authorized the repurchase of $400.0 million of common stock over a four-year period, incremental to the $113.4 million available as of that date for repurchases under the previous program. Since that date, the Company repurchased $146.9 million of common stock. The annual amount of any stock repurchases is restricted under the terms of the Company's amended senior credit facility and senior notes indenture.
(2)Employee transactions include: (1) shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options who exercised options, and (2) restricted shares and units withheld to offset statutory minimum tax withholding that occurs upon vesting of restricted shares and units. The
Company’s employee stock compensation plans provide that the shares delivered or attested to, or withheld, shall be valued at the closing price of the Company’s common stock on the date the relevant transaction occurs.
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company is a leading global designer, marketer and licensor of branded footwear, apparel and accessories. The Company’s strategic vision is to build and grow high-energy footwear, apparel and accessories brands that inspire and empower consumers to explore and enjoy their active lives. 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 direct-to-consumer footprint; and delivering supply chain excellence.
The Company’s brands are marketed in approximately 170 countries and territories at December 31, 2022, including through owned operations in the U.S., Canada, the United Kingdom and certain countries in continental Europe and Asia Pacific. In other regions (Latin America, portions of Europe and Asia Pacific, the Middle East and Africa), the Company relies on a network of third-party distributors, licensees and joint ventures. At December 31, 2022, the Company operated 154 retail stores in the U.S., United Kingdom, and Canada and 63 direct-to-consumer eCommerce sites.
On July 31, 2021, the Company entered into a definitive agreement to acquire 100% of the outstanding shares of Lady of Leisure InvestCo Limited. The acquisition was completed on August 2, 2021 for $417.4 million, net of acquired cash of $7.4 million. Lady of Leisure InvestCo Limited 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 Facility, as defined below.
The following discussion includes a comparison of the Company's results of operations and liquidity and capital resources for fiscal 2022 and 2021. A discussion of a comparison of the Company's results of operations and liquidity and capital resources for fiscal 2021 and 2020 has been omitted from this Form 10-K but may be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022, filed with the SEC on February 24, 2022. Additional information about the reorganization of the Company's reportable segments can be found in the Company's Current Report on Form 8-K/A filed with the SEC on November 10, 2022.
Known Trends Impacting Our Business
Macroeconomic conditions and supply chain disruptions and the COVID-19 pandemic continue to have an impact on the Company’s business results. During fiscal 2021 and the first half of fiscal 2022, disruption in the global supply chain due to vessel shortages, labor and container shortages, and U.S. port congestion resulted in transportation delays that interrupted the flow of the Company’s inventory and delayed shipments to wholesale partners. As a result, the Company planned fiscal 2022 product purchases based on the assumption that extended inventory transit times would continue throughout the year. However, during the third quarter of 2022, inventory transit times improved ahead of plan, resulting in challenges managing the timing of inventory flow. As of December 31, 2022, the Company had $146.8 million of inventory in-transit, which includes both inventory in-transit to the Company's distribution centers and inventory not yet able to be processed due to processing capacity pressures at the Company’s distribution centers. As a result, the Company’s inventory levels as of December 31, 2022 were elevated compared to the prior fiscal year. The inventory in-transit balance has declined from a balance of $280.9 million at October 1, 2022. The Company increased promotional activity in the third and fourth quarters of fiscal 2022 and expects this increased level of promotional activity to continue during the first half of 2023 to reduce inventory levels.
The Company incurred higher logistics costs, including freight and labor costs, during 2022 as a result of the supply chain disruption as well as inflationary pressures. The Company implemented selective price increases by brand and product to partially offset the effects of inflation on the Company’s financial results. The Company expects to continue to evaluate future pricing of its products. In addition to inflationary headwinds, the strengthening of the U.S. dollar relative to other major currencies also negatively impacted the Company’s financial results in 2022 and is expected to have a negative impact on the Company's 2023 financial results.
In March 2022, the Company temporarily suspended all business operations in Russia due to the Russia-Ukraine conflict. The Company has no assets or employees in Russia or Ukraine. The Company’s business operations in Russia represent less than 1 percent of revenue. Please refer to Item 1A, “Risk Factors” for a more complete discussion of the risks the Company encounters in our business.
2022 FINANCIAL OVERVIEW
•Revenue was $2,684.8 million for 2022, representing an increase of 11.2% compared to the prior year's revenue of $2,414.9 million.
•Gross margin for 2022 was 39.9%, a decrease of 270 basis points from 2021.
•The effective tax rate in 2022 was 25.2%, compared to 16.6% in 2021.
•Diluted loss per share in 2022 was $2.37, compared to diluted earnings per share of $0.81 in 2021.
•The Company declared cash dividends of $0.40 per share in 2022 and 2021.
•Cash flow used in operating activities was $178.9 million for 2022 and cash flow provided by operating activities was $86.8 million for 2021.
•Compared to the prior year, inventory increased $379.7 million, or 103.9%.
RESULTS OF OPERATIONS
The following is a discussion of the Company’s results of operations and liquidity and capital resources. This section should be read in conjunction with the Company’s consolidated financial statements and related notes, which are included in Item 8 of this Annual Report on Form 10-K.
|(In millions, except per share data)||2022||2021||Percent Change|
|$||2,684.8 ||$||2,414.9 ||11.2 ||%|
Cost of goods sold
|1,614.4 ||1,385.0 ||16.6 ||%|
|1,070.4 ||1,029.9 ||3.9 ||%|
Selling, general and administrative expenses
|906.4 ||817.8 ||10.8 ||%|
|Gain on sale of trademarks||(90.0)||— ||— |
|Impairment of goodwill and intangible assets||428.7 ||— ||— |
|Environmental and other related costs, net of recoveries||33.7 ||56.4 ||(40.2)||%|
|Operating profit (loss)||(208.4)||155.7 ||(233.8)||%|
Interest expense, net
|47.3 ||37.4 ||26.5 ||%|
|Debt extinguishment and other costs||— ||34.3 ||(100.0)||%|
|Other expense (income), net||(2.8)||3.7 ||(175.7)||%|
|Earnings (loss) before income taxes||(252.9)||80.3 ||(414.9)||%|
|Income tax expense (benefit)||(63.8)||13.3 ||(579.7)||%|
|Net earnings (loss)||(189.1)||67.0 ||(382.2)||%|
|Less: net loss attributable to noncontrolling interests||(0.8)||(1.6)||50.0 ||%|
|Net earnings (loss) attributable to Wolverine World Wide, Inc.||$||(188.3)||$||68.6 ||(374.5)||%|
|Diluted earnings (loss) per share||$||(2.37)||$||0.81 ||(392.6)||%|
Revenue was $2,684.8 million for 2022, representing an increase of 11.2% compared to the prior year's revenue of $2,414.9 million. The change in revenue reflected a 19.0% increase from the Active Group, a 7.6% increase from the Work Group and a 6.2% decline from the Lifestyle Group. The Active Group's revenue increase was driven by an increase of $116.9 million from Merrell®, $94.3 million from Sweaty Betty®, $29.1 million from Saucony®, and $10.3 million from Chaco®. The Work Group’s revenue increase was driven by an increase of $32.1 million from Cat® and $20.1 million from Wolverine®, partially offset by a decrease of $9.2 million from Bates®. The Lifestyle Group’s revenue decline was driven by a decrease of $33.4 million from Sperry® and $7.8 million from Keds®, partially offset by an increase of $11.7 million from Hush Puppies®. International revenue represented 41.8%, and 34.8% of total reported revenues in 2022 and 2021, respectively. Changes in foreign exchange rates decreased revenue by $70.0 million during 2022. Direct-to-consumer revenue increased by $64.1 million, or 10.2% during 2022 compared to 2021.
For 2022, the Company’s gross margin was 39.9%, compared to 42.6% in 2021. The gross margin decrease was driven by unfavorable product mix and higher promotional activity in the Company's direct to consumer channel (150 basis points), increased closeout sales and closeout reserves (90 basis points) and unfavorable product mix and higher promotional activity across the Company's brands (30 basis points).
Operating expenses increased $404.6 million in 2022, to $1,278.8 million. The increase was driven by higher impairment of intangible assets ($428.7 million), Sweaty Betty® operating expenses included contribution through the one-year anniversary of the acquisition ($60.2 million), higher general and administrative costs ($26.6 million), higher selling costs ($10.4 million), higher distribution costs ($9.5 million), higher advertising costs ($6.0 million), higher Sweaty Betty® integration costs ($2.0 million), and higher product development costs ($1.1 million), partially offset by the gain recorded on the sale of the Champion trademarks for footwear in the United States and Canada ($90.0 million), lower environmental and other related costs, net of recoveries ($22.7 million), lower incentive compensation costs ($20.0 million), and lower acquisition costs ($7.5 million). Environmental and other related costs were $56.3 million and $73.9 million in 2022 and 2021, respectively. See Note 17 to the Company's Consolidated Financial Statements for further discussion.
INTEREST, OTHER AND TAXES
Net interest expense was $47.3 million in 2022 compared to $37.4 million in 2021. Interest expense increased in the current year due to higher average principal balances of variable rate debt and higher average interest rates on the Company’s variable rate debt, partially offset by lower interest rates on the Company's senior notes. 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 in August 2021 due in 2029.
The effective tax rate in 2022 was 25.2%, compared to 16.6% in 2021. The Company recognized tax benefits in 2022 which increased the tax benefit recognized from the pretax loss, resulting in a higher effective tax rate. In 2021, the Company also recognized tax benefits which reduced the tax expense on pretax income, resulting in a lower effective tax rate.
Other income was $2.8 million in 2022 compared to other expense of $3.7 million in 2021. The decrease in expense was driven by lower non-service pension costs ($3.0 million), higher sublease income ($1.8 million), and lower losses from equity method investments ($1.6 million).
The Company’s portfolio of brands are organized into the following three reportable segments. During the fourth quarter of 2022, the Company announced changes to its reportable segments as a result of changes in how its Chief Operating Decision Maker, the Company's Chief Executive Officer, allocates resources to and assess performance of the Company's operating segments. All prior period disclosures have been retrospectively adjusted to reflect the new reportable segments.
•Active Group, consisting of Merrell® footwear and apparel, Saucony® footwear and apparel, Sweaty Betty® activewear, and Chaco® footwear;
•Work Group, consisting of Wolverine® footwear and apparel, Cat® footwear, Bates® uniform footwear, Harley-Davidson® footwear and HYTEST® safety footwear; and;
•Lifestyle Group, consisting of Sperry® footwear, Keds® footwear, and Hush Puppies® footwear and apparel.
Kids' footwear offerings from Saucony®, Sperry®, Keds®, Merrell®, Hush Puppies® and Cat® are included with the applicable brand.
The Company also reports “Other” and “Corporate” categories. The Other category consists of the Company’s leather marketing operations, sourcing operations that include third-party commission revenues, multi-branded direct-to-consumer retail stores and the Stride Rite® licensed business. The Corporate category consists of the gain on the sale of the Champion trademarks in 2022 and unallocated corporate expenses, such as corporate employee costs, costs related to the COVID-19 pandemic, impairment of intangible assets and goodwill, reorganization activities, and environmental and other related costs.
The reportable segment results for years 2022 and 2021 are as follows:
| ||Fiscal Year|
|(In millions)||2022||2021||Change||Percent Change|
|Active Group||$||1,570.2 ||$||1,319.6 ||$||250.6 ||19.0 ||%|
|Work Group||590.5 ||548.8 ||41.7 ||7.6 ||%|
|Lifestyle Group||447.5 ||477.0 ||(29.5)||(6.2)||%|
|76.6 ||69.5 ||7.1 ||10.2 ||%|
|$||2,684.8 ||$||2,414.9 ||$||269.9 ||11.2 ||%|
|OPERATING PROFIT (LOSS)|
|Active Group||$||198.4 ||$||229.5 ||$||(31.1)||(13.6)||%|
|Work Group||102.5 ||103.8 ||(1.3)||(1.3)||%|
|Lifestyle Group||48.1 ||67.5 ||(19.4)||(28.7)||%|
|11.8 ||8.1 ||3.7 ||45.7 ||%|
Further information regarding the reportable segments can be found in Note 18 to the Company's Consolidated Financial Statements.
The Active Group’s revenue increased $250.6 million, or 19.0%, in 2022 compared to 2021. The revenue increase was driven by an increase of $116.9 million from Merrell®, $94.3 million from Sweaty Betty®, $29.1 million from Saucony®, and $10.3 million from Chaco®. The Merrell® increase was primarily due to the strength of the hike product category, which includes the industry leading Moab franchise as well as strong performance across all regions, specifically the international channel. The Sweaty Betty® increase included contribution through the one-year anniversary of the acquisition. The Saucony® increase was primarily driven by the strength and expanded sales of core technical road and trail product franchises which include the Ride, Guide, Kinvara, Triumph, Peregrine and Endorphin series. The Chaco® increase was primarily the result of improved inventory positions in the current period versus the prior period which was negatively impacted by supply chain constraints.
The Active Group’s operating profit decreased $31.1 million, or 13.6%, in 2022 compared to 2021. The operating profit decrease was due to a 320 basis point decrease in gross margin and a $97.0 million increase in selling, general and administrative costs, partially offset by revenue increases. The decrease in gross margin in the current year period was due to unfavorable product mix and higher promotional activity in the Company's direct to consumer channel and increased closeout sales in the wholesale channel. The increase in selling, general and administrative expenses in 2022 includes a contribution of $60.2 million of Sweaty Betty® operating expenses through the one-year anniversary of the acquisition, as well as higher advertising costs, labor and distribution costs and employee costs.
The Work Group’s revenue increased $41.7 million, or 7.6%, in 2022 compared to 2021. The revenue increase was driven by an increase of $32.1 million from Cat® and $20.1 million from Wolverine®, partially offset by a decrease of $9.2 million from Bates®. The Cat® increase was primarily due to the strength of the life and work product categories. The Wolverine® increase was primarily due to the strong performance of its core franchises which include Raider and Rancher, strength of the work product category, and expanded work footwear products. The Bates® decline was primarily due to a reduction in military exchange customer revenue for domestically manufactured products.
The Work Group’s operating profit decreased $1.3 million, or 1.3%, in 2022 compared to 2021. The operating profit decrease was due to a 240 basis point decrease in gross margin and by a $2.9 million increase in selling, general and administrative costs, partially offset by revenue increases. The decrease in gross margin in the current year period was due to unfavorable product mix and higher promotional activity in the Company's direct to consumer channel and increased closeout sales in the wholesale channel. The increase in selling, general and administrative expenses in 2022 was primarily due to higher advertising costs, labor and distribution costs and employee costs.
The Lifestyle Group’s revenue decreased $29.5 million, or 6.2%, in 2022 compared to 2021. The revenue decrease was driven by a decrease of $33.4 million from Sperry® and $7.8 million from Keds®, partially offset by an increase of $11.7 million from Hush Puppies®. The Sperry® and Keds® declines were primarily driven by supply chain issues and softer consumer demand in both the U.S. wholesale and direct-to-consumer sales channels. The Hush Puppies® increase was primarily due to the launch of a strategic distribution partnership with DSW in North America and the strength of the brand’s lifestyle head-to-toe product offering internationally, with a focus on casual, comfort and color.
The Lifestyle Group’s operating profit decreased $19.4 million, or 28.7%, in 2022 compared to 2021. The operating profit decrease was due to a 150 basis point decrease in gross margin and revenue decreases, partially offset by a $0.4 million decrease in selling, general and administrative costs. The decrease in gross margin in the current year period was due to unfavorable product mix and higher promotional activity in the Company's direct to consumer channel and increased closeout sales in the wholesale channel.
The Other category's revenue increased $7.1 million, or 10.2%, in 2022 compared to 2021. The revenue increase was primarily driven by an increase of $6.0 million from the performance leathers business.
Corporate expenses increased $316.0 million in 2022 compared to 2021 primarily due to the impairment of intangible assets related to the Sperry® trade name and Sweaty Betty® trade name and goodwill ($428.7 million), reorganization and integration activities ($9.6 million), and higher employee costs ($7.8 million), partially offset by the gain recorded on the sale of the Champion trademarks for footwear in the United States and Canada ($90.0 million), lower environmental and other related costs ($22.7 million), and lower incentive compensation costs ($19.2 million).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents (1)
|$||135.5 ||$||161.7 |
|Debt||1,158.0 ||966.8 |
Available Revolving Facility (2)
|569.3 ||769.2 |
(1)Cash and cash equivalents at the end of the year in the Consolidated Statements of Cash Flows includes $4.0 million of Wolverine Leathers business related cash and cash equivalents that are classified as held for sale as of December 31, 2022 that are not included in cash and cash equivalents in the Consolidated Balance Sheets.
(2)Amounts are net of both borrowings, if any, and outstanding standby letters of credit issued in accordance with the terms of the Revolving Facility.
Cash and cash equivalents of $135.5 million as of December 31, 2022 were $26.2 million lower compared to January 1, 2022. The decrease is due primarily to cash used by operating activities of $178.9 million, share repurchases of $81.3 million, additions to property, plant, and equipment of $36.5 million, cash dividends paid of $32.8 million, and shares acquired related to employee stock plans of $7.7 million, partially offset by net revolver borrowings of $200.0 million, cash received from the sale of the Champion trademark of $90.0 million, proceeds from company-owned life insurance policies of $30.5 million, and contributions from noncontrolling interests of $7.0 million. The Company had $569.3 million of borrowing capacity available under the Revolving Facility as of December 31, 2022. Cash and cash equivalents located in foreign jurisdictions totaled $114.9 million as of December 31, 2022.
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 and for general corporate purposes.
The Company may purchase up to an additional $366.5 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 shares and may be suspended at any time. The Company repurchased $81.3 million and $39.6 million of shares during 2022 and 2021, respectively.
A detailed discussion of environmental remediation costs is found in Note 17 to the Company's Consolidated 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 affected site. As of December 31, 2022, the Company has a reserve of $74.1 million, of which $49.8 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 $24.3 million recorded in other liabilities and 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 17 to the Company's Consolidated Financial Statements also includes a detailed discussion of environmental litigation matters. The Company has established an accrual in the amount of $40.5 million, and made related payments of $50.1 million, with respect to certain of these matters for the year ended December 31, 2022, as discussed in Note 17. The Company expects to disburse payments during 2023 equal to the remainder of the established accrual.
Developments may occur that could materially change the Company’s current cost estimates. The Company adjusts recorded liabilities as further information develops or circumstances change.
The Company expects to meet its contractual obligations through its typical sources of liquidity in the normal course of business, such as cash from operating activities, and believes it has the financial resources to satisfy these contractual obligations. The Company had the following contractual obligations due by period at December 31, 2022:
|(In millions)||Total||Less than|
|1-3 years||3-5 years||More than|
Long-term debt obligations (1)
|$||1,446.3 ||$||489.4 ||$||135.4 ||$||234.7 ||$||586.8 |
Operating lease obligations
|236.5 ||38.6 ||60.8 ||47.1 ||90.0 |
Purchase obligations (2)
|423.1 ||423.1 ||— ||— ||— |
|— ||— ||— ||— ||— |
Supplemental Executive Retirement Plan
|44.9 ||3.9 ||8.3 ||8.8 ||23.9 |
Municipal water improvements (3)
|31.9||31.9 ||— ||— ||— |
TCJA transition obligation
|28.1 ||7.0 ||21.1 ||— ||— |
|$||2,210.8 ||$||993.9 ||$||225.6 ||$||290.6 ||$||700.7 |
(1)Includes principal and interest payments on the Company’s long-term debt. Estimated future interest payments on outstanding debt obligations are based on interest rates as of December 31, 2022. Actual cash outflows may differ significantly due to changes in underlying interest rates.
(2)Purchase obligations related primarily to inventory and capital expenditure commitments.
(3)Under the terms of a Consent Decree resolving certain civil and regulatory actions, the Company is obligated to contribute towards the costs of extending municipal water lines, developing a replacement wellfield and making certain improvements to Plainfield Township’s existing water treatment plant, all subject to an aggregate cap of $69.5 million. During 2022 and 2021, the Company made payments of $15.0 and $12.9 million towards the total cap, respectively. Due to the uncertainty of the timing and amounts related to the Company's other environmental remediation costs, they have been excluded from this table. See Note 17 to the Company's Consolidated Financial Statements for additional information.
(4)The total amount of unrecognized tax benefits on the consolidated balance sheet at December 31, 2022 is $9.0 million. At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes. As a result, this amount is not included in the table above.
On October 21, 2021, the Company entered into a 2021 Replacement Facility Amendment and Reaffirmation Agreement (the “Amendment”) to the Company's Credit Facility (as amended and restated, the "Credit Agreement"). The Amendment amended and restated the 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%. The maturity date of the loans under the Senior Credit Facilities was extended to October 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 amended senior credit facility are met. The Term Facility requires quarterly principal payments with a balloon payment due on October 21, 2026.
On August 26, 2021, the Company issued $550.0 million aggregate principal debt amount of 4.000% senior notes due on August 15, 2029. Related interest payments are due semi-annually beginning February 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 on September 1, 2026 and $300.0 million senior notes due on May 15, 2025.
As of December 31, 2022, the Company was in compliance with all covenants and performance ratios under the Credit Agreement.
The Company’s debt at December 31, 2022 totaled $1,158.0 million, compared to $966.8 million at January 1, 2022. The Company expects to use the current borrowings to fund organic growth initiatives, reduce debt, pay dividends and for general corporate purposes. The increased debt position resulted from borrowings under the Revolving Facility to fund organic growth initiatives, pay dividends and for general corporate purposes.
The following table summarizes cash flow activities:
|Fiscal Year Ended|
|(In millions)||December 31,|
|Net cash provided by (used in) operating activities||(178.9)||86.8 |
|Net cash provided by (used in) investing activities||54.6 ||(437.3)|
|Net cash provided by (used in) financing activities||107.1 ||169.3 |
|Additions to property, plant and equipment||(36.5)||(17.6)|
|Depreciation and amortization||34.6 ||33.2 |
The principal source of the Company’s operating cash flow is net earnings, including cash receipts from the sale of the Company’s products, net of costs of goods sold.
Cash from operations during 2022 was lower compared to 2021, due primarily to an increase in net working capital representing a use of cash of $274.4 million. Working capital balances were unfavorably impacted by an increase in inventories of $428.9 million, a decrease in accounts receivable of $84.5 million, and an increase in other operating assets of $21.1 million, partially offset by an increase in accounts payable of $62.6 million and an increase in other operating liabilities of $26.1 million. Operating cash flows included non-cash add back for the impairment of intangible assets of $428.7 million, depreciation and amortization expense adjustment of $34.6 million, stock-based compensation expense adjustment of $33.4 million, deferred income tax adjustment of $105.7 million, gain on sale of the Champion trademark of $90.0 million, environmental and other related costs, net of cash payments and recoveries received cash outflow of $23.0 million, and pension expense adjustment of $9.3 million.
The Company made capital expenditures of $36.5 million and $17.6 million in years 2022 and 2021, respectively, for building improvements, eCommerce site enhancements, new retail stores, distribution operations improvements and information system enhancements. The current year activity includes additional investment in the Company’s China joint venture of $2.8 million and proceeds received from the sale of the Champion trademarks of $90.0 million.
The current year debt activity includes net borrowings under the Revolving Facility of $200.0 million and $30.5 million in proceeds from company-owned life insurance policies. The Company paid $7.7 million and $14.1 million in 2022 and 2021, respectively, in connection with shares or units withheld to pay employee taxes related to awards under stock incentive plans and received $1.4 million and $17.1 million in proceeds from the exercise of stock options in 2022 and 2021, respectively. The Company also repurchased $81.3 million and $39.6 million of its common stock during 2022 and 2021, respectively. The
Company received $7.0 million and $4.8 million from noncontrolling owners of the Company’s China joint venture to support the growth of the joint venture in 2022 and 2021, respectively.
The Company declared cash dividends of $0.40 per share in each of 2022 and 2021. Dividends paid totaled $32.8 million and $33.5 million for 2022 and 2021, respectively. A quarterly dividend of $0.10 per share was declared on February 8, 2023 to shareholders of record on April 3, 2023.
NEW ACCOUNTING STANDARDS
See Note 2 to the Company's Consolidated Financial Statements for information related to new accounting standards.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP"), requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from the Company’s estimates. However, actual results may differ materially from these estimates under different assumptions or conditions.
The Company has identified the following critical accounting policies used in determining estimates and assumptions in the amounts reported. Management believes that an understanding of these policies is important to an overall understanding of the Company’s Consolidated Financial Statements. Significant accounting policies are summarized in Note 1 to the Company's Consolidated Financial Statements.
Revenue Recognition and Performance Obligations
Revenue is recognized upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration to be received in exchange for those goods or services. The Company identifies the performance obligation in the contract, determines the transaction price, allocates the transaction price to the performance obligations, and recognizes revenue upon completion of the performance obligation. Revenue is recognized net of variable consideration and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Control of the Company's goods and services, and associated revenue, are transferred to customers at a point in time. The Company’s contract revenue consist of wholesale revenue and direct-to-consumer revenue. Wholesale revenue is recognized for products sourced by the Company when control transfers to the customer generally occurring upon the purchase, shipment or delivery of branded products or to the customer. Direct-to-consumer includes eCommerce revenue that is recognized for products sourced by the Company when control transfers to the customer once the related goods have been shipped and retail store revenue recognized at time of sale. The point of purchase or shipment was evaluated to best represent when control transfers based on the Company’s right of payment for the goods, the customer’s legal title to the asset, the transfer of physical possession and the customer having the risks and rewards of the goods. Payment terms for the Company's revenue vary by sales channel. Standard credit terms apply to the Company's wholesale receivables, while payment is rendered at the time of sale within the direct-to-consumer channel.
Revenue is recorded at the net sales price (“transaction price”), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, customer markdowns, customer rebates and other sales incentives relating to the sale of the Company’s products. These reserves are based on the amounts earned, or to be claimed on the related sales. These estimates take into consideration a range of possible outcomes, which are probability-weighted in accordance with the expected value method for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts. Revenue recognized during the year ended December 31, 2022 related to the Company’s contract liabilities was nominal.
The Company values its inventory at the lower of cost or net realizable value. Cost is determined by the last-in, first out ("LIFO") method for certain domestic finished product inventories. Cost is determined using the first-in, first-out (“FIFO”) method for all raw materials, work-in-process and finished product inventories in foreign countries and certain domestic finished product inventories. The average cost of inventory is used for finished product inventories of the Company’s direct-to-
consumer business and Sweaty Betty® inventory. The Company has applied these inventory cost valuation methods consistently from year to year.
The Company reduces the carrying value of its inventories to the lower of cost or net realizable value for excess or obsolete inventories based upon assumptions about future demand and market conditions. If the Company were to determine that the estimated realizable value of its inventory is less than the carrying value of such inventory, the Company would provide a reserve for such difference as a charge to cost of sales. If actual market conditions are different from those projected, adjustments to those inventory reserves may be required. The adjustments would increase or decrease the Company’s cost of sales and net income in the period in which they were realized or recorded. Inventory quantities are verified at various times throughout the year by performing physical inventory counts and subsequently comparing those results to perpetual inventory balances. If the Company determines that adjustments to the inventory quantities are appropriate, an adjustment to the Company’s cost of goods sold and inventory is recorded in the period in which such determination was made.
The Company accounts for business combinations using the acquisition method of accounting, which requires that once control is obtained, the consolidated financial statements reflect the operations of an acquired business starting from the acquisition date.
All assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. The Company allocates the purchase price of an acquired business to the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed, with any excess purchase price recorded as goodwill. Contingent consideration, if any, is included in the purchase price and is recognized at its fair value on the acquisition date. During the measurement period, which is up to one year from the acquisition date, adjustments to the assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill.
The determination of fair values of identifiable assets and liabilities requires estimates and the use of valuation techniques and requires management to make judgments that may involve the use of significant estimates. For intangible assets acquired in a business combination, the Company typically uses the income method. Significant estimates used in valuing certain intangible assets include, but are not limited to, the amount and timing of future cash flows, growth rates and discount rates, among other items. If the actual results differ from the estimates and judgments used, the amounts recorded in the Consolidated Financial Statements may be exposed to potential impairment of the intangible assets and goodwill as discussed in the "Goodwill and Indefinite-Lived Intangibles" section below. Refer to Note 19 “Business Acquisitions” for additional discussion.
Goodwill and Indefinite-Lived Intangibles
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to impairment tests at least annually. The Company reviews the carrying amounts of goodwill and indefinite-lived intangible assets by reporting unit at least annually, or when indicators of impairment are present, to determine if such assets may be impaired. If the carrying amounts of these assets are not recoverable based upon discounted cash flow and market approach analyses, the carrying amounts of such assets are reduced by the estimated difference between the carrying values and estimated fair values. The Company includes assumptions such as a discount rate and expected future operating performance, which includes forecasted revenue growth, earnings before interest, taxes, depreciation and amortization ("EBITDA") margin and cost of capital, which are derived from internal projections and operating plans, as part of a discounted cash flow analysis to estimate fair value.
For goodwill, if the estimated fair value of the reporting unit exceeds its carrying value, no further review is required. However, if the estimated fair value of the reporting unit is less than its carrying value, the Company records an impairment charge equal to the excess of the recorded goodwill over the fair value of the goodwill.
The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill and indefinite-lived intangible assets are less than their carrying value. The Company would not be required to quantitatively determine the fair value unless the Company determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value.
The Company performs its annual testing for goodwill and indefinite-lived intangible asset impairment at the beginning of the fourth quarter of the fiscal year for all reporting units. In the fourth quarter of 2022, after completion of the annual impairment testing, the Company recorded a $48.4 million impairment charge for Sweaty Betty® goodwill. The Company did not recognize any impairment charges for goodwill during years 2021 and 2020. In the fourth quarter of 2022, the Company recognized impairment charges of $191.0 million for the Sperry® trade name and $189.3 million for the Sweaty Betty® trade name. No impairment charges were recognized for the Company's intangible assets during 2021. In the fourth quarter of 2020, the Company recorded a $222.2 million impairment charge for the Sperry® trade name. Refer to Note 4, “Goodwill and Other
Intangibles” for additional discussion on the Sweaty Betty® goodwill impairment and the Sweaty Betty® and Sperry® trade name impairments.
The Company establishes a reserve for estimated environmental remediation costs based upon the evaluation of currently-available facts with respect to each individual affected site. The costs are recorded on an undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of feasibility studies, the Company’s commitment to a plan of action, or approval by regulatory agencies. Liabilities for estimated costs of environmental remediation are based primarily upon third-party environmental studies, other internal analysis and the extent of the contamination and the nature of required remedial actions at each site. The Company records adjustments to the estimated costs if there are changes in the scope of the required remediation activity, extent of contamination, governmental regulations or remediation technologies. Environmental costs relating to existing conditions caused by past operations that do not contribute to current or future revenues are expensed as incurred. Refer to Note 17, “Litigation and Contingencies” for additional discussion on estimated environmental remediation costs.
Assets related to potential recoveries from other responsible parties are recognized when a definitive agreement is reached and collection of cash is realizable. Recoveries of covered losses under insurance policies are recognized only when realization of the claim is deemed probable.
The Company is subject to legal proceedings and claims related to the environmental matters as described in Note 17 to the Company's Consolidated Financial Statements. The Company routinely assesses the legal and factual circumstances of each matter and the likelihood of any adverse outcomes in these matters, as well as ranges of possible losses. Assessments of lawsuits and claims can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. The Company accrues an estimated liability for legal proceeding claims that are both probable and estimable and reserves may change in future periods due to new developments in each matter. For further discussion, refer to Note 17 “Litigation and Contingencies”.
The determination of the obligation and expense for retirement benefits depends upon the selection of certain actuarial assumptions used in calculating such amounts. These assumptions include, among others, the discount rate, expected long-term rate of return on plan assets, mortality rates and rates of increase in compensation. These assumptions are reviewed with the Company’s actuaries and updated annually based on relevant external and internal factors and information, including, but not limited to, long-term expected asset returns, rates of termination, regulatory requirements and plan changes.
The Company utilizes a bond matching calculation to determine the discount rate used to calculate its year-end pension liability and subsequent year pension expense. A hypothetical bond portfolio is created based on a presumed purchase of individual bonds to settle the plans' expected future benefit payments. The discount rate is the resulting yield of the hypothetical bond portfolio. The bonds selected are listed as high grade by at least two recognized ratings agency and are non-callable, currently purchasable and non-prepayable. The calculated discount rate was 5.56% at December 31, 2022, compared to 3.09% at January 1, 2022. Pension expense is also impacted by the expected long-term rate of return on plan assets, which the Company has determined to be 6.87% and 6.75% for fiscal 2022 and 2021, respectively. This rate is based on both actual historical rates of return experienced by the pension assets and the long-term rate of return of a composite portfolio of equity and fixed income securities that reflects the approximate diversification of the pension assets.
The Company maintains certain strategic management and operational activities in overseas subsidiaries, and its foreign earnings are taxed at rates that have generally been lower than the U.S. federal statutory income tax rate. A significant amount of the Company’s earnings are generated by its Canadian, European and Asian subsidiaries and, to a lesser extent, in jurisdictions that are not subject to income tax. Income tax audits associated with the allocation of this income and other complex issues may require an extended period of time to resolve and may result in income tax adjustments if changes to the income allocation are required between jurisdictions with different income tax rates. The Company evaluates the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in the Company’s assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. The carrying value of the Company’s deferred tax assets assumes that the Company will be able to generate sufficient taxable income in future years to utilize these deferred tax assets. If these assumptions change, the Company may be required to record valuation allowances against its gross deferred tax assets in future years, which would cause the Company to record additional income tax expense in its consolidated statements of operations. Management evaluates the potential that the Company will be able to realize its gross deferred tax assets and assesses the need for valuation allowances on a quarterly basis.
On a periodic basis, the Company estimates the full year effective tax rate and records a quarterly income tax provision in accordance with the projected full year rate. As the year progresses, that estimate is refined based upon actual events and the distribution of earnings in each tax jurisdiction during the year. This continual estimation process periodically results in a change to the expected effective tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the revised anticipated annual rate.
The Company intends to repatriate cash held in foreign jurisdictions and has recorded a deferred tax liability related to estimated state taxes and foreign withholding taxes on the future dividends received in the U.S. from the foreign subsidiaries.
The Company intends to permanently reinvest all non-cash undistributed earnings outside of the U.S. and has, therefore, not established a deferred tax liability on that amount of foreign unremitted earnings. However, if these non-cash undistributed earnings were repatriated, the Company would be required to accrue and pay applicable U.S. taxes and withholding taxes payable to various countries. It is not practicable to estimate the amount of the deferred tax liability associated with these non-cash unremitted earnings due to the complexity of the hypothetical calculation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the Company's financial position and results of operations are routinely subject to a variety of risks, including market risk associated with interest rate movements on borrowings and investments and currency rate movements on non-U.S. dollar denominated assets, liabilities and cash flows. The Company regularly assesses these risks and has established policies and business practices that should mitigate a portion of the adverse effect of these and other potential exposures.
Foreign Exchange Risk
The Company faces market risk to the extent that changes in foreign currency exchange rates affect the Company’s foreign assets, liabilities and inventory purchase commitments. The Company manages these risks by attempting to denominate contractual and other foreign arrangements in U.S. dollars. The Company does not believe that there has been a material change in the nature of the Company’s primary market risk exposures, including the categories of market risk to which the Company is exposed and the particular markets that present the primary risk of loss to the Company. As of the date of this Annual Report on Form 10-K, the Company does not know of any material change in the near-term in the general nature of its primary market risk exposure.
Under the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 815, Derivatives and Hedging, the Company is required to recognize all derivatives on the balance sheet at fair value. Derivatives that are not qualifying hedges must be adjusted to fair value through earnings. If a derivative is a qualifying hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings.
The Company conducts wholesale operations outside of the U.S. in Canada, continental Europe, the United Kingdom, Hong Kong, China and Mexico where the functional currencies are primarily the Canadian dollar, euro, British pound, Hong Kong dollar, Chinese renminbi and Mexican peso, respectively. The Company utilizes foreign currency forward exchange contracts to manage the volatility associated primarily with U.S. dollar inventory purchases made by non-U.S. wholesale operations in the normal course of business as well as to manage foreign currency translation exposure. At December 31, 2022 and January 1, 2022, the Company had outstanding forward currency exchange contracts to purchase primarily U.S. dollars in the amounts of $334.2 million and $296.7 million, respectively, with maturities ranging up to 524 and 538 days, respectively.
The Company also has sourcing locations in Asia, where financial statements reflect the U.S. dollar as the functional currency. However, operating costs are paid in the local currency. Revenue generated by the Company from third-party foreign licensees is calculated in the local currencies but paid in U.S. dollars. Accordingly, the Company’s reported results are subject to foreign currency exposure for this stream of revenue and expenses. Any associated foreign currency gains or losses on the settlement of local currency amounts are reflected within the Company's consolidated statement of operations and comprehensive income.
Assets and liabilities outside the U.S. are primarily located in the United Kingdom, Canada and the Netherlands. The Company’s investments in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term. At December 31, 2022, a stronger U.S. dollar compared to certain foreign currencies decreased the value of these investments in net assets by $76.3 million from their value at January 1, 2022. At January 1, 2022, a stronger U.S. dollar compared to foreign currencies decreased the value of these investments in net assets by $20.0 million from their value at January 2, 2021.
Interest Rate Risk
The Company is exposed to interest rate changes primarily as a result of interest expense on the Incremental Term Loan borrowings and any borrowings under the Revolving Facility. The Company’s total variable-rate debt was $615.0 million at December 31, 2022 and the Company held a forward-dated interest rate swap agreement, denominated in U.S. dollars that will effectively convert $176.2 million of this amount to fixed-rate debt. The interest rate swap derivative instrument is held and used by the Company as a tool for managing interest rate risk. The counterparty to the swap instrument is a large financial institution that the Company believes is of high-quality creditworthiness. While the Company may be exposed to potential losses due to the credit risk of non-performance by this counterparty, such losses are not anticipated. The fair value of the interest rate swap was determined to be a net asset of $6.1 million as of December 31, 2022. As of December 31, 2022, the weighted-average interest rate on the Company’s variable-rate debt, net of the impact of the interest rate swap, was 4.86%. Based on the level of variable-rate debt outstanding as of that date, a 100 basis point increase in the weighted-average interest rate would have increased the Company’s annual pre-tax interest expense by approximately $4.4 million. The Company does not enter into contracts for speculative or trading purposes, nor is it a party to any leveraged derivative instruments.
Item 8. Financial Statements and Supplementary Data
Table of Contents
Consolidated Financial Statements
|Consolidated Statements of Operations|
|Consolidated Statements of Comprehensive Income (Loss)|
|Consolidated Balance Sheets|
|Consolidated Statements of Cash Flows|
|Consolidated Statements of Stockholders' Equity|
|Note 1. Summary of Significant Accounting Policies|
|Note 2. New Accounting Standards|
|Note 3. Earnings Per Share|
|Note 4. Goodwill and Other Intangibles|
|Note 5. Accounts Receivable|
|Note 6. Revenue From Contracts With Customers|
|Note 7. Inventories|
|Note 8. Debt|
|Note 9. Property, Plant and Equipment|
|Note 10. Leases|
|Note 11. Derivative Financial Instruments|
|Note 12. Stock-Based Compensation|
|Note 13. Retirement Plans|
|Note 14. Income Taxes|
|Note 15. Accumulated Other Comprehensive Income (Loss)|
|Note 16. Fair Value Measurements|
|Note 17. Litigation and Contingencies|
|Note 18. Business Segments|
|Note 19. Business Acquisition|
Note 20. Variable Interest Entities and Related Party Transactions
|Note 21. Assets and Liabilities Held for Sale|
|Note 22. Subsequent Event|
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42)
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
| ||Fiscal Year|
|(In millions, except per share data)||2022||2021||2020|
|Revenue||$||2,684.8 ||$||2,414.9 ||$||1,791.1 |
|Cost of goods sold||1,614.4 ||1,385.0 ||1,055.5 |
|Gross profit||1,070.4 ||1,029.9 ||735.6 |
|Selling, general and administrative expenses||906.4 ||817.8 ||639.4 |
|Gain on sale of trademarks||(90.0)||— ||— |
|Impairment of goodwill and intangible assets||428.7 ||— ||222.2 |
|Environmental and other related costs, net of recoveries||33.7 ||56.4 ||11.1 |
|Operating profit (loss)||(208.4)||155.7 ||(137.1)|
|Interest expense, net||47.3 ||37.4 ||43.6 |
|Debt extinguishment and other costs||— ||34.3 ||5.5 |
|Other expense (income), net||(2.8)||3.7 ||(2.1)|
|Total other expenses||44.5 ||75.4 ||47.0 |
|Earnings (loss) before income taxes||(252.9)||80.3 ||(184.1)|
|Income tax expense (benefit)||(63.8)||13.3 ||(45.5)|
|Net earnings (loss)||(189.1)||67.0 ||(138.6)|
|Less: net loss attributable to noncontrolling interests||(0.8)||(1.6)||(1.7)|
|Net earnings (loss) attributable to Wolverine World Wide, Inc.||$||(188.3)||$||68.6 ||$||(136.9)|
|Net earnings (loss) per share (see Note 3):|
See accompanying notes to consolidated financial statements.
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
|Net earnings (loss)||$||(189.1)||$||67.0 ||$||(138.6)|
|Other comprehensive income (loss) net of tax:|
|Foreign currency translation adjustments||(76.8)||(20.0)||10.6 |
|Unrealized gain (loss) on derivative instruments:|
Unrealized gain (loss) arising during the period, net of taxes of $7.9, $3.0 and $(5.2)
|25.4 ||7.7 ||(17.6)|
Reclassification adjustments included in net earnings (loss), net of taxes of $(4.7), $1.4 and $0.4
|(14.6)||3.7 ||3.1 |
Net actuarial gain (loss) arising during the period, net of taxes of $6.3, $7.8 and $(8.0)
|22.6 ||29.5 ||(30.0)|
Amortization of prior actuarial losses, net of taxes of $2.4, $3.0 and $1.4
|8.9 ||10.8 ||5.2 |
|Other comprehensive income (loss)||(34.5)||31.7 ||(28.7)|
|Less: other comprehensive income (loss) attributable to noncontrolling interests||(0.5)||— ||(0.2)|
|Other comprehensive income (loss) attributable to Wolverine World Wide, Inc.||(34.0)||31.7 ||(28.5)|
|Comprehensive income (loss)||(223.6)||98.7 ||(167.3)|
|Less: comprehensive loss attributable to noncontrolling interests||(1.3)||(1.6)||(1.9)|
|Comprehensive income (loss) attributable to Wolverine World Wide, Inc.||$||(222.3)||$||100.3 ||$||(165.4)|
See accompanying notes to consolidated financial statements.
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
|(In millions, except share data)||December 31,|
|Cash and cash equivalents||$||131.5 ||$||161.7 |
Accounts receivable, less allowances of $11.1 and $28.3
|241.7 ||319.6 |
|Finished products, net||743.2 ||354.1 |
|Raw materials and work-in-process, net||2.0 ||11.4 |
|Total inventories||745.2 ||365.5 |
|Prepaid expenses and other current assets||79.0 ||56.9 |
|Current assets held for sale||67.9 ||— |
|Total current assets||1,265.3 ||903.7 |
Property, plant and equipment, net of accumulated depreciation of $236.1 and $219.1
|136.2 ||129.0 |
Lease right-of-use assets
|174.7 ||138.2 |
|Goodwill||485.0 ||556.6 |
|Indefinite-lived intangibles||274.0 ||718.1 |
|Amortizable intangibles, net||67.4 ||74.6 |
|Deferred income taxes||24.5 ||1.8 |
|Other assets||65.6 ||64.4 |
|Total assets||$||2,492.7 ||$||2,586.4 |
LIABILITIES AND STOCKHOLDERS’ EQUITY
|Accounts payable||$||272.2 ||$||222.1 |
|Accrued salaries and wages||32.3 ||41.7 |
|Other accrued liabilities||322.9 ||222.5 |
|Lease liabilities||39.1 ||38.3 |
|Current maturities of long-term debt||10.0 ||10.0 |
|Borrowings under revolving credit agreements||425.0 ||225.0 |
|Current liabilities held for sale||8.8 ||— |
|Total current liabilities||1,110.3 ||759.6 |
Long-term debt, less current maturities
|723.0 ||731.8 |
Accrued pension liabilities
|72.9 ||107.4 |
Deferred income taxes
|35.3 ||118.9 |
Lease liabilities, noncurrent
|153.6 ||118.2 |
|58.6 ||106.1 |
Common stock – par value $1, authorized 320,000,000 shares; 112,202,078, and 111,632,094 shares issued
|112.2 ||111.6 |
|Additional paid-in capital||325.4 ||298.9 |
|Retained earnings||907.2 ||1,128.2 |
|Accumulated other comprehensive loss||(132.9)||(98.9)|
Cost of shares in treasury; 33,413,204, and 29,604,013 shares
|Total Wolverine World Wide, Inc. stockholders’ equity||320.6 ||629.6 |
|18.4 ||14.8 |
|Total stockholders’ equity||339.0 ||644.4 |
|Total liabilities and stockholders’ equity||$||2,492.7 ||$||2,586.4 |
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|Net earnings (loss)||$||(189.1)||$||67.0 ||$||(138.6)|
|Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:|
Depreciation and amortization
|34.6 ||33.2 ||32.8 |
Deferred income taxes
Stock-based compensation expense
|33.4 ||38.1 ||28.9 |
Pension and SERP expense
|9.3 ||14.0 ||8.5 |
|Debt extinguishment, interest rate swap termination, and other costs||— ||5.8 ||5.5 |