WOLVERINE WORLD WIDE INC /DE/ - Quarter Report: 2023 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2023
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File Number: 001-06024
__________________________________________________________
WOLVERINE WORLD WIDE, INC.
(Exact Name of Registrant as Specified in its Charter)
__________________________________________________________
| Delaware | 38-1185150 | |||||||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||||||||
| 9341 Courtland Drive N.E. | , | Rockford | , | Michigan | 49351 | |||||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||||||||
(616) 866-5500
(Registrant’s telephone number, including area code)
________________________________________________
Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Title of each class | Trading symbol | Name of each exchange on which registered | ||||||
| Common Stock, $1 Par Value | WWW | New York Stock Exchange | ||||||
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 ☒ 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 ☒ 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 | ☒ | Accelerated filer | ☐ | |||||||||||
| Non-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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 79,532,461 shares of common stock, $1 par value, outstanding as of October 23, 2023.
Table of Contents
| PART I | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
2
FORWARD-LOOKING STATEMENTS
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;
•currency restrictions;
•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, 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;
•labor disruptions;
•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 outbreaks of COVID-19 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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Form 10-K”), filed with the SEC on February, 23, 2023. 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.
3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations and Comprehensive Income
(Unaudited)
| Quarter Ended | Year-To-Date Ended | ||||||||||||||||||||||
| (In millions, except per share data) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
Revenue | $ | 527.7 | $ | 691.4 | $ | 1,716.2 | $ | 2,019.8 | |||||||||||||||
Cost of goods sold | 312.3 | 413.6 | 1,036.7 | 1,173.6 | |||||||||||||||||||
Gross profit | 215.4 | 277.8 | 679.5 | 846.2 | |||||||||||||||||||
Selling, general and administrative expenses | 203.3 | 216.8 | 610.8 | 657.3 | |||||||||||||||||||
| Gain on sale of businesses, trademarks, and intangible assets | (57.7) | — | (77.8) | (90.0) | |||||||||||||||||||
| Impairment of long-lived assets | 40.2 | — | 55.8 | — | |||||||||||||||||||
| Environmental and other related costs, net of recoveries | 2.3 | 2.2 | (28.0) | 32.6 | |||||||||||||||||||
Operating profit | 27.3 | 58.8 | 118.7 | 246.3 | |||||||||||||||||||
Other expenses: | |||||||||||||||||||||||
Interest expense, net | 15.5 | 12.5 | 47.4 | 31.3 | |||||||||||||||||||
| Other expense, net | 2.4 | 2.7 | 3.2 | 2.2 | |||||||||||||||||||
| Total other expense, net | 17.9 | 15.2 | 50.6 | 33.5 | |||||||||||||||||||
| Earnings before income taxes | 9.4 | 43.6 | 68.1 | 212.8 | |||||||||||||||||||
| Income tax expense | 0.4 | 4.8 | 16.7 | 41.1 | |||||||||||||||||||
| Net earnings | $ | 9.0 | $ | 38.8 | $ | 51.4 | $ | 171.7 | |||||||||||||||
| Less: net earnings (loss) attributable to noncontrolling interests | 0.4 | (0.2) | (0.2) | (1.6) | |||||||||||||||||||
| Net earnings attributable to Wolverine World Wide, Inc. | $ | 8.6 | $ | 39.0 | $ | 51.6 | $ | 173.3 | |||||||||||||||
| Net earnings per share (see Note 3): | |||||||||||||||||||||||
Basic | $ | 0.11 | $ | 0.49 | $ | 0.64 | $ | 2.12 | |||||||||||||||
Diluted | $ | 0.11 | $ | 0.48 | $ | 0.64 | $ | 2.12 | |||||||||||||||
| Comprehensive income (loss) | $ | (0.2) | $ | 13.5 | $ | 39.8 | $ | 110.1 | |||||||||||||||
| Less: comprehensive income (loss) attributable to noncontrolling interests | 0.2 | (0.6) | (0.2) | (2.4) | |||||||||||||||||||
| Comprehensive income (loss) attributable to Wolverine World Wide, Inc. | $ | (0.4) | $ | 14.1 | $ | 40.0 | $ | 112.5 | |||||||||||||||
Cash dividends declared per share | $ | 0.10 | $ | 0.10 | $ | 0.30 | $ | 0.30 | |||||||||||||||
See accompanying notes to consolidated condensed financial statements.
4
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
| (In millions, except share data) | September 30, 2023 | December 31, 2022 | October 1, 2022 | ||||||||||||||
ASSETS | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 160.4 | $ | 131.5 | $ | 136.4 | |||||||||||
Accounts receivable, less allowances of $13.3, $11.1 and $23.0 | 272.0 | 241.7 | 440.0 | ||||||||||||||
| Finished products, net | 561.7 | 743.2 | 871.1 | ||||||||||||||
| Raw materials and work-in-process, net | 2.1 | 2.0 | 9.8 | ||||||||||||||
| Total inventories | 563.8 | 745.2 | 880.9 | ||||||||||||||
| Prepaid expenses and other current assets | 84.9 | 79.0 | 94.5 | ||||||||||||||
| Current assets held for sale | 16.1 | 67.9 | — | ||||||||||||||
| Total current assets | 1,097.2 | 1,265.3 | 1,551.8 | ||||||||||||||
Property, plant and equipment, net of accumulated depreciation of $254.6, $236.1 and $228.4 | 126.5 | 136.2 | 126.0 | ||||||||||||||
| Lease right-of-use assets, net | 148.7 | 174.7 | 165.0 | ||||||||||||||
| Goodwill | 465.4 | 485.0 | 526.5 | ||||||||||||||
| Indefinite-lived intangibles | 237.0 | 274.0 | 658.6 | ||||||||||||||
| Amortizable intangibles, net | 57.4 | 67.4 | 67.7 | ||||||||||||||
| Deferred income taxes | 26.3 | 24.5 | 0.8 | ||||||||||||||
| Other assets | 72.8 | 65.6 | 74.2 | ||||||||||||||
| Total assets | $ | 2,231.3 | $ | 2,492.7 | $ | 3,170.6 | |||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable | $ | 197.2 | $ | 272.2 | $ | 317.9 | |||||||||||
| Accrued salaries and wages | 21.8 | 32.3 | 26.5 | ||||||||||||||
| Other accrued liabilities | 210.9 | 322.9 | 203.4 | ||||||||||||||
| Lease liabilities | 38.7 | 39.1 | 33.5 | ||||||||||||||
| Current maturities of long-term debt | 10.0 | 10.0 | 10.0 | ||||||||||||||
| Borrowings under revolving credit agreements | 370.0 | 425.0 | 740.0 | ||||||||||||||
| Current liabilities held for sale | 3.1 | 8.8 | — | ||||||||||||||
| Total current liabilities | 851.7 | 1,110.3 | 1,331.3 | ||||||||||||||
| Long-term debt, less current maturities | 716.3 | 723.0 | 725.2 | ||||||||||||||
| Accrued pension liabilities | 71.7 | 72.9 | 103.0 | ||||||||||||||
| Deferred income taxes | 34.0 | 35.3 | 116.4 | ||||||||||||||
| Lease liabilities, noncurrent | 141.3 | 153.6 | 147.5 | ||||||||||||||
| Other liabilities | 53.6 | 58.6 | 73.0 | ||||||||||||||
| Stockholders’ equity: | |||||||||||||||||
Common stock – par value $1, authorized 320,000,000 shares; 112,939,664, 112,202,078, and 112,170,049 shares issued | 112.9 | 112.2 | 112.2 | ||||||||||||||
| Additional paid-in capital | 330.7 | 325.4 | 318.7 | ||||||||||||||
| Retained earnings | 934.5 | 907.2 | 1,277.1 | ||||||||||||||
| Accumulated other comprehensive loss | (144.5) | (132.9) | (159.7) | ||||||||||||||
Cost of shares in treasury; 33,407,203, 33,413,204, and 33,414,974 shares | (891.2) | (891.3) | (891.4) | ||||||||||||||
| Total Wolverine World Wide, Inc. stockholders’ equity | 342.4 | 320.6 | 656.9 | ||||||||||||||
| Noncontrolling interest | 20.3 | 18.4 | 17.3 | ||||||||||||||
| Total stockholders’ equity | 362.7 | 339.0 | 674.2 | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | 2,231.3 | $ | 2,492.7 | $ | 3,170.6 | |||||||||||
See accompanying notes to consolidated condensed financial statements.
5
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
| Year-To-Date Ended | |||||||||||
| (In millions) | September 30, 2023 | October 1, 2022 | |||||||||
OPERATING ACTIVITIES | |||||||||||
| Net earnings | $ | 51.4 | $ | 171.7 | |||||||
| Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | |||||||||||
Depreciation and amortization | 26.3 | 25.2 | |||||||||
Deferred income taxes | (1.6) | 2.5 | |||||||||
Stock-based compensation expense | 11.8 | 26.4 | |||||||||
Pension and SERP expense | 1.2 | 7.0 | |||||||||
| Impairment of long-lived assets | 55.8 | — | |||||||||
Environmental and other related costs, net of cash payments and recoveries received | (68.8) | (35.8) | |||||||||
| Gain on sale of businesses, trademarks and intangible assets | (77.8) | (90.0) | |||||||||
Other | (1.1) | (4.9) | |||||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | (25.1) | (133.5) | |||||||||
Inventories | 178.5 | (533.5) | |||||||||
Other operating assets | (11.7) | (15.1) | |||||||||
Accounts payable | (74.7) | 109.2 | |||||||||
Income taxes payable | 5.6 | 5.7 | |||||||||
Other operating liabilities | (62.8) | (25.1) | |||||||||
| Net cash provided by (used in) operating activities | 7.0 | (490.2) | |||||||||
INVESTING ACTIVITIES | |||||||||||
Additions to property, plant and equipment | (18.5) | (23.5) | |||||||||
| Proceeds from sale of businesses, trademarks, intangible assets and other assets | 136.0 | 90.0 | |||||||||
Investment in joint ventures | — | (2.8) | |||||||||
Other | (1.3) | 4.5 | |||||||||
| Net cash provided by investing activities | 116.2 | 68.2 | |||||||||
FINANCING ACTIVITIES | |||||||||||
| Payments under revolving credit agreements | (620.0) | (153.0) | |||||||||
| Borrowings under revolving credit agreements | 565.0 | 668.0 | |||||||||
Payments on long-term debt | (7.5) | (7.5) | |||||||||
| Payments of debt issuance costs | (0.9) | — | |||||||||
Cash dividends paid | (24.5) | (24.7) | |||||||||
Purchases of common stock for treasury | — | (81.3) | |||||||||
| Employee taxes paid under stock-based compensation plans | (5.8) | (7.4) | |||||||||
Proceeds from the exercise of stock options | 0.1 | 1.4 | |||||||||
Contributions from noncontrolling interests | 2.1 | 7.0 | |||||||||
| Net cash provided by (used in) financing activities | (91.5) | 402.5 | |||||||||
Effect of foreign exchange rate changes | (2.5) | (5.8) | |||||||||
| Increase (decrease) in cash and cash equivalents | 29.2 | (25.3) | |||||||||
Cash and cash equivalents at beginning of the year | 135.5 | 161.7 | |||||||||
Cash and cash equivalents at end of the quarter | $ | 164.7 | $ | 136.4 | |||||||
Cash and cash equivalents at the end of the third quarter of 2023 in the consolidated condensed statements of cash flows includes $4.3 million of Wolverine Leathers business related cash and cash equivalents that are classified as held for sale as of September 30, 2023 that are not included in cash and cash equivalents in the consolidated condensed balance sheets. The cash and cash equivalents at beginning of the year balance includes $4.0 million of Wolverine Leathers business related cash and cash equivalents that were classified as held for sale as of December 31, 2022.
See accompanying notes to consolidated condensed financial statements.
6
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Equity
(Unaudited)
| Wolverine World Wide, Inc. Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||
| (In millions, except share and per share data) | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Non-controlling Interest | Total | ||||||||||||||||||||||||||||||||||
| Balance at July 2, 2022 | $ | 112.1 | $ | 311.9 | $ | 1,246.1 | $ | (134.8) | $ | (891.4) | $ | 17.9 | $ | 661.8 | |||||||||||||||||||||||||||
| Net earnings (loss) | 39.0 | (0.2) | 38.8 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (24.9) | (0.4) | (25.3) | ||||||||||||||||||||||||||||||||||||||
Shares issued, net of shares forfeited under stock incentive plans (20,672 shares) | 0.1 | (0.3) | (0.2) | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 7.1 | 7.1 | |||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.10 per share) | (8.0) | (8.0) | |||||||||||||||||||||||||||||||||||||||
| Balance at October 1, 2022 | $ | 112.2 | $ | 318.7 | $ | 1,277.1 | $ | (159.7) | $ | (891.4) | $ | 17.3 | $ | 674.2 | |||||||||||||||||||||||||||
| Balance at July 1, 2023 | $ | 112.9 | $ | 326.8 | $ | 933.8 | $ | (135.5) | $ | (891.2) | $ | 20.1 | $ | 366.9 | |||||||||||||||||||||||||||
| Net earnings | 8.6 | 0.4 | 9.0 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (9.0) | (0.2) | (9.2) | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 4.0 | 4.0 | |||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.10 per share) | (7.9) | (7.9) | |||||||||||||||||||||||||||||||||||||||
| Issuance of treasury shares (2,374 shares) | (0.1) | — | (0.1) | ||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | 112.9 | $ | 330.7 | $ | 934.5 | $ | (144.5) | $ | (891.2) | $ | 20.3 | $ | 362.7 | |||||||||||||||||||||||||||
See accompanying notes to consolidated condensed financial statements.
7
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Equity
(Unaudited)
| Wolverine World Wide, Inc. Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||
| (In millions, except share and per share data) | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Non-controlling Interest | Total | ||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | 111.6 | $ | 298.9 | $ | 1,128.2 | $ | (98.9) | $ | (810.2) | $ | 14.8 | $ | 644.4 | |||||||||||||||||||||||||||
| Net earnings (loss) | 173.3 | (1.6) | 171.7 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (60.8) | (0.8) | (61.6) | ||||||||||||||||||||||||||||||||||||||
Shares issued, net of shares forfeited under stock incentive plans (463,473 shares) | 0.5 | (8.0) | (7.5) | ||||||||||||||||||||||||||||||||||||||
Shares issued for stock options exercised, net (74,482 shares) | 0.1 | 1.4 | 1.5 | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 26.4 | 26.4 | |||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.30 per share) | (24.4) | (24.4) | |||||||||||||||||||||||||||||||||||||||
Issuance of treasury shares (4,203 shares) | — | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||||||
Purchase of common stock for treasury (3,815,164 shares) | (81.3) | (81.3) | |||||||||||||||||||||||||||||||||||||||
| Capital contribution from noncontrolling interest | $ | 7.0 | $ | 7.0 | |||||||||||||||||||||||||||||||||||||
| Other | $ | (2.1) | $ | (2.1) | |||||||||||||||||||||||||||||||||||||
| Balance at October 1, 2022 | $ | 112.2 | $ | 318.7 | $ | 1,277.1 | $ | (159.7) | $ | (891.4) | $ | 17.3 | $ | 674.2 | |||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | 112.2 | $ | 325.4 | $ | 907.2 | $ | (132.9) | $ | (891.3) | $ | 18.4 | $ | 339.0 | |||||||||||||||||||||||||||
| Net earnings (loss) | 51.6 | (0.2) | 51.4 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (11.6) | — | (11.6) | ||||||||||||||||||||||||||||||||||||||
Shares issued, net of shares forfeited under stock incentive plans (731,544 shares) | 0.7 | (6.5) | (5.8) | ||||||||||||||||||||||||||||||||||||||
Shares issued for stock options exercised, net (6,042 shares) | — | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 11.8 | 11.8 | |||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.30 per share) | (24.3) | (24.3) | |||||||||||||||||||||||||||||||||||||||
Issuance of treasury shares (6,001 shares) | (0.1) | 0.1 | — | ||||||||||||||||||||||||||||||||||||||
| Capital contribution from noncontrolling interest | 2.1 | 2.1 | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | 112.9 | $ | 330.7 | $ | 934.5 | $ | (144.5) | $ | (891.2) | $ | 20.3 | $ | 362.7 | |||||||||||||||||||||||||||
See accompanying notes to consolidated condensed financial statements.
8
WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
1.BASIS OF PRESENTATION
Nature of Operations
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 shoes, boots and apparel; and uniform shoes and boots. The Company’s portfolio of owned and licensed brands includes: Bates®, Cat®, Chaco®, Harley-Davidson®, Hush Puppies®, HYTEST®, Merrell®, Saucony®, Sperry®, Stride Rite®, Sweaty Betty® and Wolverine®. The Company’s products are marketed worldwide through owned operations, through licensing and distribution arrangements with third parties, and joint ventures. The Company also operates retail stores and eCommerce sites to market both its own brands and branded footwear and apparel from other manufacturers, as well as a leathers division that markets Wolverine Performance Leathers™.
Effective February 4, 2023, the Company completed the sale of the Keds® business. See Note 18 for further discussion.
In the third quarter of fiscal 2023, the Company entered into a multi-year licensing agreement of the Hush Puppies® brand in the United States and Canada. As part of this agreement, the Company agreed to sell inventory and provide certain transition services to the licensee. In addition, the Company completed the sale of Hush Puppies® trademarks, patents, copyrights, and domains in China, Hong Kong, and Macau. Wolverine will continue to own the Hush Puppies® brand throughout the rest of the world. See Note 18 for further discussion.
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for a complete presentation of the financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included in the accompanying financial statements. For further information, refer to the consolidated financial statements and notes included in the Company’s 2022 Form 10-K.
Fiscal Year
The Company’s fiscal year is the 52 or 53-week period that ends on the Saturday nearest to December 31. Fiscal years 2023 and 2022 each have 52 weeks. The Company reports its quarterly results of operations on the basis of 13-week quarters for each of the first three fiscal quarters and a 13 or 14-week period for the fiscal fourth quarter. References to particular years or quarters refer to the Company’s fiscal years ended on the Saturday nearest to December 31 or the fiscal quarters within those years.
Seasonality
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 inventory builds 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 direct-to-consumer sales being higher 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 2: "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.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or an asset group may not be recoverable. Each impairment test is based on a comparison of the carrying amount of the asset or asset group to the future undiscounted net cash flows expected to be generated by the asset or asset group. Assets are considered impaired if the carrying amount exceeds fair value. The impairment amount recognized is the amount by which the carrying amount of the assets exceeds their fair value.
In the second quarter of 2023, the Company incurred $15.6 million in non-cash impairment charges on certain Corporate U.S. office long-lived property, plant and equipment and right-of-use assets, primarily resulting from divestiture activities and
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consolidation of U.S. offices, to adjust the carrying amount of the assets to estimated fair value. Fair value was estimated based on the discounted cash flows of estimated rental income from subleases net of estimated expenses. In the third quarter of 2023, the Company incurred $1.9 million in non-cash impairment charges on certain Sperry® retail store assets where the estimated future cash flows did not support the net book value of the assets. The following table provides details related to asset impairment charges recorded during 2023:
| Quarter Ended | Year-To-Date Ended | ||||||||||
| (In millions) | September 30, 2023 | September 30, 2023 | |||||||||
| Lease right-of-use assets impairment | $ | — | $ | 12.1 | |||||||
| Property, plant and equipment impairment | 1.9 | 5.4 | |||||||||
Indefinite-lived trade name impairment (1) | 38.3 | 38.3 | |||||||||
| Total impairment | $ | 40.2 | $ | 55.8 | |||||||
(1) See Note 4 for information related to the Indefinite-lived trade name impairment recorded in the third quarter of fiscal 2023.
2.NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (“FASB”) has issued the following Accounting Standards Update (“ASU”) that the Company has adopted. The following is a summary of the new standard.
| Standard | Description | Effect on the Financial Statements | ||||||||||||
| ASU 2020-04, Reference Rate Reform (Topic 848); Facilitation of the Effects of Reference Rate Reform on Financial Reporting (as amended by ASU 2021-01 and ASU 2022-06). | Provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. | The Company adopted ASU 2020-04 during the second quarter of 2023 on a prospective basis. The Company amended its amended senior credit facility to use SOFR as an alternative to LIBOR. The adoption of the ASU did not have a material effect on the consolidated financial statements. | ||||||||||||
3.EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share.
| Quarter Ended | Year-To-Date Ended | ||||||||||||||||||||||
| (In millions, except per share data) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
Numerator: | |||||||||||||||||||||||
| Net earnings attributable to Wolverine World Wide, Inc. | $ | 8.6 | $ | 39.0 | $ | 51.6 | $ | 173.3 | |||||||||||||||
Adjustment for earnings allocated to non-vested restricted common stock | (0.2) | (0.8) | (1.2) | (3.4) | |||||||||||||||||||
| Net earnings used in calculating basic and diluted earnings per share | $ | 8.4 | $ | 38.2 | $ | 50.4 | $ | 169.9 | |||||||||||||||
Denominator: | |||||||||||||||||||||||
Weighted average shares outstanding | 79.5 | 78.7 | 79.4 | 80.0 | |||||||||||||||||||
Effect of dilutive stock options | — | 0.2 | — | 0.2 | |||||||||||||||||||
Shares used in calculating diluted earnings per share | 79.5 | 78.9 | 79.4 | 80.2 | |||||||||||||||||||
| Net earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.11 | $ | 0.49 | $ | 0.64 | $ | 2.12 | |||||||||||||||
| Diluted | $ | 0.11 | $ | 0.48 | $ | 0.64 | $ | 2.12 | |||||||||||||||
For the quarter and year-to-date ended September 30, 2023, 1,964,421 and 2,042,094 outstanding stock options, respectively, have not been included in the denominator for the computation of diluted earnings per share because they were anti-dilutive.
For the quarter and year-to-date ended October 1, 2022, 1,422,302 and 1,126,353 outstanding stock options, respectively, have not been included in the denominator for the computation of diluted earnings per share because they were anti-dilutive.
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4.GOODWILL AND INDEFINITE-LIVED INTANGIBLES
The changes in the carrying amount of goodwill are as follows:
| Year-To-Date Ended | |||||||||||
| (In millions) | September 30, 2023 | October 1, 2022 | |||||||||
Goodwill balance at beginning of the year | $ | 485.0 | $ | 556.6 | |||||||
| Sale of business (see Note 18) | (20.4) | — | |||||||||
| Foreign currency translation effects | 0.8 | (30.1) | |||||||||
Goodwill balance at end of the quarter | $ | 465.4 | $ | 526.5 | |||||||
The Company’s indefinite-lived intangible assets, which comprise trade names and trademarks, totaled $237.0 million, $274.0 million, and $658.6 million as of September 30, 2023, December 31, 2022, and October 1, 2022, respectively. In the third quarter of 2023, due to the continued lower current year performance of the Sperry® brand, the Company determined that a triggering event had occurred requiring impairment testing of the Sperry® trade name. Based on the results of the impairment testing, the Company recognized impairment charges of $38.3 million to the Sperry® trade name. The impairment charge was due to reductions in future cash flow assumptions mainly due to decreases in anticipated future performance and an increase in the discount rate used in the valuation. In conjunction with the Sperry® trade name impairment trigger identified, the Company performed a quantitative impairment analysis of the Lifestyle reporting unit and concluded the reporting unit was not impaired. The estimated fair value of the Lifestyle reporting unit exceeded the carrying value by 30%.
In the fourth quarter of 2022, the Company recognized impairment charges of $191.0 million and $189.3 million related to the Sperry® and Sweaty Betty® trade names, respectively, and recognized a $48.4 million goodwill impairment charge related to the Sweaty Betty® reporting unit.
The risk of future non-cash impairment of the Sperry® and Sweaty Betty® trade names and Sweaty Betty® goodwill is dependent on whether actual results differ from the key assumptions used in the determination of each trade name's fair value and the Sweaty Betty® reporting unit’s fair value, such as revenue growth, earnings before interest, taxes depreciation and amortization margin, discount rate, and assumed tax rate, or if macroeconomic conditions deteriorate and adversely affect the values of the Company's Sperry® and Sweaty Betty® trade names and the Sweaty Betty® reporting unit. A future impairment charge of the Sperry® trade name or Sweaty Betty® trade name and the Sweaty Betty® reporting unit goodwill could have an adverse material effect on the Company's consolidated financial results. The carrying values of the Company’s Sperry® and Sweaty Betty® trade names indefinite-lived assets were $67.0 million and $95.3 million, respectively, as of September 30, 2023.
5.ACCOUNTS RECEIVABLE
The Company and certain of its subsidiaries sell, on a continuous basis without recourse, their trade receivables to Rockford ARS, LLC (“Rockford ARS”), a wholly-owned bankruptcy-remote subsidiary of the Company. On December 7, 2022, Rockford ARS entered into a receivables purchase agreement (“RPA”) to sell up to $175.0 million of receivables to certain purchasers (the “Purchasers”) on a recurring basis in exchange for cash (referred to as “capital” in the RPA) equal to the gross receivables transferred. The parties intend that the transfers of receivables to the Purchasers constitute purchases and sales of receivables. Rockford ARS has guaranteed to each Purchaser the prompt payment of sold receivables, and has granted a security interest in its assets for the benefit of the Purchasers. Under the RPA, which matures on December 5, 2025 each Purchaser’s share of capital accrues yield at a floating rate plus an applicable margin. The Company is the master servicer under the RPA, and is responsible for administering and collecting receivables.
The proceeds of the RPA are classified as operating activities in the Company's consolidated condensed statements of cash flows. Cash received from collections of sold receivables may be used to fund additional purchases of receivables on a revolving basis or to return all or any portion of outstanding capital of the Purchasers. Subsequent collections of the pledged receivables, which have not been sold, will be classified as operating cash flows at the time of collection. Total receivables sold under the RPA were $144.7 million and $510.3 million for the quarter and year-to-date ended September 30, 2023, respectively. Total cash collections under the RPA were $148.7 million and $521.5 million in the quarter and year-to-date ended September 30, 2023, respectively. The fair value of the sold receivables approximated book value due to their credit quality and short-term nature, and as a result, no gain or loss on sale of receivables was recorded.
As of the fiscal quarter ended September 30, 2023, the amount sold to the Purchasers under the RPA was $131.5 million, which was derecognized from the consolidated condensed balance sheets. As collateral against sold receivables, Rockford ARS maintains a certain level of unsold receivables, which was $61.5 million as of the fiscal quarter ended September 30, 2023.
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6.REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition and Performance Obligations
The Company reports disaggregated revenue by sales channel, including the wholesale and direct-to-consumer sales channels, reconciled to the Company’s reportable segments. The wholesale channel includes royalty revenues due to the similarity in the Company’s oversight and management, customer base, the performance obligation (footwear and apparel goods) and point in time completion of the performance obligation. The direct-to-consumer sales channel includes sales from the Company’s owned retail stores and from the Company’s owned eCommerce sites.
Quarter Ended September 30, 2023 | Quarter Ended October 1, 2022 | ||||||||||||||||||||||||||||||||||
| (In millions) | Wholesale | Direct-to-Consumer | Total | Wholesale | Direct-to-Consumer | Total | |||||||||||||||||||||||||||||
| Active Group | $ | 225.2 | $ | 103.4 | $ | 328.6 | $ | 288.7 | $ | 109.5 | $ | 398.2 | |||||||||||||||||||||||
| Work Group | 111.4 | 11.6 | 123.0 | 145.4 | 12.4 | 157.8 | |||||||||||||||||||||||||||||
| Lifestyle Group | 42.8 | 20.0 | 62.8 | 81.7 | 36.0 | 117.7 | |||||||||||||||||||||||||||||
| Other | 11.7 | 1.6 | 13.3 | 15.8 | 1.9 | 17.7 | |||||||||||||||||||||||||||||
| Total Revenue | $ | 391.1 | $ | 136.6 | $ | 527.7 | $ | 531.6 | $ | 159.8 | $ | 691.4 | |||||||||||||||||||||||
Year-To-Date Ended September 30, 2023 | Year-To-Date Ended October 1, 2022 | ||||||||||||||||||||||||||||||||||
| (In millions) | Wholesale | Direct-to-Consumer | Total | Wholesale | Direct-to-Consumer | Total | |||||||||||||||||||||||||||||
| Active Group | $ | 800.4 | $ | 297.4 | $ | 1,097.8 | $ | 849.5 | $ | 323.1 | $ | 1,172.6 | |||||||||||||||||||||||
| Work Group | 322.4 | 32.9 | 355.3 | 398.1 | 37.7 | 435.8 | |||||||||||||||||||||||||||||
| Lifestyle Group | 162.0 | 61.0 | 223.0 | 244.8 | 102.1 | 346.9 | |||||||||||||||||||||||||||||
| Other | 35.9 | 4.2 | 40.1 | 60.0 | 4.5 | 64.5 | |||||||||||||||||||||||||||||
| Total Revenue | $ | 1,320.7 | $ | 395.5 | $ | 1,716.2 | $ | 1,552.4 | $ | 467.4 | $ | 2,019.8 | |||||||||||||||||||||||
The Company has agreements to license symbolic intellectual property with minimum guarantees or fixed consideration. The Company was due $15.2 million of remaining fixed transaction price under its license agreements as of September 30, 2023, which it expects to recognize per the terms of its contracts over the course of time through December 2028. The Company has elected to omit the remaining variable consideration under its license agreements given the Company recognizes revenue equal to what it has the right to invoice and that amount corresponds directly with the value to the customer of the Company’s performance to date.
Reserves for Variable Consideration
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, as detailed below, are based on the amounts earned, or to be claimed on the related sales. These estimates take into consideration a range of possible outcomes, which are probability-weighted in accordance with the expected value method for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts. Revenue recognized during the fiscal periods presented related to the Company’s contract liabilities was nominal.
The Company’s contract balances are as follows:
| (In millions) | September 30, 2023 | December 31, 2022 | October 1, 2022 | ||||||||||||||
| Product returns reserve | $ | 10.8 | $ | 15.3 | $ | 11.6 | |||||||||||
| Customer markdowns reserve | 4.6 | 2.6 | 2.2 | ||||||||||||||
| Other sales incentives reserve | 3.4 | 3.3 | 3.7 | ||||||||||||||
| Customer rebates liability | 14.0 | 19.8 | 18.2 | ||||||||||||||
| Customer advances liability | 4.9 | 9.1 | 5.3 | ||||||||||||||
The amount of variable consideration included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the
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contract will not occur in a future period. Actual amounts of consideration ultimately received may differ from initial estimates. If actual results in the future vary from initial estimates, the Company subsequently adjusts these estimates, which affects net revenue and earnings in the period such variances become known.
7.DEBT
Total debt consists of the following obligations:
| (In millions) | September 30, 2023 | December 31, 2022 | October 1, 2022 | ||||||||||||||
| Term Facility, due October 21, 2026 | $ | 182.5 | $ | 190.0 | $ | 192.5 | |||||||||||
| Senior Notes, 4.000% interest, due August 15, 2029 | 550.0 | 550.0 | 550.0 | ||||||||||||||
| Borrowings under revolving credit agreements | 370.0 | 425.0 | 740.0 | ||||||||||||||
| Unamortized deferred financing costs | (6.2) | (7.0) | (7.3) | ||||||||||||||
| Total debt | $ | 1,096.3 | $ | 1,158.0 | $ | 1,475.2 | |||||||||||
The Company’s credit agreement provides for a term loan A facility (the “Term Facility”) and for a revolving credit facility (the “Revolving Facility” and, together with the Term Facility, the “Senior Credit Facilities”). The maturity date of the loans under the Senior Credit Facilities is October 21, 2026. The credit agreement provides for a debt capacity of up to an aggregate debt amount (including outstanding term loan principal and revolver commitment amounts in addition to permitted incremental debt) not to exceed $2.0 billion unless certain specified conditions set forth in the Credit Agreement are met.
The Term Facility requires quarterly principal payments with a balloon payment due on October 21, 2026. The scheduled principal payments due under the Term Facility over the next 12 months total $10.0 million as of September 30, 2023 and are recorded as current maturities of long-term debt on the consolidated condensed balance sheets.
The Revolving Facility allows the Company to borrow up to an aggregate amount of $1.0 billion. The Revolving Facility also includes a $100.0 million swingline subfacility and a $50.0 million letter of credit subfacility. The Company had outstanding letters of credit under the Revolving Facility of $6.6 million, $5.7 million and $5.6 million as of September 30, 2023, December 31, 2022 and October 1, 2022, respectively. These outstanding letters of credit reduce the borrowing capacity under the Revolving Facility.
The interest rates applicable to amounts outstanding under Term Facility and to U.S. dollar denominated amounts outstanding under the Revolving Facility are, at the Company’s option, either (1) the Alternate Base Rate plus an Applicable Margin as determined by the Company’s Consolidated Leverage Ratio, within a range of 0.125% to 1.000%, or (2) the Eurocurrency Rate plus an Applicable Margin as determined by the Company’s Consolidated Leverage Ratio, within a range of 1.125% to 2.000% (all capitalized terms used in this sentence are as defined in the Credit Agreement). At September 30, 2023, the Term Facility and the Revolving Facility had a weighted-average interest rate of 6.38%.
The obligations of the Company pursuant to the Credit Agreement are guaranteed by substantially all of the Company’s material domestic subsidiaries and secured by substantially all of the personal and real property of the Company and its material domestic subsidiaries, subject to certain exceptions.
The Senior Credit Facilities also contain certain affirmative and negative covenants, including covenants that limit the ability of the Company and its Restricted 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, as well as covenants restricting the activities of certain foreign subsidiaries of the Company that hold intellectual property related assets. Further, the Senior Credit Facilities require compliance with the following financial covenants: a maximum Consolidated Leverage Ratio and a minimum Consolidated Interest Coverage Ratio (all capitalized terms used in this paragraph are as defined in the Senior Credit Facilities). As of September 30, 2023, the Company was in compliance with all covenants and performance ratios under the Senior Credit Facilities.
On June 30, 2023, the Company entered into the Fourth Amendment (the “Amendment”) to its credit agreement, dated as of July 31, 2012. The Amendment provides the Company with near-term financial flexibility by adjusting the maximum Consolidated Leverage Ratio allowed under the credit agreement through the end of fiscal 2023. Financial covenant thresholds will revert to pre-existing levels in the first quarter of fiscal 2024.
The Company’s $550.0 million 4.000% senior notes issued on August 26, 2021 are due on August 15, 2029. Related interest payments are due semi-annually. The senior notes are guaranteed by substantially all of the Company’s domestic subsidiaries.
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The Company has a foreign revolving credit facility with aggregate available borrowings of $2.0 million that are uncommitted and, therefore, each borrowing against the facility is subject to approval by the lender. There were no borrowings against this facility as of September 30, 2023, December 31, 2022 and October 1, 2022.
The Company included in interest expense the amortization of deferred financing costs of $0.6 million and $1.6 million for the quarter and year-to-date ended September 30, 2023, respectively. The Company included in interest expense the amortization of deferred financing costs of $0.5 million and $1.5 million for the quarter and year-to-date ended October 1, 2022, respectively.
8.LEASES
The following is a summary of the Company’s lease cost.
| Quarter Ended | Year-To-Date Ended | ||||||||||||||||||||||
| (In millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
| Operating lease cost | $ | 10.0 | $ | 8.6 | $ | 30.5 | $ | 26.4 | |||||||||||||||
| Variable lease cost | 3.9 | 3.8 | 10.9 | 11.4 | |||||||||||||||||||
| Short-term lease cost | 0.7 | 0.6 | 2.6 | 2.2 | |||||||||||||||||||
| Sublease income | (1.3) | (2.0) | (4.5) | (6.2) | |||||||||||||||||||
| Total lease cost | $ | 13.3 | $ | 11.0 | $ | 39.5 | $ | 33.8 | |||||||||||||||
The following is a summary of the Company’s supplemental cash flow information related to leases.
| Quarter Ended | Year-To-Date Ended | ||||||||||||||||||||||
| (In millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
| Cash paid for operating lease liabilities | $ | 10.0 | $ | 11.1 | $ | 32.6 | $ | 30.3 | |||||||||||||||
| Operating lease assets obtained in exchange for lease liabilities | 4.2 | 9.7 | 9.6 | 59.0 | |||||||||||||||||||
The Company did not enter into any real estate leases with commencement dates subsequent to September 30, 2023.
9.DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes foreign currency forward exchange contracts designated as cash flow hedges 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. These foreign currency forward exchange hedge contracts extended out to a maximum of 531 days, 524 days, and 524 days as of September 30, 2023, December 31, 2022 and October 1, 2022, respectively. If, in the future, the foreign exchange contracts are determined not to be highly effective or are terminated before their contractual termination dates, the Company would remove the hedge designation from those contracts and reclassify into earnings the unrealized gains or losses that would otherwise be included in accumulated other comprehensive income (loss) within stockholders’ equity.
The Company also utilizes foreign currency forward exchange contracts that are not designated as hedging instruments to manage foreign currency transaction exposure. Foreign currency derivatives not designated as hedging instruments are offset by foreign exchange gains or losses resulting from the underlying exposures of foreign currency denominated assets and liabilities.
The Company has an interest rate swap arrangement, which unless otherwise terminated, will mature on May 30, 2025. This agreement, which exchanges floating rate interest payments for fixed rate interest payments over the life of the agreement without the exchange of the underlying notional amounts, has been designated as a cash flow hedge of the underlying debt. The notional amount of the interest rate swap arrangement is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap arrangement is recognized as interest expense, net. In accordance with FASB Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, the Company has formally documented the relationship between the interest rate swap and the variable rate borrowing, as well as its risk management objective and strategy for undertaking the hedge transactions. This process included linking the derivative to the specific liability or asset on the balance sheet. The Company also assessed at the inception of the hedge, and continues to assess on an ongoing basis, whether the derivative used in the hedging transaction is highly effective in offsetting changes in the cash flows of the hedged item.
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The notional amounts of the Company’s derivative instruments are as follows:
| (Dollars in millions) | September 30, 2023 | December 31, 2022 | October 1, 2022 | ||||||||||||||
| Foreign exchange hedge contracts | $ | 267.8 | $ | 334.2 | $ | 376.3 | |||||||||||
| Interest rate swap | 109.6 | 176.2 | 240.6 | ||||||||||||||
The recorded fair values of the Company’s derivative instruments are as follows:
| (In millions) | September 30, 2023 | December 31, 2022 | October 1, 2022 | ||||||||||||||
| Financial assets: | |||||||||||||||||
| Foreign exchange hedge contracts | $ | 4.3 | $ | 7.5 | $ | 32.3 | |||||||||||
| Interest rate swap | 3.0 | 6.1 | 7.2 | ||||||||||||||
| Financial liabilities: | |||||||||||||||||
| Foreign exchange hedge contracts | $ | (0.3) | $ | (1.3) | $ | — | |||||||||||
Foreign exchange hedge contract financial assets are recorded to prepaid expenses and other current assets and financial liabilities are recorded to other accrued liabilities on the consolidated balance sheets. Interest rate swap financial assets are recorded to other assets and financial liabilities are recorded to other liabilities on the consolidated condensed balance sheets.
10.STOCK-BASED COMPENSATION
The Company recognized compensation expense of $4.0 million and $11.8 million, and related income tax benefits of $0.8 million and $2.3 million, for grants under its stock-based compensation plans for the quarter and year-to-date ended September 30, 2023, respectively. The Company recognized compensation expense of $7.1 million and $26.4 million, and related income tax benefits of $1.4 million and $5.1 million, for grants under its stock-based compensation plans for the quarter and year-to-date ended October 1, 2022, respectively.
The Company grants restricted stock or units (“restricted awards”), performance-based restricted stock or units (“performance awards”) and stock options under its stock-based compensation plans.
The Company granted restricted awards and performance awards as follows:
Year-To-Date Ended September 30, 2023 | Year-To-Date Ended October 1, 2022 | ||||||||||||||||||||||
| (In millions) | Company Shares Issued | Weighted-Average Grant Date Fair Value | Company Shares Issued | Weighted-Average Grant Date Fair Value | |||||||||||||||||||
| Restricted Awards | 1,412,030 | $ | 14.90 | 965,341 | $ | 26.06 | |||||||||||||||||
| Performance Awards | 680,737 | $ | 15.16 | 393,647 | $ | 29.90 | |||||||||||||||||
11.RETIREMENT PLANS
The following is a summary of net pension and Supplemental Executive Retirement Plan (“SERP”) expense recognized by the Company.
| Quarter Ended | Year-To-Date Ended | ||||||||||||||||||||||
| (In millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
Service cost pertaining to benefits earned during the period | $ | 0.7 | $ | 1.3 | $ | 2.3 | $ | 4.0 | |||||||||||||||
Interest cost on projected benefit obligations | 4.4 | 3.3 | 13.3 | 9.9 | |||||||||||||||||||
Expected return on pension assets | (4.6) | (5.1) | (13.9) | (15.4) | |||||||||||||||||||
Net amortization loss | (0.1) | 2.9 | (0.5) | 8.5 | |||||||||||||||||||
Net pension expense | $ | 0.4 | $ | 2.4 | $ | 1.2 | $ | 7.0 | |||||||||||||||
The non-service cost components of net pension expense is recorded in the Other expense, net line item on the consolidated condensed statements of operations and comprehensive income.
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12.INCOME TAXES
The Company maintains management and operational activities in overseas subsidiaries, and its foreign earnings are taxed at rates that are different 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.
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.
The Company’s effective tax rates for the quarter and year-to-date ended September 30, 2023 were 4.6% and 24.5%, respectively. The Company’s effective tax rates for the quarter and year-to-date ended October 1, 2022 were 10.9% and 19.3%, respectively. The decrease in the effective tax rate between 2023 and 2022 for the quarter-to-date period is due to income mix changes between jurisdictions with differing tax rates, partially offset by discrete tax expenses in the current year compared to discrete benefits in the prior year. The increase in the effective tax rate between 2023 and 2022 for the year-to-date period is due to discrete tax expenses in the current year compared to discrete tax benefits in the prior year, partially offset by income mix changes between jurisdictions with differing tax rates.
The Company is subject to periodic audits by U.S. federal, state, local and non-U.S. tax authorities. Currently, the Company is undergoing routine periodic audits in both U.S. federal, state, local and non-U.S. tax jurisdictions. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next 12 months as a result of the audits; however, any payment of tax is not expected to be significant to the consolidated condensed financial statements. The Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2017 in the majority of tax jurisdictions.
13.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) represents net earnings and any revenue, expenses, gains and losses that, under U.S. GAAP, are excluded from net earnings and recognized directly as a component of stockholders’ equity.
The change in accumulated other comprehensive income (loss) during the quarters ended September 30, 2023 and October 1, 2022 is as follows:
| (In millions) | Foreign currency translation | Derivatives | Pension | Total | |||||||||||||||||||
| Balance at July 2, 2022 | $ | (115.9) | $ | 9.8 | $ | (28.7) | $ | (134.8) | |||||||||||||||
Other comprehensive income (loss) before reclassifications (1) | (40.9) | 17.4 | — | (23.5) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | — | (4.7) | (2) | 2.9 | (3) | (1.8) | |||||||||||||||||
| Income tax expense (benefit) | — | 1.1 | (0.7) | 0.4 | |||||||||||||||||||
| Net reclassifications | — | (3.6) | 2.2 | (1.4) | |||||||||||||||||||
Net current-period other comprehensive income (loss) (1) | (40.9) | 13.8 | 2.2 | (24.9) | |||||||||||||||||||
| Balance at October 1, 2022 | $ | (156.8) | $ | 23.6 | $ | (26.5) | $ | (159.7) | |||||||||||||||
| Balance at July 1, 2023 | $ | (125.0) | $ | (8.5) | $ | (2.0) | $ | (135.5) | |||||||||||||||
Other comprehensive income (loss) before reclassifications (1) | (13.1) | 8.9 | — | (4.2) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | — | (6.1) | (2) | (0.1) | (3) | (6.2) | |||||||||||||||||
| Income tax expense (benefit) | — | 1.4 | — | 1.4 | |||||||||||||||||||
| Net reclassifications | — | (4.7) | (0.1) | (4.8) | |||||||||||||||||||
Net current-period other comprehensive income (loss) (1) | (13.1) | 4.2 | (0.1) | (9.0) | |||||||||||||||||||
| Balance at September 30, 2023 | $ | (138.1) | $ | (4.3) | $ | (2.1) | $ | (144.5) | |||||||||||||||
(1)Other comprehensive income (loss) is reported net of taxes and noncontrolling interest.
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(2)Amounts related to foreign currency derivatives deemed to be highly effective are included in cost of goods sold. Amounts related to foreign currency derivatives that are no longer deemed to be highly effective are included in other income. Amounts related to the interest rate swap are included in interest expense.
(3)Amounts reclassified are included in the computation of net pension expense.
The change in accumulated other comprehensive income (loss) during the year-to-date periods ended September 30, 2023 and October 1, 2022 is as follows:
| (In millions) | Foreign currency translation | Derivatives | Pension | Total | |||||||||||||||||||
| Balance at January 1, 2022 | $ | (56.8) | $ | (8.9) | $ | (33.2) | $ | (98.9) | |||||||||||||||
Other comprehensive income (loss) before reclassifications (1) | (100.0) | 39.1 | — | (60.9) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | — | (8.7) | (2) | 8.5 | (3) | (0.2) | |||||||||||||||||
| Income tax expense (benefit) | — | 2.1 | (1.8) | 0.3 | |||||||||||||||||||
| Net reclassifications | — | (6.6) | 6.7 | 0.1 | |||||||||||||||||||
Net current-period other comprehensive income (loss) (1) | (100.0) | 32.5 | 6.7 | (60.8) | |||||||||||||||||||
| Balance at October 1, 2022 | $ | (156.8) | $ | 23.6 | $ | (26.5) | $ | (159.7) | |||||||||||||||
| Balance at December 31, 2022 | $ | (133.1) | $ | 1.9 | $ | (1.7) | $ | (132.9) | |||||||||||||||
Other comprehensive income (loss) before reclassifications (1) | (9.2) | 6.0 | — | (3.2) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | 4.2 | (16.2) | (2) | (0.5) | (3) | (12.5) | |||||||||||||||||
| Income tax expense (benefit) | — | 4.0 | 0.1 | 4.1 | |||||||||||||||||||
| Net reclassifications | 4.2 | (12.2) | (0.4) | (8.4) | |||||||||||||||||||
Net current-period other comprehensive income (loss) (1) | (5.0) | (6.2) | (0.4) | (11.6) | |||||||||||||||||||
| Balance at September 30, 2023 | $ | (138.1) | $ | (4.3) | $ | (2.1) | $ | (144.5) | |||||||||||||||
(1)Other comprehensive income (loss) is reported net of taxes and noncontrolling interest.
(2)Amounts related to foreign currency derivatives deemed to be highly effective are included in cost of goods sold. Amounts related to foreign currency derivatives that are no longer deemed to be highly effective are included in other income. Amounts related to the interest rate swap are included in interest expense.
(3)Amounts reclassified are included in the computation of net pension expense.
14. FAIR VALUE MEASUREMENTS
The Company measures certain financial assets and liabilities at fair value on a recurring basis. For additional information regarding the Company’s fair value policies, refer to Note 1 in the Company’s 2022 Form 10-K.
Recurring Fair Value Measurements
The following table sets forth financial assets and liabilities measured at fair value in the consolidated condensed balance sheets and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy.
| Fair Value Measurements | |||||||||||||||||
| Quoted Prices With Other Observable Inputs (Level 2) | |||||||||||||||||
| (In millions) | September 30, 2023 | December 31, 2022 | October 1, 2022 | ||||||||||||||
| Financial assets: | |||||||||||||||||
| Derivatives | $ | 7.3 | $ | 13.6 | $ | 39.5 | |||||||||||
| Financial liabilities: | |||||||||||||||||
| Derivatives | $ | (0.3) | $ | (1.3) | $ | — | |||||||||||
The fair value of foreign currency forward exchange contracts represents the estimated receipts or payments necessary to terminate the contracts. The interest rate swap was valued based on the current forward rates of the future cash flows.
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Nonrecurring Fair Value Measurements
Indefinite-lived intangible assets and goodwill are tested annually, or if a triggering event occurs that indicates an impairment loss may have been incurred, using fair value measurements with unobservable inputs (Level 3). In the third quarter of fiscal 2023, after completion of impairment testing, the Company recognized impairment charges of $38.3 million to the Sperry® trade name. Refer to Note 4, “Goodwill and Other Intangibles” for additional discussion on the Sperry® trade name impairment.
Fair Value Disclosures
The Company’s financial instruments that are not recorded at fair value consist of cash and cash equivalents, accounts and notes receivable, accounts payable, borrowings under revolving credit agreements and other short-term and long-term debt. The carrying amount of these financial instruments is historical cost, which approximates fair value, except for the debt. The carrying value and the fair value of the Company’s debt are as follows:
| (In millions) | September 30, 2023 | December 31, 2022 | October 1, 2022 | ||||||||||||||
| Carrying value | $ | 1,096.3 | $ | 1,158.0 | $ | 1,475.2 | |||||||||||
| Fair value | 971.9 | 1,042.9 | 1,355.2 | ||||||||||||||
The fair value of the fixed rate debt was based on third-party quotes (Level 2). The fair value of the variable rate debt was calculated by discounting the future cash flows to its present value using a discount rate based on the risk-free rate of the same maturity (Level 3).
15. LITIGATION AND CONTINGENCIES
Litigation
The Company operated a leather tannery in Rockford, Michigan from the early 1900s through 2009 (the “Tannery”). The Company also owns a parcel on House Street in Plainfield Township that the Company used for the disposal of Tannery byproducts until about 1970 (the "House Street" site). Beginning in the late 1950s, the Company used 3M Company’s Scotchgard™ in its processing of certain leathers at the Tannery. Until 2002 when 3M Company changed its Scotchgard™ formula, Tannery byproducts disposed of by the Company at the House Street site and other locations may have contained PFOA and/or PFOS, two chemicals in the family of compounds known as per- and polyfluoroalkyl substances (together, “PFAS”). PFOA and PFOS help provide non-stick, stain-resistant, and water-resistant qualities, and were used for many decades in commercial products like firefighting foams and metal plating, and in common consumer items like food wrappers, microwave popcorn bags, pizza boxes, Teflon™, carpets and Scotchgard™.
In May 2016, the Environmental Protection Agency (“EPA”) announced a lifetime health advisory level of 70 parts per trillion (“ppt”) combined for PFOA and PFOS, which the EPA reduced in June 2022 to 0.004 ppt and 0.02 ppt for PFOA and PFOS, respectively. In January 2018, the Michigan Department of Environmental Quality (“MDEQ”, now known as the Michigan Department of Environment, Great Lakes, and Energy (“EGLE”)) enacted a drinking water criterion of 70 ppt combined for PFOA and PFOS, which set an official state standard for acceptable concentrations of these contaminants in groundwater used for drinking water purposes. On August 3, 2020, Michigan changed the standards for PFOA and PFOS in drinking water to 8 and 16 ppt, respectively, and set standards for four other PFAS substances.
Civil and Regulatory Actions of EGLE and EPA
On January 10, 2018, EGLE filed a civil action against the Company in the U.S. District Court for the Western District of Michigan under the federal Resource Conservation and Recovery Act of 1976 (“RCRA”) and Parts 201 and 31 of the Michigan Natural Resources and Environmental Protection Act (“NREPA”) alleging that the Company’s past and present handling, storage, treatment, transportation and/or disposal of solid waste at the Company’s properties has resulted in releases of PFAS at levels exceeding applicable Michigan cleanup criteria for PFOA and PFOS (the "EGLE Action"). Plainfield and Algoma Townships intervened in the EGLE Action alleging claims under RCRA, NREPA, the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and common law nuisance.
On February 3, 2020, the parties entered into a consent decree resolving the EGLE Action, which was approved by U.S. District Judge Janet T. Neff on February 19, 2020 (the “Consent Decree”). Under the Consent Decree, the Company agreed to pay for an extension of Plainfield Township’s municipal water system to more than 1,000 properties in Plainfield and Algoma Townships, subject to an aggregate cap of $69.5 million. The Company also agreed to continue maintaining water filters for certain homeowners, resample certain residential wells for PFAS, continue remediation at the Company’s Tannery property and House Street site, and conduct further investigations and monitoring to assess the presence of PFAS in area groundwater. The Company’s activities under the Consent Decree are not materially impacted by either the drinking water standards that became effective on August 3, 2020, or the EPA’s revised advisory levels issued in June 2022.
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On December 19, 2018, the Company filed a third-party complaint against 3M Company seeking, among other things, recovery of the Company’s remediation and other costs incurred in defense of the EGLE Action ("the 3M Action"). On June 20, 2019, the 3M Company filed a counterclaim against the Company in response to the 3M Action, seeking, among other things, contractual and common law indemnity and contribution under CERCLA and Part 201 of NREPA. On February 20, 2020, the Company and 3M Company entered into a settlement agreement resolving the 3M Action, under which 3M Company paid the Company a lump sum amount of $55.0 million during the first quarter of 2020.
On January 10, 2018, the EPA entered a Unilateral Administrative Order (the “Order”) under Section 106(a) of CERCLA, 42 U.S.C. § 9606(a) with an effective date of February 1, 2018. The Order pertained to specified removal actions at the Company's Tannery and House Street sites, including certain time critical removal actions subsequently identified in an April 29, 2019 letter from the EPA, to abate the actual or threatened release of hazardous substances at or from the sites. On October 28, 2019, the EPA and the Company entered into an Administrative Settlement and Order on Consent (“AOC”) that supersedes the Order and addresses the agreed-upon removal actions outlined in the Order. The Company has completed the activities required by the AOC, and is awaiting the final review and determination from the EPA.
The Company discusses its reserve for remediation costs in the environmental liabilities section below.
Individual and Class Action Litigation
Beginning in late 2017, individual lawsuits and three putative class action lawsuits were filed against the Company that raise a variety of claims, including claims related to property, remediation, and human health effects. The three putative class action lawsuits were subsequently refiled in the U.S. District Court for the Western District of Michigan as a single consolidated putative class action lawsuit. 3M Company has been named as a co-defendant in the individual lawsuits and consolidated putative class action lawsuit. In addition, the current owner of a former landfill and gravel mining operation sued the Company seeking damages and cost recovery for property damage allegedly caused by the Company’s disposal of tannery waste containing PFAS (this suit collectively with the individual lawsuits and putative class action, the “Litigation Matters”).
On January 11, 2022, the Company and 3M Company entered into a master settlement agreement with the law firm representing certain of the plaintiffs in the individual lawsuits included in the Litigation Matters, and each of these plaintiffs subsequently agreed to participate in the settlement. These plaintiffs’ lawsuits were dismissed with prejudice on or around April 25, 2022.
On December 9, 2021, the Company and 3M Company reached a settlement in principle to resolve certain of the remaining individual lawsuits included in the Litigation Matters, and the parties entered into definitive settlement agreements in March 2022. These plaintiffs’ lawsuits were dismissed with prejudice on June 14, 2022. The last remaining individual action was dismissed without prejudice on June 24, 2022.
In addition, in September 2022, the parties to the putative class action filed a motion for preliminary approval of a proposed class action settlement seeking to resolve the putative class action plaintiffs’ claims. On March 29, 2023, the court presiding over the putative class action granted final approval of the proposed settlement and dismissed the lawsuit with prejudice.
The last remaining Litigation Matter, the lawsuit filed by the current owner of a former landfill and gravel mining operations, was pending in Michigan state court but has been administratively stayed by the Court.
There were no developments during the first three quarters of 2023 that required the Company to change the amount accrued for the Litigation Matters described above. The Company made related payments of $37.8 million in connection with the Litigation Matters described above during the first three quarters of 2023. As of September 30, 2023, the Company had recorded liabilities of $2.7 million for certain of the Litigation Matters described above which are recorded as other accrued liabilities in the consolidated condensed balance sheets.
In December 2018, the Company filed a lawsuit against certain of its historic liability insurers, seeking to compel them to provide a defense against the Litigation Matters on the Company's behalf and coverage for remediation efforts undertaken by, and indemnity provided by, the Company. The Company recognized certain recoveries from legacy insurance policies in 2023 and 2022 and continues pursuing additional recoveries through the lawsuit.
Other Litigation
The Company is also involved in litigation incidental to its business and is a party to legal actions and claims, including, but not limited to, those related to employment, intellectual property, and consumer related matters. Some of the legal proceedings include claims for compensatory as well as punitive damages. While the final outcome of these matters cannot be predicted with certainty, considering, among other things, the meritorious legal defenses available to the Company and reserves for liabilities that the Company has recorded, along with applicable insurance, it is management’s opinion that the outcome of these
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items are not expected to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Environmental Liabilities
The following is a summary of the activity with respect to the environmental remediation reserve established by the Company:
| Year-To-Date Ended | |||||||||||
| (In millions) | September 30, 2023 | October 1, 2022 | |||||||||
Remediation liability at beginning of the year | $ | 74.1 | $ | 85.7 | |||||||
Changes in estimate | (21.0) | — | |||||||||
Amounts paid | (9.5) | (21.3) | |||||||||
Remediation liability at the end of the quarter | $ | 43.6 | $ | 64.4 | |||||||
The reserve balance as of September 30, 2023 includes $22.8 million that is expected to be paid within the next twelve months and is recorded as a current obligation in other accrued liabilities, with the remaining $20.8 million expected to be paid over the course of up to 25 years, recorded in other liabilities.
The Company's remediation activity at the Tannery property, House Street site and other relevant operations or disposal sites is ongoing. Although the Consent Decree has made near-term costs more clear, it is difficult to estimate the long-term cost of environmental compliance and remediation given the uncertainties regarding the interpretation and enforcement of applicable environmental laws and regulations, the extent of environmental contamination and the existence of alternative cleanup methods. Future developments may occur that could materially change the Company’s current cost estimates, including, but not limited to: (i) changes in the information available regarding the environmental impact of the Company’s operations and products; (ii) changes in environmental regulations, changes in permissible levels of specific compounds in drinking water sources, or changes in enforcement theories and policies, including efforts to recover natural resource damages; (iii) new and evolving analytical and remediation techniques; (iv) changes to the form of remediation; (v) success in allocating liability to other potentially responsible parties; and (vi) the financial viability of other potentially responsible parties and third-party indemnitors. For locations at which remediation activity is largely ongoing, the Company cannot estimate a possible loss or range of loss in excess of the associated established reserves for the reasons described above. The Company adjusts recorded liabilities as further information develops or circumstances change.
Minimum Royalties and Advertising Commitments
The Company has future minimum royalty and advertising obligations due under the terms of certain licenses held by the Company. These minimum future obligations for the fiscal periods subsequent to September 30, 2023 are as follows:
| (In millions) | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | |||||||||||||||||||||||||||||
| Minimum royalties | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
| Minimum advertising | — | 3.9 | 3.3 | 3.3 | 3.4 | 3.6 | |||||||||||||||||||||||||||||
Minimum royalties are based on both fixed obligations and assumptions regarding the Consumer Price Index. Royalty obligations in excess of minimum requirements are based upon future sales levels. In accordance with these agreements, the Company incurred royalty expense of $0.5 million and $1.2 million for the quarter and year-to-date ended September 30, 2023, respectively. For the quarter and year-to-date ended October 1, 2022, the Company incurred royalty expense in accordance with these agreements of $0.7 million and $1.9 million, respectively.
The terms of certain license agreements also require the Company to make advertising expenditures based on the level of sales of the licensed products. In accordance with these agreements, the Company incurred advertising expense of $1.3 million and $5.0 million for the quarter and year-to-date ended September 30, 2023, respectively. For the quarter and year-to-date ended October 1, 2022, the Company incurred advertising expense in accordance with these agreements of $1.9 million and $4.8 million, respectively.
16. BUSINESS SEGMENTS
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
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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 and Hush Puppies® footwear and apparel as well as Keds® footwear prior to the divestiture of the brand, effective February 4, 2023.
The Company's operating segments are the Work Group, Lifestyle Group, Active Group, and Sweaty Betty®. Sweaty Betty® and the Active Group were evaluated and combined into one reportable segment because they meet the similar economic characteristics and qualitative aggregation criteria set forth in the relevant accounting guidance.
Kids' footwear offerings from Saucony®, Sperry®, Merrell®, Hush Puppies® and Cat® as well as Keds® prior to divestiture of the brand effective February 4, 2023 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 gains on the sale of businesses and trademarks, unallocated corporate expenses, such as corporate employee costs, corporate facility costs, reorganization activities, impairment of long-lived assets 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 licensees and distributors; 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.
Company management uses various financial measures to evaluate the performance of the reportable segments. The following is a summary of certain key financial measures for the respective fiscal periods indicated.
| Quarter Ended | Year-to-Date Ended | ||||||||||||||||||||||
| (In millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Active Group | $ | 328.6 | $ | 398.2 | $ | 1,097.8 | $ | 1,172.6 | |||||||||||||||
| Work Group | 123.0 | 157.8 | 355.3 | 435.8 | |||||||||||||||||||
| Lifestyle Group | 62.8 | 117.7 | 223.0 | 346.9 | |||||||||||||||||||
| Other | 13.3 | 17.7 | 40.1 | 64.5 | |||||||||||||||||||
| Total | $ | 527.7 | $ | 691.4 | $ | 1,716.2 | $ | 2,019.8 | |||||||||||||||
| Segment operating profit (loss): | |||||||||||||||||||||||
| Active Group | $ | 32.7 | $ | 54.9 | $ | 124.6 | $ | 180.8 | |||||||||||||||
| Work Group | 15.4 | 28.2 | 45.7 | 81.7 | |||||||||||||||||||
| Lifestyle Group | 5.4 | 13.4 | 18.6 | 43.2 | |||||||||||||||||||
| Other | 2.8 | 2.8 | 9.3 | 9.7 | |||||||||||||||||||
| Corporate | (29.0) | (40.5) | (79.5) | (69.1) | |||||||||||||||||||
| Operating profit | 27.3 | 58.8 | 118.7 | 246.3 | |||||||||||||||||||
| Interest expense, net | 15.5 | 12.5 | 47.4 | 31.3 | |||||||||||||||||||
| Other expense, net | 2.4 | 2.7 | 3.2 | 2.2 | |||||||||||||||||||
| Earnings before income taxes | $ | 9.4 | $ | 43.6 | $ | 68.1 | $ | 212.8 | |||||||||||||||
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| (In millions) | September 30, 2023 | December 31, 2022 | October 1, 2022 | ||||||||||||||
| Total assets: | |||||||||||||||||
| Active Group | $ | 1,270.0 | $ | 1,331.5 | $ | 1,697.4 | |||||||||||
| Work Group | 322.4 | 375.7 | 452.0 | ||||||||||||||
| Lifestyle Group | 336.5 | 514.8 | 760.9 | ||||||||||||||
| Other | 64.5 | 58.6 | 67.0 | ||||||||||||||
| Corporate | 237.9 | 212.1 | 193.3 | ||||||||||||||
| Total | $ | 2,231.3 | $ | 2,492.7 | $ | 3,170.6 | |||||||||||
| Goodwill: | |||||||||||||||||
| Active Group | $ | 314.9 | $ | 314.4 | $ | 358.0 | |||||||||||
| Work Group | 59.8 | 59.6 | 58.7 | ||||||||||||||
| Lifestyle Group | 77.1 | 97.4 | 96.2 | ||||||||||||||
| Other | 13.6 | 13.6 | 13.6 | ||||||||||||||
| Total | $ | 465.4 | $ | 485.0 | $ | 526.5 | |||||||||||
17. VARIABLE INTEREST ENTITIES AND RELATED PARTY TRANSACTIONS
Assets and Liabilities of Consolidated VIEs
The Company has joint ventures that source and market the Company’s footwear and apparel products in China. Based upon the criteria set forth in FASB ASC 810, Consolidation, the Company has determined two of the joint ventures are variable interest entities (VIEs) of which the Company is the primary beneficiary and, as a result, the Company consolidates these VIEs. The primary beneficiary determination is based on the relationship between the Company and the VIE, including contractual agreements between the Company and the VIE.
Specifically, the Company has the power to direct the activities that are considered most significant to the entities’ performance and the Company has the obligation to absorb losses and the right to receive benefits that are significant to the entities. The other equity holder’s interests are reflected in “net loss attributable to noncontrolling interests” in the consolidated condensed statement of operations and “Noncontrolling interest” in the consolidated condensed balance sheets. Assets held by these VIEs are only available to settle obligations of the respective entities. Holders of liabilities of these VIEs do not have recourse to the Company.
The following is a summary of these VIE’s assets and liabilities included in the Company’s consolidated condensed balance sheets.
| (In millions) | September 30, 2023 | December 31, 2022 | October 1, 2022 | ||||||||||||||
| Cash | $ | 4.1 | $ | 5.8 | $ | 8.9 | |||||||||||
| Accounts receivable | 8.4 | 19.7 | 11.3 | ||||||||||||||
| Inventory | 36.1 | 16.0 | 16.3 | ||||||||||||||
| Other current assets | 4.0 | 2.4 | 1.7 | ||||||||||||||
| Noncurrent assets | 0.9 | 0.8 | 2.9 | ||||||||||||||
| Total assets | $ | 53.5 | $ | 44.7 | $ | 41.1 | |||||||||||
| Current liabilities | $ | 11.8 | $ | 9.6 | $ | 5.8 | |||||||||||
| Noncurrent liabilities | 0.1 | 1.6 | — | ||||||||||||||
| Total liabilities | $ | 11.9 | $ | 11.2 | $ | 5.8 | |||||||||||
Nonconsolidated VIEs
The Company also has two joint ventures that are VIEs that are not consolidated as the Company does not have the power to direct the most significant activities that impact the VIEs' economic performance. The two VIEs distribute footwear and apparel products in the Asia Pacific region. The following is a summary of carrying amounts of assets included in the Company’s consolidated condensed balance sheets as of September 30, 2023, December 31, 2022 and October 1, 2022, respectively, related
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to VIEs for which the Company is not the primary beneficiary. The Company’s maximum exposure to loss is the same as the carrying amounts.
The following is a summary of the carrying amounts of assets included in the Company’s Consolidated Condensed Balance Sheets.
| (In millions) | September 30, 2023 | December 31, 2022 | October 1, 2022 | ||||||||||||||
Equity method investments (1) | $ | 7.9 | $ | 8.1 | $ | 8.9 | |||||||||||
(1) Equity method investments are included in “Other Assets” on the consolidated condensed balance sheets.
Related Party Transactions
In the normal course of business, the Company enters into transactions with related party equity affiliates. Related party transactions consist of the sale of goods, made at arm’s length, and other arrangements. For the quarter and year-to-date ended September 30, 2023, the Company recognized net sales to equity affiliates totaling $16.8 million and $41.1 million, respectively. For the quarter and year-to-date ended October 1, 2022, the Company recognized net sales to equity affiliates totaling $9.5 million and $20.5 million, respectively.
The following table summarizes related party transactions included in the consolidated condensed balance sheets.
| (In millions) | September 30, 2023 | December 31, 2022 | October 1, 2022 | ||||||||||||||
| Accounts receivable due from related parties | $ | 8.4 | $ | 18.1 | $ | 11.3 | |||||||||||
| Long term liabilities due to related parties | — | — | — | ||||||||||||||
| Long term assets due from related parties | — | 1.6 | 2.4 | ||||||||||||||
18. DIVESTITURES AND ASSETS AND LIABILITIES HELD FOR SALE
Divestiture of Keds® Business
On February 7, 2023 the Company entered into an Asset Purchase Agreement with Designer Brands, Inc. (the "Buyer") pursuant to which the Buyer agreed to purchase the global Keds® business. The sale was effective February 4, 2023, in accordance with the terms and conditions of the Asset Purchase Agreement.
The following table summarizes the net gain recognized in connection with the divestiture:
| (In millions) | |||||
| Net proceeds | $ | 83.4 | |||
| Net assets disposed | (65.9) | ||||
| Direct costs to sell | (1.6) | ||||
| AOCI reclassification adjustment, foreign currency translation | 4.2 | ||||
| Gain on sale of business | $ | 20.1 | |||
The Company determined that the divestiture of the Keds® business did not represent a strategic shift that had or will have a major effect on the Consolidated Results of Operations, and therefore results were not classified as discontinued operations. The proceeds from the sales were used to reduce outstanding revolver borrowings.
Divestiture of U.S. Wolverine Leathers Business
On August 23, 2023, the Company completed the sale of its U.S. Wolverine Leathers business to its long-time customer, New Balance. The Company received $4.0 million in cash for the sale and recognized a gain on sale of $1.9 million. The assets sold, which were included in the Other segment category, consist of $2.1 million in inventory.
Divestiture of Hush Puppies intellectual property in China, Hong Kong, and Macau
On September 1, 2023, the Company entered into an asset purchase agreement to sell the Hush Puppies® trademarks, patents, copyrights and domains in China, Hong Kong and Macau to its current sublicensee, Beijing Jiaman Dress Co., Ltd. for cash of $58.8 million and recognized a gain on sale of $55.8 million. The gain on sale is net of transaction related fees of $3.0 million.
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The transaction closed on September 14, 2023. The Company will continue to own the Hush Puppies® brand throughout the rest of the world.
Assets and Liabilities Held for Sale
During the fourth quarter of 2022, the Company announced that it had initiated a formal process to divest the Wolverine Leathers business. As noted above, the Company completed the sale of its U.S. Wolverine Leathers business. The Company continues to explore alternatives for the non-U.S. Wolverine Leathers business. The Company has determined that the non-U.S. Wolverine Leathers business meets the criteria to be classified as held for sale, and therefore has reclassified the related assets and liabilities as held for sale on the consolidated condensed balance sheets.
The following is a summary of the major categories of assets and liabilities that have been classified as held for sale on the consolidated condensed balance sheets at September 30, 2023:
| (In millions) | September 30, 2023 | ||||
| Cash and cash equivalents | $ | 4.3 | |||
| Accounts receivables, net | 3.0 | ||||
| Inventories | 8.8 | ||||
| Total assets held for sale | $ | 16.1 | |||
| Accounts payable | $ | 2.8 | |||
| Accrued liabilities | 0.3 | ||||
| Total liabilities held for sale | $ | 3.1 | |||
The Company determined that the planned divestiture of the non-U.S. Wolverine Leathers business does not represent a strategic shift that had or will have a major effect on the consolidated condensed results of operations, and therefore results of this business were not classified as discontinued operations.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and 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 condensed financial statements and related notes included elsewhere in this Quarterly Report.
BUSINESS OVERVIEW
The Company is a leading global designer, marketer and licensor of branded footwear, apparel and accessories. The Company’s 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 September 30, 2023, 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 September 30, 2023, the Company operated 165 retail stores in the U.S., Europe and Canada and 56 direct-to-consumer eCommerce sites.
Effective February 4, 2023, the Company completed the sale of the Keds® business. On May 10, 2023, the Company announced that it is exploring strategic alternatives for the Sperry® business while it continues the foundational work needed to position the brand for long-term success.
In the third quarter of fiscal 2023, the Company entered into a multi-year licensing agreement of the Hush Puppies® brand in the United States and Canada. In addition, the Company completed the sale of Hush Puppies® trademarks, patents, copyrights, and domains in China, Hong Kong, and Macau.
Known Trends Impacting Our Business
Macroeconomic conditions and supply chain disruptions continue to adversely affect the Company’s business results. During the third quarter of 2022, inventory transit times improved ahead of plan, resulting in challenges managing the timing of inventory flow, which led to the Company having excess inventory. Elevated inventory levels have resulted, and continue to result, in storage and process capacity pressures at the Company’s U.S. distribution centers. The Company has incurred additional inventory carrying costs including costs for outside storage and other inventory related holding costs. The Company decreased inventory purchases and increased promotional activity during the fourth quarter of 2022 and the first three quarters of 2023 to reduce excess inventory. These actions resulted in inventories declining in the first three quarters of 2023 by $181.4 million, compared to the fourth quarter of 2022. As of the end of the third quarter of 2023, the Company had $16.6 million of inventory in-transit, which represents a decrease of $125.9 million as compared to the end of the fourth quarter of 2022. As inventory transit and product purchase timelines continue to move towards pre-pandemic levels, the Company expects that the flow of seasonal product and our inventory levels will normalize by the end of fiscal 2023.
Inflation and other macroeconomic pressures in the U.S. and the global economy such as rising interest rates, energy prices and recession fears are creating a complex and challenging retail environment for the Company and our customers as consumers generally seek discounted merchandise and reduce discretionary spending, which in turn impacts wholesale customer orders. Inflationary pressures are increasing logistics costs, including labor costs, raw materials costs and product input costs, which continue to adversely affect the Company’s results. These increased costs, combined with higher promotional activity, contributed to gross margin contraction of 230 basis points for the first three quarters of 2023 compared to the first three quarters of 2022. These impacts were partially offset by selective price increases taken in prior quarters by certain brands and products. The Company expects to continue to evaluate future pricing of its products. In addition, the strengthening of the U.S. dollar relative to other major currencies negatively impacted the Company’s financial results in the third quarter of 2023.
For a more complete discussion of the risks the Company encounters in our business, please refer to Item 1A, “Risk Factors” in the Company’s 2022 Form 10-K.
2023 FINANCIAL OVERVIEW
•Revenue was $527.7 million for the third quarter of 2023, representing a decrease of 23.7% compared to the third quarter of 2022.
•Gross margin was 40.8% in the third quarter of 2023 compared to 40.2% in the third quarter of 2022.
•The effective tax rates in the third quarters of 2023 and 2022 were 4.6% and 10.9%, respectively.
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•Diluted earnings per share for the third quarter of 2023 was $0.11 per share compared to $0.48 per share for the third quarter of 2022.
•The Company declared cash dividends of $0.10 per share in the third quarters of both 2023 and 2022.
•Cash flow provided by operating activities was $7.0 million for the first three quarters of 2023 compared to cash flow used in operating activities of $490.2 million for the first three quarters of 2022.
•Compared to the third quarter of 2022, inventory decreased $317.1 million, or 36.0%.
RESULTS OF OPERATIONS
| Quarter Ended | Year-To-Date Ended | ||||||||||||||||||||||||||||||||||
| (In millions, except per share data) | September 30, 2023 | October 1, 2022 | Percent Change | September 30, 2023 | October 1, 2022 | Percent Change | |||||||||||||||||||||||||||||
Revenue | $ | 527.7 | $ | 691.4 | (23.7) | % | $ | 1,716.2 | $ | 2,019.8 | (15.0) | % | |||||||||||||||||||||||
Cost of goods sold | 312.3 | 413.6 | (24.5) | 1,036.7 | 1,173.6 | (11.7) | |||||||||||||||||||||||||||||
Gross profit | 215.4 | 277.8 | (22.5) | 679.5 | 846.2 | (19.7) | |||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 203.3 | 216.8 | (6.2) | 610.8 | 657.3 | (7.1) | |||||||||||||||||||||||||||||
| Gain on sale of businesses, trademarks, and intangible assets | (57.7) | — | * | (77.8) | (90.0) | 13.6 | |||||||||||||||||||||||||||||
| Impairment of long-lived assets | 40.2 | — | * | 55.8 | — | * | |||||||||||||||||||||||||||||
| Environmental and other related costs, net of recoveries | 2.3 | 2.2 | 4.5 | (28.0) | 32.6 | (185.9) | |||||||||||||||||||||||||||||
Operating profit | 27.3 | 58.8 | (53.6) | 118.7 | 246.3 | (51.8) | |||||||||||||||||||||||||||||
Interest expense, net | 15.5 | 12.5 | 24.0 | 47.4 | 31.3 | 51.4 | |||||||||||||||||||||||||||||
| Other expense, net | 2.4 | 2.7 | (11.1) | 3.2 | 2.2 | 45.5 | |||||||||||||||||||||||||||||
| Earnings before income taxes | 9.4 | 43.6 | (78.4) | 68.1 | 212.8 | (68.0) | |||||||||||||||||||||||||||||
| Income tax expense | 0.4 | 4.8 | (91.7) | 16.7 | 41.1 | (59.4) | |||||||||||||||||||||||||||||
| Net earnings | 9.0 | 38.8 | (76.8) | 51.4 | 171.7 | (70.1) | |||||||||||||||||||||||||||||
| Less: net earnings (loss) attributable to noncontrolling interests | 0.4 | (0.2) | 300.0 | (0.2) | (1.6) | 87.5 | |||||||||||||||||||||||||||||
| Net earnings attributable to Wolverine World Wide, Inc. | $ | 8.6 | $ | 39.0 | (77.9) | $ | 51.6 | $ | 173.3 | (70.2) | |||||||||||||||||||||||||
| Diluted earnings per share | $ | 0.11 | $ | 0.48 | (77.1) | % | $ | 0.64 | $ | 2.12 | (69.8) | % | |||||||||||||||||||||||
* Percentage change not meaningful
REVENUE
Revenue was $527.7 million for the third quarter of 2023, representing a decline of $163.7 million compared to the third quarter of 2022. The change in revenue reflected a $69.6 million, or 17.5%, decline from the Active Group, a $34.8 million, or 22.1%, decline from the Work Group, and a $54.9 million, or 46.6%, decline from the Lifestyle Group. The Active Group’s revenue decrease was primarily driven by a decrease of $50.4 million from Merrell®, $18.9 million from Saucony® and $7.5 million from Chaco®, partially offset by an increase of $7.2 million from Sweaty Betty®. The Work Group’s revenue decrease was primarily driven by a decrease of $28.1 million from Cat®, $4.0 million from Harley-Davidson® and $2.8 million from Wolverine®. The Lifestyle Group’s revenue decline was primarily driven by a decrease of $32.7 million from Sperry® and $21.3 million from Keds®, which was sold during the first quarter of 2023. Changes in foreign exchange rates increased revenue by $6.9 million during the third quarter of 2023. Direct-to-consumer revenue decreased during the third quarter of 2023 by $23.2 million, or 14.5%, compared to the third quarter of 2022.
Revenue was $1,716.2 million for the first three quarters of 2023, representing a decline of $303.6 million compared to the first three quarters of 2022. The change in revenue reflected a $74.8 million, or 6.4%, decrease from the Active Group, a $80.5 million, or 18.5%, decrease from the Work Group, and a $123.9 million, or 35.7%, decrease from the Lifestyle Group. The Active Group’s revenue decrease was primarily driven by a decrease of $56.4 million from Merrell®, $22.7 million from Chaco® and $2.3 million from Sweaty Betty®, partially offset by an increase of $6.6 million from Saucony®. The Work Group’s revenue decrease was primarily driven by a decrease of $40.1 million from Cat®, $26.3 million from Wolverine®, $12.5 million from Harley-Davidson® and $5.1 million from Bates®. The Lifestyle Group’s revenue decline was primarily driven by a decrease of $67.5 million from Keds®, which was sold during the first quarter of 2023, and $59.7 million from Sperry®, partially offset by an increase of $3.3 million from Hush Puppies®. Changes in foreign exchange rates decreased revenue by
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$0.4 million during the first three quarters of 2023. Direct-to-consumer revenue decreased during the first three quarters of 2023 by $71.9 million, or 15.4%, compared to the first three quarters of 2022.
GROSS MARGIN
Gross margin was 40.8% in the third quarter of 2023 compared to 40.2% in the third quarter of 2022. The gross margin increase in the third quarter was primarily driven by favorable product mix changes in the Company’s wholesale channel (100 basis points), partially offset by increased closeout sales (40 basis points).
Gross margin was 39.6% in the first three quarters of 2023 compared to 41.9% during the first three quarters of 2022. The gross margin decrease in the first three quarters of 2023 was primarily driven by unfavorable product cost changes in the Company’s wholesale channel (100 basis points), unfavorable average selling price and product costs changes in the Company’s direct-to-consumer channel (60 basis points), and increased closeout sales (50 basis points).
OPERATING EXPENSES
Operating expenses decreased $30.9 million, from $219.0 million in the third quarter of 2022 to $188.1 million in the third quarter of 2023. The decrease was primarily driven by the gain on the sale of businesses, trademarks, and intangible assets ($57.7 million), lower advertising costs ($14.0 million), lower incentive compensation costs ($5.9 million), lower product development costs ($1.5 million), lower general and administrative costs ($1.5 million), and lower selling costs ($1.3 million), partially offset by the impairment of intangible assets ($38.3 million), higher reorganization costs ($8.5 million), higher divestiture costs ($2.1 million) and the impairment of long-lived assets ($1.9 million). Environmental and other related costs were $2.3 million and $2.2 million in the third quarter of 2023 and 2022, respectively.
Operating expenses decreased $39.1 million, from $599.9 million in the first three quarters of 2022 to $560.8 million in the first three quarters of 2023. The decrease was primarily driven by the gain on the sale of businesses, trademarks, and intangible assets ($77.8 million), lower environmental and other related costs, net of insurance recoveries ($60.6 million), lower advertising costs ($33.4 million), lower incentive compensation costs ($23.9 million), lower selling costs ($5.8 million), lower product development costs ($3.1 million), and prior year Sweaty Betty integration costs that did not reoccur ($1.2 million), partially offset by the prior year gain recorded on the sale of the Champion trademarks for footwear in the United States and Canada ($90.0 million), the impairment of intangible assets ($38.3 million), the impairment of long-lived assets ($17.5 million), higher reorganization costs ($15.8 million), higher general and administrative costs ($3.0 million), and higher divestiture costs ($2.1 million). Environmental and other related costs were $6.0 million and $44.7 million in the first three quarters of 2023 and 2022, respectively.
INTEREST, OTHER AND INCOME TAXES
Net interest expense was $15.5 million in the third quarter of 2023 compared to $12.5 million in the third quarter of 2022. Net interest expense was $47.4 million in the first three quarters of 2023 compared to $31.3 million in the first three quarters of 2022. The increase in interest expense for both the quarter-to-date and year-to-date periods is due to higher average revolver borrowings and higher average interest rates on the Company’s outstanding debt.
Other expense was $2.4 million in the third quarter of 2023, compared to other expense of $2.7 million in the third quarter of 2022. Other expense was $3.2 million in the first three quarters of 2023, compared to other expense of $2.2 million in the first three quarters of 2022.
The effective tax rates in the third quarter of 2023 and 2022 were 4.6% and 10.9%, respectively. The effective tax rates in the first three quarters of 2023 and 2022 were 24.5% and 19.3%, respectively. The decrease in the effective tax rate between 2023 and 2022 for the quarter-to-date period is due to income mix changes between jurisdictions with differing tax rates, partially offset by discrete tax expenses in the current year compared to discrete benefits in the prior year. The increase in the effective tax rate between 2023 and 2022 for the year-to-date period is due to discrete tax expenses in the current year compared to discrete tax benefits in the prior year, partially offset by income mix changes between jurisdictions with differing tax rates.
REPORTABLE SEGMENTS
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;
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•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 and Hush Puppies® footwear and apparel as well as Keds® footwear prior to the divestiture of the brand, effective February 4, 2023.
Kids' footwear offerings from Saucony®, Sperry®, Merrell®, Hush Puppies® and Cat® as well as Keds® prior to the divestiture of the brand, effective February 4, 2023 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 unallocated corporate expenses, such as corporate employee costs, corporate facility costs, reorganization activities, impairment of long-lived assets and environmental and other related costs.
The reportable segment results are as follows:
| Quarter Ended | Year-To-Date Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | September 30, 2023 | October 1, 2022 | Change | Percent Change | September 30, 2023 | October 1, 2022 | Change | Percent Change | |||||||||||||||||||||||||||||||||||||||
| REVENUE | |||||||||||||||||||||||||||||||||||||||||||||||
| Active Group | $ | 328.6 | $ | 398.2 | $ | (69.6) | (17.5) | % | $ | 1,097.8 | $ | 1,172.6 | $ | (74.8) | (6.4) | % | |||||||||||||||||||||||||||||||
| Work Group | 123.0 | 157.8 | (34.8) | (22.1) | 355.3 | 435.8 | (80.5) | (18.5) | |||||||||||||||||||||||||||||||||||||||
| Lifestyle Group | 62.8 | 117.7 | (54.9) | (46.6) | 223.0 | 346.9 | (123.9) | (35.7) | |||||||||||||||||||||||||||||||||||||||
| Other | 13.3 | 17.7 | (4.4) | (24.9) | 40.1 | 64.5 | (24.4) | (37.8) | |||||||||||||||||||||||||||||||||||||||
Total | $ | 527.7 | $ | 691.4 | $ | (163.7) | (23.7) | $ | 1,716.2 | $ | 2,019.8 | $ | (303.6) | (15.0) | |||||||||||||||||||||||||||||||||
| OPERATING PROFIT (LOSS) | |||||||||||||||||||||||||||||||||||||||||||||||
| Active Group | $ | 32.7 | $ | 54.9 | $ | (22.2) | (40.4) | $ | 124.6 | $ | 180.8 | $ | (56.2) | (31.1) | |||||||||||||||||||||||||||||||||
| Work Group | 15.4 | 28.2 | (12.8) | (45.4) | 45.7 | 81.7 | (36.0) | (44.1) | |||||||||||||||||||||||||||||||||||||||
| Lifestyle Group | 5.4 | 13.4 | (8.0) | (59.7) | 18.6 | 43.2 | (24.6) | (56.9) | |||||||||||||||||||||||||||||||||||||||
| Other | 2.8 | 2.8 | — | — | 9.3 | 9.7 | (0.4) | (4.1) | |||||||||||||||||||||||||||||||||||||||
Corporate | (29.0) | (40.5) | 11.5 | 28.4 | (79.5) | (69.1) | (10.4) | (15.1) | |||||||||||||||||||||||||||||||||||||||
Total | $ | 27.3 | $ | 58.8 | $ | (31.5) | (53.6) | % | $ | 118.7 | $ | 246.3 | $ | (127.6) | (51.8) | % | |||||||||||||||||||||||||||||||
Further information regarding the reportable segments can be found in Note 16 to the consolidated condensed financial statements.
Active Group
The Active Group’s revenue decreased $69.6 million, or 17.5%, in the third quarter of 2023 compared to the third quarter of 2022. The revenue decline was primarily driven by decreases of $50.4 million from Merrell®, $18.9 million from Saucony® and $7.5 million from Chaco® partially offset by an increase of $7.2 million from Sweaty Betty®. The Merrell® decrease was primarily due to the softening of hike category sales, following growth in the prior year, and high inventory levels at retail customers, which has adversely impacted order patterns. The Saucony® decrease is primarily due to softer consumer demand in the U.S. wholesale and eCommerce channels. The Chaco® decrease was primarily due to softer consumer demand and high inventory levels at retail customers. The Sweaty Betty® increase was primarily due to higher direct-to-consumer revenue resulting from new stores and improved order fulfillment in the U.S. wholesale channel.
The Active Group’s revenue decreased $74.8 million, or 6.4%, in the first three quarters of 2023 compared to the first three quarters of 2022. The revenue decline was primarily driven by decreases of $56.4 million from Merrell®, $22.7 million from Chaco®, and $2.3 million from Sweaty Betty®, partially offset by an increase of $6.6 million from Saucony®. The Merrell® decrease is primarily due to softer consumer demand in International, U.S. wholesale, and eCommerce channels. The Chaco® decrease was primarily due to softer consumer demand and high inventory levels at retail customers. The Sweaty Betty® decrease was primarily due to softer consumer demand in direct-to-consumer sales channels reflecting the challenging UK economic environment. The Saucony® increase was primarily driven by the strength and expanded sales of core technical road and trail product franchises, which include the Guide, Triumph and Endorphin series, and strength in international markets, partially offset by softer consumer demand in the U.S. wholesale and eCommerce channels.
The Active Group’s operating profit decreased $22.2 million, or 40.4%, in the third quarter of 2023 compared to the third quarter of 2022. The operating profit decrease was due to revenue decreases, partially offset by a 40 basis point increase in
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gross margin and a $6.8 million decrease in selling, general and administrative expenses. The increase in gross margin in the current year period was due to favorable product mix changes in the Company’s wholesale channel. The decrease in selling, general and administrative expenses in the current year periods was primarily due to lower advertising costs and selling expenses.
The Active Group’s operating profit decreased $56.2 million, or 31.1%, in the first three quarters of 2023 compared to the first three quarters of 2022. The operating profit decrease was due to revenue decreases and a 350 basis point decrease in gross margin, partially offset by a $16.0 million decrease in selling, general and administrative expenses. The decrease in gross margin in the current year period was due to increased closeout sales and higher promotional activity in the Company’s direct-to-consumer channel. The decrease in selling, general and administrative expenses in the current year periods was primarily due to lower advertising costs and selling expenses.
Work Group
The Work Group’s revenue decreased $34.8 million, or 22.1%, during the third quarter of 2023 compared to the third quarter of 2022. The revenue decline was primarily driven by a decrease of $28.1 million from Cat®, $4.0 million from Harley-Davidson®, and $2.8 million from Wolverine®. The Work Group’s revenue decreased $80.5 million, or 18.5%, during the first three quarters of 2023 compared to the first three quarters of 2022. The revenue decline was primarily driven by a decrease of $40.1 million from Cat®, $26.3 million from Wolverine®, $12.5 million from Harley-Davidson®, and $5.1 million from Bates®. The Cat® decrease was primarily due to softer consumer demand across all regions. The Wolverine® decrease was primarily due to softer consumer demand in U.S. wholesale and high inventory levels at retail customers resulting in a continually heightened promotional environment. The Harley-Davidson® decrease was primarily due to lower at-once shipments and declines in top dealer accounts. The Bates® decrease was primarily due to softer consumer demand in U.S. wholesale and direct-to-consumer channels.
The Work Group’s operating profit decreased $12.8 million, or 45.4%, in the third quarter of 2023 compared to the third quarter of 2022. The operating profit decrease was due to revenue decreases and a 120 basis point decrease in gross margin, partially offset by a $0.8 million decrease in selling, general and administrative expenses. The Work Group’s operating profit decreased $36.0 million, or 44.1%, in the first three quarters of 2023 compared to the first three quarters of 2022. The operating profit decrease was due to revenue decreases and a 230 basis point decrease in gross margin, partially offset by a $1.3 million decrease in selling, general and administrative expenses. The decrease in gross margin in the current year periods was due to increased closeout sales, product mix and unfavorable average selling price and higher promotional activity in the Company’s direct-to-consumer channel. The decrease in selling, general and administrative expenses in the current year periods was primarily due to lower advertising costs and selling expenses.
Lifestyle Group
The Lifestyle Group’s revenue decreased $54.9 million, or 46.6%, during the third quarter of 2023 compared to the third quarter of 2022. The revenue decline was driven by a decrease of $32.7 million from Sperry® and $21.3 million from Keds®. The Lifestyle Group’s revenue decreased $123.9 million, or 35.7%, during the first three quarters of 2023 compared to the first three quarters of 2022. The revenue decrease was driven by a decrease of $67.5 million from Keds® and $59.7 million from Sperry®, partially offset by an increase of $3.3 million from Hush Puppies®. The Keds® decrease is due to the divestiture of the business effective February 4, 2023. The Sperry® decline was primarily driven by softer consumer demand in the U.S. wholesale channel and direct-to-consumer sales channels, due to lower traffic. The Hush Puppies® increase was primarily due to the launch of a strategic distribution partnership with DSW in North America during the spring of fiscal 2022 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 $8.0 million, or 59.7%, in the third quarter of 2023 compared to the third quarter of 2022. The operating profit decrease was due to revenue decreases, partially offset by a 240 basis point increase in gross margin and a $13.1 million decrease in selling, general and administrative expenses. The increase in gross margin in the current year period was primarily due to the divestiture of the lower margin Keds® business. The decrease in selling, general and administrative expenses in the current year period was primarily due to lower advertising costs, selling expenses and the divestiture of the Keds® business.
The Lifestyle Group’s operating profit decreased $24.6 million, or 56.9%, in the first three quarters of 2023 compared to the first three quarters of 2022. The operating profit decrease was due to revenue decreases and a 150 basis point decrease in gross margin, partially offset by a $32.6 million decrease in selling, general and administrative expenses. The decrease in gross margin in the current year period was due to increased closeout sales and higher promotional activity in the Company’s direct-to-consumer channel. The decrease in selling, general and administrative expenses in the current year period was primarily due to lower advertising costs, selling expenses and the divestiture of the Keds® business.
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Other
The Other category’s revenue decreased $4.4 million, or 24.9%, in the third quarter of 2023 compared to the third quarter of 2022. The revenue decline was primarily driven by a $5.8 million decrease from the performance leathers business. The Other category’s revenue decreased $24.4 million, or 37.8%, in the first three quarters of 2023 compared to the first three quarters of 2022. The revenue decrease was primarily driven by a $18.7 million decrease from the performance leathers business.
Corporate
Corporate expenses decreased $11.5 million in the third quarter of 2023 compared to the third quarter of 2022, primarily due to gain on sale of businesses, trademarks, and intangible assets ($57.7 million), lower employee costs ($3.3 million) and lower incentive compensation costs ($2.7 million), partially offset by the impairment of long-lived assets ($40.2 million), higher reorganization costs ($8.5 million), and costs incurred associated with divestitures ($2.1 million) .
Corporate expenses increased $10.4 million in the first three quarters of 2023 compared to the first three quarters of 2022, primarily due to the 2022 gain recorded on the sale of the Champion trademarks for footwear in the United States and Canada ($90.0 million), the impairment of long-lived assets ($55.8 million), and higher reorganization costs ($15.8 million), partially offset by the gain on sale of businesses, trademarks, and intangible assets ($77.8 million), lower environmental and other related costs, net of insurance recoveries ($60.6 million), lower incentive compensation costs ($16.8 million), and lower employee costs ($3.6 million).
LIQUIDITY AND CAPITAL RESOURCES
| (In millions) | September 30, 2023 | December 31, 2022 | October 1, 2022 | ||||||||||||||
Cash and cash equivalents (1) | $ | 164.7 | $ | 135.5 | $ | 136.4 | |||||||||||
| Debt | 1,096.3 | 1,158.0 | 1,475.2 | ||||||||||||||
Available revolving credit facility (2) | 623.4 | 569.3 | 254.4 | ||||||||||||||
(1)Cash and cash equivalents at September 30, 2023 in the consolidated condensed statements of cash flows includes $4.3 million of Wolverine Leathers business related cash and cash equivalents that are classified as held for sale and are not included in cash and cash equivalents in the consolidated condensed balance sheets. Cash and cash equivalents at December 31, 2022 includes $4.0 million of Wolverine Leathers business related cash and cash equivalents that were classified as held for sale.
(2)Amounts are net of both borrowings, if any, and outstanding standby letters of credit in accordance with the terms of the revolving credit facility.
Liquidity
Cash and cash equivalents of $164.7 million as of September 30, 2023 were $28.3 million higher compared to October 1, 2022. The increase is due primarily to cash provided by operating activities of $318.3 million, proceeds from divestitures of $136.0 million, and proceeds from company-owned life insurance policies of $30.5 million, partially offset by borrowings less repayments of debt of $380.0 million, cash dividends paid of $32.6 million, additions to property, plant and equipment of $31.5 million and shares acquired related to employee stock plans of $6.1 million. The Company had $623.4 million of borrowing capacity available under the revolving facility as of September 30, 2023. Cash and cash equivalents located in foreign jurisdictions totaled $143.5 million as of September 30, 2023.
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 did not repurchase shares during the first three quarters of 2023 and repurchased $81.3 million of shares in the first three quarters of 2022. The common stock repurchase program expired in September 2023.
A detailed discussion of environmental remediation costs is found in Note 15 to the consolidated condensed financial statements. The Company has established a reserve for estimated environmental remediation costs based upon an evaluation of currently available facts with respect to each individual site. As of September 30, 2023, the Company had a reserve of $43.6 million, of which $22.8 million is expected to be paid in the next 12 months and is recorded as a current obligation in other accrued liabilities, and the remaining $20.8 million is recorded in other liabilities and is 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
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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 15 to the consolidated condensed financial statements also includes a detailed discussion of environmental litigation matters. As of September 30, 2023, the Company had recorded liabilities of $2.7 million for certain of the Litigation Matters described above which are recorded as other accrued liabilities in the consolidated condensed balance sheets.
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.
Financing Arrangements
The Company’s credit agreement provides for a term loan A facility (the “Term Facility”) and for a revolving credit facility (the “Revolving Facility” and, together with the Term Facility, the “Senior Credit Facilities”). The maturity date of the loans under the Senior Credit Facilities is October 21, 2026. The credit agreement provides for a debt capacity of up to an aggregate debt amount (including outstanding term loan principal and revolver commitment amounts in addition to permitted incremental debt) not to exceed $2.0 billion unless certain specified conditions set forth in the Credit Agreement are met. The Revolving Facility allows the Company to borrow up to an aggregate amount of $1.0 billion.
The Company’s $550.0 million 4.000% senior notes issued on August 26, 2021 are due on August 15, 2029. Related interest payments are due semi-annually. The senior notes are guaranteed by substantially all of the Company’s domestic subsidiaries.
As of September 30, 2023, the Company was in compliance with all covenants and performance ratios under the Senior Credit Facilities.
On June 30, 2023 the Company entered into the Fourth Amendment (the “Amendment”) to its credit agreement, dated as of July 31, 2012. The Amendment provides the Company with near-term financial flexibility by adjusting the maximum Consolidated Leverage Ratio allowed under the credit agreement through the end of fiscal 2023. Financial covenant thresholds will revert to pre-existing levels in the first quarter of fiscal 2024.
The Company’s debt at September 30, 2023 totaled $1,096.3 million compared to $1,158.0 million at December 31, 2022. The reduced debt position primarily resulted from proceeds received from sale of businesses and trademarks.
Cash Flows
The following table summarizes cash flow activities:
| Year-To-Date Ended | |||||||||||
| (In millions) | September 30, 2023 | October 1, 2022 | |||||||||
| Net cash provided by (used in) operating activities | $ | 7.0 | $ | (490.2) | |||||||
| Net cash provided by investing activities | 116.2 | 68.2 | |||||||||
| Net cash provided by (used in) financing activities | (91.5) | 402.5 | |||||||||
| Additions to property, plant and equipment | (18.5) | (23.5) | |||||||||
| Depreciation and amortization | 26.3 | 25.2 | |||||||||
Operating Activities
The principal source of the Company’s operating cash flow is net earnings, including cash receipts from the sale of the Company’s products, net of costs of goods sold.
For the first three quarters of 2023, a decrease in net working capital represented a source of cash of $9.8 million. Working capital balances were favorably impacted by a decrease in inventories of $178.5 million and an increase in income taxes payable of $5.6 million, partially offset by an increase in accounts receivable of $25.1 million, a decrease in other operating liabilities of $62.8 million, a decrease in accounts payable of $74.7 million, and an increase in other operating assets of $11.7 million. Operating cash flows included depreciation and amortization expense adjustment of $26.3 million, impairment of long-lived assets of $55.8 million, stock-based compensation expense adjustment of $11.8 million, pension expense adjustment of $1.2 million, environmental and other related costs, net of cash payments and recoveries cash outflow of $68.8 million, and gain on sale of divestitures of $77.8 million.
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Investing Activities
The Company made capital expenditures of $18.5 million and $23.5 million in the first three quarters of 2023 and 2022, respectively, for building improvements, eCommerce site enhancements, new retail stores, distribution operations improvements and information system enhancements. The current year investing activity includes proceeds from divestitures of $136.0 million.
Financing Activities
The current year activity includes net payments under the Revolving Facility of $55.0 million. The Company paid $7.5 million in principal payments associated with its financing arrangements during the first three quarters of 2023 and 2022, respectively. The Company paid $5.8 million and $7.4 million during the first three quarters of 2023 and 2022, respectively, in connection with shares or units withheld to pay employee taxes related to awards under stock incentive plans and received $0.1 million and $1.4 million in proceeds from the exercise of stock options during the first three quarters of 2023 and 2022, respectively. The Company did not repurchase shares in the first three quarters of 2023 and repurchased $81.3 million of shares in the first three quarters of 2022.
The Company declared cash dividends of $0.30 per share during the first three quarters of 2023 and 2022. Dividends paid in the first three quarters of 2023 and 2022 totaled $24.5 million, and $24.7 million respectively. A quarterly dividend of $0.10 per share was declared on November 1, 2023 to shareholders of record on January 2, 2024.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company’s consolidated condensed financial statements, which have been prepared in accordance with 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 critical accounting policies used in determining estimates and assumptions in the amounts reported. For information regarding our critical accounting policies refer to Part II, Item 7: “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in the Company’s 2022 Form 10-K. Management believes there have been no material changes in those critical accounting policies.
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ITEM 3. Quantitative and Qualitative Disclosures about Market 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 Quarterly Report on Form 10-Q, 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, 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. As of September 30, 2023 and October 1, 2022, the Company had outstanding forward currency exchange contracts to purchase primarily U.S. dollars in the amounts of $267.8 million and $376.3 million, respectively, with maturities ranging up to 531 and 524 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 condensed 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. As of September 30, 2023, a stronger U.S. dollar compared to certain foreign currencies decreased the value of these investments in net assets by $9.2 million from their value as of December 31, 2022. As of October 1, 2022, a stronger U.S. dollar compared to certain foreign currencies decreased the value of these investments in net assets by $100.0 million from their value as of January 1, 2022.
The Company is exposed to interest rate changes primarily as a result of interest expense on the term loan borrowings and any borrowings under the Revolving Facility. The Company’s total variable-rate debt was $552.5 million at September 30, 2023 and the Company held a forward dated interest rate swap agreement, denominated in U.S. dollars, that effectively converts $109.6 million of this amount to fixed-rate debt.
The Company does not enter into contracts for speculative or trading purposes, nor is it a party to any leveraged derivative instruments.
ITEM 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on, and as of the time of such evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures, as defined in Securities Exchange Act Rule 13a-15(e), were effective as of the end of the period covered by this report. There have been no changes during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. 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, refer to Note 15 to the Company’s consolidated condensed financial statements.
ITEM 1A. Risk Factors
There have been no material changes in the assessment of the Company’s risk factors from those set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 23, 2023.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding the Company’s purchases of its own common stock during the third quarter of 2023.
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 7 (July 2, 2023 to August 5, 2023) | |||||||||||||||||||||||
Common Stock Repurchase Program(1) | — | — | — | $ | 366,524,492 | ||||||||||||||||||
Employee Transactions(2) | 8,857 | 12.74 | — | ||||||||||||||||||||
| Period 8 (August 6, 2023 to September 2, 2023) | |||||||||||||||||||||||
Common Stock Repurchase Program(1) | — | — | — | $ | 366,524,492 | ||||||||||||||||||
Employee Transactions(2) | 292 | 8.41 | — | ||||||||||||||||||||
| Period 9 (September 3, 2023 to September 30, 2023) | |||||||||||||||||||||||
Common Stock Repurchase Program(1) | — | — | — | $ | — | ||||||||||||||||||
Employee Transactions(2) | — | — | — | ||||||||||||||||||||
| Total for the Third Quarter Ended September 30, 2023 | |||||||||||||||||||||||
Common Stock Repurchase Program(1) | — | — | — | $ | — | ||||||||||||||||||
Employee Transactions(2) | 9,149 | 12.60 | — | ||||||||||||||||||||
(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 Senior Credit Facilities and senior notes indenture. The common stock repurchase program expired on September 11, 2023.
(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 5. Other Information
(c) During the quarter ended September 30, 2023, no director or Section 16 officer of the Company adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement, in each case, as defined in Item 408(a) of Regulation S-K.
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ITEM 6. Exhibits
Exhibits filed as a part of this Form 10-Q are incorporated by reference herein.
| Exhibit Number | Document | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32 | ||||||||
| 101 | The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL: (i) Consolidated Condensed Statements of Operations and Comprehensive Income; (ii) Consolidated Condensed Balance Sheets; (iii) Consolidated Condensed Statements of Cash Flows; (iv) Consolidated Condensed Statements of Stockholders’ Equity; and (v) Notes to Consolidated Condensed Financial Statements. | |||||||
| 104 | The cover page of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (included in Exhibit 101). | |||||||
* Management contract or compensatory plan or arrangement
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WOLVERINE WORLD WIDE, INC. | ||||||||
| November 9, 2023 | /s/ Christopher E. Hufnagel | |||||||
| Date | Christopher E. Hufnagel President and Chief Executive Officer (Principal Executive Officer and Duly Authorized Signatory for Registrant) | |||||||
| November 9, 2023 | /s/ Michael D. Stornant | |||||||
| Date | Michael D. Stornant Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer and Duly Authorized Signatory for Registrant) | |||||||
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