Wolverine World Wide - 10-Q quarterly report FY

PART I. FINANCIAL INFORMATION

ITEM 1.     Financial Statements

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Thousands of dollars)

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS -- Continued

(Thousands of dollars, except share data)

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS

(Thousands of dollars, except shares and per share data)
(Unaudited)

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS
OF STOCKHOLDERS' EQUITY

(Thousands of dollars, except share data)
(Unaudited)

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Thousands of dollars)
(Unaudited)

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 8, 2001 and September 9, 2000

1. Basis of Presentation

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for fair presentation have been included in the accompanying financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Certain amounts previously reported in 2000 have been reclassified to conform with the presentation used in 2001.

2. Fluctuations

The Company's sales are seasonal. Seasonal sales patterns and the fact that the fourth quarter has sixteen or seventeen weeks as compared to twelve weeks in each of the first three quarters can cause significant differences in sales and earnings from quarter to quarter. These differences, however, have followed a consistent pattern each year.

3. Sourcing Realignment and Other Nonrecurring Charges

As discussed in the Annual Report on Form 10-K for the fiscal year ended December 30, 2000, the Company initiated a strategic realignment of its global sourcing and manufacturing operations on July 12, 2000. In connection with this realignment, the Company closed five of its manufacturing facilities in New York, Missouri, Canada, Puerto Rico and Costa Rica. The Company also eliminated certain footwear product offerings and related raw material inventories, reduced administrative support services and incurred other nonrecurring expenses in connection with the strategic realignment. The realignment activities were primarily completed in the third and fourth quarters of 2000.

Remaining liabilities associated with the sourcing realignment include pension benefits for certain terminated employees of $2,531,204 to be paid during their retirement and lease termination costs of $177,675 that are payable through 2004.

4. Net Earnings Per Share

The following table sets forth the reconciliation of weighted average shares used in the computation of basic and diluted earnings per share:

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 8, 2001 and September 9, 2000

5. Comprehensive Income (Loss)

Total comprehensive income was $14,785,000 and $28,481,000 for the 12-week and 36-week periods ended September 8, 2001, respectively. Total comprehensive loss was $16,365,000 and $5,420,000 for the 12-week and 36-week periods ended September 9, 2000, respectively. In addition to net earnings, comprehensive income included foreign currency translation gains of $421,000 and losses of $721,000 for the 12-week and 36-week periods ended September 8, 2001, respectively, and losses of $885,000 and $2,331,000 for the 12-week and 36-week periods ended September 9, 2000, respectively.

6. Business Segments

The Company has one reportable segment that is engaged in the manufacture and marketing of branded footwear to the retail sector, including casual shoes, slippers, moccasins, dress shoes, boots, uniform shoes and work shoes. Revenues of this segment are derived from the sale of branded footwear products to external customers and the Company's retail division as well as royalty income from the licensing of the Company's trademarks and brand names to licensees. The business units comprising the branded footwear segment manufacture or source, market and distribute products in a similar manner. Branded footwear is distributed through wholesale channels and under licensing and distributor arrangements.

The other business units in the following table consist of the Company's retail, apparel and accessories, tannery and procurement operations. The Company operated 63 domestic retail stores at September 8, 2001 that sell Company-manufactured or sourced products and footwear manufactured by unaffiliated companies. The other business units distribute products through retail and wholesale channels.

There have been no changes in the way the Company measures segment profits or in its basis of determining business segments.

Business segment information is as follows (thousands of dollars):

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 8, 2001 and September 9, 2000

Within the Company's other business units, Wolverine Retail's net sales and other operating income decreased $0.3 million (2.7%) for the 2001 third quarter and $0.7 million (2.5%) for 2001 year-to-date as compared to the same periods of 2000. The Wolverine Leathers and Wolverine Procurement divisions recorded a decrease in net sales and other operating income of $1.2 million from the 2000 third quarter and an increase of $0.1 million over the 2000 year-to-date level. The 2001 third quarter decrease relates primarily to reduced demand for sueded leather for footwear.

As discussed in Note 3 of the consolidated condensed financial statements, on July 12, 2000, the Company announced a strategic realignment of its global sourcing and manufacturing operations. In connection with this realignment, the Company closed manufacturing facilities in New York, Missouri, Canada, Costa Rica and Puerto Rico. Remaining liabilities associated with the sourcing realignment include pension benefits for certain terminated employees and lease termination costs. A non-recurring, pre-tax charge to earnings of $41.1 million was recorded in the 2000 third quarter, of which $11.7 million was reflected in cost of products sold for inventory write-downs, $17.0 million was recognized in selling and administrative expenses for severance, bad debt, and a portion of other expenses, and $12.4 million was recorded in other expense for the loss on disposal of fixed assets, goodwill impairment and other exit costs. The realignment charge resulted in a reduction of earnings of $0.65 per share for the 2000 third quarter and 2000 year-to-date.

The following table summarizes the 2001 results and the effect of the nonrecurring charges on certain components of the Company's 2000 third quarter and year-to-date operating results (thousands of dollars, except per share data; percentages relate to total net sales and other operating income):

The analysis in the following paragraph excludes the realignment and other nonrecurring charges in 2000. Gross margin as a percentage of net sales and other operating income for the 2001 third quarter was 36.4%, compared to 33.5% for the 2000 third quarter. The 2001 year-to-date gross margin of 35.6% compares to 33.6% for the same period in 2000. Gross margin dollars increased $9.1 million or 15.5% for the 2001 third quarter and $20.6 million or 13.2% for 2001 year-to-date as compared to the same periods of 2000, respectively. The gross margin percentages for the branded footwear businesses were 36.3% for the 2001 third quarter and 35.4% for 2001 year-to-date as compared to 33.0% and 33.1% for the same periods of 2000, respectively. The margin increases for the branded footwear businesses reflect a larger mix of high margin Merrell® and Harley-Davidson® sales and improved initial margins from the Hush Puppies U.S. wholesale operation and the Wolverine Slipper Group in 2001 as compared to 2000. The benefits realized from the 2000 sourcing realignment also contributed to the margin increase. The gross margin percentage for the other business units increased slightly to 38.1% for the 2001 third quarter from 37.9% for the same period of 2000 and decreased to 36.9% for 2001 year-to-date compared to 37.7% for 2000 year-to-date as a result of increased raw material costs associated with the tannery operations.

The analysis in the following paragraph excludes the realignment and other nonrecurring charges in 2000. Selling and administrative expenses of $44.1 million for the 2001 third quarter increased $4.5 million from the 2000 third quarter level of $39.6 million and, as a percentage of net sales and other operating income, increased to 23.7% in 2001 compared to 22.6% in the 2000 third quarter. Selling and administrative expenses for 2001 year-to-date increased $13.1 million to $127.1 million from $114.0 million for the same period of 2000 and, as a percentage of net sales and other operating income, increased to 25.6% in 2001 compared to 24.6% for 2000 year-to-date. The change in the year-to-date selling and administrative expenses includes increases of $3.1 million in advertising costs, $7.8 million in selling and administration costs for expansion of the Merrell®, Stanley® and Harley-Davidson® brands and $3.1 million in employee benefit program costs.

Interest expense for the 2001 third quarter was $1.8 million, compared to $2.1 million for the same period of 2000. Interest expense for 2001 and 2000 year-to-date was $5.1 million and $7.0 million, respectively. The decrease in interest expense for 2001 year-to-date reflects lower average borrowings as compared to 2000 year-to-date and lower interest rates on the Company's borrowings under its revolving credit facility.

The analysis in the following paragraph excludes the realignment and other nonrecurring charges in 2000. The 2001 third quarter and year-to-date effective tax rate of 34.0% compares to 33.0% for the respective periods in the prior year. The increase in the 2001 effective tax rate over 2000 relates to a higher percentage of income being generated in jurisdictions with relatively higher tax rates.

The analysis in the following paragraph excludes the realignment and other nonrecurring charges in 2000. Net earnings of $14.4 million for the 2001 third quarter compares to net earnings of $11.7 million for the same period in 2000. The 2001 year-to-date net earnings increased to $29.2 million in 2001 from $24.0 million for the same period of 2000. Diluted earnings per share were $0.34 and $0.69 for the 2001 third quarter and 2001 year-to-date, respectively compared to $0.28 and $0.58 for the same periods of 2000, respectively.

Financial Condition, Liquidity and Capital Resources

Net cash used in operating activities was $18.2 million for 2001 year-to-date compared to $0.2 million provided by operating activities for 2000 year-to-date. Cash of $56.9 million for 2001 year-to-date and $47.4 million for 2000 year-to-date was used to fund working capital requirements. Accounts receivable of $184.6 million at September 8, 2001 reflects an increase of $4.2 million (2.3%) from the balance at September 9, 2000 and an increase of $22.7 million (14.0%) from the December 30, 2000 balance. Inventories of $185.5 million at September 8, 2001 reflect an increase of $10.6 million (6.0%) compared to the balance at September 9, 2000 and an increase of $41.3 million (28.6%) over the balance at December 30, 2000, reflecting consistent seasonal trends. Accounts payable and other accrued liabilities of $54.0 million at September 8, 2001 reflect a $6.9 million (14.8%) increase over the $47.1 million balance at September 9, 2000 and a $5.2 million (10.7%) increase from the $48.8 million balance at December 30, 2000. The increase in accounts payable and other accrued liabilities compared to the 2000 third quarter level was primarily attributable to income taxes payable resulting from higher earnings in 2001 as compared to 2000.

Additions to property, plant and equipment of $7.7 million for 2001 year-to-date compares to $6.9 million reported for the same period of 2000. This increase occurred because the Company's planned purchases were made in different periods in 2001 as compared to 2000. Depreciation and amortization expense was $12.9 million for 2001 year-to-date compared to $12.8 million for the same period of 2000.

The Company maintains short-term borrowing and commercial letter-of-credit facilities of $66.4 million, of which $35.0 million, $27.9 million and $27.0 million were outstanding at September 8, 2001, September 9, 2000 and December 30, 2000, respectively. Long-term debt, excluding current maturities, of $115.6 million at September 8, 2001 compares to $147.7 million and $87.8 million at September 9, 2000 and December 30, 2000, respectively. The decrease in debt at September 8, 2001 as compared to September 9, 2000 resulted from improved operating cash flows that provided funds to pay down amounts borrowed under the revolving credit facility.

The Company has long-term revolving credit facilities of $110.0 million expiring in May 2006. The revolving credit facilities are used to support working capital requirements. The combination of credit facilities and cash flows from operations is expected to be sufficient to meet future capital needs in the forseeable future. Any excess cash flows from operations are expected to be used to pay down existing debt, fund growth initiatives and repurchase the Company's common stock under the repurchase program as discussed in the following paragraph.

Effective October 3, 2000, the Company's Board of Directors approved a common stock repurchase program authorizing the repurchase of up to 2.0 million shares of common stock over 24 months. The primary purpose of this stock repurchase program is to increase stockholder value. There were no shares repurchased during the 2001 third quarter and 395,500 total cumulative common shares were repurchased under the program through September 8, 2001. The Company intends to continue to repurchase shares of its common stock in open market transactions, from time to time, depending upon market conditions and other factors.

The 2001 third quarter dividend declared of $.04 per share of common stock represents a 14.3% increase over the $.035 per share declared in the 2000 third quarter. The dividend is payable November 1, 2001 to stockholders of record on October 1, 2001.

The current ratio was 6.3 to 1.0 for the 2001 third quarter compared with 7.2 to 1.0 for the same period of 2000. The Company's total debt to total capital ratio decreased to 0.25 to 1.0 for the 2001 third quarter from 0.32 to 1.0 for the same period of 2000.

ITEM 3.          Quantitative and Qualitative Disclosures about Market Risk

The information concerning quantitative and qualitative disclosures about market risk contained in the Company's Form 10-K Annual Report for its fiscal year ended December 30, 2000, is incorporated herein by reference.

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 and to the extent that its long-term debt requirements are affected by changes in interest rates. The Company manages these risks by attempting to denominate contractual and other foreign arrangements in U.S. dollars and by maintaining a significant percentage of fixed-rate debt. 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 Form 10-Q Quarterly Report, the Company does not know of or expect there to be any material change in the general nature of its primary market risk exposure in the near term.

The methods used by the Company to manage its primary market risk exposures, as described in the sections of its annual report incorporated herein by reference in response to this item, have not changed materially during the current year. As of the date of this Form 10-Q Quarterly Report, the Company does not expect to change its methods used to manage its market risk exposures in the near term. However, the Company may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

The Company's market risk exposure is mainly comprised of its vulnerability to changes in foreign currency exchange rates and interest rates. Prevailing rates and rate relationships in the future will be primarily determined by market factors that are outside of the Company's control. All information provided in response to this item consists of forward-looking statements. Reference is made to the section captioned "Forward-Looking Statements" at the beginning of this document for a discussion of the limitations on the Company's responsibility for such statements.

PART II. OTHER INFORMATION

ITEM 6.          Exhibits and Reports on Form 8-K

          (a)          Exhibits. The following documents are filed as exhibits to this report on Form 10-Q:

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.

EXHIBIT INDEX