(EDGAR Online via COMTEX) -- 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 vision statement is "to build a family of the most admired performance and lifestyle brands on earth" and the Company seeks to fulfill this vision by offering innovative products and compelling brand propositions; complementing its footwear brands with strong apparel and accessories offerings; expanding its global consumer-direct footprint; and delivering supply chain excellence. The Company's brands are marketed in approximately 170 countries and territories at September 26, 2020, 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 26, 2020, the Company operated 97 retail stores in the U.S. and Canada and 36 consumer-direct eCommerce sites. COVID-19 In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. COVID-19 has had a negative effect on the global economy and on the Company's 2020 operating and financial results to date. The full financial effects of the COVID-19 pandemic cannot be reasonably estimated at this time due to uncertainty as to its severity and duration. The Company has taken the following proactive and precautionary measures to mitigate known areas of risk and navigate the future environment: To increase liquidity and flexibility of the Company's capital structure, the Company borrowed $171 million in incremental 364-day term loan under its senior credit facility, $21 million of which was repaid during the third quarter, and sold $300 million of 6.375% Senior Notes (refer to Note 7, "Debt"), delayed most capital projects, suspended share repurchases, implemented select employee furloughs and organizational changes, compensation changes for the Company's management team and Board of Directors, delayed or canceled certain future product purchases across its portfolio of brands, took additional steps to reduce discretionary spending and other expenditures, and initiated conversations with landlords to seek lease concessions. Lease concessions have been received for some of the Company's leased properties and other discussions are still ongoing. The Company temporarily closed all U.S. and Canada retail stores on March 17, 2020. Stores began reopening in May under a phased approach and during the second quarter all stores had reopened with newly instituted health and safety protocols for customers and employees following regulatory guidance and protocols promulgated by health authorities and government officials. During the period stores were closed, the Company's distribution centers remained open and the Company's direct on-line channels continued to serve customer demand. The COVID-19 pandemic has had, and is expected to continue to have, a material adverse impact on the Company's financial results. Expenses related to the COVID-19 pandemic in the first three quarters of the year include $10.2 million of severance expenses, $8.9 million of credit loss expenses, and $5.8 million for other costs that includes costs to modify office workspace, purchase masks, and inventory related costs. Expenses related to the COVID-19 pandemic in the third quarter include $5.5 million of severance expenses and $2.1 million of other costs. The full nature and extent of the impact will depend on future developments, including, among other things; the continued spread and duration of the pandemic; the negative impact on global and regional economies and economic activity; actions governments, businesses and individuals take in response to the pandemic; the effects of the pandemic, including all of the foregoing, on the Company's manufacturers, distributors, suppliers, joint venture partners, wholesale customers and other counterparties, and how quickly the global economy and demand for the Company's products recovers after the pandemic subsides. The Company continues to monitor the situation closely. 2020 FINANCIAL OVERVIEW Revenue was $493.1 million for the third quarter of 2020, representing a decline of 14.1% compared to the third quarter of 2019. The change in revenue reflected a 9.9% decline from the Michigan Group and a 19.7% decline from the Boston Group. Changes in foreign exchange rates increased revenue by $2.5 million during the third quarter of 2020. Owned eCommerce revenue increased during the third quarter of 2020 by 56.4% compared to the third quarter of 2019. Gross margin was 41.0% in the third quarter of 2020 compared to 42.4% in the third quarter of 2019. Table of Contents The effective tax rates in the third quarters of 2020 and 2019 were 28.5% and 20.3%, respectively. Diluted earnings per share for the third quarters of 2020 and 2019 were $0.27 per share and $0.57 per share, respectively. The Company declared cash dividends of $0.10 per share in both the third quarters of 2020 and 2019. Cash flow provided by operating activities was $135.5 million and $16.0 million for the first three quarters of 2020 and 2019, respectively, and was $96.5 million and $12.1 million for the third quarter of 2020 and 2019, respectively. Compared to the third quarter of 2019, inventory decreased $92.0 million, or 22.0%. RESULTS OF OPERATIONS Quarter Ended Year-To-Date Ended September 26, September 28, Percent September 26, September 28, Percent (In millions, except per share data) 2020 2019 Change 2020 2019 Change Revenue $ 493.1 $ 574.3 (14.1) % $ 1,281.5 $ 1,666.3 (23.1) % Cost of goods sold 291.1 331.0 (12.1) 750.5 972.4 (22.8) Gross profit 202.0 243.3 (17.0) 531.0 693.9 (23.5) Selling, general and administrative expenses 157.5 165.9 (5.1) 457.2 498.6 (8.3) Environmental and other related costs, net of recoveries 1.9 9.1 (79.1) 6.8 19.1 (64.4) Operating profit 42.6 68.3 (37.6) 67.0 176.2 (62.0) Interest expense, net 12.8 8.2 56.1 31.1 21.8 42.7 Debt extinguishment and other costs - - - 0.2 - - Other income, net (0.6) (0.9) 33.3 (2.9) (3.2) 9.4 Earnings before income taxes 30.4 61.0 (50.2) 38.6 157.6 (75.5) Income tax expense 8.7 12.4 (29.8) 6.0 28.2 (78.7) Net earnings 21.7 48.6 (55.3) 32.6 129.4 (74.8) Less: net earnings (loss) attributable to noncontrolling interests (0.7) (0.1) (600.0) (1.2) - - Net earnings attributable to Wolverine World Wide, Inc. $ 22.4 $ 48.7 (54.0) % $ 33.8 $ 129.4 (73.9) % Diluted earnings per share $ 0.27 $ 0.57 (52.6) % $ 0.41 $ 1.44 (71.5) %
Table of Contents GROSS MARGIN Gross margin was 41.0% in the third quarter of 2020 compared to 42.4% in the third quarter of 2019. Gross margin was 41.4% in the first three quarters of 2020 compared to 41.6% during the first three quarters of 2019. The decrease in the third quarter and the first three quarters is due to increased closeout sales, the impact of tariffs, and lower royalty revenue, partially offset by improved product mix. OPERATING EXPENSES Operating expenses decreased $15.6 million, from $175.0 million in the third quarter of 2019 to $159.4 million in the third quarter of 2020. The decrease was primarily driven by lower selling costs ($9.5 million), lower product development costs ($2.9 million), lower distribution costs ($0.7 million), lower general and administrative costs ($10.3 million), and lower environmental and other related costs, net of insurance recoveries ($7.2 million), partially offset by higher advertising ($6.0 million), higher incentive compensation ($6.3 million), and higher non-operating costs incurred due to the COVID-19 pandemic ($2.9 million). Operating expenses decreased $53.7 million, from $517.7 million in the first three quarters of 2019 to $464.0 million in the first three quarters of 2020. The decrease was primarily driven by lower selling costs ($29.9 million), lower product development costs ($8.7 million), lower distribution costs ($4.6 million), lower incentive compensation ($1.2 million), lower general and administrative costs ($21.8 million), and lower environmental and other related costs, net of insurance recoveries ($12.3 million), partially offset by higher advertising ($5.9 million) and higher non-operating costs incurred due to the COVID-19 pandemic ($19.1 million). INTEREST, OTHER AND INCOME TAXES Net interest expense was $12.8 million in the third quarter of 2020 compared to $8.2 million in the third quarter of 2019. Net interest expense was $31.1 million in the first three quarters of 2020 compared to $21.8 million in the first three quarters of 2019. Interest expense increased in the current year periods due to higher average debt balances in 2020. Other income was $0.6 million in the third quarter of 2020, compared to $0.9 million in the third quarter of 2019. Other income was $2.9 million in the first three quarters of 2020, compared to $3.2 million in the first three quarters of 2019. The decrease in other income in the first three quarters of 2020 was driven by higher non-service pension costs ($1.5 million) and higher losses from equity method investments ($0.7 million), partially offset by higher sublease income ($0.7 million) and gains on foreign exchange derivatives reclassified from accumulated other comprehensive loss ($1.3 million). The effective tax rates in the third quarter of 2020 and 2019 were 28.5% and 20.3%, respectively. The effective tax rates in the first three quarters of 2020 and 2019 were 15.5% and 17.9%, respectively. The increase in the effective rate for the current quarterly period reflects a negative impact from current period discrete items, as well as a shift in income between tax jurisdictions with differing tax rates. The decrease in the current year-to-date effective tax rate is driven by the positive impact of discrete items partially offset by the negative impact of a shift in income between jurisdictions with differing tax rates. REPORTABLE SEGMENTS The Company's portfolio of brands is organized into the following two operating segments, which the Company has determined to be reportable segments. Wolverine Michigan Group, consisting of Merrell� footwear and apparel, Cat� footwear, Wolverine� footwear and apparel, Chaco� footwear, Hush Puppies� footwear and apparel, Bates� uniform footwear, Harley-Davidson� footwear and Hytest� safety footwear; and Wolverine Boston Group, consisting of Sperry� footwear and apparel, Saucony� footwear and apparel, Keds� footwear and apparel, and the Kids' footwear business, which includes the Stride Rite� licensed business, as well as Kids' footwear offerings from Saucony�, Sperry�, Keds�, Merrell�, Hush Puppies� and Cat�. The Company also reports "Other" and "Corporate" categories. The Other category consists of the Company's leather marketing operations, sourcing operations that include third-party commission revenues and multi-branded consumer-direct retail stores. The Corporate category consists of unallocated corporate expenses, such as COVID-19 related costs, environmental and other related costs.
Quarter Ended Year-To-Date Ended September 26, September 28, September 26, September 28, Percent (In millions) 2020 2019 Change Percent Change 2020 2019 Change Change REVENUE Wolverine Michigan Group $ 287.3 $ 318.8 $ (31.5) (9.9) % $ 752.5 $ 939.7 $ (187.2) (19.9) % Wolverine Boston Group 193.8 241.3 (47.5) (19.7) 498.4 676.8 (178.4) (26.4) Other 12.0 14.2 (2.2) (15.5) 30.6 49.8 (19.2) (38.6) Total $ 493.1 $ 574.3 $ (81.2) (14.1) % $ 1,281.5 $ 1,666.3 $ (384.8) (23.1) % Quarter Ended Year-To-Date Ended September 26, September 28, September 26, September 28, Percent (In millions) 2020 2019 Change Percent Change 2020 2019 Change Change OPERATING PROFIT (LOSS) Wolverine Michigan Group $ 52.3 $ 66.0 $ (13.7) (20.8) % $ 133.8 $ 183.8 $ (50.0) (27.2) % Wolverine Boston Group 33.0 46.5 (13.5) (29.0) 60.4 115.7 (55.3) (47.8) Other 0.7 0.7 - - 1.0 3.0 (2.0) (66.7) Corporate (43.4) (44.9) 1.5 3.3 (128.2) (126.3) (1.9) (1.5) Total $ 42.6 $ 68.3 $ (25.7) (37.6) % $ 67.0 $ 176.2 $ (109.2) (62.0) %
Further information regarding the reportable segments can be found in Note 16 to the consolidated condensed financial statements. Wolverine Michigan Group
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LIQUIDITY AND CAPITAL RESOURCES September 26, December 28, September 28, (In millions) 2020 2019 2019 Cash and cash equivalents $ 342.0 $ 180.6 $ 125.2 Debt 876.6 798.4 934.0 Available revolving credit facility (1) 794.0 434.3 303.1
(1)Amounts are net of both borrowings, if any, and outstanding standby letters of credit in accordance with the terms of the Revolving Credit Facility.
Year-To-Date Ended September 26, September 28, (In millions) 2020 2019 Net cash provided by operating activities $ 135.5 $ 16.0 Net cash provided by (used in) investing activities 9.6 (53.4) Net cash provided by financing activities 15.4 19.4 Additions to property, plant and equipment 6.0 28.7 Depreciation and amortization 23.8 23.3
Nov 05, 2020
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