WOLVERINE WORLD WIDE INC /DE/
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 2, 2010
| o | 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: 001-6024
WOLVERINE WORLD WIDE, INC.
(Exact name of registrant as specified in its charter)
|
Delaware
(State or other jurisdiction of incorporation or organization) |
38-1185150
(I.R.S. Employer Identification No.) |
|
| 9341 Courtland Drive N.E., Rockford, Michigan | 49351 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
(616) 866-5500
Securities registered pursuant to Section 12(b) of the Securities Exchange Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock, $1 Par Value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
þ
No
o
Indicate by check mark whether the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes
o
No
þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
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 and post such files).
Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
| Large accelerated filer þ | Accelerated filer o | Non-Accelerated filer o | Smaller reporting company o | |||
| (do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes
o
No
þ
The aggregate market value of the registrant’s voting stock held by non-affiliates of the
registrant based on the closing price on the New York Stock Exchange on June 19, 2009, the last
business day of the registrant’s most recently completed second fiscal quarter: $1,061,976,492.
Number of shares outstanding of the registrant’s Common Stock, $1 par value (excluding shares of
treasury stock) as of February 26, 2010: 49,801,541.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the registrant’s annual stockholders’ meeting
to be held April 22, 2010 are incorporated by reference into Part III of this report.
Table of Contents
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| Exhibit 10.13 | ||||||||
| Exhibit 10.29 | ||||||||
| Exhibit 10.32 | ||||||||
| Exhibit 21 | ||||||||
| Exhibit 23 | ||||||||
| Exhibit 24 | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32 | ||||||||
2
Table of Contents
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” — which are, statements
relating to future events. Forward-looking statements are based on management’s beliefs,
assumptions, current expectations, estimates and projections about the footwear business, worldwide
economics and the Company itself. Words such as “anticipates,” “believes,” “estimates,” “expects,”
“forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “should,” “will,” variations
of such words and similar expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and involve certain risks, uncertainties and
assumptions (“Risk Factors”) that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ
from what may be expressed or forecasted in such forward-looking statements.
Risk Factors include, but are not limited to:
| • |
uncertainties relating to changes in demand for the Company’s products;
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| • |
changes in consumer preferences or spending patterns;
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| • |
changes in local, domestic or international economic and market conditions;
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| • |
the impact of competition and pricing by the Company’s competitors;
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| • |
the cost and availability of inventories, services, labor and equipment furnished to the
Company;
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| • |
the ability of the Company to manage and forecast its growth and inventories;
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| • |
increased costs of future pension funding requirements;
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| • |
changes in duty structures in countries of import and export;
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| • |
changes in interest rates, tax laws, duties, tariffs, quotas or applicable assessments;
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| • |
foreign currency fluctuations compared to the U.S. dollar;
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| • |
changes in monetary controls and valuations of the Chinese yuan relative to the U.S.
dollar;
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| • |
the risk of doing business in developing countries and economically volatile areas;
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| • |
the cost and availability of contract manufacturers;
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| • |
the cost and availability of raw materials, including leather and petroleum-based
materials;
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| • |
changes in planned consumer demand or at-once orders;
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| • |
loss of significant customers;
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| • |
customer order cancellations;
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| • |
the exercise of future purchase options by the U.S. Department of Defense on previously
awarded contracts;
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| • |
the impact of a global recession on demand for the Company’s products;
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| • |
the impact of limited credit availability on the Company’s suppliers, distributors and
customers;
|
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| • |
the success of
Merrell
®
Apparel and consumer-direct business initiatives;
|
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| • |
changes in business strategy or development plans;
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| • |
integration of operations of newly acquired businesses;
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| • |
relationships with international distributors and licensees;
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| • |
the ability to secure and protect trademarks, patents and other intellectual property;
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| • |
technological developments;
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the ability to attract and retain qualified personnel;
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the size and growth of footwear markets;
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service interruptions at shipping and receiving ports;
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changes in the amount or severity of inclement weather;
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changes due to the growth of Internet commerce;
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3
Table of Contents
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the popularity of particular designs and categories of footwear;
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the Company’s ability to adapt and compete in global apparel and accessory markets;
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the ability to retain rights to brands licensed by the Company;
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the impact of the Company’s restructuring plan on future operating results;
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the Company’s ability to implement and recognize benefits from tax planning strategies;
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the Company’s ability to meet at-once orders;
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changes in government and regulatory policies;
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retail buying patterns;
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consolidation in the retail sector; and
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the acceptance of U.S. brands in international markets.
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Additionally, concerns regarding acts of terrorism, international conflict, and subsequent events
have created significant global economic and political uncertainties that may have material and
adverse effects on consumer demand, foreign sourcing of footwear, shipping and transportation,
product imports and exports and the sale of products in foreign markets. These matters are
representative of the Risk Factors that could cause a difference between an ultimate actual outcome
and a forward-looking statement. Historical operating results are not necessarily indicative of
the results that may be expected in the future. The Risk Factors included here are not exhaustive.
Other Risk Factors exist, and new Risk Factors emerge from time to time, that may cause actual
results to differ materially from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not place undue reliance on forward-looking statements as
a prediction of actual results. Furthermore, the Company undertakes no obligation to update, amend
or clarify forward-looking statements, whether as a result of new information, future events or
otherwise.
| Item 1. |
Business
|
General
Wolverine World Wide, Inc. (the “Company”) is a leading designer, manufacturer and marketer of a
broad range of quality casual, rugged outdoor and work footwear and over the last few years has
extended certain of its footwear brands into casual, outdoor and work apparel. The Company, a
Delaware corporation, is the successor of a Michigan corporation of the same name, originally
organized in 1906, which in turn was the successor of a footwear business established in Grand
Rapids, Michigan in 1883.
Approximately 42.9 million pairs/units of the Company’s branded footwear and apparel were sold
during fiscal 2009 in approximately 180 countries and territories around the world. The Company’s
products generally feature contemporary styling with proprietary technologies designed to provide
maximum comfort and performance. The products are marketed throughout the world under widely
recognized brand names, including
Bates
®
,
Cat
®
Footwear,
Chaco
®
,
Cushe
TM
,
Harley-Davidson
®
Footwear,
Hush Puppies
®
,
HyTest
®
,
Merrell
®
,
Patagonia
®
Footwear,
Sebago
®
,
Soft Style
®
and
Wolverine
®
. The Company believes that
its primary competitive advantages are its well-recognized brand names, its patented proprietary
designs and comfort technologies, its wide range of distribution channels and its diversified
manufacturing and sourcing base.
Cat
®
is a registered trademark of Caterpillar
Inc.,
Harley-Davidson
®
is a registered trademark of H-D Michigan, Inc. and
Patagonia
®
is a registered trademark of Patagonia, Inc.
The Company’s products are sold at numerous price points under a variety of brand names designed to
appeal to most consumers of casual, work and outdoor footwear. The Company’s products are
organized under four operating units: (i) the Wolverine Footwear Group, consisting of the
Bates
®
,
HyTest
®
and
Wolverine
®
boots
and shoes, and
Wolverine
®
brand apparel, (ii) the Outdoor Group, consisting of
Merrell
®
,
Patagonia
®
and
Chaco
®
footwear, and
Merrell
®
brand apparel, (iii) the Heritage Brands
Group, consisting of
Cat
®
footwear,
Harley-Davidson
®
footwear and
Sebago
®
footwear and apparel, and (iv) The Hush Puppies
Company, consisting of
Hush Puppies
®
footwear,
Soft Style
®
footwear
and
Cushe
TM
footwear. The Company also licenses some of its brands for use on
non-footwear products.
The Company’s Global Operations Group is responsible for manufacturing, sourcing, distribution and
customer support for the Company’s business. The Company wholesales products domestically to a
wide range of retail customers, including department stores, national chains, catalogs, specialty
retailers, mass merchants and Internet retailers and to governments and municipalities. Many of
the retailers carrying Wolverine products operate multiple storefront locations. The Company’s
products are marketed worldwide in approximately 180 countries and territories through
Company-owned wholesale operations, licensees and distributors.
4
Table of Contents
For financial information regarding the Company, see the consolidated financial statements of the
Company and the notes thereto, which are attached as Appendix A to this Form 10-K. The Company has
one reportable segment, Branded Footwear, Apparel, and Licensing. The Branded Footwear, Apparel,
and Licensing segment engages in manufacturing, sourcing, licensing, marketing and distributing
branded footwear and apparel, including casual shoes and apparel, dress shoes, boots, uniform
shoes, work shoes and rugged outdoor footwear and apparel. The Company’s Other Business units
consist of its retail operations and leather and pigskin procurement operations, which are
described below. Financial information regarding the Company’s business segments and financial
information by geographic area is found in Note 9 to the consolidated financial statements of the
Company that are attached as Appendix A to this Annual Report on Form 10-K.
Branded Footwear, Apparel and Licensing
The Company sources and markets a broad range of footwear styles, including shoes, boots and
sandals under many recognizable brand names, including
Bates
®
,
Cat
®
,
Chaco
®
,
Cushe
TM
,
Harley-Davidson
®
,
Hush Puppies
®
,
HyTest
®
,
Merrell
®
,
Patagonia
®
,
Sebago
®
,
Soft Style
®
and
Wolverine
®
.
The Company combines quality materials and skilled workmanship to produce footwear according to its
specifications at both Company-owned and third-party manufacturing facilities. The Company also
markets
Merrell
®
,
Sebago
®
, and
Wolverine
®
brand apparel and licenses some of its brands for use on non-footwear products,
including
Hush Puppies
®
apparel, eyewear, watches, socks, handbags and plush
toys and
Wolverine
®
brand eyewear and gloves.
The Company’s four branded footwear, apparel, and licensing operating units are described below.
| 1. |
The Outdoor Group
The Outdoor Group consists of
Merrell
®
Footwear,
Merrell
®
Apparel and
accessories,
Patagonia
®
Footwear and
Chaco
®
Footwear. Outdoor Group products include performance outdoor and hiking
footwear, casual and after-sport footwear and performance and casual
Merrell
®
apparel.
|
Merrell
®
Footwear
The
Merrell
®
footwear
line consists primarily of running, technical hiking, rugged outdoor and
outdoor-inspired casual footwear designed for backpacking, day hiking and everyday
use. The
Merrell
®
footwear line also includes the “After-Sport”
category, incorporating
Merrell
®
Footwear’s technical hiking and
outdoor expertise with
Wolverine Performance Leathers
™ and other technical materials
to create footwear with unique styling, performance and comfort features.
Merrell
®
footwear products are sold primarily through outdoor
specialty retailers, department stores and catalogs.
Merrell
®
footwear is marketed in approximately 150 countries and territories
worldwide.
Merrell
®
Apparel and Accessories
The
Merrell
®
apparel line consists primarily of technical outdoor
and outdoor-inspired casual apparel and performance socks. In addition to
Merrell
®
apparel, the Outdoor Group markets
Merrell
®
accessories, including packs, bags and luggage.
Patagonia
®
Footwear
Pursuant to an agreement with Lost Arrow
Corporation, the Company has obtained the exclusive worldwide rights to manufacture,
market, distribute and sell footwear under
Patagonia
®
and other
trademarks. The
Patagonia
®
Footwear line focuses primarily on
casual and outdoor performance footwear.
Patagonia
®
is a registered
trademark of Patagonia, Inc.
Chaco
®
Footwear
The Company acquired
Chaco
®
in January, 2009. The line is focused primarily on technical outdoor performance
sandals. The
Chaco
®
brand was launched in 1989 to meet the needs of the
whitewater enthusiast and continues to focus on performance sandals for the outdoor
enthusiast.
Chaco
®
footwear is sold primarily through specialty outdoor
retailers and department stores.
| 2. |
Wolverine Footwear Group
The Wolverine Footwear Group markets footwear
and apparel products under the
Wolverine
®
brand and footwear under
the
Bates
®
and
HyTest
®
brands. Wolverine
Footwear Group products feature performance and comfort features to serve a variety of
work, outdoor and lifestyle functions.
|
5
Table of Contents
Wolverine
®
Footwear
The
Wolverine
®
brand
offers high quality work boots and shoes that incorporate innovative technologies to
deliver comfort and durability. The
Wolverine
®
brand, which has
been in existence for 127 years, markets work and outdoor footwear in three
categories: (i) work and industrial; (ii) outdoor sport; and (iii) rugged casual.
The development of
DuraShocks
®
, MultiShox
®
,
Wolverine Fusion
®
and
Wolverine Compressor
®
technologies as well as the development of the
Contour Welt
®
line have allowed the
Wolverine
®
brand to introduce a
broad line of work footwear with a focus on comfort. The
Wolverine
®
work product line features work boots and shoes with protective features
such as toe caps, metatarsal guards and electrical hazard protection, targeting
industrial and farm workers. The
Wolverine
®
rugged casual and
outdoor sport product lines incorporate
DuraShocks
®
,
Wolverine
iCS
TM
and other technologies and comfort features into products designed
for casual and outdoor sport use. The rugged casual line targets active lifestyles
and includes trail shoes and outdoor sandals. The outdoor sport line is designed to
meet the demands of hunters, fishermen and other active outdoor sports enthusiasts.
Wolverine
®
Apparel and Licensing
The Wolverine Footwear Group
markets a line of work and rugged casual
Wolverine
®
brand
apparel. In addition, the Company licenses its
Wolverine
®
brand
for use on eyewear and gloves.
Bates
®
Uniform Footwear
The Bates Uniform Footwear Division is
an industry leader in supplying footwear to military and civilian uniform users.
The Bates Uniform Footwear Division utilizes
DuraShocks
®
,
DuraShocks SR
™,
CoolTech
,
Wolverine iCS
TM
and other proprietary comfort
technologies in the design of its military-style boots and oxfords. The Bates
Uniform Footwear Division contracts with the U.S. Department of Defense and the
militaries of several foreign countries to supply military footwear. Civilian
uniform uses include police, security, postal, restaurant and other industrial
occupations. Bates Uniform Footwear Division’s products are also distributed
through specialty retailers and catalogs.
HyTest
®
Safety Footwear
The
HyTest
®
product
line consists primarily of high-quality work boots and shoes that incorporate
various specialty safety features, including steel toe, composite toe, metatarsal
guards, electrical hazard, static dissipating and conductive footwear designed to
protect against hazards of the workplace.
HyTest
®
footwear is
distributed primarily through a network of independently-owned
Shoemobile
®
mobile truck retail outlets providing direct sales of the Company’s
occupational and work footwear brands to workers at industrial facilities and also
through direct sales arrangements with large industrial customers.
| 3. |
The Heritage Brands Group
The Heritage Brands Group consists of
Cat
®
Footwear,
Harley-Davidson
®
Footwear and
the
Sebago
®
product line.
|
Caterpillar
®
Footwear
Pursuant to a license arrangement with
Caterpillar Inc., the Company has exclusive worldwide rights to manufacture, market
and distribute footwear under the
Caterpillar
®
,
Cat
®
, Cat & Design,
Walking Machines
®
and other trademarks. The Company believes the association with
Cat
®
equipment enhances the reputation of its footwear for
quality, ruggedness and durability.
Cat
®
brand footwear
products include work boots and shoes, sport boots, rugged casuals and lifestyle
footwear, including lines of work and casual footwear featuring
iTechnology
™ and
Hidden Tracks
®
comfort features.
Cat
®
footwear products target work and industrial users and active lifestyle
users.
Cat
®
footwear is marketed in approximately 140 countries
and territories worldwide.
Cat
®
,
Caterpillar
®
, Cat & Design and
Walking Machines
®
are registered trademarks of Caterpillar Inc.
Harley-Davidson
®
Footwear
Pursuant to a license arrangement
with the Harley-Davidson Motor Company, the Company has the exclusive right to
manufacture, market, distribute and sell
Harley-Davidson
®
branded footwear throughout the world.
Harley-Davidson
®
branded footwear products include motorcycle, casual, fashion, work and
western footwear for men, women and children.
Harley-Davidson
®
footwear is sold globally through a network of independent
Harley-Davidson
®
dealerships, as well as through department
stores and specialty retailers.
Harley-Davidson
®
is a
registered trademark of H-D Michigan, Inc.
6
Table of Contents
Sebago
®
The
Sebago
®
product line has been
marketed since 1946 and consists primarily of performance nautical and
American-inspired casual footwear for men and women, such as boat shoes and hand
sewn loafers. Highly recognized
Sebago
®
line extensions include
Sebago Docksides
®
,
Drysides
™ and
Athletic Marine.
The
Sebago
®
product line is marketed in approximately 115 countries
and territories worldwide. The
Sebago
®
manufacturing and design
tradition of quality components, durability, comfort and “Americana” heritage is
further supported by targeted distribution to better-grade independent, marine and
department store retailers throughout the world. The Company also launched a
classic and marine
Sebago
®
apparel line in 2009.
| 4. |
The Hush Puppies Company
|
Hush Puppies
®
Since 1958, the
Hush Puppies
®
brand
has been a leader in the casual footwear market. The brand offers shoes and boots
for men, women and children, and is marketed in approximately 140 countries and
territories. The modern styling is complemented by a variety of comfort features
and proprietary technologies that have earned the brand its reputation for comfort,
style and value. In addition, the
Hush Puppies
®
brand is
licensed for use on certain items, including apparel, eyewear, handbags, socks,
watches and plush toys.
Soft Style
®
The
Soft Style
®
product line consists primarily
of women’s dress and casual footwear.
Cushe
TM
The Company acquired the
Cushe
TM
Footwear business in January 2009. The
Cushe
TM
business focuses
on relaxed, design-led footwear for active men and women. The
Cushe
TM
Footwear business targets younger consumers and
better-grade retailers with products ranging from sport casuals to sandals.
Other Businesses
In addition to manufacturing, sourcing, marketing and distributing the Company’s footwear and
apparel products as reported in the branded footwear, apparel, and licensing segment, the Company
also (i) operates 83 North American and 5 U.K.-based retail stores featuring footwear and apparel,
(ii) operates a performance leathers business through its Wolverine Leathers Division, and (iii)
purchases and cures raw pigskins for sale to various customers through its wholly-owned subsidiary
Wolverine Procurement, Inc.
| 1. |
Wolverine Retail
.
The Company operates 83 North American and 5
U.K.-based retail stores as of February 2010. These stores are operated under the
Hush
Puppies
®
,
Hush Puppies and Family
SM
,
Track’N
Trail
®
,
Rockford Footwear Depot
®
and
Merrell
®
names. Both the
Rockford Footwear Depot
®
and
Track’N Trail
®
retail formats carry a large
selection of Company-branded products, featuring such brands as
Wolverine
®
,
Merrell
®
,
Hush
Puppies
®
,
Cat
®
,
Chaco
®
,
Cushe
TM
,
Patagonia
®
,
Sebago
®
and
Harley-Davidson
®
. The Company also operates
Merrell
®
concept stores and
Hush Puppies
®
concept stores,
providing a platform to showcase these brands exclusively. In addition, the Company
operates 23 direct-to-customer retail websites, including,
www.merrell.com,
www.catfootwear.com
,
www.hushpuppies.com
,
www.sebago.com, www.wolverine.com,
www.chacousa.com, www.cushe.com
and
www.batesfootwear.com
.
|
||
| 2. |
The Wolverine Leathers Division
.
The Wolverine Leathers Division
markets pigskin leather primarily for use in the footwear industry. The Company
believes pigskin leather offers superior performance and advantages over cowhide
leather. The Company’s waterproof and stain resistant leathers are featured in some of
the Company’s domestic footwear lines and many products offered by the Company’s
international licensees and distributors.
|
||
| 3. |
Wolverine Procurement, Inc
.
Wolverine Procurement, Inc. performs
skinning operations and purchases raw pigskins from third parties, which it cures and
sells to the Wolverine Leathers Division and to outside customers for processing into
pigskin leather products.
|
7
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Marketing
The Company’s marketing strategy is to develop brand-specific plans and related promotional
materials for U.S. and international markets to foster a consistent message for each of the
Company’s core brands. Each brand group has dedicated marketing personnel who develop the
marketing strategy for brands within that group. Marketing campaigns and strategies vary by brand
and may target accounts and/or end users as they strive to increase awareness of, and affinity for,
the Company’s branded products. The Company’s advertisements typically emphasize fashion, comfort,
quality, durability, functionality and other performance and lifestyle aspects of the Company’s
products. Components of the brand-specific plans vary and may include print, radio and television
advertising, social networking sites, event sponsorships, in-store point of purchase displays,
promotional materials, and sales and technical assistance.
The Company’s brand groups provide its international licensees and distributors with creative
direction and materials to convey consistent messages and brand images, including (i) direction on
the categories of footwear to be promoted, (ii) photography and layouts, (iii) broadcast
advertising, including commercials and film footage, (iv) point-of-purchase presentation
specifications, blueprints and packaging, (v) sales materials and (vi) consulting on retail store
layout and design. The Company believes its brand names provide a competitive advantage and the
Company makes significant expenditures on marketing and promotion to support the position of its
products and enhance brand awareness.
Domestic Sales and Distribution
The Company uses a wide variety of domestic distribution channels and strategies to distribute its
branded footwear products:
| • |
The Company uses a dedicated sales force and customer service team, advertising, point
of purchase support and in-stock inventories to service department stores, national chains,
specialty retailers, catalogs, independent retailers and uniform outlets.
|
||
| • |
Volume direct programs ship products directly to the retail customer without going
through a Company distribution center and provide products at competitive prices with
limited marketing support. These programs service major retail, mail order, mass merchant
and government customers.
|
||
| • |
A network of independent
Shoemobile
®
distribution outlets distributes the
Company’s work and occupational footwear at industrial facilities.
|
||
| • |
The Company solicits all branches of the United States military and enters bids for
contracts to supply specific footwear products. Such contracts typically contain future
purchase options that are not required to be exercised.
|
In addition to its wholesale activities, the Company also operates a consumer-direct business as
described above. The Company continues to develop new programs, both independently and with its
retail customers, for the distribution of its products.
A broad distribution base insulates the Company from dependence on any one customer. No customer
of the Company accounted for more than 10% of the Company’s revenue in fiscal 2009.
The Company experiences moderate fluctuations in sales volume during the year as reflected in
quarterly revenue (and taking into consideration the 16 weeks or 17 weeks included in the fourth
accounting period versus the 12 weeks included in the first three accounting periods). The Company
also experiences some fluctuation in its levels of working capital, typically including an increase
in working capital requirements near the end of the third quarter. The Company provides working
capital for such fluctuations through internal financing and through a revolving credit agreement.
The Company expects current seasonal sales patterns to continue in future years.
International Operations and Global Licensing
The Company’s foreign-sourced revenue is generated from a combination of (i) sales of branded
footwear and apparel through the Company’s owned operations in Canada, the United Kingdom, Austria,
Finland, France,
Germany, Italy, the Netherlands, Spain, Sweden and Switzerland; (ii) sales to international
distributors for certain markets and businesses; and (iii) royalty income from a network of
third-party licensees and distributors. The Company’s owned operations are located in markets
where the Company believes it can gain a strategic advantage by more directly controlling the sale
into retail accounts. License and distribution arrangements enable the Company to develop sales in
international markets without the capital commitment required to maintain related foreign
operations, employees, inventories or localized marketing programs.
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The Company continues to develop its network of licensees and distributors to market its footwear
brands. The Company assists in designing products that are appropriate to each foreign market, but
consistent with the global brand position. Independent licensees and distributors purchase goods
from either the Company or authorized third-party manufacturers pursuant to distribution agreements
or manufacture branded products consistent with Company standards pursuant to license agreements.
Distributors and licensees are responsible for independently marketing and distributing Company
branded products in their respective territories, with product and marketing support from the
Company.
Manufacturing and Sourcing
The Company controls the majority of the units of footwear and apparel marketed globally under the
Company’s brand names. The balance is controlled directly by the Company’s licensees. Of the
units sourced and/or manufactured by the Company, approximately 93% are purchased or sourced from
third parties, with the remainder produced at Company-operated facilities. The Company sources a
majority of its footwear from a variety of foreign manufacturing facilities in the Asia-Pacific
region, South America and India. The Company maintains offices in the Asia-Pacific region to
facilitate and develop strategies for the sourcing and importation of quality footwear and apparel.
The Company has established guidelines for each of its third-party manufacturers in order to
monitor product quality, labor practices and financial viability. The Company has adopted
“Engagement Criteria for Partners & Sources” to require that its domestic and foreign
manufacturers, licensees and distributors use ethical business standards, comply with all
applicable health and safety laws and regulations, are committed to environmentally safe practices,
treat employees fairly with respect to wages, benefits and working conditions, and do not use child
or prison labor. Footwear produced by the Company is manufactured at Company-operated facilities
located in Michigan and the Dominican Republic.
The Company’s owned manufacturing operations allow the Company to (i) reduce its production lead
time, enabling it to more quickly respond to market demand and reduce inventory risk, (ii) lower
freight, shipping and duty costs for sales to certain markets, and (iii) more closely monitor
product quality. The Company’s third party sourcing strategy allows the Company to (i) benefit
from lower manufacturing costs and state-of-the-art manufacturing facilities, (ii) source the
highest quality raw materials from around the world, and (iii) avoid capital expenditures necessary
for additional owned factories. The Company believes that its overall global manufacturing
strategy provides the flexibility to properly balance the need for timely shipments, high quality
products and competitive pricing.
The Company’s principal required raw material is quality leather, which it purchases from a select
group of domestic and offshore suppliers. The global availability of common upper materials and
specialty leathers eliminates any reliance by the Company upon a sole supplier.
The Company currently purchases the vast majority of the raw pigskins used for its Wolverine
Leathers Division from one domestic source, which has been a reliable and consistent supplier for
over 30 years. Alternative sources of raw pigskin are available, but with less advantageous
pricing, quality and compatibility with the Company’s processing method. The Company purchases all
of its other raw materials and component parts from a variety of sources and does not believe that
any of these sources are a dominant supplier.
The Company is subject to the normal risks of doing business abroad due to its international
operations, including the risk of expropriation, acts of war or terrorism, political disturbances
and similar events, the imposition of trade barriers, quotas, tariffs and duties, loss of most
favored nation trading status and currency and exchange rate fluctuations. With respect to
international sourcing activities, management believes that over a period of time, it could arrange
adequate alternative sources of supply for the products currently obtained from its foreign
suppliers,
but that a sustained disruption of such sources of supply could have an adverse impact on the
Company’s results of operations and financial position.
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Trademarks, Licenses and Patents
The Company holds a significant portfolio of registered and common law trademarks that identify its
branded products. The Company’s owned trademarks include
Hush Puppies
®
,
Wolverine
®
,
Bates
®
,
Cushe
TM
,
Chaco
®
,
Soft Style
®
,
Wolverine Fusion
®
,
DuraShocks
®
,
MultiShox
®
,
Wolverine
Compressor
®
,
Hidden Tracks
®
,
iTechnology
TM
,
Bounce
®
,
Comfort Curve
®
,
HyTest
®
,
Merrell
®
, M Circle Design (registered
design trademark),
Continuum
®
,
Sebago
®
,
Q-Form
®
and
Track ‘N Trail
®
. The Company’s Wolverine
Leathers Division markets its pigskin leathers under the trademarks
Wolverine Warrior
Leather
®
,
Weather Tight
®
,
All Season Weather Leathers
™ and
its registered Wolverine Leathers & Design trademark. The Company has the rights to manufacture,
market and distribute footwear throughout the world under the
Cat
®
,
Harley-Davidson
®
and
Patagonia
®
trademarks pursuant to
license arrangements with the respective trademark owners. The Cat
®
,
Harley-Davidson
®
, and Patagonia
®
licenses extend for five
or more years and are subject to early termination for breach.
The Company believes that consumers identify its products by the Company’s trademarks and that its
trademarks are valuable assets. The Company is not aware of any infringing uses or any prior
claims of ownership of its trademarks that could materially affect its current business. The
Company has a policy of pursuing registration of its primary trademarks whenever practicable and to
vigorously defend its trademarks against infringement or other threats. The Company also holds
many design and utility patents, copyrights and various other proprietary rights. The Company
vigorously protects its proprietary rights under applicable laws.
Order Backlog
At February 20, 2010, the Company had an order backlog of approximately $424 million compared to an
order backlog of approximately $357 million at February 21, 2009, determined on a consistent basis.
Substantially all of the backlog relates to orders for products expected to be shipped in 2010.
Orders in the backlog are subject to cancellation by customers and to changes in planned customer
demand or at-once orders. The backlog at a particular time is affected by a number of factors,
including seasonality, retail conditions, expected customer demand, product availability and the
schedule for the manufacture and shipment of products. Accordingly, a comparison of backlog from
period to period is not necessarily meaningful and may not be predictive of eventual actual
shipments.
Competition
The Company markets its footwear and apparel lines in a highly competitive and fragmented
environment. The Company competes with numerous domestic and international marketers and
importers, some of which are larger and have greater resources than the Company. The Company has
at least thirty major competitors for its brands of footwear and apparel. Product performance and
quality, including technological improvements, product identity, competitive pricing and ability to
control costs, and the ability to adapt to style changes are all important elements of competition
in the footwear and apparel markets served by the Company. The footwear and apparel industries in
general are subject to changes in consumer preferences. The Company strives to maintain its
competitive position through promotions designed to increase brand awareness, manufacturing and
sourcing efficiencies, and the style, comfort and value of its products. Future sales by the
Company will be affected by its continued ability to sell its products at competitive prices and to
meet shifts in consumer preferences.
Because of the lack of reliable published statistics, the Company is unable to state with certainty
its position in the footwear and apparel industries. Market shares in the non-athletic footwear
and apparel industry are highly fragmented and no one company has a dominant market position.
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Research and Development
In addition to normal and recurring product development, design and styling activities, the Company
engages in research and development related to the development of new production techniques and to
improving the function,
performance, reliability and quality of its branded footwear and other products. The Company’s
continuing relationship with the Biomechanics Evaluation Laboratory at Michigan State University,
for example, has helped validate and refine specific biomechanical design concepts, such as
Bounce
®
,
DuraShocks
®
and
Hidden Tracks
®
comfort technologies, that have been incorporated in the Company’s footwear. While the
Company expects to continue to be a leading developer of footwear innovations, research and
development costs do not represent a material portion of operating expenses.
Environmental Matters
Compliance with federal, state and local provisions which have been enacted or adopted regulating
the discharge of materials into the environment, or otherwise relating to the protection of the
environment have not had, nor are they expected to have, any material effect on the capital
expenditures, earnings or competitive position of the Company and its subsidiaries. The Company
uses and generates certain substances and wastes that are regulated or may be deemed hazardous
under certain federal, state and local regulations with respect to the environment. The Company
from time to time works with federal, state and local agencies to resolve cleanup issues at various
waste sites and other regulatory issues.
Employees
As of January 2, 2010, the Company had approximately 4,018 domestic and foreign production, office
and sales employees. Approximately 149 employees were covered by two union contracts expiring at
various dates through March 31, 2011. The Company presently considers its employee relations to be
good.
Available Information
Information about the Company, including the Company’s Code of Conduct & Compliance, Corporate
Governance Guidelines, Director Independence Standards, Accounting and Finance Code of Ethics,
Audit Committee Charter, Compensation Committee Charter, and Governance Committee Charter, is
available at its website at
www.wolverineworldwide.com/investors_governance.asp
. Printed copies of
the documents listed above are available, without charge, by writing to the Company at 9341
Courtland Drive, N.E., Rockford, Michigan 49351, Attention: General Counsel.
The Company also makes available on or through its website, free of charge, the Company’s Annual
Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments
to those reports (along with certain other Company filings with the Securities and Exchange
Commission (“SEC”)) as soon as reasonably practicable after electronically filing such material
with, or furnishing it to, the SEC. These materials are also accessible on the SEC’s website at
www.sec.gov
.
| Item 1A. |
Risk Factors
|
The Company’s sales, operating results and financial position are dependent on general economic
conditions and other factors affecting consumer spending.
The success of the Company’s operations depends to a significant extent upon a number of factors
affecting disposable consumer income and consumer spending patterns, both nationally and
internationally, including general economic conditions and factors such as employment, business
conditions, interest rates and taxation. Uncertainty about current and future global economic
conditions may cause the Company’s customers to defer or cancel purchases of the Company’s
products. In addition, recessionary economic cycles, higher interest rates on consumer or business
borrowings, restricted credit availability, inflation, higher levels of unemployment and consumer
debt, higher tax rates or other economic factors may cause consumer confidence to decline, which
could adversely affect the demand for the Company’s products. Consumer spending patterns may be
affected by changes in the amount or severity of inclement weather, the acceptability of U.S.
brands in international markets and the growth or decline of global footwear markets. If demand
for the Company’s products declines, the Company’s sales and profit margins may also decline.
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General economic conditions and regulatory factors such as those listed above, as well as increased
costs of fuel, labor, commodities, insurance and health care, may increase the Company’s cost of
sales and operating expenses, which may adversely affect the Company’s financial position and
results of operations.
The Company’s business will be adversely affected if the Company is not able to maintain its
competitive position in the footwear industry, or compete effectively in retail and apparel
markets.
The Company competes with numerous other marketers of footwear, some of which are larger and have
greater resources than the Company. Product performance and quality, including technological
improvements, product identity, competitive pricing and the ability to adapt to style changes are
all important elements of competition in the footwear industry. The footwear industry in general
is subject to changes in consumer preferences with respect to the popularity of particular designs
and categories of footwear. The Company strives to maintain and improve its competitive position
through increasing brand awareness, gaining sourcing efficiencies, and enhancing the style, comfort
and value of its products. Future sales by the Company will be affected by its continued ability
to sell its products at competitive prices and to meet shifts in consumer preferences. If the
Company is unable to respond effectively to competitive pressures and changes in consumer spending,
the Company’s business, results of operations and financial position may be adversely affected.
In addition, the Company has only recently begun to expand into apparel and has increased its focus
on its consumer-direct initiatives. Many of its competitors in these areas have greater
experience, a more developed consumer and customer base in these sectors, lower prices, or greater
financial, technical or marketing resources than the Company. The Company’s competitors in these
sectors may be able to undertake more effective marketing campaigns; adopt more aggressive pricing
policies; make more attractive offers to potential employees, distribution partners and
manufacturers; or may be able to respond more quickly to changes in consumer preferences, than the
Company. If the Company’s consumer-direct or apparel initiatives are not successful, the Company’s
business, results of operations and financial position may be adversely affected.
If the Company is not able to manage its inventories effectively, its costs could increase and/or
its sales could decrease, each of which could adversely affect its operating results.
The Company’s ability to manage its inventories properly is an important factor in its operations.
Inventory shortages can impede the Company’s ability to meet at-once orders and can adversely
affect the timing of shipments to customers and diminish brand loyalty. Conversely, excess
inventories can result in lower gross margins due to the necessity of lowering prices in order to
liquidate excess inventories, as well as increased interest costs. If the Company is unable to
effectively manage its inventory, its business, results of operations and financial position may be
adversely affected.
The potential imposition of additional duties, quotas, tariffs and other trade restrictions could
have an adverse impact on the Company’s sales and profitability.
All of the Company’s products manufactured overseas and imported into the United States, the
European Union and other countries are subject to customs duties collected by customs authorities.
Customs information submitted by the Company is routinely subject to review by customs authorities.
Additional U.S. or foreign customs duties, quotas, tariffs, anti-dumping duties, safeguard
measures, cargo restrictions to prevent terrorism or other trade restrictions may be imposed on the
importation of the Company’s products in the future. The imposition of such costs or restrictions
in foreign countries where the Company operates, as well as in countries where the Company’s
third-party distributors and licensees operate, could result in increases in the cost of the
Company’s products generally and could adversely affect the sales and profitability of the Company.
In December 2009, the European Union approved a 15-month extension of anti-dumping duties on
specific types of leather upper footwear originating in China and Vietnam and imported into member
states of the European Union. Because the Company sources a substantial portion of its products
from suppliers located in China and Vietnam, the imposition of these anti-dumping duties has
negatively affected, and, for as long as such anti-dumping duties remain in effect, will continue
to negatively affect, the Company’s sales and gross margin in the European Union.
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The Company’s business could be adversely affected by changes in currency values.
Foreign currency fluctuations relative to the U.S. dollar affect the Company’s revenue and
profitability. In addition, because currency valuations fluctuate and the Company may employ
hedging strategies over time, changes in currency exchange rates may impact the Company’s financial
results positively or negatively in one period and not another, which may also make it difficult to
compare the Company’s operating results from different periods. Currency exchange rate
fluctuations may also adversely impact the third parties that manufacture the Company’s products by
making their purchases of raw materials or other production costs more expensive and harder to
finance and thereby raising prices for the Company, its distributors and licensees. For a more
detailed discussion of risk relating to foreign currency fluctuation, see Item 7A,
Quantitative and
Qualitative Disclosures About Market Risk.
A majority of the Company’s products are produced outside the United States where the Company is
subject to the risks of international commerce.
The Company currently sources most of its products from third-party manufacturers in foreign
countries, predominantly China. As is common in the industry, the Company does not have long-term
contracts with its third-party suppliers. There can be no assurance that the Company will not
experience difficulties with such suppliers, including reduction in the availability of production
capacity, failure to meet production deadlines or increases in manufacturing costs. The Company’s
future results will depend partly on its ability to maintain positive working relationships with
its third-party suppliers.
Foreign manufacturing is subject to a number of risks, including work stoppages, transportation
delays and interruptions, political instability, foreign currency fluctuations, changing economic
conditions, expropriation, nationalization, the imposition of tariffs, import and export controls
and other non-tariff barriers and changes in governmental policies. Various factors could
significantly interfere with the Company’s ability to source its products, including adverse
developments in trade or political relations with China or other countries where the Company
sources its products, or China shifting its manufacturing capacity away from footwear and apparel
to other industries. Any of these events could have an adverse effect on the Company’s business,
results of operations and financial position and in particular on the Company’s ability to meet
customer demands and produce its products in a cost-effective manner.
Currency exchange rate fluctuations in China could result in higher costs and decreased margins.
The Company sources a substantial portion of its products from China. The official exchange rate
for conversion of the Chinese yuan was pegged to the U.S. dollar from 1994 to 2005. Beginning in
2005, the exchange rate for the yuan was linked to a trade-weighted basket of foreign currencies of
China’s primary trading partners. The exchange rate is permitted to float each day up to 0.5% in
either direction from the previous day’s close. As a result, the value of the yuan may increase
incrementally over time. Such increases could significantly increase production costs of products
the Company sources from China. Additional revaluations in the yuan could impact the prices the
Company pays its Chinese manufacturers if they adjust their selling prices accordingly. Increases
in the Company’s production costs will decrease its gross margin unless the Company is able to
increase prices to offset such increased costs.
Any disruption in the supply of key production materials could interrupt product manufacturing and
increase product costs.
The Company’s ability to competitively price its products depends on the cost of components,
services, labor, equipment and raw materials, including leather and materials used in the
production of footwear outsoles. The cost of services and materials is subject to change based on
availability and market conditions that are difficult to predict. Conditions such as diseases
affecting the availability of leather affect the cost of the footwear marketed by the Company. In
addition, fuel prices and numerous other factors, such as the possibility of service interruptions
at shipping and receiving ports, affect the Company’s shipping costs. Increases in cost for
services and materials used in production could have a negative impact on the Company’s business,
results of operations and financial position.
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The Company purchases raw pigskins for its leathers operations from a single domestic source
pursuant to short-term contracts. Although this source has been a reliable and consistent supplier
for over 30 years, there are no assurances that it will continue as a supplier. Failure of this
source to continue to supply the Company with raw pigskin or to supply the Company with raw pigskin
on less favorable terms could have a negative impact on the Company’s business, results of
operations and financial position, including increasing the Company’s cost of raw materials for its
leathers business and as a result, decreasing the Company’s profits.
If the Company’s customers significantly reduce their purchases from the Company or are not able to
pay for its products in a timely manner, the Company’s business, results of operations and
financial position may be adversely affected.
The Company’s financial success is directly related to the willingness of its customers to continue
to purchase its products. The Company does not typically have long-term contracts with its
customers. Sales to the Company’s customers are generally on an order-by-order basis and are
subject to rights of cancellation and rescheduling by the customers. Failure to fill customers’
orders in a timely manner could harm the Company’s relationships with its customers. Furthermore,
if any of the Company’s major customers experience a significant downturn in its business, or fail
to remain committed to the Company’s products or brands, then these customers may reduce or
discontinue purchases from the Company, which could have an adverse effect on the Company’s
business, results of operations and financial position.
The Company sells its products to wholesale customers and extends credit based on an evaluation of
each customer’s financial condition, usually without requiring collateral. The financial
difficulties of a customer could cause the Company to stop doing business with that customer or
reduce its business with that customer. The Company’s inability to collect from its customers or a
cessation or reduction of sales to certain customers because of credit concerns could have an
adverse effect on the Company’s business, results of operations and financial position.
The recent trend toward consolidation in the retail industry could lead to customers seeking more
favorable terms of purchase from the Company and could lead to a decrease in the number of stores
that carry the Company’s products. In addition, changes in the channels of distribution, such as
the growth of Internet commerce and the trend toward the sale of private label products by major
retailers, could have an adverse effect on the Company’s business, results of operations and
financial position.
The Company has been awarded a number of U.S. Department of Defense contracts that include future
purchase options for
Bates
®
footwear. Failure to exercise these purchase
options by the Department of Defense or the failure of the Company to secure future U.S. Department
of Defense contracts could have an adverse effect on the Company’s business, results of operations
and financial position.
The Company’s consolidation of its manufacturing facilities in North America could disrupt
manufacturing and supply of its products to customers, and any such disruption could adversely
affect the Company’s ability to obtain future business.
The Company has consolidated its manufacturing facilities in North America. The Company has ceased
its manufacturing operations in Arkansas and relocated those operations to the Company’s facilities
in Michigan. If the Company does not integrate the consolidation of its manufacturing facilities
in an efficient manner, the manufacture and supply of certain of the Company’s products, including
products intended for the U.S. Department of Defense, may be disrupted. Failure to fill orders in
a timely manner due to the consolidation or other factors could harm the Company’s relationships
with U.S. Department of Defense and other customers and adversely affect the Company’s ability to
obtain future contracts with the U.S. Department of Defense and other customers on favorable terms
or otherwise.
14
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The Company’s financial success may be adversely affected by the ongoing effects of the recent
crisis in the credit markets.
Difficulties in the credit markets over the last 24 months have led to a substantial decrease in
the availability of both consumer and business credit. Commercial banks are demanding that
borrowers pay higher interest rates and agree
to more onerous terms, and in other cases are refusing to provide financing. If these conditions
continue or worsen, they could adversely impact the Company’s future results of operations and
financial position. If the Company’s third-party distributors, suppliers and retailers are not
able to obtain financing on favorable terms, or at all, they may delay or cancel orders for the
Company’s products, or fail to meet their obligations to the Company in a timely manner, either of
which could adversely impact the Company’s sales, cash flow and operating results. In addition,
the lack of available credit and/or the increased cost of credit may significantly impair the
Company’s ability to obtain additional credit to finance future expansion plans, or refinance
existing credit, on favorable terms, or at all. The extent and duration of any future weakening of
the credit markets is unknown. In addition, there can be no assurance regarding either the length
of time it will take for the credit markets to recover or how successful any such recovery will be.
The market price of the Company’s common stock may be adversely affected by market volatility.
Market disruption and volatile credit and financial markets may contribute to extreme price and
volume fluctuations in the stock market. This volatility could negatively affect the market price
of Company’s common stock for reasons unrelated to its operating performance.
Unfavorable findings resulting from a government audit could subject the Company to a variety of
penalties and sanctions, and could negatively impact the Company’s future revenues.
The federal government has the right to audit the Company’s performance under its government
contracts. If a government audit uncovers improper or illegal activities, the Company could be
subject to civil and criminal penalties and administrative sanctions, including termination of
contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from
doing business with U.S. federal government agencies. The Company could also suffer serious harm
to its reputation if the government alleges that the Company acted in an improper or illegal
manner, whether or not any such allegations have merit. If, as the result of an audit or for any
other reason, the Company is suspended or barred from contracting with the federal government
generally, or any specific agency, if the Company’s reputation or relationship with government
agencies is impaired, or if the government otherwise ceases doing business with the Company or
significantly decreases the amount of business it does with the Company, the Company’s revenue and
profitability could decrease. The Company is also subject to tax, customs and other audits in
various jurisdictions where it operates. Negative audit findings could have a negative effect on
the Company’s business, results of operations and financial position.
Failure of the Company’s international licensees and distributors to meet sales goals could have an
adverse effect on the Company.
The Company’s products are sold in many international markets through independent licensees or
distributors. Failure by the Company’s licensees or distributors to meet planned annual sales
goals could have an adverse effect on the Company’s business, results of operations and financial
position, and it may be difficult and costly to locate an acceptable substitute distributor or
licensee. If a change in distributors becomes necessary, the Company may experience increased
costs, as well as substantial disruption and a resulting loss of sales and brand equity in the
market where such distributors operate.
The Company’s reputation and competitive position could suffer if its third-party manufacturers,
distributors, licensees and others violate laws or fail to conform to the Company’s ethical
standards.
The Company requires its independent contract manufacturers, distributors, licensees and others
with which it does business to comply with the Company’s standards relating to working conditions
and other matters. If a party with which the Company does business is found to have violated the
Company’s standards, the Company could receive negative publicity that could damage its reputation
and negatively affect the value of its brands.
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The Company’s business could be adversely affected by global political and economic uncertainty.
Concerns regarding acts of terrorism, international conflict and subsequent events have created
significant global economic and political uncertainties that may have material and adverse effects
on consumer demand, foreign
sourcing of footwear, shipping and transportation, product imports and exports and the sale of
products in foreign markets, any of which could adversely affect the Company’s ability to source,
manufacture, distribute and sell its products. The Company is subject to risks of doing business
in developing countries and economically volatile areas. These risks include social, political and
economic instability; nationalization of the Company’s assets and operations in a developing
country by local government authorities; slower payment of invoices; and restrictions on the
Company’s ability to repatriate foreign currency. In addition, commercial laws in these areas may
not be well-developed or consistently administered, and new laws may be retroactively applied. Any
of these risks could have an adverse impact on the Company’s prospects and results of operations in
these areas.
If the Company’s efforts to establish and protect its intellectual property are unsuccessful, the
value of its brands could suffer.
The Company invests significant resources to develop and protect its intellectual property, and
believes that its trademarks and other intellectual property rights are important to its success.
The Company’s ability to remain competitive is dependent upon its continued ability to secure and
protect trademarks, patents and other intellectual property rights in the United States and
internationally for all of its lines of business. The Company relies on a combination of trade
secret, patent, trademark, copyright and other laws, license agreements and other contractual
provisions and technical measures to protect its intellectual property rights; however, some
countries’ laws do not protect intellectual property rights to the same extent as do U.S. laws.
The Company’s business could be significantly harmed if it is not able to protect its intellectual
property, or if a court found that the Company was infringing on other persons’ intellectual
property rights. Any intellectual property lawsuits or threatened lawsuits in which the Company is
involved, either as a plaintiff or as a defendant, could cost the Company a significant amount of
time and money and distract management’s attention from operating the Company’s business. In
addition, if the Company does not prevail on any intellectual property claims, the Company may have
to change its manufacturing processes, products or trade names, any of which could reduce its
profitability.
In addition, some of the Company’s branded footwear operations are operated pursuant to licensing
agreements with third-party trademark owners. These agreements are subject to early termination
for breach. Expiration or early termination of any of these license agreements by the licensor
could have a material adverse effect on the Company’s business, results of operations and financial
position.
Loss of services of the Company’s key personnel could adversely affect its business.
The Company is dependent on the efforts and abilities of its senior officers. While the Company
believes that its senior management team has significant depth and that appropriate senior
management succession plans are in place, the loss of one or more members of senior executive
management or the failure to successfully implement succession planning could have an adverse
effect on the Company, its results of operations and financial position. The Company’s future
success also depends on its ability to identify, attract and retain additional qualified personnel.
Competition for such employees in the footwear, apparel and retail industries is intense and
failure to retain or attract key employees could adversely impact the Company.
Inflationary and other pressures may lead to higher employment and pension costs for the Company.
General inflationary pressures, changes in employment laws and regulations, and other factors could
increase the Company’s overall employment costs. The Company’s employment costs include costs
relating to health care benefits and benefits under the Company’s retirement plans, including a
U.S.-based defined benefit plan. The annual cost of benefits can vary significantly depending on a
number of factors, including changes in the assumed or actual rate of return on pension plan
assets, a change in the discount rate used to measure pension obligations, a change in method or
timing of meeting pension funding obligations and the rate of health care cost inflation.
Increases in the Company’s overall employment and pension costs could have an adverse effect on the
Company’s business, results of operations and financial position.
16
Table of Contents
Disruption to the Company’s information technology systems could adversely affect the Company’s
business.
The Company’s technology systems are critical to the operations of its business. Any interruption,
impairment or loss of data integrity or malfunction of these systems could severely impact the
Company’s business, including delays in product fulfillment and reduced efficiency in operations.
In addition, costs and potential problems and interruptions associated with the implementation of
new or upgraded systems or with maintenance or adequate support of existing systems could also
disrupt or reduce the efficiency of our operations.
The Company is subject to risks associated with its growth strategy and acquiring other businesses.
The Company completed two acquisitions in 2009 and may make other strategic acquisitions in the
future, and the Company cannot provide assurance that it will be able to successfully integrate the
operations of these newly-acquired businesses into the Company’s operations. Acquisitions involve
numerous risks, including risks inherent in entering new markets in which the Company may not have
prior experience; potential loss of significant customers or key personnel of the acquired
business; managing geographically-remote operations; and potential diversion of management’s
attention from other aspects of the Company’s business operations. Acquisitions may also result in
incurrence of debt, dilutive issuances of the Company’s equity securities and write-offs of
goodwill and substantial amortization expenses of other intangible assets. The failure to
integrate newly acquired businesses or the inability to make suitable strategic acquisitions in the
future could have an adverse effect on the Company’s business, results of operations and financial
position.
The maintenance and growth of the Company’s business depends upon the availability of adequate
capital.
The maintenance and growth of the Company’s business depends on the availability of adequate
capital, which in turn depends in large part on cash flow generated by its business and the
availability of equity and debt financing. The Company’s current revolving credit agreement
expires in July 2010, and the likelihood of replacing it on similar terms as favorable to the
Company is limited. Distress in the financial markets over the past 24 months has had an adverse
impact on the availability and cost of credit. The Company cannot provide assurance that its
operations will generate positive cash flow or that it will be able to obtain equity or debt
financing on acceptable terms or at all. Further, the Company cannot provide assurance that it
will be able to finance any expansion plans.
Expanding the Company’s brands into new markets may be difficult and costly, and if the Company is
unable to successfully continue such expansion, its brands may be adversely affected.
As part of its growth strategy, the Company seeks to enhance the positioning of its brands, to
extend its brands into complementary product categories such as apparel, to expand geographically,
to expand the Company’s owned retail operations and to improve operational performance. There can
be no assurance that the Company will be able to successfully implement any or all of these growth
strategies, which could have an adverse effect on the Company’s business, results of operations and
financial position. The Company has invested substantial resources into these strategies and the
failure of one or more of these strategies could have an adverse effect on the Company’s business,
results of operations and financial position.
Counterfeiting of the Company’s brands can divert sales and damage its brand image.
The Company periodically discovers products that are counterfeit reproductions of its products or
that otherwise infringe on its intellectual property rights in its markets. The Company has not
always been able to successfully stop production and sales of counterfeit products and infringement
of the Company’s intellectual property rights. The actions the Company takes to establish and
protect trademarks, patents and other intellectual property rights both inside and outside of the
United States may not be adequate to prevent imitation of its products by others. If the Company
is unsuccessful in challenging a party’s products on the basis of infringement of the Company’s
intellectual property rights, continued sales of these products could adversely affect the
Company’s sales, devalue its brands and result in the shift of consumer preference away from the
Company’s products.
17
Table of Contents
Changes in government regulation may increase the costs of compliance.
The Company’s business is affected by changes in government and regulatory policies in the United
States and on a global basis. New requirements relating to product safety and testing and new
environmental requirements, as well as changes in interest rates, tax laws, duties, tariffs and
quotas could have a negative impact on the Company’s ability to produce and market footwear at
competitive prices.
The disruption, expense, and potential liability associated with existing and future litigation
against the Company could have a material adverse effect on its reputation, financial position and
results of operations.
The Company is a defendant from time to time in lawsuits and regulatory actions relating to its
business. Due to the inherent uncertainties of litigation and regulatory proceedings, the Company
cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome
could have an adverse impact on the Company’s business, financial position and results of
operations. In addition, regardless of the outcome of any litigation or regulatory proceedings,
such proceedings are expensive and may require that the Company devote substantial resources and
executive time to defend the Company.
Provisions of Delaware law and the Company’s certificate of incorporation and bylaws could prevent
or delay a change in control or change in management that could be beneficial to the Company’s
stockholders.
Provisions of the Company’s certificate of incorporation and bylaws, as well as provisions of
Delaware law, could discourage, delay or prevent a merger, acquisition or other change in control
of the Company. These provisions are intended to protect stockholders’ interests by providing the
Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a
potential acquirer in order to obtain more favorable terms. Such provisions include a board of
directors that is classified so that only one-third of directors stand for election each year.
These provisions could also discourage proxy contests and make it more difficult for stockholders
to elect directors and take other corporate actions.
| Item 1B. |
Unresolved Staff Comments
|
None.
| Item 2. |
Properties
|
The Company operates its domestic administration, sales and marketing operations primarily from an
owned facility of approximately 225,000 square feet in Rockford, Michigan. The Company’s
manufacturing operations are primarily conducted at a combination of leased and owned facilities in
Michigan and the Dominican Republic. The Company operates its U.S. distribution operations
primarily through an owned distribution center in Rockford, Michigan, totaling approximately
305,000 square feet, a leased distribution center in Cedar Springs, Michigan, of approximately
356,000 square feet and a leased distribution center in Howard City, Michigan, of approximately
460,000 square feet.
The Company also leases and owns various other offices and distribution centers to meet its
operational requirements. In addition, the Company operates retail stores through leases with
various third-party landlords. The Company conducts international operations in Canada, the United
Kingdom, China, Hong Kong and Europe through leased distribution centers, offices and/or showrooms.
The Company believes that its current facilities are suitable and adequate for its current needs.
| Item 3. |
Legal Proceedings
|
The Company is involved in litigation and various legal matters arising in the normal course of
business, including certain environmental compliance activities. The Company has considered facts
related to legal and regulatory matters and opinions of counsel handling these matters, and does
not believe the ultimate resolution of such proceedings will have a material adverse effect on the
Company’s financial position, results of operations, or cash flows.
18
Table of Contents
Supplemental Item.
Executive Officers of the Registrant
The following table lists the names and ages of the Executive Officers of the Company and the
positions presently held with the Company. The information provided below the table lists the
business experience of each such Executive Officer for at least the past five years. All Executive
Officers serve at the pleasure of the Board of Directors of the Company, or if not appointed by the
Board of Directors, they serve at the pleasure of management.
| Name | Age | Positions held with the Company | ||||
|
Kenneth A. Grady
|
53 | General Counsel and Secretary | ||||
|
Donald T. Grimes
|
47 | Senior Vice President, Chief Financial Officer and Treasurer | ||||
|
Robin J. Kleinjans-McKee
|
34 | Corporate Controller | ||||
|
Blake W. Krueger
|
56 | Chairman, Chief Executive Officer and President | ||||
|
Pamela L. Linton
|
60 | Senior Vice President, Human Resources | ||||
|
Michael F. McBreen
|
44 | President, Global Operations Group | ||||
|
Michael D. Stornant
|
43 | Vice President, Corporate Planning and Analysis | ||||
|
James D. Zwiers
|
42 | Senior Vice President and President, Outdoor Group | ||||
Kenneth A. Grady has served the Company as General Counsel and Secretary since October 2006.
During 2006, he was President and shareholder of the law firm K.A. Grady PC. During 2005, he
served as Vice President, General Counsel and Secretary of PC Connection, Inc., a direct marketer
of information technology products and solutions. From 2004 to 2005, Mr. Grady served as Executive
Vice President of Administration, General Counsel and Secretary of KB Toys, Inc., a specialty toy
retailer. From 2001 to 2004, he served as Vice President, General Counsel and Secretary of KB
Toys, Inc.
Donald T. Grimes has served the Company as Senior Vice President, Chief Financial Officer and
Treasurer since May 2008. From 2007 to 2008, he was the Executive Vice President and Chief
Financial Officer for Keystone Automotive Operations, Inc., a distributor of automotive accessories
and equipment. Prior to Keystone, Mr. Grimes held a series of senior corporate and divisional
finance roles at Brown-Forman Corporation, a manufacturer and marketer of premium wines and
spirits. During his employment at Brown-Forman, Mr. Grimes was Vice President, Director of
Beverage Finance from 2006 to 2007; Vice President, Director of Corporate Planning and Analysis
from 2003 to 2006; and Chief Financial Officer of Brown-Forman Spirits America from 1999 to 2003.
Robin J. Kleinjans-McKee has served the Company as Corporate Controller since February 2009. From
2006 to 2009, she was the Company’s Director of Financial Reporting. From 2004 to 2006, Ms.
Kleinjans-McKee served as Assurance Senior Manager at BDO Seidman, LLP, a professional services
firm. From 1997 to 2004, Ms. Kleinjans-McKee served in various audit positions at BDO Seidman,
LLP.
Blake W. Krueger has served the Company as Chairman since January 2010 and as Chief Executive
Officer and President since April 2007. From October 2005 to April 2007 he served as Chief
Operating Officer and President. From August 2004 to October 2005, he served as Executive Vice
President and Secretary of the Company and President of the Heritage Brands Group. From November
2003 to August 2004 he served the Company as Executive Vice President, Secretary, and President of
Caterpillar Footwear. From April 1996 to November 2003 he served the Company as Executive Vice
President, General Counsel and Secretary. From 1993 to April 1996 he served as General Counsel and
Secretary. From 1985 to 1996 he was a partner with the law firm of Warner Norcross & Judd LLP.
Pamela L. Linton has served the Company as Senior Vice President, Human Resources since December
2007. From 2005 to 2007 she was an independent consultant. From 2001 to 2005 she was Senior Vice
President, Global Human Resources of American Greetings Corporation, a greeting card and gift wrap
company.
Michael F. McBreen has served the Company as President, Global Operations Group of Wolverine since
June 2008. From 2007 to 2008, he was Vice President, Supply Chain & Logistics for Furniture Brands
International, a home furnishings company. Prior to Furniture Brands International, Mr. McBreen
held a series of senior supply chain roles with Nike, Inc., a marketer of athletic footwear and
apparel. During his employment at Nike, Mr. McBreen
was Director, Global Apparel Operations from 2004 to 2007; Director, Global Apparel Operations &
Corporate Responsibility from 2002 to 2004; and Director, Global Supply Chain Operations from 2000
to 2002.
19
Table of Contents
Michael D. Stornant has served the Company as Vice President, Corporate Planning and Analysis since
February 2009. He served the Company as Corporate Controller from May 2008 until February 2009.
From 2007 to 2008, he served as Senior Vice President of Owned Operations for the Global Operations
Group at Wolverine. From 2006 to 2007, he was Wolverine’s Vice President of Finance for the Global
Operations Group. From 2003 to 2006, he served the Company as the Director of Internal Audit.
From 1996 to 2003, he held various finance-related positions at the Company.
James D. Zwiers has served the Company as Senior Vice President and President, Outdoor Group since
March 2009. From January 2008 until March 2009 he served as Senior Vice President of the Company.
From October 2006 to December 2007 he served as President of the Company’s Hush Puppies U.S.
Division. From October 2005 to October 2006 he served as the Company’s General Counsel and
Secretary. From December 2003 to October 2005 he served as General Counsel and Assistant
Secretary. From January 1998 to December 2003 he served the Company as Associate General Counsel
and Assistant Secretary. From 1995 to 1998 he was an attorney with the law firm of Warner Norcross
& Judd LLP.
| Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
The Company’s common stock is traded on the New York Stock Exchange under the symbol “WWW.” The
following table shows the high and low stock prices on the New York Stock Exchange and dividends
declared by calendar quarter for 2009 and 2008. The number of stockholders of record on February
19, 2010, was 1,622.
| 2009 | 2008 | |||||||||||||||
| Stock Price | High | Low | High | Low | ||||||||||||
|
First quarter
|
$ | 21.87 | $ | 13.15 | $ | 29.17 | $ | 19.85 | ||||||||
|
Second quarter
|
23.90 | 15.26 | 31.21 | 26.59 | ||||||||||||
|
Third quarter
|
27.25 | 21.06 | 28.66 | 22.23 | ||||||||||||
|
Fourth quarter
|
28.31 | 23.94 | 29.45 | 16.24 | ||||||||||||
| Cash Dividends Declared Per Share | 2009 | 2008 | ||||||
|
First quarter
|
$ | 0.11 | $ | 0.11 | ||||
|
Second quarter
|
0.11 | 0.11 | ||||||
|
Third quarter
|
0.11 | 0.11 | ||||||
|
Fourth quarter
|
0.11 | 0.11 | ||||||
A quarterly dividend of $0.11 per share was declared during the first quarter of fiscal 2010. See
Item 12 for information with respect to the Company’s equity compensation plans. The Company
currently expects that comparable cash dividends will be paid in future quarters in 2010.
20
Table of Contents
Stock Performance Graph
The following graph compares the five year cumulative total stockholder return on Wolverine common
stock to the Standard & Poor’s Small Cap 600 Index and the Standard & Poor’s 600 Footwear Index,
assuming an investment of $100.00 at the beginning of the period indicated. Wolverine is part of
the Standard & Poor’s Small Cap 600 Index and the Standard & Poor’s Footwear Index. This Stock
Performance Graph shall not be deemed to be incorporated by reference into the Company’s SEC
filings and shall not constitute soliciting material or otherwise be considered filed under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
21
Table of Contents
The following table provides information regarding the Company’s purchases of its own common stock
during the fourth quarter of fiscal 2009:
Issuer Purchases of Equity Securities
| Total Number | ||||||||||||||||
| of Shares | Maximum | |||||||||||||||
| Purchased | Number | |||||||||||||||
| as Part of | of Shares that | |||||||||||||||
| Total | Publicly | May Yet | ||||||||||||||
| Number of | Average | Announced | Be Purchased | |||||||||||||
| Shares | Price Paid | Plans or | Under the Plans | |||||||||||||
| Period | Purchased | per Share | Programs | or Programs | ||||||||||||
|
Period 1 (September 13, 2009 to October 10,
2009)
|
||||||||||||||||
|
Common Stock Repurchase Program
(1)
|
— | $ | — | — | 199,996 | |||||||||||
|
Employee Transactions
(2)
|
151 | 24.14 | N/A | N/A | ||||||||||||
|
Period 2 (October 11, 2009 to November 7, 2009)
|
||||||||||||||||
|
Common Stock Repurchase Program
(1)
|
— | $ | — | — | 199,996 | |||||||||||
|
Employee Transactions
(2)
|
39 | 27.13 | N/A | N/A | ||||||||||||
|
Period 3 (November 8, 2009 to December 5, 2009)
|
||||||||||||||||
|
Common Stock Repurchase Program
(1)
|
— | $ | — | — | 199,996 | |||||||||||
|
Employee Transactions
(2)
|
2,708 | 26.95 | N/A | N/A | ||||||||||||
|
Period 4 (December 6, 2009 to January 2, 2010)
|
||||||||||||||||
|
Common Stock Repurchase Program
(1)
|
— | $ | — | — | 199,996 | |||||||||||
|
Employee Transactions
(2)
|
10,719 | 27.21 | N/A | N/A | ||||||||||||
|
Total for Fourth Quarter ended January 2, 2010
|
||||||||||||||||
|
Common Stock Repurchase Program
(1)
|
— | $ | — | — | 199,996 | |||||||||||
|
Employee Transactions
(2)
|
13,617 | 27.12 | N/A | N/A | ||||||||||||
| (1) |
The Company’s Board of Directors approved a common stock repurchase
program on April 19, 2007. This program authorizes the repurchase of
7.0 million shares of common stock over a 36-month period, commencing
on the effective date of the program. The Company’s Board of
Directors approved an additional common stock repurchase program on
February 11, 2010. This program authorizes the repurchase of up to
$200.0 million of shares of common stock over a four-year period.
|
|
| (2) |
Employee transactions include: (1) shares delivered or attested in
satisfaction of the exercise price and/or tax withholding obligations
by holders of employee stock options who exercised options, and (2)
restricted shares withheld to offset statutory minimum tax withholding
that occurs upon vesting of restricted shares. The Company’s employee
stock compensation plans currently provide that the value of the
shares delivered or attested to, or withheld, shall be the closing
price of the Company’s common stock on the date the relevant
transaction occurs.
|
22
Table of Contents
| Item 6. |
Selected Financial Data
|
Five-Year Operating and Financial Summary
(1)
| (Thousands of Dollars, Except Per Share Data) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
Summary of Operations
|
||||||||||||||||||||
|
Revenue
|
$ | 1,101,056 | $ | 1,220,568 | $ | 1,198,972 | $ | 1,141,887 | $ | 1,060,999 | ||||||||||
|
Net earnings
|
61,912 | 95,821 | 92,886 | 83,647 | 74,467 | |||||||||||||||
|
Per share of common stock:
|
||||||||||||||||||||
|
Basic net earnings
(2)(3)(4)
|
$ | 1.26 | $ | 1.94 | $ | 1.75 | $ | 1.50 | $ | 1.30 | ||||||||||
|
Diluted net earnings
(2)(3)(4)
|
1.24 | 1.90 | 1.70 | 1.46 | 1.26 | |||||||||||||||
|
Cash dividends declared
(2)
|
0.44 | 0.44 | 0.36 | 0.30 | 0.26 | |||||||||||||||
|
Financial Position at Year End
|
||||||||||||||||||||
|
Total assets
|
$ | 707,933 | $ | 664,780 | $ | 638,378 | $ | 671,092 | $ | 626,580 | ||||||||||
|
Long-term debt
|
1,615 | 5 | 10,731 | 21,471 | 32,411 | |||||||||||||||
Notes to Five-Year Operating and Financial Summary
| (1) |
This summary should be read in conjunction with the consolidated
financial statements and the related notes, which are attached as
Appendix A to this Annual Report on Form 10-K.
|
|
| (2) |
On December 15, 2004, the Company announced a three-for-two stock
split in the form of a stock dividend on shares of common stock
outstanding at January 3, 2005 that was distributed to stockholders on
February 1, 2005. All per share data has been retroactively adjusted
for the increased shares resulting from this stock split.
|
|
| (3) |
Basic earnings per share are based on the weighted average number of
shares of common stock outstanding during the year after adjustment
for nonvested restricted common stock. Diluted earnings per share
assume the exercise of dilutive stock options and the vesting of all
outstanding restricted stock.
|
|
| (4) |
Basic and diluted net earnings per share have been retroactively
adjusted to reflect the adoption of FASB ASC Topic 260,
Earnings Per
Share
on January 4, 2009
,
for participating securities which represent
unvested restricted common stock which contain nonforfeitable rights
to dividends or dividend equivalents.
|
23
Table of Contents
| Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
OVERVIEW
BUSINESS OVERVIEW
Wolverine World Wide, Inc. (the “Company”) is a leading global marketer of branded footwear,
apparel and accessories. The Company’s stated mission is to “
Excite Consumers Around the World
with Innovative Footwear and Apparel that Bring Style to Purpose
.” The Company intends to fulfill
this mission by offering innovative products and compelling brand propositions, delivering supply
chain excellence and operating efficiency, complementing its footwear brands with strong apparel
and accessories offerings and building a more substantial global consumer-direct footprint.
The Company’s portfolio consists of 12 footwear and apparel brands that were marketed in
approximately 180 countries and territories in 2009. The Company controls distribution of its
brands into the retail channel via subsidiary operations in the United States, Canada, the United
Kingdom and certain continental European countries. In other markets, the Company relies on a
network of distributors and licensees to market its brands, from which the Company receives
distribution fees and royalty income. The Company also owned and operated 88 brick-and-mortar
retail stores in the United States, Canada and the United Kingdom and operated 23 e-commerce
websites at the end of fiscal 2009.
Difficult economic conditions in most of the Company’s major markets in 2009 resulted in
consolidations and bankruptcy filings among certain of the Company’s customers and a general
reduction in consumer spending. Furthermore, foreign exchange volatility had a negative impact on
the Company’s 2009 results. The Company has proactively taken actions to respond to the
challenging economic conditions by reducing costs, delivering revenue growth via its January 2009
acquisitions of the
Chaco
®
and
Cushe
TM
brands and improving performance by
thoroughly examining all profit levers. The Company believes these measures will continue to
enable it to combat the economic uncertainty caused by tough global economic conditions. The
Company remains focused on building strong global lifestyle brands that have compelling consumer
propositions and excellent prospects for growth.
FINANCIAL OVERVIEW
| • |
Profitable operations combined with outstanding working capital management and
disciplined capital spending helped generate $168.6 million of cash from operating
activities in 2009, compared to $93.5 million in 2008.
|
||
| • |
The Company ended 2009 with $160.4 million of cash and cash equivalents and
interest-bearing debt of only $1.6 million.
|
||
| • |
Revenue for 2009 was $1.101 billion, 9.8% below 2008 revenue of $1.221 billion, due to
negative foreign exchange impact, tough global trading conditions and one fewer week in
the current fiscal year compared to the prior fiscal year partially offset by revenue
contributions from newly acquired brands.
|
||
| • |
Accounts receivable decreased 2.5% in 2009 compared to 2008, due in part to the 9.8%
decrease in full year revenue.
|
||
| • |
Inventory decreased $38.7 million, or 19.7%, in 2009 compared to 2008, due to
successful inventory reduction initiatives.
|
||
| • |
Diluted earnings per share for 2009 were $1.24 per share compared to $1.90 per share
for 2008, including the impact of $0.53 per share of non-recurring restructuring and
other transition costs and a negative $0.16 per share impact from foreign exchange rate
fluctuations.
|
||
| • |
The Company declared cash dividends of $0.44 per share in 2009, equal to the prior year.
|
||
| • |
Despite tough retail conditions, the Company’s consumer direct business reported a high
single-digit sales increase over 2008 due to significant growth from e-commerce and
strong comparable store sales performance.
|
24
Table of Contents
2009 DEVELOPMENTS
Strategic Restructuring Plan
On January 7, 2009, the Board of Directors of the Company approved a strategic restructuring plan
designed to create significant operating efficiencies, improve the Company’s supply chain and
create a stronger global platform. On October 7, 2009, the Company announced that two initiatives
in its restructuring plan had been expanded to enable the consolidation of two domestic
manufacturing facilities into one and to finalize realignment in certain product creation
organizations.
The Company estimates that the total non-recurring implementation costs relating to the strategic
restructuring plan, spanning both fiscal 2009 and fiscal 2010, will range from approximately $38.0
million to $39.0 million and that all remaining initiatives under this plan will be completed in
the first half of fiscal 2010. Approximately $10.0 million to $11.0 million of the estimated total
costs represent non-cash charges. In fiscal 2009 the Company incurred non-recurring restructuring
and other transition costs of approximately $35.6 million, or $0.53 per diluted share. Continuing
annualized pretax benefits once all initiatives are fully implemented are estimated in the range of
$19.0 million to $21.0 million. The Company estimates that 2009 results reflect approximately
$13.0 million in pretax benefits relating to the strategic restructuring plan, with the remainder
of the estimated pretax benefits to be realized in reported financial results for future periods as
all initiatives are completed.
Cushe
TM
Footwear Brand
On January 8, 2009, the Company announced the acquisition of the
Cushe
TM
footwear brand,
an acquisition that is expected to drive new global opportunities and leverage the strength of the
Company’s business model and operating infrastructure.
Cushe
TM
is included in the
financial results of the Hush Puppies Company.
Chaco
®
Footwear Brand
On January 22, 2009, the Company announced the acquisition of
Chaco
®
, a performance
outdoor footwear brand with a unique heritage and strong consumer following. This acquisition
represents an excellent opportunity for the Company to leverage its world-class sourcing and
logistics infrastructure, building upon
Chaco
®
’s
leadership in the U.S. market while
expanding its business internationally.
Chaco
®
is included in the financial results of
the Outdoor Group.
Effective Tax Rate
The Company’s full year effective tax rate in fiscal year 2009 was 27.8%, compared to 31.8% in
fiscal year 2008. The lower effective tax rate reflects benefits from the strategic restructuring
plan, the cumulative full year benefits from new tax planning strategies related primarily to the
Company’s international operations and the net benefit from non-recurring adjustments in the
current year.
OUTLOOK FOR 2010
The Company observed stabilization in many of its major markets in the latter part of fiscal 2009,
and signs of improving consumer confidence and economic output. Though unemployment rates remain
high, the Company expects continued improvement in economic conditions in most of its major markets
and, based on an improved order backlog position throughout its portfolio, expects to deliver both
revenue and earnings growth in 2010. Foreign exchange rates are not expected to have a significant
impact on revenue.
The Company expects modest improvement in gross margin in 2010, based on relatively flat product
costs, a full-year benefit from 2009 price increases and benefits from shifts in both product and
geographic mix, partially offset by negative foreign exchange primarily from foreign currency
forward contracts.
A moderate increase is expected in operating expenses due to incremental investments behind the
Merrell
®
,
Chaco
®
,
Sebago
®
and
Cushe
TM
brands and consumer-direct
initiatives, strategies designed to capitalize on opportunities to gain market share and accelerate
growth of these important drivers of sales and profit.
The Company’s Board of Directors approved an additional common stock repurchase program on February
11, 2010. This program authorizes the repurchase of up to $200.0 million of shares of common stock
over a four-year period.
25
Table of Contents
The following is a discussion of the Company’s results of operations and liquidity and capital
resources. This section should be read in conjunction with the Company’s consolidated financial
statements and related notes included elsewhere in this Annual Report.
RESULTS OF OPERATIONS — FISCAL 2009 COMPARED TO FISCAL 2008
FINANCIAL SUMMARY — 2009 VERSUS 2008
| 2009 | 2008 | Change | ||||||||||||||||||||||
| % of | % of | |||||||||||||||||||||||
| (Millions of Dollars, Except Per Share Data) | $ | Total | $ | Total | $ | % | ||||||||||||||||||
|
Revenue
|
||||||||||||||||||||||||
|
Branded footwear, apparel and
licensing
|
$ | 991.2 | 90.0 | % | $ | 1,106.1 | 90.6 | % | $ | (114.9 | ) | (10.4 | %) | |||||||||||
|
Other business units
|
109.9 | 10.0 | % | 114.5 | 9.4 | % | (4.6 | ) | (4.0 | %) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Revenue
|
$ | 1,101.1 | 100.0 | % | $ | 1,220.6 | 100.0 | % | $ | (119.5 | ) | (9.8 | %) | |||||||||||
|
|
||||||||||||||||||||||||
| % of | % of | |||||||||||||||||||||||
| $ | Revenue | $ | Revenue | $ | % | |||||||||||||||||||
|
Gross Profit
|
||||||||||||||||||||||||
|
Branded footwear, apparel and
licensing
|
$ | 390.8 | 39.4 | % | $ | 444.7 | 40.2 | % | $ | (53.9 | ) | (12.1 | %) | |||||||||||
|
Other business units
|
40.9 | 37.2 | % | 41.3 | 36.1 | % | (0.4 | ) | (0.9 | %) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Gross Profit
|
$ | 431.7 | 39.2 | % | $ | 486.0 | 39.8 | % | $ | (54.3 | ) | (11.2 | %) | |||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Selling, general and
administrative expenses
|
$ | 316.4 | 28.7 | % | $ | 345.2 | 28.3 | % | $ | (28.8 | ) | (8.3 | %) | |||||||||||
|
Restructuring and other transition
costs
|
29.7 | 2.7 | % | — | 0.0 | % | 29.7 | 100.0 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Operating Expenses
|
$ | 346.1 | 31.4 | % | $ | 345.2 | 28.3 | % | $ | 0.9 | 0.3 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest expense — net
|
$ | 0.1 | 0.0 | % | $ | 1.1 | 0.1 | % | $ | (1.0 | ) | (89.8 | %) | |||||||||||
|
Other (income) — net
|
(0.2 | ) | 0.0 | % | (0.9 | ) | (0.1 | %) | 0.7 | 78.3 | % | |||||||||||||
|
Earnings before income taxes
|
85.7 | 7.8 | % | 140.6 | 11.5 | % | (54.9 | ) | (39.0 | %) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net Earnings
|
$ | 61.9 | 5.6 | % | $ | 95.8 | 7.9 | % | $ | (33.9 | ) | (35.4 | %) | |||||||||||
|
|
||||||||||||||||||||||||
|
Diluted earnings per share
|
$ | 1.24 | — | $ | 1.90 | — | $ | (0.66 | ) | (34.7 | %) | |||||||||||||
The Company has one reportable segment that is engaged in manufacturing, sourcing, marketing,
licensing and distributing branded footwear, apparel and accessories. Within the branded footwear,
apparel and licensing segment, the Company has identified four primary operating units:
| • |
Outdoor Group, consisting of the
Merrell
®
,
Chaco
®
and
Patagonia
®
footwear, and
Merrell
®
brand apparel;
|
||
| • |
Wolverine Footwear Group, consisting of the
Bates
®
,
HyTest
®
, and
Wolverine
®
, boots and shoes, and
Wolverine
®
brand apparel and
certain private label branded products;
|
||
| • |
Heritage Brands Group, consisting of the
Cat
®
footwear,
Harley-Davidson
®
footwear and
Sebago
®
footwear and apparel; and
|
||
| • |
Hush Puppies Company, consisting of the
Hush Puppies
®
,
Soft Style
®
and
Cushe
TM
brands.
|
26
Table of Contents
The Company’s other business units, which do not collectively comprise a separate reportable
segment, consist of Wolverine Retail, Wolverine Procurement and Wolverine Leathers.
The following is supplemental information on total revenue:
TOTAL REVENUE
| 2009 | 2008 | Change | ||||||||||||||||||||||
| (Millions of Dollars) | $ | % | $ | % | $ | % | ||||||||||||||||||
|
Outdoor Group
|
$ | 416.2 | 37.8 | % | $ | 428.4 | 35.1 | % | $ | (12.2 | ) | (2.8 | %) | |||||||||||
|
Wolverine Footwear Group
|
233.2 | 21.2 | % | 261.9 | 21.5 | % | (28.7 | ) | (10.9 | %) | ||||||||||||||
|
Heritage Brands Group
|
198.3 | 18.0 | % | 242.3 | 19.8 | % | (44.0 | ) | (18.2 | %) | ||||||||||||||
|
Hush Puppies Company
|
131.6 | 12.0 | % | 160.9 | 13.2 | % | (29.3 | ) | (18.2 | %) | ||||||||||||||
|
Other
|
11.9 | 1.1 | % | 12.6 | 1.0 | % | (0.7 | ) | (6.1 | %) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Total branded footwear,
apparel and licensing
revenue
|
$ | 991.2 | 90.0 | % | $ | 1,106.1 | 90.6 | % | $ | (114.9 | ) | (10.4 | %) | |||||||||||
|
Other business units
|
109.9 | 10.0 | % | 114.5 | 9.4 | % | (4.6 | ) | (4.0 | %) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Revenue
|
$ | 1,101.1 | 100.0 | % | $ | 1,220.6 | 100.0 | % | $ | (119.5 | ) | (9.8 | %) | |||||||||||
|
|
||||||||||||||||||||||||
REVENUE
Revenue for 2009 decreased $119.5 million from 2008, to $1,101.1 million. Declines in unit volume
for the branded footwear, apparel and licensing operations were primarily due to tough market
conditions brought about by the global recession. These declines were only partially offset by
price increases for selected brands, causing revenue to decrease $76.7 million. Changes in foreign
exchange rates decreased revenue by $38.2 million. Revenue from the other business units decreased
$4.6 million. International revenue represented 37.3% of total revenue in 2009 compared to 40.2%
in 2008, with the decline resulting primarily from the stronger U.S. dollar.
The Outdoor Group generated revenue of $416.2 million for 2009, a $12.2 million decrease from 2008.
The
Merrell
®
brand’s revenue decreased at a mid single-digit rate over the prior year,
primarily as a result of the strengthening of the U.S. dollar and tough economic conditions in the
brand’s international markets.
Patagonia
®
Footwear’s revenue decreased at a rate in the
low single-digits in 2009 compared to 2008, due primarily to tough economic conditions. The
addition and successful integration of the
Chaco
®
brand early in the fiscal year
contributed to the group’s overall revenue performance in 2009.
The Wolverine Footwear Group recorded revenue of $233.2 million in 2009, a $28.7 million decrease
from 2008. Revenue for the
Wolverine
®
brand declined at a high single-digit rate due
primarily to negative economic conditions in the U.S. work sector. The
Bates
®
uniform
footwear business realized a decrease in revenue at a rate in the low teens due primarily to
planned reduction in purchases by the U.S. Department of Defense.
HyTest
®
’s revenue
declined at a rate in the low thirties due to factory closures and high unemployment rates among
the brand’s target consumers.
The Heritage Brands Group recorded revenue of $198.3 million during 2009, a $44.0 million decrease
over 2008.
Cat
®
Footwear’s revenue decreased at a rate in the low twenties compared to
2008, reflecting challenging economic conditions in many of the brand’s major markets and the
impact of the stronger U.S. dollar.
Harley-Davidson
®
Footwear revenue decreased at rate
in the mid teens due primarily to declines in the dealer and retail market. The
Sebago
®
brand experienced a decline in revenue at a rate in the low teens for 2009 as a result of tough
economic conditions in many of the brand’s most important markets and the stronger U.S. dollar.
The Hush Puppies Company recorded revenue of $131.6 million in 2009, a $29.3 million decrease from
2008.
Hush Puppies
®
revenue decreased at a rate in the high teens due primarily to
continued retail consolidation in Europe caused by weaker consumer spending and the strengthening
of the U.S. dollar compared to 2008. The
Soft Style
®
brand experienced a decline in
revenue at a rate in the mid thirties as a result of a weak retail environment and production
delays at third-party factories. Revenue generated by the
Cushe
TM
brand, acquired in
early fiscal 2009, partially offset these revenue declines.
27
Table of Contents
Within the Company’s other business units, Wolverine Retail reported a high single-digit sales
increase versus 2008
as a result of growth from the Company’s e-commerce channel and low single-digit growth in
comparable store sales from Company-owned stores. Wolverine Retail operated 88 retail stores
worldwide at the end of 2009 compared to 90 at the end of 2008, as 9 new store openings were more
than offset by the Company’s decision to close 11 underperforming locations in order to improve
financial results. The Wolverine
®
Leathers business reported a revenue decline at a rate in the
mid twenties for 2009, primarily due to a decline in demand for its proprietary products and a
significant decline in the market price for finished leather.
GROSS MARGIN
Gross margin in 2009 of 39.2% was 60 basis points lower than the prior year. Non-recurring
restructuring and other transition costs of $5.9 million included in cost of goods sold in 2009
accounted for 50 basis points of the decline, with the remainder of the decrease resulting from the
negative impact of foreign exchange, increases in product costs and a higher mix of lower margin
product sales in 2009.
OPERATING EXPENSES
Operating expenses of $346.1 million in 2009 increased $0.9 million from $345.2 million in 2008.
The increase was related to non-recurring restructuring and other transition costs of $29.7
million, operating expenses associated with recently acquired brands of $6.9 million and increased
pension expense of $8.8 million. These increases were offset by the favorable impact of foreign
exchange of $8.6 million, lower general and administrative costs as a result of the Company’s
restructuring and cost-savings initiatives and decreases in certain operating expenses that vary
with revenue, such as selling commissions and distribution costs.
INTEREST, OTHER AND TAXES
The decrease in net interest expense reflected lower outstanding debt as a result of the repayment
in full of the Company’s senior notes during the fourth quarter of 2008 and lower average balances
outstanding on the Company’s revolving line of credit during 2009.
The decrease in other income is related primarily to the change in realized gains or losses on
foreign denominated assets and liabilities.
The Company’s full year effective tax rate for fiscal year 2009 was 27.8%, compared to 31.8% for
fiscal year 2008. The lower effective tax rate reflects benefits from the Company’s strategic
restructuring plan, the cumulative full year benefits from tax planning strategies related
primarily to the Company’s international operations and the net benefit from non-recurring
adjustments in the current year.
NET EARNINGS AND EARNINGS PER SHARE
As a result of the revenue, gross margin and expense changes discussed above, the Company had net
earnings of $61.9 million in 2009 compared to $95.8 million in 2008, a decrease of $33.9 million.
Diluted net earnings per share decreased 34.7% in 2009 to $1.24 from $1.90 in 2008. The decrease
was primarily attributable to non-recurring restructuring and other transition costs, increased
pension expense and the negative effect of foreign exchange rates.
Inflation has not had a significant impact on revenue or net earnings.
28
Table of Contents
RESULTS OF OPERATIONS — FISCAL 2008 COMPARED TO FISCAL 2007
FINANCIAL SUMMARY — 2008 VERSUS 2007
| 2008 | 2007 | Change | ||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| (Millions of Dollars, Except Per Share Data) | $ | Total | $ | Total | $ | Total | ||||||||||||||||||
|
Revenue
|
||||||||||||||||||||||||
|
Branded footwear, apparel and
licensing
|
$ | 1,106.1 | 90.6 | % | $ | 1,099.2 | 91.7 | % | $ | 6.9 | 0.6 | % | ||||||||||||
|
Other business units
|
114.5 | 9.4 | % | 99.8 | 8.3 | % | 14.7 | 14.8 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Revenue
|
$ | 1,220.6 | 100.0 | % | $ | 1,199.0 | 100.0 | % | $ | 21.6 | 1.8 | % | ||||||||||||
|
|
||||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| $ | Revenue | $ | Revenue | $ | Revenue | |||||||||||||||||||
|
Gross Profit
|
||||||||||||||||||||||||
|
Branded footwear, apparel and
licensing
|
$ | 444.7 | 40.2 | % | $ | 434.6 | 39.5 | % | $ | 10.1 | 2.3 | % | ||||||||||||
|
Other business units
|
41.3 | 36.1 | % | 37.3 | 37.4 | % | 4.0 | 10.7 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Gross Profit
|
$ | 486.0 | 39.8 | % | $ | 471.9 | 39.4 | % | $ | 14.1 | 3.0 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Selling, general and
administrative expenses
|
$ | 345.2 | 28.3 | % | $ | 333.2 | 27.8 | % | $ | 12.0 | 3.6 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
Total Operating Expenses
|
$ | 345.2 | 28.3 | % | $ | 333.2 | 27.8 | % | $ | 12.0 | 3.6 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest (income) expense — net
|
1.1 | 0.1 | % | (0.7 | ) | (0.1 | %) | 1.8 | 264.6 | % | ||||||||||||||
|
Other (income) expense — net
|
(0.9 | ) | (0.1 | %) | 0.8 | 0.1 | % | (1.7 | ) | (196.2 | %) | |||||||||||||
|
Earnings before income taxes
|
$ | 140.6 | 11.5 | % | $ | 138.6 | 11.6 | % | $ | 2.0 | 1.5 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net Earnings
|
$ | 95.8 | 7.9 | % | $ | 92.9 | 7.7 | % | $ | 2.9 | 3.2 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
Diluted earnings per share
|
$ | 1.90 | — | $ | 1.70 | — | $ | 0.20 | 11.8 | % | ||||||||||||||
In 2007 and 2008, the Company had one reportable segment that was engaged in manufacturing,
sourcing, marketing, licensing, and distributing branded footwear, apparel and accessories. Within
the branded footwear, apparel and licensing segment, the Company has identified four primary
operating units:
| • |
Outdoor Group, consisting of the
Merrell
®
and
Patagonia
®
footwear,
and
Merrell
®
brand apparel;
|
||
| • |
Wolverine Footwear Group, consisting of the
Bates
®
,
HyTest
®
,
Stanley
®
and
Wolverine
®
, boots and shoes, and Wolverine brand apparel
and certain private label branded products;
|
||
| • |
Heritage Brands Group, consisting of the
Cat
®
footwear,
Harley-Davidson
®
footwear and
Sebago
®
footwear brands; and
|
||
| • |
Hush Puppies Company.
|
The Company’s other business units, which do not collectively comprise a second reportable segment,
consist of Wolverine Retail, Wolverine Procurement and Wolverine Leathers.
29
Table of Contents
The following is supplemental information on total revenue:
TOTAL REVENUE
| 2008 | 2007 | Change | ||||||||||||||||||||||
| (Millions of Dollars) | $ | % | $ | % | $ | % | ||||||||||||||||||
|
Outdoor Group
|
$ | 428.4 | 35.1 | % | $ | 416.7 | 34.8 | % | $ | 11.7 | 2.8 | % | ||||||||||||
|
Wolverine Footwear Group
|
261.9 | 21.5 | % | 256.6 | 21.4 | % | 5.3 | 2.1 | % | |||||||||||||||
|
Heritage Brands Group
|
242.3 | 19.8 | % | 241.0 | 20.1 | % | 1.3 | 0.5 | % | |||||||||||||||
|
Hush Puppies Company
|
160.9 | 13.2 | % | 174.1 | 14.5 | % | (13.2 | ) | (7.6 | %) | ||||||||||||||
|
Other
|
12.6 | 1.0 | % | 10.8 | 0.9 | % | 1.8 | 17.2 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total branded footwear,
apparel, and licensing
revenue
|
$ | 1,106.1 | 90.6 | % | $ | 1,099.2 | 91.7 | % | $ | 6.9 | 0.6 | % | ||||||||||||
|
Other business units
|
114.5 | 9.4 | % | 99.8 | 8.3 | % | 14.7 | 14.8 | % | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Revenue
|
$ | 1,220.6 | 100.0 | % | $ | 1,199.0 | 100.0 | % | $ | 21.6 | 1.8 | % | ||||||||||||
|
|
||||||||||||||||||||||||
REVENUE
Revenue for 2008 exceeded revenue for 2007 by $21.6 million. Changes in product mix and price
increases for the branded footwear, apparel and licensing operations, as discussed below,
contributed $16.7 million of the revenue increase. The impact of translating foreign-denominated
revenue to U.S. dollars increased revenue by $3.2 million. These increases were partially offset
by a decrease of $13.0 million due to the planned phase-out of the
Hush Puppies
®
slippers,
Stanley
®
Footgear and private label businesses. The other business units contributed $14.7 million to the
revenue increase. International revenue represented 40.2% of total revenue in 2008 compared to
39.0% in 2007.
The Outdoor Group earned revenue of $428.4 million for 2008, an $11.7 million increase over 2007.
The
Merrell
®
brand grew revenue at a low single-digit rate over the prior year, due primarily to
the inclusion of a full year of sales of
Merrell
®
Apparel, which was introduced in the second half
of 2007.
Patagonia
®
Footwear grew its revenue at a rate in the low teens in 2008, its second full
year of operation. The solid revenue growth, which is primarily attributable to increased sales of
Patagonia
®
Footwear products in the performance category, demonstrates the brand’s appeal for
outdoor enthusiasts.
The Wolverine Footwear Group recorded revenue of $261.9 million for 2008, a $5.3 million increase
from 2007. Despite the challenging retail environment in the United States, revenue from the
Wolverine
®
brand increased at a low single-digit rate for 2008 compared to 2007 due primarily to
the success of the premium-priced
Contour Welt
®
collection. The
Bates
®
military and
civilian uniform footwear business delivered a strong performance in 2008, growing its revenue at a
rate in the mid teens due to increased civilian business and U.S. Department of Defense contract
shipments compared to 2007.
HyTest
®
grew revenue at a high single-digit rate over the prior year
due primarily to a successful contract bid for one of its distributors. Revenue from the
Stanley
®
Footgear and private label businesses decreased by $11.4 million in 2008 compared to 2007 as a
result of the planned phase-out of these businesses. The
Stanley
®
Footgear license expired on June
30, 2008.
The Heritage Brands Group generated revenue of $242.3 million during 2008, a $1.3 million increase
over 2007.
Cat
®
Footwear’s revenue increased at a low single-digit rate in 2008 as a result of
solid revenue growth in the United States, Canada and globally through the international
distribution network, partially offset by a decrease in Europe as a result of the challenging
retail climate.
Harley-Davidson
®
Footwear revenue decreased at a mid single-digit rate in 2008 due
primarily to the planned repositioning of the brand in the United States market and resulting
distribution channel modifications. Revenue for the
Sebago
®
brand increased slightly from 2007, as
strong revenue growth in the United States was offset by lower sales in international markets.
The Hush Puppies Company recorded revenue of $160.9 million in 2008, a $13.2 million decrease from
2007. Revenue earned by the international licensing business grew at a rate in the mid teens
during 2008 due to positive response to
Hush Puppies
®
product offerings. Decreases in the United
States, Europe and Canada more than offset this increase, driven by bankruptcies of key retailers
in the United States and United Kingdom, soft retail conditions,
production delays resulting from factory closures and a planned exit of a highly-promotional
department store customer in Canada.
Hush Puppies
®
2008 revenue also declined by $1.6
million from 2007 as a result of the planned phase-out of the slipper business.
30
Table of Contents
Within the Company’s other business units, Wolverine Retail reported a high single-digit sales
increase in comparison to 2007 as a result of growth from the Company’s e-commerce channel.
Wolverine Retail operated 90 retail stores in North America at the end of both 2008 and 2007. The
Wolverine
®
Leathers operation reported a revenue growth rate in the mid twenties for
2008, primarily due to an increase in orders placed by key customers and increased demand for its
proprietary products.
GROSS MARGIN
Gross margin for 2008 of 39.8% was 40 basis points higher than the prior year. Benefits from
foreign exchange were partially offset by higher freight and product costs from third-party
manufacturers and service providers and the variation in the business mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses of $345.2 million for 2008 increased $12.0 million
from $333.2 million in 2007. Continued investment in brand development through product, marketing
and retail placement initiatives increased costs in 2008 by $4.7 million in comparison to 2007.
The remaining increase related primarily to increased selling costs due to the increase in revenue
and an increase in corporate general and administrative expenses, partially driven by costs
associated with the consolidation of the Company’s European operations in new London-based offices.
INTEREST, OTHER AND TAXES
The change in net interest (income) expense reflected increased borrowings to fund the repurchase
of the Company’s stock throughout 2008.
The change in other (income) expense primarily related to the change in realized gains or losses on
foreign denominated assets and liabilities.
The Company’s effective tax rate for 2008 was 31.8% compared to 33.0% in 2007. In the fourth
quarter of 2008, the research and development tax credit was extended by the U.S. Congress and as a
result the Company recognized an income tax benefit in the fourth quarter. In addition, the
reduced rate reflects a higher portion of earnings from lower-taxed foreign jurisdictions.
NET EARNINGS AND EARNINGS PER SHARE
As a result of the revenue, gross margin and expense changes discussed above, the Company achieved
net earnings of $95.8 million in 2008 compared to $92.9 million in 2007, an increase of $2.9
million.
Diluted net earnings per share increased 11.8% in 2008 to $1.90 from $1.70 in 2007. In addition to
the increase in net earnings, the increase in earnings per share is attributable to fewer shares
outstanding throughout 2008 as a result of the repurchase of the Company’s common stock.
Inflation has not had a significant impact on revenue or net earnings.
31
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
| January 2, | January 3, | Change | ||||||||||||||
| (Millions of Dollars) | 2010 | 2009 | $ | % | ||||||||||||
|
Cash and cash equivalents
|
$ | 160.4 | $ | 89.5 | $ | 70.9 | 79.3 | % | ||||||||
|
Accounts receivable
|
163.8 | 167.9 | (4.1 | ) | (2.5 | %) | ||||||||||
|
Inventories
|
158.1 | 196.8 | (38.7 | ) | (19.7 | %) | ||||||||||
|
Accounts payable
|
42.3 | 45.3 | (3.0 | ) | (6.7 | %) | ||||||||||
|
Current accrued liabilities
|
90.1 | 86.5 | 3.6 | 4.1 | % | |||||||||||
|
|
||||||||||||||||
|
Interest-bearing debt
|
1.6 | 59.5 | (57.9 | ) | (97.3 | %) | ||||||||||
|
|
||||||||||||||||
|
Cash provided by operating activities
|
168.6 | 93.5 | 75.1 | 80.4 | % | |||||||||||
|
Additions to property, plant and equipment
|
11.7 | 24.1 | (12.4 | ) | (51.6 | %) | ||||||||||
|
Depreciation and amortization
|
17.6 | 20.7 | (3.1 | ) | (14.9 | %) | ||||||||||
Cash and cash equivalents at the end of fiscal 2009 increased 79.3% from 2008 due primarily to
significant reductions in net working capital and lower capital expenditures. Cash from operating
activities was $168.6 million in 2009 compared to $93.5 million in 2008.
Accounts receivable at the end of fiscal 2009 decreased 2.5% compared to 2008 primarily due to the
decrease in revenue. No single customer accounted for more than 10% of the outstanding accounts
receivable balance at January 2, 2010. Inventory levels at the end of fiscal 2009 decreased 19.7%
from 2008. The decrease in inventory levels at the end of fiscal 2009 was primarily attributable
to the higher levels of inventory at the end of 2008, as the Company purchased inventory in the
fourth quarter of that year ahead of announced price increases from third party factories and the
Company’s focused efforts to achieve meaningful reductions in inventory during the year.
Current accrued liabilities increased in comparison to 2008 primarily due to an increase in the
accrual for foreign exchange contracts and taxes payable to the Canadian government in connection
with a legal entity restructuring related to the Company’s Canadian subsidiary. Applying the
provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 715,
Compensation — Retirement Benefits
, the Company’s qualified defined benefit
pension plans (the “Plans”) were underfunded by $52.2 million and $36.4 million, at January 2, 2010
and January 3, 2009, respectively. Under the Employee Retirement Income Security Act of 1974, the
Plans had no minimum funding requirements for 2009 and 2008. Discretionary cash contributions were
made to the Plans totaling $2.6 million in 2009 and $3.0 million in 2008. The Company expects to
contribute approximately $10.5 million to its qualified defined benefit pension plans and to pay
approximately $2.0 million in benefits under the Supplemental Executive Retirement Plan (the
“SERP”) in 2010.
The Company has a revolving credit agreement that expires in July 2010 and allows for borrowings of
a maximum of $150.0 million. The Company plans to negotiate a new revolving credit agreement, and
anticipates closing on the new facility before the expiration of the current facility. The
revolving credit facility is used to support working capital requirements and other business needs.
There were no amounts outstanding under the revolving credit facility at January 2, 2010 compared
to $59.5 million outstanding at January 3, 2009. The Company considers balances drawn on the
revolving credit facility, if any, to be short-term in nature. The Company was in compliance with
all debt covenant requirements at January 2, 2010 and January 3, 2009. Proceeds from the existing
credit facility and the expected new credit facility, along with cash flows from operations, are
expected to be sufficient to meet capital needs in the foreseeable future. Any excess cash flows
from operating activities are expected to be used to purchase property, plant and equipment, pay
down existing debt, fund internal and external growth initiatives, pay dividends or repurchase the
Company’s common stock.
The Company had commercial letter-of-credit facilities outstanding of $0.5 million and $2.5 million
at January 2, 2010 and January 3, 2009, respectively. The total debt to total capital ratio for
the Company was 0.3% at the end of fiscal year 2009 and 12.2% at the end of fiscal year 2008.
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The majority of capital expenditures in 2009 were for information system enhancements,
manufacturing equipment and building improvements. The Company leases machinery, equipment and
certain warehouse, office and retail store space under operating lease agreements that expire at
various dates through 2023.
The Company’s Board of Directors approved a common stock repurchase program on April 19, 2007. The
program authorized the repurchase of 7.0 million shares of common stock over a 36-month period
beginning on the effective date of the program. The Company repurchased 406,200 shares at an
average price of $13.77 per share during the first quarter of 2009 under the program. No shares
were repurchased in the remaining quarters of 2009. As of January 2, 2010, the Company was
authorized to repurchase an additional 199,996 shares under the program. The primary purpose of
the stock repurchase program is to increase stockholder value. The Company intends to continue to
repurchase shares of its common stock in open market or privately negotiated transactions, from
time to time, depending upon market conditions and other factors. The Company’s Board of Directors
approved an additional common stock repurchase program on February 11, 2010. This program
authorizes the repurchase of up to $200.0 million of shares of common stock over a four-year
period.
| 2009 | 2008 | Cumulative | ||||||||||||||||||||||
| (Thousands of Dollars, | Market price | Market price | Market price | |||||||||||||||||||||
| Except Per Share Data) | Shares | of shares | Shares | of shares | Shares | of shares | ||||||||||||||||||
| Authorization effective date | repurchased | repurchased | repurchased | repurchased | repurchased | repurchased | ||||||||||||||||||
|
April 19, 2007
|
406,200 | $ | 5,593 | 2,844,269 | $ | 73,948 | 6,800,004 | $ | 175,498 | |||||||||||||||
The Company declared dividends of $21.5 million, or $0.44 per share for fiscal years 2009 and 2008.
On February 11, 2010, the Company declared a quarterly cash dividend of $0.11 per share of common
stock, to be paid on May 3, 2010 to shareholders of record on April 1, 2010.
NEW ACCOUNTING STANDARDS
In December 2007, the FASB issued ASC Topic 805,
Business Combinations
(“ASC 805”). ASC 805
establishes principles and requirements for how the acquirer of a business recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects
of the business combination. ASC 805 is to be applied prospectively to business combinations for
which the acquisition date is on or after an entity’s fiscal year beginning after December 15, 2008
(fiscal year 2009 for the Company). The Company adopted ASC 805 in fiscal year 2009.
In December 2007, the FASB issued ASC Topic 810,
Consolidation
(“ASC 810”). ASC 810 establishes
new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated financial statements and
separate from the parent’s equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income statement. ASC 810
clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling financial interest.
In addition, this statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. ASC 810 also includes expanded
disclosure requirements regarding the interests of the parent and its noncontrolling interest. ASC
810 is effective for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008 (fiscal year 2009 for the Company). Earlier adoption is prohibited. The
Company currently does not have any noncontrolling interests and will apply this standard when
future acquisitions occur.
In March 2008, the FASB issued ASC Topic 815,
Derivatives and Hedging
(“ASC 815”). ASC 815 changes
the disclosure requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about how and why an entity uses derivative instruments,
how the instruments are accounted for under
ASC 815 and its related interpretations, and how the instruments and related hedged items affect an
entity’s financial position, financial performance and cash flows. The guidance in ASC 815 is
effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 (fiscal year 2009 for the Company). Since ASC 815 requires only additional
disclosures concerning derivatives and hedging activities, adoption of ASC 815 did not affect the
Company’s financial position, results of operations or cash flows.
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Table of Contents
In June 2008, the FASB issued ASC Topic 260,
Earnings Per Share
(“ASC 260”). ASC 260 provides that
unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. ASC 260 is effective for
fiscal years beginning after December 15, 2008 (fiscal year 2009 for the Company). Upon adoption,
a company is required to retrospectively adjust its earnings per share data, including any amounts
related to interim periods, summaries of earnings, and selected financial data, to conform to the
provisions of ASC 260. The impact of adopting the standard reduced previously reported basic net
earnings per share by $0.02 and had no impact on diluted net earnings per share for the years ended
January 3, 2009 and December 29, 2007.
On December 30, 2008, the FASB issued ASC Topic 715,
Compensation — Retirement Benefits
(“ASC
715”) to provide guidance on an employer’s disclosures about plan assets of a defined benefit
pension or other postretirement plan. The disclosures about plan assets required by ASC 715 must
be provided for fiscal years ending after December 15, 2009 (fiscal year 2009 for the Company).
Upon initial application, the additional disclosure under ASC 715 is not required for earlier
periods that are presented for comparative purposes. Earlier application of the provisions of ASC
715 is permitted. Because ASC 715 requires only additional disclosures concerning plan assets,
adoption of ASC 715 did not affect the Company’s consolidated financial position, results of
operations or cash flows.
In April 2009, the FASB issued FASB ASC Topic 825,
Financial Instruments
and ASC Topic 270,
Interim
Reporting
(“ASC 825” and “ASC 270”), to require, on an interim basis, disclosures about the fair
value of financial instruments for public entities. ASC 825 and ASC 270 are expected to improve
the transparency and quality of information provided to financial statement users by increasing the
frequency of disclosures about fair value for interim periods as well as annual periods. ASC 825
and ASC 270 are effective for interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The Company has disclosed the
information required by ASC 825 and ASC 270 on an interim basis, and the adoption did not affect
the Company’s consolidated financial position, results of operations or cash flows.
In May 2009, the FASB issued FASB ASC Topic 855,
Subsequent Events
(“ASC 855”). The objective of
this statement is to establish general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or are available to
be issued. ASC 855, among other things, sets forth the period after the balance sheet date during
which management should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial statements and the
disclosures an entity should make about events or transactions that occurred after the balance
sheet date. In accordance with this statement, an entity should apply the requirements to interim
or annual financial periods ending after June 15, 2009. The Company adopted ASC 855 in the second
quarter of 2009 and the adoption did not affect the Company’s consolidated financial position,
results of operations or cash flows.
In June 2009, the FASB issued FASB ASC Topic 105,
Generally Accepted Accounting Principles
(“ASC
105”). ASC 105 establishes the FASB Accounting Standards Codification
TM
(“Codification”) as the source of authoritative U.S. generally accepted accounting principles
(“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities
laws are also sources of authoritative U.S. GAAP for SEC registrants. ASC 105 and the Codification
were effective for financial statements issued for interim and annual periods ending after
September 15, 2009 (fiscal year 2009 for the Company). The Company adopted this ASC and changed
applicable disclosures.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company’s consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States, 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.
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The Company has identified the following critical accounting policies used in determining estimates
and assumptions in the amounts reported. Management believes that an understanding of these
policies is important to an overall understanding of the Company’s consolidated financial
statements.
REVENUE RECOGNITION
Revenue is recognized on the sale of products manufactured or sourced by the Company when the
related goods have been shipped, legal title has passed to the customer and collectability is
reasonably assured. Revenue generated through programs with licensees and distributors involving
products bearing the Company’s trademarks is recognized as earned according to stated contractual
terms upon either the purchase or shipment of branded products by licensees and distributors.
The Company records provisions against gross revenue for estimated stock returns and cash discounts
in the period when the related revenue is recorded. These estimates are based on factors that
include, but are not limited to, historical stock returns, historical discounts taken and analysis
of credit memorandum activity. The actual amount of customer returns or allowances may differ from
the Company’s estimates. The Company records either an increase or decrease to net sales in the
period in which it determines an adjustment to be appropriate.
ACCOUNTS RECEIVABLE
The Company maintains an allowance for uncollectible accounts receivable for estimated losses
resulting from its customers’ inability to make required payments. Company management evaluates
the allowance for uncollectible accounts receivable based on a review of current customer status
and historical collection experience. Historically, losses have been within the Company’s
expectations. Adjustments to these estimates may be required if the financial condition of the
Company’s customers were to change. If the Company were to determine that increases or decreases
to the allowance for uncollectible accounts were appropriate, the Company would record either an
increase or decrease to general and administrative expenses in the period in which the Company made
such a determination. At January 2, 2010 and January 3, 2009, management believed that it had
provided sufficient reserves to address future collection uncertainties.
INVENTORY
The Company values its inventory at the lower of cost or market. Cost is determined by the
last-in, first-out (“LIFO”) method for all domestic raw materials and work-in-process inventories
and certain domestic finished goods inventories. Cost is determined using the first-in, first-out
(“FIFO”) method for all raw materials, work-in-process and finished goods inventories in foreign
countries. The FIFO method is also used for all finished goods inventories of the Company’s retail
business, due to the unique nature of those operations, and for certain domestic finished goods
inventories. The Company has applied these inventory cost valuation methods consistently from year
to year.
The Company reduces the carrying value of its inventories to the lower of cost or market for excess
or obsolete inventories based upon assumptions about future demand and market conditions. If the
Company were to determine that the estimated market value of its inventory is less than the
carrying value of such inventory, the Company would provide a reserve for such difference as a
charge to cost of sales. If actual market conditions are different from those projected,
adjustments to those inventory reserves may be required. The adjustments would increase or
decrease the Company’s cost of sales and net income in the period in which they were realized or
recorded. Inventory quantities are verified at various times throughout the year by performing
annual physical inventory observations and perpetual inventory cycle count procedures. If the
Company determines that adjustments to the inventory quantities are appropriate, an increase or
decrease to the Company’s cost of sales and inventory is recorded in the period in which such
determination was made. At January 2, 2010 and January 3, 2009,
management believed that it had provided sufficient reserves for excess or obsolete inventories.
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GOODWILL AND OTHER NON-AMORTIZABLE INTANGIBLES
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject
to impairment tests at least annually or when indicators of impairment exist. The first step of
the goodwill impairment test requires that the fair value of the applicable reporting unit be
compared with its recorded value. The Company establishes fair value by calculating the present
value of the expected future cash flows of the reporting unit and by completing a market analysis.
The Company uses assumptions about expected future operating performance in determining estimates
of those cash flows, which may differ from actual cash flows. If the recorded values of these
assets are not recoverable, based on the discounted cash flow and market approach analyses,
management performs the next step, which compares the fair value of the reporting unit calculated
in step one to the fair value of the tangible and intangible assets of the reporting unit, which
results in an implied fair value of goodwill. Goodwill is reduced by any shortfall of implied
goodwill to its carrying value. Impairment tests for other non-amortizable intangibles require the
determination of the fair value of the intangible asset. The carrying value is reduced by any
excess over fair value. The Company reviewed the carrying amounts of goodwill and other
non-amortizable intangible assets and determined that there was no impairment for the years ended
January 2, 2010 or January 3, 2009.
INCOME TAXES
The Company operates in multiple tax jurisdictions, both inside and outside the United States.
Accordingly, management must determine the appropriate allocation of income in accordance with
local law for each of these jurisdictions. Income tax audits associated with the allocation of
this income and other complex issues may require an extended period of time to resolve and may
result in income tax adjustments if changes to the income allocation are required between
jurisdictions with different income tax rates. Because income tax adjustments in certain
jurisdictions can be significant, the Company records accruals representing management’s best
estimate of the probable resolution of these matters. To the extent additional information becomes
available, such accruals are adjusted to reflect the revised estimated probable outcome. The
Company believes its tax accruals are adequate to cover exposures related to changes in income
allocation between tax jurisdictions. The carrying value of the Company’s deferred tax assets
assumes that the Company will be able to generate sufficient taxable income in future years to
utilize these deferred tax assets. If these assumptions change, the Company may be required to
record valuation allowances against its gross deferred tax assets in future years, which would
cause the Company to record additional income tax expense in the Company’s consolidated statements
of operations. Management evaluates the potential the Company will be able to realize its gross
deferred tax assets and assesses the need for valuation allowances on a quarterly basis.
On a periodic basis, the Company estimates what the effective tax rate will be for the full fiscal
year and records a quarterly income tax provision in accordance with the anticipated annual rate.
As the fiscal year progresses, that estimate is refined based upon actual events and earnings in
each tax jurisdictions during the year. This continual estimation process periodically results in
a change to the expected effective tax rate for the fiscal year. When this occurs, the Company
adjusts the income tax provision during the quarter in which the change in estimate occurs so that
the year-to-date provision reflects the revised anticipated annual rate.
RETIREMENT BENEFITS
The determination of the obligation and expense for retirement benefits is dependent on the
selection of certain actuarial assumptions used in calculating such amounts. These assumptions
include, among others, the discount rate, expected long-term rate of return on plan assets and
rates of increase in compensation. These assumptions are reviewed with the Company’s actuaries and
updated annually based on relevant external and internal factors and information, including but not
limited to, long-term expected asset returns, rates of termination, regulatory requirements and
plan changes.
The Company utilizes a bond matching calculation to determine the discount rate used to calculate
its year-end pension liability and subsequent year pension expense. A hypothetical bond portfolio
is created based on a presumed purchase of bonds with maturities that match the plan’s expected
future cash outflows. The discount rate
is the resulting yield of the hypothetical bond portfolio. The bonds selected are rated AA- or
higher by a recognized ratings agency and are non-callable, currently purchasable and
non-prepayable. The discount rate at year end 2009 was 6.17%. Pension expense is also impacted by
the expected long-term rate of return on plan assets, which the Company has determined to be 8.5%.
This determination is based on both actual historical rates of return experienced by the pension
assets and the long-term rate of return of a composite portfolio of equity and fixed income
securities that reflects the approximate diversification of the pension assets.
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Table of Contents
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with the fair value recognition
provisions of FASB ASC Topic 718,
Compensation — Stock Compensation
. The Company utilizes the
Black-Scholes model, which requires the input of subjective assumptions. These assumptions include
estimating (a) the length of time employees will retain their vested stock options before
exercising them (“expected term”), (b) the volatility of the Company’s common stock price over the
expected term and (c) the number of options that will be forfeited. Changes in these assumptions
can materially affect the estimate of fair value of stock-based compensation and, consequently, the
related expense amounts recognized on the consolidated statements of operations.
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 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.
The Company does not believe that there has been a material change during 2009 in the nature of
the Company’s primary market risk exposures, including the categories of market risk to which the
Company is exposed and the particular markets that present the primary risk of loss to the Company.
As of the date of this Annual Report on Form 10-K, the Company does not know of or expect there to
be any material change in the general nature of its primary market risk exposure in the near term.
Under the provisions of FASB ASC 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 until the hedged item is
recognized in earnings.
The Company conducts wholesale operations outside of the United States in the United Kingdom,
continental Europe and Canada where the functional currencies are primarily the British pound, euro
and Canadian dollar, respectively. The Company utilizes foreign currency forward exchange
contracts to manage the volatility associated with U.S. dollar inventory purchases made by non-U.S.
wholesale operations in the normal course of business. At January 2, 2010 and January 3, 2009, the
Company had outstanding forward currency exchange contracts to purchase $69.6 million and $63.1
million, respectively, of U.S. dollars with maturities ranging up to 308 days.
The Company also has production facilities in the Dominican Republic and 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. Royalty revenue generated by the Company from
third-party foreign licensees is calculated in the licensees’ 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.
Assets and liabilities outside the United States 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. Accordingly, the Company
does not hedge these net investments. For the year ended January 2, 2010, the weakening of the
U.S. dollar compared to foreign currencies increased the value of these investments in net assets
by $15.3 million. For the year ended January 3, 2009, the strengthening of the U.S. dollar
compared to foreign currencies decreased the value of these investments in net assets by $36.3
million. These changes resulted in cumulative foreign currency translation adjustments at January
2, 2010 and January 3, 2009 of $14.5 million and $0.9 million, respectively, that are deferred and
recorded as a component of accumulated other comprehensive income in stockholders’ equity.
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Because the Company markets, sells and licenses its products throughout the world, it could be
affected by weak economic conditions in foreign markets that could reduce demand for its products.
The Company is exposed to changes in interest rates primarily as a result of its revolving credit
agreement. As of January 2, 2010, the Company had no outstanding balance on its revolving credit,
compared to $59.5 million as of January 3, 2009.
The Company does not enter into contracts for speculative or trading purposes, nor is it a party to
any leveraged derivative instruments.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements as of January 2, 2010.
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CONTRACTUAL OBLIGATIONS
The Company has the following payments under contractual obligations due by period:
| Less than | More than | |||||||||||||||||||
| (Thousands of Dollars) | Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
|
Operating leases
|
$ | 114,877 | $ | 16,107 | $ | 26,093 | $ | 20,509 | $ | 52,168 | ||||||||||
|
Short- and long-term debt obligations
|
1,615 | 538 | 1,077 | — | — | |||||||||||||||
|
Purchase obligations
(1)
|
146,760 | 146,760 | — | — | — | |||||||||||||||
|
Restructuring related obligations
|
948 | 948 | — | — | — | |||||||||||||||
|
Deferred compensation
|
918 | 191 | 333 | 208 | 186 | |||||||||||||||
|
Pension
(2)
|
10,466 | 10,466 | — | — | — | |||||||||||||||
|
SERP
|
25,036 | 1,988 | 3,983 | 4,942 | 14,123 | |||||||||||||||
|
Dividends declared
|
5,446 | 5,446 | — | — | — | |||||||||||||||
|
Minimum royalties
|
7,374 | 1,544 | 2,742 | 2,028 | 1,060 | |||||||||||||||
|
Minimum advertising
|
16,922 | 2,208 | 4,618 | 4,899 | 5,197 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
(3)
|
$ | 330,362 | $ | 186,196 | $ | 38,846 | $ | 32,586 | $ | 72,734 | ||||||||||
|
|
||||||||||||||||||||
| (1) |
Purchase obligations primarily relate to inventory and capital expenditure commitments.
|
|
| (2) |
Pension obligations reflect only expected pension funding as there are currently no
required funding obligations under government regulation. Funding amounts are
calculated on an annual basis and no required or planned funding beyond one year has
been determined.
|
|
| (3) |
The Company adopted FASB ASC Topic 740,
Income Taxes,
on December 31, 2006. The total
amount of unrecognized tax benefits on the Consolidated Balance Sheet at January 2,
2010 is $8.4 million. At this time, the Company is unable to make a reasonably
reliable estimate of the timing of payments in individual years beyond 12 months due
to uncertainties in the timing of tax audit outcomes. As a result, this amount is not
included in the table above.
|
The Company had $153.7 million of additional borrowing capacity available under all of its existing
credit facilities at January 2, 2010. The Company’s additional borrowing capacity is summarized as
follows:
| Expiration of availability | ||||||||||||
| Total commitments | Less than | 1 year or | ||||||||||
| (Millions of Dollars) | available | 1 year | greater | |||||||||
|
Revolving credit
|
$ | 150.0 | $ | 150.0 | $ | — | ||||||
|
Standby letters of credit
|
3.7 | 3.7 | — | |||||||||
39
Table of Contents
| Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk
|
The response to this Item is set forth under the caption “Quantitative and Qualitative Disclosures
About Market Risk” in Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and is incorporated herein by reference.
| Item 8. |
Financial Statements and Supplementary Data
|
The response to this Item is set forth in Appendix A of this Annual Report on Form 10-K and is
incorporated herein by reference.
| Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
None.
| Item 9A. |
Controls and Procedures
|
Evaluation of Disclosure 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 were
effective as of the end of the period covered by this report.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). Under the
supervision and with the participation of management, including our Chief Executive Officer and
Chief Financial Officer, we conducted an evaluation of the effectiveness of internal control over
financial reporting as of January 2, 2010, based on the framework in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on that evaluation, management concluded that internal control over financial reporting was
effective as of January 2, 2010.
The effectiveness of the Company’s internal control over financial reporting as of January 2, 2010,
has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated
in its report, which is included in Appendix A and is incorporated into this Item 9A by reference.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during
the sixteen-week period ended January 2, 2010 that has materially affected, or that is reasonably
likely to materially affect, the Company’s internal control over financial reporting.
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| Item 9B. |
Other Information
|
None.
| Item 10. |
Directors and Executive Officers of the Registrant
|
The Company’s Audit Committee is comprised of four Board members, all of whom are independent under
independence standards adopted by the Board and applicable SEC regulations and New York Stock
Exchange standards (including independence standards related specifically to Audit Committee
membership). The Audit Committee members each have financial and business experience with
companies of substantial size and complexity and have an understanding of financial statements,
internal controls and audit committee functions. The Company’s Board of Directors has determined
that Jeffrey M. Boromisa and William K. Gerber are audit committee financial experts, as defined by
the SEC. Additional information regarding the Audit Committee is provided in the Definitive Proxy
Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 22,
2010, under the caption “Corporate Governance” under the subheading “Board and Committee Membership
and Meetings.”
The Company has adopted an Accounting and Finance Code of Ethics that applies to the Company’s
principal executive officer, principal financial officer and principal accounting officer, and has
adopted a Code of Conduct & Compliance that applies to the Company’s directors and employees. The
Accounting and Finance Code of Ethics and the Code of Conduct & Compliance are available on the
Company’s website at
www.wolverineworldwide.com/investors_governance.asp
. Any waiver from the
Accounting and Finance Code of Ethics or the Code of Conduct & Compliance with respect to the
Company’s executive officers and directors will be disclosed on the Company’s website. Any
amendment to the Accounting and Finance Code of Ethics and the Code of Conduct & Compliance will be
disclosed on the Company’s website.
The information regarding directors of the Company contained under the caption “Directors” in the
Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be
held on April 22, 2010, is incorporated herein by reference.
The information regarding directors and executive officers of the Company under the caption
“Additional Information” under the subheading “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Definitive Proxy Statement of the Company with respect to the Annual Meeting of
Stockholders to be held on April 22, 2010, is incorporated herein by reference.
| Item 11. |
Executive Compensation
|
The information contained under the caption “Executive Compensation” and under the caption
“Corporate Governance” under the subheading “Board and Committee Membership and Meetings” in the
Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be
held on April 22, 2010, is incorporated herein by reference.
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The information contained under the caption “Corporate Governance” under the subheading “Securities
Ownership of Officers and Directors and Certain Beneficial Owners” and under the caption “Stock
Incentive Plan of 2010” under the subheading “New Plan Benefits” contained in the Definitive Proxy
Statement of the Company with respect to the Annual Meeting of Stockholders to be held on April 22,
2010, is incorporated herein by reference.
41
Table of Contents
| Item 13. |
Certain Relationships and Related Transactions, and Director Independence
|
The information contained under the caption “Related Matters” under the subheadings “Certain
Relationships and Related Transactions” and “Related Person Transactions Policy” contained in the
Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be
held on April 22, 2010, is incorporated herein by reference. The information contained under the
caption “Corporate Governance” under the subheading “Director Independence” contained in the
Definitive Proxy Statement of the Company with respect to the Annual Meeting of Stockholders to be
held on April 22, 2010, is incorporated herein by reference.
| Item 14. |
Principal Accountant Fees and Services
|
The information contained under the caption “Independent Auditor” in the Definitive Proxy Statement
of the Company with respect to the Annual Meeting of Stockholders to be held on April 22, 2010, is
incorporated herein by reference.
| Item 15. |
Exhibits and Financial Statement Schedules
|
The following consolidated financial statements of Wolverine World Wide, Inc. and its subsidiaries
are filed as a part of this report:
| • |
Consolidated Balance Sheets as of January 2, 2010 and January 3, 2009.
|
||
| • |
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Fiscal
Years Ended January 2, 2010, January 3, 2009, and December 29, 2007.
|
||
| • |
Consolidated Statements of Operations for the Fiscal Years Ended January 2, 2010,
January 3, 2009, and December 29, 2007.
|
||
| • |
Consolidated Statements of Cash Flows for the Fiscal Years Ended January 2, 2010,
January 3, 2009, and December 29, 2007.
|
||
| • |
Notes to the Consolidated Financial Statements as of January 2, 2010.
|
||
| • |
Reports of Independent Registered Public Accounting Firm.
|
The following consolidated financial statement schedule of Wolverine World Wide, Inc. and its
subsidiaries is filed as a part of this report:
| • |
Schedule II—Valuation and Qualifying Accounts.
|
All other schedules (I, III, IV, and V) for which provision is made in the applicable accounting
regulations of the SEC are not required under the related instructions or are inapplicable and,
therefore, have been omitted.
42
Table of Contents
The following exhibits are filed as part of this report:
|
Exhibit
Number |
Document | |||
|
|
||||
| 3.1 |
Restated Certificate of Incorporation. Previously filed as
Exhibit 3.1 to the Company’s Annual Report on Form 10-K for
the period ended December 30, 2006. Here incorporated by
reference.
|
|||
|
|
||||
| 3.2 |
Amended and Restated By-laws. Previously filed as Exhibit
3.1 to the Company’s Current Report on
Form 8-K
filed on
October 15, 2008. Here incorporated by reference.
|
|||
|
|
||||
| 4.1 |
The Registrant has other long-term debt instruments
outstanding in addition to those described in Exhibit 4.2.
The authorized amount of none of these classes of debt
exceeds 10% of the Company’s total consolidated assets.
The Company agrees to furnish copies of any agreement
defining the rights of holders of any such long-term
indebtedness to the Securities and Exchange Commission upon
request.
|
|||
|
|
||||
| 4.2 |
Credit Agreement dated as of July 22, 2005, among Wolverine
World Wide, Inc. and certain of its subsidiaries, JPMorgan
Chase Bank, N.A., as Administrative Agent, Harris, N.A., as
Syndication Agent, Comerica Bank, Standard Federal Bank
N.A. and National City Bank of the Midwest, as
Documentation Agents, and certain other Banks that are
parties to the Credit Agreement. Previously filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on July 28, 2005. Here incorporated by reference.
|
|||
|
|
||||
| 10.1 |
1993 Stock Incentive Plan, as amended and restated.*
Previously filed as Exhibit 10.1 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 3,
2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.2 |
Amended and Restated 1995 Stock Incentive Plan.* Previously
filed as Exhibit 10.2 to the Company’s Annual Report on
Form 10-K for the fiscal year ended January 3, 2009. Here
incorporated by reference.
|
|||
|
|
||||
| 10.3 |
Amended and Restated 1997 Stock Incentive Plan.* Previously
filed as Exhibit 10.3 to the Company’s Annual Report on
Form 10-K for the fiscal year ended January 3, 2009. Here
incorporated by reference.
|
|||
|
|
||||
| 10.4 |
Amended and Restated Stock Incentive Plan of 1999.*
Previously filed as Exhibit 10.4 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 3,
2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.5 |
Amended and Restated Stock Incentive Plan of 2001.*
Previously filed as Exhibit 10.5 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 3,
2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.6 |
Amended and Restated Stock Incentive Plan of 2003.*
Previously filed as Exhibit 10.6 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 3,
2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.7 |
Amended and Restated Stock Incentive Plan of 2005.*
Previously filed as Exhibit 10.7 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 3,
2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.8 |
Amended and Restated Directors’ Stock Option Plan.*
Previously filed as Exhibit 10.8 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 3,
2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.9 |
Amended and Restated Outside Directors’ Deferred
Compensation Plan.* Previously filed as Exhibit 10.9 to the
Company’s Annual Report on Form 10-K for the fiscal year
ended December 29, 2007. Here incorporated by reference.
|
|||
|
|
||||
| 10.10 |
Amended and Restated Executive Short-Term Incentive Plan
(Annual Bonus Plan).* Previously filed as Exhibit 10.10 to
the Company’s Annual Report on Form 10-K for the fiscal
year ended January 3, 2009. Here incorporated by
reference.
|
|||
43
Table of Contents
|
Exhibit
Number |
Document | |||
|
|
||||
| 10.11 |
Amended and Restated Executive Long-Term Incentive Plan
(3-Year Bonus Plan).* Previously filed as Exhibit 10.11 to
the Company’s Annual Report on Form 10-K for the fiscal
year ended January 3, 2009. Here incorporated by
reference.
|
|||
|
|
||||
| 10.12 |
Amended and Restated Stock Option Loan Program.* Previously
filed as Exhibit 10.12 to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 29, 2007.
Here incorporated by reference.
|
|||
|
|
||||
| 10.13 |
Executive Severance Agreement.* Previously filed as Exhibit
10.3 to the Company’s Current Report on Form 8-K filed on
December 17, 2008. Here incorporated by reference. A
participant schedule of current executive officers who are
parties to the agreement is attached as Exhibit 10.13.
|
|||
|
|
||||
| 10.14 |
Form of Indemnification Agreement.* The Company has entered
into an Indemnification Agreement with each director and
with Messrs. Grady, Grimes, Krueger, McBreen and Zwiers
and Ms. Linton. Previously filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on April 25,
2007. Here incorporated by reference.
|
|||
|
|
||||
| 10.15 |
Amended and Restated Benefit Trust Agreement dated April
25, 2007.* Previously filed as Exhibit 10.5 to the
Company’s Current Report on Form 8-K filed on April 25,
2007. Here incorporated by reference.
|
|||
|
|
||||
| 10.16 |
Employees’ Pension Plan (Restated as amended through
November 30, 2007).* Previously filed as Exhibit 10.17 to
the Company’s Annual Report on Form 10-K for the fiscal
year ended December 29, 2007. Here incorporated by
reference.
|
|||
|
|
||||
| 10.17 |
Form of Incentive Stock Option Agreement.* Previously filed
as Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated February 9, 2005. Here incorporated by reference.
|
|||
|
|
||||
| 10.18 |
Form of Non-Qualified Stock Option Agreement for Blake W.
Krueger and Timothy J. O’Donovan.* Previously filed as
Exhibit 10.2 to the Company’s Current Report on Form 8-K
dated February 9, 2005. Here incorporated by reference.
|
|||
|
|
||||
| 10.19 |
Form of Non-Qualified Stock Option Agreement for executive
officers other than those to whom Exhibit 10.18 applies.*
Previously filed as Exhibit 10.3 to the Company’s Current
Report on Form 8-K dated February 9, 2005. Here
incorporated by reference.
|
|||
|
|
||||
| 10.20 |
Form of Restricted Stock Agreement.* Previously filed as
Exhibit 10.4 to the Company’s Current Report on Form 8-K
dated February 9, 2005. Here incorporated by reference.
|
|||
|
|
||||
| 10.21 |
Form of Incentive Stock Option Agreement.* Previously filed
as Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated February 15, 2006. Here incorporated by reference.
|
|||
|
|
||||
| 10.22 |
Form of Non-Qualified Stock Option Agreement for Blake W.
Krueger and Timothy J. O’Donovan.* Previously filed as
Exhibit 10.2 to the Company’s Current Report of Form 8-K
dated February 15, 2006. Here incorporated by reference.
|
|||
|
|
||||
| 10.23 |
Form of Non-Qualified Stock Option Agreement for executive
officers other than those to whom Exhibit 10.22 applies.*
Previously filed as Exhibit 10.3 to the Company’s Current
Report on Form 8-K dated February 15, 2006. Here
incorporated by reference.
|
|||
|
|
||||
| 10.24 |
Form of Restricted Stock Agreement.* Previously filed as
Exhibit 10.4 to the Company’s Current Report on Form 8-K
dated February 15, 2006. Here incorporated by reference.
|
|||
|
|
||||
| 10.25 |
Form of Stock Option Agreement for non-employee directors.*
Previously filed as Exhibit 10.23 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 1,
2005. Here incorporated by reference.
|
|||
|
|
||||
| 10.26 |
2009 Form of Non-Qualified Stock Option Agreement for
Donald T. Grimes, Blake W. Krueger, Pamela L. Linton,
Michael F. McBreen and James D. Zwiers.* Previously filed
as Exhibit 10.26 to the Company’s Annual Report on Form
10-K for the fiscal year ended January 3, 2009. Here
incorporated by reference.
|
|||
44
Table of Contents
|
Exhibit
Number |
Document | |||
|
|
||||
| 10.27 |
2009 Form of Non-Qualified Stock Option Agreement for
executive officers other than those to whom Exhibit 10.26
applies.* Previously filed as Exhibit 10.27 to the
Company’s Annual Report on Form 10-K for the fiscal year
ended January 3, 2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.28 |
Form of Performance Share Award Agreement.* Previously
filed as Exhibit 10.28 to the Company’s Annual Report on
Form 10-K for the fiscal year ended (2009-2011 Performance Period) January 3, 2009. Here
incorporated by reference.
|
|||
|
|
||||
| 10.29 |
Form of Performance Share Award Agreement (2010-2012 Performance Period).*
|
|||
|
|
||||
| 10.30 |
Separation Agreement between Wolverine World Wide, Inc.
and Blake W. Krueger, dated as of March 13, 2008, as
amended.* Previously filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the period ended March
22, 2008.
|
|||
|
|
||||
| 10.31 |
First Amendment to Separation Agreement between Wolverine
World Wide, Inc. and Blake W. Krueger, dated as of
December 11, 2008.* Previously filed as Exhibit 10.30 to
the Company’s Annual Report on Form 10-K for the fiscal
year ended January 3, 2009. Here incorporated by
reference.
|
|||
|
|
||||
| 10.32 |
409A Supplemental Executive Retirement Plan.* Previously
filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on December 17, 2008. Here incorporated by
reference. A participant schedule of current executive
officers who participate in this plan is attached as
Exhibit 10.32.
|
|||
|
|
||||
| 10.33 |
Form of 409A Supplemental Retirement Plan Participation
Agreement with Mr. Krueger.* Previously filed as Exhibit
10.32 to the Company’s Annual Report on Form 10-K for the
fiscal year ended January 3, 2009. Here incorporated by
reference.
|
|||
|
|
||||
| 10.34 |
Outside Directors’ Deferred Compensation Plan.* Previously
filed as Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on December 17, 2008. Here incorporated by
reference.
|
|||
|
|
||||
| 21 |
Subsidiaries of Registrant.
|
|||
|
|
||||
| 23 |
Consent of Ernst & Young LLP.
|
|||
|
|
||||
| 24 |
Powers of Attorney.
|
|||
|
|
||||
| 31.1 |
Certification of President and Chief Executive Officer
under Section 302 of the Sarbanes-Oxley Act of 2002.
|
|||
|
|
||||
| 31.2 |
Certification of Senior Vice President, Chief Financial
Officer and Treasurer under Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|||
|
|
||||
| 32 |
Certification pursuant to 18 U.S.C. § 1350.
|
|||
| * |
Management contract or compensatory plan or arrangement.
|
The Company will furnish a copy of any exhibit listed above to any stockholder without charge upon
written request to Mr. Kenneth A. Grady, General Counsel and Secretary, 9341 Courtland Drive
N.E., Rockford, Michigan 49351.
45
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
||||
| Dated: March 3, 2010 | By: | /s/ Blake W. Krueger | ||
| Blake W. Krueger | ||||
|
Chairman, Chief Executive Officer and President
(Principal Executive Officer) |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
| Signature | Title | Date | ||
|
|
||||
|
/s/ Blake W. Krueger
|
Chairman, Chief Executive Officer and
President
(Principal Executive Officer) |
March 3, 2010 | ||
|
|
||||
|
/s/ Donald T. Grimes
|
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer) |
March 3, 2010 | ||
|
|
||||
|
*/s/ Jeffrey M. Boromisa
|
Director | March 3, 2010 | ||
|
|
||||
|
*/s/ William K. Gerber
|
Director | March 3, 2010 | ||
|
|
||||
|
*/s/ Alberto L. Grimoldi
|
Director | March 3, 2010 | ||
|
|
||||
|
*/s/ Joseph R. Gromek
|
Director | March 3, 2010 | ||
|
|
||||
|
*/s/ David T. Kollat
|
Director | March 3, 2010 | ||
|
|
||||
|
/s/ Blake W. Krueger
|
Director | March 3, 2010 | ||
|
|
||||
|
*/s/ Brenda J. Lauderback
|
Director | March 3, 2010 | ||
|
|
||||
|
*/s/ David P. Mehney
|
Director | March 3, 2010 | ||
|
|
||||
|
*/s/ Timothy J. O’Donovan
|
Director | March 3, 2010 | ||
|
|
||||
|
*/s/ Shirley D. Peterson
|
Director | March 3, 2010 | ||
|
|
||||
|
*/s/ Michael A. Volkema
|
Director | March 3, 2010 | ||
|
|
||||
|
*By: /s/ Blake W. Krueger
Blake W. Krueger
Attorney-in-Fact |
Chairman, Chief Executive Officer and President | March 3, 2010 |
46
Table of Contents
APPENDIX A
Financial Statements
Table of Contents
| As of Fiscal Year End | ||||||||
| (Thousands of Dollars, Except Per Share Data) | 2009 | 2008 | ||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 160,439 | $ | 89,502 | ||||
|
Accounts receivable, less allowances (2009 – $13,946; 2008 – $15,161)
|
163,755 | 167,949 | ||||||
|
Inventories
|
||||||||
|
Finished products
|
140,124 | 177,801 | ||||||
|
Raw materials and work-in-process
|
17,941 | 18,976 | ||||||
|
|
||||||||
|
|
158,065 | 196,777 | ||||||
|
|
||||||||
|
Deferred income taxes
|
12,475 | 8,127 | ||||||
|
Prepaid expenses and other current assets
|
8,804 | 11,487 | ||||||
|
|
||||||||
|
Total current assets
|
503,538 | 473,842 | ||||||
|
|
||||||||
|
Property, plant and equipment:
|
||||||||
|
Land
|
881 | 882 | ||||||
|
Buildings and improvements
|
80,511 | 81,875 | ||||||
|
Machinery and equipment
|
147,197 | 143,203 | ||||||
|
Software
|
74,559 | 72,478 | ||||||
|
|
||||||||
|
|
303,148 | 298,438 | ||||||
|
|
||||||||
|
Less accumulated depreciation
|
229,196 | 212,681 | ||||||
|
|
||||||||
|
|
73,952 | 85,757 | ||||||
|
Other assets:
|
||||||||
|
Goodwill
|
39,972 | 32,310 | ||||||
|
Other non-amortizable intangibles
|
16,226 | 9,257 | ||||||
|
Cash surrender value of life insurance
|
35,405 | 35,531 | ||||||
|
Deferred income taxes
|
35,094 | 23,314 | ||||||
|
Other
|
3,746 | 4,769 | ||||||
|
|
||||||||
|
|
130,443 | 105,181 | ||||||
|
|
||||||||
|
Total assets
|
$ | 707,933 | $ | 664,780 | ||||
|
|
||||||||
|
|
||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 42,262 | $ | 45,320 | ||||
|
Accrued salaries and wages
|
20,751 | 22,702 | ||||||
|
Income taxes
|
18,887 | 1,817 | ||||||
|
Taxes, other than income taxes
|
4,521 | 4,308 | ||||||
|
Restructuring reserve
|
5,926 | — | ||||||
|
Other accrued liabilities
|
37,922 | 29,533 | ||||||
|
Accrued pension liabilities
|
2,044 | 28,144 | ||||||
|
Current maturities of long-term debt
|
538 | 5 | ||||||
|
Revolving credit agreement
|
— | 59,500 | ||||||
|
|
||||||||
|
Total current liabilities
|
132,851 | 191,329 | ||||||
|
|
||||||||
|
Long-term debt (less current maturities)
|
1,077 | — | ||||||
|
Deferred compensation
|
5,870 | 7,714 | ||||||
|
Accrued pension liabilities
|
84,134 | 34,777 | ||||||
|
Other liabilities
|
1,968 | 1,038 | ||||||
|
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Common stock, $1 par value: authorized 160,000,000 shares; shares
issued, including treasury shares: 2009 – 62,763,924; 2008 – 61,655,814
|
62,764 | 61,656 | ||||||
|
Additional paid-in capital
|
81,021 | 64,696 | ||||||
|
Retained earnings
|
706,439 | 666,027 | ||||||
|
Accumulated other comprehensive income (loss)
|
(42,806 | ) | (42,834 | ) | ||||
|
Cost of shares in treasury: 2009 – 13,170,471 shares; 2008 – 12,748,721 shares
|
(325,385 | ) | (319,623 | ) | ||||
|
|
||||||||
|
Total stockholders’ equity
|
482,033 | 429,922 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 707,933 | $ | 664,780 | ||||
|
|
||||||||
See accompanying notes to consolidated financial statements.
A-1
Table of Contents
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
AND COMPREHENSIVE INCOME
| Fiscal Year | ||||||||||||
| (Thousands of Dollars, Except Per Share Data) | 2009 | 2008 | 2007 | |||||||||
|
COMMON STOCK
|
||||||||||||
|
Balance at beginning of the year
|
$ | 61,656 | $ | 61,085 | $ | 60,468 | ||||||
|
Common stock issued under stock incentive plans
(2009 – 1,108,112 shares; 2008 – 570,691 shares; 2007 – 618,123 shares) |
1,108 | 571 | 617 | |||||||||
|
|
||||||||||||
|
Balance at end of the year
|
62,764 | 61,656 | 61,085 | |||||||||
|
|
||||||||||||
|
ADDITIONAL PAID-IN CAPITAL
|
||||||||||||
|
Balance at beginning of the year
|
64,696 | 47,786 | 31,341 | |||||||||
|
Stock-based compensation expense
|
8,935 | 8,164 | 8,316 | |||||||||
|
Amounts associated with common stock issued
under stock incentive plans:
|
||||||||||||
|
Proceeds over par value
|
6,557 | 5,859 | 4,603 | |||||||||
|
Income tax benefits
|
1,427 | 2,842 | 3,572 | |||||||||
|
Issuance of performance-based shares (2009 – 286,006 shares)
|
(286 | ) | — | — | ||||||||
|
Issuance of treasury shares (2009 – 32,455 shares;
2008 – 22,842 shares; 2007 – 12,661 shares)
|
(111 | ) | 54 | 47 | ||||||||
|
Net change in employee notes receivable
|
(197 | ) | (9 | ) | (93 | ) | ||||||
|
|
||||||||||||
|
Balance at end of the year
|
81,021 | 64,696 | 47,786 | |||||||||
|
|
||||||||||||
|
RETAINED EARNINGS
|
||||||||||||
|
Balance at beginning of the year
|
666,027 | 591,706 | 519,815 | |||||||||
|
Net earnings
|
61,912 | 95,821 | 92,886 | |||||||||
|
Cash dividends declared (2009 – $0.44 per share;
2008 – $0.44 per share; 2007 – $0.36 per share)
|
(21,500 | ) | (21,500 | ) | (18,844 | ) | ||||||
|
Cumulative effect of adopting ASC Topic 740 (See Note 7)
|
— | — | (509 | ) | ||||||||
|
Pension adjustments (See Note 6)
|
— | — | (1,642 | ) | ||||||||
|
|
||||||||||||
|
Balance at end of the year
|
706,439 | 666,027 | 591,706 | |||||||||
|
|
||||||||||||
|
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
|
||||||||||||
|
Balance at beginning of the year
|
(42,834 | ) | 22,268 | 3,923 | ||||||||
|
Foreign currency translation adjustments
|
15,349 | (36,305 | ) | 13,643 | ||||||||
|
Change in fair value of foreign exchange contracts,
net of taxes (2009 – $3,482; 2008 – ($3,447); 2007 –
$929)
|
(7,469 | ) | 5,978 | (1,007 | ) | |||||||
|
Pension adjustments, net of taxes
(2009 – $4,228; 2008 – $18,963; 2007 – ($3,396))
|
(7,852 | ) | (34,775 | ) | 5,709 | |||||||
|
|
||||||||||||
|
Balance at end of the year
|
(42,806 | ) | (42,834 | ) | 22,268 | |||||||
|
|
||||||||||||
|
COST OF SHARES IN TREASURY
|
||||||||||||
|
Balance at beginning of the year
|
(319,623 | ) | (244,066 | ) | (110,988 | ) | ||||||
|
Common stock purchased for treasury (2009 – 454,205
shares; 2008 – 2,921,264 shares; 2007 – 4,587,473 shares)
|
(6,566 | ) | (76,129 | ) | (133,379 | ) | ||||||
|
Issuance of treasury shares (2009 – 32,455 shares;
2008 – 22,842 shares; 2007 – 12,661 shares)
|
804 | 572 | 301 | |||||||||
|
|
||||||||||||
|
Balance at end of the year
|
(325,385 | ) | (319,623 | ) | (244,066 | ) | ||||||
|
|
||||||||||||
|
Total stockholders’ equity at end of the year
|
$ | 482,033 | $ | 429,922 | $ | 478,779 | ||||||
|
|
||||||||||||
|
COMPREHENSIVE INCOME
|
||||||||||||
|
Net earnings
|
$ | 61,912 | $ | 95,821 | $ | 92,886 | ||||||
|
Foreign currency translation adjustments
|
15,349 | (36,305 | ) | 13,643 | ||||||||
|
Change in fair value of foreign exchange contracts, net
of taxes
|
(7,469 | ) | 5,978 | (1,007 | ) | |||||||
|
Pension adjustments, net of taxes
|
(7,852 | ) | (34,775 | ) | 5,709 | |||||||
|
|
||||||||||||
|
Total comprehensive income
|
$ | 61,940 | $ | 30,719 | $ | 111,231 | ||||||
|
|
||||||||||||
See accompanying notes to consolidated financial statements.
A-2
Table of Contents
| Fiscal Year | ||||||||||||
| (Thousands of Dollars, Except Per Share Data) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Revenue
|
$ | 1,101,056 | $ | 1,220,568 | $ | 1,198,972 | ||||||
|
Cost of goods sold
|
663,461 | 734,547 | 727,041 | |||||||||
|
Restructuring and other transition costs
|
5,873 | — | — | |||||||||
|
|
||||||||||||
|
Gross profit
|
431,722 | 486,021 | 471,931 | |||||||||
|
|
||||||||||||
|
Selling, general and administrative expenses
|
316,378 | 345,183 | 333,151 | |||||||||
|
Restructuring and other transition costs
|
29,723 | — | — | |||||||||
|
|
||||||||||||
|
Operating profit
|
85,621 | 140,838 | 138,780 | |||||||||
|
|
||||||||||||
|
Other expenses (income):
|
||||||||||||
|
Interest expense
|
494 | 2,850 | 2,470 | |||||||||
|
Interest income
|
(383 | ) | (1,757 | ) | (3,134 | ) | ||||||
|
Other (income) expense
|
(182 | ) | (839 | ) | 873 | |||||||
|
|
||||||||||||
|
|
(71 | ) | 254 | 209 | ||||||||
|
|
||||||||||||
|
Earnings before income taxes
|
85,692 | 140,584 | 138,571 | |||||||||
|
|
||||||||||||
|
Income taxes
|
23,780 | 44,763 | 45,685 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net earnings
|
$ | 61,912 | $ | 95,821 | $ | 92,886 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net earnings per share (see Note 1):
|
||||||||||||
|
Basic
|
$ | 1.26 | $ | 1.94 | $ | 1.75 | ||||||
|
Diluted
|
1.24 | 1.90 | 1.70 | |||||||||
See accompanying notes to consolidated financial statements.
A-3
Table of Contents
| Fiscal Year | ||||||||||||
| (Thousands of Dollars) | 2009 | 2008 | 2007 | |||||||||
|
OPERATING ACTIVITIES
|
||||||||||||
|
Net earnings
|
$ | 61,912 | $ | 95,821 | $ | 92,886 | ||||||
|
Adjustments necessary to reconcile net earnings
to net cash provided by operating activities:
|
||||||||||||
|
Depreciation
|
15,932 | 18,460 | 20,223 | |||||||||
|
Amortization
|
1,689 | 2,236 | 2,568 | |||||||||
|
Deferred income taxes
|
(7,845 | ) | (43 | ) | (5,660 | ) | ||||||
|
Stock-based compensation expense
|
8,935 | 8,164 | 8,316 | |||||||||
|
Excess tax benefits from stock-based compensation
|
(462 | ) | (1,610 | ) | (2,620 | ) | ||||||
|
Pension expense
|
11,177 | 1,252 | 2,884 | |||||||||
|
Restructuring and other transition costs
|
35,596 | — | — | |||||||||
|
Cash payments related to restructuring and other
transition costs
|
(20,653 | ) | — | — | ||||||||
|
Other
|
(7,921 | ) | 13,966 | 4,339 | ||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
Accounts receivable
|
9,817 | 3,419 | (21,530 | ) | ||||||||
|
Inventories
|
44,500 | (39,201 | ) | 22,450 | ||||||||
|
Other operating assets
|
3,103 | (386 | ) | 3,141 | ||||||||
|
Accounts payable
|
(7,326 | ) | (5,064 | ) | 3,140 | |||||||
|
Income taxes
|
17,070 | (2,094 | ) | (2,524 | ) | |||||||
|
Other operating liabilities
|
3,085 | (1,450 | ) | (4,325 | ) | |||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
168,609 | 93,470 | 123,288 | |||||||||
|
|
||||||||||||
|
INVESTING ACTIVITIES
|
||||||||||||
|
Business acquisitions
|
(7,954 | ) | — | — | ||||||||
|
Additions to property, plant and equipment
|
(11,670 | ) | (24,126 | ) | (17,879 | ) | ||||||
|
Other
|
(2,679 | ) | (4,133 | ) | (4,441 | ) | ||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(22,303 | ) | (28,259 | ) | (22,320 | ) | ||||||
|
|
||||||||||||
|
FINANCING ACTIVITIES
|
||||||||||||
|
Net borrowings under revolver
|
(59,500 | ) | 59,500 | — | ||||||||
|
Payments of long-term debt
|
— | (10,714 | ) | (10,713 | ) | |||||||
|
Payments of capital lease obligations
|
(5 | ) | (12 | ) | (26 | ) | ||||||
|
Cash dividends paid
|
(21,502 | ) | (20,758 | ) | (18,391 | ) | ||||||
|
Purchase of common stock for treasury
|
(6,566 | ) | (76,129 | ) | (133,379 | ) | ||||||
|
Proceeds from shares issued under stock incentive plans
|
7,867 | 7,047 | 5,662 | |||||||||
|
Excess tax benefits from stock-based compensation
|
462 | 1,610 | 2,620 | |||||||||
|
|
||||||||||||
|
Net cash used in financing activities
|
(79,244 | ) | (39,456 | ) | (154,227 | ) | ||||||
|
Effect of foreign exchange rate changes
|
3,875 | (12,340 | ) | 4,683 | ||||||||
|
|
||||||||||||
|
Increase (decrease) in cash and cash equivalents
|
70,937 | 13,415 | (48,576 | ) | ||||||||
|
|
||||||||||||
|
Cash and cash equivalents at beginning of the year
|
89,502 | 76,087 | 124,663 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of the year
|
$ | 160,439 | $ | 89,502 | $ | 76,087 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
OTHER CASH FLOW INFORMATION
|
||||||||||||
|
Interest paid
|
$ | 486 | $ | 2,365 | $ | 1,916 | ||||||
|
Net income taxes paid
|
7,297 | 35,995 | 48,336 | |||||||||
See accompanying notes to consolidated financial statements.
A-4
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts are in thousands of dollars except share data and elsewhere as noted.
1. Summary of Significant Accounting Policies
NATURE OF OPERATIONS
Wolverine World Wide, Inc. is a leading designer, manufacturer and marketer of a broad range of
quality casual shoes, performance outdoor footwear, apparel, work shoes and boots, and uniform
shoes and boots. The Company’s global portfolio of owned and licensed brands includes:
Bates
®
,
Cat
®
Footwear,
Chaco
®
,
Cushe
TM
Harley-Davidson
®
Footwear,
Hush Puppies
®
,
HyTest
®
,
Merrell
®
,
Patagonia
®
Footwear,
Sebago
®
,
Soft Style
®
and
Wolverine
®
. Licensing programs are
utilized to extend the global reach of the Company’s owned brands. The Company also operates a
retail division to market its brands and branded footwear and apparel from other manufacturers; a
leathers division that markets
Wolverine Performance Leathers
™; and a pigskin procurement
operation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Wolverine World Wide, Inc. and its
wholly-owned subsidiaries (collectively, the “Company”). All intercompany accounts and
transactions have been eliminated in consolidation.
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 presented in this report include the 52-week period ended January 2,
2010, the 53-week period ended January 3, 2009 and the 52-week period ended December 29, 2007.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized on the sale of products manufactured or sourced by the Company when the
related goods have been shipped, legal title has passed to the customer and collectability is
reasonably assured. Revenue generated through programs with licensees and distributors involving
products bearing the Company’s trademarks is recognized as earned according to stated contractual
terms upon either the purchase or shipment of branded products by licensees and distributors.
The Company records provisions against gross revenue for estimated stock returns and cash discounts
in the period when the related revenue is recorded. These estimates are based on factors that
include, but are not limited to, historical sales returns, historical cash discounts taken and
analysis of credit memorandum activity.
COST OF GOODS SOLD
Cost of goods sold for the Company’s operations include the actual product costs, including inbound
freight charges, purchasing, sourcing, inspection and receiving costs. Warehousing costs are
included in selling, general and administrative expenses.
SHIPPING AND HANDLING COSTS
Shipping and handling costs that are charged to and reimbursed by the customer are recognized as
revenue, while the related expenses incurred by the Company are recorded as cost of goods sold.
CASH EQUIVALENTS
Cash equivalents include highly liquid investments with a maturity of three months or less when
purchased. Cash equivalents are stated at cost, which approximates market.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
The Company maintains an allowance for uncollectible accounts receivable for estimated losses
resulting from its customers’ inability to make required payments. Company management evaluates
the allowance for uncollectible accounts receivable based on a review of current customer status
and historical collection experience. Adjustments to these estimates may be required if the
financial condition of the Company’s customers were to change. The Company does not require
collateral or other security on trade accounts receivable for the majority of its customers.
A-5
Table of Contents
INVENTORIES
The Company values its inventory at the lower of cost or market. Cost is determined by the
last-in, first-out (“LIFO”) method for all domestic raw materials and work-in-process inventories
and certain domestic finished goods inventories. Cost is determined using the first-in, first-out
(“FIFO”) method for all raw materials, work-in-process and finished goods inventories in foreign
countries. The FIFO method is also used for all finished goods inventories of the Company’s retail
business, due to the unique nature of those operations and for certain domestic finished goods
inventories. The Company has applied these inventory cost valuation methods consistently from year
to year.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost and include expenditures for computer
hardware and software, store furniture and fixtures, office furniture and machinery and equipment.
Normal repairs and maintenance are expensed as incurred.
Depreciation of property, plant and equipment is computed using the straight-line method. The
depreciable lives range from five to forty years for buildings and improvements and from three to
ten years for machinery, equipment and software. Leasehold improvements are depreciated at the
lesser of the estimated useful life or lease term, including reasonably assured lease renewals as
determined at lease inception.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the purchase price over the fair value of net tangible and
identifiable intangible assets of acquired businesses. Other intangibles consist primarily of
trademarks and patents. Goodwill and intangible assets deemed to have indefinite lives are not
amortized, but are subject to impairment tests at least annually in accordance with FASB ASC Topic
350,
Intangibles – Goodwill and Other
. The Company reviews the carrying amounts of goodwill and
other non-amortizable intangible assets at least annually, or when indicators of impairment are
present, by reporting unit to determine if such assets may be impaired. If the carrying amounts of
these assets are not recoverable based upon discounted cash flow and market approach analyses, the
carrying amounts of such assets are reduced by the estimated shortfall of fair value to recorded
value.
Inherent in the development of the present value of future cash flow projections are assumptions
and estimates the Company derives from a review of its operating results, business plans, expected
growth rates, cost of capital and tax rates. The Company also makes certain assumptions about
future economic conditions, interest rates and other market data which it relies upon in
determining the fair value of assets under the discounted cash flow method. Many of the factors
used in assessing fair value are outside the control of the Company, and these assumptions and
estimates can change in future periods.
The market approach is the other primary method used for estimating fair value of a reporting unit.
This approach relies on the market value (based on market capitalization) of companies that are
engaged in the same or a similar line of business.
Estimated aggregate amortization expense for such intangibles for each of the five fiscal years
subsequent to 2009 is as follows:
| 2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||
|
Amortization expense
|
$ | 1,801 | $ | 1,005 | $ | 294 | $ | 141 | $ | 74 | ||||||||||
Other amortizable intangible assets (principally patents) are amortized using the straight-line
method over their estimated useful lives (periods ranging from two to ten years). Other
amortizable intangible assets are included in other assets on the consolidated balance sheets and
have net carrying amounts of $3,363 and $4,390 for 2009 and 2008, respectively, and accumulated
amortization of $4,860 and $4,433 for 2009 and 2008, respectively.
The Company has performed the required annual impairment tests and has determined that goodwill and
other non-amortizable intangibles were not impaired at January 2, 2010 and January 3, 2009.
A-6
Table of Contents
The changes in the carrying amount of goodwill and other non-amortizable intangibles for the years
ended January 2, 2010 and January 3, 2009 are as follows:
| Goodwill | Trademarks | Total | ||||||||||
|
Balance at December 29, 2007
|
$ | 39,573 | $ | 8,936 | $ | 48,509 | ||||||
|
Intangibles acquired
|
— | 338 | 338 | |||||||||
|
Intangibles disposed
|
— | (17 | ) | (17 | ) | |||||||
|
Foreign currency translation effects
|
(7,263 | ) | — | (7,263 | ) | |||||||
|
|
||||||||||||
|
Balance at January 3, 2009
|
$ | 32,310 | $ | 9,257 | $ | 41,567 | ||||||
|
Intangibles acquired
|
5,464 | 6,969 | 12,433 | |||||||||
|
Foreign currency translation effects
|
2,198 | — | 2,198 | |||||||||
|
|
||||||||||||
|
Balance at January 2, 2010
|
$ | 39,972 | $ | 16,226 | $ | 56,198 | ||||||
|
|
||||||||||||
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. If such
assets are considered to be impaired, the impairment amount to be recognized is the amount by which
the carrying value of the assets exceeds their fair value.
RETIREMENT BENEFITS
The determination of the obligation and expense for retirement benefits is dependent on the
selection of certain actuarial assumptions used in calculating such amounts. These assumptions
include, among others, the discount rate, expected long-term rate of return on plan assets and
rates of increase in compensation. These assumptions are reviewed with the Company’s actuaries and
updated annually based on relevant external and internal factors and information, including but not
limited to, long-term expected asset returns, rates of termination, regulatory requirements and
plan changes. See Note 6 to the consolidated financial statements for additional information.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with the fair value recognition
provisions of FASB ASC Topic 718,
Compensation – Stock Compensation
(“ASC 718”). The Company
recognized compensation costs of $8,935, $8,164 and $8,316 and related income tax benefits of
$2,321, $1,699 and $2,092 for grants under its stock-based compensation plans in the statements of
operations for the years ended January 2, 2010, January 3, 2009 and December 29, 2007,
respectively.
Stock-based compensation expense recognized in the consolidated condensed statements of operations
for the years ended January 2, 2010, January 3, 2009 and December 29, 2007 has been reduced for
estimated forfeitures, as it is based on awards ultimately expected to vest. ASC 718 requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical
experience.
The Company estimated the fair value of employee stock options on the date of grant using the
Black-Scholes model. The estimated weighted-average fair value for each option granted was $4.40,
$5.68 and $6.87 per share in 2009, 2008 and 2007, respectively, with the following weighted-average
assumptions:
| 2009 | 2008 | 2007 | ||||||||||
|
Expected market price volatility
(1)
|
34.8 | % | 28.9 | % | 23.3 | % | ||||||
|
Risk-free interest rate
(2)
|
1.6 | % | 2.5 | % | 4.8 | % | ||||||
|
Dividend yield
(3)
|
1.8 | % | 1.6 | % | 1.4 | % | ||||||
|
Expected term
(4)
|
4 years | 4 years | 4 years | |||||||||
| (1) |
Based on historical volatility of the Company’s common stock. The expected volatility is based on the
daily percentage change in the price of the stock over the four years prior to the grant.
|
|
| (2) |
Represents the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant.
|
|
| (3) |
Represents the Company’s cash dividend yield for the expected term.
|
|
| (4) |
Represents the period of time that options granted are expected to be outstanding. As part of the
determination of the expected term, the Company concluded that all employee groups exhibit similar exercise
and post-vesting termination behavior.
|
A-7
Table of Contents
The Company issued 1,217,244 shares of common stock in connection with the exercise of stock
options and restricted stock grants made during the fiscal year ended January 2, 2010. The Company
cancelled 58,979 shares of common stock issued under restricted stock awards as a result of
forfeitures during 2009.
INCOME TAXES
The provision for income taxes is based on the earnings reported in the consolidated financial
statements. A deferred income tax asset or liability is determined by applying currently enacted
tax laws and rates to the cumulative temporary differences between the carrying values of assets
and liabilities for financial statement and income tax purposes. The Company recognizes interest
and penalties related to unrecognized tax benefits through interest expense and income tax expense,
respectively.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
| 2009 | 2008 | 2007 | ||||||||||
|
Numerator:
|
||||||||||||
|
Net earnings
|
$ | 61,912 | $ | 95,821 | $ | 92,886 | ||||||
|
Adjustment for earnings allocated to
nonvested restricted common stock
|
(1,036 | ) | (996 | ) | (1,123 | ) | ||||||
|
|
||||||||||||
|
Net earnings used in calculating basic
earnings per share
|
60,876 | 94,825 | 91,763 | |||||||||
|
Adjustment for earnings reallocated to
nonvested restricted common stock
|
8 | 18 | 26 | |||||||||
|
|
||||||||||||
|
Net earnings used in calculating
diluted earnings per share
|
$ | 60,884 | $ | 94,843 | $ | 91,789 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Denominator:
|
||||||||||||
|
Weighted average shares outstanding
|
49,192,662 | 49,381,789 | 53,140,581 | |||||||||
|
Adjustment for nonvested restricted
common stock
|
(921,715 | ) | (513,063 | ) | (641,088 | ) | ||||||
|
|
||||||||||||
|
Shares used in calculating basic
earnings per share
|
48,270,947 | 48,868,726 | 52,499,493 | |||||||||
|
Effect of dilutive stock options
|
708,485 | 1,151,565 | 1,586,803 | |||||||||
|
|
||||||||||||
|
Shares used in calculating diluted
earnings per share
|
48,979,432 | 50,020,291 | 54,086,296 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net earnings per share:
|
||||||||||||
|
Basic
|
$ | 1.26 | $ | 1.94 | $ | 1.75 | ||||||
|
Diluted
|
$ | 1.24 | $ | 1.90 | $ | 1.70 | ||||||
Options to purchase 2,353,412 shares of common stock in 2009, 1,273,676 shares in 2008 and
546,247 shares in 2007 have not been included in the denominator for the computation of diluted
earnings per share because the related exercise prices were greater than the average market price
for the period and, therefore, they were anti-dilutive.
Effective January 4, 2009, the Company implemented FASB ASC Topic 260,
Earnings Per Share
(“ASC
260”). ASC 260 addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting, and therefore need to be included in the earnings
allocation in computing earnings per share under the two-class method. Under the guidance in ASC
260, unvested share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents, whether paid or unpaid, are participating securities, as defined, and
therefore should be included in the computation of basic and diluted earnings per share using the
two-class method. Certain of the Company’s restricted stock awards allow the holder to receive a
nonforfeitable dividend equivalent. The impact of adopting the standard reduced previously
reported basic net earnings per share by $0.02 and had no impact on diluted net earnings per share
for the years ended January 3, 2009 and December 29, 2007.
FOREIGN CURRENCY
For most of the Company’s international subsidiaries, the local currency is the functional
currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the
year-end exchange rate. Operating statement amounts are translated at average exchange rates for
each period. The cumulative translation adjustments resulting from changes in exchange rates are
included in the consolidated balance sheets as a component of accumulated other comprehensive
income (loss) in stockholders’ equity. Transaction gains and losses are included in the
consolidated statements of operations and were not material in 2009, 2008 and 2007.
A-8
Table of Contents
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company follows FASB ASC Topic 820,
Fair Value Measurements and Disclosures
(“ASC 820”), which
provides a consistent definition of fair value, focuses on exit price, prioritizes the use of
market-based inputs over entity-specific inputs for measuring fair value and establishes a
three-tier hierarchy for fair value measurements. As required, effective January 3, 2009 and
January 2, 2010, the Company adopted the provisions of ASC 820 for financial assets and liabilities
and nonfinancial assets and liabilities, respectively. This topic requires fair value measurements
to be classified and disclosed in one of the following three categories:
| Level 1: |
Quoted prices (unadjusted) in active markets for identical assets and liabilities.
|
||
| Level 2: |
Either direct or indirect inputs, other than quoted prices included within
Level 1, which are observable for similar assets or liabilities.
|
||
| Level 3: |
Valuations derived from valuation techniques in which one or more
significant inputs are unobservable.
|
The Company’s financial instruments consist of cash and cash equivalents, accounts and notes
receivable, accounts payable, borrowings under the revolving credit agreement and long-term debt.
The carrying amounts of the Company’s financial instruments approximate their fair value. As of
January 2, 2010 the carrying value and fair value of the Company’s fixed rate long-term debt was
$1,615 and $1,658, respectively. There was no long-term debt outstanding at January 3, 2009. Fair
value was determined using discounted cash flow analyses and current interest rates for similar
instruments. The Company does not hold or issue financial instruments for trading purposes.
As of January 2, 2010 and January 3, 2009, a liability of $2,625 and an asset of $3,246,
respectively, have been recognized for the fair value of the Company’s foreign currency forward
exchange contracts. In accordance with ASC 820, these assets and liabilities fall within Level 2
of the fair value hierarchy. The prices for the financial instruments are determined using prices
for recently-traded financial instruments with similar underlying terms as well as directly or
indirectly observable inputs. The Company did not have any additional assets or liabilities that
were measured at fair value on a recurring basis at January 2, 2010.
The Company follows FASB ASC Topic 815,
Derivatives and Hedging
, which is intended to improve
transparency in financial reporting and requires that all derivative instruments be recorded on the
consolidated balance sheets at fair value by establishing criteria for designation and
effectiveness of hedging relationships. The Company utilizes foreign currency forward exchange
contracts to manage the volatility associated with U.S. dollar inventory purchases made by non-U.S.
wholesale operations in the normal course of business. At January 2, 2010 and January 3, 2009,
foreign exchange contracts with a notional value of $69,618 and $63,129, respectively, were
outstanding to purchase U.S. dollars with maturities ranging up to 308 days. These contracts have
been designated as cash flow hedges.
The fair value of the foreign currency forward exchange contracts represents the estimated receipts
or payments necessary to terminate the contracts. Hedge effectiveness is evaluated by the
hypothetical derivative method. Any hedge ineffectiveness is reported within the cost of goods
sold caption of the consolidated condensed statements of operations. Hedge ineffectiveness was not
material to the Company’s consolidated condensed financial statements in 2009, 2008, or 2007. If,
in the future, the foreign exchange contracts are determined to be ineffective hedges or terminated
before their contractual termination dates, the Company would be required to reclassify into
earnings all or a portion of the unrealized amounts related to the cash flow hedges that are
currently included in accumulated other comprehensive income (loss) within stockholders’ equity.
For the fiscal years ended January 2, 2010, January 3, 2009 and December 29, 2007, the Company
recognized a net loss of $547, a net gain of $434 and a net loss of $2,615, respectively, in
accumulated other comprehensive income (loss) related to the effective portion of its foreign
exchange contracts. For the fiscal years ended January 2, 2010, January 3, 2009 and December 29,
2007, the Company reclassified a loss of $2,996, and gains of $2,132 and $1,894, respectively, from
accumulated other comprehensive income (loss) into cost of goods sold related to the effective
portion of its foreign exchange contracts designated and qualifying as cash flow hedges.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net earnings and any revenue, expenses, gains and losses
that, under accounting principles generally accepted in the United States, are excluded from net
earnings and recognized directly as a component of stockholders’ equity.
A-9
Table of Contents
The ending accumulated other comprehensive income (loss) is as follows:
| 2009 | 2008 | |||||||
|
|
||||||||
|
Foreign currency translation adjustments
|
$ | 14,477 | $ | (872 | ) | |||
|
Change in fair value of foreign exchange contracts,
net of taxes
(2009 – $1,578; 2008 – $(1,904)) |
(3,546 | ) | 3,923 | |||||
|
Pension adjustments, net of taxes
(2009 – $28,459; 2008 – $24,231) |
(53,737 | ) | (45,885 | ) | ||||
|
|
||||||||
|
Accumulated other comprehensive income (loss)
|
$ | (42,806 | ) | $ | (42,834 | ) | ||
|
|
||||||||
SUBSEQUENT EVENTS
In preparing these financial statements, the Company has evaluated events and transactions for
potential recognition or disclosure through March 3, 2010, the date financial statements were
issued.
RECLASSIFICATIONS
Certain amounts on the consolidated condensed financial statements previously reported in 2008 and
2007 have been reclassified to conform to the presentation used in 2009. These reclassifications
did not affect net earnings.
2. Inventories
Inventories of $48,800 at January 2, 2010 and $65,000 at January 3, 2009 have been valued using the
LIFO method. If the FIFO method had been used, inventories would have been $9,838 and $11,854
higher than reported at January 2, 2010 and January 3, 2009, respectively.
Long-term debt consists of the following obligations:
| 2009 | 2008 | |||||||
|
Notes payable
|
$ | 1,615 | $ | — | ||||
|
Other
|
— | 5 | ||||||
|
|
||||||||
|
|
1,615 | 5 | ||||||
|
Less current maturities
|
538 | 5 | ||||||
|
|
||||||||
|
Total long-term debt
|
$ | 1,077 | $ | — | ||||
|
|
||||||||
In 2009, the Company entered into a $1,615 note payable in connection with the
Cushe
TM
acquisition. The note is payable over three years at a fixed interest rate of 4.5%.
The Company has an unsecured revolving credit agreement that allows for borrowings up to $150,000,
subject to increase or decrease as specified in the credit agreement. This agreement, which
expires in July 2010, contains restrictive covenants that, among other things, require the Company
to maintain certain financial ratios related to debt to total capital and minimum fixed charge
coverage. At January 2, 2010, the Company was in compliance with all restrictive covenants.
Interest is paid at a variable rate based on one of the following options elected by the Company:
prime, LIBOR, or money market rate plus applicable spread. The Company had zero drawn on the
revolving credit facility at January 2, 2010. At January 3, 2009, $59,500 was outstanding under
the revolving credit agreement, which the Company considered short-term in nature.
The Company had commercial letters of credit outstanding of $450 and $2,466 at January 2, 2010 and
January 3, 2009, respectively.
Interest costs of $158 in 2009, $227 in 2008 and $237 in 2007 were capitalized in connection with
various capital improvement and computer hardware and software installation projects.
A-10
Table of Contents
4. Leases
The Company leases machinery, equipment, and certain warehouse, office and retail store space under
operating lease agreements that expire at various dates through 2023. Certain leases contain
renewal provisions and generally require the Company to pay utilities, insurance, taxes and other
operating expenses. At January 2, 2010, minimum rental payments due under all non-cancelable
leases were as follows:
| 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||||||
|
Minimum rental payments
|
$ | 16,107 | $ | 14,241 | $ | 11,852 | $ | 10,715 | $ | 9,794 | $ | 52,168 | ||||||||||||
Rental expense under all operating leases, consisting primarily of minimum rentals, totaled $19,187
in 2009, $18,255 in 2008 and $14,681 in 2007.
5. Capital Stock
The Company has 2,000,000 authorized shares of $1 par value preferred stock, of which none was
issued or outstanding as of January 2, 2010 or January 3, 2009. The Company has designated 150,000
shares of preferred stock as Series A junior participating preferred stock and 500,000 shares of
preferred stock as Series B junior participating preferred stock for possible future issuance.
As of January 2, 2010, the Company had stock options outstanding or available for grant under stock
incentive plans adopted in 1993, 1995, 1997, 1999, 2001, 2003 and 2005. Shares of restricted stock
may also be granted under each of these plans, with the exception of the 1993, 1995 and 1997 plans.
As of January 2, 2010, the Company had approximately 1,712,056 stock incentive units (stock
options, stock appreciation rights, restricted stock, restricted stock units and common stock)
available for issuance under the Stock Incentive Plan of 2005. Under the provisions of the Stock
Incentive Plan of 2005, each option granted counts as one stock incentive unit and all other awards
granted, including restricted stock, counts as two stock incentive units. In addition, as of
January 2, 2010, the Company had approximately 255,238 stock incentive units (stock options,
restricted stock and common stock) available for grant under the balance of its other plans.
Options granted under each plan have an exercise price equal to the fair market value of the
underlying stock on the grant date, expire no later than ten years from the grant date, and
generally vest over three years. Restricted stock issued under these plans is subject to certain
restrictions, including a prohibition against any sale, transfer, or other disposition by the
officer or employee during the vesting period (except for certain transfers for estate planning
purposes for certain officers), and a requirement to forfeit all or a certain portion of the award
upon certain terminations of employment or upon failure to achieve performance criteria in certain
instances. These restrictions typically lapse over a three- to five-year period from the date of
the award. The Company has elected to recognize expense for these stock-based incentive plans
ratably over the vesting term on a straight-line basis. Certain option and restricted share awards
provide for accelerated vesting under various scenarios, including retirement and upon a change in
control of the Company. With regard to acceleration of vesting upon retirement, employees of
eligible retirement age are vested in accordance with plan provisions and applicable stock option
and restricted stock agreements. The Company issues shares to plan participants upon exercise or
vesting of stock-based incentive awards from either authorized, but unissued, shares or treasury
shares.
A-11
Table of Contents
A summary of the transactions under the stock option plans is as follows:
| Average | ||||||||||||||||
| Weighted- | Remaining | |||||||||||||||
| Shares | Average | Contractual | Aggregate | |||||||||||||
| Under | Exercise | Term | Intrinsic | |||||||||||||
| Option | Price | (Years) | Value | |||||||||||||
|
Outstanding at December 30, 2006
|
4,574,945 | $ | 16.53 | 5.6 | $ | 54,873,000 | ||||||||||
|
Granted
|
623,577 | 30.16 | ||||||||||||||
|
Exercised
|
(551,020 | ) | 14.67 | |||||||||||||
|
Cancelled
|
(59,257 | ) | 27.73 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding at December 29, 2007
|
4,588,245 | $ | 18.46 | 5.4 | $ | 31,096,000 | ||||||||||
|
Granted
|
845,843 | 25.21 | ||||||||||||||
|
Exercised
|
(713,048 | ) | 15.46 | |||||||||||||
|
Cancelled
|
(148,656 | ) | 25.36 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding at January 3, 2009
|
4,572,384 | $ | 19.95 | 5.6 | $ | 16,155,438 | ||||||||||
|
Granted
|
863,017 | 17.55 | ||||||||||||||
|
Exercised
|
(582,318 | ) | 13.56 | |||||||||||||
|
Cancelled
|
(233,737 | ) | 20.91 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding at January 2, 2010
|
4,619,346 | $ | 20.17 | 5.8 | $ | 34,212,280 | ||||||||||
|
Estimated forfeitures
|
(6,389 | ) | ||||||||||||||
|
|
||||||||||||||||
|
Vested or expected to vest at
January 2, 2010
|
4,612,957 | $ | 20.17 | 5.8 | $ | 34,159,759 | ||||||||||
|
Nonvested at January 2, 2010
and expected to vest
|
(1,238,396 | ) | ||||||||||||||
|
|
||||||||||||||||
|
Exercisable at January 2, 2010
|
3,374,561 | $ | 19.75 | 4.8 | $ | 26,437,862 | ||||||||||
|
|
||||||||||||||||
The total pretax intrinsic value of options exercised during the year ended January 2, 2010 was
$5,745. As of January 2, 2010, there was $2,329 of unrecognized compensation cost related to stock
option awards that is expected to be recognized over a weighted-average period of 1.2 years.
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value,
based on the Company’s closing stock price of $27.22 as of December 31, 2009, which would have been
received by the option holders had all option holders exercised in-the-money options as of that
date. The total number of in-the-money options exercisable as of January 2, 2010 was 2,921,804.
As of January 3, 2009, 3,467,874 outstanding options were exercisable, and the weighted-average
exercise price was $17.75.
A summary of the nonvested restricted shares issued under stock award plans is as follows:
| Weighted- | ||||||||
| Average | ||||||||
| Grant Date | ||||||||
| Shares | Fair Value | |||||||
|
Nonvested at December 30, 2006
|
775,810 | $ | 17.09 | |||||
|
Granted
|
146,950 | 30.17 | ||||||
|
Vested
|
(335,695 | ) | 14.81 | |||||
|
Forfeited
|
(13,684 | ) | 27.64 | |||||
|
|
||||||||
|
Nonvested at December 29, 2007
|
573,381 | $ | 21.52 | |||||
|
Granted
|
179,755 | 24.85 | ||||||
|
Vested
|
(234,581 | ) | 18.36 | |||||
|
Forfeited
|
(46,063 | ) | 24.08 | |||||
|
|
||||||||
|
Nonvested at January 3, 2009
|
472,492 | $ | 24.11 | |||||
|
Granted
|
636,659 | 17.28 | ||||||
|
Vested
|
(145,797 | ) | 20.31 | |||||
|
Forfeited
|
(58,979 | ) | 20.45 | |||||
|
|
||||||||
|
Nonvested at January 2, 2010
|
904,375 | $ | 20.14 | |||||
|
|
||||||||
A-12
Table of Contents
As of January 2, 2010, there was $4,792 of unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under restricted stock award plans. That cost is
expected to be recognized over a weighted-average period of 2 years. The total fair value of
shares vested during the year ended January 2, 2010 was $2,761.
6. Retirement Plans
The Company has non-contributory, defined benefit pension plans covering a majority of its domestic
employees. The Company’s principal defined benefit pension plan provides benefits based on the
employee’s years of service and final average earnings (as defined in the plan), while the other
plan provides benefits at a fixed rate per year of service.
The Company has a Supplemental Executive Retirement Plan (the “SERP”) for certain current and
former employees that entitles a participating employee to receive payments from the Company
following retirement based on the employee’s years of service and final average earnings (as
defined in the SERP). Under the SERP, the employees can elect early retirement with a
corresponding reduction in benefits. The Company also has individual deferred compensation
agreements with certain former employees that entitle them to receive payments from the Company for
a period of fifteen to eighteen years following retirement. The Company maintains life insurance
policies with a cash surrender value of $35,405 at January 2, 2010 and $35,531 at January 3, 2009
that are intended to fund deferred compensation benefits under the SERP and deferred compensation
agreements.
The Company has a defined contribution 401(k) plan covering substantially all domestic employees
that provides for Company contributions based on earnings. The Company recognized expense for its
defined contribution plan of $1,919 in 2009, $2,245 in 2008 and $2,078 in 2007.
The Company has certain defined contribution plans at foreign subsidiaries. Contributions to these
plans were $954 in 2009, $1,194 in 2008 and $1,327 in 2007. The Company also has a defined benefit
plan at a foreign location that provides for retirement benefits based on years of service. The
obligation recorded under this plan was $2,778 at January 2, 2010 and $2,620 at January 3, 2009
which is recognized as a deferred compensation liability on the accompanying balance sheet.
Effective in 2007, the Company adopted the measurement date provisions of FASB ASC Topic 715,
Compensation – Retirement Benefits,
requiring the measurement date of the defined benefit pension
plans to correspond with the Company’s fiscal year end (the previous measurement date was September
30). As a result, the Company recognized a reduction of $1,642 in retained earnings and a
reduction in accumulated other comprehensive income (loss) of $6,338.
A-13
Table of Contents
The following summarizes the status of and changes in the Company’s pension assets and related
obligations for its pension plans (which include the Company’s defined benefit pension plans and
the SERP) as of:
| 2009 | 2008 | |||||||
|
|
||||||||
|
Change in projected benefit obligations:
|
||||||||
|
Projected benefit obligations at beginning of the year
|
$ | 174,970 | $ | 175,091 | ||||
|
Service cost pertaining to benefits earned during the year
|
4,543 | 4,859 | ||||||
|
Interest cost on projected benefit obligations
|
12,232 | 11,413 | ||||||
|
Actuarial (gains) losses
|
30,521 | (5,309 | ) | |||||
|
Plan amendment
|
— | 220 | ||||||
|
Special termination benefits
|
139 | — | ||||||
|
Benefits paid to plan participants
|
(10,735 | ) | (11,304 | ) | ||||
|
|
||||||||
|
Projected benefit obligations at end of the year
|
$ | 211,670 | $ | 174,970 | ||||
|
|
||||||||
|
|
||||||||
|
Change in fair value of pension assets:
|
||||||||
|
Fair value of pension assets at beginning of the year
|
$ | 112,049 | $ | 167,159 | ||||
|
Actual return (loss) on plan assets
|
19,464 | (48,879 | ) | |||||
|
Company contributions
|
4,714 | 5,073 | ||||||
|
Benefits paid to plan participants
|
(10,735 | ) | (11,304 | ) | ||||
|
|
||||||||
|
Fair value of pension assets at end of the year
|
$ | 125,492 | $ | 112,049 | ||||
|
|
||||||||
|
|
||||||||
|
Funded status
|
$ | (86,178 | ) | $ | (62,921 | ) | ||
|
|
||||||||
|
|
||||||||
|
Amounts recognized in the consolidated balance sheets:
|
||||||||
|
Current liabilities
|
$ | (2,044 | ) | $ | (28,144 | ) | ||
|
Non current liabilities
|
(84,134 | ) | (34,777 | ) | ||||
|
|
||||||||
|
Net amount recognized
|
$ | (86,178 | ) | $ | (62,921 | ) | ||
|
|
||||||||
|
|
||||||||
|
Amounts recognized in accumulated other comprehensive income (loss),
net of tax:
|
||||||||
|
Unrecognized net actuarial loss
|
$ | (53,165 | ) | $ | (44,707 | ) | ||
|
Unrecognized prior service cost
|
(572 | ) | (1,178 | ) | ||||
|
|
||||||||
|
Net amount recognized
|
$ | (53,737 | ) | $ | (45,885 | ) | ||
|
|
||||||||
|
|
||||||||
|
Funded status of pension plans and SERP (supplemental):
|
||||||||
|
Funded status of qualified defined benefit plans and SERP
|
$ | (86,178 | ) | $ | (62,921 | ) | ||
|
Nonqualified trust assets (cash surrender value of life insurance) recorded
in other assets and intended to satisfy the projected benefit obligation
of unfunded supplemental employee retirement plans
|
33,731 | 33,633 | ||||||
|
|
||||||||
|
Net funded status of pension plans and SERP (supplemental)
|
$ | (52,447 | ) | $ | (29,288 | ) | ||
|
|
||||||||
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
| 2009 | 2008 | |||||||
|
Projected benefit obligations
|
$ | 211,670 | $ | 174,970 | ||||
|
Accumulated benefit obligations
|
202,428 | 165,432 | ||||||
|
Fair value of plan assets
|
125,492 | 112,049 | ||||||
The accumulated benefit obligations for all defined benefit pension plans and the SERP were
$202,428 at January 2, 2010 and $165,432 at January 3, 2009.
A-14
Table of Contents
The following is a summary of net pension and SERP cost recognized by the Company:
| 2009 | 2008 | 2007 | ||||||||||
|
Service cost pertaining to benefits earned during the year
|
$ | (4,543 | ) | $ | (4,859 | ) | $ | (4,849 | ) | |||
|
Interest cost on projected benefit obligations
|
(12,233 | ) | (11,413 | ) | (11,011 | ) | ||||||
|
Expected return on pension assets
|
10,911 | 13,914 | 14,024 | |||||||||
|
Net amortization loss
|
(9,275 | ) | (3,967 | ) | (5,569 | ) | ||||||
|
Curtailment (gain)
|
(612 | ) | — | — | ||||||||
|
Special termination benefit charge
|
(139 | ) | — | — | ||||||||
|
|
||||||||||||
|
Net pension cost
|
$ | (15,891 | ) | $ | (6,325 | ) | $ | (7,405 | ) | |||
|
|
||||||||||||
The prior service cost and actuarial loss included in accumulated other comprehensive income (loss)
and expected to be recognized in net periodic pension cost during 2010 is $258 ($168, net of tax)
and $10,046 ($6,530, net of tax), respectively. Expense for qualified defined benefit pension
plans was $12,871 in 2009, $3,601 in 2008 and $4,707 in 2007.
| 2009 | 2008 | |||||||
|
Weighted-average assumptions used to determine benefit obligations at fiscal year end:
|
||||||||
|
Discount rate
|
6.17 | % | 7.25 | % | ||||
|
Rate of compensation increase
|
3.25 | % | 3.50 | % | ||||
|
|
||||||||
|
Weighted average assumptions used to determine net periodic benefit cost for the years ended:
|
||||||||
|
Discount rate
|
7.25 | % | 6.70 | % | ||||
|
Expected long-term rate of return on plan assets
|
8.50 | % | 8.50 | % | ||||
|
Rate of compensation increase
|
3.50 | % | 3.50 | % | ||||
Unrecognized net actuarial losses exceeding certain corridors are amortized over a five-year
period, unless the minimum amortization method based on average remaining service periods produces
a higher amortization. The Company utilizes a bond matching calculation to determine the discount
rate. A hypothetical bond portfolio is created based on a presumed purchase of bonds with
maturities that match the plan’s expected future cash outflows. The discount rate is the resulting
yield of the hypothetical bond portfolio. The discount rate is used in the calculation of the year
end pension liability and pension expense for the subsequent year.
The long-term rate of return is based on overall market expectations for a balanced portfolio with
an asset mix similar to the Company’s, utilizing historic returns for broad market and fixed income
indices.
| 2009 | 2008 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
|
Weighted average asset allocations at
fiscal year end by asset category are
as follows:
|
||||||||||||||||
|
Equity securities
|
85,026 | 67.8 | % | 73,776 | 65.8 | % | ||||||||||
|
Fixed income investments
|
36,302 | 29.0 | % | 35,585 | 31.8 | % | ||||||||||
|
Cash and money market investments
|
4,164 | 3.2 | % | 2,688 | 2.4 | % | ||||||||||
|
|
||||||||||||||||
|
Fair value of plan assets
|
125,492 | 100.0 | % | 112,049 | 100.0 | % | ||||||||||
|
|
||||||||||||||||
The Company’s investment policy for plan assets uses a blended approach of U.S. and foreign
equities combined with U.S. fixed income investments. Policy guidelines indicate that total
equities should not exceed 80% and fixed income securities should not exceed 50%. Within the
equity and fixed income classifications, the investments are diversified.
In accordance with ASC 820, these assets fall within Level 1 of the fair value hierarchy. Fair
value is determined using quoted prices (unadjusted) in active markets for identical assets.
The Company expects to contribute $10,466 to its qualified defined benefit pension plans and $1,988
to the SERP in 2010.
A-15
Table of Contents
Expected benefit payments for the five years subsequent to 2009 and the sum of the five years
following those are as follows:
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015-2019 | |||||||||||||||||||
|
Expected benefit payments
|
$ | 11,061 | $ | 11,357 | $ | 11,493 | $ | 12,015 | $ | 13,055 | $ | 73,490 | ||||||||||||
7. Income Taxes
Earnings before income taxes consist of the following:
| 2009 | 2008 | 2007 | ||||||||||
|
United States
|
$ | 51,167 | $ | 82,604 | $ | 87,648 | ||||||
|
Foreign
|
34,525 | 57,980 | 50,923 | |||||||||
|
|
||||||||||||
|
|
$ | 85,692 | $ | 140,584 | $ | 138,571 | ||||||
|
|
||||||||||||
The provisions for income taxes consist of the following:
| 2009 | 2008 | 2007 | ||||||||||
|
Current expense:
|
||||||||||||
|
Federal
|
$ | 11,492 | $ | 26,053 | $ | 33,442 | ||||||
|
State
|
1,596 | 483 | 977 | |||||||||
|
Foreign
|
17,547 | 18,270 | 16,926 | |||||||||
|
Deferred credit
|
(6,855 | ) | (43 | ) | (5,660 | ) | ||||||
|
|
||||||||||||
|
|
$ | 23,780 | $ | 44,763 | $ | 45,685 | ||||||
|
|
||||||||||||
A reconciliation of the Company’s total income tax expense and the amount computed by applying the
statutory federal income tax rate of 35% to earnings before income taxes is as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Income taxes at statutory rate
|
$ | 29,992 | $ | 49,204 | $ | 48,500 | ||||||
|
State income taxes, net of federal income tax
|
324 | 375 | 302 | |||||||||
|
Nontaxable earnings of foreign affiliates
|
(2,981 | ) | (1,555 | ) | (2,026 | ) | ||||||
|
Research and development credits
|
(700 | ) | (875 | ) | (877 | ) | ||||||
|
Foreign earnings taxed at rates differing from
the U.S. statutory rate
|
(8,444 | ) | (3,352 | ) | (1,439 | ) | ||||||
|
Tax reserve adjustments
|
4,908 | 244 | 670 | |||||||||
|
Other
|
681 | 722 | 555 | |||||||||
|
|
||||||||||||
|
|
$ | 23,780 | $ | 44,763 | $ | 45,685 | ||||||
|
|
||||||||||||
Significant components of the Company’s deferred income tax assets and liabilities as of the end of
2009 and 2008 are as follows:
| 2009 | 2008 | |||||||
|
Deferred income tax assets:
|
||||||||
|
Accounts receivable and inventory valuation allowances
|
$ | 5,210 | $ | 5,631 | ||||
|
Deferred compensation accruals
|
2,466 | 2,825 | ||||||
|
Accrued pension costs
|
31,584 | 24,231 | ||||||
|
Net operating loss carryforwards
|
1,026 | 646 | ||||||
|
Other amounts not deductible until paid
|
14,246 | 7,153 | ||||||
|
|
||||||||
|
Total gross deferred income tax assets
|
54,532 | 40,486 | ||||||
|
Less valuation allowance
|
(1,026 | ) | (646 | ) | ||||
|
|
||||||||
|
Net deferred income tax assets
|
53,506 | 39,840 | ||||||
|
|
||||||||
|
Deferred income tax liabilities:
|
||||||||
|
Tax depreciation in excess of book depreciation
|
(4,107 | ) | (4,484 | ) | ||||
|
Prepaid pension costs
|
(994 | ) | (2,173 | ) | ||||
|
Other
|
(836 | ) | (1,742 | ) | ||||
|
|
||||||||
|
Total deferred income tax liabilities
|
(5,937 | ) | (8,399 | ) | ||||
|
|
||||||||
|
Net deferred income tax assets
|
$ | 47,569 | $ | 31,441 | ||||
|
|
||||||||
A-16
Table of Contents
The valuation allowance for deferred tax assets as of January 2, 2010, and January 3, 2009, was
$1,026 and $646, respectively. The net change in the total valuation allowance for each of the
years ended January 2, 2010, and January 3, 2009, was $380 and $646, respectively. The valuation
allowance was related to foreign net operating loss carryforwards that, in the judgment of
management, are not more likely than not to be realized. The ultimate realization of the net
operating loss carryforwards depends on the generation of future taxable income in the foreign tax
jurisdictions.
At January 2, 2010, the Company has foreign net operating loss carryforwards of $3,634, which are
available for an unlimited carryforward period to offset future foreign taxable income.
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
| 2009 | 2008 | 2007 | ||||||||||
|
Beginning balance
|
$ | 3,171 | $ | 2,927 | $ | 2,415 | ||||||
|
Increases related to current year tax positions
|
5,225 | 244 | 1,001 | |||||||||
|
Release due to settlements of audits
|
— | — | (489 | ) | ||||||||
|
|
||||||||||||
|
Ending balance
|
$ | 8,396 | $ | 3,171 | $ | 2,927 | ||||||
|
|
||||||||||||
The Company had unrecognized tax benefits of $7,588 as of January 2, 2010, $2,646 as of January 3,
2009 and $2,382 as of December 29, 2007, that if recognized currently would reduce the annual
effective tax rate. The Company recognizes interest and penalties related to unrecognized tax
benefits through interest expense and income tax expense, respectively. Interest accrued related
to unrecognized tax benefits was $681 as of January 2, 2010, $553 as of January 3, 2009 and $282 as
of December 29, 2007.
The Company is subject to periodic audits by domestic and foreign tax authorities. Currently, the
Company is undergoing routine periodic audits in both domestic and foreign 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 financial statements.
For the majority of tax jurisdictions, 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 2005.
No provision has been made for U.S. federal and state income taxes or foreign taxes that may result
from future remittances of the remaining undistributed earnings of foreign subsidiaries of $163,664
at January 2, 2010, as the Company expects such earnings will remain invested overseas
indefinitely. At January 3, 2009, undistributed foreign earnings were $169,600.
8. Litigation and Contingencies
The Company is involved in various environmental claims and other legal actions arising in the
normal course of business. The environmental claims include sites where the U.S. Environmental
Protection Agency has notified the Company that it is a potentially responsible party with respect
to environmental remediation. These remediation claims are subject to ongoing environmental impact
studies, assessment of remediation alternatives, allocation of costs between responsible parties
and concurrence by regulatory authorities and have not yet advanced to a stage where the Company’s
liability is fixed. However, after taking into consideration legal counsel’s evaluation of all
actions and claims against the Company, management is currently of the opinion that their outcome
will not have a material adverse effect on the Company’s consolidated financial position, results
of operations or cash flows.
The Company is involved in routine litigation incidental to its business and is a party to legal
actions and claims, including, but not limited to, those related to employment and intellectual
property. 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 and liabilities that have been
recorded along with applicable insurance, it is currently the opinion of the Company’s management
that these items will not have a material adverse effect on the Company’s financial position,
results of operations or cash flows.
Pursuant to certain of the Company’s lease agreements, the Company has provided financial
guarantees to third parties in the form of indemnification provisions. These provisions require
the Company to indemnify and reimburse the third parties for costs, including but not limited to
adverse judgments in lawsuits, taxes and operating
costs. The terms of the guarantees are equal to the terms of the related lease agreements. The
Company is not able to calculate the maximum potential amount of future payments it could be
required to make under these guarantees, as the potential payment is dependent upon the occurrence
of future unknown events.
A-17
Table of Contents
The Company has future minimum royalty and advertising obligations due under the terms of certain
licenses held by the Company. These minimum future obligations are as follows:
| 2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||
|
Minimum royalties
|
$ | 1,544 | $ | 1,772 | $ | 970 | $ | 999 | $ | 1,029 | ||||||||||
|
Minimum advertising
|
2,208 | 2,275 | 2,343 | 2,413 | 2,486 | |||||||||||||||
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 $2,861, $3,198 and
$3,456 for 2009, 2008 and 2007, respectively.
The terms of certain license agreements also require the Company to make advertising expenditures
based on the level of sales. In accordance with these agreements, the Company incurred advertising
expense of $2,682, $3,018 and $3,508 for 2009, 2008 and 2007, respectively.
9. Business Segments
The Company has one reportable segment that is engaged in manufacturing, sourcing, marketing,
licensing, and distributing branded footwear, apparel and accessories to the retail sector.
Revenue earned by operation of this segment is derived from the sale of branded footwear and
apparel to external customers as well as royalty income from the licensing of the Company’s
trademarks and brand names to licensees and distributors. The operating segments aggregated into
the branded footwear, apparel and licensing segment manufacture or source, market and distribute
products in a similar manner. Branded footwear, apparel and licensed products are distributed
through wholesale channels and under licensing and distributor arrangements.
The other business units in the following tables consist of the Company’s retail, leather and
pigskin procurement operations. These other operations do not collectively form a reportable
segment because their respective operations are dissimilar and they do not meet the quantitative
requirements. The Company operated 83 retail stores in North America, 5 retail stores in the
United Kingdom and 23 consumer-direct internet sites at January 2, 2010 that sell Company-branded
products, as well as footwear, apparel and accessory brands owned by unaffiliated companies. The
other business units distribute products through retail and wholesale channels.
The Company measures segment profits as earnings before income taxes. The accounting policies used
to determine profitability and total assets of the branded footwear, apparel and licensing segment
and other business units are the same as disclosed in
Note 1.
Business segment information is as follows:
| 2009 | ||||||||||||||||
| Branded | ||||||||||||||||
| Footwear, | ||||||||||||||||
| Apparel | Other | |||||||||||||||
| and Licensing | Businesses | Corporate | Consolidated | |||||||||||||
|
Revenue
|
$ | 991,168 | $ | 109,888 | $ | — | $ | 1,101,056 | ||||||||
|
Intersegment sales
|
55,983 | 3,019 | — | 59,002 | ||||||||||||
|
Interest (income) expense – net
|
8,893 | 1,159 | (9,941 | ) | 111 | |||||||||||
|
Depreciation expense
|
6,501 | 3,035 | 6,396 | 15,932 | ||||||||||||
|
Earnings (loss) before income taxes
|
116,568 | (8,092 | ) | (22,784 | ) | 85,692 | ||||||||||
|
Total assets
|
499,091 | 34,036 | 174,806 | 707,933 | ||||||||||||
|
Additions to property, plant and equipment
|
3,240 | 3,712 | 4,718 | 11,670 | ||||||||||||
A-18
Table of Contents
| 2008 | ||||||||||||||||
| Branded | ||||||||||||||||
| Footwear, | ||||||||||||||||
| Apparel | Other | |||||||||||||||
| and Licensing | Businesses | Corporate | Consolidated | |||||||||||||
|
Revenue
|
$ | 1,106,081 | $ | 114,487 | $ | — | $ | 1,220,568 | ||||||||
|
Intersegment sales
|
47,386 | 3,542 | — | 50,928 | ||||||||||||
|
Interest (income) expense – net
|
9,650 | 1,102 | (9,659 | ) | 1,093 | |||||||||||
|
Depreciation expense
|
6,823 | 3,768 | 7,869 | 18,460 | ||||||||||||
|
Earnings (loss) before income taxes
|
158,615 | 3,294 | (21,325 | ) | 140,584 | |||||||||||
|
Total assets
|
483,041 | 57,049 | 124,690 | 664,780 | ||||||||||||
|
Additions to property, plant and equipment
|
11,443 | 4,654 | 8,029 | 24,126 | ||||||||||||
| 2007 | ||||||||||||||||
| Branded | ||||||||||||||||
| Footwear, | ||||||||||||||||
| Apparel | Other | |||||||||||||||
| and Licensing | Businesses | Corporate | Consolidated | |||||||||||||
|
Revenue
|
$ | 1,099,205 | $ | 99,767 | $ | — | $ | 1,198,972 | ||||||||
|
Intersegment sales
|
45,603 | 2,616 | — | 48,219 | ||||||||||||
|
Interest (income) expense – net
|
9,578 | 1,128 | (11,370 | ) | (664 | ) | ||||||||||
|
Depreciation expense
|
9,660 | 3,621 | 6,942 | 20,223 | ||||||||||||
|
Earnings (loss) before income taxes
|
145,686 | 2,338 | (9,453 | ) | 138,571 | |||||||||||
|
Total assets
|
491,926 | 52,018 | 94,434 | 638,378 | ||||||||||||
|
Additions to property, plant and equipment
|
7,313 | 3,380 | 7,186 | 17,879 | ||||||||||||
Geographic information, based on shipping destination, related to revenue from external customers
included in the consolidated statements of operations is as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
United States
|
$ | 690,269 | $ | 729,826 | $ | 730,654 | ||||||
|
Foreign countries:
|
||||||||||||
|
Europe
|
198,487 | 243,701 | 250,428 | |||||||||
|
Canada
|
89,409 | 90,789 | 86,339 | |||||||||
|
Other
|
122,891 | 156,252 | 131,551 | |||||||||
|
|
||||||||||||
|
Total from foreign countries
|
410,787 | 490,742 | 468,318 | |||||||||
|
|
||||||||||||
|
|
$ | 1,101,056 | $ | 1,220,568 | $ | 1,198,972 | ||||||
|
|
||||||||||||
The Company’s long-lived assets (primarily property, plant and equipment) are as follows:
| 2009 | 2008 | |||||||
|
United States
|
$ | 68,883 | $ | 82,072 | ||||
|
Foreign countries
|
8,815 | 8,454 | ||||||
|
|
||||||||
|
|
$ | 77,698 | $ | 90,526 | ||||
|
|
||||||||
The Company does not believe that it is dependent upon any single customer because no customer
accounts for more than 10% of consolidated revenue.
The Company sources approximately 93% (based on pairs) of its footwear products from unrelated
suppliers located primarily in the Asia-Pacific region. The remainder is produced in Company-owned
manufacturing facilities in the United States and the Dominican Republic. All apparel and
accessories are sourced from unrelated suppliers. While changes in suppliers could cause delays in
manufacturing and a possible loss of sales, management believes that other suppliers could provide
similar products on comparable terms.
Revenue derived from the branded footwear, apparel and licensing segment accounted for
approximately 90% of revenue in 2009, 91% in 2008 and 92% in 2007. No other product groups account
for more than 10% of
consolidated revenue.
A-19
Table of Contents
10. Restructuring and Other Transition Costs
On January 7, 2009, the Board of Directors of the Company approved a strategic restructuring plan
designed to create significant operating efficiencies, improve the Company’s supply chain and
create a stronger global platform. On October 7, 2009, the Company announced that two initiatives
in its restructuring plan had been expanded to enable the consolidation of two domestic
manufacturing facilities into one and to finalize realignment in certain of the Company’s product
creation organizations. The Company incurred restructuring and other transition costs of $35,596
($25,700 on an after-tax basis), or $0.53 per diluted share for the year ended January 2, 2010.
The following is a summary of the restructuring and other transition costs recorded as of January
2, 2010:
| Year Ended | ||||
| January 2, 2010 | ||||
|
Restructuring
|
$ | 29,083 | ||
|
Other transition costs
|
6,513 | |||
|
|
||||
|
Total restructuring and other transition costs
|
$ | 35,596 | ||
|
|
||||
Restructuring
The Company incurred restructuring charges of $29,083 ($20,998 on an after-tax basis) for the year
ended January 2, 2010.
The following is a summary of the activity with respect to a reserve established by the Company in
connection with the restructuring plan, by category of costs:
| Non-cash | ||||||||||||||||||||
| Severance and | charges related | |||||||||||||||||||
| employee | to property and | Facility exit | Other related | |||||||||||||||||
| related | equipment | costs | restructuring | Total | ||||||||||||||||
|
Balance at January 3, 2009
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
Charges incurred
|
15,391 | 7,964 | 2,473 | 3,255 | 29,083 | |||||||||||||||
|
Amounts paid or utilized
|
(11,525 | ) | (7,964 | ) | (988 | ) | (2,680 | ) | (23,157 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Balance at January 2, 2010
|
$ | 3,866 | $ | — | $ | 1,485 | $ | 575 | $ | 5,926 | ||||||||||
|
|
||||||||||||||||||||
Other Transition Costs
Incremental costs incurred related to the restructuring plan that do not qualify as restructuring
under the provisions of FASB ASC Topic 420,
Exit or Disposal Cost Obligations
, have been included
in the Company’s consolidated condensed statements of operations on the line items titled
“Restructuring and other transition costs”. These primarily include costs related to closure of
facilities, new employee training and transition to outsourced services. All costs included in
this caption were solely related to the transition and implementation of the restructuring plan and
do not include ongoing business operating costs. Other transition costs for the year ended January
2, 2010, were $6,513 ($4,702 on an after-tax basis).
11. Business Acquisitions
The Company accounted for the following acquisitions under the provisions of FASB ASC Topic 805,
Business Combinations
.
On January 8, 2009, the Company announced the acquisition of the
Cushe
TM
footwear brand.
The purchase price consisted of $1,615 cash, a $1,615 note payable over three years and contingent
consideration of $918. The Company acquired assets valued at $299, consisting primarily of
property, plant and equipment, inventory, and assumed operating liabilities valued at $317,
resulting in goodwill and intangibles of $4,167 at January 2, 2010. Amounts relating to the
acquisition are subject to changes in foreign currency exchange rates.
On January 22, 2009, the Company acquired the
Chaco
®
footwear brand and certain assets for cash of
$6,910 and assumed operating liabilities valued at $4,662. The Company acquired assets valued at
$3,912, consisting primarily of accounts receivable and inventory. The purchase resulted in
goodwill and intangibles recorded at January 2, 2010 of $7,660.
A-20
Table of Contents
Using the purchase method of accounting, the purchase price in each of these acquisitions is
allocated to the assets acquired and liabilities assumed based on their estimated fair values as of
the effective date of the acquisition. The excess purchase price over the assets and liabilities
is recorded as goodwill. The purchase price allocation for each acquisition was finalized during
the third quarter of 2009 and a final determination of all purchase accounting adjustments was made
upon finalization of asset valuations and acquisition costs. Pro forma results of operations have
not been presented because the effects of these acquisitions, individually and in the aggregate,
were not material to the Company’s consolidated results of operations. Both of the brands have
been consolidated into the Company’s results of operations since their respective acquisition
dates.
12. Quarterly Results of Operations (Unaudited)
The Company reports its quarterly results of operations on the basis of 12-week periods for each of
the first three quarters and a 16- or 17-week period for the fourth quarter. The fourth quarter of
2009 includes 16 weeks and the fourth quarter of 2008 includes 17 weeks. The aggregate quarterly
earnings per share amounts disclosed in the table below may not equal the annual per share amounts
due to rounding and the fact that results for each quarter are calculated independently of the
annual period.
The Company’s unaudited quarterly results of operations are as follows:
| 2009 | ||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
Revenue
|
$ | 255,324 | $ | 246,438 | $ | 286,764 | $ | 312,530 | ||||||||
|
Gross profit
|
102,943 | 92,041 | 113,965 | 122,773 | ||||||||||||
|
Net earnings
|
10,495 | 7,885 | 26,794 | 16,738 | ||||||||||||
|
Net earnings per share:
|
||||||||||||||||
|
Basic
|
$ | 0.21 | $ | 0.16 | $ | 0.54 | $ | 0.34 | ||||||||
|
Diluted
|
0.21 | 0.16 | 0.54 | 0.33 | ||||||||||||
| 2008 | ||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
Revenue
|
$ | 288,238 | $ | 267,362 | $ | 318,852 | $ | 346,116 | ||||||||
|
Gross profit
|
121,561 | 102,399 | 128,730 | 133,331 | ||||||||||||
|
Net earnings
|
23,701 | 16,812 | 31,191 | 24,117 | ||||||||||||
|
Net earnings per share:
|
||||||||||||||||
|
Basic
|
$ | 0.47 | $ | 0.34 | $ | 0.64 | $ | 0.50 | ||||||||
|
Diluted
|
0.46 | 0.33 | 0.62 | 0.49 | ||||||||||||
A-21
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Wolverine World Wide, Inc.
We have audited the accompanying consolidated balance sheets of Wolverine World Wide, Inc. and
subsidiaries as of January 2, 2010 and January 3, 2009, and the related consolidated statements of
stockholders’ equity and comprehensive income, operations, and cash flows for each of the three
fiscal years in the period ended January 2, 2010. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Wolverine World Wide, Inc. and subsidiaries at
January 2, 2010 and January 3, 2009, and the consolidated results of their operations and their
cash flows for each of the three fiscal years in the period ended January 2, 2010, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Wolverine World Wide, Inc.’s internal control over financial reporting as of
January 2, 2010, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3,
2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Grand Rapids, Michigan
March 3, 2010
March 3, 2010
A-22
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Wolverine World Wide, Inc.
We have audited Wolverine World Wide, Inc.’s internal control over financial reporting as of
January 2, 2010, based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Wolverine
World Wide, Inc.’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Wolverine World Wide, Inc. maintained, in all material respects, effective internal
control over financial reporting as of January 2, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Wolverine World Wide, Inc. and
subsidiaries as of January 2, 2010 and January 3, 2009, and the related consolidated statements of
stockholders’ equity and comprehensive income, operations, and cash flows for each of the three
fiscal years in the period ended January 2, 2010 of Wolverine World Wide, Inc. and our report dated
March 3, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Grand Rapids, Michigan
March 3, 2010
March 3, 2010
A-23
Table of Contents
APPENDIX B
Schedule II — Valuation and Qualifying Accounts
Wolverine World Wide, Inc. and Subsidiaries
| Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
| Additions | ||||||||||||||||||||
| (2) | ||||||||||||||||||||
| (1) | Charged to | |||||||||||||||||||
| Balance at | Charged to | Other | Balance at | |||||||||||||||||
| Beginning of | Costs and | Accounts | Deductions | End of | ||||||||||||||||
| Description | Period | Expenses | (Describe) | (Describe) | Period | |||||||||||||||
|
|
||||||||||||||||||||
|
Fiscal year ended January 2, 2010
|
||||||||||||||||||||
|
Deducted from asset accounts:
|
||||||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 8,383,000 | $ | 1,733,000 | $ | 1,979,000 | (A) | $ | 8,137,000 | |||||||||||
|
Allowance for sales returns
|
5,311,000 | 28,386,000 | 29,048,000 | (B) | 4,649,000 | |||||||||||||||
|
Allowance for cash discounts
|
1,467,000 | 11,717,000 | 12,024,000 | (C) | 1,160,000 | |||||||||||||||
|
Inventory valuation allowances
|
8,912,000 | 6,419,000 | 8,981,000 | (D) | 6,350,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 24,073,000 | $ | 48,255,000 | $ | 52,032,000 | $ | 20,296,000 | ||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Fiscal year ended January 3, 2009
|
||||||||||||||||||||
|
Deducted from asset accounts:
|
||||||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 6,866,000 | $ | 2,266,000 | $ | 749,000 | (A) | $ | 8,383,000 | |||||||||||
|
Allowance for sales returns
|
5,269,000 | 31,994,000 | 31,952,000 | (B) | 5,311,000 | |||||||||||||||
|
Allowance for cash discounts
|
1,508,000 | 14,602,000 | 14,643,000 | (C) | 1,467,000 | |||||||||||||||
|
Inventory valuation allowances
|
14,902,000 | 9,806,000 | 15,796,000 | (D) | 8,912,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 28,545,000 | $ | 58,668,000 | $ | 63,140,000 | $ | 24,073,000 | ||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Fiscal year ended December 29, 2007
|
||||||||||||||||||||
|
Deducted from asset accounts:
|
||||||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 6,324,000 | $ | 2,169,000 | $ | 1,627,000 | (A) | $ | 6,866,000 | |||||||||||
|
Allowance for sales returns
|
5,322,000 | 30,363,000 | 30,416,000 | (B) | 5,269,000 | |||||||||||||||
|
Allowance for cash discounts
|
1,674,000 | 14,955,000 | 15,121,000 | (C) | 1,508,000 | |||||||||||||||
|
Inventory valuation allowances
|
10,458,000 | 6,831,000 | 2,387,000 | (D) | 14,902,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 23,778,000 | $ | 54,318,000 | $ | 49,551,000 | $ | 28,545,000 | ||||||||||||
|
|
||||||||||||||||||||
| (A) |
Accounts charged off, net of recoveries.
|
|
| (B) |
Actual customer returns.
|
|
| (C) |
Discounts given to customers.
|
|
| (D) |
Adjustment upon disposal of related inventories.
|
Table of Contents
EXHIBIT INDEX
| Exhibit | ||||
| Number | Document | |||
|
|
||||
| 3.1 |
Restated Certificate of Incorporation. Previously filed as
Exhibit 3.1 to the Company’s Annual Report on Form 10-K for
the period ended December 30, 2006. Here incorporated by
reference.
|
|||
|
|
||||
| 3.2 |
Amended and Restated By-laws. Previously filed as Exhibit
3.1 to the Company’s Current Report on
Form 8-K
filed on
October 15, 2008. Here incorporated by reference.
|
|||
|
|
||||
| 4.1 |
The Registrant has other long-term debt instruments
outstanding in addition to those described in Exhibit 4.2.
The authorized amount of none of these classes of debt
exceeds 10% of the Company’s total consolidated assets.
The Company agrees to furnish copies of any agreement
defining the rights of holders of any such long-term
indebtedness to the Securities and Exchange Commission upon
request.
|
|||
|
|
||||
| 4.2 |
Credit Agreement dated as of July 22, 2005, among Wolverine
World Wide, Inc. and certain of its subsidiaries, JPMorgan
Chase Bank, N.A., as Administrative Agent, Harris, N.A., as
Syndication Agent, Comerica Bank, Standard Federal Bank
N.A. and National City Bank of the Midwest, as
Documentation Agents, and certain other Banks that are
parties to the Credit Agreement. Previously filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on July 28, 2005. Here incorporated by reference.
|
|||
|
|
||||
| 10.1 |
1993 Stock Incentive Plan, as amended and restated.*
Previously filed as Exhibit 10.1 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 3,
2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.2 |
Amended and Restated 1995 Stock Incentive Plan.* Previously
filed as Exhibit 10.2 to the Company’s Annual Report on
Form 10-K for the fiscal year ended January 3, 2009. Here
incorporated by reference.
|
|||
|
|
||||
| 10.3 |
Amended and Restated 1997 Stock Incentive Plan.* Previously
filed as Exhibit 10.3 to the Company’s Annual Report on
Form 10-K for the fiscal year ended January 3, 2009. Here
incorporated by reference.
|
|||
|
|
||||
| 10.4 |
Amended and Restated Stock Incentive Plan of 1999.*
Previously filed as Exhibit 10.4 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 3,
2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.5 |
Amended and Restated Stock Incentive Plan of 2001.*
Previously filed as Exhibit 10.5 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 3,
2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.6 |
Amended and Restated Stock Incentive Plan of 2003.*
Previously filed as Exhibit 10.6 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 3,
2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.7 |
Amended and Restated Stock Incentive Plan of 2005.*
Previously filed as Exhibit 10.7 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 3,
2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.8 |
Amended and Restated Directors’ Stock Option Plan.*
Previously filed as Exhibit 10.8 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 3,
2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.9 |
Amended and Restated Outside Directors’ Deferred
Compensation Plan.* Previously filed as Exhibit 10.9 to the
Company’s Annual Report on Form 10-K for the fiscal year
ended December 29, 2007. Here incorporated by reference.
|
|||
|
|
||||
| 10.10 |
Amended and Restated Executive Short-Term Incentive Plan
(Annual Bonus Plan).* Previously filed as Exhibit 10.10 to
the Company’s Annual Report on Form 10-K for the fiscal
year ended January 3, 2009. Here incorporated by
reference.
|
|||
|
|
||||
i
Table of Contents
| Exhibit | ||||
| Number | Document | |||
|
|
||||
| 10.11 |
Amended and Restated Executive Long-Term Incentive Plan
(3-Year Bonus Plan).* Previously filed as Exhibit 10.11 to
the Company’s Annual Report on Form 10-K for the fiscal
year ended January 3, 2009. Here incorporated by
reference.
|
|||
|
|
||||
| 10.12 |
Amended and Restated Stock Option Loan Program.* Previously
filed as Exhibit 10.12 to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 29, 2007.
Here incorporated by reference.
|
|||
|
|
||||
| 10.13 |
Executive Severance Agreement.* Previously filed as Exhibit
10.3 to the Company’s Current Report on Form 8-K filed on
December 17, 2008. Here incorporated by reference. A
participant schedule of current executive officers who are
parties to the agreement is attached as Exhibit 10.13.
|
|||
|
|
||||
| 10.14 |
Form of Indemnification Agreement.* The Company has entered
into an Indemnification Agreement with each director and
with Messrs. Grady, Grimes, Krueger, McBreen and Zwiers
and Ms. Linton. Previously filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on April 25,
2007. Here incorporated by reference.
|
|||
|
|
||||
| 10.15 |
Amended and Restated Benefit Trust Agreement dated April
25, 2007.* Previously filed as Exhibit 10.5 to the
Company’s Current Report on Form 8-K filed on April 25,
2007. Here incorporated by reference.
|
|||
|
|
||||
| 10.16 |
Employees’ Pension Plan (Restated as amended through
November 30, 2007).* Previously filed as Exhibit 10.17 to
the Company’s Annual Report on Form 10-K for the fiscal
year ended December 29, 2007. Here incorporated by
reference.
|
|||
|
|
||||
| 10.17 |
Form of Incentive Stock Option Agreement.* Previously filed
as Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated February 9, 2005. Here incorporated by reference.
|
|||
|
|
||||
| 10.18 |
Form of Non-Qualified Stock Option Agreement for Blake W.
Krueger and Timothy J. O’Donovan.* Previously filed as
Exhibit 10.2 to the Company’s Current Report on Form 8-K
dated February 9, 2005. Here incorporated by reference.
|
|||
|
|
||||
| 10.19 |
Form of Non-Qualified Stock Option Agreement for executive
officers other than those to whom Exhibit 10.18 applies.*
Previously filed as Exhibit 10.3 to the Company’s Current
Report on Form 8-K dated February 9, 2005. Here
incorporated by reference.
|
|||
|
|
||||
| 10.20 |
Form of Restricted Stock Agreement.* Previously filed as
Exhibit 10.4 to the Company’s Current Report on Form 8-K
dated February 9, 2005. Here incorporated by reference.
|
|||
|
|
||||
| 10.21 |
Form of Incentive Stock Option Agreement.* Previously filed
as Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated February 15, 2006. Here incorporated by reference.
|
|||
|
|
||||
| 10.22 |
Form of Non-Qualified Stock Option Agreement Blake W.
Krueger and Timothy J. O’Donovan.* Previously filed as
Exhibit 10.2 to the Company’s Current Report of Form 8-K
dated February 15, 2006. Here incorporated by reference.
|
|||
|
|
||||
| 10.23 |
Form of Non-Qualified Stock Option Agreement for executive
officers other than those to whom Exhibit 10.22 applies.*
Previously filed as Exhibit 10.3 to the Company’s Current
Report on Form 8-K dated February 15, 2006. Here
incorporated by reference.
|
|||
|
|
||||
| 10.24 |
Form of Restricted Stock Agreement.* Previously filed as
Exhibit 10.4 to the Company’s Current Report on Form 8-K
dated February 15, 2006. Here incorporated by reference.
|
|||
|
|
||||
| 10.25 |
Form of Stock Option Agreement for non-employee directors.*
Previously filed as Exhibit 10.23 to the Company’s Annual
Report on Form 10-K for the fiscal year ended January 1,
2005. Here incorporated by reference.
|
|||
|
|
||||
| 10.26 |
2009 Form of Non-Qualified Stock Option Agreement for
Donald T. Grimes, Blake W. Krueger, Pamela L. Linton,
Michael F. McBreen and James D. Zwiers.* Previously filed
as Exhibit 10.26 to the Company’s Annual Report on Form
10-K for the fiscal year ended January 3, 2009. Here
incorporated by reference.
|
|||
ii
Table of Contents
| Exhibit | ||||
| Number | Document | |||
|
|
||||
| 10.27 |
2009 Form of Non-Qualified Stock Option Agreement for
executive officers other than those to whom Exhibit 10.26
applies.* Previously filed as Exhibit 10.27 to the
Company’s Annual Report on Form 10-K for the fiscal year
ended January 3, 2009. Here incorporated by reference.
|
|||
|
|
||||
| 10.28 |
Form of Performance Share Award Agreement.* Previously
filed as Exhibit 10.28 to the Company’s Annual Report on
Form 10-K for the fiscal year ended (2009-2011 Performance Period) January 3, 2009. Here
incorporated by reference.
|
|||
|
|
||||
| 10.29 |
Form of Performance Share Award Agreement (2010-2012 Performance Period).*
|
|||
|
|
||||
| 10.30 |
Separation Agreement between Wolverine World Wide, Inc. and
Blake W. Krueger, dated as of March 13, 2008, as amended.*
Previously filed as Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the period ended March 22, 2008.
Here incorporated by reference.
|
|||
|
|
||||
| 10.31 |
First Amendment to Separation Agreement between Wolverine
World Wide, Inc. and Blake W. Krueger, dated as of
December 11, 2008.* Previously filed as Exhibit 10.30 to
the Company’s Annual Report on Form 10-K for the fiscal
year ended January 3, 2009. Here incorporated by
reference.
|
|||
|
|
||||
| 10.32 |
409A Supplemental Executive Retirement Plan.* Previously
filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on December 17, 2008. Here incorporated by
reference. A participant schedule of current executive
officers who participate in this plan is attached as
Exhibit 10.32.
|
|||
|
|
||||
| 10.33 |
Form of 409A Supplemental Retirement Plan Participation
Agreement with Mr. Krueger.* Previously filed as Exhibit
10.32 to the Company’s Annual Report on Form 10-K for the
fiscal year ended January 3, 2009. Here incorporated by
reference.
|
|||
|
|
||||
| 10.34 |
Outside Directors’ Deferred Compensation Plan.* Previously
filed as Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on December 17, 2008. Here incorporated by
reference.
|
|||
|
|
||||
| 21 |
Subsidiaries of Registrant.
|
|||
|
|
||||
| 23 |
Consent of Ernst & Young LLP.
|
|||
|
|
||||
| 24 |
Powers of Attorney.
|
|||
|
|
||||
| 31.1 |
Certification of Chairman, Chief Executive Officer and
President under Section 302 of the Sarbanes-Oxley Act of
2002.
|
|||
|
|
||||
| 31.2 |
Certification of Senior Vice President, Chief Financial
Officer and Treasurer under Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|||
|
|
||||
| 32 |
Certification pursuant to 18 U.S.C. § 1350.
|
|||
| * |
Management contract or compensatory plan or arrangement.
|
iii
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. (removed and Reserved)Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors and Executive Officers Of The RegistrantItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesItem 15(a)(1). Financial Statements Attached As Appendix AItem 15(a)(1)Item 15(a)(2). Financial Statement Schedules Attached As Appendix BItem 15(a)(2)Item 15(a)(3). ExhibitsItem 15(a)(3)