WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the second twelve week accounting period ended June 19, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 1-6024
WOLVERINE WORLD WIDE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 38-1185150 |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
9341 Courtland Drive, Rockford, Michigan | 49351 |
(Address of Principal Executive Offices) | (Zip Code) |
There were 44,380,590 shares of Common Stock, $1 par value, outstanding as of July 27, 1999, of which 3,120,452 shares are held as Treasury Stock.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Thousands of dollars)
June 19, | January 2, | June 20, | |||
1999 | 1999 | 1998 | |||
(Unaudited) | (Audited) | (Unaudited) | |||
ASSETS | |||||
CURRENT ASSETS | |||||
Cash and cash equivalents | $ 4,340 | $ 6,203 | $ 5,234 | ||
Accounts receivable, less allowances | |||||
June 19, 1999 - $6,543 | |||||
January 2, 1999 - $5,896 | |||||
June 20, 1998 - $8,151 | 147,004 | 152,110 | 133,336 | ||
Inventories: | |||||
Finished products | 139,765 | 113,923 | 130,331 | ||
Raw materials and work in process | 44,309 |
53,116 |
43,040 |
||
184,074 | 167,039 | 173,371 | |||
Other current assets | 11,405 |
15,626 |
10,286 |
||
TOTAL CURRENT ASSETS | 346,823 | 340,978 | 322,227 | ||
PROPERTY, PLANT & EQUIPMENT | |||||
Gross cost | 206,508 | 194,374 | 179,006 | ||
Less accumulated depreciation | 89,482 |
83,239 |
77,940 |
||
117,026 | 111,135 | 101,066 | |||
OTHER ASSETS | 66,449 |
69,365 |
58,625 |
||
TOTAL ASSETS | $530,298 |
$521,478 |
$481,918 |
CONSOLIDATED CONDENSED BALANCE SHEETS - Continued
(Thousands of dollars)
June 19, | January 2, | June 20, | |||
1999 | 1999 | 1998 | |||
(Unaudited) | (Audited) | (Unaudited) | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
CURRENT LIABILITIES | |||||
Notes payable to banks | $ 758 | $ 6,546 | $ 6,441 | ||
Accounts payable and other accrued liabilities | 41,130 | 40,161 | 45,896 | ||
Current maturities of long-term debt | 4,561 |
4,561 |
4,417 |
||
TOTAL CURRENT LIABILITIES | 46,449 | 51,268 | 56,754 | ||
LONG-TERM DEBT (less current maturities) | 171,979 | 157,089 | 116,258 | ||
OTHER NONCURRENT LIABILITIES | 11,617 | 12,801 | 12,029 | ||
STOCKHOLDERS' EQUITY | |||||
Common Stock - par value $1, authorized | |||||
80,000,000 shares; shares issued | |||||
(including shares in treasury): | |||||
June 19, 1999 - 44,298,569 shares | |||||
January 2, 1999 - 43,832,070 shares | |||||
June 20, 1998 - 43,686,126 shares | 44,299 | 43,832 | 43,686 | ||
Additional paid-in capital | 76,603 | 72,825 | 70,202 | ||
Retained earnings | 226,243 | 227,829 | 203,985 | ||
Accumulated other comprehensive income | (1,204) | (1,014) | (100) | ||
Unearned compensation | (7,826) | (5,999) | (6,731) | ||
Cost of shares in treasury: | |||||
June 19, 1999 - 3,120,452 shares | |||||
January 2, 1999 - 3,067,177 shares | |||||
June 20, 1998 - 824,147 shares | (37,862) |
(37,153) |
(14,165) |
||
TOTAL STOCKHOLDERS' EQUITY | 300,253 |
300,320 |
296,877 |
||
TOTAL LIABILITIES AND | |||||
STOCKHOLDERS' EQUITY | $530,298 |
$521,478 |
$481,918 |
See notes to consolidated condensed financial statements.
CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS
(Thousands of dollars, except shares and per share data)
(Unaudited)
12 Weeks Ended |
24 Weeks Ended |
||||||
June 19, | June 20, | June 19, | June 20, | ||||
1999 |
1998 |
1999 |
1998 |
||||
NET SALES AND OTHER | |||||||
OPERATING INCOME | $131,444 | $142,002 | $267,637 | $290,516 | |||
Cost of products sold | 94,964 |
94,270 |
189,289 |
196,887 |
|||
GROSS MARGIN | 36,480 | 47,732 | 78,348 | 93,629 | |||
Selling and administrative expenses | 37,613 |
32,510 |
71,752 |
67,060 |
|||
OPERATING INCOME (LOSS) | (1,133) | 15,222 | 6,596 | 26,569 | |||
OTHER EXPENSES (INCOME): | |||||||
Interest expense | 2,547 | 2,052 | 4,831 | 3,722 | |||
Interest income | (333) | (467) | (451) | (530) | |||
Other - net | 695 |
(131) |
881 |
|
|||
2,909 |
1,454 |
5,261 |
3,192 |
||||
EARNINGS (LOSS) BEFORE | |||||||
INCOME TAXES | (4,042) | 13,768 | 1,335 | 23,377 | |||
Income taxes (credit) | (1,330) |
4,613 |
444 |
7,834 |
|||
NET EARNINGS (LOSS) | $(2,712) |
$9,155 |
$891 |
$15,543 |
|||
EARNINGS (LOSS) PER SHARE: | |||||||
Basic | $(.07) |
$.22 |
$.02 |
$.37 |
|||
Diluted | $(.07) |
$.21 |
$.02 |
$.36 |
|||
CASH DIVIDENDS PER SHARE | $.0300 |
$.0275 |
$.0600 |
$.0550 |
|||
SHARES USED FOR NET EARNINGS | |||||||
(LOSS) PER SHARE COMPUTATION: | |||||||
Basic | 40,228,497 |
42,164,205 |
40,141,118 |
42,052,078 |
|||
Diluted | 41,127,679 |
43,751,263 |
41,333,571 |
43,717,789 |
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
24 Weeks Ended |
|||
June 19, | June 20, | ||
1999 |
1998 |
||
OPERATING ACTIVITIES | |||
Net earnings | $ 891 | $15,543 | |
Depreciation, amortization and other non-cash items | 3,415 | 1,618 | |
Unearned compensation | 1,234 | 1,107 | |
Russian restructuring charge | 14,000 | ||
Changes in operating assets and liabilities: | |||
Accounts receivable | 2,906 | 4,730 | |
Inventories | (23,935) | (29,537) | |
Other current assets | 3,321 | 5,907 | |
Accounts payable and other accrued liabilities | 469 |
(11,331) |
|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 2,301 | (11,963) | |
FINANCING ACTIVITIES | |||
Proceeds from long-term borrowings | 25,000 | 42,765 | |
Payments of long-term borrowings | (10,110) | (16,354) | |
Proceeds from short-term borrowings | 7,285 | ||
Payments of short-term borrowings | (5,788) | (4,095) | |
Cash dividends | (2,477) | (2,357) | |
Proceeds from shares issued under employee stock plans | 475 |
186 |
|
NET CASH PROVIDED BY FINANCING ACTIVITIES | 7,100 | 27,430 | |
INVESTING ACTIVITIES | |||
Additions to property, plant and equipment | (12,134) | (15,628) | |
Other | 870 |
(373) |
|
NET CASH USED IN INVESTING ACTIVITIES | (11,264) |
(16,001) |
|
DECREASE IN CASH AND CASH EQUIVALENTS | (1,863) | (534) | |
Cash and cash equivalents at beginning of the year | 6,203 |
5,768 |
|
CASH AND CASH EQUIVALENTS AT END OF THE | |||
PERIOD | $ 4,340 |
$ 5,234 |
See notes to consolidated condensed financial statements.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 19, 1999 and June 20, 1998
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. Certain amounts previously reported in 1998 have been reclassified to conform with the presentation used in 1999.
NOTE B - Fluctuations
The Company's sales are seasonal, particularly in its major divisions, The Hush Puppies Company, the Wolverine Footwear Group, the Performance Footwear Group, the Wolverine Slipper Group and the Wolverine Leathers Division. Seasonal sales patterns and the fact that the fourth quarter has sixteen or seventeen weeks as compared to twelve weeks in each of the first three quarters cause significant differences in sales and earnings from quarter to quarter. These differences, however, have followed a consistent pattern each year.
NOTE C - Restructuring Charge
As a result of the continued deterioration in Russian economic and political conditions, the Company approved a plan in the second quarter of 1999 to close its Russian wholesale footwear business. In connection with the closure, the Company recorded a non-recurring, non-cash, pre-tax charge to earnings of $14.0 million, of which $6.9 million is reflected in a writedown in cost of goods sold for inventory, $6.6 million is reflected in selling and administrative expenses for goodwill, bad debt, severance, and other restructuring expenses, and $0.5 million is reflected in other expense for the disposal of fixed assets. The $14.0 million restructuring charge resulted in a reduction of net earnings of $0.23 per share after tax for the twenty-four weeks ended June 19, 1999. As of June 19, 1999, $4.4 million has been charged against the restructuring reserve. The Company expects to complete the liquidation and exit the business by the end of 1999.
NOTE D - Earnings Per Share
The following table sets forth the reconciliation of weighted average shares used in the computation of basic and diluted earnings per share:
Quarter Ended |
Year-to-date Ended |
||||||
June 19, | June 20, | June 19, | June 20, | ||||
1999 |
1998 |
1999 |
1998 |
||||
Weighted average shares outstanding | 41,127,679 | 42,839,279 | 40,991,423 | 42,743,458 | |||
Adjustment for nonvested common stock | (899,182) |
(675,074) |
(850,305) |
(691,380) |
|||
Denominator for basic earnings per share | 40,228,497 | 42,164,205 | 40,141,118 | 42,052,078 | |||
Effect of dilutive stock options | 911,984 | 342,148 | 974,331 | ||||
Adjustment for nonvested common stock | 899,182 |
675,074 |
850,305 |
691,380 |
|||
Denominator for diluted earnings per share | 41,127,679 |
43,751,263 |
41,333,571 |
43,717,789 |
NOTE E - Comprehensive Income
Second quarter 1999 total comprehensive income was a loss of $2,803,000 while year-to-date 1999 comprehensive income totaled $701,000. Total comprehensive income was $9,098,000 and $15,511,000, for the second quarter and year-to-date of 1998,
respectively. In addition to net earnings, comprehensive income included foreign currency translation losses of $91,000 and $190,000 for the second quarter and year-to-date of 1999, respectively, and $57,000 and $32,000 for the second quarter and
year-to-date of 1998, respectively.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 19, 1999 and June 20, 1998
The Company has one reportable segment that is engaged in the manufacture and marketing of branded footwear to the retail sector, including casual shoes, slippers, moccasins, dress shoes, boots, uniform shoes and work shoes. Revenues of this segment are derived from the sale of branded footwear products to external customers and the Company's retail division as well as royalty income from the licensing of the Company's trademarks and brand names to licensees. The business units comprising the branded footwear segment manufacture or source, market and distribute products in a similar manner. Branded footwear is distributed through wholesale channels and under licensing and distributor arrangements.
The other business units in the following table consist of the Company's retail, tannery and pigskin procurement operations. The Company operated 56 domestic retail stores at June 19, 1999 that sell Company-manufactured or sourced products and footwear manufactured by unaffiliated companies. The other business units distribute products through retail and wholesale channels.
There have been no changes in the way the Company measures segment profits or in its basis of segmentation since the year ended January 2, 1999.
Business segment information is as follows (in thousands of dollars):
Branded | Other | ||||||
Footwear |
|
Businesses |
|
Corporate |
|
Consolidated |
|
Quarter ended June 19, 1999 |
|||||||
Net sales and other operating income | |||||||
from external customers | $113,609 | $17,835 | $ | $131,444 | |||
Intersegment sales | 545 | 1,421 | 1,966 | ||||
Earnings (loss) before income taxes | (6,097) | 2,481 | $(426) | (4,042) | |||
Year-to-date ended June 19, 1999 |
|||||||
Net sales and other operating income | |||||||
from external customers | $236,027 | $31,610 | $ | $267,637 | |||
Intersegment sales | 6,191 | 2,486 | 8,677 | ||||
Earnings (loss) before income taxes | (1,154) | 2,827 | $(338) | 1,335 | |||
Quarter ended June 20, 1998 |
|||||||
Net sales and other operating income | |||||||
from external customers | $122,777 | $19,225 | $ | $142,002 | |||
Intersegment sales | 3,005 | 2,200 | 5,205 | ||||
Earnings (loss) before income taxes | 12,146 | 2,513 | $(891) | 13,768 | |||
Year-to-date ended June 20, 1998 |
|||||||
Net sales and other operating income | |||||||
from external customers | $256,471 | $34,045 | $ | $290,516 | |||
Intersegment sales | 8,539 | 4,087 | 12,626 | ||||
Earnings before income taxes | 19,754 | 3,384 | $239 | 23,377 |
Results of Operations - Comparisons of Second Quarter 1999 To Second Quarter 1998
Second quarter net sales and other operating income of $131.4 million for 1999 fell below the 1998 level of $142.0 million by $10.6 million (7.4%) and 1999 year-to-date net sales and other operating income of $267.6 million fell below the 1998 year-to-date level of $290.5 million by $22.9 million (7.9%). On a combined basis, net sales and other operating income for the Company's branded footwear businesses, consisting of The Hush Puppies Company, the Wolverine Footwear Group (comprised of Wolverine®, Hy-Test®, Coleman®, Bates® and Harley-Davidson® brands), the Performance Footwear Group (comprised of Caterpillar® Footwear Group and Merrell®), the Wolverine Children's Group, and the Wolverine Slipper Group, decreased $9.2 million (7.5%) for the 1999 second quarter and $20.5 million (8.0%) for the year-to-date. The Company's other business units (Hush Puppies Retail Division and Wolverine Leathers Division) reported a $1.4 million (7.2%) and $2.4 million (7.1%) decline in net sales and other operating income for the second quarter and year-to-date of 1999 compared to 1998, respectively.
Within the Branded Footwear segment, The Hush Puppies Company reported a net sales and other operating income decrease of $6.7 million (19.5%) in the second quarter of 1999 and an $18.4 million (21.7%) decrease for the year-to-date 1999 when compared to the same periods in the prior year. The Wolverine Footwear Group's net sales and other operating income remained flat for the second quarter of 1999 as compared to 1998 and increased $3.4 million (3.1%) for the year-to-date 1999 over the 1998 level. The Performance Footwear Group continued its growth reflecting an increase in net sales and other operating income of $1.8 million (9.2%) for the second quarter of 1999 and $2.2 million (5.3%) for the year-to-date 1999 over the 1998 levels. The Wolverine Children's Group increased net sales and other operating income by $0.9 million (37.0%) for the second quarter and $0.6 million (10.7%) for the year-to-date 1999 as compared to the same periods of 1998. The Wolverine Slipper Group recognized a $0.8 million (55.3%) net sales and other operating income increase for the second quarter of 1999 and a $0.7 million increase (28.5%) for the year-to-date 1999 when compared to the same periods in the prior year.
The Hush Puppies U.S. wholesale operations' 1999 net sales and other operating income decreased $2.3 million (11.3%) from the 1998 second quarter level and decreased $8.2 million (16.8%) from the year-to-date 1998 level. Net sales and other operating income from the Hush Puppies International licensing operation increased $1.0 million (32.8%) and $1.1 million (19.5%) for the second quarter and year-to-date 1999, respectively, over the same periods in 1998, reflecting continued international demand for the brand. The Hush Puppies U.K. wholesale operations' 1999 second quarter net sales and other operating income decreased $4.5 million (55.3%) and year-to-date 1999 net sales and other operating income decreased $10.5 million (46.2%) as compared to the same periods of 1998 as a result of the planned reduction in the specialty store segment of its distribution channel. Net sales and other operating income in the Hush Puppies Canadian wholesale operation decreased $0.9 million (30.5%) and $0.7 million (9.3%) for the second quarter and year-to-date of 1999 as compared to 1998.
The Wolverine Footwear Group's net sales and other operating income remained flat for the second quarter with the Wolverine Boots and Shoes Division reporting a decrease of $0.8 million (2.4%) and an increase of $1.3 million (2.1%) over the 1998 second quarter and year-to-date levels, respectively. Hy-Test Boots and Shoes reported a $1.0 million (14.9%) and $0.9 million (6.2%) decrease in net sales and other operating income for the second quarter and year-to-date of 1999, respectively. This was a result of the sale of two Company-owned mobile retail distribution groups since the second quarter of 1998. Harley-Davidson footwear, which began operations in the third quarter of 1998, contributed $4.6 million and $8.7 million to net sales and other operating income during the second quarter and year-to-date of 1999. Coleman footgear net sales and other operating income decreased $1.9 million and $3.1 million for the second quarter and year-to-date of 1999, respectively. Net sales and other operating income for the Bates footwear division, including shipments to the United States Department of Defense, decreased $1.5 million (11.2%) for second quarter of 1999 and $3.2 million (12.2%) for the first half of 1999 over prior year levels as a result of a slow down in draw orders against contracts.
The Performance Footwear Group recognized a $1.8 million (9.2%) and $2.2 million (5.3%) increase in net sales and other operating income for the second quarter and year-to-date of 1999, respectively, as compared to the same periods of 1998. The Merrell
outdoor footwear business contributed $4.3 million (61.1%) to the increase in net sales and other operating income in the second quarter of 1999 over the same period of 1998 and $6.0 million (42.6%) for the year-to-date 1999 over the level for the same
period of the prior year. The Caterpillar U.S. wholesale operation reported a $1.7 million (20.1%) and $2.3 million (12.7%) drop in 1999 second quarter and year-to-date net sales and other operating income, respectively. Caterpillar international
royalty revenue for the second quarter and year-to-date of 1999
The Wolverine Slipper Group's second quarter and year-to-date 1999 net sales and other operating income increased $0.8 million (55.3%) and $0.7 million (28.5%), respectively, compared to the same periods in 1998, primarily as a result of a reduction in seasonal returns and improved factory delivery.
The Hush Puppies Retail Division's net sales and other operating income remained flat for both the second quarter and year-to-date 1999. Same-store net sales were down 0.1% for the year as compared to the 1998 level, reflecting the sluggish demand in the retail footwear sector.
The Wolverine Leathers Division recorded a decrease in net sales and other operating income of $1.4 million (13.7%) from the second quarter of 1998 and $2.3 million (12.2%) from the first half of 1998. The decrease relates primarily to reduced demand for the Hush Puppies Classics sueded product line.
Gross margin as a percentage of net sales and other operating income for the second quarter of 1999 was 27.8%, (33.0% excluding the Russian restructuring charge), compared to the prior year's second quarter level of 33.6%. Year-to-date gross margin of 29.3% (31.9% excluding the Russian restructuring charge) for 1999 compares to 32.2% for the same period in 1998. Gross margin dollars for the second quarter of 1999 decreased $11.3 million or 23.6% ($4.4 million excluding the Russian restructuring charge) and $15.3 million or 16.3% ($8.4 million excluding the Russian restructuring charge) for the year-to-date 1999 from the same periods of 1998, respectively. The gross margin percentage for the branded footwear businesses, excluding the Russian restructuring charge, was 32.2% for the second quarter of 1999 and 31.1% for the year-to-date 1999 as compared to 33.0% and 31.5% for the same periods of 1998, respectively, reflecting that initial pricing margins for branded footwear continued to be strong. The gross margin percentage for the other business units increased to 38.4% for the second quarter of 1999 from 37.8% for the same period of 1998 and 37.1% for the year-to-date 1999 compared to 38.0% for 1998. The Hush Puppies Company's gross margin decreased to 31.7% from 32.8% for the second quarter of 1999 and 31.4% from 31.7% for the year-to-date 1999 as compared to 1998 levels as a result of markdowns to move inventories. The Wolverine Footwear Group experienced a 1.5 and 0.8 percentage point increase in gross margin for second quarter and year-to-date 1999, respectively, as compared to the same periods of 1998 as a result of better initial pricing margins. The Performance Footwear Group recognized a 1.4 percentage point decrease in gross margin for the second quarter of 1999 and 2.9 percentage point decrease for the first half of 1999 when compared to the same periods of 1998 resulting primarily from a higher percentage of factory direct sales, which have lower margins but also have lower selling and administrative costs. Gross margin for the Wolverine Leathers Division increased 4.6 percentage points for the second quarter of 1999 and remained flat for the year-to-date 1999 as compared to the same periods of 1998.
Selling and administrative expenses of $37.6 million for the second quarter of 1999 increased $5.1 million over the 1998 second quarter level of $32.5 million and, as a percentage of net sales and other operating income, increased to 28.6% compared to 22.9% in the second quarter of 1998. Year-to-date selling and administrative expenses for 1999 increased $4.7 million to $71.8 million from $67.1 million for the same period of 1998 and, as a percentage of net sales and other operating income, increased to 26.8% compared to 23.1%. Excluding the Russian restructuring charge, selling and administrative expenses for the second quarter of 1999 would have been $31.0 million, a decrease of $1.5 million from the same period of 1998 and as a percentage of net sales and other operating income, would have increased to 23.6% from 22.9%. Year-to-date selling and administrative expenses excluding the Russian restructuring charge would have been $65.2 million, a decrease of $1.9 million from 1998 and as a percentage of net sales and other operating income, would have increased to 24.3% from 23.1%. The change in year-to-date selling and administrative expenses includes increased depreciation expense of $1.6 million related to the recent investments in warehousing infrastructure and information services and $1.7 million of Harley-Davidson selling and administration costs. These increases were offset by $5.2 million in cost reductions applicable to actions initiated in the last half of 1998.
Interest expense for the second quarter of 1999 was $2.5 million, compared to $2.1 million for the same period of 1998. Year-to-date interest expense for 1999 and 1998 was $4.8 million and $3.7 million, respectively. The increase in interest expense reflects additional borrowings on the revolving credit facility to support the repurchase of 2.2 million shares of the Company's common stock primarily during the fourth quarter of 1998, and increased working capital borrowings during 1999.
The 1999 second quarter and year-to-date effective tax rates of 32.9% and 33.3%, respectively, decreased from the 1998 second quarter and year-to-date effective tax rate of 33.5%, as a result of earnings from certain foreign subsidiaries, which are taxed generally at lower rates, becoming a larger percentage of total consolidated earnings.
Financial Condition, Liquidity and Capital Resources
Net cash provided by operating activities was $2.3 million in 1999 compared to net cash used of $12.0 million in 1998, an improvement of $14.3 million. Cash of $17.2 million for 1999 and $30.2 million for 1998 was used to fund working capital requirements. Accounts receivable of $147.0 million at June 19, 1999 reflects an increase of $13.7 million (10.3%) over the balance at June 20, 1998 and a decrease of $5.1 million (3.4%) from the January 2, 1999 balance. Inventories of $184.1 million at June 19, 1999 reflect an increase of $10.7 million (6.2%) compared to the balance at June 20, 1998 and an increase of $17.0 million (10.2%) over the balance at January 2, 1999. The expansion of the Merrell business and the addition of the Harley-Davidson business increased accounts receivable and inventories by $10.8 million and $7.4 million, respectively, over the June 20, 1998 balances. Order backlog was approximately 3% higher at June 19, 1999, when compared to the previous years' second quarter. Accounts payable and other accrued liabilities of $41.1 million at June 19, 1999 reflect a $4.8 million (10.4%) decrease from the $45.9 million balance at June 20, 1998 and a $1.0 million (2.4%) increase from the $40.2 million balance at January 2, 1999.
Additions to property, plant and equipment of $12.1 million in the first half of 1999 compares to $15.6 million reported during the same period in 1998. The majority of these expenditures are related to the replacement of legacy information systems and purchases of manufacturing equipment necessary to upgrade the Company's footwear and leather manufacturing facilities. Depreciation and amortization expense of $6.8 million in the first half of 1999 compares to $5.3 million in the comparable period of 1998. This increase was a result of the capital investments noted above and the amortization of goodwill related to the acquisitions made during the past three years.
The Company maintains short-term borrowing and commercial letter-of-credit facilities of $69.1 million, of which $36.0 million, $30.1 million and $32.7 million were outstanding at June 19, 1999, January 2, 1999 and June 20, 1998, respectively. Long-term debt, excluding current maturities, of $172.0 million at June 19, 1999 compares to $116.3 million and $157.1 million at June 20, 1998 and January 2, 1999, respectively. The increase in debt since June 20, 1998 was a result of the repurchase of 2.2 million shares of the Company's common stock as discussed below and increases in working capital borrowings during 1999.
As discussed in the notes to the consolidated condensed financial statements, the Company recorded a non-recurring, non-cash, pre-tax charge to earnings related to the closing of the Russian wholesale footwear business of $14.0 million, of which $6.9 million is reflected in a writedown in cost of goods sold for inventory, $6.6 million is reflected in selling and administrative expenses for goodwill, bad debt, severance, and other restructuring expenses, and $0.5 million is reflected in other expense for the disposal of fixed assets. The $14.0 million pre-tax restructuring charge resulted in a reduction of net earnings of $0.23 per share after tax for the twenty-four weeks ended June 19, 1999.
Effective August 20, 1998, the Company's Board of Directors approved and the Company executed a common stock repurchase program for a total of 2.2 million shares of common stock. The primary purpose of this stock repurchase program was to take advantage of the low market price relative to management's assessment of the future prospects of the business and its corresponding favorable effect on stockholder value. The total cost of shares repurchased under this program totaled $23.0 million, averaging $10.25 per share.
It is expected that continued Company growth will require increases in capital funding over the next several years. The Company has a long-term domestic revolving credit facility of $165 million. The Company's subsidiary in the
United Kingdom has a $17.2 million, three-year variable rate revolving credit agreement expiring in January 2000 to support its working capital requirements. In addition, the Company issued $75 million of senior debt during the fourth quarter of 1998 and
used the proceeds to reduce outstanding borrowings under its revolving credit facility. The combination of credit facilities and cash flows from operations is expected to be sufficient to meet future capital needs. Any excess cash flows from operations
are expected to be used to pay down the revolving credit facility.
The 1999 second quarter dividend declared of $.03 per share of common stock represents approximately a 9.1% increase over the $.0275 per share declared in the second quarter of 1998. The dividend is payable August 2, 1999 to stockholders of record on July 1, 1999.
Year 2000 Readiness Disclosure
The "Year 2000 Issue" is the result of computer programs that use two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This situation could result in system failures or miscalculations causing disruptions to operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
The Company has and continues to modify or replace portions of its software so that its computer systems and equipment will function properly with respect to dates in the year 2000 and thereafter. This modification and replacement process is being implemented by the Company's Information Systems Team under a general remediation strategy developed by an Executive Oversight Committee, consisting of internal executive management, a member of the Board of Directors and various other third parties. The Company presently believes that with planned modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if the Company fails to complete modifications required to obtain year 2000 compliance in a timely manner or if significant suppliers or customers experience year 2000 problems, the Year 2000 Issue could have a material adverse impact on the operations and financial condition of the Company.
The Company has completed a thorough assessment of all its existing information systems. A significant portion of the Company's Year 2000 Issues will be resolved by the installation of year 2000 compliant information systems. The new systems are designed to manage order processing, warehousing and finance activities on a fully integrated enterprise-wide basis (the "Base System"). Implementation of the Base System began in 1997 primarily in response to business demand and growth, although implementation of the Base System will replace software that is not year 2000 compliant as an ancillary benefit. Year 2000 compliance for information systems not replaced by the Base System, including manufacturing and raw material inventory systems, will be addressed through a combination of reprogramming and replacement. The Company is utilizing both internal and external resources to replace, reprogram and test its information systems for year 2000 modifications. Implementation of the Base System is now substantially completed and the Company anticipates reprogramming and replacement efforts for year 2000 compliance in its information systems to be substantially complete by the end of third quarter 1999, which is prior to any anticipated impact on its operating systems, with the balance of modifications to be completed on less critical systems during the fourth quarter of 1999.
The Company has also completed a thorough assessment of all operating systems and equipment containing computer microchips that may be year 2000 sensitive (commonly referred to as "embedded chips"). With priority given to critical items, the Company intends to test operating systems and equipment containing embedded chips for year 2000 compliance and to reprogram or replace such equipment as appropriate. Company-owned manufacturing systems are generally year 2000 compliant and will not require significant reprogramming or replacement. Year 2000 modifications for critical operating systems and equipment are now substantially completed, with the modification or elimination of lower priority systems and equipment to be completed during the third and fourth quarters of 1999.
The Company has initiated formal communications with significant suppliers and vendors to determine the extent to which the Company may be vulnerable to a failure by any of these third parties to remediate their own Year 2000 Issues. The Company has also received year 2000 communications from substantially all its significant customers indicating formal attention to Year 2000 Issues. Although the Company has not received any specific indications that any significant suppliers, vendors or customers will not be year 2000 compliant, other companies are widely resistant to providing any written or binding assurances that they will be year 2000 compliant given the scope and uncertainties relating to Year 2000 Issues. For this reason, the Company can provide no assurance that the systems of suppliers, vendors or significant customers will be year 2000 compliant or that the lack of year 2000 compliance among suppliers, vendors or significant customers could not have an adverse effect on the Company's operations or financial condition.
To date, the Company has spent approximately $19.0 million for implementation of the new Base System and estimates that total costs for implementing the new Base System will approximate $21.0 million. The Company has also spent approximately $0.9 million
to date for additional assessment, reprogramming, replacement and other year 2000 compliance issues not covered by implementation of the Base System and estimates that total costs for such items will approximate $2.5 million. To the extent these costs
represent investment in new or upgraded technology with definable value lasting beyond 2000 and year 2000 compliance is merely an ancillary
The Company has given consideration to the most reasonably likely worst-case year 2000 scenarios and contingency planning to address such scenarios. Year 2000 problems may involve temporary delays in the delivery to the Company of footwear or raw materials used in its manufacturing operations. The Company sources footwear from numerous vendors located in 22 countries and sources raw materials, principally leather and footwear soles, from a select group of domestic and international suppliers. The possibility that year 2000 problems could cause the temporary failure in basic utilities, delays in transportation, interruption of electronic communications or the interruption of banking and commercial payment systems in various parts of the world is beyond the reasonable ability of the Company to assess or control. Any such events could disrupt suppliers' abilities to make timely deliveries to the Company and could disrupt the Company's own operations. Although there is also the risk that suppliers may fail to completely remediate their own internal year 2000 problems, the Company believes this risk is mitigated by the fact that the bulk of its supplied goods, such as pigskins for tanning or leather footwear uppers stitched offshore, involve relatively lower levels of technology that are less susceptible to year 2000 problems. To the extent year 2000 problems affect vendors and suppliers, the Company could experience delays which in turn could adversely affect its ability to fill customer orders in a timely manner resulting in a reduction or delay in sales and earnings.
The Company believes that any supply delays will generally be temporary in nature and that the Company can address any material delays in supply through the diversity of its supplier base and owned manufacturing facilities. Because the Company sources finished footwear and stitched uppers from numerous vendors throughout the world, and because this work is to a large degree interchangeable, management believes it can address any serious supplier problems by shifting orders to suppliers not experiencing significant Year 2000 Issues or shifting production to Company-owned facilities as may be required. To the extent any important suppliers are unable to provide reasonable assurances of continued performance during the year 2000, the Company may elect to accumulate reasonable advance inventories or, because the Company is not dependent upon any single supplier for footwear or raw materials, may identify alternative suppliers for the goods in question.
The Company's customers consist primarily of mass merchants and footwear retailers. Although the Company's customers are subject to the general risks associated with the year 2000, these risks may be mitigated because the Company's footwear products are not vulnerable to Year 2000 Issues and because the Company's customers sell footwear in retail stores and have a relatively low degree of direct dependence upon technology that is vulnerable to Year 2000 Issues. Year 2000 problems among customers could adversely affect the Company's sales and earnings. Customers are not under an obligation to purchase Company products and an inability of customers to purchase Company products arising from year 2000 problems is beyond the ability of the Company to correct or control.
Internally, an unforeseen delay in implementation of the Company's new Base System could adversely affect the Company's operations and sales and would have to be addressed by the parallel remediation of legacy information systems to support continuing operations until completion of the Base System. Additionally, any delay in the reprogramming and replacement of manufacturing or raw material inventory related systems could also adversely affect the Company's operations and sales. The Company does not currently believe these risks are likely because implementation of the Base System and the reprogramming and replacement efforts are scheduled for completion prior to the year 2000.
The costs and anticipated completion dates for year 2000 modifications and the estimated impact of Year 2000 Issues are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, the level of year 2000 disruptions experienced by the Company's suppliers and customers and the success of any required contingency actions, and similar uncertainties.
This Year 2000 Readiness Disclosure is in part based upon and repeats information provided to the Company by outside sources, including certain customers, suppliers, outside consultants and other business partners and certain manufacturers, vendors and licensors of the Company's software, hardware and other systems and equipment. Although the Company believes this outside information is accurate, the Company is not the original source of this outside information and has not independently verified the information.
The information concerning quantitative and qualitative disclosures about market risk contained in the Company's Form 10-K Annual Report for its fiscal year ended January 2, 1999, is incorporated herein by reference
The Company faces market risk to the extent that changes in foreign currency exchange rates affect the Company's foreign assets, liabilities and inventory purchase commitments and to the extent that its long-term debt requirements are affected by changes in interest rates. The Company manages these risks by attempting to denominate contractual and other foreign arrangements in U.S. dollars and by maintaining a significant percentage of fixed-rate debt. The Company does not believe that there has been a material change in the nature of the Company's primary market risk exposures, including the categories of market risk to which the Company is exposed and the particular markets that present the primary risk of loss to the Company. As of the date of this Form 10-Q Quarterly Report, the Company does not know of or expect there to be any material change in the general nature of its primary market risk exposure in the near term.
The methods used by the Company to manage its primary market risk exposures, as described in the sections of its annual report incorporated herein by reference in response to this item, have not changed materially during the current year. As of the date of this Form 10-Q Quarterly Report, the Company does not expect to change its methods used to manage its market risk exposures in the near term. However, the Company may change those methods in the future to adapt to changes in circumstances or to implement new techniques.
The Company's market risk exposure is mainly comprised of its vulnerability to changes in foreign currency exchange rates and interest rates. Prevailing rates and rate relationships in the future will be primarily determined by market factors that are outside of the Company's control. All information provided in response to this item consists of forward-looking statements. Reference is made to the section captioned "Forward-Looking Statements" at the beginning of this document for a discussion of the limitations on the Company's responsibility for such statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
On April 23, 1999, the Company held its 1999 Annual Meeting of Stockholders. The purposes of the meeting were to elect four directors for three-year terms expiring in 2002, to approve the Stock Incentive Plan of 1999 and to consider and ratify the appointment of Ernst & Young LLP as the Company's independent auditors for the current fiscal year.
Four candidates nominated by management were elected by the stockholders to serve as directors of the Company at the meeting. The following sets forth the results of the voting with respect to each candidate:
Name of Candidate | Shares Voted | |||
Daniel T. Carroll | For | 35,653,290 | ||
Authority Withheld | 209,925 | |||
Broker Non-Votes | 0 | |||
Donald V. Fites | For | 35,668,932 | ||
Authority Withheld | 194,283 | |||
Broker Non-Votes | 0 | |||
Phillip D. Matthews | For | 35,673,898 | ||
Authority Withheld | 189,317 | |||
Broker Non-Votes | 0 | |||
Paul D. Schrage | For | 35,657,149 | ||
Authority Withheld | 206,066 | |||
Broker Non-Votes | 0 |
Shares Voted | ||
For | 30,990,386 | |
Against | 4,111,172 | |
Abstentions | 761,657 | |
Broker Non-Votes | 0 |
Shares Voted | ||
For | 35,746,970 | |
Against | 60,261 | |
Abstentions | 55,984 | |
Broker Non-Votes | 0 |
(a) Exhibits. The following documents are filed as exhibits to this report on Form 10-Q:
Exhibit | |
Number | Document |
3.1 | Certificate of Incorporation, as amended. Previously filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 14, 1997. Here incorporated by reference. |
3.2 | Amended and Restated Bylaws. Previously filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. Here incorporated by reference. |
27 | Financial Data Schedule. |
WOLVERINE WORLD WIDE, INC. | |
AND SUBSIDIARIES | |
August 3, 1999 | /s/ Geoffrey B. Bloom |
Date | Geoffrey B. Bloom |
Chairman and Chief Executive Officer | |
(Duly Authorized Signatory for Registrant) | |
August 3, 1999 | /s/ Stephen L. Gulis, Jr. |
Date | Stephen L. Gulis, Jr. |
Executive Vice President, Chief Financial Officer and | |
Treasurer | |
(Principal Financial Officer and Duly Authorized Signatory | |
for Registrant) |
Exhibit | |
Number | Document |
3.1 | Certificate of Incorporation, as amended. Previously filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 14, 1997. Here incorporated by reference. |
3.2 | Amended and Restated Bylaws. Previously filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. Here incorporated by reference. |
27 | Financial Data Schedule. |