Wolverine Form 10-Q 2013-Q3

 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 third twelve week accounting period ended September 7, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-06024
________________________________________________  
WOLVERINE WORLD WIDE, INC.
(Exact Name of Registrant as Specified in its Charter)
 ________________________________________________ 
Delaware
 
38-1185150
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
 
9341 Courtland Drive N.E., Rockford, Michigan
 
49351
(Address of Principal Executive Offices)
 
(Zip Code)
(616) 866-5500
(Registrant’s Telephone Number, Including Area Code)
________________________________________________ 
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  x    No  ¨
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
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
x
  
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
There were 50,291,244 shares of Common Stock, $1 par value, outstanding as of October 9, 2013, which does not reflect the two-for-one stock split in the form of a 100 percent stock dividend payable on November 1, 2013 to stockholders of record on October 1, 2013.

 
 
 

Table of Contents

TABLE OF CONTENTS
 
Part I.
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 

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FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements,” which are statements relating to future, not past, events. In this context, forward-looking statements often address management’s current beliefs, assumptions, expectations, estimates and projections about future business and financial performance, global political, economic and market conditions, and the Company itself. Such statements often contain words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “should,” “will,” variations of such words, and similar expressions. Forward-looking statements, by their nature, address matters that are, to varying degrees, uncertain. Uncertainties that could cause the Company’s performance to differ materially from what is expressed in forward-looking statements include, but are not limited to, the following:
changes in national, regional or global economic and market conditions;
the impact of financial and credit markets on the Company, its suppliers and customers;
changes in interest rates, tax laws, duties, tariffs, quotas or applicable assessments in countries of import and export;
the impact of regulation, regulatory and legal proceedings and legal compliance risks;
currency fluctuations;
currency restrictions;
changes in future pension funding requirements and pension expenses;
the risks of doing business in developing countries, and politically or economically volatile areas;
the ability to secure and protect owned intellectual property or use licensed intellectual property;
potential negative effects that could result from a U.S. federal government shutdown, including but not limited to delays in importing products at U.S. ports, supply chain disruption, and reduced purchasing by the Department of Defense or other military purchasers;
changes in consumer preferences, spending patterns, buying patterns, price sensitivity or demand for the Company’s products;
the impact of seasonality and unpredictable weather conditions;
changes in relationships with, including the loss of, significant customers;
the cancellation of orders for future delivery;
the failure of the Department of Defense to exercise future purchase options or award new contracts, or the cancellation or modification of existing contracts by the Department of Defense or other military purchasers;
matters relating to the Company’s recent acquisition of the Performance + Lifestyle Group business of Collective Brands, Inc. (“PLG” or “the PLG acquisition”), including the Company’s ability to realize the benefits of the PLG acquisition or to do so on a timely basis, the Company’s ability to combine its business with PLG successfully or in a timely and cost-efficient manner, the degree of business disruption relating to the PLG acquisition, and the Company’s increased indebtedness following the PLG acquisition;
the cost, availability and management of raw materials, inventories, services and labor for owned and contract manufacturers;
problems affecting the Company’s distribution system, including service interruptions at shipping and receiving ports;
the failure to maintain the security of personally identifiable and other information of the Company’s customers and employees;
the inability for any reason to effectively compete in global footwear, apparel and consumer direct markets; and
strategic actions, including new initiatives and ventures, acquisitions and dispositions, and the Company’s success in integrating acquired businesses and implementing new initiatives and ventures.

These uncertainties could cause a material difference between an actual outcome and a forward-looking statement. The uncertainties included here are not exhaustive and are described in more detail in Part I, Item 1A, “Risk Factors” of the Company’s Form 10-K for the fiscal year ended December 29, 2012, and any information regarding such Risk Factors included in the Company’s subsequent filings with the Securities and Exchange Commission, including Part II, Item 1A of this Quarterly Report on Form 10-Q. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company does not undertake an obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I.
FINANCIAL INFORMATION
ITEM 1.
Financial Statements

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
(In millions, except share data)
September 7,
2013
 
December 29,
2012
 
September 8,
2012
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
147.8

 
$
171.4

 
$
144.3

Accounts receivable, less allowances:
 
 
 
 
 
September 7, 2013 – $38.5
 
 
 
 
 
December 29, 2012 – $26.7
 
 
 
 
 
September 8, 2012 – $14.8
478.9

 
353.6

 
280.5

Inventories:
 
 
 
 
 
Finished products
432.9

 
431.8

 
241.5

Raw materials and work-in-process
29.7

 
34.4

 
28.2

 
462.6

 
466.2

 
269.7

Deferred income taxes
26.7

 
28.0

 
14.3

Prepaid expenses and other current assets
34.1

 
55.7

 
18.6

Total current assets
1,150.1

 
1,074.9

 
727.4

Property, plant and equipment:
 
 
 
 
 
Gross cost
411.2

 
384.8

 
300.9

Accumulated depreciation
(255.9
)
 
(235.1
)
 
(225.0
)
 
155.3

 
149.7

 
75.9

Other assets:
 
 
 
 
 
Goodwill and indefinite-lived intangibles
1,138.5

 
1,139.7

 
57.5

Amortizable intangibles, net
130.5

 
153.5

 
0.8

Deferred income taxes
0.4

 
0.9

 
43.1

Deferred financing costs, net
34.3

 
38.9

 
0.4

Other
61.1

 
56.8

 
42.9

 
1,364.8

 
1,389.8

 
144.7

Total assets
$
2,670.2

 
$
2,614.4

 
$
948.0

See accompanying notes to consolidated condensed financial statements.

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WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets – continued
(Unaudited)
(In millions, except share data)
September 7,
2013
 
December 29,
2012
 
September 8,
2012
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
182.8

 
$
160.9

 
$
59.5

Accrued salaries and wages
40.8

 
36.4

 
17.1

Other accrued liabilities
111.3

 
91.3

 
67.4

Current maturities of long-term debt
40.2

 
30.7

 

Borrowings under revolving credit agreement

 

 
27.0

Total current liabilities
375.1

 
319.3

 
171.0

Long-term debt, less current maturities
1,101.9

 
1,219.3

 

Accrued pension liabilities
167.4

 
165.5

 
95.3

Deferred income taxes
236.1

 
240.5

 

Other liabilities
21.7

 
26.1

 
14.0

Stockholders’ equity
 
 
 
 
 
Wolverine World Wide, Inc. stockholders’ equity:
 
 
 
 
 
Common stock – par value $1, authorized 160,000,000 shares; shares issued (including shares in treasury):
 
 
 
 
 
September 7, 2013 – 100,645,938 shares
 
 
 
 
 
December 29, 2012 – 98,749,221 shares
 
 
 
 
 
September 8, 2012 – 97,997,058 shares
100.7

 
98.7

 
98.0

Additional paid-in capital

 

 

Retained earnings
746.3

 
633.4

 
638.0

Accumulated other comprehensive loss
(78.4
)
 
(87.5
)
 
(69.4
)
Cost of shares in treasury:
 
 
 
 
 
September 7, 2013 – 77,284 shares
 
 
 
 
 
December 29, 2012 – 82,019 shares
 
 
 
 
 
September 8, 2012 – 0 shares
(2.1
)
 
(2.2
)
 

Total Wolverine World Wide, Inc. stockholders’ equity
766.5

 
642.4

 
666.6

Non-controlling interest
1.5

 
1.3

 
1.1

Total stockholders’ equity
768.0

 
643.7

 
667.7

Total liabilities and stockholders’ equity
$
2,670.2

 
$
2,614.4

 
$
948.0

All share data has been presented to reflect the two-for-one stock split in the form of a 100 percent stock dividend payable on November 1, 2013 to stockholders of record on October 1, 2013.
See accompanying notes to consolidated condensed financial statements.


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WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations and Comprehensive Income
(Unaudited)
 
12 Weeks Ended
 
36 Weeks Ended
(In millions, except per share data)
September 7,
2013
 
September 8,
2012
 
September 7,
2013
 
September 8,
2012
Revenue
$
716.6

 
$
353.1

 
$
1,950.3

 
$
988.6

Cost of goods sold
430.6

 
214.5

 
1,161.2

 
599.8

Gross profit
286.0

 
138.6

 
789.1

 
388.8

Selling, general and administrative expenses
192.3

 
89.3

 
584.3

 
274.8

Acquisition-related transaction and integration costs
7.4

 
3.0

 
30.5

 
7.9

Operating profit
86.3

 
46.3

 
174.3

 
106.1

Other expenses:
 
 
 
 
 
 
 
Interest expense – net
11.9

 
0.3

 
37.3

 
1.0

Acquisition-related interest expense

 
1.4

 

 
1.4

Other (income) expense – net
1.0

 
(0.3
)
 
2.0

 
1.3

 
12.9

 
1.4

 
39.3

 
3.7

Earnings before income taxes
73.4

 
44.9

 
135.0

 
102.4

Income taxes
19.0

 
12.1

 
32.7

 
18.1

Net earnings
54.4

 
32.8

 
102.3

 
84.3

Net (earnings) loss attributable to non-controlling interests

 
(0.1
)
 
(0.2
)
 
0.1

Net earnings attributable to Wolverine World Wide, Inc.
$
54.4

 
$
32.7

 
$
102.1

 
$
84.4

Net earnings per share (see Note 3):
 
 
 
 
 
 
 
Basic
$
0.55

 
$
0.34

 
$
1.03

 
$
0.88

Diluted
$
0.54

 
$
0.33

 
$
1.02

 
$
0.86

 
 
 
 
 
 
 
 
Comprehensive income
$
58.4

 
$
37.2

 
$
111.4

 
$
85.9

Comprehensive (income) loss attributable to non-controlling interest

 
(0.1
)
 
(0.2
)
 
0.1

Comprehensive income attributable to Wolverine World Wide, Inc.
$
58.4

 
$
37.1

 
$
111.2

 
$
86.0

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.06

 
$
0.06

 
$
0.18

 
$
0.18

All per share data has been presented to reflect the two-for-one stock split in the form of a 100 percent stock dividend payable on November 1, 2013 to stockholders of record on October 1, 2013.
See accompanying notes to consolidated condensed financial statements.

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WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flow
(Unaudited)
 
36 Weeks Ended
(In millions)
September 7,
2013
 
September 8,
2012
OPERATING ACTIVITIES
 
 
 
Net earnings
$
102.3

 
$
84.3

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
37.0

 
11.5

Deferred income taxes
(6.3
)
 
(3.5
)
Stock-based compensation expense
21.1

 
11.0

Excess tax benefits from stock-based compensation
(2.0
)
 
(6.1
)
Pension contribution
(1.4
)
 
(26.7
)
Pension expense
25.8

 
19.4

Other
5.2

 
(4.9
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(128.4
)
 
(59.0
)
Inventories
1.4

 
(37.6
)
Other operating assets
24.1

 
10.7

Accounts payable
22.4

 
2.3

Income taxes payable
6.2

 
4.5

Other operating liabilities
18.0

 
2.7

Net cash provided by operating activities
125.4

 
8.6

INVESTING ACTIVITIES
 
 
 
Additions to property, plant and equipment
(29.2
)
 
(8.3
)
Proceeds from sale of property, plant and equipment
2.8

 

Investment in joint venture
(1.6
)
 
(2.5
)
Other
(1.8
)
 
(1.8
)
Net cash used in investing activities
(29.8
)
 
(12.6
)
FINANCING ACTIVITIES
 
 
 
Net borrowings under revolver

 
16.0

Payments of long-term debt
(107.9
)
 
(0.5
)
Cash dividends paid
(17.7
)
 
(17.6
)
Purchase of common stock for treasury

 
(2.4
)
Surrender of common stock for treasury
(0.6
)
 
(5.7
)
Proceeds from shares issued under stock incentive plans
7.2

 
9.1

Excess tax benefits from stock-based compensation
2.0

 
6.1

Contributions from non-controlling interests

 
1.2

Net cash provided by (used in) financing activities
(117.0
)
 
6.2

Effect of foreign exchange rate changes
(2.2
)
 
2.1

Increase (decrease) in cash and cash equivalents
(23.6
)
 
4.3

Cash and cash equivalents at beginning of the period
171.4

 
140.0

Cash and cash equivalents at end of the period
$
147.8

 
$
144.3

See accompanying notes to consolidated condensed financial statements.

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WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
September 7, 2013 and September 8, 2012
(Unaudited)
 
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 footwear and apparel; performance outdoor and athletic footwear and apparel; children’s footwear; industrial work shoes, boots and apparel; and uniform shoes and boots. The Company’s portfolio of owned and licensed brands includes: Bates®, Cat® Footwear, Chaco®, Cushe®, Harley-Davidson® Footwear, Hush Puppies®, HyTest®, Keds®, Merrell®, Patagonia® Footwear, Saucony®, Sebago®, Soft Style®, Sperry Top-Sider®, Stride Rite® and Wolverine®. Licensing and distribution arrangements with third-parties extend the global reach of the Company’s brand portfolio.
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for a complete presentation of the financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included in the accompanying financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2012.
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 from 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 for estimated sales returns and allowances at the time of sale based on historical rates of returns and allowances and specific identification of outstanding returns not yet received from customers. However, estimates of actual returns and allowances in any future period are inherently uncertain and actual returns and allowances may differ from these estimates. If actual or expected future returns and allowances were significantly greater or lower than established reserves, a reduction or increase to net revenues would be recorded in the period this determination was made.
Cost of Goods Sold
Cost of goods sold includes the actual product costs, including inbound and certain outbound freight charges, purchasing, sourcing, inspection and receiving costs. Warehousing costs are included in selling, general and administrative expenses with the exception of certain consumer direct warehousing costs that are included in cost of goods sold.
Seasonality
The Company’s business is subject to seasonal influences and the Company’s fiscal year has 12 weeks in each of the first three fiscal quarters and, depending on the fiscal calendar, 16 or 17 weeks in the fourth fiscal quarter. Both of these factors can cause significant differences in revenue, earnings and cash flows from quarter to quarter; however, the differences have followed a consistent pattern in previous years.

2.
NEW ACCOUNTING STANDARDS
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 requires preparers to report, in one place, information about reclassifications out of accumulated other comprehensive income (“AOCI”). For significant items reclassified out of AOCI to net income in their entirety in the same reporting period, reporting (either on the face of the statement where net income is presented or in the accompanying notes) is required about the effect of the reclassifications on the respective line items in the statement where net income is presented. For items that are not reclassified to net income in their entirety in the same reporting period, a cross reference to other disclosures currently required under U.S. GAAP is required in the accompanying notes. The above information must be presented in one place

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(parenthetically on the face of the financial statements by income statement line item or in a note). ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted ASU 2013-02 in the first quarter of fiscal 2013, and the adoption did not affect the Company’s consolidated financial position, results of operations or cash flows.
In July 2012, FASB issued ASU 2012-02, Intangibles-Goodwill and Other (ASC Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-02 amends prior indefinite-lived intangible asset impairment testing guidance. Under ASU 2012-02, the Company has the option to first assess qualitative factors to determine whether it is more likely than not (a likelihood of more than 50%) that an indefinite-lived intangible asset is impaired. If, after considering the totality of events and circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is not impaired, then calculating the fair value of such asset is unnecessary. The Company adopted ASU 2012-02 in the fourth quarter of fiscal 2012, and the adoption did not affect the Company’s consolidated financial position, results of operations or cash flows.
 
3.
EARNINGS PER SHARE
The Company calculates earnings per share in accordance with FASB Accounting Standards Codification (“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, the Company’s unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and must be included in the computation of earnings per share pursuant to the two-class method.
On July 11, 2013, the Company’s Board of Directors approved a two-for-one stock split in the form of a 100 percent stock dividend payable on November 1, 2013 to stockholders of record on October 1, 2013. The earnings per share calculation has been adjusted for all periods presented to reflect the stock split. The following table sets forth the computation of basic and diluted earnings per share:
(In millions, except share and per share data)
12 Weeks Ended
 
36 Weeks Ended
 
September 7,
2013
 
September 8,
2012
 
September 7,
2013
 
September 8,
2012
Numerator:
 
 
 
 
 
 
 
Net earnings attributable to Wolverine World Wide, Inc.
$
54.4

 
$
32.7

 
$
102.1

 
$
84.4

Adjustment for earnings allocated to non-vested restricted common stock
(1.1
)
 
(0.5
)
 
(2.0
)
 
(1.5
)
Net earnings used in calculating basic earnings per share
53.3

 
32.2

 
100.1

 
82.9

Adjustment for earnings reallocated from non-vested restricted common stock
0.1

 

 
0.1

 
0.1

Net earnings used in calculating diluted earnings per share
$
53.4

 
$
32.2

 
$
100.2

 
$
83.0

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
100,474,793

 
97,743,844

 
100,087,863

 
97,333,545

Adjustment for non-vested restricted common stock
(3,391,901)

 
(2,758,969)

 
(3,280,184)

 
(2,784,802)

Shares used in calculating basic earnings per share
97,082,892

 
94,984,875

 
96,807,679

 
94,548,743

Effect of dilutive stock options
2,121,186

 
2,244,358

 
1,852,797

 
2,252,554

Shares used in calculating diluted earnings per share
99,204,078

 
97,229,233

 
98,660,476

 
96,801,297

Net earnings per share:
 
 
 
 
 
 
 
Basic
$
0.55

 
$
0.34

 
$
1.03

 
$
0.88

Diluted
$
0.54

 
$
0.33

 
$
1.02

 
$
0.86

For the 12 and 36 weeks ended September 7, 2013, options relating to 36,849 and 687,888 shares of common stock outstanding, respectively, have not been included in the denominator for the computation of diluted earnings per share because they were anti-dilutive.
For the 12 and 36 weeks ended September 8, 2012, options relating to 526,890 and 1,053,596 shares of common stock outstanding, respectively, have not been included in the denominator for the computation of diluted earnings per share because they were anti-dilutive.
 

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4.
GOODWILL AND INDEFINITE-LIVED INTANGIBLES
The changes in the carrying amount of goodwill and indefinite-lived intangibles are as follows:
(In millions)
Goodwill
 
Indefinite-lived
intangibles
 
Total
Balance at September 8, 2012
$
39.6

 
$
17.9

 
$
57.5

Acquisition of PLG
419.6

 
661.8

 
1,081.4

Foreign currency translation effects
0.7

 
0.1

 
0.8

Balance at December 29, 2012
459.9

 
679.8

 
1,139.7

Acquisition adjustments
(11.1
)
 
9.0

 
(2.1
)
Foreign currency translation effects
(3.0
)
 
3.9

 
0.9

Balance at September 7, 2013
$
445.8

 
$
692.7

 
$
1,138.5

 
5.
INDEBTEDNESS
Total borrowings consist of the following obligations:
(In millions)
September 7,
2013
 
December 29,
2012
 
September 8,
2012
Term Loan A, due October 9, 2017
$
529.4

 
$
550.0

 
$

Term Loan B, due October 9, 2019
237.7

 
325.0

 

Senior notes, 6.125% interest, due October 15, 2020
375.0

 
375.0

 

Borrowings under Revolving Credit Facility (1)

 

 
27.0

Total interest-bearing debt
1,142.1

 
1,250.0

 
27.0

Less: current maturities of long-term debt
40.2

 
30.7

 

Less: borrowings under Revolving Credit Facility (1)

 

 
27.0

Total long-term debt
$
1,101.9

 
$
1,219.3

 
$

(1)
Borrowings shown for September 8, 2012 were under the Company’s previous revolving credit facility.
On October 9, 2012, the Company completed all conditions precedent for the receipt of funding under a new credit agreement (the “New Credit Agreement”) with a bank syndicate. The New Credit Agreement provided the Company with a $1,100.0 million secured credit facility, consisting of a Term Loan A Facility in an aggregate amount of up to $550.0 million (the “Term Loan A Facility”), a Term Loan B Facility in an aggregate amount of up to $350.0 million (the “Term Loan B Facility” and collectively with the Term Loan A Facility the "Term Loan Facilities") and a Revolving Credit Facility in an aggregate amount of up to $200.0 million (the “Revolving Credit Facility”). The New Credit Agreement also provided the Company with the option to increase the aggregate principal amount of all facilities by up to an additional amount such that the total amount of all of the facilities does not exceed $1,300.0 million. As of September 7, 2013, the Company had no outstanding borrowings under the Revolving Credit Facility and outstanding letters of credit of $3.1 million. As of December 29, 2012, the Company had no outstanding borrowings under the Revolving Credit Facility and outstanding letters of credit of $1.9 million.
As required by the New Credit Agreement, the Company also entered into an interest rate swap with a notional amount of $462.2 million that reduces the Company’s exposure to fluctuations in interest rates on its variable rate debt. This derivative instrument was designated as a cash flow hedge of its variable rate debt.
The Term Loan A Facility and the Revolving Credit Facility have a term of five years, and the Term Loan B Facility has a term of seven years. The interest rates applicable to amounts outstanding under the Term Loan A Facility and to U.S. dollar denominated amounts outstanding under the Revolving Credit Facility will be, at the Company’s option, either (1) the Alternate Base Rate as defined in the New Credit Agreement plus an applicable margin determined by the Company’s Consolidated Leverage Ratio, as defined in the New Credit Agreement, with a range of 0.375% to 1.25%, or (2) the Eurocurrency Rate as defined in the New Credit Agreement plus an applicable margin determined by the Company’s Consolidated Leverage Ratio, as defined in the New Credit Agreement, with a range of 1.375% to 2.25%.
The Revolving Credit Facility includes a $100.0 million foreign currency subfacility under which borrowings may be made, subject to certain conditions, in Canadian dollars, British pounds, euros, Hong Kong dollars, Swedish kronor, Swiss francs and such additional currencies determined in accordance with the New Credit Agreement. The Revolving Credit Facility also includes a $35.0 million swingline subfacility and a $50.0 million letter of credit subfacility.

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The obligations of the Company pursuant to the New Credit Agreement are guaranteed by substantially all of the Company’s material domestic subsidiaries and secured by substantially all of the personal and real property of the Company and its material domestic subsidiaries, subject to certain exceptions.
The New Credit Agreement also contains certain affirmative and negative covenants, including covenants that limit the ability of the Company and its Restricted Subsidiaries (as defined in the New Credit Agreement) to, among other things: incur or guarantee indebtedness; incur liens; pay dividends or repurchase stock; enter into transactions with affiliates; consummate asset sales, acquisitions or mergers; prepay certain other indebtedness; or make investments, as well as covenants restricting the activities of certain foreign subsidiaries of the Company that hold intellectual property related assets. Further, the New Credit Agreement requires compliance with the following financial covenants: a maximum Consolidated Leverage Ratio; a maximum Consolidated Secured Leverage Ratio; and a minimum Consolidated Interest Coverage Ratio (in each case as such ratios are defined in the New Credit Agreement). As of September 7, 2013 the Company was in compliance with all such restrictions and financial covenants.
Subsequent to the end of the third fiscal quarter, on October 10, 2013, the Company amended the New Credit Agreement (the "Amendment") and paid down the balance of the Term Loan B Facility to zero while increasing the balance of the Term Loan A Facility to $775.0 million, resulting in a decrease in the applicable interest rate. The Amendment also extended the maturity date of the Term Loan A Facility and the Revolving Credit Facility to October 10, 2018, allowed for incremental facilities that, when combined with the Term Loan A Facility and the Revolving Credit Facility, do not exceed $1,350.0 million in the aggregate, and made certain other changes to the New Credit Agreement. The Amendment also increased the swingline subfacility to $50.0 million under the Revolving Credit Facility.
On October 9, 2012, the Company also issued a total of $375.0 million in senior notes in a private placement offering (the “Notes”). The Notes bear interest at 6.125% and are due in 2020. Related interest payments are due semi-annually. The Notes are guaranteed by substantially all of the Company’s domestic subsidiaries.
For the 12 and 36 weeks ended September 7, 2013, the Company included in interest expense the amortization of deferred financing costs of approximately $1.5 million and $4.6 million, respectively. For the 12 and 36 weeks ended September 8, 2012, the Company included in interest expense the amortization of deferred financing costs of approximately $0.1 million and $0.3 million, respectively.
The Company used the net proceeds from the Notes, together with the borrowings under the Term Loan Facilities and cash on hand, to finance the PLG acquisition, repay any amounts outstanding under prior indebtedness, terminate its previous revolving credit facility and provide for the working capital needs of the Company, including the payment of transaction expenses in connection with the PLG acquisition.
Cash flows from operating activities, along with borrowings under the Revolving Credit Facility, if any, are expected to be sufficient to meet the Company’s working capital needs for the foreseeable future. Any excess cash flows from operating activities are expected to be used to purchase property, plant and equipment, reduce debt, fund growth initiatives, pay dividends or repurchase the Company’s common stock.
 

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6.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net earnings and any revenue, expenses, gains and losses that, under U.S. GAAP, are excluded from net earnings and recognized directly as a component of stockholders’ equity.
The changes in accumulated other comprehensive income (loss) are as follows for the periods indicated:
Changes in Accumulated Other Comprehensive Income (Loss) by Component (1)
(In millions)
Foreign
currency
translation
adjustments
 
Foreign
exchange
contracts
 
Interest rate
swap
 
Pension
adjustments
 
Total
Balance of accumulated other comprehensive income (loss) as of December 29, 2012
$
5.9

 
$
(1.7
)
 
$
(1.0
)
 
$
(90.7
)
 
$
(87.5
)
Other comprehensive income (loss) before reclassifications
(4.7
)
 
(0.9
)
 
1.0

 

 
(4.6
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
0.6

 

 
9.1

 
9.7

Net current-period other comprehensive income (loss)
(4.7
)
 
(0.3
)
 
1.0

 
9.1

 
5.1

Balance of accumulated other comprehensive income (loss) as of June 15, 2013
1.2

 
(2.0
)
 

 
(81.6
)
 
(82.4
)
Other comprehensive income (loss) before reclassifications
(5.3
)
 
1.1

 
3.1

 

 
(1.1
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
0.5

 

 
4.6

 
5.1

Net current-period other comprehensive income (loss)
(5.3
)
 
1.6

 
3.1

 
4.6

 
4.0

Balance of accumulated other comprehensive income (loss) as of September 7, 2013
$
(4.1
)
 
$
(0.4
)
 
$
3.1

 
$
(77.0
)
 
$
(78.4
)
(1)
All amounts are net of tax and noncontrolling interest.
The reclassification adjustments out of accumulated other comprehensive income (loss) are as follows for the periods indicated:
12 Weeks Ended
September 7, 2013
Reclassifications out of Accumulated Other Comprehensive Income (Loss) (1)
(In millions)
 
 
 
 
Details about accumulated other comprehensive income
components
 
Amount reclassified  from
accumulated other
comprehensive income
 
Affected line item in the
statement where net income is
presented
Foreign exchange contracts:
 
 
 
 
Reclassification adjustments into cost of goods sold
 
$
0.8

 
Cost of goods sold
 
 
0.8

 
Total before tax
 
 
(0.3
)
 
Tax benefit
 
 
$
0.5

 
Net of tax
Amortization of defined benefit pension items:
 
 
 
 
Prior actuarial loss
 
$
7.1

 
(2)
 
 
7.1

 
Total before tax
 
 
(2.5
)
 
Tax benefit
 
 
$
4.6

 
Net of tax
Total reclassifications for the period ending
 
$
5.1

 
Net of tax
 

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36 Weeks Ended
September 7, 2013
Reclassifications out of Accumulated Other Comprehensive Income (Loss) (1)
(In millions)
 
 
 
 
Details about accumulated other comprehensive income
components
 
Amount reclassified  from
accumulated other
comprehensive income
 
Affected line item in the
statement where net income is
presented
Foreign exchange contracts:
 
 
 
 
Reclassification adjustments into cost of goods sold
 
$
1.7

 
Cost of goods sold
 
 
1.7

 
Total before tax
 
 
(0.6
)
 
Tax benefit
 
 
$
1.1

 
Net of tax
Amortization of defined benefit pension items:
 
 
 
 
Prior actuarial loss
 
$
21.1

 
(2)
 
 
21.1

 
Total before tax
 
 
(7.4
)
 
Tax benefit
 
 
$
13.7

 
Net of tax
Total reclassifications for the period ending
 
$
14.8

 
Net of tax
(1)
Amounts in parentheses indicate increases to net earnings.
(2)
These accumulated other comprehensive income components are included in the computation of net periodic pension costs (see Note 9 for additional details).
 
7.
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. ASC 820 requires fair value measurements to be classified and disclosed in one of the following three categories:
Level 1:
  
Fair value is measured using quoted prices (unadjusted) in active markets for identical assets and liabilities.
 
 
 
Level 2:
  
Fair value is measured using either direct or indirect inputs, other than quoted prices included within Level 1, which are observable for similar assets or liabilities.
 
 
 
Level 3:
  
Fair value is measured using 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, foreign currency forward exchange contracts, an interest rate swap agreement, borrowings under the Company’s Revolving Credit Facility and long-term debt. The carrying amount of the Company’s financial instruments is historical cost, which approximates fair value, except for the interest rate swap and foreign currency forward exchange contracts, which are carried at fair value. As of September 7, 2013 the carrying value and the fair value of the Company’s long-term debt, including current maturities, were $1,142.1 million and $1,159.7 million, respectively. As of December 29, 2012, the carrying value and the fair value of the Company’s long-term debt, including current maturities, were $1,250.0 million and $1,308.9 million, respectively. Fair values were calculated by discounting the future cash flows of the financial instruments to their present value, using interest rates currently offered for borrowings and deposits of similar nature and remaining maturities (Level 2). The Company does not hold or issue financial instruments for trading purposes.
The Company follows FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”), 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 September 7, 2013 and September 8, 2012, foreign exchange contracts with a notional value of $96.0 million and $83.1 million, respectively, were outstanding to purchase U.S. dollars with maturities ranging up to 336 days for both periods. These contracts have been designated as cash flow hedges.

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The following table sets forth financial assets and liabilities measured at fair value in the consolidated condensed balance sheets and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy as of September 7, 2013 and September 8, 2012.
 
Fair Value Measurements
 
Quoted Prices With Other Observable Inputs (Level 2)
(In millions)
September 7, 2013
 
September 8, 2012
Financial assets
 
 
 
Interest rate swap asset
$
4.7

 
$

Financial liabilities
 
 
 
Foreign exchange contracts liability
$
0.2

 
$
1.5

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 and comprehensive income. Hedge ineffectiveness was not material to the Company’s consolidated condensed financial statements for the 12 and 36 weeks ended September 7, 2013 and September 8, 2012. 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.
The Company has one interest rate swap agreement which exchanges floating rate for fixed rate interest payments over the life of the agreement without the exchange of the underlying notional amounts. The notional amounts of the interest rate swap agreement are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss.
The differential paid or received on the interest rate swap agreement is recognized as interest expense. The Company’s interest rate swap arrangement, which reduces the Company’s exposure to fluctuations in interest rates on its variable rate debt, has a notional amount of $462.2 million. This derivative instrument, which, unless otherwise terminated, will expire on October 6, 2017, has been designated as a cash flow hedge of the debt. In accordance with ASC 815, the Company formally documented the relationship between the interest rate swap and the variable rate borrowings, as well as its risk management objective and strategy for undertaking the hedge transaction. This process included linking the derivative to the specific liability or asset on the balance sheet. The Company also assessed at the hedge’s inception and continues to assess on an ongoing basis, whether the derivative used in the hedging transaction is highly effective in offsetting changes in the cash flows of the hedged item. The effective portion of unrealized gains (losses) is deferred as a component of accumulated other comprehensive income (loss) and will be recognized in earnings at the time the hedged item affects earnings. Any ineffective portion of the change in fair value will be immediately recognized in earnings.
 
8.
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”). All share and per share data in this Quarterly Report on Form 10-Q has been presented to reflect the two-for-one stock split in the form of a 100 percent stock dividend payable on November 1, 2013 to stockholders of record on October 1, 2013. The Company recognized compensation expense of $7.4 million and $21.1 million, and related income tax benefits of $2.6 million and $7.1 million, for grants under its stock-based compensation plans for the 12 and 36 weeks ended September 7, 2013, respectively.
The Company recognized compensation expense of $3.1 million and $11.0 million, and related income tax benefits of $1.0 million and $3.6 million, for grants under its stock-based compensation plans for the 12 and 36 weeks ended September 8, 2012, respectively.
Stock-based compensation expense recognized in the consolidated condensed statements of operations and comprehensive income is based on awards ultimately expected to vest and, as such, has been reduced for estimated forfeitures. 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.

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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 $5.22 and $5.36 for the 36 weeks ended September 7, 2013 and September 8, 2012, respectively, with the following weighted-average assumptions:
 
12 Weeks Ended
 
36 Weeks Ended
 
September 7,
2013
 
September 8,
2012
 
September 7,
2013
 
September 8,
2012
Expected market price volatility (1)
30.8
%
 
36.9
%
 
33.3
%
 
37.8
%
Risk-free interest rate (2)
1.1
%
 
0.5
%
 
0.6
%
 
0.6
%
Dividend yield (3)
1.0
%
 
1.3
%
 
1.2
%
 
1.3
%
Expected term (4)
4 years

 
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.
The Company issued 237,526 and 2,142,090 shares of common stock in connection with new restricted stock grants made and the exercise of stock options during the 12 and 36 weeks ended September 7, 2013, respectively. During the 12 and 36 weeks ended September 7, 2013, the Company canceled 59,748 and 171,388 shares, respectively, of common stock issued under restricted stock awards as a result of forfeitures.
The Company issued 709,734 and 2,385,500 shares of common stock in connection with new restricted stock grants made and the exercise of stock options during the 12 and 36 weeks ended September 8, 2012, respectively. During the 12 and 36 weeks ended September 8, 2012, the Company canceled 41,474 and 72,692 shares, respectively, of common stock issued under restricted stock awards as a result of forfeitures.
 
9.
PENSION EXPENSE
A summary of net pension and Supplemental Executive Retirement Plan expense recognized by the Company is as follows:
 
12 Weeks Ended
 
36 Weeks Ended
 
September 7,
2013
 
September 8,
2012
 
September 7,
2013
 
September 8,
2012
Service cost pertaining to benefits earned during the period
$
2.0

 
$
1.8

 
$
6.2

 
$
5.3

Interest cost on projected benefit obligations
4.3

 
3.3

 
13.0

 
9.9

Expected return on pension assets
(4.8
)
 
(3.4
)
 
(14.5
)
 
(10.3
)
Net amortization loss
7.1

 
4.8

 
21.1

 
14.5

Net pension expense
$
8.6

 
$
6.5

 
$
25.8

 
$
19.4

 
10.
INCOME TAXES
The Company’s effective tax rate for the 12 weeks ended September 7, 2013 and September 8, 2012 was 25.9% and 27.1%, respectively. For the 36 weeks ended September 7, 2013 and September 8, 2012, the Company’s effective tax rate was 24.2% and 17.7%, respectively. The lower effective tax rate for the 12 weeks ended September 7, 2013 versus the prior year reflects the benefit from the deductibility of the acquisition-related transaction and integration expenses occurring primarily in high statutory tax rate jurisdictions. The higher effective tax rate for the 36 weeks ended September 7, 2013 versus the prior year reflects the benefits in the prior year of a favorable court decision in a foreign tax jurisdiction supporting the Company’s long-term global tax planning strategies.
The Company maintains certain strategic management and operational activities in overseas subsidiaries, and its foreign earnings are taxed at rates that are generally lower than the U.S. federal statutory income tax rate. A significant amount of the Company’s earnings are generated by its Canadian, European and Asia Pacific subsidiaries and, to a lesser extent, in other foreign jurisdictions that are not subject to income tax and free trade zones where the Company owns manufacturing operations. The Company has not provided for U.S. taxes for earnings generated in foreign jurisdictions because it plans to reinvest these earnings indefinitely

15

Table of Contents

outside the U.S. However, if certain foreign earnings previously treated as permanently reinvested are repatriated, the additional U.S. tax liability could have a material adverse effect on the Company’s after-tax results of operations and financial position.
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 2008.
 
11.
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, it is management’s opinion that the outcome of these matters 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 management’s opinion that the outcome of these items will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
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:
(In millions)
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
Minimum royalties
$
1.1

 
$
1.7

 
$
1.5

 
$

 
$

 
$

Minimum advertising
4.0

 
7.9

 
9.0

 
3.1

 
2.7

 
8.8


Minimum royalties are based on both fixed obligations and assumptions regarding the Consumer Price Index. Royalty obligations in excess of minimum requirements are based upon future sales levels. In accordance with these agreements, the Company incurred royalty expense of $0.5 million and $1.3 million, respectively, for the 12 and 36 weeks ended September 7, 2013. For the 12 and 36 weeks ended September 8, 2012, the Company incurred royalty expense of $0.4 million and $1.3 million, 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, for the 12 and 36 weeks ended September 7, 2013 the Company incurred advertising expense of $0.9 million and $3.0 million, respectively. For the 12 and 36 weeks ended September 8, 2012, the Company incurred advertising expense of $0.9 million and $2.6 million, respectively.
 
12.
BUSINESS SEGMENTS
During the first quarter of fiscal 2013, the Company reorganized its portfolio of 16 brands, including the PLG brands acquired in the fourth quarter of fiscal 2012, into the following three operating segments, which the Company has determined are reportable operating segments.
Lifestyle Group, consisting of Sperry Top-Sider® footwear and apparel, Stride Rite® footwear, Hush Puppies® footwear and apparel, Keds® footwear, and Soft Style® footwear;
Performance Group, consisting of Merrell® footwear and apparel, Saucony® footwear and apparel, Chaco® footwear, Patagonia® footwear, and Cushe® footwear; and
Heritage Group, consisting of Wolverine® footwear and apparel, Cat® footwear, Bates® uniform footwear, Sebago® footwear and apparel, Harley-Davidson® footwear, and HyTest® Safety footwear.
The reportable segments are engaged in designing, manufacturing, sourcing, marketing, licensing and distributing branded footwear, apparel and accessories. Reported revenue of the reportable operating segments includes revenue from the sale of branded

16

Table of Contents

footwear, apparel and accessories to third-party customers; royalty income from the licensing of the Company’s trademarks and brand names to third-party licensees and distributors; and revenue from the Company’s mono-branded consumer direct business. Prior year results have been restated to reflect these new reportable operating segments.
The Other category consists of the Company’s multi-branded consumer direct business, leather marketing operations, and sourcing operations that include third-party commission revenues. The Corporate category consists primarily of unallocated corporate expenses including acquisition-related transaction and integration expenses. This segment structure is consistent with the way management makes operating decisions, allocates resources and manages the growth and profitability of the Company’s business. The Company allocated goodwill in accordance with FASB ASC Topic 350, Intangibles – Goodwill and Other in connection with the reorganization of the Company’s brand portfolio in the first quarter of fiscal 2013.
The accounting policies of each operating segment are the same as those described in the summary of significant accounting policies set forth in Note 1 to the consolidated condensed financial statements.
Company management uses various financial measures to evaluate the performance of the reportable operating segments. The following is a summary of certain key financial measures for the respective fiscal periods indicated.
 
12 Weeks Ended
 
36 Weeks Ended
(In millions)
September 7,
2013
 
September 8,
2012
 
September 7,
2013
 
September 8,
2012
Revenue:
 
 
 
 
 
 
 
Lifestyle Group
$
295.8

 
$
38.0

 
$
821.3

 
$
98.9

Performance Group
254.1

 
152.2

 
694.5

 
454.3

Heritage Group
144.6

 
143.5

 
373.7

 
374.2

Other
22.1

 
19.4

 
60.8

 
61.2

Total
$
716.6

 
$
353.1

 
$
1,950.3

 
$
988.6

Operating (loss) profit:
 
 
 
 
 
 
 
Lifestyle Group
$
56.6

 
$
9.9

 
$
148.5

 
$
22.0

Performance Group
56.4

 
33.4

 
137.8

 
101.2

Heritage Group
24.6

 
25.6

 
56.0

 
57.7

Other
0.2

 
(0.7
)
 
(0.3
)
 
(1.3
)
Corporate
(51.5
)
 
(21.9
)
 
(167.7
)
 
(73.5
)
Total
$
86.3

 
$
46.3

 
$
174.3

 
$
106.1

 
(In millions)
September 7,
2013
 
September 8,
2012
Total assets:
 
 
 
Lifestyle Group
$
1,448.9

 
$
79.6

Performance Group
547.9

 
256.3

Heritage Group
277.7

 
251.7

Other
63.3

 
55.6

Corporate
332.4

 
304.8

Total
$
2,670.2

 
$
948.0

Goodwill:
 
 
 
Lifestyle Group
$
329.5

 
$
6.5

Performance Group
92.9

 
10.3

Heritage Group
23.4

 
22.8

Total
$
445.8

 
$
39.6

 
13.
BUSINESS ACQUISITIONS
On October 9, 2012, the Company acquired all of the outstanding equity interests of PLG as well as certain other assets. Consideration paid to acquire PLG was approximately $1,249.5 million in cash. PLG markets casual and athletic footwear, apparel and related accessories for adults and children under well-known brand names including Sperry Top-Sider®, Saucony®, Stride Rite®, and Keds®. The Company accounted for the acquisition under the provisions of FASB ASC Topic 805, Business

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Table of Contents

Combinations. The related assets acquired and liabilities assumed were recorded at fair value on the acquisition date. The operating results for PLG are included in the Company’s consolidated results of operations beginning October 9, 2012.
The Company funded the transaction using a combination of approximately $88.8 million of cash on hand and new borrowings. The Company’s debt financing included net proceeds from the term loan debt associated with the New Credit Agreement and net proceeds from the Notes.
During the first quarter of fiscal 2013, the Company reorganized its brand portfolio into three reportable operating segments, as described above. PLG’s operating results are included in the Performance Group and the Lifestyle Group operating segments.
For the 12 weeks ended September 7, 2013, the Company incurred $7.4 million of acquisition-related transaction and integration costs. These costs include compensation expenses ($4.6 million), other purchased services ($2.5 million) and professional and legal fees ($0.3 million). For the 12 weeks ended September 8, 2012, the Company incurred $3.0 million of acquisition-related transaction and integration costs. These costs included professional and legal fees ($2.6 million) and other purchased services ($0.4 million). For the 12 weeks ended September 8, 2012, the Company incurred $1.4 million of acquisition-related interest expense.
For the 36 weeks ended September 7, 2013, the Company incurred $30.5 million of acquisition-related transaction and integration costs. These costs include compensation expenses ($20.3 million), other purchased services ($6.2 million), amortization related to short-lived intangible assets ($2.4 million) and professional and legal fees ($1.6 million). For the 36 weeks ended September 8, 2012, the Company incurred $7.9 million of acquisition-related transaction and integration costs. These costs included professional and legal fees ($7.3 million) and other purchased services ($0.6 million). For the 36 weeks ended September 8, 2012, the Company incurred $1.4 million of acquisition-related interest expense.
During the measurement period, the Company made certain post-closing adjustments related to the valuation of a receivable due from the seller, other assets and accruals, intangible assets and deferred income taxes that resulted in a net reduction to goodwill of $11.1 million. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed in connection with the PLG acquisition:
(In millions)
Initial valuation  at
December 29, 2012
 
Measurement
period
adjustments
 
Adjusted preliminary valuation at
September 7, 2013
Cash
$
23.6

 
$

 
$
23.6

Accounts receivable
146.9

 
4.3

 
151.2

Inventories
203.5

 

 
203.5

Deferred income taxes
13.6

 

 
13.6

Other current assets
13.2

 

 
13.2

Property, plant and equipment
77.1

 

 
77.1

Goodwill
419.6

 
(11.1
)
 
408.5

Intangible assets
820.6

 

 
820.6

Other
11.2

 
1.8

 
13.0

Total assets acquired
1,729.3

 
(5.0
)
 
1,724.3

Accounts payable
97.4

 

 
97.4

Other accrued liabilities
40.0

 
1.5

 
41.5

Deferred income taxes
294.7

 
(6.5
)
 
288.2

Accrued pension liabilities
37.7

 

 
37.7

Other liabilities
10.0

 

 
10.0

Total liabilities assumed
479.8

 
(5.0
)
 
474.8

Net assets acquired
$
1,249.5

 
$

 
$
1,249.5

The allocations of the purchase price above are still considered preliminary and are based upon valuation information available and estimates and assumptions made at December 29, 2012 and September 7, 2013. The Company is still verifying data and finalizing information related to the valuation and recording of identifiable intangible assets, deferred income taxes and uncertain tax provisions, accrued pension liabilities and the resulting effects on the amount of recorded goodwill. The Company expects to finalize these matters within the measurement period, which will close during the fourth quarter of fiscal 2013.

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Table of Contents

The excess of the purchase price over the fair value of net assets acquired of $408.5 million was preliminarily recorded as goodwill in the consolidated condensed balance sheets and has been assigned to the Performance Group and Lifestyle Group reportable operating segments as follows:
(In millions)
Goodwill from the acquisition of PLG
 
 
Performance Group
$
82.4

Lifestyle Group
326.1

Total
$
408.5

The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of PLG. Substantially all of the goodwill is not amortizable for income tax purposes.

Intangible assets acquired in the acquisition were preliminarily valued as follows:
(In millions)
Intangible asset
 
Useful life
Trade names and trademarks
$
670.8

 
Indefinite
Customer lists
100.5

 
3-20 years
Licensing agreements
28.8

 
4-5 years
Developed product technology
14.8

 
3-5 years
Backlog
5.1

 
6 months
Net favorable leases
0.6

 
10 years
Total intangible assets acquired
$
820.6

 
 
The Company preliminarily assigned fair values to the identifiable intangible assets through a combination of the relief from royalty and the excess earnings methods.
At the time of the acquisition, a step-up in the value of inventory of $4.0 million was recorded in the allocation of the purchase price based on valuation estimates, all of which was charged to cost of sales in the fourth quarter of fiscal 2012 as the inventory was deemed sold. In addition, fixed assets were written up by approximately $18.8 million to their estimated fair market value based on a valuation method that included both cost and market approaches. This additional step-up in value is being depreciated over the estimated remaining useful lives of the assets.
 
14.
SUBSEQUENT EVENTS
On October 4, 2013, the Board of Directors of the Company approved a plan to restructure its Dominican Republic manufacturing operations in a manner intended to lower the Company’s cost of sourced goods, as described below (the “Restructuring Plan”). The Company intends to close a manufacturing facility in the Dominican Republic and is evaluating strategic alternatives with respect to a second manufacturing facility in the Dominican Republic. As a result of this Restructuring Plan, the Company will incur charges relating to the disposal of property and equipment, write down of inventory that will no longer be used in the Company's production process, and severance costs to be paid to employees. The range of charges is currently estimated to be between $7.0 million and $10.4 million. The Company expects to complete the Restructuring Plan in fiscal 2014 with the majority of costs incurred in the fourth quarter of fiscal 2013.
See Note 5 for a description of the Company's amendment to the New Credit Agreement completed on October 10, 2013.
 
15.
SUBSIDIARY GUARANTORS OF THE NOTES
The following tables present consolidated condensed financial information for (a) the Company (for purposes of this discussion and table, “Parent”); (b) the guarantors of the Notes, which include substantially all of the domestic, wholly-owned subsidiaries of the Parent (“Subsidiary Guarantors”); and (c) the wholly- and partially-owned foreign subsidiaries of the Parent, which do not guarantee the Notes (“Non-Guarantor Subsidiaries”). Separate financial statements of the Subsidiary Guarantors are not presented because they are fully and unconditionally, jointly and severally liable under the guarantees, except for normal and customary release provisions.

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Table of Contents

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations and Comprehensive Income
For the 12 weeks ended September 7, 2013
(Unaudited)
(In millions)
Parent
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
135.5

 
$
1,527.4

 
$
226.0

 
$
(1,172.3
)
 
$
716.6

Cost of goods sold
95.0

 
1,358.1

 
130.1

 
(1,152.6
)
 
430.6

Gross profit
40.5

 
169.3

 
95.9

 
(19.7
)
 
286.0

Selling, general and administrative expenses
24.5

 
115.2

 
72.6

 
(20.0
)
 
192.3

Acquisition-related transaction and integration costs
4.1

 
1.2

 
2.1

 

 
7.4

Operating profit
11.9

 
52.9

 
21.2

 
0.3

 
86.3

Other expenses:
 
 
 
 
 
 
 
 
 
Interest expense – net
11.9

 

 

 

 
11.9

Acquisition-related interest expense

 

 

 

 

Other expense – net
(0.9
)
 
0.1

 
2.0

 
(0.2
)
 
1.0

 
11.0

 
0.1

 
2.0

 
(0.2
)
 
12.9

Earnings before income taxes
0.9

 
52.8

 
19.2

 
0.5

 
73.4

Income taxes
17.1

 

 
1.9

 

 
19.0

Earnings before equity in earnings (loss) of consolidated subsidiaries
(16.2
)
 
52.8

 
17.3

 
0.5

 
54.4

Equity in earnings (loss) of consolidated subsidiaries
70.6

 
133.0

 
(6.1
)
 
(197.5
)
 

Net earnings
54.4

 
185.8

 
11.2

 
(197.0
)
 
54.4

Net (earnings) loss attributable to non-controlling interests

 

 

 

 

Net earnings (loss) attributable to Wolverine World Wide, Inc.
$
54.4

 
$
185.8

 
$
11.2

 
$
(197.0
)
 
$
54.4

 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
58.4

 
$
185.8

 
$
7.3

 
$
(193.1
)
 
$
58.4

Comprehensive (income) loss attributable to non-controlling interest

 

 

 

 

Comprehensive income attributable to Wolverine World Wide, Inc.
$
58.4

 
$
185.8

 
$
7.3

 
$
(193.1
)
 
$
58.4


20

Table of Contents

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations and Comprehensive Income
For the 12 weeks ended September 8, 2012
(Unaudited)
(In millions)
Parent
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
129.5

 
$
128.5

 
$
128.0

 
$
(32.9
)
 
$
353.1

Cost of goods sold
93.6

 
80.3

 
65.0

 
(24.4
)
 
214.5

Gross profit
35.9

 
48.2

 
63.0

 
(8.5
)
 
138.6

Selling, general and administrative expenses
22.1

 
32.1

 
43.6

 
(8.5
)
 
89.3

Acquisition-related transaction and integration costs
3.0

 

 

 

 
3.0

Operating profit
10.8

 
16.1

 
19.4

 

 
46.3

Other expenses:
 
 
 
 
 
 
 
 
 
Interest expense – net
0.8

 
(0.1
)
 
(0.4
)
 

 
0.3

Acquisition-related interest expense
1.4

 

 

 

 
1.4

Other expense – net

 
0.1

 
(0.4
)
 

 
(0.3
)
 
2.2

 

 
(0.8
)
 

 
1.4

Earnings before income taxes
8.6

 
16.1

 
20.2

 

 
44.9

Income taxes
10.6

 

 
1.5

 

 
12.1

Earnings before equity in earnings (loss) of consolidated subsidiaries
(2.0
)
 
16.1

 
18.7

 

 
32.8

Equity in earnings (loss) of consolidated subsidiaries
34.7

 
19.3

 
24.8

 
(78.8
)
 

Net earnings
32.7

 
35.4

 
43.5

 
(78.8
)
 
32.8

Net (earnings) loss attributable to non-controlling interests

 

 
(0.1
)
 

 
(0.1
)
Net earnings (loss) attributable to Wolverine World Wide, Inc.
$
32.7

 
$
35.4

 
$
43.4

 
$
(78.8
)
 
$
32.7

 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
37.1

 
$
35.4

 
$
47.9

 
$
(83.2
)
 
$
37.2

Comprehensive (income) loss attributable to non-controlling interest

 

 
(0.1
)
 

 
(0.1
)
Comprehensive income attributable to Wolverine World Wide, Inc.
$
37.1

 
$
35.4

 
$
47.8

 
$
(83.2
)
 
$
37.1


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Table of Contents

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations and Comprehensive Income
For the 36 weeks ended September 7, 2013
(Unaudited)
(In millions)
Parent
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
357.1

 
$
2,868.2

 
$
548.0

 
$
(1,823.0
)
 
$
1,950.3

Cost of goods sold
253.7

 
2,385.3

 
293.9

 
(1,771.7
)
 
1,161.2

Gross profit
103.4

 
482.9

 
254.1

 
(51.3
)
 
789.1

Selling, general and administrative expenses
112.7

 
325.9

 
196.3

 
(50.6
)
 
584.3

Acquisition-related transaction and integration costs
12.5

 
12.8

 
5.2

 

 
30.5

Operating profit
(21.8
)
 
144.2

 
52.6

 
(0.7
)
 
174.3

Other expenses:
 
 
 
 
 
 
 
 
 
Interest expense – net
37.3

 

 

 

 
37.3

Acquisition-related interest expense

 

 

 

 

Other expense – net
(0.9
)
 
0.1

 
2.8

 

 
2.0

 
36.4

 
0.1

 
2.8

 

 
39.3

Earnings before income taxes
(58.2
)
 
144.1

 
49.8

 
(0.7
)
 
135.0

Income taxes
27.7

 

 
5.0

 

 
32.7

Earnings before equity in earnings (loss) of consolidated subsidiaries
(85.9
)
 
144.1

 
44.8

 
(0.7
)
 
102.3

Equity in earnings (loss) of consolidated subsidiaries
188.0

 
293.4

 
45.9

 
(527.3
)
 

Net earnings
102.1

 
437.5

 
90.7

 
(528.0
)
 
102.3

Net (earnings) loss attributable to non-controlling interests

 

 
(0.2
)
 

 
(0.2
)
Net earnings (loss) attributable to Wolverine World Wide, Inc.
$
102.1

 
$
437.5

 
$
90.5

 
$
(528.0
)
 
$
102.1

 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
111.2

 
$
437.5

 
$
82.3

 
$
(519.6
)
 
$
111.4

Comprehensive (income) loss attributable to non-controlling interest

 

 
(0.2
)
 

 
(0.2
)
Comprehensive income attributable to Wolverine World Wide, Inc.
$
111.2

 
$
437.5

 
$
82.1

 
$
(519.6
)
 
$
111.2


22

Table of Contents

WOLVERINE WORLD WIDE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations and Comprehensive Income
For the 36 weeks ended September 8, 2012
(Unaudited)
(In millions)
Parent
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
349.6

 
$
375.7

 
$
345.0

 
$
(81.7
)
 
$
988.6

Cost of goods sold
256.6

 
230.9

 
170.7

 
(58.4
)
 
599.8

Gross profit
93.0

 
144.8

 
174.3

 
(23.3
)
 
388.8

Selling, general and administrative expenses
86.4

 
84.5

 
128.1

 
(24.2
)
 
274.8

Acquisition-related transaction and integration costs
7.9

 

 

 

 
7.9

Operating profit
(1.3
)
 
60.3

 
46.2

 
0.9

 
106.1

Other expenses:
 
 
 
 
 
 
 
 
 
Interest expense – net
0.7

 
(0.1
)
 
0.4

 

 
1.0

Acquisition-related interest expense
1.4

 

 

 

 
1.4

Other expense – net

 
0.1

 
1.2

 

 
1.3

 
2.1

 

 
1.6

 

 
3.7

Earnings before income taxes
(3.4
)
 
60.3

 
44.6

 
0.9

 
102.4

Income taxes
17.0