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Wolverine World Wide(WWW) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements The unaudited consolidated condensed financial statements detail the company's financial position, operational results, cash flows, and changes in equity Consolidated Condensed Statements of Operations and Comprehensive Income The statements of operations show a significant decline in revenue and net earnings for the quarter and year-to-date periods ended September 30, 2023 Operations and Comprehensive Income Summary | Metric (in millions) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :------------------- | :------ | :------ | :------- | :------- | | Revenue | $527.7 | $691.4 | $1,716.2 | $2,019.8 | | Gross profit | $215.4 | $277.8 | $679.5 | $846.2 | | Operating profit | $27.3 | $58.8 | $118.7 | $246.3 | | Net earnings | $9.0 | $38.8 | $51.4 | $171.7 | | Diluted EPS | $0.11 | $0.48 | $0.64 | $2.12 | - Revenue decreased by 23.7% for Q3 2023 and 15.0% for YTD 2023 compared to the prior year11 - Net earnings attributable to Wolverine World Wide, Inc decreased by 77.9% for Q3 2023 and 70.2% for YTD 202311 Consolidated Condensed Balance Sheets The balance sheets show a decrease in total assets and liabilities as of September 30, 2023, driven by reductions in inventories and debt Balance Sheet Summary | Metric (in millions) | Sep 30, 2023 | Dec 31, 2022 | Oct 1, 2022 | | :------------------- | :----------- | :----------- | :---------- | | Total current assets | $1,097.2 | $1,265.3 | $1,551.8 | | Total assets | $2,231.3 | $2,492.7 | $3,170.6 | | Total current liabilities | $851.7 | $1,110.3 | $1,331.3 | | Total liabilities and stockholders' equity | $2,231.3 | $2,492.7 | $3,170.6 | - Total inventories decreased from $745.2 million at December 31, 2022, to $563.8 million at September 30, 202314 - Borrowings under revolving credit agreements decreased from $425.0 million at December 31, 2022, to $370.0 million at September 30, 202314 Consolidated Condensed Statements of Cash Flows The statements of cash flows show a significant improvement in cash from operating activities for the year-to-date period due to working capital changes Cash Flow Summary | Metric (in millions) | YTD Sep 30, 2023 | YTD Oct 1, 2022 | | :------------------- | :--------------- | :-------------- | | Net cash provided by (used in) operating activities | $7.0 | $(490.2) | | Net cash provided by investing activities | $116.2 | $68.2 | | Net cash provided by (used in) financing activities | $(91.5) | $402.5 | | Cash and cash equivalents at end of the quarter | $164.7 | $136.4 | - Net cash provided by operating activities improved from a use of $490.2 million in YTD 2022 to a provision of $7.0 million in YTD 202316 - Investing activities provided $116.2 million in YTD 2023, up from $68.2 million in YTD 2022, largely due to proceeds from divestitures16 Consolidated Condensed Statements of Stockholders' Equity The statements of stockholders' equity reflect a decrease in total equity due to net earnings being offset by comprehensive loss and dividends Stockholders' Equity Summary | Metric (in millions) | Sep 30, 2023 | Oct 1, 2022 | | :------------------- | :----------- | :---------- | | Total Wolverine World Wide, Inc. stockholders' equity | $342.4 | $656.9 | | Total stockholders' equity | $362.7 | $674.2 | | Retained earnings | $934.5 | $1,277.1 | | Accumulated other comprehensive loss | $(144.5) | $(159.7) | - Total stockholders' equity decreased from $674.2 million at October 1, 2022, to $362.7 million at September 30, 20231922 Notes to Consolidated Condensed Financial Statements These notes provide detailed explanations for the financial statements, covering accounting policies, standards, and specific financial line items 1. BASIS OF PRESENTATION This note outlines the Company's operations, basis for financial preparation, fiscal year, seasonality, and impairment of long-lived assets - The Company is a leading designer, marketer, and licensor of a broad range of footwear and apparel, with brands including Merrell, Saucony, Sweaty Betty, Wolverine, Cat, Sperry, and Hush Puppies25 - The Company completed the sale of the Keds business effective February 4, 2023, and entered into a multi-year licensing agreement for the Hush Puppies brand in the U.S. and Canada, also selling Hush Puppies trademarks in China, Hong Kong, and Macau25 Impairment Charges | Impairment Type (in millions) | Q3 2023 | YTD 2023 | | :---------------------------- | :------ | :------- | | Lease right-of-use assets | $— | $12.1 | | Property, plant and equipment | $1.9 | $5.4 | | Indefinite-lived trade name | $38.3 | $38.3 | | Total impairment | $40.2 | $55.8 | 2. NEW ACCOUNTING STANDARDS The Company adopted ASU 2020-04 for reference rate reform, which did not materially affect the consolidated financial statements - The Company adopted ASU 2020-04, Reference Rate Reform, in Q2 2023, amending its senior credit facility to use SOFR33 - The adoption of ASU 2020-04 did not have a material effect on the consolidated financial statements33 3. EARNINGS PER SHARE This note details the computation of basic and diluted earnings per share, showing a significant decrease compared to the prior year Earnings Per Share Calculation | Metric (in millions, except per share data) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :---------------------------------------- | :------ | :------ | :------- | :------- | | Net earnings attributable to Wolverine World Wide, Inc. | $8.6 | $39.0 | $51.6 | $173.3 | | Basic EPS | $0.11 | $0.49 | $0.64 | $2.12 | | Diluted EPS | $0.11 | $0.48 | $0.64 | $2.12 | | Weighted average shares outstanding | 79.5 | 78.7 | 79.4 | 80.0 | - Diluted EPS decreased by 77.1% for Q3 2023 and 69.8% for YTD 202335 - 1.96 million and 2.04 million outstanding stock options were anti-dilutive for the quarter and year-to-date ended September 30, 2023, respectively35 4. GOODWILL AND INDEFINITE-LIVED INTANGIBLES This note details changes in goodwill and intangibles, highlighting a $38.3 million impairment charge to the Sperry trade name in Q3 2023 Goodwill and Intangibles Summary | Metric (in millions) | Sep 30, 2023 | Oct 1, 2022 | | :------------------- | :----------- | :---------- | | Goodwill balance at end of the quarter | $465.4 | $526.5 | | Indefinite-lived intangibles | $237.0 | $658.6 | - A $38.3 million impairment charge was recognized for the Sperry trade name in Q3 202337 - In Q4 2022, the Company recognized $191.0 million and $189.3 million impairment charges for Sperry and Sweaty Betty trade names, respectively, and a $48.4 million goodwill impairment for the Sweaty Betty reporting unit37 5. ACCOUNTS RECEIVABLE The Company utilizes a receivables purchase agreement to sell trade receivables without recourse, with $510.3 million sold year-to-date - Total receivables sold under the RPA were $144.7 million for Q3 2023 and $510.3 million for YTD 202339 - As of September 30, 2023, $131.5 million in receivables were sold and derecognized, with $61.5 million in unsold receivables held as collateral40 6. REVENUE FROM CONTRACTS WITH CUSTOMERS This note disaggregates revenue by channel and segment, showing overall declines for the quarter and year-to-date periods Revenue by Segment and Channel | Revenue (in millions) | Q3 2023 Wholesale | Q3 2023 Direct-to-Consumer | Q3 2023 Total | YTD 2023 Wholesale | YTD 2023 Direct-to-Consumer | YTD 2023 Total | | :-------------------- | :---------------- | :------------------------- | :------------ | :----------------- | :-------------------------- | :------------- | | Active Group | $225.2 | $103.4 | $328.6 | $800.4 | $297.4 | $1,097.8 | | Work Group | $111.4 | $11.6 | $123.0 | $322.4 | $32.9 | $355.3 | | Lifestyle Group | $42.8 | $20.0 | $62.8 | $162.0 | $61.0 | $223.0 | | Other | $11.7 | $1.6 | $13.3 | $35.9 | $4.2 | $40.1 | | Total Revenue | $391.1 | $136.6 | $527.7 | $1,320.7 | $395.5 | $1,716.2 | - Total revenue decreased by 23.7% in Q3 2023 and 15.0% in YTD 2023 compared to the prior year42 Contract Balances | Contract Balance (in millions) | Sep 30, 2023 | Dec 31, 2022 | Oct 1, 2022 | | :----------------------------- | :----------- | :----------- | :---------- | | Product returns reserve | $10.8 | $15.3 | $11.6 | | Customer markdowns reserve | $4.6 | $2.6 | $2.2 | | Other sales incentives reserve | $3.4 | $3.3 | $3.7 | | Customer rebates liability | $14.0 | $19.8 | $18.2 | | Customer advances liability | $4.9 | $9.1 | $5.3 | 7. DEBT The Company's total debt decreased to $1,096.3 million, and it remained in compliance with all financial covenants as of September 30, 2023 Debt Summary | Debt (in millions) | Sep 30, 2023 | Dec 31, 2022 | Oct 1, 2022 | | :----------------- | :----------- | :----------- | :---------- | | Term Facility | $182.5 | $190.0 | $192.5 | | Senior Notes | $550.0 | $550.0 | $550.0 | | Borrowings under revolving credit agreements | $370.0 | $425.0 | $740.0 | | Total debt | $1,096.3 | $1,158.0 | $1,475.2 | - The weighted-average interest rate for the Term Facility and Revolving Facility was 6.38% at September 30, 202349 - The Company entered into an amendment on June 30, 2023, to adjust the maximum Consolidated Leverage Ratio, providing near-term financial flexibility52 8. LEASES Total lease cost increased for the quarter and year-to-date periods ended September 30, 2023, compared to the prior year Lease Cost Summary | Lease Cost (in millions) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :----------------------- | :------ | :------ | :------- | :------- | | Operating lease cost | $10.0 | $8.6 | $30.5 | $26.4 | | Total lease cost | $13.3 | $11.0 | $39.5 | $33.8 | Lease-Related Cash Flow | Cash Flow (in millions) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :---------------------- | :------ | :------ | :------- | :------- | | Cash paid for operating lease liabilities | $10.0 | $11.1 | $32.6 | $30.3 | | Operating lease assets obtained | $4.2 | $9.7 | $9.6 | $59.0 | 9. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses foreign currency forward contracts and an interest rate swap to hedge cash flow and transaction exposures Notional Amounts of Derivatives | Notional Amounts (in millions) | Sep 30, 2023 | Dec 31, 2022 | Oct 1, 2022 | | :----------------------------- | :----------- | :----------- | :---------- | | Foreign exchange hedge contracts | $267.8 | $334.2 | $376.3 | | Interest rate swap | $109.6 | $176.2 | $240.6 | Fair Values of Derivatives | Fair Values (in millions) | Sep 30, 2023 | Dec 31, 2022 | Oct 1, 2022 | | :------------------------ | :----------- | :----------- | :---------- | | Foreign exchange hedge contracts (assets) | $4.3 | $7.5 | $32.3 | | Interest rate swap (assets) | $3.0 | $6.1 | $7.2 | | Foreign exchange hedge contracts (liabilities) | $(0.3) | $(1.3) | $— | 10. STOCK-BASED COMPENSATION Stock-based compensation expense and related income tax benefits decreased for both the quarter and year-to-date periods Compensation Expense Summary | Metric (in millions) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :------------------- | :------ | :------ | :------- | :------- | | Compensation expense | $4.0 | $7.1 | $11.8 | $26.4 | | Income tax benefits | $0.8 | $1.4 | $2.3 | $5.1 | Stock Award Activity | Award Type (shares in millions) | YTD Sep 30, 2023 Issued | YTD Sep 30, 2023 Avg Fair Value | YTD Oct 1, 2022 Issued | YTD Oct 1, 2022 Avg Fair Value | | :------------------------------ | :---------------------- | :------------------------------ | :--------------------- | :----------------------------- | | Restricted Awards | 1.41 | $14.90 | 0.97 | $26.06 | | Performance Awards | 0.68 | $15.16 | 0.39 | $29.90 | 11. RETIREMENT PLANS Net pension expense significantly decreased for both the quarter and year-to-date periods compared to the prior year Net Pension Expense Components | Metric (in millions) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :------------------- | :------ | :------ | :------- | :------- | | Service cost | $0.7 | $1.3 | $2.3 | $4.0 | | Interest cost | $4.4 | $3.3 | $13.3 | $9.9 | | Expected return on pension assets | $(4.6) | $(5.1) | $(13.9) | $(15.4) | | Net amortization loss | $(0.1) | $2.9 | $(0.5) | $8.5 | | Net pension expense | $0.4 | $2.4 | $1.2 | $7.0 | 12. INCOME TAXES The Company's effective tax rate fluctuated due to income mix changes between jurisdictions and discrete tax items Effective Tax Rate | Metric | Q3 2023 Effective Tax Rate | Q3 2022 Effective Tax Rate | YTD 2023 Effective Tax Rate | YTD 2022 Effective Tax Rate | | :----- | :------------------------- | :------------------------- | :-------------------------- | :-------------------------- | | Rate | 4.6% | 10.9% | 24.5% | 19.3% | - The decrease in Q3 effective tax rate is due to income mix changes, partially offset by discrete tax expenses69 - The increase in YTD effective tax rate is due to discrete tax expenses, partially offset by income mix changes69 13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive loss increased during the quarter and year-to-date, primarily due to foreign currency translation losses AOCI Components | Metric (in millions) | Sep 30, 2023 | Oct 1, 2022 | | :------------------- | :----------- | :---------- | | Balance at end of quarter | $(144.5) | $(159.7) | | Foreign currency translation | $(138.1) | $(156.8) | | Derivatives | $(4.3) | $23.6 | | Pension | $(2.1) | $(26.5) | - Net current-period other comprehensive loss was $(9.0) million for Q3 2023 and $(11.6) million for YTD 20237172 14. FAIR VALUE MEASUREMENTS The Company measures certain financial instruments at fair value and applied nonrecurring measurements to intangible assets, resulting in an impairment Recurring Fair Value Measurements | Financial Instruments (in millions) | Sep 30, 2023 | Dec 31, 2022 | Oct 1, 2022 | | :-------------------------------- | :----------- | :----------- | :---------- | | Derivatives (assets) | $7.3 | $13.6 | $39.5 | | Derivatives (liabilities) | $(0.3) | $(1.3) | $— | - A $38.3 million impairment charge was recognized for the Sperry trade name in Q3 202377 Fair Value of Debt | Debt (in millions) | Sep 30, 2023 Carrying Value | Sep 30, 2023 Fair Value | | :----------------- | :-------------------------- | :---------------------- | | Total debt | $1,096.3 | $971.9 | 15. LITIGATION AND CONTINGENCIES This note details ongoing environmental litigation related to PFAS contamination, for which the Company maintains a remediation reserve - The Company settled the EGLE Action in February 2020, agreeing to pay up to $69.5 million for municipal water system extensions82 - A settlement with 3M Company in February 2020 resulted in a $55.0 million payment to the Company for remediation costs83 Environmental Remediation Reserve Activity | Environmental Remediation Reserve (in millions) | YTD Sep 30, 2023 | YTD Oct 1, 2022 | | :---------------------------------------------- | :--------------- | :-------------- | | Remediation liability at beginning of the year | $74.1 | $85.7 | | Changes in estimate | $(21.0) | $— | | Amounts paid | $(9.5) | $(21.3) | | Remediation liability at the end of the quarter | $43.6 | $64.4 | 16. BUSINESS SEGMENTS All reportable segments experienced revenue and operating profit declines for the quarter and year-to-date periods Segment Revenue | Segment Revenue (in millions) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :---------------------------- | :------ | :------ | :------- | :------- | | Active Group | $328.6 | $398.2 | $1,097.8 | $1,172.6 | | Work Group | $123.0 | $157.8 | $355.3 | $435.8 | | Lifestyle Group | $62.8 | $117.7 | $223.0 | $346.9 | | Other | $13.3 | $17.7 | $40.1 | $64.5 | | Total | $527.7 | $691.4 | $1,716.2 | $2,019.8 | Segment Operating Profit | Segment Operating Profit (in millions) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :------------------------------------- | :------ | :------ | :------- | :------- | | Active Group | $32.7 | $54.9 | $124.6 | $180.8 | | Work Group | $15.4 | $28.2 | $45.7 | $81.7 | | Lifestyle Group | $5.4 | $13.4 | $18.6 | $43.2 | | Other | $2.8 | $2.8 | $9.3 | $9.7 | | Corporate | $(29.0) | $(40.5) | $(79.5) | $(69.1) | | Operating profit | $27.3 | $58.8 | $118.7 | $246.3 | - Total assets decreased across all segments from October 1, 2022, to September 30, 2023104 17. VARIABLE INTEREST ENTITIES AND RELATED PARTY TRANSACTIONS The Company consolidates two joint ventures in China as Variable Interest Entities and engages in arm's-length related party transactions Consolidated VIEs Summary | Consolidated VIEs (in millions) | Sep 30, 2023 | Dec 31, 2022 | Oct 1, 2022 | | :------------------------------ | :----------- | :----------- | :---------- | | Total assets | $53.5 | $44.7 | $41.1 | | Total liabilities | $11.9 | $11.2 | $5.8 | - Net sales to equity affiliates totaled $16.8 million for Q3 2023 and $41.1 million for YTD 2023, up from $9.5 million and $20.5 million respectively in the prior year111 Related Party Balances | Related Party Balances (in millions) | Sep 30, 2023 | Dec 31, 2022 | Oct 1, 2022 | | :----------------------------------- | :----------- | :----------- | :---------- | | Accounts receivable due from related parties | $8.4 | $18.1 | $11.3 | 18. DIVESTITURES AND ASSETS AND LIABILITIES HELD FOR SALE The Company completed several divestitures in 2023, generating significant gains, and has classified one business as held for sale - Sale of Keds business effective February 4, 2023, generated net proceeds of $83.4 million and a gain of $20.1 million114 - Sale of U.S. Wolverine Leathers business completed August 23, 2023, for $4.0 million cash, recognizing a $1.9 million gain115 - Sale of Hush Puppies intellectual property in China, Hong Kong, and Macau completed September 14, 2023, for $58.8 million cash, recognizing a $55.8 million gain116 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's financial performance, liquidity, and capital resources, highlighting revenue declines and inventory management efforts BUSINESS OVERVIEW Wolverine World Wide, Inc is a global designer, marketer, and licensor of branded footwear, apparel, and accessories - The Company markets brands in approximately 170 countries and territories, operating 165 retail stores and 56 direct-to-consumer eCommerce sites122 - The Keds business was sold effective February 4, 2023, and strategic alternatives for the Sperry business are being explored123 - A multi-year licensing agreement for the Hush Puppies brand in the U.S. and Canada was entered, and Hush Puppies trademarks in China, Hong Kong, and Macau were sold123 Known Trends Impacting Our Business Macroeconomic conditions, excess inventory, and inflationary pressures continue to adversely affect the Company's business and gross margin - Excess inventory from improved transit times led to storage and capacity pressures, resulting in additional carrying costs124 - Inventory declined by $181.4 million in the first three quarters of 2023 due to decreased purchases and increased promotional activity124 - Inflationary pressures and higher promotional activity caused a 230 basis point gross margin contraction for the first three quarters of 2023 compared to 2022125 2023 FINANCIAL OVERVIEW For the third quarter of 2023, revenue decreased significantly, while gross margin slightly increased and operating cash flow improved year-to-date - Revenue for Q3 2023 was $527.7 million, a 23.7% decrease from Q3 2022127 - Gross margin was 40.8% in Q3 2023, up from 40.2% in Q3 2022127 - Diluted EPS for Q3 2023 was $0.11, compared to $0.48 for Q3 2022130 - Cash flow provided by operating activities was $7.0 million for YTD 2023, a significant improvement from a $490.2 million use in YTD 2022130 RESULTS OF OPERATIONS The Company experienced substantial declines in revenue and operating profit due to decreased sales, increased interest, and impairment charges Financial Performance Summary | Metric (in millions) | Q3 2023 | Q3 2022 | % Change Q3 | YTD 2023 | YTD 2022 | % Change YTD | | :------------------- | :------ | :------ | :---------- | :------- | :------- | :----------- | | Revenue | $527.7 | $691.4 | (23.7)% | $1,716.2 | $2,019.8 | (15.0)% | | Gross profit | $215.4 | $277.8 | (22.5)% | $679.5 | $846.2 | (19.7)% | | Operating profit | $27.3 | $58.8 | (53.6)% | $118.7 | $246.3 | (51.8)% | | Net earnings | $9.0 | $38.8 | (76.8)% | $51.4 | $171.7 | (70.1)% | | Diluted EPS | $0.11 | $0.48 | (77.1)% | $0.64 | $2.12 | (69.8)% | REVENUE Revenue declined by 23.7% in Q3 2023 and 15.0% year-to-date, driven by decreases across all reportable segments and key brands - Active Group revenue decreased by $69.6 million (17.5%) in Q3 2023, driven by Merrell ($50.4M), Saucony ($18.9M), and Chaco ($7.5M), partially offset by Sweaty Betty ($7.2M)130 - Work Group revenue decreased by $34.8 million (22.1%) in Q3 2023, primarily from Cat ($28.1M), Harley-Davidson ($4.0M), and Wolverine ($2.8M)130 - Lifestyle Group revenue declined by $54.9 million (46.6%) in Q3 2023, mainly due to Sperry ($32.7M) and the Keds divestiture ($21.3M)130 GROSS MARGIN Gross margin slightly increased in Q3 2023 due to favorable product mix but decreased year-to-date from unfavorable product costs and pricing - Q3 2023 gross margin increased by 60 basis points to 40.8%, driven by favorable product mix (100 bps) partially offset by increased closeout sales (40 bps)132 - YTD 2023 gross margin decreased by 230 basis points to 39.6%, due to unfavorable product cost changes (100 bps), direct-to-consumer pricing/costs (60 bps), and increased closeout sales (50 bps)133 OPERATING EXPENSES Operating expenses decreased in Q3 2023 due to gains on divestitures, partially offset by impairment and reorganization costs - Q3 2023 operating expenses decreased by $30.9 million, driven by a $57.7 million gain on sale of businesses and lower advertising costs ($14.0M), offset by impairment of intangible assets ($38.3M) and reorganization costs ($8.5M)134 - YTD 2023 operating expenses decreased by $39.1 million, driven by a $77.8 million gain on sale of businesses and lower environmental costs ($60.6M), offset by prior year Champion trademark sale gain ($90.0M), impairment of intangible assets ($38.3M), and long-lived assets ($17.5M)135 INTEREST, OTHER AND INCOME TAXES Net interest expense increased significantly due to higher borrowings and interest rates, while the effective tax rate fluctuated - Net interest expense increased to $15.5 million in Q3 2023 (from $12.5M in Q3 2022) and $47.4 million in YTD 2023 (from $31.3M in YTD 2022) due to higher borrowings and interest rates136 - Effective tax rates were 4.6% for Q3 2023 (down from 10.9% in Q3 2022) and 24.5% for YTD 2023 (up from 19.3% in YTD 2022)138 REPORTABLE SEGMENTS All reportable segments experienced revenue and operating profit declines due to softer consumer demand and the impact of divestitures Segment Revenue Performance | Segment (in millions) | Q3 2023 Revenue | Q3 2022 Revenue | Q3 % Change | YTD 2023 Revenue | YTD 2022 Revenue | YTD % Change | | :-------------------- | :-------------- | :-------------- | :---------- | :--------------- | :--------------- | :----------- | | Active Group | $328.6 | $398.2 | (17.5)% | $1,097.8 | $1,172.6 | (6.4)% | | Work Group | $123.0 | $157.8 | (22.1)% | $355.3 | $435.8 | (18.5)% | | Lifestyle Group | $62.8 | $117.7 | (46.6)% | $223.0 | $346.9 | (35.7)% | Segment Operating Profit Performance | Segment (in millions) | Q3 2023 Operating Profit | Q3 2022 Operating Profit | Q3 % Change | YTD 2023 Operating Profit | YTD 2022 Operating Profit | YTD % Change | | :-------------------- | :----------------------- | :----------------------- | :---------- | :------------------------ | :------------------------ | :----------- | | Active Group | $32.7 | $54.9 | (40.4)% | $124.6 | $180.8 | (31.1)% | | Work Group | $15.4 | $28.2 | (45.4)% | $45.7 | $81.7 | (44.1)% | | Lifestyle Group | $5.4 | $13.4 | (59.7)% | $18.6 | $43.2 | (56.9)% | Active Group The Active Group's revenue decreased due to declines in Merrell, Saucony, and Chaco, driven by softening demand and high retail inventory - Q3 2023 revenue decline was driven by Merrell ($50.4M), Saucony ($18.9M), and Chaco ($7.5M), partially offset by Sweaty Betty ($7.2M)142 - YTD 2023 revenue decline was driven by Merrell ($56.4M) and Chaco ($22.7M), partially offset by Saucony ($6.6M)142 - Operating profit decreased by 40.4% in Q3 2023 and 31.1% YTD, due to revenue declines and a 350 basis point decrease in YTD gross margin143144 Work Group The Work Group's revenue decreased due to declines across its brands, reflecting softer consumer demand and high retail inventory levels - Q3 2023 revenue decline was driven by Cat ($28.1M), Harley-Davidson ($4.0M), and Wolverine ($2.8M)145 - YTD 2023 revenue decline was driven by Cat ($40.1M), Wolverine ($26.3M), Harley-Davidson ($12.5M), and Bates ($5.1M)145 - Operating profit decreased by 45.4% in Q3 2023 and 44.1% YTD, due to revenue declines and a 230 basis point decrease in YTD gross margin145 Lifestyle Group The Lifestyle Group's revenue decreased primarily due to the divestiture of Keds and declines in Sperry from softer consumer demand - Q3 2023 revenue decline was driven by Sperry ($32.7M) and Keds ($21.3M) divestiture146 - YTD 2023 revenue decline was driven by Keds ($67.5M) divestiture and Sperry ($59.7M), partially offset by Hush Puppies ($3.3M)146 - Operating profit decreased by 59.7% in Q3 2023 and 56.9% YTD, with Q3 gross margin increasing by 240 basis points due to the Keds divestiture146 Other The 'Other' category revenue declined, primarily driven by a decrease from the performance leathers business - Q3 2023 revenue decreased by $4.4 million (24.9%), primarily from the performance leathers business ($5.8M)147 - YTD 2023 revenue decreased by $24.4 million (37.8%), primarily from the performance leathers business ($18.7M)147 Corporate Corporate expenses decreased in Q3 2023 due to divestiture gains but increased year-to-date as prior year gains did not recur - Q3 2023 Corporate expenses decreased by $11.5 million, driven by a $57.7 million gain on sale of businesses, offset by $40.2 million impairment of long-lived assets and $8.5 million reorganization costs148 - YTD 2023 Corporate expenses increased by $10.4 million, due to the prior year's $90.0 million gain on Champion trademarks not recurring, and $55.8 million impairment of long-lived assets, partially offset by a $77.8 million gain on sale of businesses and $60.6 million lower environmental costs149 LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity improved with increased cash and available credit, driven by positive operating cash flows and divestiture proceeds Liquidity Summary | Metric (in millions) | Sep 30, 2023 | Dec 31, 2022 | Oct 1, 2022 | | :------------------- | :----------- | :----------- | :---------- | | Cash and cash equivalents | $164.7 | $135.5 | $136.4 | | Debt | $1,096.3 | $1,158.0 | $1,475.2 | | Available revolving credit facility | $623.4 | $569.3 | $254.4 | Liquidity Cash and cash equivalents increased, supported by operating activities and divestitures, with sufficient borrowing capacity available - Cash and cash equivalents increased by $28.3 million to $164.7 million as of September 30, 2023151 - Cash provided by operating activities was $318.3 million, and proceeds from divestitures were $136.0 million151 - The Company had $623.4 million of borrowing capacity available under its revolving facility151 Financing Arrangements Total debt decreased due to divestiture proceeds, and the Company remains in compliance with all covenants under its Senior Credit Facilities - Total debt decreased to $1,096.3 million as of September 30, 2023, from $1,158.0 million at December 31, 2022161 - The Company was in compliance with all covenants and performance ratios under the Senior Credit Facilities as of September 30, 2023159 - An amendment on June 30, 2023, adjusted the maximum Consolidated Leverage Ratio, providing near-term financial flexibility160 Cash Flows Net cash from operating activities improved significantly, investing activities were driven by divestitures, and financing activities reflected debt payments Cash Flow Summary | Cash Flow (in millions) | YTD Sep 30, 2023 | YTD Oct 1, 2022 | | :---------------------- | :--------------- | :-------------- | | Net cash provided by (used in) operating activities | $7.0 | $(490.2) | | Net cash provided by investing activities | $116.2 | $68.2 | | Net cash provided by (used in) financing activities | $(91.5) | $402.5 | Operating Activities Operating activities generated cash, a significant improvement from the prior year, primarily driven by a decrease in inventories - A decrease in net working capital provided $9.8 million in cash for YTD 2023164 - Inventories decreased by $178.5 million, favorably impacting working capital164 - Operating cash flows included a $77.8 million gain on sale of divestitures and a $68.8 million cash outflow for environmental and other related costs164 Investing Activities Investing activities provided cash, primarily driven by proceeds from divestitures, partially offset by capital expenditures - Capital expenditures were $18.5 million in YTD 2023, down from $23.5 million in YTD 2022165 - Proceeds from divestitures contributed $136.0 million to investing activities in YTD 2023165 Financing Activities Financing activities used cash, mainly due to net payments under the Revolving Facility and cash dividends paid - Net payments under the Revolving Facility amounted to $55.0 million in YTD 2023166 - Cash dividends paid totaled $24.5 million in YTD 2023, consistent with $0.30 per share declared167 - No shares were repurchased in YTD 2023, compared to $81.3 million in YTD 2022166 CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's financial statements rely on management's estimates and assumptions, with no material changes to critical policies since year-end - The preparation of financial statements requires management to make estimates and assumptions168 - Management believes there have been no material changes in critical accounting policies since the 2022 Form 10-K169 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risks from foreign currency exchange rates and interest rate changes, which it manages with derivatives - The Company faces market risk from foreign currency exchange rates and interest rate changes171 - Outstanding forward currency exchange contracts totaled $267.8 million as of September 30, 2023, to manage foreign currency exposure173 - Total variable-rate debt was $552.5 million at September 30, 2023, with an interest rate swap converting $109.6 million to fixed-rate176 ITEM 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective, with no material changes to internal controls - Disclosure controls and procedures were effective as of September 30, 2023178 - No material changes to internal control over financial reporting occurred during Q3 2023178 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings The Company is involved in various legal matters incidental to its business, including environmental compliance activities detailed in Note 15 - The Company is involved in litigation and legal matters, including environmental compliance activities180 - Further details on legal matters are provided in Note 15 of the financial statements180 ITEM 1A. Risk Factors There have been no material changes to the Company's risk factors from those disclosed in its 2022 Annual Report on Form 10-K - No material changes in risk factors from the 2022 Form 10-K were identified181 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company did not repurchase any common stock under its public program, which expired, though some shares were acquired via employee transactions - No shares were purchased under the common stock repurchase program during Q3 2023, and the program expired on September 11, 2023184185 - 9,149 shares were purchased through employee transactions at an average price of $12.60 per share in Q3 2023184 ITEM 5. Other Information No director or Section 16 officer adopted or terminated a Rule 10b5-1 trading arrangement during the third quarter - No director or Section 16 officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q3 2023185 ITEM 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including corporate governance documents and required certifications - Exhibits include corporate governance documents, an employment agreement, and certifications under the Sarbanes-Oxley Act187 - Financial information for the quarter ended September 30, 2023, is provided in Inline XBRL format187 SIGNATURES The report is duly signed on behalf of the Company by its Chief Executive Officer and Chief Financial Officer on November 9, 2023 - The report was signed by Christopher E. Hufnagel, President and CEO, and Michael D. Stornant, EVP, CFO and Treasurer, on November 9, 2023190