Notes to Consolidated Condensed Financial Statements
July 1, 2017
and
June 18, 2016
(Unaudited)
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1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations
Wolverine World Wide, Inc. (the “Company”) is a leading designer, manufacturer, marketer and licensor 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
®
,
Chaco
®
,
Harley-Davidson
®
,
Hush Puppies
®
,
HyTest
®
,
Keds
®
, Merrell
®
,
Saucony
®
, Sebago
®
,
Sperry
®
, Stride Rite
®
and
Wolverine
®
. Licensing and distribution arrangements with third parties extend the global reach of the Company’s brand portfolio. The Company also operates a consumer-direct division to market both its own brands and branded footwear and apparel from other manufacturers, as well as a leathers division that markets
Wolverine Performance Leathers™
.
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 fiscal
2016
Form 10-K.
Fiscal Year
The Company’s fiscal year is the 52 or 53-week period that ends on the Saturday nearest to December 31. Fiscal years 2017 and 2016 both have
52
weeks. Prior to fiscal 2017, the Company reported its quarterly results of operations on the basis of 12-week periods for each of the first three fiscal quarters and a 16 or 17-week period for the fiscal fourth quarter. Beginning in fiscal 2017, the Company's fiscal year will be comprised of 13-week quarters for each of the first three fiscal quarters and a 13 or 14-week period for the fiscal fourth quarter. There is no change to the Company’s annual fiscal year reporting. References to the “quarter ended” or “second quarter” refer to the 13-week period ended
July 1, 2017
or the 12-week period ended
June 18, 2016
. References to the “first two quarters” refer to the 26-week period ended
July 1, 2017
or the 24-week period ended
June 18, 2016
.
Revenue Recognition
Revenue is recognized on the sale of products manufactured or sourced by the Company when the related goods have been shipped, legal title has passed to the customer and collectability is reasonably assured. Revenue generated through 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. Retail store revenue is recognized at time of sale.
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 less than established reserves, a reduction or increase to net revenue 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 freight charges and certain outbound freight charges, purchasing, sourcing, inspection and receiving costs. Warehousing costs are included in selling, general and administrative expenses.
Seasonality
The Company’s business is subject to seasonal influences that can cause significant differences in revenue, earnings and cash flows from quarter to quarter; however, the differences have followed a consistent pattern in recent years. Prior to fiscal 2017, the Company’s fiscal year had 12 weeks in each of the first three fiscal quarters and, 16 weeks in the fourth fiscal quarter, which also impacted the comparability from quarter to quarter.
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2.
|
NEW ACCOUNTING STANDARDS
|
The Financial Accounting Standards Board (“FASB”) issued the following Accounting Standards Updates (“ASU”) that have been adopted by the Company during fiscal
2017
. The following is a summary of the effect of adoption of these new standards.
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Standard
|
|
Description
|
|
Effect on the Financial Statements or Other Significant Matters
|
ASU 2015-11,
Simplifying the Measurement of Inventory
|
|
Requires that an entity measure inventory at the lower of cost and net realizable value. This ASU does not apply to inventory measured using last-in, first-out.
|
|
Did not have, nor does the Company believe it will have, a material impact on the accounting for its inventory.
|
ASU 2016-05,
Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
|
|
Clarifies that the novation of a derivative contract (i.e., a change in the counterparty) in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship, provided that all other hedge accounting criteria continue to be met.
|
|
Did not have, nor does the Company believe it will have, a material impact on the accounting for its derivatives.
|
ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
|
|
Seeks to provide simplification to issues of share-based payment awards in relation to income tax consequences, forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows.
|
|
The adoption of the new standard in fiscal 2017 did not have a significant impact on the Company’s results of operations and cash flows.
|
ASU 2017-01,
Clarifying the Definition of a Business
|
|
Clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
|
|
The adoption of the new standard in fiscal 2017 did not have a significant impact on the Company’s results of operations and cash flows.
|
The FASB has issued the following ASUs that have not yet been adopted by the Company. The following is a summary of the planned adoption period and anticipated impact of adopting these new standards.
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Standard
|
|
Description
|
|
Planned Period of Adoption
|
|
Effect on the Financial Statements or Other Significant Matters
|
ASU 2014-09,
Revenue from Contracts with Customers
(as amended by ASUs 2015-04, 2016-08, 2016-10, 2016-12 and 2017-10)
|
|
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also amends the required disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
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|
Q1 2018
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|
The Company does not expect the adoption of the new standard to have a significant impact on its consolidated financial position, results of operations or cash flows. The effect on results is not expected to be material because the Company’s analysis of contracts under the new revenue recognition standard supports the recognition of revenue at a point in time for the majority of contracts, which is consistent with the current revenue recognition model. Revenue on the majority of contracts will continue to be recognized at a point in time because of the distinct transfer of control to the customer.
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Standard
|
|
Description
|
|
Planned Period of Adoption
|
|
Effect on the Financial Statements or Other Significant Matters
|
ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
|
|
Enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This ASU addresses certain aspects of recognition, measurement, presentation and disclosure of financial statements.
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|
Q1 2018
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|
The Company is evaluating the impacts of the new standard on its consolidated financial statements.
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ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
|
|
Sponsors of benefit plans would be required to present service cost in the same line item or items as other current employee compensation costs, and present the remaining components of net benefit cost in one or more separate line items outside of income from operations, while also limiting the components of net benefit cost eligible to be capitalized to service cost.
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Q1 2018
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|
The Company does not expect the adoption of the new standard to have a significant impact on its consolidated financial position, results of operations or cash flows. The new standard will require the Company to present the non-service pension costs as a component of expense below operating profit.
|
ASU 2016-02,
Leases
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|
The core principle is that a lessee shall recognize a lease asset and lease liability in its statement of financial position. A lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term.
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Q1 2019
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|
The Company is evaluating the impacts of the new standard on its existing leases.
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ASU 2016-13,
Measurement of Credit Losses on Financial Instruments
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|
Seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
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Q1 2020
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|
The Company is evaluating the impacts of the new standard on its existing financial instruments, including trade receivables.
|
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.
The following table sets forth the computation of basic and diluted earnings per share.
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(In millions, except per share data)
|
13 Weeks Ended
July 1, 2017
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|
12 Weeks Ended
June 18, 2016
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26 Weeks Ended
July 1, 2017
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|
24 Weeks Ended
June 18, 2016
|
Numerator:
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|
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|
Net earnings attributable to Wolverine World Wide, Inc.
|
$
|
20.7
|
|
|
$
|
24.0
|
|
|
$
|
37.4
|
|
|
$
|
41.4
|
|
Adjustment for earnings allocated to non-vested restricted common stock
|
(0.5
|
)
|
|
(0.5
|
)
|
|
(0.8
|
)
|
|
(0.9
|
)
|
Net earnings used in calculating basic and diluted earnings per share
|
$
|
20.2
|
|
|
$
|
23.5
|
|
|
$
|
36.6
|
|
|
$
|
40.5
|
|
Denominator:
|
|
|
|
|
|
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|
Weighted average shares outstanding
|
96.8
|
|
|
99.5
|
|
|
96.9
|
|
|
99.4
|
|
Adjustment for non-vested restricted common stock
|
(2.2
|
)
|
|
(4.0
|
)
|
|
(2.3)
|
|
|
(3.8)
|
|
Shares used in calculating basic earnings per share
|
94.6
|
|
|
95.5
|
|
|
94.6
|
|
|
95.6
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|
Effect of dilutive stock options
|
1.6
|
|
|
0.6
|
|
|
1.5
|
|
|
0.5
|
|
Shares used in calculating diluted earnings per share
|
96.2
|
|
|
96.1
|
|
|
96.1
|
|
|
96.1
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|
Net earnings per share:
|
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Basic
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.39
|
|
|
$
|
0.42
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|
Diluted
|
$
|
0.21
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$
|
0.24
|
|
|
$
|
0.38
|
|
|
$
|
0.42
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|
For the 13 and
26
weeks ended
July 1, 2017
, options relating to
1,814,701
and
1,836,686
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
24
weeks ended
June 18, 2016
, options relating to
5,587,283
and
5,717,179
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.
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GOODWILL AND INDEFINITE-LIVED INTANGIBLES
|
The changes in the carrying amount of goodwill and indefinite-lived intangibles are as follows:
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(In millions)
|
Goodwill
|
|
Indefinite-lived
intangibles
|
|
Total
|
Balance at January 2, 2016
|
$
|
429.1
|
|
|
$
|
685.4
|
|
|
$
|
1,114.5
|
|
Foreign currency translation effects
|
2.8
|
|
|
—
|
|
|
2.8
|
|
Balance at June 18, 2016
|
$
|
431.9
|
|
|
$
|
685.4
|
|
|
$
|
1,117.3
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
$
|
424.3
|
|
|
$
|
678.5
|
|
|
$
|
1,102.8
|
|
Foreign currency translation effects
|
2.9
|
|
|
—
|
|
|
2.9
|
|
Balance at July 1, 2017
|
$
|
427.2
|
|
|
$
|
678.5
|
|
|
$
|
1,105.7
|
|
In the fourth quarter of fiscal 2016, as a result of its annual impairment testing, the Company recorded a $
7.1 million
impairment charge for the
Stride Rite
®
trade name. The results of our indefinite-lived intangible impairment test based on the Company's outlook for future operating results continue to support the book value of the
Sperry
®
trade name. If the operating results for
Stride Rite
®
and
Sperry
®
were to decline in future periods, the Company may record a non-cash indefinite-lived intangible asset impairment charge. The carrying value of the Company’s
Stride Rite
®
and
Sperry
®
trade name indefinite-lived intangible assets was $
7.9 million
and $
586.8 million
, respectively, as of
July 1, 2017
.
The Company has an agreement with a financial institution to sell selected trade accounts receivable on a recurring, nonrecourse basis that expires in the fourth quarter of fiscal 2017. Under the agreement, up to $
200.0 million
of accounts receivable may be sold to the financial institution and remain outstanding at any point in time. After the sale, the Company does not retain any interests in the accounts receivable and removes them from its consolidated balance sheet, but continues to service and collect the outstanding accounts receivable on behalf of the financial institution. The Company recognizes a servicing asset or servicing liability, initially
measured at fair value, each time it undertakes an obligation to service the accounts receivable under the agreement. The fair value of this obligation resulted in a nominal servicing liability for all periods presented. For receivables sold under the agreement,
90
% of the stated amount is paid for in cash to the Company at the time of sale, with the remainder paid to the Company at the completion of the collection process. The following is a summary of the stated amount of accounts receivable that was sold as well as fees charged by the financial institution.
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(In millions)
|
13 Weeks Ended
July 1, 2017
|
|
12 Weeks Ended
June 18, 2016
|
|
26 Weeks Ended
July 1, 2017
|
|
24 Weeks Ended
June 18, 2016
|
Accounts receivable sold
|
$
|
148.4
|
|
|
$
|
140.2
|
|
|
$
|
298.0
|
|
|
$
|
298.9
|
|
Fees charged
|
0.5
|
|
|
0.4
|
|
|
1.0
|
|
|
0.8
|
|
The fees are recorded in other expense. Net proceeds of this program are classified in operating activities in the consolidated condensed statements of cash flows. This program reduced the Company's accounts receivable by $
82.2 million
, $
81.1 million
and $
76.5 million
as of
July 1, 2017
,
December 31, 2016
and
June 18, 2016
, respectively.
Total debt consists of the following obligations:
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(In millions)
|
July 1,
2017
|
|
December 31,
2016
|
|
June 18,
2016
|
Term Loan A, due July 13, 2020
|
$
|
560.6
|
|
|
$
|
575.6
|
|
|
$
|
441.5
|
|
Senior Notes, 5.000% interest, due September 1, 2026
|
250.0
|
|
|
250.0
|
|
|
—
|
|
Public Bonds, 6.125% interest
|
—
|
|
|
—
|
|
|
375.0
|
|
Borrowings under revolving credit agreements and other short-term notes
|
1.6
|
|
|
2.9
|
|
|
—
|
|
Capital lease obligation
|
0.5
|
|
|
0.5
|
|
|
0.6
|
|
Unamortized debt issuance costs
|
(7.4
|
)
|
|
(8.3
|
)
|
|
(9.1
|
)
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Total debt
|
$
|
805.3
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|
|
$
|
820.7
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|
|
$
|
808.0
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|
On September 15, 2016, the Company amended its credit agreement (as amended, the "Credit Agreement"). The Credit Agreement provided a $
588.8 million
term loan facility (“Term Loan A”) and a $
600.0 million
revolving credit facility (the “Revolving Credit Facility”), both with maturity dates of July 13, 2020. The Credit Agreement’s debt capacity is limited to an aggregate debt amount (including outstanding term loan principal and revolver commitment amounts in addition to permitted incremental debt) not to exceed $
1,750.0 million
, unless certain specified conditions set forth in the Credit Agreement are met. Term Loan A requires quarterly principal payments with a balloon payment due on July 13, 2020. The scheduled principal payments due over the next 12 months total $
45.0 million
as of July 1, 2017 and are recorded as current maturities of long-term debt on the consolidated balance sheet.
The Revolving Credit Facility allows the Company to borrow up to an aggregate amount of
$600.0 million
, which includes a $
200.0 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 as are determined in accordance with the Credit Agreement. The Revolving Credit Facility also includes a
$50.0 million
swingline subfacility and a
$50.0 million
letter of credit subfacility. The Company had outstanding letters of credit under the Revolving Credit Facility of $
2.5 million
, $
2.6 million
and $
2.6 million
as of
July 1, 2017
,
December 31, 2016
and
June 18, 2016
, respectively. These outstanding letters of credit reduce the borrowing capacity under the Revolving Credit Facility.
The interest rates applicable to amounts outstanding under Term Loan A 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 plus an Applicable Margin as determined by the Company’s Consolidated Leverage Ratio, within a range of
0.25%
to
1.00%
, or (2) the Eurocurrency Rate plus an Applicable Margin as determined by the Company’s Consolidated Leverage Ratio, within a range of
1.25%
to
2.00%
(all capitalized terms used in this sentence are as defined in the Credit Agreement). The Company has two interest rate swap arrangements that reduce the Company’s exposure to fluctuations in interest rates on its variable rate debt. At
July 1, 2017
, Term Loan A had a weighted-average interest rate of
3.02
%.
The obligations of the Company pursuant to the 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 Credit Agreement also contains certain affirmative and negative covenants, including covenants that limit the ability of the Company and its Restricted Subsidiaries 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 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 (all capitalized terms used in this paragraph are as defined in the Credit Agreement). As of
July 1, 2017
, the Company was in compliance with all covenants and performance ratios under the Credit Agreement.
The Company has $
250.0 million
of senior notes outstanding that are due on September 1, 2026 (the “Senior Notes”). The Senior Notes bear interest at
5.00%
with the related interest payments due semi-annually. The Senior Notes are guaranteed by substantially all of the Company’s domestic subsidiaries.
The Company has various foreign revolving credit facilities with aggregate available borrowings of $
9.0 million
that are uncommitted and, therefore, each borrowing against the applicable facility is subject to approval by the lender. Borrowings against these facilities were $
1.6 million
, $
1.8 million
and $
0
as of
July 1, 2017
,
December 31, 2016
and
June 18, 2016
, respectively.
The Company has a capital lease obligation with payments scheduled to continue through February 2022.
The Company included in interest expense the amortization of deferred financing costs of $
0.7 million
and
$1.4 million
for the 13 and
26
weeks ended
July 1, 2017
, respectively. The Company included in interest expense the amortization of deferred financing costs of
$0.7 million
and
$1.4 million
for the 12 and
24
weeks ended
June 18, 2016
, respectively.
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7.
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DERIVATIVE FINANCIAL INSTRUMENTS
|
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 does not hold or issue financial instruments for trading purposes.
The Company utilizes foreign currency forward exchange contracts to manage the volatility associated primarily with U.S. dollar inventory purchases made by non-U.S. wholesale operations in the normal course of business. These foreign currency forward exchange hedge contracts extend out to a maximum of
363
days,
356
days and
363
days, as of
July 1, 2017
,
December 31, 2016
and
June 18, 2016
, respectively. The Company also utilizes foreign currency forward exchange contracts that are not designated as hedging instruments to manage foreign currency translation exposure. Foreign currency derivatives not designated as hedging instruments are offset by foreign exchange gains or losses resulting from the underlying exposures of foreign currency denominated assets and liabilities.
The Company has
two
interest rate swap arrangements which exchange floating rate for fixed rate interest payments over the life of the agreements without the exchange of the underlying notional amounts. These derivative instruments, which, unless otherwise terminated, will mature on
October 6, 2017
and
July 13, 2020
, have been designated as cash flow hedges of the debt. The notional amounts of the interest rate swap arrangements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss.
The Company has a cross currency swap to minimize the impact of exchange rate fluctuations. The hedging instrument, which, unless otherwise terminated, will mature on
September 1, 2021
, has been designated as a hedge of a net investment in a foreign operation. The Company will pay
2.75
% on the euro-denominated notional amount and receive
5.00
% on the USD notional amount, with an exchange of principal at maturity. Changes in fair value related to movements in the foreign currency exchange spot rate are recorded in accumulated other comprehensive income (loss), offsetting the currency translation adjustment related to the underlying net investment that is also recorded in accumulated other comprehensive income (loss). All other changes in fair value are recorded in other income or expense.
The notional amounts of the Company’s derivative instruments are as follows:
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(Dollars in millions)
|
July 1, 2017
|
|
December 31, 2016
|
|
June 18, 2016
|
Foreign exchange contracts:
|
|
|
|
|
|
Hedge contracts
|
$
|
157.8
|
|
|
$
|
169.2
|
|
|
$
|
193.1
|
|
Non-hedge contracts
|
6.6
|
|
|
2.1
|
|
|
15.0
|
|
Interest rate swaps
|
475.2
|
|
|
496.0
|
|
|
556.3
|
|
Cross currency swap
|
106.4
|
|
|
—
|
|
|
—
|
|
The recorded fair values of the Company’s derivative instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
July 1, 2017
|
|
December 31, 2016
|
|
June 18, 2016
|
Financial assets:
|
|
|
|
|
|
Foreign exchange contracts - hedge
|
$
|
0.4
|
|
|
$
|
6.6
|
|
|
$
|
1.2
|
|
Interest rate swaps
|
0.2
|
|
|
0.1
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
Foreign exchange contracts - hedge
|
$
|
(4.3
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(3.1
|
)
|
Foreign exchange contracts - non-hedge
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
Interest rate swaps
|
(3.8
|
)
|
|
(5.3
|
)
|
|
(13.6
|
)
|
Cross currency swap
|
(6.6
|
)
|
|
—
|
|
|
—
|
|
Hedge effectiveness on the foreign exchange contracts is evaluated by the hypothetical derivative method. Any hedge ineffectiveness is reported within the cost of goods sold line item in the consolidated condensed statements of operations. Hedge ineffectiveness was not material to the Company’s consolidated condensed financial statements for the quarters ended
July 1, 2017
and
June 18, 2016
. 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) (“AOCI”) within stockholders’ equity.
The differential paid or received on the interest rate swap arrangements is recognized as interest expense. In accordance with ASC 815, the Company has formally documented the relationship between the interest rate swaps 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 hedges’ inception, and continues to assess on an ongoing basis, whether the derivatives used in the hedging transaction are 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 AOCI 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 as a component of interest expense.
Hedge effectiveness on the cross currency swap is assessed using the spot method. In accordance with ASC 815, the Company has formally documented the relationship between the cross currency swap and the Company’s investment in its euro-denominated subsidiary, as well as its risk management objective and strategy for undertaking the hedge transaction. This process included linking the derivative to its net investment on the balance sheet. The Company also assessed at the hedges’ 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 AOCI 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 as a component of interest expense.
|
|
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”). The Company recognized compensation expense of $
5.3 million
and $
13.0 million
, and related income tax benefits of $
1.8 million
and $
4.4 million
, for grants under its stock-based compensation plans for the 13 and
26
weeks ended
July 1, 2017
, respectively. The Company recognized compensation expense of $
3.9 million
and $
11.5 million
, and related income tax benefits of $
1.3 million
and $
3.9 million
, for grants under its stock-based compensation plans for the 12 and
24
weeks ended
June 18, 2016
.
The Company grants restricted stock or units (“restricted awards”), performance-based restricted stock or units (“performance awards”) and stock options under its stock-based compensation plans.
During the
26 weeks ended July 1, 2017
, the Company granted
93,274
employee stock options with an estimated weighted average grant date fair value of $
5.50
. During the
24 weeks ended June 18, 2016
, the Company granted
2,375,573
employee stock options with an estimated weighted average grant date fair value of $
3.32
. The Company estimated the fair value of the options on the date of grant using the Black-Scholes-Merton model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
26 Weeks Ended
July 1, 2017
|
|
24 Weeks Ended
June 18, 2016
|
Expected market price volatility
(1)
|
29.3
|
%
|
|
27.1
|
%
|
Risk-free interest rate
(2)
|
1.7
|
%
|
|
1.0
|
%
|
Dividend yield
(3)
|
1.0
|
%
|
|
1.4
|
%
|
Expected term
(4)
|
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 estimated 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.
|
During the
26 weeks ended July 1, 2017
, the Company issued
744,504
restricted awards at a weighted average grant date fair value of
$22.94
per award. During the
24 weeks ended June 18, 2016
, the Company issued
996,301
restricted awards at a weighted average grant date fair value of $
16.56
per award.
During the
26 weeks ended July 1, 2017
, the Company issued
488,918
performance awards at a weighted average grant date fair value of
$25.02
per award. During the
24 weeks ended June 18, 2016
, the Company issued
980,093
performance awards at a weighted average grant date fair value of $
16.53
per award.
The following is a summary of net pension and Supplemental Executive Retirement Plan (“SERP”) expense recognized by the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
13 Weeks Ended
July 1, 2017
|
|
12 Weeks Ended
June 18, 2016
|
|
26 Weeks Ended
July 1, 2017
|
|
24 Weeks Ended
June 18, 2016
|
Service cost pertaining to benefits earned during the period
|
$
|
1.8
|
|
|
$
|
1.5
|
|
|
$
|
3.6
|
|
|
$
|
3.0
|
|
Interest cost on projected benefit obligations
|
4.4
|
|
|
4.4
|
|
|
8.8
|
|
|
8.8
|
|
Expected return on pension assets
|
(4.9
|
)
|
|
(4.7
|
)
|
|
(9.8
|
)
|
|
(9.3
|
)
|
Net amortization loss
|
2.5
|
|
|
1.2
|
|
|
4.9
|
|
|
2.3
|
|
Net pension expense
|
$
|
3.8
|
|
|
$
|
2.4
|
|
|
$
|
7.5
|
|
|
$
|
4.8
|
|
The Company maintains 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 Asian subsidiaries and, to a lesser extent, in jurisdictions that are not subject to income tax. The Company has not provided for U.S. taxes for earnings generated in foreign jurisdictions because it intends to reinvest these earnings indefinitely 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 results of operations and financial position.
The Company’s effective tax rates for the 13 and
26
weeks ended
July 1, 2017
were
7.0
% and
13.7
%, respectively. The Company’s effective tax rates for the 12 and
24
weeks ended
June 18, 2016
were
26.7
% and
28.8
%, respectively. The lower effective tax rate in the current year periods reflects the positive impact from discrete items and a shift in income between tax jurisdictions with differing tax rates. The shift in income for both periods reflects a reduction in U.S. income due to higher restructuring and impairment costs and organizational transformation costs.
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.
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
2012
in the majority of tax jurisdictions.
|
|
11.
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
AOCI 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 change in AOCI during the second quarter of fiscal 2017 and fiscal 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Foreign
currency
translation
adjustments
|
|
Derivatives
|
|
Pension
adjustments
|
|
Total
|
Balance of AOCI as of March 26, 2016
|
$
|
(42.3
|
)
|
|
$
|
(3.2
|
)
|
|
$
|
(12.0
|
)
|
|
$
|
(57.5
|
)
|
Other comprehensive income (loss) before reclassifications
(1)
|
5.3
|
|
|
(3.9
|
)
|
|
—
|
|
|
1.4
|
|
Amounts reclassified from AOCI
|
—
|
|
|
(2.7
|
)
|
(2)
|
1.2
|
|
(3)
|
(1.5
|
)
|
Income tax expense (benefit)
|
—
|
|
|
0.8
|
|
|
(0.5
|
)
|
|
0.3
|
|
Net reclassifications
|
—
|
|
|
(1.9
|
)
|
|
0.7
|
|
|
(1.2
|
)
|
Net current-period other comprehensive income (loss)
(1)
|
5.3
|
|
|
(5.8
|
)
|
|
0.7
|
|
|
0.2
|
|
Balance of AOCI as of June 18, 2016
|
$
|
(37.0
|
)
|
|
$
|
(9.0
|
)
|
|
$
|
(11.3
|
)
|
|
$
|
(57.3
|
)
|
|
|
|
|
|
|
|
|
Balance of AOCI as of April 1, 2017
|
$
|
(50.8
|
)
|
|
$
|
1.5
|
|
|
$
|
(28.8
|
)
|
|
$
|
(78.1
|
)
|
Other comprehensive income (loss) before reclassifications
(1)
|
9.2
|
|
|
(9.6
|
)
|
|
—
|
|
|
(0.4
|
)
|
Amounts reclassified from AOCI
|
—
|
|
|
(1.9
|
)
|
(2)
|
2.5
|
|
(3)
|
0.6
|
|
Income tax expense (benefit)
|
—
|
|
|
0.3
|
|
|
(0.9
|
)
|
|
(0.6
|
)
|
Net reclassifications
|
—
|
|
|
(1.6
|
)
|
|
1.6
|
|
|
—
|
|
Net current-period other comprehensive income (loss)
(1)
|
9.2
|
|
|
(11.2
|
)
|
|
1.6
|
|
|
(0.4
|
)
|
Balance of AOCI as of July 1, 2017
|
$
|
(41.6
|
)
|
|
$
|
(9.7
|
)
|
|
$
|
(27.2
|
)
|
|
$
|
(78.5
|
)
|
|
|
(1)
|
Other comprehensive income (loss) is reported net of taxes and noncontrolling interest.
|
|
|
(2)
|
Amounts related to foreign currency derivatives are included in cost of goods sold. Amounts related to interest rate swaps and cross currency hedges are included in interest expense.
|
|
|
(3)
|
Amounts reclassified are included in the computation of net pension expense.
|
The change in accumulated other comprehensive income (loss) during the first
two
quarters of fiscal 2017 and fiscal 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Foreign
currency
translation
adjustments
|
|
Derivatives
|
|
Pension
adjustments
|
|
Total
|
Balance of AOCI as of January 2, 2016
|
$
|
(47.3
|
)
|
|
$
|
4.0
|
|
|
$
|
(12.8
|
)
|
|
$
|
(56.1
|
)
|
Other comprehensive income (loss) before reclassifications
(1)
|
10.3
|
|
|
(10.0
|
)
|
|
—
|
|
|
0.3
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
(4.2
|
)
|
(2)
|
2.3
|
|
(3)
|
(1.9
|
)
|
Income tax expense (benefit)
|
—
|
|
|
1.2
|
|
|
(0.8
|
)
|
|
0.4
|
|
Net reclassifications
|
—
|
|
|
(3.0
|
)
|
|
1.5
|
|
|
(1.5
|
)
|
Net current-period other comprehensive income (loss)
(1)
|
10.3
|
|
|
(13.0
|
)
|
|
1.5
|
|
|
(1.2
|
)
|
Balance of AOCI as of June 18, 2016
|
$
|
(37.0
|
)
|
|
$
|
(9.0
|
)
|
|
$
|
(11.3
|
)
|
|
$
|
(57.3
|
)
|
|
|
|
|
|
|
|
|
Balance of AOCI as of December 31, 2016
|
$
|
(53.5
|
)
|
|
$
|
2.8
|
|
|
$
|
(30.4
|
)
|
|
$
|
(81.1
|
)
|
Other comprehensive income (loss) before reclassifications
(1)
|
11.9
|
|
|
(10.2
|
)
|
|
—
|
|
|
1.7
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
(2.6
|
)
|
(2)
|
4.9
|
|
(3)
|
2.3
|
|
Income tax expense (benefit)
|
—
|
|
|
0.3
|
|
|
(1.7
|
)
|
|
(1.4
|
)
|
Net reclassifications
|
—
|
|
|
(2.3
|
)
|
|
3.2
|
|
|
0.9
|
|
Net current-period other comprehensive income (loss)
(1)
|
11.9
|
|
|
(12.5
|
)
|
|
3.2
|
|
|
2.6
|
|
Balance of AOCI as of July 1, 2017
|
$
|
(41.6
|
)
|
|
$
|
(9.7
|
)
|
|
$
|
(27.2
|
)
|
|
$
|
(78.5
|
)
|
|
|
(1)
|
Other comprehensive income (loss) is reported net of taxes and noncontrolling interest.
|
|
|
(2)
|
Amounts related to foreign currency derivatives are included in cost of goods sold. Amounts related to interest rate swaps and cross currency hedges are included in interest expense.
|
|
|
(3)
|
Amounts reclassified are included in the computation of net pension expense.
|
|
|
12.
|
FAIR VALUE MEASUREMENTS
|
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.
|
Recurring Fair Value Measurements
The following table sets forth financial assets and liabilities measured at fair value in the consolidated balance sheets and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Quoted Prices With Other Observable Inputs (Level 2)
|
(In millions)
|
July 1, 2017
|
|
December 31, 2016
|
|
June 18, 2016
|
Financial assets:
|
|
|
|
|
|
Derivatives
|
$
|
0.6
|
|
|
$
|
6.7
|
|
|
$
|
1.2
|
|
Financial liabilities:
|
|
|
|
|
|
Derivatives
|
$
|
(14.7
|
)
|
|
$
|
(5.6
|
)
|
|
$
|
(16.8
|
)
|
The fair value of foreign currency forward exchange contracts represents the estimated receipts or payments necessary to terminate the contracts. The interest rate swaps are valued based on the current forward rates of the future cash flows. The fair value of the cross currency swap is determined using the current forward rates and changes in the spot rate.
Nonrecurring Fair Value Measurements
The following is a summary of assets and impairments that were measured at fair value on a nonrecurring basis.
|
|
|
|
|
|
|
|
|
|
26 Weeks Ended July 1, 2017
|
(In millions)
|
Fair Value
|
|
Impairment
|
Property and equipment
|
$
|
—
|
|
|
$
|
4.6
|
|
The property and equipment was valued using an income approach based on the discounted cash flows expected to be generated by the underlying assets (Level 3).
Fair Value Disclosures
The Company’s financial instruments that are not recorded at fair value consist of cash and cash equivalents, accounts and notes receivable, accounts payable, borrowings under revolving credit agreements and other short-term and long-term debt. The carrying amount of these financial instruments is historical cost, which approximates fair value, except for the debt. The carrying value and the fair value of the Company’s debt, excluding capital leases, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
July 1, 2017
|
|
December 31, 2016
|
|
June 18, 2016
|
Carrying value
|
$
|
804.8
|
|
|
$
|
820.2
|
|
|
$
|
807.4
|
|
Fair value
|
822.8
|
|
|
827.6
|
|
|
849.3
|
|
The fair value of the fixed rate debt was based on third-party quotes (Level 2). The fair value of the variable rate debt was calculated by discounting the future cash flows to its present value using a discount rate based on the risk-free rate of the same maturity (Level 3).
|
|
13.
|
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 also involved in routine non-environmental 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.
Minimum future royalty and advertising obligations for the fiscal periods subsequent to
July 1, 2017
under the terms of certain licenses held by the Company are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
Minimum royalties
|
$
|
1.0
|
|
|
$
|
1.4
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Minimum advertising
|
1.4
|
|
|
2.9
|
|
|
3.0
|
|
|
3.1
|
|
|
3.2
|
|
|
10.2
|
|
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 $
1.1 million
for the 13 and
26
weeks ended
July 1, 2017
, respectively. For the 12 and
24
weeks ended
June 18, 2016
, the Company incurred royalty expense, in accordance with these agreements, of $
0.5 million
and $
0.9 million
, respectively.
The terms of certain license agreements also require the Company to make advertising expenditures based on the level of sales of the licensed products. In accordance with these agreements, the Company incurred advertising expense of $
0.7 million
and $
1.6 million
for the 13 and
26
weeks ended
July 1, 2017
, respectively. For the 12 and
24
weeks ended
June 18, 2016
, the Company incurred advertising expense, in accordance with these agreements, of $
0.9 million
and $
1.6 million
, respectively.
The Company’s portfolio of brands is organized into the following
four
operating segments, which the Company has determined to be reportable operating segments. During the second quarter of fiscal 2017, the components within the Wolverine Multi-Brand Group were realigned as the Company transitions
Stride Rite
®
to a global license arrangement. The license arrangement was effective on July 2, 2017, subsequent to the second quarter.
|
|
•
|
Wolverine Outdoor & Lifestyle Group
, consisting of
Merrell
®
footwear and apparel,
Cat
®
footwear,
Hush Puppies
®
footwear
and apparel,
Chaco
®
footwear,
Sebago
®
footwear and apparel and
Cushe
®
footwear;
|
|
|
•
|
Wolverine Boston Group
, consisting of
Sperry
®
footwear and apparel,
Saucony
®
footwear and apparel and
Keds
®
footwear and apparel;
|
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•
|
Wolverine Heritage Group
, consisting of
Wolverine
®
footwear and apparel,
Bates
®
uniform footwear,
Harley-Davidson
®
footwear and
HyTest
®
safety footwear; and
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•
|
Wolverine Multi-Brand Group
, consisting of the Company’s Children’s footwear business and the Company's multi-brand consumer-direct businesses. The Children’s footwear business includes
Stride Rite
®
, as well as children’s footwear offerings from
Saucony
®
,
Sperry
®
,
Keds
®
and
Merrell
®
.
|
The reportable segments are engaged in designing, manufacturing, sourcing, marketing, licensing and distributing branded footwear, apparel and accessories. Reported revenue for the reportable operating segments includes revenue from the sale of branded footwear, apparel and accessories to third-party customers; revenue from third-party licensees and distributors; and revenue from the Company’s consumer-direct businesses.
The Company also reports “Other” and “Corporate” categories. The Other category consists of the Company’s leather marketing operations and sourcing operations that include third-party commission revenues. The Corporate category consists of unallocated corporate expenses, including restructuring and impairment costs and organizational transformation costs. The Company’s operating segments are determined based on how the Company internally reports and evaluates financial information used to make operating decisions. The operating segment managers all report directly to the chief operating decision maker.
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.
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(In millions)
|
13 Weeks Ended
July 1, 2017
|
|
12 Weeks Ended
June 18, 2016
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26 Weeks Ended
July 1, 2017
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24 Weeks Ended
June 18, 2016
|
Revenue:
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|
|
|
|
Wolverine Outdoor & Lifestyle Group
|
$
|
231.9
|
|
|
$
|
203.0
|
|
|
$
|
464.5
|
|
|
$
|
420.7
|
|
Wolverine Boston Group
|
221.7
|
|
|
218.2
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|
|
425.6
|
|
|
427.3
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|
Wolverine Heritage Group
|
74.1
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74.2
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|
|
149.8
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|
146.0
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|
Wolverine Multi-Brand Group
|
51.7
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|
69.7
|
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|
116.1
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138.1
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|
Other
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19.4
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|
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18.6
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34.1
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29.2
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Total
|
$
|
598.8
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|
|
$
|
583.7
|
|
|
$
|
1,190.1
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|
|
$
|
1,161.3
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Operating profit (loss):
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Wolverine Outdoor & Lifestyle Group
|
$
|
44.0
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|
$
|
34.7
|
|
|
$
|
96.3
|
|
|
$
|
83.5
|
|
Wolverine Boston Group
|
38.9
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|
|
30.9
|
|
|
70.8
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|
|
58.6
|
|
Wolverine Heritage Group
|
11.2
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8.3
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20.8
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16.8
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|
Wolverine Multi-Brand Group
|
4.1
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2.6
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4.3
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1.2
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Other
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1.9
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1.6
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3.2
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2.1
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Corporate
|
(70.9
|
)
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(36.3
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)
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(133.6
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)
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(86.4
|
)
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Total
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$
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29.2
|
|
|
$
|
41.8
|
|
|
$
|
61.8
|
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$
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75.8
|
|
|
|
|
|
|
|
|
|
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(In millions)
|
July 1,
2017
|
|
December 31,
2016
|
|
June 18,
2016
|
Total assets:
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|
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Wolverine Outdoor & Lifestyle Group
|
$
|
444.2
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$
|
391.8
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$
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455.8
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Wolverine Boston Group
|
1,283.2
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1,273.5
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1,337.0
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Wolverine Heritage Group
|
130.3
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157.8
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148.8
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Wolverine Multi-Brand Group
|
130.5
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140.8
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189.4
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Other
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31.0
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33.7
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28.3
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Corporate
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480.8
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434.1
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294.2
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Total
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$
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2,500.0
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$
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2,431.7
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$
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2,453.5
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Goodwill:
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Wolverine Outdoor & Lifestyle Group
|
$
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127.7
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$
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126.6
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$
|
129.9
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Wolverine Boston Group
|
259.3
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|
257.5
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|
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259.5
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Wolverine Heritage Group
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16.5
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16.5
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16.5
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Wolverine Multi-Brand Group
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23.7
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23.7
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26.0
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Total
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$
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427.2
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$
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424.3
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$
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431.9
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15.
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RESTRUCTURING ACTIVITIES
|
2017 Plan
During the second quarter of fiscal 2017, the Company implemented certain organizational changes (the “2017 Plan”). The Company currently estimates pretax charges related to the 2017 Plan will range from $
2.4 million
to $
2.6 million
. The Company estimates it will record the remaining charges through the end of fiscal 2017. Once fully implemented, the Company expects annual pretax benefits of approximately $
8.4 million
as a result of the 2017 Plan. Costs incurred related to the 2017 Plan have been recorded within the Corporate category. The cumulative costs incurred of $
2.0 million
are recorded in the
restructuring and impairment costs
line item as a component of operating expenses.
The following is a summary of the activity during the first
two
quarters of fiscal 2017, with respect to a reserve established by the Company in connection with the 2017 Plan, by category of costs.
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(In millions)
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Severance and employee related
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Costs associated with exit or disposal activities
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Total
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Balance at December 31, 2016
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$
|
—
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$
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—
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$
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—
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Restructuring costs
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1.7
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|
0.3
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2.0
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Amounts paid
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(0.1
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)
|
|
(0.3
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)
|
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(0.4
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)
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Balance at July 1, 2017
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$
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1.6
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$
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—
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$
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1.6
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2016 Plan
On October 6, 2016, the Board of Directors of the Company approved a realignment of the Company’s consumer-direct operations (the “2016 Plan”), which will result in the closure of certain retail stores. The Company has closed
231
retail stores in connection with the 2016 Plan through the end of the
second
quarter of fiscal 2017 and plans to close approximately
33
additional stores through the end of fiscal 2017. The Company currently estimates pretax charges related to the 2016 Plan will range from $
71.0 million
to $
76.0 million
. The Company estimates it will record the remaining charges through the end of fiscal 2017. Once fully implemented, the Company expects annual pretax benefits of approximately $
20.0 million
as a result of the 2016 Plan. Costs incurred related to the 2016 Plan have been recorded within the Corporate category. The cumulative costs incurred is $
52.8 million
, with $
9.8 million
recorded in the restructuring costs line item as a component of cost of goods sold, and $
43.0 million
recorded in the
restructuring and impairment costs
line item as a component of operating expenses.
The following is a summary of the activity during the first
two
quarters of fiscal 2017, with respect to a reserve established by the Company in connection with the 2016 Plan, by category of costs.
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(In millions)
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Severance and employee related
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Impairment of property and equipment
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Costs associated with exit or disposal activities
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Total
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Balance at December 31, 2016
|
$
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0.8
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$
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—
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$
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1.2
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$
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2.0
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Restructuring costs
|
3.0
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|
4.6
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|
|
39.4
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47.0
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Amounts paid
|
(3.0
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)
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—
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(21.7
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)
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(24.7
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)
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Charges against assets
|
—
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(4.6
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)
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(4.0
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)
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(8.6
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)
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Balance at July 1, 2017
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$
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0.8
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$
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—
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$
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14.9
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$
|
15.7
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2014 Plan
On July 9, 2014, the Board of Directors of the Company approved a realignment of the Company’s consumer-direct operations (the “2014 Plan”). As a part of the 2014 Plan, the Company closed
136
retail stores, consolidated certain consumer-direct support functions and implemented certain other organizational changes. The Company completed the 2014 Plan during the first quarter of fiscal 2016. Costs incurred related to the 2014 Plan have been recorded within the Corporate category. The cumulative costs incurred is $
49.5 million
, with $
6.5 million
recorded in the restructuring costs line item as a component of cost of goods sold, and $
43.0 million
recorded in the
restructuring and impairment costs
line item as a component of operating expenses. Approximately $
23.0 million
represents non-cash charges. The majority of the remaining restructuring reserve relates to a lease liability that extends to 2019.
The following is a summary of the activity during the first
two
quarters of fiscal 2017 and fiscal 2016, with respect to a reserve established by the Company in connection with the 2014 Plan, by category of costs.
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(In millions)
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Severance and employee related
|
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Impairment of property and equipment
|
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Costs associated with exit or disposal activities
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Total
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Balance at January 2, 2016
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$
|
2.1
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$
|
—
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$
|
6.5
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$
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8.6
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Restructuring and impairment costs
|
1.2
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|
0.2
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9.6
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11.0
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Amounts paid
|
(3.3
|
)
|
|
—
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(4.7
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)
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(8.0
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)
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Charges against assets
|
—
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|
|
(0.2
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)
|
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(6.9
|
)
|
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(7.1
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)
|
Balance at June 18, 2016
|
$
|
—
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|
|
$
|
—
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$
|
4.5
|
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|
$
|
4.5
|
|
|
|
|
|
|
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Balance at December 31, 2016
|
$
|
—
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|
$
|
—
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$
|
1.7
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$
|
1.7
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Amounts paid
|
—
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|
|
—
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|
|
(0.2
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)
|
|
(0.2
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)
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Balance at July 1, 2017
|
$
|
—
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|
$
|
—
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$
|
1.5
|
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$
|
1.5
|
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Other Restructuring Activities
During the first
two
quarters of fiscal 2017 and fiscal 2016, the Company recorded restructuring costs of $
0.7 million
and $
5.1 million
, respectively, in connection with certain organizational changes. The costs associated with these restructuring activities were recorded within the Company’s Corporate category in the
restructuring and impairment costs
line item as a component of operating expenses.
During the
24 weeks ended June 18, 2016
, the Company recorded restructuring costs of $
0.3 million
related to its decision to wind-down operations of its
Cushe
®
brand. The Company recorded these costs within its Corporate category in the restructuring and impairment costs line item as a component of operating expenses.
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16.
|
ASSETS AND LIABILITIES HELD FOR SALE
|
In May 2017, the Company agreed to enter into a global, multi-year licensing agreement of the
Stride Rite
®
brand. As part of this agreement, which became effective in the third quarter of fiscal 2017, the Company agreed to sell inventory and certain other assets and liabilities related to the
Stride Rite
®
brand and provide certain transition services to the licensee. The sale of inventory and other assets and liabilities was completed in the third quarter of fiscal 2017. Subsequent to quarter end, the Company received cash proceeds of $
16.1 million
for the sale of these assets and liabilities. The assets and liabilities sold are classified as held for sale as of July 1, 2017, and are as follows:
|
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|
|
(In millions)
|
July 1,
2017
|
Inventory
|
$
|
16.3
|
|
Other current assets
|
0.6
|
|
Other accrued liabilities
|
(1.8
|
)
|
Total assets and liabilities held for sale
|
$
|
15.1
|
|
Amendments to Operating Leases
Subsequent to quarter end, the Company paid $
27.0 million
to amend or terminate
70
leases with a common landlord. The agreement terminated the leases for
44
retail stores that the Company had closed in the second quarter of fiscal 2017. The agreement also modified an additional
26
leases for retail stores that are currently open. The Company will close these stores in the fourth quarter of fiscal 2017 with the leases terminating on December 31, 2017. The Company recognized lease termination costs of $
12.2 million
in the second quarter of fiscal 2017 for the stores that have already closed. These costs are included in the restructuring and impairment costs line item on the Condensed Consolidated Statements of Operations. The remaining $
14.8 million
will be recognized as an in-substance lease termination cost in the third quarter of fiscal 2017.
Sale of Assets
Subsequent to quarter end, on July 31, 2017, the Company entered into an agreement to sell certain intangible and other assets related to the
Sebago
®
brand. As part of this agreement, the buyer acquired the intellectual property rights to design, manufacture and market all products under the
Sebago
®
brand. The Company received $
14.3 million
in the third quarter of fiscal 2017 and will recognize a gain on sale of approximately $
8.0 million
.