What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-26 · 191 added, 169 removed, 165 unchanged (69% of the section changed)

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In other regions (Latin America, portions of Europe and Asia Pacific, the Middle East and Africa), the Company relies on a network of third-party distributors, licensees and joint ventures.

At January 2, 2021, the Company oper ated 97 re tail stores in the U.S.

and Canada an d 37 co nsumer-direct eCommerce sites.

At January 1, 2022, the Company oper ated 143 re tail stores in the U.S., United Kingdom, and Canada an d 65 consumer-direct eCommerce sites.

On July 31, 2021, the Company entered into a definitive agreement to acquire 100% of the outstanding shares of Lady Leisure InvestCo Limited.

The acquisition was completed on August 2, 2021 for $417.4 million, which is net of acquired cash of $7.4 million.

Lady Leisure InvestCo Limited owns the Sweaty Betty ® brand and activewear business, a premium women’s activewear brand.

The acquisition was funded with cash on hand and borrowings under the Company’s Revolving Facility.

The following discussion includes a comparison of the Company's results of operations and liquidity and capital resources for fiscal 2021 and 2020.

A discussion of a comparison of the Company's results of operations and liquidity and capital resources for fiscal 2020 and 2019 has been omitted from this Form 10-K but may be found in Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, filed with the SEC on February 26, 2020.

Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic.

COVID-19 has had a negative effect on the global economy and on the Company’s 2020 operating and financial results.

The full financial effects of the COVID-19 pandemic cannot be reasonably estimated at this time due to uncertainty as to its severity and duration.

The Company has taken the following proactive and precautionary measures to mitigate known areas of risk and navigate the future environment:

• To increase liquidity and flexibility of the Company’s capital structure, the Company borrowed $171 million in incremental 364-day term loan under its senior credit facility and by the end of the fourth quarter the amount had been repaid, and sold $300 million of 6.375% senior notes (refer to Note 7, “Debt”), delayed most capital projects, suspended share repurchases, implemented select employee furloughs and organizational changes, compensation changes for the Company's management team and Board of Directors, delayed or canceled certain future product purchases across its portfolio of brands, took additional steps to reduce discretionary spending and other expenditures, and initiated conversations with landlords to seek lease concessions.

Lease concessions have been received for some of the Company’s leased properties and other discussions are still ongoing.

• The Company temporarily closed all U.S.

and Canada retail stores on March 17, 2020.

Stores began reopening in May under a phased approach and during the second quarter all stores had reopened with newly instituted health and safety protocols for customers and employees following regulatory guidance and protocols promulgated by health authorities and government officials.

During the period stores were closed, the Company’s distribution centers remained open and the Company’s direct on-line channels continued to serve customer demand.

The COVID-19 pandemic has had, and is expected to continue to have, a material adverse impact on the Company’s financial results.

Expenses related to the COVID-19 pandemic in fiscal year 2020 include $10.9 million of severance expenses, $8.5 million of credit loss expenses related to accounts receivable, $5.5 million of expenses in connection with the Company's credit facility refinance and an interest rate swap termination, $4.4 million of inventory charges, $3.9 million of air freight charges related to production delays, $3.6 million in connection with facility exit costs and $6.4 million for other costs.

The full nature and extent of the impact of the pandemic on the Company's business will depend on future developments, including, among other things;

the continued spread and duration of the pandemic;

the negative impact on global and regional economies and economic activity;

actions governments, businesses and individuals take in response to the pandemic;

the effects of the pandemic, including all of the foregoing, on the Company’s manufacturers, distributors, suppliers, joint venture partners, wholesale customers and other counterparties, and how quickly the global economy and demand for the Company's products recovers after the pandemic subsides.

The Company continues to monitor the situation closely .

Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, filed with the SEC on February 26, 2021.

Known Trends Impacting Our Business

The global impact of the COVID-19 pandemic continues to affect the Company’s business.

Most importantly, the Company remains focused on the health and safety of its employees, customers and partners around the world.

In accordance with regulatory guidance and protocols promulgated by health authorities and government officials, the Company continues to execute a number of enhanced business practices including temporary office closures, travel restrictions, enhanced cleaning procedures and social distancing designed to protect all employees, customers and partners.

Following the onset of the pandemic, the Company further prioritized brand investments in the Company’s owned eCommerce sites.

The Company’s brands’ online growth accelerated due to the investments in this channel and consumer preference changes in favor of digital purchases.

The Company continues to prioritize eCommerce investments including digital leadership, marketing investments in digital platforms, developing richer content and storytelling, and optimizing digital user experiences to increase conversion.

The Company is offering incremental exclusive products through owned eCommerce sites, and the Company has enhanced the online customer shopping experience.

During the third quarter of 2021, a significant portion of the Company’s contract manufacturer’s production capacity in Vietnam was subject to government mandated shutdowns due to COVID-19.

Contract manufacturers in certain other Asia Pacific countries were also subject to closures, reduced capacity and production delays due to COVID-19.

Factories reopened during October 2021, although some did not reopen at full capacity.

These production capacity restraints significantly negatively impacted, and are expected to continue to significantly negatively impact, the Company’s previously planned inventory production and in turn, deliveries to wholesale customers.

The COVID-19 pandemic has had a material adverse impact, and is expected to continue to have an adverse impact, on the Company’s financial results.

In addition to the contract manufacturer closures during the third quarter discussed above, the effects of the pandemic caused disruption in the global supply chain due to vessel shortages, containers damaged and lost in transit, labor and container shortages and U.S.

port congestion that resulted in transportation delays that interrupted the flow of the Company’s inventory and caused delays of shipments to wholesale partners during fiscal 2021.

The Company expects certain aspects of the disruption in the global supply chain to continue, which may negatively impact results in fiscal 2022.

Expenses related to the COVID-19 pandemic incurred in fiscal 2021 included $26.1 million of costs primarily for incremental air freight cost to expedite the delivery of inventory resulting from production and shipping delays.

Expenses related to the COVID-19 pandemic incurred in fiscal 2020 included $37.6 million of costs related to severance expenses, credit loss expenses, air freight related to production delays, facility exit costs and other costs.

The Company continues to monitor the ongoing impacts of COVID-19, including developments that are outside the Company’s control, such as the planned return to full production of factories in Vietnam and certain other Asia Pacific countries and the planned shift of production capacity to other countries following factory closures.

These developments and other potential impacts of COVID-19, such as new or prolonged factory closures and other adverse impacts on the global supply chain affecting the planned delivery of inventory, could materially adversely impact revenue growth as well as profitability in future periods.

2021 FINANCIAL OVERVIEW

• Revenue was $1,791.1 million for 2020, representing a decrease of 21.2% compared to the prior year's revenue of $2,273.7 million.

The decrease reflects a 19.1% decline from the Michigan Group and a 23.6% decline from the Boston Group.

Changes in foreign exchange rates decreased revenue by $0.5 million du ring 2020.

• Revenue was $2,414.9 million for 2021, representing an increase of 34.8% compared to the prior year's revenue of $1,791.1 million.

The increase reflects a 23.6% increase from the Michigan Group, a 34.5% increase from the Boston Group and a 18.8% increase on Sweaty Betty ® revenue of $117.3 million.

Changes in foreign exchange rates increased revenue by $25.3 million during 2021.

Owned eCommerce revenue increased 39.7% during 2021 compared to 2020.

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• The effective tax rate in 2021 was 16.6%, compared to 24.7% in 2020.

• Diluted loss per share for 2020 was $1.70, compared to a diluted earnings per share $1.44 for 2019.

• Diluted earnings per share in 2021 was $0.81, compared to a diluted loss per share of $1.70 in 2020.

• The Company declared cash dividends of $0.40 per share in 2021 and 2020.

• Cash flow provided by operating activities was $86.8 million and $309.1 million for 2021 and 2020, respectively.

• Compared to the prior year, inventory decreased $105.1 million, or 30.2%.

• Compared to the prior year, inventory increased $122.4 million, or 50.3% .

RESULTS OF OPERATIONS

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37.4 43.6 (14.2) %

Debt extinguishment, interest rate swap termination, and other costs 5.5 — —

Other income, net (2.1) (4.9) (57.1) %

Debt extinguishment and other costs 34.3 5.5 523.6

Other expense (income), net 3.7 (2.1) 276.2 %

Earnings (loss) before income taxes 80.3 (184.1) 143.6 %

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Diluted earnings (loss) per share $ 0.81 $ (1.70) 147.6 %

Revenue was $1,791.1 million for 2020, representing a decline of 21.2% compared to the prior year's revenue of $2,273.7 million.

The change in revenue reflected a 19.1% decline from the Michigan Group and a 23.6% decline from the Boston Group.

The Michigan Group's revenue decline was driven by mid-teens decline from Merrell ® , low-thirties decline from Cat ® , low-teens decline from each of Wolverine ® and Chaco ® , low-twenties decline from Bates ® , mid-thirties decline from Hytest ® , and mid-forties decline from Hush Puppies ® .

The Boston Group’s revenue decline was driven by high-thirties decline from Sperry ® and high-twenties decline from each of Keds ® and Kids’.

International revenue represented 31.1%, an d 33.7% of total reported revenues in 2020 and 2019 respectively.

Changes in foreign exchange rates decreased revenue by $ 0.5 million during 2020.

Owned eCommerce revenue increased during 2020 by 49.9% compared to 2019.

Revenue was $2,414.9 million for 2021, representing an increase of 34.8% compared to the prior year's revenue of $1,791.1 million.

The change in revenue reflected a 23.6% increase from the Michigan Group and a 34.5% increase from the Boston Group.

The Michigan Group's revenue increase was driven by high-forties increase from Hytest ® , low-thirties increase from Cat ® , high-twenties increase from Wolverine ® , mid-twenties increase from Hush Puppies ® , low-twenties increase from Harley-

Davidson ® , low-twenties increase from Merrell ® , and low-teens increase from Bates ® .

The Boston Group’s revenue increase was driven by high-fifties increase from Saucony ® , high-twenties increase from Kids’, and mid-twenties increase from Sperry ® .

International revenue represented 34.8%, and 31.1% of total reported revenues in 2021 and 2020, respectively.

Sweaty Betty ® contributed $117.3 million to the current year revenue increase.

Changes in foreign exchange rates increased revenue by $25.3 million during 2021.

Owned eCommerce revenue increased during 2021 by 39.7% compared to 2020, including a 21.4% contribution from the Sweaty Betty ® acquisition.

For 2021, the Company’s gross margin was 42.6%, compared to 41.1% in 2020.

The gross margin increase was driven by favorable product mix including higher margin eCommerce revenue (180 basis points) and favorable LIFO adjustment resulting from liquidation of historical LIFO layers from the decline in inventory (15 basis points), partially offset by lower international royalties (75 basis points), incremental tariffs (50 basis points), and higher non-operating costs due to the COVID-19 pandemic (35 basis points).

The gross margin increase was driven by favorable product mix and average selling price through the Company's direct to consumer channel (110 basis points), the contribution from the Sweaty Betty ® acquisition (80 basis points), and favorable product mix and average selling price across the Company's brands mainly attributable to Saucony ® , Merrell ® and Wolverine ® (80 basis points), partially offset by incremental air freight costs resulting from production and shipping delays caused by the COVID-19 pandemic (140 basis points).

OPERATING EXPENSES

Operating expenses increased $1.5 million in 2021, to $874.2 million.

The increase was driven by the impairment of intangible assets ($222.2 million), higher non-operating costs incurred due to the COVID-19 pandemic ($21.8 million), higher advertising costs ($16.2 million), and higher incentive compensation costs ($7.4 million).

These increases were partially offset by lower environmental and other related costs, net of recoveries ($72.4 million), lower selling costs ($35.1 million), lower general and administrative costs ($24.4 million), lower product development costs ($10.3 million), and lower distribution costs ($5.5 million).

The increase was driven by higher general and administrative costs ($61.7 million), higher advertising costs ($59.8 million), higher environmental and other related costs, net of recoveries ($45.3 million), higher selling costs ($34.2 million), higher incentive compensation costs ($22.5 million), higher distribution costs ($16.9 million), higher acquisition costs ($7.5 million), and higher product development costs ($5.1 million).

These increases were partially offset by lower impairment of intangible assets ($222.2 million) and lower non-operating costs incurred due to the COVID-19 pandemic ($29.4 million).

Environmental and other related costs were $73.9 million and $19.4 million in 2021 and 2020, respectively.

The increase in environmental and other related costs in 2021 is due to settlement accruals recorded.

See Note 17 to the Company's Consolidated Financial Statements for further discussion.

INTEREST, OTHER AND TAXES

Net interest expense was $37.4 million in 2021 compared to $43.6 million in 2020.

Interest expense increased in the current year due to higher average debt balances in 2020.

The Company incurred a $4.9 million expense in connection with the termination of the interest rate swap and $0.6 million expense in connection with the Company's refinancing activities.

Interest expense decreased in the current year due to the lower average debt balances outstanding on the Company's credit facility.

The Company incurred $34.0 million of debt extinguishment and other costs in connection with the extinguishment of the $250.0 million senior notes due on September 1, 2026 and $300.0 million senior notes due on May 15, 2025.

The Company also incurred $0.3 million of debt extinguishment and other costs in connection with the 2021 Replacement Facility Amendment and Reaffirmation Agreement entered into on October 21, 2021.

The effective tax rate in 2021 was 16.6%, compared to 24.7% in 2020.

The higher effective tax rate in 2020 reflects the positive net impact from one-time discrete items combined with a shift in income between tax jurisdictions with differing tax rates.

Other income was $2.1 million in 2020 compared to $4.9 million in 2019.

The decrease was driven by higher non-service pension costs ($2.0 million) and higher losses from equity method investments ($1.3 million), partially offset by higher sublease income ($0.8 million).

The Company recognized discrete tax benefits in 2021 which reduced the tax expense on pretax income, resulting in a lower effective tax rate.

In 2020, the Company also recognized discrete tax benefits however such benefits increased the tax benefit recognized from the pretax loss, resulting in a higher effective tax rate.

Other expense was $3.7 million in 2021 compared to other income of $2.1 million in 2020.

The increase in expense was driven by higher non-service pension costs ($4.9 million) and higher losses from equity method investments ($1.8 million), partially offset by higher sublease income ($1.7 million).

REPORTABLE SEGMENTS

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The Company also reports “Other” and “Corporate” categories.

The Other category consists of the Company’s leather marketing operations, sourcing operations and multi-branded consumer-direct retail stores.

The Corporate category consists of unallocated corporate expenses such as costs related to the COVID-19 pandemic, impairment of intangible assets and environmental and other related costs.

The Other category consists of the Sweaty Betty ® activewear business, the Company’s leather marketing operations, sourcing operations that include third-party commission revenues and multi-branded consumer-direct retail stores.

The Corporate category consists of unallocated corporate expenses, such as corporate employee costs, costs related to the COVID-19 pandemic, impairment of intangible assets and environmental and other related costs.

The reportable segment results for years 2021 and 2020 are as follows:

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Wolverine Michigan Group

The Michigan Group’s revenue decreased $248.7 million, or 19.1%, in 2020 compared to 2019.

The decline as driven by mid-teens decline from Merrell ® , low-thirties decline from Cat ® , low-teens decline from each of Wolverine ® and Chaco ® , low-twenties decline from Bates ® , mid-thirties decline from Hytest ® , and mid-forties decline from Hush Puppies ® .

The decline across all brands is due to the COVID-19 pandemic, partially offset by eCommerce growth.

The Michigan Group’s operating profit decreased $64.9 million, or 26.5%, in 2020 compared to 2019.

The operating profit decline was due to the revenue declines, partially offset by a 70 basis point increase in gross margin and a $30.0 million decrease in selling, general and administrative costs.

The increase in gross margin in the current year period was due improved product mix including higher margin eCommerce sales, partially offset by increased tariffs.

The decrease in selling, general and administrative expenses in the current year period was due to reductions in employee costs and other discretionary spending in response to the COVID-19 pandemic.

The Michigan Group’s revenue increased $247.9 million, or 23.6%, in 2021 compared to 2020.

The increase was driven by high-forties increase from Hytest ® , low-thirties increase from Cat ® , high-twenties increase from Wolverine ® , mid-twenties increase from Hush Puppies ® , low-twenties increase from Harley-Davidson ® , low-twenties increase from Merrell ® , and low-teens increase from Bates ® .

The increase across all brands is due to economic recovery from the effects of the COVID-19 pandemic experienced in the prior period as a result of the closure of brick-and-mortar stores in 2020, as well as accelerated growth from Merrell ® , Cat ® and Wolverine ® resulting from strength in the outdoor and work categories.

The Michigan Group’s operating profit increased $65.4 million, or 36.4%, in 2021 compared to 2020.

The operating profit increase was due to the revenue increases and a 100 basis point increase in gross margin, partially offset by a $50.9 million increase in selling, general and administrative costs.

The increase in gross margin in the current year period was due to improved product mix, including higher margin eCommerce sales, partially offset by increased product and shipping costs including air freight.

The increase in selling, general and administrative expenses in 2021 was primarily due to higher advertising costs and higher employee costs.

Wolverine Boston Group

The Boston Group’s revenue decreased $214.9 million, or 23.6% , in 2020 compared to 2019.

The decline was driven by high-thirties decline from Sperry ® and high-twenties decline from each of Keds ® and Kids’.

The decline across all brands is due to the COVID-19 pandemic, partially offset by eCommerce growth.

The Boston Group’s operating profit decreased $65.7 million, or 42.7%, in 2020 compared to 2019.

The operating profit decline was due to the revenue declines, partially offset by a 150 basis point increase in gross margin and a $13.2 million decrease in selling, general and administrative costs.

The increase in gross margin in the current year period was due improved product mix including higher margin eCommerce sales, partially offset by increased tariffs.

The decrease in selling, general and administrative expenses in the current year period was due to reductions in employee costs and other discretionary spending in response to the COVID-19 pandemic.

The Other category's revenue decreased $19.0 million, or 30.1%, in 2020 compared to 2019.

The decline is due to high-twenties decline in the performance leathers business due to the COVID-19 pandemic.

Corporate expens es increased $176.2 million in 2020 compared to 2019 due to the impairment of the Sperry trade name ($222.2 million) and higher non-operating costs due to the COVID-19 pandemic ($29.3 million), partially offset by lower environmental and other related costs ($72.4 million).

Refer to Note 4, “Goodwill and Other Intangibles” for additional discussion on the Sperry trade name impairment.

The Boston Group’s revenue increased $239.8 million, or 34.5%, in 2021 compared to 2020.

The increase was driven by high-fifties increase from Saucony ® , high-twenties increase from Kids’ and mid-twenties increase from Sperry ® .

The increase across all brands is due to economic recovery from the effects of the COVID-19 pandemic experienced in the prior period as a result of closure of brick-and-mortar stores in 2020, as well as accelerated growth from Saucony ® resulting from strength in the running category and innovative product launches.

The Boston Group’s operating profit increased $61.2 million, or 69.5%, in 2021 compared to 2020.

The operating profit increase was due to the revenue increases and a 40 basis point increase in gross margin, partially offset by a $46.0 million increase in selling, general and administrative costs.

The increase in gross margin in the current year period was due to improved product mix including higher margin eCommerce sales, partially offset by increased product and shipping costs including air freight.

The increase in selling, general and administrative expenses in 2021 was primarily due to higher advertising costs and higher employee costs.

The Other category's revenue increased $136.1 million, or 308.6%, in 2021 compared to 2020.

The revenue increase was driven by low-forties increase in the performance leathers business and an $117.3 million contribution from the Sweaty Betty ® acquisition.

Corporate expenses decreased $153.5 million in 2021 compared to 2020 primarily due to the impairment of the Sperry trade name in 2020 ($222.2 million) and lower non-operating costs due to the COVID-19 pandemic ($29.2 million), partially offset by higher environmental and other related costs ($45.3 million), higher incentive compensation and bonus expense ($28.4 million), higher wages and employee cost ($13.1 million), and higher acquisition costs ($7.5 million).

LIQUIDITY AND CAPITAL RESOURCES

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Debt 966.8 722.5

Available Revolving Credit Facility (1)

Net cash provided by operating activities 309.1 222.6

Net cash provided by (used in) investing activities 6.1 (61.5)

Net cash used in financing activities (154.0) (124.6)

Additions to property, plant and equipment 10.3 34.4

Depreciation and amortization 32.8 32.7

(1) Amounts are net of both borrowings, if any, and outstanding standby letters of credit issued in accordance with the terms of the Revolving Credit Facility.

Cash and cash equivalents of $347.4 million as of January 2, 2021 were $166.8 million higher compared to December 28, 2019.

The increase is due primarily to cash provided by operating activities of $309.1 million, cash provided by investing activities of $6.1 million, partially offset by net repayments of debt of $72.5 million, cash dividends paid of $33.6 million, share repurchases of $21.0 million, and shares acquired related to employee stock plans of $24.8 million.

The Company had $793.9 million of borrowing capacity available under the Revolving Credit Facility as of January 2, 2021.

Available Revolving Facility (1)

(1) Amounts are net of both borrowings, if any, and outstanding standby letters of credit issued in accordance with the terms of the Revolving Facility.

Cash and cash equivalents of $161.7 million as of January 1, 2022 were $185.7 million lower compared to January 2, 2021.

The decrease is due primarily to the acquisition of Sweaty Betty ® for $417.4 million, share repurchases of $39.6 million, cash dividends paid of $33.5 million, additions to property, plant, and equipment of $17.6 million, shares acquired related to employee stock plans of $14.1 million and payments of debt issuance and debt extinguishment costs of $10.4 million, partially offset by net revolver borrowings of $225.0 million, cash provided by operating activities of $86.8 million, and net borrowings of long-term debt of $20.0 million.

The Company had $769.2 million of borrowing capacity available under the Revolving Facility as of January 1, 2022.

Cash and cash equivalents located in foreign jurisdictions totaled $133.4 million as of January 1, 2022.

Cash flow from operating activities, along with the Revolving Credit Facility capacity, are expected to be sufficient to meet the Company’s working capital needs for the foreseeable future.

Any excess cash flow from operating activities is expected to be used to fund organic growth initiatives, reduce debt, and pay dividends.

The Company funded the purchase price for the Sweaty Betty ® acquisition through a combination of cash on hand and borrowings under the Revolving Facility.

Cash flow from operating activities is expected to be sufficient to meet the Company’s working capital needs for the foreseeable future.

Any excess cash flow from operating activities is expected to be used to fund organic growth initiatives, reduce debt, pay dividends, pursue acquisitions and for general corporate purposes.

The Company may purchase up to an additional $447.8 million of shares under its existing common stock repurchase program which expires in 2023.

The common stock repurchase program does not obligate the Company to acquire any shares and may be suspended at any time.

The Company repurchased $39.6 million and $21.0 million of shares during 2021 and 2020, respectively.

A detailed discussion of environmental remediation costs is found in Note 17 to the Company's Consolidated Financial Statements.

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Future developments may occur that could materially change the Company’s current cost estimates.

Note 17 to the Company's Consolidated Financial Statements also includes a detailed discussion of environmental litigation matters.

The Company has established an accrual in the amount of $50.7 million, and made related payments of $0.6 million, with respect to certain of these matters for the year ended January 1, 2022, as discussed in Note 17.

The Company expects to disburse payments during 2022 equal to the remainder of the established accrual.

Developments may occur that could materially change the Company’s current cost estimates.

The Company adjusts recorded liabilities as further information develops or circumstances change.

The future impact of the COVID-19 pandemic on the Company’s statement of operations and cash flows remains uncertain.

The actions the Company has taken and continues to take to improve the Company’s liquidity are discussed above in this Item 7 and below under “Financing Arrangements.”

The Company expects to meet its contractual obligations through its typical sources of liquidity in the normal course of business, such as coash from operating activities, and believes it has the financial resources to satisfy these contractual obligations.

The Company had the following contractual obligations due by period at January 1, 2022:

(In millions) Total Less than

1 year 1-3 years 3-5 years More than

Long-term debt obligations (1)

$ 1,176.9 $ 263.8 $ 77.6 $ 226.7 $ 608.8

Operating lease obligations

193.2 35.9 44.9 35.8 76.6

Purchase obligations (2)

988.0 988.0 — — —

Supplemental Executive Retirement Plan

42.1 3.9 8.1 8.3 21.8

Municipal water improvements (3)

46.9 18.6 28.3 — —

TCJA transition obligation

28.4 0.4 16.3 11.7 —

$ 2,475.5 $ 1,310.6 $ 175.2 $ 282.5 $ 707.2

(1) Includes principal and interest payments on the Company’s long-term debt.

Estimated future interest payments on outstanding debt obligations are based on interest rates as of January 1, 2022.

Actual cash outflows may differ significantly due to changes in underlying interest rates.

(2) Purchase obligations related primarily to inventory and capital expenditure commitments.

(3) Under the terms of a Consent Decree resolving certain civil and regulatory actions, the Company is obligated to contribute towards the costs of extending municipal water lines, developing a replacement wellfield and making certain improvements to Plainfield Township’s existing water treatment plant, all subject to an aggregate cap of $69.5 million.

During 2021 and 2020, the Company made payments of $12.9 and $9.7 million towards the total cap, respectively.

Due to the uncertainty of the timing and amounts related to the Company's other environmental remediation costs, they have been excluded from this table.

See Note 17 to the Company's Consolidated Financial Statements for additional information.

(4) The total amount of unrecognized tax benefits on the consolidated balance sheet at January 1, 2022 is $10.9 million.

At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes.

As a result, this amount is not included in the table above.

Financing Arrangements

On October 21, 2021, the Company entered into a 2021 Replacement Facility Amendment and Reaffirmation Agreement (the “Amendment”) to the Company's Credit Facility (as amended and restated, the "Credit Agreement").

The Amendment amended and restated the Credit Agreement to, among other things:

(i) provide for a term loan A facility (the “Term Facility”) in an aggregate principal amount of $200.0 million, which replaced the existing term loan A;

(ii) provide for an increased revolving credit facility (the “Revolving Facility” and, together with the Term Facility, the “Senior Credit Facilities”) with total commitments of $1.0 billion, an increase of $200.0 million from the existing Revolving Facility;

and (iii) set the LIBOR floor to 0.000%, a decrease of 0.750%.

The maturity date of the loans under the Senior Credit Facilities was extended to October 21, 2026.

The Amendment provides for a debt capacity of up to an aggregate debt amount (including outstanding term loan principal and revolver commitment amounts in addition to permitted incremental debt) not to exceed $2.0 billion unless certain specified conditions set forth in the amended senior credit facility are met.

The Term Facility requires quarterly principal payments with a balloon payment due on October 21, 2026.

On August 26, 2021, the Company issued $550.0 million aggregate principal debt amount of 4.000% senior notes due on August 15, 2029.

Related interest payments are due semi-annually beginning February 15, 2022.

The senior notes are guaranteed by substantially all of the Company’s domestic subsidiaries.

The proceeds from the senior notes were used to extinguish the Company’s $250.0 million senior notes due on September 1, 2026 and $300.0 million senior notes due on May 15, 2025.

As of January 1, 2022, the Company was in compliance with all covenants and performance ratios under the Credit Agreement.

The Company’s debt at January 1, 2022 totaled $966.8 million compared to $722.5 million at January 2, 2021.

The Company expects to use the current borrowings to fund organic growth initiatives, reduce debt, pay dividends, pursue acquisitions and for general corporate purposes.

The increased debt position resulted from borrowings under the Revolving Facility to fund the Sweaty Betty ® acquisition as well as the new Term Facility's increased principal balance resulting from the Amendment.

The following table summarizes cash flow activities:

Fiscal Year Ended

(In millions) January 1,

2022 January 2,

Net cash provided by operating activities $ 86.8 $ 309.1

Net cash provided by (used in) investing activities (437.3) 6.1

Net cash provided by (used in) financing activities 169.3 (154.0)

Additions to property, plant and equipment 17.6 10.3

Depreciation and amortization 33.2 32.8

Operating Activities

The principal source of the Company’s operating cash flow is net earnings, including cash receipts from the sale of the Company’s products, net of costs of goods sold.

Cash from operations during 2020 was higher compared to 2019, due primarily to a decrease in net working capital representing a source of cash of $187.9 million.

Working capital balances were favorably impacted by a decrease in inventories of $107.2 million, a decrease in accounts receivable of $64.8 million, an increase in other operating liabilities of $27.9 million, and a decrease in other operating assets of $7.4 million, partially offset by a decrease in accounts payable of $18.9 million.

Operating cash flows were favorably impacted by Environmental and other related costs, net of cash payments and recoveries received, of $31.5 million, which included $55.0 million paid by 3M Company during the first quarter of 2020.

See Note 17 for additional information regarding this settlement payment.

Cash from operations during 2021 was lower compared to 2020, due primarily to an increase in net working capital representing a use of cash of $88.4 million.

Working capital balances were unfavorably impacted by an increase in inventories of $77.2 million, an increase in accounts receivable of $49.2 million, and an increase in other operating assets of $2.3 million, partially offset by an increase in accounts payable of $23.0 million and an increase in other operating liabilities of $15.7 million.

Operating cash flows were favorably impacted by stock-based compensation expense of $38.1 million, environmental and other related costs of $33.7 million, depreciation and amortization expense of $33.2 million, pension expense of $14.0 million and debt extinguishment costs of $5.8 million, partially offset by deferred income taxes of $14.7 million.

Investing Activities

The Company made capital expenditures of $10.3 million and $34.4 million in years 2020 and 2019 respectively, for building improvements, new retail stores and information system enhancements.

Capital expenditures were lower in 2020 compared to 2019 due to reductions in non-essential capital spending in response to the COVID-19 pandemic.

The Company made a cash investment of $3.5 million and $8.5 million in joint ventures in years 2020 and 2019 respectively.

The Company made a contingent consideration payment of $5.5 million during 2020 related to the Saucony ® Italy distributor acquisition.

The Company's initial cash payment for the business acquisition was $15.1 million paid in 2019.

See Note 19 for additional information regarding the acquisition.

The Company received proceeds of $26.8 million from company-owned life insurance policy liquidations.

The Company acquired the Sweaty Betty ® brand and activewear business in 2021 resulting in a net cash payment of $417.4 million.

The Company also made capital expenditures of $17.6 million and $10.3 million in years 2021 and 2020, respectively, for building improvements, new retail stores, distribution operations improvements and information system enhancements.

The Company also received $26.8 million of proceeds during the second quarter of 2020 related to a company-owned life insurance policy.

During the first quarter of 2020, the Company made a contingent consideration payment of $5.5 million related to the Saucony ® Italy distributor acquisition.

Financing Activities

On May 5, 2020, the Company entered into a Second Amendment to its senior credit facility.

In connection with the Second Amendment, the Company borrowed an incremental $171.0 million in aggregate principal in Incremental Term Loan.

The Incremental Term Loan was repaid in full by the end of fiscal 2020.

The Amended Senior Credit Facility also includes a $200.0 million term loan facility and a $800.0 million Revolving Credit Facility, both with maturity dates of December 6, 2023, that remain unchanged as a result of the Second Amendment.

The Amended Senior Credit Facility’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 Amended Senior Credit Facility are met.

Term Loan A requires quarterly principal payments with a balloon payment due on December 6, 2023

The Revolving Credit Facility allows the Company to borrow up to an aggregate amount of $800.0 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 no outstanding borrowings under the Revolving Credit Facility and outstanding letters of credit under the Revolving Credit Facility of $6.1 million as of January 2, 2021.

The outstanding letters of credit reduce the borrowing capacity under the Revolving Credit Facility.

On May 11, 2020, the Company issued $300.0 million aggregate principal amount of 6.375% senior notes due on May 15, 2025 related interest payments are due semi-annually beginning on November 15, 2020.

These senior notes are guaranteed by substantially all of the Company’s domestic subsidiaries.

As of January 2, 2021, the Company was in compliance with all covenants and performance ratios under the Credit Agreement.

The Company’s debt at January 2, 2021 totaled $722.5 million, compared to $798.4 million at December 28, 2019.

The decrease was due to repayments on the Revolving Credit Facility of $360.0 million and scheduled principal payments on Term Loan A of $12.5 million, partially offset by the $300.0 million 6.375% senior notes issued.

The Company has a foreign revolving credit facility with aggregate available borrowin gs of $4.0 million that are uncommitted and, therefore, each borrowing against the applicable facility is subject to approval by the lender.

There were no borrowings against this facility at January 2, 2021.

The Company repurchased $21.0 million and $319.2 million of Company common stock in years 2020 and 2019 respectively, under stock repurchase plans.

The Company may purchase up to an additional $487.4 million of shares under its existing stock repurchase program which expires in 2023.

As part of its strategy to increase liquidity and the flexibility of the Company’s capital structure as a result of the COVID-19 pandemic, the Company temporarily suspended share repurchases in March 2020.

In addition to the stock repurchase program activity, the Company acquired $24.8 million and $16.9 million of shares in years

2020 and 2019 respectively, in connection with shares or units withheld to pay employee taxes related to stock-based compensation plans.

The Company declared cash dividends of $0.40 per share for each of fiscal 2020 and 2019.

The current year debt activity includes net borrowings under the Revolving Facility of $225.0 million.

The current year revolver borrowings were used to fund a portion of the Sweaty Betty ® brand and activewear business acquisition.

On August 26, 2021, the Company issued $550.0 million aggregate principal amount of senior notes, and the proceeds from these senior notes were used to extinguish the Company’s $250.0 million senior notes due on September 1, 2026 and $300.0 million senior notes due on May 15, 2025.

The October 21, 2021 Replacement Facility Amendment and Reaffirmation Agreement also provided for a term facility that replaced the prior term loan A, resulting in a $20.0 million increase in long-term debt.

Payments of debt issuance costs of $10.4 million were associated with the current year debt transactions.

The prior year activity included net revolving credit payments of $360.0 million, net long-term debt borrowings of $287.5 million that included issuance of senior notes and quarterly term loan payments, and payments of debt issuance costs of $6.4 million.

The Company paid $14.1 million and $24.8 million in 2021 and 2020, respectively, in connection with shares or units withheld to pay employee taxes related to awards under stock incentive plans and received $17.1 million and $9.8 million in proceeds from the exercise of stock options in 2021 and 2020, respectively.

The Company also repurchased $39.6 million and $21.0 million of its common stock during 2021 and 2020, respectively.

The Company received $4.8 million and $1.8 million from noncontrolling owners of the Company’s China joint venture to support the growth of the joint venture in 2021 and 2020, respectively.

During 2020, the Company terminated an interest rate swap and the fair value of the swap of $7.3 million was repaid.

The Company declared cash dividends of $0.40 per share in each of 2021 and 2020.

Dividends paid totaled $33.5 million and $33.6 million for 2021 and 2020, respectively.

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See Note 2 to the Company's Consolidated Financial Statements for information related to new accounting standards.

CRITICAL ACCOUNTING POLICIES

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.

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Management believes that an understanding of these policies is important to an overall understanding of the Company’s Consolidated Financial Statements.

Significant accounting policies are summarized in Note 1 to the consolidated financial statements.

Revenue Recognition and Performance Obligations

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Revenue recognized during the year ended January 1, 2022, related to the Company’s contract liabilities was nominal.

Allowance for Credit Losses

The Company maintains an allowance for credit losses on accounts receivable that represents estimated losses resulting from its customers’ failure to make required payments.

Company management evaluates the allowance for credit losses based on a review of current customer status and historical collection experience along with current and reasonable supportable forecasts of future economic conditions.

The Company values its inventory at the lower of cost or net realizable value.

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Cost is determined using the first-in, first-out (“FIFO”) method for all raw materials, work-in-process and finished goods inventories in foreign countries and certain domestic finished goods inventories.

The average cost of inventory is used for finished goods inventories of the Company’s consumer-direct business.

The average cost of inventory is used for finished goods inventories of the Company’s consumer-direct business and Sweaty Betty ® inventory.

The Company has applied these inventory cost valuation methods consistently from year to year.

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The adjustments would increase or decrease the Company’s cost of sales and net income in the period in which they were realized or recorded.

Inventory quantities are verified at various times throughout the year by performing physical inventory counts and subsequently comparing those results to perpetual inventory balances.

Inventory quantities are verified at various times throughout the year by performing physical inventory counts and subsequently comparing those results to perpetual inventory

If the Company determines that adjustments to the inventory quantities are appropriate, an adjustment to the Company’s cost of goods sold and inventory is recorded in the period in which such determination was made.

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting, which requires that once control is obtained, the consolidated financial statements reflect the operations of an acquired business starting from the acquisition date.

All assets acquired and liabilities assumed are recorded at fair value as of the acquisition date.

The Company allocates the purchase price of an acquired business to the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed, with any excess purchase price recorded as goodwill.

Contingent consideration, if any, is included in the purchase price and is recognized at its fair value on the acquisition date.

During the measurement period, which is up to one year from the acquisition date, adjustments to the assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill.

The determination of fair values of identifiable assets and liabilities requires estimates and the use of valuation techniques and requires management to make judgments that may involve the use of significant estimates.

For intangible assets acquired in a business combination, the Company typically uses the income method.

Significant estimates used in valuing certain intangible assets include, but are not limited to, the amount and timing of future cash flows, growth rates and discount rates, among other items.

If the actual results differ from the estimates and judgments used, the amounts recorded in the Consolidated Financial Statements may be exposed to potential impairment of the intangible assets and goodwill as discussed in the "Goodwill and Indefinite-Lived Intangibles" section below.

Refer to Note 19 “Business Acquisitions” for additional discussion.

Goodwill and Indefinite-Lived Intangibles

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If the carrying amounts of these assets are not recoverable based upon discounted cash flow and market approach analyses, the carrying amounts of such assets are reduced by the estimated difference between the carrying values and estimated fair values.

The Company includes assumptions about expected future operating performance as part of a discounted cash flow analysis to estimate fair value.

The Company includes assumptions about expected future operating performance, which are derived from internal projections and operating plans, as part of a discounted cash flow analysis to estimate fair value.

For goodwill, if the estimated fair value of the reporting unit exceeds its carrying value, no further review is required.

However, if the estimated fair value of the reporting unit is less than its carrying value, the Company records an impairment charge equal to the excess of the recorded goodwill over the fair value of the goodwill.

The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value.

The Company would not be required to quantitatively determine the fair value of the indefinite-lived intangible unless the Company determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value.

Future cash flows of the individual indefinite-lived intangible assets are used to measure their fair value after consideration by management of certain assumptions, such as forecasted growth rates and cost of capital, which are derived from internal projections and operating plans.

The Company performs its annual testing for goodwill and indefinite-lived intangible asset impairment at the beginning of the fourth quarter of the year for all reporting units.

The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill and indefinite-lived intangible assets are less than their carrying value.

The Company would not be required to quantitatively determine the fair value unless the Company determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value.

The Company performs its annual testing for goodwill and indefinite-lived intangible asset impairment at the beginning of the fourth quarter of the fiscal year for all reporting units.

The Company did not recognize any impairment charges for goodwill during years 2021, 2020 and 2019.

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Refer to Note 4, “Goodwill and Other Intangibles” for additional discussion on the Sperry trade name impairment.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or an asset group may not be recoverable.

Each impairment test is based on a comparison of the carrying amount of the asset or asset group to the future undiscounted net cash flows expected to be generated by the asset or asset group.

If such assets are considered to be impaired, the impairment amount to be recognized is the amount by which the carrying value of the assets exceeds their fair value.

No impairment charges were recognized for the Company's long-lived assets during years 2020, 2019 and 2018.

Environmental

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Liabilities for estimated costs of environmental remediation are based primarily upon third-party environmental studies, other internal analysis and the extent of the contamination and the nature of required remedial actions at each site.

The Company records adjustments to the estimated costs if there are changes in the scope

of the required remediation activity, extent of contamination, governmental regulations or remediation technologies.

The Company records adjustments to the estimated costs if there are changes in the scope of the required remediation activity, extent of contamination, governmental regulations or remediation technologies.

Environmental costs relating to existing conditions caused by past operations that do not contribute to current or future revenues are expensed as incurred.

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Assets related to potential recoveries from other responsible parties are recognized when a definitive agreement is reached and collection of cash is realizable.

Recoveries of covered losses under insurance policies are recognized only when realization of the claim is deemed realized or realizable.

Recoveries of covered losses under insurance policies are recognized only when realization of the claim is deemed probable.

The Company is subject to legal proceedings and claims related to the environmental matters as described in Note 17 to the Company's Consolidated Financial Statements.

The Company routinely assesses the legal and factual circumstances of each matter and the likelihood of any adverse outcomes in these matters, as well as ranges of possible losses.

Assessments of lawsuits and claims can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.

The Company accrues an estimated liability for legal proceeding claims that are both probable and estimable and reserves may change in future periods due to new developments in each matter.

For further discussion, refer to Note 17 “Litigation and Contingencies”.

Retirement Benefits

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The bonds selected are listed as high grade by at least two recognized ratings agency and are non-callable, currently purchasable and non-prepayable.

The calculated discount rate was 2.85% at January 2, 2021, compared to 3.60% at December 28, 2019.

Pension expense is also impacted by the expected long-term rate of return on plan assets, which the Company has determined to be 6.75% for both fiscal 2020 and 2019.

The calculated discount rate was 3.09% at January 1, 2022, compared to 2.85% at January 2, 2021.

Pension expense is also impacted by the expected long-term rate of return on plan assets, which the Company has determined to be 6.75% and 6.75% for fiscal 2021 and 2020, respectively.

This rate is based on both actual historical rates of return experienced by the pension assets and the long-term rate of return of a composite portfolio of equity and fixed income securities that reflects the approximate diversification of the pension assets.

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It is not practicable to estimate the amount of the deferred tax liability associated with these non-cash unremitted earnings due to the complexity of the hypothetical calculation.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements as of January 2, 2021.

CONTRACTUAL OBLIGATIONS

As of January 2, 2021, the Company had the following payments under contractual obligations due by period:

(In millions) Total Less than

1 year 1-3 years 3-5 years More than

Long-term debt obligations (1)

$ 899.6 $ 46.9 $ 242.9 $ 351.5 $ 258.3

Operating lease obligations

211.1 33.9 51.2 35.8 90.2

Purchase obligations (2)

550.6 550.6 — — —

Supplemental Executive Retirement Plan

42.2 3.8 8.0 8.3 22.1

Deferred compensation

1.6 0.4 0.8 0.3 0.1

Dividends declared

8.3 8.3 — — —

Municipal water improvements (3)

59.8 13.2 46.6 — —

TCJA transition obligation

27.9 0.2 16.1 11.6 —

Minimum royalties

3.5 1.7 1.8 — —

Minimum advertising

13.8 3.3 6.9 3.6 —

$ 1,818.4 $ 662.3 $ 374.3 $ 411.1 $ 370.7

(1) Includes principal and interest payments on the Company’s long-term debt.

Estimated future interest payments on outstanding debt obligations are based on interest rates as of January 2, 2021.

Actual cash outflows may differ significantly due to changes in underlying interest rates.

(2) Purchase obligations related primarily to inventory and capital expenditure commitments.

(3) Under the terms of the approved Consent Decree, the Company is obligated to contribute towards the costs of extending municipal water lines, developing a replacement wellfield and making certain improvements to Plainfield Township’s existing water treatment plant, all subject to an aggregate cap of $69.5 million.

During 2020, the Company made payments of $9.7 million towards the total cap.

Due to the uncertainty of the timing and amounts related to the Company's other environmental remediation costs, they have been excluded from this table.

See Note 17 to the Company's Consolidated Financial Statements for additional information.

(4) The total amount of unrecognized tax benefits on the consolidated balance sheet at January 2, 2021 is $5.5 million.

At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes.

As a result, this amount is not included in the table above.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis