Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
BUSINESS OVERVIEW
The Company is a leading global designer, marketer and licensor of branded footwear, apparel and accessories. The Company’s strategic vision is to build and grow high-energy footwear, apparel and accessories brands that inspire and empower consumers to explore and enjoy their active lives. The Company seeks to fulfill this vision by offering innovative products and compelling brand propositions; complementing its footwear brands with strong apparel and accessories offerings; expanding its global direct-to-consumer footprint; and delivering supply chain excellence.
The Company’s brands are marketed in approximately 170 countries and territories at December 31, 2022, including through owned operations in the U.S., Canada, the United Kingdom and certain countries in continental Europe and Asia Pacific. 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 December 31, 2022, the Company oper ated 154 retail stores in the U.S., United Kingdom, and Canada an d 63 direct-to-consumer eCommerce sites.
On July 31, 2021, the Company entered into a definitive agreement to acquire 100% of the outstanding shares of Lady of Leisure InvestCo Limited. The acquisition was completed on August 2, 2021 for $417.4 million, net of acquired cash of $7.4 million. Lady of 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, as defined below.
The following discussion includes a comparison of the Company's results of operations and liquidity and capital resources for fiscal 2022 and 2021. A discussion of a comparison of the Company's results of operations and liquidity and capital resources for fiscal 2021 and 2020 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 January 1, 2022, filed with the SEC on February 24, 2022. Additional information about the reorganization of the Company's reportable segments can be found in the Company's Current Report on Form 8-K/A filed with the SEC on November 10, 2022.
Known Trends Impacting Our Business
Macroeconomic conditions and supply chain disruptions and the COVID-19 pandemic continue to have an impact on the Company’s business results. During fiscal 2021 and the first half of fiscal 2022, disruption in the global supply chain due to vessel shortages, labor and container shortages, and U.S. port congestion resulted in transportation delays that interrupted the flow of the Company’s inventory and delayed shipments to wholesale partners. As a result, the Company planned fiscal 2022 product purchases based on the assumption that extended inventory transit times would continue throughout the year. However, during the third quarter of 2022, inventory transit times improved ahead of plan, resulting in challenges managing the timing of inventory flow. As of December 31, 2022, the Company had $146.8 million of inventory in-transit, which includes both inventory in-transit to the Company's distribution centers and inventory not yet able to be processed due to processing capacity pressures at the Company’s distribution centers. As a result, the Company’s inventory levels as of December 31, 2022 were elevated compared to the prior fiscal year. The inventory in-transit balance has declined from a balance of $280.9 million at October 1, 2022. The Company increased promotional activity in the third and fourth quarters of fiscal 2022 and expects this increased level of promotional activity to continue during the first half of 2023 to reduce inventory levels.
The Company incurred higher logistics costs, including freight and labor costs, during 2022 as a result of the supply chain disruption as well as inflationary pressures. The Company implemented selective price increases by brand and product to partially offset the effects of inflation on the Company’s financial results. The Company expects to continue to evaluate future pricing of its products. In addition to inflationary headwinds, the strengthening of the U.S. dollar relative to other major currencies also negatively impacted the Company’s financial results in 2022 and is expected to have a negative impact on the Company's 2023 financial results.
In March 2022, the Company temporarily suspended all business operations in Russia due to the Russia-Ukraine conflict. The Company has no assets or employees in Russia or Ukraine. The Company’s business operations in Russia represent less than 1 percent of revenue. Please refer to Item 1A, “Risk Factors” for a more complete discussion of the risks the Company encounters in our business.
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2022 FINANCIAL OVERVIEW
• Revenue was $2,684.8 million for 2022, representing an increase of 11.2% compared to the prior year's revenue of $2,414.9 million.
• Gross margin for 2022 was 39.9%, a decrease of 270 basis points from 2021.
• The effective tax rate in 2022 was 25.2%, compared to 16.6% in 2021.
• Diluted loss per share in 2022 was $2.37, compared to diluted earnings per share of $0.81 in 2021.
• The Company declared cash dividends of $0.40 per share in 2022 and 2021.
• Cash flow used in operating activities was $178.9 million for 2022 and cash flow provided by operating activities was $86.8 million for 2021.
• Compared to the prior year, inventory increased $379.7 million, or 103.9% .
RESULTS OF OPERATIONS
The following is a discussion of the Company’s results of operations and liquidity and capital resources. This section should be read in conjunction with the Company’s consolidated financial statements and related notes, which are included in Item 8 of this Annual Report on Form 10-K.
Fiscal Year
(In millions, except per share data) 2022 2021 Percent Change
Revenue
$ 2,684.8 $ 2,414.9 11.2 %
Cost of goods sold
1,614.4 1,385.0 16.6 %
Gross profit
1,070.4 1,029.9 3.9 %
Selling, general and administrative expenses
906.4 817.8 10.8 %
Gain on sale of trademarks (90.0) — —
Impairment of goodwill and intangible assets 428.7 — —
Environmental and other related costs, net of recoveries 33.7 56.4 (40.2) %
Operating profit (loss) (208.4) 155.7 (233.8) %
Interest expense, net
47.3 37.4 26.5 %
Debt extinguishment and other costs — 34.3 (100.0) %
Other expense (income), net (2.8) 3.7 (175.7) %
Earnings (loss) before income taxes (252.9) 80.3 (414.9) %
Income tax expense (benefit) (63.8) 13.3 (579.7) %
Net earnings (loss) (189.1) 67.0 (382.2) %
Less: net loss attributable to noncontrolling interests (0.8) (1.6) 50.0 %
Net earnings (loss) attributable to Wolverine World Wide, Inc. $ (188.3) $ 68.6 (374.5) %
Diluted earnings (loss) per share $ (2.37) $ 0.81 (392.6) %
REVENUE
Revenue was $2,684.8 million for 2022, representing an increase of 11.2% compared to the prior year's revenue of $2,414.9 million. The change in revenue reflected a 19.0% increase from the Active Group, a 7.6% increase from the Work Group and a 6.2% decline from the Lifestyle Group. The Active Group's revenue increase was driven by an increase of $116.9 million from Merrell ® , $94.3 million from Sweaty Betty ® , $29.1 million from Saucony ® , and $10.3 million from Chaco ® . The Work Group’s revenue increase was driven by an increase of $32.1 million from Cat ® and $20.1 million from Wolverine ® , partially offset by a decrease of $9.2 million from Bates ® . The Lifestyle Group’s revenue decline was driven by a decrease of $33.4 million from Sperry ® and $7.8 million from Keds ® , partially offset by an increase of $11.7 million from Hush Puppies ® . International revenue represented 41.8%, and 34.8% of total reported revenues in 2022 and 2021, respectively. Changes in foreign exchange rates decreased revenue by $70.0 million during 2022. Direct-to-consumer revenue increased by $64.1 million, or 10.2% during 2022 compared to 2021.
GROSS MARGIN
For 2022, the Company’s gross margin was 39.9%, compared to 42.6% in 2021. The gross margin decrease was driven by unfavorable product mix and higher promotional activity in the Company's direct to consumer channel (150 basis points), increased closeout sales and closeout reserves (90 basis points) and unfavorable product mix and higher promotional activity across the Company's brands (30 basis points).
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OPERATING EXPENSES
Operating expenses increased $404.6 million in 2022, to $1,278.8 million. The increase was driven by higher impairment of intangible assets ($428.7 million), Sweaty Betty ® operating expenses included contribution through the one-year anniversary of the acquisition ($60.2 million), higher general and administrative costs ($26.6 million), higher selling costs ($10.4 million), higher distribution costs ($9.5 million), higher advertising costs ($6.0 million), higher Sweaty Betty ® integration costs ($2.0 million), and higher product development costs ($1.1 million), partially offset by the gain recorded on the sale of the Champion trademarks for footwear in the United States and Canada ($90.0 million), lower environmental and other related costs, net of recoveries ($22.7 million), lower incentive compensation costs ($20.0 million), and lower acquisition costs ($7.5 million). Environmental and other related costs were $56.3 million and $73.9 million in 2022 and 2021, respectively. See Note 17 to the Company's Consolidated Financial Statements for further discussion.
INTEREST, OTHER AND TAXES
Net interest expense was $47.3 million in 2022 compared to $37.4 million in 2021. Interest expense increased in the current year due to higher average principal balances of variable rate debt and higher average interest rates on the Company’s variable rate debt, partially offset by lower interest rates on the Company's senior notes. The Company redeemed and replaced the 6.375% senior notes due in 2025 and the 5.000% senior notes due in 2026 with the 4.000% senior notes in August 2021 due in 2029.
The effective tax rate in 2022 was 25.2%, compared to 16.6% in 2021. The Company recognized tax benefits in 2022 which increased the tax benefit recognized from the pretax loss, resulting in a higher effective tax rate. In 2021, the Company also recognized tax benefits which reduced the tax expense on pretax income, resulting in a lower effective tax rate.
Other income was $2.8 million in 2022 compared to other expense of $3.7 million in 2021. The decrease in expense was driven by lower non-service pension costs ($3.0 million), higher sublease income ($1.8 million), and lower losses from equity method investments ($1.6 million).
REPORTABLE SEGMENTS
The Company’s portfolio of brands are organized into the following three reportable segments. During the fourth quarter of 2022, the Company announced changes to its reportable segments as a result of changes in how its Chief Operating Decision Maker, the Company's Chief Executive Officer, allocates resources to and assess performance of the Company's operating segments. All prior period disclosures have been retrospectively adjusted to reflect the new reportable segments.
• Active Group, consisting of Merrell ® footwear and apparel, Saucony ® footwear and apparel, Sweaty Betty ® activewear, and Chaco ® footwear;
• Work Group, consisting of Wolverine ® footwear and apparel, Cat ® footwear, Bates ® uniform footwear, Harley-Davidson ® footwear and HYTEST ® safety footwear; and;
• Lifestyle Group , consisting of Sperry ® footwear, Keds ® footwear, and Hush Puppies ® footwear and apparel.
Kids' footwear offerings from Saucony ® , Sperry ® , Keds ® , Merrell ® , Hush Puppies ® and Cat ® are included with the applicable brand.
The Company also reports “Other” and “Corporate” categories. The Other category consists of the Company’s leather marketing operations, sourcing operations that include third-party commission revenues, multi-branded direct-to-consumer retail stores and the Stride Rite ® licensed business. The Corporate category consists of the gain on the sale of the Champion trademarks in 2022 and unallocated corporate expenses, such as corporate employee costs, costs related to the COVID-19 pandemic, impairment of intangible assets and goodwill, reorganization activities, and environmental and other related costs.
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The reportable segment results for years 2022 and 2021 are as follows:
Fiscal Year
(In millions) 2022 2021 Change Percent Change
REVENUE
Active Group $ 1,570.2 $ 1,319.6 $ 250.6 19.0 %
Work Group 590.5 548.8 41.7 7.6 %
Lifestyle Group 447.5 477.0 (29.5) (6.2) %
Other
76.6 69.5 7.1 10.2 %
Total
$ 2,684.8 $ 2,414.9 $ 269.9 11.2 %
OPERATING PROFIT (LOSS)
Active Group $ 198.4 $ 229.5 $ (31.1) (13.6) %
Work Group 102.5 103.8 (1.3) (1.3) %
Lifestyle Group 48.1 67.5 (19.4) (28.7) %
Other
11.8 8.1 3.7 45.7 %
Corporate
(569.2) (253.2) (316.0) (124.8) %
Total
$ (208.4) $ 155.7 $ (364.1) (233.8) %
Further information regarding the reportable segments can be found in Note 18 to the Company's Consolidated Financial Statements.
Active Group
The Active Group’s revenue increased $250.6 million, or 19.0%, in 2022 compared to 2021. The revenue increase was driven by an increase of $116.9 million from Merrell ® , $94.3 million from Sweaty Betty ® , $29.1 million from Saucony ® , and $10.3 million from Chaco ® . The Merrell ® increase was primarily due to the strength of the hike product category, which includes the industry leading Moab franchise as well as strong performance across all regions, specifically the international channel. The Sweaty Betty ® increase included contribution through the one-year anniversary of the acquisition. The Saucony ® increase was primarily driven by the strength and expanded sales of core technical road and trail product franchises which include the Ride, Guide, Kinvara, Triumph, Peregrine and Endorphin series. The Chaco ® increase was primarily the result of improved inventory positions in the current period versus the prior period which was negatively impacted by supply chain constraints.
The Active Group’s operating profit decreased $31.1 million, or 13.6%, in 2022 compared to 2021. The operating profit decrease was due to a 320 basis point decrease in gross margin and a $97.0 million increase in selling, general and administrative costs, partially offset by revenue increases. The decrease in gross margin in the current year period was due to unfavorable product mix and higher promotional activity in the Company's direct to consumer channel and increased closeout sales in the wholesale channel. The increase in selling, general and administrative expenses in 2022 includes a contribution of $60.2 million of Sweaty Betty ® operating expenses through the one-year anniversary of the acquisition, as well as higher advertising costs, labor and distribution costs and employee costs.
Work Group
The Work Group’s revenue increased $41.7 million, or 7.6%, in 2022 compared to 2021. The revenue increase was driven by an increase of $32.1 million from Cat ® and $20.1 million from Wolverine ® , partially offset by a decrease of $9.2 million from Bates ® . The Cat ® increase was primarily due to the strength of the life and work product categories. The Wolverine ® increase was primarily due to the strong performance of its core franchises which include Raider and Rancher, strength of the work product category, and expanded work footwear products. The Bates ® decline was primarily due to a reduction in military exchange customer revenue for domestically manufactured products.
The Work Group’s operating profit decreased $1.3 million, or 1.3%, in 2022 compared to 2021. The operating profit decrease was due to a 240 basis point decrease in gross margin and by a $2.9 million increase in selling, general and administrative costs, partially offset by revenue increases. The decrease in gross margin in the current year period was due to unfavorable product mix and higher promotional activity in the Company's direct to consumer channel and increased closeout sales in the wholesale channel. The increase in selling, general and administrative expenses in 2022 was primarily due to higher advertising costs, labor and distribution costs and employee costs.
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Lifestyle Group
The Lifestyle Group’s revenue decreased $29.5 million, or 6.2%, in 2022 compared to 2021. The revenue decrease was driven by a decrease of $33.4 million from Sperry ® and $7.8 million from Keds ® , partially offset by an increase of $11.7 million from Hush Puppies ® . The Sperry ® and Keds ® declines were primarily driven by supply chain issues and softer consumer demand in both the U.S. wholesale and direct-to-consumer sales channels. The Hush Puppies ® increase was primarily due to the launch of a strategic distribution partnership with DSW in North America and the strength of the brand’s lifestyle head-to-toe product offering internationally, with a focus on casual, comfort and color.
The Lifestyle Group’s operating profit decreased $19.4 million, or 28.7%, in 2022 compared to 2021. The operating profit decrease was due to a 150 basis point decrease in gross margin and revenue decreases, partially offset by a $0.4 million decrease in selling, general and administrative costs. The decrease in gross margin in the current year period was due to unfavorable product mix and higher promotional activity in the Company's direct to consumer channel and increased closeout sales in the wholesale channel.
Other
The Other category's revenue increased $7.1 million, or 10.2%, in 2022 compared to 2021. The revenue increase was primarily driven by an increase of $6.0 million from the performance leathers business.
Corporate
Corporate expenses increased $316.0 million in 2022 compared to 2021 primarily due to the impairment of intangible assets related to the Sperry ® trade name and Sweaty Betty ® trade name and goodwill ($428.7 million), reorganization and integration activities ($9.6 million), and higher employee costs ($7.8 million), partially offset by the gain recorded on the sale of the Champion trademarks for footwear in the United States and Canada ($90.0 million), lower environmental and other related costs ($22.7 million), and lower incentive compensation costs ($19.2 million).
LIQUIDITY AND CAPITAL RESOURCES
Fiscal Year
(In millions) 2022 2021
Cash and cash equivalents (1)
$ 135.5 $ 161.7
Debt 1,158.0 966.8
Available Revolving Facility (2)
569.3 769.2
(1) Cash and cash equivalents at the end of the year in the Consolidated Statements of Cash Flows includes $4.0 million of Wolverine Leathers business related cash and cash equivalents that are classified as held for sale as of December 31, 2022 that are not included in cash and cash equivalents in the Consolidated Balance Sheets.
(2) Amounts are net of both borrowings, if any, and outstanding standby letters of credit issued in accordance with the terms of the Revolving Facility.
Liquidity
Cash and cash equivalents of $135.5 million as of December 31, 2022 were $26.2 million lower compared to January 1, 2022. The decrease is due primarily to cash used by operating activities of $178.9 million, share repurchases of $81.3 million, additions to property, plant, and equipment of $36.5 million, cash dividends paid of $32.8 million, and shares acquired related to employee stock plans of $7.7 million, partially offset by net revolver borrowings of $200.0 million, cash received from the sale of the Champion trademark of $90.0 million, proceeds from company-owned life insurance policies of $30.5 million, and contributions from noncontrolling interests of $7.0 million. The Company had $569.3 million of borrowing capacity available under the Revolving Facility as of December 31, 2022. Cash and cash equivalents located in foreign jurisdictions totaled $114.9 million as of December 31, 2022.
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 and for general corporate purposes.
The Company may purchase up to an additional $366.5 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 $81.3 million and $39.6 million of shares during 2022 and 2021, respectively.
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A detailed discussion of environmental remediation costs is found in Note 17 to the Company's Consolidated Financial Statements. The Company has established a reserve for estimated environmental remediation costs based upon an evaluation of currently available facts with respect to each individual affected site. As of December 31, 2022, the Company has a reserve of $74.1 million, of which $49.8 million is expected to be paid in the next 12 months and is recorded as a current obligation in other accrued liabilities, with the remaining $24.3 million recorded in other liabilities and expected to be paid over the course of up to 25 years. The Company's remediation activity at its former Tannery site and sites where the Company disposed of Tannery byproducts is ongoing. It is difficult to estimate the cost of environmental compliance and remediation given the uncertainties regarding the interpretation and enforcement of applicable environmental laws and regulations, the extent of environmental contamination and the existence of alternative cleanup methods.
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 $40.5 million, and made related payments of $50.1 million, with respect to certain of these matters for the year ended December 31, 2022, as discussed in Note 17. The Company expects to disburse payments during 2023 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 Company expects to meet its contractual obligations through its typical sources of liquidity in the normal course of business, such as cash 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 December 31, 2022:
(In millions) Total Less than
1 year 1-3 years 3-5 years More than
5 years
Long-term debt obligations (1)
$ 1,446.3 $ 489.4 $ 135.4 $ 234.7 $ 586.8
Operating lease obligations
236.5 38.6 60.8 47.1 90.0
Purchase obligations (2)
423.1 423.1 — — —
Pension (3)
— — — — —
Supplemental Executive Retirement Plan
44.9 3.9 8.3 8.8 23.9
Municipal water improvements (3)
31.9 31.9 — — —
TCJA transition obligation
28.1 7.0 21.1 — —
Total (4)
$ 2,210.8 $ 993.9 $ 225.6 $ 290.6 $ 700.7
(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 December 31, 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. D uring 2022 and 2021, the Company made paymen ts of $15.0 and $12 .9 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 December 31, 2022 is $9.0 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,
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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 December 31, 2022, the Company was in compliance with all covenants and performance ratios under the Credit Agreement.
The Company’s debt at December 31, 2022 totaled $1,158.0 million, compared to $966.8 million at January 1, 2022. The Company expects to use the current borrowings to fund organic growth initiatives, reduce debt, pay dividends and for general corporate purposes. The increased debt position resulted from borrowings under the Revolving Facility to fund organic growth initiatives, pay dividends and for general corporate purposes.
Cash Flows
The following table summarizes cash flow activities:
Fiscal Year Ended
(In millions) December 31,
2022 January 1,
2022
Net cash provided by (used in) operating activities (178.9) 86.8
Net cash provided by (used in) investing activities 54.6 (437.3)
Net cash provided by (used in) financing activities 107.1 169.3
Additions to property, plant and equipment (36.5) (17.6)
Depreciation and amortization 34.6 33.2
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 2022 was lower compared to 2021, due primarily to an increase in net working capital representing a use of cash of $274.4 million. Working capital balances were unfavorably impacted by an increase in inventories of $428.9 million, a decrease in accounts receivable of $84.5 million, and an increase in other operating assets of $21.1 million, partially offset by an increase in accounts payable of $62.6 million and an increase in other operating liabilities of $26.1 million. Operating cash flows included non-cash add back for the impairment of intangible assets of $428.7 million, depreciation and amortization expense adjustment of $34.6 million, stock-based compensation expense adjustment of $33.4 million, deferred income tax adjustment of $105.7 million, gain on sale of the Champion trademark of $90.0 million, environmental and other related costs, net of cash payments and recoveries received cash outflow of $23.0 million, and pension expense adjustment of $9.3 million.
Investing Activities
The Company made capital expenditures of $36.5 million and $17.6 million in years 2022 and 2021, respectively, for building improvements, eCommerce site enhancements, new retail stores, distribution operations improvements and information system enhancements. The current year activity includes additional investment in the Company’s China joint venture of $2.8 million and proceeds received from the sale of the Champion trademarks of $90.0 million.
Financing Activities
The current year debt activity includes net borrowings under the Revolving Facility of $200.0 million and $30.5 million in proceeds from company-owned life insurance policies. The Company paid $7.7 million and $14.1 million in 2022 and 2021, respectively, in connection with shares or units withheld to pay employee taxes related to awards under stock incentive plans and received $1.4 million and $17.1 million in proceeds from the exercise of stock options in 2022 and 2021, respectively. The Company also repurchased $81.3 million and $39.6 million of its common stock during 2022 and 2021, respectively. The
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Company received $7.0 million and $4.8 million from noncontrolling owners of the Company’s China joint venture to support the growth of the joint venture in 2022 and 2021, respectively.
The Company declared cash dividends of $0.40 per share in each of 2022 and 2021. Dividends paid totaled $32.8 million and $33.5 million for 2022 and 2021 , respectively. A quarterly dividend of $0.10 per share was declared on February 8, 2023 to shareholders of record on April 3, 2023.
NEW ACCOUNTING STANDARDS
See Note 2 to the Company's Consolidated Financial Statements for information related to new accounting standards.
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. ("U.S. GAAP"), requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from the Company’s estimates. However, actual results may differ materially from these estimates under different assumptions or conditions.
The Company has identified the following critical accounting policies used in determining estimates and assumptions in the amounts reported. 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 Company's Consolidated Financial Statements.
Revenue Recognition and Performance Obligations
Revenue is recognized upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration to be received in exchange for those goods or services. The Company identifies the performance obligation in the contract, determines the transaction price, allocates the transaction price to the performance obligations, and recognizes revenue upon completion of the performance obligation. Revenue is recognized net of variable consideration and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Control of the Company's goods and services, and associated revenue, are transferred to customers at a point in time. The Company’s contract revenue consist of wholesale revenue and direct-to-consumer revenue. Wholesale revenue is recognized for products sourced by the Company when control transfers to the customer generally occurring upon the purchase, shipment or delivery of branded products or to the customer. Direct-to-consumer includes eCommerce revenue that is recognized for products sourced by the Company when control transfers to the customer once the related goods have been shipped and retail store revenue recognized at time of sale. The point of purchase or shipment was evaluated to best represent when control transfers based on the Company’s right of payment for the goods, the customer’s legal title to the asset, the transfer of physical possession and the customer having the risks and rewards of the goods. Payment terms for the Company's revenue vary by sales channel. Standard credit terms apply to the Company's wholesale receivables, while payment is rendered at the time of sale within the direct-to-consumer channel.
Revenue is recorded at the net sales price (“transaction price”), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, customer markdowns, customer rebates and other sales incentives relating to the sale of the Company’s products. These reserves are based on the amounts earned, or to be claimed on the related sales. These estimates take into consideration a range of possible outcomes, which are probability-weighted in accordance with the expected value method for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts. Revenue recognized during the year ended December 31, 2022 related to the Company’s contract liabilities was nominal.
Inventory
The Company values its inventory at the lower of cost or net realizable value. Cost is determined by the last-in, first out ("LIFO") method for certain domestic finished product inventories. Cost is determined using the first-in, first-out (“FIFO”) method for all raw materials, work-in-process and finished product inventories in foreign countries and certain domestic finished product inventories. The average cost of inventory is used for finished product inventories of the Company’s direct-to-
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consumer business and Sweaty Betty ® inventory. The Company has applied these inventory cost valuation methods consistently from year to year.
The Company reduces the carrying value of its inventories to the lower of cost or net realizable value for excess or obsolete inventories based upon assumptions about future demand and market conditions. If the Company were to determine that the estimated realizable value of its inventory is less than the carrying value of such inventory, the Company would provide a reserve for such difference as a charge to cost of sales. If actual market conditions are different from those projected, adjustments to those inventory reserves may be required. 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. 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
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to impairment tests at least annually. The Company reviews the carrying amounts of goodwill and indefinite-lived intangible assets by reporting unit at least annually, or when indicators of impairment are present, to determine if such assets may be impaired. 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 such as a discount rate and expected future operating performance, which includes forecasted revenue growth, earnings before interest, taxes, depreciation and amortization ("EBITDA") margin and cost of capital, 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 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. In the fourth quarter of 2022, after completion of the annual impairment testing, the Company recorded a $48.4 million impairment charge for Sweaty Betty ® goodwill. The Company did not recognize any impairment charges for goodwill during years 2021 and 2020. In the fourth quarter of 2022, the Company recognized impairment charges of $191.0 million for the Sperry ® trade name and $189.3 million for the Sweaty Betty ® trade name. No impairment charges were recognized for the Company's intangible assets during 2021. In the fourth quarter of 2020, the Company recorded a $222.2 million impairment charge for the Sperry ® trade name. Refer to Note 4, “Goodwill and Other
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Intangibles” for additional discussion on the Sweaty Betty ® goodwill impairment and the Sweaty Betty ® and Sperry ® trade name impairments.
Environmental
The Company establishes a reserve for estimated environmental remediation costs based upon the evaluation of currently-available facts with respect to each individual affected site. The costs are recorded on an undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of feasibility studies, the Company’s commitment to a plan of action, or approval by regulatory agencies. 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. Environmental costs relating to existing conditions caused by past operations that do not contribute to current or future revenues are expensed as incurred. Refer to Note 17, “Litigation and Contingencies” for additional discussion on estimated environmental remediation costs.
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 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
The determination of the obligation and expense for retirement benefits depends upon the selection of certain actuarial assumptions used in calculating such amounts. These assumptions include, among others, the discount rate, expected long-term rate of return on plan assets, mortality rates and rates of increase in compensation. These assumptions are reviewed with the Company’s actuaries and updated annually based on relevant external and internal factors and information, including, but not limited to, long-term expected asset returns, rates of termination, regulatory requirements and plan changes.
The Company utilizes a bond matching calculation to determine the discount rate used to calculate its year-end pension liability and subsequent year pension expense. A hypothetical bond portfolio is created based on a presumed purchase of individual bonds to settle the plans' expected future benefit payments. The discount rate is the resulting yield of the hypothetical bond portfolio. 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 5.56% at December 31, 2022, compared to 3.09% at January 1, 2022. Pension expense is also impacted by the expected long-term rate of return on plan assets, which the Company has determined to be 6.87% and 6.75% for fiscal 2022 and 2021, 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.
Income Taxes
The Company maintains certain strategic management and operational activities in overseas subsidiaries, and its foreign earnings are taxed at rates that have generally been 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. Income tax audits associated with the allocation of this income and other complex issues may require an extended period of time to resolve and may result in income tax adjustments if changes to the income allocation are required between jurisdictions with different income tax rates. The Company evaluates the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in the Company’s assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. The carrying value of the Company’s deferred tax assets assumes that the Company will be able to generate sufficient taxable income in future years to utilize these deferred tax assets. If these assumptions change, the Company may be required to record valuation allowances against its gross deferred tax assets in future years, which would cause the Company to record additional income tax expense in its consolidated statements of operations. Management evaluates the potential that the Company will be able to realize its gross deferred tax assets and assesses the need for valuation allowances on a quarterly basis.
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On a periodic basis, the Company estimates the full year effective tax rate and records a quarterly income tax provision in accordance with the projected full year rate. As the year progresses, that estimate is refined based upon actual events and the distribution of earnings in each tax jurisdiction during the year. This continual estimation process periodically results in a change to the expected effective tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the revised anticipated annual rate.
The Company intends to repatriate cash held in foreign jurisdictions and has recorded a deferred tax liability related to estimated state taxes and foreign withholding taxes on the future dividends received in the U.S. from the foreign subsidiaries.
The Company intends to permanently reinvest all non-cash undistributed earnings outside of the U.S. and has, therefore, not established a deferred tax liability on that amount of foreign unremitted earnings. However, if these non-cash undistributed earnings were repatriated, the Company would be required to accrue and pay applicable U.S. taxes and withholding taxes payable to various countries. 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.