Wolverine World Wide Inc: Form 10-Q for the period ended Sep 30, 2023

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 condensed financial statements and related notes included elsewhere in this Quarterly Report.

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 September 30, 2023, 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 September 30, 2023, the Company operated 165 retail stores in the U.S., Europe and Canada and 56 direct-to-consumer eCommerce sites.

Effective February 4, 2023, the Company completed the sale of the Keds® business. On May 10, 2023, the Company announced that it is exploring strategic alternatives for the Sperry® business while it continues the foundational work needed to position the brand for long-term success.

In the third quarter of fiscal 2023, the Company entered into a multi-year licensing agreement of the Hush Puppies® brand in the United States and Canada. In addition, the Company completed the sale of Hush Puppies® trademarks, patents, copyrights, and domains in China, Hong Kong, and Macau.

Known Trends Impacting Our Business

Macroeconomic conditions and supply chain disruptions continue to adversely affect the Company’s business results. During the third quarter of 2022, inventory transit times improved ahead of plan, resulting in challenges managing the timing of inventory flow, which led to the Company having excess inventory. Elevated inventory levels have resulted, and continue to result, in storage and process capacity pressures at the Company’s U.S. distribution centers. The Company has incurred additional inventory carrying costs including costs for outside storage and other inventory related holding costs. The Company decreased inventory purchases and increased promotional activity during the fourth quarter of 2022 and the first three quarters of 2023 to reduce excess inventory. These actions resulted in inventories declining in the first three quarters of 2023 by $181.4 million, compared to the fourth quarter of 2022. As of the end of the third quarter of 2023, the Company had $16.6 million of inventory in-transit, which represents a decrease of $125.9 million as compared to the end of the fourth quarter of 2022. As inventory transit and product purchase timelines continue to move towards pre-pandemic levels, the Company expects that the flow of seasonal product and our inventory levels will normalize by the end of fiscal 2023.

Inflation and other macroeconomic pressures in the U.S. and the global economy such as rising interest rates, energy prices and recession fears are creating a complex and challenging retail environment for the Company and our customers as consumers generally seek discounted merchandise and reduce discretionary spending, which in turn impacts wholesale customer orders. Inflationary pressures are increasing logistics costs, including labor costs, raw materials costs and product input costs, which continue to adversely affect the Company’s results. These increased costs, combined with higher promotional activity, contributed to gross margin contraction of 230 basis points for the first three quarters of 2023 compared to the first three quarters of 2022. These impacts were partially offset by selective price increases taken in prior quarters by certain brands and products. The Company expects to continue to evaluate future pricing of its products. In addition, the strengthening of the U.S. dollar relative to other major currencies negatively impacted the Company’s financial results in the third quarter of 2023.

For a more complete discussion of the risks the Company encounters in our business, please refer to Item 1A, “Risk Factors” in the Company’s 2022 Form 10-K.

2023 FINANCIAL OVERVIEW

• Revenue was $527.7 million for the third quarter of 2023, representing a decrease of 23.7% compared to the third quarter of 2022.
• Gross margin was 40.8% in the third quarter of 2023 compared to 40.2% in the third quarter of 2022.
• The effective tax rates in the third quarters of 2023 and 2022 were 4.6% and 10.9%, respectively.
• Diluted earnings per share for the third quarter of 2023 was $0.11 per share compared to $0.48 per share for the third quarter of 2022.
• The Company declared cash dividends of $0.10 per share in the third quarters of both 2023 and 2022.
• Cash flow provided by operating activities was $7.0 million for the first three quarters of 2023 compared to cash flow used in operating activities of $490.2 million for the first three quarters of 2022.
• Compared to the third quarter of 2022, inventory decreased $317.1 million, or 36.0%.

RESULTS OF OPERATIONS

(In millions, except per share data)

* Percentage change not meaningful

REVENUE

Revenue was $527.7 million for the third quarter of 2023, representing a decline of $163.7 million compared to the third quarter of 2022. The change in revenue reflected a $69.6 million, or 17.5%, decline from the Active Group, a $34.8 million, or 22.1%, decline from the Work Group, and a $54.9 million, or 46.6%, decline from the Lifestyle Group. The Active Group’s revenue decrease was primarily driven by a decrease of $50.4 million from Merrell®, $18.9 million from Saucony® and $7.5 million from Chaco®, partially offset by an increase of $7.2 million from Sweaty Betty®. The Work Group’s revenue decrease was primarily driven by a decrease of $28.1 million from Cat®, $4.0 million from Harley-Davidson® and $2.8 million from Wolverine®. The Lifestyle Group’s revenue decline was primarily driven by a decrease of $32.7 million from Sperry® and $21.3 million from Keds®, which was sold during the first quarter of 2023. Changes in foreign exchange rates increased revenue by $6.9 million during the third quarter of 2023. Direct-to-consumer revenue decreased during the third quarter of 2023 by $23.2 million, or 14.5%, compared to the third quarter of 2022.

Revenue was $1,716.2 million for the first three quarters of 2023, representing a decline of $303.6 million compared to the first three quarters of 2022. The change in revenue reflected a $74.8 million, or 6.4%, decrease from the Active Group, a $80.5 million, or 18.5%, decrease from the Work Group, and a $123.9 million, or 35.7%, decrease from the Lifestyle Group. The Active Group’s revenue decrease was primarily driven by a decrease of $56.4 million from Merrell®, $22.7 million from Chaco® and $2.3 million from Sweaty Betty®, partially offset by an increase of $6.6 million from Saucony®. The Work Group’s revenue decrease was primarily driven by a decrease of $40.1 million from Cat®, $26.3 million from Wolverine®, $12.5 million from Harley-Davidson® and $5.1 million from Bates®. The Lifestyle Group’s revenue decline was primarily driven by a decrease of $67.5 million from Keds®, which was sold during the first quarter of 2023, and $59.7 million from Sperry®, partially offset by an increase of $3.3 million from Hush Puppies®. Changes in foreign exchange rates decreased revenue by

$0.4 million during the first three quarters of 2023. Direct-to-consumer revenue decreased during the first three quarters of 2023 by $71.9 million, or 15.4%, compared to the first three quarters of 2022.

GROSS MARGIN

Gross margin was 40.8% in the third quarter of 2023 compared to 40.2% in the third quarter of 2022. The gross margin increase in the third quarter was primarily driven by favorable product mix changes in the Company’s wholesale channel (100 basis points), partially offset by increased closeout sales (40 basis points).

Gross margin was 39.6% in the first three quarters of 2023 compared to 41.9% during the first three quarters of 2022. The gross margin decrease in the first three quarters of 2023 was primarily driven by unfavorable product cost changes in the Company’s wholesale channel (100 basis points), unfavorable average selling price and product costs changes in the Company’s direct-to-consumer channel (60 basis points), and increased closeout sales (50 basis points).

OPERATING EXPENSES

Operating expenses decreased $30.9 million, from $219.0 million in the third quarter of 2022 to $188.1 million in the third quarter of 2023. The decrease was primarily driven by the gain on the sale of businesses, trademarks, and intangible assets ($57.7 million), lower advertising costs ($14.0 million), lower incentive compensation costs ($5.9 million), lower product development costs ($1.5 million), lower general and administrative costs ($1.5 million), and lower selling costs ($1.3 million), partially offset by the impairment of intangible assets ($38.3 million), higher reorganization costs ($8.5 million), higher divestiture costs ($2.1 million) and the impairment of long-lived assets ($1.9 million). Environmental and other related costs were $2.3 million and $2.2 million in the third quarter of 2023 and 2022, respectively.

Operating expenses decreased $39.1 million, from $599.9 million in the first three quarters of 2022 to $560.8 million in the first three quarters of 2023. The decrease was primarily driven by the gain on the sale of businesses, trademarks, and intangible assets ($77.8 million), lower environmental and other related costs, net of insurance recoveries ($60.6 million), lower advertising costs ($33.4 million), lower incentive compensation costs ($23.9 million), lower selling costs ($5.8 million), lower product development costs ($3.1 million), and prior year Sweaty Betty integration costs that did not reoccur ($1.2 million), partially offset by the prior year gain recorded on the sale of the Champion trademarks for footwear in the United States and Canada ($90.0 million), the impairment of intangible assets ($38.3 million), the impairment of long-lived assets ($17.5 million), higher reorganization costs ($15.8 million), higher general and administrative costs ($3.0 million), and higher divestiture costs ($2.1 million). Environmental and other related costs were $6.0 million and $44.7 million in the first three quarters of 2023 and 2022, respectively.

INTEREST, OTHER AND INCOME TAXES

Net interest expense was $15.5 million in the third quarter of 2023 compared to $12.5 million in the third quarter of 2022. Net interest expense was $47.4 million in the first three quarters of 2023 compared to $31.3 million in the first three quarters of 2022. The increase in interest expense for both the quarter-to-date and year-to-date periods is due to higher average revolver borrowings and higher average interest rates on the Company’s outstanding debt.

Other expense was $2.4 million in the third quarter of 2023, compared to other expense of $2.7 million in the third quarter of 2022. Other expense was $3.2 million in the first three quarters of 2023, compared to other expense of $2.2 million in the first three quarters of 2022.

The effective tax rates in the third quarter of 2023 and 2022 were 4.6% and 10.9%, respectively. The effective tax rates in the first three quarters of 2023 and 2022 were 24.5% and 19.3%, respectively. The decrease in the effective tax rate between 2023 and 2022 for the quarter-to-date period is due to income mix changes between jurisdictions with differing tax rates, partially offset by discrete tax expenses in the current year compared to discrete benefits in the prior year. The increase in the effective tax rate between 2023 and 2022 for the year-to-date period is due to discrete tax expenses in the current year compared to discrete tax benefits in the prior year, partially offset by income mix changes between jurisdictions with differing tax rates.

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 and Hush Puppies® footwear and apparel as well as Keds® footwear prior to the divestiture of the brand, effective February 4, 2023.

Kids' footwear offerings from Saucony®, Sperry®, Merrell®, Hush Puppies® and Cat® as well as Keds® prior to the divestiture of the brand, effective February 4, 2023 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 unallocated corporate expenses, such as corporate employee costs, corporate facility costs, reorganization activities, impairment of long-lived assets and environmental and other related costs.

The reportable segment results are as follows:

(In millions)

Further information regarding the reportable segments can be found in Note 16 to the consolidated condensed financial statements.

Active Group

The Active Group’s revenue decreased $69.6 million, or 17.5%, in the third quarter of 2023 compared to the third quarter of 2022. The revenue decline was primarily driven by decreases of $50.4 million from Merrell®, $18.9 million from Saucony® and $7.5 million from Chaco® partially offset by an increase of $7.2 million from Sweaty Betty®. The Merrell® decrease was primarily due to the softening of hike category sales, following growth in the prior year, and high inventory levels at retail customers, which has adversely impacted order patterns. The Saucony® decrease is primarily due to softer consumer demand in the U.S. wholesale and eCommerce channels. The Chaco® decrease was primarily due to softer consumer demand and high inventory levels at retail customers. The Sweaty Betty® increase was primarily due to higher direct-to-consumer revenue resulting from new stores and improved order fulfillment in the U.S. wholesale channel.

The Active Group’s revenue decreased $74.8 million, or 6.4%, in the first three quarters of 2023 compared to the first three quarters of 2022. The revenue decline was primarily driven by decreases of $56.4 million from Merrell®, $22.7 million from Chaco®, and $2.3 million from Sweaty Betty®, partially offset by an increase of $6.6 million from Saucony®. The Merrell® decrease is primarily due to softer consumer demand in International, U.S. wholesale, and eCommerce channels. The Chaco® decrease was primarily due to softer consumer demand and high inventory levels at retail customers. The Sweaty Betty® decrease was primarily due to softer consumer demand in direct-to-consumer sales channels reflecting the challenging UK economic environment. The Saucony® increase was primarily driven by the strength and expanded sales of core technical road and trail product franchises, which include the Guide, Triumph and Endorphin series, and strength in international markets, partially offset by softer consumer demand in the U.S. wholesale and eCommerce channels.

The Active Group’s operating profit decreased $22.2 million, or 40.4%, in the third quarter of 2023 compared to the third quarter of 2022. The operating profit decrease was due to revenue decreases, partially offset by a 40 basis point increase in gross margin and a $6.8 million decrease in selling, general and administrative expenses. The increase in gross margin in the current year period was due to favorable product mix changes in the Company’s wholesale channel. The decrease in selling, general and administrative expenses in the current year periods was primarily due to lower advertising costs and selling expenses.

The Active Group’s operating profit decreased $56.2 million, or 31.1%, in the first three quarters of 2023 compared to the first three quarters of 2022. The operating profit decrease was due to revenue decreases and a 350 basis point decrease in gross margin, partially offset by a $16.0 million decrease in selling, general and administrative expenses. The decrease in gross margin in the current year period was due to increased closeout sales and higher promotional activity in the Company’s direct-to-consumer channel. The decrease in selling, general and administrative expenses in the current year periods was primarily due to lower advertising costs and selling expenses.

Work Group

The Work Group’s revenue decreased $34.8 million, or 22.1%, during the third quarter of 2023 compared to the third quarter of 2022. The revenue decline was primarily driven by a decrease of $28.1 million from Cat®, $4.0 million from Harley-Davidson®, and $2.8 million from Wolverine®. The Work Group’s revenue decreased $80.5 million, or 18.5%, during the first three quarters of 2023 compared to the first three quarters of 2022. The revenue decline was primarily driven by a decrease of $40.1 million from Cat®, $26.3 million from Wolverine®, $12.5 million from Harley-Davidson®, and $5.1 million from Bates®. The Cat® decrease was primarily due to softer consumer demand across all regions. The Wolverine® decrease was primarily due to softer consumer demand in U.S. wholesale and high inventory levels at retail customers resulting in a continually heightened promotional environment. The Harley-Davidson® decrease was primarily due to lower at-once shipments and declines in top dealer accounts. The Bates® decrease was primarily due to softer consumer demand in U.S. wholesale and direct-to-consumer channels.

The Work Group’s operating profit decreased $12.8 million, or 45.4%, in the third quarter of 2023 compared to the third quarter of 2022. The operating profit decrease was due to revenue decreases and a 120 basis point decrease in gross margin, partially offset by a $0.8 million decrease in selling, general and administrative expenses. The Work Group’s operating profit decreased $36.0 million, or 44.1%, in the first three quarters of 2023 compared to the first three quarters of 2022. The operating profit decrease was due to revenue decreases and a 230 basis point decrease in gross margin, partially offset by a $1.3 million decrease in selling, general and administrative expenses. The decrease in gross margin in the current year periods was due to increased closeout sales, product mix and unfavorable average selling price and higher promotional activity in the Company’s direct-to-consumer channel. The decrease in selling, general and administrative expenses in the current year periods was primarily due to lower advertising costs and selling expenses.

Lifestyle Group

The Lifestyle Group’s revenue decreased $54.9 million, or 46.6%, during the third quarter of 2023 compared to the third quarter of 2022. The revenue decline was driven by a decrease of $32.7 million from Sperry® and $21.3 million from Keds®. The Lifestyle Group’s revenue decreased $123.9 million, or 35.7%, during the first three quarters of 2023 compared to the first three quarters of 2022. The revenue decrease was driven by a decrease of $67.5 million from Keds® and $59.7 million from Sperry®, partially offset by an increase of $3.3 million from Hush Puppies®. The Keds® decrease is due to the divestiture of the business effective February 4, 2023. The Sperry® decline was primarily driven by softer consumer demand in the U.S. wholesale channel and direct-to-consumer sales channels, due to lower traffic. The Hush Puppies® increase was primarily due to the launch of a strategic distribution partnership with DSW in North America during the spring of fiscal 2022 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 $8.0 million, or 59.7%, in the third quarter of 2023 compared to the third quarter of 2022. The operating profit decrease was due to revenue decreases, partially offset by a 240 basis point increase in gross margin and a $13.1 million decrease in selling, general and administrative expenses. The increase in gross margin in the current year period was primarily due to the divestiture of the lower margin Keds® business. The decrease in selling, general and administrative expenses in the current year period was primarily due to lower advertising costs, selling expenses and the divestiture of the Keds® business.

The Lifestyle Group’s operating profit decreased $24.6 million, or 56.9%, in the first three quarters of 2023 compared to the first three quarters of 2022. The operating profit decrease was due to revenue decreases and a 150 basis point decrease in gross margin, partially offset by a $32.6 million decrease in selling, general and administrative expenses. The decrease in gross margin in the current year period was due to increased closeout sales and higher promotional activity in the Company’s direct-to-consumer channel. The decrease in selling, general and administrative expenses in the current year period was primarily due to lower advertising costs, selling expenses and the divestiture of the Keds® business.

Other

The Other category’s revenue decreased $4.4 million, or 24.9%, in the third quarter of 2023 compared to the third quarter of 2022. The revenue decline was primarily driven by a $5.8 million decrease from the performance leathers business. The Other category’s revenue decreased $24.4 million, or 37.8%, in the first three quarters of 2023 compared to the first three quarters of 2022. The revenue decrease was primarily driven by a $18.7 million decrease from the performance leathers business.

Corporate

Corporate expenses decreased $11.5 million in the third quarter of 2023 compared to the third quarter of 2022, primarily due to gain on sale of businesses, trademarks, and intangible assets ($57.7 million), lower employee costs ($3.3 million) and lower incentive compensation costs ($2.7 million), partially offset by the impairment of long-lived assets ($40.2 million), higher reorganization costs ($8.5 million), and costs incurred associated with divestitures ($2.1 million) .

Corporate expenses increased $10.4 million in the first three quarters of 2023 compared to the first three quarters of 2022, primarily due to the 2022 gain recorded on the sale of the Champion trademarks for footwear in the United States and Canada ($90.0 million), the impairment of long-lived assets ($55.8 million), and higher reorganization costs ($15.8 million), partially offset by the gain on sale of businesses, trademarks, and intangible assets ($77.8 million), lower environmental and other related costs, net of insurance recoveries ($60.6 million), lower incentive compensation costs ($16.8 million), and lower employee costs ($3.6 million).

LIQUIDITY AND CAPITAL RESOURCES

(In millions)

(1) Cash and cash equivalents at September 30, 2023 in the consolidated condensed statements of cash flows includes $4.3 million of Wolverine Leathers business related cash and cash equivalents that are classified as held for sale and are not included in cash and cash equivalents in the consolidated condensed balance sheets. Cash and cash equivalents at December 31, 2022 includes $4.0 million of Wolverine Leathers business related cash and cash equivalents that were classified as held for sale.

(2) Amounts are net of both borrowings, if any, and outstanding standby letters of credit in accordance with the terms of the revolving credit facility.

Liquidity

Cash and cash equivalents of $164.7 million as of September 30, 2023 were $28.3 million higher compared to October 1, 2022. The increase is due primarily to cash provided by operating activities of $318.3 million, proceeds from divestitures of $136.0 million, and proceeds from company-owned life insurance policies of $30.5 million, partially offset by borrowings less repayments of debt of $380.0 million, cash dividends paid of $32.6 million, additions to property, plant and equipment of $31.5 million and shares acquired related to employee stock plans of $6.1 million. The Company had $623.4 million of borrowing capacity available under the revolving facility as of September 30, 2023. Cash and cash equivalents located in foreign jurisdictions totaled $143.5 million as of September 30, 2023.

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 did not repurchase shares during the first three quarters of 2023 and repurchased $81.3 million of shares in the first three quarters of 2022. The common stock repurchase program expired in September 2023.

A detailed discussion of environmental remediation costs is found in Note 15 to the consolidated condensed 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 site. As of September 30, 2023, the Company had a reserve of $43.6 million, of which $22.8 million is expected to be paid in the next 12 months and is recorded as a current obligation in other accrued liabilities, and the remaining $20.8 million is recorded in other liabilities and is 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 15 to the consolidated condensed financial statements also includes a detailed discussion of environmental litigation matters. As of September 30, 2023, the Company had recorded liabilities of $2.7 million for certain of the Litigation Matters described above which are recorded as other accrued liabilities in the consolidated condensed balance sheets.

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.

Financing Arrangements

The Company’s credit agreement provides for a term loan A facility (the “Term Facility”) and for a revolving credit facility (the “Revolving Facility” and, together with the Term Facility, the “Senior Credit Facilities”). The maturity date of the loans under the Senior Credit Facilities is October 21, 2026. The credit agreement 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 Credit Agreement are met. The Revolving Facility allows the Company to borrow up to an aggregate amount of $1.0 billion.

The Company’s $550.0 million 4.000% senior notes issued on August 26, 2021 are due on August 15, 2029. Related interest payments are due semi-annually. The senior notes are guaranteed by substantially all of the Company’s domestic subsidiaries.

As of September 30, 2023, the Company was in compliance with all covenants and performance ratios under the Senior Credit Facilities.

On June 30, 2023 the Company entered into the Fourth Amendment (the “Amendment”) to its credit agreement, dated as of July 31, 2012. The Amendment provides the Company with near-term financial flexibility by adjusting the maximum Consolidated Leverage Ratio allowed under the credit agreement through the end of fiscal 2023. Financial covenant thresholds will revert to pre-existing levels in the first quarter of fiscal 2024.

The Company’s debt at September 30, 2023 totaled $1,096.3 million compared to $1,158.0 million at December 31, 2022. The reduced debt position primarily resulted from proceeds received from sale of businesses and trademarks.

Cash Flows

The following table summarizes cash flow activities:

(In millions)

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.

For the first three quarters of 2023, a decrease in net working capital represented a source of cash of $9.8 million. Working capital balances were favorably impacted by a decrease in inventories of $178.5 million and an increase in income taxes payable of $5.6 million, partially offset by an increase in accounts receivable of $25.1 million, a decrease in other operating liabilities of $62.8 million, a decrease in accounts payable of $74.7 million, and an increase in other operating assets of $11.7 million. Operating cash flows included depreciation and amortization expense adjustment of $26.3 million, impairment of long-lived assets of $55.8 million, stock-based compensation expense adjustment of $11.8 million, pension expense adjustment of $1.2 million, environmental and other related costs, net of cash payments and recoveries cash outflow of $68.8 million, and gain on sale of divestitures of $77.8 million.

Investing Activities

The Company made capital expenditures of $18.5 million and $23.5 million in the first three quarters of 2023 and 2022, respectively, for building improvements, eCommerce site enhancements, new retail stores, distribution operations improvements and information system enhancements. The current year investing activity includes proceeds from divestitures of $136.0 million.

Financing Activities

The current year activity includes net payments under the Revolving Facility of $55.0 million. The Company paid $7.5 million in principal payments associated with its financing arrangements during the first three quarters of 2023 and 2022, respectively. The Company paid $5.8 million and $7.4 million during the first three quarters of 2023 and 2022, respectively, in connection with shares or units withheld to pay employee taxes related to awards under stock incentive plans and received $0.1 million and $1.4 million in proceeds from the exercise of stock options during the first three quarters of 2023 and 2022, respectively. The Company did not repurchase shares in the first three quarters of 2023 and repurchased $81.3 million of shares in the first three quarters of 2022.

The Company declared cash dividends of $0.30 per share during the first three quarters of 2023 and 2022. Dividends paid in the first three quarters of 2023 and 2022 totaled $24.5 million, and $24.7 million respectively. A quarterly dividend of $0.10 per share was declared on November 1, 2023 to shareholders of record on January 2, 2024.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the Company’s consolidated condensed financial statements, which have been prepared in accordance with 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 critical accounting policies used in determining estimates and assumptions in the amounts reported. For information regarding our critical accounting policies refer to Part II, Item 7: “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in the Company’s 2022 Form 10-K. Management believes there have been no material changes in those critical accounting policies.

The Company faces market risk to the extent that changes in foreign currency exchange rates affect the Company’s foreign assets, liabilities and inventory purchase commitments. The Company manages these risks by attempting to denominate contractual and other foreign arrangements in U.S. dollars. The Company does not believe that there has been a material change in the nature of the Company’s primary market risk exposures, including the categories of market risk to which the Company is exposed and the particular markets that present the primary risk of loss to the Company. As of the date of this Quarterly Report on Form 10-Q, the Company does not know of any material change in the near-term in the general nature of its primary market risk exposure.

Under the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 815, Derivatives and Hedging, the Company is required to recognize all derivatives on the balance sheet at fair value. Derivatives that are not qualifying hedges must be adjusted to fair value through earnings. If a derivative is a qualifying hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings.

The Company conducts wholesale operations outside of the U.S. in Canada, continental Europe, United Kingdom, Hong Kong, China and Mexico where the functional currencies are primarily the Canadian dollar, euro, British pound, Hong Kong dollar, Chinese renminbi and Mexican peso, respectively. The Company utilizes foreign currency forward exchange contracts to manage the volatility associated primarily with U.S. dollar inventory purchases made by non-U.S. wholesale operations in the normal course of business as well as to manage foreign currency translation exposure. As of September 30, 2023 and October 1, 2022, the Company had outstanding forward currency exchange contracts to purchase primarily U.S. dollars in the amounts of $267.8 million and $376.3 million, respectively, with maturities ranging up to 531 and 524 days, respectively.

The Company also has sourcing locations in Asia, where financial statements reflect the U.S. dollar as the functional currency. However, operating costs are paid in the local currency. Revenue generated by the Company from third-party foreign licensees is calculated in the local currencies but paid in U.S. dollars. Accordingly, the Company’s reported results are subject to foreign currency exposure for this stream of revenue and expenses. Any associated foreign currency gains or losses on the settlement of local currency amounts are reflected within the Company's consolidated condensed statement of operations and comprehensive income.

Assets and liabilities outside the U.S. are primarily located in the United Kingdom, Canada and the Netherlands. The Company’s investments in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term. As of September 30, 2023, a stronger U.S. dollar compared to certain foreign currencies decreased the value of these investments in net assets by $9.2 million from their value as of December 31, 2022. As of October 1, 2022, a stronger U.S. dollar compared to certain foreign currencies decreased the value of these investments in net assets by $100.0 million from their value as of January 1, 2022.

The Company is exposed to interest rate changes primarily as a result of interest expense on the term loan borrowings and any borrowings under the Revolving Facility. The Company’s total variable-rate debt was $552.5 million at September 30, 2023 and the Company held a forward dated interest rate swap agreement, denominated in U.S. dollars, that effectively converts $109.6 million of this amount to fixed-rate debt.

The Company does not enter into contracts for speculative or trading purposes, nor is it a party to any leveraged derivative instruments.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on, and as of the time of such evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures, as defined in Securities Exchange Act Rule 13a-15(e), were effective as of the end of the period covered by this report. There have been no changes during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes in the assessment of the Company’s risk factors from those set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 23, 2023.