Weyco Group, Inc. Form 10-Q Summary
Business Context and Reporting Period
Weyco Group designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS and Rafters. Its reportable segments are North American wholesale and North American retail; other operations include Florsheim Australia and Florsheim Europe. The unaudited filing covers the quarter and six months ended June 30, 2018.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Net sales | $60.9 million | $57.5 million | $130.4 million | $126.6 million |
| Gross earnings | $23.7 million | $22.1 million | $50.3 million | $47.3 million |
| Gross margin | 38.9% | 38.4% | 38.6% | 37.4% |
| Earnings from operations | $1.9 million | $1.9 million | $5.5 million | $5.3 million |
| Operating margin | 3.2% | 3.3% | 4.2% | 4.2% |
| Net earnings attributable to Weyco | $1.6 million | $1.3 million | $4.6 million | $3.5 million |
| Diluted EPS | $0.15 | $0.12 | $0.44 | $0.33 |
- Six-month operating cash flow was $14.0 million, compared with $20.7 million in the prior-year period.
- Cash and cash equivalents were $24.0 million at June 30, 2018. Cash and marketable securities totaled $50.2 million, compared with $47.1 million at December 31, 2017.
- The company had no borrowings under its $60 million unsecured revolving credit facility, which expires November 4, 2018.
- First-half cash uses included $6.9 million of dividends, $6.6 million of share repurchases and $491,000 of capital expenditures.
- Total assets were $247.8 million and total liabilities were $45.8 million at June 30, 2018. The long-term pension liability was $24.6 million.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 6%, while first-half sales increased 3%. Growth was concentrated in North American wholesale, led primarily by Florsheim.
- North American wholesale sales rose 8% in the quarter and 5% year to date; wholesale operating earnings increased 35% and 15%, respectively, supported by higher sales and gross margins.
- North American retail sales declined 3% in the quarter and 1% year to date, although same-store sales, including internet sales, increased 2% and 4%, respectively. Operating earnings improved due partly to the closure of underperforming stores and stronger internet operations.
- Other operations reported an operating loss of $23,000 in the quarter and $53,000 year to date, versus operating earnings of $408,000 and $658,000, respectively, in 2017. The decline was mainly attributable to lower Florsheim Australia sales.
- The effective tax rate declined to 24.8% for the quarter and 25.0% year to date, from 36.0% and 38.2%, respectively, primarily because of the U.S. federal tax rate reduction to 21% under the Tax Cuts and Jobs Act.
- Comprehensive income attributable to Weyco decreased to $1.0 million for the quarter and $4.1 million year to date, primarily reflecting unfavorable foreign-currency translation adjustments.
- The company repurchased 199,500 shares during the second quarter at an average price of $33.03; approximately 817,000 shares remained available under the repurchase program at June 30, 2018.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management estimated 2018 capital expenditures of $1.5 million to $2.5 million; $491,000 had been spent through June 30.
- Management stated that cash, marketable securities, operating cash flow and available borrowing capacity should provide adequate liquidity for at least one year, subject to uncertainty.
- On July 31, 2018, the minority shareholder of Florsheim Australia exercised its right to tender a 45% interest. Weyco expects to purchase that interest for $3.8 million on August 30, 2018.
- The company made a $3.0 million pension contribution in the second quarter and expected no additional cash pension contributions for the remainder of 2018.
- Inventory is sourced from third-party overseas manufacturers, and the business is exposed to retail conditions, economic conditions, foreign-currency movements and international operating risks. Management reported no material changes to the risk factors or market-risk disclosures in the 2017 Form 10-K.
- Foreign exchange contracts at June 30, 2018 covered the purchase of $2.5 million U.S. dollars for approximately $3.1 million Australian dollars; no significant unrealized gain or loss was reported.
- ASC 606 revenue recognition was adopted January 1, 2018 using the modified retrospective method, with no material impact on financial position or results.
- No material changes in contractual obligations were reported, and no legal proceedings were reported.
Important Facts for Investors to Verify
- Confirm whether wholesale momentum, particularly Florsheim sales, continues and whether higher gross margins offset selling and administrative expense growth.
- Monitor Florsheim Australia and other international operations, which shifted to operating losses year over year.
- Assess the effect of the $3.8 million Florsheim Australia minority-interest purchase on ownership, earnings and liquidity.
- Review the decline in operating cash flow and the sustainability of dividends and share repurchases.
- Evaluate pension obligations, foreign-currency exposure and the November 2018 expiration of the revolving credit facility.
- Verify management’s capital-expenditure estimate and its stated expectation of adequate liquidity for at least one year.