WEYCO GROUP INC annual report, FY2016

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Weyco Group, Inc. 2016 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2016; filed March 9, 2017. The filing is an annual report, not a standalone fourth-quarter filing, although fourth-quarter results are provided. Weyco designs and distributes footwear under the Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi brands. Its reportable segments are North American wholesale and North American retail, with additional operations in Australia, South Africa, Asia Pacific, and Europe.

Financial performance and position

  • Net sales: $296.9 million, down 7% from $320.6 million in 2015.
  • Gross earnings: $112.0 million; gross margin was approximately 37.7%, compared with 37.9% in 2015. Distribution costs are included in selling and administrative expenses rather than cost of sales.
  • Operating earnings: $21.2 million, down 29% from $29.8 million; operating margin was approximately 7.1%, compared with 9.3% in 2015.
  • Net earnings attributable to Weyco: $16.5 million, down 10% from $18.2 million. Diluted EPS was $1.56 versus $1.68.
  • Adjusted results: Excluding the Umi trademark impairment, the corporate-owned life insurance deferred-tax reversal, and the 2015 BOGS/Rafters earnout adjustment, adjusted operating earnings were $23.0 million versus $29.3 million, and adjusted diluted EPS was $1.36 versus $1.65.
  • Cash flow: Operating cash flow was $46.9 million, compared with operating cash used of $5.7 million in 2015, primarily reflecting a $27.3 million reduction in inventories and lower operating working capital requirements.
  • Liquidity: Cash and short-term marketable securities totaled $18.3 million at year-end; including longer-term marketable securities, total cash and marketable securities were approximately $39.4 million. Management stated that cash, securities, operating cash flow, and borrowing availability should support needs through March 2018, subject to no assurance.
  • Debt: Revolving-line borrowings were $4.3 million versus $26.6 million at year-end 2015. The company had a $60 million unsecured revolving credit facility expiring November 3, 2017, bearing interest at LIBOR plus 0.75%.
  • Capital allocation: The company paid $8.9 million of dividends, repurchased 410,983 shares for $11.0 million, paid the final $5.2 million BOGS earnout, and invested $6.0 million in capital expenditures. The annual dividend increased to $0.83 per share from $0.79.
  • Balance sheet: Total assets were $268.2 million versus $299.0 million, primarily due to lower inventory. Inventory declined to $69.9 million from $97.2 million. The long-term pension liability was $27.8 million.

Segment and quarterly developments

  • North American wholesale: Sales declined 9% to $227.5 million and operating earnings fell 32% to $16.4 million. BOGS/Rafters sales declined 23%, Nunn Bush declined 13%, Umi declined 20%, and licensing revenue declined 23%; Florsheim sales increased 1%.
  • North American retail: Sales declined 1% to $21.9 million and operating earnings declined 16% to $2.1 million. Same-store sales, including U.S. internet sales, increased 1%, but the company operated three fewer domestic stores than in 2015.
  • Other international operations: Sales increased 1% to $47.5 million, while operating earnings declined 9% to $2.7 million, mainly because of lower results at the Macau retail store.
  • Fourth quarter: Net sales were $82.1 million and net earnings attributable to Weyco were $8.2 million, versus $87.4 million and $7.0 million, respectively, in the fourth quarter of 2015. Fourth-quarter 2016 results included the Umi impairment and the deferred-tax reversal.

Material changes, outlook, and risks

  • The company recorded a $1.8 million impairment charge, or $1.1 million after tax, for the Umi trademark after determining that the brand did not fit its long-term strategic objectives. Management was evaluating strategic alternatives for Umi.
  • A $3.1 million deferred tax liability related to corporate-owned life insurance policies was reversed because management determined that surrendering the policies to meet liquidity needs was remote. This reduced the 2016 effective tax rate to 23.0% from 37.7%.
  • The company completed the final $5.2 million BOGS/Rafters earnout payment in March 2016. The 2015 results included a $458,000 pretax gain from revising that earnout liability.
  • Management expected 2017 capital expenditures of approximately $2 million to $3 million. It also expected pension expense to decline by approximately $2.1 million in 2017 following the pension-plan freeze effective December 31, 2016. No material 2017 pension contribution was expected at the filing date.
  • The company faced a challenging retail environment, declining traffic at brick-and-mortar customers, increasing online shopping, weak department-store conditions, and a mild winter that adversely affected BOGS sales and retailer inventory levels.
  • Key risks include consumer and retail-market weakness, dependence on independent manufacturers in China and India, supplier and freight cost inflation, inventory forecasting risk, foreign exchange volatility, tariffs and trade-policy changes, competition, cybersecurity and systems interruptions, brand impairment, pension funding requirements, and limited stock trading liquidity.
  • The company had $51.5 million of inventory purchase commitments due within one year and $41.1 million of operating-lease commitments. The filing reports no legal proceedings or off-balance-sheet arrangements.
  • Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion.

Investor verification points

  • Verify whether wholesale demand, particularly for BOGS and Nunn Bush, recovered and whether department-store exposure continued to pressure sales.
  • Assess the sustainability of 2016 operating cash flow, including the extent to which it benefited from inventory reduction rather than earnings growth.
  • Confirm the status and renewal terms of the $60 million revolving credit facility, which was scheduled to expire in November 2017.
  • Monitor Umi brand strategy and potential additional trademark or goodwill impairments.
  • Evaluate the effect of foreign sourcing costs, tariffs, freight rates, and Australian and Canadian currency movements on margins.
  • Review pension funding, asset returns, discount-rate changes, and the expected benefit of the December 2016 plan freeze.
  • Reconcile reported and adjusted earnings, particularly the one-time tax benefit and Umi impairment, when assessing normalized profitability.