Weyco Group, Inc. 2015 Form 10-K Summary
Business Context and Reporting Period
Weyco Group designs and distributes branded footwear, including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters and Umi. Products are sold through North American wholesale and retail channels and through operations in Australia, South Africa, Asia Pacific and Europe. The filing covers the fiscal year ended December 31, 2015; quarterly data identifies fourth-quarter results separately.
- North American wholesale represented approximately 78% of 2015 sales, retail approximately 7%, and other operations approximately 15%.
- The company operated 13 U.S. stores and an internet business at year-end and employed 662 people worldwide.
- Year-end backlog was $41 million, compared with $57 million in 2014.
Financial Results and Key Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $320.6 million | $320.5 million | Flat |
| Gross earnings | $121.6 million | $123.1 million | Down 1% |
| Gross margin | 37.9% | 38.4% | Down approximately 50 basis points |
| Earnings from operations | $29.8 million | $30.7 million | Down 3% |
| Net earnings attributable to Weyco | $18.2 million | $19.0 million | Down 4% |
| Diluted EPS | $1.68 | $1.75 | Down 4% |
| Operating cash flow | $(5.7) million | $17.8 million | Declined $23.6 million |
| Capital expenditures | $2.5 million | $2.9 million | Down |
| Cash dividends paid | $8.5 million | $8.0 million | Up |
- Wholesale sales increased 3% to $251.4 million and wholesale operating earnings increased 8% to $24.3 million. Product-margin performance improved, particularly in the United States.
- Retail sales declined 5% to $22.1 million and retail operating earnings declined 24% to $2.5 million, mainly because three fewer domestic stores operated during 2015. Same-store sales, including internet sales, increased 1%.
- Other operations sales declined 12% to $47.1 million and operating earnings declined 38% to $3.0 million, primarily because of currency translation and weaker performance at newer stores in Asia and Australia.
- Other expense increased to $1.4 million, including $961,000 of foreign-exchange transaction losses and $473,000 related to losses and a write-off of an Australian foreign-joint-venture investment.
- The effective tax rate increased to 37.7% from 36.2%, mainly because of higher state and foreign tax rates.
Balance Sheet, Debt and Liquidity
- Total assets were $299.0 million, up from $277.4 million. Inventories increased to $97.2 million from $69.0 million, primarily to support higher backlog and core-product availability, particularly for BOGS.
- Cash and cash equivalents were $17.9 million and marketable securities were $25.2 million, for total cash and marketable securities of approximately $43.1 million.
- Revolving-line borrowings were $26.6 million at year-end, compared with $5.4 million in 2014. The company had a $60 million unsecured facility, bearing interest at LIBOR plus 0.75%, expiring November 4, 2016. The highest borrowing balance during 2015 was $42.0 million.
- Cash flow was supported by $21.2 million of net revolving-line borrowings, $6.1 million from stock-option exercises and $5.2 million of net marketable-securities maturities. Uses included $9.9 million of share repurchases, $8.5 million of dividends and $2.5 million of capital expenditures.
- The company had $135.5 million of disclosed contractual obligations, including $56.8 million of inventory purchase commitments, $38.7 million of operating leases, $34.8 million of pension obligations and $5.2 million of BOGS contingent consideration.
Material Changes, Outlook and Unusual Items
- Management expects 2016 capital expenditures of $4 million to $5 million, including distribution-center improvements in Glendale, Wisconsin.
- Management stated that cash, marketable securities, operating cash flow and borrowing capacity should provide adequate support for 2016 needs, although no assurance was given.
- The final BOGS earn-out payment was reduced to $5.2 million from the prior estimate of $5.7 million and was due in March 2016. The resulting $458,000 pre-tax gain, or $279,000 after tax, benefited 2015 earnings.
- Foreign-currency weakness, especially in the Australian and Canadian dollars, adversely affected reported sales, margins and earnings. The company used forward contracts to manage portions of its exposure.
- The defined benefit pension liability was $30.6 million on an unfunded basis, compared with $33.7 million in 2014. Pension assumptions and investment returns can cause significant fourth-quarter non-cash gains or losses.
- No goodwill, trademark or long-lived-asset impairment charges were recorded in 2015. Management concluded that internal control over financial reporting was effective, and the independent auditor issued unqualified opinions on the financial statements and internal controls.
Principal Risks and Contingencies
- Consumer discretionary spending, retailer financial health, retail-industry consolidation and changing fashion preferences could reduce sales and margins.
- The company relies entirely on independent overseas manufacturers, primarily in China and India, without long-term production contracts. Supply interruptions, raw-material costs, tariffs, duties, transportation disruptions and geopolitical events could affect operations.
- Long production lead times and significant inventory levels create risks of excess inventory, markdowns or product shortages.
- Foreign-exchange volatility affects international results and Canadian margins; a 10% depreciation in the U.S. dollar under the disclosed exposure scenario would have resulted in an estimated $327,000 loss.
- Goodwill and trademarks totaled approximately $45.9 million and remain subject to impairment risk. Municipal bond investments totaled approximately $25.2 million and are exposed to credit and market-value deterioration.
- Cybersecurity, information-system interruptions, data loss, executive succession, pension funding, customer credit, lease commitments and inventory purchase obligations are additional material considerations.
Investor Verification Checklist
- Verify the sustainability of wholesale growth and whether retail and international operating declines have reversed.
- Review inventory levels, sell-through, markdown exposure and the effect of BOGS seasonality and weather.
- Confirm refinancing or renewal of the $60 million revolving facility before its November 2016 expiration.
- Assess operating cash conversion after the $28.2 million inventory increase and the company’s continued dividends and share repurchases.
- Review the March 2016 BOGS earn-out payment and any subsequent liquidity impact.
- Monitor Australian and Canadian currency movements, foreign-exchange hedges and related margin effects.
- Evaluate pension assumptions, required contributions and potential fourth-quarter mark-to-market volatility.
- Confirm future impairment testing for goodwill, trademarks and municipal bond investments.