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, Rafters and Umi. Reportable segments are North American wholesale, North American retail, and other international operations. The filing covers the unaudited three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
- North American retail consisted of 18 company-owned stores and an internet business at September 30, 2013.
- As of October 31, 2013, 10,838,791 common shares were outstanding.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $83.1 million | $79.5 million | $221.7 million | $215.1 million |
| Gross earnings | $31.6 million | $30.4 million | $84.0 million | $81.4 million |
| Gross margin | 38.0% | 38.3% | 37.9% | 37.8% |
| Earnings from operations | $8.6 million | $8.1 million | $17.0 million | $17.3 million |
| Operating margin | 10.3% | 10.2% | 7.6% | 8.1% |
| Net earnings attributable to Weyco | $5.4 million | $5.2 million | $10.8 million | $11.3 million |
| Diluted EPS | $0.50 | $0.48 | $1.00 | $1.03 |
- Operating cash flow for the first nine months was $13.9 million, compared with cash used of $51,000 in the prior-year period.
- Cash and cash equivalents were $9.8 million at September 30, 2013, compared with $17.3 million at December 31, 2012. Marketable securities totaled $34.2 million, producing cash and marketable securities of approximately $44.0 million.
- Short-term borrowings were $25.0 million versus $45.0 million at year-end 2012. The company had a $60 million unsecured revolving facility and was in compliance with its minimum-net-worth covenant at quarter-end.
- Total assets were $265.9 million and total equity was $187.9 million at September 30, 2013. The long-term pension liability was $27.5 million.
- Cash dividends paid were $3.9 million, and the company repurchased 195,050 shares for $4.6 million during the first nine months.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 5%, driven primarily by a 6% increase in North American wholesale sales. Nunn Bush sales rose 39% in the quarter and 11% year to date, while Stacy Adams, Florsheim and Umi declined in the quarter.
- Year-to-date sales increased 3%, with wholesale up 4%, retail down 2%, and other international operations up 2%.
- Retail same-store sales increased 7% in the quarter and 8% year to date, largely due to internet sales. Retail revenue declined because the company had closed eight more domestic stores than in the prior-year period.
- Third-quarter operating earnings rose 6%, while year-to-date operating earnings declined 2%. Excluding prior-year income from contingent-consideration remeasurement, management stated that operating earnings would have increased approximately 12% for the quarter and 8% year to date.
- Other international operating earnings declined 18% in the quarter and 37% year to date, primarily because of lower margins and higher expenses in Florsheim Australia, including costs associated with BOGS expansion.
- The effective tax rate increased to 35.9% from 35.2% in the quarter and to 35.5% from 34.1% year to date, primarily because tax-exempt municipal bond income represented a smaller percentage of pretax earnings.
Guidance, Outlook, Risks and Unusual Items
- Management estimated 2013 capital expenditures would be less than $6 million. It stated that cash, marketable securities, operating cash flow and available borrowing capacity should provide adequate liquidity for at least one year, subject to uncertainties.
- On November 5, 2013, after quarter-end, Weyco replaced its BMO Harris facility with a new $60 million unsecured PNC revolving credit facility expiring November 5, 2014. Borrowings bear interest at LIBOR plus 0.75%, and the new agreement has no financial covenants.
- The company recorded a $200,000 other-than-temporary impairment on a municipal bond after questioning the bond’s collectability. It also recorded foreign-currency losses related to intercompany loans.
- The company paid $1.27 million of contingent consideration related to the BOGS acquisition in March 2013. A second payment, with a recorded liability of $5.0 million at September 30, 2013, is due in March 2016 and depends on BOGS gross-margin performance.
- The company purchased a 50% interest in a Montreal building for approximately $3.2 million, accounted for under the equity method.
- Pension expense was $2.8 million year to date, and approximately $1.3 million of pension contributions were made. No additional cash contributions were expected for the remainder of 2013.
- Management reported no material changes to previously disclosed risk factors, market risks or contractual obligations. Forward-looking results remain subject to economic conditions, the retail environment, foreign-currency movements, overseas sourcing, brand and product performance, and execution of international expansion.
Important Facts for Investors to Verify
- Whether wholesale growth, particularly in Nunn Bush and BOGS, offsets weakness in Stacy Adams, Umi, retail stores and Florsheim Australia.
- The sustainability of improved operating cash flow and the effect of seasonal working-capital movements on liquidity.
- The terms, utilization and maturity risk of the replacement PNC credit facility.
- The collectability and valuation of municipal bond investments and the potential for additional impairments.
- The amount and timing of the March 2016 BOGS contingent-consideration payment.
- The funded status and future cash requirements of the $27.5 million pension liability.
- The impact of foreign-currency movements, international expansion costs and U.S. retail conditions on future margins.