WEYCO GROUP INC annual report, FY2011

Weyco Group, Inc. — FY2011 Form 10-K Summary

Business Context and Reporting Period

Weyco Group designs, markets, and distributes footwear under the Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi brands. The company operates North American wholesale and retail segments, along with businesses in Australia, South Africa, Asia Pacific, and Europe. The filing covers the fiscal year ended December 31, 2011; fourth-quarter results are included in the annual results.

North American wholesale represented approximately 74% of 2011 sales, retail approximately 9%, and other businesses approximately 17%.
The company acquired BOGS and Rafters owner The Combs Company on March 2, 2011.
The company operated 30 U.S. retail stores and an Internet business at year-end and employed 621 people.
Year-end confirmed order backlog was $40 million, compared with $28 million at December 31, 2010.

Financial Performance and Position

Metric	2011	2010	Change
Net sales	$271.1 million	$229.2 million	18%
Gross earnings	$106.7 million	$90.3 million	18%
Earnings from operations	$23.2 million	$18.8 million	24%
Net earnings attributable to Weyco	$15.3 million	$13.7 million	12%
Diluted earnings per share	$1.37	$1.19	15%
Operating cash flow	$17.1 million	$0.1 million	Significant increase
Total assets	$273.5 million	$223.4 million	22%
Bank borrowings	$37.0 million	$5.0 million	Increase

Approximate consolidated gross margin was 39.4%, operating margin 8.6%, and net margin attributable to Weyco 5.6%.
Cash and cash equivalents were $10.3 million; marketable securities totaled $51.6 million at amortized cost, for aggregate cash and marketable securities of approximately $62 million.
Current assets were $128.2 million versus current liabilities of $64.9 million. Inventory was $62.7 million, up from $56.1 million, primarily reflecting BOGS inventory.
The company had $37 million outstanding under a $50 million unsecured revolving credit facility at a 1.0% interest rate. The company was in compliance with its minimum-net-worth covenant.
Interest expense increased to $611,000 from $120,000 because of acquisition-related borrowings.
Capital expenditures were $8.2 million, including $3.8 million for an adjacent Glendale, Wisconsin distribution center. Dividends paid were $7.2 million, and share repurchases totaled $13.0 million, including a $9.0 million private transaction.

Material Changes Versus Prior Comparable Period

BOGS and Rafters contributed approximately $28.0 million of sales from the March 2, 2011 acquisition date through year-end and added $11.1 million of goodwill and $22.0 million of trademarks to the balance sheet.
North American wholesale sales increased 20% to $199.1 million, but segment operating earnings were essentially flat at $15.7 million. Wholesale gross margin declined to 31% from 32% because of higher labor and material costs from overseas suppliers, while selling and administrative expenses increased.
North American retail sales rose 10% to $24.7 million. Retail operating earnings improved to $1.6 million from a $0.4 million loss, supported by an 18% increase in same-store sales, stronger Internet sales, and the closure of five underperforming stores.
Other business sales increased 16% to $47.3 million, primarily from Florsheim Australia. The weaker U.S. dollar relative to the Australian dollar increased reported sales and operating earnings.
Licensing revenue increased 58% to $3.4 million, principally due to BOGS-related licensing.
Retail impairment charges declined to $165,000 from $310,000 in 2010 and $1.1 million in 2009. No goodwill or trademark impairment was recorded.
The pension liability increased to $26.3 million from $18.6 million, and accumulated other comprehensive loss increased to $13.4 million from $9.0 million.

Guidance, Outlook, Risks, and Unusual Items

Management expected 2012 capital expenditures of approximately $6 million to $8 million, including costs to connect and expand the two Glendale distribution facilities.
Beginning June 1, 2012, Weyco planned to assume BOGS distribution in Canada. Management estimated potential incremental sales of $6 million to $8 million in 2012 and $8 million to $10 million in 2013.
Three additional retail locations had closed by the filing date, and management expected three more closures before the end of 2012.
Management stated that cash, marketable securities, operating cash flow, and available borrowing capacity should adequately support 2012 cash needs.
BOGS acquisition consideration includes contingent payments. The estimated fair value was $9.7 million at year-end, while the potential aggregate payment range was estimated at $5 million to $14 million. The obligation is remeasured quarterly and depends on future BOGS gross-margin performance.
Total disclosed contractual obligations were $120.1 million, including $50.8 million of inventory purchase commitments due within one year, $45.4 million of operating leases, $13.9 million of pension obligations, and $10.0 million of undiscounted contingent consideration.
Key risks include discretionary consumer spending and retail weakness, retailer credit and concentration, foreign sourcing and supply-chain disruption, leather and rubber costs, foreign currency exposure, competition, changing consumer preferences, information-system failures, acquisition integration, and potential impairment of approximately $45.9 million of goodwill and indefinite-lived trademarks.
The company relies on independent manufacturers primarily in China and India and generally forecasts demand at least five months ahead, creating inventory and delivery risks.
Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2011. No legal proceedings or unresolved staff comments were reported.

Most Important Facts for Investors to Verify

Whether BOGS achieves the sales and gross-margin performance underlying the contingent consideration and projected Canadian distribution opportunity.
Whether wholesale margins recover from the 2011 decline amid continuing overseas labor, material, freight, and currency pressures.
The refinancing or renewal terms for the $50 million revolving credit facility, which was scheduled to expire April 30, 2012.
Inventory levels, purchase commitments, and working-capital requirements following the BOGS acquisition.
Progress on retail closures and whether the retail segment sustains its return to profitability.
The funding status and sensitivity of the company’s pension obligations, including the effect of lower discount rates or investment returns.
Potential future impairment of goodwill and trademarks, which totaled approximately 17% of assets at year-end.
The company’s ability to maintain dividends and share repurchases while funding acquisitions, capital expenditures, inventory, and debt repayment.