Weyco Group, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter results. 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
| Metric | 2017 | 2016 | Change |
|---|
| Net sales | $283.7 million | $296.9 million | Down 4% |
| Gross earnings | $110.7 million | $112.0 million | Down 1% |
| Gross margin | 39.0% | 37.7% | Up 130 bps |
| Earnings from operations | $23.4 million | $22.8 million | Up 3% |
| Operating margin | 8.3% | 7.7% | Up 60 bps |
| Net earnings attributable to Weyco | $16.5 million | $16.5 million | Approximately flat |
| Diluted EPS | $1.60 | $1.56 | Up 3% |
| Cash flow from operations | $33.5 million | $46.9 million | Down 29% |
- North American wholesale sales declined 5% to $217.3 million; operating earnings increased 13% to $20.2 million. Florsheim sales increased 5%, while Nunn Bush declined 11%, BOGS/Rafters declined 9%, Stacy Adams declined 2%, and Umi declined 39% as the brand was wound down.
- North American retail sales declined 5% to $20.9 million and operating earnings declined 35% to $1.4 million, primarily because of lower domestic website sales. Three fewer domestic brick-and-mortar locations were operating at year-end.
- Other operations sales declined 4% to $45.6 million and operating earnings declined 34% to $1.8 million, principally because of weaker Florsheim Australia results.
- Cash and marketable securities totaled $47.1 million at year-end, including $29.4 million of cash and short-term marketable securities. Total marketable securities were approximately $23.6 million at amortized cost.
- No borrowings were outstanding at year-end under the $60 million unsecured revolving credit facility, which expires November 4, 2018. The highest 2017 borrowing balance was $4.8 million.
- Total assets were $262.8 million, inventories were $60.3 million versus $69.9 million in 2016, and total liabilities were $57.2 million.
- Capital expenditures were $1.6 million. The Company paid $9.1 million of dividends and repurchased 548,539 shares for $15.2 million. The annual dividend increased to $0.87 per share from $0.83.
Fourth-quarter results
| Metric | Q4 2017 | Q4 2016 |
|---|
| Net sales | $80.3 million | $82.1 million |
| Gross earnings | $33.9 million | $33.3 million |
| Net earnings attributable to Weyco | $8.1 million | $8.2 million |
| Diluted EPS | $0.79 | $0.78 |
Material changes and unusual items
- The Tax Cuts and Jobs Act produced a $1.5 million non-cash tax benefit in the fourth quarter of 2017 from remeasurement of deferred tax balances. The reported 2017 effective tax rate was 30.2%, compared with 23.0% in 2016.
- Excluding non-recurring items, adjusted net earnings attributable to Weyco increased to $15.0 million, or $1.45 diluted EPS, from $14.4 million, or $1.36 diluted EPS, in 2016. These are non-GAAP measures.
- The 2016 comparison included a $1.8 million Umi trademark impairment charge, a $3.1 million reversal of a deferred tax liability related to corporate-owned life insurance, and a $113,000 retail fixed-asset impairment charge.
- The pension plan was frozen effective December 31, 2016, reducing 2017 pension expense by approximately $2.2 million. The year-end unfunded pension obligation was approximately $28.2 million.
- Weyco adopted pension-cost presentation guidance and stock-compensation guidance in 2017. It expects the new revenue standard, to be adopted in the first quarter of 2018 using the modified retrospective method, to have no material effect on consolidated results, although certain classifications will change.
Outlook, risks and contingencies
- Management expects 2018 capital expenditures of approximately $2.0 million to $3.0 million and believes available liquidity, operating cash flow and borrowing capacity will support business needs through March 2019.
- Backlog was $35 million at December 31, 2017, down from $38 million a year earlier. Most customer blanket orders are not confirmed and are excluded from backlog.
- Inventory purchase commitments totaled approximately $57.0 million, all due within one year. Operating lease commitments totaled $36.6 million, and disclosed pension obligations totaled $32.6 million.
- Principal risks include weak consumer and retail conditions, department-store consolidation and e-commerce competition, changing footwear preferences, foreign sourcing and supply-chain disruptions, labor and materials cost inflation, tariffs and trade restrictions, foreign-currency volatility, cybersecurity incidents, and impairment of goodwill or trademarks.
- The Company relies primarily on suppliers in China and India without long-term manufacturing contracts and forecasts demand at least five months in advance, creating inventory and delivery risk.
- Marketable securities were primarily investment-grade municipal bonds; management identified no other-than-temporary impairment at year-end. A 10% appreciation of the U.S. dollar would have resulted in an estimated $152,000 loss based on disclosed foreign-exchange exposures.
- The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective internal controls, and no material litigation or unresolved SEC staff comments were disclosed.
Important facts for investors to verify
- Whether the sales declines in Nunn Bush, BOGS/Rafters, retail websites and Florsheim Australia reverse, and whether Florsheim’s growth continues.
- The sustainability of the improved gross margin and the extent to which 2017 earnings benefited from pension savings and the tax-rate remeasurement.
- Progress on the Umi wind-down and any future goodwill, trademark or store-asset impairment charges.
- Cash conversion, inventory levels and the ability to fund dividends, repurchases, capital expenditures and $57.0 million of inventory commitments without renewed borrowing.
- The renewal or replacement of the revolving credit facility before its November 2018 expiration.
- Changes in supplier costs, freight, tariffs, foreign exchange, customer credit quality and demand across wholesale and international markets.
