Weyco Group, Inc. 2014 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. Products are sourced primarily from independent manufacturers in China and India and sold through North American wholesale, North American retail, licensing, and international operations. The filing covers the fiscal year ended December 31, 2014, with comparisons to 2013 and 2012. The company operated 16 U.S. stores and an internet business at year-end and employed approximately 640 people worldwide.
Financial performance and position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $320.5 million | $300.3 million | Up 7% |
| Gross earnings | $123.1 million | $117.3 million | Up 5% |
| Gross margin | 38.4% | 39.1% | Down approximately 70 bps |
| Earnings from operations | $30.7 million | $27.8 million | Up 10% |
| Operating margin | 9.6% | 9.2% | Improved |
| Net earnings attributable to Weyco | $19.0 million | $17.6 million | Up 8% |
| Diluted earnings per share | $1.75 | $1.62 | Up 8% |
| Cash flow from operations | $17.8 million | $29.8 million | Down $12.0 million |
| Capital expenditures | $2.9 million | $2.7 million | Up modestly |
North American wholesale sales increased 8% to $243.4 million and operating earnings increased 9% to $22.5 million. BOGS/Rafters sales rose 46% to $57.8 million, while Nunn Bush sales declined 4% and Florsheim sales declined 1%. North American retail sales were essentially flat at $23.3 million, although same-store sales increased 5% despite seven fewer stores. Retail operating earnings rose 9% to $3.3 million. Other international operations generated $53.7 million of sales, up 5%, and operating earnings of $4.8 million, up 21%.
At December 31, 2014, cash and short-term marketable securities totaled $18.4 million, while total cash and marketable securities, including longer-term investments, totaled approximately $43.0 million. Outstanding borrowings were $5.4 million compared with $12.0 million in 2013. The company had a $60 million unsecured revolving credit facility expiring November 5, 2015, with borrowings priced at LIBOR plus 0.75%. Total assets were $277.4 million and total equity was $198.0 million.
Inventory increased to $69.0 million from $63.2 million, and accounts receivable increased to $55.1 million from $48.5 million. The company paid approximately $8.0 million in dividends and repurchased 297,576 shares for approximately $8.0 million. Cash dividends declared increased to $0.75 per share from $0.54 per share.
Material changes versus prior comparable period
- Sales growth was led primarily by BOGS, particularly women’s and children’s boots in the United States and Canada.
- Operating earnings improved despite a decline in wholesale gross margin to 32.3% from 32.6%, partly because of Canadian currency pressure.
- 2014 earnings included a $611,000 pretax increase in the estimated contingent consideration liability related to the BOGS acquisition, reducing earnings by approximately $373,000 after tax, or $0.03 per diluted share.
- Operating cash flow declined substantially because of increases in accounts receivable and inventory.
- The unfunded benefit obligation increased to $33.7 million from $22.3 million, primarily because of a lower discount rate and an updated mortality table. This contributed to a $6.6 million after-tax reduction in other comprehensive income.
- The company closed one domestic retail location in 2014. One additional location closed in January 2015, and management planned to close two more by the end of 2015.
Guidance, outlook, risks, contingencies, and unusual items
Management expected 2015 capital expenditures of approximately $2 million to $3 million and stated that cash, operating cash flow, and available borrowing capacity should adequately support 2015 needs, although there can be no assurance. No formal revenue or earnings guidance was provided in the filing.
- West Coast port labor disruptions in late 2014 delayed shipments from Asia by three to four weeks and could continue to affect inventory deliveries until the container backlog is cleared.
- The company relies entirely on independent foreign manufacturers without long-term supply contracts and faces risks from labor, freight, raw-material, tariff, political, currency, and transportation disruptions.
- Contingent consideration related to BOGS was recorded at approximately $5.7 million at year-end, with the final payment due in March 2016. Management estimated a reasonably possible payment range of $5.3 million to $6.3 million.
- Contractual obligations totaled approximately $161.3 million, including $80.8 million of inventory purchase commitments, $37.6 million of operating leases, $37.1 million of pension obligations, and $5.7 million of contingent consideration.
- Goodwill and trademarks totaled approximately $45.9 million, or about 17% of total assets. No impairment was recorded in 2014, but future impairment remains possible.
- Foreign exchange exposure is concentrated in the Canadian and Australian dollars. The company used forward contracts, and estimated that a 10% depreciation in the U.S. dollar at year-end would have produced an approximate $340,000 loss based on outstanding exposures.
- Investment securities consisted primarily of investment-grade municipal bonds totaling approximately $30.5 million at amortized cost. No other-than-temporary impairment was recorded in 2014.
- Management reported effective disclosure controls and internal control over financial reporting. Deloitte & Touche issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether BOGS growth remains sustainable and whether the final contingent consideration payment falls within or above the estimated $5.3 million to $6.3 million range.
- Inventory and receivables trends, given the $12.0 million year-over-year decline in operating cash flow.
- The effect of Canadian and Australian currency movements, sourcing costs, freight costs, and port conditions on gross margins.
- The company’s ability to renew or replace the $60 million revolving credit facility before its November 2015 expiration.
- Future pension funding requirements and sensitivity to discount-rate, mortality, and investment-return assumptions.
- Progress in closing underperforming retail stores while maintaining internet and same-store sales growth.
- Potential impairment risk associated with the $45.9 million of goodwill and trademarks.