WEYCO GROUP INC quarterly report, Q2 FY2013

Weyco Group, Inc. Form 10-Q Summary

Business context and reporting period

Weyco Group designs and markets branded footwear, including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi. It reports North American wholesale and retail segments, with additional international operations classified as “Other.” The filing covers the three and six months ended June 30, 2013; financial statements are unaudited.

North American wholesale products are sold primarily through footwear, department, and specialty retailers.
Retail operations included 19 company-owned U.S. stores and an Internet business at June 30, 2013.
As of August 1, 2013, 10,828,541 common shares were outstanding.

Financial performance and position

Metric	Three months ended June 30, 2013	Three months ended June 30, 2012	Six months ended June 30, 2013	Six months ended June 30, 2012
Net sales	$65.0 million	$60.3 million	$138.6 million	$135.6 million
Gross earnings	$24.7 million	$22.9 million	$52.4 million	$50.9 million
Earnings from operations	$3.7 million	$3.4 million	$8.4 million	$9.2 million
Net earnings attributable to Weyco	$2.2 million	$2.2 million	$5.4 million	$6.1 million
Diluted EPS	$0.20	$0.20	$0.50	$0.55
Net cash from operating activities	Not provided for the quarter	Not provided for the quarter	$15.9 million	$6.6 million

Calculated consolidated gross margin was approximately 38.0% in the second quarter and 37.8% year to date. Operating margin was approximately 5.7% and 6.0%, respectively.
At June 30, 2013, cash and cash equivalents were $7.0 million and marketable securities totaled $37.9 million, for combined liquidity investments of approximately $45.0 million.
Short-term bank borrowings were $20.0 million at approximately 1.2%. The company had a $60 million unsecured revolving facility and was in compliance with its minimum-net-worth covenant.
Total assets were $253.0 million, compared with $285.3 million at December 31, 2012. Total equity was $182.6 million.
Inventories declined to $52.3 million from $65.4 million at December 31, 2012. Accounts receivable declined to $42.7 million from $49.0 million.
The company held $37.9 million of municipal bonds at amortized cost and reported no other-than-temporary impairment.

Material changes versus the prior comparable period

Second-quarter sales increased 8%, led by a 9% increase in North American wholesale sales. Nunn Bush and Florsheim sales increased, while retail sales declined 4%.
First-half sales increased 2%. Wholesale sales rose 2%, retail sales declined 1%, and Other sales increased 3%.
Second-quarter operating earnings increased 8%; first-half operating earnings declined 9%. Excluding prior-year contingent-consideration benefits, management stated that operating earnings would have increased approximately 57% for the quarter and approximately $0.4 million year to date.
Prior-year results included approximately $0.7 million of second-quarter and $1.2 million of first-half income from reductions in the BOGS contingent-consideration liability.
Retail operating earnings improved by approximately $0.6 million in the quarter and $1.0 million year to date, reflecting higher same-store sales and closure of underperforming stores. Same-store sales increased 6% in the quarter and 8% year to date.
Other segment operating earnings declined approximately $0.4 million in the quarter and $1.2 million year to date, primarily because of higher retail and wholesale operating expenses in international businesses.
Foreign exchange losses increased other expense by approximately $0.4 million in the quarter and $0.6 million year to date, primarily from revaluation of intercompany loans involving Florsheim Australia.
The effective tax rate increased to 34% from 30% in the quarter and to 35% from 33% year to date, primarily because tax-exempt municipal bond income represented a smaller percentage of pretax earnings.
Cash from operations increased by $9.3 million year to date, primarily because of working-capital changes, including a $13.0 million inventory-related cash benefit.

Guidance, outlook, risks, contingencies, and unusual items

Management estimated 2013 capital expenditures of $5 million to $6 million. First-half capital expenditures were $4.3 million, including approximately $3.2 million for a 50% interest in a Montreal office and distribution-center building.
The company repurchased 195,050 shares for $4.6 million during the first half and had 628,475 shares remaining under its repurchase authorization at June 30, 2013.
The company paid no cash dividends during the first half because payments normally made in that period were accelerated into December 2012; the regular quarterly dividend schedule resumed in July 2013.
A $1.27 million contingent-consideration payment related to the BOGS acquisition was made in March 2013. A second payment is due in March 2016; the recorded long-term contingent-consideration liability was $5.0 million at June 30, 2013.
Management believed cash, marketable securities, operating cash flow, and available borrowing capacity would support cash needs for at least one year, although it provided no assurance.
The revolving credit agreement was renewed through April 30, 2014 on essentially the same terms. The company’s primary operating and market risks were described as unchanged from the 2012 Form 10-K.
Key risks include U.S. economic and retail conditions, demand and inventory trends, foreign currency movements, overseas sourcing, international operating expenses, pension obligations, and execution of brand and retail strategies.
Management expected approximately $1.6 million of pension contributions during 2013. The pension liability was $28.2 million at June 30, 2013.

Important facts for investors to verify

Verify whether wholesale sales and gross-margin improvements offset continued weakness in BOGS U.S. demand and international operating-cost pressure.
Monitor cash balances, municipal-bond maturities, revolving-credit availability, and compliance with the minimum-net-worth covenant.
Assess the effect of the March 2016 BOGS contingent-consideration payment and any future remeasurement changes.
Evaluate the sustainability of improved retail profitability after store closures and the continued growth of Internet sales.
Track foreign-exchange losses, pension contributions, and the company’s stated $5 million to $6 million 2013 capital-expenditure plan.
Confirm that the regular dividend schedule and stock-repurchase activity remain consistent with operating cash generation and liquidity.