Weyco Group, Inc. 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter results. Weyco designs, markets, and distributes branded footwear, including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi. Operations comprise North American wholesale, North American retail, and other international businesses.
Business Context and Reporting Period
- Products are sourced primarily from independent manufacturers in China and India, with most purchases denominated in U.S. dollars.
- North American wholesale represented approximately 75% of 2013 sales; retail represented approximately 8%; other international operations represented approximately 17%.
- The company operated 17 company-owned U.S. stores and an internet business at year-end, and sold wholesale products through more than 10,000 stores.
- Year-end order backlog was $53 million, compared with $42 million in 2012; substantially all orders were expected to be filled within one year.
Financial Performance and Key Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $300.3 million | $293.5 million | Up 2% |
| Gross earnings | $117.3 million | $114.9 million | Up 2% |
| Gross margin | 39.1% | 39.1% | Approximately flat |
| Earnings from operations | $27.8 million | $29.8 million | Down 7% |
| Operating margin | 9.2% | 10.2% | Down approximately 100 bps |
| Net earnings attributable to Weyco | $17.6 million | $19.0 million | Down 7% |
| Diluted earnings per share | $1.62 | $1.73 | Down 6% |
| Net margin | 5.9% | 6.5% | Down approximately 60 bps |
| Cash flow from operations | $29.8 million | $18.0 million | Up $11.8 million |
Fourth quarter: Net sales were $78.5 million, gross earnings were $33.3 million, and net earnings attributable to Weyco were $6.8 million, or $0.62 diluted EPS, compared with $78.4 million, $33.5 million, and $7.7 million, or $0.71 diluted EPS, respectively, in the fourth quarter of 2012.
- North American wholesale sales increased 4% to $225.7 million, while operating earnings declined 7% to $20.7 million. Wholesale gross margin improved to 32.6% from 32.2%.
- North American retail sales declined 4% to $23.3 million, but operating earnings increased 82% to $3.0 million. Same-store sales, including internet sales, increased 7%.
- Other international sales were essentially flat at $51.4 million, while operating earnings declined 33% to $4.0 million, primarily because of weaker Australian wholesale performance and infrastructure costs.
- Interest income was $1.5 million, interest expense was $0.4 million, and the effective tax rate was 35.2%, compared with 34.1% in 2012.
Liquidity, Debt, and Capital Allocation
- Cash and marketable securities totaled $46.2 million at December 31, 2013, including $21.2 million of cash and short-term marketable securities. Total debt was $12.0 million, down from $45.0 million at year-end 2012.
- The company had a $60 million unsecured revolving credit facility expiring November 5, 2014. Borrowings at year-end carried an interest rate of approximately 0.9%; the highest outstanding balance during 2013 was $45 million.
- Capital expenditures were $2.7 million, and the company invested $3.2 million for a 50% interest in a Montreal building. Expected 2014 capital expenditures were approximately $2 million to $3 million.
- The company paid $4.1 million of cash dividends and repurchased 195,050 shares for $4.6 million during 2013. Approximately 628,000 shares remained authorized for repurchase at year-end.
- Contractual obligations totaled $142.0 million, including $65.6 million of inventory purchase commitments due within one year, $36.3 million of operating leases, $35.0 million of pension obligations, and approximately $5.2 million of estimated BOGS contingent consideration.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by higher Nunn Bush, BOGS, and Florsheim volumes. BOGS/Rafters sales increased 9%, while Umi sales declined 24% and Stacy Adams sales declined 2%.
- Reported 2012 operating earnings included approximately $3.5 million of income from reducing the estimated BOGS contingent consideration liability. Excluding that item, 2013 operating earnings would have increased approximately 6%.
- Retail results improved because of higher same-store and internet sales and the closure of underperforming stores. Six retail locations closed during 2013, and no additional domestic closures were expected in 2014.
- International operating earnings declined primarily because of lower Australian wholesale sales, higher infrastructure costs, foreign exchange effects, and a weaker Australian dollar.
- Operating cash flow improved substantially, while year-end inventory declined to $63.2 million from $65.4 million and total assets declined to $267.5 million from $285.3 million.
- The company recorded a $200,000 other-than-temporary impairment loss on a municipal bond investment and $653,000 of net other expense in 2013.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that available cash, marketable securities, operating cash flow, and borrowing capacity were expected to adequately support 2014 needs, although no assurance was provided.
- Management expects 2014 capital expenditures of approximately $2 million to $3 million and did not expect to close additional domestic retail locations.
- The final BOGS contingent consideration payment is due in March 2016. The recorded fair value was approximately $5.1 million, with a reasonably possible payment range of $2 million to $7 million.
- Key risks include discretionary consumer spending, retailer credit and consolidation, changing fashion preferences, foreign sourcing and supply disruptions, raw-material and freight costs, currency fluctuations, competition, cybersecurity and information-system interruptions, acquisition integration, and possible impairment of goodwill and trademarks.
- Goodwill and trademarks totaled approximately $45.9 million, or approximately 17% of total assets. No impairment charges were recorded in 2013, 2012, or 2011.
- The company’s municipal bond portfolio totaled approximately $30.2 million at amortized cost. Management classified the investments as held to maturity, but deterioration in municipal bonds could affect liquidity and results.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2013. No material legal proceedings or unresolved SEC staff comments were reported.
Important Facts for Investors to Verify
- Reconcile the 2013 earnings decline with the $3.5 million one-time benefit recognized in 2012 from BOGS contingent consideration remeasurement.
- Assess whether wholesale volume growth can offset international margin pressure, retail store closures, and ongoing distribution and sourcing costs.
- Review the maturity and credit quality of the $30.2 million municipal bond portfolio, including the bond that generated the $200,000 impairment.
- Monitor the $60 million revolving credit facility’s November 2014 expiration and the company’s ability to maintain low debt while funding dividends, repurchases, inventory, and acquisitions.
- Evaluate the $65.6 million of near-term inventory purchase commitments against expected demand, inventory levels, and potential markdown exposure.
- Review sensitivity to the BOGS contingent consideration estimate, pension obligations, foreign exchange movements, and impairment assumptions for goodwill and trademarks.