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. Its reportable segments are North American wholesale and North American retail; other operations include Australia, South Africa, Asia Pacific and Europe. The unaudited filing covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Net sales | $62.9 million | $65.0 million | $137.8 million | $138.6 million |
| Gross earnings | $24.2 million | $24.7 million | $51.6 million | $52.4 million |
| Gross margin | 38.5% | 38.0% | 37.4% | 37.8% |
| Earnings from operations | $3.4 million | $3.7 million | $8.3 million | $8.4 million |
| Operating margin | 5.4% | 5.7% | 6.0% | 6.0% |
| Net earnings attributable to Weyco | $2.2 million | $2.2 million | $5.4 million | $5.4 million |
| Diluted EPS | $0.20 | $0.20 | $0.50 | $0.50 |
For the first six months, operating cash flow was $7.8 million, compared with $15.9 million in 2013. Cash and cash equivalents were $11.2 million at June 30, 2014, and marketable securities totaled $34.3 million at amortized cost, for combined cash and marketable securities of approximately $45.5 million. Outstanding short-term borrowings were $10.8 million, versus $12.0 million at December 31, 2013.
Six-month investing cash outflow was $4.9 million, primarily reflecting $7.4 million of marketable-securities purchases, partly offset by $3.4 million of maturities. Financing cash outflow was $7.7 million, including $6.0 million of dividends and $1.2 million of share repurchases. Capital expenditures were $725,000; management estimated full-year 2014 capital expenditures of $1.5 million to $2.5 million.
Material Changes Versus Prior Comparable Period
- Second-quarter sales declined 3%, and first-half sales declined 1%.
- North American wholesale sales declined 6% in the quarter and 1% year to date. Q2 decreases in Nunn Bush and Florsheim were partly offset by 36% growth in BOGS/Rafters sales.
- North American retail sales declined 2% in the quarter and 6% year to date, primarily reflecting two fewer domestic stores. Same-store sales nevertheless increased 4% in the quarter and 2% year to date, driven mainly by the internet business.
- Other operations increased sales 5% in the quarter and 4% year to date. Other operating earnings increased 18% in the quarter and 38% year to date, primarily due to improved Florsheim Australia and Europe performance.
- Consolidated operating earnings declined 8% in the quarter and 1% year to date. Higher wholesale gross margins partly offset lower wholesale volume.
- Other income and expense improved by approximately $613,000 in the quarter and $587,000 year to date because 2013 included foreign-exchange losses on intercompany loans. The 2014 Australian dollar environment produced insignificant foreign-exchange gains.
- The effective tax rate declined to 33% from 34% in the quarter and to 34% from 35% year to date.
Guidance, Outlook, Risks and Unusual Items
- Management expected continued BOGS sales growth in the second half of 2014 based on higher backlogs as of June 30, 2014.
- Wholesale gross margins were expected to remain flat or improve slightly in the second half of 2014, despite rising labor and material costs and selective wholesale price increases.
- The company stated that available cash, marketable securities, operating cash flow and borrowing capacity should support cash needs for at least one year, although no assurance was provided.
- The $60 million unsecured revolving credit facility expires November 5, 2014, bears interest at LIBOR plus 0.75%, and had $10.8 million outstanding at June 30, 2014. The quarter’s highest balance was approximately $12.2 million.
- Contingent consideration related to the 2011 BOGS acquisition was approximately $5.1 million at June 30, 2014. A second payment is due in March 2016 and is based on BOGS gross-margin performance.
- Foreign-exchange exposure included forward contracts to sell $14.0 million of Canadian dollars and contracts at Florsheim Australia to buy $6.6 million of U.S. dollars. No significant quarter-end gains or losses were reported.
- Approximately $3.0 million of cash and cash equivalents was held by foreign subsidiaries.
- The filing identifies economic conditions, the U.S. retail environment, foreign currency movements, input-cost inflation, seasonal BOGS inventory requirements and demand at department stores and off-price retailers as relevant business considerations. No material changes to previously disclosed risk factors, contractual obligations or market-risk disclosures were reported.
- No legal proceedings were reported. Management concluded that disclosure controls and procedures were effective, with no significant changes in internal control over financial reporting.
Investor Verification Items
- Verify whether BOGS growth and backlog trends offset weakness in Nunn Bush, Florsheim and Stacy Adams.
- Monitor wholesale gross-margin stability against labor and material-cost inflation.
- Assess operating-cash-flow conversion, inventory growth and seasonal working-capital needs.
- Review renewal or refinancing of the revolving credit facility before its November 5, 2014 expiration.
- Track the potential $5.1 million BOGS contingent-consideration obligation due in March 2016.
- Evaluate foreign-exchange effects, particularly the Australian dollar and Canadian-dollar exposures.
- Confirm the company’s ability to sustain dividends, share repurchases and planned capital expenditures while preserving liquidity.