Weyco Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Weyco Group designs and markets footwear under brands including Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters and Umi. Its reportable segments are North American wholesale and North American retail, with additional operations in Australia, South Africa, Asia Pacific and Europe. The filing covers the unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $75.3 million | $65.1 million | +16% |
| Gross earnings | $28.0 million | $24.8 million | +13% |
| Gross margin | 37.2% | 38.1% | Down approximately 90 basis points |
| Earnings from operations | $5.8 million | $4.8 million | +21% |
| Operating margin | 7.7% | 7.4% | Improved |
| Net earnings attributable to Weyco | $3.9 million | $3.4 million | +15% |
| Diluted earnings per share | $0.35 | $0.30 | +17% |
| Net cash from operating activities | $0.3 million | $2.8 million | Down $2.4 million |
- Wholesale sales increased 18% to $56.6 million, driven by BOGS/Rafters, Stacy Adams, Nunn Bush and Umi. Retail sales increased 1% to $5.7 million, while other operations increased 14% to $13.0 million.
- Wholesale operating earnings rose 23% to $4.5 million. Retail had an operating loss of $5,000, compared with a $60,000 loss in the prior-year quarter.
- Cash and cash equivalents were $10.5 million at March 31, 2012. Cash and marketable securities totaled approximately $62 million.
- Short-term borrowings were $39.0 million, compared with $37.0 million at December 31, 2011. The company had a $50 million unsecured revolving credit facility and was in compliance with its minimum-net-worth covenant.
- Total assets were $271.8 million and total equity was $174.9 million at March 31, 2012.
- Capital expenditures were $0.9 million in the quarter. Management expected full-year 2012 capital expenditures of $6 million to $8 million.
- The quarterly dividend was $0.16 per share, and $1.7 million of dividends were paid during the quarter.
Material Changes Versus the Prior Comparable Period
- The principal year-over-year sales benefit came from the BOGS acquisition. Q1 2012 included BOGS operations for the full quarter, while Q1 2011 included only the period beginning March 2, 2011. BOGS sales increased to $5.8 million from $2.2 million.
- On a pro forma basis, assuming BOGS had been acquired on January 1, 2011, Q1 2011 sales would have been $69.5 million and Weyco-attributable earnings would have been $3.1 million; Q1 2012 reported sales and earnings were $75.3 million and $3.9 million.
- Gross margin declined primarily because of higher labor, material and freight costs at overseas factories, particularly in China and India. Selling and administrative expenses declined to 29% of sales from 31%.
- Operating cash flow fell primarily because of changes in accounts receivable and accounts payable. Accounts receivable increased $10.6 million as a use of cash, partly offset by an $11.4 million source from lower inventories.
- Retail performance improved despite seven fewer domestic stores year over year, including three closures during Q1 2012. Same-store sales increased 14%.
- Interest income declined approximately $100,000, while interest expense increased to $129,000 from $90,000 because of higher revolving-credit borrowings.
Guidance, Outlook, Risks and Unusual Items
- Management expected capital expenditures of $6 million to $8 million for 2012 and stated that available liquidity was expected to support business needs for at least one year, although no assurance was provided.
- The revolving credit agreement was renewed on April 30, 2012 through April 30, 2013. The borrowing rate changed to LIBOR plus 100 basis points; based on April 30 LIBOR, the rate would have been approximately 1.2%.
- The company faces continuing cost pressure from overseas manufacturing, including labor, materials, freight and foreign-exchange effects. Management stated that these costs were expected to continue increasing in the near to medium term.
- BOGS acquisition consideration includes a $2.0 million holdback payment due in the third quarter of 2012 and formula-driven contingent payments due in 2013 and 2016. Estimated contingent consideration decreased to $9.2 million from $9.7 million at year-end, producing a $518,000 remeasurement gain, partly offset by $25,000 of interest expense.
- Pension expense increased to $989,000 from $737,000, and the pension liability was $26.8 million at March 31, 2012.
- The filing states that there were no material changes in reported market risks or risk factors and no legal proceedings. Forward-looking results remain subject to economic conditions, the retail environment, supplier costs, foreign-exchange movements and other risks described in the 2011 Form 10-K.
Important Facts for Investors to Verify
- Assess the extent to which sales and earnings growth reflects the full-quarter BOGS contribution rather than organic growth.
- Monitor overseas sourcing costs and whether price increases can offset further labor, material and freight inflation.
- Reconcile weak operating cash flow with reported earnings and track working-capital movements.
- Review the renewed credit agreement, borrowing costs, covenant requirements and $39 million of outstanding borrowings.
- Evaluate the timing and potential amount of the BOGS holdback and contingent consideration payments.
- Track retail store closures, same-store sales and whether the retail segment reaches sustained profitability.