Weyco Group, Inc. — FY2012 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. The company operates through North American wholesale, North American retail, and international businesses in Australia, South Africa, Asia Pacific, and Europe. The filing covers the fiscal year ended December 31, 2012; fourth-quarter data is also presented.
- Wholesale represented approximately 74% of 2012 sales; retail represented 8%; other operations represented 18%.
- The company operated 23 U.S. stores and an Internet business at year-end.
- Products are sourced primarily from independent manufacturers in China and India.
- Backlog was $42 million at December 31, 2012, compared with $40 million at December 31, 2011.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $293.5 million | $271.1 million | +8% |
| Gross earnings | $114.9 million | $106.7 million | +8% |
| Gross margin | 39.1% | 39.4% | Down approximately 30 bps |
| Operating earnings | $29.8 million | $23.2 million | +28% |
| Operating margin | 10.2% | 8.6% | Improved |
| Net earnings attributable to Weyco | $19.0 million | $15.3 million | +24% |
| Net margin attributable to Weyco | 6.5% | 5.6% | Improved |
| Diluted EPS | $1.73 | $1.37 | +26% |
| Cash dividends per share | $0.84 | $0.64 | +31% |
Fourth-quarter 2012 sales were $78.4 million, compared with $74.8 million in the fourth quarter of 2011. Net earnings attributable to Weyco were $7.7 million, compared with $5.5 million, and diluted EPS was $0.71, compared with $0.50.
- North American wholesale sales increased 9% to $217.9 million, with operating earnings increasing 42% to $22.2 million.
- North American retail sales decreased 2% to $24.3 million, while operating earnings increased 7% to $1.7 million.
- Other operations sales increased 8% to $51.2 million; operating earnings were essentially flat at $5.9 million.
- Wholesale gross margin was 32.2%, compared with 31.8% in 2011. Distribution costs, reported within selling and administrative expenses, were $10.0 million, compared with $8.6 million.
- The effective tax rate was 34.1%, compared with 34.3%.
Cash flow, balance sheet, debt, and liquidity
| Metric | December 31, 2012 | December 31, 2011 |
|---|---|---|
| Cash and cash equivalents | $17.3 million | $10.3 million |
| Short-term marketable securities | $8.0 million | $4.7 million |
| Total marketable securities | $44.2 million | $51.6 million |
| Cash and marketable securities | $61.5 million | $61.9 million |
| Inventories | $65.4 million | $62.7 million |
| Total assets | $285.3 million | $273.5 million |
| Bank borrowings | $45.0 million | $37.0 million |
| Long-term pension liability | $27.5 million | $26.3 million |
- Operating cash flow was $18.0 million, compared with $17.1 million in 2011.
- Capital expenditures were $9.5 million, compared with $8.2 million, primarily reflecting the connection of a newly acquired building to the Glendale, Wisconsin distribution center.
- Cash dividends paid were $10.9 million, and share repurchases totaled $6.6 million for 285,422 shares.
- The company had a $60 million unsecured revolving credit facility, with $45 million outstanding at approximately 1.2% interest at year-end. The facility was scheduled to expire on April 30, 2013, and the company was in compliance with its minimum-net-worth covenant.
- Management expected 2013 capital expenditures of approximately $4 million to $6 million and $1 million to $3 million annually thereafter.
Material changes versus the prior comparable period
- Sales growth was driven by higher volumes across wholesale brands, including a full year of BOGS sales and the assumption of BOGS and Rafters distribution in Canada. BOGS sales increased to $36.4 million from $28.0 million.
- Wholesale operating earnings benefited from a $3.4 million reduction in the estimated BOGS contingent consideration liability. This was a material unusual item and increased 2012 earnings.
- Retail sales declined despite an 8% increase in same-store sales because seven unprofitable stores were closed. Three additional locations were expected to close in 2013.
- Interest income declined by approximately $380,000 due to lower average investment balances, while interest expense declined modestly to $561,000.
- Inventory increased 4% and accounts receivable increased to $49.0 million from $43.6 million, contributing to working-capital use of cash.
- Goodwill and trademarks totaled approximately $45.9 million, or approximately 16% of total assets. No impairment charges were recorded.
Outlook, risks, contingencies, and unusual items
- Management stated that cash, marketable securities, operating cash flow, and available borrowing facilities were expected to support 2013 operating needs, although no assurance was provided.
- The company had approximately $50.2 million of inventory purchase commitments due within one year and $39.4 million of operating lease commitments.
- BOGS contingent consideration had a recorded fair value of $6.3 million at year-end. Approximately $1.27 million was due by March 31, 2013; management estimated the possible 2016 payment at $2 million to $8 million.
- Pension obligations totaled approximately $31.0 million in the contractual-obligations table, including a defined-benefit plan and supplemental executive plan. Required 2013 cash contributions were not determinable at filing.
- Principal risks include consumer and retail weakness, retailer consolidation, changing fashion preferences, foreign sourcing and supply disruption, leather and rubber costs, foreign currency exposure, competition, information-system interruptions, acquisition integration, executive succession, pension assumptions, and impairment of goodwill or trademarks.
- The company relies on suppliers without long-term manufacturing contracts and typically forecasts demand at least five months in advance, creating inventory and markdown risk.
- Forward-looking statements are subject to material uncertainty. No significant subsequent events requiring adjustment or disclosure were identified through March 14, 2013.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2012.
Important facts for investors to verify
- Verify the status and refinancing or renewal terms of the $60 million revolving facility, which was scheduled to mature on April 30, 2013.
- Assess the sustainability of earnings excluding the $3.4 million BOGS contingent-consideration gain.
- Monitor BOGS performance and the eventual 2016 contingent payment, whose possible amount ranged from $2 million to $8 million.
- Review inventory, receivables, and wholesale demand for evidence of excess inventory or retailer credit deterioration.
- Evaluate pension funding requirements, the $27.5 million reported pension liability, and sensitivity to discount-rate and asset-return assumptions.
- Confirm the timing and cash impact of planned store closures, capital expenditures, dividends, and share repurchases.
- Review exposure to foreign sourcing, foreign currency movements, raw-material costs, and customer and supplier concentration.