Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - WEST MARINE INC | wmar2017q2ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - WEST MARINE INC | wmar2017q2ex312.htm |
| EX-31.1 - EXHIBIT 31.1 - WEST MARINE INC | wmar2017q2ex311.htm |
| EX-10.3 - EXHIBIT 10.3 - WEST MARINE INC | wmar2017q2_ex103.htm |
| EX-4.1 - EXHIBIT 4.1 - WEST MARINE INC | wmar2017q2ex41.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Q | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 1, 2017
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-22512
WEST MARINE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 77-0355502 |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
500 Westridge Drive
Watsonville, CA 95076-4100
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (831) 728-2700
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Q No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Q No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act). (Check one):
Large accelerated filer | o | Accelerated filer | Q | |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o | |
Emerging growth company | o | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No Q
At July 31, 2017, the number of shares outstanding of the registrant’s common stock was 25,279,858.
TABLE OF CONTENTS
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PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
WEST MARINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 1, 2017, DECEMBER 31, 2016 AND JULY 2, 2016
(Unaudited and in thousands, except share data)
July 1, 2017 | December 31, 2016 | July 2, 2016 | |||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 113,271 | $ | 76,141 | $ | 89,551 | |||||
Trade receivables, net | 10,341 | 6,413 | 10,649 | ||||||||
Merchandise inventories, net | 243,408 | 212,106 | 253,635 | ||||||||
Other current assets | 21,378 | 20,568 | 19,686 | ||||||||
Total current assets | 388,398 | 315,228 | 373,521 | ||||||||
Property and equipment, net | 77,832 | 82,517 | 80,508 | ||||||||
Long-term deferred income taxes | 3,718 | 3,862 | 4,017 | ||||||||
Other assets | 4,431 | 4,495 | 4,501 | ||||||||
TOTAL ASSETS | $ | 474,379 | $ | 406,102 | $ | 462,547 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 73,172 | $ | 32,999 | $ | 77,186 | |||||
Accrued payroll | 15,532 | 15,609 | 16,879 | ||||||||
Accrued expenses and other | 41,331 | 29,510 | 37,243 | ||||||||
Total current liabilities | 130,035 | 78,118 | 131,308 | ||||||||
Deferred rent and other | 20,609 | 19,253 | 18,193 | ||||||||
Total liabilities | 150,644 | 97,371 | 149,501 | ||||||||
Commitments and Contingencies - see Note 5 | |||||||||||
Stockholders’ equity: | |||||||||||
Preferred stock, $.001 par value: 1,000,000 shares authorized; no shares outstanding | — | — | — | ||||||||
Common stock, $.001 par value: 50,000,000 shares authorized; 25,967,831 shares issued and 25,278,942 shares outstanding at July 1, 2017; 25,690,484 shares issued and 25,001,595 shares outstanding at December 31, 2016; and 25,628,645 shares issued and 24,939,756 shares outstanding at July 2, 2016 | 26 | 26 | 26 | ||||||||
Treasury stock | (9,698 | ) | (9,461 | ) | (9,411 | ) | |||||
Additional paid-in capital | 216,900 | 214,790 | 213,137 | ||||||||
Accumulated other comprehensive loss | (57 | ) | (534 | ) | (552 | ) | |||||
Retained earnings | 116,564 | 103,910 | 109,846 | ||||||||
Total stockholders’ equity | 323,735 | 308,731 | 313,046 | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 474,379 | $ | 406,102 | $ | 462,547 | |||||
See accompanying notes to condensed consolidated financial statements.
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WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE 13 WEEKS AND 26 WEEKS ENDED JULY 1, 2017 AND JULY 2, 2016
(Unaudited and in thousands, except per share data)
13 Weeks Ended | 26 Weeks Ended | ||||||||||||||
July 1, 2017 | July 2, 2016 | July 1, 2017 | July 2, 2016 | ||||||||||||
Net revenues | $ | 247,238 | $ | 251,599 | $ | 376,301 | $ | 382,004 | |||||||
Cost of goods sold | 156,979 | 162,369 | 253,120 | 259,869 | |||||||||||
Gross profit | 90,259 | 89,230 | 123,181 | 122,135 | |||||||||||
Selling, general and administrative expense | 54,156 | 52,718 | 99,044 | 100,761 | |||||||||||
Income from operations | 36,103 | 36,512 | 24,137 | 21,374 | |||||||||||
Interest expense | 99 | 116 | 210 | 221 | |||||||||||
Income before income taxes | 36,004 | 36,396 | 23,927 | 21,153 | |||||||||||
Provision for income taxes | 14,784 | 14,812 | 9,977 | 8,682 | |||||||||||
Net income | $ | 21,220 | $ | 21,584 | $ | 13,950 | $ | 12,471 | |||||||
Net income per common and common equivalent share: | |||||||||||||||
Basic | $ | 0.84 | $ | 0.87 | $ | 0.55 | $ | 0.50 | |||||||
Diluted | $ | 0.84 | $ | 0.86 | $ | 0.55 | $ | 0.50 | |||||||
Weighted average common and common equivalent shares outstanding: | |||||||||||||||
Basic | 25,235 | 24,884 | 25,141 | 24,825 | |||||||||||
Diluted | 25,338 | 24,958 | 25,287 | 24,910 | |||||||||||
See accompanying notes to condensed consolidated financial statements.
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WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE 13 WEEKS AND 26 WEEKS ENDED JULY 1, 2017 AND JULY 2, 2016
(Unaudited and in thousands)
13 Weeks Ended | 26 Weeks Ended | ||||||||||||||
July 1, 2017 | July 2, 2016 | July 1, 2017 | July 2, 2016 | ||||||||||||
Net income | $ | 21,220 | $ | 21,584 | $ | 13,950 | $ | 12,471 | |||||||
Other comprehensive income | |||||||||||||||
Foreign currency translation adjustment | 484 | (3 | ) | 476 | (234 | ) | |||||||||
Total comprehensive income | $ | 21,704 | $ | 21,581 | $ | 14,426 | $ | 12,237 | |||||||
See accompanying notes to condensed consolidated financial statements.
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WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 26 WEEKS ENDED JULY 1, 2017 AND JULY 2, 2016
(Unaudited and in thousands)
26 Weeks Ended | |||||||
July 1, 2017 | July 2, 2016 | ||||||
OPERATING ACTIVITIES: | |||||||
Net income | $ | 13,950 | $ | 12,471 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 11,648 | 10,987 | |||||
Share-based compensation | 1,550 | 1,449 | |||||
Realized cumulative foreign currency translation adjustment | 580 | — | |||||
Deferred income taxes | 1,124 | 973 | |||||
Provision for doubtful accounts | 63 | 100 | |||||
Lower of cost or market inventory adjustments | 1,136 | 1,119 | |||||
Loss on asset disposals | 82 | 166 | |||||
Changes in assets and liabilities: | |||||||
Trade receivables | (3,990 | ) | (3,607 | ) | |||
Merchandise inventories | (32,438 | ) | (31,901 | ) | |||
Other current assets | (902 | ) | 3,656 | ||||
Other assets | (66 | ) | (392 | ) | |||
Accounts payable | 41,083 | 51,999 | |||||
Accrued payroll | (77 | ) | (4,627 | ) | |||
Accrued expenses and other | 11,760 | 9,737 | |||||
Deferred items and other non-current liabilities | 375 | 193 | |||||
Net cash provided by operating activities | 45,878 | 52,323 | |||||
INVESTING ACTIVITIES: | |||||||
Proceeds from sale of property and equipment | 19 | 23 | |||||
Purchases of property and equipment | (7,845 | ) | (11,111 | ) | |||
Net cash used in investing activities | (7,826 | ) | (11,088 | ) | |||
FINANCING ACTIVITIES: | |||||||
Borrowings on line of credit | 345 | 820 | |||||
Repayments on line of credit | (317 | ) | (820 | ) | |||
Cash dividend paid | (1,262 | ) | — | ||||
Proceeds from exercise of stock options | 250 | — | |||||
Proceeds from sale of common stock pursuant to Associates Stock Buying Plan | 310 | 287 | |||||
Treasury shares acquired | (236 | ) | (125 | ) | |||
Net cash provided by (used in) financing activities | (910 | ) | 162 | ||||
Effect of exchange rate changes on cash | (12 | ) | (5 | ) | |||
NET INCREASE IN CASH | 37,130 | 41,392 | |||||
CASH AT BEGINNING OF PERIOD | 76,141 | 48,159 | |||||
CASH AT END OF PERIOD | $ | 113,271 | $ | 89,551 | |||
Other cash flow information: | |||||||
Cash paid for interest | $ | 141 | $ | 156 | |||
Cash paid for income taxes, net of refunds of $30 and $2,947 | 161 | (2,753 | ) | ||||
Non-cash investing activities | |||||||
Property and equipment additions in accounts payable | 1,542 | 570 | |||||
See accompanying notes to condensed consolidated financial statements.
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WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen and Twenty-six Weeks Ended July 1, 2017 and July 2, 2016
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared from the records of West Marine, Inc. and its subsidiaries (collectively, the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary to fairly state the financial position, results of operations and cash flows for the interim periods presented, have been included.
The condensed consolidated balance sheet at December 31, 2016 presented herein has been derived from the audited consolidated financial statements of the Company that were included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”). These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, for the fiscal year ended December 31, 2016 that were included in the 2016 Form 10-K.
On June 29, 2017, the Company entered into an agreement and plan of merger (the "Merger Agreement") with Rising Tide Parent Inc., a Delaware corporation (“Parent”), and Rising Tide Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Sub”). Parent and Sub are entities affiliated with Monomoy Capital Partners, a New York-based private equity fund ("Monomoy"). For more information, see Note 8.
Accounting policies followed by the Company are described in Note 1 in the audited consolidated financial statements for the year ended December 31, 2016. Certain information and disclosures normally included in the notes to annual financial statements prepared in accordance with GAAP have been omitted for purposes of the condensed consolidated interim financial statements presented herein. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the 13-week and 26-week periods ended July 1, 2017 are not necessarily indicative of the results to be expected for any other interim period or for the fiscal year ending December 30, 2017. Historically, the Company's revenues and net income are higher in the second and third quarters and are lower in the first and fourth quarters of the fiscal year. The increase in revenues and earnings, principally during the period from April through August, is representative of the peak months for boat buying, usage and maintenance in most of the Company's retail markets.
The Company's fiscal year consists of 52 or 53 weeks, ending on the Saturday closest to December 31. The 2017 fiscal year and 2016 fiscal year consist of 52 weeks ending on December 30, 2017 and December 31, 2016, respectively. All quarters of both fiscal years 2017 and 2016 consist of 13 weeks. All references to years relate to fiscal years rather than calendar years.
Cash and Cash Equivalents
The Company's cash and cash equivalents consist of cash on hand, bank deposits and amounts in transit from banks for customer credit card and debit card transactions. As of July 1, 2017, December 31, 2016 and July 2, 2016, cash balances were $113.3 million, $76.1 million and $89.6 million, respectively.
Reportable Segment
West Marine is an omni-channel retail organization operating one reporting segment in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting. The metrics used by the Company's Chief Executive Officer (as the chief operating decision maker) to assess the performance of the Company and the process he uses to allocate resources focus on viewing the business as a single, integrated business. The Company has integrated systems and has commingled sales channel payroll expense, inventories, merchandise procurement activities, and distribution networks to concentrate its strategy as an omni-channel retailer.
Revenues from customers are derived from merchandise sales, and the Company does not rely on any individual major customer.
The Company considers its merchandise expansion strategy to be important to the future success of the Company and is providing the following product category information. Net revenues from the Company's merchandise mix for the periods ended July 1, 2017 and July 2, 2016, respectively, is reflected in the table below:
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13 Weeks Ended | 26 Weeks Ended | ||||||||||
Net Revenues from: | July 1, 2017 | July 2, 2016 | July 1, 2017 | July 2, 2016 | |||||||
Core boating products | 77.0 | % | 77.2 | % | 77.7 | % | 77.9 | % | |||
Merchandise expansion products | 23.0 | % | 22.8 | % | 22.3 | % | 22.1 | % | |||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
The Company considers core boating products to be maintenance-related products, electronics, sailboat hardware, anchors/docking/moorings, engine systems, safety, electrical, plumbing, boats, outboards, ventilation, deck hardware/fasteners, navigation, trailering, seating/boat covers and barbecues/appliances. The Company considers its merchandise expansion products to be apparel, footwear, clothing accessories, fishing, watersports, paddlesports, coolers, bikes and cabin/galley.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
In May 2014, FASB issued an accounting standards update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to December 15, 2017 for annual reporting periods beginning after that date. FASB also approved permitting early adoption of the standard, but not before the original effective date of December 15, 2016. The Company did not early adopt the standard; therefore, the new standard will be effective for the Company's 2018 fiscal year. The standard permits the use of either the full retrospective or modified retrospective approach. The Company currently expects to adopt the new standard using the modified retrospective approach.
In April 2016, FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the following two aspects of Topic 606: identifying performance obligations; and licensing implementation guidance. The Company did not early adopt the standard; therefore, the new standard will be effective for the Company's 2018 fiscal year. The Company is currently assessing and evaluating the new standard and has not yet concluded whether the adoption of ASU 2016-10 will have a material impact on the Company's consolidated financial statements. The Company currently expects to adopt an accounting policy to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good, rather than as an additional promised service. This guidance does not represent a change from current practice for the Company. The Company does not have any license or royalty revenue.
In May 2016, FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which focuses on clarifying the guidance on assessing collectability, presentation of sales taxes, non-cash consideration, and completed contracts and contract modification at transition. The Company did not early adopt the standard; therefore, the new standard will be effective for the Company's 2018 fiscal year. The Company has not yet concluded whether the adoption of ASU 2016-12 will have a material impact on its consolidated financial statements. Consistent with its current accounting policy, the Company currently expects to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price.
In February 2016, FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by recognizing all lease assets and liabilities on the balance sheet for leases with a term of more than 12 months. In addition, the update will require additional disclosures regarding key information about leasing arrangements. Under existing guidance, operating leases with a term of more than 12 months are not recorded as lease assets and lease liabilities on the balance sheet. The update will be effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this accounting guidance on its consolidated financial statements. The Company expects the adoption of this accounting guidance to result in an increase in lease assets and a corresponding increase in lease liabilities on its consolidated balance sheets.
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,which is intended to decrease the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update provide guidance on specific cashflow issues. The amendments in ASU 2016-15 are effective for the Company for fiscal years beginning after December 15, 2017, and
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interim periods within those fiscal years, and should be applied using the retrospective transition method for each period presented. Early adoption is permitted, but all amendments must be adopted in the same period. The Company is not planning to early adopt and is currently evaluating the impact that the amendments will have on its consolidated financial statements.
In May 2017, FASB issued ASU 2017-09, Stock Compensation (Topic 718): Scope of Modification Accounting, which is intended to provide clarity and reduce diversity in practice when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. The effective date for ASU 2017-09 is for fiscal years beginning after December 15, 2017, with early adoption permitted. West Marine will apply the guidance prospectively at the beginning of its 2018 fiscal year.
NOTE 2: INCOME TAXES
The Company calculates its interim income tax provision by estimating the annual effective tax rate and applying that rate to its year-to-date ordinary earnings. The Company's effective tax rate for the 13-week period ended July 1, 2017 was 41.1%, which resulted in a provision of $14.8 million, while the effective tax rate for the 13-week period ended July 2, 2016 was 40.7%, which resulted in a provision of $14.8 million. The Company's effective tax rate for the 26-week period ended July 1, 2017 was 41.7%, which resulted in a provision of $10.0 million, while the effective tax rate for the 26-week period ended July 2, 2016 was 41.0%, which resulted in a provision of $8.7 million. This rate increase primarily was driven by Canadian net operating losses not expected to be benefited in the tax provision and by transaction costs not estimated to be deductible.
The Company maintains valuation allowances against its California Enterprise Zone credits in the amount of $4.1 million, against its South Carolina state tax credits in the amount of $0.6 million, and against its Canadian net deferred tax assets in the amount of $1.4 million. The Company continues to monitor and adjust these valuation allowances based on current evaluations of its ability to realize these deferred tax assets.
During the 13-week period ended July 1, 2017, the Company recognized less than $0.1 million of expense related to uncertain tax positions, including accrued interest and penalties. The Company also recognized less than $0.1 million of tax expense relating to stock compensation.
The Company files income tax returns in the U.S. federal jurisdiction, various states and cities, Puerto Rico and Canada. The Company has substantially settled all federal income tax matters through 2012, as well as all state and foreign jurisdictions through 2011 and 2008, respectively.
NOTE 3: SHARE-BASED COMPENSATION
The Company recognized share-based compensation expense of $0.8 million for the 13-week period ended July 1, 2017 and $0.8 million for the 13-week period ended July 2, 2016, the majority of which was recorded as selling, general and administrative ("SG&A") expense. The Company recognized share-based compensation expense of $1.6 million for the 26-week period ended July 1, 2017 and $1.4 million for the 26-week period ended July 2, 2016, the majority of which was recorded as SG&A expense. During the 13-week period ended April 1, 2017, the Company adopted ASU 2016-09, which did not have a significant impact on the income tax rate.
NOTE 4: COMPREHENSIVE INCOME
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes income, expenses, gains and losses that bypass the income statement and are reported directly as a separate component of equity. The Company’s comprehensive income consists of net income and foreign currency translation adjustments for all periods presented.
NOTE 5: CONTINGENCIES
Derrick McNeil v. West Marine, Inc., et. al. ("McNeil"); George Patterson v. Randolph K. Repass, Matthew L. Hyde, Barbara L. Rambo, Dennis F. Madsen, Robert D. Olsen, James F. Nordstrom, Jr., Alice M. Richter, and Christiana Shi ("Patterson"); and Daniel Greenberg v. West Marine, Inc., et. al. ("Greenberg"). On July 27, 2017, McNeil and Patterson each filed a lawsuit in the United States District Court for the District of Delaware and in the Superior Court of the State of California, County of Santa Cruz (Patterson), and on July 31, 2017, Greenberg filed a lawsuit in the United States District Court for the Northern District of California. All three lawsuits are putative securities class action complaints that name the Company and/or its directors as defendants and relate to Monomoy’s proposed acquisition of the Company. The McNeil and Greenberg lawsuits allege, among other things, that the Company and its directors violated Section 14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), by omitting certain information from the preliminary proxy statement filed with the Securities and Exchange Commission in connection with the merger of Sub with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of Parent (the "Merger"). The Patterson lawsuit alleges that the Company’s directors were conflicted and breached their fiduciary duties to stockholders by, among other things, seeking to sell the Company through an allegedly unfair process, for an unfair price and on unfair terms, and because the preliminary proxy statement omits certain information. Based on these allegations, the complaints seek, among other things, equitable relief, including additional disclosure
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in the proxy statement, an injunction of the Merger and costs and expenses of the litigation, including attorneys’ fees. Based on the facts known to date, the Company considers the claims asserted to be without merit and intends to vigorously defend against them.
The Company also is involved in various other legal and administrative proceedings, claims and litigation, and regulatory compliance audits arising in the ordinary course of business. Accordingly, material adverse developments, settlements or resolutions may occur and negatively impact the Company's results in the quarter and/or fiscal year in which such developments, settlements or resolutions are reached.
Based on the facts currently available, the Company does not believe that the disposition of the class action lawsuits discussed above or any other claims, regulatory compliance audits, legal or administrative proceedings that are pending or asserted, individually or in the aggregate, will have a material adverse effect on the Company's financial position. However, an adverse judgment by a court, administrative or regulatory agency, arbitrator or a settlement could adversely impact the Company's results of operations in any given period.
For any other claims, regulatory compliance audits, legal or administrative proceedings where the Company has determined that a loss is probable, there is no material difference between the amount accrued and the reasonably possible amount of loss. For any such matters where a loss is reasonably possible, the range of estimated loss is not material individually or in aggregate.
NOTE 6: NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if unvested restricted stock units vested and outstanding options to purchase common stock were exercised. Options to purchase approximately 0.5 million shares and 0.6 million shares of common stock that were outstanding for the quarters ended July 1, 2017 and July 2, 2016, respectively, have been excluded from the calculation of diluted income per share because inclusion of such shares would be anti-dilutive. Options to purchase approximately 0.5 million shares and 0.6 million shares of common stock that were outstanding for the first 26 weeks ended July 1, 2017 and July 2, 2016, respectively, have been excluded from the calculation of diluted income per share because inclusion of such shares would be anti-dilutive.
The following is a reconciliation of the Company’s basic and diluted net income per share computations (shares in thousands):
13 Weeks Ended | |||||||||||||
July 1, 2017 | July 2, 2016 | ||||||||||||
Shares | Net Income Per Share | Shares | Net Income Per Share | ||||||||||
Basic | 25,235 | $ | 0.84 | 24,884 | $ | 0.87 | |||||||
Effect of dilutive stock options | 103 | 0.00 | 74 | (0.01 | ) | ||||||||
Diluted | 25,338 | $ | 0.84 | 24,958 | $ | 0.86 | |||||||
26 Weeks Ended | |||||||||||||
July 1, 2017 | July 2, 2016 | ||||||||||||
Shares | Net Income Per Share | Shares | Net Income Per Share | ||||||||||
Basic | 25,141 | $ | 0.55 | 24,825 | $ | 0.50 | |||||||
Effect of dilutive stock options | 146 | 0.00 | 85 | 0.00 | |||||||||
Diluted | 25,287 | $ | 0.55 | 24,910 | $ | 0.50 | |||||||
NOTE 7: STOCKHOLDERS EQUITY
On March 23, 2017, the Company declared a cash dividend of $0.05 per share on issued and outstanding shares of common stock. A $1.3 million dividend payable was recorded to retained earnings in the first quarter of 2017. The dividend was paid on May 25, 2017 to stockholders of record as of the close of business on May 11, 2017.
US GAAP requires accumulated foreign currency translation balances to be reclassified into the Consolidated Statement of Operations once the liquidation of the net assets of a foreign entity is substantially complete. As of July 1, 2017, because we had ceased operations in Canada, we had determined that the liquidation of our Canadian entity was substantially complete. All remaining activities associated with these entities, including the final disposition of remaining balance sheet amounts and formal dissolution of these entities are being managed and expected to be concluded by the end of the year. Accordingly, the Company reclassified into SG&A $0.6 million of foreign currency translation losses associated with our Canadian entity for the three and six months ended July 1, 2017.
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NOTE 8: MERGER AGREEMENT
On June 29, 2017, the Company entered into the Merger Agreement with Parent and Sub. Under the Merger Agreement, at the effective time of the Merger, Sub will merge with and into the Company, with the Company surviving the Merger as a wholly-owned subsidiary of Parent.
Also, at the effective time of the Merger, each share of the Company’s common stock issued and outstanding prior to the effective time, other than (i) shares held in the treasury of the Company or owned of record by any wholly-owned subsidiary of the Company, Parent or any of its wholly-owned subsidiaries and (ii) shares of common stock held by stockholders who have not voted in favor of the adoption of the Merger Agreement and who have perfected their statutory right of appraisal in respect of such shares of common stock in accordance with Section 262 of the Delaware General Corporation Law, will be cancelled and automatically be converted into the right to receive $12.97 per share in cash, without interest, subject to any withholding taxes.
The Merger Agreement also provides for certain mutual termination rights of the Company and Parent, including the right of either party to terminate the Merger Agreement if the Merger is not consummated on or before six months from the date of the Merger Agreement. Upon termination of the Merger Agreement under certain circumstances, The Company would be obligated to pay Parent a termination fee of $11 million. Upon termination of the Merger Agreement under certain circumstances, Parent would be obligated to pay the Company a termination fee of $17 million.
The Company was granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR”), by the Federal Trade Commission on July 25, 2017. The early termination of the HSR waiting period satisfies one of the conditions to the proposed Merger. Closing of the transaction remains subject to other closing conditions, including the affirmative vote in favor of the Merger by holders of a majority of the Company’s outstanding shares of common stock and other customary closing conditions. It is anticipated that the special meeting of the Company’s stockholders to vote on the Merger will be held in the third quarter of this year and, if the transaction is approved, the Merger would be expected to close shortly thereafter.
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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Part I, Item 1 of this Quarterly Report on Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”). All references to the second quarter and the first six months of 2017 mean the 13-week and 26-week periods ended July 1, 2017, respectively, and all references to the second quarter and the first six months of 2016 mean the 13-week and 26-week periods ended July 2, 2016, respectively. Unless the context otherwise requires, “West Marine,” “we,” “us” and “our” refer to West Marine, Inc. and its subsidiaries.
Overview
West Marine is a leading omni-channel specialty retailer exclusively offering boating gear, apparel, footwear and other waterlife-related products to anyone who enjoys recreational time on or around the water. Providing great customer experiences and a consistent brand is important to us, regardless of the sales channel our customer uses. Our 250 stores open at the end of the second quarter of 2017 are located in 37 states and Puerto Rico. In order to focus our resources and improve profitability, we closed eight Canadian stores during 2015, and closed the remaining two stores in June 2017. With our numerous stores and our eCommerce websites reaching domestic and international customers, we are recognized as a dominant waterlife outfitter for cruisers, sailors, anglers and paddlesports enthusiasts.
Over the last few years and continuing in 2017, we have been focused on growing revenue and improving profitability with the following key strategies:
• | eCommerce |
• | Store optimization |
• | Merchandise expansion |
Our principal executive offices are located at 500 Westridge Drive, Watsonville, California 95076-4100, and our telephone number is (831) 728-2700.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We have identified certain policies that require the application of significant judgment by management. Our most critical accounting policies are those related to inventory valuations (including valuation adjustments and capitalization of indirect costs), vendor allowances receivable, costs associated with exit activities, impairment of long-lived assets, income taxes, liabilities for self-insurance or high-deductible losses, and share-based compensation. These critical accounting policies are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2016 Form 10-K. The following discussion and analysis should be read in conjunction with such description of our critical accounting policies and with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report.
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Results of Operations
The following table sets forth certain statement of operations components expressed as a percentage of net revenues:
13 Weeks Ended | 26 Weeks Ended | ||||||||||
July 1, 2017 | July 2, 2016 | July 1, 2017 | July 2, 2016 | ||||||||
Net revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of goods sold | 63.5 | 64.5 | 67.3 | 68.0 | |||||||
Gross profit | 36.5 | 35.5 | 32.7 | 32.0 | |||||||
Selling, general and administrative expense | 21.9 | 21.0 | 26.3 | 26.4 | |||||||
Income from operations | 14.6 | 14.5 | 6.4 | 5.6 | |||||||
Interest expense | 0.0 | 0.0 | 0.0 | 0.1 | |||||||
Income before income taxes | 14.6 | 14.5 | 6.4 | 5.5 | |||||||
Provision for income taxes | 6.0 | 5.9 | 2.7 | 2.2 | |||||||
Net income | 8.6 | % | 8.6 | % | 3.7 | % | 3.3 | % | |||
Thirteen Weeks Ended July 1, 2017 Compared to Thirteen Weeks Ended July 2, 2016
Net revenues for the second quarter of 2017 were $247.2 million, a decrease of $4.4 million, or 1.7%, compared to net revenues of $251.6 million in the second quarter of 2016. Comparable store sales were down 1.2% compared to last year. Comparable store sales is calculated by including net sales of stores that have been open at least 13 months and sales from our direct-to-consumer and professional channels. A store is included in comparable store sales in the fiscal period in which it commences its 14th month of operations.
We saw sales growth in the quarter from our eCommerce strategy. During the second quarter, our eCommerce sales increased by 10.2% and represented 11.2% of our net revenues, as compared to 10.0% last year. Sales in our merchandise expansion categories (including footwear, apparel, clothing accessories, fishing products and paddle sports equipment) decreased by 1.1%. Merchandise expansion products represented 23.0% of our second quarter total sales, as compared to 22.8% last year. Sales of core boating products, which represented 77.0% of our total sales for the second quarter of this year and tend to be dependent upon boat-usage, declined by 2.2% as compared to the same period last year. Core boating product sales declined, in part, due to a late start to the boating season as well as lower sales to professional customers, as we have modified discounts and service levels to improve profits over the long term. During the second quarter of last year, core boating products represented 77.2% of total sales.
We had 250 stores open at the end of the second quarter of 2017, compared to 258 stores open at the end of the second quarter of 2016. Store count declined by 3.1% year-over-year and selling square footage decreased by 2.0%.
Gross profit was $90.3 million, an increase of $1.0 million, compared to the same period last year. Gross margin increased to 36.5% in the second quarter of 2017, compared to 35.5% in the second quarter last year. This primarily was driven by improved inventory management and 1.1% related to product margin expansion, partially offset by higher occupancy cost given lower net revenues in the period. Cost of goods sold includes costs related to the purchase, transportation and storage of merchandise, shipping expense and store occupancy costs. Consideration in the form of cash or credits received from vendors is recorded as a reduction to cost of goods sold as the related products are sold.
Selling, general and administrative (“SG&A”) expense was $54.1 million, an increase of $1.4 million, or 2.7%, compared to $52.7 million for the same period last year. SG&A expense increased as a percentage of net revenues to 21.9% in the second quarter of 2017, compared to 21.0% for the same period last year. The primary driver of the higher SG&A expense was $1.4 million for transaction costs related to the definitive merger agreement between West Marine and affiliates of Monomoy Capital Partners, a New York-based private equity fund (“Monomoy”), announced on June 29, 2017. Additionally, we incurred a $0.6 million charge related to the reclassification of accumulated foreign currency translation balances following the cessation of operations in Canada and $0.4 million for training programs. Partially offsetting these expenses were $1.1 million related to a supplier refund for prior year over-billing and $0.5 million related to lower benefit costs.
Our effective tax rate is subject to change based on the mix of income from different state and foreign jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. Our foreign earnings are not indefinitely reinvested outside the U.S. and are subject to current U.S. income tax. We evaluate our effective income tax rate on a quarterly basis and update our estimate of the full-year effective income tax rate as necessary.
Net income for the 13-week period ended July 1, 2017 was $21.2 million, a $0.4 million decrease compared to the same period last year. Our effective income tax rate for the 13-week period ended July 1, 2017 was 41.1%, which resulted in a provision
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of $14.8 million, while the effective tax rate for the 13-week period ended July 2, 2016 was 40.7%, which resulted in a provision of $14.8 million.
Twenty-six Weeks Ended July 1, 2017 Compared to Twenty-six Weeks Ended July 2, 2016
Net revenues for the first six months of 2017 were $376.3 million, a decrease of $5.7 million, or 1.5%, compared to net revenues of $382.0 million in the first six months of 2016. Comparable store sales were down 0.8% to last year.
We saw sales growth in the first six months of 2017 from our eCommerce strategy. During the first six months of 2017, our eCommerce sales increased by 9.9% and represented 11.9% of our net revenues, as compared to 10.7% last year. Sales in our merchandise expansion categories (including footwear, apparel, clothing accessories, fishing products and paddle sports equipment) decreased by 0.7%. Merchandise expansion products represented 22.3% of our first six months total sales, as compared to 22.1% last year. Sales of core boating products, which represented 77.7% of our total sales for the first six months of this year and tend to be dependent upon boat-usage, declined by 1.7% as compared to the same period last year. Core boating product sales declined, in part, due to a late start to the boating season as well as lower sales to professional customers, as we have modified discounts and service levels to improve profits over the long term. During the first six months of last year, core boating products represented 77.9% of total sales.
Gross profit increased by $1.0 million, or 0.9%, to $123.2 million in the first six months of 2017, compared to $122.1 million for the same period last year. Gross margin increased to 32.7% in the first six months of 2017, compared to 32.0% for the same period last year. This primarily was driven by 0.7% related to product margin expansion and an improvement in supply chain efficiencies of 0.1%, improved inventory management, partially offset by higher occupancy cost given lower net revenues in the period.
SG&A expense was $99.0 million, a decrease of $1.7 million, or 1.7%, compared to $100.8 million for the same period last year. SG&A expense decreased as a percentage of net revenues to 26.3% in the first six months of 2017, compared to 26.4% for the same period last year. The primary drivers of the lower SG&A expense were $2.4 million attributed to lower benefit costs, including lower year-over-year health care claims, $1.3 million in lower training costs, including West Marine University, our biennial company-wide training event, and store associated training programs, $1.1 million related to a supplier refund for prior year over-billing. Offsetting these savings was $1.5 million in transaction costs related to the definitive merger agreement between West Marine and affiliates of Monomoy, as well as $0.6 million related to the reclassification of accumulated foreign currency translation balances following the cessation of operations in Canada.
Net income for the 26-week period ended July 1, 2017 was $14.0 million, a $1.5 million increase compared to the same period last year. Our effective income tax rate for the 26-week period ended July 1, 2017 was 41.7%, which resulted in a provision of $10.0 million, while the effective tax rate for the 26-week period ended July 2, 2016 was 41.0%, which resulted in a provision of $8.7 million.
Liquidity and Capital Resources
We ended the second quarter of 2017 with $113.3 million of cash and cash equivalents, compared to $89.6 million at the end of the second quarter of 2016. Working capital (the excess of current assets over current liabilities) increased to $258.4 million at the end of the second quarter of 2017, compared to $242.2 million at the end of the second quarter of 2016. The increase in working capital primarily was attributable to a $23.7 million increase in cash and a $4.0 million decrease in accounts payable, partially offset by a $10.2 million decrease in merchandise inventory, and an increase of $2.7 million in accrued expenses. We believe that our cash on hand, cash flow from operating activities and available borrowings under our credit facility will be sufficient to meet our capital requirements for the foreseeable future.
Operating Activities
During the first six months of 2017, net cash provided by operating activities was $45.9 million, compared to $52.3 million during the same period last year. The decrease in cash provided by operating activities year-over-year primarily was due to a decrease in accounts payable of $10.9 million and current-year changes in other assets of $4.6 million, partially offset by current-year changes in accrued payroll of $4.6 million and accrued expenses of $2.0 million. The primary drivers for the change in accounts payable were lower inventory levels. The primary driver of the change in other current assets was an increase in prepaid expenses. The primary driver of the changes in accrued payroll were decreases in variable compensation. Additionally, net income for the first six months of 2017 was $1.5 million greater than net income for the first six months of 2016.
Investing Activities
Net cash used in investing activities was $7.8 million for the first six months of 2017, compared to net cash used of $11.1 million for the first six months of 2016. During the last six months of 2017, we expect to spend approximately $12 million to $15 million on capital expenditures, mainly for information technology enhancements and our store optimization program as well as eCommerce website enhancements. Under our store optimization strategy, we opened one standard store, completed three store
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revitalization projects and finished one revitalization-select projects (a smaller-scale revitalization) during the first six months of 2017. During the first six months of 2016, we opened one flagship store, completed seven store revitalization projects and finished four revitalization-select projects. These capital expenditures represent the majority of our investing activities each year.
Financing Activities
Net cash used in financing activities was $0.9 million for the first six months of 2017, primarily attributable to cash paid for a dividend and withholding of shares for taxes related to restricted stock units vested during the period, partially offset by cash from share-based compensation plans. For the first six months of 2016, net cash provided in financing activities was $0.2 million, primarily attributable to cash from share-based compensation plans, partially offset by proceeds from withholding of shares for taxes related to restricted stock units vested during the period.
Credit Agreement
On April 10, 2017, we and certain of our subsidiaries, along with the lenders that are signatories thereto and Wells Fargo Bank, National Association (as successor by merger to Wells Fargo Retail Finance, LLC), as agent for the lenders, entered into a joinder and second amendment to our amended and restated loan and security agreement, to among other things: extend the maturity of the agreement to April 10, 2022; reduce the maximum availability borrowing capacity from $120.0 million to $60.0 million; reduce the interest rates applicable to borrowings under our amended and restated loan and security agreement; allow for payment of dividends of up to $15.0 million in any consecutive 12-month period, including the dividend declared on March 23, 2017; reduce the fee that we must pay on undrawn availability; and release West Marine Canada Corp., a Nova Scotia unlimited liability company and wholly-owned subsidiary of the Company, from its obligations under the loan agreement due to the winding down of Canadian operations. In addition, at our option and subject to certain conditions, we may increase our borrowing capacity up to an additional $12.5 million. The amount available to be borrowed is based on a percentage of our inventory (excluding capitalized indirect costs) and accounts receivable. This loan agreement amends and supersedes our previous loan and security agreement that was scheduled to expire on November 30, 2017.
The revolving credit facility is guaranteed by West Marine, Inc. and West Marine Insurance, Inc. (a Vermont corporation and wholly-owned subsidiary of the Company) and secured by a security interest in all of our accounts receivable and inventory, certain other related assets, and all proceeds thereof. The revolving credit facility is available for general working capital and general corporate purposes.
The amount available to be borrowed is based on a percentage of our inventory (excluding capitalized indirect costs) and accounts receivable. Before the amendment, at our election, borrowings under the revolving credit facility bore interest at one of the following options:
1.The prime rate, which is defined in the loan agreement as the highest of:
a.Federal funds rate, as in effect from time to time, plus one-half of one percent;
b.LIBOR rate for a one-month interest period plus one percent; or
c.The rate of interest in effect for such day as publicly announced from time to time by Wells Fargo as its “prime rate,” or
2.The LIBOR rate quoted by the British Bankers Association for the applicable interest period.
In each case, the applicable interest rate is increased by a margin imposed by the loan agreement. The applicable margin for any date will depend upon the amount of available credit under the revolving credit facility. The margin range for option (1) above is between 0.25% and 0.5% and for option (2) above is between 1.25% and 1.5%. The loan agreement also imposes a fee on the unused portion of the revolving credit facility available. For the second quarter of 2017 and 2016, the weighted-average interest rate on all of our outstanding borrowings was 4.3% and 4.0%, respectively. For the first six months of 2017 and 2016, the weighted-average interest rate on all of our outstanding borrowings was 4.3% and 4.0%, respectively.
Although the loan agreement contains customary covenants, including, but not limited to, restrictions on our ability to incur liens, make acquisitions and investments, pay dividends and sell or transfer assets, it does not contain debt or other similar financial covenants, such as maintaining certain specific leverage, debt service or interest coverage ratios. Instead, our loan is asset-based (which means our lenders maintain a security interest in our inventory and accounts receivable which serve as collateral for the loan), and the amount we may borrow under our revolving credit facility at any given time is determined by the estimated value of these assets as determined by the lenders’ appraisers. Additionally, we must maintain a minimum revolving credit availability equal to the greater of $7 million or 10% of the borrowing base. In addition, there are customary events of default under our loan agreement, including failure to comply with our covenants. If we fail to comply with any of the covenants contained in the loan agreement, an event of default occurs which, if not waived by our lenders or cured within the applicable time periods, results in the lenders having the right to accelerate repayment of all outstanding indebtedness under the loan agreement before the stated maturity date and the revolving credit facility could be terminated. As of July 1, 2017, we were in compliance with the covenants under our loan agreement, had less than $0.1 million outstanding under our revolving credit facility and $55.8 million available
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for future borrowings. The highest outstanding balance during the second quarter of 2017 and 2016 was $0.2 million and $0.3 million, respectively. The highest outstanding balance during the first six months of 2017 and 2016 was $0.2 million and $0.3 million, respectively.
We may borrow against the aggregate borrowing base up to the maximum revolver amount, which was $60.0 million at July 1, 2017 and $120.0 million at December 31, 2016 and July 2, 2016. Our borrowing base at the periods then ended consisted of the following (in millions):
July 1, 2017 | December 31, 2016 | July 2, 2016 | |||||||||
Accounts receivable availability | $ | 16.5 | $ | 5.0 | $ | 12.1 | |||||
Inventory availability | 167.4 | 122.4 | 166.0 | ||||||||
Less: reserves | (8.0 | ) | (6.9 | ) | (8.0 | ) | |||||
Less: minimum availability | (17.6 | ) | (12.0 | ) | (17.0 | ) | |||||
Less: suppressed availability | (98.3 | ) | — | (33.1 | ) | ||||||
Total borrowing base | $ | 60.0 | $ | 108.5 | $ | 120.0 | |||||
Our aggregate borrowing base was reduced by the following obligations (in millions):
Ending loan balance | $ | — | $ | — | $ | — | |||||
Outstanding letters of credit | 4.2 | 4.2 | 4.2 | ||||||||
Total obligations | $ | 4.2 | $ | 4.2 | $ | 4.2 | |||||
Accordingly, our availability as of July 1, 2017, December 31, 2016 and July 2, 2016, respectively, was (in millions): | |||||||||||
Total borrowing base | $ | 60.0 | $ | 108.5 | $ | 120.0 | |||||
Less: obligations | (4.2 | ) | (4.2 | ) | (4.2 | ) | |||||
Total availability | $ | 55.8 | $ | 104.3 | $ | 115.8 | |||||
EBITDA
In addition to disclosing financial results that are determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we are providing EBITDA, which is a non-GAAP financial measure, as a supplemental measure to help investors evaluate our fundamental operational performance. EBITDA is defined as net income (loss) plus interest expense, income tax (benefit), and depreciation and amortization. EBITDA is not a presentation made in accordance with GAAP, is not a measure of financial performance or condition, liquidity or profitability, and should not be considered as an alternative to (1) net income, operating income or any other performance measures determined in accordance with GAAP or (2) operating cash flows determined in accordance with GAAP. Additionally, EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements, such as interest payments, tax payments and debt service requirements or replacement of fixed assets. By eliminating interest, income taxes, depreciation and amortization, we believe the result is a useful measure across time in evaluating our fundamental core operating performance. We also believe that EBITDA provides a clearer picture of operating performance of the business, given the significant investments we are making in the growth of the business, by eliminating the effects of depreciation and interest expense.
Our presentation of EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, the presentation of EBITDA may not be comparable to other similarly titled measures of other companies. Management believes that the presentation of EBITDA is useful to investors because these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of the operating performance of companies in industries similar to ours. Management also uses EBITDA to evaluate our operations. However, as indicated, EBITDA does not include interest expense on borrowed money, the payment of income taxes, amortization of our definite-lived intangible assets, or depreciation expense on our capital assets, which are necessary elements of our operations. Since EBITDA does not account for these and other expenses, its utility as a measure of our operating performance has limitations. Due to these limitations, management does not view EBITDA in isolation but also uses other measurements, such as net income, revenues and gross profit, to measure operating performance.
The following table sets forth a reconciliation of net income, the most directly comparable GAAP financial measure, to EBITDA (in millions):
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13 Weeks Ended | 26 Weeks Ended | ||||||||||||||
July 1, 2017 | July 2, 2016 | July 1, 2017 | July 2, 2016 | ||||||||||||
Net income | $ | 21.2 | $ | 21.6 | $ | 14.0 | $ | 12.5 | |||||||
Add: | |||||||||||||||
Interest expense(1) | 0.1 | 0.1 | 0.2 | 0.2 | |||||||||||
Depreciation and amortization (2) | 5.8 | 5.5 | 11.5 | 10.9 | |||||||||||
Income tax expense | 14.8 | 14.8 | 10.0 | 8.7 | |||||||||||
EBITDA | $ | 41.9 | $ | 42.0 | $ | 35.7 | $ | 32.3 | |||||||
(1) | Amortization of deferred financing costs related to our revolving credit facility is included in interest expense. |
(2) Included in cost of goods sold and SG&A expense.
Off-Balance Sheet Arrangements
Operating leases are the only financing arrangements not currently reported on our condensed consolidated balance sheets. We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes. As of July 1, 2017, we were not involved in any unconsolidated special purpose entities or variable interest entities.
Substantially all of the real property used in our business is leased under operating lease agreements, as described in Item 2, “Properties” and Note 6 to our consolidated financial statements in the 2016 Form 10-K.
Seasonality
Our business is highly seasonal. In 2016, approximately 63% of our net sales and all of our net income occurred during the second and third quarters, principally during the period from April through August, which represents the peak months for boat buying, usage and maintenance in most of our markets.
Business Trends
We believe that there are fundamental trends continuing to impact our industry that are affecting our customers and their purchasing patterns. These trends reinforce our realization that our core boat parts and accessories business will not be sufficient to meet our growth expectations. To accomplish our goal of achieving steady, profitable growth, we are continuing our emphasis on execution of our growth strategies to expand our potential market and reduce our dependence on weather.
Our key growth strategies have delivered encouraging results. As we continue to test and learn, we have ramped up our investments, with the results outlined below:
• | eCommerce: Sales from eCommerce increased by 9.9% for the first six months of 2017 as compared to last year. eCommerce sales represented 11.9% of total sales this year, up from 10.7% for the same period last year. |
• | Store optimization: We continue to increase the number of waterlife stores, which provide an enhanced shopping experience for our customers, both in terms of store design and expanded product assortment. Our store optimization strategy has evolved from store consolidations, where we created fewer and better stores in our major markets, to also include revitalizations of select stores. A store revitalization consists of light remodeling, space optimization, product assortment changes, new product category introduction, and associate training. |
• | Merchandise expansion: Sales in our merchandise expansion categories support our eCommerce and store optimization strategies and declined by 0.7% for the first six months of 2017 as compared to last year. During this same period, sales in our core categories decreased by 1.7%. This strategy welcomes a broader base of customers who are passionate about recreating on and around the water by providing a wide selection of products. We offer this expanded assortment in our waterlife stores, on our retail eCommerce website and in our revitalized stores. Sales of merchandise expansion products represented 22.3% of total sales for the first six months of 2017, up from 22.1% for the same period last year. |
We continue to see evidence of positive inter-dependence across our growth strategies. Specifically, our eCommerce and store optimization strategies are enabling us to better present our merchandise expansion product offerings, and all of our strategies have resulted in attracting new customers and building our customer base.
Given the success of our growth strategies, and the need to continue to drive them at a fast pace in order to continue to reposition our business to provide steady profitable growth, our financial plan for 2017 includes further investment of resources in support of our key growth strategies. We expect overall capital spending to be slightly below depreciation expense, which was approximately $22.2 million in 2016.
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For more information see the “Overview,” “Fiscal 2016 Compared with Fiscal 2015 - Revenues,” and “Business Trends” discussions in Item 7-“Management's Discussion and Analysis of Financial Condition and Results of Operations” in the 2016 Form 10-K.
Internet Address and Access to SEC Filings
Our Internet address is westmarine.com. The information contained in, or that can be accessed through, our website is not part of this report. Interested readers may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act in the “Investor Relations” portion of our website as well as through the Securities and Exchange Commission’s website, sec.gov.
Forward-Looking Statements
All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “will,” and similar expressions also identify forward-looking statements. These forward-looking statements include, among other things: expectations related to our earnings, growth and profitability; statements that relate to West Marine's future plans, expectations and objectives; expectations and projections with respect to our ability to: continue to appropriately invest in, and execute on, our key growth strategies; experience increased sales from expanded merchandise assortments; continue to successfully execute our store optimization strategy; successfully and fully execute our 15/50 plan; continue to invest in our technology infrastructure, inventory, maintain in-stock levels; improve financial performance; increase sales through all channels and control operating expenses; as well as facts and assumptions underlying these statements or projections. Actual results may differ materially from the results expressed or implied in these forward-looking statements due to various risks, uncertainties or other factors. Additionally, West Marine's operations could be adversely affected if participation in the boating industry declines, if boat usage decreases, if fuel prices were to significantly increase, or if unseasonably cold weather, prolonged winter-like conditions, natural disasters such as hurricanes, man-made disasters or extraordinary amounts of rainfall occur during the peak boating season in the second and third quarters. Among these and other risks and uncertainties, there can be no guarantee that the Merger will be consummated, or if it is consummated, that it will close within the anticipated time frame. Additional risks and uncertainties relating to the Merger include: the company may be unable to obtain the approval of the company stockholders required for the Merger; other conditions to the closing may not be satisfied or waived; the Merger may involve unexpected costs, liabilities or delays; the company’s business may suffer as a result of uncertainty surrounding the proposed Merger, including due to disruption of current plans and operations and the potential difficulties in employee retention as a result of the proposed transaction; the outcome of the pending or future legal proceedings related to the proposed transaction; the ability to obtain the requisite stockholder approval; and the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement. Risk factors that may affect the proposed Merger and/or our operating results in the future include the risk factors set forth in Item 1A of this report, the risk factors set forth in Item 1A of the 2016 Form 10-K, and those risks which may be described from time to time in West Marine's other filings with the Securities and Exchange Commission. Except as required by applicable law, West Marine assumes no responsibility to update any forward-looking statements as a result of new information, future events or otherwise.
Recently Issued Accounting Pronouncements
See Note 1 to our unaudited condensed consolidated financial statements in Part I, Item 1 of this report for a discussion of recently-issued accounting pronouncements.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not undertake any specific actions to diminish our exposure to interest rate or currency rate risk, and we are not a party to any interest rate or currency rate risk management transactions. We do not purchase or hold any derivative financial instruments. We believe there has been no material change in our exposure to market risk from that discussed in the 2016 Form 10-K.
At the end of the quarter ended July 1, 2017, we had less than $0.1 million in outstanding current portion - long-term debt and, accordingly, would not be impacted by a change in interest rates. We had up to $60.0 million in borrowing capacity under our credit facility. There are various interest rate options available, as described above.
Our only significant risk exposure was from U.S. dollar to Canadian dollar exchange rate fluctuations. A 10% increase in the exchange rate of the U.S. dollar versus the Canadian dollar would have an effect of reducing our pre-tax income and cash flows by approximately $0.1 million over the next year. In June 2017, we closed our last two Canadian stores, and as a result, we don't expect exchange rate fluctuations will materially impact our results going forward.
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ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We conducted, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of July 1, 2017, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the second quarter of 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
See Part I, Item 1, Note 5 to our unaudited condensed consolidated financial statements in this report for a discussion of our legal proceedings.
ITEM 1A – RISK FACTORS
We have included in Part I, Item 1A of the 2016 Form 10-K, a description of certain risks and uncertainties that could affect our business, future performance or financial condition, referred to as “Risk Factors.” Investors should consider these Risk Factors prior to making an investment decision with respect to our common stock. There have been no material change in our Risk Factors since we filed the 2016 Form 10-K, except as set forth below.
RISKS RELATED TO THE PENDING MERGER
If the proposed Merger is not consummated, our business could be harmed and our stock price could decline.
The consummation of the Merger is conditioned upon, among other things, the adoption of the Merger Agreement by our stockholders and other customary closing conditions. Therefore, the Merger may not be consummated or may not be consummated in a timely manner. If the Merger Agreement is terminated, the market price of our common stock will likely decline. In addition, our stock price may decline as a result of the fact that we have incurred and will continue to incur significant expenses related to the Merger prior to its closing that will not be recovered if the Merger is not consummated. If the Merger Agreement is terminated under certain circumstances we may be obligated to pay Parent the Company Termination Fee of $11 million. As a consequence of the failure of the Merger to be consummated, as well as of some or all of these potential effects of the termination of the Merger Agreement, our business could be harmed in that concerns about our viability are likely to increase, making it more difficult to retain employees and existing customers and to generate new business.
The fact that there is a Merger pending could harm our business, revenue and results of operations.
While the Merger is pending, it creates uncertainty about our future. As a result of this uncertainty, customers may decide to delay, defer, or cancel purchases of our products pending consummation of the Merger or termination of the Merger Agreement. If these decisions represent a significant portion of our anticipated revenue, our results of operations and quarterly revenues could be substantially below the expectations of investors.
In addition, while the Merger is pending, we are subject to a number of risks that may harm our business, revenue and results of operations, including:
• | the diversion of management and employee attention and the unavoidable disruption to our relationships with customers and vendors may detract from our ability to grow revenues and minimize costs; |
• | we have and will continue to incur significant expenses related to the Merger prior to its closing; |
• | it may be difficult for us to retain employees due to the announcement and pendency of the Merger; and |
• | we may be unable to respond effectively to competitive pressures, industry developments and future opportunities. |
Our executive officers may have interests in the Merger other than, or in addition to, the interests of our stockholders generally.
Members of our Board and our executive officers may have interests in the Merger that are different from, or are in addition to, the interests of our stockholders generally. Our Board was aware of these interests and considered them, among other matters, in approving the Merger Agreement. You should keep this in mind when considering the recommendation of the Board in favor of the adoption of the Merger Agreement. These interests include the treatment of outstanding equity awards upon consummation of the Merger pursuant to the Merger Agreement, the vesting or delivery of outstanding equity awards and payments that may
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come due in connection with a change of control, which will occur upon the consummation of the Merger, under the Company’s Amended and Restated Executive Officer Severance Plan, and the continuation of indemnification obligations and directors’ and officers’ insurance for former and continuing officers and directors.
Litigation has been instituted against West Marine and members of the West Marine board of directors, challenging the Merger, and adverse judgments in these lawsuits or any other may prevent the Merger from becoming effective within the expected timeframe or at all.
West Marine and members of the West Marine board of directors have been named as defendants in three class action lawsuits challenging the Merger. If the plaintiffs in these or any other actions that may be brought are successful, these adverse judgments may prevent the parties from completing the Merger in the expected timeframe, if at all. Even if the plaintiffs in these potential actions are not successful, the costs of defending against such claims could adversely affect the financial condition of West Marine and such actions could adversely affect the reputation of West Marine and members of the board of directors or management.
See Note 5 to our unaudited condensed consolidated financial statements in Part I, Item 1 of this report for a discussion of these and other legal proceedings
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURE
None.
ITEM 5 – OTHER INFORMATION
None.
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ITEM 6 – EXHIBITS | |
2.1 | Agreement and Plan of Merger, dated as of June 29, 2017, by and among Rising Tide Parent Inc., Rising Ride Merger Sub Inc. and West Marine, Inc. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated June 29, 2017 and filed on June 30, 2017). |
3.1 | Certificate of Incorporation of West Marine, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K filed March 18, 2004). |
3.2 | Bylaws of West Marine, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated December 6, 2012 and filed on December 11, 2012). |
4.1 | Voting and Support Agreement, dated as of June 29, 2017, by and among West Marine, Inc. and certain West Marine stockholders. |
4.2 | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 2012). |
10.1 | Amended and Restated Loan and Security Agreement, dated as of August 23, 2010, by and among West Marine Products, Inc., each of the other persons that are signatories thereto as borrowers, each of the persons that are signatories thereto as guarantors, the lenders that are signatories thereto, Wells Fargo Retail Finance, LLC, as agent for the lenders, and Wells Fargo Capital Finance, LLC, as sole lead arranger and sole book-runner (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 23, 2010 and filed on August 27, 2010). |
10.2 | First Amendment of Amended and Restated Loan and Security Agreement, dated as of November 30, 2012, by and among West Marine Products, Inc., each of the other persons that are signatories thereto as borrowers, each of the persons that are signatories thereto as guarantors, the lenders that are signatories thereto, Wells Fargo Bank, National Association (as successor by merger to Wells Fargo Retail Finance, LLC), as agent for the lenders (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated November 30, 2012 and filed on December 4, 2012). |
10.3 | Joinder and Second Amendment of Amended and Restated Loan and Security Agreement, dated as of April 10, 2017, by and among West Marine Products, Inc., each of the other persons that are signatories thereto as borrowers, each of the persons that are signatories thereto as guarantors, the lenders that are signatories thereto, Wells Fargo Bank, National Association (as successor by merger to Wells Fargo Retail Finance, LLC), as agent for the lenders. |
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. |
101.INS† | XBRL Instance Document. |
101.SCH† | XBRL Taxonomy Extension Schema Document. |
101.CAL† | XBRL Taxonomy Calculation Linkbase Document. |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB† | XBRL Taxonomy Label Linkbase Document. |
101.PRE† | XBRL Taxonomy Presentation Linkbase Document. |
† | Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the condensed consolidated balance sheets as of July 1, 2017, December 31, 2016 and July 2, 2016; (ii) the condensed consolidated statements of income for the 13 weeks ended July 1, 2017 and July 2, 2016 and 26 weeks ended July 1, 2017 and July 2, 2016; (iii) the condensed consolidated statements of comprehensive income for the 13 weeks ended July 1, 2017 and July 2, 2016 and 26 weeks ended July 1, 2017 and July 2, 2016; and (iv) the condensed consolidated statements of cash flows for the 26 weeks ended July 1, 2017 and July 2, 2016. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: | August 7, 2017 | WEST MARINE, INC. | ||
By: | /s/ Matthew L. Hyde | |||
Matthew L. Hyde | ||||
Chief Executive Officer | ||||
By: | /s/ Jeffrey L. Lasher | |||
Jeffrey L. Lasher | ||||
Chief Financial Officer | ||||
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