UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

Or

 

¨ 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: 0-9068

 

WEYCO GROUP, INC.

(Exact name of registrant as specified in its charter)

 

WISCONSIN		39-0702200
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

	333 W. Estabrook Boulevard
	P. O. Box 1188
	Milwaukee, Wisconsin 53201
	(Address of principal executive offices)
	(Zip Code)
	(414) 908-1600
	(Registrant’s telephone number, including area code)

  

Indicate by 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 x   No ¨

 

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 (Section 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 x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x   Non-accelerated filer ¨ Smaller reporting company  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨   No x

 

As of August 1, 2014, there were 10,822,329 shares of common stock outstanding.

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

The consolidated condensed financial statements included herein have been prepared by Weyco Group, Inc. (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest annual report on Form 10-K.

 

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

 

		June 30,				December 31,
		2014				2013
		(Dollars in thousands)
ASSETS:
Cash and cash equivalents		$	11,222			$	15,969
Marketable securities, at amortized cost			4,602				5,196
Accounts receivable, net			41,115				48,530
Accrued income tax receivable			3,016				1,055
Inventories			63,392				63,196
Prepaid expenses and other current assets			3,757				6,136
Total current assets			127,104				140,082
Marketable securities, at amortized cost			29,685				25,024
Property, plant and equipment, net			34,239				35,112
Goodwill			11,112				11,112
Trademarks			34,748				34,748
Other assets			21,407				21,455
Total assets		$	258,295			$	267,533
LIABILITIES AND EQUITY:
Short-term borrowings		$	10,820			$	12,000
Accounts payable			6,410				13,956
Dividend payable			-				1,949
Accrued liabilities			9,599				10,902
Deferred income tax liabilities			1,371				849
Total current liabilities			28,200				39,656
Deferred income tax liabilities			1,953				1,993
Long-term pension liability			21,179				21,901
Other long-term liabilities			7,325				6,991
Equity:
Common stock			10,860				10,876
Capital in excess of par value			33,018				31,729
Reinvested earnings			157,171				156,983
Accumulated other comprehensive loss			(8,814	)			(9,422	)
Total Weyco Group, Inc. equity			192,235				190,166
Noncontrolling interest			7,403				6,826
Total equity			199,638				196,992
Total liabilities and equity		$	258,295			$	267,533

 

The accompanying notes to consolidated condensed financial statements (unaudited) are an integral part of these financial statements.

 

 

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (UNAUDITED)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		(In thousands, except per share amounts)
Net sales		$	62,863			$	65,041			$	137,792			$	138,631
Cost of sales			38,646				40,343				86,211				86,234
Gross earnings			24,217				24,698				51,581				52,397
Selling and administrative expenses			20,830				21,018				43,324				44,029
Earnings from operations			3,387				3,680				8,257				8,368
Interest income			306				386				595				798
Interest expense			(29	)			(112	)			(71	)			(239	)
Other income (expense), net			75				(538	)			(40	)			(627	)
Earnings before provision for income taxes			3,739				3,416				8,741				8,300
Provision for income taxes			1,238				1,151				2,990				2,910
Net earnings			2,501				2,265				5,751				5,390
Net earnings (loss) attributable to noncontrolling interest			294				60				339				(15	)
Net earnings attributable to Weyco Group, Inc.		$	2,207			$	2,205			$	5,412			$	5,405
Weighted average shares outstanding
Basic			10,822				10,763				10,827				10,762
Diluted			10,907				10,813				10,919				10,824
Earnings per share
Basic		$	0.20			$	0.20			$	0.50			$	0.50
Diluted		$	0.20			$	0.20			$	0.50			$	0.50
Cash dividends declared (per share)		$	0.19			$	0.18			$	0.37			$	0.18
Comprehensive income		$	3,143			$	982			$	6,597			$	3,864
Comprehensive income (loss) attributable to noncontrolling interest			370				(533	)			577				(680	)
Comprehensive income attributable to Weyco Group, Inc.		$	2,773			$	1,515			$	6,020			$	4,544

 

The accompanying notes to consolidated condensed financial statements (unaudited) are an integral part of these financial statements.

 

 

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		Six Months Ended June 30,
		2014				2013
		(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	5,751			$	5,390
Adjustments to reconcile net earnings to net cash provided by operating activities -
Depreciation			1,888				1,985
Amortization			151				171
Bad debt expense			152				87
Deferred income taxes			344				(727	)
Net foreign currency transaction (gains) losses			(4	)			580
Stock-based compensation			676				633
Pension contribution			(1,300	)			(110	)
Pension expense			1,106				1,796
Increase in cash surrender value of life insurance			(115	)			(115	)
Changes in operating assets and liabilities -
Accounts receivable			7,236				6,278
Inventories			(143	)			12,960
Prepaid expenses and other assets			2,514				99
Accounts payable			(7,541	)			(6,628	)
Accrued liabilities and other			(998	)			(5,004	)
Accrued income taxes			(1,953	)			(1,493	)
Net cash provided by operating activities			7,764				15,902
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities			(7,427	)			(12	)
Proceeds from maturities of marketable securities			3,382				6,308
Life insurance premiums paid			(155	)			(155	)
Investment in real estate			-				(3,206	)
Purchases of property, plant and equipment			(725	)			(1,125	)
Net cash (used for) provided by investing activities			(4,925	)			1,810
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid			(5,954	)			-
Shares purchased and retired			(1,249	)			(4,623	)
Proceeds from stock options exercised			608				2,828
Payment of contingent consideration			-				(1,270	)
Proceeds from bank borrowings			33,999				2,000
Repayments of bank borrowings			(35,179	)			(27,000	)
Income tax benefits from stock-based compensation			37				455
Net cash used for financing activities			(7,738	)			(27,610	)
Effect of exchange rate changes on cash and cash equivalents			152				(342	)
Net decrease in cash and cash equivalents		$	(4,747	)		$	(10,240	)
CASH AND CASH EQUIVALENTS at beginning of period			15,969				17,288
CASH AND CASH EQUIVALENTS at end of period		$	11,222			$	7,048
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net of refunds		$	4,498			$	4,527
Interest paid		$	46			$	206

 

The accompanying notes to consolidated condensed financial statements (unaudited) are an integral part of these financial statements.

 

 

NOTES:

 

1.

Financial Statements

 

In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2014, are not necessarily indicative of the results for the full year.

 

2.

Earnings Per Share

 

The following table sets forth the computation of earnings per share and diluted earnings per share:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		(In thousands, except per share amounts)
Numerator:
Net earnings attributable to Weyco Group, Inc.		$	2,207			$	2,205			$	5,412			$	5,405
Denominator:
Basic weighted average shares outstanding			10,822				10,763				10,827				10,762
Effect of dilutive securities:
Employee stock-based awards			85				50				92				62
Diluted weighted average shares outstanding			10,907				10,813				10,919				10,824
Basic earnings per share		$	0.20			$	0.20			$	0.50			$	0.50
Diluted earnings per share		$	0.20			$	0.20			$	0.50			$	0.50

 

Diluted weighted average shares outstanding for the three and six months ended June 30, 2014, exclude anti-dilutive stock options totaling 330,200 shares of common stock at a weighted average price of $28.50. Diluted weighted average shares outstanding for the three and six months ended June 30, 2013, exclude anti-dilutive stock options totaling 773,150 shares of common stock at a weighted average price of $24.99.

 

3.

Investments

 

As noted in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, all of the Company’s municipal bond investments are classified as held-to-maturity securities and reported at amortized cost pursuant to Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities (“ASC 320”) as the Company has the intent and ability to hold all security investments to maturity.

 

Below is a summary of the amortized cost and estimated market values of the Company’s investment securities as of June 30, 2014, and December 31, 2013.

 

		June 30, 2014								December 31, 2013
		Amortized				Market				Amortized				Market
		Cost				Value				Cost				Value
		(Dollars in thousands)
Municipal bonds:
Current		$	4,602			$	4,635			$	5,196			$	5,264
Due from one through five years			17,228				18,158				17,636				18,527
Due from six through ten years			11,341				11,751				7,388				7,777
Due from eleven through twenty years			1,116				1,121				-				-
Total		$	34,287			$	35,665			$	30,220			$	31,568

 

 

The unrealized gains and losses on investment securities at June 30, 2014, and at December 31, 2013, were as follows:

 

		June 30, 2014								December 31, 2013
		Unrealized				Unrealized				Unrealized				Unrealized
		Gains				Losses				Gains				Losses
		(Dollars in thousands)
Municipal bonds		$	1,385			$	(7	)		$	1,348			$	-

 

The estimated market values provided are level 2 valuations as defined by ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). The Company reviewed its portfolio of investments as of June 30, 2014, and determined that no other-than-temporary market value impairment exists.

 

4.

Intangible Assets

 

The Company’s indefinite-lived and amortizable intangible assets as recorded in the Consolidated Condensed Balance Sheets (Unaudited) consisted of the following as of June 30, 2014:

 

						June 30, 2014
		Weighted				Gross
		Average				Carrying				Accumulated
		Life (Yrs)				Amount				Amortization				Net
						(Dollars in thousands)
Indefinite-lived intangible assets:
Goodwill						$	11,112			$	-			$	11,112
Trademarks							34,748				-				34,748
Total indefinite-lived intangible assets						$	45,860			$	-			$	45,860
Amortizable intangible assets:
Non-compete agreement			5			$	200			$	(133	)		$	67
Customer relationships			15				3,500				(778	)			2,722
Total amortizable intangible assets						$	3,700			$	(911	)		$	2,789

 

The Company’s indefinite-lived and amortizable intangible assets as recorded in the Consolidated Condensed Balance Sheets (Unaudited) consisted of the following as of December 31, 2013:

 

						December 31, 2013
		Weighted				Gross
		Average				Carrying				Accumulated
		Life (Yrs)				Amount				Amortization				Net
						(Dollars in thousands)
Indefinite-lived intangible assets:
Goodwill						$	11,112			$	-			$	11,112
Trademarks							34,748				-				34,748
Total indefinite-lived intangible assets						$	45,860			$	-			$	45,860
Amortizable intangible assets:
Non-compete agreement			5			$	200			$	(113	)		$	87
Customer relationships			15				3,500				(661	)			2,839
Total amortizable intangible assets						$	3,700			$	(774	)		$	2,926

 

The Company’s amortizable intangible assets are included within other assets in the Consolidated Condensed Balance Sheets (Unaudited).

 

 

5.

Segment Information

 

The Company has two reportable segments: North American wholesale operations (“wholesale”) and North American retail operations (“retail”). The chief operating decision maker, the Company’s Chief Executive Officer, evaluates the performance of its segments based on earnings from operations and accordingly, interest income or expense, other income or expense, and income taxes are not allocated to the segments. The “other” category in the tables below includes the Company’s wholesale and retail operations in Australia, South Africa, Asia Pacific and Europe, which do not meet the criteria for separate reportable segment classification. Summarized segment data for the three and six months ended June 30, 2014 and 2013, was as follows:

 

Three Months Ended
June 30,		Wholesale				Retail				Other				Total
		(Dollars in thousands)
2014
Product sales		$	44,106			$	5,276			$	12,834			$	62,216
Licensing revenues			647				-				-				647
Net sales		$	44,753			$	5,276			$	12,834			$	62,863
Earnings from operations		$	1,739			$	563			$	1,085			$	3,387
2013
Product sales		$	46,858			$	5,383			$	12,174			$	64,415
Licensing revenues			626				-				-				626
Net sales		$	47,484			$	5,383			$	12,174			$	65,041
Earnings from operations		$	2,179			$	584			$	917			$	3,680

 

Six Months Ended
June 30,		Wholesale				Retail				Other				Total
		(Dollars in thousands)
2014
Product sales		$	100,167			$	10,482			$	25,847			$	136,496
Licensing revenues			1,296				-				-				1,296
Net sales		$	101,463			$	10,482			$	25,847			$	137,792
Earnings from operations		$	5,308			$	980			$	1,969			$	8,257
2013
Product sales		$	101,507			$	11,131			$	24,773			$	137,411
Licensing revenues			1,220				-				-				1,220
Net sales		$	102,727			$	11,131			$	24,773			$	138,631
Earnings from operations		$	5,911			$	1,026			$	1,431			$	8,368

 

6.

Employee Retirement Plans

 

The components of the Company’s net pension expense were as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		(Dollars in thousands)
Benefits earned during the period		$	240			$	447			$	631			$	832
Interest cost on projected benefit obligation			630				608				1,292				1,186
Expected return on plan assets			(598	)			(525	)			(1,171	)			(1,044	)
Net amortization and deferral			156				441				354				822
Net pension expense		$	428			$	971			$	1,106			$	1,796

 

7.

Stock-Based Compensation Plans

 

During the three and six months ended June 30, 2014, the Company recognized approximately $338,000 and $676,000, respectively, of compensation expense associated with stock option and restricted stock awards granted in years 2010 through 2013. During the three and six months ended June 30, 2013, the Company recognized approximately $317,000 and $633,000, respectively, of compensation expense associated with stock option and restricted stock awards granted in years 2009 through 2012.

 

 

The following table summarizes the stock option activity under the Company’s plans for the six-month period ended June 30, 2014:

 

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Shares				Price				Term (Years)				Value*
Outstanding at December 31, 2013			1,260,866			$	24.41
Issued			-			$	-
Exercised			(31,875	)		$	19.08
Forfeited or expired			(4,450	)		$	25.55
Outstanding at June 30, 2014			1,224,541			$	24.54				3.3			$	3,870,000
Exercisable at June 30, 2014			549,206			$	22.58				1.8			$	2,653,000

 

* The aggregate intrinsic value of outstanding and exercisable stock options is defined as the difference between the market value of the Company's stock on June 30, 2014, the last trading day of the quarter, of $27.41 and the exercise price multiplied by the number of in-the-money outstanding and exercisable stock options.

 

The following table summarizes the Company’s stock option activity for the three and six months ended June 30, 2014 and 2013:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		(Dollars in thousands)
Total intrinsic value of stock options exercised		$	59			$	111			$	96			$	1,166
Cash received from stock option exercises		$	443			$	329			$	608			$	2,828
Income tax benefit from the exercise of stock options		$	24			$	44			$	37			$	455

 

The following table summarizes the Company’s restricted stock award activity for six-month period ended June 30, 2014:

 

										Weighted
						Weighted				Average
		Shares of				Average				Remaining				Aggregate
		Restricted				Grant Date				Contractual				Intrinsic
		Stock				Fair Value				Term (Years)				Value*
Non-vested at December 31, 2013			47,500			$	25.86
Issued			-				-
Vested			-				-
Forfeited			-				-
Non-vested at June 30, 2014			47,500			$	25.86				2.5			$	1,302,000

 

* The aggregate intrinsic value of non-vested restricted stock was calculated using the market value of the Company's stock on June 30, 2014, the last trading day of the quarter, of $27.41 multiplied by the number of non-vested restricted shares outstanding.

 

8.

Short-Term Borrowings

 

At June 30, 2014, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 5, 2014. The line of credit bears interest at LIBOR plus 0.75%. At June 30, 2014, outstanding borrowings were approximately $10.8 million at an interest rate of 0.90%. The highest balance on the line of credit during the quarter was approximately $12.2 million.

 

 

9.

Contingent Consideration

 

Contingent consideration is comprised of two contingent payments that the Company is obligated to pay the former shareholders of The Combs Company (“Bogs”) related to the Company’s acquisition of Bogs in 2011. The estimate of contingent consideration is formula-driven and is based on Bogs achieving certain levels of gross margin dollars between January 1, 2011, and December 31, 2015. The first contingent payment was due in 2013 and was paid on March 28, 2013, in the amount of $1,270,000. The second payment is due in March 2016. In accordance with ASC 805, Business Combinations (“ASC 805”), the Company remeasures its estimate of the fair value of the contingent payments at each reporting date. The change in fair value is recognized in earnings.

 

The Company’s estimate of the fair value of the contingent payments as recorded in the Consolidated Condensed Balance Sheets (Unaudited) was approximately $5.1 million as of June 30, 2014, and December 31, 2013. The balance was recorded within other long-term liabilities in the Consolidated Condensed Balance Sheets (Unaudited).

 

The following table summarizes the activity during 2014 related to the contingent payments as recorded in the Consolidated Condensed Statements of Earnings and Comprehensive Income (Unaudited) (dollars in thousands):

 

		2014
Beginning balance, December 31, 2013		$	5,064
Interest expense			26
Ending balance, June 30, 2014		$	5,090

 

The fair value measurement of the contingent consideration is based on significant inputs not observed in the market and thus represents a level 3 valuation as defined by ASC 820.

 

10.

Financial Instruments

 

At June 30, 2014, the Company had forward exchange contracts outstanding to sell $14.0 million Canadian dollars at a price of approximately $12.6 million U.S. dollars. Additionally, the Company’s majority-owned subsidiary, Florsheim Australia, had forward exchange contracts outstanding to buy $6.6 million U.S. dollars at a price of approximately $7.3 million Australian dollars. Based on quarter-end exchange rates, there were no significant gains or losses on the outstanding contracts.

 

11.

Comprehensive Income

 

Comprehensive income for the three and six months ended June 30, 2014 and 2013, was as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		(Dollars in thousands)
Net earnings		$	2,501			$	2,265			$	5,751			$	5,390
Foreign currency translation adjustments			546				(1,551	)			630				(2,027	)
Pension liability, net of tax of $61, $172, $138, and $320, respectively			96				268				216				501
Total comprehensive income		$	3,143			$	982			$	6,597			$	3,864

 

The components of accumulated other comprehensive loss as recorded on the Consolidated Condensed Balance Sheets (Unaudited) were as follows:

 

		June 30,				December 31,
		2014				2013
		(Dollars in thousands)
Foreign currency translation adjustments		$	(542	)		$	(934	)
Pension liability, net of tax			(8,272	)			(8,488	)
Total accumulated other comprehensive loss		$	(8,814	)		$	(9,422	)

 

 

The following presents a tabular disclosure about changes in accumulated other comprehensive loss during the six months ended June 30, 2014:

 

		Foreign Currency Translation Adjustments				Defined Benefit Pension Items				Total
Beginning Balance, December 31, 2013		$	(934	)		$	(8,488	)		$	(9,422	)
Other comprehensive income before reclassifications			392				-				392
Amounts reclassified from accumulated other comprehensive loss			-				216				216
Net current period other comprehensive income			392				216				608
Ending Balance, June 30, 2014		$	(542	)		$	(8,272	)		$	(8,814	)

 

The following presents a tabular disclosure about reclassification adjustments out of accumulated other comprehensive loss during the six months ended June 30, 2014:

 

		Amounts reclassified from accumulated other comprehensive loss for the six months ended June 30, 2014				Affected line item in the statement where net income is presented
Amortization of defined benefit pension items
Prior service cost		$	(55	)			(1)
Actuarial losses			409				(1)
Total before tax			354
Tax benefit			(138	)
Net of tax		$	216

 

(1)

These amounts were included in the computation of net periodic pension cost. See Note 7 for additional details.

 

12.

Equity

 

A reconciliation of the Company’s equity for the six months ended June 30, 2014, is as follows:

 

														Accumulated
						Capital in								Other
		Common				Excess of				Reinvested				Comprehensive				Noncontrolling
		Stock				Par Value				Earnings				Loss				Interest
		(Dollars in thousands)
Balance, December 31, 2013		$	10,876			$	31,729			$	156,983			$	(9,422	)		$	6,826
Net earnings			-				-				5,412				-				339
Foreign currency translation  adjustments			-				-				-				392				238
Pension liability adjustment, net of tax			-				-				-				216				-
Cash dividends declared			-				-				(4,023	)			-				-
Stock options exercised			32				576				-				-				-
Stock-based compensation expense			-				676				-				-				-
Income tax benefit from stock options exercised			-				37				-				-				-
Shares purchased and retired			(48	)			-				(1,201	)			-				-
Balance, June 30, 2014		$	10,860			$	33,018			$	157,171			$	(8,814	)		$	7,403

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

FORWARD-LOOKING STATEMENTS

 

This report contains certain forward-looking statements with respect to the Company’s outlook for the future. These statements represent the Company's reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially. The reader is cautioned that these forward-looking statements are subject to a number of risks, uncertainties or other factors that may cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to, the risk factors described under Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

GENERAL

 

The Company designs and markets quality and innovative footwear for men, women and children under a portfolio of well-recognized brand names including: “Florsheim,” “Nunn Bush,” “Stacy Adams,” “BOGS,” “Rafters” and “Umi.” Inventory is purchased from third-party overseas manufacturers. The majority of foreign-sourced purchases are denominated in U.S. dollars.

 

The Company has two reportable segments, North American wholesale operations (“wholesale”) and North American retail operations (“retail”). In the wholesale segment, the Company’s products are sold to leading footwear, department, and specialty stores, primarily in the United States and Canada. The Company also has licensing agreements with third parties who sell its branded apparel, accessories and specialty footwear in the United States, as well as its footwear in Mexico and certain markets overseas. Licensing revenues are included in the Company’s wholesale segment. The Company’s retail segment consisted of 17 Company-owned retail stores in the United States and an internet business as of June 30, 2014. Sales in retail outlets are made directly to consumers by Company employees.

 

The Company’s “other” operations include the Company’s wholesale and retail businesses in Australia, South Africa, Asia Pacific (collectively, “Florsheim Australia”) and Europe (“Florsheim Europe”). The majority of the Company’s operations are in the United States, and its results are primarily affected by the economic conditions and the retail environment in the United States.

 

EXECUTIVE OVERVIEW

 

Second Quarter Highlights

 

Consolidated net sales for the second quarter of 2014 were $62.9 million, down 3% from last year’s second quarter net sales of $65.0 million. Earnings from operations were $3.4 million this quarter, a decrease of 8% compared to $3.7 million in 2013. Consolidated net earnings attributable to Weyco Group, Inc. and diluted earnings per share were flat at $2.2 million and $0.20 per share, respectively, for the second quarters of both 2014 and 2013.

 

The majority of the decrease in consolidated net sales came from the Company’s wholesale segment. Wholesale net sales decreased $2.7 million this quarter, compared to the same period last year. This decrease was primarily due to lower sales of the Nunn Bush and Florsheim brands, partially offset by higher sales of the BOGS brand.

 

Consolidated earnings from operations decreased $300,000 for the quarter. Earnings from operations in the Company’s wholesale and retail segments were down for the quarter, however, Florsheim Australia’s earnings from operations increased due to improved performance of its retail businesses.

 

Year-to-Date Highlights

 

Consolidated net sales for the first half of 2014 were $137.8 million, down 1% from net sales of $138.6 million in the first half of 2013. Earnings from operations were $8.3 million in the first six months of 2014, a decrease of 1% as compared to $8.4 million in 2013. Consolidated net earnings attributable to Weyco Group, Inc. and diluted earnings per share were flat at $5.4 million and $0.50 per share, respectively, for the six month periods ended June 30, 2014 and 2013.

 

The majority of the decrease in consolidated net sales for the six months ended June 30, 2014, came from Company’s wholesale segment. Wholesale net sales decreased $1.3 million in the first six months of 2014, compared to the same period last year. This decrease was primarily due to lower sales of the Nunn Bush, Stacy Adams and Florsheim brands, partially offset by higher sales of the BOGS brand.

 

 

Consolidated earnings from operations decreased $100,000 for the six months ended June 30, 2014. Earnings from operations in the Company’s wholesale and retail segments were down for the year-to-date period, however, Florsheim Australia’s earnings from operations increased due to improved performance of its retail businesses.

 

Financial Position Highlights

 

At June 30, 2014, cash and marketable securities totaled $45.5 million and outstanding debt totaled $10.8 million. At December 31, 2013, cash and marketable securities totaled $46.2 million and outstanding debt totaled $12.0 million. The Company’s main source of cash for the first six months of 2014 was from operations. The Company’s main uses of cash during the year-to-date period were for payments of cash dividends and purchases of marketable securities.

 

SEGMENT ANALYSIS

 

Net sales and earnings from operations for the Company’s segments in the three and six months ended June 30, 2014 and 2013, were as follows:

 

		Three Months Ended June 30,								%				Six Months Ended June 30,								%
		2014				2013				Change				2014				2013				Change
		(Dollars in thousands)
Net Sales
North American Wholesale		$	44,753			$	47,484				-6%			$	101,463			$	102,727				-1%
North American Retail			5,276				5,383				-2%				10,482				11,131				-6%
Other			12,834				12,174				5%				25,847				24,773				4%
Total		$	62,863			$	65,041				-3%			$	137,792			$	138,631				-1%
Earnings from Operations
North American Wholesale		$	1,739			$	2,179				-20%			$	5,308			$	5,911				-10%
North American Retail			563				584				-4%				980				1,026				-4%
Other			1,085				917				18%				1,969				1,431				38%
Total		$	3,387			$	3,680				-8%			$	8,257			$	8,368				-1%

 

 

North American Wholesale Segment

 

Net Sales

 

Net sales in the Company’s North American wholesale segment for the three and six months ended June 30, 2014 and 2013, were as follows:

 

North American Wholesale Segment Net Sales

 

		Three Months Ended June 30,								%				Six Months Ended June 30,								%
		2014				2013				Change				2014				2013				Change
		(Dollars in thousands)												(Dollars in thousands)
North American Net Sales
Stacy Adams		$	13,498			$	13,484				0%			$	31,259			$	32,200				-3%
Nunn Bush			14,112				17,132				-18%				30,724				33,267				-8%
Florsheim			11,436				12,406				-8%				24,434				24,893				-2%
BOGS/Rafters			4,405				3,245				36%				12,172				9,548				27%
Umi			655				591				11%				1,578				1,599				-1%
Total North American Wholesale		$	44,106			$	46,858				-6%			$	100,167			$	101,507				-1%
Licensing			647				626				3%				1,296				1,220				6%
Total North American Wholesale Segment		$	44,753			$	47,484							$	101,463			$	102,727

 

Stacy Adams year-to-date net sales were down due mainly to lower sales volumes with department stores and national shoe chains. The decreases in Nunn Bush and Florsheim second quarter and year-to-date net sales were primarily due to lower sales volumes with department stores and off-price retailers. BOGS net sales for the quarter and year-to-date periods were up across all major distribution categories. In general, BOGS first quarter sales increased due to higher sales of winter boots and BOGS second quarter sales were up due to higher sales of rain boots. Based on increased backlogs as of June 30, 2014 compared to the same date last year, management is anticipating continued growth in sales of BOGS products during the second half of 2014.

 

Licensing revenues consist of royalties earned on the sales of branded apparel, accessories and specialty footwear in the United States and on branded footwear in Mexico and certain overseas markets.

 

Earnings from Operations

 

Earnings from operations in the North American wholesale segment were $1.7 million in the second quarter of 2014, compared to $2.2 million in the second quarter of 2013. Wholesale gross earnings were $13.6 million, or 30.5% of net sales, in the second quarter of 2014, compared to $14.2 million, or 29.9% of net sales, in last year’s second quarter. The decrease in wholesale earnings from operations for the quarter ended June 30, 2014, was due to lower sales partially offset by higher gross margins.

 

For the six months ended June 30, 2014, earnings from operations for the wholesale segment were $5.3 million, down from $5.9 million in the same period last year. Wholesale gross earnings were $30.9 million, or 30.4% of net sales, for the six months ended June 30, 2014, compared to $31.3 million, or 30.5% of net sales, in the same period last year. The decrease in wholesale earnings from operations for the year-to-date period was mainly due to lower sales.

 

The Company’s gross margins for the wholesale segment improved in the second quarter, and were relatively flat for the year-to-date period, compared to the same periods last year. The Company continues to face upward cost pressures, primarily due to increasing labor and material prices, however, the Company has selectively raised its wholesale prices to offset the effect of these increasing costs. Overall, the Company expects wholesale gross margins to remain flat or slightly improve in the second half of 2014.

 

The Company’s cost of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs). Distribution costs were $2.6 million for each of the three month periods ended June 30, 2014 and 2013. For the six month periods ended June 30, 2014 and 2013, distribution costs were $5.4 million and $5.5 million, respectively. These costs were included in selling and administrative expenses. The Company’s gross earnings may not be comparable to other companies, as some companies may include distribution costs in cost of sales.

 

 

North American wholesale segment selling and administrative expenses include, and are primarily related to, distribution costs, salaries and commissions, advertising costs, employee benefit costs and depreciation. As a percent of net sales, wholesale selling and administrative expenses were 27% this quarter compared with 26% in the same quarter last year. For the six months ended June 30, wholesale selling and administrative expenses were 26% of net sales in 2014 and 25% of net sales in 2013.

 

North American Retail Segment

 

Net Sales

 

Net sales in the Company’s North American retail segment decreased $107,000, or 2%, in the second quarter of 2014, compared to the second quarter of 2013 and decreased $649,000, or 6%, for the six months ended June 30, 2014, compared to the same period last year. There were two fewer domestic retail stores at June 30, 2014, than at June 30, 2013, as the Company has been closing unprofitable stores. Same store sales were up 4% for the quarter and 2% for the first half of 2014, as compared to the same periods in 2013, due mainly to increases in the Company’s internet business.

 

Earnings from Operations

 

Retail earnings from operations decreased by $21,000 and $46,000 for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. Gross earnings as a percent of net sales were flat at 65.4% in the second quarters of 2014 and 2013. For the six months ended June 30, retail gross earnings as a percent of net sales were 65.3% in 2014, compared to 65.2% in 2013.

 

Selling and administrative expenses for the retail segment include, and are primarily related to, rent and occupancy costs, employee costs and depreciation. Selling and administrative expenses as a percent of net sales were flat at 55% and 56%, respectively, for the three and six month periods ended June 30, 2014, compared to the same periods last year.

 

Other

 

The Company’s other net sales were $12.8 million in the second quarter of 2014, up 5% as compared to $12.2 million in 2013. The majority of the Company’s other net sales are generated by Florsheim Australia. Florsheim Australia’s net sales were up 3% for the quarter; however, in local currency, its net sales were up 10%. This increase was primarily due to higher sales volumes in its retail businesses, where same store sales were up 17% for the quarter. The increase was only 3% in U.S. dollars due to the weaker Australian dollar relative to the U.S. dollar in 2014. Florsheim Europe’s net sales were up 26% for the quarter due to higher wholesale sales.

 

For the six months ended June 30, 2014, other net sales increased 4% to $25.8 million, from $24.8 million in the same period last year. This increase was primarily due to higher net sales in Florsheim Europe’s wholesale business, where sales were up 15%, and at Florsheim Australia, where sales were up 2% for the year-to-date period. In local currency, Florsheim Australia’s net sales were up 13% for the first six months of 2014, due to higher sales volumes in both its retail businesses, where same store sales were up 18%, and its wholesale businesses, where sales were up 6%. The increase in Florsheim Australia’s net sales was only 2% in U.S. dollars due to the weaker Australian dollar relative to the U.S. dollar in 2014.

 

Collectively, the operating earnings of the Company’s other businesses were $1.1 million this quarter, up 18% as compared to $917,000 in the second quarter of 2013. This increase was primarily due to increased sales. For the six months ended June 30, 2014, operating earnings of the Company’s other businesses were $2.0 million, up 38% as compared to $1.4 million in the same period last year. This increase was primarily due to increased sales and lower selling and administrative expenses.

 

 

Other income and expense and taxes

 

Interest income for the quarter and six months ended June 30, 2014, was down approximately $80,000 and $203,000, respectively, compared to the same periods last year, due to lower average investment balances this year compared to last year. Interest expense for the three and six months ended June 30, 2014, was down approximately $83,000 and $168,000, respectively, compared to the same periods in 2013, due to lower average debt balances this year compared to last year.

 

Other income (expense) improved by approximately $613,000 and $587,000, respectively, for the quarter and six months ended June 30, 2014, compared to the same periods last year. Last year’s other expense included foreign exchange losses resulting from the revaluation of intercompany loans between the Company’s North American wholesale segment and Florsheim Australia. This year the Australian dollar has stabilized against the U.S. dollar, which resulted in insignificant foreign exchange gains.

 

The Company’s effective tax rate for the quarter ended June 30, 2014, was 33% as compared to 34% for the same period in 2013. The effective tax rate for the six months ended June 30 was 34% in 2014 and 35% in 2013.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s primary sources of liquidity are its cash, short-term marketable securities and revolving line of credit. During the first six months of 2014, the Company generated $7.8 million of cash from operating activities compared with $15.9 million in the same period of 2013. The decrease between years was primarily due to changes in operating assets and liabilities, principally inventory. The Company has been increasing its BOGS inventory levels in order to accommodate expected sales growth in the second half of 2014. The third and fourth quarters constitute the main selling season for BOGS products.

 

The Company paid $6.0 million of cash dividends in the first six months of 2014. No dividends were paid in the first half of 2013, as the Company accelerated the timing of two quarterly dividend payments into 2012. In addition, the dividends declared in the second quarter of 2014 were paid out on June 30, 2014. The dividends declared in the second quarter of 2013 were paid out on July 1, 2013.

 

The Company continues to repurchase its common stock under its share repurchase program when the Company believes market conditions are favorable. During the first half of 2014, the Company repurchased 48,224 shares at a total cost of $1.2 million. As of June 30, 2014, the Company had 580,251 shares available under its previously announced stock repurchase program. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” below for more information.

 

Capital expenditures totaled $725,000 in the first six months of 2014. Management estimates that annual capital expenditures for 2014 will be between $1.5 million and $2.5 million.

 

At June 30, 2014, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 5, 2014. The line of credit bears interest at LIBOR plus 0.75%. The Company repaid a net of $1.2 million on the line of credit during the first six months of 2014. At June 30, 2014, outstanding borrowings were $10.8 million at an interest rate of 0.90%. The highest balance on the line of credit during the quarter was approximately $12.2 million.

 

The Company made a contingent consideration payment of $1,270,000 in the first quarter of 2013. A second contingent consideration payment is due to the former shareholders of Bogs in March 2016. See Note 10 of the accompanying consolidated condensed financial statements.

 

At June 30, 2014, approximately $3.0 million of cash and cash equivalents was held by the Company’s foreign subsidiaries.

 

The Company will continue to evaluate the best uses for its available liquidity, including, among other uses, capital expenditures, continued stock repurchases and additional acquisitions.

 

The Company believes that available cash and marketable securities, cash provided by operations, and available borrowing facilities will provide adequate support for the cash needs of the business for at least one year, although there can be no assurances.

 

 

COMMITMENTS

 

There were no material changes to the Company’s contractual obligations during the six months ended June 30, 2014, from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes from those reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 4. Controls and Procedures.

 

The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company required to be included in the Company’s periodic filings under the Exchange Act. Such officers have also concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in accumulating and communicating information in a timely manner, allowing timely decisions regarding required disclosures.

 

There have been no significant changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

 

None

 

Item 1A. Risk Factors.

 

There have been no material changes to the risk factors affecting the Company from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

The table below presents information pursuant to Item 703(a) of Regulation S-K regarding the purchase of the Company’s common stock by the Company in the three-month period ended June 30, 2014.

 

										Total Number of				Maximum Number
		Total				Average				Shares Purchased as				of Shares
		Number				Price				Part of the Publicly				that May Yet Be
		of Shares				Paid				Announced				Purchased Under
Period		Purchased				Per Share				Program				the Program (1)
4/1/2014 - 4/30/2014			310			$	25.03				310				624,883
5/1/2014 - 5/31/2014			32,615			$	25.71				32,615				592,268
6/1/2014 - 6/30/2014			12,017			$	26.68				12,017				580,251
Total			44,942			$	25.97				44,942

 

(1)

In April 1998, the Company's Board of Directors first authorized a stock repurchase program to repurchase 1,500,000 shares of its common stock in open market transactions at prevailing prices. In April 2000 and again in May 2001, the Company's Board of Directors extended the stock repurchase program to cover the repurchase of 1,500,000 additional shares. In February 2009, the Board of Directors extended the stock repurchase program to cover the repurchase of 1,000,000 additional shares, bringing the total authorized since inception to 5,500,000 shares.

 

Item 6. Exhibits.

 

See the Exhibit Index included herewith for a listing of exhibits.

 

 

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.

 

	WEYCO GROUP, INC.
Dated: August 7, 2014	/s/ John F. Wittkowske
	John F. Wittkowske
	Senior Vice President and Chief Financial Officer

 

 

WEYCO GROUP, INC.

(THE “REGISTRANT”)

(COMMISSION FILE NO. 0-9068)

 

EXHIBIT INDEX

TO

CURRENT REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED June 30, 2014

 

Exhibit		Description		Incorporation Herein By Reference To		Filed Herewith
31.1		Certification of Chief Executive Officer				X
31.2		Certification of Chief Financial Officer				X
32		Section 906 Certification of Chief Executive Officer and Chief Financial Officer				X
101		The following financial information from Weyco Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets; (ii) Consolidated Condensed Statements of Earnings and Comprehensive Income; (iii) Consolidated Condensed Statements of Cash Flows; and (iv) Notes to Consolidated Condensed Financial Statements, furnished herewith				X