WEYCO GROUP INC - FORM 10-Q - November 8, 2016

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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 September 30, 2016

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 the 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 October 31, 2016, there were 10,449,803 shares of common stock outstanding.

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

The following unaudited consolidated condensed financial statements have been prepared by Weyco Group, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s latest annual report on Form 10-K.

 

 1 

 

 

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

 

   September 30,   December 31, 
   2016   2015 
   (Dollars in thousands) 
ASSETS:          
Cash and cash equivalents  $14,840   $17,926 
Marketable securities, at amortized cost   2,778    4,522 
Accounts receivable, net   57,662    54,009 
Accrued income tax receivable   810    - 
Inventories   70,508    97,184 
Prepaid expenses and other current assets   3,586    5,835 
Total current assets   150,184    179,476 
           
Marketable securities, at amortized cost   21,783    20,685 
Property, plant and equipment, net   34,011    31,833 
Goodwill   11,112    11,112 
Trademarks   34,748    34,748 
Other assets   22,776    21,143 
Total assets  $274,614   $298,997 
           
LIABILITIES AND EQUITY:          
Short-term borrowings  $22,810   $26,649 
Accounts payable   5,646    13,339 
Dividend payable   -    2,147 
Accrued liabilities   10,520    17,484 
Accrued income tax payable   -    31 
Deferred income tax liabilities   2,010    1,537 
Total current liabilities   40,986    61,187 
           
Deferred income tax liabilities   1,628    70 
Long-term pension liability   28,768    30,188 
Other long-term liabilities   2,500    2,823 
           
Equity:          
Common stock   10,467    10,767 
Capital in excess of par value   47,416    45,759 
Reinvested earnings   153,028    160,325 
Accumulated other comprehensive loss   (16,730)   (18,467)
Total Weyco Group, Inc. equity   194,181    198,384 
Noncontrolling interest   6,551    6,345 
Total equity   200,732    204,729 
Total liabilities and equity  $274,614   $298,997 

 

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

 

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WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (UNAUDITED)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
   (In thousands, except per share amounts) 
                 
Net sales  $79,069   $91,227   $214,836   $233,213 
Cost of sales   49,747    58,617    136,096    147,443 
Gross earnings   29,322    32,610    78,740    85,770 
                     
Selling and administrative expenses   21,992    23,474    66,023    67,516 
Earnings from operations   7,330    9,136    12,717    18,254 
                     
Interest income   190    221    584    717 
Interest expense   (61)   (67)   (228)   (97)
Other income (expense), net   113    (524)   422    (1,150)
                     
Earnings before provision for income taxes   7,572    8,766    13,495    17,724 
                     
Provision for income taxes   2,871    3,389    5,084    6,670 
                     
Net earnings   4,701    5,377    8,411    11,054 
                     
Net earnings (losses) attributable to noncontrolling interest   101    (149)   124    (145)
                     
Net earnings attributable to Weyco Group, Inc.  $4,600   $5,526   $8,287   $11,199 
                     
Weighted average shares outstanding                    
Basic   10,461    10,793    10,556    10,788 
Diluted   10,516    10,884    10,605    10,881 
                     
Earnings per share                    
Basic  $0.44   $0.51   $0.79   $1.04 
Diluted  $0.44   $0.51   $0.78   $1.03 
                     
Cash dividends declared (per share)  $0.21   $0.20   $0.62   $0.59 
                     
Comprehensive income  $5,218   $4,040   $10,400   $8,760 
                     
Comprehensive income (loss) attributable to noncontrolling interest   235    (562)   376    (846)
                     
Comprehensive income attributable to Weyco Group, Inc.  $4,983   $4,602   $10,024   $9,606 

 

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

 

 3 

 

 

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   Nine Months Ended September 30, 
   2016   2015 
   (Dollars in thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net earnings  $8,411   $11,054 
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities -          
Depreciation   2,708    2,700 
Amortization   288    334 
Bad debt expense   96    190 
Deferred income taxes   1,537    456 
Net foreign currency transaction (gains) losses   (389)   783 
Stock-based compensation   1,121    1,112 
Pension contributions   (2,400)   (2,633)
Pension expense   2,500    2,811 
Increase in cash surrender value of life insurance   (250)   (250)
Changes in operating assets and liabilities -          
Accounts receivable   (3,714)   (12,223)
Inventories   26,641    (23,844)
Prepaid expenses and other assets   800    4,122 
Accounts payable   (7,699)   (7,584)
Accrued liabilities and other   (1,023)   (4,807)
Accrued income taxes   (839)   553 
Net cash provided by (used for) operating activities   27,788    (27,226)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of marketable securities   (3,605)   (2,300)
Proceeds from maturities of marketable securities   4,190    6,305 
Life insurance premiums paid   (155)   (155)
Purchases of property, plant and equipment   (4,872)   (1,457)
Net cash (used for) provided by investing activities   (4,442)   2,393 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Cash dividends paid   (8,678)   (8,414)
Cash dividends paid to noncontrolling interest of subsidiary   (170)   - 
Shares purchased and retired   (9,368)   (4,760)
Proceeds from stock options exercised   585    2,696 
Payment of contingent consideration   (5,217)   - 
Proceeds from bank borrowings   91,729    127,253 
Repayments of bank borrowings   (95,568)   (90,684)
Income tax benefits from stock-based compensation   3    463 
Net cash (used for) provided by financing activities   (26,684)   26,554 
           
Effect of exchange rate changes on cash and cash equivalents   252    (320)
           
Net (decrease) increase in cash and cash equivalents  $(3,086)  $1,401 
           
CASH AND CASH EQUIVALENTS at beginning of period   17,926    12,499 
           
CASH AND CASH EQUIVALENTS at end of period  $14,840   $13,900 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
Income taxes paid, net of refunds  $4,083   $5,155 
Interest paid  $228   $97 

 

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

 

 4 

 

 

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. All such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2016, may not necessarily be 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 September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
   (In thousands, except per share amounts) 
Numerator:                    
Net earnings attributable to Weyco Group, Inc.  $4,600   $5,526   $8,287   $11,199 
                     
Denominator:                    
Basic weighted average shares outstanding   10,461    10,793    10,556    10,788 
Effect of dilutive securities:                    
Employee stock-based awards   55    91    49    93 
Diluted weighted average shares outstanding   10,516    10,884    10,605    10,881 
                     
Basic earnings per share  $0.44   $0.51   $0.79   $1.04 
                     
Diluted earnings per share  $0.44   $0.51   $0.78   $1.03 

 

Diluted weighted average shares outstanding for the three months ended September 30, 2016, exclude anti-dilutive stock options totaling 1,232,000 shares of common stock at a weighted average price of $26.14. Diluted weighted average shares outstanding for the nine months ended September 30, 2016, exclude anti-dilutive stock options totaling 924,161 shares of common stock at a weighted average price of $26.78. Diluted weighted average shares outstanding for the three months ended September 30, 2015, exclude anti-dilutive stock options totaling 644,600 shares of common stock at a weighted average price of $27.76. Diluted weighted average shares outstanding for the nine months ended September 30, 2015, exclude anti-dilutive stock options totaling 648,220 shares of common stock at a weighted average price of $27.76.

 

3.Investments

 

As noted in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, 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 320, Investments – Debt and Equity Securities as the Company has the intent and ability to hold all bond investments to maturity.

 

Below is a summary of the amortized cost and estimated market values of the Company’s investment securities as of September 30, 2016, and December 31, 2015.

 

   September 30, 2016   December 31, 2015 
   Amortized   Market   Amortized   Market 
   Cost   Value   Cost   Value 
   (Dollars in thousands) 
Municipal bonds:                    
Current  $2,778   $2,797   $4,522   $4,546 
Due from one through five years   13,808    14,412    12,395    13,057 
Due from six through ten years   7,501    7,970    6,929    7,217 
Due from eleven through twenty years   474    486    1,361    1,391 
Total  $24,561   $25,665   $25,207   $26,211 

 

The unrealized gains and losses on investment securities at September 30, 2016, and at December 31, 2015, were as follows:

 

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   September 30, 2016   December 31, 2015 
   Unrealized   Unrealized   Unrealized   Unrealized 
   Gains   Losses   Gains   Losses 
   (Dollars in thousands) 
Municipal bonds  $1,114   $(10)  $1,014   $(10)

 

The estimated market values provided are level 2 valuations as defined by Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”). The Company reviewed its portfolio of investments as of September 30, 2016 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 September 30, 2016:

 

       September 30, 2016 
   Weighted   Gross         
   Average   Carrying   Accumulated     
   Life (Years)   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   $(200)  $- 
Customer relationships   15    3,500    (1,303)   2,197 
Total amortizable intangible assets       $3,700   $(1,503)  $2,197 

 

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, 2015:

 

       December 31, 2015 
   Weighted   Gross         
   Average   Carrying   Accumulated     
   Life (Years)   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   $(193)  $7 
Customer relationships   15    3,500    (1,128)   2,372 
Total amortizable intangible assets       $3,700   $(1,321)  $2,379 

 

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

 

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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 the Company’s segments based on earnings from operations. Therefore, 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 nine months ended September 30, 2016 and 2015, was as follows:

 

Three Months Ended                
September 30,  Wholesale   Retail   Other   Total 
   (Dollars in thousands) 
2016                
Product sales  $61,645   $4,702   $12,197   $78,544 
Licensing revenues   525    -    -    525 
Net sales  $62,170   $4,702   $12,197   $79,069 
Earnings from operations  $6,286   $313   $731   $7,330 
                     
2015                    
Product sales  $73,695   $4,767   $11,858   $90,320 
Licensing revenues   907    -    -    907 
Net sales  $74,602   $4,767   $11,858   $91,227 
Earnings from operations  $8,156   $402   $578   $9,136 

 

Nine Months Ended                
September 30,  Wholesale   Retail   Other   Total 
   (Dollars in thousands) 
2016                
Product sales  $164,146   $14,508   $34,452   $213,106 
Licensing revenues   1,730    -    -    1,730 
Net sales  $165,876   $14,508   $34,452   $214,836 
Earnings from operations  $10,638   $787   $1,292   $12,717 
                     
2015                    
Product sales  $181,521   $14,707   $34,675   $230,903 
Licensing revenues   2,310    -    -    2,310 
Net sales  $183,831   $14,707   $34,675   $233,213 
Earnings from operations  $15,160   $1,163   $1,931   $18,254 

 

6.Employee Retirement Plans

 

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

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
   (Dollars in thousands) 
Benefits earned during the period  $409   $411   $1,228   $1,232 
Interest cost on projected benefit obligation   612    674    1,837    2,021 
Expected return on plan assets   (607)   (593)   (1,822)   (1,777)
Net amortization and deferral   419    445    1,257    1,335 
Net pension expense  $833   $937   $2,500   $2,811 

 

On September 15, 2016, the Weyco Group, Inc. Pension Plan was amended to offer an immediate pension payout either as a one-time lump sum or annuity payment to certain former employees who have not yet commenced benefits under the plan. Benefits would be calculated as of December 1, 2016, with lump sum payments being paid in December 2016 and annuity payments beginning January 1, 2017. This amendment will not have a material impact on the consolidated financial statements.

 

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7.Stock-Based Compensation Plans

 

During the three and nine months ended September 30, 2016, the Company recognized approximately $393,000 and $1,121,000 respectively, of compensation expense associated with stock option and restricted stock awards granted in years 2012 through 2016. During the three and nine months ended September 30, 2015, the Company recognized approximately $391,000 and $1,112,000, respectively, of compensation expense associated with stock option and restricted stock awards granted in years 2011 through 2015.

 

The following table summarizes the Company’s stock option activity for the nine-month period ended September 30, 2016:

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
       Exercise   Contractual   Intrinsic 
   Shares   Price   Term (Years)   Value* 
Outstanding at December 31, 2015   1,351,826   $26.09           
Granted   277,800   $25.51           
Exercised   (24,450)  $23.92           
Forfeited or expired   (9,200)  $26.67           
Outstanding at September 30, 2016   1,595,976   $26.02    3.8   $1,918,000 
Exercisable at September 30, 2016   725,269   $25.78    2.8   $1,452,000 

 

* The aggregate intrinsic value of outstanding and exercisable stock options is defined as the difference between the closing price of the Company's stock on September 30, 2016, the last trading day of the quarter, of $26.87 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 exercise activity for the three and nine months ended September 30, 2016 and 2015:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
   (Dollars in thousands) 
Total intrinsic value of stock options exercised  $14   $30   $87   $1,188 
Cash received from stock option exercises  $132   $184   $585   $2,696 
Income tax benefit from the exercise of stock options  $5   $12   $34   $463 

 

The following table summarizes the Company’s restricted stock award activity for the nine-month period ended September 30, 2016:

 

           Weighted     
       Weighted   Average     
   Shares of   Average   Remaining   Aggregate 
   Restricted   Grant Date   Contractual   Intrinsic 
   Stock   Fair Value   Term (Years)   Value* 
Non-vested at December 31, 2015   55,250   $26.45           
Issued   26,900    25.51           
Vested   (12,275)   26.41           
Forfeited   -    -           
Non-vested at September 30, 2016   69,875   $26.09    2.7   $1,878,000 

 

* The aggregate intrinsic value of non-vested restricted stock was calculated using the closing price of the Company's stock on September 30, 2016, the last trading day of the quarter, of $26.87 multiplied by the number of non-vested restricted shares outstanding.

 

8.Short-Term Borrowings

 

At September 30, 2016, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 4, 2016. The line of credit bears interest at LIBOR plus 0.75%. At September 30, 2016, outstanding borrowings were approximately $22.8 million at an interest rate of 1.3%. The highest balance on the line of credit during the quarter was approximately $23.5 million. The line of credit agreement was set to expire on November 4, 2016, but was renewed on the same terms for another one-year period, expiring November 3, 2017.

 

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9.Contingent Consideration

 

Contingent consideration was comprised of two contingent payments that the Company was 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 was formula-driven and was based on Bogs achieving certain levels of gross margin dollars between January 1, 2011, and December 31, 2015. The first earn-out payment was due in 2013 and was paid on March 28, 2013, in the amount of $1,270,000. The second earn-out payment was due in the first quarter of 2016 and was paid on March 23, 2016, in the amount of $5,217,000.

 

10.Financial Instruments

 

At September 30, 2016, the Company had foreign exchange contracts outstanding to sell $1.5 million Canadian dollars at a price of approximately $1.2 million U.S. dollars. Additionally, the Company’s majority-owned subsidiary, Florsheim Australia, had foreign exchange contracts outstanding to buy $5.2 million U.S. dollars at a price of approximately $6.8 million Australian dollars. Based on quarter-end exchange rates, there were no significant unrealized gains or losses on the outstanding contracts.

 

The Company determines the fair value of foreign exchange contracts based on the difference between the foreign currency contract rates and the widely available foreign currency rates as of the measurement date. The fair value measurements are based on observable market transactions, and thus represent a level 2 valuation as defined by ASC 820.

 

11.Comprehensive Income

 

Comprehensive income for the three and nine months ended September 30, 2016 and 2015, was as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
   (Dollars in thousands) 
Net earnings  $4,701   $5,377   $8,411   $11,054 
Foreign currency translation adjustments   261    (1,609)   1,222    (3,109)
Pension liability, net of tax of $163, $174, $490 and $520, respectively   256    272    767    815 
Total comprehensive income  $5,218   $4,040   $10,400   $8,760 

 

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

 

   September 30,   December 31, 
   2016   2015 
   (Dollars in thousands) 
Foreign currency translation adjustments  $(4,721)  $(5,691)
Pension liability, net of tax   (12,009)   (12,776)
Total accumulated other comprehensive loss  $(16,730)  $(18,467)

 

The following presents a tabular disclosure about changes in accumulated other comprehensive loss during the nine months ended September 30, 2016:

 

   Foreign
Currency
Translation
Adjustments		   Defined
Benefit
Pension
Items		   Total 
Beginning balance, December 31, 2015  $(5,691)  $(12,776)  $(18,467)
Other comprehensive income before reclassifications   970    -    970 
Amounts reclassified from accumulated other comprehensive loss   -    767    767 
Net current period other comprehensive income   970    767    1,737 
Ending balance, September 30, 2016  $(4,721)  $(12,009)  $(16,730)

 

 9 

 

 

The following presents a tabular disclosure about reclassification adjustments out of accumulated other comprehensive loss during the nine months ended September 30, 2016:

 

   Amounts reclassified
from accumulated other
comprehensive loss for
the nine months ended
September 30, 2016		   Affected line item in the
statement where net
income is presented		 
Amortization of defined benefit pension items          
Prior service cost  $(84)   (1)
Actuarial losses   1,341    (1)
Total before tax   1,257      
Tax benefit   (490)     
Net of tax  $767      

 

(1)These amounts were included in the computation of net periodic pension cost. See Note 6 for additional details.

 

12.Equity

 

A reconciliation of the Company’s equity for the nine months ended September 30, 2016, 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, 2015  $10,767   $45,759   $160,325   $(18,467)  $6,345 
                          
Net earnings   -    -    8,287    -    124 
Foreign currency translation adjustments   -    -    -    970    252 
Pension liability adjustment, net of tax   -    -    -    767    - 
Cash dividends declared   -    -    (6,568)   -    - 
Cash dividends paid to noncontrolling interest   -    -    -    -    (170)
Stock options exercised   25    560    -    -    - 
Issuance of restricted stock   27    (27)   -    -    - 
Stock-based compensation expense   -    1,121    -    -    - 
Income tax benefit from stock options exercised   -    3    -    -    - 
Shares purchased and retired   (352)   -    (9,016)   -    - 
                          
Balance, September 30, 2016  $10,467   $47,416   $153,028   $(16,730)  $6,551 

 

13.Subsequent Events

 

On November 7, 2016, the Board of Directors of the Company authorized the freezing of the Weyco Group, Inc. Pension Plan, whereby all benefit accruals, for all employees, would be frozen effective December 31, 2016. Management of the Company has not yet determined the impact of this freeze on the consolidated financial statements, although it is not expected to have a material adverse impact.

 

 10 

 

 

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. Such statements can be identified by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “should,” “will,” or variations of such words, and similar expressions. Forward-looking statements, by their nature, address matters that are, to varying degrees, uncertain. Therefore, 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, 2015.

 

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 13 Company-owned retail stores and an internet business in the United States as of September 30, 2016. 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

 

Third Quarter Highlights

 

Consolidated net sales for the third quarter of 2016 were $79.1 million, down 13% as compared to last year’s third quarter net sales of $91.2 million. Earnings from operations were $7.3 million this quarter, a decrease of 20% as compared to $9.1 million in the third quarter of 2015. Consolidated net earnings attributable to Weyco Group, Inc. were $4.6 million in the third quarter of 2016, down 17% as compared to $5.5 million in the same period last year. Diluted earnings per share were $0.44 in the third quarter of 2016 and $0.51 per share in the third quarter of 2015.

 

The majority of the decrease in consolidated net sales came from the Company’s wholesale segment. Wholesale net sales declined $12.4 million this quarter, compared to the same period one year ago. This decrease was primarily due to lower sales of the BOGS, Nunn Bush and Stacy Adams brands. Sales of the BOGS brand were down following last year’s mild winter in North America, while sales of the Nunn Bush and Stacy Adams brands were down due to a slowdown in consumer spending in the footwear and apparel segments this quarter. Sales in the Company’s retail segment were also down for the quarter, while sales in the Company’s other businesses improved due to higher sales at Florsheim Europe.

 

Consolidated earnings from operations decreased $1.8 million for the quarter, compared to the same period last year, mainly due to lower sales volumes in the Company’s North American wholesale segment.

 

 11 

 

 

Year-to-Date Highlights

 

Consolidated net sales for the first nine months of 2016 were $214.8 million, down 8% from last year’s year-to-date net sales of $233.2 million. Earnings from operations were $12.7 million in the first nine months of 2016, a decrease of 30% as compared to $18.3 million in the first nine months of 2015. Consolidated net earnings attributable to Weyco Group, Inc. were $8.3 million for the nine months ended September 30, 2016, down 26% as compared to $11.2 million in the same period last year. Diluted earnings per share to date in 2016 were $0.78, versus $1.03 per share in the same period of 2015.

 

The majority of the decrease in consolidated net sales came from the Company’s wholesale segment. Wholesale net sales decreased $18.0 million in the first nine months of 2016, compared to the same period last year, primarily due to lower sales of the BOGS and Nunn Bush brands. Sales in the Company’s retail segment and other operations were also down for the year-to-date period, compared to the same period of 2015.

 

Consolidated earnings from operations decreased $5.5 million for the nine months ended September 30, 2016, compared to the same period one year ago. The majority of the decrease came from the Company’s wholesale segment, due to lower sales volumes. Earnings from operations for the year-to-date period were also down in the Company’s retail segment and in its other businesses.

 

Financial Position Highlights

 

At September 30, 2016, cash and marketable securities totaled $39.4 million and outstanding debt totaled $22.8 million. At December 31, 2015, cash and marketable securities totaled $43.1 million and outstanding debt totaled $26.6 million. During the first nine months of 2016, the Company generated $27.8 million of cash from operations, mainly by reducing its inventory levels this year. The Company used funds to repurchase $9.4 million of Company stock, to pay $8.8 million in dividends, and to pay down $3.8 million on its revolving line of credit. In addition, the Company paid $5.2 million for the final earn-out payment related to the 2011 acquisition of Bogs and spent $4.9 million on capital expenditures.

 

SEGMENT ANALYSIS

 

Net sales and earnings from operations for the Company’s segments in the three and nine months ended September 30, 2016 and 2015, were as follows:

 

   Three Months Ended September 30,   %   Nine Months Ended September 30,   % 
   2016   2015   Change   2016   2015   Change 
   (Dollars in thousands) 
Net Sales                              
North American Wholesale  $62,170   $74,602    -17%  $165,876   $183,831    -10%
North American Retail   4,702    4,767    -1%   14,508    14,707    -1%
Other   12,197    11,858    3%   34,452    34,675    -1%
Total  $79,069   $91,227    -13%  $214,836   $233,213    -8%
                               
Earnings from Operations                              
North American Wholesale  $6,286   $8,156    -23%  $10,638   $15,160    -30%
North American Retail   313    402    -22%   787    1,163    -32%
Other   731    578    26%   1,292    1,931    -33%
Total  $7,330   $9,136    -20%  $12,717   $18,254    -30%

 

 12 

 

 

North American Wholesale Segment

 

Net Sales

 

Net sales in the Company’s North American wholesale segment for the three and nine months ended September 30, 2016 and 2015, were as follows:

 

North American Wholesale Segment Net Sales

 

   Three Months Ended September 30,   %   Nine Months Ended September 30,   % 
   2016   2015   Change   2016   2015   Change 
   (Dollars in thousands) 
North American Net Sales                              
Stacy Adams  $14,861   $15,761    -6%  $52,092   $51,370    1%
Nunn Bush   13,362    17,069    -22%   42,909    49,783    -14%
Florsheim   14,262    13,275    7%   38,513    37,028    4%
BOGS/Rafters   18,462    26,598    -31%   28,950    41,132    -30%
Umi   698    992    -30%   1,681    2,208    -24%
Total North American Wholesale  $61,645   $73,695    -16%  $164,145   $181,521    -10%
Licensing   525    907    -42%   1,731    2,310    -25%
Total North American Wholesale                              
Segment  $62,170   $74,602    -17%  $165,876   $183,831    -10%

 

Stacy Adams and Nunn Bush were both impacted by a slowdown in consumer spending in the footwear and apparel segments this quarter. Stacy Adams sales were down mainly with off-price retailers. For the quarter and year-to-date periods, Nunn Bush sales were down across a number of distribution categories, but most significantly, with mid-tier department stores. Mid-tier department stores are facing a challenging environment as consumer buying shifts to the internet. Net sales of the Florsheim brand were up for the quarter, mainly due to higher sales to national shoe chains. To date in 2016, Florsheim’s net sales were up due to higher sales to national shoe chains and department stores, partially offset by lower sales to international retailers. BOGS net sales were down for the quarter and first nine months of 2016, compared to the same periods last year. These decreases can largely be attributed to last year’s mild winter in North America, which caused many retailers to carry over unsold BOGS inventory into the current year; this not only impacted shipments this year, but it also caused retailers to be conservative with their orders for Fall of 2016.

 

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. The decrease in licensing revenues for the third quarter and to date through September 30th resulted mainly from licensee transitions that occurred during 2016.

 

Earnings from Operations

 

Earnings from operations in the North American wholesale segment were $6.3 million in the third quarter of 2016, down 23% as compared to $8.2 million in the third quarter of 2015. For the nine months ended September 30, 2016, earnings from operations for the wholesale segment were $10.6 million, down 30% as compared to $15.2 million in the same period last year. The decreases for the quarter and year-to-date periods were the result of lower sales volumes.

 

Wholesale gross earnings were 32.2% of net sales in the third quarter of 2016 compared to 31.4% of net sales in last year’s third quarter. The increase this quarter mainly resulted from the Company’s ongoing effort to increase selling prices on select products. For the year-to-date period, wholesale gross earnings were flat at 31.2% of net sales in both 2016 and 2015. Gross margins in the U.S. were up slightly due to increased selling prices on select products, as described above. This increase was partially offset by lower gross margins in Canada. Gross margins in Canada continue to be affected by the weaker Canadian dollar relative to the U.S. dollar, as inventory is purchased in U.S. dollars. In 2015, gains recorded on favorable foreign exchange contacts partially offset the impact of the weakening Canadian dollar. In 2016, however, no significant gains were recorded on such contracts.

 

The Company’s cost of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs). Distribution costs were $2.8 million for the third quarter of 2016 versus $2.9 million for the same period of 2015. For the nine-month periods ended September 30, 2016 and 2015, distribution costs were $8.8 million and $8.3 million, respectively. The increase for the year-to-date period was primarily due to additional storage costs incurred in the first half of 2016. Distribution 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.

 

 13 

 

 

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 22% and 21% for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, wholesale selling and administrative expenses were 25% of net sales in 2016 and 23% of net sales in 2015. The increases in selling and administrative expenses as a percent of sales for the quarter and year-to-date periods was primarily due to lower sales volumes in 2016, as many of the Company’s selling and administrative costs are fixed in nature and do not correlate with changes in sales volume.

 

North American Retail Segment

 

Net Sales

 

Net sales in the Company’s North American retail segment declined $65,000 and $199,000, in the third quarter and for the nine months ended September 30, 2016, respectively. Same store sales, which include sales of both the U.S. internet business and brick and mortar stores, increased 2% for the quarter and increased 3% for the year-to-date period, as compared to the same periods in 2015. The increases in same store sales for both periods were due to higher sales in the Company’s internet business.

 

Earnings from Operations

 

Retail earnings from operations decreased $89,000 and $376,000 for the three and nine months ended September 30, 2016, respectively, compared to the same periods in 2015. For the quarter, the decrease in earnings from operations was mainly due to lower operating earnings in the Company’s U.S. internet business resulting from higher marketing costs. For the year-to-date period, the decrease in earnings from operations was due to lower net sales at the Company’s brick and mortar stores and higher operating costs in the internet business. Gross earnings as a percent of net sales were 65.5% in the third quarter of 2016 compared to 66.0% in the third quarter of 2015. For the nine months ended September 30, retail gross earnings as a percent of net sales were 65.1% in 2016 and 66.0% in 2015.

 

Selling and administrative expenses for the retail segment include, and are primarily related to, rent and occupancy costs, employee costs, advertising expense and freight. Selling and administrative expenses as a percent of net sales were 59% and 58% for the three-month periods ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, selling and administrative expenses as a percent of net sales were 60% in 2016 and 58% in 2015.

 

Other

 

The Company’s other net sales were $12.2 million in the third quarter of 2016, up 3% as compared to $11.9 million in 2015. This increase was due to higher net sales at Florsheim Europe. Florsheim Australia’s net sales were flat for the quarter. In local currency, Florsheim Australia’s net sales were down 4% for the quarter. Earnings from operations of Florsheim Australia and Florsheim Europe were $731,000 in the third quarter of 2016, up 26% as compared to $578,000 in the same period last year. The increase between years was driven by higher sales volumes and operating earnings at Florsheim Europe.

 

For the nine months ended September 30, 2016, other net sales were $34.5 million, down 1% from $34.7 million in the same period last year. This decrease was due to lower net sales at Florsheim Australia, largely offset by increased sales at Florsheim Europe. Florsheim Australia’s sales through September 30th were down 4% in 2016, compared to the same period last year. In local currency, Florsheim Australia’s net sales were down 1% for the year-to-date period. Earnings from operations of Florsheim Australia and Florsheim Europe were $1.3 million in the first nine months of 2016, down 33% as compared to $1.9 million in the same period last year. This decrease was largely due to lower sales and gross margins at Florsheim Australia. Florsheim Australia purchases its inventory in U.S. dollars, and its gross margins have been negatively impacted by the weakness of its local currency compared to the U.S. dollar. In 2015, gains recorded on favorable foreign exchange contacts partially offset the impact of the weakening Australian dollar. In 2016, however, no significant gains were recorded on such contracts.

 

 14 

 

 

Other income and expense

 

Interest income for the quarter and nine months ended September 30, 2016, was down $31,000 and $133,000, respectively, compared to the same periods last year, due to lower average investment balances this year compared to last year. For the three months ended September 30, 2016, interest expense decreased $6,000, compared to the same period last year, due to a lower average debt balance this quarter. For the nine months ended September 30, 2016, interest expense increased $131,000, compared to the same period in 2015, mainly due to a higher average debt balance throughout 2016, as compared to last year.

 

Other income (expense) for the quarter and nine months ended September 30, 2016, improved by $637,000 and $1,572,000, respectively, compared to the same periods last year. This quarter’s other income included foreign currency transaction gains of $102,000 compared to $340,000 of losses in the same period of 2015. For the nine months ended September 30, 2016, other income included foreign exchange transaction gains of $389,000 compared to $783,000 of losses in the same period of 2015. These gains and losses mainly resulted from the revaluation of an intercompany loan between the Company’s wholesale segment and Florsheim Australia.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s primary sources of liquidity are its cash, short-term marketable securities and its revolving line of credit. During the first nine months of 2016, the Company generated $27.8 million of cash from operating activities compared with a use of $27.2 million of cash in the same period of 2015. The change between years was primarily due to changes in operating assets and liabilities, principally inventory. The decrease in inventory at September 30, 2016 was the result of the Company reducing its inventories to coincide with lower backlogs, mainly for the BOGS brand.

 

The Company paid cash dividends of $8.8 million and $8.4 million during the nine months ended September 30, 2016 and 2015, respectively.

 

The Company continues to repurchase its common stock under its share repurchase program when the Company believes market conditions are favorable. During the first nine months of 2016, the Company repurchased 352,175 shares at a total cost of $9.4 million. As of September 30, 2016, the Company had approximately 624,000 shares available under its previously announced stock repurchase program.

 

Capital expenditures totaled $4.9 million in the first nine months of 2016. The Company completed remodeling projects on two of its domestic retail stores, and also opened a new outlet store in the third quarter. In addition, the Company completed a construction project to increase the capacity of its U.S. distribution center. Management estimates that annual capital expenditures for 2016 will be approximately $5.5 million.

 

At September 30, 2016, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 4, 2016. The line of credit bears interest at LIBOR plus 0.75%. The Company repaid a net of $3.8 million on the line of credit during the first nine months of 2016. At September 30, 2016, outstanding borrowings were $22.8 million at an interest rate of 1.3%. The highest balance on the line of credit during the quarter was $23.5 million. The line of credit agreement was set to expire on November 4, 2016, but was renewed on the same terms for another one-year period, expiring November 3, 2017.

 

A contingent consideration payment was made in March 2016 in the amount of $5,217,000. See Note 9 of the accompanying consolidated condensed financial statements.

 

At September 30, 2016, approximately $1.8 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 nine months ended September 30, 2016, from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

 15 

 

 

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, 2015.

 

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, 2015.

 

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 September 30, 2016.

 

            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) 
                  
 7/1/2016 - 7/31/2016    19,212   $27.87    19,212    728,096 
                       
 8/1/2016 - 8/31/2016    55,068   $25.73    55,068    673,028 
                       
 9/1/2016 - 9/30/2016    49,045   $26.69    49,045    623,983 
                       
 Total    123,325   $26.45    123,325      

 

(1)In 1998 the Company's stock repurchase program was established. On several occasions since the program's inception, the Board of Directors has extended the number of shares authorized for repurchase under the program. In total, 6.5 million shares have been authorized for repurchase.

 

Item 5.  Other Information

 

On November 4, 2016, the Company renewed its line of credit agreement with PNC Bank, N.A. for another term that expires on November 3, 2017, on the same terms as the prior agreement. The forgoing description does not purport to be complete and is qualified in its entirety by reference to the Amendment to PNC Bank Loan Agreement and Committed Line of Credit Note, a copy of which is filed as Exhibit 10.1 to this Form 10-Q.

 

On November 7, 2016, the Board of Directors of the Company authorized the freezing of the Weyco Group, Inc. Pension Plan, whereby all benefit accruals, for all employees, would be frozen effective December 31, 2016. The forgoing description does not purport to be complete and is qualified in its entirety by reference to the Second Amendment to Weyco Group, Inc. Pension Plan, a copy of which is filed as Exhibit 10.2 to this Form 10-Q.

 

 16 

 

 

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:    November 8, 2016 /s/ John F. Wittkowske
  John F. Wittkowske
  Senior Vice President and Chief Financial Officer

 

 17 

 

 

WEYCO GROUP, INC.

(THE “REGISTRANT”)

(COMMISSION FILE NO. 0-9068)

 

EXHIBIT INDEX

TO

CURRENT REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED September 30, 2016

 

Exhibit   Description   Incorporation Herein By Reference To   Filed
Herewith
             
10.1   Amendment to PNC Bank Loan Agreement and Committed Line of Credit Note, dated November 4, 2016        X
             
10.2   Second Amendment to Weyco Group, Inc. Pension Plan, dated November 7, 2016        X
             
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 September 30, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets (Unaudited); (ii) Consolidated Condensed Statements of Earnings and Comprehensive Income (Unaudited); (iii) Consolidated Condensed Statements of Cash Flows (Unaudited); and (iv) Notes to Consolidated Condensed Financial Statements, furnished herewith        X

 

 

 

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