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 JuneSeptember 30, 2012

 

Or

 

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

 

For the transition period from __________ to ______________________________to_______________

Commission File Number:0-9068

 

WEYCO GROUP, INC.INC
(Exact name of registrant as specified in its charter)

 

WISCONSIN39-0702200
(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.

Yesx 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). YesxNo¨

 

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 filerx 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¨ Nox

 

As of August 1,October 31, 2012, there were 10,873,61210,844,734 sharesof 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. It is suggested that these financial statements and notes 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,  September 30, December 31, 
 2012  2011  2012  2011 
 (Dollars in thousands)  (Dollars in thousands) 
ASSETS:                
Cash and cash equivalents $9,266  $10,329  $7,529  $10,329 
Marketable securities, at amortized cost  5,513   4,745   6,873   4,745 
Accounts receivable, net  38,246   43,636   58,627   43,636 
Accrued income tax receivable  1,211   816   -   816 
Inventories  60,615   62,689   62,839   62,689 
Deferred income tax benefits  100   395   286   395 
Prepaid expenses and other current assets  5,178   5,613   4,449   5,613 
Total current assets  120,129   128,223   140,603   128,223 
                
Marketable securities, at amortized cost  43,118   46,839   38,720   46,839 
Deferred income tax benefits  4,205   3,428   4,429   3,428 
Property, plant and equipment, net  31,583   31,077   34,137   31,077 
Goodwill  11,112   11,112   11,112   11,112 
Trademarks  34,748   34,748   34,748   34,748 
Other assets  18,270   18,081   18,596   18,081 
Total assets $263,165  $273,508  $282,345  $273,508 
                
LIABILITIES AND EQUITY:                
Short-term borrowings $34,000  $37,000  $44,000  $37,000 
Accounts payable  4,405   12,936   9,536   12,936 
Dividend payable  1,848   1,742   1,841   1,742 
Accrued liabilities  14,387   13,217   13,277   13,217 
Accrued income tax payable  1,401   - 
Total current liabilities  54,640   64,895   70,055   64,895 
                
Long-term pension liability  27,107   26,344   27,455   26,344 
Other long-term liabilities  7,832   10,879   7,786   10,879 
                
Equity:                
Common stock  10,882   10,922   10,845   10,922 
Capital in excess of par value  24,730   22,222   25,808   22,222 
Reinvested earnings  145,104   146,266   146,660   146,266 
Accumulated other comprehensive loss  (13,325)  (13,419)  (12,782)  (13,419)
Total Weyco Group, Inc. equity  167,391   165,991   170,531   165,991 
Noncontrolling interest  6,195   5,399   6,518   5,399 
Total equity  173,586   171,390   177,049   171,390 
Total liabilities and equity $263,165  $273,508  $282,345  $273,508 

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,  Three Months Ended September 30, Nine Months Ended September 30, 
 2012  2011  2012  2011  2012  2011  2012  2011 
 (In thousands, except per share amounts)  (In thousands, except per share amounts) 
                  
Net sales $60,333  $56,550  $135,647  $121,696  $79,473  $74,601  $215,120  $196,297 
Cost of sales  37,455   33,887   84,738   74,208   49,027   46,061   133,765   120,269 
Gross earnings  22,878   22,663   50,909   47,488   30,446   28,540   81,355   76,028 
                                
Selling and administrative expenses  19,476   19,930   41,674   39,946   22,338   21,823   64,012   61,769 
Earnings from operations  3,402   2,733   9,235   7,542   8,108   6,717   17,343   14,259 
                                
Interest income  483   586   966   1,176   438   543   1,404   1,719 
Interest expense  (116)  (137)  (245)  (227)  (143)  (124)  (388)  (351)
Other income and expense, net  (123)  52   (65)  108   10   (62)  (55)  46 
                                
Earnings before provision for income taxes  3,646   3,234   9,891   8,599   8,413   7,074   18,304   15,673 
                                
Provision for income taxes  1,094   946   3,284   2,809   2,961   2,525   6,245   5,334 
                                
Net earnings  2,552   2,288   6,607   5,790   5,452   4,549   12,059   10,339 
                                
Net earnings attributable to noncontrolling interest  333   351   519   481   260   140   779   621 
                                
Net earnings attributable to Weyco Group, Inc. $2,219  $1,937  $6,088  $5,309  $5,192  $4,409  $11,280  $9,718 
                                
Weighted average shares outstanding                                
Basic  10,865   11,120   10,877   11,221   10,827   10,946   10,860   11,128 
Diluted  10,982   11,239   11,005   11,358   10,911   11,037   10,974   11,251 
                                
Earnings per share                                
Basic $0.20  $0.17  $0.56  $0.47  $0.48  $0.40  $1.04  $0.87 
Diluted $0.20  $0.17  $0.55  $0.47  $0.48  $0.40  $1.03  $0.86 
                                
Cash dividends per share $0.17  $0.16  $0.33  $0.32  $0.17  $0.16  $0.50  $0.48 
                                
                
Comprehensive income $2,088  $2,689  $6,978  $6,691  $6,058  $3,369  $13,036  $10,060 
                                
Comprehensive income attributable to noncontrolling interest  151   420   796   610   323   (269)  1,119   341 
                                
Comprehensive income attributable to Weyco Group, Inc. $1,937  $2,269  $6,182  $6,081  $5,735  $3,638  $11,917  $9,719 

 

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,  Nine Months Ended September 30, 
 2012  2011  2012  2011 
 (Dollars in thousands)  (Dollars in thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net earnings $6,607  $5,790  $12,059  $10,339 
Adjustments to reconcile net earnings to net cash provided by operating activities -        
Adjustments to reconcile net earnings to net cash (used for) provided by operating activities -        
Depreciation  1,603   1,342   2,442   2,085 
Amortization  184   83   249   178 
Bad debt expense  152   99   173   133 
Deferred income taxes  (841)  (957)  (1,381)  (1,420)
Net gain on remeasurement of contingent consideration  (1,219)  -   (1,681)  - 
Net foreign currency transaction losses (gains)  90   (121)
Net foreign currency transaction losses  83   303 
Stock-based compensation  598   597   896   896 
Pension contribution  -   (1,600)
Pension expense  1,869   1,474   2,638   2,212 
Net gain on sale of marketable securities  -   (346)
Net losses (gains) on disposal of property, plant and equipment  3   (13)  3   (13)
Increase in cash surrender value of life insurance  (115)  (127)  (250)  (268)
Changes in operating assets and liabilities, net of effects from acquisitions -                
Accounts receivable  5,244   8,083   (15,163)  (8,328)
Inventories  2,082   4,662   (145)  2,483 
Prepaids and other assets  376   1,060   848   736 
Accounts payable  (8,547)  (3,484)  (3,401)  (1,785)
Accrued liabilities and other  (1,099)  (1,320)  362   111 
Accrued income taxes  (392)  (2,281)  2,217   (351)
Net cash provided by operating activities  6,595   14,887 
Net cash (used for) provided by operating activities  (51)  5,365 
                
CASH FLOWS FROM INVESTING ACTIVITIES:                
Acquisition of businesses, net of cash acquired  -   (27,023)  -   (27,023)
Purchase of marketable securities  -   (80)  -   (1,154)
Proceeds from maturities of marketable securities  2,905   4,035 
Proceeds from maturities and sales of marketable securities  5,947   11,349 
Proceeds from the sale of property, plant and equipment  -   13   -   14 
Life insurance premiums paid  (155)  (155)  (155)  (155)
Purchase of property, plant and equipment  (2,128)  (3,117)  (5,411)  (4,013)
Net cash provided by (used for) investing activities  622   (26,327)  381   (20,982)
                
CASH FLOWS FROM FINANCING ACTIVITIES:                
Cash dividends paid  (3,496)  (3,634)  (5,351)  (5,396)
Shares purchased and retired  (3,812)  (10,205)  (5,684)  (12,132)
Proceeds from stock options exercised  1,566   725   2,216   1,059 
Payment of indemnification holdback  (2,000)  - 
Repayment of debt assumed in acquisition  -   (3,814)  -   (3,814)
Net borrowings of commercial paper  -   19,950 
Net repayments of commercial paper  -   (5,000)
Proceeds from bank borrowings  9,000   31,000   22,000   68,000 
Repayments of bank borrowings  (12,000)  (20,000)  (15,000)  (24,000)
Income tax benefits from stock-based compensation  469   341   643   457 
Net cash (used for) provided by financing activities  (8,273)  14,363   (3,176)  19,174 
                
Effect of exchange rate changes on cash and cash equivalents  (7)  102   46   (88)
                
Net (decrease) increase in cash and cash equivalents $(1,063) $3,025  $(2,800) $3,469 
                
CASH AND CASH EQUIVALENTS at beginning of period  10,329   7,150   10,329   7,150 
                
CASH AND CASH EQUIVALENTS at end of period $9,266  $10,175  $7,529  $10,619 
                
SUPPLEMENTAL CASH FLOW INFORMATION:                
Income taxes paid, net of refunds $4,010  $4,751  $4,665  $5,304 
Interest paid $191  $221  $309  $354 

 

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

3

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 sixnine months ended JuneSeptember 30, 2012 are not necessarily indicative of the results for the full year.

 

2.Acquisition

 

On March 2, 2011, the Company acquired 100% of the outstanding shares of The Combs Company, the owner of the BOGS and Rafters footwear brands. Hereinafter in this document, The Combs Company will be referred to as “Bogs” and the individual BOGS brand will be referred to as “BOGS.” The Company acquired Bogs from its former shareholders for $29.3 million in cash plus assumed debt of approximately $3.8 million and contingent payments after two and five years (in 2013 and 2016), which are dependent on Bogs achieving certain performance measures. In accordance with the agreement, $2.0 million of the cash portion of the purchase price was held back to be used to help satisfy any claims of indemnification by the Company, and any amounts not used therefore willwere to be paid to the seller 18 months from the date of acquisition. This holdback was paid in full to the former shareholders of Bogs in the third quarter of 2012. At the acquisition date, the Company’s estimate of the fair value of the contingent payments was approximately $9.8 million in aggregate. For more information regarding the contingent payments, including an estimate of fair value as of JuneSeptember 30, 2012, see Note 10. The acquisition of Bogs was funded with available cash and short-term borrowings under the Company’s $50 million borrowing facility.

 

The acquisition of Bogs was accounted for in these consolidated condensed financial statements as a business combination under Accounting Standards Codification (“ASC”) 805,Business Combinations (“ASC 805”). Under ASC 805, the total purchase price is allocated to tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the acquisition date. The Company’s final allocation of the purchase price was as follows (dollars in thousands):

 

Cash $317 
Accounts receivable, less reserves of $316  3,839 
Inventory  2,932 
Prepaids  15 
Property, plant and equipment, net  7 
Goodwill  11,112 
Trademark  22,000 
Other intangible assets  3,700 
Accounts payable  (454)
Accrued liabilities  (561)
  $42,907 

 

Other intangible assets consist of customer relationships and a non-compete agreement. Goodwill reflects the excess purchase price over the fair value of net assets, and has been assigned to the Company’s North American wholesale segment (“wholesale”). All of the goodwill is expected to be deductible for tax purposes. For more information on the intangible assets acquired, see Note 5.

 

The operating results of Bogs have been consolidated into the Company’s wholesale segment since the date of acquisition. Accordingly, the Company’s 2012 results included Bogs’Bogs operations from January 1 through JuneSeptember 30, 2012, while 2011 only included Bogs’Bogs operations from March 2 through JuneSeptember 30, 2011. Bogs net sales were $9.4$24.9 million in the first halfnine months of 2012 compared to $4.9$15.6 million in 2011.

4

Pro Forma Results of Operations

 

The following table provides consolidated results of operations for the sixnine months ended JuneSeptember 30, 2012 compared to unaudited pro forma results of operations for the sixnine months ended JuneSeptember 30, 2011, as if Bogs had been acquired on January 1, 2011. The unaudited pro forma results include adjustments to reflect additional amortization of intangible assets, interest expense and a corresponding estimate of the provision for income taxes.

 

   Six Months Ended June 30, 
  Actual  Pro forma 
  2012  2011 
   (Dollars in thousands)  
Net sales $135,647  $126,064 
Net earnings attributable to Weyco Group, Inc. $6,088  $5,138 

  Nine Months Ended September 30, 
  Actual  Pro forma 
  2012  2011 
  (Dollars in thousands) 
Net sales $215,120  $200,665 
Net earnings attributable to Weyco Group, Inc. $11,280  $9,548 

 

The unaudited pro forma information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisition of Bogs been effective on January 1, 2011 or of the Company’s future results of operations.

 

3.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,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2012  2011  2012  2011  2012  2011  2012  2011 
 (In thousands, except per share amounts)  (In thousands, except per share amounts) 
Numerator:                                
Net earnings attributable to Weyco Group, Inc. $2,219  $1,937  $6,088  $5,309  $5,192  $4,409  $11,280  $9,718 
                                
Denominator:                                
Basic weighted average shares outstanding  10,865   11,120   10,877   11,221   10,827   10,946   10,860   11,128 
Effect of dilutive securities:                                
Employee stock-based awards  117   119   128   137   84   91   114   123 
Diluted weighted average shares outstanding  10,982   11,239   11,005   11,358   10,911   11,037   10,974   11,251 
                                
Basic earnings per share $0.20  $0.17  $0.56  $0.47  $0.48  $0.40  $1.04  $0.87 
                                
Diluted earnings per share $0.20  $0.17  $0.55  $0.47  $0.48  $0.40  $1.03  $0.86 

 

Diluted weighted average shares outstanding for the three and sixnine months ended JuneSeptember 30, 2012 exclude anti-dilutive unvested restricted stock and outstanding stock options totaling 805,000711,330 shares of common stock at a weighted average price of $25.38.$25.68. Diluted weighted average shares outstanding for the three and sixnine months ended JuneSeptember 30, 2011 exclude anti-dilutive unvested restricted stock and outstanding stock options totaling 460,675451,500 shares of common stock at a weighted average price of $26.80.$26.81.

5

 

4.Investments

 

As noted in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, all of the Company’s investments are classified as held-to-maturity securities and reported at amortized cost pursuant to ASC 320,Investments – Debt and Equity Securities (“ASC 320”) as the Company has the intent and ability to hold all security investments to maturity.

 

The

Below is a summary of the amortized cost and estimated market values of all marketablethe Company’s investment securities as of Juneas of September 30, 2012 and December 31, 2011 as reported in the Consolidated Condensed Balance Sheets (Unaudited) was $48.6 million and $51.6 million, respectively. The estimated fair market value of those marketable securities as of June 30, 2012 and December 31, 2011 was $51.2 million and $54.2 million, respectively.2011.

 

  September 30, 2012  December 31, 2011 
  Amortized  Market  Amortized  Market 
  Cost  Value  Cost  Value 
  (Dollars in thousands) 
Municipal bonds:                
Current $6,873  $6,975  $4,745  $4,781 
Due from one through five years  27,549   28,968   32,679   34,184 
Due from six through ten years  11,171   12,095   14,160   15,216 
Total $45,593  $48,038  $51,584  $54,181 

The unrealized gains and losses on investment securities as of JuneSeptember 30, 2012 and December 31, 2011 were as follows:

  June 30, 2012  December 31, 2011 
  Unrealized  Unrealized  Unrealized  Unrealized 
  Gains  Losses  Gains  Losses 
  (Dollars in thousands) 
Municipal bonds $2,756  $200  $2,797  $200 

  September 30, 2012  December 31, 2011 
  Unrealized  Unrealized  Unrealized  Unrealized 
  Gains  Losses  Gains  Losses 
  (Dollars in thousands) 
Municipal bonds $2,645  $200  $2,797  $200 

 

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 JuneSeptember 30, 2012 and determined that no other-than-temporary market value impairment exists.

 

5.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 JuneSeptember 30, 2012:

 

    June 30, 2012     September 30, 2012 
 Weighted Gross      Weighted Gross     
 Average Carrying Accumulated    Average Carrying Accumulated   
 Life (Yrs)  Amount  Amortization  Net  Life (Yrs)  Amount  Amortization  Net 
   (Dollars in thousands)    (Dollars in thousands) 
Indefinite-lived intangible assets:                              
Goodwill     $11,112  $-  $11,112      $11,112  $-  $11,112 
Trademarks     34,748   -   34,748      34,748   -   34,748 
Total indefinite-lived intangible assets    $45,860  $-  $45,860     $45,860  $-  $45,860 
                              
Amortizable intangible assets:                              
Non-compete agreement  5  $200  $(53) $147   5  $200  $(63) $137 
Customer relationships  15   3,500   (311)  3,189   15   3,500   (369)  3,131 
Total amortizable intangible assets    $3,700  $(364) $3,336     $3,700  $(432) $3,268 

 

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, 2011:

 

     December 31, 2011 
  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  $(33) $167 
Customer relationships  15   3,500   (195)  3,305 
Total amortizable intangible assets     $3,700  $(228) $3,472 

 

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

6.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 sixnine months ended JuneSeptember 30, 2012 and 2011 was as follows:

 

Three Months Ended                  
June 30, Wholesale  Retail  Other  Total 
September 30, Wholesale Retail Other Total 
 (Dollars in thousands)  (Dollars in thousands) 
2012                         
Product sales $43,076  $5,589  $11,129  $59,794  $60,198  $5,521  $12,916  $78,635 
Licensing revenues  539   -   -   539   838   -   -   838 
Net sales $43,615  $5,589  $11,129  $60,333  $61,036  $5,521  $12,916  $79,473 
Earnings from operations $2,092  $37  $1,273  $3,402  $6,559  $322  $1,227  $8,108 
                                
2011                                
Product sales $38,838  $5,866  $11,289  $55,993  $55,466  $5,812  $12,231  $73,509 
Licensing revenues  557   -   -   557   1,092   -   -   1,092 
Net sales $39,395  $5,866  $11,289  $56,550  $56,558  $5,812  $12,231  $74,601 
Earnings from operations $1,017  $202  $1,514  $2,733  $4,971  $245  $1,501  $6,717 

 

Six Months Ended         
June 30, Wholesale  Retail  Other  Total 
Nine Months Ended         
September 30, Wholesale Retail Other Total 
 (Dollars in thousands)  (Dollars in thousands) 
2012                         
Product sales $98,978  $11,249  $24,156  $134,383  $159,175  $16,771  $37,072  $213,018 
Licensing revenues  1,264   -   -   1,264   2,102   -   -   2,102 
Net sales $100,242  $11,249  $24,156  $135,647  $161,277  $16,771  $37,072  $215,120 
Earnings from operations $6,562  $32  $2,641  $9,235  $13,121  $355  $3,867  $17,343 
                                
2011                                
Product sales $86,385  $11,443  $22,715  $120,543  $141,850  $17,256  $34,945  $194,051 
Licensing revenues  1,153   -   -   1,153   2,246   -   -   2,246 
Net sales $87,538  $11,443  $22,715  $121,696  $144,096  $17,256  $34,945  $196,297 
Earnings from operations $4,654  $142  $2,746  $7,542  $9,633  $386  $4,240  $14,259 

7

 

7.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, 
  2012  2011  2012  2011 
  (Dollars in thousands) 
Benefits earned during the period $369  $321  $768  $642 
Interest cost on projected benefit obligation  573   595   1,175   1,191 
Expected return on plan assets  (492)  (505)  (974)  (1,010)
Net amortization and deferral  430   326   900   651 
Net pension expense $880  $737  $1,869  $1,474 

7
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2012  2011  2012  2011 
  (Dollars in thousands) 
Benefits earned during the period $352  $321  $1,120  $963 
Interest cost on projected benefit obligation  571   595   1,746   1,786 
Expected return on plan assets  (510)  (505)  (1,484)  (1,514)
Net amortization and deferral  356   326   1,256   977 
 Net pension expense $769  $737  $2,638  $2,212 

 

8.Stock-Based Compensation Plans

 

During the three and sixnine months ended JuneSeptember 30, 2012, the Company recognized approximately $299,000$298,000 and $598,000,$896,000, respectively, of compensation expense associated with stock option and restricted stock awards granted in years 2008 through 2011. During the three and sixnine months ended JuneSeptember 30, 2011, the Company recognized approximately $329,000$298,000 and $597,000,$896,000, respectively, of compensation expense associated with stock option and restricted stock awards granted in years 2007 through 2010.

 

The following table summarizes the stock option activity under the Company’s plans for the six-month period ended June 30, 2012:

      Weighted  ��       Weighted    
   Weighted Average      Weighted Average   
   Average Remaining Aggregate    Average Remaining Aggregate 
   Exercise Contractual Intrinsic    Exercise Contractual Intrinsic 
 Shares  Price  Term (Years)  Value*  Shares  Price  Term (Years)  Value* 
Outstanding at December 31, 2011  1,307,488  $21.76           1,307,488  $21.76         
Exercised  (125,496) $12.48           (169,646) $13.06        
Forfeited or expired  (10,150) $26.73           (11,250) $26.49        
Outstanding at June 30, 2012  1,171,842  $22.71   2.64  $2,339,032 
Exercisable at June 30, 2012  689,564  $21.48   1.63  $2,331,355 
Outstanding at September 30, 2012  1,126,592  $23.02   2.46  $2,576,000 
Exercisable at September 30, 2012  645,364  $21.94   1.42  $2,436,000 

 

* 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 29,September 28, 2012, the last trading day of the quarter, of $23.18$24.35 and the exercise price.price multiplied by the number of in-the-money outstanding and exercisable stock options.

  

The following table summarizes stock option activity for the three and sixnine months ended JuneSeptember 30, 2012 and 2011:

 

 Three Months Ended June 30,  Six Months Ended June 30,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2012  2011  2012  2011  2012  2011  2012  2011 
 (Dollars in thousands)  (Dollars in thousands) 
Total intrinsic value of stock options exercised $1,147  $862  $1,204  $874  $446  $300  $1,650  $1,174 
Cash received from stock option exercises $1,430  $553  $1,566  $725  $650  $333  $2,216  $1,059 
Income tax benefit from the exercise of stock options $447  $336  $469  $341  $174  $117  $643  $457 

 

The following table summarizes the stock option activity under the Company’s restricted stock award activityplans for six-monththe nine-month period ended JuneSeptember 30, 2012:

 

      Weighted          Weighted    
   Weighted Average      Weighted Average   
 Shares of Average Remaining Aggregate  Shares of Average Remaining Aggregate 
 Restricted Grant Date Contractual Intrinsic  Restricted Grant Date Contractual Intrinsic 
 Stock  Fair Value  Term (Years)  Value*  Stock  Fair Value  Term (Years)  Value* 
Non-vested at December 31, 2011  38,000  $24.47           38,000  $24.47         
Issued  -   -           -   -        
Vested  -   -           -   -        
Forfeited  -   -           -   -        
Non-vested at June 30, 2012  38,000  $24.47   2.53  $880,840 
Non-vested at September 30, 2012  38,000  $24.47   2.27  $925,000 

 

* The aggregate intrinsic value of non-vested restricted stock was calculated using the market value of the Company's stock on on June 29,September 28, 2012, the last trading day of the quarter, of $23.18$24.35 multiplied by the number of non-vested restricted shares outstanding.

8

 

9.Short-Term Borrowings

 

At JuneSeptember 30, 2012, the Company had a $50 million unsecured revolving line of credit. At the end of the secondthird quarter, the Company had $34$44 million of bank borrowings outstanding at an interest rate of approximately 1.2%. The Company’s borrowing facility includes one financial covenant that specifies a minimum level of net worth. The Company was in compliance with the covenant at JuneSeptember 30, 2012. The line of credit agreement expired on April 30, 2012 and was renewed for another term that expires on April 30, 2013. Under the current line of credit agreement, the interest rate on bank borrowings is LIBOR plus 100 basis points. The facility expires on April 30, 2013.

Effective November 2, 2012, the Company amended the line of credit agreement to increase the amount of the borrowing facility from $50 million to $60 million. No other terms or conditions of the line of credit agreement were amended.

 

10.Contingent Consideration

 

Contingent consideration is comprised of two contingent payments that the Company is obligated to pay the former shareholders of Bogs two and five years following the Bogs acquisition date (in 2013 and 2016). 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. In accordance with 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 as follows:

 

 June 30, December 31,  September 30, December 31, 
 2012  2011  2012  2011 
 (Dollars in thousands)  (Dollars in thousands) 
Current portion $2,025  $-  $1,630  $- 
Long-term portion  6,496   9,693   6,451   9,693 
Total contingent consideration $8,521  $9,693  $8,081  $9,693 

 

The fair value of the contingent payments was recorded at present value. Accordingly, the two components of the change in contingent consideration between December 31, 2011 and JuneSeptember 30, 2012 were the net gain on remeasurement of contingent consideration of approximately $1,219,000$1,681,000 less interest expense of $47,000.$69,000. The net gain was recorded within selling and administrative expenses in the Consolidated Condensed Statements of Earnings and Comprehensive Income (Unaudited). The reduction inof the liability in 2012 was largelyprimarily due to a decrease in the Company’s estimate of the 2013 contingent payment as a result of lower Bogs net salesgross margin dollars relative to the Company’s original projections.

 

The current portion of contingent consideration is recorded within accrued liabilities in the Consolidated Condensed Balance Sheets (Unaudited). The long-term portion is recorded within other long-term liabilities in the Consolidated Condensed Balance Sheets (Unaudited). The total contingent consideration has been assigned to the Company’s wholesale segment.

 

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. The fair value measurement was determined using a probability-weighted model which includes various estimates related to Bogs’Bogs future sales levels and gross margins. As of JuneSeptember 30, 2012, management estimates that the range of reasonably possible potential payments is $5 million to $12$10 million in aggregate.

9
 

 

11.Comprehensive Income

 

Comprehensive income for the three and sixnine months ended JuneSeptember 30, 2012 and 2011 was as follows:

 

 Three Months Ended June 30,  Six Months Ended June 30,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2012  2011  2012  2011  2012  2011  2012  2011 
 (Dollars in thousands)  (Dollars in thousands) 
Net earnings $2,552  $2,288  $6,607  $5,790  $5,452  $4,549  $12,059  $10,339 
Foreign currency translation adjustments  (743)  203   (194)  504   405   (1,379)  211   (875)
Pension liability, net of tax of $178, $127, $361 and $254, respectively  279   198   565   397 
Pension liability, net of tax of $129, $127, $490, and $381, respectively  201   199   766   596 
Total comprehensive income $2,088  $2,689  $6,978  $6,691  $6,058  $3,369  $13,036  $10,060 

Certain comprehensive income amounts in the above table for the three and nine months ended September 30, 2011 have been corrected from the amounts previously presented.

 

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

 

 June 30, December 31,  September 30, December 31, 
 2012  2011  2012  2011 
 (Dollars in thousands)  (Dollars in thousands) 
Foreign currency translation adjustments $452  $923  $794  $923 
Pension liability, net of tax  (13,777)  (14,342)  (13,576)  (14,342)
Total accumulated other comprehensive loss $(13,325) $(13,419) $(12,782) $(13,419)

 

In 2012, the Company adopted new accounting guidance from the Financial Accounting Standards Board related to the financial statement presentation of comprehensive income. This guidance does not change the nature of or accounting for items reported within comprehensive income, and the adoption of this guidance did not impact the Company’s results of operations or financial condition.

 

12.Equity

 

A reconciliation of the Company’s equity for the sixnine months ended JuneSeptember 30, 2012 is as follows:

 

       Accumulated          Accumulated   
   Capital in   Other      Capital in   Other   
 Common Excess of Reinvested Comprehensive Noncontrolling  Common Excess of Reinvested Comprehensive Noncontrolling 
 Stock  Par Value  Earnings  Loss  Interest  Stock  Par Value  Earnings  Loss  Interest 
 (Dollars in thousands)  (Dollars in thousands) 
                      
Balance, December 31, 2011 $10,922  $22,222  $146,266  $(13,419) $5,399  $10,922  $22,222  $146,266  $(13,419) $5,399 
                                        
Net earnings  -   -   6,088   -   519   -   -   11,280   -   779 
Foreign currency translation adjustments  -   -   -   (471)  277   -   -   -   (129)  340 
Pension liability adjustment, net of tax  -   -   -   565   -   -   -   -   766   - 
Cash dividends declared  -   -   (3,603)  -   -   -   -   (5,450)  -   - 
Stock options exercised  125   1,441   -   -   -   170   2,047   -   -   - 
Stock-based compensation expense  -   598   -   -   -   -   896   -   -   - 
Income tax benefit from stock options exercised  -   469   -   -   -   -   643   -   -   - 
Shares purchased and retired  (165)  -   (3,647)  -   -   (247)  -   (5,436)  -   - 
                                        
Balance, June 30, 2012 $10,882  $24,730  $145,104  $(13,325) $6,195 
Balance, September 30, 2012 $10,845$25,808 $146,660 $(12,782) $6,518 

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 endedyear-ended December 31, 2011.

 

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. As of JuneSeptember 30, 2012, the Company also had licensing agreements with third partiesthird-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 26Company-owned retail stores in the United States and an Internet business as of JuneSeptember 30, 2012. 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

 

Acquisition

On March 2, 2011, the Company acquired 100% of the outstanding shares of The Combs Company (“Bogs”) from its former shareholders for $29.3 million in cash plus assumed debt of approximately $3.8 million and contingent payments after two and five years (in 2013 and 2016), which are dependent on Bogs achieving certain performance measures. In accordance with the agreement, $2.0 million of the cash portion of the purchase price was held back to be used to help satisfy any claims of indemnification by the Company, and any amounts not used therefore willwere to be paid to the seller 18 months from the date of acquisition. This holdback was paid in full to the former shareholders of Bogs in the third quarter of 2012. At the acquisition date, the Company’s estimate of the fair value of the contingent payments was approximately $9.8 million in aggregate. At JuneSeptember 30, 2012, the Company’s estimate of the fair value of the contingent payments was approximately $8.5$8.1 million in aggregate. See Note 10.

 

The operating results of Bogs have been consolidated into the Company’s wholesale segment since the date of acquisition. Accordingly, the Company’s 2012 results included Bogs’Bogs operations from January 1 through JuneSeptember 30, 2012, while 2011 only included Bogs’Bogs operations from March 2 through JuneSeptember 30, 2011. Bogs net sales were $9.4$24.9 million for the sixnine months ended JuneSeptember 30, 2012 compared to $4.9$15.6 million in 2011. See Note 2.

 

On June 1, 2012, the Company took over the sales and distribution of the BOGS and Rafters brands in Canada from a third-party licensee. Consequently, Bogs wholesale sales for the third quarter increased and its licensing revenues decreased.

SecondThird Quarter Highlights

 

Consolidated net sales for the secondthird quarter of 2012 were $60.3$79.5 million, up 7% over last year’s secondthird quarter net sales of $56.6$74.6 million. North American wholesale net sales were up $4.2 million for the quarter compared with the second quarter of 2011. The improvements in 2012 were across the majority of the Company’s wholesale brands. Retail net sales decreased approximately $277,000 in the second quarter comparedOperating earnings increased 21% to the same period last year. Net sales of the Company’s other businesses were relatively flat compared with the second quarter of 2011.

Consolidated gross earnings were $22.9$8.1 million this quarter, compared with $22.7from $6.7 million in the second quarter of 2011. This increase was largely achieved through higher sales volumes across the Company, offset by lower gross earnings as a percent of net sales, which were 37.9% for the second quarter of 2012 and 40.1% for the second quarter of 2011. Selling and administrative expenses were 32% of sales for the second quarter of 2012 as compared with 35% in 2011. Consolidated earnings from operations for this year’s second quarter were $3.4 million, up from $2.7 million last year.

The Company’s net earnings attributable to Weyco Group, Inc. this quarter were $2.2 million compared with $1.9$5.2 million in the samethird quarter of 2012 compared with $4.4 million last year. Diluted earnings per share for the three months ended JuneSeptember 30, 2012 were $0.20$0.48 per share, compared with $0.17up from $0.40 per share in last year’s secondthird quarter.

The majority of the Company’s operations are in its North American wholesale segment, and its consolidated results primarily reflect the results of that business. North American wholesale net sales increased $4.5 million this quarter compared to the same period last year. North American wholesale operating earnings increased $1.6 million this quarter over last year’s third quarter. The takeover of the Canadian distribution of Bogs added $4.1 million in net sales and contributed to the increase in operating earnings this quarter.

 

Year to DateYear-to-Date Highlights

 

Consolidated net sales for the first halfnine months of 2012 were $135.6$215.1 million, compared with $121.7 millionup 10% over last year. North American wholesaleyear’s year-to-date net sales of $196.3 million. Operating earnings increased 22% to $100.2$17.3 million in the first halfnine months of this year2012, from $14.3 million in 2011. Consolidated net earnings attributable to Weyco Group, Inc. for nine months ended September 30, 2012 were $11.3 million compared with $87.5$9.7 million last year. These increasesDiluted earnings per share to date through September 30, 2012 were $1.03 per share, up from $0.86 per share for the same period in 2011.

As noted above, the Company’s consolidated results primarily reflect the results of its North American wholesale segment. North American wholesale net sales increased $17.2 million compared to the same period last year. This increase was primarily due to higher sales volumes across the majorityall of the Company’s wholesale brands.brands, which included increased Bogs sales volumes due to the takeover of the Bogs Canadian distribution during 2012. The acquisition of Bogs also contributed to the wholesale sales increase, this year. Bogs contributed $9.4 million inas 2012 net sales this year, compared with $4.9 million last year. Salesincluded Bogs sales for the entire period while 2011 only included Bogs sales from March 2, 2011 through September 30, 2011. North American wholesale operating earnings increased $3.5 million. The increase in the retail segment were relatively flat year-to-date, and sales in the Company’s other businesses increased $1.4 million.

Consolidated grossoperating earnings were $50.9 million this year compared with $47.5 million last year. This was achieved throughprimarily due to higher sales volumes acrossas well as an adjustment to reduce the wholesale brands, slightly offset by lower gross margins. Sellingestimated liability for future payments due to the former owners of the BOGS and administrative expenses as a percent of sales decreased slightly since last year, as wholesale selling and administrative expenses as a percent of sales decreased while retail selling and administrative expenses as a percent of sales increased slightly. Consolidated earnings from operations year to date in 2012 were $9.2 million compared with $7.5 million last year.

Consolidated net earnings attributable to Weyco Group, Inc. for the six months ended June 30, 2012 were $6.1 million compared with $5.3 million in 2011. Diluted earnings per share to date through June 30, 2012 were $0.55 compared with $0.47 for the same period in 2011.Rafters brands. See Note 10.

 

Financial Position Highlights

 

At JuneSeptember 30, 2012 cash and marketable securities totaled $58$53 million and total outstanding debt was $34$44 million. At December 31, 2011, cash and marketable securities totaled $62 million and total outstanding debt was $37 million. The Company’s main sources of cash for the first nine months of 2012 were from the maturities of marketable securities as well as borrowings under the revolving line of credit. The Company’s main uses of cash during the year-to-date period were for the payment of dividends, common stock repurchases, and the payment of an indemnification holdback to the former shareholders of Bogs. The Company also had increased capital expenditures in 2012 due to the construction to connect a new building that was acquired in 2011 to the Company’s existing distribution center.

 

SEGMENT ANALYSIS

 

Net sales and earnings from operations for the Company’s segments in the three and sixnine months ended JuneSeptember 30, 2012 and 2011 were as follows:

 

  Three Months Ended June 30,  %  Six Months Ended June 30,  % 
  2012  2011  Change  2012  2011  Change 
  (Dollars in thousands)    
Net Sales                        
North American Wholesale $43,615  $39,395   11% $100,242  $87,538   15%
North American Retail  5,589   5,866   -5%  11,249   11,443   -2%
Other  11,129   11,289   -1%  24,156   22,715   6%
Total $60,333  $56,550   7% $135,647  $121,696   11%
                         
Earnings from Operations                        
North American Wholesale $2,092  $1,017   106% $6,562  $4,654   41%
North American Retail  37   202   -82%  32   142   -77%
Other  1,273   1,514   -16%  2,641   2,746   -4%
Total $3,402  $2,733   24% $9,235  $7,542   22%

12
  Three Months Ended September 30,  %  Nine Months Ended September 30,  % 
  2012  2011  Change  2012  2011  Change 
  (Dollars in thousands)    
Net Sales                        
North American Wholesale $61,036  $56,558   8% $161,277  $144,096   12%
North American Retail  5,521   5,812   -5%  16,771   17,256   -3%
Other  12,916   12,231   6%  37,072   34,945   6%
Total $79,473  $74,601   7% $215,120  $196,297   10%
                         
Earnings from Operations                        
North American Wholesale $6,559  $4,971   32% $13,121  $9,633   36%
North American Retail  322   245   31%  355   386   -8%
Other  1,227   1,501   -18%  3,867   4,240   -9%
Total $8,108  $6,717   21% $17,343  $14,259   22%

 

North American Wholesale Segment

 

Net Sales

 

Net sales in the Company’s North American wholesale segment for the three and sixnine months ended JuneSeptember 30, 2012 and 2011 were as follows:

 

North American Wholesale Segment Net Sales

 

  Three Months Ended June 30,  %  Six Months Ended June 30,  % 
  2012  2011  Change  2012  2011  Change 
  (Dollars in thousands)     (Dollars in thousands)    
North American Net Sales                        
Stacy Adams $13,172�� $11,658   13% $31,601  $27,405   15%
Nunn Bush  15,410   14,091   9%  33,545   30,176   11%
Florsheim  10,550   10,024   5%  22,616   22,387   1%
BOGS/Rafters  3,538   2,644   34%  9,372   4,885   92%
Umi  406   421   -4%  1,844   1,532   20%
Total North American Wholesale $43,076  $38,838   11% $98,978  $86,385   15%
Licensing  539   557   -3%  1,264   1,153   10%
Total North American Wholesale Segment $43,615  $39,395   11% $100,242  $87,538   15%

  Three Months Ended September 30,  %  Nine Months Ended September 30,  % 
  2012  2011  Change  2012  2011  Change 
  (Dollars in thousands)    
North American Net Sales                        
Stacy Adams $14,300  $14,294   0% $45,901  $41,698   10%
Nunn Bush  13,859   16,594   -16%  47,404   46,771   1%
Florsheim  14,350   11,938   20%  36,965   34,324   8%
BOGS/Rafters  15,564   10,686   46%  24,937   15,571   60%
Umi  2,125   1,954   9%  3,968   3,486   14%
Total North American Wholesale $60,198  $55,466   9% $159,175  $141,850   12%
Licensing  838   1,092   -23%  2,102   2,246   -6%
Total North American Wholesale Segment $61,036  $56,558   8% $161,277  $144,096   12%

  

The increasesincrease in Stacy Adams second quarter and year to dateyear-to-date net sales werewas driven by higher sales volumes towith department stores and national shoe chains. The increasesdecrease in Nunn Bush secondthird quarter net sales was largely due to lower sales volumes with department stores and national shoe chain, primarily due to limited placement of new fall styles with several accounts. Florsheim’s third quarter and year to date net sales were driven by higher sales volumes to department stores. Florsheimyear-to-date net sales increased due to higher sales volumes with national shoe chainsdepartment stores, chain stores and independents.international retailers. The increase in Bogs third quarter net sales was primarily due to the Company’s takeover of Bogs distribution in Canada, effective June 1, 2012. Bogs net sales in Canada were $4.1 million this quarter. The remaining increase in Bogs third quarter net sales was due to higher sales volumes with independent retailers in the United States. Bogs was acquired on March 2, 2011. Accordingly, the Company’s 2012year-to-date results included Bogs’Bogs operations from January 1 through JuneSeptember 30, 2012, while 2011 only included Bogs’Bogs operations from March 2 through JuneSeptember 30, 2011.

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 Canada, Mexico, and certain overseas markets. Licensing revenues decreased in the third quarter due to the Company’s takeover of the sales and distribution of BOGS and Rafters in Canada on June 1, 2012. Prior to this takeover, a third-party licensee operated that business and paid the Company royalties based on sales.

 

Earnings from Operations

 

Earnings from operations in the North American wholesale segment were $2.1$6.6 million in the secondthird quarter of 2012, compared to $1.0with $5.0 million in 2011. For the sixnine months ended JuneSeptember 30, 2012, earnings from operations for the North American wholesale segment were $6.6$13.1 million, up from $4.7$9.6 million fromin the same period last year.

 

Wholesale gross earnings increased $480,000 and $2.9by $1.9 million or 11% for the three and six months ended JuneSeptember 30, 2012. This increase was achieved through higher sales volumes across several wholesale brands as well as higher gross margins as a percent of net sales. Wholesale gross earnings were 32.4% of net sales in the third quarter of 2012 respectively,compared to 31.6% in last year’s third quarter. The takeover of the Canadian distribution of Bogs contributed to the increase in third quarter wholesale gross earnings as a percent of sales.

Wholesale gross earnings increased by $4.8 million or 11% for the nine months ended September 30, 2012. This increase was due to higher sales volumes, which were slightly offset by lower gross margins as a percent of net sales. Wholesale gross earnings were 29.3%30.9% of net sales infor the second quarter ofnine months ended September 30, 2012 compared with 31.3% in last year’s second quarter. For the six months ended June 30, wholesale gross earnings were 30.0% of net sales in 2012 compared with 31.1% in 2011. This decrease was primarily due to upward cost pressures from the Company’s third-party overseas factories, primarily located in China and India. There continues to be upward cost pressures from those countries due to a variety of factors including higher labor, material and freight costs. Where possible, the Company has increased its selling prices to offset the effect of these increased costs.

 

The Company’s cost of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs). Distribution costs for the three-month periods ended JuneSeptember 30, 2012 and 2011 were $2.3$2.5 million and $2.0$2.2 million, respectively. For the sixnine month periods ended JuneSeptember 30, 2012 and 2011, distribution costs were $4.9$7.4 million and $4.0$6.3 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 25%22% this quarter compared with 29%to 23% in the same quarter last year. For the sixnine months ended JuneSeptember 30, wholesale selling and administrative expenses were 24%23% of net sales in 2012 and 26%25% of net sales in 2011. The decreases in selling and administrative expenses as a percent of sales were mainlylargely due to sales volume increases, as many of the Company’s selling and administrative expenses are fixed in nature. In addition, during 2012, selling and administrative expenses for the current quarter and year-to-date period were reduced by approximately $700,000$461,000 and $1.2$1.7 million, respectively, for period endperiod-end remeasurements of the estimated liability for future payments due to the former owners of the BOGS and Rafters brands. The reduction of this liability was primarily due to a decrease in the estimated liability was due to lower Bogs net salesCompany’s estimate of the 2013 contingent payment which is based on 2011 and 2012 gross margin dollars. The Company lowered its estimate of 2012 gross margin dollars, relative to the Company’sits original projections. Sales volumes in late 2011 and early 2012projections, primarily because sales of Bogs products were downless than expected due to the mild winter experienced in the U.S. This could also affect overall saleslate in 2012, as retailers often carry over excess stock2011 and in 2012. Also, the Company made other refinements to the next season.estimated liability based on Bogs actual performance to date compared to previous estimates.

13

 

North American Retail Segment

 

Net Sales

 

Net sales in the Company’s North American retail segment decreased $277,000$291,000 or 5% in the secondthird quarter of 2012, compared to the same period last year and down $194,000decreased $485,000 or 2% for3% in the sixnine months ended JuneSeptember 30, 2012 compared withto the same period last year. There were fivefour fewer domestic stores at JuneSeptember 30, 2012 than at JuneSeptember 30, 2011, as the Company has been closing unprofitable stores. Same store sales were up 5%2% for the quarter and up 9%7% for the first halfnine months of 2012.

 

Earnings from Operations

 

For the quarter and six months ended June 30, retailRetail earnings from operations decreased $165,000 and $110,000 respectively,increased $77,000 or 31% in the third quarter of 2012 compared withto the same periodsperiod last year.

Second quarter gross Gross earnings as a percent of net retail sales were approximately level withincreased to 64.3% this quarter, from 63.7% in last year’s third quarter.

Retail earnings from operations decreased $31,000 or 8% in the prior year at 64.1% this year and 64.0%nine months ended September 30, 2012 compared to the same period last year. For the six months ended June 30, grossGross earnings as a percent of net retail sales wereincreased to 64.4% for the nine months ended September 30, 2012, and 63.9%from 63.8% in the same period last year.

 

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 64%58.4% in the secondthird quarter of 2012 and 61%59.5% in last year’s secondthird quarter. To date in 2012, selling and administrative expenses were 64%62.3% of net sales compared with 63%to 61.6% of net sales for the first halfnine months of 2011. In May 2012, the Company paidYear-to-date selling and administrative expenses included a one-time $208,000 fee paid in the second quarter of $208,0002012 to terminate the lease of an unprofitable retail store. This was included in second quarter 2012 selling and administrative expenses and was the cause of the increase in selling and administrative expenses for the quarter and year-to-date, and consequently, represented the majority of the decrease in operating earnings for the periods.

 

Other

 

The Company’s other net sales decreased 1%increased 6% for the quarter and increased 6% for the first halfnine months of the year compared to the same periods last year. The majority of the Company’s other net sales are generated by Florsheim Australia. For the quarter and sixnine months ended JuneSeptember 30, 2012, Florsheim Australia’s net sales were up 3%14% and 9%11%, respectively. The quarter and year to dateyear-to-date increases were achieved through higher sales volumes in both its wholesale and retail businesses. Florsheim Europe’s net sales decreased for the second quarter and first sixnine months of the year compared to last year due to lower wholesale sales.year.

 

Collectively, the operating earnings of the Company’s other businesses for the quarter and sixnine months ended JuneSeptember 30, 2012 decreased $241,000 and $105,000, respectively,were down slightly compared to 2011.

In June 2012, These decreases were primarily due to lower gross earnings as a percent of net sales in Florsheim Australia partnered with Pitanco Shoes to expand itsAustralia’s wholesale and retail presence in the Chinese market. Pitanco is a manufacturer, distributor and retailer of men’s and woman’s leather shoes, handbags, travel goods, and accessories. It currently operates over 1,000 Pitanco branded shoe stores and shop in shops located in many cities throughout China. This partnership agreement is not material to the Company at this time.business.

  

Other income and expense and taxes

 

Interest income for the quarter and sixnine months ended JuneSeptember 30, 2012 was down approximately $103,000$105,000 and $210,000,$315,000, respectively, compared to the same periods last year, primarily due to a lower average investment balancebalances this year compared to last year. Interest expense wasremained relatively flat for the quarter and year-to-date.year-to-date periods.

 

The Company’s effective tax rate for the quarter ended JuneSeptember 30, 2012 was 30%35.2% as compared with 29%35.7% for the same period of 2011. The effective tax rate for the sixnine months ended JuneSeptember 30 was 33%34.1% in both 2012 and 34.0% 2011.

14

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s primary sourcesources of liquidity isare its cash, short-term marketable securities and its revolving line of credit. DuringThe Company used $51,000 of cash in operating activities during the first sixnine months of 2012, the Companyand generated $6.6$5.4 million of cash from operating activities compared with $14.9 million induring the same period one year ago. The decrease between years was primarily due to changes in operating assets and liabilities, and most significantly the accounts receivable and inventory balances. The increases in the accounts payable balance. Capitalreceivable and inventory balances were primarily due to the takeover of Bogs distribution in Canada.

The Company’s capital expenditures were $2.1$5.4 million in the first halfnine months of 2012 compared with $3.1$4.0 million last year. Capital expenditures in 2012 included payments on a project to connect a neighboring building that was acquired in December 2011 to the Company’s existing distribution center in Glendale, Wisconsin. This project is expected to be complete by the end of the year. Management estimates that annualthere will be an additional $3 million to $5 million in capital expenditures forduring the rest of 2012 are expected to be between $7complete this project. The Company expects capital expenditures to decrease to approximately $2 million and $8 million.to $4 million in 2013.

 

The Company paid cash dividends of $3.5 million and $3.6approximately $5.4 million during the sixnine months ended JuneSeptember 30, 2012 and 2011, respectively.2011.

 

The Company continues to repurchase its common stock under its share repurchase program when the Company believes market conditions are favorable. During the first halfnine months of 2012, the Company repurchased 165,986247,000 shares at a total cost of $3.8$5.7 million. As of JuneSeptember 30, 2012, the Company had 942,961861,569 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.

 

At JuneSeptember 30, 2012, the Company had a $50 million unsecured revolving line of credit. At the end of the secondthird quarter, the Company had $34$44 million of bank borrowings outstanding at an interest rate of approximately 1.2%. The Company’s borrowing facility includes one financial covenant that specifies a minimum level of net worth. The Company was in compliance with the covenant at JuneSeptember 30, 2012. The line of credit agreement expired on April 30, 2012 and was renewed for another term that expires April 30, 2013. Under the current line of credit agreement, the interest rate on bank borrowings is LIBOR plus 100 basis points. The facility expires on April 30, 2013. Effective November 2, 2012, the Company amended the line of credit agreement to increase the amount of the borrowing facility from $50 million to $60 million to cover possible short-term cash needs due to the timing of inventory purchases and capital expenditures during the rest of 2012. See Part II, Item 5, “Other Information” below for more information.

 

In conjunctionconnection with the Bogs acquisition, the Company has aheld back $2.0 million of the purchase price to be used to help satisfy any claims of indemnification. This holdback payment duewas paid in full to the former shareholders of Bogs in the third quarter of 2012 and2012. The Company also has two contingent payments due to the former shareholders of Bogs in 2013 and 2016. See Notes 2 and 10.

 

The Company will continue to evaluate the best uses for its available liquidity, including, among other uses, 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.

 

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, 2011.

 

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, 2011.

 

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 JuneSeptember 30, 2012.

 

        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) 
             
4/1/2012 - 4/30/2012  23,452  $22.76   23,452   1,079,724 
                 
5/1/2012 - 5/31/2012  95,997  $23.03   95,997   983,727 
                 
6/1/2012 - 6/30/2012  40,766  $22.96   40,766   942,961 
                 
Total  160,215  $22.97   160,215     
        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) 
                 
7/1/2012 - 7/31/2012  27,914  $23.01   27,914   915,047 
                 
8/1/2012 - 8/31/2012  30,950  $23.00   30,950   884,097 
                 
9/1/2012 - 9/30/2012  22,528  $22.94   22,528   861,569 
                 
Total  81,392  $22.99   81,392     

(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.

 

(1) In April 1998,Item 5. Other Information.

On November 2, 2012, the Company's BoardCompany entered into an amendment (the “Amendment”) to the credit agreement with BMO Harris Bank, N.A. (“BMO Harris Bank”). The Amendment increases the amount of Directors first authorizedthe borrowing facility from $50 million to $60 million. All other terms and conditions of the credit agreement remain the same. The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the Amendment, a stock repurchase programcopy of which is filed as Exhibit 10.1 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.this Form 10-Q.

 

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 9,November 7, 2012/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 ENDEDJuneSeptember 30, 2012

 

Exhibit Description Incorporation Herein By Reference
To

Filed


Herewith

       
10.1(1) SeventhEighth Amendment to Second Amended and Restated Credit Agreement, dated April 30,November 2, 2012 Exhibit 10.1 to Form 10-Q filed May 8, 2012  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 JuneSeptember 30, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets; (ii) ConsoidatedConsolidated Condensed Statements of Earnings and Comprehensive Income; (iii) Consolidated Condensed Statements of Cash Flows; and (v) Notes to Consolidated Condensed Financial Statements, furnished herewith   X

(1) Represents a non-material amendment to the Amended and Restated Credit Agreement