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 March 31,September 30, 2016

Or

 

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

 

For the transition period fromto _______________to _______________

 

Commission File Number:0-9068

 

WEYCO GROUP, 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.

YesxNo¨

 

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).   Yesx 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,”filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer¨Accelerated filerxNon-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 April 30,October 31, 2016, there were 10,620,91810,449,803 sharesof 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)

 

 March 31, December 31,  September 30, December 31, 
 2016  2015  2016  2015 
 (Dollars in thousands)  (Dollars in thousands) 
ASSETS:                
Cash and cash equivalents $16,317  $17,926  $14,840  $17,926 
Marketable securities, at amortized cost  3,476   4,522   2,778   4,522 
Accounts receivable, net  59,119   54,009   57,662   54,009 
Accrued income tax receivable  810   - 
Inventories  74,885   97,184   70,508   97,184 
Prepaid expenses and other current assets  4,002   5,835   3,586   5,835 
Total current assets  157,799   179,476   150,184   179,476 
                
Marketable securities, at amortized cost  21,737   20,685   21,783   20,685 
Deferred income tax benefits  101   - 
Property, plant and equipment, net  32,006   31,833   34,011   31,833 
Goodwill  11,112   11,112   11,112   11,112 
Trademarks  34,748   34,748   34,748   34,748 
Other assets  21,314   21,143   22,776   21,143 
Total assets $278,817  $298,997  $274,614  $298,997 
                
LIABILITIES AND EQUITY:                
Short-term borrowings $24,634  $26,649  $22,810  $26,649 
Accounts payable  4,752   13,339   5,646   13,339 
Dividend payable  -   2,147   -   2,147 
Accrued liabilities  9,543   17,484   10,520   17,484 
Accrued income tax payable  550   31   -   31 
Deferred income tax liabilities  1,996   1,537   2,010   1,537 
Total current liabilities  41,475   61,187   40,986   61,187 
                
Deferred income tax liabilities  -   70   1,628   70 
Long-term pension liability  30,505   30,188   28,768   30,188 
Other long-term liabilities  2,637   2,823   2,500   2,823 
                
Equity:        
Common stock  10,656   10,767   10,467   10,767 
Capital in excess of par value  46,134   45,759   47,416   45,759 
Reinvested earnings  158,093   160,325   153,028   160,325 
Accumulated other comprehensive loss  (17,200)  (18,467)  (16,730)  (18,467)
Total Weyco Group, Inc. equity  197,683   198,384   194,181   198,384 
Noncontrolling interest  6,517   6,345   6,551   6,345 
Total equity  204,200   204,729   200,732   204,729 
Total liabilities and equity $278,817  $298,997  $274,614  $298,997 

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

 

 12 

 

 

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (UNAUDITED)

 

  Three Months Ended March 31, 
  2016  2015 
  (In thousands, except per share amounts) 
       
Net sales $78,900  $78,052 
Cost of sales  51,773   49,315 
Gross earnings  27,127   28,737 
         
Selling and administrative expenses  23,312   22,951 
Earnings from operations  3,815   5,786 
         
Interest income  204   260 
Interest expense  (73)  (18)
Other income (expense), net  154   (278)
         
Earnings before provision for income taxes  4,100   5,750 
         
Provision for income taxes  1,468   2,158 
         
Net earnings  2,632   3,592 
         
Net loss attributable to noncontrolling interest  (55)  (41)
         
Net earnings attributable to Weyco Group, Inc. $2,687  $3,633 
         
Weighted average shares outstanding        
Basic  10,657   10,770 
Diluted  10,693   10,867 
         
Earnings per share        
Basic $0.25  $0.34 
Diluted $0.25  $0.33 
         
Cash dividends declared (per share) $0.20  $0.19 
         
Comprehensive income $4,126  $2,266 
         
Comprehensive income (loss) attributable to noncontrolling interest  172   (301)
         
Comprehensive income attributable to Weyco Group, Inc. $3,954  $2,567 

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

2

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

  Three Months Ended March 31, 
  2016  2015 
  (Dollars in thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net earnings $2,632  $3,592 
Adjustments to reconcile net earnings to net cash provided by operating activities -        
Depreciation  919   734 
Amortization  99   110 
Bad debt (income) expense  (142)  34 
Deferred income taxes  144   (55)
Net foreign currency transaction (gains) losses  (149)  203 
Stock-based compensation  364   360 
Pension expense  767   937 
Increase in cash surrender value of life insurance  (135)  (135)
Changes in operating assets and liabilities -        
Accounts receivable  (4,950)  (683)
Inventories  22,313   7,822 
Prepaid expenses and other assets  1,715   1,870 
Accounts payable  (8,571)  (8,841)
Accrued liabilities and other  (2,005)  (5,564)
Accrued income taxes  528   1,218 
Net cash provided by operating activities  13,529   1,602 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of marketable securities  (1,501)  (300)
Proceeds from maturities of marketable securities  1,475   1,715 
Purchase of property, plant and equipment  (924)  (531)
Net cash (used for) provided by investing activities  (950)  884 
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Cash dividends paid  (4,272)  (4,095)
Shares purchased and retired  (2,895)  (2,422)
Proceeds from stock options exercised  12   2,149 
Payment of contingent consideration  (5,217)  - 
Proceeds from bank borrowings  31,299   31,419 
Repayments of bank borrowings  (33,314)  (30,203)
Income tax benefits from stock-based compensation  -   412 
Net cash used for financing activities  (14,387)  (2,740)
         
Effect of exchange rate changes on cash and cash equivalents  199   (128)
         
Net decrease in cash and cash equivalents $(1,609) $(382)
         
CASH AND CASH EQUIVALENTS at beginning of period  17,926   12,499 
         
CASH AND CASH EQUIVALENTS at end of period $16,317  $12,117 
         
SUPPLEMENTAL CASH FLOW INFORMATION:        
Income taxes paid, net of refunds $693  $535 
Interest paid $73  $18 
  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 month periodand nine months ended March 31,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 March 31,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2016  2015  2016  2015  2016  2015 
 (In thousands, except per share amounts)  (In thousands, except per share amounts) 
Numerator:                        
Net earnings attributable to Weyco Group, Inc. $2,687  $3,633  $4,600  $5,526  $8,287  $11,199 
                        
Denominator:                        
Basic weighted average shares outstanding  10,657   10,770   10,461   10,793   10,556   10,788 
Effect of dilutive securities:                        
Employee stock-based awards  36   97   55   91   49   93 
Diluted weighted average shares outstanding  10,693   10,867   10,516   10,884   10,605   10,881 
                        
Basic earnings per share $0.25  $0.34  $0.44  $0.51  $0.79  $1.04 
                        
Diluted earnings per share $0.25  $0.33  $0.44  $0.51  $0.78  $1.03 

 

Diluted weighted average shares outstanding for the three months ended March 31,September 30, 2016, exclude anti-dilutive stock options totaling 932,0001,232,000 shares of common stock at a weighted average price of $27.09.$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 March 31,September 30, 2015, exclude anti-dilutive stock options totaling 652,700644,600 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-endedyear 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 March 31,September 30, 2016, and December 31, 2015.

 

  March 31, 2016  December 31, 2015 
  Amortized  Market  Amortized  Market 
  Cost  Value  Cost  Value 
  (Dollars in thousands) 
Investments:                
Current $3,476  $3,504  $4,522  $4,546 
Due from one through five years  12,974   13,653   12,395   13,057 
Due from six through ten years  7,699   8,124   6,929   7,217 
Due from eleven through twenty years  1,064   1,099   1,361   1,391 
Total $25,213  $26,380  $25,207  $26,211 

4

  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 March 31,September 30, 2016, and at December 31, 2015, were as follows:

 

  March 31, 2016  December 31, 2015 
  Unrealized  Unrealized  Unrealized  Unrealized 
  Gains  Losses  Gains  Losses 
  (Dollars in thousands) 
Investments $1,177  $(10) $1,014  $(10)
5

  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 March 31,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 March 31,September 30, 2016:

 

   March 31, 2016     September 30, 2016 
 Weighted Gross       Weighted Gross      
 Average Carrying Accumulated     Average Carrying Accumulated    
 Life (Years) Amount  Amortization  Net  Life (Years)  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  $(200) $-   5  $200  $(200) $- 
Customer relationships 15  3,500   (1,186)  2,314   15   3,500   (1,303)  2,197 
Total amortizable intangible assets $3,700  $(1,386) $2,314     $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).

 

 56 

 

 

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 tabletables 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 March 31,September 30, 2016 and 2015, was as follows:

 

Three Months Ended                  
March 31, Wholesale  Retail  Other  Total 
September 30, Wholesale  Retail  Other  Total 
 (Dollars in thousands)  (Dollars in thousands) 
2016                         
Product sales $61,636  $5,085  $11,569  $78,290  $61,645  $4,702  $12,197  $78,544 
Licensing revenues  610   -   -   610   525   -   -   525 
Net sales $62,246  $5,085  $11,569  $78,900  $62,170  $4,702  $12,197  $79,069 
Earnings from operations $3,333  $246  $236  $3,815  $6,286  $313  $731  $7,330 
                                
2015                                
Product sales $60,448  $4,920  $11,989  $77,357  $73,695  $4,767  $11,858  $90,320 
Licensing revenues  695   -   -   695   907   -   -   907 
Net sales $61,143  $4,920  $11,989  $78,052  $74,602  $4,767  $11,858  $91,227 
Earnings from operations $4,811  $272  $703  $5,786  $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 March 31,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2016  2015  2016  2015  2016  2015 
 (Dollars in thousands)  (Dollars in thousands) 
Benefits earned during the period $375  $411  $409  $411  $1,228  $1,232 
Interest cost on projected benefit obligation  614   673   612   674   1,837   2,021 
Expected return on plan assets  (584)  (592)  (607)  (593)  (1,822)  (1,777)
Net amortization and deferral  362   445   419   445   1,257   1,335 
Net pension expense $767  $937  $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.

7

 

7.Stock-Based Compensation Plans

 

During the three and nine months ended March 31,September 30, 2016, the Company recognized approximately $364,000$393,000 and $1,121,000 respectively, of compensation expense associated with stock option and restricted stock awards granted in the years 2012 through 2015.2016. During the three and nine months ended March 31,September 30, 2015, the Company recognized approximately $360,000$391,000 and $1,112,000, respectively, of compensation expense associated with stock option and restricted stock awards granted in the years 2011 through 2014.2015.

 

The following table summarizes the Company’s stock option activity for the three monthnine-month period ended March 31,September 30, 2016:

 

      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, 2015  1,351,826  $26.09           1,351,826  $26.09         
Granted  277,800  $25.51         
Exercised  (500) $23.87           (24,450) $23.92         
Forfeited or expired  (4,250) $26.75           (9,200) $26.67         
Outstanding at March 31, 2016  1,347,076  $26.09   3.8  $1,438,000 
Exercisable at March 31, 2016  597,656  $25.56   2.9  $967,000 
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 market valueclosing price of the Company's stock on March 31,September 30, 2016, the last trading day of $26.62the quarter, of $26.87 and the exercise price multiplied by the number of in-the-money outstanding and exercisable stock options.

 

6

The following table summarizes the Company’s stock option exercise activity for the three and nine months ended March 31,September 30, 2016 and 2015:

 

 Three Months Ended March 31,  Three Months Ended September 30, Nine Months Ended September 30, 
 2016  2015  2016 2015 2016 2015 
 (Dollars in thousands)  (Dollars in thousands) 
Total intrinsic value of stock options exercised $1  $1,057  $14  $30  $87  $1,188 
Cash received from stock option exercises $12  $2,149  $132  $184  $585  $2,696 
Income tax benefit from the exercise of stock options $-  $412  $5  $12  $34  $463 

 

The following table summarizes the Company’s restricted stock award activity for the three monthnine-month period ended March 31,September 30, 2016:

 

      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, 2015  55,250  $26.45           55,250  $26.45         
Issued  -   -           26,900   25.51         
Vested  (900)  26.94           (12,275)  26.41         
Forfeited  -   -           -   -         
Non-vested at March 31, 2016  54,350  $26.44   2.5  $1,447,000 
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 market valueclosing price of the Company's stock on March 31,September 30, 2016, the last trading day of $26.62the quarter, of $26.87 multiplied by the number of non-vested restricted shares outstanding.

 

8.Short-Term Borrowings

 

At March 31,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 March 31,September 30, 2016, outstanding borrowings were approximately $24.6$22.8 million at an interest rate of 1.19%1.3%. The highest balance on the line of credit during the quarter was approximately $28.4$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.

8

 

9.Contingent Consideration

 

Contingent consideration was comprised of two earn-outcontingent 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 22,23, 2016, in the amount of $5,217,000.

 

10.Financial Instruments

 

At March 31,September 30, 2016, the Company had forwardforeign exchange contracts outstanding to sell $2.5$1.5 million Canadian dollars at a price of approximately $1.9$1.2 million U.S. dollars. Additionally, the Company’s majority-owned subsidiary, Florsheim Australia, had forwardforeign exchange contracts outstanding to buy $7.6$5.2 million U.S. dollars at a price of approximately $10.3$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 forwardforeign 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.

 

7

11.Comprehensive Income

 

Comprehensive income for the three and nine months ended March 31,September 30, 2016 and 2015, was as follows:

 

 Three Months Ended March 31,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2016  2015  2016  2015  2016  2015 
 (Dollars in thousands)  (Dollars in thousands) 
Net earnings $2,632  $3,592  $4,701  $5,377  $8,411  $11,054 
Foreign currency translation adjustments  1,273   (1,597)  261   (1,609)  1,222   (3,109)
Pension liability, net of tax of $141 and $174, respectively  221   271 
Pension liability, net of tax of $163, $174, $490 and $520, respectively  256   272   767   815 
Total comprehensive income $4,126  $2,266  $5,218  $4,040  $10,400  $8,760 

 

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

 

 March 31, December 31,  September 30, December 31, 
 2016  2015  2016  2015 
 (Dollars in thousands)  (Dollars in thousands) 
Foreign currency translation adjustments $(4,645) $(5,691) $(4,721) $(5,691)
Pension liability, net of tax  (12,555)  (12,776)  (12,009)  (12,776)
Total accumulated other comprehensive loss $(17,200) $(18,467) $(16,730) $(18,467)

 

The following presents a tabular disclosure about changes in accumulated other comprehensive loss during the threenine months ended March 31,September 30, 2016:

 

 Foreign
Currency
Translation
Adjustments		  Defined
Benefit
Pension
Items		  Total  Foreign
Currency
Translation
Adjustments		  Defined
Benefit
Pension
Items		  Total 
Beginning balance, December 31, 2015 $(5,691) $(12,776) $(18,467) $(5,691) $(12,776) $(18,467)
Other comprehensive income before reclassifications  1,046   -   1,046   970   -   970 
Amounts reclassified from accumulated other comprehensive loss  -   221   221   -   767   767 
Net current period other comprehensive income  1,046   221   1,267   970   767   1,737 
Ending balance, March 31, 2016 $(4,645) $(12,555) $(17,200)
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 threenine months ended March 31,September 30, 2016:

 

 Amounts reclassified
from accumulated other
comprehensive loss for
the three months ended
March 31, 2016		  Affected line item in the
statement where net
income is presented		 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 $(28) (1) $(84)  (1)
Actuarial losses  390  (1)  1,341   (1)
Total before tax  362     1,257     
Tax benefit  (141)    (490)    
Net of tax $221    $767     

 

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

 

8

12.Equity

 

A reconciliation of the Company’s equity for the threenine months ended March 31,September 30, 2016, 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, 2015 $10,767  $45,759  $160,325  $(18,467) $6,345  $10,767  $45,759  $160,325  $(18,467) $6,345 
                                        
Net earnings  -   -   2,687   -   (55)  -   -   8,287   -   124 
Foreign currency translation adjustments  -   -   -   1,046   227   -   -   -   970   252 
Pension liability adjustment, net of tax  -   -   -   221   -   -   -   -   767   - 
Cash dividends declared  -   -   (2,136)  -   -   -   -   (6,568)  -   - 
Cash dividends paid to noncontrolling interest  -   -   -   -   (170)
Stock options exercised  1   11   -   -   -   25   560   -   -   - 
Issuance of restricted stock  27   (27)  -   -   - 
Stock-based compensation expense  -   364   -   -   -   -   1,121   -   -   - 
Income tax benefit from stock options exercised  -   -   -   -   -   -   3   -   -   - 
Shares purchased and retired  (112)  -   (2,783)  -   -   (352)  -   (9,016)  -   - 
                                        
Balance, March 31, 2016 $10,656  $46,134  $158,093  $(17,200) $6,517 
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.

 

 910 

 

 

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”“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.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 March 31,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

 

Sales and EarningsThird Quarter Highlights

 

Consolidated net sales for the firstthird quarter of 2016 were $78.9$79.1 million, up 1% overdown 13% as compared to last year’s firstthird quarter net sales of $78.1$91.2 million. Earnings from operations decreased 34% to $3.8were $7.3 million this quarter, from $5.8a decrease of 20% as compared to $9.1 million in the same periodthird quarter of 2015. Consolidated net earnings attributable to Weyco Group, Inc. were $2.7$4.6 million in the firstthird quarter of 2016, down 26% from $3.617% as compared to $5.5 million in the same period last year’s first quarter.year. Diluted earnings per share were $0.25 for$0.44 in the three months ended March 31,third quarter of 2016 as compared to $0.33and $0.51 per share in the firstthird quarter of 2015.

 

The majority of the increasedecrease in consolidated net sales came from the Company’s wholesale segment. Wholesale net sales increased $1.1declined $12.4 million this quarter, compared to the same period last year.one year ago. This increasedecrease was primarily due to higherlower sales of the BOGS, Nunn Bush and Stacy Adams and Florsheim brands, partially offset by decreasedbrands. Sales of the BOGS brand were down following last year’s mild winter in North America, while sales of BOGS product.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 Australia also had decreased net sales, caused by the translation of the weaker Australian currency into U.S. dollars.Europe.

 

Consolidated earnings from operations decreased $2.0 million for the quarter compared to the same period last year. A majority of this decrease came from the Company’s wholesale segment. Wholesale earnings from operations decreased $1.5$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.

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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 gross marginssales of the BOGS and Nunn Bush brands. Sales in Canadathe Company’s retail segment and higher U.S. selling and administrative expenses.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 at Florsheim Australia decreased approximately $500,000 this quarter, mainly due to lower gross margins.for the year-to-date period were also down in the Company’s retail segment and in its other businesses.

 

Financial Position Highlights

 

At March 31,September 30, 2016, cash and marketable securities totaled $41.5$39.4 million and outstanding debt totaled $24.6$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 threenine months of 2016, the Company generated $13.5$27.8 million of cash from operations.operations, mainly by reducing its inventory levels this year. The Company paid dividends of $4.3used funds to repurchase $9.4 million spent $2.9 million on purchases of Company stock, paidto pay $8.8 million in dividends, and to pay down $2.0$3.8 million on its revolving line of credit and had $924,000 of capital expenditures.credit. In addition, the Company paid $5.2 million for the final earn-out payment related to the 2011 acquisition of Bogs.Bogs and spent $4.9 million on capital expenditures.

10

 

SEGMENT ANALYSIS

 

Net sales and earnings from operations for the Company’s segments forin the three and nine months ended March 31,September 30, 2016 and 2015, were as follows:

 

 Three Months Ended March 31, %  Three Months Ended September 30, % Nine Months Ended September 30, % 
 2016  2015  Change  2016  2015  Change  2016  2015  Change 
 (Dollars in thousands)    (Dollars in thousands) 
Net Sales                                    
North American Wholesale $62,246  $61,143   2% $62,170  $74,602   -17% $165,876  $183,831   -10%
North American Retail  5,085   4,920   3%  4,702   4,767   -1%  14,508   14,707   -1%
Other  11,569   11,989   -4%  12,197   11,858   3%  34,452   34,675   -1%
Total $78,900  $78,052   1% $79,069  $91,227   -13% $214,836  $233,213   -8%
                                    
Earnings from Operations                                    
North American Wholesale $3,333  $4,811   -31% $6,286  $8,156   -23% $10,638  $15,160   -30%
North American Retail  246   272   -10%  313   402   -22%  787   1,163   -32%
Other  236   703   -66%  731   578   26%  1,292   1,931   -33%
Total $3,815  $5,786   -34% $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 March 31,September 30, 2016 and 2015, were as follows:

 

North American Wholesale Segment Net Sales

 

 Three Months Ended March 31, %  Three Months Ended September 30, % Nine Months Ended September 30, % 
 2016  2015  Change  2016  2015  Change  2016  2015  Change 
 (Dollars in thousands)    (Dollars in thousands) 
North American Net Sales                                    
Stacy Adams $22,901  $20,450   12% $14,861  $15,761   -6% $52,092  $51,370   1%
Nunn Bush  16,814   17,369   -3%  13,362   17,069   -22%  42,909   49,783   -14%
Florsheim  13,634   12,604   8%  14,262   13,275   7%  38,513   37,028   4%
BOGS/Rafters  7,751   9,344   -17%  18,462   26,598   -31%  28,950   41,132   -30%
Umi  536   681   -21%  698   992   -30%  1,681   2,208   -24%
Total North American Wholesale $61,636  $60,448   2% $61,645  $73,695   -16% $164,145  $181,521   -10%
Licensing  610   695   -12%  525   907   -42%  1,731   2,310   -25%
Total North American Wholesale Segment $62,246  $61,143   2%
Total North American Wholesale                        
Segment $62,170  $74,602   -17% $165,876  $183,831   -10%

 

The increase in Stacy Adams first quarter net sales was driven by strong new product sales. The decline atand Nunn Bush waswere both impacted by a slowdown in consumer spending in the footwear and apparel segments this quarter. Stacy Adams sales were down mainly due to lowerwith off-price retailers. For the quarter and year-to-date periods, Nunn Bush sales towere down across a number of distribution categories, but most significantly, with mid-tier department stores. Mid-tier department stores and off-price retailers.are facing a challenging environment as consumer buying shifts to the internet. Net sales of the Florsheim net salesbrand were up for the quarter, primarilymainly due to higher sales to department stores and national shoe chains. NetTo date in 2016, Florsheim’s net sales of thewere up due to higher sales to national shoe chains and department stores, partially offset by lower sales to international retailers. BOGS and Rafters brandsnet sales were down thisfor the quarter primarily dueand first nine months of 2016, compared to thisthe same periods last year. These decreases can largely be attributed to last year’s mild winter.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.

11

 

Earnings from Operations

 

Overall product margins forEarnings from operations in the North American wholesale segment were 28.5%$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 firstthird quarter of 2016 as compared to 30.2%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 first quarter of 2015. The majority of this decreaseU.S. were up slightly due to increased selling prices on select products, as described above. This increase was due topartially offset by lower gross margins in Canada. Gross margins in Canada continue to be negatively affected by the weaker Canadian dollar becauserelative to the U.S. dollar, as inventory is purchased in U.S. dollars. Earnings from operations inIn 2015, gains recorded on favorable foreign exchange contacts partially offset the North American wholesale segment decreased 31% to $3.3 million inimpact of the first quarter of 2015, from $4.8 million in the same period last year. The decline in wholesale operating earnings resulted primarily from lower gross margins in Canada and higher U.S. selling and administrative expenses.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 $3.2 million and $2.8 million for three-monththe third quarter of 2016 versus $2.9 million for the same period of 2015. For the nine-month periods ended March 31,September 30, 2016 and 2015, distribution costs were $8.8 million and $8.3 million, respectively. TheseThe 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. WholesaleAs a percent of net sales, wholesale selling and administrative expenses were 24%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 first quarter of 2016 versus 23% in the same period last year. The increaseand year-to-date periods was primarily due to higher distributionlower sales volumes in 2016, as many of the Company’s selling and administrative costs mainly an increaseare fixed in temporary labor costsnature and additional storage costsdo not correlate with changes in the first quarter of 2016.sales volume.

 

North American Retail Segment

 

Net Sales

 

Net sales in the Company’s North American retail segment were $5.1 milliondeclined $65,000 and $199,000, in the firstthird quarter ofand for the nine months ended September 30, 2016, up 3% as compared to $4.9 million in 2015.respectively. Same store sales, which include sales of both the U.S. internet business and brick and mortar stores, were up 7%increased 2% for the quarter. There were two fewer domestic retail stores operating duringquarter and increased 3% for the first quarter of 2016 than there wereyear-to-date period, as compared to the same periods in last year’s first quarter.2015. The increaseincreases in same store sales wasfor both periods were due to an increasehigher sales in the Company’s U.S. internet business.

 

Earnings from Operations

 

EarningsRetail 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 North American retail segment were $246,000Company’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 firstinternet business. Gross earnings as a percent of net sales were 65.5% in the third quarter of 2016 down 10% as compared to $272,00066.0% in the firstthird quarter of 2015. RetailFor the nine months ended September 30, retail gross earnings were 64.8%as a percent of net sales were 65.1% in the first quarter of 2016 as compared to 65.9% of net salesand 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. RetailSelling 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 were 60.0%as a percent of net sales were 60% in the first quarter of 2016 versus 60.3%and 58% in last year’s first quarter.2015.

 

Other

 

The Company’s other businesses include its wholesale and retailnet 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. NetEurope 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 ofvolumes and operating earnings at Florsheim Europe.

For the Company’snine months ended September 30, 2016, other businessesnet sales were $11.6$34.5 million, down 1% from $34.7 million in the first quarter of 2016, down 4% as compared to $12.0 million in 2015.same period last year. This decrease was due to lower net sales at Florsheim Australia, causedlargely offset by increased sales at Florsheim Europe. Florsheim Australia’s sales through September 30th were down 4% in 2016, compared to the translation of the weaker Australian currency into U.S. dollars.same period last year. In local currency, Florsheim Australia’s net sales were up 2%down 1% for the quarter. This increase was due to higher sales volumes in both its retail businesses, where sales were up 1% (same store sales up 4%), and its wholesale businesses, where sales were up 3%.

Collectively, earningsyear-to-date period. Earnings from operations of Florsheim Australia and Florsheim Europe were $236,000 this quarter,$1.3 million in the first nine months of 2016, down 66%33% as compared to $703,000$1.9 million in the first quarter of 2015.same period last year. This decrease was primarilylargely 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 and taxes

 

Interest income for the first quarter ofand nine months ended September 30, 2016, was down $56,000 as$31,000 and $133,000, respectively, compared to the first quarter of 2015,same periods last year, due to a lower average investment balancebalances this year compared to last year. InterestFor the three months ended September 30, 2016, interest expense was up $55,000 fordecreased $6,000, compared to the quarter,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 this yearthroughout 2016, as compared to last year.

 

The Company’s effective tax rateOther income (expense) for the quarter and nine months ended March 31,September 30, 2016, was 35.8% asimproved by $637,000 and $1,572,000, respectively, compared to 37.5% forthe 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.

12

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s primary sources of liquidity are its cash, short-term marketable securities and its revolving line of credit.Thecredit. During the first nine months of 2016, the Company generated $13.5$27.8 million of cash from operating activities during the first three monthscompared with a use of 2016, compared to $1.6$27.2 million of cash in the same period one year ago.of 2015. The increasechange between years was primarily due to the largechanges in operating assets and liabilities, principally inventory. The decrease in inventory at September 30, 2016 was the inventory balance duringresult of the first quarter.Company reducing its inventories to coincide with lower backlogs, mainly for the BOGS brand.

 

The Company paid cash dividends of $4.3$8.8 million and $4.1$8.4 million during the threenine months ended March 31,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 quarternine months of 2016, the Company repurchased 111,939352,175 shares at a total cost of $2.9$9.4 million. As of March 31,September 30, 2016, the Company had 864,219approximately 624,000 shares available under its previously announced stock repurchase program. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” below for more information.

 

Capital expenditures were $924,000totaled $4.9 million in the first threenine 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 April 2016,addition, the Company begancompleted a construction project to increase the capacity of its U.S. distribution center. The Company expects this project to be complete in the third quarter. Including this project, managementManagement estimates that annual capital expenditures for 2016 will be between $4 million and $5approximately $5.5 million.

 

At March 31,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 paid downrepaid a net of $2.0$3.8 million on the line of credit during the first threenine months of 2016. At March 31,September 30, 2016, outstanding borrowings were $24.6$22.8 million at an interest rate of 1.19%1.3%. The highest balance on the line of credit during the quarter was approximately $28.4$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.

 

In connection with the Bogs acquisition, the Company had to pay two earn-out payments to the former shareholders of Bogs. The Company made the first earn-out payment of $1,270,000 in the first quarter of 2013. The secondA contingent consideration payment was duemade in the first quarter of 2016 and was paid on March 22, 2016 in the amount of $5,217,000. See Note 9 of the accompanying consolidated condensed financial statements.

 

As of March 31,At September 30, 2016, approximately $1.9$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 quarternine months ended March 31,September 30, 2016, from those disclosed in the Company’s Annual Report on Form 10-K for the year-endedyear 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-endedyear ended December 31, 2015.

13

 

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.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-endedyear 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 monththree-month period ended March 31,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) 
             
1/1/2016 - 1/31/2016  40,370  $25.49   40,370   935,788 
                 
2/1/2016 - 2/29/2016  32,907  $26.08   32,907   902,881 
                 
3/1/2016 - 3/31/2016  38,662  $26.06   38,662   864,219 
                 
Total  111,939  $25.86   111,939     
         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.

14

 

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:    May 5,November 8, 2016
/s/ John F. Wittkowske
 John F. Wittkowske
 Senior Vice President and Chief Financial Officer

 

 1517 

 

 

WEYCO GROUP, INC.

(THE “REGISTRANT”)

(COMMISSION FILE NO. 0-9068)

 

EXHIBIT INDEX

TO

CURRENT REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDEDMarch 31,September 30, 2016

 

Exhibit Description Incorporation Herein By Reference ToFiled
Herewith
10.1Amendment to PNC Bank Loan Agreement and Committed Line of Credit Note, dated November 4, 2016 X
10.2SecondToAmendment to Weyco Group, Inc. Pension Plan, dated November 7, 2016 Filed
Herewith		 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 March 31,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 (v)(iv) Notes to Consolidated Condensed Financial Statements, furnished herewith   X