UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2016March 31, 2017

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.

(Exact name of registrant as specified in its charter)

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¨ Emerging Growth Company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. __

 

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 October 31, 2016,April 28, 2017, there were 10,449,803 sharesof10,403,947 shares of common stock outstanding.

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

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

 

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

  March 31,  December 31, 
  2017  2016 
  (Dollars in thousands) 
ASSETS:        
Cash and cash equivalents $21,473  $13,710 
Marketable securities, at amortized cost  4,756   4,601 
Accounts receivable, net  47,762   50,726 
Income tax receivable  0   789 
Inventories  55,134   69,898 
Prepaid expenses and other current assets  3,076   6,203 
Total current assets  132,201   145,927 
         
Marketable securities, at amortized cost  19,283   21,061 
Deferred income tax benefits  701   660 
Property, plant and equipment, net  33,345   33,717 
Goodwill  11,112   11,112 
Trademarks  32,978   32,978 
Other assets  22,762   22,785 
Total assets $252,382  $268,240 
         
LIABILITIES AND EQUITY:        
Short-term borrowings $-  $4,268 
Accounts payable  4,844   11,942 
Dividend payable  -   2,192 
Accrued liabilities  9,275   10,572 
Accrued income tax payable  193   - 
Total current liabilities  14,312   28,974 
         
Deferred income tax liabilities  801   703 
Long-term pension liability  27,716   27,801 
Other long-term liabilities  2,453   2,482 
         
Common stock  10,430   10,505 
Capital in excess of par value  50,911   50,184 
Reinvested earnings  155,182   157,468 
Accumulated other comprehensive loss  (16,077)  (16,569)
Total Weyco Group, Inc. equity  200,446   201,588 
Noncontrolling interest  6,654   6,692 
Total equity  207,100   208,280 
Total liabilities and equity $252,382  $268,240 

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

 1 

 

 

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETSSTATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (UNAUDITED)

 

  September 30,  December 31, 
  2016  2015 
  (Dollars in thousands) 
ASSETS:        
Cash and cash equivalents $14,840  $17,926 
Marketable securities, at amortized cost  2,778   4,522 
Accounts receivable, net  57,662   54,009 
Accrued income tax receivable  810   - 
Inventories  70,508   97,184 
Prepaid expenses and other current assets  3,586   5,835 
Total current assets  150,184   179,476 
         
Marketable securities, at amortized cost  21,783   20,685 
Property, plant and equipment, net  34,011   31,833 
Goodwill  11,112   11,112 
Trademarks  34,748   34,748 
Other assets  22,776   21,143 
Total assets $274,614  $298,997 
         
LIABILITIES AND EQUITY:        
Short-term borrowings $22,810  $26,649 
Accounts payable  5,646   13,339 
Dividend payable  -   2,147 
Accrued liabilities  10,520   17,484 
Accrued income tax payable  -   31 
Deferred income tax liabilities  2,010   1,537 
Total current liabilities  40,986   61,187 
         
Deferred income tax liabilities  1,628   70 
Long-term pension liability  28,768   30,188 
Other long-term liabilities  2,500   2,823 
         
Equity:        
Common stock  10,467   10,767 
Capital in excess of par value  47,416   45,759 
Reinvested earnings  153,028   160,325 
Accumulated other comprehensive loss  (16,730)  (18,467)
Total Weyco Group, Inc. equity  194,181   198,384 
Noncontrolling interest  6,551   6,345 
Total equity  200,732   204,729 
Total liabilities and equity $274,614  $298,997 
  Three Months Ended March 31, 
  2017  2016 
  (In thousands, except per share amounts) 
       
Net sales $69,120  $78,900 
Cost of sales  43,892   51,773 
Gross earnings  25,228   27,127 
         
Selling and administrative expenses  21,769   22,920 
Earnings from operations  3,459   4,207 
         
Interest income  179   204 
Interest expense  (7)  (73)
Other expense, net  (135)  (238)
         
Earnings before provision for income taxes  3,496   4,100 
         
Provision for income taxes  1,381   1,468 
         
Net earnings  2,115   2,632 
         
Net loss attributable to noncontrolling interest  (102)  (55)
         
Net earnings attributable to Weyco Group, Inc. $2,217  $2,687 
         
Weighted average shares outstanding        
Basic  10,435   10,657 
Diluted  10,498   10,693 
         
Earnings per share        
Basic $0.21  $0.25 
Diluted $0.21  $0.25 
         
Cash dividends declared (per share) $0.21  $0.20 
         
Comprehensive income $2,875  $4,126 
         
Comprehensive income attributable to noncontrolling interest  166   172 
         
Comprehensive income attributable to Weyco Group, Inc. $2,709  $3,954 

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 EARNINGS AND COMPREHENSIVE INCOMECASH FLOWS (UNAUDITED)

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2016  2015  2016  2015 
  (In thousands, except per share amounts) 
             
Net sales $79,069  $91,227  $214,836  $233,213 
Cost of sales  49,747   58,617   136,096   147,443 
Gross earnings  29,322   32,610   78,740   85,770 
                 
Selling and administrative expenses  21,992   23,474   66,023   67,516 
Earnings from operations  7,330   9,136   12,717   18,254 
                 
Interest income  190   221   584   717 
Interest expense  (61)  (67)  (228)  (97)
Other income (expense), net  113   (524)  422   (1,150)
                 
Earnings before provision for income taxes  7,572   8,766   13,495   17,724 
                 
Provision for income taxes  2,871   3,389   5,084   6,670 
                 
Net earnings  4,701   5,377   8,411   11,054 
                 
Net earnings (losses) attributable to noncontrolling interest  101   (149)  124   (145)
                 
Net earnings attributable to Weyco Group, Inc. $4,600  $5,526  $8,287  $11,199 
                 
Weighted average shares outstanding                
Basic  10,461   10,793   10,556   10,788 
Diluted  10,516   10,884   10,605   10,881 
                 
Earnings per share                
Basic $0.44  $0.51  $0.79  $1.04 
Diluted $0.44  $0.51  $0.78  $1.03 
                 
Cash dividends declared (per share) $0.21  $0.20  $0.62  $0.59 
                 
Comprehensive income $5,218  $4,040  $10,400  $8,760 
                 
Comprehensive income (loss) attributable to noncontrolling interest  235   (562)  376   (846)
                 
Comprehensive income attributable to Weyco Group, Inc. $4,983  $4,602  $10,024  $9,606 
  Three Months Ended March 31, 
  2017  2016 
  (Dollars in thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net earnings $2,115  $2,632 
Adjustments to reconcile net earnings to net cash provided by operating activities -        
Depreciation  1,001   919 
Amortization  97   99 
Bad debt expense (income)  133   (142)
Deferred income taxes  10   144 
Net foreign currency transaction losses (gains)  1   (149)
Stock-based compensation  369   364 
Pension expense  266   767 
Increase in cash surrender value of life insurance  (135)  (135)
Changes in operating assets and liabilities -        
Accounts receivable  2,823   (4,950)
Inventories  14,765   22,313 
Prepaid expenses and other assets  3,210   1,715 
Accounts payable  (7,096)  (8,571)
Accrued liabilities and other  (1,291)  (2,005)
Accrued income taxes  981   528 
Net cash provided by operating activities  17,249   13,529 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of marketable securities  (250)  (1,501)
Proceeds from maturities of marketable securities  1,850   1,475 
Purchase of property, plant and equipment  (416)  (924)
Net cash provided by (used for) investing activities  1,184   (950)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Cash dividends paid  (4,378)  (4,272)
Cash dividends paid to noncontrolling interest of subsidiary  (204)  - 
Shares purchased and retired  (2,393)  (2,895)
Proceeds from stock options exercised  356   12 
Payment of contingent consideration  -   (5,217)
Proceeds from bank borrowings  6,816   31,299 
Repayments of bank borrowings  (11,084)  (33,314)
Income tax benefits from stock-based compensation  15   - 
Net cash used for financing activities  (10,872)  (14,387)
         
Effect of exchange rate changes on cash and cash equivalents  202   199 
         
Net increase (decrease) in cash and cash equivalents $7,763  $(1,609)
         
CASH AND CASH EQUIVALENTS at beginning of period  13,710   17,926 
         
CASH AND CASH EQUIVALENTS at end of period $21,473  $16,317 
         
SUPPLEMENTAL CASH FLOW INFORMATION:        
Income taxes paid, net of refunds $308  $693 
Interest paid $7  $73 

 

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

 3

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

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

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

4 

 

 

NOTES:

 

1.Financial Statements

 

In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and nine monthsthree-month period ended September 30, 2016,March 31, 2017, may not necessarily be indicative of the results for the full year.

 

2.New Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2017-07“Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost”(“ASU 2017-07”). This new standard requires that employers disaggregate the service cost component from the other components of net periodic benefit cost in the income statement. The service cost component should be included in the same line item as other compensation costs rendered by employees, while the other cost components should be presented outside of earnings from operations. The amendments in this update are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. The Company retrospectively adopted this ASU in the first quarter of 2017. Accordingly, the service cost component of net periodic benefit cost was included within selling and administrative expenses while the other cost components were classified in other expense, net, in the Consolidated Condensed Statements of Earnings and Comprehensive Income (Unaudited). See Note 8.

3.Reclassification

Certain prior year amounts in the Consolidated Condensed Statements of Earnings and Comprehensive Income (Unaudited) were reclassified to conform to current year presentation. For the three months ended March 31, 2016, the Company reclassified $392,000 of expense from selling and administrative expenses to other expense, net. This amount represents the non-service cost components of net periodic benefit cost for the period then ended, and was reclassified in connection with the adoption of ASU 2017-07. This reclassification had no effect on previously reported net earnings or equity.

4.Earnings Per Share

 

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

 

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended March 31, 
 2016  2015  2016  2015  2017  2016 
 (In thousands, except per share amounts)  (In thousands, except per share amounts) 
Numerator:                        
Net earnings attributable to Weyco Group, Inc. $4,600  $5,526  $8,287  $11,199  $2,217  $2,687 
                        
Denominator:                        
Basic weighted average shares outstanding  10,461   10,793   10,556   10,788   10,435   10,657 
Effect of dilutive securities:                        
Employee stock-based awards  55   91   49   93   63   36 
Diluted weighted average shares outstanding  10,516   10,884   10,605   10,881   10,498   10,693 
                        
Basic earnings per share $0.44  $0.51  $0.79  $1.04  $0.21  $0.25 
                        
Diluted earnings per share $0.44  $0.51  $0.78  $1.03  $0.21  $0.25 

 

Diluted weighted average shares outstanding for the three months ended September 30, 2016,March 31, 2017, exclude anti-dilutive stock options totaling 1,232,000573,000 shares of common stock at a weighted average price of $26.14.$27.45. Diluted weighted average shares outstanding for the ninethree months ended September 30,March 31, 2016, exclude anti-dilutive stock options totaling 924,161932,000 shares of common stock at a weighted average price of $26.78. Diluted weighted average shares outstanding for the three months ended September 30, 2015, exclude anti-dilutive stock options totaling 644,600 shares of common stock at a weighted average price of $27.76. Diluted weighted average shares outstanding for the nine months ended September 30, 2015, exclude anti-dilutive stock options totaling 648,220 shares of common stock at a weighted average price of $27.76.$27.09.

4

 

3.5.Investments

 

As noted in the Company’s Annual Report on Form 10-K for the year endedyear-ended December 31, 2015,2016, all of the Company’s municipal bond investmentsmarketable securities 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 investmentmarketable securities as of September 30, 2016,March 31, 2017, and December 31, 2015.2016.

 

 September 30, 2016  December 31, 2015  March 31, 2017  December 31, 2016 
 Amortized Market Amortized Market  Amortized Market Amortized Market 
 Cost  Value  Cost  Value  Cost  Value  Cost  Value 
 (Dollars in thousands)  (Dollars in thousands) 
Municipal bonds:                                
Current $2,778  $2,797  $4,522  $4,546  $4,756  $4,770  $4,601  $4,610 
Due from one through five years  13,808   14,412   12,395   13,057   11,437   11,820   12,133   12,486 
Due from six through ten years  7,501   7,970   6,929   7,217   6,373   6,536   7,705   7,804 
Due from eleven through twenty years  474   486   1,361   1,391   1,473   1,509   1,223   1,222 
Total $24,561  $25,665  $25,207  $26,211  $24,039  $24,635  $25,662  $26,122 

 

The unrealized gains and losses on investmentmarketable securities at September 30, 2016,March 31, 2017, and at December 31, 2015,2016, were as follows:

 

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)
  March 31, 2017  December 31, 2016 
  Unrealized  Unrealized  Unrealized  Unrealized 
  Gains  Losses  Gains  Losses 
  (Dollars in thousands) 
Municipal bonds $658  $(62) $546  $(86)

 

The estimated market values provided are level 2 valuations as defined by Accounting Standards Codification 820,Fair Value Measurements and Disclosures (“(“ASC 820”). The Company reviewed its portfolio of investments as of September 30, 2016March 31, 2017, and determined that no other-than-temporary market value impairment exists.

 

4.6.Intangible Assets

 

The Company’s indefinite-lived andintangible assets as recorded in the Consolidated Balance Sheets consisted of the following:

  March 31, 2017  December 31, 2016 
  Gross        Gross       
  Carrying  Accumulated     Carrying  Accumulated    
  Amount  Impairment  Net  Amount  Impairment  Net 
  (Dollars in thousands)  (Dollars in thousands) 
Indefinite-lived intangible assets                        
Goodwill $11,112  $-  $11,112  $11,112  $-  $11,112 
Trademarks  34,748   (1,770)  32,978   34,748   (1,770)  32,978 
Total indefinite-lived intangible assets $45,860  $(1,770) $44,090  $45,860  $(1,770) $44,090 

5

The Company’s amortizable intangible assets as recorded in the Consolidated Condensed Balance Sheets (Unaudited) consisted of the following as of September 30, 2016:following:

 

     September 30, 2016 
  Weighted  Gross       
  Average  Carrying  Accumulated    
  Life (Years)  Amount  Amortization  Net 
     (Dollars in thousands) 
Indefinite-lived intangible assets:                
Goodwill     $11,112  $-  $11,112 
Trademarks      34,748   -   34,748 
Total indefinite-lived intangible assets     $45,860  $-  $45,860 
                 
Amortizable intangible assets:                
Non-compete agreement  5  $200  $(200) $- 
Customer relationships  15   3,500   (1,303)  2,197 
Total amortizable intangible assets     $3,700  $(1,503) $2,197 
    March 31, 2017  December 31, 2016 
  Weighted Gross        Gross       
  Average Carrying  Accumulated     Carrying  Accumulated    
  Life (Years) Amount  Amortization  Net  Amount  Amortization  Net 
    (Dollars in thousands)  (Dollars in thousands) 
Amortizable intangible assets Customer relationships 15 $3,500  $(1,419) $2,081  $3,500  $(1,361) $2,139 
Total amortizable intangible assets   $3,500  $(1,419) $2,081  $3,500  $(1,361) $2,139 

 

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 SheetsSheets. (Unaudited).

6

 

5.7.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 tablestable below includes the Company’s wholesale and retail operations in Australia, South Africa, Asia Pacific and Europe, which do not meet the criteria for separate reportable segment classification. Summarized segment data for the three and nine months ended September 30,March 31, 2017 and 2016, and 2015, was as follows:

 

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

Nine Months Ended         
September 30, Wholesale Retail Other Total 
Three Months Ended         
March 31, Wholesale Retail Other Total 
 (Dollars in thousands) 
2017         
Product sales $52,149  $4,930  $11,340  $68,419 
Licensing revenues  701   -   -   701 
Net sales $52,850  $4,930  $11,340  $69,120 
Earnings from operations $3,166  $43  $250  $3,459 
 (Dollars in thousands)                 
2016                         
Product sales $164,146  $14,508  $34,452  $213,106  $61,636  $5,085  $11,569  $78,290 
Licensing revenues  1,730   -   -   1,730   610   -   -   610 
Net sales $165,876  $14,508  $34,452  $214,836  $62,246  $5,085  $11,569  $78,900 
Earnings from operations $10,638  $787  $1,292  $12,717  $3,725  $246  $236  $4,207 
                
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 

 

6.8.Employee Retirement Plans

 

The components of the Company’s net pension expenseperiodic benefit cost were as follows:

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2016  2015  2016  2015 
  (Dollars in thousands) 
Benefits earned during the period $409  $411  $1,228  $1,232 
Interest cost on projected benefit obligation  612   674   1,837   2,021 
Expected return on plan assets  (607)  (593)  (1,822)  (1,777)
Net amortization and deferral  419   445   1,257   1,335 
Net pension expense $833  $937  $2,500  $2,811 
  Three Months Ended March 31, 
  2017  2016 
  (Dollars in thousands) 
Service cost $140  $375 
Interest cost  548   614 
Expected return on plan assets  (542)  (584)
Net amortization and deferral  120   362 
Net periodic benefit cost $266  $767 

 

On September 15, 2016,The components of net periodic benefit cost other than 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 underservice cost component are included in "other expense, net" in the plan. Benefits would be calculated asConsolidated Condensed Statements of December 1, 2016, with lump sum payments being paid in December 2016Earnings and annuity payments beginning January 1, 2017. This amendment will not have a material impact on the consolidated financial statements.Comprehensive Income (Unaudited).

 

 76 

 

 

7.9.Stock-Based Compensation Plans

 

During the three and nine months ended September 30, 2016,March 31, 2017, the Company recognized approximately $393,000 and $1,121,000 respectively,$369,000 of compensation expense associated with stock option and restricted stock awards granted in the years 20122013 through 2016. During the three and nine months ended September 30, 2015,March 31, 2016, the Company recognized approximately $391,000 and $1,112,000, respectively,$364,000 of compensation expense associated with stock option and restricted stock awards granted in the years 20112012 through 2015.

 

The following table summarizes the Company’s stock option activity for the nine-monththree-month period ended September 30, 2016:March 31, 2017:

 

        Weighted    
     Weighted  Average    
     Average  Remaining  Aggregate 
     Exercise  Contractual  Intrinsic 
  Shares  Price  Term (Years)  Value* 
Outstanding at December 31, 2015  1,351,826  $26.09         
Granted  277,800  $25.51         
Exercised  (24,450) $23.92         
Forfeited or expired  (9,200) $26.67         
Outstanding at September 30, 2016  1,595,976  $26.02   3.8  $1,918,000 
Exercisable at September 30, 2016  725,269  $25.78   2.8  $1,452,000 
        Weighted    
     Weighted  Average    
     Average  Remaining  Aggregate 
     Exercise  Contractual  Intrinsic 
  Shares  Price  Term (Years)  Value* 
Outstanding at December 31, 2016  1,486,257  $26.13         
Exercised  (13,387) $26.59         
Forfeited or expired  (2,650) $26.08         
Outstanding at March 31, 2017  1,470,220  $26.12   3.4  $3,002,000 
Exercisable at March 31, 2017  748,620  $26.06   2.4  $1,610,000 

 

* The aggregate intrinsic value of outstanding and exercisable stock options is defined as the difference between the closing pricemarket value of the Company's stock on September 30, 2016, the last trading dayMarch 31, 2017 of the quarter, of $26.87$28.08 and the exercise price multiplied by the number of in-the-money outstanding and exercisable stock options.

 

The following table summarizes the Company’s stock option exercise activity for the three and nine months ended September 30, 2016March 31, 2017 and 2015:2016:

 

 Three Months Ended September 30, Nine Months Ended September 30,  Three Months Ended March 31, 
 2016 2015 2016 2015  2017  2016 
 (Dollars in thousands)  (Dollars in thousands) 
Total intrinsic value of stock options exercised $14  $30  $87  $1,188  $41  $1 
Cash received from stock option exercises $132  $184  $585  $2,696  $356  $12 
Income tax benefit from the exercise of stock options $5  $12  $34  $463  $15  $- 
        

 

The following table summarizes the Company’s restricted stock award activity for the nine-monththree-month period ended September 30, 2016:March 31, 2017:

 

      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         
Non-vested at December 31, 2016  58,500  $26.09         
Issued  26,900   25.51           -   -         
Vested  (12,275)  26.41           -             
Forfeited  -   -           -   -         
Non-vested at September 30, 2016  69,875  $26.09   2.7  $1,878,000 
Non-vested at March 31, 2017  58,500  $26.09   2.5  $1,643,000 

 

* The aggregate intrinsic value of non-vested restricted stock was calculated using the closing pricemarket value of the Company's stock on September 30, 2016, the last trading dayMarch 31, 2017 of the quarter, of $26.87$28.08 multiplied by the number of non-vested restricted shares outstanding.

 

8.10.Short-Term Borrowings

 

At September 30, 2016,March 31, 2017, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 4, 2016.3, 2017. The line of credit bears interest at LIBOR plus 0.75%. At September 30, 2016,March 31, 2017, the Company had no amounts outstanding borrowings were approximately $22.8 million at an interest rateon the line of 1.3%.credit. The highest balance on the line of credit during the quarter was approximately $23.5$4.3 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 contingent payments that the Company was obligated to pay the former shareholders of The Combs Company (“Bogs”) related to the Company’s acquisition of Bogs in 2011. The estimate of contingent consideration was formula-driven and was based on Bogs achieving certain levels of gross margin dollars between January 1, 2011, and December 31, 2015. The first earn-out payment was due in 2013 and was paid on March 28, 2013, in the amount of $1,270,000. The second earn-out payment was due in the first quarter of 2016 and was paid on March 23, 2016, in the amount of $5,217,000.

 

10.11.Financial Instruments

 

At September 30, 2016,March 31, 2017, the Company had foreign exchange contracts outstanding to sell $1.5$4.0 million Canadian dollars at a price of approximately $1.2$3.0 million U.S. dollars. Additionally, theThe Company’s majority-owned subsidiary, Florsheim Australia, had foreign exchange contracts outstanding to buy $5.2$2.9 million U.S. dollars at a price of approximately $6.8$3.7 million Australian dollars. Florsheim Australia also had foreign exchange contracts outstanding to buy 625,000 Euros at a price of approximately $880,000 Australian dollars. Based on quarter-end exchange rates, there were no significant unrealized gains or losses on the outstanding contracts.

7

 

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

 

11.12.Comprehensive Income

 

Comprehensive income for the three and nine months ended September 30,March 31, 2017 and 2016, and 2015, was as follows:

 

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended March 31, 
 2016  2015  2016  2015  2017  2016 
 (Dollars in thousands)  (Dollars in thousands) 
Net earnings $4,701  $5,377  $8,411  $11,054  $2,115  $2,632 
Foreign currency translation adjustments  261   (1,609)  1,222   (3,109)  687   1,273 
Pension liability, net of tax of $163, $174, $490 and $520, respectively  256   272   767   815 
Pension liability, net of tax of $47 and $141, respectively  73   221 
Total comprehensive income $5,218  $4,040  $10,400  $8,760  $2,875  $4,126 

 

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

 

 September 30, December 31,  March 31, December 31, 
 2016  2015  2017 2016 
 (Dollars in thousands)  (Dollars in thousands) 
Foreign currency translation adjustments $(4,721) $(5,691) $(5,070) $(5,489)
Pension liability, net of tax  (12,009)  (12,776)  (11,007)  (11,080)
Total accumulated other comprehensive loss $(16,730) $(18,467) $(16,077) $(16,569)

 

The following presents a tabular disclosure about changes in accumulated other comprehensive loss during the ninethree months ended September 30, 2016:March 31, 2017:

 

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

9

  Foreign
Currency
Translation
Adjustments		  Defined
Benefit
Pension
Items		  Total 
Beginning balance, December 31, 2016 $(5,489) $(11,080) $(16,569)
Other comprehensive income before reclassifications  419   -   419 
Amounts reclassified from accumulated other comprehensive loss  -   73   73 
Net current period other comprehensive income  419   73   492 
Ending balance, March 31, 2017 $(5,070) $(11,007) $(16,077)

 

The following presents a tabular disclosure about reclassification adjustments out of accumulated other comprehensive loss during the ninethree months ended September 30, 2016:March 31, 2017:

 

 Amounts reclassified
from accumulated other
comprehensive loss for
the three months ended
March 31, 2017		  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 $(84)  (1) $(16)(1) Other expense, net
Actuarial losses  1,341   (1)  136(1) Other expense, net
Total before tax  1,257       120   
Tax benefit  (490)      (47)  
Net of tax $767      $73   

 

(1)These amounts were included in the computation of net periodic pensionbenefit cost. See Note 68 for additional details.

 

8

12.13.Equity

 

A reconciliation of the Company’s equity for the ninethree months ended September 30, 2016,March 31, 2017, is as follows:

 

           Accumulated    
     Capital in     Other    
  Common  Excess of  Reinvested  Comprehensive  Noncontrolling 
  Stock  Par Value  Earnings  Loss  Interest 
  (Dollars in thousands) 
                
Balance, December 31, 2015 $10,767  $45,759  $160,325  $(18,467) $6,345 
                     
Net earnings  -   -   8,287   -   124 
Foreign currency translation adjustments  -   -   -   970   252 
Pension liability adjustment, net of tax  -   -   -   767   - 
Cash dividends declared  -   -   (6,568)  -   - 
Cash dividends paid to noncontrolling interest  -   -   -   -   (170)
Stock options exercised  25   560   -   -   - 
Issuance of restricted stock  27   (27)  -   -   - 
Stock-based compensation expense  -   1,121   -   -   - 
Income tax benefit from stock options exercised  -   3   -   -   - 
Shares purchased and retired  (352)  -   (9,016)  -   - 
                     
Balance, September 30, 2016 $10,467  $47,416  $153,028  $(16,730) $6,551 

13.Subsequent Events

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

           Accumulated    
     Capital in     Other    
  Common  Excess of  Reinvested  Comprehensive  Noncontrolling 
  Stock  Par Value  Earnings  Loss  Interest 
  (Dollars in thousands) 
                
Balance, December 31, 2016 $10,505  $50,184  $157,468  $(16,569)  $6,692 
                     
Net earnings  -   -   2,217   -   (102)
Foreign currency translation adjustments  -   -   -   419   268 
Pension liability adjustment, net of tax  -   -   -   73   - 
Cash dividends declared  -   -   (2,198)  -   - 
Cash dividends paid to noncontrolling interest  -   -   -   -   (204)
Stock options exercised  13   343   -   -   - 
Stock-based compensation expense  -   369   -   -   - 
Income tax benefit from stock options exercised  -   15   -   -   - 
Shares purchased and retired  (88)  -   (2,305)  -   - 
                     
Balance, March 31, 2017 $10,430  $50,911  $155,182  $(16,077)  $6,654 

 

 109 

 

 

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, 2015.2016.

 

GENERAL

 

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

 

The Company has two reportable segments, North American wholesale operations (“wholesale”) and North American retail operations (“retail”). In the wholesale segment, the Company’s products are sold to leading footwear, department and specialty stores, primarily in the United States and Canada. The Company also has licensing agreements with third parties who sell its branded apparel, accessories and specialty footwear in the United States, as well as its footwear in Mexico and certain markets overseas. Licensing revenues are included in the Company’s wholesale segment. The Company’s retail segment consisted of 13 Company-owned retail stores and an internet business in the United States as of September 30, 2016.March 31, 2017. Sales in retail outlets are made directly to consumers by Company employees.

 

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

 

EXECUTIVE OVERVIEW

 

Third Quarter Highlights

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

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

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

11

Year-to-Date Highlights

 

Consolidated net sales for the first nine monthsquarter of 20162017 were $214.8$69.1 million, down 8% from12% as compared to last year’s year-to-datefirst quarter net sales of $233.2$78.9 million. Earnings from operations were $12.7$3.5 million this quarter, a decrease of 18% as compared to $4.2 million in the first nine monthssame period of 2016, a decrease of 30% as compared to $18.3 million in the first nine months of 2015.2016. Consolidated net earnings attributable to Weyco Group, Inc. were $8.3$2.2 million forin the nine months ended September 30, 2016,first quarter of 2017, down 26%17% as compared to $11.2$2.7 million in the same period last year.year’s first quarter. Diluted earnings per share were $0.21 for the three months ended March 31, 2017, as compared to date in 2016 were $0.78, versus $1.03 per share$0.25 in the same periodfirst quarter of 2015.2016.

 

The majority of the decrease in consolidated net sales came from the Company’s wholesale segment. Wholesale net sales decreased $18.0$9.4 million inthis quarter, compared to the first nine monthssame period one year ago, with sales volumes down across all wholesale brands. These sales declines were the result of 2016,a challenging retail environment, particularly at customers’ brick and mortar locations, where foot traffic has declined due to the growing popularity of online retailing. The Company’s retail segment and Florsheim Australia were also down for the quarter.

Consolidated earnings from operations decreased $748,000 for the quarter, compared to the same period last year, primarilymainly due to lower sales of the BOGS and Nunn Bush brands. Salesvolumes in the Company’s retail segment and other operations were also down for the year-to-date period, compared to the same period of 2015.

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

 

Financial Position Highlights

 

At September 30,March 31, 2017, cash and marketable securities totaled $45.5 million and there was no debt outstanding on the Company’s revolving line of credit. At December 31, 2016, cash and marketable securities totaled $39.4 million and outstanding debt totaled $22.8 million. At December 31, 2015, cash and marketable securities totaled $43.1 million and outstanding debt totaled $26.6$4.3 million. During the first ninethree months of 2016,2017, the Company generated $27.8$17.2 million of cash from operations, mainly by reducing its inventory levels this year.operations. The Company used funds to repurchase $9.4paid dividends of $4.6 million, of Company stock, to pay $8.8 million in dividends, and to pay down $3.8paid off $4.3 million on its revolving line of credit. In addition, the Company paid $5.2 million for the final earn-out payment related to the 2011 acquisition of Bogs andcredit, spent $4.9$2.4 million on purchases of Company stock, and had $416,000 of capital expenditures.

10

 

SEGMENT ANALYSIS

 

Net sales and earnings from operations for the Company’s segments infor the three and nine months ended September 30,March 31, 2017 and 2016, and 2015, were as follows:

 

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

12

  Three Months Ended March 31,  % 
  2017  2016  Change 
  (Dollars in thousands)    
Net Sales            
North American Wholesale $52,850  $62,246   -15%
North American Retail  4,930   5,085   -3%
Other  11,340   11,569   -2%
Total $69,120  $78,900   -12%
             
Earnings from Operations            
North American Wholesale $3,166  $3,725   -15%
North American Retail  43   246   -83%
Other  250   236   6%
Total $3,459  $4,207   -18%

 

North American Wholesale Segment

 

Net Sales

 

Net sales in the Company’s North American wholesale segment for the three and nine months ended September 30,March 31, 2017 and 2016, and 2015, were as follows:

 

North American Wholesale Segment Net Sales

 

 Three Months Ended September 30, % Nine Months Ended September 30, %  Three Months Ended March 31, % 
 2016  2015  Change  2016  2015  Change  2017 2016 Change 
 (Dollars in thousands)  (Dollars in thousands)   
North American Net Sales                                    
Stacy Adams $14,861  $15,761   -6% $52,092  $51,370   1% $19,318  $22,901   -16%
Nunn Bush  13,362   17,069   -22%  42,909   49,783   -14%  13,746   16,814   -18%
Florsheim  14,262   13,275   7%  38,513   37,028   4%  12,458   13,634   -9%
BOGS/Rafters  18,462   26,598   -31%  28,950   41,132   -30%  6,157   7,751   -21%
Umi  698   992   -30%  1,681   2,208   -24%  470   536   -12%
Total North American Wholesale $61,645  $73,695   -16% $164,145  $181,521   -10% $52,149  $61,636   -15%
Licensing  525   907   -42%  1,731   2,310   -25%  701   610   15%
Total North American Wholesale                        
Segment $62,170  $74,602   -17% $165,876  $183,831   -10%
Total North American Wholesale Segment $52,850  $62,246   -15%

 

The Company’s wholesale segment continued to face a challenging retail environment this quarter. Foot traffic at customers’ brick and mortar locations has been declining, due to the growing popularity of online retailing. This quarter, Stacy Adams, and Nunn Bush were both impacted by a slowdown in consumer spendingand Florsheim’s sales volumes declined in the footwear and apparel segments this quarter. Stacy Adams sales were down mainlydepartment store trade channel, a segment particularly struggling with off-price retailers. For the quarter and year-to-date periods, Nunn Bush sales were down across a number of distribution categories, but most significantly, with mid-tier department stores. Mid-tier department stores are facing a challenging environment as consumer buying shifts to the internet. Net sales of the Florsheim brand were up for the quarter, mainly due to higher sales to national shoe chains. To date in 2016, Florsheim’s net sales were up due to higher sales to national shoe chains and department stores, partially offset by lower sales to international retailers.reduced foot traffic. BOGS net sales were also down for the quarter, reflecting the continued softness in the outdoor and first nine months of 2016, compared to the same periods last year. These decreases can largely be attributed to last year’s mild winter in North America, which caused many retailers to carry over unsold BOGS inventory into the current year; this not only impacted shipments this year, but it also caused retailers to be conservative with their orders for Fall of 2016.better footwear channels.

 

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 decreaseincrease in licensing revenues for the thirdthis quarter and to date through September 30th resulted mainly from a licensee transitionstransition that occurred duringin 2016. The new licensee was operational by the first quarter of 2017, resulting in increased revenues compared to the same period last year.

11

 

Earnings from Operations

 

Gross earnings for the North American wholesale segment were 30.8% of net sales in the first quarter of 2017, as compared to 29.2% in the first quarter of 2016. Earnings from operations in the North American wholesale segment were $6.3decreased 15% to $3.2 million in the thirdfirst 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, earnings2017, from operations for the wholesale segment were $10.6 million, down 30% as compared to $15.2$3.7 million in the same period last year. The decreases for the quarter and year-to-date periods were the result of lower sales volumes.

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

 

The Company’s cost of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs). or shipping and handling expenses. Distribution costs were $2.8$2.7 million and $3.2 million for the third quarter ofthree-month periods ended March 31, 2017 and 2016, versus $2.9 millionrespectively. The Company’s consolidated wholesale shipping and handling expenses were approximately $340,000 and $385,000 for the same period of 2015. For the nine-month periodsthree-months ended September 30,March 31, 2017 and 2016, and 2015, distribution costs were $8.8 million and $8.3 million, respectively. The increase for the year-to-date period was primarily due to additional storage costs incurred in the first half of 2016. DistributionThese 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 and shipping and handling expenses 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. AsWholesale selling and administrative expenses were $13.1 million in the first quarter of 2017, compared to $14.4 million in 2016. The decrease this year was primarily due to lower salesmen’s commissions in accordance with lower sales volumes, and a percentdecrease in advertising costs. Pension expense was also lower this year, which was a direct result of net sales,the Company’s decision to freeze pension benefits under its defined benefit plan as of December 31, 2016. Despite these cost savings, wholesale selling and administrative expenses were 22% and 21% for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, wholesale selling and administrative expenses wereincreased to 25% of net sales in 2016 andthe first quarter of 2017 as compared to 23% of net sales in 2015. The increases in selling and administrative expenses as a percent of sales for the quarter and year-to-date periods was primarilylast year, due to lower sales volumes in 2016, asthe fixed nature of many of the Company’s selling and administrative costs are fixed in nature and do not correlate with changes in sales volume.other operating costs.

 

North American Retail Segment

 

Net Sales

 

Net sales in the Company’s North American retail segment declined $65,000 and $199,000,were $4.9 million in the thirdfirst quarter and for the nine months ended September 30, 2016, respectively.of 2017, down 3% as compared to $5.1 million in 2016. Same store sales, which include sales of both the U.S. internet business andsales, were down 7% for the quarter, due to decreased sales at brick and mortar stores increased 2% forand on the Company’s websites. There were the same number of stores operating during the first quarter of 2017 and increased 3% for2016, as one store closed and one store opened over the year-to-date period,past twelve months. Retail sales in 2017 were impacted by the later timing of the Easter holiday in 2017 as compared to the same periods in 2015. The increases in same store2016, which caused sales for both periods were due to higher sales in the Company’s internet business.shift into April this year.

 

Earnings from Operations

 

Retail earningsEarnings from operations decreased $89,000 and $376,000 forin the three and nine months ended September 30, 2016, respectively,North American retail segment were $43,000 in the first quarter of 2017 as compared to the same periods in 2015. For the quarter, the decrease in earnings from operations was mainly due to lower operating earnings$246,000 in the Company’s U.S. internet business resulting from higher marketing costs. For the year-to-date period, the decrease infirst quarter of 2016. Retail gross earnings from operations was due to lower net sales at the Company’s brick and mortar stores and higher operating costs in the internet business. Gross earnings as a percentwere 64.4% of net sales were 65.5% in the thirdfirst quarter of 20162017, as compared to 66.0% in the third quarter of 2015. For the nine months ended September 30, retail gross earnings as a percent64.8% of net sales were 65.1% in 2016 and 66.0% in 2015.

2016. Selling and administrative expenses for the retail segment include, and are primarily related to, rent and occupancy costs, employee costs, advertising expense and freight. Selling and administrative expenses as a percent of net sales were 59% and 58% for the three-month periods ended September 30, 2016 and 2015, respectively. For the nine months ended September 30,Retail selling and administrative expenses as a percentwere 64% of net sales werein the first quarter of 2017 versus 60% in 2016 and 58%last year’s first quarter. The decrease in 2015.retail earnings from operations was primarily due to the decrease in retail sales.

 

Other

 

The Company’s other netbusinesses include its wholesale and retail operations of Florsheim Australia and Florsheim Europe. Net sales of the Company’s other businesses were $12.2$11.3 million in the thirdfirst quarter of 2016, up 3%2017, down 2% as compared to $11.9$11.6 million in 2015. This increase2016. The decrease was primarily due to higherlower net sales at Florsheim Europe.Australia. Florsheim Australia’s net sales were flatdown 1% for the quarter. In local currency, Florsheim Australia’s net sales were down 4%6% for the quarter. Earnings

Collectively, earnings from operations of Florsheim Australia and Florsheim Europe were $731,000$250,000 in the thirdfirst quarter of 2017, and $236,000 in the first quarter of 2016.

Other income and expense and taxes

Interest income for the first quarter of 2017 was down $25,000 as compared to the first quarter of 2016, up 26% asdue to a lower average investment balance this year compared to $578,000last year. Interest expense was down $66,000 for the quarter, due to a lower average debt balance this year compared to last year.

In the first quarter of 2017, the Company retrospectively adopted ASU 2017-07, which required the Company to reclassify the non-service cost components of pension expense to other expense, net, in the same period last year.Consolidated Condensed Statements of Earnings and Comprehensive Income (Unaudited). The increase between yearsdecrease in other expense this quarter was driven by higher sales volumes and operating earnings at Florsheim Europe.

For the nine months ended September 30, 2016, other net sales were $34.5 million, down 1% from $34.7 millionprimarily due to a $266,000 decrease in the same period last year. This decreasenon-service cost components of pension expense. Pension expense was due to lower net sales at Florsheim Australia, largely offset by increased sales at Florsheim Europe. Florsheim Australia’s sales through September 30th were down 4% in 2016, compared tofollowing the same period last year. In local currency, Florsheim Australia’s net sales were down 1% for the year-to-date period. Earnings from operations of Florsheim Australia and Florsheim Europe were $1.3 million in the first nine months of 2016, down 33% as compared to $1.9 million in the same period last year. This decrease was largely due to lower sales and gross margins at Florsheim Australia. Florsheim Australia purchases its inventory in U.S. dollars, and its gross margins have been negatively impacted by the weakness of its local currency compared to the U.S. dollar. In 2015, gains recorded on favorable foreign exchange contacts partially offset the impactfreeze of the weakening Australian dollar. In 2016, however, no significant gains were recorded on such contracts.pension plan, effective December 31, 2016.

 

 1412 

 

 

Other income and expense

Interest incomeThe Company’s effective tax rate for the quarter and nine months ended September 30, 2016,March 31, 2017, was down $31,000 and $133,000, respectively, compared to the same periods last year, due to lower average investment balances this year compared to last year. For the three months ended September 30, 2016, interest expense decreased $6,000, compared to the same period last year, due to a lower average debt balance this quarter. For the nine months ended September 30, 2016, interest expense increased $131,000, compared to the same period in 2015, mainly due to a higher average debt balance throughout 2016,39.5% as compared to last year.

Other income (expense)35.8% for the quarter and nine months ended September 30, 2016, improved by $637,000 and $1,572,000, respectively, compared to the same periods last year. This quarter’s other income included foreign currency transaction gains of $102,000 compared to $340,000 of losses in the same period of 2015. For the nine months ended September 30, 2016, other income included foreign exchange transaction gains2016. Last year’s effective tax rate was lower due to donations of $389,000 compared to $783,000 of lossesfootwear that occurred in the same periodfirst quarter of 2015. These gains and losses mainly resulted from the revaluation of an intercompany loan between the Company’s wholesale segment and Florsheim Australia.2016.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s primary sources of liquidity are its cash, short-term marketable securities and its revolving line of credit. During the first nine months of 2016, theThe Company generated $27.8$17.2 million of cash from operating activities during the first three months of 2017, compared with a use of $27.2to $13.5 million of cash in the same period of 2015.one year ago. The changeincrease between years was primarily due to changes in operating assets and liabilities, principally inventory. The decrease in inventory at September 30, 2016 was the result of the Company reducing its inventories to coincide with lower backlogs, mainly for the BOGS brand.accounts receivable.

 

The Company paid cash dividends of $8.8$4.6 million and $8.4$4.3 million during the ninethree months ended September 30,March 31, 2017 and 2016, and 2015, respectively.

 

The Company continues to repurchase its common stock under its share repurchase program when the Company believes market conditions are favorable. During the first nine monthsquarter of 2016,2017, the Company repurchased 352,17587,886 shares at a total cost of $9.4$2.4 million. As of September 30, 2016,March 31, 2017, the Company had approximately 624,000477,289 shares available under its previously announced stock repurchase program. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” below for more information.

 

Capital expenditures totaled $4.9 millionwere $416,000 in the first ninethree months of 2016. The Company completed remodeling projects on two of its domestic retail stores, and also opened a new outlet store in the third quarter. In addition, the Company completed a construction project to increase the capacity of its U.S. distribution center.2017. Management estimates that annual capital expenditures for 20162017 will be approximately $5.5between $2 million and $3 million.

 

At September 30, 2016,March 31, 2017, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 4, 2016.3, 2017. The line of credit bears interest at LIBOR plus 0.75%. The Company repaid a net of $3.8 million onpaid off the line of credit during the first nine months of 2016. At September 30, 2016, outstanding borrowings were $22.8 million at an interest rate of 1.3%.quarter. The highest balance on the line of credit during the quarter was $23.5$4.3 million. The line of credit agreement was set to expire on November 4, 2016, but was renewed on the same terms for another one-year period, expiring November 3, 2017.

 

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

At September 30, 2016,31, 2017, approximately $1.8$2.6 million of cash and cash equivalents was held by the Company’s foreign subsidiaries.

 

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

 

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

 

COMMITMENTS

 

There were no material changes to the Company’s contractual obligations during the nine monthsquarter ended September 30, 2016,March 31, 2017, from those disclosed in the Company’s Annual Report on Form 10-K for the year endedyear-ended December 31, 2015.2016.

 

 1513 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes to quantitative and qualitative disclosures about market risk from those reported in the Company’s Annual Report on Form 10-K for the year endedyear-ended December 31, 2015.2016.

 

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, 2015.2016.

 

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 purchaserepurchase of the Company’s common stock by the Company in the three-month period ended September 30, 2016.March 31, 2017.

 

         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     
        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) 
                 
1/1/2017 - 1/31/2017  4,343  $28.01   4,343   560,832 
                 
2/1/2017 - 2/29/2017  24,608  $27.99   24,608   536,224 
                 
3/1/2017 - 3/31/2017  58,935  $26.85   58,935   477,289 
                 
Total  87,886  $27.22   87,886     

 

(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: November 8, 2016May 4, 2017
/s/ John F. Wittkowske
 John F. Wittkowske
 Senior Vice President and Chief Financial Officer

 

 1715 

 

 

WEYCO GROUP, INC.

(THE “REGISTRANT”)

(COMMISSION FILE NO. 0-9068)

 

EXHIBIT INDEX

TO

CURRENT REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDEDSeptember 30, 2016March 31, 2017

 

Exhibit Description Incorporation Herein By Reference
To		 Filed
Herewith
10.1Amendment to PNC Bank Loan Agreement and Committed Line of Credit Note, dated November 4, 2016 X
10.2SecondAmendment to Weyco Group, Inc. Pension Plan, dated November 7, 2016 X
       
31.1 Certification of Chief Executive Officer   X
       
31.2 Certification of Chief Financial Officer   X
       
32 Section 906 Certification of Chief Executive Officer and Chief Financial Officer   X
       
101 The following financial information from Weyco Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016March 31, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets (Unaudited); (ii) Consolidated Condensed Statements of Earnings and Comprehensive Income (Unaudited); (iii) Consolidated Condensed Statements of Cash Flows (Unaudited); and (iv)(v) Notes to Consolidated Condensed Financial Statements, furnished herewith   X