UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

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

 

Or

 

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

 

For the transition period from                             to                             

 

Commission File Number:0-9068

 

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

 

WISCONSIN39-0702200
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

 

333 W. Estabrook Boulevard

P. O. Box 1188

Milwaukee, Wisconsin 53201

(Address of principal executive offices)

(Zip Code)

 

(414) 908-1600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesx   No¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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

 

Large accelerated filer  Accelerated Filer¨   Accelerated filer  Filerx   Non-accelerated filer      Non-Accelerated Filer¨    Smaller reporting company  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. __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 April 28,October 31, 2017, there were 10,403,94710,192,905 shares of common stock outstanding.

 

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

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

 

1

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

 

  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 STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (UNAUDITED)

  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 
  September 30,  December 31, 
  2017  2016 
  (Dollars in thousands) 
ASSETS:        
Cash and cash equivalents $6,704  $13,710 
Marketable securities, at amortized cost  11,354   4,601 
Accounts receivable, net  56,271   50,726 
Income tax receivable  781   789 
Inventories  57,692   69,898 
Prepaid expenses and other current assets  3,010   6,203 
Total current assets  135,812   145,927 
         
Marketable securities, at amortized cost  18,273   21,061 
Deferred income tax benefits  707   660 
Property, plant and equipment, net  32,371   33,717 
Goodwill  11,112   11,112 
Trademarks  32,978   32,978 
Other assets  22,984   22,785 
Total assets $254,237  $268,240 
         
LIABILITIES AND EQUITY:        
Short-term borrowings $4,772  $4,268 
Accounts payable  5,001   11,942 
Dividend payable  -   2,192 
Accrued liabilities  12,207   10,572 
Total current liabilities  21,980   28,974 
         
Deferred income tax liabilities  3,096   703 
Long-term pension liability  23,724   27,801 
Other long-term liabilities  2,269   2,482 
         
Common stock  10,197   10,505 
Capital in excess of par value  53,258   50,184 
Reinvested earnings  147,951   157,468 
Accumulated other comprehensive loss  (14,997)  (16,569)
Total Weyco Group, Inc. equity  196,409   201,588 
Noncontrolling interest  6,759   6,692 
Total equity  203,168   208,280 
Total liabilities and equity $254,237  $268,240 

 

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 INCOME (UNAUDITED)

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (In thousands, except per share amounts) 
             
Net sales $76,906  $79,069  $203,479  $214,836 
Cost of sales  47,438   49,747   126,693   136,096 
Gross earnings  29,468   29,322   76,786   78,740 
                 
Selling and administrative expenses  21,666   21,568   63,635   64,751 
Earnings from operations  7,802   7,754   13,151   13,989 
                 
Interest income  193   190   572   584 
Interest expense  -   (61)  (7)  (228)
Other expense, net  (53)  (311)  (243)  (850)
                 
Earnings before provision for income taxes  7,942   7,572   13,473   13,495 
                 
Provision for income taxes  3,022   2,871   5,135   5,084 
                 
Net earnings  4,920   4,701   8,338   8,411 
                 
Net (losses) earnings attributable to noncontrolling interest  (14)  101   (70)  124 
                 
Net earnings attributable to Weyco Group, Inc. $4,934  $4,600  $8,408  $8,287 
                 
Weighted average shares outstanding                
Basic  10,160   10,461   10,299   10,556 
Diluted  10,218   10,516   10,360   10,605 
                 
Earnings per share                
Basic $0.49  $0.44  $0.82  $0.79 
Diluted $0.48  $0.44  $0.81  $0.78 
                 
Cash dividends declared (per share) $0.22  $0.21  $0.65  $0.62 
                 
Comprehensive income $5,452  $5,218  $10,251  $10,400 
                 
Comprehensive income attributable to noncontrolling interest  25   235   271   376 
                 
Comprehensive income attributable to Weyco Group, Inc. $5,427  $4,983  $9,980  $10,024 

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)

 

 Three Months Ended March 31,  Nine Months Ended September 30, 
 2017  2016  2017  2016 
 (Dollars in thousands)  (Dollars in thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net earnings $2,115  $2,632  $8,338  $8,411 
Adjustments to reconcile net earnings to net cash provided by operating activities -                
Depreciation  1,001   919   2,971   2,708 
Amortization  97   99   265   288 
Bad debt expense (income)  133   (142)
Bad debt expense  350   96 
Deferred income taxes  10   144   2,192   1,537 
Net foreign currency transaction losses (gains)  1   (149)
Net foreign currency transaction gains  (61)  (389)
Stock-based compensation  369   364   1,174   1,121 
Pension contributions  (4,000)  (2,400)
Pension expense  266   767   746   2,500 
Increase in cash surrender value of life insurance  (135)  (135)  (250)  (250)
Changes in operating assets and liabilities -                
Accounts receivable  2,823   (4,950)  (5,703)  (3,714)
Inventories  14,765   22,313   12,195   26,641 
Prepaid expenses and other assets  3,210   1,715   3,167   800 
Accounts payable  (7,096)  (8,571)  (6,838)  (7,699)
Accrued liabilities and other  (1,291)  (2,005)  1,879   (1,023)
Accrued income taxes  981   528   22   (839)
Excess tax benefits from stock-based compensation  (30)  - 
Net cash provided by operating activities  17,249   13,529   16,417   27,788 
                
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of marketable securities  (250)  (1,501)
Purchases of marketable securities  (14,719)  (3,605)
Proceeds from maturities of marketable securities  1,850   1,475   10,710   4,190 
Purchase of property, plant and equipment  (416)  (924)
Net cash provided by (used for) investing activities  1,184   (950)
Life insurance premiums paid  (155)  (155)
Purchases of property, plant and equipment  (1,406)  (4,872)
Net cash used for investing activities  (5,570)  (4,442)
                
CASH FLOWS FROM FINANCING ACTIVITIES:                
Cash dividends paid  (4,378)  (4,272)  (8,877)  (8,678)
Cash dividends paid to noncontrolling interest of subsidiary  (204)  -   (204)  (170)
Shares purchased and retired  (2,393)  (2,895)  (11,621)  (9,368)
Proceeds from stock options exercised  356   12   2,013   585 
Taxes paid related to the net share settlement of equity awards  (51)  - 
Payment of contingent consideration  -   (5,217)  -   (5,217)
Proceeds from bank borrowings  6,816   31,299   20,651   91,729 
Repayments of bank borrowings  (11,084)  (33,314)  (20,147)  (95,568)
Income tax benefits from stock-based compensation  15   - 
Excess tax benefits from stock-based compensation  -   3 
Net cash used for financing activities  (10,872)  (14,387)  (18,236)  (26,684)
                
Effect of exchange rate changes on cash and cash equivalents  202   199   383   252 
                
Net increase (decrease) in cash and cash equivalents $7,763  $(1,609)
Net decrease in cash and cash equivalents $(7,006) $(3,086)
                
CASH AND CASH EQUIVALENTS at beginning of period  13,710   17,926   13,710   17,926 
                
CASH AND CASH EQUIVALENTS at end of period $21,473  $16,317  $6,704  $14,840 
                
SUPPLEMENTAL CASH FLOW INFORMATION:                
Income taxes paid, net of refunds $308  $693  $2,829  $4,083 
Interest paid $7  $73  $7  $228 

 

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

 34 

 

 

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 periodthree and nine months ended March 31,September 30, 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 (“FASB”) 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 benefitpension 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 areCompany adopted ASU 2017-07 effective for annualJanuary 1, 2017 and retrospectively applied it to all 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.presented. Accordingly, the service cost component of net periodic benefitpension 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.

 

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). This new standard simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as specifies the classification of certain cash flows associated with share-based payment transactions within the statements of cash flows. The Company adopted ASU 2016-09 effective January 1, 2017. The adoption of this standard resulted in the following:

·The prospective recognition of excess tax benefits or deficiencies within the provision for income taxes in the income statement. Prior to the adoption of the new standard, these amounts would have been recorded within capital in excess of par value on the balance sheet. This change may create volatility in the Company’s future effective tax rate.

·Accounting rules require the use of the treasury stock method when calculating potential common shares used to determine diluted earnings per share. The new standard requires that the calculation of diluted earnings per share under the treasury stock method exclude the amount of excess tax benefits that would have been recognized within capital in excess of par value on the balance sheet. This change was adopted prospectively and had an immaterial impact on the Company’s weighted average diluted shares outstanding for the quarter and year-to-date periods.

·The new standard requires that excess tax benefits from share-based payment awards be reported as operating activities in the cash flow statement. Previously, these cash flows were included in financing activities. This change was adopted prospectively, and had an immaterial impact on the Consolidated Condensed Statements of Cash Flows (Unaudited) for the year-to-date period.

·The new standard requires that cash flows related to employee taxes paid for withheld shares be presented as a financing activity in the cash flow statement. Previously, accounting rules did not specify where such cash flows should be reported. This change was retrospectively applied to all periods presented, and had an immaterial impact on the Consolidated Condensed Statements of Cash Flows (Unaudited) for the year-to-date period.

The Company elected not to change its policy on accounting for forfeitures, and will continue to estimate forfeitures expected to occur to determine the amount of stock-based compensation expense recognized in each period. Finally, the Company will continue to allow its employees to withhold up to the minimum statutory withholding requirements, as allowed under the new standard.

5

ASU No. 2014-09, "Revenue from Contracts with Customers," outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. Additional ASUs have also been issued as part of the overall new revenue guidance. The new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The standard allows the Company to transition to the new model using either a full or modified retrospective approach. This guidance will be effective for the Company’s interim and annual periods beginning January 1, 2018.

The Company plans to complete an assessment of its revenue streams during the fourth quarter of 2017. Based on its assessment to date, the Company does not expect that the adoption of this new standard will have a material impact on its consolidated financial statements. The Company is continuing its assessment, which may identify other impacts. The Company currently plans to adopt the new standard in the first quarter of 2018. The Company is currently planning to adopt this standard using the modified retrospective approach.

In February 2016, the FASB issued ASU No. 2016-02 “Leases.” This new standard requires lessees to recognize the rights and obligations created by finance and operating leases with terms exceeding 12 months as assets and liabilities on their balance sheets. The amendments in this update are effective for fiscal years beginning after December 15, 2018 and interim periods therein. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements.

3.ReclassificationReclassifications

 

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 and nine months ended March 31,September 30, 2016, the Company reclassified $392,000$424,000 and $1,272,000, respectively, of expense from selling and administrative expenses to other expense, net. This amount representsThese amounts represent the non-service cost components of net periodic benefitpension cost for the periodperiods then ended, and waswere reclassified in connection with the adoption of ASU 2017-07. This reclassificationThese reclassifications had no effect on previously reported net earnings or equity.

 

4.Earnings Per Share

 

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

 

 Three Months Ended March 31,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2017  2016  2017  2016  2017  2016 
 (In thousands, except per share amounts)  (In thousands, except per share amounts) 
Numerator:                        
Net earnings attributable to Weyco Group, Inc. $2,217  $2,687  $4,934  $4,600  $8,408  $8,287 
                        
Denominator:                        
Basic weighted average shares outstanding  10,435   10,657   10,160   10,461   10,299   10,556 
Effect of dilutive securities:                        
Employee stock-based awards  63   36   58   55   61   49 
Diluted weighted average shares outstanding  10,498   10,693   10,218   10,516   10,360   10,605 
                        
Basic earnings per share $0.21  $0.25  $0.49  $0.44  $0.82  $0.79 
                        
Diluted earnings per share $0.21  $0.25  $0.48  $0.44  $0.81  $0.78 

 

Diluted weighted average shares outstanding for the three months ended March 31,September 30, 2017, exclude anti-dilutive stock optionsstock-based awards totaling 573,0001,116,325 shares of common stock at a weighted average price of $27.45.$26.49. Diluted weighted average shares outstanding for the nine months ended September 30, 2017, exclude anti-dilutive stock-based awards totaling 844,036 shares of common stock at a weighted average price of $26.93. Diluted weighted average shares outstanding for the three months ended March 31,September 30, 2016, exclude anti-dilutive stock optionsstock-based awards 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-based awards totaling 924,161 shares of common stock at a weighted average price of $26.78.

 

 46 

 

 

5.Investments

 

As noted in the Company’s Annual Report on Form 10-K for the year-endedyear ended December 31, 2016, all of the Company’s marketable securities are classified as held-to-maturity securities and reported at amortized cost pursuant to Accounting Standards Codification (“ASC”) 320,Investments – Debt and Equity Securities,, as the Company has the intent and ability to hold all investments to maturity.

 

Below is a summary of the amortized cost and estimated market values of the Company’s marketable securities as of March 31,September 30, 2017, and December 31, 2016.

 

 March 31, 2017  December 31, 2016  September 30, 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 $4,756  $4,770  $4,601  $4,610  $11,354  $11,380  $4,601  $4,610 
Due from one through five years  11,437   11,820   12,133   12,486   9,819   10,157   12,133   12,486 
Due from six through ten years  6,373   6,536   7,705   7,804   5,789   6,050   7,705   7,804 
Due from eleven through twenty years  1,473   1,509   1,223   1,222   2,665   2,763   1,223   1,222 
Total $24,039  $24,635  $25,662  $26,122  $29,627  $30,350  $25,662  $26,122 

 

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

 

  March 31, 2017  December 31, 2016 
  Unrealized  Unrealized  Unrealized  Unrealized 
  Gains  Losses  Gains  Losses 
  (Dollars in thousands) 
Municipal bonds $658  $(62) $546  $(86)
  September 30, 2017  December 31, 2016 
  Unrealized  Unrealized  Unrealized  Unrealized 
  Gains  Losses  Gains  Losses 
  (Dollars in thousands) 
Municipal bonds $759  $(36) $546  $(86)

 

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

 

6.Intangible Assets

 

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

 

 March 31, 2017  December 31, 2016  September 30, 2017  December 31, 2016 
 Gross       Gross       Gross     Gross     
 Carrying Accumulated     Carrying Accumulated     Carrying Accumulated   Carrying Accumulated   
 Amount  Impairment  Net  Amount  Impairment  Net  Amount  Impairment  Net  Amount  Impairment  Net 
 (Dollars in thousands) (Dollars in thousands)  (Dollars in thousands) (Dollars in thousands) 
Indefinite-lived intangible assets                                                
Goodwill $11,112  $-  $11,112  $11,112  $-  $11,112  $11,112  $-  $11,112  $11,112  $-  $11,112 
Trademarks  34,748   (1,770)  32,978   34,748   (1,770)  32,978   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  $45,860  $(1,770) $44,090  $45,860  $(1,770) $44,090 

 

 57 

 

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

 

    September 30, 2017  December 31, 2016 
   March 31, 2017  December 31, 2016  Weighted Gross       Gross      
 Weighted Gross       Gross       Average Carrying Accumulated     Carrying Accumulated    
 Average Carrying Accumulated     Carrying Accumulated     Life (Years)  Amount  Amortization  Net  Amount  Amortization  Net 
 Life (Years) Amount  Amortization  Net  Amount  Amortization  Net    (Dollars in thousands) (Dollars in thousands) 
   (Dollars in thousands) (Dollars in thousands)                
Amortizable intangible assets Customer relationships 15 $3,500  $(1,419) $2,081  $3,500  $(1,361) $2,139   15  $3,500  $(1,536) $1,964  $3,500  $(1,361) $2,139 
Total amortizable intangible assets   $3,500  $(1,419) $2,081  $3,500  $(1,361) $2,139      $3,500  $(1,536) $1,964  $3,500  $(1,361) $2,139 

 

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

Amortization expense related to the intangible assets was approximately $58,000 for both the third quarters of 2017 and 2016. For the nine months ended September 30, amortization expense related to the intangible assets was approximately $175,000 and $182,000 in 2017 and 2016, respectively.

 

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 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, 2017 and 2016, was as follows:

 

Three Months Ended                  
March 31, Wholesale Retail Other Total 
September 30, Wholesale Retail Other Total 
 (Dollars in thousands)  (Dollars in thousands) 
2017                  
Product sales $52,149  $4,930  $11,340  $68,419  $60,200  $4,291  $11,887  $76,378 
Licensing revenues  701   -   -   701   528   -   -   528 
Net sales $52,850  $4,930  $11,340  $69,120  $60,728  $4,291  $11,887  $76,906 
Earnings from operations $3,166  $43  $250  $3,459  $7,416  $17  $369  $7,802 
                                
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 $3,725  $246  $236  $4,207  $6,710  $313  $731  $7,754 

Nine Months Ended            
September 30, Wholesale  Retail  Other  Total 
  (Dollars in thousands) 
2017                
Product sales $154,049  $13,979  $33,631  $201,659 
Licensing revenues  1,820   -   -   1,820 
Net sales $155,869  $13,979  $33,631  $203,479 
Earnings from operations $11,880  $244  $1,027  $13,151 
                 
2016                
Product sales $164,145  $14,508  $34,452  $213,105 
Licensing revenues  1,731   -   -   1,731 
Net sales $165,876  $14,508  $34,452  $214,836 
Earnings from operations $11,910  $787  $1,292  $13,989 

 

8.Employee Retirement Plans

 

The components of the Company’s net periodic benefitpension cost were as follows:

 

 Three Months Ended March 31,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2017  2016  2017  2016  2017  2016 
 (Dollars in thousands)  (Dollars in thousands) 
Service cost $140  $375  $141  $409  $423  $1,228 
Interest cost  548   614   552   612   1,655   1,837 
Expected return on plan assets  (542)  (584)  (576)  (607)  (1,727)  (1,822)
Net amortization and deferral  120   362   132   419   395   1,257 
Net periodic benefit cost $266  $767 
Net periodic pension cost $249  $833  $746  $2,500 

8

 

The components of net periodic benefitpension cost other than the service cost component are included in "other expense, net" in the Consolidated Condensed Statements of Earnings and Comprehensive Income (Unaudited).

 

6

The Company made a $4.0 million pension contribution in the second quarter of 2017. No additional cash contributions are expected for the remainder of 2017.

 

9.Stock-Based Compensation Plans

 

During the three and nine months ended March 31,September 30, 2017, the Company recognized approximately $369,000$395,000 and $1,174,000 respectively, of compensation expense associated with stock option and restricted stock awards granted in the years 2013 through 2016.2017. 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.

 

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

 

      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, 2016  1,486,257  $26.13           1,486,257  $26.13         
Granted  211,200  $27.94         
Exercised  (13,387) $26.59           (81,464) $24.71         
Forfeited or expired  (2,650) $26.08           (14,175) $26.46         
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 
Outstanding at September 30, 2017  1,601,818  $26.44   3.9  $3,149,000 
Exercisable at September 30, 2017  898,106  $26.19   2.4  $1,992,000 

 

* The aggregate intrinsic value of outstanding and exercisable stock options is defined as the difference between the market value of the Company's stock on March 31,September 29, 2017, the last trading day of $28.08the quarter, of $28.38 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 March 31,September 30, 2017 and 2016:

 

 Three Months Ended March 31,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2017  2016  2017  2016  2017  2016 
 (Dollars in thousands)  (Dollars in thousands) 
Total intrinsic value of stock options exercised $41  $1  $208  $14  $272  $87 
Cash received from stock option exercises $356  $12  $1,575  $132  $2,013  $585 
Income tax benefit from the exercise of stock options $15  $-  $81  $5  $106  $34 
        

 

The following table summarizes the Company’s restricted stock award activity for the three-monthnine-month period ended March 31,September 30, 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, 2016  58,500  $26.09           58,500  $26.09         
Issued  -   -           30,800   27.94         
Vested  -               (18,600)  26.05         
Forfeited  -   -           -   -         
Non-vested at March 31, 2017  58,500  $26.09   2.5  $1,643,000 
Non-vested at September 30, 2017  70,700  $26.90   2.9 $2,006,000 

 

* The aggregate intrinsic value of non-vested restricted stock was calculated using the market value of the Company's stock on March 31,September 29,  2017, the last trading day of $28.08the quarter, of $28.38 multiplied by the number of non-vested restricted shares outstanding.

 

10.Short-Term Borrowings

 

At March 31,September 30, 2017, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 3, 2017. The line of credit bears interest at LIBORthe daily London Interbank Offered Rate (“LIBOR”) plus 0.75%. At March 31,September 30, 2017, the Company had no amounts outstanding on the lineborrowings were approximately $4.8 million at an interest rate of credit.2.0%. The highest balance on the line of credit during the quarter was $4.3approximately $4.8 million. Subsequent to September 30, 2017, the line of credit agreement was renewed on the same terms for another one-year period, expiring November 4, 2018.

9

 

11.Financial Instruments

 

At March 31,September 30, 2017, the Company had foreign exchange contracts outstanding to sell $4.0$8.0 million Canadian dollars at a price of approximately $3.0$6.0 million U.S. dollars. The Company’s majority-owned subsidiary, Florsheim Australia, had foreign exchange contracts outstanding to buy $2.9$3.7 million U.S. dollars at a price of approximately $3.7$4.7 million Australian dollars. Florsheim Australia also had foreign exchange contracts outstanding to buy 625,000200,000 Euros at a price of approximately $880,000$299,000 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.

 

12.Comprehensive Income

 

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

 

 Three Months Ended March 31,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2017  2016  2017  2016  2017  2016 
 (Dollars in thousands)  (Dollars in thousands) 
Net earnings $2,115  $2,632  $4,920  $4,701  $8,338  $8,411 
Foreign currency translation adjustments  687   1,273   452   261   1,672   1,222 
Pension liability, net of tax of $47 and $141, respectively  73   221 
Pension liability, net of tax of $52, $163, $154 and $490, respectively  80   256   241   767 
Total comprehensive income $2,875  $4,126  $5,452  $5,218  $10,251  $10,400 

 

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

 

 March 31, December 31,  September 30, December 31, 
 2017 2016  2017  2016 
 (Dollars in thousands)  (Dollars in thousands) 
Foreign currency translation adjustments $(5,070) $(5,489) $(4,158) $(5,489)
Pension liability, net of tax  (11,007)  (11,080)  (10,839)  (11,080)
Total accumulated other comprehensive loss $(16,077) $(16,569) $(14,997) $(16,569)

 

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

 

 Foreign
Currency
Translation
Adjustments		  Defined
Benefit
Pension
Items		  Total  Foreign
Currency
Translation
Adjustments		  Defined
Benefit
Pension
Items		  Total 
Beginning balance, December 31, 2016 $(5,489) $(11,080) $(16,569) $(5,489) $(11,080) $(16,569)
Other comprehensive income before reclassifications  419   -   419   1,331   -   1,331 
Amounts reclassified from accumulated other comprehensive loss  -   73   73   -   241   241 
Net current period other comprehensive income  419   73   492   1,331   241   1,572 
Ending balance, March 31, 2017 $(5,070) $(11,007) $(16,077)
Ending balance, September 30, 2017 $(4,158) $(10,839) $(14,997)

 

10

The following presents a tabular disclosure about reclassification adjustments out of accumulated other comprehensive loss during the threenine months ended March 31,September 30, 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, 2017		  Affected line item in the
statement where net
income is presented
Amortization of defined benefit pension items           
Prior service cost $(16)(1) Other expense, net $(47)(1) Other expense, net
Actuarial losses  136(1) Other expense, net  442(1) Other expense, net
Total before tax  120     395  
Tax benefit  (47)    (154) 
Net of tax $73    $241  

 

(1)These amounts were included in the net periodic benefitpension cost. See Note 8 for additional details.

8

 

13.Equity

 

A reconciliation of the Company’s equity for the threenine months ended March 31,September 30, 2017, 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, 2016 $10,505  $50,184  $157,468  $(16,569)  $6,692  $10,505  $50,184  $157,468  $(16,569) $6,692 
                                        
Net earnings  -   -   2,217   -   (102)  -   -   8,408   -   (70)
Foreign currency translation adjustments  -   -   -   419   268   -   -   -   1,331   341 
Pension liability adjustment, net of tax  -   -   -   73   -   -   -   -   241   - 
Cash dividends declared  -   -   (2,198)  -   -   -   -   (6,725)  -   - 
Cash dividends paid to noncontrolling interest  -   -   -   -   (204)  -   -   -   -   (204)
Stock options exercised  13   343   -   -   -   82   1,931   -   -   - 
Issuance of restricted stock  31   (31)  -   -   - 
Stock-based compensation expense  -   369   -   -   -   -   1,174   -   -   - 
Income tax benefit from stock options exercised  -   15   -   -   - 
Shares purchased and retired  (88)  -   (2,305)  -   -   (421)  -   (11,200)  -   - 
                                        
Balance, March 31, 2017 $10,430  $50,911  $155,182  $(16,077)  $6,654 
Balance, September 30, 2017 $10,197  $53,258  $147,951  $(14,997) $6,759 

14.Subsequent Events

On October 31, 2017, the Company’s Board of Directors authorized the repurchase of an additional 1.0 million shares of common stock under its repurchase program, bringing the total available to purchase to approximately 1.1 million shares.

 

 911 

 

 

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, 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 retail10 brick and mortar stores and an internet businessbusinesses in the United States as of March 31,September 30, 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

 

Sales and EarningsThird Quarter Highlights

 

Consolidated net sales for the firstthird quarter of 2017 were $69.1$76.9 million, down 12%3% as compared to last year’s firstthird quarter net sales of $78.9$79.1 million. Earnings from operations were $3.5 million this quarter, a decrease of 18% as compared to $4.2$7.8 million in the same period ofboth 2017 and 2016. Consolidated net earnings attributable to Weyco Group, Inc. were $2.2increased 7% to $4.9 million in the first quarter of 2017, down 17% as compared to $2.7up from $4.6 million in last year’s first quarter.year. Diluted earnings per share were $0.21 for the three months ended March 31, 2017, as compared to $0.25$0.48 this quarter and $0.44 per share in the firstthird quarter of 2016.

 

The majority of the decrease in consolidated net sales came from the Company’s wholesale segment. Wholesale net sales decreased $9.4declined $1.4 million, due mainly to lower sales of the Stacy Adams, Nunn Bush, and BOGS brands, partially offset by higher sales of the Florsheim brand. Net sales of the Company’s retail segment and its other operations were also down.

Consolidated earnings from operations were relatively flat for the quarter. Earnings from operations in the Company’s wholesale segment were up, due to higher gross margins and lower wholesale selling and administrative expenses, but this increase was offset by lower earnings from operations in the Company’s retail segment and its other operations.

Other expense was down due to lower pension expense in 2017.

12

Year-to-Date Highlights

Consolidated net sales for the first nine months of 2017 were $203.5 million, down 5% from last year’s year-to-date net sales of $214.8 million. Earnings from operations were $13.2 million in 2017, a decrease of 6% as compared to $14.0 million in 2016. Consolidated net earnings attributable to Weyco Group, Inc. were $8.4 million this quarter,year, up 1% as compared to $8.3 million last year. Diluted earnings per share to date in 2017 were $0.81, versus $0.78 per share in the same period of 2016.

The majority of the decrease in consolidated net sales came from the Company’s wholesale segment. Wholesale net sales were down $10.0 million, due primarily to lower sales of the Stacy Adams, Nunn Bush, and BOGS brands, partially offset by higher sales of the Florsheim brand. Net sales in the Company’s retail segment and its other operations were also down.

Consolidated earnings from operations decreased $838,000 for the nine months ended September 30, 2017, compared to the same period one year ago, with sales volumes down across all wholesale brands. These sales declines wereago. The decrease occurred mainly in the result of 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, mainly due to lower sales volumesand higher retail selling and administrative expenses. Earnings from operations in the Company’s wholesale segment.segment were flat, as lower sales were offset by higher gross margins and lower wholesale selling and administrative expenses this year. Earnings from operations in the Company’s other businesses were also down.

Other expense was down due to lower pension expense in 2017.

 

Financial Position Highlights

 

At March 31,September 30, 2017, cash and marketable securities totaled $45.5$36.3 million and there was nooutstanding debt outstanding on the Company’s revolving line of credit.totaled $4.8 million. At December 31, 2016, cash and marketable securities totaled $39.4 million and outstanding debt totaled $4.3 million. During the first threenine months of 2017, the Company generated $17.2$16.4 million of cash from operations. The Company paid dividends of $4.6$9.1 million, paid off $4.3 million on its revolving line of credit, spent $2.4$11.6 million on purchases of Company stock, and purchased a net of $4.0 million in marketable securities. The Company also had $416,000$1.4 million of 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, 2017 and 2016, were as follows:

 

 Three Months Ended March 31, %  Three Months Ended September 30, % Nine Months Ended September 30, % 
 2017  2016  Change  2017  2016  Change  2017  2016  Change 
 (Dollars in thousands)    (Dollars in thousands) 
Net Sales                                    
North American Wholesale $52,850  $62,246   -15% $60,728  $62,170   -2%  $155,869  $165,876   -6% 
North American Retail  4,930   5,085   -3%  4,291   4,702   -9%   13,979   14,508   -4% 
Other  11,340   11,569   -2%  11,887   12,197   -3%   33,631   34,452   -2% 
Total $69,120  $78,900   -12% $76,906  $79,069   -3%  $203,479  $214,836   -5% 
                                    
Earnings from Operations                                    
North American Wholesale $3,166  $3,725   -15% $7,416  $6,710   11%  $11,880  $11,910   0% 
North American Retail  43   246   -83%  17   313   -95%   244   787   -69% 
Other  250   236   6%  369   731   -50%   1,027   1,292   -21% 
Total $3,459  $4,207   -18% $7,802  $7,754   1%  $13,151  $13,989   -6% 

13

 

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, 2017 and 2016, were as follows:

 

North American Wholesale Segment Net Sales

 

 Three Months Ended March 31, %  Three Months Ended September 30, % Nine Months Ended September 30, % 
 2017 2016 Change  2017  2016  Change  2017  2016  Change 
 (Dollars in thousands)    (Dollars in thousands) 
North American Net Sales                                    
Stacy Adams $19,318  $22,901   -16% $14,486  $14,861   -3%  $49,632  $52,092   -5% 
Nunn Bush  13,746   16,814   -18%  12,200   13,362   -9%   37,027   42,909   -14% 
Florsheim  12,458   13,634   -9%  15,518   14,262   9%   39,611   38,513   3% 
BOGS/Rafters  6,157   7,751   -21%  17,644   18,462   -4%   26,527   28,950   -8% 
Umi  470   536   -12%  352   698   -50%   1,252   1,681   -26% 
Total North American Wholesale $52,149  $61,636   -15% $60,200  $61,645   -2%  $154,049  $164,145   -6% 
Licensing  701   610   15%  528   525   1%   1,820   1,731   5% 
Total North American Wholesale Segment $52,850  $62,246   -15% $60,728  $62,170   -2%  $155,869  $165,876   -6% 

 

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 and Florsheim’s sales volumes declined in the department store trade channel, a segment particularly struggling with reduced foot traffic. BOGS net sales were also down for the quarter reflecting the continued softnessand year-to-date periods were down mainly with department stores. The increases in theFlorsheim sales were primarily due to higher sales to department stores and national shoe chains. BOGS sales were down as a result of lower sales with outdoor and better footwear channels.retailers.

 

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 increase in licensing revenues this quarter resulted mainly from a licensee transition that occurred in 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

 

GrossWholesale gross earnings for the North American wholesale segment were 30.8%33.9% of net sales in the firstthird quarter of 2017, compared to 32.2% of net sales in last year’s third quarter. For the first nine months of the year, wholesale gross earnings rose to 32.1% of net sales in 2017, from 31.2% of net sales in 2016. Gross margins improved as a result of a reduction in sales of closeout inventory, which is sold at lower margins.

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. Wholesale selling and administrative expenses were $13.2 million, or 22% of net sales in the third quarter of 2017, and $13.3 million, or 21% of net sales, in the third quarter of 2016. For the nine months ended September 30, wholesale selling and administrative expenses were $38.2 million, or 25% of net sales, in 2017, as compared to 29.2%$39.8 million, or 24% of net sales, in the first quarter of 2016.

Earnings from operations in the North American wholesale segment decreased 15% to $3.2were $7.4 million in the firstthird quarter of 2017, from $3.7up 11% as compared to $6.7 million in the same period last year, largely due tothird quarter of 2016. For the nine months ended September 30, 2017 and 2016, wholesale earnings from operations remained flat at $11.9 million in both periods. Despite the decrease in sales, wholesale sales.earnings from operations were up for the quarter, and flat for the first nine months of the year, due to higher gross margins and lower wholesale selling and administrative expenses.

 

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 $2.7 million and $3.2$2.6 million for three-monththe third quarter of 2017 versus $2.8 million for the same period of 2016. For the nine-month periods ended March 31,September 30, 2017 and 2016, distribution costs were $7.9 million and $8.8 million, respectively. This year, distribution costs were down due to lower employee and warehousing costs. The Company’s consolidated wholesale shipping and handling expenses were approximately $340,000$353,000 and $385,000$408,000 for the three-monthsthree months ended March 31,September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017, consolidated wholesale shipping and handling expenses were $959,000 and $1.1 million in 2016. These costs were included in selling and administrative expenses. The Company’s gross earnings may not be comparable to other companies, as some companies may include distribution costs and shipping and handling expenses in cost of sales.

 

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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. Wholesale 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 decrease in advertising costs. Pension expense was also lower this year, which was a direct result of 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 increased to 25% of net sales in the first quarter of 2017 as compared to 23% last year, due to the fixed nature of many of the Company’s other operating costs.

 

North American Retail Segment

 

Net Sales

 

Net sales in the Company’s North American retail segment were $4.9 million indeclined $411,000 and $529,000, for the first quarter ofthree and nine months ended September 30, 2017, down 3% asrespectively, compared to $5.1 million in 2016.the same periods last year. Same store sales, which include sales of both the U.S. internet business and brick and mortar same stores, were down 10% and 6% for the quarter and year-to-date periods, respectively. Same store sales were down 7% for the quarter, due to decreased sales at both brick and mortar storeslocations and on the Company’s websites. There wereThe majority of the same number of stores operating duringCompany’s brick and mortar locations are in Florida and Texas, and sales for the first quarter of 2017 and 2016, as one store closed and one store opened over the past twelve months. Retail sales in 2017year were impacted by the later timing of the Easter holiday in 2017 as compared to 2016, which caused sales to shift into April this year.recent hurricanes.

 

Earnings from Operations

 

Earnings from operationsGross earnings as a percent of net sales were 63.6% in the North American retail segment were $43,000 in the firstthird quarter of 2017, as compared to $246,00065.5% in the firstthird quarter of 2016. RetailFor the nine months ended September 30, retail gross earnings were 64.4%as a percent of net sales were 64.4% in 2017 and 65.1% in 2016.

Retail earnings from operations declined $296,000 for the quarter, compared to the third quarter of 2016, due mainly to lower sales. For the year-to-date period, retail earnings from operations were down $543,000 in 2017, compared to the first quarternine months of 2017, as compared2016, due to 64.8% of netlower sales in 2016.and higher retail selling and administrative expenses. Selling and administrative expenses for the retail segment include, and are primarily related to, rent and occupancy costs, employee costs, advertising expense and freight. Retail selling and administrative expenses were 64%as a percent of net sales were 63% and 59% for the three-month periods ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, selling and administrative expenses as a percent of net sales were 63% in the first quarter of 2017 versusand 60% in last year’s first quarter. The decrease in retail earnings from operations was primarily due to the decrease in retail sales.2016.

 

Other

 

The Company’s other businesses include its wholesale and retail operationsnet sales were $11.9 million in the third quarter of 2017, down 3% as compared to $12.2 million in 2016. For the nine months ended September 30, 2017, other net sales were $33.6 million, down 2% from $34.5 million in the same period last year. The decreases in both periods were due to lower sales at both Florsheim Australia and Florsheim Europe. Net sales of the Company’s other businesses were $11.3 million in the first quarter of 2017, down 2% as compared to $11.6 million in 2016. The decrease was primarily due to lower net sales at Florsheim Australia. Florsheim Australia’s net sales, which accounts for the majority of other net sales, were down 1%2% for both the quarter.quarter and first nine months of 2017, as compared to the same periods of 2016. In local currency, Florsheim Australia’s net sales were down 6% for the quarter.quarter and 5% for the year-to-date period, compared to the same periods last year, with sales down in both its retail and wholesale businesses.

 

Collectively, the earnings from operations of Florsheim Australia and Florsheim Europethe Company’s other businesses were $250,000$369,000 in the firstthird quarter of 2017 and $236,000$731,000 in the firstsame period last year. For the nine months ended September 30, earnings from operations of the Company’s other businesses were $1.0 million in 2017 and $1.3 million in 2016. The decreases for the quarter of 2016.and year-to-date periods were primarily due to lower operating earnings in Florsheim Australia’s retail businesses, mainly due to the decrease in retail sales.

 

Other income and expense and taxes

 

Interest income was $193,000 and $190,000 in the third quarters of 2017 and 2016, respectively. For the nine months ended September 30, interest income was $572,000 in 2017 and $584,000 in 2016. Interest expense for the first quarter ofthree and nine months ended September 30, 2017, was down $25,000 asdecreased $61,000 and $221,000, respectively, compared to the first quarter ofsame periods in 2016, due to a lower average investment balance this year compared to last year. Interest expense was down $66,000 for the quarter, due to a lower average debt balancebalances this year compared to last year.

 

InThe Company adopted ASU 2017-07 in the first quarter of 2017 the Companyand retrospectively adopted ASU 2017-07, whichapplied it to all periods presented. This required the Company to reclassify the non-service cost components of pension expense from selling and administrative expenses to other expense, net, in the Consolidated Condensed Statements of Earnings and Comprehensive Income (Unaudited). The decrease in other expense thisfor the quarter and first nine months of 2017 was primarilymainly due to a $266,000 decreasedecreases of $316,000 and $949,000, respectively, in the non-service cost components of pension expense. Pension expense was down following the freezedecreased in 2017 as a result of freezing benefits under the pension plan, effective December 31, 2016.

 

 1215 

 

The Company’s effective tax rate for the quarter ended March 31, 2017, was 39.5% as compared to 35.8% for the same period of 2016. Last year’s effective tax rate was lower due to donations of footwear that occurred in the first quarter of 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. TheDuring the first nine months of 2017, the Company generated $17.2$16.4 million of cash from operating activities, during the first three months of 2017, compared to $13.5$27.8 million in the same period one year ago.of 2016. The increasedecrease between years was primarily due to changes in operating assets and liabilities, principally accounts receivable.inventory.

 

The Company paid cash dividends of $4.6$9.1 million and $4.3$8.8 million during the threenine months ended March 31,September 30, 2017 and 2016, 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 2017, the Company repurchased 87,886420,711 shares at a total cost of $2.4$11.6 million. As of March 31,September 30, 2017, the Company had 477,289approximately 144,000 shares available under its previously announced stock repurchase program. On October 31, 2017, the Company’s Board of Directors authorized the repurchase of an additional 1.0 million shares of its common stock under its repurchase program, bringing the total available to purchase to approximately 1.1 million shares. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” below for more information.

 

Capital expenditures were $416,000totaled $1.4 million in the first threenine months of 2017. Management estimates that annual capital expenditures for 20172016 will be between $2$1.5 million and $3$2.0 million.

 

At March 31,September 30, 2017, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 3, 2017. The line of credit bears interest at LIBOR plus 0.75%. The Company paid offborrowed a net of $0.5 million on the line of credit during the quarter.first nine months of 2017. At September 30, 2017, outstanding borrowings were $4.8 million at an interest rate of 2.0%. The highest balance on the line of credit during the quarter was $4.3$4.8 million. Subsequent to September 30, 2017, the line of credit agreement was renewed on the same terms for another one-year period, expiring November 4, 2018.

 

As of March 31,At September 30, 2017, approximately $2.6$1.6 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 quarternine months ended March 31,September 30, 2017, from those disclosed in the Company’s Annual Report on Form 10-K for the year-endedyear ended December 31, 2016.

13

 

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, 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.

 

16

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, 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 repurchasepurchase of the Company’s common stock by the Company in the three-month period ended March 31,September 30, 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) 
                 
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     
        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) 
             
7/1/2017 - 7/31/2017  45,937  $27.89   45,937   270,823 
                 
8/1/2017 - 8/31/2017  89,816  $27.57   89,816   181,007 
                 
9/1/2017 - 9/30/2017  36,543  $27.94   36,543   144,464 
                 
Total  172,296  $27.73   172,296     

 

(1)In 1998 the Company's stock repurchase program was established. On several occasions since the program's inception, the Company's Board of Directors has extended the number of shares authorized for repurchase under the program. In total, 6.57.5 million shares have been authorized for repurchase.repurchase to date. This includes the additional 1.0 million shares that were authorized for repurchase on October 31, 2017.

Item 5. Other Information

On November 2, 2017, the Company renewed its line of credit agreement with PNC Bank, N.A. for another term that expires on November 4, 2018, 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 Line of Credit Renewal Letter with PNC Bank, N.A., a copy of which is filed as Exhibit 10.1 to this Form 10-Q.

 

Item 6. Exhibits.

 

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

 

 1417 

 

 

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 4,November 6, 2017
/s/ John F. Wittkowske
 John F. Wittkowske
 Senior Vice President and Chief Financial Officer

 

 1518 

 

 

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, 2017

 

Exhibit Description Incorporation Herein By Reference
To		 Filed
Herewith
       
31.110.1 CertificationLine of Chief Executive OfficerCredit Renewal Letter with PNC Bank, N.A., dated November 2, 2017   X
       
31.210.21a CertificationForm of Chief Financial Officerincentive stock option agreement for the Weyco Group, Inc. 2017 Incentive Plan   X
       
3210.21b Form of non-qualified stock option agreement for the Weyco Group, Inc. 2017 Incentive PlanX
10.21cForm of restricted stock agreement for the Weyco Group, Inc. 2017 Incentive PlanX
31.1Certification of Chief Executive OfficerX
31.2Certification of Chief Financial OfficerX
32Section 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, 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 (v)(iv) Notes to Consolidated Condensed Financial Statements, furnished herewith   X

 

19