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 September 30, 2017March 31, 2020

 

Or

 

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

 

For the transition period fromto

For the transition period from to   

 

Commission File Number:0-9068000-09068

WEYCO GROUP, INC.

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

(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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading SymbolName of each exchange on which registered
Common Stock - $1.00 par value per shareWEYSThe Nasdaq Stock Market

 

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.

YesYesx Nox   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).

YesYesx No   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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer¨  Accelerated Filerx Non-Accelerated Filer¨ Smaller Reporting Companyx¨  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 Yes¨ Noxx

 

As of October 31, 2017,April 24, 2020, there were 10,192,9059,813,371 shares of common stock outstanding.

 

 

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

The following consolidated condensed balance sheet as of December 31, 2019, which has been derived from audited financial statements, and the unaudited interim consolidated condensed financial statements have been prepared by Weyco Group, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s latest annual report on Form 10-K.

 

1

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

 

 September 30, December 31,  March 31, December 31, 
 2017  2016  2020  2019 
 (Dollars in thousands)  (Dollars in thousands) 
ASSETS:             
Cash and cash equivalents $6,704  $13,710  $14,181  $9,799 
Marketable securities, at amortized cost  11,354   4,601   2,129   5,904 
Accounts receivable, net  56,271   50,726   46,535   51,532 
Income tax receivable  781   789 
Inventories  57,692   69,898   67,983   86,713 
Prepaid expenses and other current assets  3,010   6,203   4,176   6,047 
Total current assets  135,812   145,927   135,004   159,995 
                
Marketable securities, at amortized cost  18,273   21,061   15,081   15,814 
Deferred income tax benefits  707   660   2,175   2,487 
Property, plant and equipment, net  32,371   33,717   32,844   32,214 
Operating lease right-of-use assets  16,303   18,753 
Goodwill  11,112   11,112   11,112   11,112 
Trademarks  32,978   32,978   32,868   32,868 
Other assets  22,984   22,785   23,395   23,674 
Total assets $254,237  $268,240  $268,782  $296,917 
                
LIABILITIES AND EQUITY:                
Short-term borrowings $4,772  $4,268  $-  $7,049 
Accounts payable  5,001   11,942   3,992   12,455 
Dividend payable  -   2,192   -   2,355 
Operating lease liabilities  5,823   6,505 
Accrued liabilities  12,207   10,572   9,871   13,422 
Accrued income tax payable  755   90 
Total current liabilities  21,980   28,974   20,441   41,876 
                
Deferred income tax liabilities  3,096   703   3,182   3,085 
Long-term pension liability  23,724   27,801   27,352   27,523 
Operating lease liabilities  12,117   14,110 
Other long-term liabilities  2,269   2,482   264   329 
Total liabilities  63,356   86,923 
                
Common stock  10,197   10,505   9,813   9,873 
Capital in excess of par value  53,258   50,184   66,183   65,832 
Reinvested earnings  147,951   157,468   156,386   158,825 
Accumulated other comprehensive loss  (14,997)  (16,569)  (26,956)  (24,536)
Total Weyco Group, Inc. equity  196,409   201,588 
Noncontrolling interest  6,759   6,692 
Total equity  203,168   208,280   205,426   209,994 
Total liabilities and equity $254,237  $268,240  $268,782  $296,917 

 

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

 

2

1

 

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  Three Months Ended March 31, 
 (In thousands, except per share amounts)  2020  2019 
          (In thousands, except per share amounts) 
Net sales $76,906  $79,069  $203,479  $214,836  $63,584  $74,128 
Cost of sales  47,438   49,747   126,693   136,096   40,407   45,364 
Gross earnings  29,468   29,322   76,786   78,740   23,177   28,764 
                        
Selling and administrative expenses  21,666   21,568   63,635   64,751   21,836   23,618 
Earnings from operations  7,802   7,754   13,151   13,989   1,341   5,146 
                        
Interest income  193   190   572   584   149   223 
Interest expense  -   (61)  (7)  (228)  (51)  (32)
Other expense, net  (53)  (311)  (243)  (850)
Other income (expense), net  407   (125)
                        
Earnings before provision for income taxes  7,942   7,572   13,473   13,495   1,846   5,212 
                        
Provision for income taxes  3,022   2,871   5,135   5,084   684   1,244 
                        
Net earnings  4,920   4,701   8,338   8,411   1,162   3,968 
                
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   9,781   9,949 
Diluted  10,218   10,516   10,360   10,605   9,786   10,027 
                        
Earnings per share                        
Basic $0.49  $0.44  $0.82  $0.79  $0.12  $0.40 
Diluted $0.48  $0.44  $0.81  $0.78  $0.12  $0.40 
                        
Cash dividends declared (per share) $0.22  $0.21  $0.65  $0.62  $0.24  $0.23 
                        
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 
Comprehensive (loss) income $(1,258) $4,206 

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

3

2

 

 

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 Nine Months Ended September 30,  Three Months Ended March 31, 
 2017  2016  2020  2019 
 (Dollars in thousands)  (Dollars in thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net earnings $8,338  $8,411  $1,162  $3,968 
Adjustments to reconcile net earnings to net cash provided by operating activities -                
Depreciation  2,971   2,708   733   827 
Amortization  265   288   71   83 
Bad debt expense  350   96   145   48 
Deferred income taxes  2,192   1,537   360   (12)
Net foreign currency transaction gains  (61)  (389)
Stock-based compensation  1,174   1,121 
Pension contributions  (4,000)  (2,400)
Net foreign currency transaction (gains) losses  (356)  16 
Share-based compensation expense  351   366 
Pension expense  746   2,500   111   229 
Increase in cash surrender value of life insurance  (250)  (250)  (135)  (135)
Changes in operating assets and liabilities -                
Accounts receivable  (5,703)  (3,714)  4,878   816 
Inventories  12,195   26,641   18,704   6,900 
Prepaid expenses and other assets  3,167   800   2,176   2,182 
Accounts payable  (6,838)  (7,699)  (8,477)  (7,990)
Accrued liabilities and other  1,879   (1,023)  (5,410)  (3,537)
Accrued income taxes  22   (839)  680   696 
Excess tax benefits from stock-based compensation  (30)  - 
Net cash provided by operating activities  16,417   27,788   14,993   4,457 
                
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchases of marketable securities  (14,719)  (3,605)  -   (1,327)
Proceeds from maturities of marketable securities  10,710   4,190   4,510   680 
Life insurance premiums paid  (155)  (155)
Purchases of property, plant and equipment  (1,406)  (4,872)  (1,797)  (981)
Net cash used for investing activities  (5,570)  (4,442)
Net cash provided by (used for) investing activities  2,713   (1,628)
                
CASH FLOWS FROM FINANCING ACTIVITIES:                
Cash dividends paid  (8,877)  (8,678)  (4,694)  (4,593)
Cash dividends paid to noncontrolling interest of subsidiary  (204)  (170)
Shares purchased and retired  (11,621)  (9,368)  (1,304)  (1,828)
Proceeds from stock options exercised  2,013   585 
Taxes paid related to the net share settlement of equity awards  (51)  - 
Payment of contingent consideration  -   (5,217)
Net proceeds from stock options exercised  -   7 
Proceeds from bank borrowings  20,651   91,729   11,883   31,813 
Repayments of bank borrowings  (20,147)  (95,568)  (18,932)  (33,933)
Excess tax benefits from stock-based compensation  -   3 
Net cash used for financing activities  (18,236)  (26,684)  (13,047)  (8,534)
                
Effect of exchange rate changes on cash and cash equivalents  383   252   (277)  72 
                
Net decrease in cash and cash equivalents $(7,006) $(3,086)
Net increase (decrease) in cash and cash equivalents $4,382  $(5,633)
                
CASH AND CASH EQUIVALENTS at beginning of period  13,710   17,926   9,799   22,973 
                
CASH AND CASH EQUIVALENTS at end of period $6,704  $14,840  $14,181  $17,340 
                
SUPPLEMENTAL CASH FLOW INFORMATION:                
Income taxes paid, net of refunds $2,829  $4,083  $235  $423 
Interest paid $7  $228  $51  $31 

 

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, 2017,March 31, 2020, 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 pension 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 Company adopted ASU 2017-07 effective January 1, 2017 and retrospectively applied it to all periods presented. Accordingly, the service cost component of net periodic pension 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.Reclassifications

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 September 30, 2016, the Company reclassified $424,000 and $1,272,000, respectively, of expense from selling and administrative expenses to other expense, net. These amounts represent the non-service cost components of net periodic pension cost for the periods then ended, and were reclassified in connection with the adoption of ASU 2017-07. These 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 September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (In thousands, except per share amounts) 
Numerator:                
Net earnings attributable to Weyco Group, Inc. $4,934  $4,600  $8,408  $8,287 
                 
Denominator:                
Basic weighted average shares outstanding  10,160   10,461   10,299   10,556 
Effect of dilutive securities:                
Employee stock-based awards  58   55   61   49 
Diluted weighted average shares outstanding  10,218   10,516   10,360   10,605 
                 
Basic earnings per share $0.49  $0.44  $0.82  $0.79 
                 
Diluted earnings per share $0.48  $0.44  $0.81  $0.78 

  Three Months Ended March 31, 
  2020  2019 
  (In thousands, except per share amounts) 
Numerator:        
Net earnings $1,162  $3,968 
         
Denominator:        
Basic weighted average shares outstanding  9,781   9,949 
Effect of dilutive securities:        
Employee share-based awards  5   78 
Diluted weighted average shares outstanding  9,786   10,027 
         
Basic earnings per share $0.12  $0.40 
         
Diluted earnings per share $0.12  $0.40 

 

Diluted weighted average shares outstanding for the three months ended September 30, 2017, excludeMarch 31, 2020, excludes anti-dilutive stock-based awardsstock options totaling 1,116,3251,190,000 shares of common stock at a weighted average price of $26.49.$26.74. Diluted weighted average shares outstanding for the ninethree months ended September 30, 2017, excludeMarch 31, 2019, excludes anti-dilutive stock-based awardsstock options totaling 844,036348,000 shares of common stock at a weighted average price of $26.93. Diluted weighted average shares outstanding for the three months ended September 30, 2016, exclude anti-dilutive stock-based awards totaling 1,232,000 shares of common stock at a weighted average price of $26.14. Diluted weighted average shares outstanding for the nine months ended September 30, 2016, exclude anti-dilutive stock-based awards totaling 924,161 shares of common stock at a weighted average price of $26.78.$29.51.

 

6

5.3.Investments

 

As noted in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2019, 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 September 30, 2017,March 31, 2020 and December 31, 2016.2019.

 

  September 30, 2017  December 31, 2016 
  Amortized  Market  Amortized  Market 
  Cost  Value  Cost  Value 
  (Dollars in thousands) 
Municipal bonds:                
Current $11,354  $11,380  $4,601  $4,610 
Due from one through five years  9,819   10,157   12,133   12,486 
Due from six through ten years  5,789   6,050   7,705   7,804 
Due from eleven through twenty years  2,665   2,763   1,223   1,222 
Total $29,627  $30,350  $25,662  $26,122 

 

  March 31, 2020  December 31, 2019 
  Amortized  Market  Amortized  Market 
  Cost  Value  Cost  Value 
  (Dollars in thousands) 
Municipal bonds:                
Current $2,129  $2,143  $5,904  $5,915 
    Due from one through five years  7,615   7,861   8,336   8,621 
    Due from six through ten years  4,818   5,209   4,255   4,618 
    Due from eleven through twenty years  2,648   2,844   3,223   3,430 
        Total $17,210  $18,057  $21,718  $22,584 


The unrealized gains and losses on marketable securities at September 30, 2017,March 31, 2020, and at December 31, 2016,2019, were as follows:

 

  September 30, 2017  December 31, 2016 
  Unrealized  Unrealized  Unrealized  Unrealized 
  Gains  Losses  Gains  Losses 
  (Dollars in thousands) 
Municipal bonds $759  $(36) $546  $(86)
  March 31, 2020  December 31, 2019 
  Unrealized  Unrealized  Unrealized  Unrealized 
  Gains  Losses  Gains  Losses 
  (Dollars in thousands) 
Municipal bonds $847  $-  $866  $- 

 

The estimated market values provided are level 2 valuations as defined by ASC 820,Fair Value Measurements and Disclosures (“(“ASC 820”). The Company reviewed its portfolio of investments as of September 30, 2017March 31, 2020 and determined that no other-than-temporary market value impairment exists.

 

6.4.Intangible Assets

 

TheDuring the three months ended March 31, 2020, there were no changes in the carrying value of the Company’s indefinite-lived and amortizable intangible assets (goodwill and trademarks). Based upon the impact of the COVID-19 pandemic on the Company’s business and results of operations, management tested its goodwill and trademarks for impairment as recordedof March 31, 2020, and found no impairment. However, the Company can make no assurances that the goodwill or trademarks will not be impaired in the Consolidated Condensed Balance Sheets (Unaudited) consisted of the following:

  September 30, 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 

7

future. 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 
  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  $(1,536) $1,964  $3,500  $(1,361) $2,139 
Total amortizable intangible assets     $3,500  $(1,536) $1,964  $3,500  $(1,361) $2,139 

The amortizable intangible assets arewhich were included within other assets in the Consolidated Condensed Balance Sheets. (Unaudited).Sheets (unaudited), consisted of the following:

 

     March 31, 2020  December 31, 2019 
  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   (2,119) $1,381  $3,500   (2,061) $1,439 
Total amortizable intangible assets     $3,500   (2,119) $1,381  $3,500   (2,061) $1,439 

Amortization expense related to the intangible assets was approximately $58,000 for$60,000 in both the thirdfirst quarters of 20172020 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.2019.

 

7.5.Segment Information

 

The Company has two reportable segments: North American wholesale operations (“wholesale”) and North American retail operations (“retail”). The chief operating decision maker, the Company’s Chief Executive Officer, evaluates the performance of the Company’s segments based on earnings from operations. Therefore, interest income or expense, other income or expense, and income taxes are not allocated to the segments. The “other” category in the 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, 2017March 31, 2020 and 2016,2019, was as follows:

 

Three Months Ended            
September 30, Wholesale  Retail  Other  Total 
  (Dollars in thousands) 
2017            
Product sales $60,200  $4,291  $11,887  $76,378 
Licensing revenues  528   -   -   528 
Net sales $60,728  $4,291  $11,887  $76,906 
Earnings from operations $7,416  $17  $369  $7,802 
                 
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 $6,710  $313  $731  $7,754 

Three Months Ended            
March 31, Wholesale  Retail  Other  Total 
  (Dollars in thousands) 
2020            
Product sales $52,228  $4,761  $6,134  $63,123 
Licensing revenues  461   -   -   461 
Net sales $52,689  $4,761  $6,134  $63,584 
Earnings (loss) from operations $2,760  $(89) $(1,330) $1,341 
                 
2019                
Product sales $58,774  $5,571  $9,076  $73,421 
Licensing revenues  707   -   -   707 
Net sales $59,481  $5,571  $9,076  $74,128 
Earnings (loss) from operations $5,206  $483  $(543) $5,146 

 

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 

5

 

8.6.Employee Retirement Plans

 

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

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (Dollars in thousands) 
Service cost $141  $409  $423  $1,228 
Interest cost  552   612   1,655   1,837 
Expected return on plan assets  (576)  (607)  (1,727)  (1,822)
Net amortization and deferral  132   419   395   1,257 
Net periodic pension cost $249  $833  $746  $2,500 

8

  Three Months Ended March 31, 
  2020  2019 
  (Dollars in thousands) 
Service cost $115  $103 
Interest cost  500   606 
Expected return on plan assets  (690)  (626)
Net amortization and deferral  186   146 
Net periodic pension cost $111  $229 

 

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

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.

 

9.7.Stock-BasedLeases

The Company leases retail shoe stores, as well as several office and distribution facilities worldwide. The leases have original lease periods expiring between 2020 and 2030. Many leases include one or more options to renew. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonable assured at lease commencement. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The components of the Company’s operating lease costs were as follows (dollars in thousands):

  Three Months Ended March 31, 
  2020  2019 
Operating lease costs $1,882  $2,194 
Variable lease costs(1)  10   9 
Total lease costs $1,892  $2,203 

(1) Variable lease costs primarily include percentage rentals based upon sales in excess of specified amounts.

The following is a schedule of maturities of operating lease liabilities as of March 31, 2020 (dollars in thousands):

  Operating Leases 
2020, excluding the quarter ended March 31, 2020 $4,981 
2021  5,385 
2022  3,251 
2023  2,220 
2024  1,473 
Thereafter  2,598 
Total lease payments  19,908 
Less imputed interest  (1,968)
Present value of lease liabilities  17,940 

6

The operating lease liabilities are classified in the consolidated condensed balance sheet (unaudited) as follows (dollars in thousands):

  March 31, 2020  December 31, 2019 
Operating lease liabilities - current $5,823  $6,505 
Operating lease liabilities - non-current  12,117   14,110 
Total $17,940  $20,615 

The Company determined the present value of its lease liabilities using a weighted-average discount rate of 4.25%. As of March 31, 2020, the Company’s leases have a weighted-average remaining lease term of 4.4 years.

Supplemental cash flow information related to the Company’s operating leases is as follows (dollars in thousands):

  Three Months Ended March 31, 
  2020  2019 
Cash paid for amounts included in the measurement of lease liabilities $1,978  $2,252 
Right-of-use assets obtained in exchange for new lease liabilities (noncash) $144  $26,029 

8.Share-Based Compensation Plans

 

During the three and nine months ended September 30, 2017,March 31, 2020, the Company recognized approximately $395,000 and $1,174,000 respectively,$351,000 of compensation expense associated with stock option and restricted stock awards granted in years 20132016 through 2017.2019. During the three and nine months ended September 30, 2016,March 31, 2019, the Company recognized approximately $393,000 and $1,121,000, respectively,$366,000 of compensation expense associated with stock option and restricted stock awards granted in years 20122015 through 2016.2019.

 

The following table summarizes the Company’s stock option activity for the nine-monththree-month period ended September 30, 2017:March 31, 2020:

 

      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         
Outstanding at December 31, 2019  1,176,770  $27.14         
Granted  211,200  $27.94           -  $-         
Exercised  (81,464) $24.71           -  $-         
Forfeited or expired  (14,175) $26.46           (4,275) $27.78         
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 
Outstanding at March 31, 2020  1,172,495  $27.13   4.4  $- 
Exercisable at March 31, 2020  701,820  $26.71   2.2  $- 

*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, 2020, the last trading day of the quarter, of $20.17 and the exercise price multiplied by the number of in-the-money outstanding and exercisable stock options. All of the Company's stock options were underwater (i.e. the respective exercise prices were higher than the closing price of the Company's stock) as of March 31, 2020; therefore, the aggregate intrinsic value is zero.

 

* 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 September 29, 2017, the last trading day of the quarter, of $28.38 and the exercise price multiplied by the number of in-the-money outstanding and exercisable stock options.

7

 

The following table summarizes the Company’s stock option exercise activity for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:

 

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended March 31, 
 2017  2016  2017  2016  2020  2019 
 (Dollars in thousands)  (Dollars in thousands) 
Total intrinsic value of stock options exercised $208  $14  $272  $87  $-  $11 
Cash received from stock option exercises $1,575  $132  $2,013  $585  $-  $7 
Income tax benefit from the exercise of stock options $81  $5  $106  $34  $-  $3 

 

The following table summarizes the Company’s restricted stock award activity for the nine-monththree-month period ended September 30, 2017:March 31, 2020:

 

        Weighted    
     Weighted  Average    
  Shares of  Average  Remaining  Aggregate 
  Restricted  Grant Date  Contractual  Intrinsic 
  Stock  Fair Value  Term (Years)  Value* 
Non-vested at December 31, 2016  58,500  $26.09         
Issued  30,800   27.94         
Vested  (18,600)  26.05         
Forfeited  -   -         
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 September 29,  2017, the last trading day of the quarter, of $28.38 multiplied by the number of non-vested restricted shares outstanding.  

        Weighted    
     Weighted  Average    
  Shares of  Average  Remaining  Aggregate 
  Restricted  Grant Date  Contractual  Intrinsic 
  Stock  Fair Value  Term (Years)  Value* 
Non-vested at December 31, 2019  68,735  $28.04         
Issued  -   -         
Vested  -   -         
Forfeited  -   -         
Non-vested at March 31, 2020  68,735  $28.04   2.5  $1,386,000 

 

10.*The aggregate intrinsic value of non-vested restricted stock was calculated using the market value of the Company's stock on March 31, 2020, the last trading day of the quarter, of $20.17 multiplied by the number of non-vested restricted shares outstanding.

9.Short-Term Borrowings

 

At September 30, 2017,March 31, 2020, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 3, 2017.5, 2020. The line of credit bears interest at the daily London Interbank Offered Rate (“LIBOR”) plus 0.75%. At September 30, 2017,March 31, 2020, there were no amounts outstanding borrowings were approximately $4.8 million at an interest rateon the line of 2.0%.credit. The highest balance on the line of credit during the quarter was approximately $4.8$8.5 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

 

11.10.Financial Instruments

 

At September 30, 2017,March 31, 2020, the Company had foreign exchange contracts outstanding to sell $8.0 million Canadian dollars at a price of approximately $6.0 million U.S. dollars. The Company’s majority-ownedwholly-owned subsidiary, Florsheim Australia, had foreign exchange contracts outstanding to buy $3.7$3.0 million U.S. dollars at a price of approximately $4.7$4.3 million Australian dollars. Florsheim Australia also hadThese contracts are set to expire in the second quarter of 2020. In the first quarter of 2020, the Company recorded unrealized gains of approximately $362,000 U.S. dollars related to foreign exchange contracts outstanding to buy 200,000 Euros at a price of approximately $299,000 Australian dollars. Based on quarter-end exchange rates, there were no significant unrealized gains or losses on the outstanding contracts.

 

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

 


12.11.Comprehensive (Loss) Income

 

Comprehensive (loss) income for the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, was as follows:

 

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

  Three Months Ended March 31, 
  2020  2019 
  (Dollars in thousands) 
Net earnings $1,162  $3,968 
Foreign currency translation adjustments  (2,558)  130 
Pension liability, net of tax of $48 and $38, respectively  138   108 
Total comprehensive (loss) income $(1,258) $4,206 

 

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

 

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

  March 31,  December 31, 
  2020  2019 
  (Dollars in thousands) 
Foreign currency translation adjustments $(9,591) $(7,033)
Pension liability, net of tax  (17,365)  (17,503)
Total accumulated other comprehensive loss $(26,956) $(24,536)

 

The following presents a tabular disclosure about changes in accumulated other comprehensive loss during the ninethree months ended September 30, 2017:March 31, 2020:

 

  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  1,331   -   1,331 
Amounts reclassified from accumulated other comprehensive loss  -   241   241 
Net current period other comprehensive income  1,331   241   1,572 
Ending balance, September 30, 2017 $(4,158) $(10,839) $(14,997)
  Foreign Currency Translation Adjustments  Defined Benefit Pension
Items		  Total 
Beginning balance, December 31, 2019 $(7,033) $(17,503) $(24,536)
Other comprehensive loss before reclassifications  (2,558)  -   (2,558)
Amounts reclassified from accumulated other comprehensive loss  -   138   138 
Net current period other comprehensive (loss) income  (2,558)  138   (2,420)
Ending balance, March 31, 2020 $(9,591) $(17,365) $(26,956)

 

10

The following presents a tabular disclosure about reclassification adjustments out of accumulated other comprehensive loss during the ninethree months ended September 30, 2017:March 31, 2020:

 

 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		 Amounts reclassified from accumulated other comprehensive loss for the three months ended March 31, 2020 Affected line item in the statement where net income is presented
Amortization of defined benefit pension items           
Prior service cost $(47)(1) Other expense, net $(16)(1)Other income (expense), net
Actuarial losses  442(1) Other expense, net  202(1)Other income (expense), net
Total before tax  395    186   
Tax benefit  (154)   (48)  
Net of tax $241   $138   

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


9

 

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

13.12.Equity

 

A reconciliation ofThe following table reconciles the Company’s equity for the ninethree months ended September 30, 2017, is as follows:March 31, 2020:

 

           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  -   -   8,408   -   (70)
Foreign currency translation adjustments  -   -   -   1,331   341 
Pension liability adjustment, net of tax  -   -   -   241   - 
Cash dividends declared  -   -   (6,725)  -   - 
Cash dividends paid to noncontrolling interest  -   -   -   -   (204)
Stock options exercised  82   1,931   -   -   - 
Issuance of restricted stock  31   (31)  -   -   - 
Stock-based compensation expense  -   1,174   -   -   - 
Shares purchased and retired  (421)  -   (11,200)  -   - 
                     
Balance, September 30, 2017 $10,197  $53,258  $147,951  $(14,997) $6,759 

14.Subsequent Events
           Accumulated 
     Capital in     Other 
  Common  Excess of  Reinvested  Comprehensive 
  Stock  Par Value  Earnings  Loss 
  (Dollars in thousands) 
Balance, December 31, 2019 $9,873  $65,832  $158,825  $(24,536)
Net earnings  -   -   1,162   - 
Foreign currency translation adjustments  -   -   -   (2,558)
Pension liability adjustment, net of tax  -   -   -   138 
Cash dividends declared  -   -   (2,357)  - 
Share-based compensation expense  -   351   -   - 
Shares purchased and retired  (60)  -   (1,244)  - 
Balance, March 31, 2020 $9,813 $66,183 $156,386 $(26,956)

 

On October 31, 2017,

The following table reconciles the Company’s Board of Directors authorizedequity for 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.three months ended March 31, 2019:

 

11
           Accumulated 
     Capital in     Other 
  Common  Excess of  Reinvested  Comprehensive 
  Stock  Par Value  Earnings  Loss 
  (Dollars in thousands) 
Balance, December 31, 2018 $10,057  $64,263 $152,835 $(21,572)
Net earnings  -   -   3,968   - 
Foreign currency translation adjustments  -   -   -   130 
Pension liability adjustment, net of tax  -   -   -   108 
Cash dividends declared  -   -   (2,299)  - 
Stock options exercised  1   6   -   - 
Issuance of restricted stock  1   (1)  -   - 
Share-based compensation expense  -   366   -   - 
Shares purchased and retired  (64)  -   (1,764)  - 
Balance, March 31, 2019 $9,995 $64,634 $152,740 $(21,334)

 


 

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-endedyear ended December 31, 2016.2019, and Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q.

 

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,” “NunnFlorsheim, Nunn Bush,” “Stacy Stacy Adams,” “BOGS,” “Rafters,” BOGS, and “Umi.”Rafters. 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, as well as e-commerce retailers, 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 108 brick and mortar retail stores and internete-commerce businesses in the United States as of September 30, 2017.March 31, 2020. 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 2017 were $76.9 million, down 3% as compared to last year’s third quarter net sales of $79.1 million. Earnings fromThe Company’s operations were $7.8 million in both 2017 and 2016. Consolidated net earnings attributable to Weyco Group, Inc. increased 7% to $4.9 million in 2017, up from $4.6 million last year. Diluted earnings per share were $0.48 this quarter and $0.44 per sharebusiness experienced significant disruptions beginning in the thirdsecond half of March 2020 due to the unprecedented conditions surrounding the COVID-19 pandemic. Government-mandated shutdowns of non-essential businesses resulted in the majority of retailers temporarily closing their stores, which significantly affected the Company’s wholesale business. The Company’s domestic retail locations closed on March 18, 2020, and remain closed due to government orders. Overseas, the Company’s wholesale and retail businesses in Australia, Asia, South Africa, and Europe were similarly impacted by retail store closures and lockdowns requiring consumers to stay at home. These closings resulted in lower first quarter sales and earnings across all of 2016.the Company’s businesses.

 

The Company’s distribution center and the majority of its supply chain continue to operate, which enable the decrease in consolidated net sales came from the Company’s wholesale segment. Wholesale net sales declined $1.4 million, due mainlyCompany to lower sales of the Stacy Adams, Nunn Bush, and BOGS brands, partially offset by higher sales of the Florsheim brand. Net sales ofcontinue to ship e-commerce orders. However, it is unclear when the Company’s retail segmentpartners will reopen their stores, therefore the Company cannot presently estimate the impact of COVID-19 on its business, but the Company expects the pandemic and resulting global economic slowdown to have an adverse effect on its other operations were also down.businesses and operating results in 2020.

 

Consolidated earnings from operations were relatively flatIn light of these challenges, the Company plans to prioritize managing its liquidity, costs, and inventories in 2020. Collection of accounts receivable has slowed, and the Company expects that to continue over the coming months. The Company has already begun a dialog with many of its customers and will continue to actively manage receivables to secure payments and mitigate risk. The Company has reduced operating expenses where appropriate. In addition, the Company is pursuing rent relief for its retail stores worldwide, and outside of the quarter. Earnings from operationsU.S., the Company has qualified for government subsidies in Canada and Australia. The Company will continue to scrutinize its costs in light of an anticipated decrease in demand.

The Company has reduced its 2020 planned inventory receipts in response to reduced short-term demand for its products, and expects to closely manage its inventory levels throughout the year. While there have been some disruptions in the Company’s wholesale segment were up,supply chain as a result of the pandemic, such disruptions have not had a significant impact on the Company’s operations to this point. Currently, the Company’s third-party factories in China are operating, but production in India has ceased due to higher gross marginsa country-wide shut down 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.Company is not certain when that production will resume.

 

Other expense was down dueThe Company’s distribution system allows it to lower pension expensequickly adapt to changes in 2017.customer demand, and the Company believes its system is well-suited for adjusting to the future consumer landscape. The Company believes that its strong brands resonate well with consumers and that it is in a strong financial position to get through these challenges.

 

12


Year-to-DateSales and Earnings Highlights

 

Consolidated net sales for the first nine monthsquarter of 20172020 were $203.5$63.6 million, down 5% from14% compared to last year’s year-to-datefirst quarter net sales of $214.8$74.1 million. EarningsConsolidated earnings from operations were $13.2$1.3 million in 2017,this quarter, a decrease of 6% as74% compared to $14.0$5.1 million in 2016. Consolidated net earnings attributable to Weyco Group, Inc. were $8.4 million this 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 consolidated2019. Consolidated net sales came from the Company’s wholesale segment. Wholesale net salesearnings were down $10.0$1.2 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 segmentfirst quarter of 2020 and its other operations$4.0 million in last year’s first quarter. Diluted earnings per share 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. The decrease occurred mainly$0.12 per share this quarter and $0.40 per share in the Company’s retail segment, due to lower sales and higher retail selling and administrative expenses. Earnings from operations in the Company’s wholesale 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.first quarter of 2019.

 

Financial Position Highlights

 

At September 30, 2017,March 31, 2020, cash and marketable securities totaled $36.3$31.4 million and there was no debt outstanding debt totaled $4.8 million. At December 31, 2016, cash and marketable securities totaled $39.4 million and outstanding debt totaled $4.3 million.on the Company’s revolving line of credit. During the first ninethree months of 2017,2020, the Company generated $16.4$15.0 million of cash from operations. The Company paid dividends of $9.1$4.7 million, spent $11.6paid down $7.0 million on purchasesthe line of credit, repurchased $1.3 million of Company stock, and purchased a net of $4.0 million in marketable securities. The Company also had $1.4$1.8 million of capital expenditures.expenditures during the quarter.

 

SEGMENT ANALYSIS

 

Net sales and earnings from operations for the Company’s segments infor the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, were as follows:

 

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

13

  Three Months Ended March 31,  % 
  2020  2019  Change 
  (Dollars in thousands)    
Net Sales            
North American Wholesale $52,689  $59,481   -11%
North American Retail  4,761   5,571   -15%
Other  6,134   9,076   -32%
Total $63,584  $74,128   -14%
             
Earnings (loss) from Operations            
North American Wholesale $2,760  $5,206   -47%
North American Retail  (89)  483   -118%
Other  (1,330)  (543)  -145%
Total $1,341  $5,146   -74%
             

 

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, 2017March 31, 2020 and 2016,2019, were as follows:

 

North American Wholesale Segment Net Sales

  Three Months Ended March 31,  % 
 2020 2019 Change
  (Dollars in thousands)    
North American Wholesale Segment Net Sales            
Stacy Adams $16,170  $20,968   -23%
Nunn Bush  10,619   11,594   -8%
Florsheim  19,642   18,816   4%
BOGS/Rafters  5,797   7,391   -22%
Other  -   5   -100%
Total North American Wholesale $52,228  $58,774   -11%
Licensing  461   707   -35%
Total North American Wholesale Segment $52,689  $59,481   -11%

 

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

Net sales of the Stacy Adams, and Nunn Bush, sales for the quarter and year-to-date periods were down mainly with department stores. The increasesBOGS brands declined in Florsheim sales were primarily due to higher sales to department stores and national shoe chains. BOGS sales were downmost major categories as a result of lowerthe retail shutdowns caused by the COVID-19 pandemic. These decreases were partially offset by an increase in net sales with outdoor retailers.of the Florsheim brand. Florsheim’s increase stems from strong sales in January and February before the retail shutdowns went into effect.

 

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. Licensing revenues were down in the first quarter of 2020 due to the impact of the COVID-19 pandemic.

 

Earnings from Operations

 

Wholesale grossGross earnings for the North American wholesale segment were 33.9%31.8% of net sales in the thirdfirst quarter of 2017,2020, compared to 32.2%34.3% of net sales in last year’s third quarter. For the first nine monthsquarter of 2019. The decrease in gross margins was largely due to the additional costs of the year,tariff on certain footwear imported from China. The tariff of 15% took effect on September 1, 2019, and was subsequently reduced to 7.5% on February 14, 2020. The Company purchased a limited amount of inventory at the higher tariff rate, and expects the tariff’s negative impact on its gross margins will lessen as it sells through its current inventory. Earnings from operations in the North American wholesale segment were $2.8 million in the first quarter of 2020, down 47% compared to $5.2 million in the same period last year.

The Company’s cost of sales does not include distribution costs (e.g., receiving, inspection, warehousing, shipping and handling costs). Wholesale distribution costs were $3.3 million in the first quarter of 2020 and $3.1 million in the first quarter of 2019. These costs were included in selling and administrative expenses. The Company’s gross earnings rosemay not be comparable to 32.1%other companies, as some companies may include distribution costs in cost 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.sales.

 

North American wholesale segment selling and administrative expenses include, and are primarily related to, distribution costs, salaries and commissions, advertising costs, employee benefit costs and depreciation. Wholesale selling and administrative expenses were $13.2$14.0 million, or 22%27% of net sales, in the thirdfirst quarter of 2017, and $13.32020, compared to $15.2 million, or 21%26% of net sales, in the thirdfirst quarter of 2016. For the nine months ended September 30,2019. The Company reduced its wholesale selling and administrative expenses were $38.2 million, or 25% of net sales, in 2017, as compared to $39.8 million, or 24% of net sales, in 2016.

Earnings from operations in the North American wholesale segment were $7.4 million in the third quarter of 2017, up 11% as compared to $6.7 million in the third 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 earnings from operations were up for the quarter, and flat for the first nine monthswhere appropriate, as a result of the year,sales decline due to higher gross margins and lower wholesale selling and administrative expenses.

The Company’s costthe impact of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs). Distribution costs were $2.6 million for the third quarter of 2017 versus $2.8 million for the same period of 2016. For the nine-month periods ended 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 $353,000 and $408,000 for the three months ended 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.COVID-19 pandemic.

14

 

North American Retail Segment

 

Net Sales

 

Net sales in the Company’s North American retail segment declined $411,000 and $529,000, forwere $4.8 million in the three and nine months ended September 30, 2017, respectively,first quarter of 2020, down 15% compared to the same periods$5.6 million in last year.year’s first quarter. Same store sales, which include sales of both the U.S. internet business and brick and mortar same stores,e-commerce sales, were down 10% and 6%13% for the quarter, and year-to-date periods, respectively. Same store sales were down due primarily to decreased sales at both brick and mortar locations and on the Company’s websites. The majorityimpact of the Company’s brick and mortar locations are in Florida and Texas, and sales for the quarter and year were impacted by the recent hurricanes.COVID-19 pandemic.

 

Earnings from Operations

 

GrossRetail gross earnings as a percentwere 65.3% of net sales were 63.6% in the thirdfirst quarter of 2017,2020 compared to 65.5% in the third quarter of 2016. For the nine months ended September 30, retail gross earnings as a percent65.2% 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 thirdfirst 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 nine months of 2016, due to lower sales and higher retail selling and administrative expenses.2019. 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 as a percentwere $3.2 million, or 67% of net sales, were 63% and 59% forin the three-month periods ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, selling and administrativefirst quarter of 2020 versus $3.1 million, or 57% of net sales, in last year’s first quarter. The increase in retail expenses as a percent of net sales were 63%was primarily due to the sales decline, as many retail expenses are fixed in 2017 and 60%nature. The retail segment had operating losses totaling $89,000 this quarter compared to operating earnings of $483,000 in 2016.last year’s first quarter.

 

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 $11.9$6.1 million in the thirdfirst quarter of 2017,2020, down 3% as32% compared to $12.2$9.1 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.year’s first quarter. The decreases in both periods weredecrease was due to lower sales at both Florsheim Australia and Florsheim Europe.Europe as a result of retail shutdowns and government orders for consumers to stay at home. Collectively, Florsheim Australia’s net sales, which accounts for the majority of other net sales, were down 2% for both the quarterAustralia 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 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 the Company’s other businesses were $369,000 in the third quarter of 2017 and $731,000 in the same 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 andEurope had operating losses totaling $1.3 million in 2016. The decreases for the first quarter and year-to-date periods were primarily dueof 2020, compared to lower operating earningslosses of $543,000 in Florsheim Australia’s retail businesses, mainly due to the decrease in retail sales.first quarter of 2019.

 

Other income and expense and taxes

 

Interest income was $193,000$149,000 and $190,000$223,000 in the thirdfirst quarters of 20172020 and 2016,2019, respectively. ForThe decrease was largely due to less interest earned on the nine months ended September 30, interest incomelower investment balances this quarter. Interest expense was $572,000 in 2017$51,000 and $584,000 in 2016. Interest expense$32,000 for the three and nine months ended September 30, 2017, decreased $61,000March 31, 2020 and $221,000, respectively,2019, respectively.

Other income (expense), net, totaled $407,000 of income for the quarter, compared to $125,000 of expense in the first quarter of 2019. The increase in income was primarily due to unrealized gains on favorable foreign exchange contracts held by Florsheim Australia.

The Company’s effective tax rate for the quarter ended March 31, 2020 was 37.0% compared to 23.9% for the same periods in 2016, due to lower average debt balancesperiod of 2019. The Company did not record an income tax benefit on foreign losses this yearquarter, which raised the effective tax rate as compared to last year.

 

The Company adopted ASU 2017-07 in the first quarter of 2017 and retrospectively applied 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 for the quarter and first nine months of 2017 was mainly due to decreases of $316,000 and $949,000, respectively, in the non-service cost components of pension expense. Pension expense decreased in 2017 as a result of freezing benefits under the pension plan, effective December 31, 2016.

15

13

 

 

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 2017, theThe Company generated $16.4$15.0 million of cash from operating activities during the first three months of 2020, compared to $27.8$4.5 million in the same period of 2016.one year ago. The decreaseincrease between years was primarily due to changes in operating assets and liabilities, principally inventory.inventory and accounts receivable.

 

The Company paid cash dividends of $9.1$4.7 million and $8.8$4.6 million duringin the nine months ended Septemberfirst quarters of 2020 and 2019, respectively. On May 5, 2020, the Company’s Board of Directors declared a cash dividend of $0.24 per share to all shareholders of record on May 29, 2020, payable June 30, 2017 and 2016, respectively.2020.

 

The Company continues to repurchaserepurchases its common stock under its share repurchase program when the Company believes market conditions are favorable. During the first ninethree months of 2017,2020, the Company repurchased 420,71159,523 shares atfor a total cost of $11.6$1.3 million. As of September 30, 2017,March 31, 2020, the Company had approximately 144,000the authority to repurchase 382,747 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 totaled $1.4were $1.8 million in the first ninethree months of 2017.2020. Management estimates that annual capital expenditures for 20162020 will be between $1.5$3.0 million and $2.0$4.0 million.

 

At September 30, 2017,March 31, 2020, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 3, 2017.5, 2020. The line of credit bears interest at LIBOR plus 0.75%. The Company borrowed a net of $0.5 millionAt March 31, 2020, there were no amounts outstanding on the line of credit during the 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 $4.8$8.5 million. SubsequentThe Company expects to September 30, 2017, therenew this line of credit agreement was renewed on the same terms for another one-year period, expiring November 4, 2018.later this year, but cannot provide any assurances.

 

At September 30, 2017,As of March 31, 2020, approximately $1.6$1.5 million of cash and cash equivalents was held by the Company’s foreign subsidiaries.

 

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

 

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

 

COMMITMENTS

 

There were no material changes to the Company’s contractual obligations during the nine months ended September 30, 2017, from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.Not applicable.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes from those reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.Not applicable.

 

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.

 

NoneNone.

 

Item 1A. Risk Factors.Factors.

 

There have been no material changes toThe following supplements the risk factors affecting the Company from those disclosedpreviously reported in the Company’sPart 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016.2019:

The Company’s business, results of operations and financial condition have been, and are expected to continue to be adversely affected by the effects of widespread public health epidemics, including COVID-19, that are beyond its control.

Outbreaks of infectious diseases, public health epidemics and other adverse public health developments in countries where the Company, its customers and its suppliers operate have, and are expected to continue to have, an adverse effect on its business, results of operations and financial condition. The recent outbreak of COVID-19, initially limited to a region in China and now affecting the global community, including the United States, has adversely impacted, and is expected to continue to adversely affect the Company’s business. The nature and extent of the impact, including the resulting global economic slowdown, is highly uncertain and beyond the Company’s control. Uncertain factors relating to the COVID-19 pandemic include the duration, spread and severity of the virus, the effects of the COVID-19 pandemic on the Company’s customers, vendors and suppliers, and the actions, or perception of actions that may be taken, to contain or treat its impact, including declarations of states of emergency, business closures, manufacturing restrictions and a prolonged period of travel, commercial and/or other similar restrictions and limitations, including stay-at-home and similar orders.

As a result of the COVID-19 pandemic and the measures designed to contain its spread, the Company’s sales have been, and are expected to continue to be negatively impacted as a result of disruption in demand, which could have a material adverse effect on its business, results of operations and financial condition. As a result of the economic impact of the pandemic, collection of accounts receivable has slowed, and the Company expects that to continue over the coming months.The Company has reduced operating expenses where appropriate and continues to scrutinize its costs in light of an anticipated decrease in demand. There have been some disruptions in the Company’s supply chain as a result of the pandemic. Currently, the Company’s factories in China are operating, but production in India has ceased due to a country-wide shut down and the Company is not certain when that production will resume. Similarly, additional disruptions may occur in the Company’s supply chain as a result offacility closures, worker absenteeism, quarantines or other travel or health-related restrictions, which could delay the production of its products. The duration of the disruption to the Company’s customers and to its supply chain, and related financial impact, cannot be estimated at this time. Should such disruption continue for an extended period of time, the impact could have a material adverse effect on the Company’s business, results of operations and financial condition.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

In 1998, the Company’s stock repurchase program was established. On several occasions since the program’s inception, the Board of Directors has increased the number of shares authorized for repurchase under the program. In total, 7.5 million shares have been authorized for repurchase. The table below presents information pursuant to Item 703(a) of Regulation S-K regarding the purchaserepurchases of the Company’s common stock by the Company in the three-month period ended September 30, 2017.March 31, 2020.

 

        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     
 
 
 
 
Period		 
 
 
 
 		 
Total
Number
of Shares
Purchased		 
 
 
 
 		 
 
 
 
 		 
Average
Price
Paid
Per Share		 
 
 
 
 		 
 
 
 
 		Total Number of
Shares Purchased as
Part of the Publicly
Announced Program		 
 
 
 
 		 
 
 
 
 		Maximum Number
of Shares
that May Yet Be
Purchased Under
the Program		 
 
 
 
 
01/01/2020 - 01/31/2020  13,250  $23.94   13,250   429,020 
02/01/2020 - 02/29/2020  14,250  $23.40   14,250   414,770 
03/01/2020 - 03/31/2020  32,023  $20.40   32,023   382,747 
Total  59,523   21.91   59,523     

 

(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, 7.5 million shares have been authorized for 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.

17

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

18

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, 2017

Exhibit Description Incorporation Herein By Reference
To		 Filed
Herewith
10.1Line of Credit Renewal Letter with PNC Bank, N.A., dated November 2, 2017X
10.21aForm of incentive stock option agreement for the Weyco Group, Inc. 2017 Incentive PlanX
10.21bForm 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
       
31.1 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, 2017March 31, 2020 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets (Unaudited); (ii) Consolidated Condensed Statements of Earnings and Comprehensive Income (Unaudited); (iii) Consolidated Condensed Statements of Cash Flows (Unaudited); and (iv) Notes to Consolidated Condensed Financial Statements, furnished herewith   X

 

 1916 

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 11, 2020
/s/ John F. Wittkowske
John F. Wittkowske
Senior Vice President and Chief Financial Officer