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

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, 2019

 

Or

 

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

¨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)

WEYCO GROUP, INC.

(Exact name of registrant as specified in its charter)

 

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

 

333 W. Estabrook Boulevard

P. O. Box 1188

Milwaukee, Wisconsin 53201

(Address of principal executive offices)

(Zip Code)

 

(414) 908-1600

(Registrant’s telephone number, including area code)

 

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

YesxNo¨

 

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

YesxNo¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, 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 FilerxNon-Accelerated Filer¨Smaller Reporting CompanyxEmerging Growth Company¨

 

Large Accelerated Filer¨   Accelerated Filerx    Non-Accelerated Filer¨    Smaller Reporting Company¨    Emerging Growth Company¨

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes¨Nox

 

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

As of October 31, 2017,April 26, 2019, there were 10,192,9059,998,452 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)

 

  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 
  March 31,  December 31, 
  2019  2018 
  (Dollars in thousands) 
ASSETS:        
Cash and cash equivalents $17,340  $22,973 
Marketable securities, at amortized cost  1,834   1,525 
Accounts receivable, net  50,672   51,533 
Inventories  65,783   72,684 
Prepaid expenses and other current assets  3,072   5,380 
Total current assets  138,701   154,095 
         
Marketable securities, at amortized cost  19,032   18,702 
Deferred income tax benefits  1,283   1,277 
Property, plant and equipment, net  28,877   28,707 
Operating lease right-of-use assets  24,394   - 
Goodwill  11,112   11,112 
Trademarks  32,868   32,868 
Other assets  23,449   23,283 
Total assets $279,716  $270,044 
         
LIABILITIES AND EQUITY:        
Short-term borrowings $3,720  $5,840 
Accounts payable  4,771   12,764 
Dividend payable  -   2,308 
Operating lease liabilities  7,704   - 
Accrued liabilities  10,439   14,306 
Accrued income tax payable  1,608   912 
Total current liabilities  28,242   36,130 
         
Deferred income tax liabilities  3,756   3,724 
Long-term pension liability  23,098   23,112 
Operating lease liabilities  18,362   - 
Other long-term liabilities  223   1,495 
Total liabilities  73,681   64,461 
         
Common stock  9,995   10,057 
Capital in excess of par value  64,634   64,263 
Reinvested earnings  152,740   152,835 
Accumulated other comprehensive loss  (21,334)  (21,572)
Total equity  206,035   205,583 
Total liabilities and equity $279,716  $270,044 

 

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

 

 31 

 

 

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (UNAUDITED)

  Three Months Ended March 31, 
  2019  2018 
  (In thousands, except per share amounts) 
       
Net sales $74,128  $69,526 
Cost of sales  45,364   42,901 
Gross earnings  28,764   26,625 
         
Selling and administrative expenses  23,618   23,058 
Earnings from operations  5,146   3,567 
         
Interest income  223   233 
Interest expense  (32)  - 
Other expense, net  (125)  (43)
         
Earnings before provision for income taxes  5,212   3,757 
         
Provision for income taxes  1,244   941 
         
Net earnings  3,968   2,816 
         
Net loss attributable to noncontrolling interest  -   (171)
         
Net earnings attributable to Weyco Group, Inc. $3,968  $2,987 
         
Weighted average shares outstanding        
Basic  9,949   10,173 
Diluted  10,027   10,361 
         
Earnings per share        
Basic $0.40  $0.29 
Diluted $0.40  $0.29 
         
Cash dividends declared (per share) $0.23  $0.22 
         
Comprehensive income $4,206  $2,815 
Comprehensive loss attributable to noncontrolling interest  -   (205)
Comprehensive income attributable to Weyco Group, Inc. $4,206  $3,020 

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

2

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 Nine Months Ended September 30,  Three Months Ended March 31, 
 2017  2016  2019  2018 
 (Dollars in thousands)  (Dollars in thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net earnings $8,338  $8,411  $3,968  $2,816 
Adjustments to reconcile net earnings to net cash provided by operating activities -                
Depreciation  2,971   2,708   827   962 
Amortization  265   288   83   92 
Bad debt expense  350   96   48   105 
Deferred income taxes  2,192   1,537   (12)  135 
Net foreign currency transaction gains  (61)  (389)
Stock-based compensation  1,174   1,121 
Pension contributions  (4,000)  (2,400)
Net foreign currency transaction losses (gains)  16   (14)
Share-based compensation expense  366   351 
Pension expense  746   2,500   229   213 
Increase in cash surrender value of life insurance  (250)  (250)  (135)  (135)
Changes in operating assets and liabilities -                
Accounts receivable  (5,703)  (3,714)  816   (1,415)
Inventories  12,195   26,641   6,900   9,165 
Prepaid expenses and other assets  3,167   800   2,182   2,590 
Accounts payable  (6,838)  (7,699)  (7,990)  (3,586)
Accrued liabilities and other  1,879   (1,023)  (3,537)  (3,402)
Accrued income taxes  22   (839)  696   490 
Excess tax benefits from stock-based compensation  (30)  - 
Net cash provided by operating activities  16,417   27,788   4,457   8,367 
                
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchases of marketable securities  (14,719)  (3,605)  (1,327)  (1,241)
Proceeds from maturities of marketable securities  10,710   4,190   680   1,350 
Life insurance premiums paid  (155)  (155)
Purchases of property, plant and equipment  (1,406)  (4,872)  (981)  (125)
Net cash used for investing activities  (5,570)  (4,442)  (1,628)  (16)
                
CASH FLOWS FROM FINANCING ACTIVITIES:                
Cash dividends paid  (8,877)  (8,678)  (4,593)  (4,471)
Cash dividends paid to noncontrolling interest of subsidiary  (204)  (170)  -   (88)
Shares purchased and retired  (11,621)  (9,368)  (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   2,884 
Proceeds from bank borrowings  20,651   91,729   31,813   - 
Repayments of bank borrowings  (20,147)  (95,568)  (33,933)  - 
Excess tax benefits from stock-based compensation  -   3 
Net cash used for financing activities  (18,236)  (26,684)  (8,534)  (1,675)
                
Effect of exchange rate changes on cash and cash equivalents  383   252   72   (47)
                
Net decrease in cash and cash equivalents $(7,006) $(3,086)
Net (decrease) increase in cash and cash equivalents $(5,633) $6,629 
                
CASH AND CASH EQUIVALENTS at beginning of period  13,710   17,926   22,973   23,453 
                
CASH AND CASH EQUIVALENTS at end of period $6,704  $14,840  $17,340  $30,082 
                
SUPPLEMENTAL CASH FLOW INFORMATION:                
Income taxes paid, net of refunds $2,829  $4,083  $423  $146 
Interest paid $7  $228  $31  $- 

 

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

 43 

 

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, 2019, may not necessarily be indicative of the results for the full year.

 

2.NewRecently Adopted Accounting PronouncementsPronouncement

 

In March 2017,On January 1, 2019, the Financial Accounting Standards Board (“FASB”) issuedCompany adopted Accounting Standards Update 2016-02,Leases, as amended (hereinafter referred to as “ASC 842”), which supersedes the lease accounting guidance under Topic 840. ASC 842 generally requires lessees to recognize lease liabilities and corresponding right-of-use (“ASU”ROU”) No. 2017-07“Improvingassets on the Presentationbalance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty 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 componentcash flows arising 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.leasing arrangements. The Company adopted ASU 2017-07 effective January 1, 2017 and retrospectively applied itthe new guidance using the modified retrospective transition approach by applying the new standard to all periods presented.leases existing at the date of initial application. The comparative information has not been restated and continues to be reported in accordance with historical accounting under Topic 840. The Company elected to utilize certain practical expedients that were provided for transition relief. Accordingly, the service cost componentCompany is not reassessing expired or existing contracts, lease classifications or related initial direct costs as part of net periodic pension cost was included within selling and administrative expenses whileits assessment process. Additionally, the other cost components were classified in other expense, net, inCompany elected not to apply the Consolidated Condensed Statementsrecognition requirements of Earnings and Comprehensive Income (Unaudited). See Note 8.ASC 842 to short-term leases.

 

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 resultedASC 842 on January 1, 2019, had a material impact on the Company’s consolidated condensed balance sheet due to the recognition of ROU assets and lease liabilities. The Company recognized operating lease ROU assets and corresponding lease liabilities totaling $26.0 million and $27.8 million, respectively, on January 1, 2019. The operating lease ROU assets recorded on the adoption date were net of approximately $1.8 million in reclassifications of other accrued liabilities and long-term liabilities. The adoption did not impact the following:Company’s fiscal 2019 beginning retained earnings, nor did it have a material impact on the Company’s consolidated earnings or cash flows.

·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.

 

·3.Update to Significant 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.Policies

 

The Company elected notadopted ASC 842 in the first quarter of 2019. As a result, the Company updated its significant accounting policies for leases below. Refer to change its policyNote 2 for the impact of the adoption of ASC 842 on accountingthe Company’s consolidated condensed financial statements and Note 9 for forfeitures,additional information related to the Company’s lease arrangements.

The Company leases retail shoe stores, primarily located in the U.S. and will continueAustralia, as well as several office and distribution facilities worldwide. The Company determines whether an arrangement is or contains a lease at contract inception. All of the Company’s leases are classified as operating leases, which are included in the operating lease ROU assets and operating lease liabilities in the consolidated condensed balance sheets (unaudited). The Company has no finance leases.

ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the agreement, as well as any variable rate payments that depend on an index, initially measured using the index at the lease commencement date. Lease terms may include options to estimate forfeitures expected to occur to determine the amount of stock-based compensation expense recognized in each period. Finally,renew when it is reasonably certain that the Company will continueexercise that option.

As the Company’s leases generally do not provide an implicit rate, the Company used its incremental borrowing rate in determining the present value of lease payments. The incremental borrowing rate was a hypothetical rate based on an understanding of what the Company could borrow from a third-party lender, on a collateralized basis, over a similar term, and in an amount that approximates the value of the Company’s future lease payments. The Company used a portfolio approach and applied a single discount rate to allowall of its employees to withhold up toleases.

Operating lease costs are recognized on a straight-line basis over the minimum statutory withholding requirements,lease term and are included in selling and administrative expenses. Variable lease payments that do not depend on a rate or index, payments associated with non-lease components, and short-term rentals (leases with terms less than 12 months) are expensed as allowed under the new standard.incurred.

 

 54 

 

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,  Three Months Ended March 31, 
 2017  2016  2017  2016  2019  2018 
 (In thousands, except per share amounts)  (In thousands, except per share amounts) 
Numerator:                        
Net earnings attributable to Weyco Group, Inc. $4,934  $4,600  $8,408  $8,287  $3,968  $2,987 
                        
Denominator:                        
Basic weighted average shares outstanding  10,160   10,461   10,299   10,556   9,949   10,173 
Effect of dilutive securities:                        
Employee stock-based awards  58   55   61   49 
Employee share-based awards  78   188 
Diluted weighted average shares outstanding  10,218   10,516   10,360   10,605   10,027   10,361 
                        
Basic earnings per share $0.49  $0.44  $0.82  $0.79  $0.40  $0.29 
                        
Diluted earnings per share $0.48  $0.44  $0.81  $0.78  $0.40  $0.29 

 

Diluted weighted average shares outstanding for the three months ended September 30, 2017,March 31, 2019, exclude anti-dilutive stock-based awardsstock options totaling 1,116,325348,000 shares of common stock at a weighted average price of $26.49.$29.51. Diluted weighted average shares outstanding for the ninethree months ended September 30, 2017,March 31, 2018, exclude anti-dilutive stock-based awardsstock options totaling 844,036207,000 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.$27.94.

6

 

5.Investments

 

As noted in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2018, 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, 2019 and December 31, 2016.2018.

 

 September 30, 2017  December 31, 2016  March 31, 2019  December 31, 2018 
 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 $11,354  $11,380  $4,601  $4,610  $1,834  $1,839  $1,525  $1,532 
Due from one through five years  9,819   10,157   12,133   12,486   10,194   10,373   9,752   9,861 
Due from six through ten years  5,789   6,050   7,705   7,804   6,027   6,356   6,239   6,433 
Due from eleven through twenty years  2,665   2,763   1,223   1,222   2,811   2,906   2,711   2,713 
Total $29,627  $30,350  $25,662  $26,122  $20,866  $21,474  $20,227  $20,539 

 

The unrealized gains and losses on marketable securities at September 30, 2017,March 31, 2019, and at December 31, 2016,2018, 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, 2019  December 31, 2018 
  Unrealized  Unrealized  Unrealized  Unrealized 
  Gains  Losses  Gains  Losses 
  (Dollars in thousands) 
Municipal bonds $610  $(2) $388  $(76)

 

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, 2019 and determined that no other-than-temporary market value impairment exists.

 

5

6.Intangible Assets

 

TheDuring the three months ended March 31, 2019, there were no changes in the carrying value of the Company’s indefinite-lived and amortizable intangible assets as recorded 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

(goodwill and trademarks). 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, 2019  December 31, 2018 
  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   (1,886) $1,614  $3,500   (1,828) $1,672 
Total amortizable intangible assets    $3,500   (1,886) $1,614  $3,500   (1,828) $1,672 

 

Amortization expense related to the intangible assets was approximately $58,000 for$60,000 in both the thirdfirst quarters of 20172019 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.2018.

 

7.Segment Information

 

The Company has two reportable segments: North American wholesale operations (“wholesale”) and North American retail operations (“retail”). The chief operating decision maker, the Company’s Chief Executive Officer, evaluates the performance of the Company’s segments based on earnings from operations. Therefore, interest income or expense, other income or expense, and income taxes are not allocated to the segments. The “other” category in the tablestable below includes the Company’s wholesale and retail operations in Australia, South Africa, Asia Pacific and Europe, which do not meet the criteria for separate reportable segment classification. Summarized segment data for the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018, 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 

Nine Months Ended         
September 30, Wholesale Retail Other Total 
Three Months Ended         
March 31, Wholesale Retail Other Total 
 (Dollars in thousands)  (Dollars in thousands) 
2017                
2019                
Product sales $154,049  $13,979  $33,631  $201,659  $58,774  $5,571  $9,076  $73,421 
Licensing revenues  1,820   -   -   1,820   707   -   -   707 
Net sales $155,869  $13,979  $33,631  $203,479  $59,481  $5,571  $9,076  $74,128 
Earnings from operations $11,880  $244  $1,027  $13,151 
Earnings (loss) from operations $5,206  $483  $(543) $5,146 
                                
2016                
2018                
Product sales $164,145  $14,508  $34,452  $213,105  $52,995  $4,927  $10,811  $68,733 
Licensing revenues  1,731   -   -   1,731   793   -   -   793 
Net sales $165,876  $14,508  $34,452  $214,836  $53,788  $4,927  $10,811  $69,526 
Earnings from operations $11,910  $787  $1,292  $13,989 
Earnings (loss) from operations $3,390  $206  $(29) $3,567 

 

8.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, 
  2019  2018 
  (Dollars in thousands) 
Service cost $103  $151 
Interest cost  606   549 
Expected return on plan assets  (626)  (646)
Net amortization and deferral  146   159 
Net periodic pension cost $229  $213 

 

The components of net periodic pension cost other than the service cost component arewere 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.Leases

The Company leases retail shoe stores, as well as several office and distribution facilities worldwide. The leases have original lease periods expiring between 2019 and 2033. 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, 2019 
Operating lease costs $2,194 
Variable lease costs(1)  9 
Total lease costs $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, 2019 (dollars in thousands):

  Operating Leases 
2019, excluding the quarter ended March 31, 2019 $6,605 
2020  7,685 
2021  5,703 
2022  3,372 
2023  2,361 
Thereafter  3,002 
Total lease payments  28,728 
Less imputed interest  (2,662)
Present value of lease liabilities  26,066 

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

  March 31, 2019 
Operating lease liabilities - current $7,704 
Operating lease liabilities - non-current  18,362 
Total $26,066 

The Company determined the present value of its lease liabilities using a weighted-average discount rate of 4.25%. As of March 31, 2019, the Company’s leases have a weighted-average remaining lease term of 6.25 years.

The future minimum rental commitments under operating leases in effect as of December 31, 2018 having non-cancelable lease terms in excess of one year, as determined in accordance with Topic 840 (prior to the adoption of ASC 842), were as follows (dollars in thousands):

  Operating Leases 
2019 $9,468 
2020  7,529 
2021  5,584 
2022  3,278 
2023  2,321 
Thereafter  4,161 
Total $32,341 

7

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

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

10.Stock-Based Compensation Plans

 

During the three and nine months ended September 30, 2017,March 31, 2019, the Company recognized approximately $395,000 and $1,174,000 respectively,$366,000 of compensation expense associated with stock option and restricted stock awards granted in years 20132015 through 2017.2019. During the three and nine months ended September 30, 2016,March 31, 2018, the Company recognized approximately $393,000 and $1,121,000, respectively,$351,000 of compensation expense associated with stock option and restricted stock awards granted in years 20122014 through 2016.2017.

 

The following table summarizes the Company’s stock option activity for the nine-monththree-month period ended September 30, 2017:March 31, 2019:

 

      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, 2018  1,173,620  $27.96         
Granted  211,200  $27.94           2,500  $28.77         
Exercised  (81,464) $24.71           (3,250) $27.97         
Forfeited or expired  (14,175) $26.46           (1,430) $30.43         
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, 2019  1,171,440  $27.96   3.9  $4,316,000 
Exercisable at March 31, 2019  688,757  $26.91   2.1  $2,789,000 

 

* 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 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.

*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 29, 2019, the last trading day of the quarter, of $30.96 and the exercise price multiplied by the number of in-the-money outstanding and exercisable stock options.

 

The following table summarizes the Company’s stock option exercise activity for the three and nine months ended September 30, 2017March 31, 2019 and 2016:2018:

 

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended March 31, 
 2017  2016  2017  2016  2019  2018 
 (Dollars in thousands)  (Dollars in thousands) 
Total intrinsic value of stock options exercised $208  $14  $272  $87  $11  $501 
Cash received from stock option exercises $1,575  $132  $2,013  $585  $7  $2,884 
Income tax benefit from the exercise of stock options $81  $5  $106  $34  $3  $130 

 

The following table summarizes the Company’s restricted stock award activity for the nine-monththree-month period ended September 30, 2017:March 31, 2019:

 

        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, 2018  61,480  $30.74         
Issued  600  $28.77         
Vested  -   -         
Forfeited  -   -         
Non-vested at March 31, 2019  62,080  $30.72   2.4  $1,922,000 

 

10.*The aggregate intrinsic value of non-vested restricted stock was calculated using the market value of the Company's stock on March 29, 2019, the last trading day of the quarter, of $30.96 multiplied by the number of non-vested restricted shares outstanding.

11.Short-Term Borrowings

 

At September 30, 2017,March 31, 2019, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 3, 2017.5, 2019. The line of credit bears interest at the daily London Interbank Offered Rate (“LIBOR”) plus 0.75%. At September 30, 2017,March 31, 2019, outstanding borrowings were approximately $4.8$3.7 million at an interest rate of 2.0%3.25%. The highest balance on the line of credit during the quarter was approximately $4.8$7.7 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.

 98 

 

 

11.12.Financial Instruments

 

At September 30, 2017,March 31, 2019, the Company had foreign exchange contracts outstanding to sell $8.0$3.0 million Canadian dollars at a price of approximately $6.0$2.3 million U.S. dollars. The Company’s majority-owned subsidiary, Florsheim Australia, had foreign exchange contracts outstanding to buy $3.7 million U.S. dollars at a price of approximately $4.7 million Australian dollars. Florsheim Australia also had 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.

 

12.13.Comprehensive Income

 

Comprehensive income for the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018, was as follows:

 

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended March 31, 
 2017  2016  2017  2016  2019  2018 
 (Dollars in thousands)  (Dollars in thousands) 
Net earnings $4,920  $4,701  $8,338  $8,411  $3,968  $2,816 
Foreign currency translation adjustments  452   261   1,672   1,222   130   (119)
Pension liability, net of tax of $52, $163, $154 and $490, respectively  80   256   241   767 
Pension liability, net of tax of $38 and $41, respectively  108   118 
Total comprehensive income $5,452  $5,218  $10,251  $10,400  $4,206  $2,815 

 

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

 

 September 30, December 31,  March 31, December 31, 
 2017  2016  2019  2018 
 (Dollars in thousands)  (Dollars in thousands) 
Foreign currency translation adjustments $(4,158) $(5,489) $(6,771) $(6,901)
Pension liability, net of tax  (10,839)  (11,080)  (14,563)  (14,671)
Total accumulated other comprehensive loss $(14,997) $(16,569) $(21,334) $(21,572)

 

The following presents a tabular disclosure about changes in accumulated other comprehensive loss during the ninethree months ended September 30, 2017:March 31, 2019:

 

 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)
Beginning balance, December 31, 2018 $(6,901) $(14,671) $(21,572)
Other comprehensive income before reclassifications  1,331   -   1,331   130   -   130 
Amounts reclassified from accumulated other comprehensive loss  -   241   241   -   108   108 
Net current period other comprehensive income  1,331   241   1,572   130   108   238 
Ending balance, September 30, 2017 $(4,158) $(10,839) $(14,997)
Ending balance, March 31, 2019 $(6,771) $(14,563) $(21,334)

 

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, 2019:

 

 Amounts reclassified
from accumulated other
comprehensive loss for
the three months ended
March 31, 2019
 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 $(47)(1) Other expense, net $(16)(1) Other expense, net
Actuarial losses  442(1) Other expense, net  162(1) Other expense, net
Total before tax  395    146   
Tax benefit  (154)   (38)  
Net of tax $241   $108   

 

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

 

13.Equity

A reconciliation of the Company’s equity for the nine months ended September 30, 2017, is as follows:

           Accumulated    
     Capital in     Other    
  Common  Excess of  Reinvested  Comprehensive  Noncontrolling 
  Stock  Par Value  Earnings  Loss  Interest 
  (Dollars in thousands) 
                
Balance, December 31, 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

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.

 119 

 

14.Equity

The following table reconciles the Company’s equity for the three months ended March 31, 2019:

           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)

The following table reconciles the Company’s equity for the three months ended March 31, 2018:

           Accumulated    
     Capital in     Other    
  Common  Excess of  Reinvested  Comprehensive  Noncontrolling 
  Stock  Par Value  Earnings  Loss  Interest 
  (Dollars in thousands) 
                
Balance, December 31, 2017 $10,162  $55,884  $150,350  $(17,859) $7,122 
Net earnings  -   -   2,987   -   (171)
Foreign currency translation adjustments  -   -   -   (85)  (34)
Pension liability adjustment, net of tax  -   -   -   118   - 
Cash dividends declared  -   -   (2,257)  -   - 
Cash dividends paid to noncontrolling interest  -   -   -   -   (88)
Stock options exercised  108   2,776   -   -   - 
Restricted stock forfeited  (2)  2   -   -   - 
Share-based compensation expense  -   351   -   -   - 
Balance, March 31, 2018 $10,268  $59,013  $151,080  $(17,826) $6,829 

10

 

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, 2016.2018.

 

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 109 brick and mortar retail stores and internete-commerce businesses in the United States as of September 30, 2017.March 31, 2019. 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 QuarterSales and Earnings Highlights

Consolidated net sales for the thirdfirst quarter of 20172019 were $76.9$74.1 million, down 3% asup 7% compared to last year’s thirdfirst quarter net sales of $79.1$69.5 million. EarningsConsolidation earnings from operations were $7.8$5.1 million this quarter, an increase of 44% compared to $3.6 million in both 2017 and 2016.the same period of 2018. Consolidated net earnings attributable to Weyco Group, Inc. increased 7% to $4.9were $4.0 million in 2017,the first quarter of 2019, up from $4.633% compared to $3.0 million in last year.year’s first quarter. Diluted earnings per share were $0.48 this quarter and $0.44$0.40 per share for the three months ended March 31, 2019, up from $0.29 per share in the thirdfirst quarter of 2016.2018.

 

The majority of the decreaseincrease in consolidated net sales came from the Company’s wholesale segment. Wholesale net sales declined $1.4increased $5.7 million, due mainly to lower sales of the Stacy Adams, Nunn Bush, and BOGS brands, partially offset by higher sales of the Florsheim, brand.Stacy Adams and BOGS brands. Net sales of the Company’s retail segment and its other operations were also down.up $644,000 for the quarter, due primarily to higher sales on the Company’s websites. Other net sales decreased $1.7 million for the quarter, primarily due to a 13% decline in net sales at Florsheim Australia, caused mainly by the translation of the weaker Australian currency into U.S. dollars.

 

ConsolidatedThe increase in consolidated earnings from operations were relatively flat for the quarter. Earnings from operations in the Company’s wholesale segment were up,was primarily due to higher gross margins and loweroperating earnings in the wholesale selling and administrative expenses, but this increase wassegment. Wholesale earnings from operations rose $1.8 million for the quarter due mainly to higher sales. Retail earnings from operations increased $277,000 for the quarter, mainly due to higher e-commerce sales. These increases were partially offset by lower operating earnings at Florsheim Australia resulting mainly 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 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. The decrease occurred mainly 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.sales.

 

Financial Position Highlights

At September 30, 2017,March 31, 2019, cash and marketable securities totaled $36.3$38.2 million and there was $3.7 million of 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 2017,2019, the Company generated $16.4$4.5 million of cash from operations. The Company paid dividends of $9.1$4.6 million, spent $11.6paid down $2.1 million on purchasesthe line of credit, repurchased $1.8 million of Company stock, and purchased a net of $4.0 million in marketable securities. The Company also had $1.4 million$981,000 of capital expenditures.expenditures during the quarter.

On January 1, 2019, the Company adopted the new accounting standard on leases (ASC 842). The adoption of ASC 842 resulted in the recognition of ROU assets and lease liabilities totaling $26.0 million and $27.8 million, respectively, as of the adoption date. The prior year comparative information has not been restated and continues to be reported in accordance with historical accounting under Topic 840.

11

 

SEGMENT ANALYSIS

 

Net sales and earnings from operations for the Company’s segments infor the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018, 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,  % 
  2019  2018  Change 
  (Dollars in thousands)    
Net Sales            
North American Wholesale $59,481  $53,788   11%
North American Retail  5,571   4,927   13%
Other  9,076   10,811   -16%
Total $74,128  $69,526   7%
             
Earnings (loss) from Operations            
North American Wholesale $5,206  $3,390   54%
North American Retail  483   206   134%
Other  (543)  (29)  n/a 
Total $5,146  $3,567   44%

 

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, 2019 and 2016,2018, were as follows:

 

North American Wholesale Segment Net Sales

 Three Months Ended September 30, % Nine Months Ended September 30, %  Three Months Ended March 31, % 
 2017  2016  Change  2017  2016  Change  2019  2018  Change 
 (Dollars in thousands)  (Dollars in thousands)    
North American Net Sales                        
North American Wholesale Segment Net Sales            
Stacy Adams $14,486  $14,861   -3%  $49,632  $52,092   -5%  $20,968  $19,489   8%
Nunn Bush  12,200   13,362   -9%   37,027   42,909   -14%   11,594   12,354   -6%
Florsheim  15,518   14,262   9%   39,611   38,513   3%   18,816   15,054   25%
BOGS/Rafters  17,644   18,462   -4%   26,527   28,950   -8%   7,391   6,015   23%
Umi  352   698   -50%   1,252   1,681   -26% 
Other  5   83   -94%
Total North American Wholesale $60,200  $61,645   -2%  $154,049  $164,145   -6%  $58,774  $52,995   11%
Licensing  528   525   1%   1,820   1,731   5%   707   793   -11%
Total North American Wholesale Segment $60,728  $62,170   -2%  $155,869  $165,876   -6%  $59,481  $53,788   11%

 

Stacy Adams and Nunn BushFlorsheim net sales were up for the quarter and year-to-date periodsacross the majority of distribution channels. Sales of the Nunn Bush brand were down for the quarter, mainly with department stores. The increasesincrease in FlorsheimBOGS/Rafters net sales werewas primarily due to higher sales of BOGS to department storesoutdoor and national shoe chains. BOGS sales were down as a result of lower sales with outdooronline 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.

 

Earnings from Operations

Wholesale grossGross earnings for the North American wholesale segment were 33.9%34.3% of net sales in the thirdfirst quarter of 2017,2019, compared to 32.2%33.1% of net sales in last year’s third quarter. For the first nine monthsquarter of 2018. Earnings from operations in the North American wholesale segment increased 54% to $5.2 million in the first quarter of 2019, from $3.4 million in the same period last year, wholesaledue mainly to higher sales.

The Company’s cost of sales does not include distribution costs (e.g., receiving, inspection, warehousing, shipping and handling costs). Wholesale distribution costs were $3.1 million in the first quarters of both 2019 and 2018. 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$15.2 million, or 22%26% of net sales, in the thirdfirst quarter of 2017, and $13.32019, compared to $14.4 million, or 21%27% of net sales, in the thirdfirst quarter of 2016. For the nine months ended September 30, wholesale selling2018, and administrative expenses were $38.2 million, or 25%increased as a result 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, 2017higher employees wages 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 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). 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.benefits.

 

 1412 

 

 

North American Retail Segment

 

Net Sales

Net sales in the Company’s North American retail segment declined $411,000 and $529,000, forwere $5.6 million in the three and nine months ended September 30, 2017, respectively,first quarter of 2019, up 13% compared to the same periods$4.9 in last year.year’s first quarter. Same store sales, which include U.S. e-commerce sales, were up 13% for the quarter, due to higher sales through the Company’s websites. There were the same number of both the U.S. internet business anddomestic brick and mortar same stores were down 10% and 6% for the quarter and year-to-date periods, respectively. Same store sales were down due to decreased salesoperating at both brickMarch 31, 2019 and mortar locations and on the Company’s websites. The majority 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.at March 31, 2018.

 

Earnings from Operations

GrossRetail gross earnings as a percentwere 65.2% of net sales were 63.6% in the thirdfirst quarter of 2017,2019, compared to 65.5% in the third quarter of 2016. For the nine months ended September 30, retail gross earnings as a percent64.6% 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.2018. 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 57% 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 administrative expenses as a percentfirst quarter of 2019 versus 60% of net sales were 63% in 2017 and 60%last year’s first quarter. Driven by higher online sales, retail earnings from operations rose to $483,000 in 2016.the first quarter of 2019, from $206,000 in the first quarter of 2018.

 

Other

 

The Company’s other net sales were $11.9 million in the third quarterbusinesses include its wholesale and retail operations 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 $9.1 million in the first quarter of 2019, down 16% compared to $10.8 million in last year’s first quarter. The decrease was primarily due to a 13% decline in net sales at Florsheim Australia, caused mainly by the translation of the weaker Australian currency into U.S. dollars. Florsheim Australia’s net sales which accounts for the majority of other net sales,in local currency were down 2% for both the 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%4% for the quarter, and 5% for the year-to-date period, compared to the same periods last year, with lower sales down in both its retail and wholesale businesses.

Collectively, the earnings from operationsbusinesses, as a result of the Company’s other businesses were $369,000challenging retail environment. Collectively, Florsheim Australia and Florsheim Europe had operating losses totaling $543,000 in the thirdfirst quarter of 2017 and $731,0002019, compared to operating losses of $29,000 in the same period last year. For the nine months ended September 30, earnings from operationsfirst quarter of the Company’s other businesses were $1.0 million in 2017 and $1.3 million in 2016.2018. The decreases for the quarter and year-to-date periods were primarilydecline between years was mainly due to lower operating earnings insales at Florsheim Australia’s retail businesses, mainly due to the decrease in retail sales.Australia.

 

Other income and expense and taxes

 

Interest income was $193,000$223,000 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 three and nine months ended September 30, 2017, decreased $61,000 and $221,000, respectively, compared to the same periods in 2016, due to lower average debt balances this year compared to last year.

The Company adopted ASU 2017-07$233,000 in the first quarterquarters of 20172019 and retrospectively applied it to all periods presented. This required the Company to reclassify the non-service cost components of pension2018, respectively. Interest 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 expenserose $32,000 for the quarter, and first nine months of 2017 was mainlyprimarily due to decreasesan increase in debt outstanding on the Company’s line of $316,000 and $949,000, respectively, incredit. The Company’s effective tax rate for the non-service cost componentsquarter ended March 31, 2019 was 23.9% compared to 25.0% for the same period of pension expense. Pension expense decreased in 2017 as a result of freezing benefits under the pension plan, effective December 31, 2016.2018.

15

 

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$4.5 million of cash from operating activities during the first three months of 2019, compared to $27.8$8.4 million in the same period of 2016.one year ago. The decrease between years was primarily due to changes in operating assets and liabilities, principally inventory.inventory and accounts payable.

 

The Company paid cash dividends of $9.1$4.6 million in both the first quarters of 2019 and $8.8 million during the nine months ended September 30, 2017 and 2016, respectively.2018.

 

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 2017,2019, the Company repurchased 420,71163,481 shares atfor a total cost of $11.6$1.8 million. As of September 30, 2017,March 31, 2019, the Company had approximately 144,000601,529 shares available under its previously announced stock repurchase program. On October 31, 2017, the Company’s Board of Directors authorized theThe Company did not repurchase of an additional 1.0 million sharesany of its common stock under its repurchase program, bringingshares during 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.three months ended March 31, 2018.

 

Capital expenditures totaled $1.4 millionwere $981,000 in the first ninethree months of 2017.2019. Management estimates that annual capital expenditures for 20162019 will be between $1.5$3.5 million and $2.0$4.5 million.

 

At September 30, 2017,March 31, 2019, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 3, 2017.5, 2019. The line of credit bears interest at LIBOR plus 0.75%. The Company borrowed a net of $0.5 million on the line of credit during the first nine months of 2017. At September 30, 2017,March 31, 2019, outstanding borrowings were $4.8approximately $3.7 million at an interest rate of 2.0%3.25%. The highest balance on the line of credit during the quarter was $4.8$7.7 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.

 

At September 30, 2017,As of March 31, 2019, approximately $1.6$2.0 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.

 

13

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

ThereDuring the first quarter of 2019, the Company adopted ASU 2016-02,Leases.As a result of the adoption, the Company implemented controls to ensure management properly assessed the impact of the new standard on its consolidated financial statements. Other than this change, there have been no other 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 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, 2016.2018.

 

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, 2019.

 

        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     
           Maximum Number 
  Total  Average  Total Number of  of Shares 
  Number  Price  Shares Purchased as  that May Yet Be 
  of Shares  Paid  Part of the Publicly  Purchased Under 
Period Purchased  Per Share  Announced Program  the Program 
01/01/2019 - 01/31/2019  45,481  $28.52   45,481   619,529 
02/01/2019 - 02/28/2019  12,100  $28.54   12,100   607,429 
03/01/2019 - 03/31/2019  5,900  $31.42   5,900   601,529 
Total  63,481   28.80   63,481     

 

(1)14In 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, 2019 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

 

 1915

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 9, 2019
/s/ John F. Wittkowske
John F. Wittkowske

Senior Vice President and Chief Financial Officer

16