UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
Or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to _______________
Commission File Number: 0-9068
WEYCO GROUP, INC.
(Exact name of registrant as specified in its charter)
| WISCONSIN | 39-0702200 |
| (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.
Yes x 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). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of October 31, 2016, there were 10,449,803 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, | |||||||
| 2016 | 2015 | |||||||
| (Dollars in thousands) | ||||||||
| ASSETS: | ||||||||
| Cash and cash equivalents | $ | 14,840 | $ | 17,926 | ||||
| Marketable securities, at amortized cost | 2,778 | 4,522 | ||||||
| Accounts receivable, net | 57,662 | 54,009 | ||||||
| Accrued income tax receivable | 810 | - | ||||||
| Inventories | 70,508 | 97,184 | ||||||
| Prepaid expenses and other current assets | 3,586 | 5,835 | ||||||
| Total current assets | 150,184 | 179,476 | ||||||
| Marketable securities, at amortized cost | 21,783 | 20,685 | ||||||
| Property, plant and equipment, net | 34,011 | 31,833 | ||||||
| Goodwill | 11,112 | 11,112 | ||||||
| Trademarks | 34,748 | 34,748 | ||||||
| Other assets | 22,776 | 21,143 | ||||||
| Total assets | $ | 274,614 | $ | 298,997 | ||||
| LIABILITIES AND EQUITY: | ||||||||
| Short-term borrowings | $ | 22,810 | $ | 26,649 | ||||
| Accounts payable | 5,646 | 13,339 | ||||||
| Dividend payable | - | 2,147 | ||||||
| Accrued liabilities | 10,520 | 17,484 | ||||||
| Accrued income tax payable | - | 31 | ||||||
| Deferred income tax liabilities | 2,010 | 1,537 | ||||||
| Total current liabilities | 40,986 | 61,187 | ||||||
| Deferred income tax liabilities | 1,628 | 70 | ||||||
| Long-term pension liability | 28,768 | 30,188 | ||||||
| Other long-term liabilities | 2,500 | 2,823 | ||||||
| Equity: | ||||||||
| Common stock | 10,467 | 10,767 | ||||||
| Capital in excess of par value | 47,416 | 45,759 | ||||||
| Reinvested earnings | 153,028 | 160,325 | ||||||
| Accumulated other comprehensive loss | (16,730 | ) | (18,467 | ) | ||||
| Total Weyco Group, Inc. equity | 194,181 | 198,384 | ||||||
| Noncontrolling interest | 6,551 | 6,345 | ||||||
| Total equity | 200,732 | 204,729 | ||||||
| Total liabilities and equity | $ | 274,614 | $ | 298,997 | ||||
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, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| Net sales | $ | 79,069 | $ | 91,227 | $ | 214,836 | $ | 233,213 | ||||||||
| Cost of sales | 49,747 | 58,617 | 136,096 | 147,443 | ||||||||||||
| Gross earnings | 29,322 | 32,610 | 78,740 | 85,770 | ||||||||||||
| Selling and administrative expenses | 21,992 | 23,474 | 66,023 | 67,516 | ||||||||||||
| Earnings from operations | 7,330 | 9,136 | 12,717 | 18,254 | ||||||||||||
| Interest income | 190 | 221 | 584 | 717 | ||||||||||||
| Interest expense | (61 | ) | (67 | ) | (228 | ) | (97 | ) | ||||||||
| Other income (expense), net | 113 | (524 | ) | 422 | (1,150 | ) | ||||||||||
| Earnings before provision for income taxes | 7,572 | 8,766 | 13,495 | 17,724 | ||||||||||||
| Provision for income taxes | 2,871 | 3,389 | 5,084 | 6,670 | ||||||||||||
| Net earnings | 4,701 | 5,377 | 8,411 | 11,054 | ||||||||||||
| Net earnings (losses) attributable to noncontrolling interest | 101 | (149 | ) | 124 | (145 | ) | ||||||||||
| Net earnings attributable to Weyco Group, Inc. | $ | 4,600 | $ | 5,526 | $ | 8,287 | $ | 11,199 | ||||||||
| Weighted average shares outstanding | ||||||||||||||||
| Basic | 10,461 | 10,793 | 10,556 | 10,788 | ||||||||||||
| Diluted | 10,516 | 10,884 | 10,605 | 10,881 | ||||||||||||
| Earnings per share | ||||||||||||||||
| Basic | $ | 0.44 | $ | 0.51 | $ | 0.79 | $ | 1.04 | ||||||||
| Diluted | $ | 0.44 | $ | 0.51 | $ | 0.78 | $ | 1.03 | ||||||||
| Cash dividends declared (per share) | $ | 0.21 | $ | 0.20 | $ | 0.62 | $ | 0.59 | ||||||||
| Comprehensive income | $ | 5,218 | $ | 4,040 | $ | 10,400 | $ | 8,760 | ||||||||
| Comprehensive income (loss) attributable to noncontrolling interest | 235 | (562 | ) | 376 | (846 | ) | ||||||||||
| Comprehensive income attributable to Weyco Group, Inc. | $ | 4,983 | $ | 4,602 | $ | 10,024 | $ | 9,606 | ||||||||
The accompanying notes to consolidated condensed financial statements (unaudited) are an integral part of these financial statements.
| 3 |
WEYCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Nine Months Ended September 30, | ||||||||
| 2016 | 2015 | |||||||
| (Dollars in thousands) | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net earnings | $ | 8,411 | $ | 11,054 | ||||
| Adjustments to reconcile net earnings to net cash provided by (used for) operating activities - | ||||||||
| Depreciation | 2,708 | 2,700 | ||||||
| Amortization | 288 | 334 | ||||||
| Bad debt expense | 96 | 190 | ||||||
| Deferred income taxes | 1,537 | 456 | ||||||
| Net foreign currency transaction (gains) losses | (389 | ) | 783 | |||||
| Stock-based compensation | 1,121 | 1,112 | ||||||
| Pension contributions | (2,400 | ) | (2,633 | ) | ||||
| Pension expense | 2,500 | 2,811 | ||||||
| Increase in cash surrender value of life insurance | (250 | ) | (250 | ) | ||||
| Changes in operating assets and liabilities - | ||||||||
| Accounts receivable | (3,714 | ) | (12,223 | ) | ||||
| Inventories | 26,641 | (23,844 | ) | |||||
| Prepaid expenses and other assets | 800 | 4,122 | ||||||
| Accounts payable | (7,699 | ) | (7,584 | ) | ||||
| Accrued liabilities and other | (1,023 | ) | (4,807 | ) | ||||
| Accrued income taxes | (839 | ) | 553 | |||||
| Net cash provided by (used for) operating activities | 27,788 | (27,226 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of marketable securities | (3,605 | ) | (2,300 | ) | ||||
| Proceeds from maturities of marketable securities | 4,190 | 6,305 | ||||||
| Life insurance premiums paid | (155 | ) | (155 | ) | ||||
| Purchases of property, plant and equipment | (4,872 | ) | (1,457 | ) | ||||
| Net cash (used for) provided by investing activities | (4,442 | ) | 2,393 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Cash dividends paid | (8,678 | ) | (8,414 | ) | ||||
| Cash dividends paid to noncontrolling interest of subsidiary | (170 | ) | - | |||||
| Shares purchased and retired | (9,368 | ) | (4,760 | ) | ||||
| Proceeds from stock options exercised | 585 | 2,696 | ||||||
| Payment of contingent consideration | (5,217 | ) | - | |||||
| Proceeds from bank borrowings | 91,729 | 127,253 | ||||||
| Repayments of bank borrowings | (95,568 | ) | (90,684 | ) | ||||
| Income tax benefits from stock-based compensation | 3 | 463 | ||||||
| Net cash (used for) provided by financing activities | (26,684 | ) | 26,554 | |||||
| Effect of exchange rate changes on cash and cash equivalents | 252 | (320 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | $ | (3,086 | ) | $ | 1,401 | |||
| CASH AND CASH EQUIVALENTS at beginning of period | 17,926 | 12,499 | ||||||
| CASH AND CASH EQUIVALENTS at end of period | $ | 14,840 | $ | 13,900 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Income taxes paid, net of refunds | $ | 4,083 | $ | 5,155 | ||||
| Interest paid | $ | 228 | $ | 97 | ||||
The accompanying notes to consolidated condensed financial statements (unaudited) are an integral part of these financial statements.
| 4 |
NOTES:
| 1. | Financial Statements |
In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2016, may not necessarily be indicative of the results for the full year.
| 2. | Earnings Per Share |
The following table sets forth the computation of earnings per share and diluted earnings per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Net earnings attributable to Weyco Group, Inc. | $ | 4,600 | $ | 5,526 | $ | 8,287 | $ | 11,199 | ||||||||
| Denominator: | ||||||||||||||||
| Basic weighted average shares outstanding | 10,461 | 10,793 | 10,556 | 10,788 | ||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Employee stock-based awards | 55 | 91 | 49 | 93 | ||||||||||||
| Diluted weighted average shares outstanding | 10,516 | 10,884 | 10,605 | 10,881 | ||||||||||||
| Basic earnings per share | $ | 0.44 | $ | 0.51 | $ | 0.79 | $ | 1.04 | ||||||||
| Diluted earnings per share | $ | 0.44 | $ | 0.51 | $ | 0.78 | $ | 1.03 | ||||||||
Diluted weighted average shares outstanding for the three months ended September 30, 2016, exclude anti-dilutive stock options 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 options totaling 924,161 shares of common stock at a weighted average price of $26.78. Diluted weighted average shares outstanding for the three months ended September 30, 2015, exclude anti-dilutive stock options totaling 644,600 shares of common stock at a weighted average price of $27.76. Diluted weighted average shares outstanding for the nine months ended September 30, 2015, exclude anti-dilutive stock options totaling 648,220 shares of common stock at a weighted average price of $27.76.
| 3. | Investments |
As noted in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, all of the Company’s municipal bond investments are classified as held-to-maturity securities and reported at amortized cost pursuant to Accounting Standards Codification 320, Investments – Debt and Equity Securities as the Company has the intent and ability to hold all bond investments to maturity.
Below is a summary of the amortized cost and estimated market values of the Company’s investment securities as of September 30, 2016, and December 31, 2015.
| September 30, 2016 | December 31, 2015 | |||||||||||||||
| Amortized | Market | Amortized | Market | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Municipal bonds: | ||||||||||||||||
| Current | $ | 2,778 | $ | 2,797 | $ | 4,522 | $ | 4,546 | ||||||||
| Due from one through five years | 13,808 | 14,412 | 12,395 | 13,057 | ||||||||||||
| Due from six through ten years | 7,501 | 7,970 | 6,929 | 7,217 | ||||||||||||
| Due from eleven through twenty years | 474 | 486 | 1,361 | 1,391 | ||||||||||||
| Total | $ | 24,561 | $ | 25,665 | $ | 25,207 | $ | 26,211 | ||||||||
The unrealized gains and losses on investment securities at September 30, 2016, and at December 31, 2015, were as follows:
| 5 |
| September 30, 2016 | December 31, 2015 | |||||||||||||||
| Unrealized | Unrealized | Unrealized | Unrealized | |||||||||||||
| Gains | Losses | Gains | Losses | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Municipal bonds | $ | 1,114 | $ | (10 | ) | $ | 1,014 | $ | (10 | ) | ||||||
The estimated market values provided are level 2 valuations as defined by Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”). The Company reviewed its portfolio of investments as of September 30, 2016 and determined that no other-than-temporary market value impairment exists.
| 4. | Intangible Assets |
The Company’s indefinite-lived and amortizable intangible assets as recorded in the Consolidated Condensed Balance Sheets (Unaudited) consisted of the following as of September 30, 2016:
| September 30, 2016 | ||||||||||||||||
| Weighted | Gross | |||||||||||||||
| Average | Carrying | Accumulated | ||||||||||||||
| Life (Years) | Amount | Amortization | Net | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Indefinite-lived intangible assets: | ||||||||||||||||
| Goodwill | $ | 11,112 | $ | - | $ | 11,112 | ||||||||||
| Trademarks | 34,748 | - | 34,748 | |||||||||||||
| Total indefinite-lived intangible assets | $ | 45,860 | $ | - | $ | 45,860 | ||||||||||
| Amortizable intangible assets: | ||||||||||||||||
| Non-compete agreement | 5 | $ | 200 | $ | (200 | ) | $ | - | ||||||||
| Customer relationships | 15 | 3,500 | (1,303 | ) | 2,197 | |||||||||||
| Total amortizable intangible assets | $ | 3,700 | $ | (1,503 | ) | $ | 2,197 | |||||||||
The Company’s indefinite-lived and amortizable intangible assets as recorded in the Consolidated Condensed Balance Sheets (Unaudited) consisted of the following as of December 31, 2015:
| December 31, 2015 | ||||||||||||||||
| Weighted | Gross | |||||||||||||||
| Average | Carrying | Accumulated | ||||||||||||||
| Life (Years) | Amount | Amortization | Net | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Indefinite-lived intangible assets: | ||||||||||||||||
| Goodwill | $ | 11,112 | $ | - | $ | 11,112 | ||||||||||
| Trademarks | 34,748 | - | 34,748 | |||||||||||||
| Total indefinite-lived intangible assets | $ | 45,860 | $ | - | $ | 45,860 | ||||||||||
| Amortizable intangible assets: | ||||||||||||||||
| Non-compete agreement | 5 | $ | 200 | $ | (193 | ) | $ | 7 | ||||||||
| Customer relationships | 15 | 3,500 | (1,128 | ) | 2,372 | |||||||||||
| Total amortizable intangible assets | $ | 3,700 | $ | (1,321 | ) | $ | 2,379 | |||||||||
The Company’s amortizable intangible assets are included within other assets in the Consolidated Condensed Balance Sheets (Unaudited).
| 6 |
| 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 tables 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, 2016 and 2015, was as follows:
| Three Months Ended | ||||||||||||||||
| September 30, | Wholesale | Retail | Other | Total | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 2016 | ||||||||||||||||
| Product sales | $ | 61,645 | $ | 4,702 | $ | 12,197 | $ | 78,544 | ||||||||
| Licensing revenues | 525 | - | - | 525 | ||||||||||||
| Net sales | $ | 62,170 | $ | 4,702 | $ | 12,197 | $ | 79,069 | ||||||||
| Earnings from operations | $ | 6,286 | $ | 313 | $ | 731 | $ | 7,330 | ||||||||
| 2015 | ||||||||||||||||
| Product sales | $ | 73,695 | $ | 4,767 | $ | 11,858 | $ | 90,320 | ||||||||
| Licensing revenues | 907 | - | - | 907 | ||||||||||||
| Net sales | $ | 74,602 | $ | 4,767 | $ | 11,858 | $ | 91,227 | ||||||||
| Earnings from operations | $ | 8,156 | $ | 402 | $ | 578 | $ | 9,136 | ||||||||
| Nine Months Ended | ||||||||||||||||
| September 30, | Wholesale | Retail | Other | Total | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 2016 | ||||||||||||||||
| Product sales | $ | 164,146 | $ | 14,508 | $ | 34,452 | $ | 213,106 | ||||||||
| Licensing revenues | 1,730 | - | - | 1,730 | ||||||||||||
| Net sales | $ | 165,876 | $ | 14,508 | $ | 34,452 | $ | 214,836 | ||||||||
| Earnings from operations | $ | 10,638 | $ | 787 | $ | 1,292 | $ | 12,717 | ||||||||
| 2015 | ||||||||||||||||
| Product sales | $ | 181,521 | $ | 14,707 | $ | 34,675 | $ | 230,903 | ||||||||
| Licensing revenues | 2,310 | - | - | 2,310 | ||||||||||||
| Net sales | $ | 183,831 | $ | 14,707 | $ | 34,675 | $ | 233,213 | ||||||||
| Earnings from operations | $ | 15,160 | $ | 1,163 | $ | 1,931 | $ | 18,254 | ||||||||
| 6. | Employee Retirement Plans |
The components of the Company’s net pension expense were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Benefits earned during the period | $ | 409 | $ | 411 | $ | 1,228 | $ | 1,232 | ||||||||
| Interest cost on projected benefit obligation | 612 | 674 | 1,837 | 2,021 | ||||||||||||
| Expected return on plan assets | (607 | ) | (593 | ) | (1,822 | ) | (1,777 | ) | ||||||||
| Net amortization and deferral | 419 | 445 | 1,257 | 1,335 | ||||||||||||
| Net pension expense | $ | 833 | $ | 937 | $ | 2,500 | $ | 2,811 | ||||||||
On September 15, 2016, the Weyco Group, Inc. Pension Plan was amended to offer an immediate pension payout either as a one-time lump sum or annuity payment to certain former employees who have not yet commenced benefits under the plan. Benefits would be calculated as of December 1, 2016, with lump sum payments being paid in December 2016 and annuity payments beginning January 1, 2017. This amendment will not have a material impact on the consolidated financial statements.
| 7 |
| 7. | Stock-Based Compensation Plans |
During the three and nine months ended September 30, 2016, the Company recognized approximately $393,000 and $1,121,000 respectively, of compensation expense associated with stock option and restricted stock awards granted in years 2012 through 2016. During the three and nine months ended September 30, 2015, the Company recognized approximately $391,000 and $1,112,000, respectively, of compensation expense associated with stock option and restricted stock awards granted in years 2011 through 2015.
The following table summarizes the Company’s stock option activity for the nine-month period ended September 30, 2016:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Exercise | Contractual | Intrinsic | ||||||||||||||
| Shares | Price | Term (Years) | Value* | |||||||||||||
| Outstanding at December 31, 2015 | 1,351,826 | $ | 26.09 | |||||||||||||
| Granted | 277,800 | $ | 25.51 | |||||||||||||
| Exercised | (24,450 | ) | $ | 23.92 | ||||||||||||
| Forfeited or expired | (9,200 | ) | $ | 26.67 | ||||||||||||
| Outstanding at September 30, 2016 | 1,595,976 | $ | 26.02 | 3.8 | $ | 1,918,000 | ||||||||||
| Exercisable at September 30, 2016 | 725,269 | $ | 25.78 | 2.8 | $ | 1,452,000 | ||||||||||
* The aggregate intrinsic value of outstanding and exercisable stock options is defined as the difference between the closing price of the Company's stock on September 30, 2016, the last trading day of the quarter, of $26.87 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, 2016 and 2015:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Total intrinsic value of stock options exercised | $ | 14 | $ | 30 | $ | 87 | $ | 1,188 | ||||||||
| Cash received from stock option exercises | $ | 132 | $ | 184 | $ | 585 | $ | 2,696 | ||||||||
| Income tax benefit from the exercise of stock options | $ | 5 | $ | 12 | $ | 34 | $ | 463 | ||||||||
The following table summarizes the Company’s restricted stock award activity for the nine-month period ended September 30, 2016:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Shares of | Average | Remaining | Aggregate | |||||||||||||
| Restricted | Grant Date | Contractual | Intrinsic | |||||||||||||
| Stock | Fair Value | Term (Years) | Value* | |||||||||||||
| Non-vested at December 31, 2015 | 55,250 | $ | 26.45 | |||||||||||||
| Issued | 26,900 | 25.51 | ||||||||||||||
| Vested | (12,275 | ) | 26.41 | |||||||||||||
| Forfeited | - | - | ||||||||||||||
| Non-vested at September 30, 2016 | 69,875 | $ | 26.09 | 2.7 | $ | 1,878,000 | ||||||||||
* The aggregate intrinsic value of non-vested restricted stock was calculated using the closing price of the Company's stock on September 30, 2016, the last trading day of the quarter, of $26.87 multiplied by the number of non-vested restricted shares outstanding.
| 8. | Short-Term Borrowings |
At September 30, 2016, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 4, 2016. The line of credit bears interest at LIBOR plus 0.75%. At September 30, 2016, outstanding borrowings were approximately $22.8 million at an interest rate of 1.3%. The highest balance on the line of credit during the quarter was approximately $23.5 million. The line of credit agreement was set to expire on November 4, 2016, but was renewed on the same terms for another one-year period, expiring November 3, 2017.
| 8 |
| 9. | Contingent Consideration |
Contingent consideration was comprised of two contingent payments that the Company was obligated to pay the former shareholders of The Combs Company (“Bogs”) related to the Company’s acquisition of Bogs in 2011. The estimate of contingent consideration was formula-driven and was based on Bogs achieving certain levels of gross margin dollars between January 1, 2011, and December 31, 2015. The first earn-out payment was due in 2013 and was paid on March 28, 2013, in the amount of $1,270,000. The second earn-out payment was due in the first quarter of 2016 and was paid on March 23, 2016, in the amount of $5,217,000.
| 10. | Financial Instruments |
At September 30, 2016, the Company had foreign exchange contracts outstanding to sell $1.5 million Canadian dollars at a price of approximately $1.2 million U.S. dollars. Additionally, the Company’s majority-owned subsidiary, Florsheim Australia, had foreign exchange contracts outstanding to buy $5.2 million U.S. dollars at a price of approximately $6.8 million Australian dollars. Based on quarter-end exchange rates, there were no significant unrealized gains or losses on the outstanding contracts.
The Company determines the fair value of foreign exchange contracts based on the difference between the foreign currency contract rates and the widely available foreign currency rates as of the measurement date. The fair value measurements are based on observable market transactions, and thus represent a level 2 valuation as defined by ASC 820.
| 11. | Comprehensive Income |
Comprehensive income for the three and nine months ended September 30, 2016 and 2015, was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Net earnings | $ | 4,701 | $ | 5,377 | $ | 8,411 | $ | 11,054 | ||||||||
| Foreign currency translation adjustments | 261 | (1,609 | ) | 1,222 | (3,109 | ) | ||||||||||
| Pension liability, net of tax of $163, $174, $490 and $520, respectively | 256 | 272 | 767 | 815 | ||||||||||||
| Total comprehensive income | $ | 5,218 | $ | 4,040 | $ | 10,400 | $ | 8,760 | ||||||||
The components of accumulated other comprehensive loss as recorded in the Consolidated Condensed Balance Sheets (Unaudited) were as follows:
| September 30, | December 31, | |||||||
| 2016 | 2015 | |||||||
| (Dollars in thousands) | ||||||||
| Foreign currency translation adjustments | $ | (4,721 | ) | $ | (5,691 | ) | ||
| Pension liability, net of tax | (12,009 | ) | (12,776 | ) | ||||
| Total accumulated other comprehensive loss | $ | (16,730 | ) | $ | (18,467 | ) | ||
The following presents a tabular disclosure about changes in accumulated other comprehensive loss during the nine months ended September 30, 2016:
| Foreign Currency Translation Adjustments | Defined Benefit Pension Items | Total | ||||||||||
| Beginning balance, December 31, 2015 | $ | (5,691 | ) | $ | (12,776 | ) | $ | (18,467 | ) | |||
| Other comprehensive income before reclassifications | 970 | - | 970 | |||||||||
| Amounts reclassified from accumulated other comprehensive loss | - | 767 | 767 | |||||||||
| Net current period other comprehensive income | 970 | 767 | 1,737 | |||||||||
| Ending balance, September 30, 2016 | $ | (4,721 | ) | $ | (12,009 | ) | $ | (16,730 | ) | |||
| 9 |
The following presents a tabular disclosure about reclassification adjustments out of accumulated other comprehensive loss during the nine months ended September 30, 2016:
| Amounts reclassified from accumulated other comprehensive loss for the nine months ended September 30, 2016 | Affected line item in
the statement where net income is presented | |||||||
| Amortization of defined benefit pension items | ||||||||
| Prior service cost | $ | (84 | ) | (1) | ||||
| Actuarial losses | 1,341 | (1) | ||||||
| Total before tax | 1,257 | |||||||
| Tax benefit | (490 | ) | ||||||
| Net of tax | $ | 767 | ||||||
| (1) | These amounts were included in the computation of net periodic pension cost. See Note 6 for additional details. |
| 12. | Equity |
A reconciliation of the Company’s equity for the nine months ended September 30, 2016, is as follows:
| Accumulated | ||||||||||||||||||||
| Capital in | Other | |||||||||||||||||||
| Common | Excess of | Reinvested | Comprehensive | Noncontrolling | ||||||||||||||||
| Stock | Par Value | Earnings | Loss | Interest | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Balance, December 31, 2015 | $ | 10,767 | $ | 45,759 | $ | 160,325 | $ | (18,467 | ) | $ | 6,345 | |||||||||
| Net earnings | - | - | 8,287 | - | 124 | |||||||||||||||
| Foreign currency translation adjustments | - | - | - | 970 | 252 | |||||||||||||||
| Pension liability adjustment, net of tax | - | - | - | 767 | - | |||||||||||||||
| Cash dividends declared | - | - | (6,568 | ) | - | - | ||||||||||||||
| Cash dividends paid to noncontrolling interest | - | - | - | - | (170 | ) | ||||||||||||||
| Stock options exercised | 25 | 560 | - | - | - | |||||||||||||||
| Issuance of restricted stock | 27 | (27 | ) | - | - | - | ||||||||||||||
| Stock-based compensation expense | - | 1,121 | - | - | - | |||||||||||||||
| Income tax benefit from stock options exercised | - | 3 | - | - | - | |||||||||||||||
| Shares purchased and retired | (352 | ) | - | (9,016 | ) | - | - | |||||||||||||
| Balance, September 30, 2016 | $ | 10,467 | $ | 47,416 | $ | 153,028 | $ | (16,730 | ) | $ | 6,551 | |||||||||
| 13. | Subsequent Events |
On November 7, 2016, the Board of Directors of the Company authorized the freezing of the Weyco Group, Inc. Pension Plan, whereby all benefit accruals, for all employees, would be frozen effective December 31, 2016. Management of the Company has not yet determined the impact of this freeze on the consolidated financial statements, although it is not expected to have a material adverse impact.
| 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-ended December 31, 2015.
GENERAL
The Company designs and markets quality and innovative footwear for men, women and children under a portfolio of well-recognized brand names including: “Florsheim,” “Nunn Bush,” “Stacy Adams,” “BOGS,” “Rafters,” and “Umi.” Inventory is purchased from third-party overseas manufacturers. The majority of foreign-sourced purchases are denominated in U.S. dollars.
The Company has two reportable segments, North American wholesale operations (“wholesale”) and North American retail operations (“retail”). In the wholesale segment, the Company’s products are sold to leading footwear, department, and specialty stores, primarily in the United States and Canada. The Company also has licensing agreements with third parties who sell its branded apparel, accessories and specialty footwear in the United States, as well as its footwear in Mexico and certain markets overseas. Licensing revenues are included in the Company’s wholesale segment. The Company’s retail segment consisted of 13 Company-owned retail stores and an internet business in the United States as of September 30, 2016. Sales in retail outlets are made directly to consumers by Company employees.
The Company’s “other” operations include the Company’s wholesale and retail businesses in Australia, South Africa, Asia Pacific (collectively, “Florsheim Australia”) and Europe (“Florsheim Europe”). The majority of the Company’s operations are in the United States, and its results are primarily affected by the economic conditions and the retail environment in the United States.
EXECUTIVE OVERVIEW
Third Quarter Highlights
Consolidated net sales for the third quarter of 2016 were $79.1 million, down 13% as compared to last year’s third quarter net sales of $91.2 million. Earnings from operations were $7.3 million this quarter, a decrease of 20% as compared to $9.1 million in the third quarter of 2015. Consolidated net earnings attributable to Weyco Group, Inc. were $4.6 million in the third quarter of 2016, down 17% as compared to $5.5 million in the same period last year. Diluted earnings per share were $0.44 in the third quarter of 2016 and $0.51 per share in the third quarter of 2015.
The majority of the decrease in consolidated net sales came from the Company’s wholesale segment. Wholesale net sales declined $12.4 million this quarter, compared to the same period one year ago. This decrease was primarily due to lower sales of the BOGS, Nunn Bush and Stacy Adams brands. Sales of the BOGS brand were down following last year’s mild winter in North America, while sales of the Nunn Bush and Stacy Adams brands were down due to a slowdown in consumer spending in the footwear and apparel segments this quarter. Sales in the Company’s retail segment were also down for the quarter, while sales in the Company’s other businesses improved due to higher sales at Florsheim Europe.
Consolidated earnings from operations decreased $1.8 million for the quarter, compared to the same period last year, mainly due to lower sales volumes in the Company’s North American wholesale segment.
| 11 |
Year-to-Date Highlights
Consolidated net sales for the first nine months of 2016 were $214.8 million, down 8% from last year’s year-to-date net sales of $233.2 million. Earnings from operations were $12.7 million in the first nine months of 2016, a decrease of 30% as compared to $18.3 million in the first nine months of 2015. Consolidated net earnings attributable to Weyco Group, Inc. were $8.3 million for the nine months ended September 30, 2016, down 26% as compared to $11.2 million in the same period last year. Diluted earnings per share to date in 2016 were $0.78, versus $1.03 per share in the same period of 2015.
The majority of the decrease in consolidated net sales came from the Company’s wholesale segment. Wholesale net sales decreased $18.0 million in the first nine months of 2016, compared to the same period last year, primarily due to lower sales of the BOGS and Nunn Bush brands. Sales in the Company’s retail segment and other operations were also down for the year-to-date period, compared to the same period of 2015.
Consolidated earnings from operations decreased $5.5 million for the nine months ended September 30, 2016, compared to the same period one year ago. The majority of the decrease came from the Company’s wholesale segment, due to lower sales volumes. Earnings from operations for the year-to-date period were also down in the Company’s retail segment and in its other businesses.
Financial Position Highlights
At September 30, 2016, cash and marketable securities totaled $39.4 million and outstanding debt totaled $22.8 million. At December 31, 2015, cash and marketable securities totaled $43.1 million and outstanding debt totaled $26.6 million. During the first nine months of 2016, the Company generated $27.8 million of cash from operations, mainly by reducing its inventory levels this year. The Company used funds to repurchase $9.4 million of Company stock, to pay $8.8 million in dividends, and to pay down $3.8 million on its revolving line of credit. In addition, the Company paid $5.2 million for the final earn-out payment related to the 2011 acquisition of Bogs and spent $4.9 million on capital expenditures.
SEGMENT ANALYSIS
Net sales and earnings from operations for the Company’s segments in the three and nine months ended September 30, 2016 and 2015, were as follows:
| Three Months Ended September 30, | % | Nine Months Ended September 30, | % | |||||||||||||||||||||
| 2016 | 2015 | Change | 2016 | 2015 | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Net Sales | ||||||||||||||||||||||||
| North American Wholesale | $ | 62,170 | $ | 74,602 | -17 | % | $ | 165,876 | $ | 183,831 | -10 | % | ||||||||||||
| North American Retail | 4,702 | 4,767 | -1 | % | 14,508 | 14,707 | -1 | % | ||||||||||||||||
| Other | 12,197 | 11,858 | 3 | % | 34,452 | 34,675 | -1 | % | ||||||||||||||||
| Total | $ | 79,069 | $ | 91,227 | -13 | % | $ | 214,836 | $ | 233,213 | -8 | % | ||||||||||||
| Earnings from Operations | ||||||||||||||||||||||||
| North American Wholesale | $ | 6,286 | $ | 8,156 | -23 | % | $ | 10,638 | $ | 15,160 | -30 | % | ||||||||||||
| North American Retail | 313 | 402 | -22 | % | 787 | 1,163 | -32 | % | ||||||||||||||||
| Other | 731 | 578 | 26 | % | 1,292 | 1,931 | -33 | % | ||||||||||||||||
| Total | $ | 7,330 | $ | 9,136 | -20 | % | $ | 12,717 | $ | 18,254 | -30 | % | ||||||||||||
| 12 |
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, 2016 and 2015, were as follows:
North American Wholesale Segment Net Sales
| Three Months Ended September 30, | % | Nine Months Ended September 30, | % | |||||||||||||||||||||
| 2016 | 2015 | Change | 2016 | 2015 | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| North American Net Sales | ||||||||||||||||||||||||
| Stacy Adams | $ | 14,861 | $ | 15,761 | -6 | % | $ | 52,092 | $ | 51,370 | 1 | % | ||||||||||||
| Nunn Bush | 13,362 | 17,069 | -22 | % | 42,909 | 49,783 | -14 | % | ||||||||||||||||
| Florsheim | 14,262 | 13,275 | 7 | % | 38,513 | 37,028 | 4 | % | ||||||||||||||||
| BOGS/Rafters | 18,462 | 26,598 | -31 | % | 28,950 | 41,132 | -30 | % | ||||||||||||||||
| Umi | 698 | 992 | -30 | % | 1,681 | 2,208 | -24 | % | ||||||||||||||||
| Total North American Wholesale | $ | 61,645 | $ | 73,695 | -16 | % | $ | 164,145 | $ | 181,521 | -10 | % | ||||||||||||
| Licensing | 525 | 907 | -42 | % | 1,731 | 2,310 | -25 | % | ||||||||||||||||
| Total North American Wholesale | ||||||||||||||||||||||||
| Segment | $ | 62,170 | $ | 74,602 | -17 | % | $ | 165,876 | $ | 183,831 | -10 | % | ||||||||||||
Stacy Adams and Nunn Bush were both impacted by a slowdown in consumer spending in the footwear and apparel segments this quarter. Stacy Adams sales were down mainly with off-price retailers. For the quarter and year-to-date periods, Nunn Bush sales were down across a number of distribution categories, but most significantly, with mid-tier department stores. Mid-tier department stores are facing a challenging environment as consumer buying shifts to the internet. Net sales of the Florsheim brand were up for the quarter, mainly due to higher sales to national shoe chains. To date in 2016, Florsheim’s net sales were up due to higher sales to national shoe chains and department stores, partially offset by lower sales to international retailers. BOGS net sales were down for the quarter and first nine months of 2016, compared to the same periods last year. These decreases can largely be attributed to last year’s mild winter in North America, which caused many retailers to carry over unsold BOGS inventory into the current year; this not only impacted shipments this year, but it also caused retailers to be conservative with their orders for Fall of 2016.
Licensing revenues consist of royalties earned on the sales of branded apparel, accessories and specialty footwear in the United States and on branded footwear in Mexico and certain overseas markets. The decrease in licensing revenues for the third quarter and to date through September 30th resulted mainly from licensee transitions that occurred during 2016.
Earnings from Operations
Earnings from operations in the North American wholesale segment were $6.3 million in the third quarter of 2016, down 23% as compared to $8.2 million in the third quarter of 2015. For the nine months ended September 30, 2016, earnings from operations for the wholesale segment were $10.6 million, down 30% as compared to $15.2 million in the same period last year. The decreases for the quarter and year-to-date periods were the result of lower sales volumes.
Wholesale gross earnings were 32.2% of net sales in the third quarter of 2016 compared to 31.4% of net sales in last year’s third quarter. The increase this quarter mainly resulted from the Company’s ongoing effort to increase selling prices on select products. For the year-to-date period, wholesale gross earnings were flat at 31.2% of net sales in both 2016 and 2015. Gross margins in the U.S. were up slightly due to increased selling prices on select products, as described above. This increase was partially offset by lower gross margins in Canada. Gross margins in Canada continue to be affected by the weaker Canadian dollar relative to the U.S. dollar, as inventory is purchased in U.S. dollars. In 2015, gains recorded on favorable foreign exchange contacts partially offset the impact of the weakening Canadian dollar. In 2016, however, no significant gains were recorded on such contracts.
The Company’s cost of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs). Distribution costs were $2.8 million for the third quarter of 2016 versus $2.9 million for the same period of 2015. For the nine-month periods ended September 30, 2016 and 2015, distribution costs were $8.8 million and $8.3 million, respectively. The increase for the year-to-date period was primarily due to additional storage costs incurred in the first half of 2016. Distribution costs were included in selling and administrative expenses. The Company’s gross earnings may not be comparable to other companies, as some companies may include distribution costs in cost of sales.
| 13 |
North American wholesale segment selling and administrative expenses include, and are primarily related to, distribution costs, salaries and commissions, advertising costs, employee benefit costs and depreciation. As a percent of net sales, wholesale selling and administrative expenses were 22% and 21% for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, wholesale selling and administrative expenses were 25% of net sales in 2016 and 23% of net sales in 2015. The increases in selling and administrative expenses as a percent of sales for the quarter and year-to-date periods was primarily due to lower sales volumes in 2016, as many of the Company’s selling and administrative costs are fixed in nature and do not correlate with changes in sales volume.
North American Retail Segment
Net Sales
Net sales in the Company’s North American retail segment declined $65,000 and $199,000, in the third quarter and for the nine months ended September 30, 2016, respectively. Same store sales, which include sales of both the U.S. internet business and brick and mortar stores, increased 2% for the quarter and increased 3% for the year-to-date period, as compared to the same periods in 2015. The increases in same store sales for both periods were due to higher sales in the Company’s internet business.
Earnings from Operations
Retail earnings from operations decreased $89,000 and $376,000 for the three and nine months ended September 30, 2016, respectively, compared to the same periods in 2015. For the quarter, the decrease in earnings from operations was mainly due to lower operating earnings in the Company’s U.S. internet business resulting from higher marketing costs. For the year-to-date period, the decrease in earnings from operations was due to lower net sales at the Company’s brick and mortar stores and higher operating costs in the internet business. Gross earnings as a percent of net sales were 65.5% in the third quarter of 2016 compared to 66.0% in the third quarter of 2015. For the nine months ended September 30, retail gross earnings as a percent of net sales were 65.1% in 2016 and 66.0% in 2015.
Selling and administrative expenses for the retail segment include, and are primarily related to, rent and occupancy costs, employee costs, advertising expense and freight. Selling and administrative expenses as a percent of net sales were 59% and 58% for the three-month periods ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, selling and administrative expenses as a percent of net sales were 60% in 2016 and 58% in 2015.
Other
The Company’s other net sales were $12.2 million in the third quarter of 2016, up 3% as compared to $11.9 million in 2015. This increase was due to higher net sales at Florsheim Europe. Florsheim Australia’s net sales were flat for the quarter. In local currency, Florsheim Australia’s net sales were down 4% for the quarter. Earnings from operations of Florsheim Australia and Florsheim Europe were $731,000 in the third quarter of 2016, up 26% as compared to $578,000 in the same period last year. The increase between years was driven by higher sales volumes and operating earnings at Florsheim Europe.
For the nine months ended September 30, 2016, other net sales were $34.5 million, down 1% from $34.7 million in the same period last year. This decrease was due to lower net sales at Florsheim Australia, largely offset by increased sales at Florsheim Europe. Florsheim Australia’s sales through September 30th were down 4% in 2016, compared to the same period last year. In local currency, Florsheim Australia’s net sales were down 1% for the year-to-date period. Earnings from operations of Florsheim Australia and Florsheim Europe were $1.3 million in the first nine months of 2016, down 33% as compared to $1.9 million in the same period last year. This decrease was largely due to lower sales and gross margins at Florsheim Australia. Florsheim Australia purchases its inventory in U.S. dollars, and its gross margins have been negatively impacted by the weakness of its local currency compared to the U.S. dollar. In 2015, gains recorded on favorable foreign exchange contacts partially offset the impact of the weakening Australian dollar. In 2016, however, no significant gains were recorded on such contracts.
| 14 |
Other income and expense
Interest income for the quarter and nine months ended September 30, 2016, was down $31,000 and $133,000, respectively, compared to the same periods last year, due to lower average investment balances this year compared to last year. For the three months ended September 30, 2016, interest expense decreased $6,000, compared to the same period last year, due to a lower average debt balance this quarter. For the nine months ended September 30, 2016, interest expense increased $131,000, compared to the same period in 2015, mainly due to a higher average debt balance throughout 2016, as compared to last year.
Other income (expense) for the quarter and nine months ended September 30, 2016, improved by $637,000 and $1,572,000, respectively, compared to the same periods last year. This quarter’s other income included foreign currency transaction gains of $102,000 compared to $340,000 of losses in the same period of 2015. For the nine months ended September 30, 2016, other income included foreign exchange transaction gains of $389,000 compared to $783,000 of losses in the same period of 2015. These gains and losses mainly resulted from the revaluation of an intercompany loan between the Company’s wholesale segment and Florsheim Australia.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of liquidity are its cash, short-term marketable securities and its revolving line of credit. During the first nine months of 2016, the Company generated $27.8 million of cash from operating activities compared with a use of $27.2 million of cash in the same period of 2015. The change between years was primarily due to changes in operating assets and liabilities, principally inventory. The decrease in inventory at September 30, 2016 was the result of the Company reducing its inventories to coincide with lower backlogs, mainly for the BOGS brand.
The Company paid cash dividends of $8.8 million and $8.4 million during the nine months ended September 30, 2016 and 2015, respectively.
The Company continues to repurchase its common stock under its share repurchase program when the Company believes market conditions are favorable. During the first nine months of 2016, the Company repurchased 352,175 shares at a total cost of $9.4 million. As of September 30, 2016, the Company had approximately 624,000 shares available under its previously announced stock repurchase program.
Capital expenditures totaled $4.9 million in the first nine months of 2016. The Company completed remodeling projects on two of its domestic retail stores, and also opened a new outlet store in the third quarter. In addition, the Company completed a construction project to increase the capacity of its U.S. distribution center. Management estimates that annual capital expenditures for 2016 will be approximately $5.5 million.
At September 30, 2016, the Company had a $60 million unsecured revolving line of credit with a bank expiring November 4, 2016. The line of credit bears interest at LIBOR plus 0.75%. The Company repaid a net of $3.8 million on the line of credit during the first nine months of 2016. At September 30, 2016, outstanding borrowings were $22.8 million at an interest rate of 1.3%. The highest balance on the line of credit during the quarter was $23.5 million. The line of credit agreement was set to expire on November 4, 2016, but was renewed on the same terms for another one-year period, expiring November 3, 2017.
A contingent consideration payment was made in March 2016 in the amount of $5,217,000. See Note 9 of the accompanying consolidated condensed financial statements.
At September 30, 2016, approximately $1.8 million of cash and cash equivalents was held by the Company’s foreign subsidiaries.
The Company will continue to evaluate the best uses for its available liquidity, including, among other uses, capital expenditures, continued stock repurchases and additional acquisitions.
The Company believes that available cash and marketable securities, cash provided by operations, and available borrowing facilities will provide adequate support for the cash needs of the business for at least one year, although there can be no assurances.
COMMITMENTS
There were no material changes to the Company’s contractual obligations during the nine months ended September 30, 2016, from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
| 15 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes from those reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Item 4. Controls and Procedures.
The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company required to be included in the Company’s periodic filings under the Exchange Act. Such officers have also concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in accumulating and communicating information in a timely manner, allowing timely decisions regarding required disclosures.
There have been no significant changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 1A. Risk Factors.
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 ended December 31, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The table below presents information pursuant to Item 703(a) of Regulation S-K regarding the purchase of the Company’s common stock by the Company in the three-month period ended September 30, 2016.
| Total Number of | Maximum Number | |||||||||||||||||
| Total | Average | Shares Purchased as | of Shares | |||||||||||||||
| Number | Price | Part of the Publicly | that May Yet Be | |||||||||||||||
| of Shares | Paid | Announced | Purchased Under | |||||||||||||||
| Period | Purchased | Per Share | Program | the Program (1) | ||||||||||||||
| 7/1/2016 - 7/31/2016 | 19,212 | $ | 27.87 | 19,212 | 728,096 | |||||||||||||
| 8/1/2016 - 8/31/2016 | 55,068 | $ | 25.73 | 55,068 | 673,028 | |||||||||||||
| 9/1/2016 - 9/30/2016 | 49,045 | $ | 26.69 | 49,045 | 623,983 | |||||||||||||
| Total | 123,325 | $ | 26.45 | 123,325 | ||||||||||||||
| (1) | In 1998 the Company's stock repurchase program was established. On several occasions since the program's inception, the Board of Directors has extended the number of shares authorized for repurchase under the program. In total, 6.5 million shares have been authorized for repurchase. |
Item 5. Other Information
On November 4, 2016, the Company renewed its line of credit agreement with PNC Bank, N.A. for another term that expires on November 3, 2017, on the same terms as the prior agreement. The forgoing description does not purport to be complete and is qualified in its entirety by reference to the Amendment to PNC Bank Loan Agreement and Committed Line of Credit Note, a copy of which is filed as Exhibit 10.1 to this Form 10-Q.
On November 7, 2016, the Board of Directors of the Company authorized the freezing of the Weyco Group, Inc. Pension Plan, whereby all benefit accruals, for all employees, would be frozen effective December 31, 2016. The forgoing description does not purport to be complete and is qualified in its entirety by reference to the Second Amendment to Weyco Group, Inc. Pension Plan, a copy of which is filed as Exhibit 10.2 to this Form 10-Q.
| 16 |
Item 6. Exhibits.
See the Exhibit Index included herewith for a listing of exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WEYCO GROUP, INC. | |
| Dated: November 8, 2016 | /s/ John F. Wittkowske |
| John F. Wittkowske | |
| Senior Vice President and Chief Financial Officer |
| 17 |
WEYCO GROUP, INC.
(THE “REGISTRANT”)
(COMMISSION FILE NO. 0-9068)
EXHIBIT INDEX
TO
CURRENT REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 30, 2016
| Exhibit | Description | Incorporation Herein By Reference To | Filed Herewith | |||
| 10.1 | Amendment to PNC Bank Loan Agreement and Committed Line of Credit Note, dated November 4, 2016 | X | ||||
| 10.2 | Second Amendment to Weyco Group, Inc. Pension Plan, dated November 7, 2016 | X | ||||
| 31.1 | Certification of Chief Executive Officer | X | ||||
| 31.2 | Certification of Chief Financial Officer | X | ||||
| 32 | Section 906 Certification of Chief Executive Officer and Chief Financial Officer | X | ||||
| 101 | The following financial information from Weyco Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets (Unaudited); (ii) Consolidated Condensed Statements of Earnings and Comprehensive Income (Unaudited); (iii) Consolidated Condensed Statements of Cash Flows (Unaudited); and (iv) Notes to Consolidated Condensed Financial Statements, furnished herewith | X |