UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
333 W. Estabrook Boulevard
P. O. Box 1188
Milwaukee, Wisconsin 53201
(Address of principal executive offices)
(Zip Code)
(414) 908-1600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 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¨ Nox
As of April 30, 2016, there were 10,620,918 shares of common stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The following unaudited consolidated condensed financial statements have been prepared by Weyco Group, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s latest annual report on Form 10-K.
WEYCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
The accompanying notes to consolidated condensed financial statements (unaudited) are an integral part of these financial statements.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (UNAUDITED)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NOTES:
In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 2016, may not necessarily be indicative of the results for the full year.
The following table sets forth the computation of earnings per share and diluted earnings per share:
Diluted weighted average shares outstanding for the three months ended March 31, 2016, exclude anti-dilutive stock options totaling 932,000 shares of common stock at a weighted average price of $27.09. Diluted weighted average shares outstanding for the three months ended March 31, 2015, exclude anti-dilutive stock options totaling 652,700 shares of common stock at a weighted average price of $27.76.
As noted in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2015, all of the Company’s 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 investments to maturity.
Below is a summary of the amortized cost and estimated market values of the Company’s investment securities as of March 31, 2016, and December 31, 2015.
The unrealized gains and losses on investment securities at March 31, 2016, and at December 31, 2015, were as follows:
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 March 31, 2016, and determined that no other-than-temporary market value impairment exists.
The Company’s indefinite-lived and amortizable intangible assets as recorded in the Consolidated Condensed Balance Sheets (Unaudited) consisted of the following as of March 31, 2016:
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:
The Company’s amortizable intangible assets are included within other assets in the Consolidated Condensed Balance Sheets (Unaudited).
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 table 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 months ended March 31, 2016 and 2015, was as follows:
The components of the Company’s net pension expense were as follows:
During the three months ended March 31, 2016, the Company recognized approximately $364,000 of compensation expense associated with stock option and restricted stock awards granted in the years 2012 through 2015. During the three months ended March 31, 2015, the Company recognized approximately $360,000 of compensation expense associated with stock option and restricted stock awards granted in the years 2011 through 2014.
The following table summarizes the Company’s stock option activity for the three month period ended March 31, 2016:
* The aggregate intrinsic value of outstanding and exercisable stock options is defined as the difference between the market value of the Company's stock on March 31, 2016 of $26.62 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 months ended March 31, 2016 and 2015:
The following table summarizes the Company’s restricted stock award activity for the three month period ended March 31, 2016:
* The aggregate intrinsic value of non-vested restricted stock was calculated using the market value of the Company's stock on March 31, 2016 of $26.62 multiplied by the number of non-vested restricted shares outstanding.
At March 31, 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 March 31, 2016, outstanding borrowings were approximately $24.6 million at an interest rate of 1.19%. The highest balance on the line of credit during the quarter was approximately $28.4 million.
Contingent consideration was comprised of two earn-out 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 22, 2016, in the amount of $5,217,000.
At March 31, 2016, the Company had forward exchange contracts outstanding to sell $2.5 million Canadian dollars at a price of approximately $1.9 million U.S. dollars. Additionally, the Company’s majority-owned subsidiary, Florsheim Australia, had forward exchange contracts outstanding to buy $7.6 million U.S. dollars at a price of approximately $10.3 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 forward 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.
Comprehensive income for the three months ended March 31, 2016 and 2015, was as follows:
The components of accumulated other comprehensive loss as recorded on the Consolidated Condensed Balance Sheets (Unaudited) were as follows:
The following presents a tabular disclosure about changes in accumulated other comprehensive loss during the three months ended March 31, 2016:
The following presents a tabular disclosure about reclassification adjustments out of accumulated other comprehensive loss during the three months ended March 31, 2016:
A reconciliation of the Company’s equity for the three months ended March 31, 2016, is as follows:
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 and North American retail operations. 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 March 31, 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
Sales and Earnings Highlights
Consolidated net sales for the first quarter of 2016 were $78.9 million, up 1% over last year’s first quarter net sales of $78.1 million. Earnings from operations decreased 34% to $3.8 million this quarter, from $5.8 million in the same period of 2015. Consolidated net earnings attributable to Weyco Group, Inc. were $2.7 million in the first quarter of 2016, down 26% from $3.6 million in last year’s first quarter. Diluted earnings per share were $0.25 for the three months ended March 31, 2016, as compared to $0.33 per share in the first quarter of 2015.
The majority of the increase in consolidated net sales came from the Company’s wholesale segment. Wholesale net sales increased $1.1 million this quarter, compared to the same period last year. This increase was primarily due to higher sales of the Stacy Adams and Florsheim brands, partially offset by decreased sales of BOGS product. Florsheim Australia also had decreased net sales, caused by the translation of the weaker Australian currency into U.S. dollars.
Consolidated earnings from operations decreased $2.0 million for the quarter compared to the same period last year. A majority of this decrease came from the Company’s wholesale segment. Wholesale earnings from operations decreased $1.5 million for the quarter, compared to the same period last year, primarily due to lower gross margins in Canada and higher U.S. selling and administrative expenses. Earnings from operations at Florsheim Australia decreased approximately $500,000 this quarter, mainly due to lower gross margins.
Financial Position Highlights
At March 31, 2016, cash and marketable securities totaled $41.5 million and outstanding debt totaled $24.6 million. At December 31, 2015, cash and marketable securities totaled $43.1 million and outstanding debt totaled $26.6 million. During the first three months of 2016, the Company generated $13.5 million of cash from operations. The Company paid dividends of $4.3 million, spent $2.9 million on purchases of Company stock, paid down $2.0 million on its revolving line of credit and had $924,000 of capital expenditures. In addition, the Company paid $5.2 million for the final earn-out payment related to the 2011 acquisition of Bogs.
SEGMENT ANALYSIS
Net sales and earnings from operations for the Company’s segments for the three months ended March 31, 2016 and 2015, were as follows:
North American Wholesale Segment
Net Sales
Net sales in the Company’s North American wholesale segment for the three months ended March 31, 2016 and 2015, were as follows:
North American Wholesale Segment Net Sales
The increase in Stacy Adams first quarter net sales was driven by strong new product sales. The decline at Nunn Bush was mainly due to lower sales to department stores and off-price retailers. Florsheim net sales were up for the quarter, primarily due to higher sales to department stores and national shoe chains. Net sales of the BOGS and Rafters brands were down this quarter, primarily due to this year’s mild winter.
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
Overall product margins for the North American wholesale segment were 28.5% of net sales in the first quarter of 2016, as compared to 30.2% in the first quarter of 2015. The majority of this decrease was due to lower gross margins in Canada. Gross margins in Canada continue to be negatively affected by the weaker Canadian dollar because inventory is purchased in U.S. dollars. Earnings from operations in the North American wholesale segment decreased 31% to $3.3 million in the first quarter of 2015, from $4.8 million in the same period last year. The decline in wholesale operating earnings resulted primarily from lower gross margins in Canada and higher U.S. 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 $3.2 million and $2.8 million for three-month periods ended March 31, 2016 and 2015, respectively. 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 in cost of 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 24% of net sales in the first quarter of 2016 versus 23% in the same period last year. The increase was due to higher distribution costs, mainly an increase in temporary labor costs and additional storage costs in the first quarter of 2016.
North American Retail Segment
Net sales in the Company’s North American retail segment were $5.1 million in the first quarter of 2016, up 3% as compared to $4.9 million in 2015. Same store sales, which include sales of both the U.S. internet business and brick and mortar stores, were up 7% for the quarter. There were two fewer domestic retail stores operating during the first quarter of 2016 than there were in last year’s first quarter. The increase in same store sales was due to an increase in the Company’s U.S. internet business.
Earnings from operations in the North American retail segment were $246,000 in the first quarter of 2016, down 10% as compared to $272,000 in the first quarter of 2015. Retail gross earnings were 64.8% of net sales in the first quarter of 2016, as compared to 65.9% of net sales 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. Retail selling and administrative expenses were 60.0% of net sales in the first quarter of 2016 versus 60.3% in last year’s first quarter.
Other
The Company’s other businesses include its wholesale and retail operations of Florsheim Australia and Florsheim Europe. Net sales of the Company’s other businesses were $11.6 million in the first quarter of 2016, down 4% as compared to $12.0 million in 2015. This decrease was due to lower net sales at Florsheim Australia, caused by the translation of the weaker Australian currency into U.S. dollars. In local currency, Florsheim Australia’s net sales were up 2% for the quarter. This increase was due to higher sales volumes in both its retail businesses, where sales were up 1% (same store sales up 4%), and its wholesale businesses, where sales were up 3%.
Collectively, earnings from operations of Florsheim Australia and Florsheim Europe were $236,000 this quarter, down 66% as compared to $703,000 in the first quarter of 2015. This decrease was primarily due to lower 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.
Other income and expense and taxes
Interest income for the first quarter of 2016 was down $56,000 as compared to the first quarter of 2015, due to a lower average investment balance this year compared to last year. Interest expense was up $55,000 for the quarter, due to a higher average debt balance this year compared to last year.
The Company’s effective tax rate for the quarter ended March 31, 2016, was 35.8% as compared to 37.5% for the same period of 2015.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of liquidity are its cash, short-term marketable securities and its revolving line of credit.The Company generated $13.5 million of cash from operating activities during the first three months of 2016, compared to $1.6 million in the same period one year ago. The increase between years was primarily due to the large decrease in the inventory balance during the first quarter.
The Company paid cash dividends of $4.3 million and $4.1 million during the three months ended March 31, 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 quarter of 2016, the Company repurchased 111,939 shares at a total cost of $2.9 million. As of March 31, 2016, the Company had 864,219 shares available under its previously announced stock repurchase program. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” below for more information.
Capital expenditures were $924,000 in the first three months of 2016. In April 2016, the Company began construction to increase the capacity of its U.S. distribution center. The Company expects this project to be complete in the third quarter. Including this project, management estimates that annual capital expenditures for 2016 will be between $4 million and $5 million.
At March 31, 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 paid down a net of $2.0 million on the line of credit during the first three months of 2016. At March 31, 2016, outstanding borrowings were $24.6 million at an interest rate of 1.19%. The highest balance on the line of credit during the quarter was approximately $28.4 million.
In connection with the Bogs acquisition, the Company had to pay two earn-out payments to the former shareholders of Bogs. The Company made the first earn-out payment of $1,270,000 in the first quarter of 2013. The second payment was due in the first quarter of 2016 and was paid on March 22, 2016 in the amount of $5,217,000. See Note 9 of the accompanying consolidated condensed financial statements.
As of March 31, 2016, approximately $1.9 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 quarter ended March 31, 2016, from those disclosed in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2015.
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 March 31, 2016.
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.
(THE “REGISTRANT”)
(COMMISSION FILE NO. 0-9068)
EXHIBIT INDEX
TO
CURRENT REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED March 31, 2016