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WEYS > SEC Filings for WEYS > Form 10-K on 14-Mar-2013All Recent SEC Filings

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Form 10-K for WEYCO GROUP INC


14-Mar-2013

Annual Report


ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. As of December 31, 2012, the Company also had 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 23 Company-owned retail stores in the United States and an Internet business as of December 31, 2012. 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 and Asia Pacific (collectively, "Florsheim Australia") and 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.

This discussion summarizes the significant factors affecting the consolidated operating results, financial position and liquidity of the Company for the three-year period ended December 31, 2012. This discussion should be read in conjunction with Item 8, "Financial Statements and Supplementary Data" below.

EXECUTIVE OVERVIEW

Sales and Earnings Highlights

Consolidated net sales in 2012 were $293.5 million, up 8% over last year's net sales of $271.1 million. Operating earnings were $29.8 million this year, up from $23.2 million in 2011. Consolidated net earnings attributable to Weyco Group, Inc. were $19.0 million in 2012 compared with $15.3 million last year. Diluted earnings per share for the year ended December 31, 2012 were $1.73 per share, up from $1.37 per share in 2011. Earnings for the year included $3.4 million ($2.1 million after tax, or $0.19 per share) of income resulting from a reduction in the estimated liability for future payments to be made as a result of the 2011 acquisition of Bogs.

The majority of the Company's operations are in its North American wholesale segment, and its consolidated results primarily reflect the results of that business. North American wholesale net sales increased $18.8 million in 2012 compared to 2011. This increase was primarily due to higher sales volumes across all of the Company's wholesale brands, which included increased Bogs sales volumes due to the takeover of Bogs distribution in Canada during 2012. The 2011 acquisition of Bogs also contributed to the wholesale sales increase, as 2012 net sales included twelve months of Bogs sales while 2011 net sales only included ten months of Bogs sales, based on the March 2, 2011 acquisition date.

The Company's North American wholesale segment operating earnings increased $6.6 million in 2012 compared to 2011. The increase in operating earnings was due to higher sales volumes as well as an adjustment to reduce the estimated liability for future payments due to the former owners of the BOGS and Rafters brands. See Note 11.

Financial Position Highlights

At December 31, 2012, cash and marketable securities totaled $61.5 million and outstanding debt totaled $45.0 million. At December 31, 2011, cash and marketable securities totaled $61.9 million and outstanding debt totaled $37.0 million. The Company's main sources of cash in 2012 were from operations, the maturities of marketable securities, and borrowings under the revolving line of credit. The Company's main uses of cash in 2012 were for the payment of dividends, common stock repurchases, and the payment of an indemnification holdback to the former shareholders of Bogs. The Company also had increased capital expenditures in 2012 due to construction to connect a new building that was acquired in 2011 to the Company's Glendale, Wisconsin distribution center.

Recent Acquisitions

Bogs

On March 2, 2011, the Company acquired 100% of the outstanding shares of The Combs Company ("Bogs") from its former shareholders for $29.3 million in cash plus assumed debt of approximately $3.8 million and contingent payments after two and five years (in 2013 and 2016), which are dependent on Bogs achieving certain performance measures. In accordance with the agreement, $2.0 million of the cash portion of the purchase price was held back to be used to help satisfy any claims of indemnification by the Company, and any amounts not used therefore were to be paid to the seller 18 months from the date of acquisition. This holdback was paid in full to the former shareholders of Bogs in 2012. At the acquisition date, the Company's estimate of the fair value of the contingent payments was approximately $9.8 million in aggregate. At December 31, 2012, the Company's estimate of the fair value of the contingent payments was approximately $6.3 million in aggregate. The change in fair value was recognized in earnings. See Note 11 in the Notes to Consolidated Financial Statements.

Bogs operations have been consolidated into the Company's wholesale segment since the date of acquisition. Accordingly, the Company's 2012 results included Bogs operations for the entire year while 2011 only included Bogs operations from March 2 through December 31, 2011. Bogs net sales were $36.4 million in 2012 compared to $28.0 million in 2011. See Note 3 in the Notes to Consolidated Financial Statements.

On June 1, 2012, the Company took over the sales and distribution of the BOGS and Rafters brands in Canada from a third-party licensee. Consequently, Bogs wholesale net sales increased and its licensing revenues decreased in 2012.

Umi

On April 28, 2010, the Company acquired certain assets, including the Umi brand name, intellectual property and accounts receivable from Umi LLC ("Umi"), a children's footwear company, for an aggregate price of approximately $2.6 million. The operating results of Umi have been consolidated into the Company's wholesale segment since the date of acquisition. Accordingly, the Company's 2012 and 2011 results included Umi's operations for the entire year while 2010 only included Umi's operations from April 28 through December 31, 2010. See Note 3 in the Notes to Consolidated Financial Statements.

2012 vs. 2011

SEGMENT ANALYSIS



Net sales and earnings from operations for the Company's segments, as well as
its "other" operations, in the years ended December 31, 2012 and 2011 were as
follows:



                             Years ended December 31,
                               2012              2011         % Change
                              (Dollars in thousands)
Net Sales
North American Wholesale   $     217,908       $ 199,087              9 %
North American Retail             24,348          24,740             -2 %
Other                             51,215          47,273              8 %
Total                      $     293,471       $ 271,100              8 %

Earnings from Operations
North American Wholesale   $      22,214       $  15,673             42 %
North American Retail              1,662           1,554              7 %

Other 5,920 5,970 -1 % Total $ 29,796 $ 23,197 28 %

North American Wholesale Segment



Net Sales



Net sales in the Company's North American wholesale segment for the years ended
December 31, 2012 and 2011 were as follows:



                                           Years ended December 31,
                                             2012              2011         % Change
                                            (Dollars in thousands)
North American Net Sales
Stacy Adams                              $      59,217       $  53,904             10 %
Nunn Bush                                       64,325          63,619              1 %
Florsheim                                       50,055          46,344              8 %
BOGS/Rafters                                    36,428          27,959             30 %
Umi                                              4,543           3,812             19 %
Total North American Wholesale           $     214,568       $ 195,638             10 %
Licensing                                        3,340           3,449             -3 %
Total North American Wholesale Segment   $     217,908       $ 199,087              9 %

The Company's Stacy Adams and Florsheim brands both had solid sales growth during 2012 with department and chain stores, and Internet and mail order retailers. Nunn Bush net sales were up slightly in 2012. Net sales of the BOGS and Rafters brands increased $8.5 million due mainly to the takeover by the Company of the Canadian distribution of the brands in 2012. Bogs sales in Canada were $6.9 million in 2012. Bogs also had increased sales in the United States due to twelve months of sales in 2012 compared to ten months in 2011 due to the March 2011 acquisition of the brands.

Licensing revenues were down slightly in 2012 as compared to 2011. This resulted from decreased Bogs licensing revenues offset by increased Florsheim revenues. Bogs licensing revenues decreased in 2012 due to the takeover by the Company of the distribution of the BOGS and Rafters brands in Canada, which had previously been licensed to a third party. Florsheim licensing revenues increased due the collection of past due licensing revenues from the Company's Mexican licensee of amounts that had previously been reserved for.

Earnings from Operations

Earnings from operations in the North American wholesale segment were $22.2 million in 2012 compared with $15.7 million in 2011. The 2012 reduction in the estimated liability for future payments to be made as a result of the Bogs acquisition caused $3.4 million of the increase. The remainder of the increase was achieved through higher sales volumes across all wholesale brands as well as slightly higher gross margins as a percent of net sales, partially offset by higher selling and administrative costs related to the Canadian distribution of Bogs as well as higher pension and advertising expenses in 2012. Wholesale gross earnings were 32.2% of net sales in 2012 compared to 31.8% in 2011.

The Company's cost of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs). The Company's distribution costs were $10.0 million and $8.6 million in the years ended December 31, 2012 and 2011, 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. As a percent of net sales, wholesale selling and administrative expenses were 22% this year compared to 24% in 2011. The decrease in selling and administrative expenses as a percent of net sales was largely due to the impact of the $3.4 million of income from the reduction of the estimated liability for future payments due to the former owners of the BOGS and Rafters brands. The reduction of this liability was primarily due to a decrease in the Company's estimate of the 2013 contingent payment which was based on 2011 and 2012 gross margin dollars. The Company lowered its estimate of 2012 gross margin dollars relative to its original projections, primarily because sales of Bogs products were less than expected due to the mild winters experienced in the United States since the brands were acquired.

North American Retail Segment

Net Sales

Net sales in the Company's North American retail segment decreased $392,000 or 2% in 2012 compared to 2011. There were seven fewer stores at December 31, 2012 than at December 31, 2011, as the Company has been closing unprofitable stores. Same store sales, which include retail store sales and Internet sales, were up 8% in 2012. Stores are included in same store sales beginning in the store's 13th month of operations after its grand opening. The increase in same store sales was driven in part by increases in the Company's Internet business.

Earnings from Operations

Retail earnings from operations increased $108,000 in 2012 compared to 2011. Gross earnings as a percent of net sales were 64% in 2012 and 2011. Selling and administrative expenses for the retail segment decreased in 2012 and were primarily related to rent and occupancy costs, employee costs and depreciation. Selling and administrative expenses as a percent of net sales were 57.6% in 2012 and 58.1% in 2011.

The Company reviews its long-lived assets for impairment in accordance with Accounting Standards Codification (ASC) 360, Property Plant and Equipment ("ASC 360"). See Note 2 in the Notes to Consolidated Financial Statements for further information. In 2012 and 2011, impairment charges of $93,000 and $165,000, respectively, were recognized within selling and administrative expenses to write down the fixed assets of certain retail locations that were unprofitable. Those locations have closed or are slated to close when their respective lease terms expire. In 2012, seven retail locations closed and in 2011, five locations closed. In general, earnings from operations for the retail segment have improved as fixed assets have been written down and underperforming stores have closed. In 2013, the Company expects to close three more locations.

Other

The Company's other businesses include its wholesale and retail operations in Australia, South Africa, Asia Pacific and Europe. In 2012, net sales of the Company's other businesses were $51 million, compared with $47 million in 2011. The majority of the increase was at Florsheim Australia, whose wholesale and retail net sales both increased 12%, or $4.7 million collectively. Earnings from operations in the Company's other businesses were flat.

Other income and expense and taxes

The majority of the Company's interest income is from its investments in marketable securities. Interest income for 2012 was down approximately $380,000 compared with 2011, primarily due to lower average investment balances this year compared with last year.

Interest expense was $561,000 in 2012 compared with $611,000 in 2011.

The effective tax rate for 2012 was 34.1% compared with 34.3% in 2011.

2011 vs. 2010

SEGMENT ANALYSIS



Net sales and earnings from operations for the Company's segments, as well as
its "other" operations, in the years ended December 31, 2011 and 2010 were as
follows:



                             Years ended December 31,
                               2011              2010        % Change
                              (Dollars in thousands)
Net Sales
North American Wholesale   $     199,087       $ 166,021            20 %
North American Retail             24,740          22,497            10 %
Other                             47,273          40,713            16 %
Total                      $     271,100       $ 229,231            18 %

Earnings from Operations
North American Wholesale   $      15,673       $  15,742             0 %
North American Retail              1,554            (400 )         488 %
Other                              5,970           3,439            74 %
Total                      $      23,197       $  18,781            24 %

North American Wholesale Segment



Net Sales



Net sales in the Company's North American wholesale segment for the years ended
December 31, 2011 and 2010 were as follows:



                                           Years ended December 31,
                                             2011              2010        % Change
                                            (Dollars in thousands)
North American Net Sales
Stacy Adams                              $      53,904       $  53,392             1 %
Nunn Bush                                       63,619          63,401             0 %
Florsheim                                       46,344          45,883             1 %
BOGS/Rafters                                    27,959               -           n/a
Umi                                              3,812           1,167           227 %
Total North American Wholesale           $     195,638       $ 163,843            19 %
Licensing                                        3,449           2,178            58 %
Total North American Wholesale Segment   $     199,087       $ 166,021            20 %

Net sales of Stacy Adams and Florsheim grew 1% in 2011 due to slightly higher sales volumes across several trade channels. Nunn Bush net sales remained flat in 2011. Net sales for the BOGS/Rafters brands were $28 million in 2011, following the acquisition of Bogs on March 2, 2011 (see Note 3 of the Notes to Consolidated Financial Statements). Umi was acquired on April 28, 2010. Accordingly, the Company's 2011 results included Umi's operations from January 1 through December 31, 2011, while 2010 only included Umi's operations for the period April 28 through December 31, 2010.

In 2011 and 2010, licensing revenues consisted of royalties earned on sales of branded apparel, accessories and specialty footwear in the United States and on branded footwear in Canada, Mexico and certain overseas markets. In 2011, the Company's licensing revenues increased 58%, primarily due to the addition of Bogs which contributed $1.2 million in new licensing revenues during the period.

Earnings from Operations

Earnings from operations in the North American wholesale segment were $15.7 million in each of the years 2011 and 2010. Higher net sales in 2011 were offset by slightly lower gross margins and increased selling and administrative costs, which included nonrecurring acquisition and transition costs related to the Bogs acquisition as well as other increased operating costs.

Wholesale gross earnings as a percent of net sales were 31.8% in 2011 compared with 32.5% in 2010. The decrease was due to increased pricing from the Company's third-party overseas factories resulting primarily from higher labor and material costs.

The Company's cost of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs). The Company's distribution costs were $8.6 million and $7.9 million in the years ended December 31, 2011 and 2010, 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 up approximately $9.4 million in 2011 compared with 2010. As a percent of wholesale net sales, wholesale selling and administrative expenses were 24% in 2011 compared with 23% in 2010.

North American Retail Segment

Net Sales

In the North American retail segment, net sales in 2011 were $24.7 million, up 10% from $22.5 million in 2010. There were five fewer stores in 2011 compared with 2010. Same store sales, which include the Company's retail store sales and the Company's Internet sales, were up 18%. Stores are included in same store sales beginning in the store's 13th month of operations after its grand opening.

Earnings from Operations

Earnings from operations in the North American retail segment increased $1.9 million in 2011 compared to 2010. The increase was primarily due to higher sales volumes in the Company's Internet business and across the majority of the retail locations and improvement in same store performance as well as the closing of five underperforming stores during 2011. Gross earnings as a percent of net sales in the retail segment were flat at 64% in 2011 and 2010.

Retail selling and administrative expenses were down approximately $497,000 in 2011 compared with 2010. As a percent of net retail sales, retail selling and administrative expenses were 58% in 2011 compared with 66% in 2010. In 2011 and 2010, impairment charges of $165,000 and $310,000 respectively, were recognized within selling and administrative expenses to write down the fixed assets of certain retail locations that were deemed unprofitable. Those locations have closed or are slated to close when their respective lease terms expire. In 2011, five retail locations closed and in 2010, one location closed. In general, earnings from operations for the retail segment improved as fixed assets were written down and underperforming stores were closed.

Other

In 2011, net sales of the Company's other operations were $47 million, compared with $41 million in 2010. The majority of the increase was at Florsheim Australia, whose net sales increased $6.5 million, or 20%. In local currency, Florsheim Australia's sales increased 7%, and the weaker U.S. dollar in 2011 relative to the Australian dollar caused the rest of the sales increase. Earnings from operations in the Company's other businesses in 2011 were up $2.5 million, due mainly to Florsheim Australia's increased retail sales and gross earnings as a percent of sales. The improvement in gross earnings was due to the strengthening of the Australian dollar relative to the U.S. dollar, as Florsheim Australia's purchases of inventory are denominated in U.S. dollars.

Other income and expense and taxes

The majority of the Company's interest income is from its investments in marketable securities. Interest income for 2011 was down approximately $70,000 compared with 2010, primarily due to a lower average investment balance in 2011 compared with 2010.

Interest expense was $611,000 in 2011 compared with $120,000 in 2010. The increase was due to additional debt outstanding during 2011 following the Bogs acquisition.

The effective tax rate for 2011 was 34.3% compared with 33.7% in 2010. The increase in 2011 was primarily due to higher effective rates at certain of the Company's foreign businesses.

LIQUIDITY & CAPITAL RESOURCES

The Company's primary sources of liquidity are its cash and short-term marketable securities, which aggregated $25.3 million at December 31, 2012 and $15.1 million at December 31, 2011, and its revolving line of credit. In 2012, the Company generated $18.0 million in cash from operating activities, compared with $17.1 million and $98,000 in 2011 and 2010, respectively. Fluctuations in net cash from operating activities have mainly resulted from changes in net earnings and operating assets and liabilities, and most significantly the year-end inventory and accounts receivable balances.

The Company's capital expenditures were $9.5 million, $8.2 million and $1.5 million in 2012, 2011 and 2010, respectively. Capital expenditures in 2012 included a project to connect a neighboring building, acquired in December 2011, to the Company's existing distribution center in Glendale, Wisconsin. This project was completed in the fourth quarter of 2012. The Company expects capital expenditures to decrease to approximately $4 million to $6 million in 2013, and to $1 million to $3 million thereafter.

In 2011, the Company used cash of approximately $30.8 million for its acquisition of Bogs including $3.8 million to repay the debt assumed in the transaction. The Company borrowed a net of $32 million in 2011 under its revolving line of credit to fund the Bogs acquisition and related capital expenditures and inventory purchases. In 2010, the Company used cash of approximately $2.6 million for its acquisition of Umi.

The Company paid cash dividends of $10.9 million, $7.2 million and $7.0 million in 2012, 2011 and 2010, respectively. On December 31, 2012, the Company paid two quarterly cash dividends. The Company accelerated its first and second quarter 2013 dividends, each for $0.17 per share, into 2012 and paid them on December 31st. Both dividends were paid early in anticipation of potential tax law changes effective January 1, 2013. The Company plans to resume its regular quarterly dividend payment schedule in July 2013.

The Company continues to repurchase its common stock under its share repurchase program when the Company believes market conditions are favorable. In 2012, the Company repurchased 285,422 shares for a total cost of $6.6 million. In 2011, the Company repurchased 175,606 shares for a total cost of $4.0 million through its share repurchase program and 400,319 shares for a total cost of $9.0 million in a private transaction. In 2010, the Company repurchased 101,192 shares for a total cost of $2.3 million. At December 31, 2012, the total shares available to purchase under the program was approximately 824,000 shares.

At December 31, 2012, the Company had a $60 million unsecured revolving line of credit with a bank expiring April 30, 2013. The line of credit allows for up to $60 million in borrowings at a rate of LIBOR plus 100 basis points ("LIBOR loans"). At December 31, 2012, outstanding borrowings were $45 million in LIBOR loans at an interest rate of approximately 1.2%. At December 31, 2011, outstanding borrowings were $37 million in LIBOR loans at an interest rate of approximately 1.0%. The Company's line of credit includes a financial covenant that specifies a minimum level of net worth. As of December 31, 2012, the Company was in compliance with the covenant.

In connection with the Bogs acquisition, the Company held back $2.0 million of the purchase price to be used to help satisfy any claims of indemnification. This holdback amount was paid in full to the former shareholders of Bogs in 2012. The Company also has two contingent payments due to the former shareholders of Bogs in 2013 and 2016. For additional information, see Note 11 in the Notes to Consolidated Financial Statements.

The Company will continue to evaluate the best uses for its available liquidity, including, among other uses, 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 in 2013, although there can be no assurances.

Off-Balance Sheet Arrangements

The Company does not utilize any special purpose entities or other off-balance sheet arrangements.

Commitments

The Company's significant contractual obligations are its supplemental pension plan, its operating leases, and the contingent payments that may result from the Bogs acquisition, as described above. These obligations are discussed further in the Notes to Consolidated Financial Statements. The Company also has significant obligations to purchase inventory. The pension obligations and contingent consideration were recorded on the Company's Consolidated Balance Sheets. Future obligations under operating leases are disclosed in Note 14 of the Notes to Consolidated Financial Statements. The table below provides summary information about these obligations as of December 31, 2012.

                                                  Payments Due by Period (dollars in thousands)
                                                Less Than a                                           More Than 5
. . .
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