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WEYS > SEC Filings for WEYS > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for WEYCO GROUP INC


9-May-2013

Quarterly Report


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. 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, 2012.

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 March 31, 2013, 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 Mexico and certain markets overseas. Licensing revenues are included in the Company's wholesale segment. The Company's retail segment consisted of 21Company-owned retail stores in the United States and an Internet business as of March 31, 2013. 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 2013 were $73.6 million, down 2% compared to last year's first quarter net sales of $75.3 million. North American wholesale net sales were down 2% for the quarter. Retail net sales increased 2% this quarter compared to the same period last year. Net sales of the Company's other businesses decreased 3%.

Consolidated earnings from operations were $4.7 million this quarter compared with $5.8 million for the first quarter of 2012. Gross earnings as a percent of net sales were 37.6% for the first quarter of 2013 and 37.2% for the first quarter of 2012. Selling and administrative expenses were 31% of net sales for the first quarter of 2013 as compared with 29% in 2012. In 2012, selling and administrative expenses were reduced by a $518,000 adjustment to reduce the estimated liability for future payments to be made as a result of the 2011 Bogs acquisition. No significant adjustment to the estimated liability was made in 2013.

The Company's net earnings attributable to Weyco Group, Inc. in the first quarter 2013 were $3.2 million compared with $3.9 million in the same quarter last year. Diluted earnings per share for the three months ended March 31, 2013 were $0.30 per share compared with $0.35 per share in last year's first quarter.

Financial Position Highlights

At March 31, 2013, cash and marketable securities totaled $55 million and total outstanding debt was $38 million. At December 31, 2012, cash and marketable securities totaled $62 million and total outstanding debt was $45 million.

SEGMENT ANALYSIS



Net sales and earnings from operations for the Company's segments in the three
months ended March 31, 2013 and 2012 were as follows:



                              Three Months Ended March 31,            %
                                2013                 2012           Change
                                 (Dollars in thousands)
Net Sales
North American Wholesale   $       55,243       $       56,627           -2 %
North American Retail               5,748                5,660            2 %
Other                              12,599               13,027           -3 %
Total                      $       73,590       $       75,314           -2 %

Earnings from Operations
North American Wholesale   $        3,732       $        4,470          -17 %
North American Retail                 442                   (5 )          *
Other                                 514                1,368          -62 %
Total                      $        4,688       $        5,833          -20 %

* - Not meaningful.

North American Wholesale Segment

Net Sales

Net sales in the Company's North American wholesale segment for the three months ended March 31, 2013 and 2012 were as follows:

North American Wholesale Segment Net Sales

                                                Three Months Ended March 31,            %
                                                  2013                 2012           Change
                                                   (Dollars in thousands)
North American Net Sales
Stacy Adams                                  $       18,716       $       18,429            2 %
Nunn Bush                                            16,135               18,135          -11 %
Florsheim                                            12,487               12,066            3 %
BOGS/Rafters                                          6,303                5,834            8 %
Umi                                                   1,008                1,438          -30 %
Total North American Wholesale               $       54,649       $       55,902           -2 %
Licensing                                               594                  725          -18 %
Total North American Wholesale Segment       $       55,243       $       56,627           -2 %

The increases in Stacy Adams and Florsheim first quarter net sales were driven by higher sales volumes with national shoe chains. Nunn Bush net sales decreased due to soft sales to department stores in the first quarter 2013. The Company took over the distribution of Bogs in Canada from a third party licensee effective June 1, 2012. As a result, Bogs net sales increased due to sales in Canada in the first quarter of 2013. This increase was partially offset by decreased sales of Bogs in the United States in the first quarter 2013. Management believes that Bogs net sales in the United States decreased because retailers continued to sell inventory carried over from the prior mild winter rather than buying new stock.

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

Earnings from operations in the North American wholesale segment were $3.7 million in the first quarter of 2013, compared to $4.5 million in 2012. The majority of the decrease in earnings from operations resulted from the impact of the first quarter 2012 adjustment to reduce the estimated liability for future payments related to the 2011 Bogs acquisition. The adjustment reduced first quarter 2012 selling and administrative expenses by $518,000. The first payment was made to the former owners of Bogs in the first quarter of 2013; no significant adjustment to the estimated liability was made in the first quarter of 2013.

Gross earnings were $17.1 million, or 31.0% of net sales in the first quarter of 2013 compared with $17.3 million, or 30.5% in last year's first quarter.

The Company's cost of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs). Distribution costs for the three-month periods ended March 31, 2013 and 2012 were $2.9 million and $2.5 million, 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 24.5% in the first quarter of 2013 and 23% in the same period last year.

North American Retail Segment

Net Sales

Net sales in the Company's North American retail segment were up 2% in the first quarter of 2013, compared to the same period last year. There were six fewer domestic stores at March 31, 2013 than at March 31, 2012. Same store sales were up 10% for the quarter, with the majority of the increase in the Company's Internet business. The improvement in same store performance more than offset the sales volume losses from the closed locations.

Earnings from Operations

The North American retail segment had earnings from operations of $442,000 in the first quarter of 2013, compared to a loss of ($5,000) in the first quarter of 2012. This improvement was due to higher same store sales as well as the closing of underperforming stores since March 31, 2012. Gross earnings were 65% of net sales in both the the first quarter of 2013 and 2012.

Selling and administrative expenses were 57% of net sales in the first quarter of 2013 compared with 65% of net sales in 2012. Selling and administrative expenses for the retail segment include, and are primarily related to, rent and occupancy costs, employee costs and depreciation. The decrease in selling and administrative expenses relative to net sales was mainly due to the closing of unprofitable stores since last year.

Other

The Company's other net sales decreased 3% for the quarter. The majority of the Company's other net sales are generated by Florsheim Australia. For the quarter ended March 31, 2013, Florsheim Australia's net sales decreased 2% compared to the same period last year. This was the result of an increase in Florsheim Australia's retail net sales of 9%, which was more than offset by a 13% decrease in Florsheim Australia's wholesale net sales. The increase in retail sales was due to opening a few new locations in Australia and Asia in 2013 compared to 2012, and an increase in same store sales of 8%. The decrease in wholesale sales was mainly due to lower wholesale sales in Australia and Asia.

Collectively, the operating earnings of the Company's other businesses decreased $854,000 in the first quarter of 2013 compared to 2012. The decrease in operating earnings was mainly due to lower wholesale sales volumes and higher retail selling and administrative expenses. Retail selling and administrative expenses increased due to the additional retail locations in Australia and Asia.

Other income and expense and taxes

Interest income for the first quarter of 2013 was down approximately $71,000 compared to the first quarter of 2012, primarily due to a lower average investment balance this year compared to last year. Interest expense was $127,000 in the first quarter of 2013 compared to $129,000 in 2012.

The Company's effective tax rate for the quarter ended March 31, 2013 was 36.0% as compared with 35.1% for the same period of 2012.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of liquidity is its cash, short-term marketable securities and its revolving line of credit. During the first three months of 2013, the Company generated $3.7 million of cash from operating activities, had $2.8 million in proceeds from maturities of its marketable securities, and had $2.5 million in proceeds from stock option exercises.

The Company paid no cash dividends in 2013 and $1.7 million during the three months ended March 31, 2012. The Company's first and second quarter 2013 dividends were accelerated into 2012, and were paid December 31, 2012. 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. During the first quarter of 2013, the Company repurchased 172,885 shares at a total cost of $4.1 million. As of March 31, 2013, the Company had 650,640 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 $564,000 in the first three months of 2013. On May 1, 2013, the Company purchased a 50% interest in a building Montreal, Canada for $3.4 million. The Company previously leased this facility, which is used as its Canadian office and distribution center. Management estimates that annual capital expenditures for 2013 are expected to be between $5 million and $6 million.

At March 31, 2013, the Company had a $60 million unsecured revolving line of credit. The Company repaid $7 million net on its line of credit during the first quarter 2013. At the end of the first quarter, the Company had $38 million outstanding under the facility at an interest rate of approximately 1.2%. The Company's borrowing facility includes one financial covenant that specifies a minimum level of net worth. The Company was in compliance with the covenant at March 31, 2013. The line of credit agreement expired on April 30, 2013 and was renewed for another term that expires April 30, 2014 at essentially the same terms as the prior agreement.

In conjunction with the Bogs acquisition, the Company paid contingent consideration of $1,270,000 in March 2013 and a second payment is due in March 2016. See Note 9.

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 for at least one year, although there can be no assurances.

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