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FORM 10-Q
SECURITIES & EXCHANGE COMMISSION
Washington, D. C. 20549
(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, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-9068
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WEYCO GROUP, INC.
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(Exact name of registrant as specified in its charter)
WISCONSIN 39-0702200
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
234 East Reservoir Avenue
P. O. Box 1188
Milwaukee, Wisconsin 53201
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(Address of principal executive offices)
(Zip Code)
(414) 263-8800
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(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
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As of October 30, 1998 the following shares were outstanding.
Common Stock, $1.00 par value 955,275 Shares
Class B Common Stock, $1.00 par value 3,531,650 Shares
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. It is
suggested that these 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
ASSETS
September 30 December 31
1998 1997
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CURRENT ASSETS:
Cash and cash equivalents $ 3,691,806 $ 3,323,035
Marketable securities 9,415,254 7,360,953
Accounts receivable, net 24,071,935 17,672,176
Inventories -
Finished shoes 10,898,644 10,713,099
Shoes in process 410,255 347,189
Raw materials and supplies 116,350 101,165
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Total inventories 11,425,249 11,161,453
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Deferred income tax benefits 3,322,000 3,357,000
Prepaid expenses and other current assets -- 37,447
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Total current assets 51,926,244 42,912,064
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MARKETABLE SECURITIES 26,481,785 30,105,090
OTHER ASSETS 7,231,961 6,874,191
PLANT AND EQUIPMENT 17,470,638 8,608,049
Less - Accumulated depreciation (6,531,199) (6,295,279)
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10,939,439 2,312,770
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$ 96,579,429 $ 82,204,115
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LIABILITIES & SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings $ 9,996,900 $ --
Accounts payable 8,011,539 6,275,563
Dividend payable 417,053 381,954
Accrued liabilities 8,138,154 7,006,168
Accrued income taxes 1,411,062 979,024
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Total current liabilities 27,974,708 14,642,709
DEFERRED INCOME TAX LIABILITIES 855,000 884,000
SHAREHOLDERS' INVESTMENT:
Common stock 4,622,925 4,774,925
Other shareholders' investment 63,126,796 61,902,481
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$ 96,579,429 $ 82,204,115
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WEYCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
Three Months ended September 30 Nine Months ended September 30
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1998 1997 1998 1997
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NET SALES $ 32,745,457 $ 35,982,370 $ 98,437,184 $ 99,855,623
COST OF SALES 24,141,995 26,086,296 72,208,432 72,703,204
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Gross earnings 8,603,462 9,896,074 26,228,752 27,152,419
SELLING AND ADMINISTRATIVE EXPENSES 5,282,103 5,791,151 16,630,091 16,872,194
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Earnings from operations 3,321,359 4,104,923 9,598,661 10,280,225
INTEREST INCOME 458,314 288,991 1,384,461 901,331
INTEREST EXPENSE (138,258) -- (216,140) --
OTHER INCOME AND EXPENSE, NET (33,335) 13,220 (82,771) (214,839)
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Earnings before provision for
income taxes 3,608,080 4,407,134 10,684,211 10,966,717
PROVISION FOR INCOME TAXES 1,300,000 1,600,000 3,750,000 4,000,000
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Net earnings $ 2,308,080 $ 2,807,134 $ 6,934,211 $ 6,966,717
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SHARES OUTSTANDING (Note 2)
Basic 4,634,925 4,756,425 4,727,475 4,760,025
Diluted 4,711,166 4,854,859 4,793,027 4,820,518
EARNINGS PER SHARE (Note 2):
Basic $ .50 $ .59 $ 1.47 $ 1.46
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Diluted $ .49 $ .58 $ 1.45 $ 1.45
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CASH DIVIDENDS PER SHARE $ .09 $ .08 $ .25 $ .23
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WEYCO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 3,773,406 $ 8,071,692
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (9,742,756) (18,473,290)
Proceeds from sales of marketable securities 11,322,055 9,890,322
Purchase of plant and equipment (9,118,938) (72,645)
Other -- (185,925)
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Net cash used for investing activities (7,539,639) (8,841,538)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (1,232,506) (1,063,718)
Shares purchased and retired (5,051,812) (304,500)
Proceeds from stock options exercised 422,422 108,750
Short-term borrowings 9,996,900 --
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Net cash provided by (used for)
financing activities 4,135,004 (1,259,468)
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Net increase (decrease) in cash and
cash equivalents 368,771 (2,029,314)
CASH AND CASH EQUIVALENTS at beginning
of period 3,323,035 6,837,765
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CASH AND CASH EQUIVALENTS at end
of period $ 3,691,806 $ 4,808,451
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SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 3,142,163 $ 3,621,982
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Interest paid $ 180,902 $ --
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NOTES:
(1) In the opinion of management, all adjustments (which include only normal
recurring accruals) necessary to present fairly the financial information
have been made. The results of operations for the three months or nine
months ended September 30, 1998, are not necessarily indicative of results
for the full year.
(2) Earnings per share are computed based on the weighted average number of
common and common equivalent shares outstanding. Common equivalent shares
consist of stock options which have a dilutive effect when applying the
treasury stock method. The Company adopted Statement of Accounting
Standards No. 128, "Earnings Per Share," as of December 31, 1997 and has
restated prior period earnings per share as required.
(3) The Company has entered into forward exchange contracts for the purpose of
hedging firmly committed inventory purchases with outside vendors. The
Company accounts for these contracts under the deferral method.
Accordingly, gains and losses are recorded in inventory when the inventory
is purchased.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard requires that entities
recognize derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The Company intends to adopt
this standard in 2000. The adoption of this standard is not expected to
have a material effect on the Company's balance sheet or statement of
earnings.
(4) During the first quarter of 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements, either in the statement of operations or a separate
statement. Additionally, SFAS 130 requires the display of the accumulated
balance of other comprehensive income. The adoption of this standard did
not impact the financial statements of the Company.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Liquidity
The Company's primary source of liquidity is its cash and marketable
securities which aggregated approximately $39,589,000 at September 30,
1998, compared with $40,789,000 at December 31, 1997. The Company maintains
a $7,500,000 bank line of credit and has banker acceptance loan facilities
to provide funds on a short-term basis when necessary. In addition, the
Company entered into a three year $10,000,000 revolving credit agreement
during the first quarter of 1998. The Company did not make any borrowings
under these facilities during the first nine months of 1998.
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In April 1998, the Company's Board of Directors authorized a stock
repurchase program for up to 500,000 shares or approximately 10% of its
common stock in open market transactions at prevailing prices. Through
September 30, the Company had purchased 277,000 shares at a total cost of
$7,382,000 under this program.
Plant and Equipment includes $8,622,000 of construction costs for the
Company's distribution center and related equipment. Management estimates
that the new building will be completed in the fall of 1998 with the
installation of equipment and systems to follow. Operations are expected to
begin in the new facility in the second quarter of 1999. The entire project
is expected to cost $12 million. During the first nine months of 1998, the
Company began issuing commercial paper with 30 to 90 day maturities to
finance the construction project. As of September 30, 1998, $9,997,000 of
commercial paper was outstanding.
The Company believes that available cash and marketable securities, cash
provided from operations and available borrowing facilities will provide
adequate support for the cash needs of the business.
Results of Operations
Total net sales decreased $3,237,000 (9%) for the three months ended
September 30, 1998 compared with the same period in 1997. Net sales in the
wholesale division decreased $2,808,000 (8%) from $34,130,000 in 1997 to
$31,322,000 in 1998. The decrease in sales resulted from a decrease of 9%
in the number of pairs of shoes shipped as compared with 1997, offset
slightly by an increase in the average selling price per pair, attributed
to a change in product mix.
Retail net sales decreased 23% from $1,852,000 in the third quarter of 1997
to $1,423,000 in the third quarter of 1998. The decrease resulted primarily
from the closing of 4 retail units during 1997 and 2 during 1998. Same
store net sales decreased 3% from 1997 to 1998 due to decreased volume.
For the nine months ended September 30, 1998, net sales were down 1%
compared with the same period in 1997. Wholesale sales were flat compared
to 1997 ($93,333,000 in 1998 and $93,495,000 in 1997.) Retail net sales
decreased $1,257,000 (20%) from $6,361,000 in 1997 to $5,104,000 in 1998,
as a result of the closing of 4 retail units during 1997 and 2 during 1998.
Same store net sales were down 5% compared with the same period in 1997 due
to decreased volume.
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Gross earnings as a percent of net sales decreased from 27.5% in the third
quarter of 1997 to 26.3% in the third quarter of 1998. The decrease is primarily
attributable to foreign currency losses incurred in 1998 due to the weak
Canadian dollar as well as increased labor costs at our manufacturing plant due
to the tight labor market. These factors also contributed to the decrease in
gross earnings as a percent of net sales from 27.2% for the nine months ended
September 30, 1997 to 26.7% for the same period in 1998. The reduction in the
proportion of retail sales to wholesale sales also contributes to the decline in
year-to-date gross earnings as a percent of net sales, as retail sales result in
higher margins than do wholesale sales.
Wholesale gross earnings as a percent of wholesale net sales decreased from
26.4% in the third quarter of 1997 to 25.2% in the third quarter of 1998, and
from 25.7% for the nine months ended September 30, 1997 to 25.4% for the nine
months ended September 30, 1998. These decreases are primarily attributable to
the Canadian foreign currency losses and increased manufacturing labor costs
noted above. Retail gross earnings as a percent of retail sales increased from
48.7% for the third quarter of 1997 to 50.7% for the third quarter 1998, and
from 49.7% for the nine months ended September 30, 1997 to 50.0% or the same
period of 1998. These differences are immaterial in relationship to overall
operations.
Overall selling and administrative expenses as a percent of net sales was
consistent at 16.1% for the third quarter of 1997 and 1998 and 16.9% for the
nine months ended September 30, 1997 and 1998. There were no significant
differences in wholesale or retail selling and administrative expenses as a
percent of the corresponding net sales for the third quarter 1997 compared with
1998 or for the nine months ended September 30, 1998 vs. 1997.
Interest income consists principally of interest income from fixed rate short
term municipal securities. Interest expense is primarily interest incurred on
short term borrowings.
Other
In response to the "Year 2000 Problem" relating to the inability of certain
computer software programs to process 2-digit year-date codes after December 31,
1999, management has conducted a comprehensive review of its systems and has
developed a plan to modify or replace programs as considered necessary.
Management currently anticipates that critical systems will be completed by the
end of the first quarter of 1999. The total costs of correcting the Year 2000
Problem are estimated to be $800,000.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
None
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.
November 12, 1998 /s/John Wittkowske
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Date John Wittkowske
Vice President-Finance
Chief Financial Officer
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