Weyco (WEYS) - 2018 Q4 - Annual Report

Cautionary Statements for Forward-Looking Information The report contains forward-looking statements regarding Weyco Group, Inc.'s future outlook, which are subject to risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements regarding Weyco Group, Inc.'s future outlook, which are subject to risks and uncertainties that could cause actual results to differ materially. These statements are identified by words like 'anticipates,' 'believes,' 'estimates,' 'expects,' and similar expressions[13] - Readers are cautioned that these forward-looking statements are inherently uncertain and actual results may differ due to various factors, including those detailed under Item 1A, 'Risk Factors'[13] PART I Item 1. Business Weyco Group, Inc. designs and distributes footwear under various brands, operating through North American wholesale and retail segments, and overseas operations, with full ownership of Florsheim Australia acquired in 2018 - Weyco Group, Inc. specializes in the design and distribution of footwear for men, women, and children, utilizing a portfolio of recognized brand names including Florsheim, Nunn Bush, Stacy Adams, BOGS, and Rafters[15] - The company's business is structured into two reportable segments: North American wholesale and North American retail, also conducting wholesale and retail operations overseas, collectively referred to as 'Florsheim Australia' and 'Florsheim Europe'[17] - On August 30, 2018, Weyco Group, Inc. acquired the remaining 45% interest in Florsheim Australia for $3.7 million, increasing its ownership to 100%[18] Segment Contribution to Total Net Sales (2017-2018) | Segment | 2018 (% of Total Net Sales) | 2017 (% of Total Net Sales) | | :------------------------ | :-------------------------- | :-------------------------- | | North American Wholesale | 78% | 77% | | North American Retail | 8% | 7% | | Other Businesses (Overseas) | 14% | 16% | - The company sources finished shoes from outside suppliers, primarily located in China and India, with most purchases denominated in U.S. dollars, and costs remained relatively stable in 2018[16] - As of December 31, 2018, the company employed 626 persons worldwide, with 436 being full-time employees[22] Item 1A. Risk Factors The company faces diverse risks including economic downturns, intense competition, foreign sourcing challenges, data security threats, and financial impacts from investments and pension liabilities - Decreases in disposable income and general market volatility in the U.S. and global economy may adversely affect the Company's sales volume and overall performance, particularly in the moderate-priced footwear market[27] - Volatility and uncertainty in U.S. and global credit markets could negatively impact retailer and consumer confidence, limit customer access to credit, and increase bad debt expense due to potential customer cash flow problems or bankruptcies[28][29] - The Company relies on independent foreign manufacturers (primarily in China and India) for all its products, exposing it to risks such as increased manufacturing costs, supply disruptions, long production lead times, and potential impacts from trade protection measures or tariffs[33][34][35][37] - Operating in a highly competitive footwear market, the Company faces risks of lower prices and reduced profits if it cannot maintain its competitive edge based on price, quality, service, and brand recognition[40] - The Company is dependent on information and communication systems for business support and internet sales, making it vulnerable to significant interruptions, data loss, and security breaches, which could disrupt operations and harm its reputation[41][42] - Loss of services from top executives, particularly Thomas W. Florsheim, Jr. (Chairman and CEO) and John W. Florsheim (President, COO), could adversely impact the Company's performance due to their extensive knowledge and relationships within the industry[45] - The Company's investment portfolio, primarily in municipal bonds, and its defined benefit pension plan are subject to market deterioration and changes in actuarial assumptions, which could materially affect financial condition, results of operations, and cash flow[47][48] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[50] Item 2. Properties As of December 31, 2018, the company operated various owned and leased global facilities, including a large owned office and distribution center in Glendale, Wisconsin, all deemed suitable for current operations Company Facilities as of December 31, 2018 | Location | Character | Owned/Leased | Square Footage (sq ft) | % Utilized | | :------------------------ | :------------------------------ | :----------- | :--------------------- | :--------- | | Glendale, Wisconsin | Two story office and distribution center | Owned | 1,100,000 | 90% | | Portland, Oregon | Two story office | Leased | 6,300 | 100% | | Montreal, Canada | Multistory office and distribution center | Owned | 75,800 | 100% | | Florence, Italy | Two story office and distribution center | Leased | 15,100 | 100% | | Fairfield Victoria, Australia | Office and distribution center | Leased | 54,400 | 100% | | Honeydew Park, South Africa | Distribution center | Leased | 8,600 | 85% | | Hong Kong, China | Office and distribution center | Leased | 14,000 | 100% | | Dongguan City, China | Office | Leased | 4,400 | 100% | - The Company also operates retail shoe stores under various rental agreements, in addition to the listed offices and distribution facilities, with all facilities considered suitable and adequate for current operations[53] Item 3. Legal Proceedings The company reported no legal proceedings - There are no legal proceedings[54] Item 4. Mine Safety Disclosures The company stated that mine safety disclosures are not applicable - Mine safety disclosures are not applicable[54] Executive Officers of the Registrant As of December 31, 2018, the executive leadership team included key officers such as Thomas W. Florsheim, Jr. (Chairman and CEO), John W. Florsheim (President, COO), and John F. Wittkowske (SVP, CFO) Executive Officers as of December 31, 2018 | Name | Position | Age (Years) | | :-------------------- | :------------------------------------------- | :---------- | | Thomas W. Florsheim, Jr. | Chairman and Chief Executive Officer | 60 | | John W. Florsheim | President, Chief Operating Officer and Assistant Secretary | 55 | | John F. Wittkowske | Senior Vice President, Chief Financial Officer and Secretary | 59 | | Judy Anderson | Vice President, Finance and Treasurer | 51 | | Mike Bernsteen | Vice President, and President of Nunn Bush Brand | 62 | | Dustin Combs | Vice President, and President of BOGS and Rafters Brands | 36 | | Brian Flannery | Vice President, and President of Stacy Adams Brand | 57 | | Kevin Schiff | Vice President, and President of Florsheim Brand | 50 | | George Sotiros | Vice President, Information Technology and Distribution | 52 | | Allison Woss | Vice President, Supply Chain | 46 | - Thomas W. Florsheim, Jr. and John W. Florsheim are brothers, and their father, Thomas W. Florsheim, is the Chairman Emeritus; John F. Wittkowske and George Sotiros are brothers-in-law[55] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Weyco Group, Inc.'s common stock is traded on the Nasdaq Stock Market under the symbol 'WEYS.' As of March 1, 2019, there were 114 holders of record. The company has an ongoing stock repurchase program, with 1.0 million shares authorized for repurchase on October 31, 2017, as part of a total authorization of 7.5 million shares since the program's inception in 1998 - The Company's common stock is traded on the Nasdaq Stock Market under the symbol 'WEYS,' with 114 holders of record as of March 1, 2019[64] - The Company has a stock repurchase program established in 1998, with 7.5 million shares authorized for repurchase in total, including 1.0 million shares authorized on October 31, 2017[65] Common Stock Repurchases (Q4 2018) | Period | Total Number of Shares Purchased | Average Price Paid Per Share ($) | Total Number of Shares Purchased as Part of the Publicly Announced Program | Maximum Number of Shares that May Yet Be Purchased Under the Program | | :---------------------- | :------------------------------- | :------------------------------- | :----------------------------------------------------------------------- | :-------------------------------------------------------------------- | | 10/01/2018 - 10/31/2018 | 66,569 | $31.32 | 66,569 | 750,567 | | 11/01/2018 - 11/30/2018 | 46,443 | $33.24 | 46,443 | 704,124 | | 12/01/2018 - 12/31/2018 | 39,114 | $30.60 | 39,114 | 665,010 | | Total | 152,126 | $31.72 | 152,126 | | Item 6. Selected Financial Data The company stated that selected financial data is not applicable for this item - Selected financial data is not applicable[67] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Weyco Group, Inc.'s financial performance and position for the two-year period ended December 31, 2018. It highlights a 5% increase in consolidated net sales to $298.4 million in 2018, driven by strong performance in North American wholesale and retail segments, partially offset by declines in international operations. Net earnings attributable to Weyco Group, Inc. rose 24% to $20.5 million, significantly boosted by the lower U.S. federal tax rate from the TCJA. The company maintained a solid financial position with $43.2 million in cash and marketable securities, while actively managing liquidity through share repurchases and dividends - Consolidated net sales increased by 5% to $298.4 million in 2018 from $283.7 million in 2017, primarily due to higher sales in the North American wholesale and retail segments[70] - Net earnings attributable to Weyco Group, Inc. rose 24% to $20.5 million in 2018 from $16.5 million in 2017, with diluted earnings per share increasing to $1.97 from $1.60[73] - The Tax Cuts and Jobs Act (TCJA) significantly impacted earnings, reducing the 2018 income tax provision by $3.2 million (+$0.31 diluted EPS) and the 2017 provision by $1.5 million (+$0.15 diluted EPS) due to the lower U.S. federal tax rate[72][73] - As of December 31, 2018, cash and marketable securities totaled $43.2 million; the company generated $13.1 million in cash from operations in 2018, used $11.4 million for share repurchases, and paid $9.3 million in dividends[74] General This section outlines Weyco Group, Inc.'s business model, brand portfolio, operational segments, and sensitivity to U.S. economic conditions - Weyco Group, Inc. designs and markets footwear under brands like Florsheim, Nunn Bush, Stacy Adams, BOGS, and Rafters, with inventory sourced from third-party overseas manufacturers, primarily in U.S. dollars[68] - The company's operations are mainly in the United States, making its results primarily sensitive to U.S. economic conditions and the retail environment[68] - The North American wholesale segment sells products to footwear, department, and specialty stores in the U.S. and Canada, including licensing revenues, while the North American retail segment consists of nine brick-and-mortar stores and internet businesses in the U.S[68] - The 'other' operations encompass wholesale and retail businesses in Australia, South Africa, Asia Pacific ('Florsheim Australia'), and Europe ('Florsheim Europe'); the company acquired the remaining 45% minority interest in Florsheim Australia on August 30, 2018, for $3.7 million, now owning 100%[68] Executive Overview The executive overview highlights the company's consolidated sales and earnings growth in 2018, driven by strong North American segments and favorable tax impacts Consolidated Sales and Earnings Highlights (2017-2018) | Metric | 2018 ($ in millions) | 2017 ($ in millions) | % Change | | :-------------------------------------- | :------------------- | :------------------- | :------- | | Consolidated Net Sales | $298.4 | $283.7 | 5% | | Consolidated Earnings from Operations | $25.5 | $23.4 | 9% | | Net Earnings Attributable to Weyco Group, Inc. | $20.5 | $16.5 | 24% | | Diluted Earnings Per Share | $1.97 | $1.60 | 23.1% | - Wholesale segment net sales increased by $16.1 million (7%) due to higher sales of Florsheim and BOGS brands, while retail segment net sales rose 9% driven by website sales, partially offset by a 7% decline in 'other' net sales[70] - Wholesale earnings from operations increased by $2.9 million (14%) due to higher sales and gross margins, while retail earnings from operations rose by $1.4 million due to higher website sales, and 'other' businesses' earnings declined by $2.2 million[71] - The Tax Cuts and Jobs Act (TCJA) reduced the 2018 income tax provision by $3.2 million (+$0.31 diluted EPS) and the 2017 provision by $1.5 million (+$0.15 diluted EPS) due to the lower U.S. federal tax rate[72][73] Financial Position Highlights (2018) | Metric | 2018 ($ in millions) | | :----------------------------------- | :------------------- | | Cash and Marketable Securities | $43.2 | | Outstanding on Revolving Line of Credit | $5.8 | | Cash Generated from Operations | $13.1 | | Proceeds from Stock Option Exercises | $4.4 | | Net Maturities from Marketable Securities | $3.4 | | Common Stock Repurchases | $11.4 | | Dividends Paid | $9.3 | | Acquisition of Florsheim Australia Minority Interest | $3.7 | | Capital Expenditures | $1.4 | Segment Analysis This section details the performance of North American wholesale, North American retail, and other international segments, highlighting sales and earnings trends Net Sales and Earnings from Operations by Segment (2017-2018) | Segment | 2018 Net Sales ($ in thousands) | 2017 Net Sales ($ in thousands) | % Change (Net Sales) | 2018 Earnings (Loss) from Operations ($ in thousands) | 2017 Earnings (Loss) from Operations ($ in thousands) | % Change (Earnings) | | :---------------------- | :------------------------------ | :------------------------------ | :------------------- | :---------------------------------------------------- | :---------------------------------------------------- | :------------------ | | North American Wholesale | $233,362 | $217,276 | 7% | $23,106 | $20,224 | 14% | | North American Retail | $22,683 | $20,860 | 9% | $2,732 | $1,374 | 99% | | Other | $42,330 | $45,613 | -7% | ($379) | $1,814 | -121% | | Total | $298,375 | $283,749 | 5% | $25,459 | $23,412 | 9% | - North American Wholesale net sales increased 7%, driven by Florsheim (+20%) and BOGS/Rafters (+10%) brands, while Nunn Bush sales decreased 3% due to lower sales to national shoe chains and department stores, partly from customer bankruptcies, and Stacy Adams sales were up 5%[76] - Wholesale gross earnings as a percent of net sales improved to 35.6% in 2018 from 33.6% in 2017, while selling and administrative expenses increased 14% to $59.9 million, primarily due to higher advertising and employee benefit costs[78][79] - North American Retail net sales increased 9% to $22.7 million, with same-store sales (including U.S. internet sales) up 13% due to higher website sales, and retail gross earnings as a percent of net sales improved to 65.5% in 2018 from 64.0% in 2017[81][82] - Other businesses' net sales decreased 7% to $42.3 million, mainly due to a 10% decline at Florsheim Australia, impacted by a challenging retail environment and a weaker Australian dollar, resulting in an operating loss of $379,000 in 2018[83] - An impairment charge of $246,000 was recorded in 2018 for certain retail fixed assets of underperforming stores at Florsheim Australia[84] Other Income and Expense and Taxes This section analyzes changes in interest income, interest expense, other net expenses, and the significant impact of the TCJA on the effective tax rate Other Income and Expense and Tax Summary (2017-2018) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | % Change | | :------------------------ | :-------------------- | :-------------------- | :------- | | Interest Income | $981 | $773 | 26.9% | | Interest Expense | $45 | $15 | 200% | | Other Expense, Net | $638 | $248 | 157.3% | | Effective Tax Rate | 22.5% | 30.2% | -7.7 pp | - The increase in interest income was primarily due to additional interest earned on higher cash balances, while the rise in other expense was mainly due to foreign exchange losses from the revaluation of intercompany loans[85][86] - The effective tax rate decreased significantly in 2018 to 22.5% from 30.2% in 2017, primarily due to the Tax Cuts and Jobs Act (TCJA) lowering the U.S. federal tax rate from 35% to 21%, which reduced the 2018 income tax provision by $3.2 million and the 2017 provision by $1.5 million[87] Liquidity & Capital Resources This section reviews the company's cash position, operational cash flow, capital expenditures, and credit facilities, affirming adequate liquidity for future operations Liquidity and Capital Resources Summary (2017-2018) | Metric | 2018 ($ in millions) | 2017 ($ in millions) | | :----------------------------------- | :------------------- | :------------------- | | Cash and Short-Term Marketable Securities | $24.5 | $29.4 | | Cash from Operations | $13.1 | $33.5 | | Capital Expenditures | $1.4 | $1.6 | | Cash Dividends Paid | $9.3 | $9.1 | | Common Stock Repurchased | $11.4 | $15.2 | | Outstanding on Revolving Line of Credit | $5.8 | $0 | - The decrease in cash from operations in 2018 was mainly due to an increase in year-end inventory balances in the North American wholesale segment to meet expected higher sales demand[88] - The Company expects capital expenditures to be between $3.0 million and $4.0 million in 2019, including an expansion of its corporate headquarters office space[89] - As of December 31, 2018, the Company had a $60 million unsecured revolving line of credit, with $5.8 million outstanding at an interest rate of 3.25%[91] - The Company believes its available cash, marketable securities, cash from operations, and borrowing facilities will provide adequate liquidity for at least the next 12 months[93] - The Company does not utilize any special purpose entities or other off-balance sheet arrangements[94] Critical Accounting Policies This section outlines key accounting policies requiring significant management estimates, including sales returns, pension plan accounting, and goodwill and trademark impairment assessments - Key accounting policies requiring significant management estimates and assumptions include Sales Returns, Sales Allowances and Doubtful Accounts, Pension Plan Accounting, and Goodwill and Trademarks[95] - Reserves for sales returns, allowances, and doubtful accounts are based on specific customer situations, historical experience, and economic conditions, with changes in these estimates potentially impacting financial results[96] - Pension plan accounting relies on actuarial assumptions, with the discount rate and expected rate of return on plan assets being most critical; a 0.5% decrease in the discount rate would increase the projected benefit obligation by approximately $3.8 million, while a 0.5% decrease in the expected return on plan assets would increase annual net periodic pension cost by about $180,000[97][98][99] - Goodwill ($11.1 million from BOGS and Rafters acquisition) and trademarks are reviewed annually for impairment; in 2018, a $110,000 impairment charge was recorded to write off the Umi trademark as operations wind down, and no goodwill impairment has ever been recorded[101][103] Recent Accounting Pronouncements This section details the adoption and expected impact of recent accounting standards, including ASU 2014-09, ASU 2018-02, ASU 2016-02, and ASU 2018-14 - The Company adopted ASU 2014-09 (Revenue from Contracts with Customers) on January 1, 2018, using the modified retrospective method, which did not have a material impact on financial position or results of operations[162] - ASU 2018-02 (Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income) was adopted on January 1, 2018, resulting in a reclassification of approximately $2.4 million from Accumulated Other Comprehensive Loss (AOCL) to retained earnings[163] - The Company plans to adopt ASU 2016-02 (Leases) on January 1, 2019, and expects to recognize a right-of-use asset and lease liability, each valued between $25 million and $30 million, with no material impact on earnings or cash flows anticipated[164] - ASU 2018-14 (Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans) is effective for fiscal years ending after December 15, 2020, and is not expected to materially impact earnings or cash flows[165] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company stated that quantitative and qualitative disclosures about market risk are not applicable for this item - Quantitative and qualitative disclosures about market risk are not applicable[106] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements of Weyco Group, Inc. for the years ended December 31, 2018 and 2017, including the Statements of Earnings, Comprehensive Income, Balance Sheets, Statements of Equity, and Cash Flows. It also includes Management's Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm, both affirming the effectiveness of internal controls and fair presentation of financial statements. Extensive notes to the consolidated financial statements provide detailed information on accounting policies, segment performance, liquidity, and other financial disclosures - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2018, based on criteria from COSO's Internal Control – Integrated Framework (2013)[108] - The Independent Registered Public Accounting Firm, Baker Tilly Virchow Krause, LLP, issued an unqualified opinion on the consolidated financial statements for 2018 and 2017, and on the effectiveness of internal control over financial reporting as of December 31, 2018[113][114] Consolidated Statements of Earnings (2017-2018) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | | :-------------------------------------- | :-------------------- | :-------------------- | | Net sales | $298,375 | $283,749 | | Cost of sales | $178,295 | $173,056 | | Gross earnings | $120,080 | $110,693 | | Selling and administrative expenses | $94,621 | $87,281 | | Earnings from operations | $25,459 | $23,412 | | Interest income | $981 | $773 | | Interest expense | ($45) | ($15) | | Other expense, net | ($638) | ($248) | | Earnings before provision for income taxes | $25,757 | $23,922 | | Provision for income taxes | $5,798 | $7,223 | | Net earnings | $19,959 | $16,699 | | Net (loss) earnings attributable to noncontrolling interest | ($525) | $208 | | Net earnings attributable to Weyco Group, Inc. | $20,484 | $16,491 | | Basic earnings per share | $2.01 | $1.61 | | Diluted earnings per share | $1.97 | $1.60 | Consolidated Balance Sheets (2017-2018) | Asset/Liability/Equity Category | 2018 ($ in thousands) | 2017 ($ in thousands) | | :-------------------------------------- | :-------------------- | :-------------------- | | ASSETS: | | | | Cash and cash equivalents | $22,973 | $23,453 | | Marketable securities, at amortized cost (current) | $1,525 | $5,970 | | Accounts receivable, net | $51,533 | $49,451 | | Inventories | $72,684 | $60,270 | | Total current assets | $154,095 | $145,583 | | Marketable securities, at amortized cost (non-current) | $18,702 | $17,669 | | Property, plant and equipment, net | $28,707 | $31,643 | | Goodwill | $11,112 | $11,112 | | Trademarks | $32,868 | $32,978 | | Total assets | $270,044 | $262,832 | | LIABILITIES AND EQUITY: | | | | Short-term borrowings | $5,840 | $0 | | Accounts payable | $12,764 | $8,905 | | Total current liabilities | $36,130 | $25,164 | | Long-term pension liability | $23,112 | $27,766 | | Total liabilities | $64,461 | $57,173 | | Total Weyco Group, Inc. equity | $205,583 | $198,537 | | Noncontrolling interest | $0 | $7,122 | | Total equity | $205,583 | $205,659 | | Total liabilities and equity | $270,044 | $262,832 | Consolidated Statements of Cash Flows (2017-2018) | Cash Flow Activity | 2018 ($ in thousands) | 2017 ($ in thousands) | | :-------------------------------------- | :-------------------- | :-------------------- | | Net cash provided by operating activities | $13,052 | $33,517 | | Net cash provided by investing activities | $1,824 | $235 | | Net cash used for financing activities | ($14,911) | ($24,409) | | Net (decrease) increase in cash and cash equivalents | ($480) | $9,743 | | Cash and cash equivalents at end of year | $22,973 | $23,453 | Management's Report on Internal Control Over Financial Reporting Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on COSO criteria - Management, including the CEO and CFO, assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2018, based on COSO criteria, and concluded it was effective[108] - The internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of financial statements, acknowledging inherent limitations[109] Report of Independent Registered Public Accounting Firm Baker Tilly Virchow Krause, LLP issued unqualified opinions on the consolidated financial statements and the effectiveness of internal control over financial reporting - Baker Tilly Virchow Krause, LLP provided an unqualified opinion on the consolidated financial statements for 2018 and 2017, affirming fair presentation in accordance with GAAP[113][114] - The firm also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2018, based on COSO criteria[113][114] - The audit was conducted in accordance with PCAOB standards, aiming to obtain reasonable assurance about the absence of material misstatement in financial statements and the maintenance of effective internal control[116][117] Consolidated Statements of Earnings This section presents the company's consolidated statements of earnings for 2017 and 2018, detailing net sales, gross earnings, operating expenses, and net earnings Consolidated Statements of Earnings (2017-2018) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | | :-------------------------------------- | :-------------------- | :-------------------- | | Net sales | $298,375 | $283,749 | | Cost of sales | $178,295 | $173,056 | | Gross earnings | $120,080 | $110,693 | | Selling and administrative expenses | $94,621 | $87,281 | | Earnings from operations | $25,459 | $23,412 | | Interest income | $981 | $773 | | Interest expense | ($45) | ($15) | | Other expense, net | ($638) | ($248) | | Earnings before provision for income taxes | $25,757 | $23,922 | | Provision for income taxes | $5,798 | $7,223 | | Net earnings | $19,959 | $16,699 | | Net (loss) earnings attributable to noncontrolling interest | ($525) | $208 | | Net earnings attributable to Weyco Group, Inc. | $20,484 | $16,491 | | Basic earnings per share | $2.01 | $1.61 | | Diluted earnings per share | $1.97 | $1.60 | Consolidated Statements of Comprehensive Income This section provides the consolidated statements of comprehensive income, including net earnings and other comprehensive loss components for 2017 and 2018 Consolidated Statements of Comprehensive Income (2017-2018) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | | :-------------------------------------- | :-------------------- | :-------------------- | | Net earnings | $19,959 | $16,699 | | Other comprehensive loss, net of tax: | | | | Foreign currency translation adjustments | ($2,076) | $1,729 | | Pension liability adjustments | $1,363 | ($2,593) | | Other comprehensive loss | ($713) | ($864) | | Comprehensive income | $19,246 | $15,835 | | Comprehensive (loss) income attributable to noncontrolling interest | ($997) | $634 | | Comprehensive income attributable to Weyco Group, Inc. | $20,243 | $15,201 | Consolidated Balance Sheets This section presents the consolidated balance sheets as of December 31, 2018 and 2017, detailing assets, liabilities, and equity Consolidated Balance Sheets (2017-2018) | Asset/Liability/Equity Category | 2018 ($ in thousands) | 2017 ($ in thousands) | | :-------------------------------------- | :-------------------- | :-------------------- | | ASSETS: | | | | Cash and cash equivalents | $22,973 | $23,453 | | Marketable securities, at amortized cost (current) | $1,525 | $5,970 | | Accounts receivable, net | $51,533 | $49,451 | | Inventories | $72,684 | $60,270 | | Total current assets | $154,095 | $145,583 | | Marketable securities, at amortized cost (non-current) | $18,702 | $17,669 | | Property, plant and equipment, net | $28,707 | $31,643 | | Goodwill | $11,112 | $11,112 | | Trademarks | $32,868 | $32,978 | | Total assets | $270,044 | $262,832 | | LIABILITIES AND EQUITY: | | | | Short-term borrowings | $5,840 | $0 | | Accounts payable | $12,764 | $8,905 | | Total current liabilities | $36,130 | $25,164 | | Deferred income tax liabilities | $3,724 | $2,069 | | Long-term pension liability | $23,112 | $27,766 | | Total liabilities | $64,461 | $57,173 | | Total Weyco Group, Inc. equity | $205,583 | $198,537 | | Noncontrolling interest | $0 | $7,122 | | Total equity | $205,583 | $205,659 | | Total liabilities and equity | $270,044 | $262,832 | Consolidated Statements of Equity This section outlines changes in the company's equity components for 2017 and 2018, including common stock, reinvested earnings, and comprehensive loss Consolidated Statements of Equity (2017-2018) | Equity Component | Balance, Dec 31, 2016 ($ in thousands) | Balance, Dec 31, 2017 ($ in thousands) | Balance, Dec 31, 2018 ($ in thousands) | | :-------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Common Stock | $10,505 | $10,162 | $10,057 | | Capital in Excess of Par Value | $50,184 | $55,884 | $64,263 | | Reinvested Earnings | $157,468 | $150,350 | $152,835 | | Accumulated Other Comprehensive Loss | ($16,569) | ($17,859) | ($21,572) | | Noncontrolling Interest | $6,692 | $7,122 | $0 | | Total Weyco Group, Inc. Equity | $201,588 | $198,537 | $205,583 | - Key changes in equity during 2018 include net earnings of $20.484 million, cash dividends declared of $9.297 million, and $11.063 million used for shares purchased and retired, with the acquisition of noncontrolling interest for $6.037 million eliminating the noncontrolling interest balance[127] - A reclassification of stranded tax effects from the adoption of ASU 2018-02 moved $2.361 million from Accumulated Other Comprehensive Loss to Reinvested Earnings[127] Consolidated Statements of Cash Flows This section presents the consolidated statements of cash flows for 2017 and 2018, detailing cash generated from operating, investing, and financing activities Consolidated Statements of Cash Flows (2017-2018) | Cash Flow Activity | 2018 ($ in thousands) | 2017 ($ in thousands) | | :-------------------------------------- | :-------------------- | :-------------------- | | Net cash provided by operating activities | $13,052 | $33,517 | | Net cash provided by investing activities | $1,824 | $235 | | Net cash used for financing activities | ($14,911) | ($24,409) | | Effect of exchange rate changes on cash and cash equivalents | ($445) | $400 | | Net (decrease) increase in cash and cash equivalents | ($480) | $9,743 | | Cash and cash equivalents at beginning of year | $23,453 | $13,710 | | Cash and cash equivalents at end of year | $22,973 | $23,453 | - Operating cash flow decreased significantly in 2018, primarily due to a $12.387 million increase in inventories, compared to a $9.634 million decrease in 2017[129] - Investing activities provided $1.824 million in 2018, mainly from proceeds from maturities of marketable securities ($11.338 million) offsetting purchases ($7.949 million) and capital expenditures ($1.410 million)[129] - Financing activities used $14.911 million in 2018, including $11.414 million for share repurchases, $9.213 million for cash dividends, and $3.740 million to acquire noncontrolling interest, partially offset by $4.403 million from stock option exercises and net bank borrowings[129] Notes to Consolidated Financial Statements This section provides detailed notes to the consolidated financial statements, offering further insights into accounting policies, segment information, and financial instrument valuations Note 1. Nature of Operations This note describes Weyco Group, Inc.'s core business of designing and marketing footwear, its operational segments, and key economic sensitivities - Weyco Group, Inc. designs and markets footwear under brands like Florsheim, Nunn Bush, Stacy Adams, BOGS, and Rafters, with products primarily for men, but also for women and children[131] - The company operates through North American wholesale and retail segments, and 'other' operations in Australia, South Africa, Asia Pacific, and Europe, with its results mainly influenced by U.S. economic and retail conditions[131] Note 2. Acquisition of Noncontrolling Interest This note details the August 2018 acquisition of the remaining 45% minority interest in Florsheim Australia for $3.7 million, resulting in 100% ownership - On August 30, 2018, Weyco Group, Inc. purchased the remaining 45% minority interest in Florsheim Australia Pty Ltd for $3.7 million, resulting in 100% ownership[132] - This transaction was accounted for as an equity transaction under ASC 810, with no gain or loss recognized in consolidated net earnings or comprehensive income, and the noncontrolling interest carrying amount was adjusted to zero[133] Note 3. Summary of Significant Accounting Policies This note outlines the company's critical accounting policies, including revenue recognition, inventory valuation, intangible asset impairment, and recent accounting pronouncement adoptions - The consolidated financial statements are prepared in conformity with U.S. GAAP, requiring management to make estimates and assumptions that affect reported amounts[134][135] - Revenue is recognized when control of the product is transferred to customers, net of estimated allowances for returns and discounts; wholesale revenue is recognized upon shipment, and retail revenue at the point of sale or upon shipment for e-commerce[147][149] - Inventories are primarily valued using the LIFO method (89% in 2018), with other inventories on a FIFO basis, both at the lower of cost or market/net realizable value[139][170] - Goodwill and trademarks are not amortized but are reviewed annually for impairment; in 2018, a $110,000 impairment charge was recorded for the Umi trademark[142][143] - The Company adopted ASU 2014-09 (Revenue from Contracts with Customers) and ASU 2018-02 (Reclassification of Certain Tax Effects from AOCL) in 2018, with ASU 2018-02 resulting in a $2.4 million reclassification to retained earnings[162][163] - ASU 2016-02 (Leases) will be adopted on January 1, 2019, expected to result in the recognition of a right-of-use asset and lease liability between $25 million and $30 million, without a material impact on earnings or cash flows[164] Note 4. Fair Value of Financial Instruments This note explains the company's fair value measurement hierarchy and the valuation methods applied to its financial instruments, including marketable securities and foreign exchange contracts - The Company classifies fair value measurements into a three-level hierarchy: Level 1 (quoted market prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[166][167] - Short-term financial instruments approximate fair value, while marketable securities are carried at amortized cost with fair value disclosures based on Level 2 valuations, and foreign exchange contracts are carried at fair value, also representing Level 2 valuations[167] Note 5. Investments This note details the company's marketable securities, primarily investment-grade municipal bonds, classified as held-to-maturity and reported at amortized cost - The Company's marketable securities consist primarily of investment-grade municipal bonds, classified as held-to-maturity and reported at amortized cost[137][169] Marketable Securities (Amortized Cost vs. Market Value) as of December 31, 2018 and 2017 | Category | 2018 Amortized Cost ($ in thousands) | 2018 Market Value ($ in thousands) | 2017 Amortized Cost ($ in thousands) | 2017 Market Value ($ in thousands) | | :---------------- | :----------------------------------- | :--------------------------------- | :----------------------------------- | :--------------------------------- | | Municipal bonds | $20,227 | $20,539 | $23,639 | $24,249 | Unrealized Gains and Losses on Marketable Securities (2017-2018) | Category | 2018 Unrealized Gains ($ in thousands) | 2018 Unrealized Losses ($ in thousands) | 2017 Unrealized Gains ($ in thousands) | 2017 Unrealized Losses ($ in thousands) | | :---------------- | :----------------------------------- | :------------------------------------ | :----------------------------------- | :------------------------------------ | | Municipal bonds | $388 | ($76) | $634 | ($24) | - The Company determined that no other-than-temporary impairment existed for its investments in 2018 or 2017[169] Note 6. Inventories This note provides a breakdown of inventories, detailing the valuation methods (LIFO and FIFO) and the impact of LIFO liquidations on cost of sales Inventories as of December 31, 2018 and 2017 | Category | 2018 ($ in thousands) | 2017 ($ in thousands) | | :-------------- | :-------------------- | :-------------------- | | Finished shoes | $91,276 | $78,772 | | LIFO reserve | ($18,592) | ($18,502) | | Total inventories | $72,684 | $60,270 | - At December 31, 2018, approximately 89% of inventories were valued by the LIFO method, and 11% by FIFO, compared to 86% LIFO and 14% FIFO in 2017[170] - LIFO inventory liquidations decreased cost of sales by $87,000 in 2018 and $301,000 in 2017[171] Note 7. Property, Plant and Equipment, Net This note presents the detailed breakdown of property, plant, and equipment, net of accumulated depreciation, as of December 31, 2018 and 2017 Property, Plant and Equipment, Net as of December 31, 2018 and 2017 | Category | 2018 ($ in thousands) | 2017 ($ in thousands) | | :-------------------------------- | :-------------------- | :-------------------- | | Land and land improvements | $3,778 | $3,778 | | Buildings and improvements | $26,912 | $26,912 | | Machinery and equipment | $32,310 | $31,940 | | Retail fixtures and leasehold improvements | $11,522 | $12,339 | | Construction in progress | $92 | $3 | | Property, plant and equipment | $74,614 | $74,972 | | Less: Accumulated depreciation | ($45,907) | ($43,329) | | Property, plant and equipment, net | $28,707 | $31,643 | Note 8. Intangible Assets This note details the company's indefinite-lived and amortizable intangible assets, including goodwill and trademarks, and reports an impairment charge for the Umi trademark Indefinite-Lived Intangible Assets as of December 31, 2018 and 2017 | Category | 2018 Gross Carrying Amount ($ in thousands) | 2018 Accumulated Impairment ($ in thousands) | 2018 Net ($ in thousands) | 2017 Gross Carrying Amount ($ in thousands) | 2017 Accumulated Impairment ($ in thousands) | 2017 Net ($ in thousands) | | :-------- | :---------------------------------------- | :------------------------------------------- | :------------------------ | :---------------------------------------- | :------------------------------------------- | :------------------------ | | Goodwill | $11,112 | $0 | $11,112 | $11,112 | $0 | $11,112 | | Trademarks | $34,748 | ($1,880) | $32,868 | $34,748 | ($1,770) | $32,978 | | Total | $45,860 | ($1,880) | $43,980 | $45,860 | ($1,770) | $44,090 | - An impairment charge of $110,000 was recorded in 2018 to write off the remaining value of the Umi trademark as the brand's operations are wound down[173] Amortizable Intangible Assets as of December 31, 2018 and 2017 | Category | Weighted Average Life (Years) | 2018 Gross Carrying Amount ($ in thousands) | 2018 Accumulated Amortization ($ in thousands) | 2018 Net ($ in thousands) | 2017 Gross Carrying Amount ($ in thousands) | 2017 Accumulated Amortization ($ in thousands) | 2017 Net ($ in thousands) | | :------------------ | :---------------------------- | :---------------------------------------- | :--------------------------------------------- | :------------------------ | :---------------------------------------- | :--------------------------------------------- | :------------------------ | | Customer relationships | 15 | $3,500 | ($1,828) | $1,672 | $3,500 | ($1,594) | $1,906 | | Total | | $3,500 | ($1,828) | $1,672 | $3,500 | ($1,594) | $1,906 | - Amortization expense for intangible assets was $234,000 in 2018 and $233,000 in 2017, with future amortization anticipated to be approximately $233,000 annually from 2019 through 2023[175] Note 9. Other Assets This note provides a breakdown of other assets, including cash surrender value of life insurance, amortizable intangible assets, and investment in real estate Other Assets as of December 31, 2018 and 2017 | Category | 2018 ($ in thousands) | 2017 ($ in thousands) | | :-------------------------------- | :-------------------- | :-------------------- | | Cash surrender value of life insurance | $16,961 | $16,277 | | Amortizable intangible assets | $1,672 | $1,906 | | Investment in real estate | $2,149 | $2,397 | | Other | $2,501 | $2,517 | | Total other assets | $23,283 | $23,097 | - The Company holds five life insurance policies on current and former executives, with an aggregate death benefit of approximately $17.4 million as of December 31, 2018[176] - The investment in real estate represents a 50% interest in a building in Montreal, Canada, purchased in 2013 for approximately $3.2 million, serving as the Company's Canadian office and distribution center[177] Note 10. Short-Term Borrowings This note details the company's $60 million unsecured revolving line of credit, including outstanding borrowings and interest rate as of December 31, 2018 - As of December 31, 2018, the Company had a $60 million unsecured revolving line of credit with a bank, expiring November 5, 2019[178] - Outstanding borrowings on the line of credit were approximately $5.8 million at an interest rate of 3.25% as of December 31, 2018, with no outstanding amounts at December 31, 2017[178] Note 11. Employee Retirement Plans This note describes the company's defined benefit and supplemental pension plans, including funding policies, asset allocation, funded status, and net periodic pension costs - The Company has a defined benefit pension plan and an unfunded supplemental pension plan for key executives; the defined benefit plan closed to new participants in 2011 and benefit accruals were frozen effective December 31, 2016[179] - The Company's funding policy for the defined benefit plan is to ensure full provision of employee benefits by retirement, with plan assets primarily in equity and fixed income securities[180] Pension Plan Asset Allocation as of December 31, 2018 and 2017 | Asset Category | 2018 (%) | 2017 (%) | | :-------------------- | :------- | :------- | | Equity Securities | 53% | 55% | | Fixed Income Securities | 40% | 39% | | Other | 7% | 6% | | Total | 100% | 100% | - The weighted average discount rate used to determine the funded status of the plan was 4.39% in 2018 and 3.71% in 2017, while the expected long-term rate of return on assets was 7.00% for both years[184][187] Funded Status of Pension Plans as of December 31, 2018 and 2017 | Plan Type | 2018 Funded Status ($ in thousands) | 2017 Funded Status ($ in thousands) | | :------------------------ | :---------------------------------- | :---------------------------------- | | Defined Benefit Pension Plan | ($7,657) | ($11,006) | | Supplemental Pension Plan | ($15,891) | ($17,176) | | Total Unfunded Benefit Obligation | ($23,548) | ($28,182) | Net Periodic Pension Cost Components (2017-2018) | Component | 2018 ($ in thousands) | 2017 ($ in thousands) | | :------------------------ | :-------------------- | :-------------------- | | Service cost | $569 | $563 | | Interest cost | $2,204 | $2,207 | | Expected return on plan assets | ($2,711) | ($2,301) | | Net amortization and deferral | $634 | $526 | | Net periodic pension cost | $696 | $995 | - The Company expects to recognize $647,000 in expense from amortization of unrecognized loss and $63,000 in income from amortization of prior service credit in 2019[189] - The Company also contributed $835,000 and $786,000 to its defined contribution plan in 2018 and 2017, respectively[194] Note 12. Comprehensive Income (Loss) This note details the components of accumulated other comprehensive loss (AOCL), including foreign currency translation and pension liability adjustments, and reclassifications to net income Components of Accumulated Other Comprehensive Loss (AOCL) as of December 31, 2018 and 2017 | Component | 2018 ($ in thousands) | 2017 ($ in thousands) | | :-------------------------------- | :-------------------- | :-------------------- | | Foreign currency translation adjustments | ($6,901) | ($4,186) | | Pension liability, net of tax | ($14,671) | ($13,673) | | Total accumulated other comprehensive loss | ($21,572) | ($17,859) | - Changes in AOCL during 2018 included foreign currency translation adjustments of ($1,604) thousand, pension liability adjustments of $1,363 thousand, and a reclassification of ($2,361) thousand from the adoption of ASU 2018-02[195] - Amounts reclassified from AOCL to net income for defined benefit pension items totaled $469,000 (net of tax) in 2018 and $389,000 (net of tax) in 2017[195] Note 13. Income Taxes This note explains the impact of the Tax Cuts and Jobs Act (TCJA) on the company's tax provision and effective tax rate, and details deferred tax liabilities and unrecognized tax benefits - The Tax Cuts and Jobs Act (TCJA) reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, decreasing the Company's 2018 tax provision by $3.2 million[196][197] - In 2017, the Company remeasured its deferred tax balances due to the TCJA, reducing its 2017 income tax provision by $1.5 million[198] Provision for Income Taxes (2017-2018) | Category | 2018 ($ in thousands) | 2017 ($ in thousands) | | :-------- | :-------------------- | :-------------------- | | Current | $5,155 | $5,036 | | Deferred | $643 | $2,187 | | Total provision | $5,798 | $7,223 | Effective Tax Rate Reconciliation (2017-2018) | Factor | 2018 | 2017 | | :-------------------------------------- | :-------- | :-------- | | U.S. federal statutory income tax rate | 21.0% | 35.0% | | State income taxes, net of federal tax benefit | 3.6% | 2.9% | | Non-taxable municipal bond interest | (0.5%) | (0.9%) | | Foreign income tax rate differences | 0.8% | 0.1% | | Impact of tax rate change on deferred taxes | - | (5.8%) | | Share-based compensation | (2.5%) | 0.3% | | Other | 0.1% | (1.4%) | | Effective tax rate | 22.5% | 30.2% | Net Deferred Income Tax Liabilitie