Rocky Brands, Inc. — Q1 2015 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. Rocky Brands sells footwear and accessories through Wholesale, Retail and Military segments.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $65.45 million | $65.78 million |
| Gross margin | $21.97 million; 33.6% | $21.85 million; 33.2% |
| SG&A | $19.57 million; 29.9% of sales | $20.52 million; 31.2% of sales |
| Operating income | $2.40 million; 3.7% of sales | $1.34 million; 2.0% of sales |
| Income before taxes | $2.17 million | $1.11 million |
| Net income / earnings per diluted share | $1.41 million / $0.19 | $0.72 million / $0.10 |
| Cash from operations | $0.88 million | $5.76 million |
| Capital expenditures | $0.77 million | $3.25 million |
At March 31, 2015, cash was $4.39 million, current assets were $146.83 million and current liabilities were $19.92 million. Long-term debt was $36.69 million, versus $36.27 million at year-end 2014 and $36.59 million a year earlier. Shareholders’ equity was $139.11 million.
Material changes and management commentary
- Sales were down slightly overall. Wholesale fell $2.10 million to $50.98 million, primarily from lower work footwear, commercial military footwear and lifestyle footwear sales; western footwear partly offset the declines. Retail grew $0.75 million to $11.85 million, and Military rose $1.02 million to $2.62 million.
- Gross margin improved by 0.4 percentage points. Management attributed the Wholesale margin improvement mainly to a prior-year discounted product sale to a key retail partner.
- SG&A declined $0.95 million, primarily due to lower freight, tradeshow and advertising expenses. Income from operations increased despite slightly lower sales.
- Operating cash flow declined to $0.88 million. Management cited working-capital movements; cash-flow details show decreases in accrued and other liabilities, partly offset by cash provided from receivables and inventory changes.
- The company used $0.33 million in financing activities, including $0.76 million of dividends, mostly offset by net revolving-credit borrowings. Cash decreased $0.22 million during the quarter.
Liquidity, debt, outlook and risks
- The revolving credit facility was amended in December 2014 to a $75 million facility and extended through November 2019. At March 31, borrowings were $36.7 million and reported total capacity was $74.3 million, subject to a borrowing-base calculation. The fixed-charge coverage covenant was not in effect because no triggering event had occurred.
- The filing states expected 2015 capital expenditures of approximately $6.1 million. It provides no formal revenue or earnings guidance.
- Management describes seasonal working-capital needs, with borrowing generally used to fund them. It also identifies potential exposure from customer collections, inventory obsolescence, impairment of intangible assets, inflation and realization of deferred tax assets.
- Management reported no material change in market risks or previously disclosed risk factors, no legal proceedings, and effective disclosure controls. Q1 results are not necessarily indicative of full-year results.
Important facts for investors to verify
- The debt note and MD&A give inconsistent figures for fixed LIBOR borrowings at March 31, 2015: approximately $32 million in the note and $34 million in MD&A. Confirm the correct amount and borrowing-base availability.
- Assess whether the decline in Wholesale sales—especially work footwear and the Creative Recreation brand—continues, and whether growth in Retail and Military can offset it.
- Monitor operating cash generation and seasonal working-capital needs, given the year-over-year drop in quarterly operating cash flow.
- Compare actual 2015 capital spending with the approximately $6.1 million estimate and review future covenant status and borrowing capacity.