Rocky Brands, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2014. Rocky Brands sells footwear and accessories through Wholesale, Retail, and Military segments. Results include the Creative Recreation footwear business, acquired in December 2013.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $72.7 million | $70.2 million | $207.3 million | $183.3 million |
| Gross margin | $24.3 million; 33.4% | $22.7 million; 32.4% | $68.7 million; 33.1% | $61.7 million; 33.7% |
| Income from operations | $4.9 million; 6.8% of sales | $4.4 million; 6.3% | $8.8 million; 4.2% | $8.8 million; 4.8% |
| Net income | $3.1 million | $2.9 million | $5.4 million | $5.6 million |
| Diluted EPS | $0.42 | $0.39 | $0.71 | $0.74 |
| Operating cash flow | Not separately reported for the quarter | $(3.5) million | $(11.2) million |
Balance sheet and liquidity at September 30, 2014
- Cash was $4.3 million; current assets were $160.3 million and current liabilities were $26.6 million.
- Long-term debt was $50.7 million, up from $42.4 million at September 30, 2013 and $38.4 million at December 31, 2013. The company reported $70 million of facility capacity, subject to its borrowing base.
- Trade receivables were $61.7 million and inventory was $90.1 million. Inventory was up from $78.9 million a year earlier.
- Net cash used in investing was $6.4 million for the first nine months, including $6.5 million of fixed-asset purchases. Financing provided $10.0 million, including a $12.3 million net increase in revolving-credit borrowings and $2.3 million of dividends paid.
Material changes versus prior comparable periods
- Q3 sales increased about 4%; nine-month sales increased about 13%. Wholesale drove growth, including Creative Recreation and gains in several footwear categories. Retail sales were broadly flat.
- Military sales declined to $1.1 million in Q3 from $3.2 million, and to $4.8 million for nine months from $7.9 million. The company attributed this to the timing of shipments under a U.S. military hot-weather combat-boot contract.
- Q3 gross margin improved by 1.0 percentage point, primarily from better manufacturing efficiencies. Nine-month gross margin fell 0.6 percentage point, reflecting reduced-price sales to a key retail partner and weaker Retail margins, partly offset by manufacturing efficiencies.
- SG&A increased $1.1 million in Q3 and $7.0 million for nine months, mainly from Creative Recreation expenses and, year to date, higher compensation costs. Interest expense also increased.
- Q3 net income and EPS rose year over year, while nine-month net income and EPS declined despite higher sales, with operating income essentially flat.
Outlook, management commentary, and risks
- Management expected 2014 capital expenditures of approximately $8.4 million. It said cash generated from operations and the credit facility should provide sufficient liquidity for at least the next 12 months, while noting liquidity depends on operating performance, cash flows, and covenant compliance.
- The $70 million PNC facility was entered into in October 2010 for a five-year term and generally carried an interest rate of LIBOR plus 1.50%. At September 30, 2014, the fixed-charge-coverage covenant was not in effect because no triggering event had occurred. The facility’s stated term makes its approaching maturity worth monitoring.
- The business is seasonal, with working-capital needs generally highest from May through October; the company uses its revolver to fund seasonal needs. Operating cash use reflected higher receivables and inventory, partly offset by higher payables and accrued liabilities.
- Management reduced its estimated tax rate in Q3 in connection with expected permanent capital investment in the Dominican Republic. A $0.1 million tax-provision adjustment related to the 2013 tax return increased the reported effective rate; the nine-month reported rate was 33.4%.
- The filing gives no specific full-year sales or earnings guidance. Management identified estimates involving receivables, inventory, intangibles, and taxes as important; adverse customer credit, inventory liquidation, or intangible-asset conditions could affect results. Market-risk disclosures were unchanged, and the company reported no material changes to its previously disclosed risk factors.
- No legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor facts to verify
- How Creative Recreation contributes to sales, margins, and expenses, and whether the acquired business meets management’s growth expectations.
- Whether receivables and inventory convert to cash as seasonal needs recede, and whether operating cash flow improves.
- Availability under the borrowing base, covenant status, and the timing and refinancing plan for the five-year credit facility.
- Whether lower Retail margins, reduced-price sales to a key retail partner, and declining Military shipments persist.
- The realized impact of the Dominican Republic investment on taxes and the company’s approximately $8.4 million capital-spending plan.