Rocky Brands, Inc. — Q3 2018 Form 10-Q
Business and period: Rocky Brands designs, manufactures and markets footwear, apparel and accessories under brands including Rocky, Georgia Boot, Durango and Lehigh. This unaudited filing covers the three and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods. Its reportable segments are Wholesale, Retail and Military.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $65.9 million | $64.7 million | $185.5 million | $186.2 million |
| Gross margin | $22.4 million (34.0%) | $19.5 million (30.2%) | $62.9 million (33.9%) | $57.4 million (30.8%) |
| Operating income | $5.6 million (8.5%) | $3.5 million (5.4%) | $13.2 million (7.1%) | $8.1 million (4.4%) |
| Net income | $5.0 million | $2.2 million | $10.9 million | $5.2 million |
| Diluted EPS | $0.67 | $0.30 | $1.47 | $0.70 |
Revenue by segment: Q3 Wholesale sales were $47.0 million, Retail $11.9 million and Military $7.0 million. For the nine months, Wholesale sales rose 4.0% to $127.2 million and Retail rose 8.2% to $36.7 million; Military fell 28.0% to $21.6 million.
Cash flow and balance sheet: Nine-month operating cash flow was $8.7 million, investing cash outflow $3.5 million (including $3.5 million of capital expenditures), and financing cash outflow $4.7 million. Cash increased $0.5 million to $4.2 million. At September 30, total assets were $194.2 million, inventory $78.4 million, and shareholders’ equity $150.1 million. The company had no revolver borrowings, versus $11.6 million at September 30, 2017; available borrowing capacity was $68.3 million under a $75 million facility. The facility matures in November 2019.
Changes and management commentary
- Quarterly sales increased 1.9%, while nine-month sales declined 0.4%. Growth in Wholesale and Retail was offset by lower Military sales, reflecting contracts that expired in late 2017; the sale of Creative Recreation in Q4 2017 also affected comparisons.
- Gross margin improved in both periods. Management attributed the improvement chiefly to fewer discounts and stronger initial margins in Wholesale, higher-margin direct-to-consumer sales in Retail, and the expiration of lower-margin Military contracts. The 2017 comparison also included about $1 million of Puerto Rico payroll and overhead costs that could not be capitalized after Hurricane Maria disrupted production.
- Operating expenses rose 4.8% in Q3 and 0.8% for the nine months, reflecting brand investment, sales-related costs and bad-debt expense, partly offset by lower costs following the Creative Recreation sale.
- Q3 and nine-month effective tax rates were 10.5% and 16.2%, respectively, versus 34.0% in 2017. Results included a one-time approximately $561,000 tax benefit from revised guidance on the transition tax for repatriated foreign earnings. Excluding the adjustment, management estimated a 20.5% 2018 effective tax rate.
- Management said cash and the credit facility should fund operations for at least the next 12 months, contingent on operating performance, cash flow and covenant compliance. It expected approximately $2.0 million of estimated tax payments in Q4 2018. No formal sales or earnings guidance is provided in the filing.
Risks, contingencies and other matters
Management cited risks including demand and sales-forecast variability, seasonality and weather, competition, supplier reliance, retail trends, cybersecurity and economic conditions. Working capital is seasonal and inventory rose to $78.4 million from $65.6 million at year-end 2017. The company reported no material change in risk factors or market-risk disclosures, and no credit-facility covenant trigger was in effect at September 30. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Investor facts to verify
- Whether margin gains from full-price selling and product mix can persist, particularly as Military sales remain below 2017 levels.
- Inventory growth, receivable collectability and the higher allowance for uncollectible trade receivables ($1.36 million at September 30, 2018 versus $0.18 million at December 31, 2017).
- The sustainability of reported earnings after excluding the one-time $561,000 tax benefit, and the timing and amount of remaining transition-tax payments.
- Seasonal liquidity needs, availability under the borrowing-base facility, and the facility’s November 2019 maturity.
- Future performance of the Lehigh CustomFit and e-commerce initiatives, and any impact from the loss of Creative Recreation or expired Military contracts.