Rocky Brands, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; compared with the corresponding 2016 periods. The filing is unaudited. Rocky Brands designs, manufactures and markets footwear, apparel and accessories through Wholesale, Retail and Military segments.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $58.5 million | $62.6 million | $121.5 million | $120.1 million |
| Gross profit / margin | $18.2 million / 31.1% | $16.3 million / 26.0% | $37.9 million / 31.2% | $35.2 million / 29.3% |
| SG&A | $15.9 million | $18.8 million | $33.3 million | $37.9 million |
| Operating income (loss) | $2.3 million | $(2.5) million | $4.6 million | $(2.8) million |
| Net income (loss) | $1.5 million | $(1.8) million | $3.0 million | $(2.0) million |
| EPS, basic and diluted | $0.20 | $(0.23) | $0.40 | $(0.26) |
Interest expense was $0.1 million in Q2 and $0.2 million year to date, down from $0.1 million and $0.3 million, respectively, in 2016. The company applied a 34% estimated effective tax rate; the prior-year periods recorded tax benefits because they were loss-making.
Cash flow, debt and liquidity
- Six-month operating cash flow was $7.8 million, versus $5.6 million in 2016. The company cited increased accounts payable as a primary driver.
- Investing cash outflow was $2.0 million, mainly capital expenditures; financing cash outflow was $7.6 million, largely net revolver repayments and dividends. Cash decreased $1.8 million to $2.7 million.
- Capital expenditures were approximately $2.5 million in the first half; management anticipated approximately $4.0 million for full-year 2017.
- At June 30, cash was $2.7 million, current assets $121.7 million, and current liabilities $25.1 million. Inventory was $76.3 million, up from $69.2 million at December 31, 2016.
- Credit-facility borrowings were $8.6 million, down from $14.6 million at December 31, 2016 and $23.5 million a year earlier. Total facility capacity was $63.4 million. The facility matures in November 2019; June 30 rates were 2.41% on LIBOR borrowings and 4.00% on prime borrowings. The fixed-charge coverage covenant was not in effect because no triggering event had occurred.
- Dividends paid in the first half totaled $1.6 million. A $7.5 million share repurchase authorization remained unused at quarter-end and was set to expire March 31, 2018.
Material changes versus prior period
- Q2 sales fell 6.6%, while first-half sales rose 1.2%. Q2 weakness primarily reflected lower Wholesale sales, including the end of a private-label work program and lower commercial military sales after an unusually strong 2016 initial boot sell-in.
- First-half Wholesale sales declined to $76.3 million from $81.7 million; Retail sales increased to $22.9 million from $21.9 million; Military sales rose to $22.4 million from $16.5 million.
- Gross margin improved in both periods. Management attributed Wholesale improvement to stronger full-price selling, less discounting and removal of a lower-margin private-label program. SG&A declined following the reorganization completed in Q3 2016.
- Military gross margin increased substantially year over year, but management said Q2 benefited from temporary factors, including a small high-margin order and improved Puerto Rico facility efficiencies at higher production volumes.
- Total assets were $180.9 million versus $202.5 million at June 30, 2016; total liabilities were $44.3 million versus $65.0 million. Long-term debt declined to $8.6 million from $23.5 million.
Outlook, risks and other matters
- Management expected full-year Military segment gross margin to be in the mid-teen range, despite the unusually high Q2 comparison. Full-year capital expenditures were anticipated at approximately $4.0 million.
- The business is seasonal: working capital and revolver usage typically rise during May through October and are generally lowest January through March.
- The company reclassified $0.9 million from tax receivable to a deferred tax asset after choosing to use an existing net operating loss to reduce 2017 estimated tax payments.
- Management reported no material changes to previously disclosed risk factors or market-risk exposures. No legal proceedings were reported. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
- Forward-looking statements are subject to risks and uncertainties, and the company disclaimed an obligation to update them. The filing identifies no specific new contingency or litigation matter.
Important facts for investors to verify
- Whether Wholesale sales and overall revenue stabilize after the private-label program ended and the prior-year military sell-in comparison rolled off.
- Whether improved gross margins persist, especially given management’s warning that Q2 Military margin benefited from temporary factors.
- Whether inventory growth and seasonal working-capital needs require additional revolver borrowing, and whether covenant-trigger conditions change.
- Progress toward the approximately $4.0 million 2017 capital expenditure estimate and the effect of the new revenue, lease and credit-loss accounting standards under evaluation.
- Whether the unused $7.5 million repurchase authorization is used before its March 31, 2018 expiration.