Rocky Brands, Inc. — Q1 2019 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2019, compared with Q1 2018. Rocky Brands designs, manufactures, and markets footwear, apparel, and accessories. Its reportable segments are Wholesale, Retail, and Military. Financial statement amounts below are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $65.929 | $61.387 |
| Gross profit; gross margin | $22.978; 34.9% | $20.965; 34.2% |
| Operating expenses | $18.479 | $16.737 |
| Operating income; operating margin | $4.499; 6.8% | $4.228; 6.9% |
| Net income | $3.605 | $3.251 |
| Diluted EPS | $0.48 | $0.44 |
| Cash from operating activities | $9.846 | $10.864 |
- Sales rose 7.4%; net income rose 10.9%. Gross margin improved 0.7 percentage points, while operating margin declined 0.1 points as operating expenses grew 10.4%, faster than sales.
- Segment sales: Wholesale $42.389 million (+4.8%), Retail $15.439 million (+18.2%), and Military $8.101 million (+2.6%).
- Cash and cash equivalents were $17.630 million at March 31, up from $10.173 million at year-end. Operating cash flow was $9.846 million; investing cash outflow was $1.797 million and financing cash outflow was $0.592 million. The company paid $0.886 million in dividends.
- Current assets were $133.405 million and current liabilities $25.063 million. The company reported no revolver borrowings and $59.1 million of borrowing capacity under its new $75 million asset-based facility, subject to borrowing-base limits. The facility matures February 13, 2024.
- ASC 842 lease adoption added $1.037 million of operating right-of-use assets and $1.046 million of lease liabilities at March 31. Total liabilities were $33.650 million.
Material changes and management commentary
- Retail growth reflected expansion of Lehigh’s CustomFit business and low-double-digit growth in direct-to-consumer e-commerce. Management attributed Wholesale growth to product introductions, innovation, and marketing. Military sales benefited from shipments moved into the first half following Department of Defense notifications.
- Wholesale gross margin declined to 33.9% from 34.7%, partly due to discounting aged discontinued inventory. Retail margin improved to 43.2% from 42.4% with better vendor pricing and fewer discontinued-product sales. Military margin rose to 23.8% from 17.9%, which management attributed to improved Puerto Rico facility efficiency.
- Operating expenses increased with investment in core brands and sales-related variable costs. The company entered a new revolving credit agreement with Huntington in February, replacing its PNC facility; it reported no covenant-triggering event in the quarter.
- The company adopted the new lease standard on January 1, 2019. It said the change materially affected the balance sheet but did not materially affect cash flows. A $7.5 million share-repurchase authorization was announced in March, replacing the prior plan; no shares were purchased during the quarter.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management said operating cash flow and the credit facility should provide sufficient liquidity for at least the next 12 months, conditional on future operating performance, cash flows, and covenant compliance. Management noted that possible 2019 inflationary pressures could be offset through price increases. The company cautioned that results are subject to demand and forecast changes, seasonality and weather, competition, supplier and international-trade risks, retail trends, manufacturing or distribution disruptions, cybersecurity, foreign exchange, and broader economic conditions. It reported no material change to the risk factors in its 2018 Form 10-K and no expected material change in uncertain tax positions over the next 12 months.
Important facts for investors to verify
- Whether Retail and Wholesale growth and the cited drivers continued beyond Q1, and whether Military shipments were shifted from later periods.
- Whether the margin improvements in Retail and Military can persist, and whether Wholesale discounting of aged inventory remains necessary.
- The borrowing base, availability, pricing, and covenant triggers under the new credit facility, particularly as seasonal working-capital needs rise.
- The filing reports fixed-asset purchases of $1.802 million in the cash-flow statement, while MD&A states capital expenditures were $1.6 million; reconcile the differing measures.
- Whether the $7.5 million repurchase authorization is used and how repurchases would affect liquidity alongside dividends and capital spending.