Rocky Brands, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited consolidated results compared with the three months ended March 31, 2016. Rocky Brands sells footwear and accessories through Wholesale, Retail and Military segments.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $63.1 million | $57.5 million |
| Gross profit / margin | $19.7 million / 31.3% | $18.9 million / 32.9% |
| SG&A | $17.4 million / 27.6% of sales | $19.1 million / 33.3% of sales |
| Operating income (loss) | $2.4 million | $(0.2) million |
| Net income (loss) | $1.5 million; $0.20 diluted EPS | $(0.2) million; $(0.03) diluted EPS |
| Cash from operating activities | $9.2 million | $5.3 million |
| Capital expenditures | $0.9 million | $2.1 million |
Cash and cash equivalents were $2.7 million at March 31, 2017, down from $4.5 million at December 31, 2016. Total assets were $173.8 million and total liabilities were $37.9 million. Long-term debt was $5.2 million, versus $14.6 million at year-end 2016 and $21.6 million at March 31, 2016. The revolving facility had $5.2 million drawn and $57.8 million in total capacity, subject to a borrowing-base calculation. The facility matures in November 2019. Its fixed-charge coverage covenant was not in effect at quarter-end because no triggering event had occurred.
Material changes and segment results
- Sales increased approximately 9.6%, while gross margin percentage declined 1.6 percentage points. Management attributed the overall improvement in operating results primarily to lower SG&A following reorganization efforts completed in Q3 2016.
- Wholesale sales were $39.2 million, down from $40.2 million, primarily due to discontinuation of a private-label work program. Retail sales rose to $11.9 million from $11.5 million.
- Military sales increased to $12.0 million from $5.8 million as the company fulfilled several multiyear U.S. military contracts. Military gross margin was $1.4 million, or 11.5% of segment sales, versus $0.8 million, or 13.7%.
- Management said Wholesale gross margin benefited from fewer discounts and discontinuation of lower-margin private-label products. It said Military margin percentage reflected the Puerto Rico facility expansion and expected margin to normalize as domestic manufacturing operations became optimized.
- Operating cash flow improved year over year, primarily reflecting an increase in accounts payable in Q1 2017. Financing used $10.2 million, mainly for net repayments under the revolver; dividends paid were $0.8 million.
Outlook, risks and other matters
- Management anticipated approximately $4.0 million in capital expenditures for 2017. The filing provides no specific full-year revenue or earnings guidance and cautions that quarterly results are not necessarily indicative of full-year results.
- The business is seasonal: working capital is generally lowest from January through March and highest from May through October; the company typically uses its revolver to fund seasonal needs.
- Management cited inflationary pressures on materials, salaries and benefits, and said it seeks to offset them through pricing, productivity and cost reductions. Forward-looking statements are subject to risks described in the company’s 2016 Form 10-K; management undertook no obligation to update them.
- No material change in risk factors or market-risk disclosures was reported. The company reported no legal proceedings and no material change in internal control over financial reporting; management concluded disclosure controls were effective.
- A new $7.5 million share-repurchase authorization was approved in March 2017, expiring March 31, 2018. No shares were repurchased in the quarter; the full authorization remained available at quarter-end.
- Newly adopted accounting standards noted in the filing had no effect or no material effect on the quarter. The company was assessing the impact of the forthcoming revenue-recognition standard and had not selected a transition method.
Investor verification priorities
- Track whether multiyear Military contracts sustain sales and whether Military gross margin percentage improves as management expected.
- Verify that operating cash generation remains supported by sustainable working-capital trends, particularly accounts payable, receivables and inventory.
- Review borrowing-base availability, seasonal revolver usage and any event that could activate the fixed-charge coverage covenant.
- Monitor the $7.5 million repurchase authorization and planned 2017 capital expenditures.
- Assess future disclosures on customer receivable allowances, inventory reserves and the estimated effects and transition approach for the new revenue standard.