Rocky Brands, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Rocky Brands reports Wholesale, Retail, and Military segments. Financial statements are unaudited.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $57.5 million | $65.5 million | Down 12.1% |
| Gross margin | $18.9 million; 32.9% | $22.0 million; 33.6% | Down $3.1 million; rate down 0.7 percentage points |
| SG&A | $19.1 million; 33.3% of sales | $19.6 million; 29.9% of sales | Down $0.4 million, but higher as a share of sales |
| Operating income (loss) | $(0.2) million | $2.4 million | Turned to a loss |
| Net income (loss) | $(0.2) million; $(0.03) per share | $1.4 million; $0.19 per share | Turned to a loss |
| Cash from operations | $5.3 million | $0.9 million | Increased $4.4 million |
Q1 2016 operating cash flow benefited principally from lower receivables and higher accounts payable, partly offset by increased inventory. Investing cash use was $2.1 million, mainly capital expenditures, versus $0.8 million a year earlier. Financing cash use was $2.9 million, including net revolving-credit repayments and $0.8 million of dividends. Cash increased $0.3 million to $3.7 million.
Balance sheet and liquidity
- At March 31, 2016, current assets were $132.4 million and current liabilities were $21.1 million; working capital was approximately $111.3 million.
- Inventory was $84.5 million, up $7.5 million from December 31, 2015 and $1.4 million from March 31, 2015. Trade receivables were $38.3 million, down from $44.5 million at year-end and $54.3 million a year earlier.
- Long-term debt was $21.6 million, compared with $23.7 million at year-end and $36.7 million a year earlier. The revolving facility matures in November 2019; the company reported $21.6 million borrowed and $61.3 million of total capacity at quarter-end, subject to borrowing-base limits.
- The fixed-charge coverage covenant applies only after a defined triggering event; no trigger had occurred as of March 31, 2016. The filing reports no other long-term debt maturities.
Material changes and management commentary
- Wholesale sales fell $10.8 million to $40.2 million. Management attributed declines in work, western, and lifestyle footwear to warm weather and weaker local economies tied to oil and gas production, which had created excess inventory in distribution channels and reduced fill-in orders.
- Retail sales declined modestly to $11.5 million. Military sales increased to $5.8 million from $2.6 million, including shipments under hot-weather boot orders and initial shipments under a temperate-weather contract received in early 2016.
- Wholesale gross margin rate rose slightly to 32.3%; Retail declined to 44.6%; Military improved to 13.7%. Consolidated gross margin rate fell to 32.9%.
- Management expects approximately $6.9 million in 2016 capital expenditures; $2.1 million was spent in Q1. The business is seasonal, typically using the revolving facility to fund working capital needs.
- The company stated there were no material changes to its previously disclosed risk factors or market-risk disclosures. It reported no legal proceedings and no material change in internal control over financial reporting; disclosure controls were deemed effective.
Outlook, risks, and unusual items
The filing provides no sales or earnings guidance. Management’s stated capital-spending estimate is approximately $6.9 million for 2016. Key risks discussed include continuing channel inventory pressure, weather and regional economic conditions affecting core footwear demand, possible difficulty liquidating slow-moving inventory, and estimates used in receivables allowances, sales returns, inventory reserves, intangible-asset impairment, and taxes. Management said Q1 results are not necessarily indicative of full-year results. No material unusual operating item was identified.
Important facts for investors to verify
- Whether excess channel inventory clears and Wholesale orders recover, particularly in work, western, and outdoor-related categories.
- Whether Military contract shipments continue and at what sales and gross-margin levels.
- Inventory composition, aging, and reserve adequacy given the sequential increase in inventory.
- Availability under the borrowing-base formula, seasonal borrowing needs, and any event that could activate the fixed-charge coverage covenant.
- Actual capital expenditures versus the approximately $6.9 million estimate and the cash-flow effects of working-capital movements.