Rocky Brands, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Interim financial statements are unaudited. Rocky Brands sells footwear and accessories through Wholesale, Retail, and Military segments.
Financial performance
- Q2 revenue: $68.8 million, up 15.8% from $59.4 million. Wholesale rose to $56.7 million, Retail to $10.1 million, while Military fell to $2.0 million from $3.8 million.
- First-half revenue: $134.6 million, up 19.0% from $113.1 million. Wholesale growth was led by lifestyle footwear, including Creative Recreation, alongside increases in work, western, outdoor, and military footwear.
- Profit and margins: Q2 gross margin was $22.6 million (32.8% of sales), versus $20.3 million (34.2%). Operating income was $2.5 million versus $2.9 million; reported income was $1.5 million ($0.20 per share) versus $1.8 million ($0.24). First-half gross margin was $44.4 million (33.0%), operating income $3.9 million, and reported income $2.2 million ($0.30 per share), down from $2.7 million ($0.35).
- Costs: Q2 SG&A rose $2.6 million to $20.0 million, mainly from $1.6 million of Creative Recreation expenses and $0.9 million of higher compensation. First-half SG&A increased $6.0 million to $40.6 million, including $3.3 million related to Creative Recreation and $1.4 million of higher compensation.
- Cash flow: First-half operating cash flow was positive $1.5 million, compared with cash use of $4.7 million in 2013. Receivables and inventory absorbed cash, partly offset by higher payables. Investing used $5.2 million, principally capital expenditures; financing provided $3.5 million, including a $5.0 million net increase in revolver borrowings and $1.5 million of dividends. Cash declined $0.3 million to $4.0 million.
- Liquidity and debt: At June 30, cash was $4.0 million, current assets $149.0 million, and current liabilities $26.2 million. Long-term debt was $43.4 million, up from $38.4 million at December 31, 2013. The revolving facility has stated capacity of $70 million, subject to a borrowing base. Its fixed-charge coverage covenant was not in effect because no triggering event had occurred.
Changes, outlook, and risks
- Gross margin declined year over year in both periods. Management attributed the Wholesale decline partly to reduced-price sales to a key retail partner; Retail margins were affected by lower average selling prices on internet transactions than mobile-store transactions.
- Military sales declined as the company continued fulfilling a U.S. military “Hot Weather” combat-boot contract whose shipments began in March 2013.
- The December 2013 Creative Recreation asset acquisition had a purchase price of approximately $8.7 million and added a lifestyle footwear brand. Management sees it as an opportunity to expand domestically and internationally and complement existing categories. The filing reports a $602,000 gain on purchase in the acquisition allocation.
- Capital expenditures were $5.2 million in the first half; management anticipated approximately $8.4 million for full-year 2014. No formal revenue or earnings guidance is provided. Management believed cash from operations and the credit facility would fund operations for at least 12 months, while noting liquidity depends on operating performance, cash flows, and covenant compliance.
- Risks noted include seasonal working-capital needs, customer credit and returns, inventory obsolescence, and potential impairment of intangible assets. Management said inflation affects materials, salaries, and benefits. No material changes to previously disclosed risk factors or market-risk disclosures were reported; no legal proceedings were listed.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter. The company adopted an income-tax accounting update without material effect; impacts of several not-yet-adopted accounting standards had not been determined.
Important facts for investors to verify
- Whether revenue growth from Creative Recreation and other Wholesale categories can be sustained, and how the acquisition affects profitability.
- Whether margin pressure from discounted partner sales and lower online selling prices persists.
- How the U.S. military contract’s shipment schedule affects Military revenue after the reported decline.
- Working-capital trends—especially receivables, inventories, and payables—and revolver availability under the borrowing-base calculation.
- Progress against the approximately $8.4 million 2014 capital-expenditure estimate and the company’s ability to maintain liquidity and meet any applicable credit-facility covenants.