Rocky Brands, Inc. — Q3 2012 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2012, compared with the same 2011 periods. Rocky Brands reports Wholesale, Retail and Military segments. Management cautions that interim results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $72.5 million | $71.0 million | $170.3 million | $175.6 million |
| Gross margin | $26.2 million (36.1%) | $25.6 million (36.0%) | $59.6 million (35.0%) | $65.5 million (37.3%) |
| Operating income | $7.9 million | $7.6 million | $9.7 million | $12.4 million |
| Net income | $5.4 million | $5.2 million | $6.3 million | $8.0 million |
| Diluted EPS | $0.72 | $0.70 | $0.84 | $1.07 |
Q3 sales increased about 2%, and net income increased about 3% year over year. For the first nine months, sales declined about 3% and net income declined about 22%. YTD SG&A fell to $49.9 million from $53.1 million, but lower gross margin more than offset the expense reduction.
Segments and operating drivers
- Wholesale: Q3 sales rose to $62.9 million from $60.2 million, led by western footwear and commercial military footwear, partly offset by apparel. Nine-month sales were $140.0 million versus $140.8 million; western footwear gains were offset by declines in apparel, hunting, duty and work footwear.
- Retail: Sales declined to $9.6 million from $10.3 million in Q3 and to $29.3 million from $33.0 million for nine months. Management cited the shift toward internet transactions and closure of some Lehigh mobile stores. Lower online average selling prices also pressured retail gross margin.
- Military: No segment sales in Q3 2012 versus $0.4 million in Q3 2011; nine-month sales were $1.0 million versus $1.8 million. Sales depend on winning contracts through competitive bids.
Management attributed the nine-month gross-margin decline mainly to higher product costs and temporary price concessions tied to a large customer rollout in Q1. Q3 gross margin percentage was broadly stable year over year.
Cash flow, balance sheet and liquidity
- Cash used in operating activities was $2.0 million for the first nine months, compared with $20.3 million used in 2011. Seasonal increases in receivables and inventory were partly offset by higher accounts payable.
- Investing cash outflow was $5.0 million, including $5.1 million of fixed-asset purchases. Financing provided $6.9 million, reflecting net revolving-credit borrowings. Cash decreased $0.14 million to $3.51 million.
- At September 30, 2012, trade receivables were $60.6 million and inventory was $73.0 million. Long-term debt was $41.9 million, compared with $60.1 million at September 30, 2011; total liabilities were $73.4 million.
- The company had a $70 million PNC revolving facility, with $41.9 million borrowed at quarter-end. The rate was generally LIBOR plus 1.50%; availability is subject to a borrowing-base calculation. A fixed-charge coverage covenant was not in effect because no triggering event had occurred.
- Management expected 2012 capital expenditures of approximately $6.3 million and believed the credit facility and operating cash generation would provide sufficient liquidity for at least 12 months, subject to operating performance, cash flows and covenant compliance.
Outlook, risks and notable items
The filing provides no sales or earnings guidance. Key risks and uncertainties include product-cost inflation, customer pricing concessions, seasonal working-capital needs, customer credit and inventory obsolescence, uncertain military contract awards, and potential impairment of intangible assets. Management said inflation affects materials, salaries and benefits and described efforts to offset it through pricing, productivity and cost reductions. No material change in market-risk disclosures or risk factors was reported.
The company completed the transition toward terminating its defined-benefit pension plan after deciding in late 2011 to fully fund and terminate it; no pension cost was recorded in the 2012 periods shown. A $0.2 million tax-expense decrease from tax-return/provision reconciliation benefited 2012 results. The 2012 effective tax rate for nine months was 32.6%. Management reported effective disclosure controls and no material change in internal control over financial reporting; implementation of a new ERP system in April 2012 had no material control effect. No legal proceedings were reported.
Important facts for investors to verify
- Whether the gross-margin pressure from product costs and temporary customer concessions persists or reverses.
- Whether internet-led retail sales and mobile-store closures improve profitability despite lower average selling prices.
- Working-capital trends in receivables and inventory, seasonal borrowing needs, and actual borrowing-base availability.
- Performance against the approximately $6.3 million capital-expenditure expectation and the basis for management’s 12-month liquidity assessment.
- Whether military contract wins, tax-rate assumptions and any future covenant-triggering events materially affect results or liquidity.