Rocky Brands, Inc. — Q3 2015 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2015, compared with the same 2014 periods. The company reports Wholesale, Retail, and Military segments.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $70.0 million | $72.7 million | $204.0 million | $207.3 million |
| Gross profit / margin | $22.1 million / 31.6% | $24.3 million / 33.4% | $66.7 million / 32.7% | $68.7 million / 33.1% |
| Operating income / margin | $2.9 million / 4.1% | $4.9 million / 6.8% | $8.6 million / 4.2% | $8.8 million / 4.2% |
| Net income | $1.8 million | $3.1 million | $5.2 million | $5.4 million |
| Diluted EPS | $0.24 | $0.42 | $0.69 | $0.71 |
- Cash flow: Nine-month operating cash flow was negative $1.5 million, improving from negative $3.5 million. Investing cash flow was negative $5.5 million, primarily capital expenditures; financing provided $6.3 million. Cash declined $0.6 million to $4.0 million.
- Balance sheet and liquidity: September 30 cash was $4.0 million; current assets were $159.3 million and current liabilities $23.2 million. Long-term debt was $45.0 million, versus $36.3 million at December 2014 and $50.7 million a year earlier. The $75 million revolving facility matures November 2019; availability is subject to a borrowing-base calculation. No covenant-triggering event was in effect.
- Capital spending: Nine-month capital expenditures were $5.5 million; management anticipated approximately $6.1 million for full-year 2015.
Changes and management commentary
- Q3 sales decreased 3.8% year over year; nine-month sales decreased 1.6%. Wholesale sales fell $7.4 million in Q3 and $12.3 million year to date, with declines across several footwear and apparel categories. Retail sales rose, attributed largely to consumer e-commerce. Military sales increased with shipments under a U.S. military hot-weather combat boot contract.
- Q3 gross margin fell 180 basis points. Management attributed the Wholesale decline to lower selling prices and higher product costs. Retail margins improved with a higher e-commerce mix. Nine-month gross margin declined 40 basis points.
- Q3 operating income and net income declined substantially despite slightly lower SG&A. Nine-month SG&A fell $1.7 million, primarily from lower incentive compensation, wages and benefits, and freight costs.
- Seasonality drives working-capital needs; the company typically uses its revolver to fund them. Management stated that market-risk disclosures and risk factors had no material changes from the prior annual report. No legal proceedings were reported.
Outlook, risks, and unusual items
No earnings or sales guidance was provided. The filing identifies forward-looking statement uncertainties and highlights estimation risks involving receivables, sales returns, inventory reserves, intangible-asset impairment, and deferred tax assets. The company reported no uncertain tax positions. Expected Dominican Republic capital investment affects the estimated tax rate; tax-return provision adjustments increased the reported effective rates to 32.5% for Q3 and 34.2% for the nine months. The results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Whether Wholesale sales and gross margins stabilize after the reported price, cost, and category pressures.
- Timing and profitability of shipments under the U.S. military boot contract, including the segment’s relatively low gross margin.
- Working-capital requirements, inventory and receivables collection, and borrowing-base availability under the revolver.
- Progress against the approximately $6.1 million full-year capital expenditure estimate and the effect of planned Dominican Republic investment on taxes.