Rocky Brands, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited results; comparisons are with the corresponding 2012 periods unless noted.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $70.2 million | $72.5 million | $183.3 million | $170.3 million |
| Gross margin | $22.7 million (32.4%) | $26.2 million (36.1%) | $61.7 million (33.7%) | $59.6 million (35.0%) |
| SG&A | $18.3 million (26.1% of sales) | $18.2 million (25.2%) | $52.9 million (28.9%) | $49.9 million (29.3%) |
| Operating income | $4.4 million (6.3%) | $7.9 million (10.9%) | $8.8 million (4.8%) | $9.7 million (5.7%) |
| Net income | $2.9 million | $5.4 million | $5.6 million | $6.3 million |
| Diluted EPS | $0.39 | $0.72 | $0.74 | $0.84 |
Q3 sales fell 3.3%, while net income declined 45.4%. Nine-month sales rose 7.7%, but net income fell 11.2%. Interest expense was $0.2 million for the quarter and $0.5 million year to date.
Balance sheet, cash flow and liquidity
- At September 30, 2013, cash was $4.6 million, trade receivables $60.6 million, inventory $78.9 million, and current assets $147.9 million; current liabilities were $20.1 million.
- Long-term debt was $42.4 million, up from $23.5 million at December 31, 2012. The company had a $70 million revolving facility, subject to borrowing-base limits, with $42.4 million borrowed. Its fixed-charge coverage covenant was not in effect because no triggering event had occurred.
- Nine-month operating cash flow was negative $11.2 million, versus negative $2.0 million in 2012. Receivables and inventory uses of cash were $15.8 million and $11.7 million, respectively.
- Investing cash outflow was $5.7 million, including $5.6 million of fixed-asset purchases. Financing provided $17.4 million, primarily from a net $18.9 million increase in revolving borrowings, partly offset by $1.5 million of dividends. Cash ended at $4.6 million.
Business changes and management commentary
- Q3 wholesale sales decreased $5.5 million to $57.4 million, principally from lower hunting, apparel, commercial and lifestyle footwear sales. Retail sales were essentially flat at $9.6 million. Military sales were $3.2 million, compared with none in Q3 2012.
- For the first nine months, wholesale sales increased $5.2 million, retail sales increased $1.0 million, and military sales increased $6.8 million. The C.E. Schmidt program with Tractor Supply contributed $7.8 million of year-to-date sales, including $2.0 million in Q3; military sales reflect a U.S. contract for “Hot Weather” combat boots.
- Management attributed lower wholesale margins in part to lower-margin C.E. Schmidt products and increased manufacturing costs. Retail year-to-date margin pressure was attributed largely to lower average selling prices in internet-driven transactions. Higher freight and advertising costs contributed to increased SG&A dollars year to date.
- Seasonality typically raises working-capital needs from May through October. Capital expenditures were $5.6 million year to date; management anticipated approximately $7.6 million for full-year 2013. Management said cash and the credit facility should fund operations for at least 12 months, subject to operating performance, cash flows and covenant compliance.
- After quarter-end, the company signed an agreement to acquire certain Creative Recreation assets, including its trademark, for approximately $11 million, subject to a working-capital adjustment. Funding is expected from cash and the revolving facility; closing was expected in Q4 2013 and remained subject to customary conditions.
Risks, contingencies and other items
Key exposures include seasonal working-capital requirements, collection and inventory-management estimates, product costs and the ability to sustain operating performance and meet credit-facility requirements. The filing reports no material changes in market risks or risk factors, no legal proceedings, and no material change in internal control over financial reporting. Management reported disclosure controls were effective. Interim results are not necessarily indicative of full-year results.
The filing’s tax discussion contains inconsistent period references in MD&A. The financial statements show income-tax expense of $1.3 million for Q3 and $2.8 million year to date; the notes report effective tax rates of 31.3% and 33.1%, respectively.
Important facts for investors to verify
- Whether the Creative Recreation acquisition closed, its final consideration and working-capital adjustment, and its financing impact.
- Subsequent receivables collections and inventory levels, given negative operating cash flow and the substantial seasonal working-capital build.
- Whether gross margins recover as product mix, manufacturing costs and lower-margin program sales evolve.
- Revolver availability under borrowing-base limits, covenant-trigger status, and debt levels after the acquisition and seasonal cycle.
- The tax-period inconsistencies in MD&A versus the financial-statement notes.