Rocky Brands, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Rocky Brands designs, manufactures and markets footwear, apparel and accessories. Its reportable segments are Wholesale, Retail and Military. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $55.7 million | $65.9 million | Down 15.5% |
| Gross margin | $19.3 million; 34.7% | $23.0 million; 34.9% | Down $3.7 million; margin down 0.2 percentage points |
| Operating expenses | $17.8 million; 32.0% of sales | $18.5 million; 28.0% of sales | Down 3.6% in dollars |
| Operating income | $1.5 million | $4.5 million | Down 66.4% |
| Net income | $1.2 million | $3.6 million | Down 67.1% |
| Diluted EPS | $0.16 | $0.48 | Down $0.32 |
| Operating cash flow | $14.2 million | $9.8 million | Up $4.3 million |
Segment sales were $35.0 million Wholesale (down 17.5%), $16.9 million Retail (up 9.4%) and $3.8 million Military (down 52.5%). Retail’s increase was attributed mainly to direct-to-consumer e-commerce. Overall gross margin was nearly unchanged, but operating expenses rose as a share of sales because of lower revenue.
Cash, debt and capital
Cash and cash equivalents were $44.2 million at March 31, 2020, versus $15.5 million at December 31, 2019. Operating activities provided $14.2 million; investing activities used $3.4 million; financing activities provided $18.0 million, including a $20.0 million revolver draw. The resulting increase in cash was $28.7 million.
The company reported $20.0 million of long-term debt outstanding under its asset-based revolving facility, compared with no borrowings at December 31, 2019 or March 31, 2019. The facility has a stated maximum of $75 million, subject to borrowing-base limits; reported capacity at March 31 was $60.3 million. Its maturity is February 2024. No covenant-triggering event occurred during the quarter. Management said cash and the credit facility should provide sufficient liquidity for at least the next 12 months, subject to operating performance, cash flows and covenant compliance.
Quarterly dividends were $1.0 million ($0.14 per share), and the company repurchased approximately 50,000 shares for $1.0 million. Capital expenditures were reported as $2.3 million in MD&A; cash-flow-statement purchases of fixed assets were $3.4 million.
Material changes, outlook and risks
- COVID-19 affected demand, deliveries, manufacturing and operations. Wholesale orders and replenishment declined amid store closures and stay-at-home measures; Military sales also fell due partly to fewer scheduled orders and a temporary Puerto Rico facility closure. E-commerce growth supported Retail sales.
- COVID-related facility-closure overhead and payroll costs, net of CARES Act employee-retention credits, reduced reported Wholesale and Military margins by approximately $664,000 and $324,000, respectively. Management reported adjusted Q1 margins of 33.8% for Wholesale and 26.5% for Military.
- Management expected pandemic effects to continue for the remainder of fiscal 2020 but said the ultimate impact could not be predicted, given uncertainty around severity and duration. The filing provides no specific full-year revenue or earnings guidance.
- Identified risks include further demand and consumer-spending declines; customer order reductions or cancellations; disruptions to company and third-party manufacturing, suppliers and logistics; and store closures and labor shortages. The company also cited seasonality, competition, international trade, cybersecurity, currency and broader economic risks.
- The company adopted ASU 2018-13 in Q1 2020, with no significant financial-statement impact. The filing reported no material change in market-risk disclosures and no material change in internal control over financial reporting.
Important facts for investors to verify
- How subsequent results reflect COVID-19’s effects on wholesale and Military orders, retail e-commerce, production and gross margins.
- Whether operating cash generation and the borrowing base support liquidity needs as conditions and seasonal working capital change.
- The terms and remaining capacity of the revolver, including any covenant triggers, and the company’s ability to meet them.
- Whether dividends, share repurchases and capital spending continue at a pace consistent with cash needs.
- How much of reported margin pressure was temporary COVID-related cost versus underlying segment economics; adjusted margins are management-presented measures.