Rocky Brands, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; unaudited. Rocky Brands sells footwear and accessories through Wholesale, Retail, and Military segments.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $73.2 million | $70.0 million | $193.3 million | $204.0 million |
| Gross margin | $19.8 million; 27.0% | $22.1 million; 31.6% | $54.9 million; 28.4% | $66.7 million; 32.7% |
| Operating income (loss) | $0.9 million | $2.9 million | $(1.9) million | $8.6 million |
| Net income (loss) | $0.4 million | $1.8 million | $(1.5) million | $5.2 million |
| Basic and diluted EPS | $0.06 | $0.24 | $(0.20) | $0.69 |
Q3 sales increased about 4.6%, while net income fell about 75%. For the nine-month period, sales declined about 5.3% and results shifted from profit to loss. Q3 SG&A declined to $17.7 million from $19.2 million; nine-month SG&A was $55.7 million versus $58.2 million. The nine-month operating loss included a $1.16 million reorganization charge.
Segments and drivers
- Q3 Wholesale sales were $52.9 million, down from $54.7 million; Retail was $10.3 million, essentially flat; Military rose to $10.1 million from $5.1 million.
- For the first nine months, Wholesale sales fell to $134.6 million from $159.6 million, Retail remained about $32.2 million, and Military increased to $26.5 million from $12.2 million. Military growth reflected shipments under U.S. combat-boot contracts, including a new temperate-weather order beginning in March 2016.
- Management attributed Wholesale weakness to warm weather, weak retail traffic, softer local economies—particularly those tied to oil and gas—and excess inventory in distribution channels. Lower gross margins primarily reflected higher manufacturing costs as production ramped at the Puerto Rico facility; lower average selling prices also affected Q3 Wholesale margin.
Cash, liquidity, and debt
- Nine-month operating cash flow was $2.5 million, compared with cash use of $1.5 million in 2015. Receivables and inventory used cash, partly offset by higher payables and accrued liabilities.
- Capital expenditures were $5.2 million versus $5.5 million. Management anticipated approximately $6.9 million of capital expenditures for full-year 2016.
- Cash was $3.9 million at September 30, 2016. Current assets were $140.6 million and current liabilities were $23.6 million; inventories were $79.9 million and net trade receivables were $51.3 million.
- Long-term debt was $31.0 million, versus $23.7 million at December 31, 2015 and $45.0 million at September 30, 2015. The revolving facility matures in November 2019; borrowings are subject to a borrowing base. The fixed-charge coverage covenant was not in effect because no triggering event had occurred.
- Nine-month financing cash flow was $3.1 million, including $7.3 million of net revolving-facility borrowings, $2.5 million of dividends, and $1.6 million of share repurchases.
Outlook, risks, and notable items
- No revenue or earnings guidance was provided. Management cited the reorganization as an effort to improve profitability, support long-term revenue growth, and maximize shareholder value; it said it did not expect further reorganization costs. The recorded $1.16 million charge consisted of severance, with approximately $0.88 million accrued for future payments at quarter-end.
- The company’s business is seasonal, and working-capital needs typically peak from May through October. It uses the revolving facility to fund seasonal needs.
- Management identified estimation risks involving receivable collectability, returns and allowances, inventory obsolescence, intangible-asset impairment, and deferred-tax-asset realization. The filing reported no material change in risk factors or market-risk disclosures, and no legal proceedings.
- The board authorized up to $7.5 million of share repurchases through March 1, 2017. The company repurchased 145,784 shares for $1.65 million during the first nine months; $5.85 million remained authorized at September 30.
Important facts for investors to verify
- Whether Wholesale demand and channel inventories improve, and whether Military contract shipments continue at comparable levels.
- Whether Puerto Rico manufacturing costs normalize and gross margins recover.
- Actual capital spending against the approximately $6.9 million full-year estimate, and seasonal working-capital and borrowing needs.
- Debt-facility availability and covenant status as business conditions and the borrowing base change.
- Whether the reorganization delivers expected savings and whether the company completes additional share repurchases.