Rocky Brands, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. The interim statements are unaudited. Rocky Brands sells footwear and accessories through Wholesale, Retail and Military segments.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $71.0 million | $74.8 million | $175.6 million | $186.1 million |
| Gross margin | $25.6 million (36.0%) | $27.2 million (36.4%) | $65.5 million (37.3%) | $65.0 million (35.0%) |
| Operating income | $7.6 million | $8.0 million | $12.4 million | $11.7 million |
| Net income | $5.2 million | $4.7 million | $8.0 million | $4.6 million |
| Diluted EPS | $0.70 | $0.63 | $1.07 | $0.71 |
Q3 sales declined about 5%; net income rose about 11%, aided in part by lower interest expense and lower income tax expense. For the first nine months, sales declined about 6%, while net income increased about 73%. Nine-month operating margin improved to 7.1% from 6.3%; quarterly operating margin was 10.6% versus 10.8%.
Cash flow, debt and liquidity
- Cash was $3.3 million at September 30, 2011, versus $4.4 million at December 31, 2010. Total assets were $205.5 million.
- Operating activities used $20.3 million in the first nine months, compared with $6.0 million used in the prior-year period. The main working-capital uses were receivables ($15.9 million) and inventory ($20.0 million).
- Investing activities used $6.0 million, primarily for capital expenditures. Financing activities provided $25.3 million, including a $27.0 million net increase in revolving-credit borrowings.
- Long-term debt, including current maturities, was approximately $60.1 million, versus $35.1 million at December 31, 2010. The PNC facility has a $70 million stated limit; reported borrowings were $60.1 million, subject to a borrowing base. The fixed-charge-coverage covenant was not in effect at quarter-end because no triggering event had occurred.
- Management said the credit facility and operating cash generation should fund operations for at least the next 12 months, but noted liquidity depends on future performance, cash flows and covenant compliance.
Material changes and management commentary
- Wholesale sales rose to $60.2 million in Q3 and $140.8 million year to date, but gains in duty and other footwear categories were offset by the expired Dickies license. The Dickies business declined $2.0 million in Q3 and $5.5 million year to date versus 2010.
- Retail sales declined to $10.3 million in Q3 and $33.0 million year to date. Management attributed the decreases to a shift toward internet-driven transactions and removal of some Lehigh mobile stores.
- Military sales fell to $0.4 million in Q3 and $1.8 million year to date, from $4.3 million and $15.2 million, respectively; sales depend on winning contracts.
- Q3 wholesale gross margin fell 180 basis points, mainly due to higher product costs. Year-to-date gross margin improved, reflecting higher average selling prices partly offset by product costs. SG&A was lower in dollars but higher as a percentage of nine-month sales.
- Interest expense was $0.8 million year to date, down from $4.7 million, primarily following repayment of higher-cost term debt; prior-year expense also included early-repayment fees. The 2011 figure includes about $0.1 million of mortgage prepayment fees.
Outlook, risks and unusual items
- Management anticipated approximately $7.0 million of capital expenditures for 2011; $6.0 million had been spent through September.
- The company decided to fully fund and terminate its defined-benefit pension plan, with completion expected by year-end 2011. It expected to contribute about $4.2 million and record a fourth-quarter termination expense of about $3.2 million net of tax; final amounts depend on plan-asset values at settlement.
- The estimated effective tax rate was lower in 2011, in part because of planned permanent capital investment in Dominican Republic operations, reducing expected dividends subject to U.S. tax. The company also recorded a $0.1 million tax benefit related to its 2010 federal return.
- Management cited exposure to inflation in materials, salaries and benefits; estimates and judgments involving receivables, returns, inventory, pension obligations, taxes and intangible-asset impairment; and dependence on military contract awards. The filing reported no material changes to previously disclosed risk factors or market-risk disclosures, and no legal proceedings.
- Disclosure controls were assessed as effective; the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether elevated receivables and inventory convert to cash, given the $20.3 million operating cash outflow and increased revolving borrowings.
- Available borrowing-base capacity under the $70 million facility, its covenant triggers and the company’s ability to maintain compliance.
- Actual cost, funding contribution and timing of the pension-plan termination compared with management’s estimates.
- Whether wholesale growth can offset the expired Dickies license, lower military sales and ongoing retail channel changes, and whether product-cost pressures persist.
- Whether the expected capital-spending level and management’s stated 12-month liquidity outlook remain achievable.