Rocky Brands, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The company sells footwear and accessories through Wholesale, Retail, and Military segments. Interim results are unaudited and, as the filing notes, are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $52.3 million | $55.2 million | $104.6 million | $111.3 million |
| Gross margin | $20.6 million (39.4%) | $19.1 million (34.6%) | $39.9 million (38.1%) | $37.9 million (34.0%) |
| Operating income | $3.8 million | $2.9 million | $4.8 million | $3.7 million |
| Net income (loss) | $2.28 million | $0.52 million | $2.82 million | $(0.04) million |
| Basic and diluted EPS | $0.30 | $0.08 | $0.38 | $(0.01) |
- Q2 sales fell about 5.3% year over year; first-half sales declined about 6.0%. Q2 gross margin improved 4.8 percentage points, while first-half gross margin improved 4.1 points.
- Q2 SG&A was $16.9 million, or 32.2% of sales, versus $16.2 million, or 29.3%. First-half SG&A was $35.1 million, or 33.5% of sales, versus $34.2 million, or 30.7%.
- Six-month operating cash flow was negative $1.6 million, versus positive $8.6 million in 2010. Investing cash flow was negative $4.3 million, mainly capital expenditures; financing cash flow was positive $4.8 million. Cash decreased by $1.2 million to $3.2 million.
- At June 30, total assets were $179.3 million, current assets $124.3 million, and current liabilities $18.8 million. Long-term debt was $39.5 million, with $6,865 in current maturities. The company had $39.5 million borrowed under its $70 million PNC facility; availability is subject to a borrowing-base calculation.
- Inventory was $74.4 million, up $15.5 million from year-end 2010 and $12.6 million from June 2010. Accounts payable rose to $13.0 million from $9.0 million at year-end.
Material changes and drivers
- Wholesale sales grew to $40.8 million in Q2 and $80.6 million for the first half. Higher duty footwear and other category sales were partly offset by the end of the Dickies license, which expired December 31, 2010.
- Retail sales were nearly flat in Q2 at $10.9 million but declined to $22.6 million for the first half from $23.9 million. Management cited a shift toward internet-driven transactions and removal of some Lehigh mobile stores.
- Military sales fell sharply: $0.6 million in Q2 versus $5.7 million, and $1.4 million for the first half versus $11.0 million. Sales depend on winning available contract bids.
- Management attributed higher gross margins mainly to higher average selling prices and lower manufacturing costs. Q2 Wholesale margin also benefited from a $0.6 million Puerto Rico labor-incentive refund.
- Interest expense declined substantially after repayment of high-interest term debt; prior-year expense included approximately $0.9 million of early repayment fees. Q2 2011 included approximately $0.1 million of mortgage prepayment and related fees.
Liquidity, outlook, and risks
- Management expected 2011 capital expenditures of approximately $6.0 million; $4.3 million had been spent during the first half.
- Management said the credit facility and cash generated from operations should provide sufficient liquidity for at least the next 12 months, while noting that liquidity depends on future operating performance, cash flows, and compliance with credit-facility covenants.
- The fixed-charge coverage covenant applies only after a defined triggering event; no trigger had occurred and the covenant was not in effect at June 30, 2011.
- Other disclosed exposures include seasonal working-capital needs, inventory obsolescence and valuation, customer credit and returns allowances, pension assumptions, and potential impairment of intangible assets. Management reported no material change in risk factors from its 2010 Form 10-K and no material market-risk changes.
- No legal proceedings were reported. Management stated disclosure controls were effective and there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether elevated inventory converts to sales and cash, and whether operating cash flow recovers after the first-half working-capital outflow.
- Whether Wholesale growth can offset the discontinued Dickies business and lower, bid-dependent Military revenue; monitor Retail trends and the mobile-store transition.
- Whether gross-margin gains persist without the one-time $0.6 million labor-cost refund, while SG&A remains elevated relative to sales.
- Actual borrowing-base availability, future credit-facility borrowings, and any triggering event that would activate the fixed-charge coverage covenant.
- Progress against the approximately $6.0 million 2011 capital-expenditure estimate and management’s stated liquidity outlook.