Rocky Brands, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2012, compared with the same quarter of 2011. Rocky Brands sells footwear and accessories through Wholesale, Retail, and Military segments. Management cautions that quarterly results may not indicate full-year performance.
Financial performance
- Sales: $53.3 million, up 2.0% from $52.3 million. Wholesale sales rose to $42.4 million from $39.8 million; Retail declined to $10.5 million from $11.7 million; Military declined to $0.5 million from $0.8 million.
- Profit and margins: Gross profit was $18.0 million, down from $19.3 million; gross margin fell to 33.8% from 36.8%. Operating income increased to $1.28 million from $1.04 million, with operating margin rising to 2.4% from 2.0%. Net income was $721,000 versus $542,000; diluted EPS was $0.10 versus $0.07.
- Expenses and taxes: SG&A decreased to $16.7 million from $18.2 million, or 31.4% of sales versus 34.8%. Net interest expense was $144,000 versus $216,000. Income tax expense was $406,000 versus $292,000; the estimated effective tax rate was 36% versus 35%.
- Cash flow: Operating activities provided $14.3 million, compared with $6.9 million. Investing activities used $2.0 million, primarily for capital expenditures; financing activities used $13.5 million, reflecting net revolving-credit repayments. Cash decreased by $1.2 million to $2.4 million.
- Liquidity and debt: At March 31, cash was $2.4 million, current assets were $110.9 million, and current liabilities were $15.9 million. Long-term debt was $21.5 million, down from $35.0 million at December 31, 2011. The PNC facility has a $70 million commitment; reported borrowing-base capacity was $62.0 million. Its fixed-charge coverage covenant was not in effect because no triggering event had occurred.
- Balance sheet: Total assets were $166.4 million and shareholders’ equity was $117.5 million. Inventory was $64.1 million, compared with $65.0 million at year-end and $61.7 million a year earlier.
Material changes and management commentary
- Wholesale growth was led by western, commercial military, and work footwear, partly offset by lower duty footwear and other sales. Retail sales fell as the company shifted toward internet-driven transactions and removed some Lehigh mobile stores.
- Wholesale gross margin declined 300 basis points. Management attributed the decline mainly to temporary price concessions and higher sales concentration during a rollout to a major national account. Retail gross margin fell 130 basis points, primarily due to lower average selling prices.
- Lower compensation and benefits and reduced retail operating expenses drove the SG&A decrease, partly offset by higher advertising expense.
- Management expects 2012 capital expenditures of approximately $6.3 million and believes the credit facility and operating cash flow should fund operations for at least 12 months. Liquidity remains dependent on operating performance, cash flows, and covenant compliance. The business is seasonal and typically uses its revolver to fund working capital.
- The company decided in late 2011 to fully fund and terminate its defined-benefit pension plan; no pension cost was recorded in Q1 2012, compared with $104,000 in Q1 2011.
- A new ERP system was implemented in April 2012; management reported no material effect on internal control over financial reporting. Disclosure controls were deemed effective, and there was no material change in internal controls during the quarter.
Risks, contingencies, and other items
- Results face risks from seasonality, customer demand and concentration, pricing and margins, inventory estimates, customer credit, and the ability to win military contract bids. Management also notes exposure to inflation in materials, salaries, and benefits.
- The credit facility is subject to a borrowing-base calculation and includes a fixed-charge coverage covenant that may become operative upon a defined triggering event. Management’s liquidity assessment is contingent on future performance and covenant compliance.
- The company reported no legal proceedings and no material changes to the risk factors in its 2011 Form 10-K. It reported no material changes in market risk since year-end.
- A shareholder rights agreement was scheduled to expire in June 2012. The filing reports no material expected changes in unrecognized tax positions over the next 12 months; certain federal, state, Canadian, and Puerto Rican tax years remain open to examination.
Important facts for investors to verify
- Whether the national-account rollout’s temporary concessions and increased sales concentration persist, and how they affect gross margins.
- Whether wholesale growth can offset continuing weakness in Retail and Military sales.
- Progress against the approximately $6.3 million 2012 capital-expenditure estimate and the expected cash-flow and seasonal working-capital pattern.
- Revolver availability under the borrowing base, covenant triggers and compliance, and the company’s ability to sustain the stated 12-month liquidity outlook.
- Completion and financial consequences of the pension plan funding and termination, and the status of the rights agreement scheduled to expire in June 2012.