Rocky Brands, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. Rocky Brands designs, manufactures and markets footwear, apparel and accessories. Its reportable segments are Wholesale, Retail and Military.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $61.4 million | $63.1 million | Down 2.7% |
| Gross profit / margin | $21.0 million / 34.2% | $19.7 million / 31.3% | Margin up 2.9 percentage points |
| Operating expenses | $16.7 million | $17.4 million | Down $0.6 million |
| Operating income / margin | $4.2 million / 6.9% | $2.4 million / 3.8% | Improved |
| Net income | $3.3 million | $1.5 million | Up 117% |
| Diluted EPS | $0.44 | $0.20 | Up $0.24 |
| Operating cash flow | $10.9 million | $9.2 million | Up $1.6 million |
| Capital expenditures | $1.4 million | $0.9 million | Up $0.5 million |
Gross-margin improvement and lower operating expenses more than offset lower sales. Management attributed the decrease in expenses primarily to the Creative Recreation brand sale in Q4 2017. Interest expense declined to approximately $47,000 from $90,000, reflecting lower debt. The effective tax rate fell to 20.5% from 34.0%, primarily due to the Tax Cuts and Jobs Act.
Segment sales and gross profit
| Segment | Sales, 2018 | Sales, 2017 | Gross profit, 2018 | Gross profit, 2017 |
|---|---|---|---|---|
| Wholesale | $40.4 million | $39.2 million | $14.0 million | $13.0 million |
| Retail | $13.1 million | $11.9 million | $5.5 million | $5.3 million |
| Military | $7.9 million | $12.0 million | $1.4 million | $1.4 million |
Wholesale growth was attributed to strong product lines, improved retailer and e-commerce partnerships, and redirected marketing. Retail growth came from Lehigh and branded e-commerce. Military sales declined; management noted that sales depend on contract bids and purchase orders, while the company was fulfilling several multiyear contracts. Wholesale margin benefited from more full-price selling; Retail margin declined due to sales mix and discontinued-product sales; Military margin improved with the end of older, lower-margin contracts and increased Puerto Rico facility efficiency.
Liquidity, debt and balance sheet
At March 31, 2018, cash was $10.1 million, versus $3.7 million at December 31, 2017 and $2.7 million a year earlier. Current assets were $133.9 million and current liabilities $34.1 million. Total assets were $188.1 million; total liabilities were $44.3 million. The company reported no credit-facility borrowings at quarter-end, compared with $2.2 million at December 31, 2017 and $5.2 million at March 31, 2017.
The revolving facility is stated at $75 million, subject to a borrowing-base calculation; reported capacity at March 31 was $61.0 million. Its term runs to November 2019. The fixed-charge coverage covenant was not in effect because no triggering event had occurred. Net cash used in financing was $3.0 million, including net facility repayments and $0.8 million of dividends. The company believes operating cash flow and the facility will support operations for at least the next 12 months, subject to performance, cash flows and covenant compliance.
Operating cash flow benefited primarily from lower receivables; investing cash use was mainly for equipment, molds, IT and facility improvements. Cash increased by $6.4 million during the quarter. Inventory was $65.2 million, down from $68.8 million a year earlier.
Other material changes, outlook and risks
- The company adopted ASC 606 in Q1 2018 using the modified retrospective method. It reported no material opening retained-earnings adjustment and expects no material ongoing net-income impact. The new presentation includes $13.5 million each of contract receivables and contract liabilities related to non-cancellable U.S. Military contracts; the filing reports the corresponding changes as cash-flow items.
- A tax liability related to taxation of unremitted foreign-subsidiary earnings is described in MD&A as approximately $2.5 million, payable over eight years; the first $510,000 installment was paid in April 2018. The balance sheet reports long-term taxes payable of $2.287 million.
- No quantified sales or earnings guidance is provided. Management expects any 2018 inflationary pressure may be offset through possible price increases and says it expects liquidity to be adequate for at least 12 months.
- Risks cited include consumer demand and forecasts, seasonality and weather, competition, supplier reliance, retail trends, cybersecurity and broader economic conditions. The company said there were no material changes to previously disclosed risk factors or market risks.
- Disclosure controls were concluded to be effective; no material change in internal control over financial reporting was reported. A new $7.5 million share-repurchase authorization was announced in March 2018, expiring March 1, 2019; no shares were repurchased in the quarter.
Important facts for investors to verify
- Whether the sharp year-over-year decline in Military sales persists, given reliance on contract awards and orders.
- Whether higher gross margins—especially Wholesale’s improvement from full-price selling—are sustainable, and whether Retail mix continues to pressure margins.
- The reconciliation and payment schedule for the foreign-earnings tax liability, including the reported approximately $2.5 million amount versus $2.287 million of long-term taxes payable on the balance sheet.
- The terms, borrowing-base availability and covenant triggers of the revolving facility, including seasonal working-capital needs and the November 2019 maturity.
- Cash conversion and the composition of the new Military contract receivables and liabilities, as well as the timing of related revenue recognition and collections.
- Execution of the $7.5 million repurchase authorization and its interaction with dividends, liquidity and facility restrictions.