Rocky Brands, Inc. — Q3 2017 Form 10-Q
Business context and period: The company designs, manufactures and markets footwear, apparel and accessories under brands including Rocky, Georgia Boot, Durango, Lehigh and Creative Recreation. This unaudited report covers the quarter and nine months ended September 30, 2017; comparisons are with the same periods in 2016.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $64.7 million | $73.2 million | $186.2 million | $193.3 million |
| Gross profit / margin | $19.5 million / 30.2% | $19.8 million / 27.0% | $57.4 million / 30.8% | $54.9 million / 28.4% |
| Operating income (loss) | $3.5 million | $0.9 million | $8.1 million | $(1.9) million |
| Net income (loss) | $2.2 million | $0.4 million | $5.2 million | $(1.5) million |
| Diluted EPS | $0.30 | $0.06 | $0.70 | $(0.20) |
- Cash flow: Nine-month operating cash flow was $6.8 million, versus $2.5 million. Capital expenditures were $3.5 million, versus $5.2 million; cash used in investing was $3.1 million. Financing used $6.0 million, including net revolver repayments, share repurchases and dividends. Cash declined $2.2 million to $2.2 million.
- Balance sheet and liquidity: At September 30, cash was $2.2 million, current assets $127.5 million, current liabilities $26.0 million, and working capital $101.5 million. Inventory was $76.9 million. Credit-facility debt was $11.6 million, down from $31.0 million a year earlier. The company reported $70.2 million of total borrowing capacity, subject to a borrowing-base calculation. Its $75 million facility matures in November 2019; the fixed-charge covenant was not in effect at quarter-end.
- Margins and costs: Q3 SG&A was $16.0 million (24.8% of sales), compared with $17.7 million (24.2%). Nine-month SG&A was $49.3 million (26.5%), compared with $55.7 million (28.8%). Interest expense was $0.1 million in Q3 and $0.3 million for nine months.
Material changes and management commentary
- Sales fell 11.7% in Q3 and 3.7% for the first nine months. Wholesale sales declined $6.8 million in Q3 and $12.2 million year to date, primarily following discontinuation of a private-label work program and lower commercial military sales after the prior-year initial sell-in of new boots. Retail sales increased; military-segment sales declined in Q3 but increased year to date.
- Gross margin improved year over year in both periods. Management attributed wholesale margin gains to better full-price selling, less discounting and the exit from a lower-margin private-label program. Lower SG&A reflected completion of 2016 reorganization efforts; the company recorded no reorganization charge in 2017, versus $1.2 million in 2016.
- Hurricanes Maria and Irma disrupted production at the Puerto Rico facility. Management cited approximately $1 million of additional payroll and overhead costs that could not be capitalized because of lower production volumes. Q3 military margins were also below expectations; management still expected full-year military gross margin in the mid-teen range.
Outlook, risks and unusual items
- Management anticipated approximately $4.0 million of capital expenditures for 2017. No broader revenue or earnings guidance is provided in the filing.
- The company was fulfilling several multiyear U.S. military contracts. Results remain subject to risks described in its 2016 Form 10-K; the filing reports no material changes to risk factors or market-risk disclosures.
- In Q3, the company changed its use of an existing net operating loss from carryback to carryforward, reclassifying $901,365 from tax receivable to a deferred tax asset, netted against deferred tax liabilities. The reported effective tax rate was 34%.
- The company repurchased shares under a $7.5 million program expiring March 31, 2018. The filing’s table reports 48,816 Q3 shares repurchased at an average $13.35, while the accompanying narrative says 42,816 shares—an internal discrepancy to clarify.
- Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported. No legal proceedings were reported.
Important facts for investors to verify
- Clarify the Q3 share-repurchase count discrepancy (48,816 in the table versus 42,816 in the narrative).
- Track the duration and financial effects of hurricane-related Puerto Rico production disruption and the recovery of military-segment margins.
- Monitor wholesale demand, including the effects of the discontinued private-label program and the timing of military orders.
- Review seasonal working-capital needs, inventory levels and revolver availability under the borrowing-base formula.
- Assess the eventual effects of pending revenue-recognition, lease and credit-loss accounting standards; the company had not concluded on its revenue-standard adoption method.