Rocky Brands, Inc. — Q2 2015 Form 10-Q
Business context and reporting period: The filing covers the quarter and six months ended June 30, 2015. Rocky Brands reports Wholesale, Retail, and Military segments. Interim results are unaudited and may not indicate full-year performance.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $68.6 million | $68.8 million | $134.0 million | $134.6 million |
| Gross margin | $22.6 million (33.0%) | $22.6 million (32.8%) | $44.6 million (33.3%) | $44.4 million (33.0%) |
| SG&A | $19.4 million | $20.0 million | $39.0 million | $40.6 million |
| Operating income | $3.3 million (4.7%) | $2.5 million (3.7%) | $5.7 million (4.2%) | $3.9 million (2.9%) |
| Net income | $2.0 million | $1.5 million | $3.4 million | $2.2 million |
| Diluted EPS | $0.26 | $0.20 | $0.45 | $0.30 |
Cash flow, debt and liquidity
- First-half operating cash flow was $4.5 million, versus $1.5 million in 2014; investing cash outflow was $2.3 million, versus $5.2 million.
- Cash declined by $0.1 million during the first half, ending at $4.5 million. Financing cash outflow was $2.3 million, including $1.6 million of dividends and a $0.7 million net repayment under the revolving facility.
- At June 30, cash was $4.5 million, current assets $153.7 million, and current liabilities $26.6 million. Inventory was $86.5 million and net trade receivables were $58.1 million.
- Long-term debt was $35.6 million, down from $43.4 million at June 30, 2014. The revolving credit facility has a $75 million stated capacity, subject to a borrowing-base calculation, and matures in November 2019. The fixed-charge coverage covenant was not in effect at quarter-end because no triggering event had occurred.
- First-half capital expenditures were $2.3 million; management anticipated approximately $6.1 million for full-year 2015.
Material changes and management commentary
- Sales were nearly flat year over year in Q2 and down modestly for the first half. Wholesale sales fell $2.8 million in Q2 and $4.9 million in the first half; management cited declines in commercial military, apparel, lifestyle, and work categories, partly offset by outdoor and other footwear growth.
- Retail sales rose to $10.2 million in Q2 and $22.0 million for the first half. Military sales increased to $4.5 million and $7.1 million, respectively, with shipments under a U.S. Military “Hot Weather” combat-boot contract.
- Gross margin improved slightly in both comparative periods. Management attributed Wholesale margin improvement partly to a prior-year discounted sale to a key retail partner, and Retail improvement to a mix shift toward higher-margin business.
- SG&A declined, primarily due to lower incentive compensation; first-half freight expense also decreased. Interest expense was lower year over year.
- No specific earnings or sales guidance was provided. Management cited seasonality and use of revolving borrowings to fund working capital, which typically peaks from May through October.
Risks, contingencies and other items
- Management identifies estimation risks around customer collections, returns and allowances, inventory obsolescence, intangible-asset impairment, and deferred-tax-asset realization. Actual outcomes may differ from estimates.
- The company reported no material change in risk factors or market-risk disclosures, no legal proceedings, and no material change in internal control over financial reporting. Disclosure controls were judged effective.
- Management had not determined the impact of the forthcoming revenue-recognition standard (ASC 606). Adoption was scheduled for annual periods beginning after December 15, 2017 under the filing’s stated requirements.
- Forward-looking statements are subject to risks and uncertainties; the company disclaimed an obligation to update them.
Important facts for investors to verify
- Whether Wholesale weakness persists and whether Military growth continues beyond shipments under the Hot Weather boot contract.
- Whether improved margins and lower SG&A are sustainable, particularly given the stated prior-year comparison effects and sales-mix changes.
- Working-capital trends, including receivables and inventory, and the resulting seasonal reliance on revolving borrowings.
- Progress toward the approximately $6.1 million 2015 capital-expenditure estimate and the credit facility’s borrowing-base availability and covenant triggers.
- Potential effects of ASC 606 and any changes in estimates for inventory reserves, receivable allowances, or intangible-asset impairment.