Rocky Brands, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2014, compared with the same period in 2013. Rocky Brands reports Wholesale, Retail, and Military segments. In December 2013, it acquired certain assets of Kommonwealth, Inc., including the Creative Recreation footwear brand.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $65.8 million | $53.7 million |
| Gross profit / margin | $21.9 million / 33.2% | $18.7 million / 34.8% |
| SG&A | $20.5 million | $17.2 million |
| Operating income / margin | $1.34 million / 2.0% | $1.51 million / 2.8% |
| Net income | $0.72 million | $0.89 million |
| Basic and diluted EPS | $0.10 | $0.12 |
| Operating cash flow | $5.76 million | $2.99 million |
| Capital expenditures | $3.25 million | $1.95 million |
Financial position and liquidity
- At March 31, 2014, cash was $4.2 million, current assets $140.2 million, and current liabilities $25.4 million.
- Long-term debt was $36.6 million, all reported as borrowings under the revolving credit facility. The facility has a stated $70 million capacity, subject to a borrowing-base calculation. Its rate was generally LIBOR plus 1.50%.
- Cash decreased by $11,771 during the quarter. Financing cash use of $2.55 million included net revolver repayments and $0.75 million of dividends.
- Management said existing facility availability and operating cash generation should support operations for at least 12 months, contingent on operating performance, cash flows, and covenant compliance. The fixed-charge coverage covenant was not in effect at quarter-end because no triggering event had occurred.
Material changes and management commentary
- Sales increased 22.5%. Wholesale sales rose to $53.1 million from $42.0 million, led by lifestyle footwear (including Creative Recreation), work, and western categories. Retail sales were $11.1 million versus $10.8 million; Military sales were $1.6 million versus $0.9 million, including shipments under a U.S. military hot-weather boot contract.
- Gross margin fell 1.6 percentage points. Management attributed the Wholesale decline partly to reduced-price product sold to a key retail partner; Retail margin also declined, largely due to lower average selling prices on internet transactions.
- SG&A increased by $3.35 million, including $1.6 million of Creative Recreation expenses, higher selling and distribution costs, and increased advertising. Despite higher sales, operating income and net income declined; interest expense also increased.
- Operating cash flow improved, primarily reflecting higher accounts payable, partly offset by increased receivables. The company described January–March as generally its lowest working-capital period and uses revolver borrowings to fund seasonal needs.
- Management anticipated approximately $8.4 million of capital expenditures for 2014. The filing provides no earnings or revenue guidance.
Risks, contingencies, and unusual items
- The Creative Recreation purchase-price disclosure presents a reconciliation that warrants attention: MD&A describes total consideration of approximately $8.7 million, while the purchase-price allocation table lists a $2.229 million purchase price and a $0.602 million net gain on purchase. The filing states the transaction was funded with cash and revolver availability.
- Receivables, inventory valuation, sales returns, intangible-asset impairment, and deferred-tax-asset realization involve management estimates; actual results may differ. Inventory was $78.3 million, compared with $68.3 million at March 31, 2013.
- Management cautioned that quarterly results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and uncertainties. No material change in market-risk disclosures or risk factors was reported; no legal proceedings were reported.
- Disclosure controls were assessed as effective, and the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the Creative Recreation transaction’s stated consideration, purchase-price allocation, and reported gain on purchase.
- Assess whether lower Wholesale pricing and reduced margins persist, particularly in light of the key retail partner sales.
- Monitor receivables, inventory, accounts payable, and borrowing-base availability as seasonal working-capital needs change.
- Compare planned 2014 capital spending of approximately $8.4 million with actual spending and cash generation.
- Review future results and covenant status against management’s conditional 12-month liquidity assessment.