Rocky Brands, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated results. Rocky Brands sells footwear and accessories through Wholesale, Retail and Military segments.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $59.4 million | $44.4 million | $113.1 million | $97.7 million |
| Gross margin | $20.3 million; 34.2% | $15.4 million; 34.6% | $39.0 million; 34.5% | $33.4 million; 34.1% |
| Operating income | $2.9 million; 4.8% of sales | $0.5 million; 1.1% | $4.4 million; 3.9% | $1.7 million; 1.7% |
| Net income | $1.8 million | $0.2 million | $2.7 million | $0.9 million |
| Diluted EPS | $0.24 | $0.03 | $0.35 | $0.13 |
Q2 sales rose about 34% year over year and first-half sales about 16%. Q2 gross margin declined 0.4 percentage point, while first-half margin improved 0.4 point. SG&A was $17.4 million in Q2 and $34.6 million for the first half; as a share of sales it decreased to 29.4% and 30.6%, respectively.
Segments and material comparisons
- Q2 Wholesale sales were $45.8 million, Retail $9.8 million and Military $3.8 million. First-half sales were $87.8 million, $20.6 million and $4.7 million, respectively.
- Management attributed Wholesale growth to multiple footwear and apparel categories, including work and western footwear. Sales under the C.E. Schmidt agreement with Tractor Supply were $3.5 million in Q2 and $5.8 million year to date.
- Military sales benefited from shipments under a U.S. Military “Hot Weather” combat boot contract, which began shipping in March 2013.
- Management said Q2 2012 sales were affected by a distribution-center power outage after severe storms; approximately $2.5 million of sales shifted into Q3 2012. This complicates the year-over-year Q2 comparison.
- Wholesale gross margin improved, which management attributed primarily to manufacturing efficiencies. First-half Retail margin fell to 46.4% from 47.6%, largely due to lower average selling prices on internet-driven transactions.
Cash flow, balance sheet and liquidity
- Cash used in operating activities was $4.7 million in the first half, versus $7.3 million provided in the prior-year period. Inventory consumed $14.0 million of cash and receivables $1.8 million; higher accounts payable provided $5.7 million.
- Cash used in investing was $3.6 million, mainly capital expenditures of $3.7 million. Management anticipated approximately $7.6 million of capital expenditures for full-year 2013.
- Cash was $2.9 million at June 30, down from $4.0 million at year-end 2012. Inventory was $81.2 million, up from $67.2 million at year-end; trade receivables were $46.4 million.
- Long-term debt was $31.4 million, versus $23.5 million at year-end 2012. The company had a $70 million revolving credit facility, with $31.4 million borrowed at quarter-end. The facility generally bears interest at LIBOR plus 1.50%; its fixed-charge coverage covenant was not active because no triggering event had occurred.
- Management said the credit facility and operating cash flows should provide sufficient liquidity for at least the next 12 months, subject to operating performance, cash flows and covenant compliance. The business is seasonal and typically uses the revolver for working capital.
- The company paid a $0.10-per-share dividend in June, totaling approximately $0.75 million.
Outlook, risks and other items
- No specific sales or earnings guidance was provided. Management identified planned 2013 capital expenditures of approximately $7.6 million and expected additional permanent investment in Dominican Republic operations, which it said would reduce dividends requiring U.S. tax provision.
- Management noted exposure to inflation in materials, salaries and benefits, and said it seeks to offset cost pressures through pricing, productivity and cost reductions.
- Management cited estimation risks involving receivable allowances, sales returns, inventory reserves, intangible-asset impairment and deferred tax asset realization. It cautioned that actual results may differ from estimates and forward-looking statements.
- No material change in market-risk disclosures or risk factors was reported. The filing reported no legal proceedings and no material change in internal control over financial reporting; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether inventory growth and the first-half operating cash outflow reverse as seasonal sales and collections progress.
- How much of sales growth and future profitability depends on the Tractor Supply arrangement and U.S. Military contract, including contract timing and margins.
- Whether improved manufacturing efficiencies persist and offset higher advertising, freight and selling costs.
- Revolver availability under the borrowing-base calculation, future debt levels and covenant status.
- Whether planned capital spending and Dominican Republic investment proceed as expected, and their effects on liquidity and taxes.