Rocky Brands, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2013, compared with the same quarter of 2012. Rocky Brands sells footwear and accessories through Wholesale, Retail, and Military segments.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $53.7 million | $53.3 million |
| Gross profit / margin | $18.7 million / 34.8% | $18.0 million / 33.8% |
| Operating income / margin | $1.5 million / 2.8% | $1.3 million / 2.4% |
| Net income | $892,096 | $720,687 |
| Diluted EPS | $0.12 | $0.10 |
| Cash from operations | $3.0 million | $14.3 million |
| Capital expenditures | $1.9 million | $2.0 million |
SG&A was $17.2 million, or 32.0% of sales, versus $16.7 million, or 31.4%, a year earlier. Net sales were nearly flat year over year, while net income increased. Cash and equivalents were $1.9 million at March 31, 2013, down from $4.0 million at December 31, 2012. Total assets were $173.4 million and shareholders’ equity was $126.7 million.
Reported long-term debt was $20.3 million, compared with $23.5 million at year-end 2012. The revolving facility had $20.3 million drawn against $65.2 million of borrowing-base capacity. Its stated interest rate was generally LIBOR plus 1.50%. The fixed-charge coverage covenant was not in effect because no triggering event had occurred.
Changes and segment results
- Wholesale sales were $42.0 million, down from $42.4 million; gross margin improved to $13.6 million from $12.9 million, primarily due to better manufacturing efficiencies.
- Retail sales rose to $10.8 million from $10.5 million, but gross margin declined to $5.0 million from $5.1 million. Management attributed the margin decline to lower average selling prices on internet-driven transactions relative to mobile-store transactions.
- Military sales increased to $0.9 million from $0.5 million. Shipments began in March under a U.S. Military “Hot Weather” combat boot contract.
- Q1 sales included $2.3 million under a new agreement to produce C.E. Schmidt boots for Tractor Supply. Wholesale commercial and work footwear sales declined, partly offset by growth in western and lifestyle footwear.
Cash flow, outlook, and risks
Operating cash flow fell to $3.0 million from $14.3 million. Management cited receivable reductions and higher accounts payable as sources of cash, offset by increases in inventory and other current assets, primarily income tax receivables. The cash flow statement reports $1.9 million of income taxes paid, net of refunds, versus $165,910 in Q1 2012. Financing activities used $3.2 million, reflecting a net repayment of the revolving facility.
Management anticipated approximately $7.6 million of capital expenditures for 2013, mainly for manufacturing equipment and molds, retail sales fleet, and information technology. It said the credit facility and cash from operations should provide sufficient liquidity for at least the next 12 months, while noting liquidity depends on operating performance, cash flow, and covenant compliance. The filing does not provide a specific sales or earnings forecast.
Working-capital needs are seasonal and generally lowest January through March and highest May through October; revolving borrowings fluctuate accordingly. Risks discussed include customer collection exposure, inventory obsolescence, potential impairment of intangible assets, estimates for returns and allowances, and tax-related estimates. Management reported no material change in risk factors or market-risk disclosures, no legal proceedings, and effective disclosure controls; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the new Tractor Supply and military contracts continue to generate sales and support margins.
- Whether the sharp year-over-year decline in operating cash flow reflects timing and working-capital seasonality, including elevated tax payments.
- Inventory levels, receivable collections, and availability under the borrowing-base facility as seasonal needs rise.
- Progress against the approximately $7.6 million 2013 capital expenditure expectation and the assumptions behind management’s liquidity assessment.
- Potential effects of competitive pricing, freight costs, and lower online selling prices on segment profitability.