Rocky Brands - 10-Q quarterly report FY

 

OR

(Exact name of registrant as specified in its charter)

39 E. Canal Street, Nelsonville, Ohio 45764
(Address of Principal Executive Offices, Including Zip Code)

(740) 753-1951
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES þ NO o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES þ NO o

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 5,284,725 shares of Common Stock, no par value, were outstanding at July 31, 2005.

 

See notes to the interim unaudited condensed consolidated financial statements.

See notes to the interim unaudited condensed consolidated financial statements.

See notes to the interim unaudited condensed consolidated financial statements.

NOTES TO THE INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30,

2005 AND 2004

The following is a summary of segment operating results for the Wholesale, Retail, and Military segments.

The following table sets forth, for the periods indicated, information derived from our Interim Unaudited Condensed Consolidated Financial Statements, expressed as a percentage of net sales. The discussion that follows the table should be read in conjunction with our Interim Unaudited Condensed Consolidated Financial Statements.

Net sales increased to a second quarter total of $65.5 million compared to $27.4 million for the same period in 2004. The second quarter results reflect the acquisition of EJ Footwear, which contributed $38.0 million during the three month period ended June 30, 2005.

We have commenced segment reporting for consistency with our current organizational structure and the manner in which management views our financial results. In fiscal year 2005, we are reporting financial information for three reporting segments: Wholesale, Retail and Military. Management reviews financial results of Wholesale, Retail and Military to measure performance. Wholesale sales for the second quarter were $45.5 million compared to $24.0 million for the same period in 2004. The increase is due to the acquisition of EJ Footwear in 2005. Retail sales for the second quarter were $14.2 million compared to $0.7 million for the same period in 2004, again reflecting EJ Footwear activity in 2005. Prior to the acquisition of EJ Footwear, our retail sales related only to outlet stores. Other than the sales related to EJ Footwear, changes in sales for Wholesale and Retail were not significant. Military sales for the second quarter were $5.8 million compared to $2.8 million in the same period in 2004 reflecting activity under the military contract awarded in February 2005.

Gross margin in the second quarter of 2005 increased to $25.7 million, or 39.3% of net sales, from $7.8 million or 28.3% of net sales for the same period last year. The 1100 basis point increase is primarily attributable to sales of EJ Footwear product, which carry a higher gross margin than Rocky products.

The Wholesale segment gross margin for the second quarter of $17.3 million or 38.1% of net sales compares to $7.2 million or 30.0% of net sales in the same period last year. The increase in dollars and basis points reflects sales in 2005 of EJ Footwear product, which carry a higher gross margin than Rocky products. Retail segment gross margin for the second quarter was $7.7 million or 53.9% of net sales compared to $0.2 million or 30.5% of net sales for the same period in 2004. The increase in dollars and basis points reflect EJ Footwear activity in 2005 that carry higher gross margins than Rocky outlet store sales. Military gross margin for the second quarter was $0.7 million or 12.6% of net sales compared to $0.4 million or 13.4% of net sales for the same period in 2004 reflecting activity under the military contract awarded in the first quarter of 2005.

Selling, general and administrative (“SG&A”) expenses were $19.5 million, or 29.7% of net sales for the second quarter of 2005 compared to $5.4 million, or 19.7% of net sales, a year ago. The increase is primarily a result of higher SG&A associated with the EJ Footwear business.

Interest expense was $2.1 million in the quarter ended June 30, 2005 compared to $0.3 million for the same period in the prior year. The increase was primarily due to interest on borrowings to finance the EJ Footwear Group acquisition.

Income tax expense for the quarter ended June 30, 2005 was $1.4 million compared $0.7 million for the same period a year ago. Our effective tax rate was 34.0% for the three months ended June 30, 2005 versus 32.0% for the same period in 2004. The increase in the effective tax rate in 2005 over 2004 is due primarily to the EJ Footwear Group income being subject to U.S. effective tax rates. A portion of our income is subject to lower taxes in foreign countries.

Net sales for the six months ended June 30, 2005 were $127.0 million compared to $49.3 million for the same period in 2004. The current year results reflect the acquisition of EJ Footwear, which contributed $77.9 million during the six month period ended June 30, 2005.

Wholesale segment sales for the first six months were $87.4 million compared to $40.1 million for the same period in 2004. The increase is due to acquisition of EJ Footwear in 2005. Retail sales for the first six months were $30.1 million compared to $1.5 million for the same period in 2004. The increase is due to the acquisition of EJ Footwear in 2005. Military sales for the first six months were $9.5 million compared to $7.7 million in same period in 2004 reflecting activity under the military contract awarded in February 2005.

Gross margin in the first six months of 2005 increased to $49.9 million, or 39.3% of net sales, from $13.4 million or 27.2% of net sales for the same period last year. The 1210 basis point increase is primarily attributable to sales of EJ Footwear product which carry a higher gross margin than Rocky products.

The Wholesale segment gross margin for the first six months was $32.7 million or 37.4% of net sales compares to $12.2 million or 30.3% of net sales in the same period last year. The increase in dollars and basis points reflects sales in 2005 of EJ Footwear product, which carry a higher gross margin than Rocky products. Retail segment gross margin for the first six months was $16.0 million or 53.2% of net sales compared to $0.4 million or 27.8% of net sales for the same period in 2004. The increase in dollars and basis points reflect EJ Footwear activity in 2005 that carry higher gross margins than Rocky outlet store sales. Military gross margin for the first six months was $1.2 million or 12.9% of net sales compared to $0.8 million or 10.6% of net sales for the same period in 2004 reflecting activity under the military contract awarded in February 2005.

Selling, general and administrative (“SG&A”) expenses were $40.1 million, or 31.6% of net sales for the first six months of 2005 compared to $10.7 million, or 21.7% of net sales, a year ago. The increase is primarily a result of higher SG&A associated with the EJ Footwear business.

Interest expense was $4.0 million in the six months ended June 30, 2005 compared to $0.5 million for the same period in the prior year. The increase was primarily due to interest on borrowings to finance the EJ Footwear Group acquisition.

Income tax expense for the six months ended June 30, 2005 was $2.0 million compared $0.7 million for the same period a year ago. Our effective tax rate was 34.0% for the six months ended June 30, 2005 versus 32.0% for the same period in 2004. The increase in the effective tax rate in 2005 over 2004 is due primarily to the EJ Footwear Group income being subject to U.S. effective tax rates. A portion of our income is subject to lower taxes in foreign countries.

We principally fund working capital requirements and capital expenditures through income from operations, borrowings under our credit facility and other indebtedness. Working capital is primarily used to support changes in accounts receivable and inventory because of our seasonal business cycle and business expansion. These requirements are generally lowest in the months of January through March of each year and highest during the months of May through October. At June 30, 2005, we had working capital of $115.4 million versus $59.9 million on the same date last year and $62.5 million at December 31, 2004.

Our cash flow used in operations was $1.0 million in the first six months of 2005 compared to $4.3 million in the same period of 2004. The increase in inventories reflects procurement of raw materials to support production to fulfill the military contract, and higher finished goods inventory due to the seasonal nature of the business coupled with a shift of large seasonal shipments from late second quarter in 2004 to early third quarter in 2005. The increase in accounts payable and accrued liabilities reflects the higher inventory purchases.

Our line of credit provides for advances based on a percentage of eligible accounts receivable and inventory with maximum borrowings under the line of credit of $100.0 million. As of June 30, 2005, we had borrowed $59.5 million against its then currently available line of credit of $71.8 million compared with $16.8 million and $37.1 million respectively in the same period of 2004.

The principal use of cash flows in investing activities for the first six months of 2005 and 2004 has been for the acquisition of the EJ Footwear Group in 2005, and investment in property, plant, and equipment. In the first six months of 2005, property, plant, and equipment expenditures were $2.7 million versus $2.8 million in the same period of 2004. The current year expenditures primarily represent investments in production equipment, and in expansion of the workspace at our main office building and factory store to accommodate the relocation of the EJ Footwear Group operations. Capital expenditures for fiscal year 2005 are anticipated to be approximately $6.0 million.

Our net cash provided by financing activities for the six months ended June 30, 2005 was $92.6 million, comprised of the net cash proceeds from debt financing of $94.2 million, the proceeds from the exercise of stock options of $0.7 million, offset by debt financing costs of $2.3 million.

The proceeds of the borrowing were primarily used to fund the acquisition of EJ Footwear, and increases in working capital as noted above.

We cannot determine the precise effects of inflation; however, inflation continues to have an influence on the cost of materials, salaries, and employee benefits. We attempt to offset the effects of inflation through increased selling prices, productivity improvements, and reduction of costs.

Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. A summary of our significant accounting policies is included in the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2004.

Management regularly reviews its accounting policies to make certain they are current and also provide readers of the consolidated financial statements with useful and reliable information about our operating results and financial condition. These include, but are not limited to, matters related to accounts receivable, inventories, pension benefits, and income taxes. Implementation of these accounting policies includes estimates and judgments by management based on historical experience and other factors believed to be reasonable. This may include judgments about the carrying value of assets and liabilities based on considerations that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies are most important to the portrayal of our financial condition and results of operations, and require more significant judgments and estimates in the preparation of its consolidated financial statements.

Revenue principally consists of sales to customers, and, to a lesser extent, license fees. Revenue is recognized when risk and title passes to the customer, while license fees are recognized when earned. Customer sales are recorded net of allowances for estimated returns, trade promotions and other discounts, which are recognized as a deduction from sales at the time of sale.

Management maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Management also records estimates for customer returns and discounts offered to customers. Should a greater proportion of customers return goods and take advantage of discounts than estimated by us, additional allowances may be required.

We record a reduction to gross sales based on estimated customer returns and allowances. These reductions are influenced by historical experience, based on customer returns and allowances. The actual amount of sales returns and allowances realized may differ from our estimates. If we determine that sales returns or allowances should be either increased or decreased, then the adjustment would be made to net sales in the period in which such a determination is made. Sales returns and allowances for sales returns were approximately 3.5% of sales for 2005 and 2004.

Management identifies slow moving or obsolete inventories and estimates appropriate loss provisions related to these inventories. Historically, these loss provisions have not been significant as the vast majority of our inventories are considered saleable and we have been able to liquidate slow moving or obsolete inventories through our factory outlet stores or through various discounts to customers. Should management encounter difficulties liquidating slow moving or obsolete inventories, additional provisions may be necessary. Management regularly reviews the adequacy of its inventory reserves and makes adjustments to them as required.

Intangible assets including goodwill, trademarks, and patents are reviewed for impairment at least at each reporting date. Based upon our review, none of our intangibles were impaired as of June 30, 2005.

Accounting for pensions involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, extensive use is made of assumptions about inflation, investment returns, mortality, turnover, medical costs and discount rates. These assumptions are reviewed annually. See Note 9, “Retirement Plans,” to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2004 for information on the plan and the assumptions used.

Pension expenses are determined by actuaries using assumptions concerning the discount rate, expected return on plan assets and rate of compensation increase. An actuarial analysis of benefit obligations and plan assets is determined as of September 30 each year. The funded status of our plan and reconciliation of accrued pension cost is determined annually as of December 31. Further discussion of our pension plan and related assumptions is included in Note 9, “Retirement Plans”, to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2004. Actual results would be different using other assumptions. Management records an accrual for pension costs associated with our sponsored noncontributory defined benefit pension plan covering our non-union workers. A union plan, which was frozen in 2001, was settled in April 2004.

Future adverse changes in market conditions or poor operating results of underlying plan assets could result in losses or a higher accrual.

Currently, management has not recorded a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, however in the event we were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Finally, at December 31, 2004, a provision of $157,000 has been made for U.S. taxes on the repatriation of $3,000,000 of accumulated undistributed earnings of Five Star through December 31, 2004. At December 31, 2004, after the planned repatriation above, approximately $6,839,000 is remaining that would become taxable upon repatriation to the United States. During 2005, we will complete an evaluation of foreign earnings and may repatriate up to an additional $5,000,000 of accumulated undistributed earnings, which could result in up to $260,000 of additional tax.

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q include certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our and management’s intent, belief, expectations, such as statements concerning our future profitability and our operating and growth strategy. Words such as “believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,” “estimate,” “predict,” “potential,” “continue,” “likely” and similar expressions are intended to identify forward-looking statements. Investors are cautioned that all forward-looking statements contained in this Quarterly Report on Form 10-Q and in other statements we make involve risks and uncertainties including, without limitation, the factors set forth under the caption “Business – Business Risks” included in our Annual Report on Form 10-K for the year ended December 31, 2004, and other factors detailed from time to time in our other filings with the Securities and Exchange Commission. One or more of these factors have affected, and in the future could affect our businesses and financial results in the future and could cause actual results to differ materially from plans and projections. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. All forward-looking statements made in this Quarterly Report on Form 10-Q are based on information presently available to our management. We assume no obligation to update any forward-looking statements.

There have been no material changes since December 31, 2004.

Disclosure Controls and Procedures. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 promulgated under the Exchange Act. Based upon this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were (1) designed to ensure that material information relating to our company is accumulated and made known to our management, including our chief executive officer and chief financial officer, in a timely manner, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Internal Controls. There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ended June 30, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 1. LEGAL PROCEEDINGS.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.