ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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 as well as our annual report on 10-K for the year ended December 31, 2016.
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Net Sales
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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Cost Of Goods Sold
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68.9
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%
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74.0
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%
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68.8
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%
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70.7
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%
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Gross Margin
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31.1
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%
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26.0
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%
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31.2
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%
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29.3
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%
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Selling, General and
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Administrative Expenses
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27.2
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%
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30.1
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%
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27.3
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%
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31.6
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%
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Income (Loss) From Operations
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3.9
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%
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(4.1
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)%
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3.9
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%
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(2.3
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)%
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Three Months Ended June 30, 2017 Compared to Three Months
Ended June 30, 2016
Net sales.
Net sales for the three months ended June
30, 2017 were $58.5 million compared to $62.6 million for the same period in 2016. Wholesale sales for the three months ended June
30, 2017 were $37.1 million compared to $41.5 million for the same period in 2016. The $4.4 million decrease in wholesale sales
was primarily driven by the discontinuation of a private label work program in the third quarter of 2016 and a decrease in commercial military sales in the second quarter of 2017 as we were unable to anniversary the large initial sell-in of new boots that took place in 2016 when the color pattern changed from tan to coyote. Retail sales for the
three months ended June 30, 2017 were $11.0 million compared to $10.4 million for the same period in 2016. Military segment sales
for the three months ended June 30, 2017, were $10.3 million, compared to $10.7 million in the same period in 2016. We are currently
fulfilling several multiyear contracts for the U.S. military.
Gross margin.
Gross margin for the three months ended
June 30, 2017 was $18.2 million, or 31.1% of net sales, compared to $16.3 million, or 26.0% of net sales, in the same period last
year. Wholesale gross margin for the three months ended June 30, 2017 was $11.5 million, or 31.0% of net sales, compared to $11.5
million, or 27.7% of net sales, in the same period last year. The increase in wholesale gross margins was driven by the combination of better full price selling, less discounting and the discontinuation of a lower margin private label program. The Retail gross margin for the three months
ended June 30, 2017 was $4.7 million, or 42.6% of net sales, compared to $4.6 million, or 44.5% of net sales, for the same period
in 2016. Military gross margin for the three months ended June 30, 2017 was $2.0 million, or 19.2% of net sales, compared to $0.1
million, or 1.4% of net sales, for the same period in 2016. The large increase in military gross margin percentage was due to certain temporary factors, namely we manufactured a small, high margin order for the U.S. Military as well as gained some increased efficiencies in our Puerto Rican facility due to higher volumes of commercial military production. For the year, we still expect Military segment gross margins to be in the mid-teen range. The lower military margins in 2016 were due to higher manufacturing costs associated with the ramp up of production at our manufacturing facility in Puerto Rico.
SG&A expenses.
SG&A expenses were $15.9 million,
or 27.2% of net sales, for the three months ended June 30, 2017, compared to $18.8 million, or 30.1% of net sales for the same
period in 2016. The net decrease in 2017 was primarily related to the reorganization efforts completed in the third quarter of
2016.
Interest expense.
Interest expense was $0.1 million for
the three months ended June 30, 2017 and 2016.
Income tax expense.
Income tax expense for the three months ended
June 30, 2017 was $0.8 million, compared to a $0.9 million income tax benefit for the same period a year ago. We provided for income taxes
at an effective tax rate of 34.0% for 2017 and 2016.
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Net sales.
Net sales for the six months ended June 30, 2017 were $121.5 million compared to $120.1 million for the same period in 2016. Wholesale sales for the six months ended June 30, 2017 were $76.3 million compared to $81.7 million for the same period in 2016. The $5.4 million decrease in wholesale sales was primarily driven by the discontinuation of a private label work program in the third quarter of 2016 and a decrease in commercial military sales in the second quarter of 2017 as we were unable to anniversary the large initial sell-in of new boots that took place in 2016 when the color pattern changed from tan to coyote. Retail sales for the six months ended June 30, 2017 were $22.9 million compared to $21.9 million for the same period in 2016. Military segment sales for the six months ended June 30, 2017, were $22.4 million, compared to $16.5 million in the same period in 2016. We are currently fulfilling several multiyear contracts for the U.S. military.
Gross margin.
Gross margin for the six months ended June 30, 2017 was $37.9 million, or 31.2% of net sales, compared to $35.2 million, or 29.3% of net sales, in the same period last year. Wholesale gross margin for the six months ended June 30, 2017 was $24.5 million, or 32.2% of net sales, compared to $24.5 million, or 29.9% of net sales, in the same period last year. The increase in wholesale gross margins was driven by the combination of better full price selling, less discounting and the discontinuation of a lower margin private label program. The Retail gross margin for the six months ended June 30, 2017 was $10.0 million, or 43.8% of net sales, compared to $9.8 million, or 44.6% of net sales, for the same period in 2016. Military gross margin for the six months ended June 30, 2017 was $3.4 million, or 15.0% of net sales, compared to $0.9 million, or 5.7% of net sales, for the same period in 2016. The large increase in military gross margin percentage was due to certain temporary factors, namely we manufactured a small, high margin order for the U.S. Military as well as gained some increased efficiencies in our Puerto Rican facility due to higher volumes of commercial military production. For the year, we still expect Military segment gross margins to be in the mid-teen range. The lower military margins in 2016 were due to higher manufacturing costs associated with the ramp up of production at our manufacturing facility in Puerto Rico.
SG&A expenses.
SG&A expenses were $33.3 million, or 27.4% of net sales, for the six months ended June 30, 2017, compared to $37.9 million, or 31.6% of net sales for the same period in 2016. The net decrease in 2017 was primarily related to the reorganization efforts completed in the third quarter of 2016.
Interest expense.
Interest expense was $0.2 million for the six months ended June 30, 2017 and $0.3 million for the same period in 2016.
Income tax expense.
Income tax expense for the six months ended June 30, 2017 was $1.5 million, compared to a $1.0 million income tax benefit for the same period a year ago. We provided for income taxes at an effective tax rate of 34.0% for 2017 and 2016.
Liquidity and Capital Resources
Our principal sources of liquidity have been our income from
operations and borrowings under our amended and restated credit facility. For more information regarding our amended and restated credit facility, please see footnote 9 of our financial statements.
Over the last several years our principal uses of cash have
been for working capital and capital expenditures to support our growth. Our working capital consists primarily of trade receivables
and inventory, offset by accounts payable and accrued expenses. Our working capital fluctuates throughout the year as a result
of our seasonal business cycle and business expansion and is generally lowest in the months of January through March of each year
and highest during the months of May through October of each year. We typically utilize our revolving credit facility to fund our
seasonal working capital requirements. As a result, balances on our revolving credit facility will fluctuate significantly throughout
the year. Our capital expenditures relate primarily to projects relating to our property, merchandising fixtures, molds and equipment
associated with our manufacturing and distribution operations, retail sales fleet and for information technology. Capital expenditures
were $2.5 million for the first six months of 2017, compared to $3.5 million for the same period in 2016. Total capital expenditures
for 2017 are anticipated to be approximately $4.0 million.
Operating Activities.
Cash provided by operating activities totaled $
7.8
million and $5.6 million for the six months ended June 30, 2017 and 2016, respectively.
Cash provided by operating activities for the six months ended June 30, 2017 was primarily impacted by increases in accounts payable
. Cash provided by operating activities for the six months ended June 30, 2016 was primarily impacted by increases in accounts payable and other accrued liabilities and decreases in accounts receivable, partially offset by increased inventories and other current assets, primarily income tax receivable.
Investing Activities.
Cash used in investing activities
was $2.0 million for the six months ended June 30, 2017, compared to $3.5 million in the same period of 2016. Cash used in investing
activities reflected an investment in property, plant and equipment of $2.0 million in 2017 and $3.5 million in 2016. Our 2017 and
2016 expenditures primarily related to investments in molds and equipment associated with our manufacturing operations, for information
technology and for improvements to our distribution facility.
Financing Activities.
Cash used in financing activities was $7.6 million for the six months ended June 30, 2017 and $3.1 million
in the same period of 2016. This was primarily related to net payments under the revolving credit facility and dividends paid on our common stock.
Inflation
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.
Critical Accounting Policies and Estimates
The preparation of the Company’s condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from the Company’s estimates. However, actual results may differ materially from these estimates under different assumptions or conditions.
We have identified the critical accounting policies used in determining estimates and assumptions in the amounts reported in our Management Discussion and Analysis of Financial Conditions and Results of Operations in our
2016
Form 10-K. Our management believes there have been no material changes in those critical accounting policies.
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
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, beliefs and 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 “Risk Factors” included in our Annual Report on Form 10-K
for the year ended December 31, 2016 (filed March 9, 2017), 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 historical results, and could in the future
affect t
he Company’s businesses and financial results in future periods 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, there can be no assurance that 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.