Rocky Brands, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report; fourth-quarter figures are noted separately where relevant. Rocky designs, manufactures and markets footwear, apparel and accessories under brands including Rocky, Georgia Boot, Durango and Lehigh. Sales are divided among wholesale, retail and U.S. military operations.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $239.6 million | $252.8 million |
| Gross profit / margin | $87.9 million / 36.7% | $89.4 million / 35.4% |
| Operating income / margin | $12.8 million / 5.3% | $17.1 million / 6.8% |
| Net income | $8.3 million | $7.7 million |
| Diluted earnings per share | $1.11 | $1.14 |
| Cash from operating activities | $6.5 million | $14.1 million |
- Sales fell 5.2%. Wholesale sales rose to $192.6 million, retail sales declined to $44.8 million, and military sales dropped to $2.2 million from $17.0 million.
- Gross margin percentage improved 130 basis points, but gross profit dollars declined. SG&A fell $2.5 million to $69.9 million, while a $5.3 million pension termination charge contributed to lower operating income.
- Interest expense declined to $1.0 million from $6.5 million, mainly after repayment of higher-rate debt. Income tax expense was $3.7 million; the reported effective tax rate was 31.0%.
- Year-end cash was $3.7 million; working capital was $108.6 million. Inventory increased to $65.0 million from $58.9 million.
- Total debt was $35.0 million, principally under a PNC revolving facility; debt less cash was $31.3 million. The facility had $68.2 million of borrowing capacity at year-end, subject to a borrowing base. The fixed-charge covenant was not in effect because no triggering event had occurred.
- Capital expenditures were $7.6 million. Management estimated approximately $6.3 million for 2012 and stated that cash from operations and the credit facility should fund operations for at least 12 months, subject to performance, cash flows and covenant compliance.
Material changes and unusual items
- Wholesale sales increased $4.3 million, led by a $11.2 million increase in commercial military footwear, partly offset by the loss of Dickies-licensed sales. The Dickies license expired at the end of 2010.
- Retail sales declined $2.7 million as Rocky continued shifting transactions online and removed Lehigh mobile stores and mini-stores. A fourth-quarter inventory adjustment reduced retail gross margin by $0.8 million.
- Military segment sales declined $14.8 million. Although approximately $10 million remained on a 2009 government purchase order, Rocky did not expect significant further shipments or renewal.
- Rocky funded and terminated its defined-benefit pension plan in the fourth quarter: it contributed about $4.9 million and recorded a $5.3 million pretax charge, partly offset by a $1.6 million tax benefit. The fourth-quarter net income was $0.3 million versus $3.0 million in 2010; the pension charge represented approximately $3.7 million after tax, or $0.49 per share.
- Operating cash flow decreased $7.5 million, reflecting pension funding, higher inventory and lower accounts payable. Net income increased modestly, largely due to lower interest and operating expenses, offset by the pension charge and weaker sales.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expected 2012 inflationary pressures to be offset by selling-price increases implemented in late 2011.
- A new ERP system was in implementation, with completion expected in the third quarter of 2012; the company had invested over $2 million. Management warned of potential operating disruption and internal-control deficiencies if implementation is not successful.
- Key risks include seasonal and weather-sensitive outdoor demand, forecasting and inventory exposure, changing consumer tastes, intense competition, offshore sourcing and supplier concentration. One Chinese manufacturer accounted for approximately 16% of 2011 net sales. Most waterproof fabric was sourced from W.L. Gore, and the company identified loss of the Gore-Tex license as a risk.
- The Michelin license expires December 31, 2012, and Rocky did not intend to renew it. International operations, raw-material costs, interest-rate changes and access to borrowing are additional risks.
- Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity. No material purchase-contract losses or off-balance-sheet arrangements were reported. The independent auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Whether wholesale growth and pricing can offset the loss of military-contract shipments, the expired Dickies license and lower overall sales.
- Inventory growth, the fourth-quarter retail inventory adjustment, and the impact of the online/mobile-store transition on sales and margins.
- ERP implementation progress and any resulting operational or internal-control issues.
- Actual 2012 capital spending, operating cash generation, borrowing-base availability and compliance with credit-facility terms.
- The effects of terminating the pension plan, ending the Michelin license and the expected absence of significant further military-order shipments.