Rocky Brands, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing was signed March 16, 2021. Amounts below are in U.S. dollars; financial results are for Rocky Brands before its March 2021 Honeywell footwear-business acquisition unless noted.
Business context and reporting period
Rocky designs, manufactures and markets footwear, apparel and accessories under Rocky, Georgia Boot, Durango, Lehigh and licensed Michelin brands. It reports Wholesale, Retail and Military segments. In March 2021, it acquired Honeywell’s performance and lifestyle footwear business, adding Muck, XTRATUF, Servus, NEOS and Ranger.
Key financial metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $277.3 million | $270.4 million | +2.6% |
| Gross profit / gross margin | $104.7 million / 37.8% | $97.7 million / 36.1% | Margin +1.7 percentage points |
| Operating income / operating margin | $27.2 million / 9.8% | $22.1 million / 8.1% | Operating income +23.0% |
| Net income | $21.0 million | $17.5 million | +20.1% |
| Diluted EPS | $2.86 | $2.35 | +21.7% |
| Cash from operations | $31.4 million | $18.1 million | +$13.4 million |
| Capital expenditures | $11.7 million | $7.7 million | +$4.0 million |
| Cash and cash equivalents at year-end | $28.4 million | $15.5 million | +$12.8 million |
| Working capital at year-end | $123.2 million | $114.6 million | +$8.6 million |
| Long-term debt at year-end | $0 | $0 | No balance outstanding |
Current assets were $163.2 million and current liabilities $40.0 million at year-end 2020. Inventory was $77.6 million, versus $76.7 million in 2019. The company reported $31.4 million in operating cash flow, $11.7 million used in investing activities and $6.9 million used in financing activities.
FY2020 segment sales were Wholesale $185.6 million (+3.4%), Retail $72.9 million (+12.4%) and Military $18.9 million (-27.6%). Wholesale gross margin was 35.8%, Retail 47.0% and Military 21.8%. Fourth-quarter sales were $87.6 million, compared with $75.3 million in Q4 2019; quarterly net income was $9.7 million versus $5.1 million.
Material changes versus the prior comparable period
- Sales increased as Wholesale demand strengthened and Retail e-commerce and marketplace sales grew. Military revenue declined following expiration of certain multiyear contracts.
- Gross margin improved, reflecting fewer discounts, stronger initial margins on newer products, manufacturing efficiencies and higher-margin direct-to-consumer sales. Military margin was pressured by COVID-related manufacturing shutdown costs and credits.
- Operating expenses rose 2.6% to $77.6 million, while remaining 28.0% of sales. Increased investment, commissions, freight and platform fees were partly offset by lower travel and trade-show costs.
- Cash from operations increased, supported in part by higher accounts payable and accrued liabilities. Capital spending increased to $11.7 million.
- The company repurchased 129,095 shares for $2.9 million and paid $4.1 million in dividends during 2020.
Outlook, risks and unusual items
- Management expected approximately $9.5 million of capital expenditures in 2021 and stated that cash from operations and credit availability should fund operations for at least the next 12 months, subject to operating performance and covenant compliance. No specific revenue or earnings guidance was provided.
- COVID-19 caused temporary closures of the company’s Dominican Republic and Puerto Rico manufacturing facilities, shipping and supply delays, and incremental health, safety and remote-work costs. The duration and financial effects remained uncertain.
- COVID-related closure expenses, net of employee retention credits, reduced 2020 Military gross margin by approximately $654,000. Management estimated Military margin would have been 25.3% excluding these items. The 2019 comparison included a $581,000 one-time Hurricane Maria-related reimbursement; excluding it, 2019 Military margin would have been 27.0%.
- The March 15, 2021 Honeywell business acquisition had a purchase price of $230 million. Rocky incurred $705,000 of transaction expenses in 2020 and approximately $4.5 million from January 1 through March 15, 2021; further integration costs were not quantified. The seller’s closing statements were incomplete when the filing was issued.
- At acquisition close, Rocky entered into a $130 million term facility and a $150 million asset-based revolver, of which $80 million was funded. The facilities include leverage or fixed-charge coverage covenants, restrictions on dividends, and interest-rate exposure. The term facility matures in 2026.
- Key risks include consumer and weather-driven demand, seasonality and inventory forecasting, COVID-19 and supply-chain disruption, offshore sourcing and tariffs, intense competition, retailer concentration and cancellations, and the acquired business’s integration and liabilities. Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity.
- The financial statements received an unqualified audit opinion; management and the auditor concluded internal control over financial reporting was effective as of December 31, 2020. The auditor identified impairment testing of $30.2 million in indefinite-lived intangibles as a critical audit matter; no impairment was recorded in 2020.
Important facts for investors to verify
- Post-acquisition results, final purchase-price allocation, integration costs and realized synergies from the Honeywell footwear business.
- Debt balances, borrowing-base availability, interest costs and covenant headroom under the new facilities.
- Whether gains in Wholesale and direct-to-consumer sales can offset weaker Military sales and sustain higher gross margins.
- Inventory quality, returns and allowances, and the impact of seasonal demand, weather and shipping or manufacturing disruptions.
- Cash generation and capital allocation, including dividends, share repurchases and the planned 2021 capital expenditures.