Rocky Brands, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This annual filing also reports unaudited quarterly results. The company designs, manufactures and markets footwear, apparel and accessories under Rocky, Georgia Boot, Durango, Lehigh, Creative Recreation and licensed Michelin brands. Its segments are wholesale, retail and military.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $286.2 million | $244.9 million |
| Gross profit / margin | $96.4 million / 33.7% | $83.5 million / 34.1% |
| Operating income / margin | $15.8 million / 5.5% | $11.0 million / 4.5% |
| Net income | $9.85 million | $7.37 million |
| Diluted EPS | $1.30 | $0.98 |
| Operating cash flow | $13.0 million | $(2.5) million |
| Capital expenditures | $7.1 million | $7.7 million |
| Cash and cash equivalents at year-end | $4.6 million | $4.2 million |
| Debt at year-end | $36.3 million | $38.4 million |
| Working capital at year-end | $124.8 million | $118.2 million |
Sales increased 16.9%; net income rose about 33.5%. Gross margin edged down 0.4 percentage points, while operating margin improved. Net cash from operations rebounded from an outflow in 2013, helped by higher earnings and increased payables and accrued liabilities; receivables and inventory growth partly offset those sources. Year-end inventory increased to $85.2 million from $78.2 million.
Wholesale sales rose $41.0 million to $233.9 million, led by lifestyle, work and western footwear. Retail sales increased $1.3 million to $44.3 million, while military sales declined $0.9 million to $8.0 million. Creative Recreation contributed materially to lifestyle growth following its December 2013 acquisition. The filing gives differing Creative Recreation sales figures—$14.4 million in the results discussion and $16.1 million in the acquisition note—which investors should reconcile.
In the fourth quarter, sales were $78.9 million versus $61.6 million in 2013, and net income was $4.47 million versus $1.77 million.
Rocky amended its revolving credit facility in December 2014, increasing its stated size to $75 million and extending maturity to November 2019. The rate is generally LIBOR plus 1.25%; borrowings were $36.3 million at year-end and availability is subject to a borrowing-base calculation. The fixed-charge coverage covenant was not in effect at year-end because no triggering event had occurred. Management said cash generation and the facility should fund operations for at least 12 months, subject to operating performance and covenant compliance. Net debt (debt less cash) was approximately $31.7 million. Dividends paid were $3.0 million in 2014, versus $2.3 million in 2013.
Material changes versus 2013
- Wholesale growth was supported by a full year of Creative Recreation sales and higher work, western and outdoor footwear sales.
- Consolidated gross margin declined from 34.1% to 33.7%. Retail gross margin fell from 46.1% to 43.9%, chiefly due to lower margins on contract sales to a large city transit authority.
- SG&A was $80.6 million in 2014, versus $71.4 million in 2013; 2013 also included $1.2 million of acquisition-related expenses. Compensation, sales-linked costs and Creative Recreation expenses contributed to the increase.
- Interest expense increased to $0.9 million from $0.7 million, reflecting higher debt levels, particularly in the first half of 2014.
- Operating cash flow improved to $13.0 million from cash used of $2.5 million in 2013.
Outlook, risks and unusual items
- No formal sales or earnings guidance is provided. Management anticipated approximately $6.1 million of capital expenditures in 2015 and said planned early-2015 price increases were expected to offset inflationary pressures.
- Key risks include weather-sensitive and seasonal outdoor demand, changing consumer preferences, competition, forecast and inventory risk, offshore sourcing and manufacturing exposure, and reliance on suppliers. Two Chinese manufacturers represented approximately 13% and 10% of 2014 net sales in products purchased, respectively; the company also relies heavily on Gore-Tex waterproof fabric.
- The Michelin footwear license expires December 31, 2015. The Gore-Tex license may be terminated by either party with advance notice. Either change could affect product appeal or sales.
- The U.S. military hot-weather boot contract had a first-year minimum purchase of $3 million and maximum of $15 million, with options for four additional years on the same terms; orders and future sales depend on contract awards and purchase orders.
- Creative Recreation was acquired in December 2013 for approximately $8.7 million including cash and assumed liabilities. The 2013 results included $1.2 million of acquisition expenses and a $0.6 million bargain-purchase gain; no impairment of indefinite-lived intangible assets was recorded in 2014.
- Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the Creative Recreation 2014 sales figures of $14.4 million and $16.1 million stated in different parts of the filing.
- Confirm actual borrowing-base availability under the $75 million facility, its covenants and the effect of variable interest rates; management estimated a 100-basis-point rate increase would reduce pretax income and cash flow by about $0.4 million over 12 months.
- Track inventory, receivables and seasonal working-capital needs against sales, order cancellations and weather conditions; year-end backlog was $21.6 million versus $16.7 million a year earlier, and orders may generally be canceled before shipment without penalty.
- Assess renewal or replacement plans for the Michelin license and continuity of Gore-Tex supply, as well as concentration in offshore manufacturers.
- Evaluate whether the expected 2015 price increases and capital spending support growth without further margin pressure; verify the continuation of dividends, which remain subject to board discretion and credit-facility restrictions.