Rocky Brands, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited quarterly results, including the fourth quarter. Rocky designs, manufactures and markets footwear, apparel and accessories across wholesale, retail and U.S. military channels, with brands including Rocky, Georgia Boot, Durango, Lehigh and Creative Recreation.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $244.9 million | $228.5 million |
| Gross profit / margin | $83.5 million / 34.1% | $80.5 million / 35.2% |
| Operating income / margin | $11.0 million / 4.5% | $13.8 million / 6.0% |
| Net income | $7.37 million | $8.85 million |
| Diluted EPS | $0.98 | $1.18 |
| Cash from operating activities | $(2.45) million | $18.0 million |
| Cash and cash equivalents, year-end | $4.22 million | $4.02 million |
| Debt, year-end | $38.4 million | $23.5 million |
| Working capital, year-end | $118.2 million | $105.4 million |
FY2013 investing cash outflow was $10.0 million, including $7.7 million of capital expenditures and $2.2 million for acquired business assets. Financing activities provided $12.6 million, including $14.9 million of net revolving-credit borrowings and $2.25 million of dividends. Inventory rose to $78.2 million from $67.2 million; trade receivables increased to $49.1 million from $44.6 million.
The $70 million revolving facility bore interest generally at LIBOR plus 1.50% and matured in 2015. Borrowings were subject to a borrowing base; the fixed-charge coverage covenant was not in effect at year-end because no triggering event had occurred. Management said cash generated from operations and the facility were expected to fund operations for at least the next 12 months, subject to performance, cash flow and covenant compliance. A 100-basis-point rate increase was estimated to reduce pretax income and cash flow by about $0.4 million over 12 months.
Material changes and unusual items
- Sales increased 7.1%. Wholesale sales rose $6.7 million, retail sales rose $1.8 million and military sales rose $7.8 million. Work footwear and western footwear were key wholesale growth drivers; work footwear sales included $10.3 million under the C.E. Schmidt private-label agreement.
- Military sales reached $8.9 million, compared with $1.0 million in 2012, following shipments under a hot-weather combat-boot contract. The first contract year had a $3 million minimum and $15 million maximum, with options for four additional years on the same terms; future sales depend on orders and contract options.
- Gross margin declined 110 basis points to 34.1%. Management cited the lower margin of C.E. Schmidt work footwear and lower average selling prices on internet transactions versus mobile-store sales. SG&A rose $4.7 million, including higher selling, distribution and advertising costs.
- Net income fell to $7.37 million. Results included $1.17 million of Creative Recreation acquisition-related expenses and a $0.60 million bargain-purchase gain.
- In December 2013, Rocky acquired certain Kommonwealth assets, including the Creative Recreation trademark. The filing describes total purchase consideration of approximately $8.7 million including cash and assumed liabilities; the purchase-price allocation separately reports $2.229 million as purchase price and $6.494 million of accounts payable assumed. No acquisition-related sales were recorded in 2013.
- Backlog at year-end increased to $16.7 million from $9.4 million. Orders can generally be canceled before shipment without penalty, and backlog varies seasonally.
- Fourth-quarter 2013 sales were $61.6 million and net income was $1.77 million, versus $58.3 million and $2.55 million, respectively, in fourth-quarter 2012. The 2013 quarter included $0.7 million of after-tax acquisition-related expenses.
Outlook, risks and other disclosures
- Management anticipated approximately $8.4 million of capital expenditures in 2014 and expected early-2014 price increases to offset inflationary pressures. The filing provides no quantified sales or earnings guidance.
- Growth plans include extending brands into new markets, expanding apparel and international distribution, increasing direct-to-consumer sales, and integrating Creative Recreation. Integration, consumer acceptance and execution are key uncertainties.
- Risks include weather-sensitive and seasonal outdoor demand; forecasting and inventory exposure; competition and changing consumer preferences; dependence on offshore manufacturing and a limited number of suppliers; raw-material costs; and reliance on the Gore-Tex license. The Michelin license was due to expire December 31, 2014.
- Other exposures include revolving-credit borrowing-base and covenant restrictions, variable interest rates, retail customer weakness, foreign operations, distribution disruptions, labor practices at third-party manufacturers and environmental compliance. Management stated pending routine litigation was not expected to have a material adverse effect.
- The company began an intended annual cash dividend of $0.40 per share in 2013; the board may change the policy, and the credit agreement restricts dividends. The auditor issued an unqualified opinion on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting at year-end.
Important facts for investors to verify
- Whether the sharp reversal in operating cash flow reflects seasonal working-capital timing or a persistent inventory and receivables funding need.
- Inventory quality, sell-through and markdown exposure, given the $11.0 million increase in inventory and the seasonal nature of demand.
- Profitability and cash contribution of the military contract, including actual orders, options and renewal prospects.
- Creative Recreation integration progress, purchase-price working-capital adjustment, and the reconciliation between the stated approximately $8.7 million consideration and the purchase-price allocation figures.
- Availability under the borrowing-base facility, covenant headroom and refinancing plans ahead of its 2015 maturity.
- Gross-margin recovery prospects, particularly for lower-margin private-label and online sales, and renewal or replacement of key brand licenses.