Rocky Brands, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. Financial statement amounts below are in millions of dollars unless otherwise noted.
Business context
Rocky designs, manufactures and markets footwear, apparel and accessories under the Rocky, Georgia Boot, Durango and Lehigh brands, and under licensed Michelin. Sales are reported in wholesale, retail and military segments. Products reach more than 10,000 retail locations in the U.S. and Canada; direct-to-consumer and business-to-business online sales are part of retail.
Key financial results
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $252.7 | $253.2 |
| Gross profit / gross margin | $87.0 / 34.4% | $80.8 / 31.9% |
| Operating income | $18.1 / 7.1% of sales | $11.8 / 4.7% of sales |
| Net income | $14.6 | $9.6 |
| Diluted EPS | $1.95 | $1.29 |
| Operating cash flow | $17.6 | $17.1 |
| Capital expenditures | $4.2 cash-flow statement; approximately $4.7 per MD&A | $4.3 cash-flow statement |
At year-end, cash was $10.2, inventory $72.8, working capital $106.2, total assets $184.7 and shareholders’ equity $151.6. Total current assets were $131.2 and current liabilities $25.0. Revolver borrowings and long-term debt were zero at December 31, 2018, compared with $2.2 of debt at the end of 2017. The company reported $65.4 of borrowing capacity under its prior facility at year-end.
Cash increased $6.5 during 2018. Investing activities used $4.2 and financing activities used $6.9, including dividends of $3.5 and share repurchases of $1.3. The annual dividend was $0.12 per share. The filing states that cash from operations and the credit facility should provide sufficient liquidity for at least 12 months, subject to performance and covenant compliance.
Material changes versus comparable periods
- Full-year sales decreased 0.2%, while gross profit rose 7.7% and net income increased 51.8%. Operating expenses were essentially flat.
- Wholesale sales rose 3.9% to $173.1; excluding the sold Creative Recreation brand, management reported growth of 6.6%. Retail sales rose 10.1% to $53.2, supported by Lehigh CustomFit and e-commerce. Military sales fell 30.9% to $26.4 after contracts expired.
- Gross margin improved across all segments: wholesale to 33.4% from 32.5%, retail to 44.4% from 43.8%, and military to 21.2% from 14.2%. Management cited fewer discounts and improved product mix, the absence of lower-margin Creative Recreation sales, and improved Puerto Rico manufacturing efficiencies.
- By product group, work footwear sales were $116.0 (up from $109.9), western footwear $47.3 (up from $38.6), and duty/commercial military footwear $40.6 (up from $33.7). Military footwear sales declined to $26.4 from $38.2. Lifestyle footwear fell to $0.6 from $12.9, largely reflecting the Creative Recreation sale.
- Inventory increased 11.0% to $72.8. The company reported customer returns and allowances of 4.9% of sales, versus 3.9% in 2017.
- Operating cash flow was broadly stable. Cash generation included lower receivables and higher payables/accruals, partly offset by a $7.2 inventory increase.
Fourth-quarter results
Unaudited Q4 2018 sales were $67.2, up approximately 0.3% from $67.0 in Q4 2017. Gross profit increased to $24.1 from $23.3. Net income declined to $3.6 from $4.4; diluted EPS was $0.48 versus $0.59.
Outlook, risks and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management anticipated approximately $7.3 of capital expenditures in 2019 and said potential inflationary pressure could be offset through price increases. It described growth priorities including brand extensions, online sales, international distribution and expansion of Lehigh CustomFit.
- Credit facility: After year-end, on February 13, 2019, the company entered a new asset-based revolving facility of up to $75 million, maturing in 2024, with an option to increase capacity by up to $25 million subject to conditions. The prior facility was due to mature in November 2019. No fixed-charge coverage covenant trigger was in effect at December 31, 2018.
- Tax and comparability: 2017 included a $4.5 tax benefit from the U.S. Tax Cuts and Jobs Act and a $2.1 loss on the Creative Recreation sale. In 2018, the effective tax rate was 18.7%, including a $0.6 benefit from finalizing transition-tax calculations; reported 2017 had a tax benefit overall.
- Contracts and backlog: U.S. military contracts generated 10.4% of 2018 revenue. Total year-end backlog was $28.5, down from $42.5, including military backlog of $13.0 versus $26.2. Backlog may not predict future results.
- Principal risks: Seasonality and weather sensitivity; changing consumer preferences and competition; offshore sourcing and potential tariffs; dependence on suppliers without broad long-term supply contracts; military contract renewals and fixed-price cost exposure; inventory forecasting; and disruption, cyber-security and data-privacy risks. The Michelin license expires December 31, 2020, with an option to renew.
- Contingencies and controls: Management said ordinary-course litigation was not expected to materially affect the company. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; controls were reported effective at year-end.
- Lease accounting: Adoption of the new lease standard on January 1, 2019 was expected to add approximately $0.5–$1.0 of operating lease liabilities and corresponding right-of-use assets.
Important facts for investors to verify
- Whether wholesale and retail growth can continue to offset lower military sales and declining lifestyle footwear.
- Whether gross-margin gains persist, particularly given higher inventory and the rise in returns and allowances.
- The status, funding availability, borrowing-base limits and covenants of the new $75 million credit facility.
- The timing and profitability of military contract renewals, and the implications of the lower military backlog.
- 2019 capital spending, lease liabilities after adoption of the lease standard, and any further tax or tariff effects.