Rocky Brands, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. Rocky designs, manufactures and markets footwear, apparel and accessories through wholesale, retail and military segments.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $228.3 million | $239.6 million |
| Gross margin | $80.3 million; 35.2% | $87.9 million; 36.7% |
| Operating income | $13.6 million | $12.8 million |
| Net income | $8.9 million | $8.3 million |
| Diluted EPS | $1.18 | $1.11 |
| Cash from operations | $18.0 million | $6.5 million |
| Capital expenditures | $6.1 million | $7.6 million |
| Cash and cash equivalents at year-end | $4.0 million | $3.7 million |
| Debt at year-end | $23.5 million | $35.0 million |
| Working capital at year-end | $105.4 million | $108.6 million |
Fourth-quarter 2012 sales were $58.0 million, gross margin was $20.7 million and net income was $2.5 million. In Q4 2011, sales were $64.0 million, gross margin was $22.5 million and net income was $0.3 million; the prior-year quarter included pension termination charges.
Year-end inventory increased to $67.2 million from $65.0 million. The $70 million revolving credit facility bore interest generally at LIBOR plus 1.50%, matured in 2015 and had $68.6 million of borrowing capacity at year-end. The fixed-charge coverage covenant was not in effect because no triggering event had occurred. Management said cash from operations and the facility should fund operations for at least 12 months, subject to performance and covenant compliance.
Changes versus the prior year
- Sales declined 4.7%. Wholesale revenue fell $6.6 million, retail fell $3.5 million and military segment sales fell $1.2 million.
- Within wholesale, work, outdoor, apparel and duty sales weakened; western and lifestyle footwear increased. Lower sales and higher product costs and customer promotions reduced consolidated gross margin by 150 basis points.
- SG&A fell $3.2 million to $66.7 million, mainly from lower compensation and Lehigh operating costs; advertising and freight costs increased.
- Net income rose despite lower sales, primarily because 2011 included a $5.3 million pretax pension termination charge. Debt declined $11.5 million, and operating cash flow increased $11.5 million.
Outlook, commentary and risks
- No formal earnings or sales guidance is provided. Management anticipated approximately $7.6 million in 2013 capital expenditures and expected 2012 price increases to help offset inflationary pressures.
- A new U.S. military hot-weather combat boot order has a first-year minimum of $3 million and maximum of $15 million; shipments were expected to begin in March 2013. The agreement includes four additional years of options on the same terms, not guaranteed purchases.
- Management was completing the final phase of its ERP implementation, expected by mid-2013. The project had received more than $5 million of investment; disruption or control deficiencies remain risks. Management and the auditor reported effective internal controls at year-end, and the auditor issued unqualified opinions on the financial statements and controls.
- Key exposures include seasonal and weather-sensitive outdoor demand, consumer and fashion trends, competition, offshore sourcing and supplier concentration, raw-material costs, and reliance on licensed brands and materials. One Chinese manufacturer represented about 12% of 2012 sales; Gore-Tex is a key supplier/license. The Michelin license was renewed through December 31, 2014.
- Retail sales were affected by the shift toward internet transactions and removal of mobile stores and mini-stores. Military contract revenue is irregular and depends on winning bids. The company reported no litigation expected by management to materially affect its financial position, results or liquidity.
Important facts for investors to verify
- Whether sales and gross-margin trends stabilize, particularly in wholesale work and outdoor products, and whether price increases offset higher costs without further pressure on demand.
- Whether cash generation continues and inventory growth is converted into sales without markdowns; sales returns and allowances were 4.8% of sales in 2012 versus 3.3% in 2011.
- Actual deliveries and revenue from the military boot order, including the extent to which optional contract years are exercised.
- Completion and performance of the ERP system, and the availability and terms of the revolving facility as it approaches its 2015 maturity.
- Ongoing access to key suppliers and licensed materials, and exposure to weather, offshore sourcing and foreign-exchange or import risks.