Rocky Brands, Inc. — FY 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; it is not a standalone fourth-quarter filing. Rocky Brands designs, manufactures and markets footwear, apparel and accessories across outdoor, work, duty, commercial military, western and lifestyle markets. Its wholesale, retail and military segments sell brands including Rocky, Georgia Boot, Durango, Lehigh and Creative Recreation, plus licensed Michelin products.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Net sales | $269.3 million | $286.2 million | Down 5.9% |
| Gross profit / margin | $88.9 million / 33.0% | $96.4 million / 33.7% | Margin down 70 bps |
| Operating income / margin | $10.5 million / 3.9% | $15.8 million / 5.5% | Down $5.3 million |
| Net income | $6.6 million | $9.8 million | Down 32.9% |
| Diluted earnings per share | $0.87 | $1.30 | Down $0.43 |
| Cash from operations | $23.2 million | $13.0 million | Up $10.3 million |
- Segment sales: wholesale $206.1 million (down $27.8 million); retail $45.8 million (up $1.5 million); military $17.4 million (up $9.4 million). Wholesale gross margin was 32.0%, retail 45.0%, and military 13.1%.
- Fourth quarter: sales were $65.3 million versus $78.9 million in Q4 2014; net income was $1.4 million versus $4.5 million. Quarterly figures are unaudited.
- Cash and working capital: cash was $3.4 million at year-end, versus $4.6 million a year earlier. Working capital was $114.5 million, down from $124.8 million. Inventory declined to $77.0 million from $85.2 million.
- Debt and liquidity: revolving credit borrowings were $23.7 million, down from $36.3 million; debt net of cash was $20.3 million. The amended facility has a $75 million stated commitment, borrowing-base limits, and matures in November 2019. Management said operating cash flow and the facility should fund operations for at least 12 months, subject to performance and covenant compliance. The fixed-charge coverage covenant was not in effect at year-end because no triggering event had occurred.
- Investment and distributions: 2015 capital expenditures were $8.7 million; approximately $6.9 million was anticipated for 2016. Dividends paid totaled $3.3 million in 2015.
Material changes and management commentary
- Management attributed the wholesale decline chiefly to warmer weather during the critical fall shipping season and weak fourth-quarter retail store traffic, which pressured demand across product categories. Average list prices were comparable to 2014.
- Wholesale gross margin fell 40 basis points, largely due to lower average selling prices. Retail margin improved 110 basis points as sales shifted toward higher-margin consumer e-commerce. SG&A declined $2.2 million, but increased from 28.2% to 29.1% of sales as revenue fell.
- Operating cash flow improved primarily because receivables and inventory were lower at year-end; cash generation was partly used for capital expenditures, dividends and net debt repayment.
- Backlog was $43.0 million at December 31, 2015, versus $21.6 million a year earlier; $27.7 million related to military orders, versus $4.4 million. Retailer orders can generally be canceled before shipment, and management cautions that backlog is not necessarily indicative of future results.
Outlook, risks and unusual items
- Military orders: in early 2016, Rocky reported a new U.S. military temperate-weather boot order with a $13 million minimum, projected to ship March–October 2016. Together with the existing contract, approximately $31 million of military orders were scheduled for 2016, stated as 78% above 2015 levels. Military revenue depends on contract awards and purchase orders; this is not a general company revenue forecast.
- Brand license: the Michelin footwear license expired December 31, 2015. Rocky was negotiating an extension through December 31, 2017; the filing does not establish that an extension was completed.
- Principal risks: weather and seasonal demand, consumer and fashion trends, competitive pressure, sales-forecast and inventory risk, offshore manufacturing and supplier concentration, raw-material availability and cost, and reliance on the Gore-Tex license. The company has no long-term contracts with third-party manufacturers. Two Chinese manufacturers accounted for approximately 10% and 6% of 2015 net sales, respectively.
- Funding and contingencies: the credit facility restricts additional debt, certain asset sales and dividends; liquidity depends on operating performance and covenant compliance. Routine litigation was not expected by management to materially affect financial position, results or liquidity. The filing reports no material environmental costs or off-balance-sheet arrangements.
- Other items: the 2015 effective tax rate was 31.8%, compared with 33.2% in 2014. Approximately $18.3 million of undistributed foreign earnings was considered permanently reinvested; estimated tax on distribution of Five Star earnings was approximately $6.4 million. No impairment of indefinite-lived intangible assets was recorded in 2015 or 2014. Auditors issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the 2016 military orders shipped on schedule and generated the expected sales, margin and cash collection.
- Whether wholesale demand and gross margins recovered after the weather- and traffic-related 2015 decline, and whether inventory remained appropriately valued.
- Whether the Michelin license was renewed and what effect any change had on sales and product offerings.
- Actual borrowing availability under the borrowing-base formula, future covenant status, and the facility’s seasonal utilization.
- Whether dividends and planned capital spending remained supportable by cash generation, particularly if sales weakened.