Rocky Brands, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report; it also provides unaudited fourth-quarter results. Rocky designs, manufactures and markets footwear, apparel and accessories under brands including Rocky, Georgia Boot, Durango, Lehigh and Creative Recreation. Sales are reported in wholesale, retail and military segments.
Financial results and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $260.3 million | $269.3 million |
| Gross profit (margin) | $76.7 million (29.5%) | $88.9 million (33.0%) |
| Operating income (loss) | ($3.1) million | $10.5 million |
| Net income (loss) | ($2.1) million; ($0.29) per diluted share | $6.6 million; $0.87 per diluted share |
| Cash from operations | $21.3 million | $23.2 million |
| Cash and cash equivalents at year-end | $4.5 million | $3.4 million |
| Long-term debt | $14.6 million | $23.7 million |
| Working capital | $102.7 million | $114.5 million |
- Net sales fell 3.4%. Wholesale sales declined $29.1 million to $176.9 million; retail sales were nearly flat at $45.9 million; military sales rose $20.0 million to $37.4 million.
- Gross margin contracted 350 basis points. Wholesale margin fell to 30.2% from 32.0%, while retail margin improved to 45.9% from 45.0%. Military margin dropped to 5.8% from 13.1% as Rocky invested in Puerto Rico production capacity.
- SG&A decreased $2.8 million to $75.6 million, but lower sales and gross profit, a $1.2 million reorganization charge and a $3.0 million noncash Creative Recreation trademark impairment contributed to the operating loss. The company recorded a $1.5 million income tax benefit.
- Investing activities used $5.9 million, primarily for fixed assets. Financing activities used $14.4 million, including $9.1 million of net credit-facility repayments, $3.3 million of dividends and $2.0 million of share repurchases.
- At year-end, the $75 million revolving facility had $14.6 million drawn and $57.3 million of borrowing capacity, subject to borrowing-base limits. Net debt was approximately $10.1 million. The facility matures in November 2019; its fixed-charge coverage covenant was not in effect at year-end because no triggering event had occurred.
Material changes and fourth quarter
- Wholesale sales weakened amid warmer weather during the critical fall shipping season and weak retail-store traffic; declines affected most footwear and apparel categories. Management noted average list prices were comparable with 2015.
- Military sales increased substantially and represented 14.4% of total sales, compared with 6.5% in 2015. The increase reflects contract activity and is dependent on winning bids and receiving orders.
- Fourth-quarter 2016 sales were $67.0 million, gross profit was $21.8 million and net loss was $0.6 million. The comparable 2015 quarter reported sales of $65.3 million and net income of $1.4 million.
- Year-end backlog declined to $17.0 million from $43.0 million; backlog under the identified 2016 military contract was $0.3 million versus $27.7 million a year earlier. The company cautions that backlog at a point in time may not indicate future results.
- Inventory declined to $69.2 million from $77.0 million. Total assets were $180.6 million and shareholders’ equity was $135.1 million at year-end.
Outlook, risks and unusual items
- No specific revenue or earnings forecast is provided. Management expects approximately $3.4 million of capital expenditures in 2017 and believes operating cash flow and the credit facility should provide liquidity for at least 12 months, contingent on performance, cash flows and covenant compliance.
- Management said possible 2017 inflationary pressures could be offset through price increases. It also described growth plans involving brand extensions, apparel, international distribution, online sales and potential acquisitions or brand development.
- Key exposures include weather-sensitive and seasonal demand, consumer and fashion trends, intense competition, retail-channel shifts, forecast and inventory risk, and dependence on offshore sourcing and suppliers without long-term manufacturing contracts. Potential changes to U.S. trade, tariff and tax policies were highlighted as a risk.
- Military contracts are fixed-price, subject to government funding and renewal decisions, and contributed a higher share of 2016 sales. The Michelin footwear license expires December 31, 2017, with an option to renew; the Gore-Tex license may be terminated by either party with notice.
- The company reported $1.2 million of severance-related reorganization costs and a $3.0 million noncash impairment of the Creative Recreation trademark. Management said no additional reorganization costs were expected. Ordinary-course litigation was not expected by management to have a material adverse effect.
- Management and the auditor reported effective internal control over financial reporting at December 31, 2016; the auditor expressed unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether wholesale demand and margins recover, particularly after weather-related weakness and continued retail traffic pressure.
- The duration, profitability, funding and order pipeline of military contracts, given the segment’s increased revenue share and lower 2016 gross margin.
- Whether the Creative Recreation brand’s outlook supports its remaining $2.1 million trademark carrying value and whether further impairment is possible.
- Renewal of the Michelin license and continuity of access to Gore-Tex and key offshore manufacturers.
- Liquidity and borrowing-base availability through seasonal working-capital needs, along with compliance with credit-facility restrictions and the company’s dividend and repurchase plans.
- Potential effects of trade-policy changes, weather, customer credit deterioration and inventory markdowns; the filing does not quantify the possible financial impact of these risks.