Rocky Brands, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Rocky designs, manufactures and markets footwear, apparel and accessories under the Rocky, Georgia Boot, Durango and Lehigh brands, and the licensed Michelin brand. Its Wholesale, Retail and Military segments serve work, western, outdoor, duty and other markets.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $270.4 million | $252.7 million |
| Gross profit / margin | $97.7 million / 36.1% | $87.0 million / 34.4% |
| Operating income | $22.1 million | $18.1 million |
| Net income | $17.5 million | $14.6 million |
| Diluted EPS | $2.35 | $1.95 |
| Cash from operations | $18.1 million | $17.6 million |
- Fourth-quarter 2019 net sales were $75.3 million, gross profit was $28.3 million, and net income was $5.1 million; fourth-quarter 2018 figures were $67.2 million, $24.1 million and $3.6 million, respectively.
- FY2019 sales rose 7.0%. Wholesale sales increased 3.7% to $179.5 million; Retail grew 21.8% to $64.8 million; Military sales declined 1.1% to $26.1 million.
- Operating expenses increased 9.6% to $75.6 million, faster than sales, and rose to 28.0% of sales from 27.3%. Operating margin nevertheless improved to 8.1% from 7.1%.
- By product group, work footwear was the largest category at $123.0 million (45.7% of sales), followed by western footwear at $52.3 million (19.3%).
Cash, debt and liquidity
- Year-end cash was $15.5 million, up from $10.2 million. Working capital was $114.6 million versus $106.2 million.
- No borrowings were outstanding at year-end under the $75 million asset-based revolving credit facility, which matures in February 2024; reported borrowing capacity was $74.9 million. The facility is secured by substantially all company assets and has covenant and dividend restrictions. Its fixed-charge coverage covenant was not in effect at year-end because no triggering event had occurred.
- Investing activities used $7.7 million, including capital expenditures of $9.5 million; financing activities used $5.0 million, including $4.0 million in dividends and $1.5 million in share repurchases.
- Management anticipated approximately $12.7 million of capital expenditures in 2020 and stated that the credit facility plus operating cash flow should provide liquidity for at least 12 months, subject to operating performance and covenant compliance.
Changes, outlook and material risks
- Gross margin improvement reflected stronger full-price selling, improved manufacturing efficiencies and a higher Retail direct-to-consumer mix. Military gross margin rose to 29.2% from 21.2%; the 2019 figure included a one-time $725,000 reimbursement for costs related to the temporary Puerto Rico facility closure after Hurricane Maria. Excluding that reimbursement, management reported a 26.4% Military margin.
- Retail growth was attributed to Lehigh’s CustomFit business, e-commerce investments and marketplace expansion, including Seller Fulfilled Prime status. Military sales were lower as expected following expiration of some multiyear contracts.
- Total year-end backlog fell to $20.5 million from $28.5 million: Wholesale backlog was $12.6 million versus $15.5 million, and Military backlog was $7.9 million versus $13.0 million. The company cautions that backlog may not predict future results.
- No specific 2020 revenue or earnings guidance was provided. Management said possible price increases could offset inflationary pressures.
- Key disclosed risks include seasonality and weather sensitivity, changing consumer preferences and competition, retail customer concentration and channel disruption, overseas sourcing and trade/tariff exposure, supplier and manufacturing interruptions, military contract renewals and fixed-price costs, and cybersecurity and information-system disruptions. The filing also identifies the newly emerging COVID-19 outbreak as a potential source of supply-chain disruption and weaker consumer spending.
- Military contracts generated 9.6% of 2019 revenue. Foreign-country sales were 1.4% of revenue, down from 1.9% in 2018. The Michelin brand license was scheduled to expire December 31, 2020, with an option to renew.
- Management said ordinary-course litigation was not expected, in aggregate, to materially affect financial position, results or liquidity. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether the stronger gross margin and earnings trend can continue as operating expenses rise faster than sales, and how much of Military margin improvement was recurring apart from the $725,000 reimbursement.
- Whether the decline in Military backlog and contract expirations will affect 2020 sales, and whether new contracts are awarded.
- How inventory growth, seasonality and lower backlog affect working capital, discounting and cash conversion.
- Progress on the planned 2020 capital spending, available borrowing capacity and compliance with credit-facility terms.
- Whether the Michelin license was renewed and the actual effects of COVID-19, tariffs and overseas supply interruptions on orders, costs and deliveries.