Rocky Brands, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Rocky designs, manufactures and markets footwear, apparel and accessories under the Rocky, Georgia Boot, Durango, Lehigh and licensed Michelin brands, through wholesale, retail and U.S. military segments.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $253.2 million | $260.3 million |
| Gross profit / margin | $80.8 million / 31.9% | $76.7 million / 29.5% |
| Operating income (loss) | $11.8 million | $(3.1) million |
| Net income (loss) | $9.6 million | $(2.1) million |
| Diluted EPS | $1.29 | $(0.29) |
| Cash from operating activities | $17.1 million | $21.3 million |
| Capital expenditures | $4.3 million | $5.9 million |
| Cash and cash equivalents, year-end | $3.7 million | $4.5 million |
| Long-term debt, year-end | $2.2 million | $14.6 million |
Annual sales fell 2.7%, while gross margin improved by 240 basis points. SG&A declined $6.7 million to $68.9 million, or 27.2% of sales, contributing to the return to profitability. Operating cash flow decreased $4.2 million, principally because of higher receivables, partly offset by lower inventory and higher accounts payable. Working capital was $99.2 million, down from $101.1 million; current assets were $119.2 million and current liabilities $20.0 million.
Fourth-quarter sales were $67.0 million, compared with $67.0 million in Q4 2016. Q4 net income was $4.4 million versus a loss of $0.6 million a year earlier.
Segment results and changes
- Wholesale: Sales declined $10.3 million to $166.7 million, primarily from the discontinued private-label work program and lower commercial military sales after unusually strong 2016 initial orders. Gross margin rose to 32.5% from 30.2%, reflecting better full-price selling, less discounting and the discontinued lower-margin program.
- Retail: Sales increased $2.4 million to $48.4 million, mainly from Lehigh’s business-to-business web platforms. Gross margin declined to 43.8% from 45.9%, partly because Lehigh carries a lower margin than e-commerce.
- Military: Sales increased $0.8 million to $38.2 million, a record year. Gross margin increased to 14.2% from 5.8%, largely due to improved Puerto Rico facility efficiencies, partly offset by disruption costs from Hurricanes Maria and Irma.
Year-end backlog was $42.5 million, up from $17.0 million, primarily because military backlog rose to $26.2 million from $0.3 million. The filing cautions that backlog may not indicate future results.
Liquidity, outlook, risks and unusual items
- The revolving credit facility has a $75 million stated commitment, subject to a borrowing base; year-end capacity was $63.6 million. The facility matures in November 2019. A fixed-charge coverage covenant was not in effect at year-end because no triggering event had occurred. Management said cash from operations and the facility should fund operations for at least the next 12 months, subject to performance and covenant compliance.
- Management estimated 2018 capital expenditures of approximately $4.1 million. It said inflationary pressures might be offset by possible price increases. The filing provides no formal sales or earnings guidance.
- Key risks include seasonality and weather sensitivity; consumer demand, fashion and retail-channel changes; competition; dependence on overseas sourcing, suppliers and raw materials; trade and tariff uncertainty; and the uncertainty of winning and renewing fixed-price military contracts. Military contracts represented 15.1% of 2017 revenue. The company also cited cyber/privacy risks and dependence on its Logan, Ohio distribution center.
- In November 2017, Rocky sold the Creative Recreation brand for approximately $4.4 million to focus on core brands. The sale resulted in a $2.1 million pretax loss. At year-end, approximately $1.9 million was receivable from the buyer, and Rocky had $569,000 of accrued liabilities for inventory it was obligated to purchase for the buyer. The transition was expected to finish in Q2 2018.
- The Tax Cuts and Jobs Act produced a provisional $4.5 million benefit from remeasuring deferred tax liabilities, partly offset by a $2.8 million transition tax on foreign earnings. The company reported a $2.3 million long-term tax payable on its balance sheet and said the tax accounting remained provisional, with completion expected in 2018.
- The Michelin brand license expired December 31, 2017; Rocky said it was working with Michelin to extend the agreement. The company also planned to close its Washington and Canadian logistics operations in early 2018 and cease New York City Transit mobile-store service.
- Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective as of year-end. The auditor issued unqualified opinions on the financial statements and internal controls. Management said ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether wholesale sales stabilize and Lehigh’s growth can offset declines in wholesale work and commercial military categories.
- Whether the higher military backlog converts to orders and revenue, and how contract margins and Puerto Rico operations perform.
- Collection of the Creative Recreation sale receivable, completion of the transition, and any remaining related purchase obligations.
- Final tax-reform accounting and cash-tax timing, as well as the effect of the new tax rules on future effective tax rates.
- Liquidity and borrowing-base availability through seasonal working-capital peaks, including compliance with credit-facility terms and the November 2019 maturity.
- Renewal of the Michelin license and execution of the planned logistics and retail-service changes.