2012 Annual Report
Financial Highlights
($000, except per share data)
Income Statement Data
Net sales
Gross margin
Income from Operations
Net income
2012
2011
2010
2009
2008
$228,318
$239,599
$252,792
$229,486
$259,538
35.2% 36.7% 35.4% 36.8% 39.4%
6.0% 5.3% 6.8% 3.8% 3.8%
$ 8,855
$ 8,307
$ 7,684
$ 1,175
$ 1,167
Net income per diluted share
$ 1.18
$ 1.11
$ 1.14
$ 0.21
$ 0.21
Weighted average number of fully diluted shares outstanding
7,503
7,487
6,748
5,551
5,513
Balance Sheet
Inventories
Total assets
Total debt
$ 67,196
$ 65,019
$ 58,853
$ 55,420
$ 70,302
174,844
174,066
168,579
163,390
196,862
23,461
35,000
35,096
55,592
87,740
Shareholders’ equity
125,637
116,660
105,004
82,478
80,950
$259.5
Net sales
($ millions)
$252.8
Net income per diluted share
$1.14
$1.11
$1.18
$239.6
$229.5
$228.3
$0.21
$0.21
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
Income from operations as a % of net sales
6.8%
5.3%
6.0%
3.8%
3.8%
Total debt
($ millions)
$87.7
$55.6
$35.1
$35.0
$23.5
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
Table of Contents
II
III
IV-VII
VIII-IX
Financial Highlights
Letter to Shareholders
Family of Brands
New Markets
X
1-37
F-1-F-23
Direct Business
Form 10-K
Financial Statements
II
Dear Shareholders
2012 was strategically important for Rocky Brands
as we made meaningful progress diversifying our business
and positioning the company for future development.
Throughout the year, we expanded the breadth and
reach of our Western product lines, strengthened existing
retail
relationships, generated new distribution, and
continued to grow our commercial military business. On
the downside, our performance during the second half
of the year exposed our core categories vulnerability to
weather. Another warm fall and winter hampered demand
for waterproof, insulated boots in our work and outdoor
businesses. A main reason we acquired EJ Footwear in
2005 was to mitigate our dependence on cold, wet weather,
and since then we have continued to launch products
that can sell in any season and are not weather dependent.
We are encouraged that we were able to drive strong
organic growth in certain areas of our business while still
navigating the headwinds from the weather, demonstrating
continued financial discipline that allowed us to pay off
almost a third of our total long term debt during the year.
Over the last five years, we have decreased our long term
debt by 73% and cut our annual interest expense by 93%,
freeing up cash and capital to reinvest in our brand portfolio.
The return on these investments is most notable in the growth
of the Durango brand where sales increased 44% in 2012.
This was achieved through the introduction of several new,
lightweight western boots that generated strong consumer
demand, resulting in increased orders and additional
shelf space with accounts in the western channel such as
Shepler’s, Cavendar’s, and RCC Western. Incorporating a
more urban aesthetic and distribution push, we were able
to rapidly expand the brand with more mainstream retailers
like DSW and Zappos and urban boutique stores, which are
new to us, opening up the brand to a much wider audience.
Our top-line success was not limited to Durango; our
commercial military business posted another year of
positive growth. While sales did slow during the fourth
quarter and remain challenged in early 2013 due to
proposed cutbacks in government spending, we continue
to be optimistic about the long-term prospects for this
relatively new business. Military personnel have shown
a strong affinity for our popular S2V product series and
more recently our C4T garrison boot providing us good
traction with this large and important customer base.
Another major highlight from the past year was the
improved operating performance of our Lehigh retail
division. Following a multi-year transformation that resulted
in the migration of nearly 70% of all sales transaction in
2012 to our new web-based / direct ship platform, profit
contribution more than doubled from 2011. With more
than 120 retail units decommissioned in the past 5 years,
most of the heavy lifting is behind us and we can now
focus on growing sales to leverage our enhanced business
model and drive additional profits to our bottom line.
Despite softer than expected sales in 2012 our Georgia Boot and
Rocky brands continue to occupy leadership positions in the
work and hunting categories, respectively. We have been able to
strengthen our retail relationships in a down market through
innovative product offerings that continue to distinguish
us from the competition and generate healthy sell-through.
As we head into 2013, new products and new categories are at
the heart of our growth strategy. First, we are building on the
momentum of the Durango brand with compelling new boot
collections and increased marketing support as we look to
further grow our presence at retail. The response to this year’s
Durango product lines from existing and new accounts has
been very promising and we are confident they’ll resonate with
consumers as well. Second, in June of this year, we will begin
shipping our Rocky 4EurSole shoes developed with the specific
needs of health professionals in mind. We have executed well
with this design, with a great deal of input from consumers
and the trade. Finally, regarding organic line extension
and growth, we are encouraged with our progress to date,
extending the Rocky brand to the extreme outdoor enthusiast.
These consumers require rugged and dependable footwear
and apparel, and, leveraging what we have learned serving the
U.S. military, we have built a unique product offering focused
on survival, which is resonating well with the end user. To
gain recognition, a large seeding program is underway
with high profile amateur and professional outdoorsmen.
We have two other top line drivers in 2013. First, due to
our proficiency in designing and manufacturing durable
work boots we have earned a new private label program
with Tractor Supply, the nation’s largest retail farm and ranch
chain. Beginning in spring 2013 we’ll be supplying all 1193
of their stores with seven new styles of value priced boots
designed with the farmer and rancher in mind. Second, we
recently received an order from the U.S. military to provide
the Army with combat boots. It’s a five year deal consisting
of a guaranteed first year followed by four option years.
Weather has always played a role in Rocky Brand’s fortunes.
In some years we’ve benefitted from wet, cold fall and winter
seasons and other years, like 2012, the opposite has been true.
While the nature of our business will never allow us to be
fully immune from the weather, I believe we are taking all
the right steps to try and limit the downside effects of warm,
dry conditions during our peak selling period. Looking
ahead, I am optimistic about the future growth prospects
for our portfolio of leading brands. Our recent progress in
the face of a challenging operating environment was the
product of enormous dedication and teamwork on the part
of all Rocky Brand employees. Thank you for your efforts and
I look forward to even greater successes in the years ahead.
Sincerely,
David N. Sharp
President & Chief Executive Officer
III
wholesale
Family of Brands
Rocky footwear and clothing is for people who are
active, engaged and on the go. ROCKY’s superior
comfort, design, insulation, and waterproofing system
empowers them to achieve their personal best and
gives them the confidence to succeed
- CONFIDENCE IN ACTION
TM
IV
wholesale
Family of Brands
Georgia Boot empowers those who
work hard – the workers that pride
themselves in building real value
with their hands. We help them
achieve personal success by creating
performance-enhancing footwear
designed for the physical demands
of their specific trades.
- America’s Hardest Working Boot
V
wholesale
Family of Brands
Slipping on your Durangos gives you a feeling of adventure
and freedom. You’re ready to be mischevious, have fun,
live a little on the edge and maybe even live dangerously.
Durango is not a boot, its an attitude…
we call it OUTLAW FUN
As seen on:
VI
wholesale
Family of Brands
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(Launching Holiday 2013)
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VII
wholesale
New Markets
Rocky S2V is an integrated system of apparel, footwear and
essentials that prepares you to traverse the unforeseen.
• Mitigate extremes of climate &
• Integrate your apparel and footwear
terrain, with CLIMATE IQ
with outdoor essential gear
• Adapt head-on to every condition,
• Organize, stash and carry outdoor
situation and contingency
essentials on your person
WINTER
VIII
wholesale
New Markets
Rocky 4EurSole is for women in the healthcare industry who
are dynamic, performance driven, and always on the run. The
innovative insole provides for superior comfort and unique
customization – allowing each shoe to be as individual as the
woman who wears them, while addressing the demands for
comfort, versatility and style.
Two footbeds and detachable strap for multiple styles
Fit for a Greater Purpose
Open Back
Sling Back
Full Back
Each pair of Rocky 4Eursole includes two
footbed options that allow you to change
your look from a traditional full back clog to
an open back clog. Plus the decorative strap
can be worn in front or behind your heel.
Ou
Our patented interchangeable shoe system
allo
allows you to create your own unique look
by
by changing footbed colors and switching
str
strap colors to a style that fits your unique
pe
personality. The possibilites are endless!
With so many colors and patterns to
choose from, you’ll want to collect them all!
Purchase additional straps and footbeds to
personalize your shoes.
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IX
Retail
Direct Business - Lehigh
Custom product selection, Custom service,
Custom Fit. When it comes to occupational
footwear Lehigh Outfitters, with it’s 90+
year history and eye on the future, works
to serve your specific needs. Whether
online or on site, there is a convenient
ordering and service system customized
to fit you.
Taking the customization and
convenient accessibility of a
CustomFit website one step
further, Lehigh now has the
value-added option of an on-site
iPad kiosk that displays each
account’s Customized website.
X
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:95)(cid:95)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(cid:134)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
Commission File Number: 001-34382
ROCKY BRANDS, INC.
(Exact name of Registrant as specified in its charter)
Ohio
(State or other jurisdiction of
incorporation or organization)
No. 31-1364046
(I.R.S. Employer Identification No.)
39 East Canal Street
Nelsonville, Ohio 45764
(Address of principal executive offices, including zip code)
(740) 753-1951
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Shares, without par value
Title of each class
Name of each exchange on which registered
The NASDAQ Stock Market, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).
Yes (cid:133) No (cid:54)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes (cid:133) No (cid:54)
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90
days. YES (cid:95) NO (cid:134)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES (cid:95)
NO (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as
defined in Exchange Act Rule 12b-2). (Check one):
Large accelerated filer (cid:133)(cid:3)(cid:3)(cid:3)Accelerated filer (cid:54)(cid:3)(cid:3)(cid:3)Non-accelerated filer (cid:133)(cid:3)(cid:3)(cid:3)Smaller reporting company (cid:133)
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:133) No (cid:54)
The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately
$89,559,203 on June 30, 2012.
There were 7,516,448 shares of the Registrant's Common Stock outstanding on February 24, 2013.
Portions of the Registrant's Proxy Statement for the 2013 Annual Meeting of Shareholders are incorporated by reference in Part
III.
DOCUMENTS INCORPORATED BY REFERENCE
1
TABLE OF CONTENTS
PART I
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.
Selected Consolidated Financial Data.
Management's Discussion and Analysis of Financial
Condition and Results of Operation.
Quantitative and Qualitative Disclosures About
Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
PART III
Directors, Executive Officers and Corporate
Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters.
Certain Relationships and Related Transactions, and
Director Independence.
Principal Accounting Fees and Services.
PART IV
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Exhibits, Financial Statement Schedules.
SIGNATURES
2
Page
3
11
16
17
17
17
17
19
19
30
30
30
31
33
33
33
33
33
33
34
3
7
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The
words “anticipate,” “believe,” “expect,” “estimate,” and “project” and similar words and expressions identify
forward-looking statements which speak only as of the date hereof. Investors are cautioned that such statements
involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated
results due to many factors, including, but not limited to, the factors discussed in “Item 1A, Risk Factors.” The
Company undertakes no obligation to publicly update or revise any forward-looking statements.
ITEM 1.
BUSINESS.
PART I
All references to “we,” “us,” “our,” “Rocky Brands,” or the “Company” in this Annual Report on Form 10-K mean
Rocky Brands, Inc. and our subsidiaries.
We are a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a
portfolio of well recognized brand names including Rocky, Georgia Boot, Durango, Lehigh, and the licensed brands
Mossy Oak and Michelin. Our brands have a long history of representing high quality, comfortable, functional and
durable footwear and our products are organized around five target markets: outdoor, work, duty, commercial
military and western. Our footwear products incorporate varying features and are positioned across a range of
suggested retail price points from $14.98 for our value priced products to $384.99 for our premium products. In
addition, as part of our strategy of outfitting consumers from head-to-toe, we market complementary branded
apparel and accessories that we believe leverage the strength and positioning of each of our brands.
Our products are distributed through three distinct business segments: wholesale, retail and military. In our
wholesale business, we distribute our products through a wide range of distribution channels representing over
10,000 retail store locations in the U.S. and Canada as well as in several international markets. Our wholesale
channels vary by product line and include sporting goods stores, outdoor retailers, independent shoe retailers,
hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores and other
specialty retailers. Our retail business includes direct sales of our products to consumers through our consumer and
business websites, our Lehigh Outfitters mobile and retail stores (including a fleet of trucks, supported by small
warehouses that include retail stores, which we refer to as mini-stores), and our Rocky outlet store. We also sell
footwear under the Rocky label to the U.S. military.
Competitive Strengths
Our competitive strengths include:
• Strong portfolio of brands. We believe the Rocky, Georgia Boot, Durango, Lehigh, Mossy Oak and
Michelin brands are well recognized and established names that have a reputation for performance, quality
and comfort in the markets they serve: outdoor, work, duty, commercial military and western. We plan to
continue strengthening these brands through product innovation in existing footwear markets, by extending
certain of these brands into our other target markets and by introducing complementary apparel and
accessories under our owned brands.
• Commitment to product innovation. We believe a critical component of our success in the marketplace has
been a result of our continued commitment to product innovation. Our consumers demand high quality,
durable products that incorporate the highest level of comfort and the most advanced technical features and
designs. We have a dedicated group of product design and development professionals, including well
recognized experts in the footwear and apparel industries, who continually interact with consumers to better
understand their needs and are committed to ensuring our products reflect the most advanced designs,
features and materials available in the marketplace.
• Long-term retailer relationships. We believe that our long history of designing, manufacturing and
marketing premium quality, branded footwear has enabled us to develop strong relationships with our
retailers in each of our distribution channels. We reinforce these relationships by continuing to offer
innovative footwear products, by continuing to meet the individual needs of each of our retailers and by
working with our retailers to improve the visual merchandising of our products in their stores. We believe
that strengthening our relationships with retailers will allow us to increase our presence through additional
3
store locations and expanded shelf space, improve our market position in a consolidating retail environment
and enable us to better understand and meet the evolving needs of both our retailers and consumers.
• Diverse product sourcing and manufacturing capabilities. We believe our strategy of utilizing both company
operated and third-party facilities for the sourcing of our products, offers several advantages. Operating our
own facilities significantly improves our knowledge of the entire production process, which allows us to
more efficiently source product from third parties that is of the highest quality and at the lowest cost
available. We intend to continue to source a higher proportion of our products from third-party
manufacturers, which we believe will enable us to obtain high quality products at lower costs per unit.
Growth Strategy
We intend to increase our sales through the following strategies:
• Expand into new target markets under existing brands. We believe there is significant opportunity to extend
certain of our brands into our other target markets. We intend to continue to introduce products across
varying feature sets and price points in order to meet the needs of our retailers.
• Cross-sell our brands to our retailers. We believe that many retailers of our existing and acquired brands
target consumers with similar characteristics and, as a result, we believe there is significant opportunity to
offer each of our retailers a broader assortment of footwear and apparel that target multiple markets and span
a range of feature sets and price points.
• Expand business internationally. We intend to extend certain of our brands into international markets. We
believe this is a significant opportunity because of the long history and authentic heritage of these brands. We
intend on growing our business internationally through a network of distributors.
•
Increase apparel offerings. We believe the long history and authentic heritage of our owned brands provide
significant opportunity to extend each of these brands into complementary apparel. We intend to continue to
increase our Rocky apparel offerings and believe that similar opportunities exist for our Georgia Boot and
Durango brands in their respective markets.
• Acquire or develop new brands. We intend to continue to acquire or develop new brands that are
complementary to our portfolio and could leverage our operational infrastructure and distribution network.
Product Lines
Our product lines consist of high quality products that target the following markets:
• Outdoor. Our outdoor product lines consist of footwear, apparel and accessory items marketed to outdoor
enthusiasts who spend time actively engaged in activities such as hunting, fishing, camping or hiking. Our
consumers demand high quality, durable products that incorporate the highest level of comfort and the most
advanced technical features, and we are committed to ensuring our products reflect the most advanced
designs, features and materials available in the marketplace. Our outdoor product lines consist of all-season
sport/hunting footwear, apparel and accessories that are typically waterproof and insulated and are designed
to keep outdoorsmen comfortable on rugged terrain or in extreme weather conditions.
• Work. Our work product lines consist of footwear and apparel marketed to industrial and construction
workers, as well as workers in the hospitality industry, such as restaurants or hotels. All of our work
products are specially designed to be comfortable, incorporate safety features for specific work environments
or tasks and meet applicable federal and other standards for safety. This category includes products such as
safety toe footwear for steel workers and non-slip footwear for kitchen workers.
• Duty. Our duty product line consists of footwear products marketed to law enforcement, security personnel
and postal employees who are required to spend a majority of time at work on their feet. All of our duty
footwear styles are designed to be comfortable, flexible, lightweight, slip resistant and durable. Duty
footwear is generally designed to fit as part of a uniform and typically incorporates stylistic features, such as
black leather uppers in addition to the comfort features that are incorporated in all of our footwear products.
4
• Commercial Military. Our commercial military product line consists of footwear products marketed to
military personnel as a substitute for the government issued military boots. Our commercial military boots
are designed to be comfortable, lightweight, and durable and are marketed under the Rocky brand name.
• Western. Our western product line currently consists of authentic footwear products marketed to farmers and
ranchers who generally live in rural communities in North America. We also selectively market our western
footwear to consumers enamored with the western lifestyle.
Our products are marketed under four well-recognized, proprietary brands, Rocky, Georgia Boot, Durango and
Lehigh, in addition to the licensed brands of Michelin and Mossy Oak.
Rocky
Rocky, established in 1979, is our premium priced line of branded footwear, apparel and accessories. We currently
design Rocky products for each of our four target markets and offer our products at a range of suggested retail price
points: $99.95 to $384.99 for our footwear products, $29.95 to $49.95 for tops and bottoms in our apparel lines and
$49.95 to $599.99 for our basic and technical outerwear.
The Rocky brand originally targeted outdoor enthusiasts, particularly hunters, and has since become the market
leader in the hunting boot category. In 2002, we also extended into hunting apparel, including jackets, pants, gloves
and caps. Our Rocky products for hunters and other outdoor enthusiasts are designed for specific weather conditions
and the diverse terrains of North America. These products incorporate a range of technical features and designs
such as Gore-Tex waterproof breathable fabric, 3M Thinsulate insulation, nylon Cordura fabric and camouflaged
uppers featuring either Mossy Oak or Realtree patterns. Rugged outsoles made by industry leaders like Vibram are
sometimes used in conjunction with our proprietary design features like the “Rocky Ride Comfort System” to make
the products durable and easy to wear.
We also produce Rocky duty and commercial military footwear targeting law enforcement professionals, military,
security workers and postal service employees, and we believe we have established a leading market share position
in this category.
In 2002, we introduced Rocky work footwear designed for varying weather conditions or difficult terrain,
particularly for people who make their living outdoors such as those in lumber or forestry occupations. These
products typically include many of the proprietary features and technologies that we incorporate in our hunting and
outdoor products. Similar to our strategy for the outdoor market, we introduced rugged work apparel in 2004, such
as ranch jackets and carpenter jeans.
We have also introduced western influenced work boots for farmers and ranchers. Most of these products are
waterproof, insulated and utilize our proprietary comfort systems. We also recently introduced some men’s and
women’s casual western footwear for consumers enamored with western influenced fashion.
Georgia Boot
Georgia Boot was launched in 1937 and is our moderately priced, high quality line of work footwear. Georgia Boot
footwear is sold at suggested retail price points ranging from $79.95 to $354.99. This line of products primarily
targets construction workers and those who work in industrial plants where special safety features are required for
hazardous work environments. Many of our boots incorporate steel toes or metatarsal guards to protect wearers’
feet from heavy objects and non-slip outsoles to prevent slip related injuries in the work place. All of our boots are
designed to help prevent injury and subsequent work loss and are designed according to standards determined by the
Occupational Safety & Health Administration or other standards required by employers.
In addition, we market a line of Georgia Boot footwear to brand loyal consumers for hunting and other outdoor
activities. These products are primarily all leather boots distributed in the western and southwestern states where
hunters do not require camouflaged boots or other technical features incorporated in our Rocky footwear.
We believe the Georgia Boot brand can be extended into moderately priced duty footwear as well as outdoor and
work apparel.
Durango
5
Durango is our moderately priced, high quality line of western footwear. Launched in 1965, the brand has
developed broad appeal and earned a reputation for authenticity and quality in the western footwear market. Our
current line of products is offered at suggested retail price points ranging from $79.95 to $169.99, and we market
products designed for both work and casual wear. Our Durango line of products primarily targets farm and ranch
workers who live in the heartland where western influenced footwear and apparel is worn for work and casual wear
and, to a lesser extent, this line appeals to urban consumers enamored with western influenced fashion. Many of our
western boots marketed to farm and ranch workers are designed to be durable, including special “barn yard acid
resistant” leathers to maintain integrity of the uppers, and incorporate our proprietary “Comfort Core” system to
increase ease of wear and reduce foot fatigue. Other products in the Durango line that target casual and fashion
oriented consumers have colorful leather uppers and shafts with ornate stitch patterns and are offered for men,
women and children.
Lehigh
The Lehigh brand was launched in 1922 and is our moderately priced, high quality line of safety shoes sold at
suggested retail price points ranging from $29.95 to $191.99. Our current line of products is designed to meet
occupational safety footwear needs. Most of this footwear incorporates steel toes to protect workers and often
incorporates other safety features such as metatarsal guards or non-slip outsoles. Additionally, certain models
incorporate durability features to combat abrasive surfaces or caustic substances often found in some work places.
With the recent shift in manufacturing jobs to service jobs in the U.S., Lehigh began marketing products for the
hospitality industry. These products have non-slip outsoles designed to reduce slips, trips and falls in kitchen
environments where floors are often tiled and greasy. Price points for this kind of footwear range from $29.95 to
$72.99.
Michelin
Michelin is a premier price point line of work footwear targeting specific industrial professions, primarily indoor
professions. The license to design, develop and manufacture footwear under the Michelin name was secured in
2006. Suggested retail prices for the Michelin brand are from $99.95 to $161.99. The previous license agreement
for the Michelin brand expired on December 31, 2012. We entered into a new agreement on January 1, 2013 to use
the Michelin name through December 31, 2014.
Mossy Oak
Mossy Oak is high quality, value priced line of casual and hunting footwear. The license to design, develop and
manufacture footwear under the Mossy Oak name was secured in 2008. Suggested retail prices for the Mossy Oak
Brand are from $39.95 to $79.95 for casual footwear and $49.95 to $114.99 for hunting footwear.
Sales and Distribution
Our products are distributed through three distinct business segments: wholesale, retail and military. You can find
more information regarding our three business segments in Note 14 to our consolidated financial statements.
Wholesale
In the U.S., we distribute Rocky, Georgia Boot, Durango, Michelin, and Mossy Oak products through a wide range
of wholesale distribution channels. As of December 31, 2012, our products were offered for sale at over 10,000
retail locations in the U.S. and Canada.
We sell our products to wholesale accounts in the U.S. primarily through a dedicated in-house sales team who carry
our branded products exclusively, as well as independent sales representatives who carry our branded products and
other non-competing products. Our sales force for Rocky is organized around major accounts, including Bass Pro
Shops, Cabela’s, Dick’s Sporting Goods, Tractor Supply Company and Gander Mountain, and around our target
markets: outdoor, work, duty, commercial military and western. For our Georgia Boot and Durango brands, our
sales employees are organized around each brand and target a broad range of distribution channels. All of our sales
people actively call on their retail customer base to educate them on the quality, comfort, technical features and
breadth of our product lines and to ensure that our products are displayed effectively at retail locations.
Our wholesale distribution channels vary by market:
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• Our outdoor products are sold primarily through sporting goods stores, outdoor specialty stores, catalogs and
mass merchants.
• Our work-related products are sold primarily through retail uniform stores, catalogs, farm store chains,
specialty safety stores, independent shoe stores and hardware stores.
• Our duty products are sold primarily through uniform stores and catalog specialists.
• Our commercial military products are sold primarily through base exchanges such as AAFES and consumer
websites.
• Our western products are sold through western stores, work specialty stores, specialty farm and ranch stores
and more recently, fashion oriented footwear retailers.
Retail
We market products directly to consumers through three retail strategies under the Lehigh retail brand: consumer
and business websites, mobile and retail stores and our outlet store.
Websites
We sell our product lines on our websites at www.rockyboots.com, www.georgiaboot.com,
www.lehighoutfitters.com, www.lehighsafetyshoes.com, www.slipgrips.com, www.rockymilitary.com,
www.rockys2v.com, and www.durangoboot.com. We believe that our internet presence allows us to showcase the
breadth and depth of our product lines in each of our target markets and enables us to educate our consumers about
the unique technical features of our products. We also sell directly to our business customers directly through our
Custom Fit websites that are tailored to the specific needs of our customers. Our customer’s employees order
directly through their employer’s established Custom Fit website and the footwear is delivered directly to the
consumer via a common freight carrier.
Mobile and Retail Stores
Lehigh markets branded work footwear through mobile stores to industrial and hospitality related corporate
customers across the U.S. We work closely with our customers to select footwear products best suited for the
specific safety needs of their work site and that meet the standards determined by the Occupational Safety & Health
Administration or other standards required by our customers. Our customers include large, national companies such
as 3M, Abbott Laboratories, Alcoa, Carnival Cruise Lines, Federal Express, IBM and Texas Instruments.
Our Lehigh mobile stores are stocked with work footwear, as established by the specific needs of our customers, and
typically include our owned brands augmented by branded work footwear from third parties including Dunham and
Timberland Pro. Prior to a scheduled site visit, Lehigh sales managers consult with our corporate customers to
ensure that our trucks are appropriately stocked for their specific needs. Our trucks then perform a site visit where
customer employees select work related footwear and apparel. Our corporate customers generally purchase footwear
or provide payroll deduction plans for footwear purchases by their employees. We believe that our ability to service
work sites across the U.S. allows us to effectively compete for large, national customers who have employees
located throughout the U.S.
Lehigh continues to focus on converting our customers from delivery via our mobile stores to purchasing via our
Custom Fit sites and delivery direct. This is our lowest cost safety shoe solution for our customers and our most
profitable. As part of this strategy, we continue to remove mobile trucks and stores as we convert this business.
Outlet Store
We operate the Rocky outlet store in Nelsonville, Ohio. Our outlet store primarily sells first quality or discontinued
products in addition to a limited amount of factory damaged goods. Related products from other manufacturers are
also sold in the store. Our outlet store allows us to showcase the breadth of our product lines as well as to cost-
effectively sell slow-moving inventory. Our outlet store also provides an opportunity to interact with consumers to
better understand their needs.
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Military
While we are focused on continuing to build our wholesale and retail business, we also actively bid on footwear
contracts with the U.S. military, which requires products to be made in the U.S. Our manufacturing facilities in
Puerto Rico, a U.S. territory, allow us to competitively bid for such contracts. In July 2009, we were awarded a
$29.0 million blanket purchase order from the GSA to produce footwear for the U.S. Military. The final shipment of
this contract was delivered in early 2012. Recently, we received an order to fulfill a contract to the U.S. Military to
produce “Hot Weather” combat boots. The first year of the contract includes a minimum purchase amount of $3.0
million and a maximum of $15.0 million. Shipment of the boots is expected to begin in March 2013. The contract
includes an option for four additional years with the same terms.
All of our footwear for the U.S. military is currently branded Rocky. We believe that many U.S. service men and
women are active outdoor enthusiasts and may be employed in many of the work and duty markets that we target
with our brands. As a result, we believe our sales to the U.S. military serve as an opportunity to reach our target
demographic with high quality branded products.
Marketing and Advertising
We believe that our brands have a reputation for high quality, comfort, functionality and durability built through
their long history in the markets they serve. To further increase the strength and awareness of our brands, we have
developed comprehensive marketing and advertising programs to gain national exposure and expand brand
awareness for each of our brands in their target markets.
We utilize a number of marketing initiatives. With a goal of leveraging our brand within the markets where our
dealers and consumers work, live and play, we utilize sponsorships, media outlets and grassroots campaigns to
expose Rocky, Georgia Boot and Durango to more customers. Rocky expects to increase its brand strength across
all divisions through sponsorships with Archer’s Choice and The Choice with Ralph and Vicki Cianciarulo on the
Outdoor Channel and former professional BASS fisherman Hank Parker on HP-3D which airs on NBC Sports,
Pursuit Channel, and Wild TV in the outdoor market. Country musician, military veteran and outdoor enthusiast
Craig Morgan will serve as an advocate for all Rocky products, while Kalitta MotorSports NHRA racing team will
give the brand exceptional recognition in the work, western and duty markets. Celebrating its 75th anniversary,
Georgia Boot is sponsoring the Clint Bowyer team in the Lucas Oil series of racing which is televised on SPEED,
NBC Sports, and CBS. To acknowledge the anniversary, we will be giving back to communities in which our
consumers reside by supporting underfunded trade schools and 4-H programs. Durango continues to reach target
western and fashion consumers through music, partnering with the Country Music Association (CMA) and the CMA
Music Festival, CMA Awards, and LiveNation musical events throughout the United States. The above sponsorship
properties combined with significant in-store point of purchase efforts, print advertising, and online/social
campaigns will enhance brand awareness across all of our brands and categories.
We also support independent dealers by listing their locations in our national print advertisements. In addition to
our national advertising campaign, we have developed attractive merchandising displays and store-in-store concept
fixturing that are available to our retailers who purchase the breadth of our product lines. We also attend numerous
tradeshows, including the Denver International Western Retailer Market and the Shooting, Hunting, Outdoor
Exposition. Tradeshows allow us to showcase our entire product line to retail buyers and have historically been an
important source of new accounts.
Product Design and Development
We believe that product innovation is a key competitive advantage for us in each of our markets. Our goal in
product design and development is to continue to create and introduce new and innovative footwear and apparel
products that combine our standards of quality, functionality and comfort and that meet the changing needs of our
retailers and consumers. Our product design and development process is highly collaborative and is typically
initiated both internally by our development staff and externally by our retailers and suppliers, whose employees are
generally active users of our products and understand the needs of our consumers. Our product design and
development personnel, marketing personnel and sales representatives work closely together to identify
opportunities for new styles, camouflage patterns, design improvements and newer, more advanced materials. We
have a dedicated group of product design and development professionals, some of whom are well recognized experts
in the footwear and apparel industries, who continually interact with consumers to better understand their needs and
are committed to ensuring our products reflect the most advanced designs, features and materials available in the
marketplace.
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Manufacturing and Sourcing
We manufacture footwear in facilities that we operate in the Dominican Republic and Puerto Rico, and source
footwear, apparel and accessories from third-party facilities, primarily in China. We do not have long-term
contracts with any of our third-party manufacturers. The products purchased from General Shoes US Corporation
and its subsidiaries, one of our third-party manufacturers in China with whom we have had a relationship for over 20
years and which has historically accounted for a significant portion of our manufacturing, represented approximately
12% of our net sales in 2012. We believe that operating our own facilities significantly improves our knowledge of
the entire raw material sourcing and manufacturing process enabling us to more efficiently source finished goods
from third parties that are of the highest quality and at the lowest cost available. In addition, our Puerto Rican
facilities allow us to produce footwear for the U.S. military and other commercial businesses that require production
by a U.S. manufacturer. Sourcing products from offshore third-party facilities generally enables us to lower our
costs per unit while maintaining high product quality and it limits the capital investment required to establish and
maintain company operated manufacturing facilities. Because quality is an important part of our value proposition
to our retailers and consumers, we source products from manufacturers who have demonstrated the intent and ability
to maintain the high quality that has become associated with our brands.
Quality control is stressed at every stage of the manufacturing process and is monitored by trained quality assurance
personnel at each of our manufacturing facilities, including our third-party factories. In addition, we utilize a team
of procurement, quality control and logistics employees in our China office to visit factories to conduct quality
control reviews of raw materials, work in process inventory and finished goods. We also utilize quality control
personnel at our finished goods distribution facilities to conduct quality control testing on incoming sourced finished
goods and raw materials and inspect random samples from our finished goods inventory from each of our
manufacturing facilities to ensure that all items meet our high quality standards.
Foreign Operations and Sales Outside of the United States
Our products are primarily distributed in the United States, Canada, South America, Europe and Asia. We ship our
products from our finished goods distribution facilities located in Logan, Ohio and Waterloo, Ontario, Canada and a
third-party logistics operation on the west coast. Certain of our retailers receive shipments directly from our
manufacturing sources, including all of our U.S. military sales, which are shipped directly from our manufacturing
facilities in Puerto Rico. Net sales to foreign countries, primarily Canada, represented approximately 3.9 % of net
sales in 2012, 4.1% of net sales in 2011, and 3.1% of net sales in 2010.
As previously mentioned, we maintain manufacturing facilities that we operate in the Dominican Republic and
Puerto Rico. In addition, we maintain a sales office and distribution facility in Canada and an office in China to
support our contract manufacturers.
The net book value of fixed assets located outside of the U.S. totaled $4.4 million at December 31, 2012, $4.8
million at December 31, 2011, and $3.9 million at December 31, 2010.
Suppliers
We purchase raw materials from sources worldwide. We do not have any long-term supply contracts for the
purchase of our raw materials, except for limited blanket orders on leather to protect wholesale selling prices for an
extended period of time. The principal raw materials used in the production of our products, in terms of dollar
value, are leather, Gore-Tex waterproof breathable fabric, Cordura nylon fabric and soling materials. We believe
these materials will continue to be available from our current suppliers. However, in the event these materials are
not available from our current suppliers, we believe these products, or similar products, would be available from
alternative sources.
Seasonality and Weather
Historically, we have experienced significant seasonal fluctuations in our business because we derive a significant
portion of our revenues from sales of our outdoor products. Many of our outdoor products are used by consumers in
cold or wet weather. As a result, a majority of orders for these products are placed by our retailers in January
through April for delivery in July through October. In order to meet demand, we must manufacture and source
outdoor footwear year round to be in a position to ship advance orders for these products during the last two quarters
of each year. Accordingly, average inventory levels have been highest during the second and third quarters of each
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year and sales have been highest in the last two quarters of each year. In addition, mild or dry weather conditions
historically have had a material adverse effect on sales of our outdoor products, particularly if they occurred in broad
geographical areas during late fall or early winter. Since 2005, we have experienced and we expect that we will
continue to experience less seasonality and that our business will be subject to reduced weather risk because we now
derive a higher proportion of our sales from work-related footwear products. Generally, work, duty and western
footwear is sold year round and is not subject to the same level of seasonality or variation in weather as our outdoor
product lines. However, because of seasonal fluctuations and variations in weather conditions from year to year,
there is no assurance that the results for any particular interim period will be indicative of results for the full year or
for future interim periods.
Backlog
At December 31, 2012, our backlog was $9.4 million compared to $10.5 million at December 31, 2011. Because a
substantial portion of our orders are placed by our retailers in January through April for delivery in July through
October, our backlog is lowest during the October through December period and peaks during the April through
June period. Factors other than seasonality could have a significant impact on our backlog and, therefore, our
backlog at any one point in time may not be indicative of future results. Generally, orders may be canceled by
retailers prior to shipment without penalty.
Patents, Trademarks and Trade Names
We own numerous design and utility patents for footwear, footwear components (such as insoles and outsoles) and
outdoor apparel in the U.S. and in foreign countries including Canada, Mexico, China and Taiwan. We own U.S.
and certain foreign registrations for the trademarks used in our business, including our marks Rocky, Georgia Boot,
Durango and Lehigh. In addition, we license trademarks, including Gore-Tex, Mossy Oak and Michelin, in order to
market our products.
Our license with W. L. Gore & Associates, Inc. permits us to use the Gore-Tex and related marks on products and
styles that have been approved in advance by Gore. The license agreement may be terminated by either party upon
advance written notice to the other party by October 1 for termination effective December 31 of that same year.
Our license with Mossy Oak permits us to use certain marks and patterns owned by Mossy Oak on our products.
The initial term of the license agreement was for two years ending in May 2011, and the term automatically renews
for one-year periods. The license agreement may be terminated by either party upon ninety days written notice to
the other party.
Our license with Gear Six Technologies LLC permits us to use the Michelin and related marks on our products. Our
original license agreement with Gear Six terminated on December 31, 2012. We entered into a new agreement on
January 1, 2013 to use the Michelin name through December 31, 2014.
In the U.S., our patents are generally in effect for up to 20 years from the date of the filing of the patent application.
Our trademarks are generally valid as long as they are in use and their registrations are properly maintained and have
not been found to become generic. Trademarks registered outside of the U.S. generally have a duration of 10 years
depending on the jurisdiction and are also generally subject to an indefinite number of renewals for a like period
upon appropriate application.
While we have an active program to protect our intellectual property by filing for patents and trademarks, we do not
believe that our overall business is materially dependent on any individual patent or trademark. We are not aware of
any infringement of our intellectual property rights or that we are infringing any intellectual property rights owned
by third parties. Moreover, we are not aware of any material conflicts concerning our trademarks or our use of
trademarks owned by others.
Competition
We operate in a very competitive environment. Product function, design, comfort, quality, technological and
material improvements, brand awareness, timeliness of product delivery and pricing are all important elements of
competition in the markets for our products. We believe that the strength of our brands, the quality of our products
and our long-term relationships with a broad range of retailers allows us to compete effectively in the footwear and
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apparel markets that we serve. However, we compete with footwear and apparel companies that have greater
financial, marketing, distribution and manufacturing resources than we do. In addition, many of these competitors
have strong brand name recognition in the markets they serve.
The footwear and apparel industry is also subject to rapid changes in consumer preferences. Some of our product
lines are susceptible to changes in both technical innovation and fashion trends. Therefore, the success of these
products and styles are more dependent on our ability to anticipate and respond to changing product, material and
design innovations as well as fashion trends and consumer demands in a timely manner. Our inability or failure to
do so could adversely affect consumer acceptance of these product lines and styles and could have a material
adverse effect on our business, financial condition and results of operations.
Employees
At December 31, 2012, we had approximately 2,225 employees of which approximately 2,154 are full time
employees. Approximately 1,802 of our employees work in our manufacturing facilities in the Dominican Republic
and Puerto Rico. None of our employees are represented by a union. We believe our relations with our employees
are good.
Available Information
We make available free of charge on our corporate website, www.rockybrands.com, our annual report on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange
Commission.
ITEM 1A.
RISK FACTORS.
Business Risks
Our implementation of a new Enterprise Resource Planning (“ERP”) system has the potential for business
interruption and associated adverse impact on operating results as well as internal controls.
During 2011, we began a project to implement a new ERP system to replace our current systems. During 2012, we
completed a majority of this implementation and expect to be completed by mid-2013 with the final phase of the
project. These types of project implementations carry certain risks, including potential for business interruption with
the associated adverse impact on operating income. In addition, internal controls that are modified or redesigned to
support the new ERP system implemented may result in deficiencies in the future that could constitute significant
deficiencies, or in the aggregate, a material weakness in internal control over financial reporting.
Expanding our brands into new footwear and apparel markets may be difficult and expensive, and if we are
unable to successfully continue such expansion, our brands may be adversely affected, and we may not achieve
our planned sales growth.
Our growth strategy is founded substantially on the expansion of our brands into new footwear and apparel markets.
New products that we introduce may not be successful with consumers or one or more of our brands may fall out of
favor with consumers. If we are unable to anticipate, identify or react appropriately to changes in consumer
preferences, we may not grow as fast as we plan to grow or our sales may decline, and our brand image and
operating performance may suffer.
Furthermore, achieving market acceptance for new products will likely require us to exert substantial product
development and marketing efforts, which could result in a material increase in our selling, general and
administrative, or SG&A, expenses, and there can be no assurance that we will have the resources necessary to
undertake such efforts. Material increases in our SG&A expenses could adversely impact our results of operations
and cash flows.
We may also encounter difficulties in producing new products that we did not anticipate during the development
stage. Our development schedules for new products are difficult to predict and are subject to change as a result of
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shifting priorities in response to consumer preferences and competing products. If we are not able to efficiently
manufacture newly-developed products in quantities sufficient to support retail distribution, we may not be able to
recoup our investment in the development of new products. Failure to gain market acceptance for new products that
we introduce could impede our growth, reduce our profits, adversely affect the image of our brands, erode our
competitive position and result in long term harm to our business.
A majority of our products are produced outside the U.S. where we are subject to the risks of international
commerce.
A majority of our products are produced in the Dominican Republic and China. Therefore, our business is subject to
the following risks of doing business offshore:
•
•
•
the imposition of additional United States legislation and regulations relating to imports, including quotas,
duties, taxes or other charges or restrictions;
foreign governmental regulation and taxation;
fluctuations in foreign exchange rates;
• changes in economic conditions;
•
transportation conditions and costs in the Pacific and Caribbean;
• changes in the political stability of these countries; and
• changes in relationships between the United States and these countries.
If any of these factors were to render the conduct of business in these countries undesirable or impracticable, we
would have to manufacture or source our products elsewhere. There can be no assurance that additional sources or
products would be available to us or, if available, that these sources could be relied on to provide product at terms
favorable to us. The occurrence of any of these developments would have a material adverse effect on our business,
financial condition, results of operations and cash flows.
Our success depends on our ability to anticipate consumer trends.
Demand for our products may be adversely affected by changing consumer trends. Our future success will depend
upon our ability to anticipate and respond to changing consumer preferences and technical design or material
developments in a timely manner. The failure to adequately anticipate or respond to these changes could have a
material adverse effect on our business, financial condition, results of operations and cash flows.
Loss of services of our key personnel could adversely affect our business.
The development of our business has been, and will continue to be, highly dependent upon David Sharp, President
and Chief Executive Officer, and James E. McDonald, Executive Vice President, Chief Financial Officer and
Treasurer. Messrs. Sharp and McDonald each have an at-will employment agreement with us. Each employment
agreement provides that in the event of termination of employment, without cause, the terminated executive will
receive a severance benefit. In the event of termination for any reason, the terminated executive may not compete
with us for a period of one year. Except for Mike Brooks, Chairman of the Board, none of our other executive
officers and key employees has an employment agreement with our company. The loss of the services of any of
these officers could have a material adverse effect on our business, financial condition, results of operations and
cash flows.
We depend on a limited number of suppliers for key production materials, and any disruption in the supply of
such materials could interrupt product manufacturing and increase product costs.
We purchase raw materials from a number of domestic and foreign sources. We do not have any long-term supply
contracts for the purchase of our raw materials, except for limited blanket orders on leather. The principal raw
materials used in the production of our footwear, in terms of dollar value, are leather, Gore-Tex waterproof
breathable fabric, Cordura nylon fabric and soling materials. Availability or change in the prices of our raw
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materials could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
We currently have a licensing agreement for the use of Gore-Tex waterproof breathable fabric, and any
termination of this licensing agreement could impact our sales of waterproof products.
We are currently one of the largest customers of Gore-Tex waterproof breathable fabric for use in footwear. Our
licensing agreement with W.L. Gore & Associates, Inc. may be terminated by either party upon advance written
notice to the other party by October 1 for termination effective December 31 of that same year. Although other
waterproofing techniques and materials are available, we place a high value on our Gore-Tex waterproof breathable
fabric license because Gore-Tex has high brand name recognition with our customers. The loss of our license to use
Gore-Tex waterproof breathable fabric could have a material adverse effect on our competitive position, which
could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our outdoor products are seasonal.
We have historically experienced significant seasonal fluctuations in our business because we derive a significant
portion of our revenues from sales of our outdoor products. Many of our outdoor products are used by consumers in
cold or wet weather. As a result, a majority of orders for these products are placed by our retailers in January
through April for delivery in July through October. In order to meet demand, we must manufacture and source
outdoor footwear year round to be in a position to ship advance orders for these products during the last two quarters
of each year. Accordingly, average inventory levels have been highest during the second and third quarters of each
year and sales have been highest in the last two quarters of each year. There is no assurance that we will have either
sufficient inventory to satisfy demand in any particular quarter or have sufficient demand to sell substantially all of
our inventory without significant markdowns.
Our outdoor products are sensitive to weather conditions.
Historically, our outdoor products have been used primarily in cold or wet weather. Mild or dry weather has in the
past and may in the future have a material adverse effect on sales of our products, particularly if mild or dry weather
conditions occur in broad geographical areas during late fall or early winter. Also, due to variations in weather
conditions from year to year, results for any single quarter or year may not be indicative of results for any future
period.
Our business could suffer if our third-party manufacturers violate labor laws or fail to conform to generally
accepted ethical standards.
We require our third-party manufacturers to meet our standards for working conditions and other matters before we
are willing to place business with them. As a result, we may not always obtain the lowest cost production.
Moreover, we do not control our third-party manufacturers or their respective labor practices. If one of our third-
party manufacturers violates generally accepted labor standards by, for example, using forced or indentured labor or
child labor, failing to pay compensation in accordance with local law, failing to operate its factories in compliance
with local safety regulations or diverging from other labor practices generally accepted as ethical, we likely would
cease dealing with that manufacturer, and we could suffer an interruption in our product supply. In addition, such a
manufacturer’s actions could result in negative publicity and may damage our reputation and the value of our brand
and discourage retail customers and consumers from buying our products.
The growth of our business will be dependent upon the availability of adequate capital.
The growth of our business will depend on the availability of adequate capital, which in turn will depend in large
part on cash flow generated by our business and the availability of equity and debt financing. We cannot assure you
that our operations will generate positive cash flow or that we will be able to obtain equity or debt financing on
acceptable terms or at all. Our revolving credit facility contains provisions that restrict our ability to incur additional
indebtedness or make substantial asset sales that might otherwise be used to finance our expansion. Security
interests in substantially all of our assets, which may further limit our access to certain capital markets or lending
sources, secure our obligations under our revolving credit facility. Moreover, the actual availability of funds under
our revolving credit facility is limited to specified percentages of our eligible inventory and accounts receivable.
Accordingly, opportunities for increasing our cash on hand through sales of inventory would be partially offset by
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reduced availability under our revolving credit facility. As a result, we cannot assure you that we will be able to
finance our current expansion plans.
We must comply with the restrictive covenants contained in our revolving credit facility.
Our credit facility requires us to comply with certain financial restrictive covenants that impose restrictions on our
operations, including our ability to incur additional indebtedness, make investments of other restricted payments,
sell or otherwise dispose of assets and engage in other activities. Any failure by us to comply with the restrictive
covenants could result in an event of default under those borrowing arrangements, in which case the lenders could
elect to declare all amounts outstanding there under to be due and payable, which could have a material adverse
effect on our financial condition. Our credit facility contains a restrictive covenant which requires us to maintain a
fixed charge coverage ratio. This restrictive covenant is only in effect upon a triggering event taking place (as
defined in the credit facility agreement). At December 31, 2012, there was no triggering event and the covenant was
not in effect.
We face intense competition, including competition from companies with significantly greater resources than
ours, and if we are unable to compete effectively with these companies, our market share may decline and our
business could be harmed.
The footwear and apparel industries are intensely competitive, and we expect competition to increase in the future.
A number of our competitors have significantly greater financial, technological, engineering, manufacturing,
marketing and distribution resources than we do, as well as greater brand awareness in the footwear market. Our
ability to succeed depends on our ability to remain competitive with respect to the quality, design, price and timely
delivery of products. Competition could materially adversely affect our business, financial condition, results of
operations and cash flows.
We currently manufacture a portion of our products and we may not be able to do so in the future at costs that
are competitive with those of competitors who source their goods.
We currently plan to retain our internal manufacturing capability in order to continue benefiting from expertise we
have gained with respect to footwear manufacturing methods conducted at our manufacturing facilities. We
continue to evaluate our manufacturing facilities and third-party manufacturing alternatives in order to determine the
appropriate size and scope of our manufacturing facilities. There can be no assurance that the costs of products that
continue to be manufactured by us can remain competitive with products sourced from third parties.
We rely on distribution centers in Logan, Ohio and Waterloo, Ontario, Canada, and if there is a natural disaster
or other serious disruption at any of these facilities, we may be unable to deliver merchandise effectively to our
retailers.
We rely on distribution centers located in Logan, Ohio and Waterloo, Ontario, Canada. Any natural disaster or other
serious disruption at any of these facilities due to fire, tornado, flood, terrorist attack or any other cause could
damage a portion of our inventory or impair our ability to use our distribution center as a docking location for
merchandise. Either of these occurrences could impair our ability to adequately supply our retailers and harm our
operating results.
We are subject to certain environmental and other regulations.
Some of our operations use substances regulated under various federal, state, local and international environmental
and pollution laws, including those relating to the storage, use, discharge, disposal and labeling of, and human
exposure to, hazardous and toxic materials. Compliance with current or future environmental laws and regulations
could restrict our ability to expand our facilities or require us to acquire additional expensive equipment, modify our
manufacturing processes or incur other significant expenses. In addition, we could incur costs, fines and civil or
criminal sanctions, third-party property damage or personal injury claims or could be required to incur substantial
investigation or remediation costs, if we were to violate or become liable under any environmental laws. Liability
under environmental laws can be joint and several and without regard to comparative fault. There can be no
assurance that violations of environmental laws or regulations have not occurred in the past and will not occur in the
future as a result of our inability to obtain permits, human error, equipment failure or other causes, and any such
violations could harm our business, financial condition, results of operations and cash flows.
14
If our efforts to establish and protect our trademarks, patents and other intellectual property are unsuccessful,
the value of our brands could suffer.
We regard certain of our footwear designs as proprietary and rely on patents to protect those designs. We believe
that the ownership of patents is a significant factor in our business. Existing intellectual property laws afford only
limited protection of our proprietary rights, and it may be possible for unauthorized third parties to copy certain of
our footwear designs or to reverse engineer or otherwise obtain and use information that we regard as proprietary. If
our patents are found to be invalid, however, to the extent they have served, or would in the future serve, as a barrier
to entry to our competitors, such invalidity could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
We own U.S. registrations for a number of our trademarks, trade names and designs, including such marks as
Rocky, Georgia Boot, Durango and Lehigh. Additional trademarks, trade names and designs are the subject of
pending federal applications for registration. We also use and have common law rights in certain trademarks. Over
time, we have increased distribution of our goods in several foreign countries. Accordingly, we have applied for
trademark registrations in a number of these countries. We intend to enforce our trademarks and trade names
against unauthorized use by third parties.
Our success depends on our ability to forecast sales.
Our investments in infrastructure and product inventory are based on sales forecasts and are necessarily made in
advance of actual sales. The markets in which we do business are highly competitive, and our business is affected
by a variety of factors, including brand awareness, changing consumer preferences, product innovations,
susceptibility to fashion trends, retail market conditions, weather conditions and economic and other factors. One of
our principal challenges is to improve our ability to predict these factors, in order to enable us to better match
production with demand. In addition, our growth over the years has created the need to increase the investment in
infrastructure and product inventory and to enhance our systems. To the extent sales forecasts are not achieved,
costs associated with the infrastructure and carrying costs of product inventory would represent a higher percentage
of revenue, which would adversely affect our business, financial condition, results of operations and cash flows.
Risks Related to Our Industry
Because the footwear market is sensitive to decreased consumer spending and slow economic cycles, if general
economic conditions deteriorate, many of our customers may significantly reduce their purchases from us or may
not be able to pay for our products in a timely manner.
The footwear industry has been subject to cyclical variation and decline in performance when consumer spending
decreases or softness appears in the retail market. Many factors affect the level of consumer spending in the
footwear industry, including:
•
•
•
•
•
•
•
general business conditions;
interest rates;
the availability of consumer credit;
weather;
increases in prices of nondiscretionary goods;
taxation; and
consumer confidence in future economic conditions.
Consumer purchases of discretionary items, including our products, may decline during recessionary periods and
also may decline at other times when disposable income is lower. A downturn in regional economies where we sell
products also reduces sales.
The continued shift in the marketplace from traditional independent retailers to large discount mass
merchandisers may result in decreased margins.
15
A continued shift in the marketplace from traditional independent retailers to large discount mass merchandisers has
increased the pressure on many footwear manufacturers to sell products to these mass merchandisers at less
favorable margins. Because of competition from large discount mass merchandisers, a number of our small retailing
customers have gone out of business, and in the future more of these customers may go out of business, which could
have a material adverse effect on our business, financial condition, results of operations and cash flows.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
16
ITEM 2.
PROPERTIES.
We own, subject to a mortgage, our 25,000 square foot executive offices that are located in Nelsonville, Ohio, which
are utilized by all segments. We also own, subject to a mortgage, our 192,000 square foot finished goods
distribution facility in Logan, Ohio, which is utilized by our wholesale and retail segments. We also own, subject to
a mortgage, our 41,000 square foot outlet store and a 5,500 square foot executive office building located in
Nelsonville, Ohio, a portion of which is utilized by our retail segment. In Waterloo, Ontario, we lease a 30,300
square foot distribution facility under a lease expiring in 2013, which is utilized by our wholesale segment. We
lease two manufacturing facilities in Puerto Rico consisting of 44,978 square feet and 39,581 square feet which are
utilized by the wholesale and military segments. These leases expire in 2019. In the Dominican Republic, we lease
five stand-alone manufacturing facilities as follows:
Square
Footage
Lease
Expiration
81,872
24,053
39,815
28,929
13,918
2014
2013
2014
2015
2016
ITEM 3.
LEGAL PROCEEDINGS.
We are, from time to time, a party to litigation which arises in the normal course of our business. Although the
ultimate resolution of pending proceedings cannot be determined, in the opinion of management, the resolution of
these proceedings in the aggregate will not have a material adverse effect on our financial position, results of
operations, or liquidity.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock trades on the NASDAQ National Market under the symbol “RCKY.” The following table sets
forth the range of high and low sales prices for our common stock for the periods indicated, as reported by the
NASDAQ National Market:
Quarter Ended
March 31, 2011………………………………………………………….
June 30, 2011……………………………………………………………
September 30, 2011……………………………………………………..
December 31, 2011……………………………………………………...
March 31, 2012………………………………………………………….
June 30, 2012……………………………………………………………
September 30, 2012……………………………………………………..
December 31, 2012……………………………………………………...
High
$16.47
$16.30
$13.46
$12.00
$13.81
$14.33
$14.19
$13.75
Low
$10.07
$10.78
$ 9.56
$ 8.75
$ 8.80
$11.91
$10.74
$10.84
On February 22, 2013, the last reported sales price of our common stock on the NASDAQ National Market was
$14.03 per share. As of February 22, 2013, there were 84 shareholders of record of our common stock.
17
We presently intend to retain our earnings to finance the growth and development of our business and do not
anticipate paying any cash dividends in the foreseeable future. Future dividend policy will depend upon our
earnings and financial condition, our need for funds and other factors. Presently, our credit facility restricts the
payment of dividends on our common stock. No cash dividends were paid during 2012, 2011 or 2010.
PERFORMANCE GRAPH
The following performance graph compares our performance of the Company with the NASDAQ Stock
Market (U.S.) Index and the Standard & Poor’s Footwear Index, which is a published industry index. The
comparison of the cumulative total return to shareholders for each of the periods assumes that $100 was invested on
December 31, 2007, in our common stock, and in the NASDAQ Stock Market (U.S.) Index and the Standard &
Poor’s Footwear Index and that all dividends were reinvested.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Rocky Brands, Inc., the NASDAQ Composite Index, and the S&P Footwear Index
$250
$200
$150
$100
$50
$0
12/07
12/08
12/09
12/10
12/11
12/12
Rocky Brands, Inc.
NASDAQ Composite
S&P Footwear
*$100 invested on 12/31/07 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2013 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
ROCKY BRANDS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except for per share data)
12/31/12
Five Year Financial Summary
12/31/10
12/31/11
12/31/09
12/31/08
Income Statement Data
Net sales
Gross margin (% of sales)
Net income (loss)
Per Share
Net income
Basic
Diluted
$
228,318
35.2%
8,855
$
$
239,599
36.7%
8,307
$
$
252,792
35.4%
7,684
$
$
229,486
36.8%
1,175
$
$
259,538
39.4%
1,167
$
$
$
1.18
1.18
$
$
1.11
1.11
$
$
1.14
1.14
$
$
0.21
0.21
$
$
0.21
0.21
Weighted average number of common shares outstanding
Basic
Diluted
7,503
7,503
7,487
7,487
6,748
6,764
5,551
5,551
5,509
5,513
Balance Sheet Data
Inventories
Total assets
Working capital
Long-term debt, less current maturities
Stockholders' equity
$
$
$
$
$
67,196
174,844
105,435
23,461
125,637
$
$
$
$
$
65,019
174,066
108,575
35,000
116,660
$
$
$
$
$
58,853
168,579
98,156
34,608
105,004
$
$
$
$
$
55,420
163,390
94,324
55,080
82,478
$
$
$
$
$
70,302
196,862
124,586
87,259
80,950
The 2011 financial data reflects charges for $3.7 million, net of tax benefits, for the termination of our defined
benefit pension plan. The 2009 financial data reflects restructuring charges of $0.5 million, net of tax benefits.
The 2008 financial data reflects a non-cash intangible impairment charge of $3.0 million, net of tax benefits.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Management’s Discussion and Analysis of Financial Condition and Result of Operations (“MD&A”) describes
the matters that we consider to be important to understanding the results of our operations for each of the three years
in the period ended December 31, 2012, and our capital resources and liquidity as of December 31, 2012 and 2011.
Use of the terms “Rocky,” the “Company,” “we,” “us” and “our” in this discussion refer to Rocky Brands, Inc. and
its subsidiaries. Our fiscal year begins on January 1 and ends on December 31. We analyze the results of our
operations for the last three years, including the trends in the overall business followed by a discussion of our cash
flows and liquidity, our credit facility, and contractual commitments. We then provide a review of the critical
accounting judgments and estimates that we have made that we believe are most important to an understanding of
our MD&A and our consolidated financial statements. We conclude our MD&A with information on recent
accounting pronouncements which we adopted during the year, as well as those not yet adopted that are expected to
have an impact on our financial accounting practices.
The following discussion should be read in conjunction with the “Selected Consolidated Financial Data” and our
consolidated financial statements and the notes thereto, all included elsewhere herein. The forward-looking
statements in this section and other parts of this document involve risks and uncertainties including statements
regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ
materially from the results anticipated in these forward-looking statements as a result of factors set forth under the
caption “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995” below. The Private
Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on
behalf of the Company.
19
EXECUTIVE OVERVIEW
We are a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a
portfolio of well recognized brand names including Rocky, Georgia Boot, Durango, Lehigh, and the licensed brands
Michelin and Mossy Oak.
Our products are distributed through three distinct business segments: wholesale, retail and military. In our
wholesale business, we distribute our products through a wide range of distribution channels representing over ten-
thousand retail store locations in the U.S. and Canada as well as in several international markets. Our wholesale
channels vary by product line and include sporting goods stores, outdoor retailers, independent shoe retailers,
hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores and other
specialty retailers. Our retail business includes direct sales of our products to consumers through our Lehigh mobile
stores and our websites. We also sell footwear under the Rocky label to the U.S. military.
Our growth strategy is founded substantially on the expansion of our brands into new footwear and apparel markets.
New products that we introduce may not be successful with consumers or one or more of our brands may fall out of
favor with consumers. If we are unable to anticipate, identify or react appropriately to changes in consumer
preferences, we may not grow as fast as we plan to grow or our sales may decline, and our brand image and
operating performance may suffer.
Furthermore, achieving market acceptance for new products will likely require us to exert substantial product
development and marketing efforts, which could result in a material increase in our selling, general and
administrative, or SG&A, expenses, and there can be no assurance that we will have the resources necessary to
undertake such efforts. Material increases in our SG&A expenses could adversely impact our results of operations
and cash flows.
We may also encounter difficulties in producing new products that we did not anticipate during the development
stage. Our development schedules for new products are difficult to predict and are subject to change as a result of
shifting priorities in response to consumer preferences and competing products. If we are not able to efficiently
manufacture newly-developed products in quantities sufficient to support retail distribution, we may not be able to
recoup our investment in the development of new products. Failure to gain market acceptance for new products that
we introduce could impede our growth, reduce our profits, adversely affect the image of our brands, erode our
competitive position and result in long term harm to our business.
During 2011, we began a project to implement a new Enterprise Resources Planning (ERP) system to replace our
current system. As part of this implementation, we have invested over $5 million into the project. During 2012, we
completed a majority of this implementation and expect to be completed by mid-2013 with the final phase of the
project. If we fail to properly execute and complete the implementation of this system, we could be adversely
impacted both financially and operationally.
FINANCIAL SUMMARY
(cid:121) Net sales of the wholesale segment decreased $6.6 million in 2012 over prior year primarily as a result of
decreased sales in our work footwear, outdoor footwear and apparel categories.
(cid:121) Net sales of the retail segment decreased $3.5 million in 2012 from the prior year primarily as a result of our
ongoing transition to more internet driven transactions and the continued removal of our Lehigh mobile stores
from operations and closing additional mini-stores. These changes resulted in reductions in both net sales and
SG&A expenses.
(cid:121) Net sales of the military segment decreased $1.2 million in 2012 from the prior year. From time to time, we bid
on military contracts when they become available. Our sales under such contracts are dependent on us winning
the bids for these contracts. Recently, we received an order to fulfill a contract to the U.S. Military to produce
“Hot Weather” combat boots. The first year of the contract includes a minimum purchase amount of $3.0
million and a maximum of $15.0 million. Shipment of the boots is expected to begin in March 2013. The
contract includes an option for four additional years with the same terms.
20
(cid:121) Gross margin of the wholesale segment decreased $6.2 million in 2012 over the prior year as a result of the
lower sales and decreased margin as a percentage of sales.
(cid:121) Gross margin of the retail segment decreased $1.2 million in 2012 from the prior year as a result of lower
overall sales.
(cid:121) Gross margin of the military segment decreased $0.3 million in 2012 over the prior year due primarily to lower
sales in 2012.
(cid:121) Selling, general and administrative expenses decreased $3.2 million in 2012 from prior year primarily as result
of lower compensation expense and operating costs of our Lehigh division.
(cid:121) Net interest expense decreased $0.3 million in 2012 from the prior year due to the continued reduction of debt
in 2012.
(cid:121) Net income increased $0.5 million in 2012 over prior year results primarily due to the absence of the pension
termination charges in 2012, which was mostly offset by lower sales in the current year.
(cid:121) Total debt at December 31, 2012 was $23.4 million or $11.5 million lower than the prior year. Total debt minus
cash and cash equivalents was $19.4 million or 13.0% of total capitalization at December 31, 2012 compared to
$31.3 million or 20.7% of total capitalization at year-end 2011.
(cid:121) Our cash provided by operating activities increased $11.5 million in 2012 from the prior year, primarily the
result of cash generated from earnings and changes in working capital.
Net sales. Net sales and related cost of goods sold are recognized at the time products are shipped to the customer
and title transfers. Net sales are recorded net of estimated sales discounts and returns based upon specific customer
agreements and historical trends.
Cost of goods sold. Our cost of goods sold represents our costs to manufacture products in our own facilities,
including raw materials costs and all overhead expenses related to production, as well as the cost to purchase
finished products from our third-party manufacturers. Cost of goods sold also includes the cost to transport these
products to our distribution centers.
SG&A expenses. Our SG&A expenses consist primarily of selling, marketing, wages and related payroll and
employee benefit costs, travel and insurance expenses, depreciation, amortization, professional fees, facility
expenses, bank charges, and warehouse and outbound freight expenses.
Percentage of Net Sales
The following table sets forth consolidated statements of operations data as percentages of total net sales:
Net sales
Cost of goods sold
Gross margin
SG&A expense
Pension termination charges
Income from operations
Results of Operations
Years Ended December 31,
2011
100.0%
63.3%
36.7%
29.2%
2.2%
5.3%
2012
100.0%
64.8%
35.2%
29.2%
0.0%
6.0%
2010
100.0%
64.6%
35.4%
28.6%
0.0%
6.8%
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Net sales. Net sales decreased 4.7% to $228.3 million for 2012 compared to $239.6 million the prior year.
Wholesale sales decreased $6.6 million to $186.0 million for 2012 compared to $192.6 million for 2011. The
decrease in wholesale sales was the result of a $5.2 million or 6.1% decrease in our work footwear category, a $4.3
21
million or 16.1% decrease in our outdoor footwear category, a $3.2 million or 25.2% decrease in apparel and
accessories, a $1.4 million or 9.7% decrease in our duty footwear category and a $1.0 million decrease in other
footwear, which were partially offset by a $5.2 million or 21.0% increase in our western footwear category, a $2.9
million or 39.7% increase in our lifestyle footwear category and a $0.4 million or 1.8% increase in our commercial
military footwear category. Retail sales were $41.3 million in 2012 compared to $44.8 million for 2011. The $3.5
million decrease in retail sales resulted from our ongoing transition to more internet driven transactions and the
decision to remove a portion of our Lehigh mobile stores from operations to help lower operating expenses.
Military segment sales, which occur from time to time, were $1.0 million for 2012 compared to $2.2 million in
2011. From time to time, we bid on military contracts when they become available. Our sales under such contracts
are dependent on us winning the bids for these contracts. Recently, we received an order to fulfill a contract to the
U.S. Military to produce “Hot Weather” combat boots. The first year of the contract includes a minimum purchase
amount of $3.0 million and a maximum of $15.0 million. Shipment of the boots is expected to begin in March 2013.
The contract includes an option for four additional years with the same terms. Average list prices for our footwear,
apparel and accessories were higher in 2012 than 2011 as we increased our list prices to offset higher manufacturing
and sourcing costs.
Gross margin. Gross margin decreased to $80.3 million or 35.2% of net sales for 2012 compared to $87.9 million
or 36.7% of net sales for the prior year. Wholesale gross margin for 2012 was $60.8 million, or 32.7% of net sales,
compared to $66.9 million, or 34.8% of net sales in 2011. The 210 basis point decrease was primarily due to an
increase in product costs and higher customer promotions in the current year. Retail gross margin for 2012 was
$19.5 million, or 47.2% of net sales, compared to $20.7 million, or 46.2% of net sales, in 2011. The 100 basis point
increase in 2012 over the prior year was the result of the $0.8 million inventory adjustment in the fourth quarter of
2011 resulting from our annual physical inventory. Military gross margin in 2012 was less than $0.1 million, or
4.2% of net sales, compared to $0.3 million, or 13.4% of net sales in 2011.
SG&A expenses. SG&A expenses were $66.7 million, or 29.2% of net sales in 2012 compared to $69.9 million, or
29.2% of net sales for 2011. The net change primarily resulted from decreases in compensation and benefits
expenses of $3.5 million and Lehigh mobile and store expenses of $1.5 million, partially offset by increases in
advertising expenses of $1.3 million and freight expenses of $0.5 million.
Interest expense. Interest expense was $0.7 million in 2012, compared to $1.0 million for the prior year. The
decrease of $0.3 million resulted primarily from lower average borrowings in the current year. The interest expense
for 2011 included $0.1 million of prepayment penalties and other fees from the early repayment of our mortgage
loans in April 2011.
Income taxes. Income tax expense was $4.2 million in 2012, compared to $3.7 million for the same period a year
ago. The increase in income tax expense for 2012 was due to a $0.5 million increase in pretax income and an
increase in the effective tax rate. The effective tax rate for 2012 was 32.3% compared to 31.0% for 2011. The
increase in our effective tax rate for 2012 was due principally to a lower permanent capital investment in 2012 in our
operations in the Dominican Republic as compared to 2011. Our permanent capital investment in the Dominican
Republic reduces the amount of dividends that we need to provide for U.S income taxes.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Net sales. Net sales decreased 5.2% to $239.6 million for 2011 compared to $252.8 million the prior year.
Wholesale sales increased $4.3 million to $192.6 million for 2011 compared to $188.3 million for 2010. The
increase in wholesale sales was the result of a $11.2 million or 129.6% increase in our commercial military footwear
category, a $1.3 million or 11.3% increase in apparel and accessories, a $1.0 million or 3.3% increase in our western
footwear category, a $0.5 million or 2.1% increase in our outdoor footwear category and a $0.5 million or 3.9%
increase in our duty footwear category, which were partially offset by a $7.4 million decline of our Dickies licensed
business and a $2.8 million decrease in other footwear. Our licensing agreement with Dickies expired on December
31, 2010. Retail sales were $44.8 million in 2011 compared to $47.5 million for 2010. The $2.7 million decrease in
retail sales resulted from our ongoing transition to more internet driven transactions and the decision to remove a
portion of our Lehigh mobile stores from operations to help lower operating expenses and improve operating
margins. Military segment sales, which occur from time to time, were $2.2 million for 2011 compared to $17.0
million in 2010. From time to time, we bid on military contracts when they become available. Our sales under such
contracts are dependent on us winning the bids for these contracts. Average list prices for our footwear, apparel and
accessories were higher in 2011 than 2010 as we increased our list prices to offset higher manufacturing and
sourcing costs.
22
Gross margin. Gross margin decreased to $87.9 million or 36.7% of net sales for 2011 compared to $89.4 million
or 35.4% of net sales for the prior year. Wholesale gross margin for 2011 was $66.9 million, or 34.8% of net sales,
compared to $65.5 million, or 34.8% of net sales in 2010. Retail gross margin for 2011 was $20.7 million, or 46.2%
of net sales, compared to $21.8 million, or 45.9% of net sales, in 2010. The 30 basis point increase was the result of
higher average selling prices and increased sales from our consumer web business, which carries a higher margin,
partially offset by a $0.8 million inventory adjustment in the fourth quarter resulting from our annual physical
inventory. The adjustment was related to our retail store in Nelsonville, Ohio. We have implemented additional
procedures to ensure the accuracy of the inventory going forward. Military gross margin in 2011 was $0.3 million,
or 13.4% of net sales, compared to $2.1 million, or 12.4% of net sales in 2010.
SG&A expenses. SG&A expenses were $69.9 million, or 29.2% of net sales in 2011 compared to $72.3 million, or
28.6% of net sales for 2010. The net change primarily resulted from decreases in compensation and benefits
expenses of $1.2 million, Lehigh mobile and store expenses of $0.8 million, legal and professional fees of $0.6
million, incentive accruals of $0.6 million and bad debt expenses of $0.3 million, partially offset by increases in
advertising expenses of $0.8 million and freight expenses of $0.4 million.
Pension termination charge. In the fourth quarter of 2011, we made a decision to fully fund and terminate our
defined benefit pension plan. During the fourth quarter, we contributed $4.9 million into the plan and incurred
related expenses and other adjustments of $0.4 million. As a result of these actions, we recorded pension
termination charges totaling $5.3 million and an income tax benefit of $1.6 million.
Interest expense. Interest expense was $1.0 million in 2011, compared to $6.5 million for the prior year. The
decrease of $5.5 million resulted primarily from the repayment of a $40.0 million term note carrying interest at a
rate of 11.5% and the increased write-off of fees in 2010. This repayment was made with $14 million of proceeds
from our May 2010 equity offering as well as $26 million of borrowings from our new line of credit which generally
carries an interest rate of LIBOR plus 150 basis points. Our previous credit facility carried an interest rate of
LIBOR plus 300 basis points. The interest expense for 2010 included the write off of fees of $2.1 million associated
with the early repayment of a portion of the company’s term and revolving loans. The interest expense for 2011
included $0.1 million of prepayment penalties and other fees from early repayment of our mortgage loans in April
2011.
Income taxes. Income tax expense was $3.7 million in 2011, compared to an income tax expense of $3.6 million for
the same period a year ago. The increase in income tax expense for 2011 was due to the $0.8 million increase in
pretax income, mostly offset by a decrease in the effective tax rate. The effective tax rate for 2011 was 31.0%
compared to 31.7% for 2010. The decrease in our effective tax rate for 2011 was due principally to increasing our
permanent capital investment in 2011 in our operations in the Dominican Republic, which reduced the amount of
dividends that we need to provide for U.S income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal sources of liquidity have been our income from operations and borrowings under our credit facility
and other indebtedness.
Over the last several years our principal uses of cash have been for working capital and capital expenditures to
support our growth. Our working capital consists primarily of trade receivables and inventory, offset by accounts
payable and accrued expenses. Our working capital fluctuates throughout the year as a result of our seasonal
business cycle and business expansion and is generally lowest in the months of January through March of each year
and highest during the months of May through October of each year. We typically utilize our revolving credit
facility to fund our seasonal working capital requirements. As a result, balances on our revolving credit facility will
fluctuate significantly throughout the year. Our working capital decreased to $105.4 million at December 31, 2012,
compared to $108.6 million at the end of the prior year.
Our capital expenditures relate primarily to projects relating to our corporate offices, property, merchandising
fixtures, molds and equipment associated with our manufacturing operations and for information technology.
Capital expenditures were $6.1 million for 2012 and $7.6 million in 2011. Capital expenditures for 2013 are
anticipated to be approximately $7.6 million.
23
In October 2010, we entered into a financing agreement with PNC Bank (“PNC”) to provide a $70 million credit
facility. The term of the facility is five years and the current interest rate is generally LIBOR plus 1.50%.
In April 2011, we repaid the remaining balance of approximately $1.8 million on our mortgage loans by borrowing
under a sub-facility on the PNC credit facility. The sub-facility is secured by real estate owned by us. In connection
with this transaction, we incurred approximately $0.1 million of prepayment and other fees that were reported as
additional interest expense in the second quarter of 2011. The mortgage loans were incurring interest at 8.28% and
were replaced with borrowings under the credit facility for a current interest rate of LIBOR plus 1.50%.
The total amount available under our revolving credit facility is subject to a borrowing base calculation based on
various percentages of accounts receivable and inventory. As of December 31, 2012, we had $23.4 million in
borrowings under this facility and total capacity of $68.6 million.
Our credit facility contains a restrictive covenant which requires us to maintain a fixed charge coverage ratio. This
restrictive covenant is only in effect upon a triggering event taking place (as defined in the credit facility agreement).
At December 31, 2012, there was no triggering event and the covenant was not in effect. Our credit facility places a
restriction on the amount of dividends that may be paid. No cash dividends were paid in 2012, 2011 or 2010.
We believe that our credit facility coupled with cash generated from operations will provide sufficient liquidity to
fund our operations for at least the next twelve months. Our continued liquidity, however, is contingent upon future
operating performance, cash flows and our ability to meet financial covenants under our credit facility.
Based on our expected borrowings for 2012, a hypothetical 100 basis point increase in short term interest rates
would result, over the subsequent twelve-month period, in a reduction of approximately $0.2 million in income
before income taxes and cash flows. The estimated reductions are based upon the current level of variable debt and
assume no changes in the composition of that debt.
Cash Flows
Cash Flow Summary
($ in millions)
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
2012
2011
2010
$
18.0
(6.1)
(11.5)
$
6.5
(7.5)
0.3
$
14.0
(4.7)
(6.7)
Net change in cash and cash equivalents
$
0.4
$
(0.7)
$
2.6
Operating Activities. Net cash provided by operating activities totaled $18.0 million for 2012, compared to $6.5
million for 2011, and $14.0 million for 2010. The principal sources of net cash in 2012 included higher net income,
increases in accounts payable and decreases in accounts receivable, which were partially offset by higher balances of
inventory and accrued liabilities. The principal sources of net cash in 2011 included higher net income and
decreases in accounts receivable, which were partially offset by the $4.9 million in pension contributions to fund and
terminate the defined benefit pension plan, higher balances of inventory and reduced accounts payable. The
principal sources of net cash in 2010 included higher net income and increases in accounts payable and other
accrued liabilities, partially offset by slightly higher balances of inventory and accounts receivable.
Investing Activities. Net cash used in investing activities was $6.1 million in 2012 compared to $7.5 million in 2011
and $4.7 million in 2010. The principal use of cash in 2012, 2011 and 2010 was for the purchase of molds and
equipment associated with our manufacturing operations and for information technology software and system
upgrades.
Financing Activities. Cash used in financing activities during 2012 was $11.5 million compared to cash provided by
financing activities of $0.3 million in 2011 and cash used in financing activities of $6.7 million in 2010. Proceeds
and repayments of the revolving credit facility reflect daily cash disbursement and deposit activity. Our financing
activities during 2012 included net repayments under the revolving line of credit facility of $11.5 million. Our
financing activities during 2011 included net borrowings under the revolving line of credit facility of $1.9 million
and repayments on long term debt of $2.0 million. During 2011, we repaid our long-term real estate obligations
with borrowings under the revolving line of credit. Our financing activities during 2010 included $14.1 million of
24
proceeds from the aforementioned issuance of common stock, net borrowings under the revolving line of credit
facility of $20.0 million, repayments on long term debt of $40.5 million and debt financing costs of $0.6 million.
25
Borrowings and External Sources of Funds
Our borrowings and external sources of funds were as follows at December 31, 2012 and 2011:
($ in millions)
Revolving credit facility
Less current maturities
Net long-term debt
December 31
2012
2011
$
$
23.5
-
23.5
$
$
35.0
-
35.0
We continually evaluate our external credit arrangements in light of our growth strategy and new opportunities. In
October 2010, we entered into a financing agreement with PNC bank to provide a $70 million credit facility. The
term of the credit facility is five years and the interest rate is currently LIBOR plus 1.50%.
We lease certain machinery, trucks, shoe centers, and manufacturing facilities under operating leases that generally
provide for renewal options. Future minimum lease payments under non-cancelable operating leases are $0.7
million, $0.5 million, $0.0 million, $0.0 million and $0.0 million for years 2013 through 2017, respectively, or
approximately $1.2 million in total.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations at December 31, 2012 resulting from financial contracts
and commitments. We have not included information on our recurring purchases of materials for use in our
manufacturing operations. These amounts are generally consistent from year to year, closely reflect our levels of
production, and are not long-term in nature (less than three months).
Contractual Obligations at December 31, 2012:
Long-term debt
Minimum operating lease commitments
Minimum royalty commitments
Expected cash requirements for interest (1)
Payments due by Year
$ millions
Total
$
23.5
1.2
0.2
2.2
Less Than
1 Year
$
-
0.7
0.1
0.8
1-3 Years
$
23.5
0.5
0.1
1.4
3-5 Years
$
-
-
-
-
Total contractual obligations
$
27.1
$
1.6
$
25.5
$
-
Over 5
Years
$
-
-
-
-
$
-
(1) Assumes a 3.25% interest rate, which is the highest rate possible as of December 31, 2012 on the $70 million
revolving credit facility.
From time to time, we enter into purchase commitments with our suppliers under customary purchase order terms.
Any significant losses implicit in these contracts would be recognized in accordance with generally accepted
accounting principles. At December 31, 2012, no such losses existed.
Our ongoing business activities continue to be subject to compliance with various laws, rules and regulations as may
be issued and enforced by various federal, state and local agencies. With respect to environmental matters, costs are
incurred pertaining to regulatory compliance. Such costs have not been, and are not anticipated to become, material.
We are contingently liable with respect to lawsuits, taxes and various other matters that routinely arise in the normal
course of business. We do not have off-balance sheet arrangements, financings, or other relationships with
unconsolidated entities or other persons, also known as “Variable Interest Entities.” Additionally, we do not have
any related party transactions that materially affect the results of operations, cash flow or financial condition.
Inflation
26
Our financial performance is influenced by factors such as higher raw material costs as well as higher salaries and
employee benefits. Management attempts to minimize or offset the effects of inflation through increased selling
prices, productivity improvements, and cost reductions. We were able to mitigate the effects of inflation during
2012, 2011 and 2010 due to these factors. It is anticipated that inflationary pressures during 2013 will be offset
through price increases that were implemented in the later part of 2012.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our
consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. A summary of our significant accounting policies is included in
the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Our management regularly reviews our accounting policies to make certain they are current and also provide readers
of the consolidated financial statements with useful and reliable information about our operating results and
financial condition. These include, but are not limited to, matters related to accounts receivable, inventories,
intangibles, pension benefits and income taxes. Implementation of these accounting policies includes estimates and
judgments by management based on historical experience and other factors believed to be reasonable. This may
include judgments about the carrying value of assets and liabilities based on considerations that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.
Our management believes the following critical accounting policies are most important to the portrayal of our
financial condition and results of operations and require more significant judgments and estimates in the preparation
of our consolidated financial statements.
Revenue recognition
Revenue principally consists of sales to customers, and, to a lesser extent, license fees. Revenue is recognized when
goods are shipped and title passes to the customer, while license fees are recognized when earned. Customer sales
are recorded net of allowances for estimated returns, trade promotions and other discounts, which are recognized as
a deduction from sales at the time of sale.
Accounts receivable allowances
Management maintains allowances for uncollectible accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required. The allowance for
uncollectible accounts is calculated based on the relative age and size of trade receivable balances.
Sales returns and allowances
We record a reduction to gross sales based on estimated customer returns and allowances. These reductions are
influenced by historical experience, based on customer returns and allowances. The actual amount of sales returns
and allowances realized may differ from our estimates. If we determine that sales returns or allowances should be
either increased or decreased, then the adjustment would be made to net sales in the period in which such a
determination is made. Sales returns and allowances for sales returns were approximately 4.8% of sales for 2012
and 3.3% of sales for 2011.
Inventories
Management identifies slow moving or obsolete inventories and estimates appropriate loss provisions related to
these inventories. Historically, these loss provisions have not been significant as the vast majority of our inventories
are considered saleable and we have been able to liquidate slow moving or obsolete inventories at amounts above
cost through our factory outlet stores or through various discounts to customers. Should management encounter
difficulties liquidating slow moving or obsolete inventories, additional provisions may be necessary. Management
regularly reviews the adequacy of our inventory reserves and makes adjustments to them as required.
27
Intangible assets
Intangible assets, including goodwill, trademarks and patents are reviewed for impairment annually, and more
frequently, if necessary. We perform such testing of goodwill and indefinite-lived intangible assets in the fourth
quarter of each year or as events occur or circumstances change that would more likely than not reduce the fair value
of the asset below its carrying amount.
In assessing whether indefinite-lived intangible assets are impaired, we must make certain estimates and
assumptions regarding future cash flows, long-term growth rates of our business, operating margins, weighted
average cost of capital and other factors such as; discount rates, royalty rates, cost of capital, and market multiples to
determine the fair value of our assets. These estimates and assumptions require management’s judgment, and
changes to these estimates and assumptions could materially affect the determination of fair value and/or impairment
for each of our other indefinite-lived intangible assets. Future events could cause us to conclude that indications of
intangible asset impairment exist. Impairment may result from, among other things, deterioration in the
performance of our business, adverse market conditions, adverse changes in applicable laws and regulations,
competition, or the sale or disposition of a reporting segment. Any resulting impairment loss could have a material
adverse impact on our financial condition and results of operations.
Pension benefits
Accounting for pensions involves estimating the cost of benefits to be provided well into the future and attributing
that cost over the time period each employee works. To accomplish this, extensive use is made of assumptions
about inflation, investment returns, mortality, turnover and discount rates. These assumptions are reviewed
annually. See Note 10, “Retirement Plans,” to the consolidated financial statements for information on our plan and
the assumptions used.
Pension expenses are determined by actuaries using assumptions concerning the discount rate, expected return on
plan assets and rate of compensation increase. An actuarial analysis of benefit obligations and plan assets is
determined as of December each year. The funded status of our plan and reconciliation of accrued pension cost is
determined annually as of December 31. Actual results would be different using other assumptions. On December
31, 2005 we froze the noncontributory defined benefit pension plan for all non-U.S. territorial employees. In the
fourth quarter of 2011, we fully funded and terminated the pension plan.
Income taxes
Management has recorded a valuation allowance to reduce its deferred tax assets for a portion of state and local
income tax net operating losses that it believes may not be realized. We have considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, however, in the
event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the
future, an adjustment to the deferred tax assets would be charged to income in the period such determination was
made. At December 31, 2012, approximately $15.6 million of undistributed earnings remains that would become
taxable upon repatriation to the United States.
RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In April 2011, the Financial Accounting and Standards Board (FASB) issued accounting standards update (ASU)
No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt
Restructuring. The FASB believes the guidance in this ASU will improve financial reporting by creating greater
consistency in the way GAAP is applied for various types of debt restructurings. The ASU clarifies which loan
modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a
modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for
purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a
restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following
exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. The
amendments to FASB Accounting Standards Codification™ (Codification) Topic 310, Receivables, clarify the
guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing
financial difficulties. The guidance was effective for interim and annual periods beginning on or after June 15, 2011,
28
and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The
adoption of this standard did not have a material effect on our consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the
converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the
Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value
and for disclosing information about fair value measurements, including a consistent meaning of the term “fair
value.” The Boards have concluded the common requirements will result in greater comparability of fair value
measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs.
The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective
during interim and annual periods beginning after December 15, 2011. The adoption of this standard did not have a
material effect on our consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other – (Topic 350) Testing
Goodwill for Impairment. The amendments in this update will allow an entity to first assess qualitative factors to
determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these
amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity
determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying
amount. The amendments include a number of events and circumstances for an entity to consider in conducting the
qualitative assessment. The amendments are effective for annual and interim goodwill impairment tests performed
for fiscal years beginning after December 15, 2011. The adoption of this standard did not have a material effect on
our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income. Under the amendments to Topic 220, an entity has the option to present the total of
comprehensive income, the components of net income and the components of other comprehensive income either in
a single continuous statement of comprehensive income or in two separate but consecutive statements. In both
choices, an entity is required to present each component of net income along with total net income, each component
of other comprehensive income along with a total for other comprehensive income, and a total amount for
comprehensive income. This update eliminates the option to present the components of other comprehensive income
as part of the statement of changes in stockholders' equity. The amendments in this update do not change the items
that must be reported in other comprehensive income or when an item of other comprehensive income must be
reclassified to net income. The amendments in this update should be applied retrospectively. For public entities, the
amendments are effective for fiscal years, and interim periods within those years, beginning after December 15,
2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments
do not require any transition disclosures. The adoption of this standard did not have a material effect on our
consolidated financial statements.
Accounting standards not yet adopted
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income. The update does not change the current
requirements for reporting net income or other comprehensive income in financial statements. However, the update
requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive
income by component. In addition, an entity is required to present, either on the face of the statement where net
income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income
by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be
reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under
U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other
disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments are
effective prospectively for reporting periods beginning after December 15, 2012. We are currently assessing the
potential impact of the adoption of this amendment on our consolidated financial statements and related disclosures.
29
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995
This Management’s Discussion and Analysis of Financial Conditions and Results of Operations contains forward-
looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended, which are intended to be covered by the safe harbors created
thereby. Those statements include, but may not be limited to, all statements regarding our and management’s intent,
belief, expectations, such as statements concerning our future profitability and our operating and growth strategy.
Words such as “believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,” “estimate,” “predict,”
“potential,” “continue,” “likely” and similar expressions are intended to identify forward-looking statements.
Investors are cautioned that all forward-looking statements involve risk and uncertainties including, without
limitations, dependence on sales forecasts, changes in consumer demand, seasonality, impact of weather,
competition, reliance on suppliers, changing retail trends, economic changes, as well as other factors set forth under
the caption “Item 1A, Risk Factors” in this Annual Report on Form 10-K and other factors detailed from time to
time in our filings with the Securities and Exchange Commission. Although we believe that the assumptions
underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be
inaccurate. Therefore, there can be no assurance that the forward-looking statements included herein will prove to
be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. We assume no obligation to update any forward-looking statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary market risk results from fluctuations in interest rates. We are also exposed to changes in the price of
commodities used in our manufacturing operations. However, commodity price risk related to the Company's
current commodities is not material as price changes in commodities can generally be passed along to the customer.
We do not hold any market risk sensitive instruments for trading purposes.
The following item is market rate sensitive for interest rates for the Company: long-term debt consisting of a credit
facility (as described below) with a balance at December 31, 2011 of $23.5 million.
In October 2010, we entered into a financing agreement with PNC Bank (“PNC”) to provide a $70 million credit
facility. The term of the facility is five years and the current interest rate is generally LIBOR plus 1.50%. Our
revolving credit facility matures in 2015. We have no other long-term debt maturities.
In April 2011, we repaid the remaining balance of approximately $1.8 million on our mortgage loans by borrowing
under a sub-facility on the PNC credit facility. The sub-facility is secured by real estate owned by us. In connection
with this transaction, we incurred approximately $0.1 million of prepayment and other fees that were reported as
additional interest expense in the second quarter of 2011. The mortgage loans were incurring interest at 8.28% and
were replaced with borrowings under the credit facility for a current interest rate of LIBOR plus 1.50%.
We do not have any interest rate management agreements as of December 31, 2012.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated balance sheets as of December 31, 2012 and 2011 and the related consolidated statements of
comprehensive income, shareholders’ equity, and cash flows for the years ended December 31, 2012, 2011, and
2010, together with the report of the independent registered public accounting firm thereon appear on pages F-1
through F-30 hereof and are incorporated herein by reference.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
30
ITEM 9A.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our management carried out an evaluation, with the participation
of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as
amended). Based upon that evaluation, our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective as of the end of the period covered by this report. It should be
noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
Changes in Internal Control over Financial Reporting
As part of our evaluation of the effectiveness of internal controls over financial reporting described below, we made
certain improvements to our internal controls. However, there were no changes in our internal controls over
financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Rule 13a-15(f) under the Exchange Act. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision
and with the participation of our principal executive officer and principal financial officer, our management
conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework
in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based upon that evaluation under the framework in Internal Control – Integrated Framework, our
management concluded that our internal control over financial reporting was effective as of December 31, 2012.
Schneider Downs & Co., Inc., our independent registered public accounting firm has issued an attestation report on
the effectiveness of our internal controls over financial reporting which is included on the following page.
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Rocky Brands, Inc. and Subsidiaries
Nelsonville, Ohio
We have audited Rocky Brands, Inc. and Subsidiaries’ (the “Company”) internal control over financial reporting as
of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit of
internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets and the related consolidated statements of comprehensive income,
shareholders’ equity, and cash flows of the Company, and our report dated March 4, 2013 expressed an unqualified
opinion.
/s/ Schneider Downs & Co., Inc.
Columbus, Ohio
March 4, 2013
32
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this item is included under the captions “ELECTION OF DIRECTORS” and
“INFORMATION CONCERNING THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE,”
INFORMATION CONCERNING EXECUTIVE OFFICERS,” and “SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE” in the Company's Proxy Statement for the 2013 Annual Meeting of Shareholders
(the “Proxy Statement”) to be held on May 8, 2013, to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, is incorporated herein by
reference.
We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and all employees.
The Code of Business Conduct and Ethics is posted on our website at www.rockyboots.com. The Code of Business
Conduct and Ethics may be obtained free of charge by writing to Rocky Brands, Inc., Attn: Chief Financial Officer,
39 East Canal Street, Nelsonville, Ohio 45764.
ITEM 11.
EXECUTIVE COMPENSATION.
The information required by this item is included under the captions “EXECUTIVE COMPENSATION” and
“COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” in the Company's Proxy
Statement, and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS.
The information required by this item is included under the caption “PRINCIPAL HOLDERS OF VOTING
SECURITIES - OWNERSHIP OF COMMON STOCK BY MANAGEMENT,” “- OWNERSHIP OF COMMON
STOCK BY PRINCIPAL SHAREHOLDERS,” and “EQUITY COMPENSATION PLAN INFORMATION,” in the
Company's Proxy Statement, and is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
The information required by this item is included under the caption “COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION COMPENSATION COMMITTEE” and INTERLOCKS AND
INSIDER PARTICIPATION/RELATED PARTY TRANSACTIONS” in the Company's Proxy Statement, and is
incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is included under the caption “REPORT OF THE AUDIT COMMITTEE OF
THE BOARD OF DIRECTORS” in the Company’s Proxy Statement, and is incorporated herein by reference.
33
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
PART IV
(1) The following Financial Statements are included in this Annual Report on Form 10-K on the pages
indicated below:
Reports of Independent Registered Public Accounting Firm.………………………….
F-1
Consolidated Balance Sheets as of December 31, 2012 and 2011……………………… F-2 - F-3
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2012, 2011, and 2010………………………………………….. F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2012, 2011, and 2010……………………………… F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2012, 2011, and 2010…………………………………………… F-6
Notes to Consolidated Financial Statements for the years ended
December 31, 2012, 2011, and 2010…………………………………………… F-7 - F-23
(2) The following financial statement schedule for the years ended December 31, 2012, 2011, and 2010 is
included in this Annual Report on Form 10-K and should be read in conjunction with the Consolidated
Financial Statements contained in the Annual Report.
Schedule II -- Consolidated Valuation and Qualifying Accounts.
Schedules not listed above are omitted because of the absence of the conditions under which they are
required or because the required information is included in the Consolidated Financial Statements or
the notes thereto.
(3) Exhibits:
Exhibit
Number
Description
3.1
3.2
3.3
4.1
4.2
Second Amended and Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2006).
Amendment to Company’s Second Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-
K for the fiscal year ended December 31, 2006).
Amended and Restated Code of Regulations of the Company (incorporated by reference to Exhibit
3.2 to the Registration Statement on Form S-1, registration number 33-56118 (the “Registration
Statement”)).
Form of Stock Certificate for the Company (incorporated by reference to Exhibit 4.1 to the
Registration Statement).
Articles Fourth, Fifth, Sixth, Seventh, Eighth, Eleventh, Twelfth, and Thirteenth of the Company's
Amended and Restated Articles of Incorporation (see Exhibit 3.1).
4.3
Articles I and II of the Company's Code of Regulations (see Exhibit 3.3).
34
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Amended and Restated Rights Agreement dated as of June 7, 2012, by and between the Company
and the Computershare Trust Company, N.A., as Rights Agent (incorporated by reference to the
Company’s Current Report on Form 8-K filed on June 12, 2012).
Deferred Compensation Agreement, dated May 1, 1984, between Rocky Shoes & Boots Co. and
Mike Brooks (incorporated by reference to Exhibit 10.3 to the Registration Statement).
Information concerning Deferred Compensation Agreements substantially similar to Exhibit 10.1
(incorporated by reference to Exhibit 10.4 to the Registration Statement).
Indemnification Agreement, dated December 12, 1992, between the Company and Mike Brooks
(incorporated by reference to Exhibit 10.10 to the Registration Statement).
Information concerning Indemnification Agreements substantially similar to Exhibit 10.3
(incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2005).
Amended and Restated Lease Agreement, dated March 1, 2002, between Rocky Shoes & Boots
Co. and William Brooks Real Estate Company regarding Nelsonville factory (incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002).
Lease Contract dated December 16, 1999, between Lifestyle Footwear, Inc. and The Puerto Rico
Industrial Development Company (incorporated by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
Company’s 2004 Stock Incentive Plan (incorporated by reference to the Company’s Definitive
Proxy Statement for the 2004 Annual Meeting of Shareholders, held on May 11, 2004, filed on
April 6, 2004).
Renewal of Lease Contract, dated June 24, 2004, between Five Star Enterprises Ltd. and the
Dominican Republic Corporation for Industrial Development (incorporated by reference to Exhibit
10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2004).
Second Amendment to Lease Agreement, dated as of July 26, 2004, between Rocky Shoes &
Boots, Inc. and the William Brooks Real Estate Company (incorporated by reference to Exhibit
10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2004).
Form of Option Award Agreement under the Company’s 2004 Stock Incentive Plan (incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K dated January 3, 2005, filed with
the Securities and Exchange Commission on January 7, 2005).
Form of Restricted Stock Award Agreement relating to the Retainer Shares issued under the
Company’s 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K dated January 3, 2005, filed with the Securities and Exchange Commission
on January 7, 2005).
Amendment to the Rocky Brands, Inc. Agreement with J. Michael Brooks (dated April 16, 1985),
dated December 22, 2008 (incorporated by reference to Exhibit 10.35 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2008).
First Amendment to the Rocky Brands, Inc. 2004 Stock Incentive Plan, dated December 30, 2008
(incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2008).
Employment Agreement, dated June 12, 2008, between the Company and Mike Brooks
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated
June 12, 2009, filed with the Securities and Exchange Commission on June 18, 2009).
35
10.15
10.16
10.17
Employment Agreement, dated June 12, 2008, between the Company and David Sharp
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated
June 12, 2009, filed with the Securities and Exchange Commission on June 18, 2009).
Employment Agreement, dated June 12, 2008, between the Company and James E. McDonald
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated
June 12, 2009, filed with the Securities and Exchange Commission on June 18, 2009).
Revolving Credit, Guaranty, and Security Agreement, dated October 20, 2010, among Rocky
Brands, Inc., Lehigh Outfitters, LLC, Lifestyle Footwear, Inc., Rocky Brands Wholesale LLC,
Rocky Brands International, LLC, and Rocky Canada, Inc., as borrowers, and the financial
institutions party thereto as lenders, and PNC Bank, National Association as agent for the lenders
(incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2010).
10.18
Description of Material Terms of Rocky Brands, Inc.’s Bonus Plan for Fiscal Year Ending
December 31, 2012 (incorporated by reference to Exhibit 10.19 to the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2011).
10.19*
Description of Material Terms of Rocky Brands, Inc.’s Bonus Plan for Fiscal Year Ending
December 31, 2013.
21
23*
24*
Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2006).
Independent Registered Public Accounting Firm’s Consent of Schneider Downs & Co., Inc.
Powers of Attorney.
31.1*
Rule 13a-14(a) Certification of Principal Executive Officer.
31.2*
Rule 13a-14(a) Certification of Principal Financial Officer.
32**
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer.
99*
Financial Statement Schedule.
101*
Attached as Exhibits 101 to this report are the following financial statements from the Company’s
Annual Report on Form 10-K for the year ended December 31, 2012 formatted in XBRL
(“eXtensible Business Reporting Language”): (i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Cash
Flows, and (vi) related notes to these financial statements.
* Filed with this Annual Report on Form 10-K.
** Furnished with this Annual Report on Form 10-K.
36
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 4, 2013
ROCKY BRANDS, INC.
By: /s/ James E. McDonald
James E. McDonald, Executive Vice
President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities indicated on the dates indicated.
Signature
Title
Date
/s/ David N. Sharp
David N. Sharp
/s/ James E. McDonald
James E. McDonald
/s/ Mike Brooks
Mike Brooks
* CURTIS A. LOVELAND
Curtis A. Loveland
* J. PATRICK CAMPBELL
J. Patrick Campbell
* GLENN E. CORLETT
Glenn E. Corlett
* MICHAEL L. FINN
Michael L. Finn
* G. COURTNEY HANING
G. Courtney Haning
* HARLEY E. ROUDA
Harley E. Rouda
* JAMES L. STEWART
James L. Stewart
* By: /s/ David N. Sharp
David N. Sharp, Attorney-in-Fact
President and Chief Executive Officer March 4, 2013
and Director (Principal Executive Officer)
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 4, 2013
Chairman and Director
March 4, 2013
Secretary and Director
March 4, 2013
March 4, 2013
March 4, 2013
March 4, 2013
March 4, 2013
March 4, 2013
March 4, 2013
Director
Director
Director
Director
Director
Director
7
3
ROCKY BRANDS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012,
2011 and 2010
Consolidated Statements of Shareholders’ Equity for the Years Ended
December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2012, 2011 and 2010
F-1
F-2 - F-3
F-4
F-5
F-6
Notes to Consolidated Financial Statements
F-7 - F-23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Rocky Brands, Inc. and Subsidiaries
Nelsonville, Ohio
We have audited the accompanying consolidated balance sheets of Rocky Brands, Inc. and Subsidiaries (the
“Company”) as of December 31, 2012 and 2011, and the related consolidated statements of comprehensive
income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December
31, 2012, 2011 and 2010. Our audits also included the financial statement schedule listed in the index at Item
15(a)(2). The Company’s management is responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the consolidated financial position of the Company as of December 31, 2012, and 2011, and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31, 2012, 2011
and 2010, in conformity with accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in relation to the consolidated
financial statements, as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2012, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 4, 2013 expressed an
unqualified opinion.
/s/ Schneider Downs & Co., Inc.
Columbus, Ohio
March 4, 2013
F - 1
ROCKY BRANDS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CURRENT ASSETS:
Cash and cash equivalents
Trade receivables – net
Other receivables
Inventories
Income tax receivable
Deferred income taxes
Prepaid expenses
Total current assets
FIXED ASSETS – net
IDENTIFIED INTANGIBLES
OTHER ASSETS
TOTAL ASSETS
See notes to consolidated financial statements
December 31,
2012
2011
$
4,022,579
44,555,057
575,984
67,196,245
-
1,252,030
2,127,726
$
3,650,291
45,008,793
946,686
65,019,048
1,164,664
1,154,040
2,561,941
119,729,621
119,505,463
24,252,465
23,557,102
30,498,802
30,493,107
363,527
510,293
$
174,844,415
$
174,065,965
F - 2
ROCKY BRANDS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CURRENT LIABILITIES:
Accounts payable
Accrued expenses:
Salaries and wages
Taxes - other
Accrued freight
Commissions
Income taxes payable
Other
Total current liabilities
LONG TERM DEBT
DEFERRED LIABILITIES:
Deferred income taxes
Other deferred liabilities
TOTAL LIABILITIES
December 31,
2012
2011
$
9,930,518
$
5,696,363
592,568
704,064
857,991
711,459
335,210
1,162,650
14,294,460
23,461,340
11,148,333
303,406
49,207,539
2,310,906
609,992
633,254
709,201
-
970,806
10,930,522
35,000,000
10,987,395
488,437
57,406,354
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, Series A, no par value, $.06 stated value; none
outstanding
Common stock, no par value; 25,000,000 shares authorized;
outstanding; 2012 - 7,503,568 and 2011 - 7,489,995; and
additional paid-in capital
Retained earnings
Total shareholders' equity
-
-
69,694,770
55,942,106
69,572,270
47,087,341
125,636,876
116,659,611
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
174,844,415
$
174,065,965
See notes to consolidated financial statements.
F - 3
ROCKY BRANDS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NET SALES
COST OF GOODS SOLD
GROSS MARGIN
OPERATING EXPENSES
Selling, general and administrative expenses
Pension termination charge
Total operating expenses
INCOME FROM OPERATIONS
OTHER INCOME AND (EXPENSES):
Interest expense
Other - net
Total other - net
2012
Years Ended December 31,
2011
2010
$
228,317,663
$
239,599,096
$
252,792,263
148,031,073
80,286,590
151,668,341
87,930,755
163,419,549
89,372,714
66,679,761
-
66,679,761
13,606,829
(650,873)
131,463
(519,410)
69,852,696
5,280,998
75,133,694
12,797,061
(979,511)
216,914
(762,597)
72,303,259
-
72,303,259
17,069,455
(6,464,449)
652,213
(5,812,236)
INCOME BEFORE INCOME TAXES
13,087,419
12,034,464
11,257,219
INCOME TAX EXPENSE
NET INCOME
NET INCOME PER SHARE
Basic
Diluted
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic
Diluted
COMPREHENSIVE INCOME
Net income
Other comprehensive income:
Change in pension liability, net of tax benefits of
$1,092,258 and $221,439 for 2011 and 2010,
respectively.
TOTAL COMPREHENSIVE INCOME
See notes to consolidated financial statements
4,232,654
3,727,569
3,573,487
$
8,854,765
$
8,306,895
$
7,683,732
$1.18
$1.18
$1.11
$1.11
$1.14
$1.14
7,503,494
7,503,494
7,486,655
7,487,196
6,747,847
6,764,190
$
8,854,765
$
8,306,895
$
7,683,732
-
$
8,854,765
2,828,989
11,135,884
$
388,155
8,071,887
$
F - 4
ROCKY BRANDS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock and
Accumulated
Additional Paid-in Capital
Other
Shares
Comprehensive
Outstanding
Amount
Loss
Retained
Earnings
Total
Shareholders'
Equity
BALANCE - December 31, 2009
5,576,465
54,598,104
(3,217,144)
31,096,714
83,657,552
YEAR ENDED DECEMBER 31, 2010
Net income
Change in pension liability, net of tax benefit
of $221,439
Stock issuance, net of issuance costs
Stock compensation expense
Stock issued and options exercised including
related tax benefits
7,683,732
7,683,732
388,155
1,800,000
16,072
14,105,600
129,900
34,250
218,497
388,155
14,105,600
129,900
218,497
BALANCE - December 31, 2010
7,426,787
$
69,052,101
$
(2,828,989)
$
38,780,446
$
105,003,558
YEAR ENDED DECEMBER 31, 2011
Net income
Termination of pension liability, net of tax
benefits of $1,092,258
Stock compensation expense
Stock issued and options exercised including
related tax benefits
8,306,895
8,306,895
2,828,989
12,208
122,500
51,000
397,669
2,828,989
122,500
397,669
BALANCE - December 31, 2011
7,489,995
$
69,572,270
$
-
$
47,087,341
$
116,659,611
YEAR ENDED DECEMBER 31, 2012
Comprehensive income
Stock compensation expense
13,573
122,500
8,854,765
8,854,765
122,500
BALANCE - December 31, 2012
7,503,568
$
69,694,770
$
-
$
55,942,106
$
125,636,876
See notes to consolidated financial statements.
F - 5
ROCKY BRANDS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
Deferred income taxes
Deferred compensation and pension
(Gain) loss on disposal of fixed assets
Stock compensation expense
Write-off of deferred financing costs due to repayment
Change in assets and liabilities:
Receivables
Inventories
Income tax receivable
Other current assets
Other assets
Accounts payable
Accrued and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets
Proceeds from sales of fixed assets
Investment in trademarks and patents
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility
Repayments of revolving credit facility
Repayments of long-term debt
Debt financing costs
Issuance of common stock, net of issuance costs
Proceeds from exercise of stock options
Tax benefit related to stock options
Years Ended December 31,
2012
2011
2010
$
8,854,765
$
8,306,895
$
7,683,732
5,897,100
62,948
-
(50,949)
122,500
-
824,438
(2,177,197)
-
1,598,879
146,766
3,769,551
(1,055,248)
17,993,553
(6,145,390)
118,398
(55,613)
(6,082,605)
63,140,815
(74,679,475)
-
-
-
-
-
5,659,005
584,512
416,572
53,124
122,500
-
2,549,431
(6,166,492)
(1,164,664)
(768,089)
712,419
(2,922,410)
(853,245)
6,529,558
(7,559,846)
62,295
(46,098)
(7,543,649)
76,376,444
(74,474,277)
(1,997,985)
-
-
371,427
26,242
301,851
5,638,775
339,200
(147,655)
72,545
129,900
1,503,007
(1,196,709)
(3,432,089)
-
(484,714)
744,409
1,834,607
1,370,193
14,055,201
(4,743,453)
28,560
(25,693)
(4,740,586)
231,819,597
(211,803,555)
(40,511,871)
(577,445)
14,105,600
190,620
27,877
(6,749,177)
Net cash (used in) provided by financing activities
(11,538,660)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
372,288
(712,240)
2,565,438
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD
3,650,291
4,362,531
1,797,093
END OF PERIOD
$
4,022,579
$
3,650,291
$
4,362,531
See notes to consolidated financial statements
F - 6
ROCKY BRANDS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial statements include the
accounts of Rocky Brands, Inc. (“Rocky”) and its wholly-owned subsidiaries, Lifestyle Footwear,
Inc. (“Lifestyle”), Five Star Enterprises Ltd. (“Five Star”), Rocky Canada, Inc. (“Rocky Canada”),
Rocky Brands Wholesale, LLC, Rocky Brands International, LLC and Lehigh Outfitters, LLC,
collectively referred to as the “Company.” All inter-company transactions have been eliminated.
Business Activity - We are a leading designer, manufacturer and marketer of premium quality
footwear marketed under a portfolio of well recognized brand names including Rocky Outdoor Gear,
Georgia Boot, Durango, and Lehigh. Our brands have a long history of representing high quality,
comfortable, functional and durable footwear and our products are organized around four target
markets: outdoor, work, duty and western. In addition, as part of our strategy of outfitting
consumers from head-to-toe, we market complementary branded apparel and accessories that we
believe leverage the strength and positioning of each of our brands.
Our products are distributed through three distinct business segments: wholesale, retail and military.
In our wholesale business, we distribute our products through a wide range of distribution channels
representing over ten thousand retail store locations in the U.S. and Canada. Our wholesale channels
vary by product line and include sporting goods stores, outdoor retailers, independent shoe retailers,
hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores
and other specialty retailers. Our retail business includes direct sales of our products to consumers
through our Lehigh mobile and retail stores (including a fleet of 21 trucks, supported by 3 small
warehouses that include retail stores, which we refer to as mini-stores), our Rocky outlet store and
our websites. We also sell footwear under the Rocky label to the U.S. military.
We did not have any single customer account for more than 10% of consolidated net sales in 2012,
2011 or 2010.
Estimates - The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - We consider all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Our cash and cash equivalents are
primarily held in five banks. Balances may exceed federally insured limits.
Trade Receivables - Trade receivables are presented net of the related allowance for uncollectible
accounts of approximately $650,000 and $556,000 at December 31, 2012 and 2011, respectively.
The allowance for uncollectible accounts is calculated based on the relative age and size of trade
receivable balances. Our credit policy generally provides that trade receivables will be deemed
uncollectible and written-off once we have pursued all reasonable efforts to collect on the account.
F - 7
Concentration of Credit Risk - We have significant transactions with a large number of customers.
No customer represented 10% of trade receivables - net as of December 31, 2012 and 2011. Our
exposure to credit risk is impacted by the economic climate affecting the retail shoe industry. We
manage this risk by performing ongoing credit evaluations of our customers and maintain reserves
for potential uncollectible accounts.
Supplier and Labor Concentrations - We purchase raw materials from a number of domestic and
foreign sources. We currently buy the majority of our waterproof fabric, a component used in a
significant portion of our shoes and boots, from one supplier (W.L. Gore & Associates, Inc.). We
have had a relationship with this supplier for over 20 years and have no reason to believe that such
relationship will not continue.
We produce a portion of our shoes and boots in our Dominican Republic operation and in our Puerto
Rico operation. We are not aware of any governmental or economic restrictions that would alter
these current operations.
We source a significant portion of our footwear, apparel and gloves from manufacturers in the Far
East, primarily China. We are not aware of any governmental or economic restrictions that would
alter our current sourcing operations.
Inventories - Inventories are valued at the lower of cost, determined on a first-in, first-out (FIFO)
basis, or market. Reserves are established for inventories when the net realizable value (NRV) is
deemed to be less than its cost based on our periodic estimates of NRV.
Fixed Assets - The Company records fixed assets at historical cost and generally utilizes the
straight-line method of computing depreciation for financial reporting purposes over the estimated
useful lives of the assets as follows:
Buildings and improvements
Machinery and equipment
Furniture and fixtures
Lasts, dies, and patterns
Years
5-40
3-8
3-8
3
For income tax purposes, the Company generally computes depreciation utilizing accelerated
methods.
Identified intangible assets - Identified intangible assets consist of indefinite lived trademarks and
definite lived trademarks, patents and customer lists. Indefinite lived intangible assets are not
amortized.
If events or circumstances change, a determination is made by management, in accordance with the
accounting standard for “Property, Plant and Equipment” to ascertain whether property, equipment
and certain finite-lived intangibles have been impaired based on the sum of expected future
undiscounted cash flows from operating activities. If the estimated net cash flows are less than the
carrying amount of such assets, we will recognize an impairment loss in an amount necessary to
write down the assets to fair value as determined from expected future discounted cash flows.
In accordance with the accounting standard for “Intangibles – Goodwill and Other”, we test
intangible assets with indefinite lives for impairment annually or when conditions indicate
impairment may have occurred. We perform such testing of our indefinite-lived intangible assets in
F - 8
the fourth quarter of each year or as events occur or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount.
Advertising - We expense advertising costs as incurred. Advertising expense was approximately
$7,118,000, $5,864,000, and $5,069,000 for 2012, 2011 and 2010, respectively.
Revenue Recognition - Revenue and related cost of goods sold are recognized at the time products
are shipped to the customer and title transfers. Revenue is recorded net of estimated sales discounts
and returns based upon specific customer agreements and historical trends.
Shipping Costs - In accordance with the accounting standard for “Revenue Recognition,” all
shipping costs billed to customers have been included in net sales. Shipping costs associated with
those billed to customers and included in selling, general and administrative costs totaled
approximately $6,921,000, $6,464,000 and $6,112,000 in 2012, 2011 and 2010, respectively. Our
gross profit may not be comparable to other entities whose shipping and handling is a component of
cost of sales.
Per Share Information - Basic net income per common share is computed based on the weighted
average number of common shares outstanding during the period. Diluted net income per common
share is computed similarly but includes the dilutive effect of stock options. A reconciliation of the
shares used in the basic and diluted income per share computations is as follows:
Years Ended December 31,
2011
2010
2012
Basic - weighted average shares outstanding
7,503,494
7,486,655
6,747,847
Dilutive securities - stock options
-
541
16,343
Diluted - weighted average shares outstanding
7,503,494
7,487,196
6,764,190
Anti-Dilutive securities - stock options
10,902
140,027
206,538
Comprehensive Income - Comprehensive income includes changes in equity that result from
transactions and economic events from non-core operations. Comprehensive income is composed of
two subsets – net income and other comprehensive income.
Fair Value Measurements – The fair value accounting standard defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value measurements. This
standard clarifies how to measure fair value as permitted under other accounting pronouncements.
The fair value accounting standard defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants at the measurement
date. This standard also establishes a three-level fair value hierarchy that prioritizes the inputs used
to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and
minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are
as follows:
(cid:120) Level 1 – Quoted prices in active markets for identical assets or liabilities.
F - 9
(cid:120) Level 2 – Observable inputs other than quoted market prices included in Level 1, such as
quoted prices for similar assets and liabilities in active markets; quoted prices for identical or
similar assets and liabilities in markets that are not active; or other inputs that are observable
or can be corroborated by observable market data.
(cid:120) Level 3 – Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. This includes certain pricing models,
discounted cash flow methodologies and similar techniques that use significant unobservable
inputs.
Reclassifications – Certain amounts in the accompanying financial statements and footnotes thereto
have been reclassified to conform to the current period’s presentation.
Recently Adopted Accounting Pronouncements
In April 2011, the Financial Accounting and Standards Board (FASB) issued accounting standards
update (ASU) No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a
Restructuring Is a Troubled Debt Restructuring. The FASB believes the guidance in this ASU will
improve financial reporting by creating greater consistency in the way GAAP is applied for various
types of debt restructurings. The ASU clarifies which loan modifications constitute troubled debt
restructurings. It is intended to assist creditors in determining whether a modification of the terms of
a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of
recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating
whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude
that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is
experiencing financial difficulties. The amendments to FASB Accounting Standards Codification™
(Codification) Topic 310, Receivables, clarify the guidance on a creditor’s evaluation of whether it
has granted a concession and whether a debtor is experiencing financial difficulties. The guidance
was effective for interim and annual periods beginning on or after June 15, 2011, and applies
retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption.
The adoption of this standard did not have a material effect on our consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.
GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the
Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in
ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing
information about fair value measurements, including a consistent meaning of the term “fair value.”
The Boards have concluded the common requirements will result in greater comparability of fair
value measurements presented and disclosed in financial statements prepared in accordance with
U.S. GAAP and IFRSs. The amendments in this ASU are to be applied prospectively. For public
entities, the amendments are effective during interim and annual periods beginning after December
15, 2011. The adoption of this standard did not have a material effect on our consolidated financial
statements.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other – (Topic
350) Testing Goodwill for Impairment. The amendments in this update will allow an entity to first
assess qualitative factors to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. Under these amendments, an entity would not be required to calculate the
fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is
more likely than not that its fair value is less than its carrying amount. The amendments include a
number of events and circumstances for an entity to consider in conducting the qualitative
F - 10
assessment. The amendments are effective for annual and interim goodwill impairment tests
performed for fiscal years beginning after December 15, 2011. The adoption of this standard did not
have a material effect on our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation
of Comprehensive Income. Under the amendments to Topic 220, an entity has the option to present
the total of comprehensive income, the components of net income and the components of other
comprehensive income either in a single continuous statement of comprehensive income or in two
separate but consecutive statements. In both choices, an entity is required to present each component
of net income along with total net income, each component of other comprehensive income along
with a total for other comprehensive income, and a total amount for comprehensive income. This
update eliminates the option to present the components of other comprehensive income as part of the
statement of changes in stockholders' equity. The amendments in this update do not change the items
that must be reported in other comprehensive income or when an item of other comprehensive
income must be reclassified to net income. The amendments in this update should be applied
retrospectively. For public entities, the amendments are effective for fiscal years, and interim
periods within those years, beginning after December 15, 2011. Early adoption is permitted, because
compliance with the amendments is already permitted. The amendments do not require any
transition disclosures. The adoption of this standard did not have a material effect on our
consolidated financial statements.
Accounting standards not yet adopted
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220):
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The update
does not change the current requirements for reporting net income or other comprehensive income in
financial statements. However, the update requires an entity to provide information about the
amounts reclassified out of accumulated other comprehensive income by component. In addition, an
entity is required to present, either on the face of the statement where net income is presented or in
the notes, significant amounts reclassified out of accumulated other comprehensive income by the
respective line items of net income but only if the amount reclassified is required under U.S. GAAP
to be reclassified to net income in its entirety in the same reporting period. For other amounts that
are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is
required to cross-reference to other disclosures required under U.S. GAAP that provide additional
detail about those amounts. The amendments are effective prospectively for reporting periods
beginning after December 15, 2012. We are currently assessing the potential impact of the adoption
of this amendment on our consolidated financial statements and related disclosures.
F - 11
2.
INVENTORIES
Inventories are comprised of the following:
Raw materials
Work-in-process
Finished goods
Reserve for obsolescence or
lower of cost or market
Total
December 31,
2012
2011
$
10,611,641
407,262
56,359,742
$
8,303,064
476,991
56,342,273
(182,400)
(103,280)
$
67,196,245
$
65,019,048
3.
IDENTIFIED INTANGIBLE ASSETS
A schedule of identified intangible assets is as follows:
December 31, 2012
Trademarks
Wholesale
Retail
Patents
Customer Relationships
Total Intangibles
December 31, 2011
Trademarks
Wholesale
Retail
Patents
Customer Relationships
Total Intangibles
Gross
Amount
Accumulated
Amortization
Carrying
Amount
$
27,243,578
2,900,000
2,516,402
1,000,000
33,659,980
$
$
-
-
2,161,178
1,000,000
3,161,178
$
$
$
27,243,578
2,900,000
355,224
-
30,498,802
Gross
Amount
Accumulated
Amortization
Carrying
Amount
$
27,243,578
2,900,000
2,460,790
1,000,000
33,604,368
$
-
$
-
2,111,261
1,000,000
3,111,261
$
$
$
27,243,578
2,900,000
349,529
-
30,493,107
Amortization expense related to finite-lived intangible assets was approximately $50,000, $48,000
and $47,000 in 2012, 2011 and 2010, respectively. Such amortization expense will be
approximately $48,000 per year for 2013 through 2017.
The weighted average lives of patents and customer relationships are 5 years.
Intangible assets, including trademarks and patents are reviewed for impairment annually, and more
frequently, if necessary. We perform such testing of indefinite-lived intangible assets in the fourth
quarter of each year or as events occur or circumstances change that would more likely than not
reduce the fair value of the asset below its carrying amount. Fair value, for the testing, of other
indefinite-lived intangible assets is determined using the relief from royalty method.
In assessing whether indefinite-lived intangible assets are impaired, we must make certain estimates
and assumptions regarding future cash flows, long-term growth rates of our business, operating
margins, weighted average cost of capital and other factors such as; discount rates, royalty rates, cost
of capital, and market multiples to determine the fair value of our assets. These estimates and
F - 12
assumptions require management’s judgment, and changes to these estimates and assumptions could
materially affect the determination of fair value and/or impairment for each of our indefinite-lived
intangible assets. Future events could cause us to conclude that indications of intangible asset
impairment exist. Impairment may result from, among other things, deterioration in the performance
of our business, adverse market conditions, adverse changes in applicable laws and regulations,
competition, or the sale or disposition of a reporting segment. Any resulting impairment loss could
have a material adverse impact on our financial condition and results of operations.
We evaluate our finite and indefinite lived trademarks under the terms and provisions of the
accounting standards for “Intangibles - Goodwill and Other”; and “Property, Plant and Equipment.”
These pronouncements require that we compare the fair value of an intangible asset with its carrying
amount. Our 2012 and 2011 evaluation did not result in the impairment of any of our indefinite
lived intangible assets.
4. OTHER ASSETS
Other assets consist of the following:
Deferred financing costs, net
Other
Total
December 31,
2012
2011
$
248,213
115,314
$
336,752
173,541
$
363,527
$
510,293
5. FIXED ASSETS
Fixed assets are comprised of the following:
Land
Buildings
Machinery and equipment
Furniture and fixtures
Lasts, dies and patterns
Construction work-in-progress
December 31,
2012
2011
$
671,035
17,716,426
32,935,355
2,472,083
10,019,986
1,001,880
$
671,035
17,504,573
30,410,341
2,465,674
9,581,520
1,926,973
Total
64,816,765
62,560,116
Less - accumulated depreciation
(40,564,300)
(39,003,014)
Net Fixed Assets
$
24,252,465
$
23,557,102
We incurred approximately $5,847,000, $5,609,000 and $5,583,000 in depreciation expense for
2012, 2011 and 2010, respectively.
F - 13
6. LONG-TERM DEBT
In October 2010, we entered into a financing agreement with PNC Bank (“PNC”) to provide a $70
million credit facility. The term of the facility is five years and the current interest rate is generally
LIBOR plus 1.50%.
At December 31, 2012 and 2011, we had $23,461,340 and $35,000,000 outstanding under this
facility. None of this facility was deemed to be current at December 31, 2012 or 2011.
In April 2011, we repaid the remaining balance of approximately $1.8 million on our mortgage loans
by borrowing under a sub-facility on the PNC credit facility. The sub-facility is secured by real
estate owned by us. In connection with this transaction, we incurred approximately $0.1 million of
prepayment and other fees that were reported as additional interest expense in the second quarter of
2011. The mortgage loans were incurring interest at 8.28% and were replaced with borrowings
under the credit facility for a current interest rate of LIBOR plus 1.50%.
The total amount available under our revolving credit facility is subject to a borrowing base
calculation based on various percentages of accounts receivable and inventory. As of December 31,
2012, we had $23.4 million in borrowings under this facility and total capacity of $68.6 million.
Our credit facility contains a restrictive covenant which requires us to maintain a fixed charge
coverage ratio. This restrictive covenant is only in effect upon a triggering event taking place (as
defined in the credit facility agreement). At December 31, 2012, there was no triggering event and
the covenant was not in effect. Our credit facility places a restriction on the amount of dividends
that may be paid. No cash dividends were paid in 2012, 2011 or 2010.
Our revolving credit facility matures in 2015. We have no other long-term debt maturities.
7. OPERATING LEASES
We lease certain machinery, trucks, and facilities under operating leases that generally provide for
renewal options. We incurred approximately $1,067,000, $1,583,000 and $2,015,000 in rent
expense under operating lease arrangements for 2012, 2011 and 2010, respectively.
Future minimum lease payments under non-cancelable operating leases are approximately as
follows for the years ended December 31:
2013
2014
2015
2016
2017
Total
$
685,000
454,000
23,000
5,000
5,000
$
1,172,000
8. FINANCIAL INSTRUMENTS
Generally accepted accounting standards establish a framework for measuring fair value. That
framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level l measurements) and the lowest priority to
F - 14
unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under
generally accepted accounting standards are described below:
Level 1:
liabilities in active markets that the Company has the ability to access.
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or
Level 2:
Inputs to the valuation methodology include:
(cid:120) Quoted prices for similar assets or liabilities in active markets;
(cid:120) Quoted prices for identical or similar assets or liabilities in inactive markets;
(cid:120)
Inputs other than quoted prices that are observable for the asset or liability;
(cid:120)
Inputs that are derived principally from or corroborated by observable market
data by correlation or other means.
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for
substantially the full term of the asset or liability.
Level 3:
measurement.
Inputs to the valuation methodology are unobservable and significant to the fair value
The only asset or liability measured at fair value on a recurring basis by the Company at December
31, 2012 and 2011 was cash and cash equivalents of $4,022,579 and $3,650,291, respectively. Cash
and cash equivalents are considered to be Level 1.
The fair values of cash, accounts receivable, other receivables and accounts payable approximated
their carrying values because of the short-term nature of these instruments. Accounts receivable
consists primarily of amounts due from our customers, net of allowances. Other receivables consist
primarily of amounts due from employees (sales persons’ advances in excess of commissions earned
and employee travel advances); other customer receivables, net of allowances; and expected
insurance recoveries. The carrying amounts of our revolving line of credit, our mortgages and other
short-term financing obligations also approximate fair value, as they are comparable to the available
financing in the marketplace during the year.
9.
INCOME TAXES
The Company accounts for income taxes in accordance with the accounting standard for “Income
Taxes”, which requires an asset and liability approach to financial accounting and reporting for
income taxes. Accordingly, deferred income taxes have been provided for the temporary differences
between the financial reporting and the income tax basis of the Company’s assets and liabilities by
applying enacted statutory tax rates applicable to future years to the basis differences.
F - 15
A breakdown of our income tax expense is as follows:
Federal:
Current
Deferred
Total Federal
State & local:
Current
Deferred
Total State & local
Foreign
Current
Deferred
Total Foreign
Years Ended December 31,
2011
2012
2010
$
3,946,096
307,639
4,253,735
$
2,585,271
366,042
2,951,313
$
2,854,818
236,444
3,091,262
26,073
(242,227)
(216,154)
197,538
(2,465)
195,073
259,034
230,018
489,052
298,752
(11,548)
287,204
103,993
115,386
219,379
275,476
(12,630)
262,846
Total
$
4,232,654
$
3,727,569
$
3,573,487
A reconciliation of recorded Federal income tax expense to the expected expense computed by
applying the applicable Federal statutory rate for all periods to income before income taxes follows:
Expected expense at statutory rate
Increase (decrease) in income taxes resulting from:
Exempt income from Dominican Republic
operations due to tax holiday
Tax on repatriated earnings from Dominican
Republic operations
Impact of Canadian deemed dividend
State and local income taxes
Section 199 manufacturing deduction
Meals and entertainment
Nondeductible penalties
Provision to return filing adjustments and other
Years Ended December 31,
2011
4,170,152
$
$
2012
4,523,826
$
2010
3,924,136
(1,180,971)
(1,237,418)
(1,034,742)
879,884
57,847
(203,178)
(62,704)
59,092
4,614
154,244
472,863
43,389
327,741
(103,918)
65,506
84
(10,830)
465,992
164,956
142,596
(91,327)
70,236
1,990
(70,350)
Total
$
4,232,654
$
3,727,569
$
3,573,487
F - 16
Deferred income taxes recorded in the consolidated balance sheets at December 31, 2012 and 2011
consist of the following:
Deferred tax assets:
Asset valuation allowances and accrued expenses
Inventories
State and local income taxes
Pension and deferred compensation
Net operating losses
Total deferred tax assets
Valuation allowances
December 31,
2012
2011
$
1,009,659
653,931
355,949
94,568
521,567
2,635,674
(513,527)
$
959,464
631,192
440,728
94,325
510,097
2,635,806
(507,211)
Total deferred tax assets
2,122,147
2,128,595
Deferred tax liabilities:
Fixed assets
Intangible assets
Other assets
Tollgate tax on Lifestyle earnings
Total deferred tax liabilities
(393,106)
(10,875,800)
(370,273)
(379,271)
(12,018,450)
(208,435)
(10,792,180)
(582,064)
(379,271)
(11,961,950)
Net deferred tax liability
$
(9,896,303)
$
(9,833,355)
Deferred income taxes - current
Deferred income taxes - non-current
$
1,252,030
(11,148,333)
(9,896,303)
$
$
1,154,040
(10,987,395)
(9,833,355)
$
The valuation allowance is related to certain state and local income tax net operating loss carry
forwards.
We have provided Puerto Rico tollgate taxes on approximately $3,684,000 of accumulated
undistributed earnings of Lifestyle prior to the fiscal year ended June 30, 1994, that would be
payable if such earnings were repatriated to the United States. In 2001, we received abatement for
Puerto Rico tollgate taxes on all earnings subsequent to June 30, 1994, thus no other provision for
tollgate tax has been made on earnings after that date. If we repatriate the earnings from Lifestyle,
approximately $379,000 of tollgate tax would be due.
As of December 31, 2012, we had approximately $15,569,000 of undistributed earnings from non-
U.S. subsidiaries that are intended to be permanently reinvested in non-U.S. operations. Because
these earnings are considered permanently reinvested, no U.S. tax provision has been accrued
related to the repatriation of these earnings. If the Five Star undistributed earnings were distributed
to the Company in the form of dividends, the related taxes on such distributions would be
approximately $5,450,000.
We file income tax returns in the U.S. Federal jurisdiction and various state and foreign
jurisdictions. We are no longer subject to U.S. Federal tax examinations for years before 2009.
State jurisdictions that remain subject to examination range from 2008 to 2011. Foreign jurisdiction
(Canada and Puerto Rico) tax returns that remain subject to examination range from 2006 to 2011.
F - 17
Our policy is to accrue interest and penalties on any uncertain tax position as a component of
income tax expense. As of December 31, 2012 no such expenses were recognized during the year.
We do not believe there will be any material changes in our uncertain tax positions over the next 12
months.
Accounting for uncertainty in income taxes requires financial statement recognition, measurement
and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. Under
this guidance, income tax positions must meet a more-likely-than-not recognition threshold at the
effective date to be recognized upon the adoption of the standard. The Company did not have any
unrecognized tax benefits and there was no effect on its financial condition or results of operations
as a result of implementing this standard.
10. RETIREMENT PLANS
Prior to the end of 2011, we sponsored a noncontributory defined benefit pension plan covering our
non-union workers in our Ohio and Puerto Rico operations. Benefits under the non-union plan were
based upon years of service and highest compensation levels as defined. We contributed to the plan
the minimum amount required by regulation. On December 31, 2005 we froze the noncontributory
defined benefit pension plan for all non-U.S. territorial employees.
In the fourth quarter of 2011, we made a decision to fully fund and terminate the pension plan.
During the fourth quarter, we contributed $4.9 million into the plan and incurred related expenses
and other adjustments of $0.4 million. As a result of these actions, we recorded pension termination
charges totaling $5.3 million and an income tax benefit of $1.6 million.
The funded status of the Company’s plan and reconciliation of accrued pension cost at December 31,
2011 is presented below (information with respect to benefit obligations and plan assets are as of
December 31):
December 31,
2011
$
11,548,148
123,360
625,322
-
-
296,751
(12,593,581)
$
-
$
8,028,855
5,038,632
(473,906)
(12,593,581)
$
-
Change in benefit obligation:
Projected benefit obligation at beginning of the year
Service cost
Interest cost
Change in discount rate
Curtailment decrease
Actuarial (gain)/loss
Benefits paid
Projected benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Employer contributions
Actual return on plan assets
Benefits paid
Fair value of plan assets at end of year
F - 18
Net pension cost of our plan is as follows:
Service cost
Interest cost
Expected return on assets
Amortization of unrecognized net loss
Amortization of unrecognized transition obligation
Amortization of unrecognized prior service cost
Net periodic pension cost
2011
$
123,360
625,322
(626,365)
219,050
-
75,205
2010
$
79,909
646,708
(532,218)
287,413
-
72,392
$
416,572
$
554,204
We also sponsor a 401(k) savings plan for substantially all of our employees. We provide a
contribution of 3% of applicable salary to the plan for all employees with greater than six months of
service. Additionally, we match eligible employee contributions at a rate of 0.25%, per one percent
of applicable salary contributed to the plan by the employee. This matching contribution will be
made by us up to a maximum of 1% of the employee’s applicable salary for all qualified employees.
Our contributions to the 401(k) plan were approximately $0.9 million in 2012, $1.0 million in 2011
and $1.0 million in 2010.
11. COMMITMENTS AND CONTINGENCIES
We are, from time to time, a party to litigation which arises in the normal course of business.
Although the ultimate resolution of pending proceedings cannot be determined, in the opinion of
management, the resolution of such proceedings in the aggregate will not have a material adverse
effect on our financial position, results of operations, or liquidity.
12. CAPITAL STOCK AND STOCK BASED COMPENSATION
The Company has authorized 250,000 shares of voting preferred stock without par value. No shares
are issued or outstanding. Also, the Company has authorized 250,000 shares of non-voting
preferred stock without par value. Of these, 125,000 shares have been designated Series A non-
voting convertible preferred stock with a stated value of $.06 per share, of which no shares are
issued or outstanding at December 31, 2012 and 2011, respectively.
In June 2009, our Board of Directors adopted a Rights Agreement, which provides for one preferred
share purchase right to be associated with each share of our outstanding common stock.
Shareholders exercising these rights would become entitled to purchase shares of Series B Junior
Participating Cumulative Preferred Stock. The rights are exercisable after the time when a person or
group of persons without the approval of the Board of Directors acquire beneficial ownership of 20
percent or more of our common stock or announce the initiation of a tender or exchange offer which
if successful would cause such person or group to beneficially own 20 percent or more of the
common stock. Such exercise would ultimately entitle the holders of the rights to purchase at the
exercise price, shares of common stock of the surviving corporation or purchaser, respectively, with
an aggregate market value equal to two times the exercise price. The person or groups effecting
such 20 percent acquisition or undertaking such tender offer would not be entitled to exercise any
rights. The Rights Agreement was renewed in June 2012 and expires in June 2017.
On October 11, 1995, we adopted the 1995 Stock Option Plan which provides for the issuance of
options to purchase up to 400,000 common shares. In May 1998, we adopted the Amended and
F - 19
Restated 1995 Stock Option Plan which provides for the issuance of options to purchase up to an
additional 500,000 common shares. In addition in May 2002, our shareholders approved the
issuance of a total of 400,000 additional common shares of our stock under the 1995 Stock Option
Plan. All employees, officers, directors, consultants and advisors providing services to us are
eligible to receive options under the Plans. On May 11, 2004 our shareholders approved the 2004
Stock Incentive Plan. The 2004 Stock Incentive Plan includes 750,000 of our common shares that
may be granted for stock options and restricted stock awards. As of December 31, 2012, the
Company is authorized to issue 334,250 options under the 2004 Stock Incentive Plan; no options can
be granted under the amended and restated 1995 Stock Option Plan.
The plans generally provide for grants with the exercise price equal to fair value on the date of grant,
graduated vesting periods of up to 5 years, and lives not exceeding 10 years.
The following summarizes stock option transactions from January 1, 2011 through December 31,
2012:
Outstanding at December 31, 2010
Issued
Exercised
Forfeited
Outstanding at December 31, 2011
Weighted
Average
Exercise
Price
19.95
$
$
-
$
7.28
$
26.25
$
21.31
Number of
Options
232,000
-
(51,000)
(81,000)
100,000
Options exercisable at December 31, 2011
100,000
$
21.31
Weighted
Average
Remaining
Actual Term
Aggregate
Intrinsic
Value
0.4
0.4
$
-
$
-
Unvested options at December 31, 2011
-
$
-
-
$
-
Outstanding at December 31, 2011
Issued
Exercised
Forfeited
Outstanding at December 31, 2012
100,000
-
-
(90,000)
10,000
$
21.31
$
-
$
-
$
20.97
$
24.36
Options exercisable at December 31, 2012
10,000
$
24.36
1.0
1.0
$
-
$
-
Unvested options at December 31, 2012
-
$
-
-
$
-
There were no options granted during the years 2012, 2011 or 2010.
During the years ended December 31, 2012, 2011 and 2010, a total of zero, 51,000 and 34,250
options were exercised with an intrinsic value of approximately zero, $0.1 million and $0.2 million,
respectively. During the years ended December 31, 2012, 2011 and 2010, there were no options
issued. During the year ended December 31, 2012, a total of 90,000 options were forfeited with a
fair value of approximately $0.8 million. No options vested during the years ended December 31,
2012, 2011 and 2010. At December 31, 2012 and 2011, there were no options unvested. For the
years ended December 31, 2012 and 2011, there was no compensation expense related to stock
option grants.
F - 20
During the year ended December 31, 2012, we issued 13,573 shares of common stock to members
of our Board of Directors. We recorded compensation expense of $122,500, which was the fair
market value of the shares on the grant date. The shares are fully vested but cannot be sold for one
year.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information including other cash paid for interest and Federal, state and
local income taxes was as follows:
Years Ended December 31,
2011
2010
2012
Interest paid
$
718,117
$
1,037,301
$
4,824,238
Federal, state and local income taxes paid - net
of refunds
$
2,671,990
$
4,690,479
$
2,810,434
Capitalized interest
$
-
$
1,394
$
8,330
Fixed asset purchases in accounts payable
$
618,774
$
154,170
$
560,248
14. SEGMENT INFORMATION
Operating Segments - We operate our business through three business segments: wholesale, retail
and military.
Wholesale. In our wholesale segment, our products are offered in over ten thousand retail locations
representing a wide range of distribution channels in the U.S. and Canada. These distribution
channels vary by product line and target market and include sporting goods stores, outdoor retailers,
independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store
chains, specialty safety stores and other specialty retailers.
Retail. In our retail segment, we sell our products directly to consumers through our Lehigh mobile
and retail stores, our Rocky outlet store and our websites. Our Lehigh operations include a fleet of
trucks, supported by small warehouses that include retail stores, which we refer to as mini-stores.
Through our outlet store, we generally sell first quality or discontinued products in addition to a
limited amount of factory damaged goods, which typically carry lower gross margins.
Military. While we are focused on continuing to build our wholesale and retail business, we also
actively bid, from time to time, on footwear contracts with the U.S. military. Our sales under such
contracts are dependent on us winning the bids for these contracts.
In July 2009, we were awarded a $29.0 million blanket purchase order from the GSA to produce
footwear for the U.S. Military. During 2012, we made limited shipments under this contract.
Recently, we received an order to fulfill a contract to the U.S. Military to produce “Hot Weather”
combat boots. The first year of the contract includes a minimum purchase amount of $3.0 million
and a maximum of $15.0 million. Shipment of the boots is expected to begin in March 2013. The
contract includes an option for four additional years with the same terms.
F - 21
The following is a summary of segment results for the Wholesale, Retail, and Military segments.
2012
Years Ended December 31,
2011
2010
NET SALES:
Wholesale
Retail
Military
Total Net Sales
GROSS MARGIN:
Wholesale
Retail
Military
Total Gross Margin
$
$
186,000,531
41,284,731
1,032,401
228,317,663
$
$
192,554,089
44,812,808
2,232,199
239,599,096
$
$
188,268,830
47,476,715
17,046,718
252,792,263
$
$
$
60,767,856
19,475,431
43,303
80,286,590
66,936,863
20,695,454
298,438
87,930,755
$
$
$
65,470,287
21,785,077
2,117,350
89,372,714
Segment asset information is not prepared or used to assess segment performance.
Product Group Information - The following is supplemental information on net sales by product
group:
Work footwear
Outdoor footwear
Western footwear
Duty and commercial
military footwear
Lifestyle footwear
Apparel
Other
Military footwear
2012
$
116,504,833
22,387,493
29,998,191
35,023,601
10,162,700
9,651,847
3,556,597
1,032,401
% of
Sales
51.0%
9.8%
13.1%
15.3%
4.5%
4.2%
1.6%
0.5%
2011
$
121,731,462
26,960,781
25,094,929
34,278,075
7,276,053
12,954,362
9,071,235
2,232,199
% of
Sales
50.8%
11.3%
10.5%
14.3%
3.0%
5.4%
4.8%
0.9%
2010
$
133,970,454
26,066,047
30,707,353
22,190,068
178,472
11,529,989
11,103,162
17,046,718
% of
Sales
53.0%
10.3%
12.1%
8.8%
0.1%
4.6%
4.4%
6.7%
$
228,317,663
100%
$
239,599,096
101%
$
252,792,263
100%
Net sales to foreign countries, primarily Canada, represented approximately 3.9% of net sales in
2012, 4.1% of net sales in 2011 and 3.1% of net sales in 2010.
F - 22
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for the years ended
December 31, 2012 and 2011:
2012
Net sales
Gross margin
Net income
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Total Year
$
53,325,918
18,022,081
720,687
$
44,408,358
15,351,627
218,564
$
72,539,400
26,182,580
5,367,437
$
58,043,987
20,730,302
2,548,077
$
228,317,663
80,286,590
8,854,765
Net income per common share:
Basic
Diluted
$
$
0.10
0.10
$
$
0.03
0.03
$
$
0.72
0.72
$
$
0.34
0.34
$
$
1.18
1.18
2011
Net sales
Gross margin
Net income
$
52,306,275
19,265,945
541,616
$
52,282,632
20,617,328
2,279,700
$
71,020,546
25,590,157
5,212,267
$
$
$
63,989,643
22,457,325
273,312
$
239,599,096
87,930,755
8,306,895
(a)
(b)
Net income per common share:
Basic
Diluted
$
$
0.07
0.07
$
$
0.30
0.30
$
$
0.70
0.70
$
$
0.04
0.04
$
$
1.11
1.11
No cash dividends were paid during 2012 or 2011.
(a) Includes a retail inventory adjustment that reduced gross margin by $0.8 million
(b) Includes pension termination charges of approximately $3,653,000 or $0.49 per share, net of tax benefits.
F - 23
Corporate Information
Board of Directors
Mike Brooks
Chairman of the Board
J. Patrick Campbell
Executive Chairman of the Board
Universal Companies, Inc.
Glenn E. Corlett
Retired Dean and Philip J. Gardner, Jr. Leadership Professor
of the College of Business at Ohio University
Michael L. Finn
President, Central Power Systems
and President,
Chesapeake Realty Company
G. Courtney Haning
Chairman, President and Chief Executive Officer,
Peoples National Bank
Curtis A. Loveland
Secretary
Partner, Porter, Wright, Morris & Arthur LLP
Harley E. Rouda, Jr.
Chief Executive Officer, Trident, Inc.
David Sharp
President and Chief Executive Officer
James L. Stewart
Proprietor
Rising Wolf Ranch, Inc.
Officers
Mike Brooks
Chairman of the Board
David N. Sharp
President and Chief Executive Officer
James E. McDonald
Executive Vice President, Chief Financial Officer
and Treasurer
Gary Adam
President, International Sales
Jason S. Brooks
President, U.S. Wholesale Sales
Richard Simms
President, Retail Sales
Corporate Offices
39 East Canal Street Nelsonville, Ohio 45764
(740) 753-1951
Independent Registered Public
Accounting Firm
Schneider Downs & Co., Inc.
Columbus, Ohio
Legal Counsel
Porter, Wright, Morris & Arthur LLP Columbus, Ohio
Transfer Agent and Registrar
Communications regarding changes of address, transfer
of shares, and lost certificates should be directed to the
company’s stock transfer and registrar:
Computershare Investor Services
Attn: Shareholder Services
250 Royall Street
Canton, MA 02021
(800) 725-0674
web.queries@computershare.com
Stock Listing
NASDAQ Stock Market
Symbol: RCKY
Form 10-K
Copies of the signatures, exhibit index and exhibits
contained therein as filed with the Securities and Exchange
Commission are available without charge upon written
request to:
James E. McDonald
Executive Vice President,
Chief Financial
Officer and Treasurer
Rocky Brands, Inc.
39 East Canal Street
Nelsonville, Ohio 45764
Investor Information
Corporate and investor information is available on the
company’s website at www.rockybrands.com
Rocky Brands Inc.
Rocky Brands Inc.
39 East Canal Street Nelsonville, Ohio 45764 www.rockybrands.com
39 East Canal Street Nelsonville, Ohio 45764 www.rockybrands.com