Table of Contents
II
III
IV-VII
VIII-IX
Financial Highlights
Letter to Shareholders
Family of Brands
New Markets
Financial Highlights
X
1-37
F-1-F-24
Direct Business
Form 10-K
Financial Statements
($000, except per share data)
Income Statement Data
Net sales
Gross margin
Income from Operations
Net income
2014
2013
2012
2011
2010
$286,242
$244,871
$228,537
$239,969
$252,792
33.7% 34.1% 35.2% 36.8% 35.4%
5.5% 4.5% 6.0% 5.5% 6.8%
$ 9,845
$ 7,373
$ 8,855
$ 8,307
$ 7,684
Net income per diluted share
$ 1.30
$ 0.98
$ 1.18
$ 1.11
$ 1.14
Weighted average number of fully diluted shares outstanding
7,545
7,517
7,503
7,487
6,764
Balance Sheet
Inventories
Total assets
Total debt
$ 85,237
$ 78,172
$ 67,196
$ 65,019
$ 58,853
213,228
199,025
174,844
174,066
168,579
36,270
38,388
23,461
35,000
35,096
Shareholders’ equity
138,348
131,213
125,637
116,660
105,004
Net sales
($ Millions)
Net income per diluted share
Income from operations as a % of net sales
Total debt
($ Millions)
II
Dear Shareholders
As we anticipated, sales of our Commercial Military footwear
rebounded late in the year following some earlier headwinds
created by changes in Army Wear and Appearance Regulations.
Our teams moved quickly to overcome this obstacle by developing
a newly-authorized lightweight boot that provides better
durability and comfort than its predecessor. The combination
of our new “Rocky Lightweight” boot and always-popular S2V
boot gives us a great foundation to expand this business in the
years ahead.
Our retail division continued its ongoing evolution during 2014.
After spending the past couple of years transitioning our Lehigh
Safety Shoe business to a lower cost, web-based direct-ship model,
we continue to make good progress recapturing the lost sales
from our decommissioned mobile stores through expansion of
our custom fit kiosk program. At the same time, we invested
resources to enable growth in our direct-to-consumer channel.
To improve functionality and to improve the user experience,
we transitioned our sites to a new, best-in-class, web platform.
This new vendor also facilitates responsive design, meaning that
the content is customized for the device used; i.e. regardless of
whether it is phone, tablet, or PC. The early lift in site traffic and
conversion has been very encouraging.
2014 was an important year for the Company in terms of both
delivering solid sales and earnings growth and implementing
strategic initiatives that will advance our business in the years
to come. Throughout our organization, we are focused on
innovation and the importance of seeking new opportunities.
Our focus on innovation is not limited to just products; we
remain committed to creating innovative solutions so that we are
easy to do business with. Whenever customers interact with us,
whether they are wholesale, retail, or B2C consumers, we want
them to have an exceptional experience with all of our brands.
We feel quite confident that the achievements of 2014 mark
the beginning of a prolonged period of consistent growth. For
the coming year, our priority is to maintain good top-line
momentum, hold gross margins stable, and modestly leverage
SG&A to deliver another year of solid earnings growth and
increased shareholder value.
As a closing remark, I want to thank everyone within the Rocky
Brands family for their efforts during this fantastic year. Their
enthusiasm and commitment to the job are second to none
and I am very proud of what they have accomplished. I look
forward to the next year with great optimism.
Sincerely,
David N. Sharp
President & Chief Executive Officer
III
2014 was extremely gratifying for Rocky Brands on many levels…
and we are confident that the future has never been brighter for
the Company. We delivered outstanding financial results last
year: double-digit revenue growth and a significant increase in
net income, which really highlighted the earnings power of our
business model. Each of our major footwear categories – Work,
Western and Outdoor – posted solid gains, year-over-year, as our
initiatives aimed at strengthening our brand portfolio took hold.
At the same time, our focus on the casual footwear market segment
is providing the company with exciting growth opportunities.
We are addressing this segment in two ways: by extending our
legacy brands – Rocky, Georgia Boot, and Durango – and, also,
by working to grow the newest addition…Creative Recreation.
We believe we are just beginning to harness the power of these
brands and leverage the strength of our organization.
Our accelerated growth in 2014 was driven primarily by our
wholesale business. Work, our largest category, experienced
a solid lift in sales fueled by consumer demand for several
compelling new product introductions featuring a great price/
value proposition under our Georgia Boot brand. Western was
our fastest growing category for the second consecutive year
as our expanding Durango brand product line continued to be
well-received in the core Farm & Ranch channels. At the same
time, we’ve made important progress extending Durango’s reach
into more mainstream distribution through the introduction
of fashion-forward boots that appeal to a wider audience.
Furthermore, we experienced one of our strongest years in our
core hunting boot business in the Rocky brand, thanks to the
launch of new boot collections which combine our traditional
insulated, waterproof construction with new
lightweight
components for today’s modern outdoorsman.
The performance of our growing lifestyle category reflects the
inclusion of the Creative Recreation brand, which we acquired in
December 2013. We spent most of the past year shoring up the
brand’s supply chain and revitalizing key wholesale relationships.
During the back half of 2014, we worked on attracting creative
product development and design talent to ensure that our
products are compelling and relevant. We believe the majority
of the heavy lifting is now behind us and Creative Recreation is
poised for sustained growth and will contribute to profitability
this year.
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
IV
Rockyboot.com
FAMILY OF BRANDS
WHOLESALE
GO ALL DAY WITH ZERO DRAG FROM GEORGIA BOOT
YOU WORK HARD,
GIVE YOUR FEET A REST!
The Zero Drag collection has been specially
engineered with three different layers of
comfort to keep you light on your feet, even
after a long day of work. Zero Drag from
Georgia Boot®. Go all day.
3 Layers of Comfort
Thermo-polyurethane Skin
Extremely durable but softer
and lighter than rubber
24/7 Comfort System
Unparalleled comfort
and flexibility through a
proprietary blend that is 25%
lighter than polyurethane
Comfort Core 5 Footbed
Provides cushioning, stability
and ergonomic support
16
Georgia Boot Catalog 2015 - See page 3 for Feature Legend
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
georgiaboot.com
V
WHOLESALE
FAMILY OF BRANDS
Slipping on your Durangos gives you
a feeling of adventure and freedom.
You’re ready to be mischievous,
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
P r o f i l e s i n e x c e l l e n c e
sandal collection was a standout. “Not only is it
super comfortable, but the entire bottom unit
also features Plus Foam technology with an
innovative closed-loop process, which is fully
recyclable and creates no waste,” she notes. “It’s
something that is pretty new in the footwear
world and we were excited to introduce it to
our consumer.”
The Krochet Kids collection—a collaboration
with the non-profit Krochet Kids International
organization that teaches sewing and weaving
skills to women in impoverished countries
and provides jobs—was a highlight. “Krochet
Kids recently started a program in Peru. The
hand-loom knit fabrics are beautiful,” says
White. “We were lucky enough to get to work
with some of these Peruvian ladies to create
a three-style collection for 2013.”
Overall, White attributes Vans’ success in
the surf category to the brand’s rich heritage
and Off The Wall spirit that gets translated
to the footwear. “The product stands out,” she
says. “By utilizing 48 years of heritage we can
tell real stories that mean something to our
consumers and retailers.” —J.L.
surf
vans
i n 2 01 3 , Va n s s u r f
footwear rode a wave of
popularity in the men’s,
women’s and kids’ cat-
egories. Besides utilizing
new dying and washing techniques, including
an ombré dye process, the VF Corp.-owned
brand focused on staying true to its Southern
California roots by mixing heritage looks with
fresh, modern styling. Interesting collaborations
with both artisans and athletes also played a
strong role in generating excitement among
consumers and retailers.
“When we started working on the 2013
collections, we spent some time in the Basque
Country. The European surf scene was a source
of inspiration, with its mix of a casual beach
attitude with European sophistication,” says
Lindsay White, designer. “Another key inspira-
tion for the collections was the surf traveler/
bohemian lifestyle. There were some interesting
vintage pieces we found that inspired our use of
woven stripe materials and handcrafted-looking
details. And, as always, we found inspiration
in our brand’s history, looking to vintage Vans
prints and old U.S.A.-made styles.”
On the product front, White notes that the
Mohikan moccasin, which ended up spawning
two additional styles, “was an instant win-
ner with our surf ladies,” offering a beachy,
bohemian lifestyle vibe. For men, the Nexpa
children’s
skechers
Using its men’s and women’s lines for
inspiration, Skechers raised the bar for its
children’s collections in 2013. “We started
realizing success on the right of the size
scale,” shares Skechers President Michael
Greenberg. “We are offering an increasing
number of styles with technical features and
benefits mirroring our adult lines—and the
child and parent are responding favorably.” The
results speak for themselves: Strong demand
for the expanded kids’ collection helped drive
double-digit increases in net
sales in the brand’s domestic
wholesale business in Q3.
What’s more, the SoCal-based
company received the nod for
Design Excellence in the kids’
category for the second time.
From mini-me versions
o f p o p u l a r p e r f o r m a n c e
p r o d u c t t o k i d - f r i e n d l y
styles like light-up Twinkle Toes and Bella
Ballerinas with sparkly “spinning” sneak-
ers, the word that best sums up Skechers’
2013 kids’ collections is variety. “We offer
so many options for so many different
needs,” Greenberg notes, adding that the
brand always keeps the end user in mind.
“Skechers does not view its children’s busi-
ness as an afterthought. It’s an opportunity
to capture consumers at an early age and
hold onto them throughout their lifetime.”
Color is equally important,
and a kaleidoscope of bright,
vibrant hues helped move mer-
chandise last year. What does the
future hold? There’s more innova-
tion ahead, Greenberg promises.
“We want to create products so
irresistible to consumers that
they feel an immediate need to
purchase.” —L.M.
38 footwearplusmagazine.com • march 2014
it’s not easy to break into a category domi-
nated by such heavy hitters as Nike, Adidas and
New Balance. But Skechers is doing just that. In
2013, the brand launched both GOrun 3, featuring
a new four-way stretch upper material, and GOMeb
Speed, a signature line for Skechers endorser and
Olympic marathoner Meb Keflezighi. So far so
good. Demand for the brand’s running collection
helped spur a 20 percent growth in net sales dur-
ing last year’s third quarter.
“2013 really was a breakout year for us in the
Skechers Performance Division,” says Rick Higgins,
vice president of merchandising and marketing.
“As a new division, we don’t have a history that
forces us to do things a certain way. We can try
new things and see what runners think.
“The year kicked off with our second GOrun TV
ad during the Super Bowl and that set the tone
for the remainder of the year,” he adds. Grassroots
efforts were also key. For instance, Skechers par-
ticipated in 12 Rock ‘n’ Roll marathons last year
and acted as the key footwear and apparel sponsor
for the Houston Marathon.
How has a brand best known for its accessibly
priced footwear managed to develop performance-
based products that appeal to retailers and runners
alike? The answer is simple: comfort. “The shoes
need to feel like they’re an extension of you,” says
Higgins. “We believe the shoe should be doing less
rather than more. That informs our design and
material choices as well as the outsoles. In today’s
market we are seeing the benefits of using newer
processes that enable us to create lighter-weight
footwear, and the consumer has gravitated to it.”
Looking ahead, the brand will ramp up mar-
keting this year with a new digital campaign in
partnership with Google and several TV spots with
Keflezighi, who recently re-signed with Skechers
through 2016. Higgins is pleased to have such a
solid starting block. “With several new product
innovations and marketing campaigns, we’re
encouraged to build on our growth,” he says. —L.M.
athletic lifestyle
keds
educational and leadership programs for
young women. As Brocoum puts it: “Taylor
is a style icon and role model for her fans,
and she perfectly captures the optimistic,
empowered spirit of Keds.” —L.M.
cowboy boots
durango
dUrango, a diVision of Rocky Brands, kicked
things up a notch in 2013: Sales jumped 40 percent
over 2012, and the brand took home the Plus Award for
Design Excellence in Cowboy Boots. But rest assured,
Durango is no mere flash in the pan. With classic
Americana and equestrian-inspired styles stomping
down the Fall ’14 runways, Rocky Brands CEO David
Sharp is confident Durango will continue its climb
this year. “The brand has great style details, and it
also has a great deal of comfort built in, which sets
the boots apart during the buying process,” he says,
taking care to mention that Durango also offers great
value in a market in which prices are all over the map.
Several styles stood out for the brand last year,
including some designed especially for the members
and alumni of the National FFA Organization (also
known as Future Farmers of America), and a hot pink
Lady Rebel benefitting the Stefanie Spielman Fund
for Patient Assistance, which supports breast cancer
patients. “Those really hit home with consumers,”
Sharp says. Meanwhile, the Crush collection, which
amplifies Durango’s country roots with its elaborate
embroidery and metallic embellishments, continued
to perform well at retail. Sharp says he’s encouraged
by the acceptance of the fashion-driven City collection
by customers outside the cowboy boot market. “We
really examined trends in the Western market and
trends in fashion and tried to marry the two to come
up with collections that were not only desirable, but
conveyed Durango brand DNA,” he says.
For 2014, expect further growth from Durango
in its women’s collections, as the brand’s emergence
from a Western staple into a lifestyle label continues.
“In a nutshell, our teams will not only dive deep into
industry data, but will also go and work in a store or
on a jobsite and hold consumer focus groups to really
glean information on what is needed and desired within
their market,” Sharp concludes. —L.M.
it doesn’t take a rocket scientist
to figure out what today’s Keds girl is all
about: She clearly lives a positive life and
loves all things cute and colorful. Just look
at last year’s offerings. Filled with ador-
able kicks in look-at-me hues and prints,
not to mention collaborations with Kate
Spade New York and Taylor Swift, the
2013 collections hit high notes with the
brand’s target audience of 13- to 24-year-
old women. And 2014 is shaping up to
build on last year’s success.
“Retailers, consumers and editors all
responded exceptionally well to the launch
of our Taylor Swift partnership, and we
were fortunate to see that translate into
strong sales,” says Stephanie Brocoum,
vice president of marketing, noting that
the response to the revamped Champion
sneaker in particular blew the company
away. “Surrounded by our fresh new
color palette and our fun take on
prints, the classic Champion
resonated even more with
girls than we could have
imagined.”
The collaboration with
Swift has been critical to
the 98-year-old brand’s
recent success. Keds tapped
the songstress for a multi-year
partnership back in 2012, which
kicked off with a special-edition pair
of red Champion lace-ups in honor of her
“Red” album release, and that has since
evolved into a larger lineup. But it’s not
just about the shoes: The singer’s latest
campaign for Keds delivers a strong social
message to the brand’s young female tar-
get audience. Titled “Million Brave Acts,”
it’s focused on inspiring bravery and self-
confidence in girls around the country.
It all ties back to Keds’ newly founded
Brave Life Project, which has partnered
with the Girls Leadership Institute to offer
» Taylor Swift
VI
durangoboot.com
runningskechers gorun FAMILY OF BRANDS
WHOLESALE
Creative Recreation was founded in
Los Angeles in 2002 with the sole
purpose of designing footwear that
fuses work and play. Inspired by the
spirit of street art – with its bold
creative expression and out of bounds
thinking – Creative Rec doesn’t
sit quietly or complacently on the
sideline. We thrive in energy-charged
environments, where statements are
made and are unified by a single idea
- that creativity matters.
cr8rec.com
VII
WHOLESALE
NEW MARKETS
Rocky 4EurSole is for women 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 her demands for comfort,
versatility and style.
VIII
4eursole.com
NEW MARKETS
WHOLESALE
The city of Durango was known for
a robust mining and saloon culture.
Durango embodies the wild west and
outlaw heritage. Today, the Durango
Leather Company stays true to its roots
by creating unique, modern leather
pieces that capture the freedom and
spirit of the Old West.
durangoleathercompany.com
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.
X
lehighoutfitters.com
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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 No
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 No
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 NO
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 NO
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.
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 Accelerated filer Non-accelerated filer Smaller reporting company
(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 No
The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately
$97,371,536 on June 30, 2014.
There were 7,559,525 shares of the Registrant's Common Stock outstanding on February 20, 2015.
Portions of the Registrant's Proxy Statement for the 2015 Annual Meeting of Shareholders are incorporated by reference in Part
III.
DOCUMENTS INCORPORATED BY REFERENCE
1
Page
3
11
16
16
16
16
17
19
19
29
29
29
30
32
32
32
32
32
32
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37
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
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, Creative Recreation
and the licensed brand Michelin. Our brands have a long history of representing high quality, comfortable,
functional and durable footwear and our products are organized around six target markets: outdoor, work, duty,
commercial military, western and lifestyle. Our footwear products incorporate varying features and are positioned
across a range of suggested retail price points from $49.99 for our value priced products to $359.99 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 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, Creative Recreation 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, western and lifestyle. 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
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.
3
• 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.
• 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.
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• 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.
• Lifestyle. Our lifestyle product line currently consists of footwear products marketed to more fashion minded
urban consumers.
Our products are marketed under five well-recognized, proprietary brands, Rocky, Georgia Boot, Durango, Creative
Recreation and Lehigh, in addition to the licensed brand Michelin.
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 five target markets and offer our products at a range of suggested retail price
points: $69.99 to $339.99 for our footwear products, $18.99 to $174.99 for tops and bottoms in our apparel lines and
$8.99 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 $54.99 to $359.99. 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.
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Durango
Durango is our moderately priced, high quality line of western footwear and leather jackets. Launched in 1965, the
brand has developed broad appeal and earned a reputation for authenticity and quality in the western footwear and
apparel market. Our current line of products is offered at suggested retail price points ranging from $49.99 to
$359.99, 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.
Creative Recreation
In December 2013, we completed the acquisition of certain assets of Kommonwealth, Inc. including the Creative
Recreation trademark. Headquartered in Los Angeles, California, since 2002, Creative Recreation was first to create
and market versatile footwear that could easily transition between casual and more formal environments. Creative
Recreation’s collections of upscale sneakers quickly gained strong acceptance and support from a wide array of key
influencers across multiple categories including music, sports, and acting. Creative Recreation’s ability to
successfully fuse style and versatility across a diversified assortment of products has created a wide target
demographic and a strong distribution network that spans multiple channels and price points including Barneys New
York, Nordstrom and Journeys. The current line of products is offered at suggested retail price points ranging from
$30.00 to $200.00.
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 $79.99 to $234.99. 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 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 $49.99 to $89.99.
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 $35.00 to $249.99. The license agreement for the
Michelin brand expires December 31, 2015.
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, Creative Recreation and Michelin products through a wide
range of wholesale distribution channels. As of December 31, 2014, 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
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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:
• 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.
• Our lifestyle products are sold primarily through fashion oriented footwear retailers.
Retail
We market products directly to consumers through three retail strategies under the Lehigh retail brand: Lehigh
business-to-business including direct sales and through our Custom Fit websites, consumer e-commerce websites,
and our stores, which include our outlet store, mobile and retail stores.
Websites
We sell our product lines on our websites at www.rockyboots.com, www.georgiaboot.com, www.durangoboot.com,
www.lehighoutfitters.com, www.lehighsafetyshoes.com, www.slipgrips.com, www.rockymilitary.com,
www.rockys2v.com, westernretailer.com, 4eursole.com, cr8rec.com and tacticaldemand.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 customers’ employees order directly through their employers’ established Custom Fit website and the footwear
is delivered directly to the consumer via a common freight carrier. Our customers include large, national companies
such as Carnival Cruise Lines, Princess Cruise Lines, AK Steel, Pepsi, Schneider, Hagemeyer, Saint Gobain,
Holland America Cruise Lines, and Waste Management.
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.
Mobile and Retail Stores
Lehigh’s successful continued focus on converting our customers from delivery via our mobile and retail stores to
purchasing via our Custom Fit sites and delivery direct has led to the reduction of the mobile and retail stores in the
past several years. In 2015 we will continue to service New York City Transit Authority, Savannah River Nuclear
site, and the state of Hawaii with mobile and retail stores.
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. We have received an order to fulfill a
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contract to the U.S. Military to produce “Hot Weather” combat boots. We began shipping boots in the first quarter
of 2013. The contract included a minimum purchase amount of $3.0 million and a maximum of $15.0 million for
the first year and included an option for four additional years with the same terms. During 2014, we shipped boots
under this same agreement.
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 have focused the majority of our advertising efforts on consumers in support of our retail partners. A key
component of this strategy includes in-store point of purchase materials that add a dramatic focus to our brands and
the products our retail partners carry. We also advertise through targeted national and local cable programs and
print publications aimed at audiences that share the demographic profile of our typical customers. In addition, we
promote our products on national radio broadcasts and through event sponsorships. These sponsorship’s provide
significant national exposure for all of our brands as well as a direct connection to our target consumer. Our print
advertisements and radio and television commercials emphasize the technical features of our products as well as
their high quality, comfort, functionality and durability.
We also support independent dealers by listing their locations in our national print advertisements. In addition to
our national advertising campaigns, 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 which 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.
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 GuangDong Dongguan YongDu
Shoes Company, one of our third-party manufacturers in China with whom we have had a long-term relationship,
represented approximately 13% of our net sales in 2014. The products purchased from General Shoes US
Corporation and its subsidiaries, another 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 10% of our net sales in 2014. 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
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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 facility located in Logan, Ohio and third-party logistics operations in
Kent, Washington and Ontario, Canada. 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 6.3% of net sales in 2014,
2.9 % of net sales in 2013, and 3.9% of net sales in 2012.
As previously mentioned, we maintain manufacturing facilities that we operate in the Dominican Republic and
Puerto Rico. In addition, we utilize a third party 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 $4.7 million at December 31, 2014, $4.9
million at December 31, 2013, and $4.4 million at December 31, 2012.
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
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. With the acquisition of the Creative Recreation brand and the move toward more lifestyle
geared products that are less dependent on weather conditions, we hope to reduce the seasonality and dependence on
the variations in the weather.
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Backlog
At December 31, 2014, our backlog was $21.6 million compared to $16.7 million at December 31, 2013. 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 trademarks Rocky, Georgia
Boot, Durango, Lehigh and Creative Recreation. In addition, we license trademarks, including Gore-Tex 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 Michelin Lifestyle Limited permits us to use the Michelin and related marks on our products. Our
license agreement with Michelin Lifestyle Limited to use the Michelin name extends through December 31, 2015.
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
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, 2014, we had approximately 2,714 employees of which approximately 2,687 are full time
employees. Approximately 2,261 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.
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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
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
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
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favorable to us. The occurrence of any of these developments could 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 Gary Adam, President – Sales of Rocky Brands International, LLC,
Jason Brooks, President – Sales of Rocky Brands Wholesale, LLC, and Richard Simms, President – Marketing
Services, and Michael Walker, Senior Vice President and General Manager, Supply Chain Operations, of the
Company, 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
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.
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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
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, 2014, 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.
13
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, Kent, Washington 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, Kent, Washington 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.
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, Lehigh and Creative Recreation. 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,
14
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.
A privacy breach could have a material adverse effect on the Company's business and reputation.
We rely heavily on digital technologies for the successful operation of our business, including electronic messaging,
digital marketing efforts and the collection and retention of customer data and employee information. We also rely
on third parties to process credit card transactions, perform online e-commerce and social media activities and retain
data relating to the Company’s financial position and results of operations, strategic initiatives and other important
information. Despite the security measures we have in place, our facilities and systems and those of our third-party
service providers, may be vulnerable to cyber-security breaches, acts of vandalism, computer viruses, misplaced or
lost data, programming and/or human errors or other similar events. Any misappropriation, loss or other
unauthorized disclosure of confidential or personally identifiable information, whether by us or by our third-party
service providers, could adversely affect our business. We maintain cyber risk insurance, but this insurance may not
be sufficient to cover all of our losses from any future breaches of our systems.
Our dividend policy may change.
Although we have paid dividends to our shareholders, we have no obligation to continue doing so and may change
our dividend policy at any time without notice to our shareholders. Holders of our common stock are only entitled to
receive such cash dividends as our board of directors may declare out of funds legally available for such payments.
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.
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.
15
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
PROPERTIES.
We own our 25,000 square foot executive offices that are located in Nelsonville, Ohio, which are utilized by all
segments. We also own our 192,000 square foot finished goods distribution facility in Logan, Ohio, which is
utilized by our wholesale and retail segments. We also own 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. We
lease an office in California for our Creative Recreation business. This lease expires in March 2018. 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 seven
stand-alone manufacturing facilities as follows:
Square
Footage
Lease
Expiration
93,097
36,186
28,684
28,929
13,918
34,373
20,135
2019
2019
2018
2015
2016
2018
2018
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.
16
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, 2013………………………………………………………….
June 30, 2013……………………………………………………………
September 30, 2013……………………………………………………..
December 31, 2013……………………………………………………...
March 31, 2014………………………………………………………….
June 30, 2014……………………………………………………………
September 30, 2014……………………………………………………..
December 31, 2014……………………………………………………...
High
$16.00
$16.41
$19.37
$19.97
$16.10
$15.69
$15.42
$15.15
Low
$13.00
$13.13
$14.87
$13.32
$13.35
$13.82
$13.70
$12.61
On February 20, 2015, the last reported sales price of our common stock on the NASDAQ National Market was
$20.16 per share. As of February 20, 2015, there were 82 shareholders of record of our common stock.
Dividends
During 2013, our board of directors adopted a dividend policy under which the Company intends to pay a cash
dividend on its common stock. During 2014 and 2013, we paid dividends on our common stock totaling $3,017,979
and $2,254,935, respectively. No cash dividends were paid during 2012.
17
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,
2009, 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
$350
$300
$250
$200
$150
$100
$50
$0
12/09
12/10
12/11
12/12
12/13
12/14
Rocky Brands, Inc.
NASDAQ Composite
S&P Footwear
*$100 invested on 12/31/09 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2015 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)
12/31/14
Five Year Financial Summary
12/31/12
12/31/11
12/31/13
12/31/10
Income Statement Data
Net sales
Gross margin (% of sales)
Net income (loss)
Dividends paid on common stock
Per Share
Net income
Basic
Diluted
$
$
$
$
$
286,242
33.7%
9,845
3,018
244,871
34.1%
7,373
2,255
228,537
35.2%
8,855
-
239,969
36.8%
8,307
-
$
$
$
$
$
252,792
35.4%
7,684
-
$
$
1.30
1.30
$
$
0.98
0.98
$
$
1.18
1.18
$
$
1.11
1.11
$
$
1.14
1.14
Weighted average number of common shares outstanding
Basic
Diluted
7,545
7,545
7,517
7,517
7,503
7,503
7,487
7,487
6,748
6,764
Balance Sheet Data
Inventories
Total assets
Working capital
Long-term debt, less current maturities
Stockholders' equity
$
$
$
$
$
85,237
213,228
124,773
36,270
138,348
$
$
$
$
$
78,172
199,025
118,242
38,388
131,213
$
$
$
$
$
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
The 2013 financial data reflects charges for $0.8 million, net of tax benefits, for acquisition related expenses and a
gain on bargain purchase of $0.4 million, net of tax. The 2011 financial data reflects charges for $3.7 million, net of
tax benefits, for the termination of our defined benefit pension plan. Certain amounts from prior years related to
royalty income have been reclassified to conform to current presentation. In 2013, we began reporting royalty
income as a component of net sales.
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, 2014, and our capital resources and liquidity as of December 31, 2014 and 2013.
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
19
Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on
behalf of the Company.
Certain amounts from prior year related to royalty income have been reclassified to conform to current year
presentation. In 2013, we began reporting royalty income as a component of net sales.
Creative Recreation
In December 2013, we completed the acquisition of certain assets of Kommonwealth, Inc. including the Creative
Recreation trademark. Headquartered in Los Angeles, California, since 2002, Creative Recreation was first to create
and market versatile footwear brand that could easily transition between casual and more formal environments.
Creative Recreation’s collections of upscale sneakers quickly gained strong acceptance and support from a wide array
of key influencers across multiple categories including music, sports, and acting. Creative Recreation’s ability to
successfully fuse style and versatility across a diversified assortment of products has created a wide target
demographic and a strong distribution network that spans multiple channels and price points.
We believe by combining Rocky’s strong operating platform and access to capital with Creative Recreation’s design
expertise we can strategically expand their business both domestically and overseas. At the same time, this transaction
provides us with a compelling vehicle to penetrate the casual end of the market to complement our work, western and
outdoor categories.
The total purchase price was approximately $8.7 million including cash and assumption of certain liabilities. The
acquisition was funded by our existing cash balances and funds available under our existing revolving credit facility.
We did not have any sales in 2013 related to this acquisition and the business incurred approximately $0.2 million of
operating expenses during 2013. In addition, we incurred approximately $1.2 million of related acquisition expenses
that were reflected in the results of operations for the year 2013. In addition, we recorded a gain on bargain purchase
of $0.6 million related to this acquisition.
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, Creative Recreation
and the licensed brand Michelin.
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.
20
FINANCIAL SUMMARY
Net sales of the wholesale segment increased $41.0 million in 2014 over prior year primarily as a result of
increased sales in our lifestyle footwear, work footwear and western footwear categories. The increase in the
lifestyle footwear category is primarily the result of a full year of sales for the Creative Recreation brand.
Net sales of the retail segment increased $1.3 million in 2014 from the prior year primarily as a result of higher
sales from our business and consumer web platforms.
Net sales of the military segment decreased $0.9 million in 2014 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 and the purchase orders received on these contracts. We have received an order to
fulfill a contract to the U.S. Military to produce “Hot Weather” combat boots. Shipment of the boots began in
the first quarter of 2013. During 2014, we shipped boots under this same agreement.
Gross margin of the wholesale segment increased $13.4 million in 2014 over the prior year as a result of the
higher sales. Gross margin as a percent of sales for 2014 was flat as compared to 2013.
Gross margin of the retail segment decreased $0.4 million in 2014 from the prior year as a result of lower
margin as a percentage of sales. The decrease was largely due to lower margins on contract sales to a large city
transit authority.
Gross margin of the military segment decreased $0.2 million in 2014 over the prior year due primarily to lower
sales.
Selling, general and administrative expenses increased $8.1 million in 2014 from prior year primarily as result
of higher compensation expense, higher variable expenses associated with the increase in sales and additional
expenses associated with the Creative Recreation brand.
Net interest expense increased $0.3 million in 2014 from the prior year due to higher levels of debt, primarily in
the first half of 2014 as a result of the Creative Recreation acquisition in late 2013.
Net income increased $2.5 million in 2014 from prior year results primarily due higher sales in our wholesale
business.
Total debt at December 31, 2014 was $36.3 million or $2.1 million lower than the prior year. Total debt minus
cash and cash equivalents was $31.7 million or 18.1% of total capitalization at December 31, 2014 compared to
$34.2 million or 20.1% of total capitalization at year-end 2013.
Our cash from operating activities increased $15.4 million in 2014 from the prior year, primarily the result of
higher net income and an increase in accounts payable and accrued liabilities.
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. Net sales include royalty income from licensing our brands.
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.
21
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
Acquisition related expenses
Income from operations
Results of Operations
Years Ended December 31,
2013
100.0%
65.9%
34.1%
29.1%
0.5%
4.5%
2014
100.0%
66.3%
33.7%
28.2%
0.0%
5.5%
2012
100.0%
64.8%
35.2%
29.2%
0.0%
6.0%
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net sales. Net sales increased 16.9% to $286.2 million for 2014 compared to $244.9 million the prior year.
Wholesale sales increased $41.0 million to $233.9 million for 2014 compared to $192.9 million for 2013. The
increase in wholesale sales was primarily the result of a $14.0 million or 135.3% increase in our lifestyle footwear
category, an $8.8 million or 10.0% increase in our work footwear category, an $8.3 million or 23.1% increase in our
western footwear category, a $4.4 million or 23.2% increase in our outdoor footwear category and a $2.3 million or
12.0% increase in our commercial military footwear category. The increase in the lifestyle footwear category for
2014 was the result of a full year of sales under the Creative Recreation brand, which contributed $14.4 million in
net sales during 2014. Retail sales increased to $44.3 million for 2014 compared to $43.1 million for 2013. The
$1.3 million increase in retail sales resulted from increased sales in our business-to-consumer ecommerce web
platforms. Military segment sales, which occur from time to time, were $8.0 million for 2014 compared to $8.9
million in 2013. 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 and the purchase orders received on these
contracts. We have received an order to fulfill a contract to the U.S. Military to produce “Hot Weather” combat
boots. Shipment of the boots began in the first quarter of 2013. During 2014, we shipped boots under this same
agreement. Average list prices for our footwear, apparel and accessories were higher in 2014 than 2013 as we
increased our list prices to offset higher manufacturing and sourcing costs.
Gross margin. Gross margin increased to $96.4 million or 33.7% of net sales for 2014 compared to $83.5 million or
34.1% of net sales for the prior year. Wholesale gross margin for 2014 was $75.8 million, or 32.4% of net sales,
compared to $62.4 million, or 32.4% of net sales in 2013. Retail gross margin for 2014 was $19.4 million, or 43.9%
of net sales, compared to $19.9 million, or 46.1% of net sales, in 2013. The 220 basis point decrease in 2014 from
the prior year was largely due to lower margins on contract sales to a large city transit authority. Military gross
margin in 2014 was $1.1 million, or 13.4% of net sales, compared to $1.3 million, or 14.3% of net sales in 2013.
SG&A expenses. SG&A expenses were $80.6 million, or 28.2% of net sales in 2014 compared to $72.5 million, or
29.6% of net sales for 2013. The net increase primarily reflected the additional expenses of $5.6 million related to
the Creative Recreation business and increases in compensation and benefits of $2.3 million.
Acquisition related items. Acquisition related items in 2013 included expenses of $1.2 million related to the
aforementioned acquisition of the Creative Recreation brand, which are included as a component of income from
operations. In addition, a gain on bargain purchase of $0.6 million was recorded and is included as a component of
total other income and expenses.
Interest expense. Interest expense was $0.9 million in 2014, compared to $0.7 million for the prior year. The
increase in interest expense in 2014 over prior year was due to higher levels of debt, primarily in the first half of
2014 as a result of the Creative Recreation acquisition in late 2013.
Income taxes. Income tax expense was $4.9 million in 2014, compared to $3.4 million for the same period a year
ago. The increase in income tax expense for 2014 was due to a $3.9 million increase in pretax income and an
increase in the effective tax rate. The effective tax rate for 2014 was 33.2% compared to 31.8% for 2013. The
effective tax rate for 2014 is less than the federal statutory rate due principally to our permanent capital investment
in the Dominican Republic which reduces the amount of dividends that we need to provide for U.S income taxes.
22
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Net sales. Net sales increased 7.1% to $244.9 million for 2013 compared to $228.5 million the prior year.
Wholesale sales increased $6.7 million to $192.9 million for 2013 compared to $186.2 million for 2012. The
increase in wholesale sales was primarily the result of a $9.0 million or 11.4% increase in our work footwear
category and a $6.3 million or 21.2% increase in our western footwear category, which were partially offset by a
$3.3 million or 34.2% decrease in apparel and accessories, a $3.2 million or 14.7% decrease in our commercial
military footwear category and a $3.2 million or 14.3% decrease in our outdoor footwear category. During the first
quarter of 2013, we began shipping to Tractor Supply under an agreement to produce boots under their trade name
C.E. Schmidt. During 2013, we had sales of $10.3 million under this agreement that is included in the work
footwear category. Retail sales increased to $43.1 million for 2013 compared to $41.3 million for 2012. The $1.8
million increase in retail sales resulted from increased sales in our business-to-consumer ecommerce web platforms.
Military segment sales, which occur from time to time, were $8.9 million for 2013 compared to $1.0 million in
2012. 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. We have 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 began 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 2013 than 2012 as we increased our list prices to offset higher manufacturing and
sourcing costs.
Gross margin. Gross margin increased to $83.5 million or 34.1% of net sales for 2013 compared to $80.5 million or
35.2% of net sales for the prior year. Wholesale gross margin for 2013 was $62.4 million, or 32.4% of net sales,
compared to $61.0 million, or 32.8% of net sales in 2012. The 40 basis point decrease was primarily the result of
sales of C.E. Schmidt work footwear in 2013 which carries lower margins. Retail gross margin for 2013 was $19.9
million, or 46.1% of net sales, compared to $19.5 million, or 47.2% of net sales, in 2012. The 110 basis point
decrease in 2013 from the prior year was largely due to lower average selling prices on our internet driven
transactions than our mobile store transactions. Military gross margin in 2013 was $1.3 million, or 14.3% of net
sales, compared to $0.1 million, or 4.2% of net sales in 2012.
SG&A expenses. SG&A expenses were $71.4 million, or 29.1% of net sales in 2013 compared to $66.7 million, or
29.2% of net sales for 2012. The net change primarily reflected higher selling and distribution expenses of $2.0
million and higher advertising costs of $0.9 million.
Acquisition related items. Acquisition related items in 2013 included expenses of $1.2 million related to the
aforementioned acquisition of the Creative Recreation brand, which are included as a component of income from
operations. In addition, a gain on bargain purchase of $0.6 million was recorded and is included as a component of
total other income and expenses.
Interest expense. Interest expense was $0.7 million in 2013, compared to $0.7 million for the prior year.
Income taxes. Income tax expense was $3.4 million in 2013, compared to $4.2 million for the same period a year
ago. The decrease in income tax expense for 2013 was due to a $2.3 million decrease in pretax income and a
decrease in the effective tax rate. The effective tax rate for 2013 was 31.8% compared to 32.3% for 2012. The
effective tax rate for 2013 is less than the federal statutory rate due principally to our permanent capital investment
in the Dominican Republic which reduces 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
23
fluctuate significantly throughout the year. Our working capital increased to $124.8 million at December 31, 2014,
compared to $118.2 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 $7.1 million for 2014 and $7.7 million in 2013. Capital expenditures for 2015 are
anticipated to be approximately $6.1 million.
In October 2010, we entered into a financing agreement with PNC Bank (“PNC”) to provide a $70 million credit
facility. In December 2014, we amended and restated the credit facility to increase the facility to $75 million and
extend the term of the facility an additional five years. The current interest rate is generally LIBOR plus 1.25%.
The amended and restated credit facility matures in November 2019.
The total amount available under our amended and restated revolving credit facility is subject to a borrowing base
calculation based on various percentages of accounts receivable and inventory. As of December 31, 2014, we had
$36.3 million in borrowings under this facility and total capacity of $75 million.
Our amended and restated 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
amended and restated credit facility agreement). At December 31, 2014, there was no triggering event and the
covenant was not in effect. Our amended and restated credit facility places a restriction on the amount of dividends
that may be paid. During 2014 and 2013, we paid dividends on our common stock totaling $3,017,979 and
$2,254,935, respectively. No dividends were paid during 2012.
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 2015, a hypothetical 100 basis point increase in short term interest rates
would result, over the subsequent twelve-month period, in a reduction of approximately $0.4 million in income
before income taxes and cash flows. The estimated reductions are based upon the current level of variable debt and
assume no changes in the composition of that debt.
Cash Flows
Cash Flow Summary
($ in millions)
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
2014
2013
2012
$
13.0
(7.4)
(5.2)
$
(2.4)
(10.0)
12.6
$
18.0
(6.1)
(11.5)
Net change in cash and cash equivalents
$
0.4
$
0.2
$
0.4
Operating Activities. Net cash provided by operating activities totaled $13.0 million for 2014, compared to cash
used in operating activities of $2.4 million for 2013. Net cash provided by operating activities was $18.0 million for
2012. The principal sources of net cash in 2014 included higher net income and increases in accounts payable and
other accrued liabilities, which were partially offset by higher balances of inventory and accounts receivable. The
principle use of net cash in 2013 was the result of higher working capital primarily increases in inventory and
accounts receivable and decreases in accounts payable. 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.
Investing Activities. Net cash used in investing activities was $7.4 million in 2014 compared to $10.0 million in
2013 and $6.1 million in 2012. The principal use of cash in 2014, 2013 and 2012 was for the purchase of molds and
equipment associated with our manufacturing operations and for information technology software and system
upgrades. The 2013 amount includes $2.2 million related to the purchase of the Creative Recreation brand.
Financing Activities. Cash used in financing activities during 2014 was $5.2 million compared to cash provided by
financing activities during 2013 was $12.6 million compared to cash used in financing activities during 2012 of
24
$11.5 million. Proceeds and repayments of the revolving credit facility reflect daily cash disbursement and deposit
activity. Our financing activities during 2014 included net repayments under the revolving line of credit facility of
$2.1 million. Our financing activities during 2013 included net borrowings under the revolving line of credit facility
of $14.9 million. The increases in the borrowings were primarily due to the afore-mentioned acquisition and higher
levels of inventory. Our financing activities during 2012 included net repayments under the revolving line of credit
facility of $11.5 million.
Borrowings and External Sources of Funds
Our borrowings and external sources of funds were as follows at December 31, 2014 and 2013:
($ in millions)
Revolving credit facility
Less current maturities
Net long-term debt
December 31
2014
2013
$
$
36.3
-
36.3
$
$
38.4
-
38.4
We continually evaluate our external credit arrangements in light of our growth strategy and new opportunities. In
December 2014, we amended and restated our financing agreement with PNC bank to provide a $75 million credit
facility. The term of the amended credit facility is five years and the interest rate is currently LIBOR plus 1.25%.
We lease certain machinery, shoe centers, and manufacturing facilities under operating leases that generally provide
for renewal options. Future minimum lease payments under non-cancelable operating leases are $1.3 million, $1.1
million, $1.1 million, $0.6 million and $0.4 million for years 2015 through 2019, respectively, or approximately
$4.5 million in total.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations at December 31, 2014 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, 2014:
Long-term debt
Minimum operating lease commitments
Minimum royalty commitments
Expected cash requirements for interest (1)
Payments due by Year
$ millions
Total
$
36.3
4.5
-
5.9
Less Than
1 Year
-
$
1.3
-
1.2
1-3 Years
-
$
2.2
-
2.4
3-5 Years
36.3
$
1.0
-
2.3
Over 5
Years
-
$
-
-
-
Total contractual obligations
$
46.7
$
2.5
$
4.6
$
39.6
$
-
(1) Assumes a 3.25% interest rate, which is the highest rate possible as of December 31, 2014 on the $75 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, 2014, 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
25
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
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
2014, 2013, and 2012 due to these factors. It is anticipated that inflationary pressures during 2015 will be offset
through price increases that are to be implemented in the early part of 2015.
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 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 4.1% of sales for 2014
and 4.3% of sales for 2013.
26
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.
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.
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, 2014, approximately $17.6 million of undistributed earnings remains that would become
taxable upon repatriation to the United States.
RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax
Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The
update provides that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in
the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or
a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle
any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable
jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such
purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be
combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the
unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming
disallowance of the tax position at the reporting date. The amendments in this update do not require new recurring
disclosures. The amendments are effective prospectively for reporting periods beginning after December 15, 2013.
The adoption of this standard did not have a material effect on our consolidated financial statements.
Accounting standards not yet adopted
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property,
Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of an Entity.
The amendments in this update change the requirements for reporting discontinued operations in Subtopic 205-20.
27
A discontinued operation may include a component of an entity or a group of components of an entity, or a business
or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be
reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on
an entity’s operations and financial results when any of the following occurs: 1. The component of an entity or
group of components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. 2.
The component of an entity or group of components of an entity is disposed of by sale. 3. The component of an
entity or group of components of an entity is disposed of other than by sale (for example, by abandonment or in a
distribution to owners in a spinoff). The update is effective for all disposals (or classifications as held for sale) of
components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim
periods within those years. We have not yet determined the impact this ASU will have on our consolidated financial
statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The
amendments in this update supersede the revenue recognition requirements in Topic 605, Revenue Recognition,
including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification.
In addition, the amendments supersede the cost guidance in Subtopic 605-35, Revenue Recognition—Construction-
Type and Production-Type Contracts, and create new Subtopic 340-40, Other Assets and Deferred Costs—Contracts
with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. The update is effective for public entities for annual
reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early
application is not permitted. We have not yet determined the impact this ASU will have on our consolidated
financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718). Some share-
based payment awards that require a specific performance target to be achieved before the employee can benefit
from the award, also require an employee to render service until the performance target is achieved. In some cases,
the terms of an award may provide that the performance target could be achieved after an employee completes the
requisite service period. That is, the employee would be entitled to benefit from the award regardless of whether the
employee is rendering service on the date the performance target is achieved. Some entities account for those
performance targets as performance conditions that affect the vesting of the award and, therefore, do not reflect the
performance target in the estimate of the grant-date fair value. Others treat them as nonvesting conditions that affect
the grant-date fair value of the award. The amendments apply to reporting entities that grant their employees share-
based payments in which the terms of the award provide that a performance target can be achieved after the requisite
service period. The update is effective for public entities for annual reporting periods beginning after December 15,
2015. Early adoption is permitted. We have not yet determined the impact this ASU will have on our consolidated
financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern
(Subtopic 205-40). Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether
there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote
disclosures. The amendments in this update provide that guidance. In doing so, the amendments should reduce
diversity in the timing and content of footnote disclosures. The amendments require management to assess an
entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are
currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial
doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for
considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is
alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures
when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the
financial statements are issued (or available to be issued). The update is effective for public entities for annual
reporting periods beginning after December 15, 2016. Early adoption is permitted. We have not yet determined the
impact this ASU will have on our consolidated financial statements.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items
(Subtopic 225-20). The objective of this update is to simplify the income statement presentation requirements in
Subtopic 225-20 by eliminating the concept of extraordinary items. Extraordinary items are events and transactions
that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the
extraordinary classification simplifies income statement presentation by altogether removing the concept of
extraordinary items from consideration. The amendments in this update are effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments
prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in
28
the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the
fiscal year of adoption. We have not yet determined the impact this ASU will have on our consolidated financial
statements.
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, 2014 of $36.3 million.
In October 2010, we entered into a financing agreement with PNC Bank (“PNC”) to provide a $70 million credit
facility. In December 2014, we amended and restated the credit facility to increase the facility to $75 million and
extend the term of the facility an additional five years. The current interest rate is generally LIBOR plus 1.25%.
The remainder of the terms of the original agreement did not substantially change in the amended and restated
agreement. The amended and restated credit facility matures in November 2019. We have no other long-term debt
maturities.
We do not have any interest rate management agreements as of December 31, 2014.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated balance sheets as of December 31, 2014 and 2013 and the related consolidated statements of
comprehensive income, shareholders’ equity, and cash flows for the years ended December 31, 2014, 2013, and
2012, together with the report of the independent registered public accounting firm thereon appear on pages F-1
through F-24 hereof and are incorporated herein by reference.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
29
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 (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based upon that evaluation under the framework in Internal Control – Integrated
Framework (2013), our management concluded that our internal control over financial reporting was effective as of
December 31, 2014. 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.
30
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, 2014, based on criteria established in Internal Control-Integrated Framework (2013) 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, 2014, based on criteria established in Internal Control-Integrated Framework (2013) 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 February 27, 2015 expressed an
unqualified opinion.
/s/ Schneider Downs & Co., Inc.
Columbus, Ohio
February 27, 2015
31
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 2015 Annual Meeting of Shareholders
(the “Proxy Statement”) to be held on May 13, 2015, 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.
32
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:
Report of Independent Registered Public Accounting Firm.………………………….
F-1
Consolidated Balance Sheets as of December 31, 2014 and 2013……………………… F-2 - F-3
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2014, 2013, and 2012………………………………………….. F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2014, 2013, and 2012……………………………… F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2014, 2013, and 2012…………………………………………… F-6
Notes to Consolidated Financial Statements for the years ended
December 31, 2014, 2013, and 2012…………………………………………… F-7 - F-24
(2) The following financial statement schedule for the years ended December 31, 2014, 2013, and 2012 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).
33
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).
Company’s 2014 Omnibus Incentive Plan (incorporated by reference to the Company’s Definitive
Proxy Statement for the 2015 Annual Meeting of Shareholders, held on May 7, 2015, filed on
April 7, 2014).
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).
34
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
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).
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 10.1 to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2010).
Amendment No. 1 to Loan Agreement, dated May 9, 2013, by and among Rocky Brands, Inc.,
Lehigh Outfitters, LLC, Lifestyle Footwear, Inc., Rocky Brands Wholesale LLC, Rocky Brands
International, LLC, and Rocky Canada, Inc., the lenders party thereto, and PNC Bank, National
Association, as agent for the lenders (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K dated May 8, 2013, filed with the Securities and Exchange
Commission on May 14, 2013).
Joinder and Amendment No. 2 to Loan Documents, dated December 13, 2013, by and among
Rocky Brands, Inc., Lehigh Outfitters, LLC, Lifestyle Footwear, Inc., Rocky Brands Wholesale
LLC, Rocky Brands International, LLC, Rocky Canada, Inc., and Creative Recreation, LLC, the
lenders party thereto, and PNC Bank, National Association, as agent for the lenders (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 13,
2013, filed with the Securities and Exchange Commission on December 19, 2013).
Amended and Restated Revolving Credit, Term Loan, Guaranty, and Security Agreement dated as
of December 19, 2014 among Rocky Brands, Inc., Lehigh Outfitters, LLC, Lifestyle Footwear,
Inc., Rocky Brands Wholesale LLC, Rocky Brands International, LLC, Rocky Brands Canada,
Inc., Creative Recreation, LLC, Creative Recreation Retail, LLC, Creative Recreation
International, LLC, the lenders party thereto, and PNC Bank, National Association, as agent for
lenders (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated December 19, 2014, filed with the Securities and Exchange Commission on December 23,
2014).
Description of Material Terms of Rocky Brands, Inc.’s Bonus Plan for Fiscal Year Ending
December 31, 2013 (incorporated by reference to Exhibit 10.19 to the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2012).
Description of Material Terms of Rocky Brands, Inc.’s Bonus Plan for Fiscal Year Ending
December 31, 2014 (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2013).
Company’s Incentive Compensation Plan (incorporated by reference to the Company’s Definitive
Proxy Statement for the 2012 Annual Meeting of Shareholders).
Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.23 to
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013).
Form of Performance Stock Unit Award Agreement (incorporated by reference to Exhibit 10.24 to
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013).
35
10.27
10.28
10.29
10.30
10.31
10.32
Employment Agreement, effective as of January 2, 2014, between the Company and Mike Brooks
(incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2013).
Employment Agreement, effective as of January 2, 2014, between the Company and David Sharp
(incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2013).
Employment Agreement, effective as of January 2, 2014, between the Company and James E.
McDonald (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2013).
Employment Agreement, effective as of January 2, 2014, between the Company and Gary Adam
(incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2013).
Employment Agreement, effective as of January 2, 2014, between the Company and Jason Brooks
(incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2013).
Employment Agreement, effective as of January 2, 2014, between the Company and Richard
Simms (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-
K for the fiscal year ended December 31, 2013).
10.33*
Form of Option Award Agreement under the Company’s 2014 Omnibus Incentive Plan.
10.34*
10.35*
21*
23*
24*
Form of Restricted Stock Unit Award Agreement under the Company’s 2014 Omnibus Incentive
Plan.
Form of Performance Stock Unit Award Agreement under the Company’s 2014 Omnibus
Incentive Plan.
Subsidiaries of the Company.
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, 2014 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: February 27, 2015
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
/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
* 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
Title
Date
President and Chief Executive Officer February 27, 2015
and Director (Principal Executive Officer)
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 27, 2015
Chairman and Director February 27, 2015
Secretary and Director
February 27, 2015
Director February 27, 2015
Director February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
Director
Director
Director
37
ROCKY BRANDS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014,
2013 and 2012
Consolidated Statements of Shareholders’ Equity for the Years Ended
December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2014, 2013 and 2012
F-1
F-2 - F-3
F-4
F-5
F-6
Notes to Consolidated Financial Statements
F-7 - F-24
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, 2014 and 2013, 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,
2014, 2013 and 2012. 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 and financial
statement schedule. 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, 2014, and 2013, and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31, 2014, 2013 and
2012, 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, 2014, based on
criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February 27, 2015 expressed an
unqualified opinion.
/s/ Schneider Downs & Co., Inc.
Columbus, Ohio
February 27, 2015
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,
2014
2013
$
4,616,694
55,807,103
476,480
85,237,042
-
1,291,907
2,553,442
$
4,215,617
49,069,668
325,888
78,171,670
242,228
1,104,050
2,529,407
149,982,668
135,658,528
26,264,641
26,205,080
36,681,644
36,807,099
299,490
354,051
$
213,228,443
$
199,024,758
F - 2
ROCKY BRANDS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CURRENT LIABILITIES:
Accounts payable
Accrued expenses:
Salaries and wages
Taxes - other
Accrued freight
Commissions
Accrued duty
Income taxes payable
Other
Total current liabilities
LONG TERM DEBT
DEFERRED LIABILITIES:
Deferred income taxes
Other deferred liabilities
TOTAL LIABILITIES
December 31,
2014
2013
$
15,116,131
$
11,486,473
1,773,061
532,470
683,482
681,185
2,693,223
2,687,535
1,042,653
25,209,740
36,270,373
12,928,048
472,364
74,880,525
659,002
901,116
1,143,848
698,435
1,444,369
-
1,083,196
17,416,439
38,388,198
11,750,718
255,906
67,811,261
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; 2014 - 7,550,126 and 2013 - 7,536,448; and
additional paid-in capital
Retained earnings
Total shareholders' equity
-
-
70,460,672
67,887,246
70,153,570
61,059,927
138,347,918
131,213,497
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
213,228,443
$
199,024,758
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
Acquisition related expenses
Total operating expenses
INCOME FROM OPERATIONS
OTHER INCOME AND (EXPENSES):
Interest expense
Gain on bargain purchase
Other - net
Total other - net
Years Ended December 31,
2013
2012
2014
$
286,242,169
$
244,870,731
$
228,537,050
189,881,444
161,328,280
148,031,073
96,360,725
83,542,451
80,505,977
80,597,934
-
80,597,934
15,762,791
(943,154)
-
(78,455)
(1,021,609)
71,351,688
1,172,047
72,523,735
11,018,716
(688,502)
601,975
(116,665)
(203,192)
66,679,761
-
66,679,761
13,826,216
(650,873)
-
(87,924)
(738,797)
INCOME BEFORE INCOME TAXES
14,741,182
10,815,524
13,087,419
INCOME TAX EXPENSE
COMPREHENSIVE INCOME
NET INCOME PER SHARE
Basic
Diluted
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic
Diluted
See notes to consolidated financial statements
4,895,884
3,442,768
4,232,654
$
9,845,298
$
7,372,756
$
8,854,765
$1.30
$1.30
$0.98
$0.98
$1.18
$1.18
7,544,936
7,544,936
7,517,364
7,517,364
7,503,494
7,503,494
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, 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
YEAR ENDED DECEMBER 31, 2013
Comprehensive income
Dividends paid on common stock
Stock compensation expense
32,880
458,800
7,372,756
7,372,756
(2,254,935)
(2,254,935)
458,800
BALANCE - December 31, 2013
7,536,448
$
70,153,570
$
-
$
61,059,927
$
131,213,497
YEAR ENDED DECEMBER 31, 2014
Comprehensive income
Dividends paid on common stock
Stock compensation expense
13,678
307,102
9,845,298
(3,017,979)
9,845,298
(3,017,979)
307,102
BALANCE - December 31, 2014
7,550,126
$
70,460,672
$
-
$
67,887,246
$
138,347,918
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:
Dep reciation and amortization
Deferred income taxes
Loss (gain) on disposal of fixed assets
Gain on acquisition
Stock compensation expense
Change in assets and liabilities:
Receivables
Inventories
Income tax receivable
Other current assets
Other assets
Accounts p ayable
Accrued and other liabilities
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets
Proceeds from sales of fixed assets
Acquisition of business 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
Debt financing costs
Dividends paid on common stock
Years Ended December 31,
2014
2013
2012
$
9,845,298
$
7,372,756
$
8,854,765
6,941,905
989,473
138,056
-
307,102
(6,888,027)
(7,065,372)
242,228
(24,035)
109,208
4,004,111
4,380,101
12,980,048
(7,442,086)
63,012
-
(9,446)
(7,388,520)
6,264,246
750,363
52,293
(601,975)
458,800
(3,182,751)
(9,813,065)
(242,228)
(319,340)
68,214
(4,779,055)
1,518,524
(2,453,218)
(7,717,102)
47,625
(2,229,000)
(68,452)
(9,966,929)
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)
75,190,968
(77,308,793)
(54,647)
(3,017,979)
78,622,969
(63,696,111)
(58,738)
(2,254,935)
63,140,815
(74,679,475)
-
-
Net cash (used in) p rovided by financing activities
(5,190,451)
12,613,185
(11,538,660)
INCREASE IN CASH AND CASH EQUIVALENTS
401,077
193,038
372,288
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD
4,215,617
4,022,579
3,650,291
END OF PERIOD
$
4,616,694
$
4,215,617
$
4,022,579
See notes to consolidated financial statements
F - 6
ROCKY BRANDS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
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, Lehigh Outfitters, LLC, Creative
Recreation, LLC, Creative Recreation International, LLC and Creative Recreation Retail, 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, Lehigh and Creative Recreation. Our brands have a long history of
representing high quality, comfortable, functional and durable footwear and our products are
organized around six target markets: outdoor, work, duty, commercial military, western and lifestyle.
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 retail stores (including one truck, supported by two small warehouses that
include retail stores, which we refer to as mini-stores), our Rocky outlet store and our websites. We
operate four mobile trucks to service the New York Transit Authority’s employees. 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 2014,
2013 or 2012.
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 $1,002,000 and $781,000 at December 31, 2014 and 2013, respectively.
F - 7
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.
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, 2014 and 2013. 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.
F - 8
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
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
$8,623,000, $8,038,000, and $7,118,000 for 2014, 2013 and 2012, 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. Net sales include royalty
income from licensing our brands.
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 $9,254,000, $8,294,000 and $6,921,000 in 2014, 2013 and 2012, 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,
2013
2012
2014
Basic - weighted average shares outstanding
7,544,936
7,517,364
7,503,494
Dilutive securities - stock options
-
-
-
Diluted - weighted average shares outstanding
7,544,936
7,517,364
7,503,494
Anti-Dilutive securities - stock options
-
8,630
10,902
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:
F - 9
Level 1 – Quoted prices in active markets for identical assets or liabilities.
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.
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.
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 and other short-term
financing obligations also approximate fair value, as they are comparable to the available financing
in the marketplace during the year.
Recently Adopted Accounting Pronouncements
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax
Credit Carryforward Exists. The update provides that an unrecognized tax benefit, or a portion of an
unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred
tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except
as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to
settle any additional income taxes that would result from the disallowance of a tax position or the tax
law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to
use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the
financial statements as a liability and should not be combined with deferred tax assets. The
assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and
deferred tax asset that exist at the reporting date and should be made presuming disallowance of the
tax position at the reporting date. The amendments in this update do not require new recurring
disclosures. The amendments are effective prospectively for reporting periods beginning after
December 15, 2013. The adoption of this standard did not have a material effect on our consolidated
financial statements.
Accounting standards not yet adopted
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205)
and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures
of Disposals of an Entity. The amendments in this update change the requirements for reporting
discontinued operations in Subtopic 205-20. A discontinued operation may include a component of
an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a
component of an entity or a group of components of an entity is required to be reported in
discontinued operations if the disposal represents a strategic shift that has (or will have) a major
effect on an entity’s operations and financial results when any of the following occurs: 1. The
F - 10
component of an entity or group of components of an entity meets the criteria in paragraph 205-20-
45-1E to be classified as held for sale. 2. The component of an entity or group of components of an
entity is disposed of by sale. 3. The component of an entity or group of components of an entity is
disposed of other than by sale (for example, by abandonment or in a distribution to owners in a
spinoff). The update is effective for all disposals (or classifications as held for sale) of components
of an entity that occur within annual periods beginning on or after December 15, 2014, and interim
periods within those years. We have not yet determined the impact this ASU will have on our
consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606). The amendments in this update supersede the revenue recognition requirements in Topic 605,
Revenue Recognition, including most industry-specific revenue recognition guidance throughout the
Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in
Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and
create new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In
summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. The update is effective for
public entities for annual reporting periods beginning after December 15, 2016, including interim
periods within that reporting period. Early application is not permitted. We have not yet
determined the impact this ASU will have on our consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic
718). Some share-based payment awards that require a specific performance target to be achieved
before the employee can benefit from the award, also require an employee to render service until the
performance target is achieved. In some cases, the terms of an award may provide that the
performance target could be achieved after an employee completes the requisite service period. That
is, the employee would be entitled to benefit from the award regardless of whether the employee is
rendering service on the date the performance target is achieved. Some entities account for those
performance targets as performance conditions that affect the vesting of the award and, therefore, do
not reflect the performance target in the estimate of the grant-date fair value. Others treat them as
nonvesting conditions that affect the grant-date fair value of the award. The amendments apply to
reporting entities that grant their employees share-based payments in which the terms of the award
provide that a performance target can be achieved after the requisite service period. The update is
effective for public entities for annual reporting periods beginning after December 15, 2015. Early
adoption is permitted. We have not yet determined the impact this ASU will have on our
consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going
Concern (Subtopic 205-40). Currently, there is no guidance in GAAP about management’s
responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a
going concern or to provide related footnote disclosures. The amendments in this update provide that
guidance. In doing so, the amendments should reduce diversity in the timing and content of footnote
disclosures. The amendments require management to assess an entity’s ability to continue as a going
concern by incorporating and expanding upon certain principles that are currently in U.S. auditing
standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2)
require an evaluation every reporting period including interim periods, (3) provide principles for
considering the mitigating effect of management’s plans, (4) require certain disclosures when
substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an
express statement and other disclosures when substantial doubt is not alleviated, and (6) require an
assessment for a period of one year after the date that the financial statements are issued (or
available to be issued). The update is effective for public entities for annual reporting periods
F - 11
beginning after December 15, 2016. Early adoption is permitted. We have not yet determined the
impact this ASU will have on our consolidated financial statements.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and
Unusual Items (Subtopic 225-20). The objective of this update is to simplify the income statement
presentation requirements in Subtopic 225-20 by eliminating the concept of extraordinary items.
Extraordinary items are events and transactions that are distinguished by their unusual nature and by
the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income
statement presentation by altogether removing the concept of extraordinary items from
consideration. The amendments in this update are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the
amendments prospectively. A reporting entity also may apply the amendments retrospectively to all
prior periods presented in the financial statements. Early adoption is permitted provided that the
guidance is applied from the beginning of the fiscal year of adoption. We have not yet determined
the impact this ASU will have on our consolidated financial statements.
2.
INVENTORIES
Inventories are comprised of the following:
Raw materials
Work-in-process
Finished goods
Total
December 31,
2014
2013
$
11,702,762
577,127
72,957,153
$
10,958,796
660,910
66,551,964
$
85,237,042
$
78,171,670
3.
IDENTIFIED INTANGIBLE ASSETS
A schedule of identified intangible assets is as follows:
December 31, 2014
Trademarks
Wholesale
Retail
Patents
Customer Relationships
Total Intangibles
December 31, 2013
Trademarks
Wholesale
Retail
Patents
Customer Relationships
Total Intangibles
Gross
Amount
Accumulated
Amortization
Carrying
Amount
$
32,343,578
2,900,000
2,594,301
2,200,000
40,037,879
$
-
$
-
2,269,569
1,086,666
3,356,235
$
$
$
32,343,578
2,900,000
324,732
1,113,334
36,681,644
Gross
Amount
Accumulated
Amortization
Carrying
Amount
$
$
32,343,578
2,900,000
370,188
1,193,333
36,807,099
$
32,343,578
2,900,000
2,584,855
2,200,000
40,028,433
$
-
$
-
2,214,667
1,006,667
3,221,334
$
F - 12
Amortization expense related to finite-lived intangible assets was approximately $135,000, $60,000
and $50,000 in 2014, 2013 and 2012, respectively. Such amortization expense will be
approximately $126,000 per year for 2015 through 2019. The increase in 2014 and future years is
attributed to the additional amortization related to the additional customer relationship from the
acquisition of the Creative Recreation business as noted below.
The weighted average lives of patents and customer relationships are 7 years.
As discussed further in Note 15, during late 2013, we acquired substantially all the assets of
Kommonwealth, Inc. including the Creative Recreation trademark. As part of this acquisition, we
recorded the fair value of the trademark of $5.1 million and the fair value of the customer
relationship of $1.2 million. The trademark is an indefinite-lived intangible asset and will be
reviewed annually for impairment or as events occur that would require a more frequent review. The
customer relationship intangible will be amortized over 15 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
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 2014 and 2013 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,
2014
2013
$
151,144
148,346
$
217,076
136,975
$
299,490
$
354,051
F - 13
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,
2014
2013
$
671,035
19,027,998
39,206,408
2,491,295
12,131,234
281,198
$
671,035
18,398,436
35,752,876
2,548,700
10,016,163
1,905,447
Total
73,809,168
69,292,657
Less - accumulated depreciation
(47,544,527)
(43,087,577)
Net Fixed Assets
$
26,264,641
$
26,205,080
We incurred approximately $6,807,000, $6,204,000 and $5,847,000 in depreciation expense for
2014, 2013 and 2012, respectively.
6. LONG-TERM DEBT
In October 2010, we entered into a financing agreement with PNC Bank (“PNC”) to provide a $70
million credit facility. In December 2014, we amended and restated the credit facility to increase the
facility to $75 million and extend the term of the facility an additional five years. The current interest
rate is generally LIBOR plus 1.25%. The amended and restated credit facility matures in November
2019
The total amount available under our amended and restated revolving credit facility is subject to a
borrowing base calculation based on various percentages of accounts receivable and inventory. As of
December 31, 2014, we had $36.3 million in borrowings under this facility and total capacity of $75
million.
Our amended and restated 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 amended and restated credit facility agreement). At December 31, 2014, there
was no triggering event and the covenant was not in effect. Our amended and restated credit facility
places a restriction on the amount of dividends that may be paid. During 2014 and 2013, we paid
dividends on our common stock totaling $3,017,979 and $2,254,935, respectively. No dividends were
paid during 2012.
Our amended and restated revolving credit facility matures in November 2019. We have no other
long-term debt maturities.
F - 14
7. OPERATING LEASES
We lease certain machinery, trucks, and facilities under operating leases that generally provide for
renewal options. We incurred approximately $1,324,000, $840,000 and $1,067,000 in rent expense
under operating lease arrangements for 2014, 2013 and 2012, respectively.
Future minimum lease payments under non-cancelable operating leases are approximately as
follows for the years ended December 31:
2015
2016
2017
2018
2019
Total
$
1,290,000
1,090,000
1,089,000
664,000
379,000
$
4,512,000
8. RETIREMENT PLANS
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 $1.0 million in 2014, $0.9 million in 2013
and $0.9 million in 2012.
F - 15
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.
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,
2013
2012
2014
$
3,656,356
848,666
4,505,022
$
2,540,701
778,213
3,318,914
$
3,946,096
307,639
4,253,735
203,144
140,552
343,696
46,911
255
47,166
109,254
(29,619)
79,635
42,450
1,769
44,219
26,073
(242,227)
(216,154)
197,538
(2,465)
195,073
Total
$
4,895,884
$
3,442,768
$
4,232,654
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,
2013
3,775,418
$
$
2014
5,147,234
$
2012
4,523,826
(3,477,301)
(1,871,847)
(1,180,971)
3,090,036
12,703
284,838
(135,690)
91,475
1,563
(118,974)
1,592,238
9,712
45,948
(51,396)
76,465
1,500
(135,270)
879,884
57,847
(203,178)
(62,704)
59,092
4,614
154,244
Total
$
4,895,884
$
3,442,768
$
4,232,654
F - 16
Deferred income taxes recorded in the consolidated balance sheets at December 31, 2014 and 2013
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,
2014
2013
$
776,416
705,028
394,776
80,969
575,702
2,532,891
(569,881)
$
1,094,449
735,528
345,583
94,599
565,088
2,835,247
(562,776)
Total deferred tax assets
1,963,010
2,272,471
Deferred tax liabilities:
Fixed assets
Intangible assets
Other assets
Tollgate tax on Lifestyle earnings
Total deferred tax liabilities
(1,736,042)
(11,001,289)
(482,549)
(379,271)
(13,599,151)
(875,542)
(11,192,160)
(472,166)
(379,271)
(12,919,139)
Net deferred tax liability
$
(11,636,141)
$
(10,646,668)
Deferred income taxes - current
Deferred income taxes - non-current
$
1,291,907
(12,928,048)
(11,636,141)
$
$
1,104,050
(11,750,718)
(10,646,668)
$
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, 2014, we had approximately $17,598,000 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 $6,159,000.
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 2012. In
2014, we were subjected to an IRS examination for our consolidated U.S. Federal return for the year
2011. There were no adjustments to our return as a result of that examination. State jurisdictions
F - 17
that remain subject to examination range from 2010 to 2014. Foreign jurisdiction (Canada and
Puerto Rico) tax returns that remain subject to examination range from 2009 to 2014.
Our policy is to accrue interest and penalties on any uncertain tax position as a component of
income tax expense. As of December 31, 2014 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. 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.
11. CAPITAL STOCK AND STOCK BASED COMPENSATION
On May 7, 2014, our shareholders approved the 2014 Omnibus Incentive Plan (the “2014 Plan”).
The 2014 Plan includes 500,000 of our common shares that may be granted under various types of
awards as described in the 2014 Plan. As of December 31, 2014, we were authorized to issue
493,084 shares under this plan.
On May 11, 2004 our shareholders approved the 2004 Stock Incentive Plan (the “2004 Plan”). The
2004 Plan included 750,000 of our common shares that may be granted for stock options and
restricted stock awards. During 2014, we issued the service based restricted stock, the performance
based restricted stock and the stock options noted below under the 2004 Plan. The 2004 Plan has
expired and no future issuances will be made from this plan.
Service Based Restricted Stock
During 2014, we issued 23,000 shares of restricted stock units to certain members of our
management that will be settled in one share of common stock of the company per unit. These
restricted stock units vest in increments of 25% per year over the next four years. We valued the
units at a fair value of $14.57 per unit, which was the closing price of our stock on the last trading
date prior to the grant date. For the year ended December 31, 2014, we recorded expense of $83,778
related to these restricted stock units.
Performance Based Restricted Stock
During 2014, we made available up to 23,000 shares of performance based restricted stock units to
certain members of our management. Shares underlying the performance based restricted stock
units will be issued upon achieving certain established EPS goals at the end of fiscal year 2015. For
the year ended 2014, we did not record any expense related to these restricted stock units as it is
uncertain if we will reach the performance goals.
F - 18
Stock Options
During 2014, we issued 23,000 shares of stock options to certain members of our management.
These stock options vest in increments of 20% per year over the next five years. The options are
exercisable at $14.57 per option, which was the closing price of our stock on the last trading date
prior to the grant date. We have determined the fair value of the options to be $5.94 per option
using the Black Scholes calculation. The significant assumptions utilized for the Black Scholes
calculations consist of an expected life of 6.5 years, historical volatility of 52.04%, a risk free
interest rate of 2.41%, a dividend yield of 2.75% and an employee forfeiture rate of 3.8%. Our
expected life estimate is based on the sum of the vesting terms divided by the number of vesting
tranches. For the year ended 2014, we recorded expense of $27,324 related to these stock options.
For the above issuances under the plan, we expect to recognize expense in the years 2015 through
2018 as follows:
2015
2016
2017
2018
Total
$
102,555
98,282
94,009
22,069
$
316,915
The following summarizes stock option transactions from January 1, 2014 through December 31,
2014:
Options outstanding at January 1, 2014
Issued
Exercised
Forfeited
Options outstanding at December 31, 2014
Options exercisable at:
January 1, 2014
December 31, 2014
Weighted
Average
Exercise
Price
$
-
$
14.57
-
$
$
-
$
14.57
Shares
-
23,000
-
-
23,000
-
-
$
-
$
-
Weighted
Average
Remaining
Actual Term
Aggregate
Intrinsic
Value
9.0
$
-
$
-
Unvested options at December 31, 2014
23,000
$
14.57
9.0
$
-
During the year ended December 31, 2014, we issued 13,678 shares of common stock to members
of our Board of Directors and an employee. We recorded compensation expense of $196,000, which
was the fair market value of the shares on the grant dates. The shares are fully vested.
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-
F - 19
voting convertible preferred stock with a stated value of $.06 per share, of which no shares are
issued or outstanding at December 31, 2014 and 2013, respectively.
The plans generally provided 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, 2013 through December 31,
2013:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Actual Term
Aggregate
Intrinsic
Value
Number of
Options
Outstanding at December 31, 2012
10,000
$
24.36
Issued
Exercised
Forfeited
Outstanding at December 31, 2013
Options exercisable at December 31, 2013
Unvested options at December 31, 2013
-
-
(10,000)
-
-
-
-
$
$
-
$
24.36
$
-
$
-
$
-
$
-
$
-
-
$
-
There were no options granted during the years 2013 or 2012.
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.
F - 20
12. 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,
2013
2012
2014
Interest paid
$
856,578
$
683,475
$
718,117
Federal, state and local income taxes paid - net
of refunds
$
972,645
$
3,248,181
$
2,671,990
Capitalized interest
$
-
$
-
$
-
Fixed asset purchases in accounts payable
$
85,488
$
459,941
$
618,774
13. 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 consumer and
business direct websites, our Lehigh mobile and retail stores and our Rocky outlet store. Our Lehigh
operations include a small 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.
We have received an order to fulfill a contract to the U.S. Military to produce “Hot Weather” combat
boots. We began shipping boots in the first quarter of 2013. The contract included a minimum
purchase amount of $3.0 million and a maximum of $15.0 million for the first year and included an
option for four additional years with the same terms. During 2014, we shipped boots under this
same agreement.
F - 21
The following is a summary of segment results for the Wholesale, Retail, and Military segments.
Certain amounts from prior year have been reclassified to conform to current year presentation.
2014
Years Ended December 31,
2013
2012
NET SALES:
Wholesale
Retail
Military
Total Net Sales
GROSS MARGIN:
Wholesale
Retail
Military
Total Gross Margin
$
$
233,898,250
44,347,775
7,996,144
286,242,169
$
$
192,901,438
43,092,829
8,876,464
244,870,731
$
$
186,219,918
41,284,731
1,032,401
228,537,050
$
$
$
75,840,977
19,449,609
1,070,139
96,360,725
62,420,052
19,856,441
1,265,958
83,542,451
$
$
$
60,987,243
19,475,431
43,303
80,505,977
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
Western footwear
Duty and commercial
military footwear
Lifestyle footwear
Outdoor footwear
Military footwear
Apparel
Other
Royalty income
2014
$
131,510,217
45,475,880
38,174,738
25,823,220
24,606,151
7,996,144
7,471,005
4,100,128
1,084,686
% of
Sales
45.9%
15.9%
13.3%
9.0%
8.6%
2.8%
2.6%
1.4%
0.4%
2013
$
123,131,787
36,998,504
33,517,114
10,599,879
20,194,524
8,876,464
6,676,075
4,454,968
421,416
% of
Sales
50.3%
15.1%
13.7%
4.3%
8.2%
3.6%
2.7%
1.8%
0.2%
2012
$
116,504,833
29,998,191
35,023,601
10,162,700
22,387,493
1,032,401
9,651,847
3,556,597
219,387
$
286,242,169
100%
$
244,870,731
100%
$
228,537,050
% of
Sales
51.0%
13.1%
15.3%
4.4%
9.8%
0.5%
4.2%
1.6%
0.1%
100%
Net sales to foreign countries, primarily Canada, represented approximately 6.3% of net sales in 2014,
2.9% of net sales in 2013 and 3.9% of net sales in 2012.
F - 22
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for the years ended
December 31, 2014 and 2013:
2014
Net sales
Gross margin
Net income
Dividends paid
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Total Year
$
65,783,284
21,853,149
723,788
753,981
$
68,822,520
22,585,662
1,511,461
754,321
$
72,729,678
24,273,792
3,138,507
754,665
$
78,906,687
27,648,122
4,471,542
755,012
$
286,242,169
96,360,725
9,845,298
3,017,979
Net income per common share:
Basic
Diluted
$
$
0.10
0.10
$
$
0.20
0.20
$
$
0.42
0.42
$
$
0.59
0.59
$
$
1.30
1.30
2013
Net sales
Gross margin
Net income
Dividends paid
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Total Year
$
53,715,476
18,670,770
892,096
-
$
59,419,751
20,310,487
1,772,280
750,357
$
70,176,216
22,739,670
2,934,196
752,933
$
61,559,288
21,821,524
1,774,184
751,645
(a)
(a)
$
244,870,731
83,542,451
7,372,756
2,254,935
Net income per common share:
Basic
Diluted
$
$
0.12
0.12
$
$
0.24
0.24
$
$
0.39
0.39
$
$
0.24
0.24
$
$
0.98
0.98
(a) Includes after-tax acquisition related expenses of $0.1 million and $0.7 million for the third and fourth
quarter, respectively, as discussed in Note 15.
15. ACQUISITION OF CREATIVE RECREATION
On December 13, 2013, we completed the acquisition of certain assets of Kommonwealth, Inc.
including the Creative Recreation trademark, a lifestyle footwear brand best known for its popular
crossover between athletic sneakers and dress shoes. The total purchase price was $8,722,843
including cash and assumption of certain liabilities. The acquisition was funded by our existing cash
balances and funds available under our existing revolving credit facility. We did not have any sales
in 2013 related to this acquisition and had net pre-tax operational expenses of $172,418 that was
included as a component of income from operations. In addition, we incurred $1,172,047 of
acquisition related expenses. The acquisition related expenses were included as a component of
income from operations for the year ended December 31, 2013 and consisted of the following:
F - 23
Investment banker fees
Professional fees
Valuation services
Stock compensation expense
Freight and warehousing expenses
Travel Expenses
$
503,072
187,585
37,561
290,800
86,726
66,303
Total acquisition related expenses
$
1,172,047
The acquisition was accounted for under the purchase method of accounting in accordance with ASC
805, Business Combinations, with the excess of the fair market value of the assets acquired and
liabilities assumed in excess of the purchase price recorded as a gain on purchase. Based on the
purchase price allocation, the purchase price resulted in a gain on purchase. The purchase price
allocation is based upon certain estimates made by management with the assistance of an
independent, third-party valuation company.
During 2014, we had net sales of $16.1 million in net sales for the Creative Recreation business.
Purchase Price Allocation
We negotiated the respective purchase prices of the assets based on the expected cash flows to be
derived from the assets after integration into our existing sourcing and distribution networks. The
acquisition purchase price was allocated based on the fair values of the assets acquired and liabilities
assumed, which are based on management estimates and the assistance of third-party appraisals.
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed.
Purchase Price
$
2,229,000
Preliminary Allocation of Purchase Price
Accounts receivable
Inventories
Prepaid expenses and deposits
Property and equipment
Trademarks
Customer relationships
Total assets acquired
Accounts payable
(1,081,764)
(1,162,360)
(82,339)
(698,355)
(5,100,000)
(1,200,000)
(9,324,818)
6,493,843
Net gain on purchase
$
(601,975)
Intangible assets related to the acquisitions represent the fair value of trademarks and customer
relationships. See Note 3 intangible assets.
F - 24
Corporate Information
Board of Directors
Mike Brooks
Chairman of the Board
Glenn E. Corlett
Retired Dean and Philip J. Gardner, Jr. Leadership Professor
of the College of Business at Ohio University
Michael L. Finn
Chairman, Power Distributors, LLC
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 Holdings, Inc.
David N. 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
Rocky Brands International, LLC
Jason S. Brooks
President, U.S. Wholesale Sales
Rocky Brands Wholesale, LLC
Richard Simms
President, Marketing Services
President, Retail Sales, Lehigh Outfitters, LLC
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
P.O. Box 30170
College Station, TX 77842-3170
(800) 962-4284
www-us.computershare.com/investor/Contact
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.
39 East Canal Street Nelsonville, Ohio 45764 www.rockybrands.com