Table of Contents
Financial Highlights
Letter to Shareholders
Family of Brands
New Markets
II
III
IV-VII
VIII
Direct Business
Form
Financial Statements
IX
10-K 1-37
F-1-F-25
Financial Highlights
Income Statement Data
($000, except per share data)
2016
2015
2014
2013
2012
Net sales
Gross margin
Income from Operations
Net income
$ 260,259
$ 269,302
$ 286,242
$ 244,871
$ 228,537
29.5%
-1.2%
33.0%
33.7%
34.1%
35.2%
3.9%
5.5%
4.5%
6.0%
$ (2,139)
$ 6,603
$ 9,845
$ 7,373
$ 8,855
Net income per diluted share
$ (0.29)
$ 0.87
$ 1.30
$ 0.98
$ 1.18
Weighted average number of fully diluted shares outstanding
7,505
7,574
7,548
7,517
7,503
Balance Sheet
Inventories
Total assets
Total debt
$ 69,168
$ 76,991
$ 85,237
$ 78,172
$ 67,196
180,573
193,865
213,228
199,025
174,844
14,584
23,700
36,270
38,388
23,461
Shareholders’ equity
135,093
142,121
138,348
131,213
125,637
II
Letter to Shareholders
I am honored to be addressing you again as Chief Executive Officer. My
family’s association with Rocky Brands goes back 85 years to when my great
uncle founded the Company in 1932. My involvement spans 42 years and
includes several roles starting with footwear design and sales management
in 1975. I have spent my entire career working at Rocky Brands and even
when I took a step back from the day-to-day operations in 2011 to serve
solely as Chairman of the Board, the majority of my time and energy was still
dedicated to driving improved performance at the Company for the benefit
of our shareholders. Now that I am back in the CEO role my full attention
is focused on achieving this critical goal, and I’m confident that the current
management team is up to the task.
The world has changed a lot since Rocky Brands sold its first pair of shoes 85
years ago. During this time the Company has evolved significantly including
establishing a global supply chain, diversifying our brand portfolio through
the acquisition of EJ Footwear and expanding our channels of distribution.
More recently the pace of change has accelerated especially in retail as
consumer shopping behavior has been reshaped by technology while more
volatile weather and macroeconomic conditions have created temporary
headwinds for several of our categories. What hasn’t changed is the need
to have authentic brands and innovative product to be successful over the
long-term and for this reason I am optimistic about the future outlook for
our Company. With Rocky, Georgia Boot and Durango we own some of the
oldest, most authentic brands in the Hunting, Work, and Western categories,
each of which is known for the quality and value proposition of its footwear
offering. Furthermore, in the case of Rocky, we’ve leveraged its strong
history into a leadership position in military footwear.
Despite our strong foundation we are not immune to many of the near-term
pressures facing our industry, including reduced store traffic at many of
our key wholesale accounts, weakening local economies tied to oil and gas
and other commodities, and general soft demand for non-athletic footwear.
Therefore we’ve needed to make adjustments to our operating strategies
and organizational structure in order to find new avenues for growth and
enhance profitability in the current environment.
To better capitalize on the growing demand for military footwear we made
strategic investments in our Puerto Rican manufacturing facility to increase
our production capacity. This included capital spending on new machinery
and tooling as well as additional operating expenses to expand our labor
force. Without these upgrades we would not have been in the position to
fulfill a record $38 million of contract military footwear orders in 2016.
While we did experience some temporary growing pains as we ramped up
internal production, which pressured gross margins, these issues are now
fully behind us. I am confident that we are well positioned to post another
record year of Military sales in 2017 and deliver segment gross margins
that are back to or above historical levels. At the same time, we expect our
commercial military business to continue growing nicely on the strength of
several boots that are popular with enlisted soldiers.
While the selling environment across retail remains challenging many of
our accounts started 2017 with cleaner inventories compared with a year
ago. We will continue to be cautious about the near-term prospects for our
wholesale business until we see a sustained increase in consumer demand.
That said, I am confident that when market conditions eventually get better
and retailers rebuild their inventories they will look to the Georgia Boot,
Durango and Rocky brands and our strong product offerings for their work,
western, and hunting footwear needs.
With respect to our efforts toward building
a lifestyle category, we still believe we
have the brand strength and expertise to
gain share in the casual footwear market.
Since acquiring Creative Recreation in late
2013, our teams have done a great deal of
work improving the operations and supply
chain of the business as well as developing
more compelling product collections. Unfortunately, due to challenging
selling conditions in the brand’s narrow distribution channel, it has been
difficult to grow revenue to the level needed for Creative Recreation to
achieve operating profitability. In response to this headwind, we recently
made the decision to adjust our go-to-market strategies by introducing less
fashion forward product at more accessible price points in order to attract
a larger consumer audience and open up new wholesale accounts. We
also executed a licensing agreement for Creative Recreation in Europe to
accelerate growth which, at the same time, reduces our overhead costs and
improves the margin profile of this business.
The dramatic and ongoing shift to online shopping is creating compelling
opportunities for our direct-to-consumer segment that we are committed to
capitalizing on. We continue to make inroads leveraging the investments we
have made in our digital infrastructure over the past few years to drive traffic
to our branded e-commerce websites and increase conversion. At the same
time, we are expanding our current capabilities through new technologies
and additional expertise that give us new ways to engage with our loyal
consumers and fuel increased purchasing activity. This includes increasing
the assortments available on our sites to better reflect the depth of our
merchandise offerings and provide visitors with a great selection of our
footwear. We are also directing more of our marketing investments to digital
and social media campaigns to ensure we are staying in front of consumers
and fueling increased awareness and demand for our brands and products.
Below the revenue line, we implemented a number of organizational changes
aimed at gaining greater efficiencies and designing an expense structure
more appropriate for the current business. In total, our actions generated
approximately $5 million in annualized savings with an approximately $3.5
million incremental benefit to be realized in 2017. When combined with the
return to normalized gross margins in our military segment, we are well
positioned to deliver improved bottom line trends beginning in 2017.
In closing, I want to reiterate how excited I am to have resumed the role
as Chief Executive Officer of Rocky Brands. While I am disappointed in our
recent financial performance, I am confident that the operational initiatives
we executed during 2016 have created a stronger foundation and placed the
company on the right course toward delivering sustained profitable growth
and increased shareholder value. I want to thank the entire Rocky Brands
organization for their efforts the past year and for what they will contribute
to the Company’s success in 2017 and beyond.
Sincerely,
Mike Brooks
Chairman & Chief Executive Officer
III
WHOLESALE
I 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
ONE CHANCE.
ONE SHOT.
ONE CAMO.
“By far this is the best pair of
boots I have ever bought. I walk
on concrete 8 to 12 hours a day
and these boots are outstanding.
Thanks for a great pair of boots. I
would buy these again and again.”
- Patrick
Callands, VA
IV
ROCKYBOOT.COM
WHOLESALE
I FAMILY OF BRANDS
Georgia Boot empowers those
who work hard – the workers that
pride themselves in building real
value with their hands. We help
them achieve personal success by
creating performance-enhancing
footwear designed for the physical
demands of their specific trades.
- America’s Hardest Working Boot
GEORGIABOOT.COM
V
WHOLESALE
I FAMILY OF BRANDS
Slipping on your Durangos allows
you to boldly embrace your
inner cowboy. You’re ready to
be mischievous, have fun, kick
up your heels and celebrate
freedom. Durango is not just a
boot, it’s an attitude… we call it
OUTLAW FUN.
VI
DURANGOBOOTS.COM
Defy gravity in our newest collection!
showroom #3535
WHOLESALE
I FAMILY OF BRANDS
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
I FAMILY OF BRANDS
BRAND PROMISE: 4EurSole will
demonstrate great empathy
for active women who are on
their feet all day with innovative
products that address their
footwear needs and a
marketing strategy that speaks
directly to them with great
respect for their lifestyle choices
while aligning with key values.
“They are so comfortable
they barely need any
breaking in… I could feel
the arch support and
cushion immediately. It
helps when you are on
your feet a lot and walking
around during the day.”
Laura Bambrick is a speech
therapist and blogger from
Wisconsin who created her blog,
I Do DeClaire, to explore fashion.
idodeclaire.com
VIII
4EURSOLE.COM
B2C
B2B
RETAIL I DIRECT BUSINESS
Lehigh Outfitters is one of
the largest providers and
manufacturers of safety footwear
in the industry. Selling both direct
to the consumer through three
branded retail websites offering
over 60 brands and to businesses
through our branded online
service of Lehigh CustomFit,
we are the leader in managed
safety footwear programs. One
of the unrivaled benefits of our
customized program is our on-
site kiosk. Our newly launched
SlipGrips slip-resistant tread design
DragonGrip tests superior to
competitive tread patterns and is
guaranteed to bring the market
to its feet.
LEHIGHOUTFITTERS.COM I LEHIGHSAFETYSHOES.COM I SLIPGRIPS.COM I CUSTOMFIT.ME
IX
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, 2016
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:
Title of each class
Common Shares, without par value
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
$77,716,400 on June 30, 2016.
There were 7,435,467 shares of the Registrant's Common Stock outstanding on February 21, 2017.
Portions of the Registrant's Proxy Statement for the 2017 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
30
30
30
32
32
32
32
32
32
33
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 Operations.
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.
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.
PART IV
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 $29.99 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 e-commerce
websites and our Rocky outlet store. 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.
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.
4
• 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.
• U.S. Military. Our U.S. Military product line consists of footwear products designed specifically for U.S.
Military personnel. These footwear products are designed and manufactured to meet the rigorous
specification requirements, which include lightweight, durable, waterproof footwear products manufactured
in the U.S.A. The U.S. Military products are marketed under the Rocky Brand name.
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: $39.99 to $279.99 for our footwear products, $34.99 to $239.99 for tops and bottoms in our apparel lines and
$6.99 to $59.99 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. We use rugged outsoles made by industry leaders like
Vibram as well as our own 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.
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.
5
We believe the Georgia Boot brand can be extended into moderately priced duty footwear as well as outdoor and
work apparel.
Durango
Durango is our moderately priced, high quality line of western footwear and leather goods. 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 $29.99 to
$199.99, 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 brand and 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. 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 $44.99 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 $34.99 to $249.99. The license agreement for the
Michelin brand expires on December 31, 2017, with the option to renew.
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 13 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, 2016, 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
6
Shops, Cabela’s, Dick’s Sporting Goods, Tractor Supply Company and Gander Mountain, and around our target
markets: outdoor, work, duty, commercial military, lifestyle and western. For our Georgia Boot and Durango
brands, our sales employees are organized around each brand and target a broad range of distribution channels. All
of our sales people actively call on their retail customer base to educate them on the quality, comfort, technical
features and breadth of our product lines and to ensure that our products are displayed effectively at retail locations.
Our wholesale distribution channels vary by market:
• 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
e-commerce 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, 4eursole.com and cr8rec.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 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, Pepsi, Schneider, Hagemeyer, 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 continued reduction of the mobile and retail
stores in the past several years. In 2017 we will continue to service the New York City Transit Authority with
mobile stores.
7
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 are currently fulfilling several multiyear contracts for the U.S. military. Total sales to the U.S. military
represented 14.4%, 6.5% and 2.8% of total sales for the years ending December 31, 2016, 2015 and 2014,
respectively.
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 6.7% of our net sales in 2016. 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 8.8% of our net sales in 2016. 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
8
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
Sumner, 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 2.8% of net
sales in 2016, 4.8% of net sales in 2015, and 6.3% of net sales in 2014.
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 $3.7 million at December 31, 2016, $4.1
million at December 31, 2015, and $4.7 million at December 31, 2014.
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 purchase 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 as many of our footwear products
are used by consumers in adverse weather conditions. In order to meet these demands, we must manufacture and
source footwear year round to be in a position to ship advance and at once 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 the 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. 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.
Backlog
At December 31, 2016, our backlog was $17.0 million compared to $43.0 million at December 31, 2015. The
decrease at December 31, 2016 is primarily related to the US Military contract for 2016. The backlog related to this
contract is $0.3 million at December 31, 2016, compared to $27.7 million at December 31, 2015. 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.
9
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 has a one year term that automatically
renews each year, unless either party elects to terminate by giving 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 expires on December 31, 2017, with
the option to renew.
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, 2016, we had approximately 2,407 employees of which approximately 2,383 are full time
employees. Approximately 2,004 of our employees work in our manufacturing facilities in the Dominican Republic
and Puerto Rico. None of our employees are represented by a union. We believe our relations with our employees
are good.
Available Information
We make available free of charge on our corporate website, www.rockybrands.com, our annual report on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange
Commission.
10
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.
Changes in any of these factors could materially increase our costs of products and we may not be able to recover all
of our cost increases through price increases to our customers. If any of these factors were to render the conduct of
business in these countries undesirable or impracticable, we would have to manufacture or source our products
elsewhere. There can be no assurance that additional sources or products would be available to us or, if available,
that these sources could be relied on to provide product at terms favorable to us. The occurrence of any of these
developments could have a material adverse effect on our business, financial condition, results of operations and
cash flows.
11
Changes to United States tax, tariff and import/export regulations may have a negative effect on global economic
conditions, financial markets and our business.
The results of the November 2016 U.S. elections have introduced greater uncertainty with respect to tax and trade
policies, tariffs and government regulations affecting trade between the U.S. and other countries. We source
products from manufacturers located outside of the U.S., primarily in China. Major developments in tax policy or
trade relations, such as the disallowance of tax deductions for imported products or the imposition of unilateral
tariffs on imported products, could have a material adverse effect on our business, results of operations and liquidity.
We conduct a portion of our business pursuant to U.S. military contracts, which are subject to unique risks.
We conduct a portion of our business pursuant to U.S. military contracts which are subject to unique risks. In 2016,
14.4% of our revenues were earned pursuant to U.S. military contracts. Business conducted pursuant to such
contracts is subject to extensive procurement regulations and other unique risks. The U.S. military may modify,
curtail or choose not to renew one or more of our contracts. In addition, funding pursuant to our U.S. military
contracts may be reduced or withheld as part of the U.S. Congressional appropriations process due to fiscal
constraints and/or changes in U.S. military strategy. Our contracts with the U.S. military are fixed-price contracts.
While fixed price contracts enable us to benefit from performance improvements, cost reductions and efficiencies,
they also subject us to the risk of reduced margins or incurring losses if we are unable to achieve estimated costs and
revenues.
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 dependent on execution at all levels of our
organization which requires an experienced and talented executive team. The loss of service of any of the executive
officers or key employees could have an adverse effect on our business and financial condition. We have entered
into employment agreements with several executive officers and key employees, and also offer compensation
packages designed to attract and retain talent.
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.
12
Our outdoor products are seasonal.
We have historically experienced significant seasonal fluctuations in our business because we derive a significant
portion of our revenues from sales of our outdoor products. Many of our outdoor products are used by consumers in
cold or wet weather. As a result, a majority of orders for these products are placed by our retailers in January
through April for delivery in July through October. In order to meet demand, we must manufacture and source
outdoor footwear year round to be in a position to ship advance orders for these products during the last two quarters
of each year. Accordingly, average inventory levels have been highest during the second and third quarters of each
year and sales have been highest in the last two quarters of each year. There is no assurance that we will have either
sufficient inventory to satisfy demand in any particular quarter or have sufficient demand to sell substantially all of
our inventory without significant markdowns.
Our outdoor products are sensitive to weather conditions.
Historically, our outdoor products have been used primarily in cold or wet weather. Mild or dry weather has in the
past and may in the future have a material adverse effect on sales of our products, particularly if mild or dry weather
conditions occur in broad geographical areas during late fall or early winter. Also, due to variations in weather
conditions from year to year, results for any single quarter or year may not be indicative of results for any future
period.
Our business could suffer if our third-party manufacturers violate labor laws or fail to conform to generally
accepted ethical standards.
We require our third-party manufacturers to meet our standards for working conditions and other matters before we
are willing to place business with them. As a result, we may not always obtain the lowest cost production.
Moreover, we do not control our third-party manufacturers or their respective labor practices. If one of our third-
party manufacturers violates generally accepted labor standards by, for example, using forced or indentured labor or
child labor, failing to pay compensation in accordance with local law, failing to operate its factories in compliance
with local safety regulations or diverging from other labor practices generally accepted as ethical, we likely would
cease dealing with that manufacturer, and we could suffer an interruption in our product supply. In addition, such a
manufacturer’s actions could result in negative publicity and may damage our reputation and the value of our brand
and discourage retail customers and consumers from buying our products.
The growth of our business will be dependent upon the availability of adequate capital.
The growth of our business will depend on the availability of adequate capital, which in turn will depend in large
part on cash flow generated by our business and the availability of equity and debt financing. We cannot assure 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 thereunder 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, 2016, there was no triggering event and the covenant was
not in effect.
13
We face intense competition, including competition from companies with significantly greater resources than
ours, and if we are unable to compete effectively with these companies, our market share may decline and our
business could be harmed.
The footwear and apparel industries are intensely competitive, and we expect competition to increase in the future.
A number of our competitors have significantly greater financial, technological, engineering, manufacturing,
marketing and distribution resources than we do, as well as greater brand awareness in the footwear market. Our
ability to succeed depends on our ability to remain competitive with respect to the quality, design, price and timely
delivery of products. Competition could materially adversely affect our business, financial condition, results of
operations and cash flows.
We currently manufacture a portion of our products and we may not be able to do so in the future at costs that
are competitive with those of competitors who source their goods.
We currently plan to retain our internal manufacturing capability in order to continue benefiting from expertise we
have gained with respect to footwear manufacturing methods conducted at our manufacturing facilities. We
continue to evaluate our manufacturing facilities and third-party manufacturing alternatives in order to determine the
appropriate size and scope of our manufacturing facilities. There can be no assurance that the costs of products that
continue to be manufactured by us can remain competitive with products sourced from third parties.
We rely on distribution centers in Logan, Ohio, Sumner, 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, Sumner, 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.
14
Our success depends on our ability to forecast sales.
Our investments in infrastructure and product inventory are based on sales forecasts and are necessarily made in
advance of actual sales. The markets in which we do business are highly competitive, and our business is affected
by a variety of factors, including brand awareness, changing consumer preferences, product innovations,
susceptibility to fashion trends, retail market conditions, weather conditions and economic and other factors. One of
our principal challenges is to improve our ability to predict these factors, in order to enable us to better match
production with demand. In addition, our growth over the years has created the need to increase the investment in
infrastructure and product inventory and to enhance our systems. To the extent sales forecasts are not achieved,
costs associated with the infrastructure and carrying costs of product inventory would represent a higher percentage
of revenue, which would adversely affect our business, financial condition, results of operations and cash flows.
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.
15
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.
If we do not effectively respond to the trend of consumer shopping moving to online retailers it may negatively
impact our business.
The retail industry is rapidly changing and we must ensure we are evolving both our own online e-commerce
websites as well as providing digital assistance to our wholesale customers to support their e-commerce websites.
Failure to timely identify and effectively respond to the online trends of the retail industry could negatively impact
our product reach and market share. We are making technology investments in our websites and mobile
applications. If we are unable to improve or develop relevant technology in a timely manner, our ability to compete
and our results of operations could be adversely affected.
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:
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
Square FootageLease Expiration28,684 201834,373 201820,135 201893,097 201936,186 201923,476 202016,797 2021
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 Global Select 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 Global Select Market:
Quarter Ended
March 31, 2015………………………………………………………….
June 30, 2015……………………………………………………………
September 30, 2015……………………………………………………..
December 31, 2015……………………………………………………...
March 31, 2016………………………………………………………….
June 30, 2016……………………………………………………………
September 30, 2016……………………………………………………..
December 31, 2016……………………………………………………...
High
$23.11
$23.00
$19.91
$16.00
$13.55
$13.95
$12.68
$11.65
Low
$12.94
$17.34
$13.34
$10.08
$ 9.67
$10.70
$10.17
$ 9.95
Dividends
Per Share
$0.10
$0.11
$0.11
$0.11
$0.11
$0.11
$0.11
$0.11
On February 21, 2017, the last reported sales price of our common stock on the NASDAQ Global Select Market was
$11.35 per share. As of February 21, 2017, there were 83 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 2016, 2015 and 2014, we paid dividends on our common stock totaling
$3,297,066, $3,252,254, and $3,017,979, respectively.
17
PERFORMANCE GRAPH
The following performance graph compares our performance of the Company with the NASDAQ Composite 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, 2011, 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.
The following table sets forth information concerning the Company’s purchases of common stock for the periods
indicated:
In March 2016, the Company announced a $7,500,000 share repurchase program. There was $5,549,886 remaining
under the program as of the end of the fourth quarter. The repurchase program terminated on March 1, 2017. On
March 2, 2017, the Board of Directors authorized a new $7,500,000 share repurchase program, which terminates on
March 1, 2018.
18
PeriodTotal number of shares (or units) purchasedAverage price paid per share (or unit)Total number of shares (or units) purchased as part of publicly announced plans or programsMaximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programsOctober 1, 2016 - October 31, 201629,848 10.16$ 29,848 5,549,886$ November 1, 2016- November 30, 2016- - - 5,549,886$ December 1, 2016 - December 31, 2016- - - 5,549,886$ Total29,848 10.16$ 29,848 5,549,886$ ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA.
ROCKY BRANDS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except for per share data)
The 2016 financial data reflects reorganizational charges for $0.8 million and included an impairment charge of $2.0
million net of tax benefits. The 2013 financial data reflects charges of $0.8 million, net of tax benefits, for
acquisition related expenses and a gain on bargain purchase of $0.4 million, net of tax. 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 Results 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, 2016, and our capital resources and liquidity as of December 31, 2016
and 2015. 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
12/31/1612/31/1512/31/1412/31/1312/31/12Income Statement DataNet sales260,259$ 269,302$ 286,242$ 244,871$ 228,537$ Gross margin (% of sales)29.5%33.0%33.7%34.1%35.2%Net income (loss)(2,139)$ 6,603$ 9,845$ 7,373$ 8,855$ Dividends paid on common stock3,297 3,252 3,018 2,255 - Per ShareNet income Basic(0.29)$ 0.87$ 1.30$ 0.98$ 1.18$ Diluted(0.29)$ 0.87$ 1.30$ 0.98$ 1.18$ Weighted average number of common shares outstanding Basic7,505 7,563 7,545 7,517 7,503 Diluted7,505 7,574 7,548 7,517 7,503 Balance Sheet DataInventories69,168$ 76,991$ 85,237$ 78,172$ 67,196$ Total assets180,573$ 193,865$ 213,228$ 199,025$ 174,844$ Working capital102,693$ 114,474$ 124,773$ 118,242$ 105,435$ Long-term debt, less current maturities14,584$ 23,700$ 36,270$ 38,388$ 23,461$ Stockholders' equity135,093$ 142,121$ 138,348$ 131,213$ 125,637$ Five Year Financial Summary
Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on
behalf of the Company.
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 primarily through our
websites. We also sell footwear under the Rocky label to the U.S. military.
We are currently fulfilling several multiyear contracts for the U.S. military. Net sales for the military segment of the
business increased to $37.4 million, an increase of $20.0 million over 2015 levels.
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.
FINANCIAL SUMMARY
Net sales of the wholesale segment decreased $29.1 million in 2016 from prior year primarily as a result of
decreased sales in all of our footwear and apparel categories. The decrease in 2016 is primarily due to warmer
temperatures in the fourth quarter and weak retail store traffic .
Net sales of the retail segment increased $0.1 million in 2016 from the prior year primarily as a result of higher
sales from our business and consumer web platforms.
Net sales of the military segment increased $20.0 million in 2016 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 are currently
fulfilling several multiyear contracts for the U.S. military.
Gross margin of the wholesale segment decreased $12.5 million in 2016 from the prior year as a result of the
lower sales and lower margin. Gross margin of the wholesale segment as a percent of sales for 2016 was 180
basis points less than the prior year.
20
Retail gross margin for 2016 was $21.1 million or 45.9%, compared to $20.6 million or 45.0% in 2015. The 90
basis point increase was largely due to an increase in on-line direct to consumer sales, which carry a higher
margin.
Gross margin of the military segment decreased $0.1 million in 2016 over the prior year due primarily to lower
margin as a percentage of sales due to the significant investments made in our Puerto Rico facility to handle
increased production.
Selling, general and administrative expenses decreased $2.8 million in 2016 from prior year primarily as result
of lower advertising and compensation expenses and lower freight expenses associated with the decrease in
sales.
Net interest expense decreased $0.1 million in 2016 from the prior year due to lower levels of debt.
Net income decreased $8.7 million in 2016 from prior year results primarily due to lower sales in our wholesale
business along with an impairment of $3.0 million of our Creative Recreation trade name and a reorganizational
charge of $1.2 million in 2016.
Total debt at December 31, 2016 was $14.6 million or $9.1 million lower than the prior year. Total debt minus
cash and cash equivalents was $10.1 million or 6.8% of total capitalization at December 31, 2016 compared to
$20.3 million or 12.2% of total capitalization at December 31, 2015.
Our cash from operating activities decreased $1.9 million in 2016 over the prior year, primarily the result of a
decrease in net income of $8.7 million, being offset by lower accounts receivable and lower inventory levels at
the end of 2016.
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.
Percentage of Net Sales
The following table sets forth consolidated statements of operations data as percentages of total net sales:
Results of Operations
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net sales. Net sales decreased 3.36% to $260.3 million for 2016 compared to $269.3 million the prior year.
Wholesale sales decreased $29.1 million to $176.9 million for 2016 compared to $206.1 million for 2015. The
decrease in wholesale sales was primarily the result of decreases in most of our footwear and apparel categories,
21
201620152014Net sales100.0%100.0%100.0%Cost of goods sold70.5%67.0%66.3%Gross margin29.5%33.0%33.7%SG&A expense29.1%29.1%28.2%Reorganizational charge0.4%0.0%0.0%Impairment charge1.2%0.0%0.0%Income from operations-1.2%3.9%5.5%Years Ended December 31,
except for commercial military. The decreases in 2016 are primarily the result of warmer temperatures in the critical
fall shipping season and weak retail store traffic that pressured demand in all of our categories. Retail sales
increased to $45.9 million for 2016 compared to $45.8 million for 2015. The $0.1 million increase in retail sales
resulted from increased sales in our business-to-consumer ecommerce web platforms. Military segment sales were
$37.4 million for 2016 compared to $17.4 million in 2015. We bid on military contracts when they become
available. Our U.S Military sales are dependent on us winning bids for contracts and the purchase orders received
on these contracts. We are currently fulfilling several multiyear contracts for the U.S. military. Average list prices in
2016 for our footwear, apparel and accessories were comparable to 2015.
Gross margin. Gross margin decreased to $76.7 million or 29.5% of net sales for 2016 compared to $88.9 million
or 33.0% of net sales for the prior year. Wholesale gross margin for 2016 was $53.5 million, or 30.2% of net sales,
compared to $66.0 million, or 32.0% of net sales in 2015. The 180 basis point decline was largely due to lower
overall average selling price due to the product mix of sales. Retail gross margin for 2016 was $21.1 million or
45.9%, compared to $20.6 million or 45.0% in 2015. The 90 basis point increase was largely due to an increase in
on-line direct to consumer sales, which carry a higher margin. Military gross margin in 2016 was $2.2 million, or
5.8% of net sales, compared to $2.3 million, or 13.1% of net sales in 2015. The decrease in military margin is
primarily due to additional investments needed to support the increase in military production in our Puerto Rico
facility.
SG&A expenses. SG&A expenses were $75.6 million, or 29.1% of net sales in 2016 compared to $78.4 million, or
29.1% of net sales for 2015. The net decrease primarily reflected lower advertising expenses of $1.8 million and
lower freight costs of $0.6 million, partially offset by an increase in bad debt expense of $1.4 million.
Reorganizational Charge. During the quarter ended September 30, 2016, we recorded $1.2 million in a
reorganizational charge consisting of severance. The purpose of this reorganization was to maximize profitability,
drive long-term revenue growth and maximize shareholder value.
Impairment Charge. During the quarter ended December 31, 2016, we recorded a $3.0 million non-cash impairment
charge as a result of our 2016 indefinite-lived intangible test for the Creative Recreation trademark.
Interest expense. Interest expense was $0.6 million in 2016, compared to $0.7 million for the prior year. The
decrease in interest expense in 2016 from the prior year was due to lower overall levels of debt.
Income taxes. Income tax benefit was $1.5 million in 2016, compared to an income tax expense of $3.1 million for
the same period a year ago. The decrease in income tax expense for 2016 was due to a $13.3 million decrease in
pretax income. The effective tax rate for 2016 was 40.9% compared to 31.8% for 2015. The effective tax rate for
2016 increased over 2015 as a result of a decrease in our permanent capital investment in the Dominican Republic
which increased the amount of dividends we provide for U.S income taxes.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net sales. Net sales decreased 5.9% to $269.3 million for 2015 compared to $286.2 million the prior year.
Wholesale sales decreased $27.8 million to $206.1 million for 2015 compared to $233.9 million for 2014. The
decrease in wholesale sales was primarily the result of decreases in most all our footwear and apparel categories.
The decreases in 2015 are primarily the result of warmer temperatures in the critical fall shipping season and weak
retail store traffic in the fourth quarter that pressured demand in all of our categories. Retail sales increased to $45.8
million for 2015 compared to $44.3 million for 2014. The $1.5 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 $17.4 million for 2015 compared to $8.0 million in 2014. 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. During 2015 and 2014, we shipped boots under this
agreement. Average list prices in 2015 for our footwear, apparel and accessories were comparable to 2014.
Gross margin. Gross margin decreased to $88.9 million or 33.0% of net sales for 2015 compared to $96.4 million
or 33.7% of net sales for the prior year. Wholesale gross margin for 2015 was $66.0 million, or 32.0% of net sales,
compared to $75.8 million, or 32.4% of net sales in 2014. The 40 basis point decline was largely due to lower
average selling prices. Retail gross margin for 2015 was $20.6 million, or 45.0% of net sales, compared to $19.4
million, or 43.9% of net sales, in 2014. The 110 basis point increase in 2015 from the prior year was largely due to
a shift in sales toward our business-to-consumer ecommerce web platforms, which carry higher margins. Military
22
gross margin in 2015 was $2.3 million, or 13.1% of net sales, compared to $1.1 million, or 13.4% of net sales in
2014.
SG&A expenses. SG&A expenses were $78.4 million, or 29.1% of net sales in 2015 compared to $80.6 million, or
28.2% of net sales for 2014. The net decrease primarily reflected lower compensation expenses of $3.1 million and
lower freight costs of $0.8 million, partially offset by higher spending on advertising of $1.2 million.
Interest expense. Interest expense was $0.7 million in 2015, compared to $0.9 million for the prior year. The
decrease in interest expense in 2015 from the prior year was due to lower overall levels of debt.
Income taxes. Income tax expense was $3.1 million in 2015, compared to $4.9 million for the same period a year
ago. The decrease in income tax expense for 2015 was due to a $5.1 million decrease in pretax income and a
decrease in the effective tax rate. The effective tax rate for 2015 was 31.8% compared to 33.2% for 2014. The
effective tax rate for 2015 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
fluctuate significantly throughout the year. Our working capital decreased to $102.7 million at December 31, 2016,
compared to $114.5 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 and distribution operations and for information
technology. Capital expenditures were $6.0 million for 2016 and $8.7 million in 2015. Capital expenditures for
2017 are anticipated to be approximately $3.4 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 to November 2019. The credit facility’s base interest rate is
the current prime rate less 0.25%, however the credit facility provides us the option to borrow on up to eight fixed
loans at LIBOR plus 1.25% in accordance with the 2014 amended and restated credit agreement. The LIBOR rate is
determined based on the fixed loan maturities, which vary from 30, 60, 90, or 180 days. As of December 31, 2016
and December 31, 2015, we had approximately $12.0 million and $17.0 million, respectively, in fixed LIBOR
borrowings under the credit facility.
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, 2016, we had
$14.6 million in total borrowings under this facility and total capacity of $57.3 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, 2016, 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 2016, 2015 and 2014, we paid dividends on our common stock totaling $3,297,066
$3,252,254, and $3,017,979 respectively.
Our amended and restated revolving credit facility matures in November 2019. We have no other long-term debt
maturities.
23
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 2017, a hypothetical 100 basis point increase in short term interest rates
would result, over the subsequent twelve-month period, in a reduction of approximately $0.1 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
Operating Activities. Net cash provided by operating activities totaled $21.3 million for 2016, compared to $23.2
million for 2015, and $13.0 million for 2014. The principal sources of net cash in 2016 included lower balances of
accounts receivable and inventory, in addition to an increase in accounts payable. The principal sources of net cash
in 2015 included lower balances of accounts receivable and inventory, which were partially offset by lower balances
of accounts payable and other accrued liabilities. 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.
Investing Activities. Net cash used in investing activities was $5.8 million in 2016, compared to $8.6 million in
2015, and $7.4 million in 2014. The principal use of cash in 2016, 2015 and 2014 was for the purchase of molds
and equipment associated with our manufacturing and distribution operations and for information technology
software and system upgrades.
Financing Activities. Cash used in financing activities during 2016 was $14.4 million, compared to $15.8 million in
2015, and $5.2 million for 2014. Proceeds and repayments of the revolving credit facility reflect daily cash
disbursement and deposit activity. Our financing activities during 2016 included net repayments under the
revolving line of credit facility of $9.1 million. Our financing activities during 2015 included net repayments under
the revolving line of credit facility of $12.6 million. Our financing activities during 2014 included net repayments
under the revolving line of credit facility of $2.1 million.
Borrowings and External Sources of Funds
Our borrowings and external sources of funds were as follows at December 31, 2016 and 2015:
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 $1.2 million, $0.7
million, $0.2 million, and $0.1 million for years 2017 through 2020, respectively, or approximately $2.2 million in
total.
24
Cash Flow Summary201620152014($ in millions)Cash provided by (used in): Operating activities21.3$ 23.2$ 13.0$ Investing activities(5.8) (8.6) (7.4) Financing activities(14.4) (15.8) (5.2) Net change in cash and cash equivalents1.1$ (1.2)$ 0.4$ ($ in millions)20162015Revolving credit facility14.6$ 23.7$ Less current maturities- - Net long-term debt14.6$ 23.7$ December 31
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations at December 31, 2016 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, 2016:
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, 2016, no such losses existed.
Our ongoing business activities continue to be subject to compliance with various laws, rules and regulations as may
be issued and enforced by various federal, state and local agencies. With respect to environmental matters, costs are
incurred pertaining to regulatory compliance. Such costs have not been, and are not anticipated to become, material.
We are contingently liable with respect to lawsuits, taxes and various other matters that routinely arise in the normal
course of business. We do not have off-balance sheet arrangements, financings, or other relationships with
unconsolidated entities or other persons, also known as “Variable Interest Entities.” Additionally, we do not have
any related party transactions that materially affect the results of operations, cash flow or financial condition.
Inflation
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
2016, 2015, and 2014 due to these factors. It is anticipated that any inflationary pressures during 2017 could be
offset through possible price increases.
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
25
TotalLess Than 1 Year1-3 Years3-5 YearsOver 5 YearsLong-term debt14.6$ -$ 14.6$ -$ -$ Minimum operating lease commitments2.2 1.2 0.9 0.1 - Expected cash requirements for interest (1)1.5 0.5 1.0 - - Total contractual obligations18.3$ 1.7$ 16.5$ 0.1$ -$ Payments due by Year$ millions(1) Assumes a 3.5% interest rate, which is the highest rate possible as of December 31, 2016 on the $75 million revolving credit facility.
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 status 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 3.8% of sales for 2016
and 3.5% of sales for 2015.
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
26
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, 2016, approximately $19.2 million of undistributed earnings remains that would become
taxable upon repatriation to the United States.
RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS
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 non-vesting 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. The adoption of this standard did not have a material effect 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. The adoption of this standard did not have an effect on our consolidated financial
statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30). The
objective of this update is to simplify presentation of debt issuance costs, the amendments in this update require that
debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from
the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement
guidance for debt issuance costs are not affected by the amendments in this update. The amendments in this update
are effective for fiscal years beginning after December 15, 2015. An entity should apply the new guidance on a
retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the
period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the
applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for
the change in accounting principle, the transition method, a description of the prior-period information that has been
retrospectively adjusted, and the effect of the change on the financial statement line items (that is, debt issuance cost
asset and the debt liability). The adoption of this standard did not have an effect on our consolidated financial
statements as ASU 2015-15 permitted debt issuance costs related to a line of credit arrangement to remain as an
asset and be amortized over the remaining term of the line of credit agreement.
Accounting standards not yet adopted
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. In August 2015, the FASB issued ASU No. 2015-14.
The amendments in this update defer the effective date of Update 2014-09. Public business entities, certain not-for-
profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting
periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier
27
application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim
reporting periods within that reporting period. The guidance permits the use of either a retrospective or cumulative
effect transition method. We have not yet selected a transition method but plan to select a transition method no later
than the fourth quarter of our fiscal 2017. We are currently assessing our contracts with customers and related
financial disclosures to evaluate the impact of the amended guidance on our existing revenue recognition policies
and procedures.
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 July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330). The amendments in this update require an
entity to measure inventory within the scope of this update at the lower of cost and net realizable value. Net
realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of
completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using
LIFO or the retail inventory method. The amendments in this update more closely align the measurement of
inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). For
public business entities, the amendments in this update are effective for fiscal years beginning after December 15,
2016, including interim periods within those fiscal years. The amendments in this update should be applied
prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We
have not yet determined the impact this ASU will have on our consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes - Balance Sheet Classification of Deferred
Taxes (Topic 740). The amendments in this update will simplify the presentation of deferred income taxes. The
amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified
statement of financial position. The amendments in this update apply to all entities that present a classified
statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying
component of an entity be offset and presented as a single amount is not affected by the amendments in this update.
For public business entities, the amendments in this update are effective for financial statements issued for annual
periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is
permitted for all entities as of the beginning of an interim or annual reporting period. We have not yet determined
the impact this ASU will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update will
require lessees to recognize (with the exception of short-term leases) a lease liability, which is a lessee‘s obligation
to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an
asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the
new guidance, lessor accounting is largely unchanged. The new lease guidance simplified the accounting for sale
and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. For public
business entities, the amendments in this update are effective for years beginning after December 15, 2018,
including interim periods within those fiscal years. Earlier application is permitted for all entities upon issuance.
We have not yet determined the impact this ASU will have on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718). The
amendments in this update were issued as part of the FASB’s initiative to reduce complexity in accounting
standards. The areas for simplification in this update involve several aspects of the accounting for employee share-
based payment transactions, including the income tax consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. In addition, the amendments in this update eliminate the
guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised
2004), Share-Based Payment. For public business entities, the amendments in this update are effective for years
28
beginning after December 15, 2016, including interim periods within those fiscal years. Earlier application is
permitted for all entities upon issuance. We have not yet determined the impact this ASU will have on our
consolidated financial statements.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606). This
update clarifies guidance related to identifying performance obligations and licensing implementation guidance
contained in the new revenue recognition standard. The Update includes targeted improvements based on input the
Board received from the Transition Resource Group for Revenue Recognition and other stakeholders. The update
seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost
and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The
amendments in this update are effective at the same time as ASU 2014-09. Public business entities, certain not-for-
profit entities, and certain employee benefit plans should apply the guidance in update 2014-09 to annual reporting
periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We
have not yet determined the impact this ASU will have on our consolidated financial statements.
In May 2016, the FASB issued ASU 2016-12: Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients, which provides narrow scope improvements and practical expedients
related to ASU 2014-09: Revenue from Contracts with Customers (Topic 606). The purpose of ASU 2016-12 is to
clarify certain narrow aspects of Topic 606 such as assessing the collectability criterion, presentation of sales taxes
and other similar taxes collected from customers, noncash consideration, contract modifications at transition,
completed contracts at transition, and technical correction. The standard has the same effective date as ASU 2014-
09. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the
guidance in update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim
reporting periods within that reporting period. We have not yet determined the impact this ASU will have on our
consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments, addressing eight specific cash flow issues in an effort to reduce diversity in
practice. The amended guidance is effective for fiscal years beginning after December 31, 2017, and for interim
periods within those years. Early adoption is permitted. 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, 2016 of $14.6 million.
29
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, 2016.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated balance sheets as of December 31, 2016 and 2015 and the related consolidated statements of
comprehensive income, shareholders’ equity, and cash flows for the years ended December 31, 2016, 2015 and
2014, together with the report of the independent registered public accounting firm thereon appear on pages F-1
through F-25 hereof and are incorporated herein by reference.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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/interim 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/interim 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, 2016. 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, 2016, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets and the related consolidated statements of comprehensive
income, shareholders’ equity, and cash flows of the Company, and our report dated March 8, 2017
expressed an unqualified opinion.
/s/ Schneider Downs & Co., Inc.
Columbus, Ohio
March 8, 2017
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 2017 Annual Meeting of Shareholders
(the “Proxy Statement”) to be held on May 17, 2017, 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.
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, 2016 and 2015……………………… F-2 - F-3
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2016, 2015, and 2014………………………………………….. F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2016, 2015, and 2014……………………………… F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2016, 2015, and 2014…………………………………………… F-6
Notes to Consolidated Financial Statements for the years ended
December 31, 2016, 2015, and 2014…………………………………………… F-7 - F-25
(2) The following financial statement schedule for the years ended December 31, 2016, 2015, and 2014 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
3.1
3.2
3.3
4.1
4.2
Description
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
4.5
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
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).
Amendment No. 1 to the Amended and Restated Rights Agreement, dated as of June 7, 2012, by
and between the Company and Computershare Trust Company, N.A., as Rights Agent
(incorporated by reference to the Company’s Current Report on Form 8-K filed on August 19,
2015).
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 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).
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).
10.11
Company’s Incentive Compensation Plan (incorporated by reference to the Company’s Definitive
Proxy Statement for the 2012 Annual Meeting of Shareholders).
34
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
21
23*
24*
31*
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).
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).
Form of Option Award Agreement under the Company’s 2014 Omnibus Incentive Plan
(incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2014).
Form of Restricted Stock Unit Award Agreement under the Company’s 2014 Omnibus Incentive
Plan (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2014).
Form of Performance Stock Unit Award Agreement under the Company’s 2014 Omnibus
Incentive Plan (incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2014).
Amendment No. 1 to 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 10.35 to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2015).
Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2015).
Independent Registered Public Accounting Firm’s Consent of Schneider Downs & Co., Inc.
Powers of Attorney.
Rule 13a-14(a) Certification of Principal Executive Officer/Principal Financial Officer.
32**
Section 1350 Certification of Principal Executive Officer/Principal Financial Officer.
35
99*
101*
Financial Statement Schedule.
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, 2016 formatted in XBRL
(“eXtensible Business Reporting Language”): (i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Cash
Flows, and (vi) related notes to these financial statements.
* Filed with this Annual Report on Form 10-K.
** Furnished with this Annual Report on Form 10-K.
36
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 8, 2017
ROCKY BRANDS, INC.
By: /s/Mike Brooks_________
Mike Brooks, Chief Executive Officer
(Principal Executive Officer and Principal
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/ 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/ Mike Brooks
Mike Brooks, Attorney-in-Fact
Title
Chief Executive Officer, Chairman
Director (Principal Executive Officer
and Principal Financial Officer)
Date
March 8, 2017
Secretary and Director March 8, 2017
Director March 8, 2017
Director
March 8, 2017
Director
March 8, 2017
Director March 8, 2017
Director
March 8, 2017
37
CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a) OF THE CHIEF
EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
I, Mike Brooks, certify that:
Exhibit 31
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Rocky Brands, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a)
(b)
(c)
(d)
designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this annual report is
being prepared;
designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of
registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting.
Date: March 8, 2017
/s/ Mike Brooks
Mike Brooks
Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)
38
Exhibit 32
CERTIFICATION PURSUANT TO RULE 13a - 14(b) AND
SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE
UNITED STATES CODE AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Rocky Brands, Inc. (the “Company”) on Form 10-K for the year
ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
each of the undersigned hereby certifies, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of
1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Mike Brooks
Mike Brooks
Chief Executive Officer (Principal Executive Officer and
Principal Financial Officer)
March 8, 2017
This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not
be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section.
This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933
or the Exchange Act, except as otherwise stated in such filing.
39
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23
We hereby consent to the incorporation by reference in this Annual Report on Form 10-K of Rocky Brands,
Inc. and Subsidiaries for the year ended December 31, 2016 of our reports dated March 8, 2017 included
in its Registration Statements Form S-3 (No. 333-188983) and on Form S-8 (No. 333-121756, No. 333-
198167) relating to the consolidated financial statements and internal controls for the three years ended
December 31, 2016, 2015 and 2014 listed in the accompanying index.
/s/ Schneider Downs & Co., Inc.
Columbus, Ohio
March 8, 2017
40
POWER OF ATTORNEY
Exhibit 24
Each director and officer of Rocky Brands, Inc., an Ohio corporation (the “Company”), whose signature appears below
hereby appoints Mike Brooks and Curtis A. Loveland, or either of them, as his attorney-in-fact, to sign, in his name
and behalf and in any and all capacities stated below, and to cause to be filed with the Securities and Exchange
Commission, the Company's Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended December
31, 2016, and likewise to sign and file any amendments, including post-effective amendments, to the Annual Report,
and the Company hereby also appoints such persons as its attorneys-in-fact and each of them as its attorney-in-fact
with like authority to sign and file the Annual Report and any amendments thereto in its name and behalf, each such
person and the Company hereby granting to such attorney-in-fact full power of substitution and revocation, and hereby
ratifying all that such attorney-in-fact or his substitute may do by virtue hereof.
IN WITNESS WHEREOF, we have executed this Power of Attorney, in counterparts if necessary, effective
as of March 2, 2017.
DIRECTORS/OFFICERS:
Signature
Title
/s/ Mike Brooks
Mike Brooks
/s/ Curtis A. Loveland
Curtis A. Loveland
/s/ Glenn E. Corlett
Glenn E. Corlett
/s/ Michael L. Finn
Michael L. Finn
/s/ G. Courtney Haning
G. Courtney Haning
/s/ Harley E. Rouda, Jr.
Harley E. Rouda, Jr.
Chief Executive Officer, Chairman,
and Director (Principal Executive Officer
and Principal Financial Officer)
Secretary and Director
Director
Director
Director
Director
/s/ James L. Stewart
Director
James L. Stewart
41
Exhibit 99
ROCKY BRANDS, INC. AND SUBSIDIARIES
SCHEDULE II
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED
DECEMBER 31, 2016, 2015 AND 2014
42
DESCRIPTIONBalance at Beginning of PeriodAdditions Charged to Costs and ExpensesDeductionsBalance at End of PeriodALLOWANCE FOR DOUBTFUL ACCOUNTSYear ended December 31, 2016820,000$ 1,210,659$ (989,659)$ (1)1,041,000$ Year ended December 31, 20151,002,257$ 713,190$ (895,447)$ (1)820,000$ Year ended December 31, 2014781,163$ 650,836$ (429,742)$ (1)1,002,257$ VALUATION ALLOWANCE FOR DEFERRRED TAX ASSETSYear ended December 31, 2016569,459$ -$ (98,300)$ 471,159$ Year ended December 31, 2015569,881$ -$ (422)$ 569,459$ Year ended December 31, 2014562,776$ 7,105$ -$ 569,881$ ALLOWANCE FOR DISCOUNTS AND RETURNSYear ended December 31, 20162,054,606$ 18,076,416$ $ (18,196,989)1,934,033$ Year ended December 31, 20152,917,199$ 20,632,422$ $ (21,495,015)2,054,606$ Year ended December 31, 20142,391,205$ 25,041,677$ $ (24,515,683)2,917,199$ (1)Amount charged off, net of recoveries
ROCKY BRANDS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016,
2015 and 2014
Consolidated Statements of Shareholders’ Equity for the Years Ended
December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2016, 2015 and 2014
F-1
F-2 - F-3
F-4
F-5
F-6
Notes to Consolidated Financial Statements
F-7 - F-25
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, 2016 and 2015, 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, 2016, 2015 and 2014. 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, 2016, and 2015, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31, 2016, 2015 and 2014, 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, 2016, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 8, 2017 expressed an unqualified opinion
/s/ Schneider Downs & Co., Inc.
Columbus, Ohio
March 8, 2017
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,
2016
2015
$
4,480,505
40,844,583
688,251
69,168,442
1,243,678
1,633,353
2,354,107
$
3,407,140
44,549,207
583,479
76,991,059
128,699
1,031,818
2,530,517
120,412,919
129,221,919
26,511,493
27,836,527
33,415,694
36,547,873
232,509
258,812
$
180,572,615
$
193,865,131
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
Other
Total current liabilities
LONG TERM DEBT
DEFERRED LIABILITIES:
Deferred income taxes
Other deferred liabilities
TOTAL LIABILITIES
December 31,
2016
2015
$
11,589,040
$
9,118,555
949,894
842,325
534,070
446,703
1,980,598
1,377,281
17,719,911
14,584,008
12,999,153
176,219
45,479,291
442,259
533,220
427,412
378,191
2,301,449
1,547,130
14,748,216
23,700,089
13,000,609
295,676
51,744,590
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; 2016 - 7,421,455 and 2015 - 7,567,271; and
additional paid-in capital
Retained earnings
Total shareholders' equity
-
-
69,291,637
65,801,687
70,882,392
71,238,149
135,093,324
142,120,541
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
180,572,615
$
193,865,131
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
2016
Years Ended December 31,
2015
2014
$
260,258,584
$
269,302,023
$
286,242,169
183,528,494
180,410,184
189,881,444
76,730,090
88,891,839
96,360,725
Selling, general and administrative expenses
Reorganizational charge
Impairment charge
Total operating expenses
75,631,490
1,159,527
3,000,000
79,791,017
-
-
78,402,079
78,402,079
80,597,934
INCOME (LOSS) FROM OPERATIONS
(3,060,927)
10,489,760
OTHER INCOME AND (EXPENSES):
Interest expense
Other - net
Total other - net
(616,567)
59,020
(557,547)
(696,827)
(105,433)
(802,260)
-
-
80,597,934
15,762,791
(943,154)
(78,455)
(1,021,609)
INCOME (LOSS) BEFORE INCOME TAXES
(3,618,474)
9,687,500
14,741,182
INCOME TAX EXPENSE (BENEFIT)
(1,479,078)
3,084,343
4,895,884
COMPREHENSIVE INCOME (LOSS)
$
(2,139,396)
$
6,603,157
$
9,845,298
NET INCOME (LOSS) PER SHARE
Basic
Diluted
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic
Diluted
See notes to consolidated financial statements
($0.29)
($0.29)
$0.87
$0.87
$1.30
$1.30
7,505,219
7,505,219
7,563,205
7,574,172
7,544,936
7,547,781
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, 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
YEAR ENDED DECEMBER 31, 2015
Comprehensive loss
Dividends paid on common stock
Stock issued and options exercised including
related tax benefits
Stock compensation expense
6,603,157
6,603,157
(3,252,254)
(3,252,254)
600
16,545
8,742
412,978
8,742
412,978
BALANCE - December 31, 2015
7,567,271
$
70,882,392
$
-
$
71,238,149
$
142,120,541
YEAR ENDED DECEMBER 31, 2016
Comprehensive income
Dividends paid on common stock
Repurchase of common stock
Stock compensation expense
(175,632)
29,816
(1,950,114)
359,359
(2,139,396)
(3,297,066)
(2,139,396)
(3,297,066)
(1,950,114)
359,359
BALANCE - December 31, 2016
7,421,455
$
69,291,637
$
-
$
65,801,687
$
135,093,324
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 (Loss)
Adjustments to reconcile net income (Loss) to net cash provided
by operating activities:
Depreciation and amortization
Deferred income taxes
Loss on disposal of fixed assets
Reorganizational charge
Impairment charge
Stock compensation expense
Change in assets and liabilities:
Receivables
Inventories
Income tax receivable
Other current assets
Other assets
Accounts payable
Accrued and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets
Proceeds from sales of fixed assets
Investment in trademarks and patents
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility
Repayments on revolving credit facility
Debt financing costs
Proceeds from stock options
Repurchase of common stock
Dividends paid on common stock
Years Ended December 31,
2016
2015
2014
$
(2,139,396)
$
6,603,157
$
9,845,298
7,720,836
(602,991)
47,712
486,496
3,000,000
359,359
3,273,852
7,822,617
(1,114,979)
176,410
26,303
2,346,865
(104,743)
21,298,341
(5,906,479)
44,764
-
(5,861,715)
7,188,123
332,650
19,500
-
-
412,978
11,150,897
8,245,983
(128,699)
22,925
40,678
(6,004,991)
(4,640,636)
23,242,565
(8,654,642)
17,495
(1,176)
(8,638,323)
71,255,424
(80,371,505)
68,423,672
(80,993,956)
-
-
(1,950,114)
(3,297,066)
-
8,742
-
(3,252,254)
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)
75,190,968
(77,308,793)
(54,647)
-
-
(3,017,979)
Net cash used in financing activities
(14,363,261)
(15,813,796)
(5,190,451)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1,073,365
(1,209,554)
401,077
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD
3,407,140
4,616,694
4,215,617
END OF PERIOD
$
4,480,505
$
3,407,140
$
4,616,694
See notes to consolidated financial statements
F - 6
ROCKY BRANDS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
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 Brands Canada, Inc. (“Rocky Canada”), Rocky Brands US,
LLC, Rocky Brands International, LLC, Lehigh Outfitters, LLC, collectively referred to as the “Company.”
All inter-company transactions have been eliminated.
Business Activity - We are a leading designer, manufacturer and marketer of premium quality footwear
marketed under a portfolio of well recognized brand names including Rocky Outdoor Gear, Georgia Boot,
Durango, 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 e-commerce websites and our
Rocky outlet store. We also sell footwear under the Rocky label to the U.S. military.
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 $1,041,000 and $820,000 at December 31, 2016 and 2015, respectively. The allowance
for uncollectible accounts is calculated based on the relative age and status of trade receivable balances. Our
credit policy generally provides that trade receivables will be deemed uncollectible and written-off once we
have pursued all reasonable efforts to collect on the account.
F - 7
Concentration of Credit Risk - We have significant transactions with a large number of customers. No
customer represented 10% of trade receivables - net as of December 31, 2016 and 2015. 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 produce a portion of our shoes and boots in our Dominican Republic operation and in our
Puerto Rico operation. We are not aware of any governmental or economic restrictions that would alter
these current operations.
We source a significant portion of our footwear, apparel and gloves from manufacturers in the Far East,
primarily China. We are not aware of any governmental or economic restrictions that would alter our
current sourcing operations.
Inventories - Inventories are valued at the lower of cost, determined on a first-in, first-out (FIFO) basis, or
market. Reserves are established for inventories when the net realizable value (NRV) is deemed to be less
than its cost based on our periodic estimates of NRV.
Fixed Assets - The Company records fixed assets at historical cost and generally utilizes the straight-line
method of computing depreciation for financial reporting purposes over the estimated useful lives of the
assets as follows:
Buildings and improvements
Machinery and equipment
Furniture and fixtures
Lasts, dies, and patterns
Years
5-40
3-8
3-8
3
For income tax purposes, the Company generally computes depreciation utilizing accelerated methods.
Identified intangible assets - Identified intangible assets consist of indefinite lived trademarks and definite
lived trademarks, patents and customer lists. Indefinite lived intangible assets are not amortized.
If events or circumstances change, a determination is made by management, in accordance with the
accounting standard for “Property, Plant and Equipment” to ascertain whether property, equipment and
certain finite-lived intangibles have been impaired based on the sum of expected future undiscounted cash
flows from operating activities. If the estimated net cash flows are less than the carrying amount of such
assets, we will recognize an impairment loss in an amount necessary to write down the assets to fair value as
determined from expected future discounted cash flows.
In accordance with the accounting standard for “Intangibles – Goodwill and Other”, we test intangible assets
with indefinite lives for impairment annually or when conditions indicate impairment may have occurred.
We perform such testing of our indefinite-lived intangible assets in 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
$8,079,000, $9,869,000, and $8,623,000 for 2016, 2015 and 2014, respectively.
F - 8
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. All outbound shipping costs to customers has been
included in selling, general and administrative costs and totaled approximately $7,851,000 $8,500,000, and
$9,254,000 in 2016, 2015 and 2014, respectively.
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,
2015
2014
2016
Basic - weighted average shares outstanding
7,505,219
7,563,205
7,544,936
Dilutive restricted share units
Dilutive stock options
-
-
9,987
980
2,845
-
Diluted - weighted average shares outstanding
7,505,219
7,574,172
7,547,781
Anti-Dilutive securities
97,894
84,210
43,029
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:
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.
F - 9
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 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 non-vesting 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. The adoption
of this standard did not have a material effect 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. The adoption of this
standard did not have an effect on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30). The
objective of this update is to simplify presentation of debt issuance costs, the amendments in this update
require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a
direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The
recognition and measurement guidance for debt issuance costs are not affected by the amendments in this
update. The amendments in this update are effective for fiscal years beginning after December 15, 2015. An
entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual
period presented should be adjusted to reflect the period-specific effects of applying the new guidance.
Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting
principle. These disclosures include the nature of and reason for the change in accounting principle, the
transition method, a description of the prior-period information that has been retrospectively adjusted, and
the effect of the change on the financial statement line items (that is, debt issuance cost asset and the debt
liability). The adoption of this standard did not have an effect on our consolidated financial statements as
ASU 2015-15 permitted debt issuance costs related to a line of credit arrangement to remain as an asset and
be amortized over the remaining term of the line of credit agreement.
F - 10
Accounting standards not yet adopted
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. In August 2015, the FASB issued ASU No. 2015-14. The amendments in this update defer the
effective date of Update 2014-09. Public business entities, certain not-for-profit entities, and certain
employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning
after December 15, 2017, including interim reporting periods within that reporting period. Earlier application
is permitted only as of annual reporting periods beginning after December 15, 2016, including interim
reporting periods within that reporting period. The guidance permits the use of either a retrospective or
cumulative effect transition method. We have not yet selected a transition method but plan to select a
transition method no later than the fourth quarter of 2017. We are currently assessing our contracts with
customers and related financial disclosures to evaluate the impact of the amended guidance on our existing
revenue recognition policies and procedures.
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 July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330). The amendments in this update
require an entity to measure inventory within the scope of this update at the lower of cost and net realizable
value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for
inventory measured using LIFO or the retail inventory method. The amendments in this update more closely
align the measurement of inventory in GAAP with the measurement of inventory in International Financial
Reporting Standards (IFRS). For public business entities, the amendments in this update are effective for
fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The
amendments in this update should be applied prospectively with earlier application permitted as of the
beginning of an interim or annual reporting period. We have not yet determined the impact this ASU will
have on our consolidated financial statements.
F - 11
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes - Balance Sheet Classification of
Deferred Taxes (Topic 740). The amendments in this update will simplify the presentation of deferred
income taxes. The amendments in this update require that deferred tax liabilities and assets be classified as
noncurrent in a classified statement of financial position. The amendments in this update apply to all entities
that present a classified statement of financial position. The current requirement that deferred tax liabilities
and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected
by the amendments in this update. For public business entities, the amendments in this update are effective
for financial statements issued for annual periods beginning after December 15, 2016, and interim periods
within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim
or annual reporting period. We have not yet determined the impact this ASU will have on our consolidated
financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update
will require lessees to recognize (with the exception of short-term leases) a lease liability, which is a lessee‘s
obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the
lease term. Under the new guidance, lessor accounting is largely unchanged. The new lease guidance
simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease
assets and lease liabilities. For public business entities, the amendments in this update are effective for years
beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application
is permitted for all entities upon issuance. We have not yet determined the impact this ASU will have on our
consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718). The
amendments in this update were issued as part of the FASB’s initiative to reduce complexity in accounting
standards. The areas for simplification in this update involve several aspects of the accounting for employee
share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. In addition, the amendments in this
update eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB
Statement No. 123 (revised 2004), Share-Based Payment. For public business entities, the amendments in
this update are effective for years beginning after December 15, 2016, including interim periods within those
fiscal years. Earlier application is permitted for all entities upon issuance. We have not yet determined the
impact this ASU will have on our consolidated financial statements.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606).
This update clarifies guidance related to identifying performance obligations and licensing implementation
guidance contained in the new revenue recognition standard. The Update includes targeted improvements
based on input the Board received from the Transition Resource Group for Revenue Recognition and other
stakeholders. The update seeks to proactively address areas in which diversity in practice potentially could
arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at
implementation and on an ongoing basis. The amendments in this update are effective at the same time as
ASU 2014-09. Public business entities, certain not-for-profit entities, and certain employee benefit plans
should apply the guidance in update 2014-09 to annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that reporting period. We have not yet determined the impact this
ASU will have on our consolidated financial statements.
F - 12
In May 2016, the FASB issued ASU 2016-12: Revenue from Contracts with Customers (Topic 606):
Narrow-Scope Improvements and Practical Expedients, which provides narrow scope improvements and
practical expedients related to ASU 2014-09: Revenue from Contracts with Customers (Topic 606). The
purpose of ASU 2016-12 is to clarify certain narrow aspects of Topic 606 such as assessing the collectability
criterion, presentation of sales taxes and other similar taxes collected from customers, noncash consideration,
contract modifications at transition, completed contracts at transition, and technical correction. The standard
has the same effective date as ASU 2014-09. Public business entities, certain not-for-profit entities, and
certain employee benefit plans should apply the guidance in update 2014-09 to annual reporting periods
beginning after December 15, 2017, including interim reporting periods within that reporting period. We
have not yet determined the impact this ASU will have on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, addressing eight specific cash flow issues in an effort to reduce
diversity in practice. The amended guidance is effective for fiscal years beginning after December 31, 2017,
and for interim periods within those years. Early adoption is permitted. 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,
2016
2015
$
14,260,416
751,519
54,156,507
$
12,494,980
1,155,837
63,340,242
$
69,168,442
$
76,991,059
F - 13
3. 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
Total
December 31,
2016
2015
$
671,035
20,606,826
45,124,554
2,849,091
15,593,484
464,345
$
671,035
19,247,770
40,611,815
2,722,751
13,811,676
3,161,533
85,309,335
80,226,580
Less - accumulated depreciation
(58,797,842)
(52,390,053)
Net Fixed Assets
$
26,511,493
$
27,836,527
We incurred approximately $7,589,000, $7,053,000, and $6,807,000 in depreciation expense for 2016, 2015
and 2014, respectively.
4.
IDENTIFIED INTANGIBLE ASSETS
A schedule of identified intangible assets is as follows:
December 31, 2016
Trademarks
Wholesale
Retail
Patents
Customer Relationships
Total Intangibles
December 31, 2015
Trademarks
Wholesale
Retail
Patents
Customer Relationships
Total Intangibles
Gross
Amount
Accumulated
Amortization
Carrying
Amount
$
$
29,343,578
2,900,000
2,595,477
2,200,000
37,039,055
-
$
-
2,376,694
1,246,667
3,623,361
$
$
$
29,343,578
2,900,000
218,783
953,333
33,415,694
Gross
Amount
Accumulated
Amortization
Carrying
Amount
$
$
32,343,578
2,900,000
2,595,477
2,200,000
40,039,055
-
$
-
2,324,515
1,166,667
3,491,182
$
$
$
32,343,578
2,900,000
270,962
1,033,333
36,547,873
Amortization expense related to finite-lived intangible assets was approximately $132,000, $135,000, and
$135,000 in 2016, 2015 and 2014, respectively. Such amortization expense will be approximately $116,000
per year for 2017 through 2021.
The weighted average lives of patents and customer relationships are 6 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 of other indefinite-lived intangible assets is determined using
the relief from royalty method.
F - 14
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. The
results of our 2016 indefinite-lived intangible impairment test for the Creative Recreation trademark
indicated a carrying value in excess of the fair value based on the Company’s outlook for future operating
results. Accordingly, we recorded a $3,000,000 non-cash impairment charge for the Creative Recreation
trademark in the fourth quarter of 2016. The carrying value of the Creative Recreation trademark indefinite-
lived intangible assets was $2.1 million, as of December 31, 2016. We did not recognize any impairment
charges during 2015 or 2014 for intangible assets, as the annual impairment testing indicated that all
reporting unit intangible asset fair values exceeded their respective carrying values.
5. OTHER ASSETS
Other assets consist of the following:
Deferred financing costs, net
Other
Total
December 31,
2016
2015
$
89,662
142,847
$
120,403
138,409
$
232,509
$
258,812
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 credit facility’s base interest rate is
the current prime rate less 0.25%, however the credit facility provides us the option to borrow on up to eight
fixed loans at LIBOR plus 1.25% in accordance with the 2014 amended and restated credit agreement. The
LIBOR rate is determined based on the fixed loan maturities, which vary from 30, 60, 90, or 180 days. As
of December 31, 2016 and December 31, 2015, we had approximately $12.0 million and $17.0 million,
respectively, in fixed LIBOR borrowings under the credit facility.
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,
2016, we had $14.6 million in borrowings under this facility and total capacity of $57.3 million.
F - 15
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, 2016, 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 2016, 2015 and 2014, we paid dividends on our common stock
totaling $3,297,066, $3,252,254, and $3,017,979, respectively.
Our amended and restated revolving credit facility matures in November 2019. We have no other long-term
debt maturities.
7. OPERATING LEASES
We lease certain machinery, trucks, and facilities under operating leases that generally provide for renewal
options. We incurred approximately $1,279,000, $1,335,000, and $1,324,000 in rent expense under
operating lease arrangements for 2016, 2015 and 2014, respectively.
Future minimum lease payments under non-cancelable operating leases are approximately as follows for the
years ended December 31:
2017
2018
2019
2020
2021
Total
$
1,208,051
712,690
200,963
78,383
9,100
$
2,209,187
8. RETIREMENT PLANS
We sponsor a 401(k) savings plan for substantially all of our employees. We provide a contribution of 3%
of applicable salary to the plan for all employees with greater than six months of service. Additionally, we
match eligible employee contributions at a rate of 0.25%, per one percent of applicable salary contributed to
the plan by the employee. This matching contribution will be made by us up to a maximum of 1% of the
employee’s applicable salary for all qualified employees. Our contributions to the 401(k) plan were
approximately $0.9 million in 2016, $1.0 million in 2015 and $1.0 million in 2014.
9.
INCOME TAXES
The Company accounts for income taxes in accordance with the accounting standard for “Income Taxes”,
which requires an asset and liability approach to financial accounting and reporting for income taxes.
Accordingly, deferred income taxes have been provided for the temporary differences between the financial
reporting and the income tax basis of the Company’s assets and liabilities by applying enacted statutory tax
rates applicable to future years to the basis differences.
F - 16
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,
2015
2014
2016
$
(1,192,764)
(296,045)
(1,488,809)
$
2,656,870
287,755
2,944,625
$
3,656,356
848,666
4,505,022
151,728
(349,284)
(197,556)
164,950
42,337
207,287
81,433
86,863
168,296
13,391
(41,969)
(28,578)
203,144
140,552
343,696
46,911
255
47,166
Total
$
(1,479,078)
$
3,084,343
$
4,895,884
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
2016
$
(1,270,003)
Years Ended December 31,
2015
3,404,159
$
$
2014
5,147,234
(2,367,810)
(2,816,963)
(3,477,301)
2,050,314
7,353
(99,699)
-
100,288
3,847
96,632
2,556,940
-
67,886
(194,498)
98,082
5,998
(37,261)
3,090,036
12,703
284,838
(135,690)
91,475
1,563
(118,974)
Total
$
(1,479,078)
$
3,084,343
$
4,895,884
F - 17
Deferred income taxes recorded in the consolidated balance sheets at December 31, 2016 and 2015 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,
2016
2015
$
242,916
491,371
302,929
63,214
736,519
1,836,949
(471,159)
$
510,798
563,815
425,179
72,004
650,620
2,222,416
(569,459)
Total deferred tax assets
1,365,790
1,652,957
Deferred tax liabilities:
Fixed assets
Intangible assets
Other assets
Tollgate tax on Lifestyle earnings
Total deferred tax liabilities
(1,676,813)
(10,337,533)
(337,972)
(379,271)
(12,731,589)
(1,655,838)
(11,185,988)
(400,651)
(379,271)
(13,621,748)
Net deferred tax liability
$
(11,365,800)
$
(11,968,791)
Deferred income taxes - current
Deferred income taxes - non-current
$
1,633,353
(12,999,153)
(11,365,800)
$
$
1,031,818
(13,000,609)
(11,968,791)
$
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, 2016, we had approximately $19,205,000 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 $6,722,000.
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 2013. State jurisdictions that remain
subject to examination range from 2012 to 2016. Foreign jurisdiction (Canada and Puerto Rico) tax returns
that remain subject to examination range from 2011 to 2016.
F - 18
Our policy is to accrue interest and penalties on any uncertain tax position as a component of income tax
expense. As of December 31, 2016 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. REORGANIZATIONAL CHARGE
During the third quarter of 2016, we implemented initiatives to reorganize the company to maximize
profitability, drive long-term revenue growth and maximize shareholder value. The costs related to this
reorganization are recorded to “Reorganizational Charge” in our consolidated statements of comprehensive
income. During the year ended December 31, 2016, costs of approximately $1,160,000 were recognized
related to these initiatives, which consisted of severance costs. As of December 31, 2016, we had
approximately $486,000 in accrued reorganization charges recorded to “Accrued expenses – Salaries and
wages” in our condensed consolidated balance sheet relating to future severance payments. We do not
expect to incur additional costs related to our reorganization efforts.
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, 2016, we were authorized to issue 272,723 shares under this plan.
Service Based Restricted Stock
In the first quarter of 2016, we issued 30,000 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 an average fair value of
$11.56 per unit, which was the closing price of our stock on the last trading date prior to the grant date. Also
in the first quarter of 2016, we issued an additional 2,000 restricted stock units to a member of management.
These units vest the same as the first issuance. We valued the units at an average fair value of $10.29 per
unit, which was the closing price of our stock on the last trading date prior to the grant date. In the first
quarter of 2015, we issued 28,000 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 $13.42 per unit,
which was the closing price of our stock on the last trading date prior to the grant date. In August 2015, we
issued 2,000 restricted stock units to a member of our management that will be settled in one share of
common stock of the company per unit. These restricted stock units vest on the same basis as the restricted
stock units issued in the first quarter of 2015. We valued the units at a fair value of $18.15 per unit, which
was the closing price of our stock on the last trading date prior to the grant date. For the years ended
December 31, 2016 and 2015, we recorded expense of $127,349 and $183,150, respectively, related to these
restricted stock units.
F - 19
Performance Based Restricted Stock
In the first quarter of 2016, we made available up to 43,000 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 2017. For the year ended 2016,
we did not record any expense related to these performance units as it is uncertain if we will reach the
performance goals.
In 2015, we made available up to 34,000 performance based restricted stock units to certain members of our
management. Shares underlying the performance based restricted stock units were to be issued upon
achieving certain established EPS goals at the end of fiscal year 2016. For the years ended 2016 and 2015,
we did not record any expense related to these restricted stock units as the performance goals were not
achieved.
Stock Options
In the first quarter of 2016, we issued 30,000 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 $11.56 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 $3.41 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 42.32%, a risk free
interest rate of 2.06%, a dividend yield of 3.81% and an initial employee forfeiture rate of 7.7%.
Our expected life estimate is based on the sum of the vesting terms divided by the number of
vesting tranches. Also in the first quarter of 2016, we issued an additional 2,000 stock options to a
member of our management. These units vest the same as the first issuance. The options are
exercisable at $10.29 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 $2.84 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 42.32%, a risk free
interest rate of 1.88%, a dividend yield of 4.30% and an initial employee forfeiture rate of 7.7%. In
the first quarter of 2015, we issued 28,000 stock options to certain members of our management.
These stock options vest in increments of 20% per year from the grant date. The options are
exercisable at $13.42 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 $4.70 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 46.20%, a risk free
interest rate of 1.92%, a dividend yield of 2.99% and an initial 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 years ended 2016 and 2015, we recorded expense of $35,100 and $54,828,
respectively, related to these stock options.
F - 20
For the above issuances under the plan, we expect to recognize expense in the years 2017 through 2020 as
follows:
2017
2018
2019
2020
Total
$
142,336
106,068
58,474
8,918
$
315,796
The following summarizes stock option transactions from January 1, 2015 through December 31, 2016:
Options outstanding at January 1, 2015
Issued
Exercised
Forfeited
Options outstanding at December 31, 2015
Options exercisable at:
January 1, 2015
December 31, 2015
Unvested options at December 31, 2015
Options outstanding at January 1, 2016
Issued
Exercised
Forfeited
Options outstanding at December 31, 2016
Options exercisable at:
January 1, 2016
December 31, 2016
Unvested options at December 31, 2016
Weighted
Average
Exercise
Price
$
$
$
$
$
14.57
13.74
14.57
14.57
14.57
Shares
23,000
30,000
(600)
(800)
51,600
-
$
-
4,000
$
14.57
47,600
$
14.04
51,600
32,000
-
(41,350)
42,250
14.57
$
$
11.48
$
-
$
13.33
$
12.85
4,000
6,900
35,350
$
$
$
14.57
14.10
12.60
Weighted
Average
Remaining
Actual Term
Aggregate
Intrinsic
Value
8.6
$
-
$
-
$
-
8.0
8.6
8.8
$
-
$
-
$
-
$
-
8.4
8.8
During the years ended December 31, 2016 and 2015, a total of 32,000 and 30,000, respectively, were issued
with an intrinsic value of zero for all years. During the year ended December 31, 2016, no options were
exercised. During the year ended December 31, 2016, a total of 41,350 options were forfeited with a fair
value of $192,218. A total of 4,850 options vested during the year ended December 31, 2016 with a fair
value of $25,337. At December 31, 2016 and 2015, a total of 35,350 and 47,600 options were unvested with
a fair value of $149,411 and $248,004.
F - 21
During the year ended December 31, 2016, we issued 14,568 shares of common stock to members of our
Board of Directors. We recorded compensation expense of $168,000, 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-voting convertible preferred
stock with a stated value of $.06 per share, of which no shares are issued or outstanding at December 31,
2016 and 2015, 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.
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 expired in August 2015.
Repurchase of Common Stock
In February 2016, our Board of Directors authorized the repurchase of up to $7,500,000 of common shares
outstanding in open market or privately negotiated transactions over the next 12 months. Purchases of stock
under this program were funded with borrowings from our amended and restated revolving credit facility.
For the year ended December 31, 2016, there were 175,632 shares repurchased and retired, for $1,950,114.
As of December 31, 2016, we have $5,549,886 of availability remaining under the February 2016
authorization.
Subsequent to year end, our Board of Directors authorized the repurchase of up to $7,500,000 of common
shares outstanding in open market or privately negotiated transactions over a 12 month period beginning in
March of 2017.
F - 22
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,
2015
2014
2016
Interest paid
$
606,697
$
724,651
$
856,578
Federal, state and local income taxes paid - net
of refunds
$
339,625
$
5,568,581
$
972,645
Fixed asset purchases in accounts payable
$
216,523
$
92,903
$
85,488
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 primarily sell our products directly to consumers through our consumer
and business direct websites and our Rocky outlet store. We also operate four mobile trucks to service the
New York Transit Authority’s employees. 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 are currently fulfilling several multiyear contracts for the U.S. military. Total sales to the U.S. military
represented 14.4%, 6.5% and 2.8% of total net sales for the years ending December 31, 2016, 2015 and
2014, respectively.
F - 23
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.
2016
Years Ended December 31,
2015
2014
NET SALES:
Wholesale
Retail
Military
Total Net Sales
GROSS MARGIN:
Wholesale
Retail
Military
Total Gross Margin
$
$
176,937,595
45,933,811
37,387,178
260,258,584
$
$
206,072,657
45,808,705
17,420,661
269,302,023
$
$
53,497,843
21,077,597
2,154,650
76,730,090
$
$
65,979,792
20,621,884
2,290,163
88,891,839
$
$
233,898,250
44,347,775
7,996,144
286,242,169
$
$
75,840,977
19,449,609
1,070,139
96,360,725
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
2016
$
111,156,688
38,970,631
37,081,857
15,571,965
13,318,525
37,387,178
2,861,071
3,464,667
446,002
% of
Sales
42.7%
15.0%
14.2%
6.0%
5.1%
14.4%
1.1%
1.3%
0.2%
2015
$
120,422,188
43,435,734
33,341,424
23,370,822
20,688,005
17,420,661
5,662,277
4,155,137
805,775
% of
Sales
44.7%
16.1%
12.4%
8.7%
7.7%
6.5%
2.1%
1.5%
0.3%
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
$
260,258,584
100%
$
269,302,023
100%
$
286,242,169
% of
Sales
45.9%
15.9%
13.3%
9.0%
8.6%
2.8%
2.6%
1.4%
0.4%
100%
Net sales to foreign countries, primarily Canada, represented approximately 2.8% of net sales in 2016, 4.8%
of net sales in 2015 and 6.3% of net sales in 2014.
F - 24
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for the years ended December 31,
2016 and 2015:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Total Year
2016
Net sales
Gross margin
Net (loss) income
Dividends paid
$
57,529,945
18,910,892
(191,450)
834,228
$
62,560,094
16,263,260
(1,759,329)
822,913
$
73,218,247
19,765,760
445,629
823,564
$
66,950,298
21,790,178
(634,246)
816,361
$
260,258,584
76,730,090
(2,139,396)
3,297,066
Net (loss) income per common share:
Basic
Diluted
$
$
(0.03)
(0.03)
$
$
(0.23)
(0.23)
$
$
0.06
0.06
$
$
(0.09)
(0.09)
$
$
(0.29)
(0.29)
2015
Net sales
Gross margin
Net income
Dividends paid
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Total Year
$
65,451,303
21,971,310
1,413,947
755,953
$
68,583,196
22,648,633
2,002,673
831,827
$
70,001,496
22,117,477
1,803,667
832,073
$
65,266,028
22,154,419
1,382,870
832,401
$
269,302,023
88,891,839
6,603,157
3,252,254
Net income per common share:
Basic
Diluted
$
$
0.19
0.19
$
$
0.26
0.26
$
$
0.24
0.24
$
$
0.18
0.18
$
$
0.87
0.87
15. 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.
F - 25
Corporate Information
Board of Directors
Mike Brooks
CEO
Chairman of the Board
Independent Registered Public
Accounting Firm
Schneider Downs & Co., Inc.
Columbus, Ohio
Glenn E. Corlett
Retired Dean and Philip J. Gardner, Jr. Leadership
Professor, College of Business at Ohio University
Legal Counsel
Porter, Wright, Morris & Arthur LLP Columbus, Ohio
Michael L. Finn
Chairman, Power Distributors, LLC
President, Chesapeake Realty Company
G. Courtney Haning
Chairman and Chief Executive Officer
Peoples National Bancshares, Inc.
Curtis A. Loveland
Secretary
Partner, Porter, Wright, Morris & Arthur LLP
Harley E. Rouda, Jr.
Chief Executive Officer, Trident Holdings, Inc.
James L. Stewart
Proprietor
Rising Wolf Ranch, Inc.
Officers
Mike Brooks
CEO
Chairman of the Board
Tom Robertson
Chief Financial Officer and Treasurer
Jason S. Brooks
President, Core Brands
Rocky Brands US, LLC
Richard Simms
President, Digital Resources
Brand General Manager, Georgia Boot
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:
Tom Robertson
Chief Financial Officer and Treasurer
Rocky Brands, Inc.
39 East Canal Street
Nelsonville, Ohio 45764
Corporate Offices
39 East Canal Street, Nelsonville, Ohio 45764
(740) 753-1951
Investor Information
Corporate and investor information is
available on the company’s website at
www.rockybrands.com