ANNUALREPORT2017 “
YOUR EXTRAORDINARY PASSION FOR THIS COMPANY IS INSPIRING
AND IT IS WHY I AM SO EXCITED ABOUT WHAT THE FUTURE HOLDS
It is an honor to address you in the company’s annual
letter as chief executive officer of Rocky Brands.
After starting my career with the company in the
maintenance department as a teenager, I have spent
the past two plus decades working in various positions
learning the ins and outs of the business and the
footwear industry. This included how to make boots in
our then newly opened Dominican Republic factory
before transitioning into more senior roles such as
territory sales manager, sales manager and president
of U.S. wholesale. When I was appointed CEO in May
2017, I had a full understanding of the business and a
clear vision for where I wanted to lead the company.
The overarching goal of the entire organization is to
drive long-term profit improvement and generate
increased value for shareholders.
In 2017, we made good progress towards these goals
as we capitalized on recent organizational changes
to achieve greater operating efficiencies and create
an expense structure better suited for the current size
of the business. Looking ahead, we plan to accelerate
our bottom line momentum by strategically expanding
our higher margin wholesale and direct channels and
continuing to pursue operational excellence. I am
very confident that we have assembled the right team
to build on our recent success in 2018 and for years
to come.
The past year was a critical period that has reshaped the
direction of Rocky Brands. In 2017, we shifted our focus
back to our core business and began reinvesting in the
strategic initiatives that we believe will drive sustained
growth. With Rocky, Georgia Boot and Durango, we
own some of the most authentic brands in the work,
western and hunting categories, each of which has
established loyal consumer bases through years of
introducing innovative, quality product combined
with a great value proposition. Collectively, these
brands provide the company with a solid foundation
that we believe we can leverage to create additional
growth opportunities with existing wholesale partners,
especially pure play online retailers, which are some of
our fastest growing accounts.
Moving to our retail division. It was a solid year of
growth as we successfully expanded sales of our
Lehigh business by capitalizing on the increasing
number of workers and other labor based industries
that require safety footwear for their workforces. We
believe our differentiated and proven CustomFit
program provides us with a great platform to drive
further gains in 2018 and beyond. We will be investing
in additional resources this coming year including new
technology and personnel to fuel acceleration in our
current momentum. Meanwhile the continued shift
towards online shopping has created opportunities for
our direct-to-consumer business. Going forward, we
will continue to invest in digital marketing programs
to drive more traffic to our branded ecommerce
websites and look to evolve our mobile capabilities
in order to stay better connected with our consumers
and make sure we can service their needs whenever
and however they chose to engage with us.
Our third operating segment, Military, had a record
year in 2017 in terms of sales and margins despite the
significant disruption to our operations in Puerto Rico
following the devastating impact Hurricane Maria had
on the island. The investments we made in expanding
our manufacturing capacity has allowed us to fulfill
multiple contracts and put our boots on thousands
of military personnel over the past several years. The
quality and comfort of our product has helped forge
strong relationships with soldiers who are increasingly
looking to the Rocky brand for their additional footwear
needs. Today, our incredibly popular S2V model is the
#1 military boot in the market and we are confident
we can leverage this leadership position into new
commercial opportunities within the U.S. military as
well as overseas as we look to offset some headwinds
in our contract business as we enter 2018.
the
fact
As I look back on 2017, I am very proud of our many
accomplishments, especially
that we
dramatically improved profitability and exited the
year with solid momentum in our wholesale and retail
segments – our two primary growth vehicles – and a
very strong balance sheet that was nearly debt free.
In closing, I want to thank everyone who contributed
to our recent success especially our employees. Your
extraordinary passion for this company is inspiring and
it is why I am so excited about what the future holds for
Rocky Brands and its shareholders.
Sincerely,
Jason Brooks
Chief Executive Officer
YOUR EXTRAORDINARY PASSION FOR THIS COMPANY IS INSPIRING
AND IT IS WHY I AM SO EXCITED ABOUT WHAT THE FUTURE HOLDS”
DRAMATICALLY
INCREASING
PROFITABILITY
The past year was transformative for Rocky Brands. We were able to
stabilize our core branded sales while improving margins across both
our wholesale and military segments. Accomplishing these two
achievements with a leaner corporate structure dramatically
increased our profitability year over year. As we move into 2018,
we are looking to carry top-line momentum from a strong
finish in both our wholesale and retail segment, as well as see
bottom line gains from the sale of the Creative Recreation
brand and benefits from the recently enacted tax reform.
Tom Robertson - Chief Financial Officer
INCOME STATEMENT DATA
($000, except per share data)
2017
2016
2015
2014
2013
Net sales
Gross margin
Income from Operations
Net income
$253,197
$ 260,259
$ 269,302
$ 286,242
$ 244,871
31.9%
4.7%
29.5%
-1.2%
33.0%
33.7%
34.1%
3.9%
5.5%
4.5%
$9,587
$ (2,139)
$ 6,603
$ 9,845
$ 7,373
Net income per diluted share
$1.29
$ (0.29)
$ 0.87
$ 1.30
$ 0.98
Weighted average number of fully diluted shares outstanding
7,450
7,505
7,574
7,548
7,517
BALANCE SHEET
Inventories
Total assets
Total debt
$65,622
$ 69,168
$ 76,991
$ 85,237
$ 78,172
173,479
178,939
192,833
213,228
199,025
2,199
14,584
23,700
36,270
38,388
Shareholders’ equity
141,093
135,093
142,121
138,348
131,213
$286.2
$269.3
Net Sales
($millions)
$244.9
$260.3
$253.2
Net Income
Per Diluted Share
$1.30
$1.29
$0.98
$0.87
2013
2014
2015
2016
2017
2013
2014
2015
2017
$(0.29)
5.5%
4.5%
3.9%
4.7%
$38.4
$36.3
$23.7
Total Debt
($millions)
Income from
operations
as a % of
net sales
-1.2%
2016
$14.6
$2.2
2013
2014
2015
2017
2013
2014
2015
2016
2017
2016
LEADING BY EXAMPLE
With a new, fresher, pull no punches executive team, Rocky Brands is recharged,
energized, and ready to take on 2018 and beyond. These team mates, friends and
inspiring leaders have not only increased the bottom line but fueled the passion felt
by the rest of the Rocky Brands family. And it truly does feel like that...a family.
85%
REDUCTION
IN DEBT
$11.7M
INCREASE IN
NET INCOME
240
BPS INCREASE IN
GROSS MARGIN
FROM LEFT: Jason Brooks President, Chief Executive Officer / Tom Robertson Chief Financial Officer and Treasurer / Jeff Stern Senior Vice President, Sales & Operations
Lehigh / Byron Wortham President, Core Brands Sales, Marketing, and Product Development / Richard Simms President, Operations / not in photo David Dixon
President, Manufacturing/Sourcing Operations
PIONEERING
NEW MARKETS
IN ATHLETIC &
WORK WESTERN
GEORGIA BOOT empowers the unsung heroes – the ones that take pride in building real value
with their hands. We have a heritage of providing durable, comfortable footwear designed
for the physical demands faced on and off the job. Georgia Boot is America’s Hardest
Working Boot.
GETTING
BACK
TO OUR
RUGGED
ROOTS
ROCKY is here to serve the hard-
working men and women who serve
their families, community and country,
by innovating the rugged, reliable
products they depend on.
MERGING
TRADITIONAL
WESTERN WITH
MODERN STYLE
For over half a century, DURANGO has been
providing premium quality footwear that merges
traditional western and modern style.
Through innovative design, Durango is committed
to providing the most comfortable, lightweight
and flexible footwear on the market.
Durango.. It’s Not Just A Boot, It’s An Attitude.
ESCALATING
POSITIVE
GROWTH
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
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.
leader
the
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
For the fiscal year ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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)
Registrant's telephone number, including area code (740) 753-1951
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(b) of the Act:
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, a non-accelerated filer, a smaller
reporting company, or emerging growth company (as defined in Exchange Act Rule 12b-2). (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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 $89,930,896
on June 30, 2017.
There were 7,410,761 shares of the Registrant's Common Stock outstanding on February 28, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated by reference in Part III.
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
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.
SIGNATURES
Exhibits, Financial Statement Schedules
Appendix A: Financial Statement Schedule
PART IV
Page
2
9
14
14
14
14
15
17
18
25
26
48
48
48
50
50
50
50
50
51
54
55
1
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words “anticipate,”
“believe,” “expect,” “estimate,” and “project” and similar words and expressions identify forward-looking statements which
speak only as of the date hereof. Investors are cautioned that such statements involve risks and uncertainties that could cause
actual results to differ materially from historical or anticipated results due to many factors, including, but not limited to, the
factors discussed in “Item 1A, Risk Factors.” The Company undertakes no obligation to publicly update or revise any
forward-looking statements.
ITEM 1. BUSINESS.
PART I
All references to “we,” “us,” “our,” “Rocky Brands,” or the “Company” in this Annual Report on Form 10-K mean Rocky
Brands, Inc. and our subsidiaries.
We are a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a portfolio of
well recognized brand names including Rocky, Georgia Boot, Durango, Lehigh, and the licensed 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 $19.99 for our value priced products to
$298.99 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, specialty retailers and online retailers. Our retail business includes direct sales of our products to
consumers through our business to business web platform, e-commerce websites and our Rocky outlet store. We also sell
footwear under the Rocky label to the U.S. military.
Competitive Strengths
Our competitive strengths include:
•
Strong portfolio of brands. We believe the Rocky, Georgia Boot, Durango, Lehigh, 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 own 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.
2
• 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.
•
Increases in our Lehigh business. We believe that our business to business CustomFit platform has ample opportunity
to grow as we continue to pursue large manufacturers, distributors, and other companies who are reliant on safety
footwear programs. We feel that diversifying our product lines and continuing to provide an easy, no hassle approach
to purchasing, will allow us to expand within the market.
• 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 and 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 outdoor enthusiasts 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 industrial and construction
workers and non-slip footwear for hospitality 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.
3
• 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 four well-recognized, proprietary brands, Rocky, Georgia Boot, Durango, 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 seven target markets and offer our products at a range of suggested retail price points: $49.99 to $298.99
for our footwear products, $24.99 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 a 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, forestry, and oil & gas 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 $69.99 to $269.99. This line of products primarily targets construction workers
and those who work in industrial plants where special safety features are required for hazardous work environments. Many of
our boots incorporate steel toes or metatarsal guards to protect wearers’ feet from heavy objects and non-slip outsoles to prevent
slip related injuries in the work place. All of our boots are designed to help prevent injury and subsequent work loss and are
designed according to standards determined by the Occupational Safety & Health Administration or other standards required by
employers.
In addition, we market a line of Georgia Boot footwear to brand loyal consumers for hunting and other outdoor activities. These
products are primarily all leather boots distributed in the western and southwestern states where hunters do not require
camouflaged boots or other technical features incorporated in our Rocky footwear.
We believe the Georgia Boot brand can be extended into moderately priced duty footwear as well as outdoor and work apparel.
4
Durango
Durango is our moderately priced, high quality line of western footwear. Launched in 1965, the brand has developed broad
appeal and earned a reputation for authenticity and quality in the western footwear and apparel market. Our current line of
products is offered at suggested retail price points ranging from $19.99 to $209.99, and we market products designed for both
work and casual wear. Our Durango line of products primarily targets farm and ranch workers who live in the heartland where
western influenced footwear and apparel is worn for work and casual wear and, to a lesser extent, this line appeals to urban
consumers enamored with western influenced fashion. Many of our western boots marketed to farm and ranch workers are
designed to be durable, including special “barn yard acid resistant” leathers to maintain integrity of the uppers, and incorporate
our proprietary “Comfort Core” system to increase ease of wear and reduce foot fatigue. Other products in the Durango line that
target casual and fashion oriented consumers have colorful leather uppers and shafts with ornate stitch patterns and are offered
for men, women and children.
Lehigh
The Lehigh brand was launched in 1922 and is our moderately priced, high quality line of safety shoes sold at suggested retail
price points ranging from $78.99 to $233.99. 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 hospitality environments where floors are often
tiled and greasy. Price points for this kind of footwear range from $39.99 to $86.99.
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 expired on December 31,
2017, with the option to renew. We are currently working with Michelin on extending our agreement.
Sales and Distribution
Our products are distributed through three distinct business segments: wholesale, retail and military. See Note 15 of our
consolidated financial statement for more information regarding our three business segments.
Wholesale
In the U.S., we distribute Rocky, Georgia Boot, Durango, and Michelin products through a wide range of wholesale distribution
channels. As of December 31, 2017, 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 is organized around major accounts, including Bass Pro Shops, Cabela’s, Dick’s Sporting Goods,
Tractor Supply Company, Amazon and Kohl’s, and around our target markets: outdoor, work, duty, commercial military, lifestyle
and western. For our Rocky, 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, online retailers,
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, hardware stores and online retailers.
• Our duty products are sold primarily through uniform stores, catalog specialists and online retailers.
5
• 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, online
retailers and more recently, 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 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, and 4eursole.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, Whirlpool, 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.
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 2018, we will no longer continue to service the New York City Transit Authority with mobile stores.
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.
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 both digital advertising and consumer advertising in support of our
retail partners. Digital advertising includes online brand level marketing, search engine pay-per-click, retargeting and social
media targeting. A key component to supporting our retail partners 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 sponsorships 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.
6
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. We believe that operating our own facilities significantly improves our knowledge of the entire raw material
sourcing and manufacturing process enabling us to more efficiently source finished goods from third parties that are of the highest
quality and at the lowest cost available. In addition, our Puerto Rican facilities allow us to produce footwear for the U.S. military
and other commercial businesses that require production by a U.S. manufacturer. Sourcing products from offshore third-party
facilities generally enables us to lower our costs per unit while maintaining high product quality and it limits the capital
investment required to establish and maintain company operated manufacturing facilities. Because quality is an important part
of our value proposition to our retailers and consumers, we source products from manufacturers who have demonstrated the
intent and ability to maintain the high quality that has become associated with our brands.
Quality control is stressed at every stage of the manufacturing process and is monitored by trained quality assurance personnel
at each of our manufacturing facilities, including our third-party factories. In addition, we utilize a team of procurement, quality
control and logistics employees in our China office to visit factories to conduct quality control reviews of raw materials, work in
process inventory and finished goods. We also utilize quality control personnel at our finished goods distribution facilities to
conduct quality control testing on incoming sourced finished goods and raw materials and inspect random samples from our
finished goods inventory from each of our manufacturing facilities to ensure that all items meet our high-quality standards.
Foreign Operations and Sales Outside of the United States
Our products are primarily distributed in the United States, Canada, South America, Europe, Australia 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. In early 2018 the Washington and Canada logistics operations will be wound down and closed.
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 represented approximately
3.0% of net sales in 2017, 2.8% of net sales in 2016, and 4.8% of net sales in 2015.
As previously mentioned, we maintain manufacturing facilities that we operate in the Dominican Republic and Puerto Rico. In
addition, we utilize an office in China to support our contract manufacturers.
The net book value of fixed assets located outside of the U.S. totaled $3.2 million at December 31, 2017, $3.7 million at
December 31, 2016, and $4.1 million at December 31, 2015.
Suppliers
We purchase raw materials from sources worldwide. We do not have any long-term supply contracts for the purchase of our raw
materials, except for limited blanket purchase orders on leather to protect wholesale selling prices for an extended period of time.
The principal raw materials used in the production of our products, in terms of dollar value, are leather, Gore-Tex waterproof
breathable fabric, Cordura nylon fabric and soling materials. We believe these materials will continue to be available from our
current suppliers. However, in the event these materials are not available from our current suppliers, we believe these products,
or similar products, would be available from alternative sources.
7
Seasonality and Weather
Historically, we have experienced significant seasonal fluctuations in our business as many of our footwear products are used by
consumers in adverse weather conditions. In order to meet these demands, we must manufacture and source footwear year round
to be in a position to ship advance and at once orders for these products during the last two quarters of each year. Accordingly,
average inventory levels have been highest during the second and third quarters of each year and sales have been highest in the
last two quarters of the year. In addition, mild or dry weather conditions historically have had a material adverse effect on sales
of our outdoor products, particularly if they occurred in broad geographical areas during late fall or early winter.
Backlog
($ in millions)
Wholesale Backlog
Military Backlog
Total Backlog
Years Ended December 31,
2017
2016
$
$
16.3
26.2
42.5
$
$
16.7
0.3
17.0
Our backlog consists of all open orders as of December 31st of the corresponding year to be shipped at any point in the future.
Additionally, 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.
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, and Lehigh. 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 brand and related marks on our products. Our license
agreement with Michelin Lifestyle Limited to use the Michelin name expired on December 31, 2017, with the option to renew.
We are currently working with Michelin on extending our agreement.
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.
8
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, 2017, we had approximately 2,079 employees of which approximately 2,061 are full time employees.
Approximately 1,728 of our employees work in our manufacturing facilities in the Dominican Republic and Puerto Rico. None
of our employees are represented by a union. We believe our relations with our employees are good.
Available Information
We make available free of charge on our corporate website, www.rockybrands.com, our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports
are electronically filed with or furnished to the Securities and Exchange Commission.
ITEM 1A. RISK FACTORS.
Business Risks
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;
9
•
•
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.
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 current political climate has introduced greater uncertainty with respect to 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 2017, 15.1% 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. The U.S. military provides preference on contract bids to small businesses and our current company
structure classifies us as a large business which could have an effect on our ability to be awarded new contracts in the future.
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.
10
Our outdoor and insulated products are seasonal and are sensitive to weather conditions.
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. 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.
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 may not 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, 2017, there was no triggering event
and the covenant was not in effect.
We face intense competition, including competition from companies with significantly greater resources than ours, and if we
are unable to compete effectively with these companies, our market share may decline and our business could be harmed.
The footwear and apparel industries are intensely competitive, and we expect competition to increase in the future. A number of
our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution
resources than we do, as well as greater brand awareness in the footwear market. Our ability to succeed depends on our ability
to remain competitive with respect to the quality, design, price and timely delivery of products. Competition could materially
adversely affect our business, financial condition, results of operations and cash flows.
11
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 our distribution center in Logan, Ohio and if there is a natural disaster or other serious disruption at this facility,
we may be unable to deliver merchandise effectively to our retailers.
We rely on our distribution center located in Logan, Ohio. Any natural disaster or other serious disruption at any of this facility
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 many our trademarks, trade names and designs, including such marks as Rocky, Georgia Boot,
Durango, and Lehigh. Additional trademarks, trade names and designs are the subject of pending federal applications for
registration. We also use and have common law rights in certain trademarks. Over time, we have increased distribution of our
goods in several foreign countries. Accordingly, we have applied for trademark registrations in a number of these countries. We
intend to enforce our trademarks and trade names against unauthorized use by third parties.
Our success depends on our ability to forecast sales.
Our investments in infrastructure and product inventory are based on sales forecasts and are necessarily made in advance of
actual sales. The markets in which we do business are highly competitive, and our business is affected by a variety of factors,
including brand awareness, changing consumer preferences, product innovations, susceptibility to fashion trends, retail market
conditions, weather conditions and economic conditions, 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.
12
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 damage our reputation and our customers’ willingness to purchase our products,
which may adversely affect our business. In addition, we could incur liabilities and remediation costs, including regulatory fines,
reimbursement or other compensatory costs, additional compliance costs, and costs for providing credit monitoring or other
benefits to customers or employees affected. We maintain cyber risk insurance, but this insurance may not be sufficient to cover
all of our losses from any future breaches of our systems.
Our dividend policy may change.
Although we have paid dividends to our shareholders, we have no obligation to continue doing so and may change our dividend
policy at any time without notice to our shareholders. Holders of our common stock are only entitled to receive such cash
dividends as our board of directors may declare out of funds legally available for such payments.
Risks Related to Our Industry
Because the footwear market is sensitive to decreased consumer spending and slow economic cycles, if general economic
conditions deteriorate, many of our customers may significantly reduce their purchases from us or may not be able to pay for
our products in a timely manner.
The footwear industry has been subject to cyclical variation and decline in performance when consumer spending decreases or
softness appears in the retail market. Many factors affect the level of consumer spending in the footwear industry, including:
•
•
•
general business conditions;
interest rates;
the availability of consumer credit;
• weather;
•
•
•
increases in prices of nondiscretionary goods;
taxation; and
consumer confidence in future economic conditions.
Consumer purchases of discretionary items, including our products, may decline during recessionary periods and also may
decline at other times when disposable income is lower. A downturn in regional economies where we sell products also reduces
sales.
The continued shift in the marketplace from traditional independent retailers to large discount mass merchandisers may
result in decreased margins.
A continued shift in the marketplace from traditional independent retailers to large discount mass merchandisers has increased
the pressure on many footwear manufacturers to sell products to these mass merchandisers at less favorable margins. Because
of competition from large discount mass merchandisers, a number of our small retailing customers have gone out of business,
and in the future more of these customers may go out of business, which could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
13
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 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, which are utilized by all
segments, as follows:
Square Footage
28,684
34,373
20,135
93,097
36,186
23,476
16,797
Lease Expiration
2018
2018
2018
2019
2019
2020
2021
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.
14
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, 2016
June 30, 2016
September 30, 2016
December 31, 2016
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
High
Low
Dividends
Per Share
$
$
$
$
$
$
$
$
13.55
13.95
12.68
11.65
12.80
15.70
15.00
20.15
$
$
$
$
$
$
$
$
9.67
10.70
10.17
9.95
10.25
10.70
12.20
13.40
$
$
$
$
$
$
$
$
0.11
0.11
0.11
0.11
0.11
0.11
0.11
0.11
On February 28, 2018, the last reported sales price of our common stock on the NASDAQ Global Select Market was $18.40 per
share. As of February 28, 2018, there were 79 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. Dividends paid were as follows:
For the years ended December 31,
2016
2017
2015
3,252,254
Dividends Paid
$
3,269,418 $
3,297,066 $
15
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, 2012, 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:
Period
October 1, 2017 - October 31, 2017
November 1, 2017 - November 30, 2017
December 1, 2017 - December 31, 2017
Total
Total number of
shares
purchased (1)
Average price
paid per share (or
unit)
Maximum number (or
approximate dollar value) of
shares that may yet be
purchased under the plans or
programs (2)
2,717 $
13.46 $
-
-
-
-
2,717 $
13.46 $
6,811,663
6,811,663
6,811,663
6,811,663
(1) The reported shares were repurchased pursuant to the Company’s publicly announced stock repurchase authorizations.
(2) The number shown represents, as of the end of each period, the maximum number of shares (approximate dollar value) of Common Stock that may
yet be purchased under publicly announced stock repurchase authorizations. The shares may be purchased, from time-to-time, depending on market
conditions.
In March 2017, the Company announced a $7,500,000 share repurchase plan. The repurchase program terminated on March 1,
2018. On March 1, 2018, the Company announced a new $7,500,000 share repurchase program that will replace the 2017 plan
and will expire on March 1, 2019.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
ROCKY BRANDS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
($ in thousands, except for per share data)
2017
For the years ended December 31,
2015
2016
2014
2013
Income statement data
Net sales
Gross margin (% of sales)
Net income (loss)
Dividends paid on common stock
Earnings per share
Net income
Basic
Diluted
Weighted average common shares
outstanding
Basic
Diluted
Balance sheet data
Inventory
Total assets
Working capital
Long-term debt, less current maturities
Shareholders' equity
$ 253,197
$ 260,259
$ 269,302
$ 286,242
$ 244,871
31.9 %
29.5 %
33.0 %
33.7 %
34.1 %
$
9,587
3,269
$
(2,139)
3,297
$
6,603
3,252
$
9,845
3,018
$
7,373
2,255
$
1.29
1.29
$
(0.29)
(0.29)
$
$
0.87
0.87
$
1.30
1.30
0.98
0.98
7,428
7,450
7,505
7,505
7,563
7,574
7,545
7,548
7,517
7,517
$
65,622
$ 173,479
99,160
$
2,199
$
$ 141,093
$
69,168
$ 178,939
$ 101,060
14,584
$
$ 135,093
$
76,991
$ 192,833
$ 113,442
23,700
$
$ 142,121
$
85,237
$ 213,228
$ 124,773
36,270
$
$ 138,348
$
78,172
$ 199,025
$ 118,242
38,388
$
$ 131,213
17
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, 2017, and our capital resources and liquidity as of December 31, 2017 and 2016. Use of the terms “Rocky,” the
“Company,” “we,” “us” and “our” in this discussion refer to Rocky Brands, Inc. and its subsidiaries. Our fiscal year begins on
January 1 and ends on December 31. We analyze the results of our operations for the last three years, including the trends in the
overall business followed by a discussion of our cash flows and liquidity, our credit facility, and contractual commitments. We
then provide a review of the critical accounting judgments and estimates that we have made that we believe are most important
to an understanding of our MD&A and our consolidated financial statements. We conclude our MD&A with information on
recent accounting pronouncements which we adopted during the year, as well as those not yet adopted that are expected to have
an impact on our financial accounting practices.
The following discussion should be read in conjunction with the “Selected Consolidated Financial Data” and our consolidated
financial statements and the notes thereto, all included elsewhere herein. The forward-looking statements in this section and
other parts of this document involve risks and uncertainties including statements regarding our plans, objectives, goals, strategies,
and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking
statements as a result of factors set forth under the caption “Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995” below. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking
statements made by or on behalf of the Company.
EXECUTIVE OVERVIEW
We are a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a portfolio of
well recognized brand names including Rocky, Georgia Boot, Durango, Lehigh, and the licensed 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 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
primarily through our websites. We also sell footwear under the Rocky label to the U.S. military.
Our growth strategy is founded substantially on the expansion of our brands into new footwear and apparel markets. New
products that we introduce may not be successful with consumers or one or more of our brands may fall out of favor with
consumers. If we are unable to anticipate, identify or react appropriately to changes in consumer preferences, we may not grow
as fast as we plan to grow or our sales may decline, and our brand image and operating performance may suffer.
Furthermore, achieving market acceptance for new products will likely require us to exert substantial product development and
marketing efforts, which could result in a material increase in our selling, general and administrative, or SG&A, expenses, and
there can be no assurance that we will have the resources necessary to undertake such efforts. Material increases in our SG&A
expenses could adversely impact our results of operations and cash flows.
We may also encounter difficulties in producing new products that we did not anticipate during the development stage. Our
development schedules for new products are difficult to predict and are subject to change as a result of shifting priorities in
response to consumer preferences and competing products. If we are not able to efficiently manufacture newly-developed
products in quantities sufficient to support retail distribution, we may not be able to recoup our investment in the development
of new products. Failure to gain market acceptance for new products that we introduce could impede our growth, reduce our
profits, adversely affect the image of our brands, erode our competitive position and result in long term harm to our business.
FINANCIAL SUMMARY
• Net sales of the wholesale segment decreased $10.3 million in 2017 from prior year primarily due to decreased sales in
our work and commercial military categories. The decrease in 2017 is primarily due to the discontinuation of a private
label work program in the third quarter of 2016 and a decrease in commercial military sales in the second and third
quarter of 2017 as we were unable to anniversary the large initial sell-ins of new boots that took place in 2016 when the
color pattern changed from tan to coyote.
18
• Net sales of the retail segment increased $2.4 million in 2017 from the prior year primarily as a result of a significant
increase in our Lehigh business which includes our business to business web platforms.
• Net sales of the military segment increased $0.8 million in 2017 from the prior year which resulted in a record 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 increased $0.7 million in 2017 from the prior year as a result of higher margins
due to a combination of better full price selling, less discounting and the discontinuation of a lower margin private label
program. Gross margin of the wholesale segment as a percent of sales for 2017 was 230 basis points more than the
prior year.
• Retail gross margin for 2017 was $21.2 million or 43.8%, compared to $21.1 million or 45.9% in 2016. The 210 basis
point decrease was largely due to the increase in our Lehigh sales which carries a lower margin than our e-commerce
business.
• Gross margin of the military segment increased $3.3 million in 2017 over the prior year due primarily to increased
efficiencies in our Puerto Rico facility partially offset by the additional expenses incurred due to the disruption from
Hurricanes Maria and Irma.
•
Selling, general and administrative expenses decreased $6.7 million in 2017 from prior year primarily as result of lower
compensation expenses due to the reorganizational changes made in the third quarter of 2016 as well as decreased
depreciation expenses.
• Net interest expense decreased $0.2 million in 2017 from the prior year due to lower overall levels of debt partially
offset by an increase in the effective interest rate.
• Net income increased $11.7 million in 2017 from prior year results primarily due to increased margins along with a
decrease in operating expenses year over year. There were also significant one-time charges in both 2017 and 2016. In
2017, we recognized an income tax benefit in the fourth quarter of $3.2 million associated with Tax Cuts and Jobs Act
(TCJA). The income tax benefit was partially offset by the $1.6 million loss, after-tax, on the sale of the Creative
Recreation brand. In 2016, after-tax, we recognized a $2.0 million impairment of our Creative Recreation trade name
and a reorganizational charge of $0.8 million.
• Total debt at December 31, 2017 was $2.2 million or $12.4 million lower than the prior year.
• Our cash from operating activities decreased $4.2 million in 2017 over the prior year, primarily the result of an increase
in accounts receivable partially offset by lower inventories and increased accounts payable.
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.
19
Percentage of Net Sales
The following table sets forth consolidated statements of operations data as percentages of total net sales:
Net sales
Cost of goods sold
Gross margin
SG&A expense
Reorganizational charge
Impairment charge
Income from operations
Results of Operations
2017
Years Ended December 31,
2016
2015
100.0 %
68.1
31.9
27.2
-
-
4.7 %
100.0 %
70.5
29.5
29.1
0.4
1.2
(1.2) %
100.0 %
67.0
33.0
29.1
-
-
3.9 %
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Net sales. Net sales decreased 2.7% to $253.2 million for 2017 compared to $260.3 million the prior year. Wholesale sales
decreased $10.3 million to $166.7 million for 2017 compared to $176.9 million for 2016. The decrease in wholesale sales was
primarily the result of decreased sales in our work and commercial military categories. The decrease in 2017 are primarily the
result of the discontinuation of a private label work program in the third quarter of 2016 and a decrease in commercial military
sales in the second and third quarter of 2017 as we were unable to anniversary the large initial sell-ins of new boots that took
place in 2016 when the color pattern changed from tan to coyote. Retail sales increased to $48.4 million for 2017 compared to
$45.9 million for 2016. The $2.4 million increase in retail sales resulted from a significant increase in our Lehigh business which
includes our business to business web platforms. Military segment sales were $38.2 million for 2017 compared to $37.4 million
in 2016. 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 2017 for our footwear, apparel and accessories were comparable to 2016.
Gross margin. Gross margin increased to $80.8 million or 31.9% of net sales for 2017 compared to $76.7 million or 29.5% of
net sales for the prior year. Wholesale gross margin for 2017 was $54.2 million, or 32.5% of net sales, compared to $53.5 million,
or 30.2% of net sales in 2016. The 230 basis point increase was largely due to higher margins due to a combination of better full
price selling, less discounting and the discontinuation of a lower margin private label program. Retail gross margin for 2017 was
$21.2 million or 43.8%, compared to $21.1 million or 45.9% in 2016. The 210 basis point decrease was largely due to the
increase in our Lehigh sales which carries a lower margin than our e-commerce business. Military gross margin in 2017 was
$5.4 million, or 14.2% of net sales, compared to $2.2 million, or 5.8% of net sales in 2016. The increase in military margin is
primarily due to increased efficiencies in our Puerto Rico facility partially offset by the additional expenses incurred due to the
disruption from Hurricanes Maria and Irma.
SG&A expenses. SG&A expenses were $68.9 million, or 27.2% of net sales in 2017 compared to $75.6 million, or 29.1% of net
sales for 2016. The net decrease primarily reflected lower compensation expenses due to the reorganizational changes made in
the third quarter of 2016 as well as decreased depreciation expenses.
Reorganizational Charge. During the quarter ended September 30, 2016, we recorded $0.8 million after-tax 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 $2.0 million after-tax non-cash impairment
charge as a result of our 2016 indefinite-lived intangible test for the Creative Recreation trademark.
Interest expense. Interest expense was $0.4 million in 2017, compared to $0.6 million for the prior year. The decrease in interest
expense in 2017 from the prior year was due to lower overall levels of debt partially offset by an increase in the effective interest
rate.
20
Income taxes. Income tax benefit was $0.2 million in 2017, compared to an income tax benefit of $1.5 million for the same
period a year ago. Our income tax benefit for 2017 was a result of the Tax Cuts and Jobs Act (TCJA), more specifically the
reduction in the statutory rate applied to our deferred tax liabilities. This benefit was reduced by transition taxes on previously
unremitted earnings of non—U.S. subsidiaries and taxes due on $9.4 million of pretax income.
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, 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 $0.8 million after-tax 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 $2.0 million after-tax 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 dividends paid for U.S
income tax purposes.
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.
21
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 $99.2 million at December 31, 2017, compared to $101.1 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 $4.3 million for 2017 and $6.0 million in 2016. Capital expenditures for 2018 are anticipated to be
approximately $4.1 million.
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 outlined in further detail in Note 8.
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. For more information regarding our credit facility
please see Note 7
As a result of the Tax Cuts and Jobs Act (TCJA) passed in December 2017, the Company has recorded a liability of $2.5 million
related to the taxation of unremitted earnings of non-U.S. subsidiaries, which will be paid over eight years. The Company does
not expect this to have a material impact on its current or future liquidity.
Cash Flows
($ in millions)
Operating activities
Investing activities
Financing activities
Net change in cash and cash equivalents
2017
2016
2015
$
$
17.1 $
(1.6)
(16.3)
(0.8) $
21.3 $
(5.8)
(14.4)
1.1 $
23.2
(8.6)
(15.8)
(1.2)
Operating Activities. The principal sources of net cash in 2017 included lower inventories and increases to accounts payable and
long-term taxes payable. These sources of net cash were partially offset by an increase in accounts receivable. The principal
sources of net cash in 2016 included lower balances of accounts receivable and inventory, in addition to an increase in accounts
payable. 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.
Investing Activities. The principal use of cash in 2017, 2016 and 2015 was for the purchase of molds and equipment associated
with our manufacturing and distribution operations and for information technology software and system upgrades. An offsetting
impact to the use of cash in 2017 was cash collected for the sale of the Creative Recreation brand in the fourth quarter of 2017.
Financing Activities. Proceeds and repayments of the revolving credit facility reflect daily cash disbursement and deposit
activity. Our financing activities during 2017, 2016, and 2015 principally were net repayments under the revolving line of credit
facility and payments of dividends.
The Board of Directors approved a common stock repurchase program in March 2017 that expired on March 1, 2018. On
March 1, 2018, the Company announced a new $7,500,000 share repurchase program that will replace the 2017 plan and will
expire on March 1, 2019. Management could decide to repurchase additional shares under either program up through the date of
expiration of the program. For additional information regarding this share repurchase program see Note 11.
22
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations at December 31, 2017 resulting from financial contracts and
commitments. We have not included information on our recurring purchases of materials for use in our manufacturing operations.
These amounts are generally consistent from year to year, closely reflect our levels of production, and are not long-term in nature
(less than three months).
Contractual Obligations at December 31, 2017:
($ in millions)
Long-term debt
Taxes payable (1)
Minimum operating lease commitments
Expected cash requirements for interest (2)
Total contractual obligations
Total
Less than 1
Year
3-5 Years
$
$
2.2 $
2.5
1.4
0.8
6.9 $
1-3 Years
2.2
0.6 $
0.6
0.4
3.8 $
- $
0.2
0.8
0.4
1.4 $
Over 5
Years
-
1.1
-
-
1.1
- $
0.6
-
-
0.6 $
(1) Represents one-time transition tax payable related to known amounts of cash taxes payable in future years as a result of the TCJA. For further
information, refer to Note 10.
(2) No payments are reflected in the above table after the credit facility matures in November 2019.
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, 2017, 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, 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 2017, 2016, and 2015 due to these
factors. It is anticipated that any inflationary pressures during 2018 could be offset through possible price increases.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements are prepared in accordance with GAAP. The preparation of financial statements in
conformity with GAAP requires us to establish accounting policies and make estimates that affect amounts reported in our
Consolidated Financial Statements. Note 1 of the Notes to Consolidated Financial Statements, which is incorporated by reference
into this MD&A, describes the significant accounting policies we use in our Consolidated Financial Statements.
An accounting estimate requires assumptions and judgments about uncertain matters that could have a material effect on the
Consolidated Financial Statements. Estimates are made under facts and circumstances at a point in time, and changes in those
facts and circumstances could produce results substantially different from those estimates. The most significant accounting
policies and estimates and their related application are discussed below.
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.
23
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 as a percentage of sales for the years below were as follows:
Sales, returns, and allowances
Inventories
2017
2016
2015
3.9 %
3.8 %
3.5 %
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 as required. See Note 3 for additional information regarding inventories.
Intangible assets
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.
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. See Note 5 for additional information regarding intangible
assets.
Income taxes
Management has recorded a valuation allowance to reduce its deferred tax assets for a portion of state and local income tax net
operating losses that it believes may not be realized. We have considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for a valuation allowance, however, in the event we were to determine that we would
not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be
charged to income in the period such determination was made.
On December 22, 2017, the U.S. enacted the TCJA, which significantly changes U.S. corporate income tax laws by, among other
things, reducing the U.S. corporate income tax rate to 21% beginning in 2018 and creating a territorial tax system with a one-
time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries.
24
Other significant changes to U.S. income taxes resulting from TCJA will be reflected in 2018. In addition to the reduction of the
corporate tax rate, changes in the taxation of foreign earnings and the deductibility of expenses are still being evaluated by the
Company and could have a material impact on the company’s effective tax rate.
Concurrent with the enactment of the tax reform legislation on December 22, 2017, the SEC staff issued guidance in Staff
Accounting Bulletin 118 ("SAB 118") to address concerns regarding the ability of a reporting entity to timely comply with the
accounting requirements to recognize all the effects of the Act in the period of enactment. Under SAB 118, the Company has up
to 12 months from the enactment date to complete the accounting for some or all of the income tax effects triggered by the
enactment of the law. The Company has recorded a provisional estimate of the expected tax liability as required under SAB 118
and intends to finalize the computations on or before the due date of the U.S. corporate tax return in October 2018.
RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS
Note 2 to Consolidated Financial Statements discusses new accounting pronouncements adopted during 2017 and the expected
impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent the adoption of new
accounting standards materially affect financial condition, results of operations, or liquidity, the impacts are discussed in the
applicable section of this MD&A and the Notes to 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, 2017 of $2.2 million. For additional information about our credit facility see
Note 7. We have no other long-term debt maturities.
We do not have any interest rate management agreements as of December 31, 2017.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ROCKY BRANDS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Description
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016, and 2015
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2017, 2016, and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016, and 2015
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Note 2. ACCOUNTING STANDARDS UPDATES
Note 3. INVENTORIES
Note 4. PROPERTY, PLANT, AND EQUIPMENT
Note 5. IDENTIFIED INTANGIBLE ASSETS
Note 6. OTHER ASSETS
Note 7. LONG-TERM DEBT
Note 8. OPERATING LEASES
Note 9. BENEFIT PLAN
Note 10. TAXES
Note 11. SHAREHOLDERS' EQUITY
Note 12. SHARE-BASED COMPENSATION
Note 13. EARNINGS PER SHARE
Note 14. SUPPLEMENTAL CASH FLOW INFORMATION
Note 15. SEGMENT INFORMATION
Note 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Note 17. COMMITMENTS AND CONTINGENCIES
Note 18. REORGANIZATIONAL CHARGE
Note 19. SALE OF CREATIVE RECREATION
Page
27
28
29
30
31
32
35
36
37
37
39
39
39
40
40
43
43
44
45
45
47
47
47
47
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Rocky Brands, Inc. and Subsidiaries
Nelsonville, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Rocky Brands, Inc. and Subsidiaries (the “Company”) as of
December 31, 2017 and 2016, and the related consolidated statements of operations, shareholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2017, 2016 and 2015 and the related notes and the financial statement
schedule listed in the index at Item 15(a)(2), (collectively referred to as the “financial statements”). In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,
2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based upon criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 12, 2018, expressed an unqualified opinion.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
fraud or error. Our audits included performed procedures to assess the risks of material misstatement of financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our
opinion.
/s/ Schneider Downs & Co., Inc.
We have served as the Company’s auditor since 2007.
Columbus, Ohio
March 12, 2018
27
Rocky Brands, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
2017
2016
$
$
3,680,776
45,027,002
806,468
65,622,432
1,849,237
2,199,648
119,185,563
23,781,001
30,314,749
197,977
173,479,290
$
$
4,480,505
40,844,583
688,251
69,168,442
1,243,678
2,354,107
118,779,566
26,511,493
33,415,694
232,509
178,939,262
$
12,982,535
$
11,589,040
1,754,681
599,793
770,219
455,845
2,160,847
1,301,931
20,025,851
2,199,423
2,286,512
7,726,234
148,408
32,386,428
949,894
842,325
534,070
446,703
1,980,598
1,377,281
17,719,911
14,584,008
-
11,365,800
176,219
43,845,938
68,973,927
72,118,935
141,092,862
173,479,290
$
69,291,637
65,801,687
135,093,324
178,939,262
$
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents
Trade receivables, net
Other receivables
Inventories
Income tax receivable
Prepaid expenses
Total current assets
PROPERTY, PLANT & EQUIPMENT – net
IDENTIFIED INTANGIBLES
OTHER ASSETS
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable
Accrued expenses:
Salaries and wages
Taxes - other
Accrued freight
Commissions
Accrued duty
Other
Total current liabilities
LONG TERM DEBT
LONG TERM TAXES PAYABLE
DEFERRED INCOME TAXES
DEFERRED LIABILITIES
TOTAL LIABILITIES
SHAREHOLDERS' EQUITY:
Common stock, no par value;
25,000,000 shares authorized; issued and outstanding
December 31, 2017 - 7,398,654 and December 31, 2016 -
7,421,455
Retained earnings
Total shareholders' equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
See notes to consolidated financial statements
28
Rocky Brands, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended
December 31,
2016
2017
2015
$
253,196,972 $
172,428,155
80,768,817
260,258,584 $
183,528,494
76,730,090
269,302,023
180,410,184
88,891,839
NET SALES
COST OF GOODS SOLD
GROSS MARGIN
OPERATING EXPENSES
Selling, general and administrative expenses
68,943,561
75,631,490
78,402,079
Reorganizational charge
Impairment charge
Total Operating Expenses
-
-
1,159,527
3,000,000
-
-
68,943,561
79,791,017
78,402,079
INCOME (LOSS) FROM OPERATIONS
11,825,256
(3,060,927)
10,489,760
OTHER INCOME AND (EXPENSES):
Interest expense
Other – net
Loss on disposition of Creative Recreation
Total other - net
(389,586)
15,450
(2,089,816)
(2,463,952)
(616,567)
59,020
-
(557,547)
(696,827)
(105,433)
-
(802,260)
INCOME (LOSS) BEFORE INCOME TAXES
9,361,304
(3,618,474)
9,687,500
INCOME TAX (BENEFIT) EXPENSE
(225,362)
(1,479,078)
3,084,343
9,586,666 $
(2,139,396) $
6,603,157
1.29 $
1.29 $
(0.29) $
(0.29) $
0.87
0.87
7,428,176
7,450,312
7,505,219
7,505,219
7,563,205
7,574,172
NET INCOME (LOSS)
INCOME (LOSS) PER SHARE
Basic
Diluted
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic
Diluted
See notes to consolidated financial statements
$
$
$
29
Rocky Brands, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity
Common Stock and
Additional Paid-in Capital
Shares
Outstanding
Amount
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Shareholders'
Equity
7,550,126 $ 70,460,672 $
-
$ 67,887,246 $ 138,347,918
6,603,157
(3,252,254)
6,603,157
(3,252,254)
600
16,545
8,742
412,978
7,567,271 $ 70,882,392 $
-
8,742
412,978
$ 71,238,149 $ 142,120,541
(175,632) $
29,816
(1,950,114)
359,359
7,421,455 $ 69,291,637 $
-
(51,533)
(688,337)
1,050
27,682
14,236
356,391
7,398,654 $ 68,973,927 $
-
$ (2,139,396) $
(3,297,066)
(2,139,396)
(3,297,066)
(1,950,114)
359,359
$ 65,801,687 $ 135,093,324
9,586,666
(3,269,418)
9,586,666
(3,269,418)
(688,337)
14,236
356,391
$ 72,118,935 $ 141,092,862
BALANCE - December 31, 2014
YEAR ENDED DECEMBER 31, 2015
Net income
Dividends paid on common stock
Stock issued and options exercised including tax
benefits
Stock compensation expense
BALANCE - December 31, 2015
YEAR ENDED DECEMBER 31, 2016
Net loss
Dividends paid on common stock
Repurchase of common stock
Stock compensation expense
BALANCE - December 31, 2016
YEAR ENDED DECEMBER 31, 2017
Net income
Dividends paid on common stock
Repurchase of common stock
Stock issued and options exercised including tax
benefits
Stock compensation expense
BALANCE - December 31, 2017
See notes to consolidated financial statements
30
Rocky Brands, Inc. and Subsidiaries
Consolidated Statement 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
Loss on disposition of Creative Recreation
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
Long-term taxes payable
2017
December 31,
2016
2015
$
9,586,666 $
(2,139,396) $
6,603,157
6,507,294
(3,639,566)
120,284
2,089,816
-
-
356,391
(6,074,903)
4,046,981
(605,559)
154,459
34,532
1,359,795
884,634
2,286,512
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)
-
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)
-
Net cash provided by operating activities
17,107,336
21,298,341
23,242,565
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets
Proceeds from sales of fixed assets
Proceeds from the sale of Creative Recreation
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
Proceeds from stock options
Repurchase of common stock
Dividends paid on common stock
Net cash used in financing activities
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD
END OF PERIOD
See notes to consolidated financial statements
(4,308,346)
330,118
2,399,267
-
(5,906,479)
44,764
-
-
(8,654,642)
17,495
-
(1,176)
(1,578,961)
(5,861,715)
(8,638,323)
61,779,493
(74,164,078)
14,236
(688,337)
(3,269,418)
(16,328,104)
71,255,424
(80,371,505)
-
(1,950,114)
(3,297,066)
(14,363,261)
68,423,672
(80,993,956)
8,742
-
(3,252,254)
(15,813,796)
(799,729)
1,073,365
(1,209,554)
4,480,505
3,680,776 $
3,407,140
4,480,505 $
4,616,694
3,407,140
$
31
ROCKY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED December 31, 2017, 2016 AND 2015
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, Georgia Boot, Durango, and Lehigh. Our brands have a long history
of representing high quality, comfortable, functional and durable footwear and our products are organized around seven target
markets: outdoor, work, duty, commercial military, western, lifestyle and military. 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. 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, specialty
retailers and online retailers. Our retail business includes direct sales of our products to consumers through our business to
business web-platform, 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. Balances may exceed federally insured limits.
Trade Receivables - Trade receivables are presented net of the related allowance for uncollectible accounts of approximately
$177,000 and $1,041,000 at December 31, 2017 and 2016, respectively. The Company records the allowance based on historical
experience, the age of the receivables, and identification of customer accounts that are likely to prove difficult to collect due to
various criteria including pending bankruptcy. However, estimates of the allowance in any future period are inherently uncertain
and actual allowances may differ from these estimates. If actual or expected future allowances were significantly greater or less
than established reserves, a reduction or increase to bad debt expense would be recorded in the period this determination was
made. Our credit policy generally provides that trade receivables will be deemed uncollectible and written-off once we have
pursued all reasonable efforts to collect on the account.
Concentration of Credit Risk - We have significant transactions with a large number of customers. No customer represented
10% of trade receivables - net as of December 31, 2017 and 2016. 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 Asia, 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.
32
Property, Plant and Equipment - 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, and
patents. 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. See Note 5 for more information.
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.
There were no material other comprehensive income items therefore no Statement of Comprehensive Income was presented.
Advertising - We expense advertising costs as incurred. Advertising expense was approximately $7,095,000, $8,079,000, and
$9,869,000 for 2017, 2016 and 2015, respectively.
Revenue Recognition - Revenue and related cost of goods sold are recognized at the time products are shipped to the customer
and title transfers. Revenue is recorded net of estimated sales discounts and returns based upon specific customer agreements
and historical trends. Net sales include royalty income from licensing our brands. Based on our analysis of ASU 2014-09, we
do not feel the new revenue recognition standard will have a material impact on our consolidated financial statements upon
adoption in 2018, but will result in expanded disclosures. We will apply the modified retrospective adoption method to all
contracts that were not completed as of December 31, 2017. While we do not expect the adoption of this standard to have a
material impact on the consolidated financial statements, revenues from substantially all wholesale, retail, and military sales will
be recognized upon shipment, which is a change in some instances where the revenue was not recognized until the delivery to
the customer under ASC 605.
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 have been included in selling, general and administrative
costs and totaled approximately $8,133,000 $7,851,000, and $8,500,000 in 2017, 2016 and 2015, respectively.
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.
33
• Level 2 – Observable inputs other than quoted market prices included in Level 1, such as quoted prices for similar assets
and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active;
or other inputs that are observable or can be corroborated by observable market data.
• Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
The fair values of cash and cash equivalents, receivables, and payables approximated their carrying values because of the short-
term nature of these instruments. Receivables consist primarily of amounts due from our customers, net of allowances, 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 long-term credit facility and
other short-term financing obligations also approximate fair value, as they are comparable to the available financing in the
marketplace during the year. The fair value of our revolving line of credit is categorized as Level 2.
34
2. ACCOUNTING STANDARDS UPDATES
Recently Issued Accounting Pronouncements
Rocky Brands, Inc. is currently evaluating the impact of certain ASUs on its Consolidated Financial Statements or Notes to the
Consolidated Financial Statements:
Standard
Description
The pronouncement provides specific guidance on
eight cash flow classification issues to reduce the
diversity in practice.
ASU 2016-15, Statement of
Cash Flows (Topic 230):
Classification of Certain
Cash Receipts and Cash
Payments (a consensus of the
Emerging Issues Task Force).
ASU 2016-13, Measurement
of Credit Losses on Financial
Instruments
The pronouncement seeks to provide financial
statement users with more decision-useful
information about the expected credit losses on
financial instruments and other commitments to
extend credit held by a reporting entity at each
reporting date by replacing the incurred loss
impairment methodology in current U.S. GAAP
with a methodology that reflects expected credit
losses and requires consideration of a broader range
of reasonable and supportable information to inform
credit loss estimates.
Anticipated
Adoption
Period
Q1 2018
Effect on the financial
statements or other
significant matters
The Company does not
anticipate the adoption of
this standard will have a
material impact on the
Company's financial
statements.
Q1 2020
The Company is
evaluating the impacts of
the new standard on its
existing financial
instruments, including
trade receivables.
ASU 2016-02, Leases (Topic
842).
The pronouncement introduces a lessee model that
Q1 2019
brings most leases on the balance sheet. The
standard requires that lessees recognize the
following for all leases (with the exception of short-
term leases, as that term is defined in the standard)
at the lease commencement date: (1) a lease liability,
which is a lessee’s obligation to make lease
payments arising from a lease, measured on a
discounted basis; and (2) 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.
The Company has formed
an internal project team to
begin gathering data
relating to leasing activity
at the Company. This
includes compiling a list
of all contracts that could
meet the definition of a
lease under the new
standard and evaluating
the accounting for these
contracts under the new
standard to determine the
ultimate impact the new
standard will have on the
Company's financial
statements.
ASU 2014-09, Revenue from
Contracts with Customers
(Topic 606).
The pronouncement outlines a single,
Q1 2018
The Company does not
comprehensive model for entities to use in
accounting for revenue arising from contracts with
customers and supersedes most current revenue
recognition guidance. The core principle of the new
standard is that an entity should recognize revenue
to depict the transfer of 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.
anticipate the adoption of
this standard will have a
material impact on the
Company's financial
statements and has elected
to apply the modified
retrospective method of
adoption. For additional
information please see
Note 1.
35
Accounting Standards Adopted in the Current Year
Standard
ASU 2016-09,
Compensation - Stock
Compensation (Topic
718) Improvements to
Employee Share-Based
Payment Accounting.
Description
Among other provisions, the standard requires that all
income tax effects of awards are recognized in the
income statement when the awards vest or are settled and
also allows an employer to make a policy election to
account for forfeitures as they occur.
ASU 2015-17, Income Taxes -
Balance Sheet Classification
of Deferred Taxes (Topic
740).
ASU 2015-11, Inventory
(Topic 330).
ASU 2014-15, Presentation
of Financial Statements -
Going Concern (Subtopic
205-40).
The amendments in this update 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.
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.
Prior to this ASU, there was no guidance in accounting
principles generally accepted in the United States (U.S.
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.
Effect on the financial statements
or other significant matters
The Company adopted this ASU in
the first quarter of 2017, which did
not have a material effect on the
consolidated financial statements.
Upon adoption, The Company has
elected to continue incorporating
an estimate for forfeitures for
share-based compensation with a
service condition.
The Company adopted this
ASU effective January 2017 and
applied the amendments
retrospectively to maintain
comparability of its consolidated
balance sheets. The change in
accounting standard has been
applied retrospectively by
adjusting the consolidated balance
sheets for the prior periods
presented.
ASU in the first quarter of 2017,
which did not have an effect on the
consolidated financial statements.
The Company has adopted this
ASU in the first quarter of 2017,
which did not have an effect on the
consolidated financial statements.
The amendments in this Update require an entity to
The Company has adopted this
3. INVENTORIES
Inventories are comprised of the following:
Raw materials
Work-in-process
Finished goods
Total
December 31,
2017
2016
$
$
11,394,657
709,406
53,518,369
65,622,432
$
$
14,260,416
751,519
54,156,507
69,168,442
36
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is comprised of the following:
Land
Buildings
Machinery and equipment
Furniture and fixtures
Lasts, dies and patterns
Construction work-in-progress
Total
Less - accumulated depreciation
Net Fixed Assets
$
December 31,
2017
2016
$
671,035
20,219,772
44,522,544
2,444,248
16,350,278
1,624,480
85,832,357
671,035
20,606,826
45,124,554
2,849,091
15,593,484
464,345
85,309,335
(62,051,356)
(58,797,842)
$
23,781,001
$
26,511,493
We incurred approximately $6,386,000, $7,589,000, and $7,053,000 in depreciation expense for 2017, 2016 and 2015,
respectively.
During the fourth quarter of 2017 the Creative Recreation brand was sold. As part of this sale, approximately $236,000 of molds
and lasts was sold. See Note 19 for additional information regarding the sale of Creative Recreation.
5. IDENTIFIED INTANGIBLE ASSETS
A schedule of identified intangible assets is as follows:
December 31, 2017
Trademarks
Wholesale
Retail
Patents
Customer Relationships
Total Intangibles
December 31, 2016
Trademarks
Wholesale
Retail
Patents
Customer Relationships
Total Intangibles
The weighted average life for our patents is 4.3 years.
Gross
Amount
Accumulated
Amortization
Carrying
Amount
$
$
27,192,281
2,900,000
895,477
-
$
30,987,758
$
673,009
-
673,009
Gross
Amount
Accumulated
Amortization
$
$
29,343,578
2,900,000
2,595,477
2,200,000
37,039,055
$
$
-
-
2,376,694
1,246,667
3,623,361
$
$
$
$
27,192,281
2,900,000
222,468
-
30,314,749
Carrying
Amount
29,343,578
2,900,000
218,783
953,333
33,415,694
37
A schedule of approximate amortization expense related to finite-lived intangible assets is as follows:
Amortization
Expense
2017 $
2016
2015
121,000
132,000
135,000
A schedule of approximate future expected amortization expense related to finite-lived intangible assets is as follows:
Amortization
Expense
41,000
33,000
31,000
26,000
22,000
69,000
2018 $
2019
2020
2021
2022
2023+
During the fourth quarter of 2017 the Creative Recreation brand was sold. Included in the sale were $2.1 million of trademarks
and $880,000 of customer relationships. See Note 19 for more information regarding the sale of Creative Recreation.
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.
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.
2017 Impairment Testing
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 2017 indefinite-lived intangible impairment testing indicated that
all reporting unit intangible asset fair values exceed their respective carrying values.
2016 Impairment Testing
The results of our 2016 indefinite-lived intangible impairment testing of 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. The fair value
of intangible assets at each of the remaining reporting units exceed their respective carrying amounts as of December 31, 2016.
2015 Impairment Testing
The results of our 2015 indefinite-lived intangible impairment testing indicated that all reporting unit intangible asset fair values
exceed their respective carrying values.
38
6. OTHER ASSETS
Other assets consist of the following:
Deferred financing costs, net
Other
Total
7. LONG-TERM DEBT
December 31,
2017
2016
$
$
58,921
139,056
197,977
$
$
89,662
142,847
232,509
In December 2014, we amended and restated our financing agreement with PNC Bank (“PNC”) to increase the credit facility to
$75.0 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.
The Company’s credit facility borrowings consist of the following:
LIBOR borrowings
Prime borrowings (1)
Total credit facility borrowings
December 31,
2017
-
$
$
2,199,423
2,199,423
2016
12,000,000
2,584,008
14,584,008
$
$
(1) December 31, 2017 effective rate of 4.25%. Variable effective rate at December 31, 2017, based on Prime - 0.25%
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, 2017, we had total capacity of
$63.6 million.
Credit Facility Covenants
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, 2017, 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. Please see Note 11 for more
information regarding dividends paid.
8. OPERATING LEASES
We lease certain machinery, trucks, and facilities under operating leases that generally provide for renewal options. We incurred
approximately $1,371,000, $1,279,000, and $1,335,000 in rent expense under operating lease arrangements for 2017, 2016 and
2015, respectively.
39
Future minimum lease payments under non-cancelable operating leases are approximately as follows for the years ended
December 31:
Years ended
December 31,
789,903
309,991
186,651
80,335
7,334
1,374,214
$
2018
2019
2020
2021
2022
Total $
9. BENEFIT PLAN
We sponsor a 401(k) savings plan for eligible 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 approximate contributions to the 401(k) Plan were as follows:
401k plan sponsor contributions
10. TAXES
2017
2016
$
800,000
$
900,000
$
2015
1,000,000
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (TCJA,) a comprehensive tax legislation which,
among other things, reduced the federal income tax rate for C corporations from 35% to 21% and created a territorial tax system
with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries, effective on January 1, 2018. The
TCJA makes broad and complex changes to the Internal Revenue Code which will impact the Company, including reduction of
the U.S. corporate income tax rate as well as introduction of business-related exclusions, deductions and credits. The effects of
the TCJA have been recorded in the fourth quarter 2017 and its impact to the Company’s Consolidated Financial Statements are
included and described within this footnote.
The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”) in December 2017, which provides guidance on accounting
for the tax effects of the TCJA. SAB 118 provides that the measurement period for the tax effects of the TCJA should not extend
more than one year from the date the TCJA was enacted. To the extent that a company's accounting for certain income tax effects
of the TCJA is incomplete but the company is able to determine a reasonable estimate, the company must record a provisional
estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial
statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately
before the TCJA was enacted.
As a result of the reduction in the corporate income tax rate, the Company revalued its deferred tax liabilities at December 31,
2017 and recognized a provisional tax benefit of approximately $4.5 million for the year ended December 31, 2017. The impact
ultimately realized may differ from this provisional amount, possibly materially, due to, among other things, additional analysis,
changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions
the Company may take as a result of the TCJA, including analyzing planning opportunities with respect to tax accounting
methods. The accounting for the income tax effects of the TCJA is expected to be complete when the 2017 corporate income tax
return is filed in 2018.
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.
40
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,
2017
2016
2015
$
$
3,387,046
(3,764,882)
(377,836)
$
(1,192,764)
(296,045)
(1,488,809)
2,656,870
287,755
2,944,625
64,675
125,329
190,004
(37,517)
(13)
(37,530)
151,728
(349,284)
(197,556)
164,950
42,337
207,287
81,433
86,863
168,296
13,391
(41,969)
(28,578)
Total
$
(225,362)
$
(1,479,078)
$
3,084,343
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
$
3,272,159 $
(1,270,003) $
Years Ended December 31,
2016
2017
2015
3,404,159
Increase (decrease) in income taxes resulting from:
Change in Statutory Tax Rate
Toll tax on CFC accumulated earnings and profits
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
Total
(4,490,916)
2,792,683
(1,802,186)
-
-
137,336
(260,035)
80,316
130
45,151
(225,362) $
-
-
(2,367,810)
2,050,314
7,353
(99,699)
-
100,288
3,847
96,632
(1,479,078) $
-
-
(2,816,963)
2,556,940
-
67,886
(194,498)
98,082
5,998
(37,261)
3,084,343
$
As of December 31, 2017, all previously undistributed earnings of $23.6 million from non-U.S. subsidiaries have been subject
to the TCJA transition toll tax of $2.8 million. Accordingly, the Company believes that there will be no additional tax cost
associated with the repatriation of such foreign earnings.
41
Deferred income taxes recorded in the Consolidated Balance Sheets at December 31, 2017 and 2016 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
Total deferred tax assets
Deferred tax liabilities:
Asset valuation allowances and accrued expenses
Fixed assets
Intangible assets
Other assets
Tollgate tax on Lifestyle earnings
Total deferred tax liabilities
December 31,
2016
2017
-
$
333,012
208,076
32,406
580,706
1,154,200
(480,127)
674,073
247,230
784,051
6,917,331
224,132
227,563
8,400,307
$
242,916
491,371
302,929
63,214
736,519
1,836,949
(471,159)
1,365,790
-
1,676,813
10,337,533
337,972
379,271
12,731,589
Net deferred tax liability
$
7,726,234
$
11,365,800
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, $227,563 of tollgate tax
would be due.
We are subject to tax examinations in various taxing jurisdictions. The earliest exam years open for examination are as follows:
Taxing Authority Jurisdiction:
U.S. Federal
Various U.S. States
Puerto Rico (U.S. Territory)
Canada
Earliest Exam Year
2014
2013
2012
2012
Our policy is to accrue interest and penalties on any uncertain tax position as a component of income tax expense. As of
December 31, 2017 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.
42
11. SHAREHOLDERS' EQUITY
Repurchase of Common Stock
A summary of our authorized share repurchase plans is as follows:
Maximum authorized share repurchase amount (1)
Date of plan's authorization by the Board
Funding source
Number of shares repurchased under the plan (shares)
Amount paid for shares repurchased
Weighted average price paid per share
Remaining amount of shares authorized to be purchased under the plan (in dollars)
2017
7,500,000 $
March 2017
Credit facility
51,533
688,337 $
13.36 $
6,811,663 $
2016
7,500,000
February 2016
Credit facility
175,632
1,950,114
11.10
5,549,886
$
$
$
$
(1) Common shares can be purchased in the open market or privately negotiated transactions over the next twelve months from the date of plan
authorization.
In March 2018, the Company announced a new $7,500,000 share repurchase program that will terminate on March 1, 2019. This
program is replacing the 2017 share repurchase program that expired on March 1, 2018.
Preferred Shares
The Company has authorized 250,000 shares of voting preferred stock with no par value. No shares are issued or outstanding.
Also, the Company has authorized 250,000 shares of non-voting preferred stock with no 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, 2017 and 2016, respectively.
12. SHARE-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,
2017, we were authorized to issue 135,560 shares under this plan.
Stock options
The following table presents the weighted average assumptions used in the option-pricing model at the grant date for options
granted in the three years ended December 31:
Assumptions:
Exercise price per share
Risk-free interest rate
Expected dividend yield
Expected volatility of Rocky's common stock
Expected option term (years)
Weighted-average grant date fair value per share
2017
2016
2015
$
$
11.78 $
2.25 %
3.74
35.33
6.5
2.94 $
11.48 $
2.05 %
3.84%
42.32%
6.5
3.37 $
13.74
1.92 %
2.95%
45.81%
6.5
4.78
For the years ended 2017, 2016, and 2015 we recognized share-based compensation expense and the corresponding tax benefit
as follows:
Share-based compensation expense
Tax benefit
$
2017
145,810 $
22,106
2016
162,449 $
53,291
2015
237,978
64,103
43
The following summarizes stock option activity for the year ended December 31, 2017:
$ amounts are per share
Options outstanding at January 1, 2017
Issued
Exercised
Forfeited or expired
Options outstanding at December 31, 2017
Expected to vest
Exercisable at December 31, 2017
Weighted
Average
Exercise Price
12.85
11.73
13.56
12.12
12.09
12.04
12.20
Shares
42,250 $
83,000
(1,050)
(34,900)
89,300 $
61,500 $
27,800 $
Weighted
Average
Remaining
Actual Term
Aggregate
Intrinsic Value
7.5 $
8.6 $
5.0 $
-
-
-
In the first quarter of 2017, officers and certain employees of the Company were granted 65,000 options. 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. For the year ended December 31, 2017 cash received for the exercise of stock options was $14,236.
No options were exercised in 2016. For the year ended December 31, 2015 cash received for the exercise of stock options was
$8,742.
In the first quarter of 2017, Board of Director members were granted 18,000 stock options that immediately vest and will expire
in 10 years.
Restricted stock units and performance share units
The following table summarizes the status of the Company’s restricted stock units and performance share units and activity as
of December 31, 2017:
Nonvested at January 1, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Restricted Stock Units
Performance Share Units
Weighted-Average
Grant Date Fair
Value Per Share
-
12.50
12.71
12.29
12.47
Quantity
31,499 $
-
(10,876)
(8,686)
11,937 $
Weighted-Average
Grant Date Fair
Value Per Share
12.04
-
-
6.19
11.30
Quantity
37,000 $
-
-
(13,000)
24,000 $
As of December 31, 2017, the total unrecognized compensation cost related to non-vested stock options and restricted stock units
was $153,704 with a weighted-average expense recognition period of 4.0 years.
During the years ended December 31, 2017 and 2016, we issued 16,806 and 14,568 shares of common stock to members of our
Board of Directors, respectively. We recorded compensation expense of approximately $210,000 and $168,000, respectively,
which was the fair market value of the shares on the grant dates.
13. EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing net income applicable to common shareholders by the weighted
average number of common shares outstanding during each period. The diluted earnings per share computation includes common
share equivalents, when dilutive.
44
A reconciliation of the shares used in the basic and diluted income per common share computation for the years ended
December 31, as follows:
2017
Year-ended December 31,
2016
2015
Basic - weighted average shares outstanding
7,428,176
7,505,219
7,563,205
Dilutive restricted share units
Dilutive stock options
19,442
2,694
-
-
1
1
9,987
980
Diluted - weighted average shares outstanding
7,450,312
7,505,219
7,574,172
Anti-dilutive securities
71,537
97,894
84,210
(1) No dilutive share impact due to net loss.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow for the years ended as follows:
Interest paid
Federal, state, and local income taxes paid, net
Property, plant, and equipment purchases in accounts payable
15. SEGMENT INFORMATION
2017
December 31,
2016
2015
$
$
$
415,527 $
606,697 $
724,651
1,726,959 $
339,625 $
5,568,581
182,823 $
216,523 $
92,903
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 10,000 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, specialty retailers and online retailers.
Retail. In our retail segment, we market directly to consumers through our Lehigh business-to-business including direct sales
and through our CustomFit websites, consumer e-commerce websites and our Rocky outlet store. In 2017 we also operated four
mobile trucks to service the New York Transit Authority’s employees, but that contract ended in the fourth quarter of 2017.
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.
45
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.
NET SALES:
Wholesale
Retail
Military
Total Net Sales
GROSS MARGIN:
Wholesale
Retail
Military
Total Gross Margin
2017
166,682,253 $
48,351,979
38,162,740
253,196,972 $
Years Ended
December 31,
2016
176,937,595 $
45,933,811
37,387,178
260,258,584 $
54,187,922 $
21,168,186
5,412,709
80,768,817 $
53,497,843 $
21,077,597
2,154,650
76,730,090 $
$
$
$
$
2015
206,072,657
45,808,705
17,420,661
269,302,023
65,979,792
20,621,884
2,290,163
88,891,839
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
2017
% of
Sales
2016
% of
Sales
2015
% of
Sales
$
109,871,506
38,645,942
43.4 % $
15.3
111,156,688
38,970,631
42.7 % $
15.0
120,422,188
43,435,734
44.7 %
16.1
33,711,796
12,909,520
13,002,661
38,162,740
3,323,522
3,339,565
229,720
13.3
5.1
5.1
15.1
1.3
1.3
0.1
37,081,857
15,571,965
13,318,525
37,387,178
2,861,071
3,464,667
446,002
14.2
6.0
5.1
14.4
1.1
1.3
0.2
33,341,424
23,370,822
20,688,005
17,420,661
5,662,277
4,155,137
805,775
12.4
8.7
7.7
6.5
2.1
1.5
0.3
$
253,196,972
100.0 % $
260,258,584
100.0 % $
269,302,023
100.0 %
Net sales to foreign countries represented approximately 3.0% of net sales in 2017, 2.8% of net sales in 2016 and 4.8% of net
sales in 2015.
46
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2017 and 2016:
Net sales
Gross margin
Net (loss) income
Dividends paid
Net (loss) income per common share:
Basic
Diluted
Net sales
Gross margin
Net (loss) income
Dividends paid
Net (loss) income per common share:
Basic
Diluted
$
$
$
$
$
$
$
$
$
$
$
$
1st Quarter
2nd Quarter
2017
3rd Quarter
4th Quarter
Total Year
63,072,954 $
19,748,080 $
1,495,941 $
817,901 $
58,454,954 $
18,163,521 $
1,459,183 $
818,604 $
64,675,082 $
19,511,544 $
2,234,764 $
819,059 $
66,993,982 $
23,345,672 $
4,396,778 $
813,854 $
253,196,972
80,768,817
9,586,666
3,269,418
0.20 $
0.20 $
0.20 $
0.20 $
0.30 $
0.30 $
0.59 $
0.59 $
1.29
1.29
1st Quarter
2nd Quarter
2016
3rd Quarter
4th Quarter
Total Year
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
(0.03) $
(0.03) $
(0.23) $
(0.23) $
0.06 $
0.06 $
(0.09) $
(0.09) $
(0.29)
(0.29)
17. 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.
18. 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 Operations. During the year ended December 31, 2016, costs of approximately
$1,160,000 were recognized related to these initiatives, which consisted primarily 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
consolidated balance sheet relating to future severance payments, which were paid out in 2017. We did not incur additional costs
related to our reorganization efforts.
19. SALE OF CREATIVE RECREATION
In November 2017, the Creative Recreation brand was sold to a private investment group for approximately $4.4 million. The
sale included the inventory, product designs and molds, trademarks and related intangible assets of Creative Recreation along
with certain licensing and other contracts. The brand was sold to allow the Company to better focus on our more profitable core
brands and allocate resources toward growth and development of additional opportunities with those brands moving forward. All
of the assets included in the sale were transferred to the buyer during the fourth quarter of 2017. The Company will earn a fee
for managing the Creative Recreation website during the transition of operations to the buyer. The fee is meant to offset the
transaction costs of managing the site. We expect the site and its operations to fully transition to the buyer in the second quarter
of 2018. As of December 31, 2017 there is a receivable for approximately $1.9 million due from the buyer related to assets
acquired through the sale of Creative Recreation. There is also approximately $569,000 in accrued liabilities at December 31,
2017 related to future inventory that the Company is obligated to purchase from our manufacturing partners and provide to the
private investment group. The Company incurred a $2.1 million loss on the sale of the Creative Recreation brand.
Sales of the Creative Recreation brand were reported under the wholesale reporting segment, except for Creative Recreation e-
commerce sales, which were reflected in the retail reporting segment.
47
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 and principal financial officer, of the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended). Based upon
that evaluation, our principal executive officer and our 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,
2017. 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 within this report.
ITEM 9B. OTHER INFORMATION.
None.
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Rocky Brands, Inc. and Subsidiaries
Nelsonville, Ohio
Opinion on Internal Control over Financial Reporting
We have audited Rocky Brands, Inc. and Subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control-Integrated Framework (2013) issued by the COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets and the related consolidated statements of operations, shareholders’ equity, and cash
flows of the Company, and our report dated March 12, 2018, expressed an unqualified opinion.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ Schneider Downs & Co., Inc.
Columbus, Ohio
March 12, 2018
49
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this item is included under the captions “ELECTION OF DIRECTORS”, “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 2018 Annual Meeting of Shareholders (the “Proxy Statement”) to be held on May 16, 2018,
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 “REPORT OF
THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS” 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.
information required by
The
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.
included under
item
this
is
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”, “INFORMATION CONCERNING THE BOARD OF DIRECTORS AND CORPORATE
GOVERNANCE” and “TRANSACTIONS WITH RELATED PERSONS” 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 “FEES OF THE INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM” in the Company’s Proxy Statement, and is incorporated herein by reference.
50
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 in Item 8:
• Report of Independent Registered Public Accounting Firm
• Consolidated Balance Sheets as of December 31, 2017 and 2016
• Consolidated Statements of Operations for the years ended December 31, 2017, 2016, and 2015
• Consolidated Statements of Shareholders' Equity for the years ended December 31, 2017, 2016, and 2015
• Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015
• Notes to Consolidated Financial Statements for the years ended December 31, 2017, 2016, and 2015
(2) The following financial statement schedule for the years ended December 31, 2017, 2016, and 2015 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. See Appendix A.
• Schedule II -- Consolidated Valuation and Qualifying Accounts.
Schedules not listed above are omitted because of the absence of the conditions under which they are required or
because the required information is included in the Consolidated Financial Statements or the notes thereto.
(3) Exhibits:
Exhibit
Number
Description
3.1
3.2
3.3 (P)
4.1 (P)
4.2
Second Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit
3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006).
Amendment to 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 Second
Amended and Restated Articles of Incorporation (see Exhibit 3.1).
4.3 (P)
Articles I and II of the Company's Code of Regulations (see Exhibit 3.3).
10.1 (P)
Indemnification Agreement, dated December 12, 1992, between the Company and Mike Brooks (incorporated by
reference to Exhibit 10.10 to the Registration Statement).
10.2
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).
51
10.3
10.4
10.5
10.6
10.7
10.08
10.09
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
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).
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).
Company’s Incentive Compensation Plan (incorporated by reference to the Company’s Definitive Proxy
Statement for the 2012 Annual Meeting of Shareholders).
Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.23 to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2013).
Form of Performance Stock Unit Award Agreement (incorporated by reference to Exhibit 10.24 to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2013).
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).
52
10.18*
21
23*
24*
Amendment No. 2 to Amended and Restated Revolving Credit, Term Loan, Guaranty, and Security Agreement
dated as of December 21, 2017 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.
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.
31.1*
Rule 13a-14(a) Certification of Principal Executive Officer.
31.2*
Rule 13a-14(a) Certification of Principal Financial Officer.
32**
101*
Section 1350 Certification of Principal Executive Officer/Principal Financial Officer.
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, 2017 formatted in XBRL (“eXtensible Business Reporting
Language”): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (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.
53
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 12, 2018
ROCKY BRANDS, INC.
By:
/s/JASON BROOKS
Jason Brooks, Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on the dates indicated.
Signature
Title
/s/ JASON BROOKS
Jason Brooks
Chief Executive Officer
(Principal Executive Officer)
/s/ TOM ROBERTSON
Tom Robertson
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date
March 12, 2018
March 12, 2018
* 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
* WILLIAM L. JORDAN
William L. Jordan
* ROBERT B. MOORE, JR.
Robert B. Moore, Jr.
By: /s/ JASON BROOKS
Jason Brooks, Attorney-in-Fact
Chairman and Director
March 12, 2018
Secretary and Director
March 12, 2018
March 12, 2018
March 12, 2018
March 12, 2018
March 12, 2018
March 12, 2018
March 12, 2018
March 12, 2018
Director
Director
Director
Director
Director
Director
Director
54
Appendix A
ROCKY BRANDS, INC. AND SUBSIDIARIES
Schedule II
Consolidated Valuation and Qualifying Accounts for the Years Ended December 31, 2017, 2016 and 2015
Description
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
VALUATION ALLOWANCE FOR
DEFERRED TAX ASSETS
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
ALLOWANCE FOR DISCOUNTS
AND RETURNS
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
(1) Amount charged off, net of recoveries
$
$
$
$
$
$
$
$
$
Balance at
Beginning of
Period
Additions
Charged to Costs
and Expenses
Deductions
Balance at End
of Period
1,041,000 $
820,000 $
1,002,257 $
1,489,662 $
1,210,659 $
713,190 $
(2,353,662) (1)
(989,659) (1)
(895,447) (1)
471,159 $
569,459 $
569,881 $
46,446 $
$
$
-
-
(37,478)
(98,300)
(422)
1,934,033 $
2,054,606 $
2,917,199 $
17,978,800 $
18,076,416 $
20,632,422 $
(18,487,391)
(18,196,989)
(21,495,015)
$
$
$
$
$
$
$
$
$
177,000
1,041,000
820,000
480,127
471,159
569,459
1,425,442
1,934,033
2,054,606
55
Board of Directors
Mike Brooks
Chairman of the Board
Glenn E. Corlett
Retired Dean and Philip J. Gardner, Jr. Leadership
Professor, College of Business at Ohio University
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.
William L. Jordan
Executive Vice President, Chief Administrative Officer,
Chief Legal Officer, Secretary of DSW Inc.
Robert B. Moore, Jr.
Former CEO, Bhartiya International, Ltd.
Officers
Mike Brooks
Chairman of the Board
Jason Brooks
President and Chief Executive Officer
Tom Robertson
Chief Financial Officer and Treasurer
Richard Simms
President, Operations
Byron Wortham
President, Core Brands Sales, Marketing,
and Product Development
David Dixon
President, Manufacturing/Sourcing Operations
Corporate Offices
39 East Canal Street, Nelsonville, Ohio 45764
(740) 753-1951
Independent Registered Public Accounting Firm
Schneider Downs & Co., Inc.
Columbus, Ohio
Legal Counsel
Porter, Wright, Morris & Arthur LLP Columbus, Ohio
Transfer Agent and Registrar
Communications regarding changes of address,
transfer of shares, and lost certificates should be
directed to the company’s stock transfer and registrar:
Computershare Investor Services
Attn: Shareholder Services
P.O. Box 30170
College Station, TX 77842-3170
(800) 962-4284
www-us.computershare.com/investor/Contact
Stock Listing
NASDAQ Stock Market
Symbol: RCKY
Form 10-K
Copies of the signatures, exhibit index and exhibits
contained therein as filed with the Securities and
Exchange Commission are available without charge
upon written request to:
Tom Robertson
Chief Financial Officer and Treasurer
Rocky Brands, Inc.
39 East Canal Street
Nelsonville, Ohio 45764
Investor Information
Corporate and investor information is available on the
company’s website at www.rockybrands.com