PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

(Unaudited)

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(In thousands, except per share amounts)

(Unaudited)

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Rocky Brands, Inc. and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

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1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

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, The Original Muck Boot Company ("Muck"), XTRATUF and Ranger. 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, military and western. In addition, as part of our strategy of outfitting consumers from head-to-toe, we market complementary branded apparel and accessories that we believe leverage the strength and positioning of each of our brands.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments that are necessary for a fair presentation of the financial results. All such adjustments reflected in the unaudited condensed consolidated financial statements are considered to be of normal and recurring nature. The results of operations for the three and six months ended June 30, 2023 and 2022 are not necessarily indicative of the results to be expected for the whole year. The  December 31, 2022 condensed consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). This Quarterly Report on Form 10-Q should be read in connection with our Annual Report on Form 10-K for the year ended  December 31, 2022, which includes all disclosures required by GAAP.

 

2. ACCOUNTING STANDARDS UPDATES

 

Accounting Standards Adopted in the Current Year

 

Standard		Description		Effect on the financial statements or other significant matters
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.		We adopted the new standard in Q1 2023 and the standard has not had a significant impact on our Consolidated Financial Statements year to date.

 

3. FAIR VALUE

 

Generally accepted accounting standards establish a framework for measuring fair value. The fair value accounting standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This standard clarifies how to measure fair value as permitted under other accounting pronouncements.

 

The fair value accounting standard defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. This standard also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

●

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

●

Level 2 – Observable inputs other than quoted market prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

●

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

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, 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 credit facilities is categorized as Level 2.

 

We hold assets and liabilities in a separate trust in connection with deferred compensation plans. The fair value of these assets is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).

 

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4. SALE OF SERVUS BRAND AND RELATED ASSETS

 

On March 30, 2023, we completed the sale of the Servus brand and related assets to PQ Footwear, LLC and Petroquim S.R.L. (collectively "the Buyer"). Total consideration for this transaction was approximately $19.0 million, of which $17.3 million was received at closing. The remaining $1.7 million will be paid out in accordance with the purchase agreement. The sale of the Servus brand included the sale of inventory, fixed assets, customer relationships, tradenames, and goodwill, all of which related to our Wholesale segment. In connection with the sale of the Servus brand we also are licensing the rights to certain proprietary processes to the Buyer. We recorded a gain on the sale of Servus of approximately $1.3 million which is recorded within Interest Expense and Other Income/(Expense) - net on the accompanying unaudited condensed consolidated statement of operations for the six months ended June 30, 2023.

 

5. SALE OF NEOS BRAND AND RELATED ASSETS

 

On September 30, 2022, we completed the sale of the NEOS brand and related assets to certain entities controlled by SureWerx pursuant to terms of an asset purchase agreement dated September 30, 2022. Total consideration for this transaction was approximately $5.8 million, of which $5.5 million was received at closing. The remaining $0.3 million was deposited in escrow and will be managed and paid out in accordance with the terms of the asset purchase agreement and the escrow agreement. The sale of NEOS brand included the sale of inventory, fixed assets, customer relationships, tradenames, all of which related to our Wholesale segment. 

 

6. REVENUE

 

Nature of Performance Obligations

 

Our products are distributed through three distinct channels, which represent our business segments: Wholesale, Retail, and Contract Manufacturing. 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., Canada, and internationally, mainly Europe. Our Wholesale channels vary by product line and include sporting goods stores, outdoor specialty stores, online retailers, marine stores, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Our Retail business includes direct sales of our products to consumers through our e-commerce websites, our Rocky Outdoor Gear Store, and Lehigh businesses. We also sell footwear under the Rocky Brands label to the U.S. Military.

 

Significant Accounting Policies and Judgements

 

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; this generally occurs upon shipment of our product to our customer, which is when the transfer of control of our products passes to the customer. The duration of our arrangements with our customers are typically one year or less. Revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of our products at a point in time and consists of either fixed or variable consideration or a combination of both.

 

Revenues from sales are recorded at the net sales price, which includes estimates of variable consideration for which reserves are established. Components of variable consideration include prompt payment discounts, volume rebates, and product returns. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer).

 

The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Our analyses also contemplated application of the constraint in accordance with the guidance, under which it determined a material reversal of revenue would not occur in a future period for the estimates detailed below as of  June 30, 2023. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net revenue and earnings in the period such variances become known.

 

When a customer has a right to a prompt payment discount, we estimate the likelihood that the customer will earn the discount using historical data and adjust our estimate when the estimate of the likelihood that a customer will earn the discount changes or the consideration becomes fixed, whichever occurs earlier. The estimated amount of variable consideration is recognized as a credit to trade receivables and a reduction in revenue until the uncertainty of the variable consideration is alleviated. Because most of our customers have payment terms of less than six months, there is not a significant financing component in our contracts with customers.

 

When a customer is offered a rebate on purchases retroactively, this is accounted for as variable consideration because the consideration for the current and past purchases is not fixed until it is known if the discount is earned. We estimate the expected discount the customer will earn at contract inception using historical data and projections and update our estimates when projections materially change or consideration becomes fixed. The estimated rebate is recognized as a credit to trade receivables and offset against revenue until the rebate is earned or the earning period has lapsed.

 

When a right of return is part of the arrangement with the customer, we estimate the expected returns based on an analysis using historical data. We adjust our estimate either when the most likely amount of consideration we expect to receive changes or when the consideration becomes fixed, whichever occurs earlier. See Note 7 and Note 8 for additional information.

 

Trade receivables represent our right to unconditional payment that only relies on the passage of time.

 

Current contract receivables represent contractual minimum payments required under non-cancellable contracts with the U.S. Military and other customers with a duration of one year or less.

 

Current contract liabilities are performance obligations that we expect to satisfy or relieve within the next twelve months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancellable contracts before the transfer of goods or services to the customer has occurred. Our contract liability represents unconditional obligations to provide goods under non-cancellable contracts with the U.S. Military and other customers.

 

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Items considered immaterial within the context of the contract are recognized as an expense.

 

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue producing transaction, that are collected from customers are excluded from revenue.

 

Costs associated with our manufacturer’s warranty continue to be recognized as expense when the products are sold in accordance with guidance surrounding product warranties.

 

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in operating expenses.

 

Costs associated with obtaining a contract are expensed as incurred in accordance with the practical expedient in ASC 340-40 in instances where the amortization period is one year or less. We anticipate substantially all of our costs incurred to obtain a contract would be subject to this practical expedient.

 

Contract Balances

 

The following table provides information about contract liabilities from contracts with our customers.

 

		June 30,				December 31,				June 30,
($ in thousands)		2023				2022				2022
Contract liabilities		$	2,990			$	-			$	-

 

Significant changes in the contract liabilities balance during the period are as follows:

 

($ in thousands)		Contract liabilities
Balance, December 31, 2022			-
Non-cancelable contracts with customers entered into during the period		$	2,990
Revenue recognized related to non-cancelable contracts with customers during the period			-
Balance, June 30, 2023		$	2,990

 

Disaggregation of Revenue

 

All revenues are recognized at a point in time when control of our products pass to the customer at point of shipment. Because all revenues are recognized at a point in time and are disaggregated by channel, our segment disclosures are consistent with ASC 606 disaggregation requirements. See Note 15 for segment disclosures.

 

7. TRADE RECEIVABLES

 

Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $3.2 million, $3.5 million and $2.6 million at June 30, 2023,  December 31, 2022 and  June 30, 2022, respectively. We record the allowance based on a data-driven approach, including historical experience, the age of the receivables, receivable insurance status, 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.

 

In accordance with ASC 606, the return reserve liability netted against trade receivables was approximately $1.7 million, $2.1 million and $1.3 million at  June 30, 2023,  December 31, 2022 and  June 30, 2022, respectively.

 

8. INVENTORY

 

Inventories are comprised of the following:

 

		June 30,				December 31,				June 30,
($ in thousands)		2023				2022				2022
Raw materials		$	17,671			$	16,541			$	22,214
Work-in-process			1,427				933				1,793
Finished goods			199,229				217,926				263,810
Total		$	218,327			$	235,400			$	287,817

 

In accordance with ASC 606, the return reserve allowance included within inventories was approximately $1.0 million, $1.1 million and $0.7 million at June 30, 2023,  December 31, 2022 and  June 30, 2022, respectively.

 

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9. GOODWILL

 

Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill arose from our acquisition of the performance and lifestyle footwear business of Honeywell International Inc. on March 15, 2021 (the "Acquisition"). The Acquisition expanded our brand portfolio to include the Muck, XTRATUF, Servus (see Note 4), NEOS (See Note 5) and Ranger brands (the "Acquired Brands"). Goodwill largely consists of the workforce acquired, expected cost synergies and economies of scale resulting from the business combination. The amount of goodwill that is expected to be deductible for tax purposes is $47.0 million.

 

GAAP has established guidance for reporting information about a company's operating segments, including disclosures related to a company's products and services, geographic areas and major customers. We monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments, as well as our reporting units. As previously stated, our operations represent three reporting segments: Wholesale, Retail and Contract Manufacturing. Goodwill impairment analysis will be performed for our Wholesale and Retail reporting segments. There is no goodwill allocated to our Contract Manufacturing segment. Of total goodwill, $23.0 million was allocated to our Wholesale segment and $24.8 million was allocated to our Retail segment.

 

Goodwill is subject to impairment tests at least annually. We review the carrying amounts of goodwill by reporting unit at least annually, or when indicators of impairment are present, to determine if goodwill may be impaired. We include assumptions about the expected future operating performance as part of a discounted cash flow analysis to estimate fair value. If the carrying value of these assets is not recoverable, based on the discounted cash flow analysis, management compares the fair value of the assets to the carrying value. Goodwill is considered impaired if the recorded value exceeds the fair value.

 

We may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. We would not be required to quantitatively determine the fair value of goodwill unless we determine, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value. Future cash flows of the individual indefinite-lived intangible assets are used to measure their fair value after consideration of certain assumptions, such as forecasted growth rates and cost of capital, which are derived from internal projection and operating plans. We perform our annual testing for goodwill at the beginning of the fourth quarter of each fiscal year.

 

10. IDENTIFIED INTANGIBLE ASSETS

 

A schedule of identified intangible assets is as follows:

 

		Gross				Accumulated				Carrying
($ in thousands)		Amount				Amortization				Amount
June 30, 2023
Trademarks
Wholesale (1)		$	69,439				-			$	69,439
Retail			9,220				-				9,220
Patents			895			$	836				59
Customer relationships (2)			41,659				6,358				35,301
Total Intangibles		$	121,213			$	7,194			$	114,019

 

(1) Servus trademarks were reduced from approximately $2.5 million to zero at March 30, 2023 as a result of the sale of the Servus brand (see Note 4).

 

(2) Customer relationships relating to the Servus brand of approximately $4.3 million and related amortization of approximately $0.6 million was reduced to zero at  March 30, 2023 as a result of the sale of the Servus brand (see Note 4).

 

		Gross				Accumulated				Carrying
($ in thousands)		Amount				Amortization				Amount
December 31, 2022
Trademarks
Wholesale (1)		$	71,979				-			$	71,979
Retail			9,220				-				9,220
Patents			895			$	826				69
Customer relationships (2)			46,006				5,492				40,514
Total Intangibles		$	128,100			$	6,318			$	121,782

 

(1) NEOS trademarks were reduced from approximately $0.6 million to zero at December 31, 2022 as a result of the sale of the NEOS brand (see Note 5).

 

(2)  Customer relationships relating to the NEOS brand of approximately $0.9 million and related amortization of approximately $0.1 million was reduced to zero at December 31, 2022 as a result of the sale of the NEOS brand (see Note 5).

 

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		Gross				Accumulated				Carrying
($ in thousands)		Amount				Amortization				Amount
June 30, 2022
Trademarks
Wholesale		$	72,579				-			$	72,579
Retail			9,220				-				9,220
Patents			895			$	815				80
Customer relationships			46,900				4,039				42,861
Total Intangibles		$	129,594			$	4,854			$	124,740

 

The weighted average life for our patents is 6.9 years.

 

A schedule of approximate amortization expense related to finite-lived intangible assets for the three and six months ended June 30, 2023 and 2022 is as follows: 

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
($ in thousands)		2023				2022				2023				2022
Amortization expense		$	697			$	788			$	1,478			$	1,575

 

A schedule of approximate expected remaining amortization expense related to finite-lived intangible assets for the years ending December 31 is as follows:

 

		Amortization
($ in thousands)		Expense
2023		$	1,394
2024			2,785
2025			2,781
2026			2,778
2027			2,776
2028			2,772
2029+			20,074

 

11.LONG-TERM DEBT

 

On March 15, 2021, we entered into a senior secured term loan facility ("Term Facility") with TCW Asset Management Company, LLC (TCW), as agent, for the lenders party thereto in the amount of $130 million. The Term Facility provided for quarterly payments of principal and bore interest of LIBOR plus 7.00% through June 30, 2021. After this date, interest is assessed quarterly based on our total leverage ratio. The total leverage ratio is calculated as (a) Total Debt to (b) EBITDA. If our total leverage ratio is greater than or equal to 3.50, the effective interest rate will be SOFR plus 7.50% (or at our option, Prime Rate plus 6.50%). If our total leverage ratio is less than 3.50 but greater than 3.00, the effective interest rate will be SOFR plus 7.00% (or at our option, Prime Rate plus 6.00%). If our total leverage ratio is less than 3.00, the effective interest rate will be SOFR plus 6.50% (or at our option, Prime Rate plus 5.50%). The Term Facility also has a SOFR floor rate of 1.00%. In June 2022, we entered into a second amendment with TCW to further amend our Term Facility to consent to the modifications in our borrowing capacity under the ABL Facility as described below, and to adjust certain pricing and prepayment terms, among other things. The second amendment also modified the interest index to provide the use of SOFR to calculate interest rather than LIBOR. The effective interest rate was increased to SOFR plus 7.50% through November 2022. In November 2022, the Term Facility was amended to increase the effective interest rate to SOFR plus 7.00% until June 2023 and to provide certain EBITDA adjustments with respect to financial covenants, among other things. In May 2023, we entered into a fourth amendment with TCW to further amend our Term Facility to provide certain EBITDA adjustments in respect of the financial covenants, adjust the method to calculate total debt, continue certain pricing terms, extend certain prepayment terms, and pay such lenders certain amendment fees, among other things.

 

Our Term Facility is collateralized by a second-lien on accounts receivable, inventory, cash and related assets and a first-lien on substantially all other assets. The Term Facility matures on March 15, 2026.

 

On March 15, 2021, we also entered into a senior secured asset-based credit facility ("ABL Facility") with Bank of America, N.A. ("Bank of America") as agent, for the lenders party thereto. The ABL Facility provides a new senior secured asset-based revolving credit facility up to a principal amount of $150 million, which includes a sub-limit for the issuance of letters of credit up to $5 million. The ABL Facility may be increased up to an additional $50 million at the Borrowers’ request and the Lenders’ option, subject to customary conditions. In June 2022, we further amended our ABL Facility to temporarily increase our borrowing capacity to $200 million through December 31, 2022, which thereafter will be reduced to $175 million. In November 2022, we entered into a third amendment to our ABL Facility to provide certain EBITDA adjustments with respect to our financial covenants. The ABL Facility includes a separate first in, last out (FILO) tranche, which allows the Company to borrow at higher advance rates on eligible accounts receivables and inventory balances. As of  June 30, 2023, we had borrowing capacity of $26.9 million.

 

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The ABL Facility is collateralized by a first-lien on accounts receivable, inventory, cash and related assets and a second-lien on substantially all other assets. The ABL Facility matures on March 15, 2026. Interest on the ABL Facility is based on the amount available to be borrowed as set forth on the following chart:

 

Revolver Pricing Level		Average Availability as a Percentage of Commitments		Base Rate				Term SOFR Loan				Base Rate for FILO				Term SOFR FILO Loans
I		> 66.7%			0.00	%			1.25	%			0.50	%			1.75	%
II		>33.3% and < or equal to 66.7%			0.00	%			1.50	%			0.50	%			2.00	%
III		< or equal to 33.3%			0.25	%			1.75	%			0.75	%			2.25	%

 

In connection with the Term Facility and ABL Facility, we had to pay certain fees that were capitalized and will be amortized over the life of each respective loan. In addition, the ABL Facility requires us to pay an annual collateral management fee in the amount of $75,000 due on each anniversary of the ABL Facility issuance date, until it matures.

 

Current and long-term debt consisted of the following:

 

		June 30,				December 31,				June 30,
($ in thousands)		2023				2022				2022
Term Facility that matures in 2026 with an effective interest rate of 12.77%, 12.14% and 9.06% as of June 30, 2023, December 31, 2022 and June 30, 2022, respectively		$	91,100			$	116,332			$	125,938
ABL Facility that matures in 2026:
SOFR borrowings with an effective interest rate of 5.06%, 5.47% and 3.88% as of June 30, 2023, December 31, 2022 and June 30, 2022, respectively			130,213				140,000				155,726
Prime borrowings with an effective interest rate of 8.25%, 7.27% and 5.00% as of June 30, 2023, December 31, 2022 and June 30, 2022, respectively			2,737				3,301				6,115
Total debt			224,050				259,633				287,779
Less: Unamortized debt issuance costs			(2,311	)			(2,737	)			(3,164	)
Total debt, net of debt issuance costs			221,739				256,896				284,615
Less: Debt maturing within one year			(4,625	)			(3,250	)			(3,250	)
Long-term debt		$	217,114			$	253,646			$	281,365

 

Credit Facility Covenants

 

The Term Facility contains restrictive covenants which require us to maintain a maximum total leverage ratio and a minimum fixed charge coverage ratio, as defined in the Term Facility agreement. We are in compliance with all credit facility covenants as of June 30, 2023, December 31, 2022 and  June 30, 2022.

 

Our ABL Facility contains a restrictive covenant which requires us to maintain a fixed charge coverage ratio upon a triggering event taking place (as defined in the ABL Facility agreement). During the three and six months ended June 30, 2023 and 2022, there were no triggering events and the covenant was not in effect.

 

Both the Term Facility and the ABL Facility contain restrictions on the amount of dividend payments.

 

12. TAXES

 

We are subject to tax examinations in various taxing jurisdictions. The earliest years open for examination are as follows: 

 

		Earliest Exam Year
Taxing Authority Jurisdiction:
U.S. Federal		2019
Various U.S. States		2018
Puerto Rico (U.S. Territory)		2018
Canada		2018
China		2019
Mexico		2021
United Kingdom		2021
Australia		2021

 

Our policy is to accrue interest and penalties on any uncertain tax position as a component of income tax expense. No such expenses were recognized during the three and six months ended June 30, 2023 and 2022. We do not believe there will be any material changes in our uncertain tax positions over the next 12 months.

 

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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.  We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations.

 

Our estimated effective tax rates for the three and six months ended June 30, 2023 and 2022 are as follows:

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2023				2022				2023				2022
Effective Tax Rate			20.8	%			27.7	%			20.9	%			21.8	%

 

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.

 

A reconciliation of the shares used in the basic and diluted income per common share computation for the three and six months ended June 30, 2023 and 2022 is as follows:

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(shares in thousands)		2023				2022				2023				2022
Basic - weighted average shares outstanding			7,354				7,313				7,350				7,310
Dilutive stock options(1) (2)			-				76				-				90
Diluted - weighted average shares outstanding(1) (2)			7,354				7,389				7,350				7,400
Anti-dilutive securities			283				104				283				299

 

(1) Due to a loss for the three months ended June 30, 2023, zero dilutive stock options are included for the period because the effect would be antidilutive.

 

(2) Due to a loss for the six months ended June 30, 2023, zero dilutive stock options are included for the period because the effect would be antidilutive.

   

14. SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental cash flow information for the six months ended June 30, 2023 and 2022 was as follows:

 

		Six Months Ended
		June 30,
($ in thousands)		2023				2022
Interest paid		$	4,244			$	4,566
Federal, state, and local income taxes paid, net		$	3,889			$	4,047
Change in contract receivables, net		$	(2,990	)		$	1,062
Change in contract liabilities, net		$	2,990			$	(1,062	)
Property, plant, and equipment purchases in accounts payable		$	1,114			$	2,073

 

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15. SEGMENT INFORMATION

 

We have identified three reportable segments: Wholesale, Retail and Contract Manufacturing. Our Wholesale segment includes sales of footwear and accessories to several classifications of retailers, including sporting goods stores, outdoor specialty stores, online retailers, marine stores, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Our Retail segment includes direct sales of our products to consumers through our e-commerce websites, our Rocky Outdoor Gear Store, and Lehigh businesses. Our Contract Manufacturing segment includes sales to the U.S. Military, private label sales and any sales to customers in which we are contracted to manufacture or source a specific footwear product for a customer. The following is a summary of segment results for the Wholesale, Retail and Contract Manufacturing segments for the three and six months ended June 30, 2023 and 2022.

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
($ in thousands)		2023				2022				2023				2022
NET SALES:
Wholesale		$	71,462			$	131,155			$	151,513			$	265,116
Retail			25,082				26,015				54,592				54,641
Contract Manufacturing			3,278				4,869				4,162				9,306
Total Net Sales		$	99,822			$	162,039			$	210,267			$	329,063
GROSS MARGIN:
Wholesale		$	25,176			$	40,509			$	54,485			$	88,768
Retail			12,219				12,730				26,598				26,578
Contract Manufacturing			177				512				248				1,231
Total Gross Margin		$	37,572			$	53,751			$	81,331			$	116,577

 

 

		Employee Severance, Benefits and Related Costs
		For the Six Months Ended June 30,
($ in thousands)		2023				2022
Accrued expenses, beginning of period		$	381				-
Restructuring charges			1,034			$	1,201
Cash payments			(314	)			(100	)
Accrued expenses, end of period		$	1,101			$	1,101

 

17. COMMITMENTS AND CONTINGENCIES 

Litigation

 

 

---

    

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

OVERVIEW

 

During the second quarter of 2023, we experienced a decline in sales for our brands and an increase in gross margin as a percentage of net sales. The decline in net sales during the second quarter of 2023 was due to a difficult macroeconomic backdrop coupled with overall elevated inventory levels for many of our retail partners. In addition, distribution challenges in 2021 resulted in late delivery of Fall 2021 inventory into the first half of 2022, causing a spike in orders in the such year period and creating a difficult year-over-year comparison. Lastly, the first six months of 2022 included NEOS brand net sales, which we divested in the third quarter of 2022 as well as Servus brand net sales which we divested in first quarter 2023. 

 

The increase in gross margin as a percentage of net sales was due to the realization of pricing actions taken in the second half of 2022. Furthermore, we saw a larger mix of Retail segment sales, which carry higher margins than our Wholesale and Contract Manufacturing segments, as well as lower in-bound logistics costs compared to the year ago period, which both in part attributed to the higher margins in the second quarter of 2023. 

 

During the second quarter of 2023, we experienced a decrease in our operating expenses which was driven by a decrease in variable expenses associated with lower sales and improved distribution center efficiencies compared with the year ago period. In addition, we saw a decrease in discretionary spending and a leaner operating structure in the second quarter of 2023 compared to the year ago period.

 

We completed the sale of the Servus brand during the first quarter of 2023. The gain of approximately $1.3 million on the sale of Servus is recorded in Interest Expense and Other Income/(Expense) - net within the Unaudited Condensed Consolidated Statement of Operations for the six months ended June 30, 2023. The Servus brand was sold to allow us to focus on our more profitable core brands and allocate resources toward growth and development of additional opportunities with those brands moving forward. 

 

RESULTS OF OPERATIONS

 

The following tables set forth, for the periods indicated, information derived from our Unaudited Condensed Consolidated Financial Statements, expressed as a percentage of net sales. The discussion that follows each table should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements as well as our annual report on Form 10-K for the year ended December 31, 2022.

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2023				2022				2023				2022
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			62.4				66.8				61.3				64.6
Gross margin			37.6				33.2				38.7				35.4
Operating expenses			35.4				29.7				35.7				29.7
Income from operations			2.2	%			3.5	%			3.0	%			5.7	%

 

Three Months Ended June 30, 2023 compared to Three Months Ended June 30, 2022

 

		Three Months Ended
		June 30,
($ in thousands)		2023				2022				Inc./ (Dec.)				Inc./ (Dec.)
NET SALES:
Wholesale		$	71,462			$	131,155			$	(59,693	)			(45.5	)%
Retail			25,082				26,015				(933	)			(3.6	)
Contract Manufacturing			3,278				4,869				(1,591	)			(32.7	)
Total Net Sales		$	99,822			$	162,039			$	(62,217	)			(38.4	)%

 

The decrease in Wholesale sales in the second quarter of 2023 was due to elevated inventory levels at our retail partners within our Wholesale channel and distribution challenges in 2021 resulting in the late delivery of Fall 2021 inventory into the first half of 2022, causing a spike in orders in such prior year period and creating a difficult year-over-year comparison.

 

The decrease in Retail net sales for the three months ended June 30, 2023 compared to the same period last year was primarily due to a decline in our branded e-Commerce and Marketplace businesses due to a difficult comparison with the prior year period. In the second quarter of 2022, our newly opened Reno distribution facility began shipping e-Commerce and Marketplace orders which had pent up demand.

 

Contract Manufacturing sales decreased in the second quarter of 2023 compared to the second quarter of 2022 due to the expiration of certain contracts with the U.S. Military. 

 

 

		Three Months Ended
		June 30,
($ in thousands)		2023				2022				Inc./ (Dec.)
GROSS MARGIN:
Wholesale Margin $'s		$	25,176			$	40,509			$	(15,333	)
Margin %			35.2	%			30.9	%			4.3	%
Retail Margin $'s		$	12,219			$	12,730			$	(511	)
Margin %			48.7	%			48.9	%			(0.2	)%
Contract Manufacturing Margin $'s		$	177			$	512			$	(335	)
Margin %			5.4	%			10.5	%			(5.1	)%
Total Margin $'s		$	37,572			$	53,751			$	(16,179	)
Margin %			37.6	%			33.2	%			4.4	%

 

The increase in Wholesale gross margin as a percentage of net sales for the quarter ended June 30, 2023 compared to the year ago period was primarily due to the realization of pricing actions taken in the second half 2022 as well as lower in-bound logistics costs compared to the year ago period.

 

Retail gross margin as a percentage of net sales decreased slightly for the three months ended June 30, 2023 compared to the same period a year ago primarily due to the Lehigh business accounting for a larger percentage of Retail sales which carries lower margins. 

 

Contract Manufacturing gross margin as a percentage of net sales decreased in the second quarter of 2023 compared to the second quarter of 2022 due to certain private label contracts that carried lower margins.

 

		Three Months Ended
		June 30,
($ in thousands)		2023				2022				Inc./ (Dec.)				Inc./ (Dec.)
OPERATING EXPENSES:
Operating Expenses		$	35,370			$	48,155			$	(12,785	)			(26.5	)%
% of Net Sales			35.4	%			29.7	%			5.7	%

  

On an adjusted basis to exclude $0.7 million of Acquisition-related amortization and $1.0 million of restructuring costs in the second quarter of 2023, and $1.2 million of restructuring costs and $0.9 million in Acquisition-related amortization and integration expenses in the second quarter of 2022, adjusted operating expenses were $33.6 million in the current year period and $46.0 million in the year ago period. The decrease in operating expenses in the second quarter of 2023 compared to the second quarter of 2022 was driven by a decrease in variable expenses associated with lower sales and improved distribution center efficiencies compared with the year ago period. In addition, we saw a decrease in discretionary spending and a leaner operating structure in the second quarter of 2023 compared to the year ago period. As a percentage of net sales, the increase in operating expenses was attributable to deleveraging topline sales compared to the year ago period.

 

		Three Months Ended
		June 30,
($ in thousands)		2023				2022				Inc./ (Dec.)				Inc./ (Dec.)
INCOME TAXES:
Income Tax (Benefit) Expense		$	(713	)		$	353			$	(1,066	)			(302.0	)%
Effective Tax Rate		20.8		%			27.7	%		(6.9		)%

 

The decrease in our effective tax rate in the second quarter of 2023 compared to the same year ago period was due to changes in our projected income generated from our international business for fiscal year 2023 compared to fiscal year 2022.

 

 

Six Months Ended June 30, 2023 compared to Six Months Ended June 30, 2022 

 

		Six Months Ended
		June 30,
($ in thousands)		2023				2022				Inc./ (Dec.)				Inc./ (Dec.)
NET SALES:
Wholesale		$	151,513			$	265,116			$	(113,603	)			(42.9	)%
Retail			54,592				54,641				(49	)			(0.1	)
Contract Manufacturing			4,162				9,306				(5,144	)			(55.3	)
Total Net Sales		$	210,267			$	329,063			$	(118,796	)			(36.1	)%

 

The decrease in Wholesale sales for the six months ended June 30, 2023 was due to elevated inventory levels at our retail partners within our Wholesale channel and a softer demand environment compared to the year ago period. In addition, distribution challenges in 2021 resulted in late delivery of Fall 2021 inventory into the first half of 2022, causing a spike in orders in the year ago period and creating a tough year-over-year comparison.

 

Retail net sales decreased for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 primarily due to a decline in our branded e-Commerce and Marketplace businesses due to a difficult comparison with the prior year period. In the second quarter of 2022, our newly opened Reno distribution facility began shipping e-Commerce and Marketplace orders which had pent up demand.

 

The decrease in Contract Manufacturing sales for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was due to the expiration of certain contracts with the U.S. Military. 

 

		Six Months Ended
		June 30,
($ in thousands)		2023				2022				Inc./ (Dec.)
GROSS MARGIN:
Wholesale Margin $'s		$	54,485			$	88,768			$	(34,283	)
Margin %			36.0	%			33.5	%			2.5	%
Retail Margin $'s		$	26,598			$	26,578			$	20
Margin %			48.7	%			48.6	%			0.1	%
Contract Manufacturing Margin $'s		$	248			$	1,231			$	(983	)
Margin %			6.0	%			13.2	%			(7.2	)%
Total Margin $'s		$	81,331			$	116,577			$	(35,246	)
Margin %			38.7	%			35.4	%			3.3	%

 

The increase in Wholesale gross margin as a percentage of net sales for the six months ended June 30, 2023 compared to the year ago period was due to realization of pricing actions taken in 2022 as well as lower in-bound logistics costs compared to the year ago period.

 

Retail gross margin as a percentage of net sales for the six months ended June 30, 2023 remained relatively consistent with the year ago period.

 

Contract Manufacturing gross margin as a percentage of net sales decreased for the six months ended June 30, 2023 compared to the same period a year ago due to certain private label contracts that carried lower margins. 

 

		Six Months Ended
		June 30,
($ in thousands)		2023				2022				Inc./ (Dec.)				Inc./ (Dec.)
OPERATING EXPENSES:
Operating Expenses		$	74,974			$	97,785			$	(22,811	)			(23.3	)%
% of Net Sales			35.7	%			29.7	%			6.0	%

  

On an adjusted basis to exclude $1.5 million of Acquisition-related amortization for the six months ended June 30, 2023 and $1.2 million of restructuring costs and $2.0 million in Acquisition-related amortization and integration expenses for the six months ended June 30, 2022, adjusted operating expenses were $73.5 million in the current year period and $94.6 million in the year ago period. The decrease in operating expenses for the six months ended June 30, 2023 was driven by a decrease in variable expenses associated with lower sales and improved distribution center efficiencies compared with the year ago period. In addition, we saw a decrease in discretionary spending and a leaner operating structure in the second quarter of 2023 compared to the year ago period. As a percentage of net sales, the increase in operating expenses is attributable to deleveraging topline sales compared to the year ago period.

 

		Six Months Ended
		June 30,
($ in thousands)		2023				2022				Inc./ (Dec.)				Inc./ (Dec.)
INCOME TAXES:
Income Tax (Benefit) Expense		$	(823	)		$	2,304			$	(3,127	)			(135.7	)%
Effective Tax Rate			20.9	%			21.8	%			(0.9	)%

 

The decrease in our effective tax rate for the six months ended June 30, 2023 compared to the same year ago period was due to changes in our projected income generated from our international business for fiscal year 2023 compared to fiscal year 2022.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Overview

 

Our principal sources of liquidity have been our income from operations and income from the sale of Servus during the six months ended June 30, 2023.

 

During the six months ended June 30, 2023, our primary use of cash was payments on our credit facilities. Our working capital consists primarily of trade receivables and inventory, offset by short-term debt and accounts payable. 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 can fluctuate significantly throughout the 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 $2.3 million and $5.5 million for the six months ended June 30, 2023 and 2022, respectively.

 

We lease certain machinery, one shoe center, a distribution center in Reno, Nevada, and manufacturing facilities under operating leases that generally provide for renewal options.

 

We believe that our ABL Facility, coupled with cash generated from operations will provide sufficient liquidity to fund our operations and debt obligations 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 see Note 11.

 

Cash Flows

 

		Six Months Ended
		June 30,
($ in millions)		2023				2022
Operating activities		$	19.7			$	(8.6	)
Investing activities			15.6				(3.5	)
Financing activities			(37.9	)			12.0
Net change in cash and cash equivalents		$	(2.6	)		$	(0.1	)

 

Operating Activities. Cash provided by operating activities for the six months ended June 30, 2023 was primarily impacted by a decrease in inventory and trade receivables offset by a decrease in accounts payable. Cash used in operating activities for the six months ended June 30, 2022 was primarily used to purchase inventory.

 

Investing Activities. Cash provided by investing activities for the six months ended June 30, 2023 was primarily related to the sale of the Servus brand. See Note 4. Cash used in investing activities for the six months ended June 30, 2022 was primarily related to the purchase of investments in molds and equipment associated with our manufacturing operations, information technology, and improvements to our distribution facility.

 

Financing Activities. Cash used in financing activities for the six months ended June 30, 2023 was primarily related to payments on our revolving credit facility and term loan. Cash provided by financing activities for the six months ended June 30, 2022 was primarily related to proceeds on our revolving credit facility.

 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of the Company’s Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from the Company’s estimates. However, actual results may differ materially from these estimates under different assumptions or conditions.

 

We have identified the critical accounting policies used in determining estimates and assumptions in the amounts reported in our Management Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022.

 

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995

 

This report, including Management’s Discussion and Analysis of Financial Condition 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, and 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,” “would,” “could” and similar expressions are intended to identify forward-looking statements. Investors are cautioned that 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, risks inherent to international trade, changing retail trends, the loss or disruption of our manufacturing and distribution operations, cybersecurity breaches or disruption of our digital systems, fluctuations in foreign currency exchange rates, economic changes, as well as other factors set forth under the caption “Item 1A, Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 (filed March 10, 2023) and Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (filed May 10, 2023), 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

There have been no material changes to our market risk as disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2022.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this report, our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 promulgated under the Exchange Act. Based upon this evaluation, our chief executive officer and our chief financial officer concluded that, as of June 30, 2023, our disclosure controls and procedures were (1) designed to ensure that material information relating to our Company is accumulated and made known to our management, including our chief executive officer and chief financial officer, in a timely manner, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

Changes in Internal Controls There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II -- OTHER INFORMATION

 

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Unregistered Sales of Equity Securities

 

None.

 

Use of Proceeds

 

Not applicable.

 

Our shareholder repurchase program expired on March 4, 2022.

 

 

ITEM 6. EXHIBITS

 

Exhibit Number	Description
10.1***	Fourth Amendment to the Loan and Security Agreement, date May 9, 2023, between the Company, TCW Asset Management Company LLC and other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report of Form 8-K dated May 9, 2023 and filed on May 10, 2023).
10.2***	Fourth Amendment to ABL Loan and Security Agreement, dated May 19, 2023, between the Company, Bank of America, N.A. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 19, 2023 and filed on May 24, 2023.Fourth Amendment to ABL Loan and Security Agreement, dated May 19, 2023, between the Company, Bank of America, N.A. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 19, 2023 and filed on May 24, 2023.
10.3*	Fifth Amendment to the Loan and Security Agreement, effective as of May 10, 2023, between the Company, TCW Asset Management Company LLC and other lenders party thereto.
31.1*	Certification Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Principal Executive Officer.
31.2*	Certification Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Principal Financial Officer.
32**	Section 1350 Certification of Principal Executive Officer/Principal Financial Officer.
101*	Attached as Exhibits 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 formatted in Inline XBRL (“eXtensible Business Reporting Language”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Shareholders' Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) related notes to these financial statements.
104*	Cover Page Interactive Data File, formatted in Inline XBRL and contained in Exhibit 101

 

 

* Filed with this Report.

** Furnished with this Report.

*** Exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby undertakes to furnish copies of any of the omitted schedules or exhibits upon request of the U.S. Securities and Exchange Commission Pursuant to the requirements 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.

 

 

SIGNATURE

 

 

	ROCKY BRANDS, INC.
Date: August 9, 2023	By:	/s/ SARAH O'CONNOR
		Sarah O'Connor
		Senior Vice President Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer and Duly Authorized Officer)