# Rocky Brands, Inc.: Form 10-Q for the period ended Sep 30, 2022

- Company: [Rocky Brands, Inc.](/companies/rcky.md) (CIK 895456)
- Form: 10-Q
- Filed: 2022-11-08
- Accepted by EDGAR: Nov 8, 2022, 16:45 ET
- Period: 2022-09-30
- Accession: 0001437749-22-026386
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/895456/000143774922026386/rcky20220930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/895456/000143774922026386/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $147.5m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $476.5m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $95.6m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-01-01 to 2022-09-30 | $308.0m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-07-01 to 2022-09-30 | $51.9m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-01-01 to 2022-09-30 | $168.5m | us-gaap:GrossProfit |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | $11.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | $30.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $4.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $5.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | $13.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.77 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | $1.89 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.78 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $1.91 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 7,349,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 7,382,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | −$9.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $5.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2022-01-01 to 2022-09-30 | $3.4m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2022-09-30 | $7.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $397.0m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $641.0m | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $131.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $431.6m | us-gaap:Liabilities |
| Long-term debt | at 2022-09-30 | $281.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2022-09-30 | $3.3m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2022-09-30 | $209.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 17,728 characters.

### OVERVIEW

During the third quarter of 2022, we experienced strong sales growth for our brands and saw a decrease in gross margin compared to the year ago period due to rising product costs and shipping expenses. Operating expenses decreased in the third quarter 2022 due to a decrease in our discretionary spending and increased efficiencies at our distribution centers. The combination of increased sales and a decrease in operating costs has allowed us to better capitalize on the market opportunities we are creating through our product and focus on continued operational excellence.

We also completed the sale of the NEOS brand during the third quarter 2022. The sale of NEOS inventory is recorded within net sales and cost of goods sold within the Statement of Operations for the three and nine months ended September 30, 2022. The gain on sale of the all other NEOS assets is recorded as a reduction of operating expenses within the Statement of Operations for the three and nine months ended September 30, 2022.

During the first quarter of 2021, we closed on the Acquisition of the performance and lifestyle footwear business of Honeywell International Inc. We have incurred significant expenses associated with the Acquisition for the three and nine months ended September 30, 2022 and 2021.

COVID-19- We are monitoring and responding to the evolving nature of the global novel coronavirus pandemic (“COVID-19” or “pandemic”) and its impact to our global business. The health and safety of our team members is our top priority and to protect our employees, we are implementing all measures recommended by the Centers for Disease Control and Prevention (“CDC”). We will continue to proactively manage the Company and its operations through the pandemic, however we cannot predict the ultimate impact that COVID-19 will have on our short-term and long-term demand at this time, as it will depend on, among other things, the severity and duration of the COVID-19 pandemic. The further spread of COVID-19, and the requirements to take action to help limit the spread of the illness, may impact our ability to carry out our business as usual and may materially adversely impact global economic conditions, our business, results of operations and financial condition.

### 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, 2021.

|  | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Cost of goods sold | 64.8 | 62.6 | 64.6 | 61.9 |
| Gross margin | 35.2 | 37.4 | 35.4 | 38.1 |
| Operating expenses | 27.3 | 35.2 | 29.0 | 32.9 |
| Income from operations | 7.9% | 2.2% | 6.4% | 5.2% |

### Three Months Ended September 30, 2022 compared to Three Months Ended September 30, 2021

*($ in thousands)*

| NET SALES: | Three Months Ended September 30, 2022 | 2021 | Inc./ (Dec.) | Inc./ (Dec.) |
| --- | ---: | ---: | ---: | ---: |
| Wholesale | $120,742 | $95,980 | $24,762 | 25.8% |
| Retail | 23,429 | 21,840 | 1,589 | 7.3 |
| Contract Manufacturing | 3,315 | 7,687 | (4,372) | (56.9) |
| Total Net Sales | $147,486 | $125,507 | $21,979 | 17.5% |

Included in Wholesale net sales for the three months ended September 30, 2022 was approximately $3.6 million of sales related to the sale of the NEOS inventory. The increase in net sales on an adjusted basis is due to increased demand supported by a healthy inventory position.

The increases in Retail sales was attributable to a strong growth in our Lehigh business in the third quarter of 2022 in both existing accounts and new accounts as businesses continued to re-open and get back to full capacity in the wake of the COVID-19 pandemic.

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

*($ in thousands)*

| GROSS MARGIN: | Three Months Ended September 30, 2022 | 2021 | Inc./ (Dec.) |
| --- | ---: | ---: | ---: |
| Wholesale Margin $'s | $40,007 | $34,609 | $5,398 |
| Margin % | 33.1% | 36.1% | -3.0% |
| Retail Margin $'s | $11,413 | $10,907 | $506 |
| Margin % | 48.7% | 49.9% | -1.2% |
| Contract Manufacturing Margin $'s | $510 | $1,445 | $(935) |
| Margin % | 15.4% | 18.8% | -3.4% |
| Total Margin $'s | $51,930 | $46,961 | $4,969 |
| Margin % | 35.2% | 37.4% | -2.2% |

Excluding $1.1 million of gross margin relating to the sale of NEOS inventory and $1.4 million of duties paid in excess of the correct HTS code (see Note 16), Wholesale gross margins in the third quarter of 2022 were 34.4%. Excluding $0.8 million inventory purchase accounting adjustment, Wholesale gross margin for the third quarter 2021 were 38.1%. The decrease in gross margin was due to an increase in product costs, inbound freight and logistics costs.

Retail gross margin decreased for the three months ended September 30, 2022 compared to the same period a year ago due to increased product costs and freight costs.

Contract Manufacturing gross margin decreased in the third quarter of 2022 compared to the prior year period due to increased product costs.

*($ in thousands)*

| OPERATING EXPENSES: | Three Months Ended September 30, 2022 | 2021 | Inc./ (Dec.) | Inc./ (Dec.) |
| --- | ---: | ---: | ---: | ---: |
| Operating Expenses | $40,305 | $44,208 | $(3,903) | -8.8% |
| % of Net Sales | 27.3% | 35.2% | -7.9% |  |

19

On an adjusted based to exclude $0.8 million of acquisition-related amortization and expenses relating to the disposition of assets, operating expenses were $39.5 million and 27.4% of adjusted net sales for the three months ended September 30, 2022. On an adjusted basis to exclude $2.9 million acquisition-related integration and amortization costs, operating expenses were $41.3 million and 32.9% of adjusted net sales for the three months ended September 30, 2021. The decrease in operating expenses was due to a decrease in discretionary spending and increased efficiencies at our distribution centers.

*($ in thousands)*

| INCOME TAXES: | Three Months Ended September 30, 2022 | 2021 | Inc./ (Dec.) | Inc./ (Dec.) |
| --- | ---: | ---: | ---: | ---: |
| Income Tax Expense | $1,753 | $(113) | $1,866 | 1651.3% |
| Effective Tax Rate | 23.5% | 23.2% | 0.3% |  |

The effective tax rate increased in the third quarter of 2022 compared to the same year ago period due to an increase in our projected tax rate for the year ended December 31, 2022 which is estimated to be 22.5%.

### Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

*($ in thousands)*

| NET SALES: | Nine Months Ended September 30, 2022 | 2021 | Inc./ (Dec.) | Inc./ (Dec.) |
| --- | ---: | ---: | ---: | ---: |
| Wholesale | $385,858 | $256,242 | $129,616 | 50.6% |
| Retail | 78,070 | 68,168 | 9,902 | 14.5 |
| Contract Manufacturing | 12,621 | 20,366 | (7,745) | (38.0) |
| Total Net Sales | $476,549 | $344,776 | $131,773 | 38.2% |

Included in Wholesale net sales for the nine months ended September 30, 2022 was approximately $3.6 million of sales related to the sale of the NEOS inventory. The increase in net sales on an adjusted based was due to increased demand supported by a healthy inventory position.

The increase in Retail sales was partially attributable to a strong growth in our Lehigh business in the first three quarters of 2022 as businesses continued to re-open and get back to full capacity in the wake of the COVID-19 pandemic. Our e-commerce business also increased sales in the first three quarters of 2022.

Contract Manufacturing sales decreased in the first three quarters of 2022 due to the expiration of certain contracts with the U.S. Military.

*($ in thousands)*

| GROSS MARGIN: | Nine Months Ended September 30, 2022 | 2021 | Inc./ (Dec.) |
| --- | ---: | ---: | ---: |
| Wholesale Margin $'s | $128,775 | $93,139 | $35,636 |
| Margin % | 33.4% | 36.3% | -2.9% |
| Retail Margin $'s | $37,991 | $33,551 | $4,440 |
| Margin % | 48.7% | 49.2% | -0.5% |
| Contract Manufacturing Margin $'s | $1,741 | $4,564 | $(2,823) |
| Margin % | 13.8% | 22.4% | -8.6% |
| Total Margin $'s | $168,507 | $131,254 | $37,253 |
| Margin % | 35.4% | 38.1% | -2.7% |

Excluding $1.1 million of gross margin relating to the sale of NEOS inventory and $4.7 million of duties paid in excess of the correct HTS code (see Note 16), Wholesale gross margins in the third quarter of 2022 was 34.6%. Excluding $3.5 million inventory purchase accounting adjustment, Wholesale gross margin for the third quarter 2021 was 39.1%. The decrease in gross margin was due to an increase in product costs, inbound freight costs and logistics costs.

Retail gross margin decreased for the nine months ended September 30, 2022 compared to the same period a year ago due to increased product costs and freight costs.

Contract Manufacturing gross margin decreased in the nine months ended September 30, 2022 compared to the prior year period due to increased product costs.

*($ in thousands)*

| OPERATING EXPENSES: | Nine Months Ended September 30, 2022 | 2021 | Inc./ (Dec.) | Inc./ (Dec.) |
| --- | ---: | ---: | ---: | ---: |
| Operating Expenses | $138,089 | $113,483 | $24,606 | 21.7% |
| % of Net Sales | 29.0% | 32.9% | -3.9% |  |

21

On an adjusted basis to exclude $4.0 million of acquisition-related integration expenses and amortization, restructuring costs and expenses related to the disposition of assets, operating expenses were $134.1 million and 28.4% of adjusted net sales for the nine months ended September 30, 2022. On an adjusted basis to exclude $10.3 million a cquisition-related integration and amortization costs, operating expenses were $103.1 million and 29.9% of adjusted net sales for the nine months ended September 30, 2021. The decrease in operating expenses as a percent of net sales was due to a decrease in discretionary spending and increased efficiencies at our distribution centers.

*($ in thousands)*

| INCOME TAXES: | Nine Months Ended September 30, 2022 | 2021 | Inc./ (Dec.) | Inc./ (Dec.) |
| --- | ---: | ---: | ---: | ---: |
| Income Tax Expense | $4,057 | $2,393 | $1,664 | 69.5% |
| Effective Tax Rate | 22.5% | 23.0% | -0.5% |  |

We estimate that our tax rate will decrease to 22.5% for the year ended December 31, 2022 based on our actual results and additional foreign tax credits as a result of the Acquisition.

### LIQUIDITY AND CAPITAL RESOURCES

### Overview

Our principal sources of liquidity have been our income from operations and borrowings under our credit facilities.

During the nine months ended September 30, 2022, our primary source of cash was from borrowings under our credit facilities. Our working capital consists primarily of trade receivables and inventory, offset by 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 $7.4 million and $13.9 million for the nine months ended September 30, 2022 and 2021, respectively.

We lease certain machinery, one shoe center, distribution centers in Lancaster, Ohio, 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

*($ in millions)*

|  | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Operating activities | $(9.3) | $(28.5) |
| Investing activities | (0.2) | (222.8) |
| Financing activities | 10.9 | 235.9 |
| Net change in cash and cash equivalents | $1.4 | $(15.4) |

*Operating Activities.* Cash used in operating activities for the nine months ended September 30, 2022 was primarily used to purchase inventories and to pay down accounts payable. Cash used in operating activities for the nine months ended September 30, 2021 was primarily used to purchase inventories, partially offset by an increase in accounts payable.

*Investing Activities.* Cash used in investing activities for the nine months ended September 30, 2022 was primarily related to the purchase of equipment associated with our manufacturing operations, for upgrades to information technology and for improvements to our distribution facility, partially offset by the proceeds from the sale of the NEOS brand (see Note 5). Cash used in investing activities for the nine months ended September 30, 2021 was used to fund the Acquisition. See Note 4 for additional information regarding the Acquisition.

*Financing Activities.* Cash provided by financing activities for the nine months ended September 30, 2022 was primarily related to proceeds from our revolving credit facility. Cash provided by financing activities for the nine months ended September 30, 2021 was primarily related to proceeds from our term credit facility and 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, 2021.

### 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, 2021 (filed March 15, 2022) and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 (filed May 9, 2022), and June 30, 2022 (filed August 9, 2022), 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.

## Market risk

As filed, 212 characters.

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, 2021.

## Controls and procedures

As filed, 2,669 characters.

*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 September 30, 2022, 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 September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have made the necessary and appropriate updates to our internal controls as it relates to financial reporting over our Acquired Brands, none of which were material.

Filed Nov 8, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-026386. Last ingested by Listed: Nov 3, 2026, 20:52 ET. No prices; not investment advice.