Rocky Brands, Inc. — Q3 2022 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2022. Rocky designs, manufactures and markets footwear, apparel and accessories through Wholesale, Retail and Contract Manufacturing. The 2021 acquisition of Honeywell’s performance and lifestyle footwear business expanded the brand portfolio, including Muck and XTRATUF.
Financial performance and position
Amounts below are in millions of dollars except per-share data.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $147.5 | $125.5 | $476.5 | $344.8 |
| Gross margin | $51.9; 35.2% | $47.0; 37.4% | $168.5; 35.4% | $131.3; 38.1% |
| Operating income | $11.6 | $2.8 | $30.4 | $17.8 |
| Net income (loss) | $5.7 | $(0.4) | $14.0 | $8.0 |
| Diluted EPS | $0.77 | $(0.05) | $1.89 | $1.08 |
- Q3 sales rose 17.5% year over year; nine-month sales rose 38.2%. The acquisition contributed $62.0 million of Q3 2022 sales and $193.2 million for the first nine months. Comparisons also reflect the acquired business being included for a longer period in 2022.
- Q3 operating expenses fell 8.8% to $40.3 million, helping lift operating income despite lower gross margin. Management attributed the decline to reduced discretionary spending and distribution-center efficiencies.
- For the first nine months, operating cash flow was negative $9.3 million, compared with negative $28.5 million in 2021. Inventory increased to $265.1 million from $232.5 million at December 2021; management cited inventory purchases and payments to suppliers among cash uses. Investing cash flow was negative $0.2 million and financing cash flow provided $10.9 million, primarily through revolving-credit borrowings. Cash was $7.3 million at September 30.
- At September 30, gross debt was $287.7 million and debt net of issuance costs was $284.8 million, including $3.25 million current. Long-term debt net of issuance costs was $281.5 million. The company reported $34.3 million of ABL borrowing capacity and compliance with credit-facility covenants. Current assets were $397.0 million and current liabilities $131.7 million.
Changes, outlook and notable items
- Wholesale Q3 sales increased 25.8%, Retail increased 7.3%, and Contract Manufacturing declined 56.9%. Military contract expirations contributed to the Contract Manufacturing decline. Management cited higher product, inbound freight and logistics costs for weaker gross margins across segments.
- On September 30, Rocky sold the NEOS brand and related assets for approximately $5.8 million; $5.5 million was received at closing and $0.3 million placed in escrow. The transaction included $3.6 million of inventory recorded in sales and $2.4 million in cost of goods sold; other asset-sale effects reduced operating expenses by approximately $0.7 million.
- Rocky identified misclassified import tariff codes on certain acquired-brand products and is seeking refunds of approximately $7.7 million. It recorded no gain because collection is uncertain; any refunds received will reduce cost of goods sold.
- A cost-savings review led to $1.2 million of restructuring charges in the first nine months, primarily employee severance; $0.5 million remained accrued at quarter-end. Acquisition-related costs were $2.7 million for the first nine months.
- After quarter-end, November amendments changed the term-loan and ABL agreements, including pricing and financial-covenant provisions. The filing provides no formal sales or earnings guidance. Management said its ABL facility and operating cash generation were expected to fund operations and debt obligations for at least 12 months, subject to performance, cash flows and covenant compliance.
- Key risks discussed include uncertain consumer demand and COVID-19 effects, seasonality, weather, competition, suppliers and international trade, operating disruptions, cybersecurity, foreign-exchange fluctuations, and economic conditions. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Track inventory levels, sell-through and operating cash flow, given the inventory build and continuing cash use.
- Assess gross-margin recovery as product, freight and logistics costs evolve.
- Verify progress and collectability of the $7.7 million tariff refund claims; no amount is recognized in the reported results.
- Review the November credit amendments, borrowing availability, interest costs and covenant headroom; debt and interest expense increased.
- Separate underlying growth from acquisition contributions and the NEOS sale effects when evaluating comparable performance.