Rocky Brands, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 10, 2023. This is an annual report, not a standalone fourth-quarter report. Rocky Brands designs, manufactures and markets footwear, apparel and accessories across its Rocky, Georgia Boot, Durango, Lehigh, Muck, XTRATUF, Servus, Ranger and licensed Michelin brands. Results include Wholesale, Retail and Contract Manufacturing segments.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $615.5 million | $514.2 million | +19.7% |
| Gross profit / margin | $225.2 million / 36.6% | $194.5 million / 37.8% | Margin down 1.2 percentage points |
| Operating income / margin | $44.0 million / 7.2% | $36.0 million / 7.0% | Income up $8.1 million |
| Interest and other expense | $18.3 million | $10.6 million | Up $7.7 million |
| Net income | $20.5 million | $20.6 million | Down 0.5% |
| Diluted EPS | $2.78 | $2.77 | Up $0.01 |
| Operating cash flow | $19.1 million | $(54.9) million | Improved by $74.0 million |
Wholesale sales were $484.8 million, up 24.0%; Retail sales were $115.4 million, up 21.9%; Contract Manufacturing sales fell 46.2% to $15.3 million as U.S. military contracts expired. Segment gross margins were 34.0% for Wholesale, 50.1% for Retail and 15.3% for Contract Manufacturing. Management attributed margin pressure principally to higher freight and product costs.
Sales growth reflects, in part, the Honeywell footwear acquisition completed in March 2021: acquired brands contributed $242.8 million of 2022 sales and $9.3 million of net income. Accordingly, year-over-year comparisons include a full year of acquired-business results in 2022 versus a partial year in 2021. Rocky sold the NEOS brand and related assets in September 2022 for approximately $5.8 million.
Cash, liquidity and debt
- Cash was $5.7 million at year-end; working capital was $244.8 million, versus $235.1 million a year earlier. Inventory was $235.4 million, up from $232.5 million.
- Operating cash flow was $19.1 million; investing cash outflow was $1.2 million and financing cash outflow was $18.1 million. Capital expenditures were $7.3 million; management anticipated approximately $7.1 million in 2023. Operating cash flow less reported fixed-asset purchases was approximately $12.4 million.
- Gross debt was $259.6 million ($116.3 million term facility and $143.3 million revolving facility), down from $273.6 million. Year-end borrowing capacity under the ABL facility was $56.2 million. The facilities mature in 2026 and bear variable rates; the term loan’s effective rate was 12.14% at year-end.
- Interest paid rose to $17.5 million from $7.9 million. A hypothetical 1 percentage-point rate increase was estimated to raise annual interest expense by approximately $2.6 million.
- The company reported compliance with term-loan covenants at year-end; the ABL fixed-charge covenant was not in effect because no triggering event occurred. Management said cash from operations and available facilities should fund operations for at least 12 months, subject to performance, cash flow and covenant compliance.
Material changes, outlook and risks
- Gross margin declined despite higher sales; higher freight and product costs were key factors. Interest expense increased substantially as borrowing rates rose.
- Sales returns and allowances were 6.7% of sales, compared with 2.6% in 2021. The allowance for doubtful accounts increased to $3.5 million from $0.6 million.
- A 2022 efficiency review resulted in restructuring charges, including approximately $1.0 million of costs in operating expenses and $1.2 million of accrued severance-related charges.
- The company disclosed potential recovery of approximately $7.7 million in duties overpaid because of tariff-code misclassification; $3.2 million had been received by year-end. No additional potential refund was recognized because collection remained uncertain. Any refunds are recorded as a reduction of cost of goods sold when received.
- The company provided no specific sales or earnings guidance. Its stated strategy includes extending brands into new markets, expanding e-commerce and international sales, growing Lehigh’s business-to-business platform, and pursuing complementary brands or acquisitions.
- Principal risks include seasonal and weather-sensitive demand, consumer and retail-market shifts, competition, dependence on suppliers and overseas manufacturing, freight and input costs, customer cancellations, variable-rate debt and restrictive covenants, and integration and impairment risks related to the Honeywell acquisition. U.S. military contracts represented 2.3% of 2022 revenue.
- Rocky is party to litigation with a supplier of the acquired business; management considers a materially adverse outcome remote and recorded no contingency. Management said other ordinary-course legal matters are not expected in aggregate to materially affect financial position, results or liquidity.
Investor verification checklist
- Assess whether sales growth and acquired-brand contribution translate into sustained organic growth and improved margins.
- Track return and allowance rates, receivable quality and inventory levels for signs of markdown or credit risk.
- Verify debt paydown, variable-rate interest burden, available revolver capacity and ongoing covenant compliance.
- Follow the status and accounting of the unrecognized tariff refunds, and the supplier litigation.
- Review assumptions supporting the $178.3 million of indefinite-lived intangibles and goodwill; impairment testing found fair values above carrying values, but depended on forecasts and valuation assumptions.
The independent auditor issued an unqualified opinion on the financial statements and internal controls. The filing identifies valuation of indefinite-lived intangible assets, including goodwill, as a critical audit matter.