Rocky Brands, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial statements are unaudited; amounts below are in millions except per-share data.
Business context
Rocky designs, manufactures and markets footwear and apparel through Wholesale, Retail and Contract Manufacturing segments. Results include the performance and lifestyle footwear business acquired from Honeywell on March 15, 2021, adding The Original Muck Boot Company, XTRATUF, Servus, NEOS and Ranger brands. The acquisition was funded with cash and new credit facilities.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $125.5 | $77.8 | $344.8 | $189.7 |
| Gross margin | $47.0 (37.4%) | $29.8 (38.4%) | $131.3 (38.1%) | $68.6 (36.2%) |
| Operating expenses | $44.2 | $20.2 | $113.5 | $54.3 |
| Income from operations | $2.8 | $9.7 | $17.8 | $14.3 |
| Net income (loss) | $(0.4) | $7.6 | $8.0 | $11.2 |
| Diluted EPS | $(0.05) | $1.04 | $1.08 | $1.53 |
- Q3 sales rose 61.4%; nine-month sales rose 81.8%. The acquired brands contributed $37.2 million of Q3 sales and $94.4 million for the nine months.
- Q3 net loss contrasts with prior-year profit despite higher sales. Operating expenses included $2.8 million of acquisition-related costs in Q3 and $10.3 million year to date; the acquired business contributed a Q3 net loss of $3.8 million and a nine-month net loss of $3.1 million.
- Q3 gross margin declined 1.0 percentage point. Wholesale margin included a $0.9 million acquisition inventory fair-value step-up; management reported adjusted Q3 wholesale margin of 37.0%. Nine-month consolidated margin improved 1.9 percentage points, with management citing stronger initial margins, less discounting and improved manufacturing efficiencies.
- Segment sales in Q3 were Wholesale $96.0 million, Retail $21.8 million and Contract Manufacturing $7.7 million. Retail benefited from direct-to-consumer mix; Contract Manufacturing growth reflected military orders and new private-label programs.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $(28.5) million, versus $18.1 million provided in 2020. Inventory growth used $83.6 million of cash, partly offset by a $41.1 million increase in accounts payable.
- Investing cash outflow was $222.8 million, including $207.0 million for the acquisition, net of cash acquired. Financing provided $235.9 million, primarily from new term and revolving borrowings. Cash declined $15.4 million to $12.9 million.
- At September 30, total debt was $242.6 million ($238.8 million net of issuance costs), including $128.4 million under the term facility and $114.2 million under the ABL facility. The facilities mature in 2026; stated borrowing capacity under the ABL was $35.8 million.
- Total current assets were $309.6 million and current liabilities $114.4 million; inventory was $202.2 million. Total liabilities were $360.8 million and shareholders’ equity $186.0 million.
- Management said the ABL facility and operating cash flow were expected to provide sufficient liquidity for at least 12 months, conditional on operating performance, cash flows and covenant compliance. The company reported covenant compliance at quarter-end; the ABL fixed-charge covenant was not then triggered.
Outlook, risks and unusual items
No quantified revenue or earnings guidance is provided. Management described growth opportunities from the acquired brands and expected transition-service costs to decline as integration progresses. It also reported temporary distribution-center constraints that delayed order fulfillment and reduced Q3 sales. The filing highlights uncertainty from COVID-19, consumer demand, seasonality, suppliers and international trade, and potential disruption to manufacturing, distribution or digital systems. Acquisition purchase-price allocation remained preliminary, and the company was evaluating goodwill tax treatment. Management estimated an approximately 23% tax rate following the acquisition.
Investor verification priorities
- Assess whether Q3’s operating-expense burden, acquisition costs and acquired-business losses are temporary and whether integration produces expected synergies.
- Track inventory levels, working-capital cash use, supplier and distribution constraints, and subsequent order fulfillment.
- Review debt balances, interest costs, available ABL capacity, leverage and covenant headroom; debt is secured and dividend payments are restricted.
- Verify final acquisition accounting, including purchase-price allocation, goodwill and intangible-asset values, and the acquired brands’ profitability.