Rocky Brands, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial amounts below are in millions of dollars unless noted. Rocky designs, manufactures and markets footwear, apparel and accessories through Wholesale, Retail and Contract Manufacturing segments.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $131.6 | $56.2 | $219.3 | $111.9 |
| Gross margin dollars / rate | $49.2 / 37.4% | $19.5 / 34.6% | $84.3 / 38.4% | $38.8 / 34.7% |
| Operating income | $8.4 | $3.1 | $15.0 | $4.6 |
| Net income | $3.9 | $2.4 | $8.4 | $3.6 |
| Diluted EPS | $0.52 | $0.33 | $1.13 | $0.49 |
| Operating cash flow | — | $11.0 | $18.9 |
Q2 sales grew 134.2% year over year; six-month sales grew 95.9%. Q2 operating expenses were $40.7 million, including $2.3 million of acquisition-related costs; six-month operating expenses were $69.3 million, including $7.5 million of such costs. Management cited higher demand, stronger product collections, improved wholesale stock positions, less discounting and manufacturing efficiencies as contributors to results. Reported Q2 gross margin included a $2.3 million acquisition-related inventory fair-value step-up; management reported adjusted gross margin of 39.1% for Q2 and 38.1% for the first half.
Business changes and acquisition
Rocky completed its acquisition of Honeywell’s performance and lifestyle footwear business on March 15, 2021. The preliminary closing price was approximately $207 million, net of cash acquired, against a preliminary purchase price of $230 million, with working-capital and other adjustments still subject to finalization. The acquired brands include The Original Muck Boot Company, XTRATUF, Servus, NEOS and Ranger. They contributed $50.7 million of Q2 sales and $57.2 million of first-half sales, and $0.1 million and $0.7 million of net income, respectively.
The company reported Q2 sales increases in all three segments: Wholesale $101.1 million (up 195.0%), Retail $22.3 million (up 36.8%) and Contract Manufacturing $8.1 million (up 45.6%). Wholesale included $46.9 million of acquired-brand sales; Retail included $3.8 million. Management changed the former Military segment’s name and scope to Contract Manufacturing, adding qualifying private-label and other contract sales.
Unaudited pro forma results, assuming the acquisition occurred at the start of each period and excluding 2021 acquisition-related costs, showed Q2 sales of $131.6 million and net income of $6.2 million, versus $90.3 million and $3.1 million in Q2 2020. These figures are not necessarily indicative of actual or future results.
Cash, debt and liquidity
At June 30, cash was $8.4 million, current assets $241.2 million and current liabilities $95.0 million. Inventory was $143.5 million, compared with $77.6 million at December 31, 2020. Six-month operating cash flow was $11.0 million; investing cash outflow was $216.7 million, primarily reflecting the acquisition, and financing cash inflow was $185.7 million. Cash declined by $20.0 million from year-end.
Total debt was $191.4 million before $4.0 million of unamortized issuance costs; reported debt net of costs was $187.4 million, including $3.3 million due within one year. The balance included a $129.2 million term loan and $62.2 million of ABL borrowings. The term loan’s effective rate was 8.00%; ABL rates were 1.63% for LIBOR borrowings and 3.25% for prime borrowings. The facilities mature in March 2026, and reported ABL borrowing capacity was $71.1 million. The term facility requires leverage and fixed-charge coverage tests; management said the company was in compliance at quarter-end. The ABL fixed-charge covenant was not in effect because no triggering event occurred.
Management said the ABL facility and operating cash generation should fund operations and debt obligations for at least the next 12 months, contingent on future performance, cash flows and covenant compliance. Six-month capital expenditures were $10.6 million. Dividends paid were $2.0 million; no shares were repurchased during Q2, and $7.5 million remained under the repurchase authorization.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management described strong demand and growth opportunities from the acquired brands, while expecting transition-service costs to decline as integration progresses.
- Management said the ultimate effect of COVID-19 on demand and operations remained uncertain. It cited risks including consumer demand, seasonality and weather, competition, supplier dependence, international trade, manufacturing or distribution disruption, cybersecurity and foreign-exchange movements.
- Acquisition accounting remained preliminary, including goodwill, intangible-asset valuations and working-capital true-up. Goodwill was $48.4 million; management planned its annual impairment testing in Q4 2021.
- The estimated tax rate increased to 23.0%, versus 20.0% in Q2 2020, which management attributed to the acquisition. The filing also noted acquisition integration and internal-control evaluation activities; no material change to internal control over financial reporting was reported for the quarter.
Investor verification points
- Separate underlying organic growth from the acquired business’s contribution, particularly in Wholesale.
- Track integration costs, transition-service costs, acquired-brand profitability and realization of expected synergies.
- Monitor inventory growth, working-capital needs, operating cash conversion and available ABL capacity.
- Verify debt covenant compliance, interest costs and refinancing or repayment capacity as borrowing needs change.
- Follow the final acquisition purchase-price allocation, working-capital adjustments, goodwill allocation and impairment assessments.