Business context and reporting period
Rocky Brands, Inc. designs, manufactures and markets footwear, apparel and accessories across wholesale, retail and military channels. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the same quarter of 2020.
On March 15, 2021, Rocky acquired Honeywell’s performance and lifestyle footwear business, adding The Original Muck Boot Company, XTRATUF, Servus, NEOS and Ranger. The preliminary purchase price was approximately $230 million; closing cash paid was approximately $207 million, net of cash acquired, subject to final adjustments. The acquired business contributed approximately $6.5 million of sales and $0.5 million of net income from March 15 through March 31.
Financial and operating highlights
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $87.7 million | $55.7 million |
| Gross profit / margin | $35.1 million / 40.1% | $19.3 million / 34.7% |
| Operating income / margin | $6.6 million / 7.5% | $1.5 million / 2.6% |
| Net income | $4.5 million | $1.2 million |
| Diluted EPS | $0.61 | $0.16 |
| Cash from operations | $2.9 million | $14.2 million |
Sales increased 57.3% year over year. By channel, wholesale sales were $59.2 million (+69.3%), retail sales $24.0 million (+42.0%), and military sales $4.4 million (+15.7%). The acquired brands contributed approximately $5.5 million of wholesale sales and $1.0 million of retail sales in the quarter.
At March 31, 2021, cash was $8.9 million, versus $28.4 million at year-end 2020. Current assets were $224.6 million and current liabilities $72.2 million. Inventory was $125.1 million, up from $77.6 million at year-end; trade receivables were $84.1 million, up from $48.0 million.
Debt totaled $190.5 million before $4.2 million of unamortized issuance costs, comprising a $130 million term loan and $60.5 million drawn under the ABL facility. The company reported $55.7 million of ABL borrowing capacity. The facilities mature in 2026. The term loan’s stated effective rate was 8.00%; the ABL rate was 3.25% at quarter-end.
Cash used in investing was $208.2 million, primarily for the acquisition. Financing provided $185.8 million, including proceeds from the new facilities, partly offset by revolver repayments and debt issuance costs. Capital expenditures were reported as $2.9 million in MD&A. The company paid a $0.14-per-share dividend during the quarter.
Material changes versus the prior period
- Reported sales growth reflected strong demand and improved wholesale stock positions, continued e-commerce and marketplace growth, and the partial-quarter contribution from the acquired brands. Rocky also cited COVID-related disruption to prior-year deliveries and retail activity as a comparison factor.
- Gross margin rose to 40.1% from 34.7%, which management attributed to stronger initial product margins, less discounting, improved manufacturing efficiencies and retail channel mix. Q1 2021 cost of goods sold included approximately $0.3 million of acquisition-related inventory fair-value step-up expense.
- Operating expenses increased 60.4% to $28.6 million, including approximately $5.2 million of acquisition-related banking, legal, professional and consulting costs. Management reported adjusted operating expenses of $23.4 million, or 26.7% of sales.
- Operating cash flow declined to $2.9 million from $14.2 million, with working-capital movements including higher inventory. The acquisition and related financing materially changed the balance sheet: total assets increased to $449.1 million from $229.1 million at year-end, and total liabilities to $265.2 million from $49.6 million.
Outlook, risks and unusual items
The filing provides no quantified revenue, earnings or margin guidance. Management said it expects to continue incurring acquisition and integration costs and expects transition-service costs to decline over time as integration proceeds. It believes the ABL facility and operating cash flow will provide sufficient liquidity for at least the next 12 months, subject to future performance, cash flows and covenant compliance.
Management said the ultimate effect of COVID-19 on demand and operations remains uncertain and could materially adversely affect results and financial condition. Other cited risks include seasonality, consumer demand, competition, suppliers, international trade, weather, operational disruption, cybersecurity and foreign-exchange movements. The company reported compliance with term-facility covenants at March 31, 2021; the ABL fixed-charge covenant was not triggered during the quarter. Both new facilities restrict dividends.
The acquisition’s purchase-price allocation remains preliminary and subject to working-capital and valuation adjustments. Unaudited pro forma results assuming the acquisition occurred at the start of each comparative period were sales of $126.3 million and net income of $13.9 million for Q1 2021, versus sales of $94.6 million and net income of $2.5 million for Q1 2020; the 2021 pro forma figures remove approximately $5.2 million of acquisition costs and are not necessarily indicative of actual or future results.
Important facts for investors to verify
- Final acquisition purchase-price adjustments, asset valuations, goodwill allocation and integration costs.
- Post-acquisition sales, margins and cash generation of the acquired brands, distinguishing organic growth from acquisition contributions.
- Debt pricing, seasonal ABL availability, covenant headroom and the company’s capacity to service debt while funding working capital.
- Inventory and receivables growth, and whether operating cash flow improves as the business integrates.
- The duration and business effects of COVID-19, supply and operational risks, and any later management guidance.