Rocky Brands, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Rocky designs, manufactures and markets footwear, apparel and accessories across Wholesale, Retail and Contract Manufacturing. Results include the Honeywell performance and lifestyle footwear business acquired in March 2021.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $162.0 | $131.6 | $329.1 | $219.3 |
| Gross profit / margin | $53.8 / 33.2% | $49.2 / 37.4% | $116.6 / 35.4% | $84.3 / 38.4% |
| Operating income / margin | $5.6 / 3.5% | $8.4 / 6.5% | $18.8 / 5.7% | $15.0 / 6.8% |
| Net income | $0.9 | $3.9 | $8.3 | $8.4 |
| Diluted EPS | $0.12 | $0.52 | $1.12 | $1.13 |
- Segment sales: Q2 Wholesale $131.2 million (+29.7%), Retail $26.0 million (+16.4%), and Contract Manufacturing $4.9 million (-40.0%). Wholesale and Retail growth reflected demand, including acquired brands; Contract Manufacturing declined as U.S. Military contracts expired.
- Cash flow: First-half operating cash flow was negative $8.6 million, versus positive $11.0 million a year earlier, primarily due to a $55.0 million inventory cash use. Investing cash flow was negative $3.6 million; financing cash flow was positive $12.0 million. Cash declined $0.1 million to $5.8 million.
- Balance sheet at June 30: Current assets $421.2 million and current liabilities $164.3 million (current ratio approximately 2.6); inventory was $287.8 million. Total debt was $287.8 million gross, or $284.6 million net of issuance costs, including $3.3 million current. Shareholders’ equity was $204.5 million.
- ABL borrowing capacity was temporarily increased to $200 million through December 31, 2022, then expected to reduce to $175 million; remaining borrowing capacity at June 30 was $38.2 million. The term loan’s effective rate was 9.06%. The company reported compliance with debt covenants.
Material changes and management commentary
- Sales increased 23.1% in Q2 and 50.1% in the first half, with acquired-brand sales contributing substantially. Acquired brands contributed $66.7 million of Q2 and $131.1 million of first-half sales in 2022.
- Despite sales growth, gross margin fell 4.2 percentage points in Q2 and 3.0 points for the first half. Management cited higher product, manufacturing, inbound freight, shipping and logistics costs. Q2 operating income and net income declined year over year; higher interest and other expenses also weighed on earnings.
- Management said strong brand demand, a healthy inventory position and added fulfillment capacity supported growth. It expects cash from operations together with the ABL facility to fund operations and debt obligations for at least the next 12 months, subject to operating performance, cash flows and covenant compliance.
- No formal sales or earnings guidance is provided. Management estimated a 21.8% effective tax rate for 2022, citing actual results and additional foreign tax credits.
Risks, contingencies and unusual items
- Inventory rose to $287.8 million from $232.5 million at year-end 2021 and $143.5 million a year earlier; this buildup was the main driver of negative first-half operating cash flow.
- The company identified tariff-code misclassifications on certain acquired-brand imports and is seeking approximately $6.8 million in duty refunds. No gain was recorded because collection is uncertain. Management said excess duties reduced Q2 gross margin by $1.6 million and first-half margin by $3.2 million.
- A June cost-savings review led to $1.2 million of restructuring charges, with $1.1 million accrued at quarter-end. Acquisition-related costs were $2.1 million in Q2 and $3.2 million for the first half of 2022.
- Management discussed uncertainty from COVID-19 and cited risks including consumer demand, seasonality, weather, competition, suppliers, international trade, operational disruptions, cybersecurity and foreign exchange. It reported disclosure controls effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the filing’s net-income figures: the statements of operations and cash flows report first-half 2022 net income of $8.258 million, while the shareholders’ equity statement reports $7.338 million. The filing text does not explain this difference.
- Track inventory levels, sell-through and working-capital conversion, given the inventory increase and negative operating cash flow.
- Review debt pricing, seasonal revolver usage, the $38.2 million remaining availability, and the step-down in ABL capacity after December 31, 2022.
- Monitor whether the $6.8 million potential duty refund is approved and collected; it is not recognized as an asset or gain at quarter-end.
- Assess whether cost inflation, military-contract expirations, restructuring and integration spending continue to pressure margins and earnings.