UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
Commission File Number:
ROCKY BRANDS, INC.
(Exact name of Registrant as specified in its charter)
| | No. | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
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| (Address of principal executive offices, including zip code) | ||
| Registrant's telephone number, including area code: ( | ||
| Title of class | Trading symbol | Name of exchange on which registered | ||
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Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in 12b-2 of the Exchange Act.
| ☐ Large accelerated filer | ☒ | |
| ☐ Non-accelerated filer | ||
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
There were
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| PART I |
Financial Information |
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| Item 1. |
Financial Statements | |
| Notes to Unaudited Condensed Consolidated Financial Statements |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. |
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| Item 4. |
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| PART II | Other Information |
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| Item 2. |
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| Item 5. | Other Information | 20 |
| Item 6. |
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| SIGNATURES | ||
PART 1 – FINANCIAL INFORMATION
Rocky Brands, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
| June 30, | December 31, | June 30, | ||||||||||
| 2024 | 2023 | 2023 | ||||||||||
| ASSETS: | ||||||||||||
| CURRENT ASSETS: | ||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||
| Trade receivables – net | ||||||||||||
| Contract receivables | ||||||||||||
| Other receivables | ||||||||||||
| Inventories – net | ||||||||||||
| Income tax receivable | ||||||||||||
| Prepaid expenses | ||||||||||||
| Total current assets | ||||||||||||
| LEASED ASSETS | ||||||||||||
| PROPERTY, PLANT & EQUIPMENT – net | ||||||||||||
| GOODWILL | ||||||||||||
| IDENTIFIED INTANGIBLES – net | ||||||||||||
| OTHER ASSETS | ||||||||||||
| TOTAL ASSETS | $ | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY: | ||||||||||||
| CURRENT LIABILITIES: | ||||||||||||
| Accounts payable | $ | $ | $ | |||||||||
| Contract liabilities | ||||||||||||
| Current portion of long-term debt | ||||||||||||
| Accrued expenses and other liabilities | ||||||||||||
| Total current liabilities | ||||||||||||
| LONG-TERM DEBT | ||||||||||||
| LONG-TERM TAXES PAYABLE | ||||||||||||
| LONG-TERM LEASE | ||||||||||||
| DEFERRED INCOME TAXES | ||||||||||||
| DEFERRED LIABILITIES | ||||||||||||
| TOTAL LIABILITIES | ||||||||||||
| SHAREHOLDERS' EQUITY: | ||||||||||||
| Common stock, par value; | ||||||||||||
| shares authorized; issued and outstanding June 30, 2024 - ; December 31, 2023 - ; June 30, 2023 - | ||||||||||||
| Retained earnings | ||||||||||||
| Total shareholders' equity | ||||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | $ | $ | |||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
Rocky Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended |
Six Months Ended |
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| June 30, |
June 30, |
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| 2024 |
2023 |
2024 |
2023 |
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| NET SALES |
$ | $ | $ | $ | ||||||||||||
| COST OF GOODS SOLD |
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| GROSS MARGIN |
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| OPERATING EXPENSES |
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| INCOME FROM OPERATIONS |
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| INTEREST EXPENSE AND OTHER – net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| (LOSS) INCOME BEFORE INCOME TAX EXPENSE |
( |
) | ( |
) | ( |
) | ||||||||||
| INCOME TAX (BENEFIT) EXPENSE |
( |
) | ( |
) | ( |
) | ||||||||||
| NET (LOSS) INCOME |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
) | ||||||
| (LOSS) INCOME PER SHARE |
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| Basic |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
) | ||||||
| Diluted |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
) | ||||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |
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| Basic |
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| Diluted |
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See Notes to Unaudited Condensed Consolidated Financial Statements
Rocky Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
(In thousands, except per share amounts)
(Unaudited)
| Common Stock and | ||||||||||||||||
| Additional Paid-in Capital | Total | |||||||||||||||
| Shares | Retained | Shareholders' | ||||||||||||||
| Outstanding | Amount | Earnings | Equity | |||||||||||||
| BALANCE - December 31, 2022 | $ | $ | $ | |||||||||||||
| SIX MONTHS ENDED JUNE 30, 2023 | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||||||||||
| Dividends paid on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||
| Stock issued for options exercised, including tax benefits | $ | |||||||||||||||
| Stock compensation expense | - | |||||||||||||||
| BALANCE - March 31, 2023 | $ | $ | $ | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||||||||||
| Dividends paid on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||
| Stock compensation expense | $ | - | ||||||||||||||
| BALANCE - June 30, 2023 | $ | $ | $ | |||||||||||||
| BALANCE - December 31, 2023 | $ | $ | $ | |||||||||||||
| SIX MONTHS ENDED JUNE 30, 2024 | ||||||||||||||||
| Net income | $ | $ | ||||||||||||||
| Dividends paid on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||
| Stock compensation expense | $ | - | ||||||||||||||
| BALANCE - March 31, 2024 | $ | $ | $ | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||||||||||
| Dividends paid on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||
| Stock issued for options exercised, including tax benefits | $ | |||||||||||||||
| Stock compensation expense | - | |||||||||||||||
| BALANCE - June 30, 2024 | $ | $ | $ | |||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
Rocky Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Six Months Ended |
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| June 30, |
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| 2024 |
2023 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: |
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| Net income (loss) |
$ | $ | ( |
) | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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| Depreciation and amortization |
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| Noncash lease expense |
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| Loss on term loan extinguishment |
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| Provision for bad debts |
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| Stock compensation expense |
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| Amortization of debt issuance costs |
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| Loss on disposal of assets |
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| Gain on sale of business |
( |
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| Change in assets and liabilities: |
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| Receivables |
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| Contract receivables |
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| Inventories |
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| Other current assets |
( |
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| Other assets |
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| Accounts payable |
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| Operating lease liability |
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| Accrued and other liabilities |
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| Income taxes |
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| Contract liabilities |
( |
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| Net cash provided by operating activities |
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| CASH FLOWS FROM INVESTING ACTIVITIES: |
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| Purchase of fixed assets |
( |
) | ( |
) | ||||
| Proceeds from sale of business |
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| Net cash (used in) provided by investing activities |
( |
) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
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| Proceeds from revolving credit facility |
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| Repayments of revolving credit facility |
( |
) | ( |
) | ||||
| Proceeds from long-term debt |
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| Repayments of long-term debt |
( |
) | ( |
) | ||||
| Debt issuance costs |
( |
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| Proceeds from stock options |
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| Dividends paid on common stock |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| DECREASE IN CASH AND CASH EQUIVALENTS |
( |
) | ( |
) | ||||
| CASH AND CASH EQUIVALENTS: |
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| BEGINNING OF PERIOD |
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| END OF PERIOD |
$ | $ | |
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See Notes to Unaudited Condensed Consolidated Financial Statements
Rocky Brands, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
We are a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a portfolio of well recognized brand names including Rocky, The Original Muck Boot Company ("Muck"), Georgia Boot, Durango, XTRATUF, Lehigh, Ranger and the licensed brand Michelin. Our brands have a long history of representing high quality, comfortable, functional and durable footwear and our products are organized around six target markets: outdoor, work, duty, commercial military, military and western. In addition, as part of our strategy of outfitting consumers from head-to-toe, we market complementary branded apparel and accessories that we believe leverage the strength and positioning of each of our brands.
The accompanying Unaudited Condensed Consolidated Financial Statements reflect all adjustments that are necessary for a fair presentation of the financial results. All such adjustments reflected in the Unaudited Condensed Consolidated Financial Statements are considered to be of normal and recurring nature. The results of operations for the three and six months ended June 30, 2024 and 2023 are not necessarily indicative of the results to be expected for the whole year. The December 31, 2023 Unaudited Condensed Consolidated Balance Sheet data was derived from the audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). This Quarterly Report on Form 10-Q should be read in connection with our Annual Report on Form 10-K for the year ended December 31, 2023, which includes all disclosures required by GAAP.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
We have reclassified certain amounts in Note 9 - Accrued Expenses and Other Liabilities to conform to current period presentation.
2. ACCOUNTING STANDARDS UPDATES
Recently Issued Accounting Pronouncements
Rocky Brands, Inc. is currently evaluating the impact of certain ASUs on its Unaudited Condensed Consolidated Financial Statements:
| Standard | Description | Anticipated Adoption Periods | ||
| ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures | This pronouncement requires expanded disclosures about an entity’s reportable segments, including more enhanced information about a reportable segment’s expenses, interim segment profit or loss, and how an entity’s chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocating resources. | Fiscal year ending December 31, 2024 | ||
| ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures | This pronouncement requires expanded income tax disclosures primarily related to an entity's effective tax rate reconciliation and income taxes paid. | Q1 2025 |
In addition to the recently issued accounting pronouncements, the SEC recently issued its final rule regarded climate change disclosures. We are evaluating the impact this final rule will have on our Unaudited Condensed Consolidated Financial Statements. No other new accounting pronouncement issued or effective during the period had, or is expected to have, a material impact on our Unaudited Condensed Consolidated Financial Statements.
Accounting Standards Adopted in the Prior Year
| Standard | Description | |
| ASU 2016-13, Measurement of Credit Losses on Financial Instruments | This pronouncement significantly changes how entities measure credit losses for most financial assets, including accounts receivable and held-to-maturity marketable securities, by replacing today’s “incurred loss” approach with an “expected loss” model under which allowances will be recognized based on expected rather than incurred losses. |
3. FAIR VALUE
Generally accepted accounting standards establish a framework for measuring fair value. The fair value accounting standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This standard clarifies how to measure fair value as permitted under other accounting pronouncements.
The fair value accounting standard defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. This standard also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 – Observable inputs other than quoted market prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| ● | Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
The fair values of cash and cash equivalents, receivables, and payables approximated their carrying values because of the short-term nature of these instruments. Receivables consist primarily of amounts due from our customers, net of allowances, and expected insurance recoveries. The carrying amounts of our long-term credit facility and other short-term financing obligations also approximate fair value, as they are comparable to the available financing in the marketplace during the year. The fair value of our credit facilities is categorized as Level 2.
We hold assets and liabilities in a separate trust in connection with deferred compensation plans. The deferred compensation assets are classified as trading securities within other assets and the deferred compensation liabilities are classified within deferred liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheet. The fair value of these assets is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).
4. SALE OF SERVUS BRAND AND RELATED ASSETS
On March 30, 2023, we completed the sale of the Servus brand and related assets to PQ Footwear, LLC and Petroquim S.R.L. (collectively, the "Buyer"). Total consideration for this transaction was approximately $
Nature of Performance Obligations
Our products are distributed through distinct channels, which represent our business segments: Wholesale, Retail and Contract Manufacturing. In our Wholesale business, we distribute our products through a wide range of distribution channels representing over 10,000 retail store locations in the U.S., Canada, U.K. and other international markets such as Europe. Our Wholesale channels vary by product line and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores, specialty retailers and online retailers. Our Retail business includes direct sales of our products to consumers through our business-to-business web platform, e-commerce websites, third-party marketplaces and our Rocky Outdoor Gear Store. Our Contract Manufacturing segment includes sales to the U.S. Military, private label sales and any sales to customers in which we are contracted to manufacture or source a specific footwear product for a customer.
Significant Accounting Policies and Judgments
Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied; this generally occurs at a point in time when our product ships to the customer, which is when the transfer of control passes to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of our products, which is the net sales price.
The net sales price includes estimates of variable consideration for which reserves are established. Components of variable consideration include discounts and allowances, customer rebates, markdowns, chargebacks, and product returns. These reserves, are based on the amounts earned, or to be claimed on the related sales of our products.
Elements of variable consideration including discounts and allowances and rebates are determined at contract inception and are reassessed at each reporting date, at a minimum, to reflect any change in types of variable consideration offered to the customer. We utilize the expected value method in determining estimates of variable consideration, based on evaluations of each type of variable considerable and customer contract, historical and anticipated trends, and current economic conditions. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the respective underlying contracts. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net revenue and earnings in the period such variances become known.
Trade receivables represent our right to unconditional payment.
Current contract receivables represent contractual minimum payments required under non-cancellable contracts with the U.S. Military and other customers with a duration of one year or less.
Current contract liabilities are performance obligations that we expect to satisfy or relieve within the next twelve months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancellable contracts before the transfer of goods or services to the customer has occurred. Our contract liability represents unconditional obligations to provide goods under non-cancellable contracts with the U.S. Military and other customers.
As of June 30, 2024, there are contract balances outstanding.
Items considered immaterial within the context of the contract are recognized as an expense.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue producing transaction that are collected from customers are excluded from revenue.
Costs associated with our manufacturer’s warranty are recognized as expense when the products are sold in accordance with guidance surrounding product warranties.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in operating expenses.
Contract Balances
The following table provides information about contract liabilities from contracts with our customers:
| June 30, | December 31, | June 30, | ||||||||||
| ($ in thousands) | 2024 | 2023 | 2023 | |||||||||
| Contract liabilities | $ | $ | $ | |||||||||
Significant changes in the contract liabilities balance during the period are as follows:
| ($ in thousands) | Contract liabilities | |||
| Balance, December 31, 2023 | $ | |||
| Non-cancelable contracts with customers entered into during the period | ||||
| Revenue recognized related to non-cancelable contracts with customers during the period | ( | ) | ||
| Balance, June 30, 2024 | $ | |||
Disaggregation of Revenue
All revenues are recognized at a point in time when control of our products pass to the customer at point of shipment or point of sale for retail customers. Because all revenues are recognized at a point in time and are disaggregated by channel, our segment disclosures are consistent with disaggregation requirements. See Note 14 - Segment Disclosures for segment disclosures.
Trade receivables are presented net of the related allowance for credit losses of approximately $
Inventories are comprised of the following:
| June 30, | December 31, | June 30, | ||||||||||
| ($ in thousands) | 2024 | 2023 | 2023 | |||||||||
| Raw materials | $ | $ | $ | |||||||||
| Work-in-process | ||||||||||||
| Finished goods | ||||||||||||
| Total | $ | $ | $ | |||||||||
The return reserve allowance included within inventories was approximately $
8. GOODWILL & IDENTIFIED INTANGIBLE ASSETS
There was no change in goodwill during the six months ended June 30, 2024.
Intangible assets other than goodwill at the respective balance sheet dates consisted of the following:
| June 30, 2024 | ||||||||||||
| Gross | Accumulated | Carrying | ||||||||||
| ($ in thousands) | Amount | Amortization | Amount | |||||||||
| Indefinite-lived intangible assets | ||||||||||||
| Trademarks | $ | $ | ||||||||||
| Intangible assets subject to amortization | ||||||||||||
| Patents | $ | ( | ) | |||||||||
| Customer relationships | ( | ) | ||||||||||
| Total Intangible assets other than goodwill | $ | $ | ( | ) | $ | |||||||
| December 31, 2023 | ||||||||||||
| Gross | Accumulated | Carrying | ||||||||||
| ($ in thousands) | Amount | Amortization | Amount | |||||||||
| Indefinite-lived intangible assets | ||||||||||||
| Trademarks | $ | $ | ||||||||||
| Intangible assets subject to amortization | ||||||||||||
| Patents | $ | ( | ) | |||||||||
| Customer relationships | ( | ) | ||||||||||
| Total Intangible assets other than goodwill | $ | $ | ( | ) | $ | |||||||
| June 30, 2023 | ||||||||||||
| Gross | Accumulated | Carrying | ||||||||||
| ($ in thousands) | Amount | Amortization | Amount | |||||||||
| Indefinite-lived intangible assets | ||||||||||||
| Trademarks (1) | $ | $ | ||||||||||
| Intangible assets subject to amortization | ||||||||||||
| Patents | $ | ( | ) | |||||||||
| Customer relationships (2) | ( | ) | ||||||||||
| Total Intangible assets other than goodwill | $ | $ | ( | ) | $ | |||||||
(1) Servus trademarks were reduced from approximately $
(2) Customer relationships relating to the Servus brand of approximately $
The weighted average life of patents and customer relationships is
Amortization expense for intangible assets subject to amortization for each of the three months ended June 30, 2024 and 2023 was $
As of June 30, 2024, a schedule of approximate expected remaining amortization expense related to intangible assets for the years ending December 31 is as follows:
| Amortization | ||||
| ($ in thousands) | Expense | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030+ | ||||
9. ACCRUED EXPENSES AND OTHER LIABILTIES
Amounts reported in "Accrued expenses and other liabilities" within the accompanying Unaudited Condensed Consolidated Balance Sheets were:
| June 30, | December 31, | June 30, | ||||||||||
| ($ in thousands) | 2024 | 2023 | 2023 | |||||||||
| Accrued Expenses and other liabilities: | ||||||||||||
| Accrued duty | $ | $ | $ | |||||||||
| Accrued advertising | ||||||||||||
| Salaries and wages | ||||||||||||
| Accrued freight | ||||||||||||
| Commissions | ||||||||||||
| Taxes - other | ||||||||||||
| Accrued interest | ||||||||||||
| Other | ||||||||||||
| Total accrued expenses and other liabilities | $ | $ | $ | |||||||||
On April 26, 2024, we refinanced our existing debt by amending and restating our credit agreement with Bank of America, N.A., as agent, sole lead arranger and sole bookrunner and other lenders party thereto (the "ABL Agreement"). The ABL Agreement consists of a $
This transaction resulted in a $
Loans under the ABL agreement bear interest at a variable rate equal to either (i) the Base Rate (as calculated in the ABL Agreement) or (ii) Term SOFR (as calculated in the ABL Agreement), plus in each case an interest margin determined by the Company's average daily availability as a percentage of the aggregate amount of revolving commitments for revolving loans and term loans, with a range of Base Rate margins and term SOFR margins, as set forth of the following chart:
| Revolver Pricing Level(1) | Average Availability as a Percentage of Commitments | Term SOFR Term Loan | Base Rate Term Loan | Term SOFR Revolver Loan | Base Rate Revolver Loan | Term SOFR FILO Loan | Base Rate FILO Loan | |||||||||||||||||||
| I | > 66.7% | % | % | % | % | % | % | |||||||||||||||||||
| II | >33.3% and < or equal to 66.7% | % | % | % | % | % | % | |||||||||||||||||||
| III | < or equal to 33.3% | % | % | % | % | % | % | |||||||||||||||||||
(1) Until June 30, 2024, Level III applied.
In connection with the ABL Agreement, we had to pay certain fees that were capitalized and will be amortized over the life of such agreement.
Current and long-term debt under the ABL Agreement consisted of the following:
| June 30, | ||||
| ($ in thousands) | 2024 | |||
| Term Facility that matures in 2029 with an effective interest rate of % as of June 30, 2024 | $ | |||
| ABL Facility that matures in 2029: | ||||
| SOFR borrowings with an effective interest rate of % as of June 30, 2024 | ||||
| Prime borrowings with an effective interest rate of % as of June 30, 2024 | ||||
| Total debt | ||||
| Less: Unamortized debt issuance costs | ( | ) | ||
| Total debt, net of debt issuance costs | ||||
| Less: Debt maturing within one year | ( | ) | ||
| Long-term debt | $ | |||
A schedule of debt payments for the next five years is as follows:
| Debt Payment | ||||
| ($ in thousands) | Schedule | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
Credit Facility Covenants
Our ABL Facility and Term Facility require us to maintain a minimum fixed charge coverage ratio, as defined in the agreement. As of June 30, 2024, we were in compliance with all credit facility covenants. The ABL Facility and Term Facility also contain restrictions on the amount of dividend payments. As of June 30, 2024, the Company was in compliance with the amounts paid on dividends in accordance with our debt facilities.
Retired Term Debt
On March 15, 2021, we entered into a senior secured term loan facility with TCW Asset Management Company, LLC ("TCW"), as agent, for the lenders party thereto in the amount of $
The TCW Term Facility was collateralized by a second-lien on accounts receivable, inventory, cash and related assets and a first-lien on substantially all other assets. The TCW Term Facility was replaced by the Term Facility that was part of the ABL Agreement in April 2024.
On March 15, 2021, we also entered into a senior secured asset-based credit facility (the "Original ABL Facility") with Bank of America, N.A. as agent, for the lenders party thereto. The Original ABL Facility provided a senior secured asset-based revolving credit facility up to a principal amount of $
The Original ABL Facility was collateralized by a first-lien on accounts receivable, inventory, cash and related assets and a second-lien on substantially all other assets. The Original ABL Facility was replaced with the ABL Facility that was part of the ABL Agreement in April 2024. Interest on the Original ABL Facility was based on the amount available to be borrowed as set forth on the following chart:
| Revolver Pricing Level | Average Availability as a Percentage of Commitments | Base Rate | Term SOFR Loan | Base Rate for FILO | Term SOFR FILO Loans | |||||||||||||
| I | > 66.7% | % | % | % | % | |||||||||||||
| II | >33.3% and < or equal to 66.7% | % | % | % | % | |||||||||||||
| III | < or equal to 33.3% | % | % | % | % | |||||||||||||
In connection with the TCW Term Facility and the Original ABL Facility, we had to pay certain fees that were capitalized and amortized over the life of each respective loan. In addition, the Original ABL Facility required us to pay an annual collateral management fee in the amount of $
Current and long-term debt under the Original ABL Facility and TCW Term Facility consisted of the following:
| December 31, | June 30, | |||||||
| ($ in thousands) | 2023 | 2023 | ||||||
| TCW Term Facility refinanced in April 2024 with an effective interest rate of 13.20% as of December 31, 2023 and 12.77% as of June 30, 2023 | $ | $ | ||||||
| Original ABL Facility amended and restated in April 2024: | ||||||||
| SOFR borrowings with an effective interest rate of 7.31% and 5.06% as of December 31, 2023 and June 30, 2023, respectively | ||||||||
| Prime borrowings with an effective interest rate of 8.75% as of and December 31, 2023 and 8.25% as of June 30, 2023 | ||||||||
| Total debt | ||||||||
| Less: Unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Total debt, net of debt issuance costs | ||||||||
| Less: Debt maturing within one year | ( | ) | ( | ) | ||||
| Long-term debt | $ | $ | ||||||
Retired Credit Facility Covenants
The TCW Term Facility contained restrictive covenants which required us to maintain a maximum total leverage ratio and a minimum fixed charge coverage ratio, as defined in the TCW Term Facility agreement. The Original ABL Facility contained a restrictive covenant which required us to maintain a fixed charge coverage ratio upon a triggering event taking place (as defined in the Original ABL Facility). During the three months ended June 30, 2024 and 2023, we were in compliance with all credit facility covenants.
The TCW Term Facility and the Original ABL Facility also contained restrictions on the amount of dividend payments.
We were in compliance with all TCW Term Facility and Original ABL Facility Agreement covenants through April 26, 2024, the date on which we refinanced such debt.
The effective tax rate for the six months ended June 30, 2024 and 2023 was
The Company files income tax returns in the U.S. for federal, state, and local purposes, and in certain foreign jurisdictions. The Company's tax years through 2023 remain open to examination by most taxing authorities.
Our policy is to accrue interest and penalties on any uncertain tax position as a component of income tax expense.
Basic earnings per share ("EPS") is computed by dividing net income applicable to common shareholders by the weighted average number of common shares outstanding during each period. The diluted EPS computation includes common share equivalents, when dilutive.
A reconciliation of the shares used in the basic and diluted income per common share computation for the three and six months ended June 30, 2024 and 2023 is as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (shares in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Basic - weighted average shares outstanding | ||||||||||||||||
| Dilutive restricted share units(1) (2) | ||||||||||||||||
| Dilutive stock options(1) (2) | ||||||||||||||||
| Diluted - weighted average shares outstanding | ||||||||||||||||
| Anti-dilutive securities | ||||||||||||||||
(1) Due to a net loss for the three months ended June 30, 2024 and 2023, dilutive restricted share units and stock options are included for the period because the effect would be antidilutive.
(2) Due to a net loss for the six months ended June 30, 2023, dilutive restricted share units and stock options are included for the period because the effect would be antidilutive.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the six months ended June 30, 2024 and 2023 is as follows:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| ($ in thousands) | 2024 | 2023 | ||||||
| Interest paid | $ | $ | ||||||
| Federal, state, and local income taxes paid, net | $ | $ | ||||||
| Property, plant, and equipment noncash purchases in accounts payable | $ | $ | ||||||
| Right-of-use assets obtained in exchange for operating lease liabilities, net of terminations | $ | $ | ||||||
Reportable Segments - We have identified reportable segments: Wholesale, Retail and Contract Manufacturing.
Wholesale. In our Wholesale segment, our products are offered in over
Retail. In our Retail segment, we market directly to consumers through our Lehigh business-to-business including direct sales and through our CustomFit websites, consumer e-commerce websites, third-party marketplaces and our Rocky Outdoor Gear Store. Through our outdoor gear store, we generally sell first quality or discontinued products in addition to a limited amount of factory damaged goods, which typically carry lower gross margins.
Contract Manufacturing. In our Contract Manufacturing segment, we include sales to the U.S. Military, private label sales and any sales to customers in which we are contracted to manufacture or source a specific footwear product for a customer.
Net sales to foreign countries represented approximately
For segment reporting purposes, management uses gross margin to evaluate segment performance and allocate resources. Operating expenses such as warehousing, distribution, marketing and other key activities supporting our operations are integrated to maximize efficiency and productivity; therefore, we do not include these expenses within our segment results, but instead review them at the consolidated level.
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| ($ in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| NET SALES: | ||||||||||||||||
| Wholesale | $ | $ | $ | $ | ||||||||||||
| Retail | ||||||||||||||||
| Contract Manufacturing | ||||||||||||||||
| Total Net Sales | $ | $ | $ | $ | ||||||||||||
| GROSS MARGIN: | ||||||||||||||||
| Wholesale | $ | $ | $ | $ | ||||||||||||
| Retail | ||||||||||||||||
| Contract Manufacturing | ||||||||||||||||
| Total Gross Margin | $ | $ | $ | $ | ||||||||||||
Segment asset information is not prepared or used to assess segment performance.
15. COMMITMENTS AND CONTINGENCIES
Gain Contingency
In June 2022, we became aware of a misclassification of Harmonized Tariff Schedule (HTS) codes filed with the U.S. Customs and Border Protection (U.S. Customs) on certain products imported into the U.S. during 2021 and 2022 associated with brands acquired through an acquisition in the first quarter of 2021. As a result of the misclassification of HTS codes on these products, we believe that we have paid duties in excess of the expected amount due. We have the potential to recover the total amount of overpaid duties resulting in an estimated potential refund of approximately $
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
During the second quarter of 2024, we amended and restated our Original ABL Facility which resulted in a restated $175.0 million revolving credit facility and a new $50.0 million term facility. The proceeds from this transaction were used to retire our existing senior secured term loan facility with TCW Asset Management Company, LLC as of April 26, 2024. This transaction resulted in an expense of $2.6 million, consisting of a loss on extinguishment of term debt in the amount of $1.1 million and a $1.5 million prepayment penalty, which are included in Interest Expense and Other - net within the Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2024. See Note 10 - Long Term Debt to the Unaudited Condensed Consolidated Financial Statements for further information regarding our long-term debt.
During the first quarter of 2023, we divested the Servus brand. The gain of approximately $1.3 million on the sale of the Servus brand was recorded within Interest Expense and Other - net in the Unaudited Condensed Consolidated Statements of Operations for the six months ended June 30, 2023. Following the sale of the Servus brand, we manufactured Servus product on behalf of the buyer, pursuant to a transition services agreement. These sales were recorded within our Contract Manufacturing reporting segment and are not expected to recur on an ongoing basis. The Servus brand was sold to allow us to focus on our more profitable core brands and allocate resources toward growth and development of additional opportunities with those brands moving forward.
In 2023, we were also awarded a new multi-year contract with the U.S. Military pursuant to which we will produce and ship a minimum numbers of pairs to the U.S. Military through 2026, with the option to extend. The sales under this contract are included in our Contract Manufacturing reporting segment. The first quarter of 2024 was the first full quarter in which shipments were made to the U.S. Military under this multi-year contract.
SECOND QUARTER 2024 FINANCIAL HIGHLIGHTS COMPARED TO SECOND QUARTER 2023
| ● |
Net sales decreased 1.6% to $98.3 million from the year ago quarter; |
| ● |
Operating income increased 104.7% to $4.5 million from the year ago quarter; |
| ● |
Inventory decreased 20.0% to $175.0 million as of June 30, 2023; and |
| ● |
Total debt decreased 31.3% to $152.4 million as of June 30, 2024. |
FIRST HALF OF 2024 FINANCIAL HIGHLIGHTS COMPARED TO FIRST HALF OF 2023
| ● |
Net sales increased 40 basis points to $211.2 million from the year ago period; |
| ● | Gross margin increased 20 basis points to 38.9% for the six months ending June 30, 2024; and |
| ● | Operating income increased 965 basis points to $12.5 million from the year ago period. |
During the three and six months ended June 30, 2024, compared to the same periods last year, our Wholesale segment sales decreased while our Retail segment sales increased, particularly driven by an increase in our branded e-Commerce website sales. Additionally, our Contract Manufacturing segment sales increased despite a decrease in private label contract sales during the three and six months ended June 30, 2024 due to the aforementioned newly awarded contract with the U.S. Military. These factors combined with an uptick in Wholesale gross margin resulted in increased gross margin for both the three and six months ended June 30, 2024 compared to the prior year periods. As a result of cost saving measures and operational efficiencies from strategic restructuring initiatives implemented over the past year, we also saw a reduction in operating expenses as a percentage of net sales. The decline in operating expenses coupled with increased margin led to increased operating income for both the three and six months ended June 30, 2024 compared to the prior year periods.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, information derived from our Unaudited Condensed Consolidated Financial Statements. The discussion that follows each table should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements as well as our Annual Report on Form 10-K for the year ended December 31, 2023.
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| ($ in thousands) |
2024 |
2023 |
2024 |
2023 |
||||||||||||
| Net sales |
$ | 98,258 | $ | 99,822 | $ | 211,164 | $ | 210,267 | ||||||||
| Cost of goods sold |
60,220 | 62,250 | 128,977 | 128,936 | ||||||||||||
| Gross margin |
38,038 | 37,572 | 82,187 | 81,331 | ||||||||||||
| Operating expenses |
33,530 | 35,370 | 69,695 | 74,974 | ||||||||||||
| Income from operations |
$ | 4,508 | $ | 2,202 | $ | 12,492 | $ | 6,357 | ||||||||
Second quarter net sales decreased 1.6% to $98.3 million compared with $99.8 million in the second quarter of 2023. The change in net sales was attributable to a $3.2 million decrease in Wholesale net sales, a $1.0 million increase in Retail net sales and a $0.6 million increase in Contract Manufacturing net sales.
Gross margin in the second quarter of 2024 was $38.0 million, or 38.7% of net sales, compared to $37.6 million, or 37.6% of net sales, for the same period last year. The 110-basis point increase in gross margin as a percentage of net sales was due to an increase of 200-basis points in Wholesale gross margin as well as a higher percentage of Retail net sales, which carry higher gross margins than our Wholesale and Contract Manufacturing segments.
Operating expenses were $33.5 million, or 34.1% of net sales, for the second quarter of 2024 compared to $35.4 million, or 35.4% of net sales, for the same period a year ago. The decrease in operating expense as a percentage of net sales was largely attributable to the restructuring and savings achieved from the cost-saving initiatives implemented in 2023.
Income from operations for the second quarter of 2024 was $4.5 million, or 4.6% of net sales compared to $2.2 million or 2.2% of net sales for the same period a year ago. The increase in income from operations was primarily driven by an increase in gross margin in the current year period combined with a decrease in operating expenses.
Net sales for the six months ended June 30, 2024 increased 0.4% to $211.2 million from $210.3 million for the six months ended June 30, 2023. Wholesale segment sales decreased $3.5 million, Retail segment sales increased $1.9 million and Contract Manufacturing segment sales increased $2.4 million during the first half of the year compared to the prior year period. The decrease in Wholesale sales for the six months ended June 30, 2024 was mainly attributable to the sales of Servus brand in March 2023.
Operating expenses for the six months ended June 30, 2024 were $69.7 million, or 33.0% of net sales, compared to $75.0 million, or 35.7% of net sales for the six months ended June 30, 2023. The reduction in operating expenses as a percentage of net sales during the six months ended June 30, 2024 compared to the year ago period was largely attributable to the restructuring and savings achieved from the cost-saving initiatives implemented in 2023.
Three Months Ended June 30, 2024 compared to Three Months Ended June 30, 2023
| Three Months Ended |
||||||||||||||||
| June 30, |
||||||||||||||||
| ($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
Inc./ (Dec.) |
||||||||||||
| NET SALES: |
||||||||||||||||
| Wholesale |
$ | 68,258 | $ | 71,462 | $ | (3,204 | ) | (4.5 | )% | |||||||
| Retail |
26,110 | 25,082 | 1,028 | 4.1 | ||||||||||||
| Contract Manufacturing |
3,890 | 3,278 | 612 | 18.7 | ||||||||||||
| Total Net Sales |
$ | 98,258 | $ | 99,822 | $ | (1,564 | ) | (1.6 | )% | |||||||
Wholesale net sales for the three months ended June 30, 2024 were $68.3 million compared to $71.5 million for the three months ended June 30, 2023. The decline in sales from the year-ago period was mainly attributable to non-recurring commercial military sales to a single customer in the second quarter of 2023, which did not occur again in the current year period.
Retail net sales for the three months ended June 30, 2024 were $26.1 million compared to $25.1 million for the three months ended June 30, 2023. The increase in Retail net sales for the second quarter of 2024 was due to continued growth in our e-commerce business as we focused on targeted marketing efforts, primarily through digital marketing. This led to increased brand awareness and allowed us to engage more directly with consumers, which resulted in increased traffic on our branded websites and increased sales for the three months ended June 30, 2024 compared to the prior year period.
Contract Manufacturing net sales for the three months ended June 30, 2024 were $3.9 million compared to $3.3 million for the three months ended June 30, 2023. The increase was due to a multi-year contract awarded with the U.S. Military in the fourth quarter of 2023.
| Three Months Ended |
||||||||||||
| June 30, |
||||||||||||
| ($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
|||||||||
| GROSS MARGIN: |
||||||||||||
| Wholesale Margin $'s |
$ | 25,432 | $ | 25,176 | $ | 256 | ||||||
| Margin % |
37.3 | % | 35.2 | % | 2.1 | % | ||||||
| Retail Margin $'s |
$ | 12,234 | $ | 12,219 | $ | 15 | ||||||
| Margin % |
46.9 | % | 48.7 | % | (1.8 | )% | ||||||
| Contract Manufacturing Margin $'s |
$ | 372 | $ | 177 | $ | 195 | ||||||
| Margin % |
9.6 | % | 5.4 | % | 4.2 | % | ||||||
| Total Margin $'s |
$ | 38,038 | $ | 37,572 | $ | 466 | ||||||
| Margin % |
38.7 | % | 37.6 | % | 1.1 | % | ||||||
Wholesale gross margin for the three months ended June 30, 2024 was $25.4 million, or 37.3% of net sales, compared to $25.2 million, or 35.2% of net sales, for the three months ended June 30, 2023. The increase in Wholesale gross margin was due to product mix as well as improved efficiencies at our manufacturing facilities and lower costs from our sourced factories over the last six months due to increased production.
Retail gross margin for the three months ended June 30, 2024 was $12.2 million, or 46.9% of net sales, compared to $12.2 million, or 48.7% of net sales for the three months ended June 30, 2023. The decrease in gross margin as a percent of sales was mainly attributable to product mix as combined with enhanced promotional efforts on our branded e-Commerce websites as we aim to optimize our inventory levels.
Contract Manufacturing gross margin for the three months ended June 30, 2024 was $0.4 million, or 9.6% of net sales, compared to $0.2 million, or 5.4% of net sales for the three months ended June 30, 2023. The increase in gross margin was driven by increased sales to the U.S. Military which carried higher margins than private label sales.
| Three Months Ended |
||||||||||||||||
| June 30, |
||||||||||||||||
| ($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
Inc./ (Dec.) |
||||||||||||
| OPERATING EXPENSES |
$ | 33,530 | $ | 35,370 | $ | (1,840 | ) | (5.2 | )% | |||||||
| % of Net Sales |
34.1 | % | 35.4 | % | (1.3 | )% | ||||||||||
Operating expenses for the three months ended June 30, 2024 were $33.5 million or 34.1% of net sales compared to $35.3 million, or 35.4% of net sales for the three months ended June 30, 2023. The reduction in operating expenses in the second quarter of 2024 compared to the second quarter of 2023 was attributable to the restructuring and savings achieved from the cost-saving initiatives implemented in 2023.
| Three Months Ended |
||||||||||||||||
| June 30, |
||||||||||||||||
| ($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
Inc./ (Dec.) |
||||||||||||
| INTEREST EXPENSE AND OTHER - net |
$ | (6,131 | ) | $ | (5,630 | ) | $ | (501 | ) | 8.9 | % | |||||
Interest Expense and Other - net for the three months ended June 30, 2024 was $6.1 million compared to $5.6 million in the year ago period. The increase in interest expense in the current period was due to a $2.6 million term loan extinguishment charge associated with a prepayment penalty and accelerated amortization of deferred financing fees in connection with paying off our term debt, see Note 10 - Long Term Debt to the Unaudited Condensed Consolidated Financial Statement for more information. Excluding this $2.6 million term loan extinguishment charge, Interest Expense and Other - net, decreased $2.1 million during the three months ended June 30, 2024 compared to the prior year period as a result of lower debt levels and lower interest rates in the second quarter of 2024 compared to the second quarter of 2023.
| Three Months Ended |
||||||||||||||||
| June 30, |
||||||||||||||||
| ($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
Inc./ (Dec.) |
||||||||||||
| Income Tax (Benefit) Expense |
$ | (380 | ) | $ | (713 | ) | $ | 333 | (46.7 | )% | ||||||
| Effective Tax Rate |
23.4 |
% | 20.8 | % | 2.6 |
% | ||||||||||
The increase in our effective tax rate in the second quarter of 2024 compared to the same year ago period was primarily driven by a shift in the mix of the Company's domestic and foreign earnings.
Six Months Ended June 30, 2024 compared to Six Months Ended June 30, 2023
| Six Months Ended |
||||||||||||||||
| June 30, |
||||||||||||||||
| ($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
Inc./ (Dec.) |
||||||||||||
| NET SALES: |
||||||||||||||||
| Wholesale |
$ | 148,050 | $ | 151,513 | $ | (3,463 | ) | (2.3 | )% | |||||||
| Retail |
56,517 | 54,592 | 1,925 | 3.5 | ||||||||||||
| Contract Manufacturing |
6,597 | 4,162 | 2,435 | 58.5 | ||||||||||||
| Total Net Sales |
$ | 211,164 | $ | 210,267 | $ | 897 | 0.4 | % | ||||||||
Wholesale net sales for the six months ended June 30, 2024 were $148.1 million compared to $151.5 million for the six months ended June 30, 2023. The decrease in Wholesale sales for the six months ended June 30, 2024 was primarily due to the sale of the Servus brand in March 2023 as well as non-recurring commercial military sales to a single customer in the second quarter of 2023 that were not repeated in the current year period.
Retail net sales for the six months ended June 30, 2024 were $56.5 million compared to $54.6 million for the six months ended June 30, 2023. The increase in Retail net sales was primarily due to growth in our e-commerce business as we focused on our targeted marketing efforts, primarily through digital marketing. This led to increased brand awareness and allowed us to engage more directly with consumers, which resulted in increased traffic on our branded websites and increased sales for the six months ended June 30, 2024 compared to the prior year ago period.
Contract Manufacturing net sales for the six months ended June 30, 2024 were $6.6 million compared to $4.2 million for the six months ended June 30, 2023. The increase was due to a multi-year contract awarded with the U.S. Military in the fourth quarter of 2023.
| Six Months Ended |
||||||||||||
| June 30, |
||||||||||||
| ($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
|||||||||
| GROSS MARGIN: |
||||||||||||
| Wholesale Margin $'s |
$ | 54,463 | $ | 54,485 | $ | (22 | ) | |||||
| Margin % |
36.8 | % | 36.0 | % | 0.8 | % | ||||||
| Retail Margin $'s |
$ | 27,036 | $ | 26,598 | $ | 438 | ||||||
| Margin % |
47.8 | % | 48.7 | % | (0.9 | )% | ||||||
| Contract Manufacturing Margin $'s |
$ | 688 | $ | 248 | $ | 440 | ||||||
| Margin % |
10.4 | % | 6.0 | % | 4.4 | % | ||||||
| Total Margin $'s |
$ | 82,187 | $ | 81,331 | $ | 856 | ||||||
| Margin % |
38.9 | % | 38.7 | % | 0.2 | % | ||||||
Wholesale gross margin for the six months ended June 30, 2024 was $54.5 million, or 36.8% of net sales, compared to $54.5 million, or 36.0% of net sales for the six months ended June 30, 2023. The increase in Wholesale gross margin as a percent of sales was due to the divestiture of the Servus brand in March 2023, which carried lower gross margins than the rest of our product portfolio, as well as product mix. The increase in reported gross margin for the current year period was partially offset by a $1.3 million net tariff refund received in the first quarter of 2023.
Retail gross margin for the six months ended June 30, 2024 was $27.0 million, or 47.8% of net sales, compared to $26.6 million, or 48.7% of net sales for the six months ended June 30, 2023. The decrease in gross margin as a percent of sales was mainly attributable to product mix combined with enhanced promotional efforts on our branded e-Commerce websites as we continue to optimize our inventory levels.
Contract Manufacturing gross margin for the six months ended June 30, 2024 was $0.7 million, or 10.4% of net sales, compared to $0.2 million, or 6.0% of net sales for the six months ended June 30, 2024. The increase in gross margin was driven by increased sales with the U.S. Military which carried higher margins than sales private label sales.
| Six Months Ended |
||||||||||||||||
| June 30, |
||||||||||||||||
| ($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
Inc./ (Dec.) |
||||||||||||
| OPERATING EXPENSES |
$ | 69,695 | $ | 74,974 | $ | (5,279 | ) | (7.0 | )% | |||||||
| % of Net Sales |
33.0 | % | 35.7 | % | (2.7 | )% | ||||||||||
Operating expenses for the six months ended June 30, 2024 were $69.7 million or 33.0% of net sales compared to $75.0 million, or 35.7% of net sales for the six months ended June 30, 2023. The reduction in operating expenses during the six months ended June 30, 2024 compared to the year ago period was primarily attributable to restructuring and cost-savings initiatives implemented in 2023 as well as lower outbound freight costs.
| Six Months Ended |
||||||||||||||||
| June 30, |
||||||||||||||||
| ($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
Inc./ (Dec.) |
||||||||||||
| INTEREST EXPENSE AND OTHER - net |
$ | (10,785 | ) | $ | (10,294 | ) | $ | (491 | ) | 4.8 | % | |||||
Interest Expense and Other - net for the six months ended June 30, 2024 increased $0.5 million compared to the six months ended June 30, 2023. The increase in interest expense in the current period was partially due to a $2.6 million term loan extinguishment charge associated with a prepayment penalty and accelerated amortization of deferred financing fees in connection with paying off our term debt, see Note 10 - Long Term Debt to the Unaudited Condensed Consolidated Financial Statement for more information. Additionally, for the six months ended June 30, 2023, we recorded a $1.3 million gain within Interest Expense and Other - net resulting from the sale of the Servus brand. See Note 4 - Sale of Servus Brand and Related Assets for more information. Taking these items into consideration, the decrease in Interest Expense and Other - net was attributed to lower debt levels and interest rates in current period compared to the same period last year.
| Six Months Ended |
||||||||||||||||
| June 30, |
||||||||||||||||
| ($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
Inc./ (Dec.) |
||||||||||||
| Income Tax (Benefit) Expense |
$ | 399 | $ | (823 | ) | $ | 1,222 | (148.5 | )% | |||||||
| Effective Tax Rate |
23.4 | % | 20.9 | % | 2.5 | % | ||||||||||
The increase in our effective tax rate for the six months ended June 30, 2024 compared to the same year ago period was primarily driven by a shift in the mix of the Company's domestic and foreign earnings.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal source of liquidity has been our income from operations.
During the six months ended June 30, 2024, our primary use of cash was payments on our credit facilities. Our working capital consists primarily of trade receivables and inventory, offset by short-term debt and accounts payable. Our working capital fluctuates throughout the year as a result of our seasonal business cycle and business expansion and is generally lowest in the months of January through March of each year and highest during the months of May through October of each year. We typically utilize our revolving credit facility to fund our seasonal working capital requirements. As a result, balances on our revolving credit facility can fluctuate significantly throughout the year.
Our capital expenditures relate primarily to projects relating to our corporate offices, property, merchandising fixtures, molds and equipment associated with our manufacturing and distribution operations and for information technology. Capital expenditures were $2.4 million and $2.3 million for the six months ended June 30, 2024 and 2023, respectively.
We lease certain machinery, a distribution center in Reno, Nevada, and manufacturing facilities under operating leases that generally provide for renewal options.
We believe that our ABL Facility, coupled with cash generated from operations will provide sufficient liquidity to fund our operations and debt obligations for at least the next twelve months. Our continued liquidity, however, is contingent upon future operating performance, cash flows and our ability to meet financial covenants under our credit facility. For more information regarding our credit facility see Note 10 - Long Term Debt of our Notes to Unaudited Condensed Consolidated Financial Statements.
Cash Flows
| Six Months Ended |
||||||||
| June 30, |
||||||||
| ($ in millions) |
2024 |
2023 |
||||||
| Operating activities |
$ | 23.9 | $ | 19.7 | ||||
| Investing activities |
(0.4 | ) | 15.6 | |||||
| Financing activities |
(23.8 | ) | (37.9 | ) | ||||
| Net change in cash and cash equivalents |
$ | (0.3 | ) | $ | (2.6 | ) | ||
Operating Activities. Net cash provided by operating activities for the six months ended June 30, 2024 and 2023 was $23.9 million and $19.7 million, respectively. Adjusting for non-cash items, net income provided a cash in-flow of $10.5 million and $2.7 million for the six months ended June 30, 2024 and 2023, respectively. The net change in working capital and other assets and liabilities resulted in an increase to cash provided by operating activities of $13.4 million for the six months ended June 30, 2024 compared to an increase of $17.0 million for the six months ended June 30, 2023.
Decreases in accounts receivable provided a source of cash of $13.1 million and $22.5 million for the six months ended June 30, 2024 and 2023, respectively. The year-over-year decline in cash generated from accounts receivable was attributed to lower sales during the fourth quarter of 2023 compared to the fourth quarter of 2022. This reduction in sales led to decreased collections in the subsequent quarter, as there were fewer sales upon which to collect.
An increase in inventory resulted in a use of cash of $5.8 million for the six months ended June 30, 2024 compared to a decrease of inventory and a source of cash of $10.9 million for the six months ended June 30, 2023. The rise in inventory in 2024 was driven by an increase in in-transit inventory at quarter-end as we optimize inventory levels in preparation the second half of the year. The decrease in inventory in 2023 was a result of efforts to reduce inventory levels to better align our inventory levels with supply needs.
Changes in accounts payable resulted in a source of cash of $7.1 million for the six months ended June 30, 2024 compared to a use of cash of $10.1 million for the six months ended June 30, 2023. The change in accounts payable was mainly attributable to the change in purchases resulting in the continuous improvement of our inventory levels and inventory optimization in both years.
Investing Activities. Net cash used in investing activities for the six months ended June 30, 2024 was $0.4 million, compared to net cash provided by investing activities of $15.6 million for the same period in 2023. We invested $2.1 million and $1.7 million in capital expenditures for our manufacturing operations and information technology during the six months ended June 30, 2024 and 2023, respectively. These investments were offset by proceeds from the sale of the Servus brand, totaling $1.7 million in the six months ended June 30, 2024 and $17.3 million in the six months ended June 30, 2023.
Financing Activities. Net cash used in financing activities for the six months ended June 30, 2024 and 2023 was $23.8 million and $37.9 million, respectively. The use of cash primarily related to payments on our revolving credit facility and term debt, which totaled $20.1 million and $35.6 million for the six months ended June 30, 2024 and 2023, respectively.
Litigation
The Company is involved in legal proceedings in the ordinary course of business. Unless otherwise stated, we believe that the likelihood of the resolution being materially adverse to our financial statements is remote and as such have not recorded any contingent liabilities within the accompanying Unaudited Condensed Consolidated Financial Statement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company’s Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from the Company’s estimates. However, actual results may differ materially from these estimates under different assumptions or conditions.
We have identified the critical accounting policies used in determining estimates and assumptions in the amounts reported in our Management Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995
This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our and management’s intent, belief, and expectations, such as statements concerning our future profitability and our operating and growth strategy. Words such as “believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,” “estimate,” “predict,” “potential,” “continue,” “likely,” “would,” “could” and similar expressions are intended to identify forward-looking statements. Investors are cautioned that forward-looking statements involve risk and uncertainties including, without limitations, dependence on sales forecasts, changes in consumer demand, seasonality, impact of weather, competition, reliance on suppliers, risks inherent to international trade, changing retail trends, the loss or disruption of our manufacturing and distribution operations, cybersecurity breaches or disruption of our digital systems, fluctuations in foreign currency exchange rates, economic changes, as well as other factors set forth under the caption “Item 1A, Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (filed March 15, 2024) and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 (filed May 9, 2024), and other factors detailed from time to time in our filings with the Securities and Exchange Commission. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We assume no obligation to update any forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes to our market risk as disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2023.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 promulgated under the Exchange Act. Based upon this evaluation, our chief executive officer and our chief financial officer concluded that, as of June 30, 2024, our disclosure controls and procedures were (1) designed to ensure that material information relating to our Company is accumulated and made known to our management, including our chief executive officer and chief financial officer, in a timely manner, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Controls There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II -- OTHER INFORMATION
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None.
Use of Proceeds
Not applicable.
Our shareholder repurchase program expired on March 4, 2022.
During the three months ended June 30, 2024, director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
| Exhibit Number |
Description |
| 10.1 | Amended and Restated ABL Loan and Security Agreement, dated April 26, 2024, between the Company and Bank of America, N.A. as Agent, Sole Arranger and Sole Bookrunner and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 26, 2024 and filed on April 30, 2024). |
| 10.2 | Rocky Brands, Inc. 2024 Omnibus Incentive Plan (incorporated by reference to Exhibit A to the Company’s definitive proxy statement on Schedule 14A, filed on April 29, 2024). |
| 31.1* |
|
| 31.2* |
|
| 32** |
Section 1350 Certification of Principal Executive Officer/Principal Financial Officer. |
| 101* |
Attached as Exhibits 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 formatted in Inline XBRL (“eXtensible Business Reporting Language”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Shareholders' Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) related notes to these financial statements. |
| 104* | Cover Page Interactive Data File, formatted in Inline XBRL and contained in Exhibit 101 |
* Filed with this Report.
** Furnished with this Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ROCKY BRANDS, INC. |
||
| Date: August 8, 2024 |
By: |
/s/ Thomas D. Robertson |
| Thomas D. Robertson |
||
| Chief Operating Officer, Chief Financial Officer and Treasurer | ||
| (Principal Financial and Accounting Officer) | ||