What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-16 compared with 2020-03-06 · 56 added, 39 removed, 178 unchanged (35% of the section changed)

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and its subsidiaries.

Our fiscal year begins on January 1 and ends on December 31.

Our fiscal year begins on January 1 and ends on December 31.

We analyze the results of our operations for the last two years, including the trends in the overall business followed by a discussion of our cash flows and liquidity, our credit facility, and contractual commitments.

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EXECUTIVE OVERVIEW

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, Georgia Boot, Durango, Lehigh, and the licensed brand Michelin. In addition, on March 15, 2021, we closed on our acquisition of the performance and lifestyle footwear business of Honeywell International, Inc., which expanded our brand portfolio to include The Original Muck Boot Company, XTRATUF, Servus, NEOS and Ranger brands.

Our products are distributed through three distinct business segments:

W holesale, R etail and M ilitary.

In our W holesale business, we distribute our products through a wide range of distribution channels representing over 10,000 retail store locations in the U.S.

Wholesale, Retail and Military.

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.

and Canada as well as in several international markets.

Our W holesale 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 R etail 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 outlet store.

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 outlet store.

We also sell footwear under the Rocky label to the U.S.

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If we are unable to anticipate, identify or react appropriately to changes in consumer preferences, we may not grow as fast as we plan to grow or our sales may decline, and our brand image and operating performance may suffer.

Furthermore, achieving market acceptance for new products will likely require us to exert substantial product development and marketing efforts, which could result in a material increase in our selling, general and administrative (SG&A) expenses and there can be no assurance that we will have the resources necessary to undertake such efforts.

Material increases in our SG&A expenses could adversely impact our results of operations and cash flows.

Furthermore, achieving market acceptance for new products will likely require us to exert substantial product development and marketing efforts, which could result in a material increase in our operating expenses and there can be no assurance that we will have the resources necessary to undertake such efforts.

Material increases in our operating expenses could adversely impact our results of operations and cash flows.

We may also encounter difficulties in producing new products that we did not anticipate during the development stage.

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Failure to gain market acceptance for new products that we introduce could impede our growth, reduce our profits, adversely affect the image of our brands, erode our competitive position and result in long term harm to our business.

The impact of COVID-19 and the related economic, business and market disruptions were wide-ranging.

These impacts have had and may continue to cause disruptions from both a manufacturing and distribution standpoint.

As a result of COVID-19, we were required to temporarily close our manufacturing facilities in both the Dominican Republic and Puerto Rico for several weeks spanning through both the first and second quarters of 2020.

In response to COVID-19, we have incurred incremental costs associated with protecting the health and safety of our global workforce, enhanced sanitization of our global operating facilities, and information technology capabilities for employees operating remotely.

Beginning in March 2020, restrictions imposed by various governmental authorities on both domestic and international shipping and travel have caused a disruption to the timing of delivery of raw materials and finished goods resulting in negative impacts to our financial position, results of operations and cash flows.

The duration and severity of the outbreak and its long-term impact on our business are uncertain at this time.

We are unable to predict the impact that COVID-19 will have on our future financial position, results of operations and cash flows.

Net sales and related cost of goods sold are recognized at the time products are shipped to the customer and title transfers.

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Total Net Sales

Wholesale sales increased as consumers continued to respond favorably to several recent product introductions across our brand portfolio, which we believe is being fueled by new innovations and enhanced marketing programs that are generating increased awareness and demand in our work, western, outdoor and commercial military categories.

Retail sales increased primarily due to strong growth in our Lehigh business as our CustomFit model has continued to allow us to attain growth in our key account business as well as increase participation and retention rates, and a strong increase in our direct to consumer e-commerce business which we believe is attributable to recent investments aimed at increasing traffic and conversion on our website, and increased marketing and brand awareness.

In 2019, we also successfully expanded our direct to consumer efforts on marketplaces , such as Amazon and Ebay , and gained Seller Fulfilled Prime Status which allowed us to make our entire catalog “Prime Eligible .

Wholesale sales increased due to a strong demand for our products as consumers continued to respond favorably to our recent product introductions.

We were also able to capitalize on a strong inventory position as the economy reopened and consumers returned to shopping at brick and mortar retail. 

Retail sales increased primarily due to strong growth in our direct to consumer e-Commerce and marketplace businesses.

We have increased our targeted marketing efforts and brand awareness, which has led to increased traffic on our branded websites.

We have also continued to expand our direct to consumer efforts on marketplaces, such as Amazon and eBay.

Fiscal year 2020 was our first full year of having Seller Fulfilled Prime status, which made our entire catalog “Prime Eligible”.

Military sales decreased slightly, as expected, due to the recent expiration of some multi-year contracts.

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Wholesale gross margin increased primarily due to our dedicated focus to increasing full price selling by offering less discounts while maintaining stronger initial margins on some of our newer products and increased efficiencies at our manufacturing facilities.

Retail gross margins increased primarily due to an increase in direct to consumer sales which carry a higher margin and a decrease in certain Lehigh sales that carry lower margins.

Military gross margin increased significantly due to a few lower margin contracts ending as well as increased efficiencies at our Puerto Rico facility.

In the third quarter of 2019, we also received a one-time reimbursement of $725,000 related to expenses associated with the temporary closure of our Puerto Rican manufacturing facility as a result of Hurricane Maria in 2017.

Without the one-time reimbursement, the 2019 gross margin would have been 26.4%.

Retail gross margins increased primarily due to an increase in direct to consumer sales which carry a higher margin and a decrease in certain Lehigh sales which carry lower margins.

Military gross margin decreased year-over-year due to adjustments related to the overhead, payroll expenses and supplies incurred during the temporary closure of our manufacturing facilities due to the COVID-19 pandemic.

These expenses were partially offset by the employee retention credit tied to the CARES Act of 2020.

The net effect of these closure related expenses and employee retention credits was approximately $654,000.

Adjusting for the previously mentioned expenses and credits, our 2020 military margins would have been 25.3%.

In 2019, margins included a $581,000 one-time expense reimbursement to our Puerto Rico facility associated with the temporary closure as a result of Hurricane Maria in 2017.

Excluding the one-time reimbursement, gross margins would have been 27.0%.

Twelve Months Ended

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Operating expenses increased year-over-year as we continued to invest in our core brands to help initiate growth and expand within our respective markets and invest in personnel to continue to drive operational excellence throughout our organization.

We also experienced an increase in variable expenses such as commissions, freight and third party platform fees associated with an increase in W holesale and R etail sales.

We also experienced an increase in variable expenses such as commissions, freight and third party platform fees associated with an increase in Wholesale and Retail sales.

These increases were partially offset with a decrease in certain expenses due to the COVID-19 pandemic, such as travel and tradeshows.

Twelve Months Ended

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OTHER EXPENSES:

Other Income (Expenses)

Other expenses decreased due to lower bank fees and other income increased due to favorable currency exchange rates from our Canadian business.

Other (Expense) Income

Other expenses increased due to higher interest expense from borrowing against our credit facility in the second quarter of 2020 and unfavorable currency exchange rates from our Canadian business.

Interest rates on our cash and cash equivalents have also declined in 2020.

Twelve Months Ended

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Effective Tax Rate

In 2018, the effective tax rate was less than the statutory rate of 21% primarily due to a reduction in t oll taxes on accumulated earnings and profits at our Puerto Rican wholly owned subsidiary.

The effective tax rate for 2020 increased due to additional state taxing authorities requiring unitary filings and additional share-based compensation not deductible for tax purposes. 

LIQUIDITY AND CAPITAL RESOURCES

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Our working capital consists primarily of trade receivables and inventory, offset by accounts payable and accrued expenses.

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.

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 historically utilize our revolving credit facility to fund our seasonal working capital requirements.

As a result, balances on our revolving credit facility could fluctuate significantly throughout the year.

Our working capital increased to $114.6 million at December 31, 2019, compared to $106.2 million at the end of the prior year.

Our working capital increased to $123.2 million at December 31, 2020, compared to $114.6 million at the end of the prior 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 $9.5 million for 2019 and $4.7 million in 2018.

Capital expenditures for 2020 are anticipated to be approximately $12.7 million.

Capital expenditures were $11.6 million for 2020 and $9.5 million in 2019.

Capital expenditures for 2021 are anticipated to be approximately $9.5 million.

We lease certain machinery, equipment, and manufacturing facilities under operating leases that generally provide for renewal options.

Future minimum lease payments under non-cancelable operating leases are outlined in further detail in Note 8 .

In connection with our recent acquisition of the performance and lifestyle footwear business of Honeywell International, Inc.

(Honeywell), we incurred approximately $705,000 of transaction related expenses for the year ended December 31, 2020, which are included in operating expenses in the consolidated statement of operations.

From the period January 1, 2021 to March 15, 2021, we incurred approximately $4.5 million of transaction related costs.

We expect to incur additional integration and post-close related expenses after the date of these financial statements that cannot be quantified at this time.

We believe that our credit facility coupled with cash generated from operations will provide sufficient liquidity to fund our operations for at least the next twelve months.

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For more information regarding our credit facility please see Note 7 .

Refer to Note 19  

for additional information regarding our recent acquisition.

Twelve Months Ended

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Operating Activities.

The principal sources of net cash in 2019 included increases to accounts payable and accrued liabilities.

The principal sources of net cash in 2020 and 2019 included increases to accounts payable and accrued liabilities.

These sources of net cash were partially offset by an increase in trade receivables and inventories.

The principal sources of net cash in 2018 included decreases in trade receivables and income tax receivable as well as increases to accounts payable and accrued liabilities.

These sources of net cas h were primarily offset by an increase in inventories and a decrease in long-term taxes payable.

Investing Activities.

The principal use of cash in 2019 and 2018 was for the purchase of molds and equipment associated with our manufacturing and distribution operations, distribution center expansion, building improvements, and for information technology software and system upgrades .

The principal uses of cash in 2020 and 2019 were related to investments in molds and equipment associated with our manufacturing operations, investments in information technology and improvements made to our distribution facility.

Financing Activities.

Our financing activities during 2020 and 2019 principally were payments of dividends, proceeds from stock option issuances and repurchases of our common stock.

On March 2, 2020, we announced a new $7,500,000 share repurchase program that will replace the 2019 plan and will expire on February 28, 2021.

On March 8, 2021, we announced a new $7,500,000 share repurchase program that will replace the 2020 plan and will expire on March 4, 2022.

Management could decide to repurchase additional shares under the current program up through the date of expiration of the program.

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Less than 1 Year

Long-term debt

Long-term debt (Note 7)

Long-Term Taxes payable

Minimum operating lease commitments

Minimum operating lease commitments (Note 8)

Expected cash requirements for credit facility (1)

Contract Liabilities (3)

Contract Liabilities (Note 14)

Consulting commitments

Total contractual obligations

Represents one-time transition tax payable related to known amounts of cash taxes payable in future years as a result of the TCJA.

For further information, refer to Note 10 .

Expected payments are approximately $0.1 million per year for the foreseeable future and are a fee on the unused portion of our credit facility.

Represents our contract minimums with the U.S.

For further information please see Note 14.

From time to time, we enter into purchase commitments with our suppliers under customary purchase order terms.

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At December 31, 2020, no such losses existed.

In connection with our recent acquisition of the performance and lifestyle footwear business of 

Honeywell, Honeywell will provide certain services to us under the Transition Service Agreement (TSA).

The costs associated with the TSA are both fixed and variable.

We expect these costs to decline over time as we integrate the businesses.

Our ongoing business activities continue to be subject to compliance with various laws, rules and regulations as may be issued and enforced by various federal, state and local agencies.

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Additionally, we do not have any related party transactions that materially affect the results of operations, cash flow or financial condition.

Our financial performance is influenced by factors such as higher raw material costs as well as higher salaries and employee benefits.

Management attempts to minimize or offset the effects of inflation through increased selling prices, productivity improvements, and cost reductions.

We were able to mitigate the effects of inflation during 2019 and 2018 due to these factors.

It is anticipated that any inflationary pressures during 2020 could be offset through possible price increases.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements as of December 31, 2020.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis