What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-03-15 compared with 2021-03-16 · 73 added, 89 removed, 145 unchanged (53% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) describes the matters that we consider to be important to understanding the results of our operations for each of the two years in the period ended December 31, 2020 and 2019, and our capital resources and liquidity as of December 31, 2020 and 2019.

Use of the terms “Rocky,”

the “Company,”

“we,”

“us”

and “our”

in this discussion refer to Rocky Brands, Inc.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") describes the matters that we consider to be important to understanding the results of our operations for each of the two years in the period ended December 31, 2021 and 2020, and our capital resources and liquidity as of December 31, 2021 and 2020.

Use of the terms "Rocky," the "Company," "we," "us" and "our" in this discussion refer to Rocky Brands, Inc.

and its subsidiaries.

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.

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 facilities, and contractual commitments.

We then provide a review of the critical accounting judgments and estimates that we have made that we believe are most important to an understanding of our MD&A and our consolidated financial statements.

We conclude our MD&A with information on recent accounting pronouncements which we adopted during the year, as well as those not yet adopted that are expected to have an impact on our financial accounting practices.

The following discussion should be read in conjunction with the “Selected Consolidated Financial Data”

and our consolidated financial statements and the notes thereto, all included elsewhere herein.

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto, included elsewhere herein.

The forward-looking statements in this section and other parts of this document involve risks and uncertainties including statements regarding our plans, objectives, goals, strategies, and financial performance.

Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995”

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor”

for forward-looking statements made by or on behalf of the Company.

Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995" below.

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements made by or on behalf of the Company.

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.

On January 24, 2021, we entered into a Purchase Agreement (the "Purchase Agreement") with certain subsidiaries of Honeywell International Inc.

(collectively, "Honeywell"), to purchase Honeywell's performance and lifestyle footwear business, including brand names, trademarks, assets and liabilities associated with Honeywell's performance and lifestyle footwear business (the "Acquisition") for an aggregate purchase price of $212 million.

We closed on the Acquisition on March 15, 2021 for preliminary aggregate closing price of approximately $207 million, net of cash acquired, based on preliminary working capital and other adjustments. Upon a final agreement of net working capital as of the Acquisition Date, we owed Honeywell an additional $5.4 million.

The Acquisition was funded through cash on hand and borrowings under two new credit facilities.

Note 8  for information regarding the two new credit facilities.

The Acquisition expanded our brand portfolio to include Muck, XTRATUF, Servus, NEOS and Ranger brands (the "Acquired Brands").

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.

Our footwear products incorporate varying features and are positioned across a range of suggested retail price points from 

$20.00 for our value priced products to 

$462.00 for our premium products.

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

Our products are distributed through three distinct business segments:

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 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.

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 outlet store.

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

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. 

During the quarterly period ended June 30, 2021, we made a change to our reporting segments to change our "Military" reporting segment to "Contract Manufacturing" and to change the composition thereof to continue to include sales to the U.S.

military ("Military Contracts") and to include sales under manufacturing contracts for private label or other specific footwear products sold through our Wholesale and Retail channels ("Private Contracts").

Previously, only Military Contracts were included in this segment.

There has been no change in our total consolidated financial condition, results of operations, or segment information previously reported, as the result of the change in our reportable segments, as we had no Private Contract sales during the quarterly period ended March 31, 2021 or the fiscal year ended December 31, 2020.

See Note 17  for further information.

Our growth strategy is founded substantially on the expansion of our brands into new footwear and apparel markets.

22 unchanged sentences

Our operating expenses consist primarily of selling, marketing, wages and related payroll and employee benefit costs, travel and insurance expenses, depreciation, amortization, professional fees, software licensing fees, facility expenses, bank charges, warehouse and outbound freight expenses.

We also incurred significant operating expenses associated with the Acquisition during the twelve months ended December 31, 2021.

Percentage of Net Sales

8 unchanged sentences

($ in thousands)

Contract Manufacturing

Total Net Sales

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.

Included in Wholesale net sales is $160.0 

million of net sales attributed to the Acquisition. Additionally, Wholesale sales increased due to strong demand for our products as consumers continued to respond favorably to our recent product introductions and we were able to capitalize on our strong inventory position which allowed us to gain additional market share and shelf space. 

Included in Retail net sales is $17.6 m illion of net sales attributed to the Acquired Brands.

Retail sales with our legacy brands increased primarily due to strong growth in our direct to consumer e-Commerce and marketplace businesses in the first half of the year.

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

Included in Contract Manufacturing net sales is $1.4 million of net sales attributed to the Acquisition.

Contract Manufacturing net sales increased as we continued to fulfill our military contracts and we filled orders under multiple private label programs during the twelve months ended December 31, 2021.

Twelve Months Ended

3 unchanged sentences

Retail Margin $'s

Military Margin $'s

Contract Manufacturing Margin $'s

Total Margin $'s

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 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%.

Wholesale gross margins remained flat year over year.

On an adjusted basis, to exclude the one-time inventory fair value adjustment associated with the Acquisition of $3.5 million, Wholesale gross margins for the year ended December 31, 2021 were approximately 36.7%.

On an adjusted basis, to exclude one-time COVID-19 related expenses of $1.3 million, Wholesale gross margins were 36.5% for the year ended  December 31, 2020.

The slight pick-up in adjusted margin for the year ended December 31, 2021 was due to the Acquired Brands carrying a higher margin than our legacy brands.

This is partially offset with increased shipping and freight costs.

Retail gross margins increased primarily due to sales mix.

Our direct to consumer business, which carries higher margins, increased at a faster pace than our Lehigh business, which carries lower margins, for the year ended December 31, 2021.

Contract Manufacturing gross margin increased year-over-year due to higher margin on certain military and private label contracts.

Twelve Months Ended

3 unchanged sentences

% of Net Sales

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 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.

Operating expenses increased year-over-year due the Acquisition.

We incurred significant one-time operating expenses as we integrated the businesses.

We incurred approximately $11.9 and $0.7 million of operating expenses related to the Acquisition during the years ended December 31, 2021 and 2020, respectively. 

Twelve Months Ended

2 unchanged sentences

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.

Other expenses increased due to higher interest expense in connection with the debt we incurred to fund the Acquisition.

Twelve Months Ended

3 unchanged sentences

Effective Tax Rate

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. 

The effective tax rate for the year ended December 31, 2021 decreased primarily due to the one-time benefit arising from the release of valuation allowances on state net operating losses and an increase in foreign tax credits.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity have been our income from operations and borrowings under our credit facility and other indebtedness.

Our principal sources of liquidity have been our income from operations and borrowings under our credit facilities.

Over the last several years, our principal uses of cash have been for working capital and capital expenditures to support our growth, as well as dividend payments and share repurchases.

6 unchanged sentences

Capital expenditures were $25.8 million for 2021 and $11.6 million in 2020.

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

Capital expenditures for 2022 are anticipated to be approximately $11.5 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 9 .

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.

We believe that our credit facilities coupled with cash generated from operations will provide sufficient liquidity to fund our operations 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 please see Note 7 .

Refer to Note 19  

for additional information regarding our recent acquisition.

For more information regarding our credit facilities please see Note 8 .

Refer to Note 3 for additional information regarding our recent Acquisition.

Cash Flows and Material Cash Requirements

Twelve Months Ended

5 unchanged sentences

Operating Activities.

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

The principal use of net cash in 2021 was increased inventories and accounts receivable, partially offset by increased accounts payable.

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

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

Investing Activities.

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.

The principal use of net cash in 2021 was to fund the Acquisition.

The principal uses of cash in 2020 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 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.

Our financing activities during 2021 mainly consisted of proceeds from and payments on our two new debt facilities that we incurred to fund the Acquisition and other working capital requirements.

During 2020, principal uses of financing activities were payments of dividends, proceeds from stock option issuances and repurchases of our common stock.

On March 8, 2021, we announced a new $7,500,000 share repurchase program, which expired on March 4, 2022.

For additional information regarding this share repurchase program, see Note 12 .

1 unchanged sentence

The following table summarizes our contractual obligations at December 31, 2021 resulting from financial contracts and commitments.

We have not included information on our recurring purchases of materials for use in our manufacturing operations.

These amounts are generally consistent from year to year, closely reflect our levels of production, and are not long-term in nature (less than three months).

The following table does not include information on our recurring purchases of materials for in our manufacturing operations.

Contractual Obligations at December 31, 2021:

4 unchanged sentences

Minimum operating lease commitments (Note 9)

Expected cash requirements for credit facility (1)

Contract Liabilities (Note 15)

1 unchanged sentence

Total contractual obligations

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.

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

1 unchanged sentence

At December 31, 2021, 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.

2 unchanged sentences

We are contingently liable with respect to lawsuits, taxes and various other matters that routinely arise in the normal course of business.

We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities, also known as “Variable Interest Entities.”

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

We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities, also known as "Variable Interest Entities." Additionally, we do not have any related party transactions that materially affect the results of operations, cash flow or financial condition.

OFF-BALANCE SHEET ARRANGEMENTS

9 unchanged sentences

Revenue principally consists of sales to customers, and, to a lesser extent, license fees.

See Note 14 for additional information regarding revenues.

See Note 15  for additional information regarding revenues.

Accounts receivable allowances

Management maintains allowances for uncollectible accounts for estimated losses resulting from the inability of our customers to make required payments.

Management maintains allowances for uncollectible accounts and estimated losses resulting from the inability of our customers to make required payments.

If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

5 unchanged sentences

If we determine that sales returns or allowances should be either increased or decreased, then the adjustment would be made to net sales in the period in which such a determination is made.

Sales returns and allowances as a percentage of sales for the years below were as follows:

Sales, returns, and allowances

Sales returns and allowances as a percentage of sales for the years ended December 31, 2021 and 2020 were 2.6% and 4.8%, respectively.

Management identifies slow moving inventories and estimates appropriate loss provisions related to these inventories.

2 unchanged sentences

Management regularly reviews the adequacy of our inventory reserves and makes adjustments as required.

See Note 3 for additional information regarding inventories.

See Note 4  for additional information regarding inventories.

Intangible assets

2 unchanged sentences

See Note 6 for additional information regarding intangible assets and the annual impairment analysis.

Management has recorded a valuation allowance to reduce its deferred tax assets for a portion of state and local income tax net operating losses that it believes may not be realized.

Management records a valuation allowance to reduce its deferred tax assets for a portion of state and local income tax net operating losses that it believes may not be realized.

We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, however, in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

6 unchanged sentences

Those statements include, but may not be limited to, all statements regarding our and management’s intent, belief, 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 all 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, cyber security 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 this Annual Report on Form 10-K and other factors detailed from time to time in our filings with the Securities and Exchange Commission.

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.

Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate.

3 unchanged sentences

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