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)
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(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 | 21 |
Item 6. |
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SIGNATURES |
PART I – FINANCIAL INFORMATION
Rocky Brands, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
September 30, | December 31, | September 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 September 30, 2024 - ; December 31, 2023 - ; September 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 |
Nine Months Ended |
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September 30, |
September 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 |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
INCOME BEFORE INCOME TAX EXPENSE |
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INCOME TAX EXPENSE |
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NET INCOME |
$ | $ | $ | $ | ||||||||||||
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 |
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 | $ | $ | $ | |||||||||||||
NINE MONTHS ENDED SEPTEMBER 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 | $ | $ | $ | |||||||||||||
Net income | $ | $ | ||||||||||||||
Dividends paid on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||
Stock issued for options exercised, including tax benefits | 4 | $ | ||||||||||||||
Stock compensation expense | - | |||||||||||||||
BALANCE - September 30, 2023 | $ | $ | $ | |||||||||||||
BALANCE - December 31, 2023 | $ | $ | $ | |||||||||||||
NINE MONTHS ENDED SEPTEMBER 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 | $ | $ | $ | |||||||||||||
Net income | $ | $ | ||||||||||||||
Dividends paid on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||
Stock compensation expense | $ | - | ||||||||||||||
BALANCE - September 30, 2024 | $ | $ | $ | $ |
See Notes to Unaudited Condensed Consolidated Financial Statements
Rocky Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended |
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September 30, |
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2024 |
2023 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
$ | $ | ||||||
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 and loan fees |
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Loss on disposal of assets |
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Gain on sale of business |
( |
) | ||||||
Change in assets and liabilities: |
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Receivables |
( |
) | ( |
) | ||||
Contract receivables |
( |
) | ||||||
Inventories |
( |
) | ||||||
Other current assets |
( |
) | ( |
) | ||||
Other assets |
( |
) | ||||||
Accounts payable |
( |
) | ||||||
Operating lease liability |
( |
) | ||||||
Accrued and other liabilities |
( |
) | ||||||
Income taxes |
( |
) | ||||||
Contract liabilities |
( |
) | ||||||
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 |
( |
) | ( |
) | ||||
Payment of debt issuance costs and loan fees |
( |
) | ||||||
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 |
||||||||
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 nine months ended September 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 | Effect on Consolidated Financial Statements | |||
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 | The Company is still assessing the impact of the new accounting standard but does not expect the adoption of this standard to have a material impact on its financial statements. | |||
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 | The Company is still assessing the impact of the new accounting standard but does not expect the adoption of this standard to have a material impact on its financial statements. |
In addition to the recently issued accounting pronouncements, the SEC recently issued its final rule regarding 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.
3. FAIR VALUE
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 approximate 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. The Company does not currently have any Level 3 assets or liabilities.
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 the types of variable consideration offered to the customer. We determine estimates of variable consideration based on evaluations of each type of variable consideration and customer contract, historical and anticipated trends, and current economic conditions. Overall, these reserves reflect our best estimates of the amount of consideration to be earned on the related sales. 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 September 30, 2024, there are contract receivable or contract liability 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.
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:
September 30, |
December 31, |
September 30, |
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($ 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, September 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 Information for segment disclosures.
Trade receivables are presented net of the related allowance for credit losses of approximately $
Inventories are comprised of the following:
September 30, |
December 31, |
September 30, |
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($ in thousands) |
2024 |
2023 |
2023 |
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Raw materials |
$ | $ | $ | |||||||||
Work-in-process |
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Finished goods |
||||||||||||
Total |
$ | $ | $ |
The asset associated with our returns reserve included within inventories was approximately $
8. GOODWILL & IDENTIFIED INTANGIBLE ASSETS
There was no change in goodwill during the nine months ended September 30, 2024.
Intangible assets other than goodwill at the respective balance sheet dates consisted of the following:
September 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 | $ | $ | ( | ) | $ |
September 30, 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 | $ | $ | ( | ) | $ |
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 September 30, 2024 and 2023 was $
As of September 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+ | ||||
Total | $ |
9. ACCRUED EXPENSES AND OTHER LIABILTIES
Amounts reported in "Accrued expenses and other liabilities" within the accompanying Unaudited Condensed Consolidated Balance Sheets were:
September 30, |
December 31, |
September 30, |
||||||||||
($ in thousands) |
2024 |
2023 |
2023 |
|||||||||
Accrued Expenses and other liabilities: |
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Accrued duties |
$ | $ | $ | |||||||||
Salaries and wages |
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Operating lease liability |
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Returns liability |
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Accrued freight |
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Accrued advertising |
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Commissions |
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Income taxes payable |
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Taxes - other |
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Accrued interest |
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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 September 30, 2024, Level III applied.
In connection with the ABL Agreement, we paid 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:
September 30, | ||||
($ in thousands) | 2024 | |||
Term Facility that matures in 2029 with an effective interest rate of % | $ | |||
ABL Facility that matures in 2029: | ||||
SOFR borrowings with an effective interest rate of % | ||||
Prime borrowings with an effective interest rate of % | ||||
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 | ||
Total |
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 September 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 September 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, |
September 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 September 30, 2023 |
$ | $ | ||||||
Original ABL Facility amended and restated in April 2024: |
||||||||
SOFR borrowings with an effective interest rate of 7.31% and 7.25% as of December 31, 2023 and September 30, 2023, respectively |
||||||||
Prime borrowings with an effective interest rate of 8.75% as of and December 31, 2023 and September 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 September 30, 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 three and nine months ended September 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 nine months ended September 30, 2024 and 2023 is as follows:
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, |
September 30, |
|||||||||||||||
(shares in thousands) |
2024 |
2023 |
2024 |
2023 |
||||||||||||
Basic - weighted average shares outstanding |
||||||||||||||||
Dilutive restricted share units |
||||||||||||||||
Dilutive stock options |
||||||||||||||||
Diluted - weighted average shares outstanding |
||||||||||||||||
Anti-dilutive securities |
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the nine months ended September 30, 2024 and 2023 is as follows:
Nine Months Ended | ||||||||
September 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 |
Nine Months Ended |
|||||||||||||||
September 30, |
September 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 first nine months 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 nine months ended September 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 nine months ended September 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 number 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.
THIRD QUARTER 2024 FINANCIAL HIGHLIGHTS COMPARED TO THIRD QUARTER 2023
● | Net sales decreased 8.8% to $114.6 million; |
● | Gross margin increased 110 basis points to 38.1%; |
● | Inventory decreased 11.8% to $171.8 million as of September 30, 2024; and |
● |
Total debt decreased 29.7% to $150.3 million as of September 30, 2024. |
YEAR TO DATE 2024 FINANCIAL HIGHLIGHTS COMPARED TO YEAR TO DATE 2023
● |
Net sales decreased 3.0% to $325.7 million; |
● | Gross margin increased 60 basis points to 38.6% for the; and |
● | Operating income as a percentage of net sales increased 80 basis points to $22.6 million. |
During the three and nine months ended September 30, 2024, compared to the same periods last year, our Wholesale segment sales decreased, due to certain nonrecurring sales, while our Retail segment sales increased, due to an increase in sales under our Lehigh CustomFit platform. Additionally, our Contract Manufacturing segment sales increased despite a decrease in private label contract sales during the three and nine months ended September 30, 2024, due to the U.S. Military contract awarded in the fourth quarter of 2023. These factors combined with an increase in Wholesale gross margin resulted in an overall increase in gross margin for both the three and nine months ended September 30, 2024 compared to the prior year periods.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, information derived from our Unaudited Condensed Consolidated Financial Statements. The discussion that follows each table should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements as well as our Annual Report on Form 10-K for the year ended December 31, 2023.
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, |
September 30, |
|||||||||||||||
($ in thousands) |
2024 |
2023 |
2024 |
2023 |
||||||||||||
Net sales |
$ | 114,554 | $ | 125,614 | $ | 325,718 | $ | 335,881 | ||||||||
Cost of goods sold |
70,908 | 79,076 | 199,886 | 208,012 | ||||||||||||
Gross margin |
43,646 | 46,538 | 125,832 | 127,869 | ||||||||||||
Operating expenses |
33,575 | 32,259 | 103,271 | 107,233 | ||||||||||||
Income from operations |
$ | 10,071 | $ | 14,279 | $ | 22,561 | $ | 20,636 |
Net sales decreased 8.8% to $114.6 million in the third quarter of 2024 compared to $125.6 million in the third quarter of 2023. The decline in net sales for the quarter ended September 30, 2024 over the prior year period was attributable to a decrease in Wholesale net sales, partially offset by an increase in Retail and Contract Manufacturing net sales.
Gross margin in the third quarter of 2024 was $43.6 million, or 38.1% of net sales, compared to $46.5 million, or 37.0% of net sales, for the same period last year. The increase in gross margin as a percentage of net sales was due to Wholesale product mix as well as a higher percentage of Retail net sales, which carry higher gross margins than our Wholesale and Contract Manufacturing segments.
Operating expenses for the three months ended September 30, 2024 were $33.6 million, or 29.3% of net sales, compared to $32.3 million, or 25.7% of net sales, for the three months ended September 30, 2023. The increase in operating expenses in the third quarter of 2024 compared to the third quarter of 2023 was primarily attributable to incremental brand building and advertising programs to support future growth.
Three Months Ended September 30, 2024 compared to Three Months Ended September 30, 2023
Three Months Ended |
||||||||||||||||
September 30, |
||||||||||||||||
($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
Inc./ (Dec.) |
||||||||||||
NET SALES: |
||||||||||||||||
Wholesale |
$ | 84,033 | $ | 99,716 | $ | (15,683 | ) | (15.7 | )% | |||||||
Retail |
26,771 | $ | 24,523 | 2,248 | 9.2 | |||||||||||
Contract Manufacturing |
3,750 | $ | 1,375 | 2,375 | 172.7 | |||||||||||
Total Net Sales |
$ | 114,554 | $ | 125,614 | $ | (11,060 | ) | (8.8 | )% |
Wholesale net sales for the three months ended September 30, 2024 were $84.0 million compared to $99.7 million for the three months ended September 30, 2023. The decrease in net sales in the current year period was attributed to non-recurring sales following the change to a distributor model in Canada in November 2023 and temporarily elevated commercial military footwear sales to a single customer throughout 2023. In addition to the aforementioned non-recurring sales, the decrease in Wholesale sales can be attributed to a more mild climate in the third quarter of 2024 compared to the prior year quarter as well as lean inventory on some key styles in the current period.
Retail net sales for the three months ended September 30, 2024 were $26.8 million compared to $24.5 million for the three months ended September 30, 2023. The increase in Retail net sales for the third quarter of 2024 was due to increased sales in our Lehigh CustomFit platform as a result of completing a realignment of our sales organization which allowed us to expand our customer base and increase offerings to current customers.
Contract Manufacturing net sales for the three months ended September 30, 2024 were $3.8 million compared to $1.4 million for the three months ended September 30, 2023. The increase was due to a multi-year contract awarded with the U.S. Military in the fourth quarter of 2023.
Three Months Ended |
||||||||||||
September 30, |
||||||||||||
($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
|||||||||
GROSS MARGIN: |
||||||||||||
Wholesale Margin $'s |
$ | 31,514 | $ | 34,599 | $ | (3,085 | ) | |||||
Margin % |
37.5 | % | 34.7 | % | 2.8 | % | ||||||
Retail Margin $'s |
$ | 11,683 | $ | 11,781 | $ | (98 | ) | |||||
Margin % |
43.6 | % | 48.0 | % | (4.4 | )% | ||||||
Contract Manufacturing Margin $'s |
$ | 449 | $ | 158 | $ | 291 | ||||||
Margin % |
12.0 | % | 11.5 | % | 0.5 | % | ||||||
Total Margin $'s |
$ | 43,646 | $ | 46,538 | $ | (2,892 | ) | |||||
Margin % |
38.1 | % | 37.0 | % | 1.1 | % |
Wholesale gross margin for the three months ended September 30, 2024 was $31.5 million, or 37.5% of net sales, compared to $34.6 million, or 34.7% of net sales, for the three months ended September 30, 2023. The higher Wholesale gross margins in the third quarter of 2024 compared to the third quarter 2023 was attributable to lower promotional activity in the current year period as well as opportunistic sales to certain international and key wholesale partners in the third quarter of 2023, which contributed to lower gross margins in the prior year period.
Retail gross margin for the three months ended September 30, 2024 was $11.7 million, or 43.6% of net sales, compared to $11.8 million, or 48.0% of net sales, for the three months ended September 30, 2023. The decrease in gross margin as a percent of net sales was attributable to our Lehigh CustomFit platform having a higher percentage of total retail sales than our e-commerce branded websites, which carry lower margin than our branded e-commerce websites.
Contract Manufacturing gross margin for the three months ended September 30, 2024 was $0.4 million, or 12.0% of net sales, compared to $0.2 million, or 11.5% of net sales, for the three months ended September 30, 2023. The increase in gross margin was driven by increased sales to the U.S. Military which carried higher margins than private label sales.
Three Months Ended |
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September 30, |
||||||||||||||||
($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
Inc./ (Dec.) |
||||||||||||
OPERATING EXPENSES |
$ | 33,575 | $ | 32,259 | $ | 1,316 | 4.1 | % | ||||||||
% of Net Sales |
29.3 | % | 25.7 | % | 3.6 | % |
Operating expenses for the three months ended September 30, 2024 were $33.6 million or 29.3% of net sales compared to $32.3 million, or 25.7% of net sales for the three months ended September 30, 2023. This increase in operating expenses was primarily attributable to incremental brand building and advertising programs to support future growth.
Three Months Ended |
||||||||||||||||
September 30, |
||||||||||||||||
($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
Inc./ (Dec.) |
||||||||||||
INTEREST EXPENSE AND OTHER - net |
$ | (3,180 | ) | $ | (5,649 | ) | $ | (2,469 | ) | (43.7 | )% |
Interest Expense and Other - net for the three months ended September 30, 2024 was $3.2 million compared to $5.6 million in the year ago period. The decrease in interest expense was a result of lower debt levels and lower interest rates in the third quarter of 2024 compared to the third quarter of 2023. The lower interest rates can be attributed to the refinance completed in the second quarter of 2024.
Three Months Ended |
||||||||||||||||
September 30, |
||||||||||||||||
($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
Inc./ (Dec.) |
||||||||||||
Income Tax Expense |
$ | 1,612 | $ | 1,803 | $ | (191 | ) | (10.6 | )% | |||||||
Effective Tax Rate |
23.4 |
% | 20.9 | % | 2.5 |
% |
The increase in our effective tax rate in the third 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.
Nine Months Ended September 30, 2024 compared to Nine Months Ended September 30, 2023
Nine Months Ended |
||||||||||||||||
September 30, |
||||||||||||||||
($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
Inc./ (Dec.) |
||||||||||||
NET SALES: |
||||||||||||||||
Wholesale |
$ | 232,082 | $ | 251,228 | $ | (19,146 | ) | (7.6 | )% | |||||||
Retail |
83,288 | 79,114 | 4,174 | 5.3 | ||||||||||||
Contract Manufacturing |
10,348 | 5,539 | 4,809 | 86.8 | ||||||||||||
Total Net Sales |
$ | 325,718 | $ | 335,881 | $ | (10,163 | ) | (3.0 | )% |
Wholesale net sales for the nine months ended September 30, 2024 were $232.1 million compared to $251.2 million for the nine months ended September 30, 2023. The decline in net sales from the year ago period was primarily due to the sale of the Servus brand in March 2023, the change to our distributor model in Canada in November 2023 and temporarily elevated commercial military footwear sales to a single customer throughout 2023.
Retail net sales for the nine months ended September 30, 2024 were $83.3 million compared to $79.1 million for the nine months ended September 30, 2023. The increase in Retail net sales was due to increased sales in our Lehigh CustomFit platform as we continue to expand our customer base and offerings to current customers. Additionally, we experienced growth in our e-commerce business during the nine months ended September 30, 2024 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 nine months ended September 30, 2024 compared to the prior year ago period.
Contract Manufacturing net sales for the nine months ended September 30, 2024 were $10.3 million compared to $5.5 million for the nine months ended September 30, 2023. The increase was due to a multi-year contract awarded with the U.S. Military in the fourth quarter of 2023.
Nine Months Ended |
||||||||||||
September 30, |
||||||||||||
($ in thousands) |
2024 |
2023 |
Inc./ (Dec.) |
|||||||||
GROSS MARGIN: |
||||||||||||
Wholesale Margin $'s |
$ | 85,977 | $ | 89,084 | $ | (3,107 | ) | |||||
Margin % |
37.0 | % | 35.5 | % | 1.6 | % | ||||||
Retail Margin $'s |
$ | 38,719 | $ | 38,379 | $ | 340 | ||||||
Margin % |
46.5 | % | 48.5 | % | (2.0 | )% | ||||||
Contract Manufacturing Margin $'s |
$ | 1,136 | $ | 406 | $ | 730 | ||||||
Margin % |
11.0 | % | 7.3 | % | 3.7 | % | ||||||
Total Margin $'s |
$ | 125,832 | $ | 127,869 | $ | (2,037 | ) | |||||
Margin % |
38.6 | % | 38.1 | % | 0.5 | % |
Wholesale gross margin for the nine months ended September 30, 2024 was $86.0 million, or 37.0% of net sales, compared to $89.1 million, or 35.5% of net sales, for the nine months ended September 30, 2023. The increase in Wholesale gross margin as a percent of net 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 nine months ended September 30, 2024 was $38.7 million, or 46.5% of net sales, compared to $38.4 million, or 48.5% of net sales, for the nine months ended September 30, 2023. The decrease in gross margin as a percent of net sales was due to an increase in Lehigh sales as a percent of total Retail sales, which typically carry a lower margin as well as enhanced promotional efforts on our branded e-commerce websites as we continue to optimize our inventory levels.
Contract Manufacturing gross margin for the nine months ended September 30, 2024 was $1.1 million, or 11.0% of net sales, compared to $0.4 million, or 7.3% of net sales, for the nine months ended September 30, 2023. The increase in gross margin was driven by increased sales with the U.S. Military which carried higher margins than sales private label sales.