Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

2019 Q2 10-Q 06302019 2018 Taxonomy

Table of Contents

United States

Securities and Exchange Commission

Washington, D.C. 20549



FORM 10-Q

(Mark One)

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-34382

Picture 1

ROCKY BRANDS, INC.

(Exact name of Registrant as specified in its charter)



 

 

Ohio

 

No. 31‑1364046

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)



 

 

39 East Canal Street, Nelsonville, Ohio 45764

(Address of principal executive offices, including zip code)



 

 

Registrant's telephone number, including area code: (740) 753‑9100

 



 

 

 

 



 

 

 

 

Title of class

 

Trading symbol

 

Name of exchange on which registered

Common Stock – No Par Value

 

RCKY

 

Nasdaq



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. Yes   No 



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). Yes   No 



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   Accelerated filer 

 Non-accelerated filer Smaller reporting company 

 Emerging growth company

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   No 



There were 7,396,769 shares of the Registrant's Common Stock outstanding on July 31, 2019.



 

 


 

Table of Contents

 

TABLE OF CONTENTS





 

 



 

 



 

Page

PART I

Financial Information

 

Item 1.

Financial Statements

 



Condensed Consolidated Balance Sheets as of June 30, 2019 (Unaudited), December 31, 2018, and June 30, 2018 (Unaudited)



Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)



Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)



Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (Unaudited)



Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22 

Item 4.

Controls and Procedures

22 

PART II

Other Information

 

Item 1A.

Risk Factors

22 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23 

Item 6.

Exhibits

24 

SIGNATURES 

25 



 



 

 

1


 

Table of Contents

 

PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS



Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

(Unaudited)







 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

June 30,

 

December 31,

 

June 30,



 

 

2019

 

2018

 

2018

ASSETS:

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,715 

$

10,173 

$

8,328 

Trade receivables, net

 

 

40,910 

 

43,337 

 

42,616 

Contract receivables

 

 

1,959 

 

2,602 

 

8,634 

Other receivables

 

 

152 

 

331 

 

214 

Inventories – net

 

 

77,458 

 

72,822 

 

72,644 

Income tax receivable

 

 

1,361 

 

30 

 

222 

Prepaid expenses

 

 

2,819 

 

1,890 

 

2,185 

Total current assets

 

 

140,374 

 

131,185 

 

134,843 

LEASED ASSETS

 

 

1,282 

 

 -

 

 -

PROPERTY, PLANT & EQUIPMENT – net

 

 

24,041 

 

23,057 

 

23,655 

IDENTIFIED INTANGIBLES – net

 

 

30,256 

 

30,273 

 

30,293 

OTHER ASSETS

 

 

279 

 

148 

 

173 

TOTAL ASSETS

 

$

196,232 

$

184,663 

$

188,964 



 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

$

20,182 

$

13,543 

$

17,642 

Contract liabilities

 

 

1,959 

 

2,602 

 

8,634 

Accrued expenses:

 

 

 

 

 

 

 

Salaries and wages

 

 

2,100 

 

3,339 

 

2,516 

Taxes - other

 

 

667 

 

556 

 

349 

Accrued freight

 

 

476 

 

668 

 

531 

Commissions

 

 

491 

 

560 

 

420 

Accrued duty

 

 

2,603 

 

2,334 

 

2,338 

Other

 

 

1,767 

 

1,416 

 

1,125 

     Total current liabilities

 

 

30,245 

 

25,018 

 

33,555 

LONG-TERM TAXES PAYABLE

 

 

169 

 

169 

 

1,777 

LONG-TERM LEASE

 

 

776 

 

 -

 

 -

DEFERRED INCOME TAXES

 

 

7,780 

 

7,780 

 

7,726 

DEFERRED LIABILITIES

 

 

221 

 

121 

 

153 

TOTAL LIABILITIES

 

 

39,191 

 

33,088 

 

43,211 

SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

Common stock, no par value;

 

 

 

 

 

 

 

25,000,000 shares authorized; issued and outstanding June 30, 2019 - 7,393,851;  December 31, 2018 - 7,368,494 and June 30, 2018 - 7,414,509

 

 

69,013 

 

68,387 

 

69,437 

Retained earnings

 

 

88,028 

 

83,188 

 

76,316 

Total shareholders' equity

 

 

157,041 

 

151,575 

 

145,753 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 

$

196,232 

$

184,663 

$

188,964 



See Notes to Unaudited Condensed Consolidated Financial Statements

 

2


 

Table of Contents

 

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended



 

June 30,

 

June 30,



 

2019

 

2018

 

2019

 

2018

NET SALES

$

61,959 

$

58,206 

$

127,888 

$

119,593 

COST OF GOODS SOLD

 

40,518 

 

38,674 

 

83,469 

 

79,095 

GROSS MARGIN

 

21,441 

 

19,532 

 

44,419 

 

40,498 



 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

17,498 

 

16,159 

 

35,976 

 

32,897 



 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

3,943 

 

3,373 

 

8,443 

 

7,601 



 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSES)

 

52 

 

(40)

 

117 

 

(179)



 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

3,995 

 

3,333 

 

8,560 

 

7,422 



 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

839 

 

684 

 

1,798 

 

1,522 



 

 

 

 

 

 

 

 

NET INCOME

$

3,156 

$

2,649 

$

6,762 

$

5,900 



 

 

 

 

 

 

 

 

INCOME PER SHARE

 

 

 

 

 

 

 

 

Basic

$

0.43 

$

0.36 

$

0.92 

$

0.80 

Diluted

$

0.42 

$

0.35 

$

0.91 

$

0.79 

WEIGHTED AVERAGE NUMBER OF

 

 

 

 

 

 

 

 

COMMON SHARES OUTSTANDING

 

 

 

 

 

 

 

 

Basic

 

7,388 

 

7,410 

 

7,388 

 

7,408 

Diluted

 

7,431 

 

7,464 

 

7,436 

 

7,445 



See Notes to Unaudited Condensed Consolidated Financial Statements

 

3


 

Table of Contents

 





Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(In thousands, except per share amounts)

(Unaudited)







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Common Stock and

 

Accumulated

 

 

 

 



Additional Paid-in Capital

 

Other

 

 

 

Total



Shares

 

 

 

Comprehensive

 

Retained

 

Shareholders'



Outstanding

 

Amount

 

Income

 

Earnings

 

Equity



 

 

 

 

 

 

 

 

 

BALANCE - December 31, 2018

7,368 

$

68,387 

$

 -

$

83,188 

$

151,575 



 

 

 

 

 

 

 

 

 

SIX MONTHS  ENDED JUNE 30, 2019

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$

3,605 

$

3,605 

Dividends paid on common stock ($0.12 per share)

 

 

 

 

 

 

(886)

 

(886)

Repurchase of common stock

 -

 

 -

 

 

 

 

 

 -

Stock issued for options exercised, including tax benefits

17 

$

294 

 

 

 

 

 

294 

Stock compensation expense

 

168 

 

 

 

 

 

168 

BALANCE - March 31, 2019

7,391 

$

68,849 

 

 -

$

85,907 

$

154,756 



 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$

3,156 

$

3,156 

Dividends paid on common stock ($0.14 per share)

 

 

 

 

 

 

(1,035)

 

(1,035)

Repurchase of common stock

 -

 

 -

 

 

 

 

 

 -

Stock issued for options exercised, including tax benefits

 -

 

 -

 

 

 

 

 

 -

Stock compensation expense

$

164 

 

 

 

 

 

164 

BALANCE - June 30, 2019

7,394 

$

69,013 

$

 -

$

88,028 

$

157,041 



 

 

 

 

 

 

 

 

 

BALANCE - December 31, 2017

7,399 

$

68,974 

$

 

$

72,119 

$

141,093 



 

 

 

 

 

 

 

 

 

SIX MONTHS ENDED JUNE 30, 2018

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$

3,251 

$

3,251 

Dividends paid on common stock ($0.11 per share)

 

 

 

 

 

 

(815)

 

(815)

Repurchase of common stock

 -

 

 -

 

 

 

 

 

 -

Stock issued for options exercised, including tax benefits

 -

 

 -

 

 

 

 

 

 -

Stock compensation expense

$

299 

 

 

 

 

 

299 

BALANCE - March 31, 2018

7,407 

$

69,273 

$

 -

$

74,555 

$

143,828 



 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$

2,649 

$

2,649 

Dividends paid on common stock ($0.12 per share)

 

 

 

 

 

 

(888)

 

(888)

Repurchase of common stock

 -

 

 -

 

 

 

 

 

 -

Stock issued for options exercised, including tax benefits

 -

 

 -

 

 

 

 

 

 -

Stock compensation expense

$

164 

 

 

 

 

 

164 

BALANCE - June 30, 2018

7,415 

$

69,437 

$

 -

$

76,316 

$

145,753 



See Notes to Unaudited Condensed Consolidated Financial Statements

 

4


 

Table of Contents

 

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)







 

 

 

 



 

Six Months Ended



 

June 30,



 

2019

 

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income

$

6,762 

$

5,900 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

Depreciation and amortization

 

2,545 

 

2,729 

Deferred compensation

 

74 

 

(1)

(Gain) loss on disposal of fixed assets

 

 

(4)

Stock compensation expense

 

332 

 

394 

Change in assets and liabilities:

 

 

 

 

Receivables

 

1,276 

 

4,631 

Inventories

 

(4,636)

 

(7,022)

Other current assets

 

(2,737)

 

15 

Other assets

 

(113)

 

25 

Accounts payable

 

6,581 

 

4,672 

Accrued and other liabilities

 

538 

 

242 

Long term taxes payable

 

 -

 

(510)

Net cash provided by operating activities

 

10,629 

 

11,071 



 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Purchase of fixed assets

 

(3,459)

 

(2,604)

Proceeds from sales of fixed assets

 

 -

 

14 

Net cash used in investing activities

 

(3,459)

 

(2,590)



 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Proceeds from revolving credit facility

 

 -

 

157 

Repayments on revolving credit facility

 

 -

 

(2,356)

Proceeds from stock options

 

294 

 

69 

Dividends paid on common stock

 

(1,922)

 

(1,704)

Net cash used in financing activities

 

(1,628)

 

(3,834)



 

 

 

 

INCREASE IN CASH AND CASH EQUIVALENTS                   

 

5,542 

 

4,647 



 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 BEGINNING OF PERIOD

 

10,173 

 

3,681 

 END OF PERIOD

$

15,715 

$

8,328 



 

 

 

 



See Notes to Unaudited Condensed Consolidated Financial Statements

 

5


 

Table of Contents

 



Rocky Brands, Inc. and Subsidiaries



Notes to Unaudited Condensed Consolidated Financial Statements

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, Georgia Boot, Durango and Lehigh. 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, western and lifestyle. 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.

 

In the opinion of management, 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 a normal and recurring nature. The results of operations for the three and six months ended June 30, 2019 and 2018 are not necessarily indicative of the results to be expected for the whole year. The December 31, 2018 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, 2018, which includes all disclosures required by GAAP.

 



2.   ACCOUNTING STANDARDS UPDATES



Recently Issued Accounting Pronouncements



Rocky Brands, Inc. is currently evaluating the impact of certain Accounting Standards Updates (“ASU”) on its Unaudited Condensed Consolidated Financial Statements or Notes to the Unaudited Condensed Consolidated Financial Statements:





 

 

 

 

 

 

Standard 

 

Description

 

Anticipated Adoption Period

 

Effect on the financial statements or other significant matters

ASU 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement

 

This pronouncement changes the fair value measurement disclosure requirements of ASC 820. The amendments in this ASU are the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements.

 

Q1 2020

 

The Company is evaluating the impact of the new standard on its Unaudited Condensed Consolidated Financial Statements, but does not anticipate the standard will have a significant impact.

 ASU 2016-13, Measurement of Credit Losses on Financial Instruments

 

The pronouncement seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

 

Q1 2020

 

The Company is evaluating the impacts of the new standard on its existing financial instruments, including trade receivables.



 

6


 

Table of Contents

 

Accounting Standards Adopted in the Current Year





 

 

 

 

Standard 

 

Description

 

Effect on the financial statements or other significant matters

ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting

 

The pronouncement simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees.

 

The Company adopted this ASU in the first quarter of 2019, which did not have a material effect on the Unaudited Condensed Consolidated Financial Statements.

 ASU 2016-02, Leases (Topic 842)

 

The pronouncement introduces a lessee model that brings most leases on the balance sheet. The standard requires that lessees recognize the following for all leases (with the exception of short-term leases, as that term is defined in the standard) at the lease commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

This standard was adopted on its effective date, January 1, 2019 using the modified retrospective approach. For additional information see Note 9.

 



3.   FAIR VALUE



Generally accepted accounting standards establish a framework for measuring fair value. The fair value accounting standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This standard clarifies how to measure fair value as permitted under other accounting pronouncements.

 

The fair value accounting standard defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. This standard also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:



·

Level 1 – Quoted prices in active markets for identical assets or liabilities.



·

Level 2 – Observable inputs other than quoted market prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.



·

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

   

The fair values of cash and cash equivalents, receivables, and payables approximated their carrying values because of the short-term nature of these instruments. Receivables consist primarily of amounts due from our customers, net of allowances, amounts due from employees (sales persons’ advances in excess of commissions earned and employee travel advances); other customer receivables, 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 revolving line of credit is categorized as Level 2.





4.   REVENUE



On January 1, 2018, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“New Revenue Standard”) for all contracts not yet completed as of January 1, 2018 using the modified retrospective method. This method requires a cumulative effect adjustment to reflect the impact of initially applying the New Revenue Standard as an adjustment to the opening balance of retained earnings. The New Revenue Standard did not result in a material impact to the opening balance of retained earnings, and therefore no adjustment was made.



 

7


 

Table of Contents

 

Nature of Performance Obligations



Our products are distributed through three distinct channels, which represent our business segments: Wholesale, Retail, and Military. In our Wholesale business, we distribute our products through a wide range of distribution channels representing over ten thousand retail store locations in the U.S., Canada, and internationally. Our Wholesale channels vary by product line and include sporting goods stores, outdoor specialty stores, online retailers, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Our Retail business includes direct sales of our products to consumers through our e-commerce websites, our Rocky outlet store, and Lehigh business. We also sell footwear under the Rocky label to the U.S. Military.



Significant Accounting Policies and Judgements



Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; this generally occurs upon shipment of our product to our customer, which is when the transfer of control of our products passes to the customer. The duration of our arrangements with our customers are typically one year or less. Revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of our products at a point in time and consists of either fixed or variable consideration or a combination of both.



Revenues from sales are recorded at the net sales price, which includes estimates of variable consideration for which reserves are established. Components of variable consideration include prompt payment discounts, volume rebates, and product returns. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer).



The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Our analyses also contemplated application of the constraint in accordance with the guidance, under which it determined a material reversal of revenue would not occur in a future period for the estimates detailed below as of June 30, 2019. 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.



When a customer has a right to a prompt payment discount, we estimate the likelihood that the customer will earn the discount using historical data and adjust our estimate when the estimate of the likelihood that a customer will earn the discount changes or the consideration becomes fixed, whichever occurs earlier. The estimated amount of variable consideration is recognized as a credit to trade receivables and a reduction in revenue until the uncertainty of the variable consideration is alleviated. Because most of our customers have payment terms less than six months there is not a significant financing component in our contracts with customers.



When a customer is offered a rebate on purchases retroactively this is accounted for as variable consideration because the consideration for the current and past purchases is not fixed until it is known if the discount is earned. We estimate the expected discount the customer will earn at contract inception using historical data and projections and update our estimates when projections materially change or consideration becomes fixed.  The estimated rebate is recognized as a credit to trade receivables and offset against revenue until the rebate is earned or the earning period has lapsed.



When a right of return is part of the arrangement with the customer, we estimate the expected returns based on an analysis using historical data. We adjust our estimate either when the most likely amount of consideration we expect to receive changes or when the consideration becomes fixed, whichever occurs earlier. Please see Notes 5 and 6 for additional information. 



Trade receivables represent our right to unconditional payment that only relies on the passage of time.



Contract receivables represent contractual minimum payments required under non-cancellable contracts with the U.S. Military with a duration of one year or less. 



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.



Items considered immaterial within the context of the contract are recognized as an expense.



 

8


 

Table of Contents

 

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 continue to be recognized as expense when the products are sold in accordance with guidance surrounding product warranties.



Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are in included in operating expenses.



Costs associated with obtaining a contract are expensed as incurred in accordance with the practical expedient in ASC 340-40 in instances where the amortization period is one year or less. We anticipate substantially all of our costs incurred to obtain a contract would be subject to this practical expedient.



Contract Balances



The following table provides information about contract liabilities from contracts with our customers.







 

 

 

 

 

 



 

June 30,

 

December 31,

 

June 30,

($ in thousands)

 

2019

 

2018

 

2018

Contract liabilities

$

1,959 

$

2,602 

$

8,634 



Significant changes in the contract liabilities balance during the period are as follows:







 

 

($ in thousands)

 

Contract liabilities

Balance, December 31, 2018

$

2,602 

Non-cancelable contracts with customers entered into during the period

 

2,457 

Revenue recognized related to non-cancelable contracts with customers during the period

 

(3,100)

Balance, June 30, 2019

$

1,959 



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. Because all revenues are recognized at a point in time and are disaggregated by channel, our segment disclosures are consistent with ASC 606 disaggregation requirements. See Note 13 for segment disclosures.





 

9


 

Table of Contents

 

 

5.      TRADE RECEIVABLES

 

Trade receivables are presented net of the related allowance for uncollectible accounts of approximately  $1,266,000, $1,268,000, and $430,000 at June 30, 2019, December 31, 2018 and June 30, 2018, respectively.  We record the allowance based on historical experience, the age of the receivables, and identification of customer accounts that are likely to prove difficult to collect due to various criteria including pending bankruptcy. However, estimates of the allowance in any future period are inherently uncertain and actual allowances may differ from these estimates. If actual or expected future allowances were significantly greater or less than established reserves, a reduction or increase to bad debt expense would be recorded in the period this determination was made. Our credit policy generally provides that trade receivables will be deemed uncollectible and written-off once we have pursued all reasonable efforts to collect on the account.



In accordance with ASC 606, the return reserve liability netted against trade receivables was $842,000, $1,154,000 and $775,000 for the periods ending June 30, 2019, December 31, 2018, and June 30, 2018, respectively.  



6.   INVENTORY



Inventories are comprised of the following:









 

 

 

 

 

 



 

June 30,

 

December 31,

 

June 30,

($ in thousands)

 

2019

 

2018

 

2018

Raw materials

$

12,947 

$

12,986 

$

15,185 

Work-in-process

 

1,048 

 

715 

 

939 

Finished goods

 

63,463 

 

59,121 

 

56,520 

Total

$

77,458 

$

72,822 

$

72,644 

 

In accordance with ASC 606, the return reserve asset netted against inventories was $508,000, $694,000 and $473,000 for the periods ending June 30, 2019, December 31, 2018, and June 30, 2018, respectively.



 

10


 

Table of Contents

 

7. IDENTIFIED INTANGIBLE ASSETS



A schedule of identified intangible assets is as follows:







 

 

 

 

 

 

 



 

 

Gross

 

Accumulated

 

Carrying

($ in thousands)

 

 

Amount

 

Amortization

 

Amount

June 30, 2019

 

 

 

 

 

 

 

Trademarks

 

 

 

 

 

 

 

Wholesale

 

$

27,192 

 

 -

$

27,192 

Retail

 

 

2,900 

 

 -

 

2,900 

Patents

 

 

895 

$

731 

 

164 

Total Intangibles

 

$

30,987 

$

731 

$

30,256 



 

 

 

 

 

 

 



 

 

Gross

 

Accumulated

 

Carrying

December 31, 2018

 

 

Amount

 

Amortization

 

Amount

Trademarks

 

 

 

 

 

 

 

Wholesale

 

$

27,192 

 

 -

$

27,192 

Retail

 

 

2,900 

 

 -

 

2,900 

Patents

 

 

895 

$

714 

 

181 

Total Intangibles

 

$

30,987 

$

714 

$

30,273 



 

 

 

 

 

 

 



 

 

Gross

 

Accumulated

 

Carrying

June 30, 2018

 

 

Amount

 

Amortization

 

Amount

Trademarks

 

 

 

 

 

 

 

Wholesale

 

$

27,192 

 

 -

$

27,192 

Retail

 

 

2,900 

 

 -

 

2,900 

Patents

 

 

895 

$

694 

 

201 

Total Intangibles

 

$

30,987 

$

694 

$

30,293 



The weighted average life for our patents is 3.9 years.



A schedule of approximate amortization expense related to finite-lived intangible assets for the three and six months ended June 30, 2019 and 2018 is as follows:







 

 

 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended



 

June 30,

 

June 30,

($ in thousands)

 

2019

 

2018

 

2019

 

2018

Amortization expense

$

$

11 

 

17 

$

22 





A schedule of approximate expected amortization expense related to finite-lived intangible assets for the years ending December 31, is as follows:







 

 



 

Amortization

($ in thousands)

 

Expense

7/1 - 12/31/19

 

16 
2020 

 

31 
2021 

 

26 
2022 

 

22 
2023 

 

20 
2024 

 

17 

2025+

 

33 



 

 

11


 

Table of Contents

 

8.   LONG-TERM DEBT



On February 13, 2019, we entered into a Revolving Credit, Guaranty, and Security Agreement (“Credit Agreement”) with the Huntington National Bank (“Huntington”) as administrative agent.  The Credit Agreement provides for a new senior secured asset-based revolving credit facility up to a principal amount of $75 million, which includes a sublimit for the issuance of letters of credit up to $7.5 million (the “Credit Facility”).  The Credit Facility may be increased up to an additional $25 million at our request and the lenders’ option, subject to customary conditions. The Credit Agreement matures on February 13, 2024. This new Credit Agreement replaced our previous financing agreement with PNC Bank (“PNC”).  







 

 

 

 

 

 

 

 

Revolver Pricing Level

 

Average Excess Revolver Availability for Previous Quarter

 

Applicable Spread Rates for Eurodollar Rate Revolving Advances

 

 

Applicable Spread Rates for Domestic Rate Revolving Advances

 

I

$

25,000,000+

 

1.00 

%

 

(0.50)

%

II

$

17,500,000 to < 25,000,000

 

1.25 

%

 

(0.50)

%

III

$

10,000,000 to < 17,500,000

 

1.50 

%

 

(0.25)

%

IV

$

< 10,000,000

 

1.75 

%

 

0.00 

%



The total amount available under our new Credit Facility is subject to a borrowing base calculation based on various percentages of accounts receivable and inventory. As of June 30, 2019, we had total capacity of $62.7 million.



In December 2014, we amended and restated our financing agreement with PNC to increase the credit facility to $75.0 million and extend the term of the facility an additional five years to November 2019. The credit facility’s base interest rate was the current prime rate less 0.25%, however the credit facility provided us the option to borrow on up to eight fixed loans at LIBOR plus 1.25% in accordance with the 2014 amended and restated credit agreement. The LIBOR rate was determined based on the fixed loan maturities, which vary from 30, 60, 90, or 180 days.



As of June 30, 2019, we had no outstanding borrowings against the new Credit Facility and as of December 31, 2018 and June 30, 2018, respectively, we had no outstanding borrowings against our previously amended and restated credit facility.



Credit Facility Covenants



Both our new Credit Facility and our previously amended and restated credit facility contain restrictive covenants which require us to maintain a fixed charge coverage ratio.  These restrictive covenants are only in effect upon a triggering event taking place (as defined in both agreements).  Both our new Credit Facility and the previously amended and restated credit facility contain restrictions on the amount of dividends that may be paid. During the six months ended June 30, 2019, there were no triggering events and the covenant was not in effect for the new Credit Facility



9.   LEASES



In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. ASU 2016-02 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements (please see additional detail regarding these updates to Topic 842 below). The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the Unaudited Condensed Consolidated Statements of Operations.



The new standard was effective for us on January 1, 2019, with early adoption permitted. We adopted the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We adopted the new standard on January 1, 2019 and used the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.



 

12


 

Table of Contents

 

The new standard provides several optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess, under the new standard, our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight with respect to determining the lease term (i.e., considering the actual outcome and updated expectations of lease renewals, termination option and purchase options).  We also did not elect the use of the practical expedient pertaining to land easements because we do not have any such easements.



The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for our leases.



This standard had a material effect on our Unaudited Condensed Consolidated Balance Sheets, specifically, the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our factories in the Dominican Republic and Puerto Rico and various equipment leases, all currently accounted for as operating leases; and (2) providing significant new disclosures about our leasing activities. Adoption of the standard did not have a material impact on our Unaudited Condensed Consolidated Statements of Cash Flows. We do not expect a significant change in our leasing activities as a result of this standard. Many of our leases contain renewal options, most of which are not included in the measurement of the right-of-use asset as they are not considered reasonably certain of exercise (i.e. we do not currently have a significant economic incentive to exercise these options).



The operating ROU asset and operating lease liabilities as of June 30, 2019 and upon adoption of ASC 842 are as follows:







 

 

 

 

 

 



 

 

 

(Upon ASC 842 Adoption)

 

 



 

June 30,

 

January 1,

 

 

($ in thousands)

 

2019

 

2019

 

Financial Statement Line Item

Assets:

 

 

 

 

 

 

Operating ROU Assets

$

1,282 

$

1,136 

 

Leased assets



 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Current

 

 

 

 

 

 

Operating

$

527 

$

626 

 

Other current liabilities

Noncurrent

 

 

 

 

 

 

Operating

 

776 

 

544 

 

Long-term lease liabilities

Total leased liabilities

$

1,303 

$

1,170 

 

 



Maturity of our operating lease liabilities are as follows:







 

 



 

Operating

($ in thousands)

 

Leases

07/01/2019 through 12/31/2019

$

366 
2020 

 

418 
2021 

 

298 
2022 

 

169 
2023 

 

130 

                                                                           2024

 

26 

Total lease payments

 

1,407 

Less: Interest

 

104 

Present value of lease liabilities

$

1,303 





 

13


 

Table of Contents

 

For the six months ended June 30, 2019 the weighted average remaining lease term and discount rate were as follows:







 

 

 



 

June 30,

 



 

2019

 

Weighted-average remaining lease term (years)

 

 

 

Operating leases

 

2.0

 



 

 

 

Weighted-average discount rate

 

 

 

Operating leases

 

5.1

%



For the six months ended June 30, 2019 the supplemental cash flow information is as follows:







 

 



 

June 30,

($ in thousands)

 

2019

Cash paid for amounts included in the measurement of lease liabilities

 

 

Operating cash flows from operating leases

$

201 



 

 

Right-of-use assets obtained in exchange for lease obligations

 

 

Operating leases

$

526 



The breakdown of rent expense for our operating leases for the three and six months ended June 30, 2019 and 2018, respectively are as follows:







 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

Six Months Ended

 



 

June 30,

 

 

 

June 30,

 

 

($ in thousands)

 

2019

 

 

 

2019

 

Financial Statement                    Line Item

Operating lease expenses - Manufacturing & Sourcing (1)

$

163 

 

 

$

324 

 

Cost of goods sold

Operating lease expenses (1)

 

85 

 

 

 

149 

 

Operating expenses

Total lease expenses

$

248 

 

 

$

473 

 

 



(1) Includes short-term lease expenses of approximately $24,000 and $50,000 for the three and six months ended June 30, 2019, respectively.  



10.   TAXES



We are subject to tax examinations in various taxing jurisdictions. The earliest exam years open for examination are as follows:







 

 



 

Earliest Exam Year

Taxing Authority Jurisdiction:

 

 

U.S. Federal

 

2015 

Various U.S. States

 

2014 

Puerto Rico (U.S. Territory)

 

2013 

Canada

 

2013 



Our policy is to accrue interest and penalties on any uncertain tax position as a component of income tax expense. No such expenses were recognized during the three and six months ended June 30, 2019.  We do not believe there will be any material changes in our uncertain tax positions over the next 12 months.



 

14


 

Table of Contents

 

Accounting for uncertainty in income taxes requires financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements.  Under this guidance, income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of the standard.  We did not have any unrecognized tax benefits and there was no effect on its financial condition or results of operations.



Our estimated effective tax rate was 21.0% for the three and six months ended June 30, 2019 and 20.5% for the three and six months ended June 30, 2018.  



11.    EARNINGS PER SHARE



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 earnings per share computation includes common share equivalents, when dilutive.



A reconciliation of the shares used in the basic and diluted income per common share computation for the three and six months ended June 30, 2019 and 2018 is as follows:







 

 

 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended



 

June 30,

 

June 30,

(shares in thousands)

 

2019

 

2018

 

2019

 

2018



 

 

 

 

 

 

 

 

Basic - weighted average shares outstanding

 

7,388 

 

7,410 

 

7,388 

 

7,408 

Dilutive restricted share units

 

 

 

 

Dilutive stock options

 

41 

 

53 

 

45 

 

36 

Diluted - weighted average shares outstanding

 

7,431 

 

7,464 

 

7,436 

 

7,445 

Anti-dilutive securities

 

81 

 

 -

 

75 

 

42 

 



12.   SUPPLEMENTAL CASH FLOW INFORMATION



Supplemental cash flow information for the six months ended June 30, 2019 and 2018 is as follows:







 

 

 

 

($ in thousands)

 

2019

 

2018



 

 

 

 

Interest paid

$

82 

$

93 



 

 

 

 

Federal, state, and local income taxes paid (refund), net

$

5,326 

$

(234)



 

 

 

 

Change in contract receivables, net

$

(1,959)

$

(8,634)



 

 

 

 

Change in contract liabilities, net

$

1,959 

$

8,634 



 

 

 

 

Property, plant, and equipment purchases in accounts payable

$

741 

$

170 



























 

15


 

Table of Contents

 



13. SEGMENT INFORMATION



We have identified three reportable segments: Wholesale, Retail and Military. Wholesale includes sales of footwear and accessories to several classifications of retailers, including sporting goods stores, outdoor specialty stores, online retailers, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Our Retail business includes direct sales of our products to consumers through our e-commerce websites, our Rocky outlet store, and Lehigh business. Military includes sales to the U.S. Military. The following is a summary of segment results for the Wholesale, Retail, and Military segments for the three and six months ended June 30, 2019 and 2018.

















 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

Six Months Ended



 

June 30,

 

 

June 30,

($ in thousands)

 

2019

 

2018

 

 

2019

 

2018

NET SALES:

 

 

 

 

 

 

 

 

 

Wholesale

$

40,629 

$

39,804 

 

$

83,018 

$

80,235 

Retail

 

14,105 

 

11,739 

 

 

29,544 

 

24,797 

Military

 

7,225 

 

6,663 

 

 

15,326 

 

14,561 

Total Net Sales

$

61,959 

$

58,206 

 

$

127,888 

$

119,593 



 

 

 

 

 

 

 

 

 

GROSS MARGIN:

 

 

 

 

 

 

 

 

 

Wholesale

$

13,403 

$

13,030 

 

$

27,778 

$

27,044 

Retail

 

6,102 

 

5,267 

 

 

12,778 

 

10,801 

Military

 

1,936 

 

1,235 

 

 

3,863 

 

2,653 

Total Gross Margin

$

21,441 

$

19,532 

 

$

44,419 

$

40,498 











 

16


 

Table of Contents

 

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.



RESULTS OF OPERATIONS



The following tables set forth, for the periods indicated, information derived from our Unaudited Condensed Consolidated Financial Statements, expressed as a percentage of net sales. 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 10-K for the year ended December 31, 2018.









 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended



 

June 30,

 

 

June 30,

 



 

2019

 

2018

 

 

2019

 

2018

 

Net sales

 

100.0 

%

100.0 

%

 

100.0 

%

100.0 

%

Cost of goods sold

 

65.4 

 

66.4 

 

 

65.3 

 

66.1 

 

Gross margin

 

34.6 

 

33.6 

 

 

34.7 

 

33.9 

 

Operating expenses

 

28.2 

 

27.8 

 

 

28.1 

 

27.5 

 

Income from operations

 

6.4 

%

5.8 

%

 

6.6 

%

6.4 

%



Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018





 

 

 

 

 

 

 

 

 



 

Three Months Ended

 



 

June 30,

 

($ in thousands)

 

2019

 

2018

 

Inc./ (Dec.)

 

Inc./ (Dec.)

 

NET SALES:

 

 

 

 

 

 

 

 

 

Wholesale

$

40,629 

$

39,804 

$

825 

 

2.1 

%

Retail

 

14,105 

 

11,739 

 

2,366 

 

20.2 

 

Military

 

7,225 

 

6,663 

 

562 

 

8.4 

 

Total Net Sales

$

61,959 

$

58,206 

$

3,753 

 

6.4 

%



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 both a strong growth in our Lehigh business, which was primarily attributed to an expansion in our CustomFit model which continued to add larger national accounts as well as increased the retention rate of our existing customers, and a mid-double digit 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 websites.



Military sales increased slightly as we benefited from some accelerated shipments that are pulling sales into the first half of the year based on notifications from the Department of Defense.







 

 

 

 

 

 

 



 

Three Months Ended

 



 

June 30,

 

($ in thousands)

 

2019

 

2018

 

Inc./ (Dec.)

 

GROSS MARGIN:

 

 

 

 

 

 

 

Wholesale Margin $'s

$

13,403 

$

13,030 

$

373 

 

Margin %

 

33.0 

%

32.7 

%

0.3 

%

Retail Margin $'s

$

6,102 

$

5,267 

$

835 

 

Margin %

 

43.3 

%

44.9 

%

(1.6)

%

Military Margin $'s

$

1,936 

$

1,235 

$

701 

 

Margin %

 

26.8 

%

18.5 

%

8.3 

%

Total Margin $'s

$

21,441 

$

19,532 

$

1,909 

 

Margin %

 

34.6 

%

33.6 

%

1.0 

%



 

17


 

Table of Contents

 

Wholesale gross margin increased year over year due to having a couple larger low margin orders in 2018 that we did not anniversary in 2019.



Retail gross margin decreased as Lehigh continues to become a larger percentage of the overall Retail sales as Lehigh carries lower margins than our other direct to consumer business.  



Military gross margin increased significantly as we continued to see better efficiency at our Puerto Rico facility.







 

 

 

 

 

 

 

 

 



 

Three Months Ended

 



 

June 30,

 

($ in thousands)

 

2019

 

2018

 

Inc./ (Dec.)

 

Inc./ (Dec.)

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Operating Expenses

$

17,498 

$

16,159 

$

1,339 

 

8.3 

%

% of Net Sales

 

28.2 

%

27.8 

%

0.4 

%

 

 



The increase in operating expenses was primarily related to the increased investments in our core brands to help initiate growth and expand within our respective markets and variable expenses tied to sales increases.







 

 

 

 

 

 

 

 

 



 

Three Months Ended

 



 

June 30,

 

($ in thousands)

 

2019

 

2018

 

Inc./ (Dec.)

 

Inc./ (Dec.)

 

INCOME TAXES:

 

 

 

 

 

 

 

 

 

Income Tax Expense

$

839 

$

684 

$

155 

 

22.7 

%

Effective Tax Rate

 

21.0 

%

20.5 

%

0.5 

%

 

 



The effective tax rate increased to 21.0% for the three months ended June 30, 2019.  





Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018





 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 



 

Six Months Ended

 



 

June 30,

 

($ in thousands)

 

2019

 

2018

 

Inc./ (Dec.)

 

Inc./ (Dec.)

 

NET SALES:

 

 

 

 

 

 

 

 

 

Wholesale

$

83,018 

$

80,235 

$

2,783 

 

3.5 

%

Retail

 

29,544 

 

24,797 

 

4,747 

 

19.1 

 

Military

 

15,326 

 

14,561 

 

765 

 

5.3 

 

Total Net Sales

$

127,888 

$

119,593 

$

8,295 

 

6.9 

%





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 both a strong growth in our Lehigh business, which was primarily attributed to an expansion in our CustomFit model which continued to add larger national accounts as well as increased the retention rate of our existing customers, and a mid-double digit 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 websites.



Military sales increased slightly as we benefited from some accelerated shipments that are pulling sales into the first half of the year based on notifications from the Department of Defense.











 

 

 

 

 

 

 

 

18


 

Table of Contents

 



 

Six Months Ended

 



 

June 30,

 

($ in thousands)

 

2019

 

2018

 

Inc./ (Dec.)

 

GROSS MARGIN: