Notes to the Consolidated Financial Statements
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Principles of Consolidation - The accompanying Consolidated Financial Statements include the accounts of Rocky Brands, Inc. ("Rocky Brands") and its wholly-owned subsidiaries, Lifestyle Footwear, Inc. ("Lifestyle"), Five Star Enterprises Ltd. ("Five Star"), Rocky Brands Canada, Inc. ("Rocky Brands Canada"), Rocky Brands US, LLC, Rocky Brands International, LLC, Lehigh Outfitters, LLC, US Footwear Holdings, LLC, Rocky Brands (Australia) Pty Ltd., Mexico FW Holdings, S. de R.L. de C.V., Rocky Footwear (Chuzhou) Co. Ltd., UK Footwear Holdings Limited and Rocky Outdoor Gear Store, LLC (collectively referred to as the "Company"). All inter-company transactions have been eliminated.
Business Activity - We are a leading designer, manufacturer and marketer of premium quality footwear marketed under a portfolio of well recognized brand names including Rocky, Georgia Boot, Durango, Lehigh, Muck, XTRATUF, Servus, 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, western, and military. 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.
We report our segment information in accordance with provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 280, Segment Reporting. We evaluate business performance based upon several metrics, using segment profit as the primary financial measure.
Each of our reporting segments continue to employ consistent accounting policies. As a result of this assessment, we now report our activities in the following three reporting segments: Wholesale, Retail and Contract Manufacturing. Wholesale includes sales of footwear and accessories to several classifications of retailers, including sporting goods stores, outdoor specialty stores, online retailers, marine stores, 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, marketplaces, our Rocky Outdoor Gear Store, and Lehigh businesses. Contract Manufacturing 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. See Note 18 for further information.
Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
Cash and Cash Equivalents - We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Balances may exceed federally insured limits. We also hold cash outside of the U.S. that is not federally insured.
Trade Receivables - Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $3.5 million and $0.6 million at December 31, 2022 and 2021, 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 $2.1 million and $1.7 million at December 31, 2022 and 2021, respectively.
Concentration of Credit Risk - We have significant transactions with a large number of customers. No customer represented 10% of net trade receivables as of December 31, 2022 and 2021. Our exposure to credit risk is impacted by the economic climate affecting the retail shoe industry. We manage this risk by performing ongoing credit evaluations of our customers, maintaining reserves for potential uncollectible accounts and utilizing credit insurance for some of our key customers.
Supplier and Labor Concentrations- We purchase raw materials from a number of domestic and foreign sources. We produce a portion of our shoes and boots in our Dominican Republic, Puerto Rico, Illinois and China operations. We are not aware of any governmental or economic restrictions that would alter these current operations.
We source a significant portion of our footwear, apparel and gloves from manufacturers in Asia, and primarily in China and Vietnam. We are not aware of any governmental or economic restrictions that would alter our current sourcing operations.
Inventories - Inventories are valued at the lower of cost, determined on a first-in, first-out (FIFO) basis, or net realizable value (NRV). Reserves are established for inventories when the NRV is deemed to be less than its cost based on our periodic estimates of NRV.
Property, Plant and Equipment - We record fixed assets at historical cost and generally utilizes the straight-line method of computing depreciation for financial reporting purposes over the estimated useful lives of the assets as follows:
| | Years | |
Buildings and improvements | | 5 - 40 | |
Machinery and equipment | | 3 - 8 | |
Furniture and fixtures | | 3 - 8 | |
Lasts, dies, and patterns | | 3 | |
For income tax purposes, we generally compute depreciation utilizing accelerated methods.
Goodwill - Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill arose from the Acquisition and largely consists of the workforce acquired, expected cost synergies and economies of scale resulting from the business combination. The amount of our goodwill that is deductible for tax purposes is $49.4 million.
GAAP has established guidance for reporting information about a company's operating segments, including disclosures related to a company's products and services, geographic areas and major customers. We monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments, as well as our reporting units. As previously stated, our operations represent three reporting segments, Wholesale, Retail and Contract Manufacturing. Goodwill impairment analysis will be performed for our Wholesale and Retail reporting segments. There is no goodwill allocated to our Contract Manufacturing segment. As of December 31, 2022, goodwill allocated to our Wholesale and Retail reporting segments was $25.4 million and $24.8 million, respectively.
Goodwill is subject to impairment tests at least annually. We review the carrying amounts of goodwill by reporting unit at least annually, or when indicators of impairment are present, to determine if goodwill may be impaired. We include assumptions about the expected future operating performance as part of a discounted cash flow analysis to estimate fair value. If the carrying value of these assets is not recoverable, based on the discounted cash flow analysis, management compares the fair value of the assets to the carrying value. Goodwill is considered impaired if the recorded value exceeds the fair value.
We may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. We would not be required to quantitatively determine the fair value of goodwill unless we determine, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value. Future cash flows of the individual indefinite-lived intangible assets are used to measure their fair value after consideration of certain assumptions, such as forecasted growth rates and cost of capital, which are derived from internal projection and operating plans. We perform our annual testing for goodwill at the beginning of the fourth quarter of each fiscal year, starting with our fiscal year ended December 31, 2021.
Identified intangible assets - Identified intangible assets consist of indefinite lived trademarks and definite lived trademarks, patents and customer relationships. Indefinite lived intangible assets are not amortized.
If events or circumstances change, a determination is made by management, in accordance with the accounting standard for "Property, Plant and Equipment" to ascertain whether property, equipment and certain finite-lived intangibles have been impaired based on the sum of expected future undiscounted cash flows from operating activities. If the estimated net cash flows are less than the carrying amount of such assets, we will recognize an impairment loss in an amount necessary to write down the assets to fair value as determined from expected future discounted cash flows.
In accordance with the accounting standard for "Intangibles – Goodwill and Other", we test intangible assets with indefinite lives for impairment annually or when conditions indicate impairment may have occurred. We perform such testing of our indefinite-lived intangible assets in the fourth quarter of each year or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. See Note 7 for more information.
Leases - Our leases primarily consist of office buildings, distribution centers, manufacturing facilities, and equipment. We lease assets in the normal course of business to meet our current and future needs while providing flexibility to our operations. We enter into contracts with
third parties to lease specifically identified assets. Most of our leases have contractually specified renewal periods. Our operating leases expire at various dates through
2027, and contain various provisions for rental adjustments renewal provisions for varying periods. We determine the lease term for each lease based on the terms of each contract and factor in renewal and early termination options if such options are reasonably certain to be exercised.
Under FASB ASC Topic
842, Leases, we have elected the practical expedient to account for lease components and nonlease components associated with individual leases as a single lease component for all leases. In addition, we have elected to account for multiple lease components as a single lease component. Our leases
may include variable lease costs such as payments based on changes to an index, payments based on a percentage of retail store sales, and maintenance, utilities, shared marketing or other service costs that are paid directly to the lessor under terms of the lease. We recognize variable lease payments when the amounts are incurred and determinable. We have elected to account for leases of
twelve months or less as short-term leases and accordingly do
not recognize a right-of-use asset or lease liability for these leases. We recognize lease expense for these leases on a straight-line basis over the lease term.
Comprehensive Income - Comprehensive income includes changes in equity that result from transactions and economic events from non-core operations. Comprehensive income is composed of two subsets – net income and other comprehensive income. There were no material other comprehensive income items therefore no Statements of Comprehensive Income were presented.
Advertising - We expense advertising costs as incurred. Advertising expense was approximately $15.4 million, $17.9 million and $8.4 million for 2022, 2021 and 2020, respectively. The decrease from 2021 to 2022 is due to a decrease in discretionary spending. The increase from 2020 to 2021 in advertising expense was attributed to the Acquired Brands.
Shipping Costs - All shipping costs billed to customers have been included in net sales. All outbound shipping costs to customers have been included in operating expenses and totaled approximately $38.5 million, $25.1 million and $10.5 million in 2022, 2021 and 2020, respectively. The increase in shipping costs from 2021 to 2022 is due to increased freight rates, increased sales and product mix. The increase in shipping costs from 2020 to 2021 was due to the Acquired Brands.
Stock Compensation Expense - We recognize compensation expense for awards of stock options, restricted stock units ("RSUs"), and director stock units based on the fair value on the grant date and on a straight-line basis over the requisite service period for the awards that are expected to vest, with forfeitures estimated based on our historical experience and future expectations. Stock-based compensation is included in operating expenses in the consolidated statements of operations.
Fair Value Measurements – 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 (salespersons’ 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 facilities 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.
Deferred Compensation Plan Assets and Liabilities
On December 14, 2018, our Board of Directors adopted the Rocky Brands, Inc. Executive Deferred Compensation Plan (the " Executive Deferred Compensation Plan"), which became effective January 1, 2019. The Executive Deferred Compensation Plan is an unfunded nonqualified deferred compensation plan in which certain executives are eligible to participate. The deferrals are held in a separate trust, which has been established for the administration of the Executive Deferred Compensation Plan. The trust assets and liabilities are classified as trading securities within prepaid expenses and other current assets and deferred liabilities, respectively in the accompanying consolidated balance sheets, with changes in the deferred compensation charged to operating expenses in the accompanying consolidated statements of operations. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).
Effective August 18, 2020, our Board of Directors adopted a second deferred compensation plan (the "Dominican Plan"). The Dominican Plan is an unfunded nonqualified deferred compensation plan for key employees at our Dominican Republic manufacturing facility. The funds are held in a separate trust, which has been established for the administration of the Dominican Plan. The trust liabilities are classified as trading securities within deferred liabilities in the accompanying consolidated balance sheets, with changes in the deferred compensation charged to operating expenses in the accompanying consolidated statements of operations. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).
2. ACCOUNTING STANDARDS UPDATES
Recently Issued Accounting Pronouncements
Rocky Brands, Inc. is currently evaluating the impact of certain ASUs on its Consolidated Financial Statements or Notes to the Consolidated Financial Statements:
Standard | | Description | | Anticipated Adoption Period | | Effect on the financial statements or other significant matters |
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 2023 | | We do not anticipate that adopting this standard will have a material impact on our consolidated financial statements. |
Accounting Standards Adopted in 2021
Standard | | Description | | Effect on the financial statements or other significant matters |
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes | | This pronouncement is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. | | We adopted the new standard in Q1 2021 and the standard did not have a significant impact on our Consolidated Financial Statements. |
3. BUSINESS ACQUISITION
The Performance and Lifestyle Footwear Business of Honeywell International Inc.
On January 24, 2021, we entered into a Purchase Agreement (the "Purchase Agreement") with certain subsidiaries of Honeywell International Inc. (collectively, "Honeywell"), to purchase Honeywell's performance and lifestyle footwear business, including brand names, trademarks, assets and liabilities associated with Honeywell's performance and lifestyle footwear business (the "Acquisition") for an aggregate, adjusted purchase price of $212 million.
On March 15, 2021 (the "Acquisition Date"), pursuant to the terms and conditions set forth in the Purchase Agreement, we completed the Acquisition for an aggregate preliminary closing price of approximately $207 million, net of cash acquired, based on preliminary working capital and other adjustments. Upon a final agreement of net working capital as of the Acquisition Date, we owed Honeywell an additional $5.4 million. The Acquisition was funded through cash on hand and borrowings under two new credit facilities. See Note 9 for information regarding the two credit facilities.
The Acquisition expanded our brand portfolio to include Muck, XTRATUF, Servus, Ranger, and NEOS brands (the "Acquired Brands"). We acquired 100% of the voting interests of certain subsidiaries and additional assets comprising the performance and lifestyle footwear business of Honeywell with the Acquisition. On September 30, 2022, we completed the sale of the NEOS brand and the related assets. See Note 4 for additional information.
Through the Acquisition, we have greatly enhanced our powerful portfolio of footwear brands and significantly increased our sales and profitability. We acquired a well-run business with a corporate culture and a customer base similar to ours, which provides meaningful growth opportunities within our existing product categories as well as an entry into new market segments. Its innovative and authentic product collections complement our existing offering with minimal overlap, which we believe will allow us to strengthen our wholesale relationships and serve a wider consumer audience. At the same time, we plan to leverage our existing advanced fulfillment capabilities to improve distribution of the Acquired Brands to wholesale customers and accelerate direct-to-consumer penetration.
In connection with the Acquisition, we also entered into employment agreements with seven key employees from the performance and lifestyle footwear business of Honeywell, pursuant to which, among other things, we agreed to grant 25,000 non-qualified stock options in the aggregate to the seven employees as an inducement for continuing their employment with us.
We acquired multiple leases through the Acquisition including the lease of our Rock Island and China manufacturing facilities and an office building lease in Westwood, Massachusetts. We closed the office in Westwood, Massachusetts on December 31, 2022.
The Acquisition contributed net sales of $242.8 million to our consolidated operating results for the year ended December 31, 2022. The Acquisition contributed net income of $9.3 million to our consolidated operating results for the year ended December 31, 2022.
Acquisition-related costs
Costs incurred to complete and integrate the Acquisition are expensed as incurred and included in "operating expenses" in the accompanying consolidated statements of operations. During the years ended December 31, 2022, 2021, and 2020 there were approximately $3.5 million, $11.9 million and $0.7 million, respectively, of acquisition-related costs recognized. These costs represent investment banking fees, legal and professional fees, transaction fees, integration costs, amortization and consulting fees associated with the Acquisition.
Purchase Price Allocation
The Acquisition has been accounted for under the business combinations accounting guidance. As a result, we have applied acquisition accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the Acquisition Date. The aggregate closing price noted above was allocated to the major categories of assets acquired and liabilities assumed based on their fair values at the Acquisition Date using primarily Level 2 and Level 3 inputs. These Level 2 and Level 3 valuation inputs include an estimate of future cash flows and discount rates. Additionally, estimated fair values are based, in part, upon outside valuation for certain assets, including specifically identified intangible assets.
The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill is not finalized and is subject to adjustment until the final valuation related to assets acquired and liabilities assumed is obtained (up to one year from the Acquisition Date).
The following table summarizes the consideration paid and estimated fair value of the assets acquired and liabilities assumed as of the Acquisition Date.
($ in thousands) | | Fair Value | |
Cash | | $ | 2,655 | |
Accounts receivable (1) | | | 36,734 | |
Inventories (2) | | | 41,057 | |
Property, plant and equipment | | | 16,243 | |
Goodwill (3) | | | 50,246 | |
Intangible assets | | | 98,620 | |
Other assets | | | 1,250 | |
Accounts payable | | | (18,108 | ) |
Accrued expenses | | | (13,634 | ) |
Total identifiable net assets | | | 215,063 | |
Cash acquired | | | (2,655 | ) |
Total cash paid, net of cash acquired | | $ | 212,408 | |
(1) The recorded amount for accounts receivable considers expected uncollectible amounts of approximately $0.6 million in its determination of fair value.
(2) Fair value of finished goods inventories included step up value of approximately $3.5 million, all of which was expensed during the twelve months ended December 31, 2021, and is included in "Cost of Goods Sold" in the accompanying consolidated statement of operations.
(3) Goodwill largely consists of the acquired workforce, expected costs synergies and economies of scale resulting from the Acquisition.
Unaudited Pro Forma Financial Information
The following unaudited pro forma results of operations assume that the Acquisition occurred at the beginning of the periods presented. These unaudited pro forma results are presented for information purposes only and are not necessarily indicative of what the results of operations would have been if the Acquisition had occurred at the beginning of the periods presented, nor are they indicative of the future results of operations. The pro forma results presented below are adjusted for the removal of the step up value of finished goods inventory associated with the Acquisition of approximately $3.5 million for the year ended December 31, 2021. The pro forma results presented below are also adjusted for the removal of acquisition-related costs of approximately $3.5 million, $11.9 million and $0.7 million for the twelve months ended December 31, 2022, 2021, and 2020, respectively.
| | Year Ended December 31, | |
($ in thousands, except per share amount) | | 2022 | | | 2021 | | | 2020 | |
Net sales | | $ | 615,475 | | | $ | 552,905 | | | $ | 482,562 | |
Net income | | $ | 23,250 | | | $ | 40,248 | | | $ | 41,726 | |
Diluted earnings per share | | $ | 3.16 | | | $ | 5.43 | | | $ | 5.69 | |
4. ASSET SALE
On September 30, 2022, we completed the sale of the NEOS brand and related assets to certain entities controlled by SureWerx pursuant to terms of an asset purchase agreement dated September 30, 2022. Total consideration for this transaction was approximately $5.8 million, of which $5.5 million was received at closing. The remaining $0.3 million was deposited in escrow and shall be managed and paid out in accordance with the terms of the asset purchase agreement and the escrow agreement. The sale of the NEOS brand included the sale of inventory, fixed assets, customer relationships, tradenames, all of which related to our Wholesale segment. This transaction resulted in the sale of inventory of approximately $3.6 million recorded in net sales and approximately $2.4 million recorded in costs of goods sold in the accompanying condensed consolidated Statement of Operations for the twelve months ended December 31, 2022. Fixed assets, customer relationships and tradenames sold in connection with the sale of the NEOS brand resulted in reduction of operating expenses of approximately $0.7 million recorded in the accompanying unaudited condensed consolidated statement of operations for the twelve months ended December 31, 2022.
5. INVENTORIES
Inventories are comprised of the following:
| | December 31, | | | December 31, | |
($ in thousands) | | 2022 | | | 2021 | |
Raw materials | | $ | 16,541 | | | $ | 20,933 | |
Work-in-process | | | 933 | | | | 1,316 | |
Finished goods | | | 217,926 | | | | 210,215 | |
Total | | $ | 235,400 | | | $ | 232,464 | |
In accordance with ASC 606, the returns reserve asset included within inventories was approximately $1.1 million and $0.9 million at December 31, 2022 and December 31, 2021, respectively.
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is comprised of the following:
| | December 31, | | | December 31, | |
($ in thousands) | | 2022 | | | 2021 | |
Land | | $ | 972 | | | $ | 972 | |
Buildings | | | 37,601 | | | | 36,456 | |
Machinery and equipment | | | 60,942 | | | | 57,304 | |
Furniture and fixtures | | | 2,022 | | | | 2,548 | |
Lasts, dies and patterns | | | 13,973 | | | | 12,360 | |
Construction work-in-progress | | | 11,798 | | | | 14,452 | |
Total | | | 127,308 | | | | 124,092 | |
Less - accumulated depreciation | | | (69,949 | ) | | | (64,103 | ) |
| | | | | | | | |
Net Property, Plant and Equipment | | $ | 57,359 | | | $ | 59,989 | |
We incurred approximately $9.2 million, $8.8 million, and $5.2 million in depreciation expense for 2022, 2021, and 2020, respectively.
7. IDENTIFIED INTANGIBLE ASSETS
A schedule of identified intangible assets is as follows:
| | Gross | | | Accumulated | | | Carrying | |
($ in thousands) | | Amount | | | Amortization | | | Amount | |
December 31, 2022 | | | | | | | | | | | | |
Trademarks | | | | | | | | | | | | |
Wholesale (1) | | $ | 71,979 | | | | - | | | $ | 71,979 | |
Retail (2) | | | 9,220 | | | | - | | | | 9,220 | |
Patents | | | 895 | | | $ | 826 | | | | 69 | |
Customer relationships (3) | | | 46,006 | | | | 5,492 | | | | 40,514 | |
Total Intangibles | | $ | 128,100 | | | $ | 6,318 | | | $ | 121,782 | |
(1)
$45.4 million of the total resulted from our Acquisition that occurred on
March 15, 2021. NEOS trademarks were reduced from approximately
$0.6 million to
zero at
December 31, 2022 as a result of the sale of the NEOS bran
d (see
Note 4
).
(2)
$6.3 million of the total resulted from our Acquisition that occurred on
March 15, 2021.
(3) Resulted from our Acquisition that occurred on
March 15, 2021. Customer relationships relating to the NEOS brand of approximately
$0.9 million and related amortization of approximately
$0.1 million was reduced to
zero at
December 31, 2022 as a result of the sale of the NEOS br
and (see
Note 4
).
| | Gross | | | Accumulated | | | Carrying | |
($ in thousands) | | Amount | | | Amortization | | | Amount | |
December 31, 2021 | | | | | | | | | | | | |
Trademarks | | | | | | | | | | | | |
Wholesale (1) | | $ | 72,579 | | | | - | | | $ | 72,579 | |
Retail (2) | | | 9,220 | | | | - | | | | 9,220 | |
Patents | | | 895 | | | $ | 804 | | | | 91 | |
Customer relationships (3) | | | 46,900 | | | | 2,475 | | | | 44,425 | |
Total Intangibles | | $ | 129,594 | | | $ | 3,279 | | | $ | 126,315 | |
(1) $45.4 million of the total resulted from our Acquisition that occurred on March 15, 2021.
(2) $6.3 million of the total resulted from our Acquisition that occurred on March 15, 2021.
(3) Resulted from our Acquisition that occurred on March 15, 2021.
The weighted average remaining life for our patents is 7.1 years.
A schedule of approximate actual and expected amortization expense related to finite-lived intangible assets is as follows:
| | Amortization | |
($ in thousands) | | Expense | |
2023 | | | 3,011 | |
2024 | | | 3,074 | |
2025 | | | 3,070 | |
2026 | | | 3,067 | |
2027 | | | 3,064 | |
2028+ | | | 25,297 | |
Indefinite lived intangible assets, such as trademarks are reviewed for impairment testing annually, more frequently if necessary. We perform such testing of indefinite-lived intangible assets in the fourth quarter of each year or as events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount. Fair value of other indefinite-lived intangible assets is determined using the relief from royalty method. Definite lived intangible assets, such as patents and customer relationships are only reviewed for impairment if a triggering event has occurred to indicate that its fair value of the asset is below its carrying value.
In assessing whether indefinite-lived intangible assets are impaired, we must make certain estimates and assumptions regarding future cash flows, long-term growth rates of our business, operating margins, weighted average cost of capital and other factors such as: discount rates, royalty rates, cost of capital, and market multiples to determine the fair value of our assets. These estimates and assumptions require management’s judgment, and changes to these estimates and assumptions could materially affect the determination of fair value and/or impairment for each of our indefinite-lived intangible assets. Future events could cause us to conclude that indications of intangible asset impairment exist. Impairment may result from, among other things, deterioration in the performance of our business, adverse market conditions, adverse changes in applicable laws and regulations, competition, or the sale or disposition of a reporting segment. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
2022 and 2021 Impairment Testing
We evaluate our finite and indefinite lived intangible assets under the terms and provisions of the accounting standards for "Intangibles - Goodwill and Other" and "Property, Plant and Equipment." These pronouncements require that we compare the fair value of an intangible asset with its carrying amount. The results of our 2022 and 2021 finite and indefinite-lived intangible impairment testing indicated that all reporting unit intangible asset fair values exceed their respective carrying values.
8. OTHER ASSETS
Other assets consist of the following:
| | December 31, | | | December 31, | |
($ in thousands) | | 2022 | | | 2021 | |
Long-term deposits | | $ | 607 | | | $ | 606 | |
NQDC plan assets | | | 335 | | | | 311 | |
Total | | $ | 942 | | | $ | 917 | |
9. LONG-TERM DEBT
On March 15, 2021, we entered into a senior secured term loan facility ("Term Facility") with TCW Asset Management Company, LLC, as agent, for the lenders party thereto in the amount of $130 million. The Term Facility provided for quarterly payments of principal and bears interest of LIBOR plus 7.00% through June 30, 2021. After this date, interest was assessed quarterly based on our total leverage ratio. The total leverage ratio is calculated as (a) Total Debt to (b) EBITDA. If our total leverage ratio is greater than or equal to 4.00, the effective interest rate will be SOFR plus 7.50% (or at our option, Prime Rate plus 6.50%). If our total leverage ratio is less than 4.00, but greater than 3.00, the effective interest rate will be SOFR plus 7.00% (or at our option, Prime Rate plus 6.00%). If our total leverage ratio is less than 3.00, the effective interest rate will be SOFR plus 6.50% (or at our option, Prime Rate plus 5.50%). The Term Facility also has a SOFR floor rate of 1.00%. In June 2022, we entered into a second amendment with TCW to further amend our Term Facility to consent to modifications in our borrowing capacity under the ABL Facility as described below, and to adjust certain pricing and prepayment terms, among other things. The second amendment also modified the interest index whereas SOFR will be used to calculate interest rather than LIBOR. The effective interest rate was increased to SOFR plus 7.50% through November 2022. In November 2022, the Term Facility was amended to increase the effective interest rate to LIBOR plus 7.00% until June 2023 and to provide certain EBITDA adjustments with response to financial covenants, among other things.
Our Term Facility is collateralized by a second-lien on accounts receivable, inventory, cash and related assets and a first-lien on substantially all other assets. The Term Facility matures on March 15, 2026.
On March 15, 2021, we also entered into a senior secured asset-based credit facility ("ABL Facility") with Bank of America, N.A. ("Bank of America") as agent, for the lenders party thereto. The ABL Facility provides a new senior secured asset-based revolving credit facility up to a principal amount of $150 million, which includes a sub-limit for the issuance of letters of credit up to $5 million. The ABL Facility may be increased up to an additional $50 million at the Borrowers’ request and the Lenders’ option, subject to customary conditions. In December of 2021, we amended our ABL Facility to temporarily increase our borrowing capacity from $150 million to $175 million until June 2022, at which time our borrowing capacity will go down to $165 million. In June 2022, we further amended our ABL Facility to temporarily increase our borrowing capacity by $25 million to $200 million through December 31, 2022, which thereafter will be reduced to $175 million. In November 2022, we entered into a third amendment to our ABL Facility to provide certain EBITDA adjustments with respect to our financial covenants. The ABL Facility includes a separate first in, last out (FILO) tranche, which allows the Company to borrow at higher advance rates on eligible accounts receivables and inventory balances. As of December 31, 2022, we had borrowing capacity of $56.2 million.
Interest expense was approximately $18.3 million, $10.6 million and $0.2 million, respectively for the years ended December 31, 2022, 2021 and 2020.
The ABL Facility is collateralized by first-lien on accounts receivable, inventory, cash and related assets and a second-lien on substantially all other assets. The ABL Facility matures on March 15, 2026. Interest on the ABL Facility is based on the amount available to be borrowed as set forth on the following chart:
| Average Availability as a | | | | | | | | | | | | | | | | |
Revolver Pricing Level (1) | Percentage of Commitments | | Base Rate | | | Term SOFR Loan | | | Base Rate for FILO | | | Term SOFR FILO Loans | |
I | > 66.7% | | | 0.00 | % | | | 1.25 | % | | | 0.50 | % | | | 1.75 | % |
II | >33.3% and < or equal to 66.7% | | | 0.00 | % | | | 1.50 | % | | | 0.50 | % | | | 2.00 | % |
III | < or equal to 33.3% | | | 0.25 | % | | | 1.75 | % | | | 0.75 | % | | | 2.25 | % |
(1) Tier II applied until June 30, 2021.
In connection with the Term Facility and ABL Facility, we had to pay certain fees that were capitalized and will be amortized over the life of each respective loan. In addition, the ABL Facility requires us to pay an annual collateral management fee in the amount of $75,000 due on each anniversary of the ABL Facility issuance date, until it matures.
Current and long-term debt consisted of the following:
| | December 31, | | | December 31, | |
($ in thousands) | | 2022 | | | 2021 | |
Term Facility that matures in 2026 with an effective interest rate of 12.14% and 8.00% as of December 31, 2022 and December 31, 2021, respectively | | $ | 116,332 | | | $ | 127,563 | |
ABL Facility that matures in 2026: | | | | | | | | |
LIBOR borrowings with an effective interest rate of 5.47% and 1.88% as of December 31, 2022 and December 31, 2021, respectively | | | 140,000 | | | | 140,000 | |
Prime borrowings with an effective interest rate of 7.27% and 3.50% as of December 31, 2022 and December 31, 2021, respectively | | | 3,301 | | | | 6,072 | |
Total debt | | | 259,633 | | | | 273,635 | |
Less: Unamortized debt issuance costs | | | (2,737 | ) | | | (3,591 | ) |
Total debt, net of debt issuance costs | | | 256,896 | | | | 270,044 | |
Less: Debt maturing within one year | | | (3,250 | ) | | | (3,250 | ) |
Long-term debt | | $ | 253,646 | | | $ | 266,794 | |
Credit Facility Covenants
The Term Facility contains restrictive covenants which require us to maintain a maximum total leverage ratio and a minimum fixed charge coverage ratio, as defined in the agreement. We are in compliance with all Term Facility covenants as of December 31, 2022.
Our ABL Facility contains a restrictive covenant which requires us to maintain a fixed charge coverage ratio upon a triggering event taking place (as defined in the ABL Facility agreement). During the twelve months ended December 31, 2022, there were no triggering events and the covenant was not in effect.
Huntington Credit Facility
The Huntington credit facility was terminated in March 2021 and was replaced by the ABL Facility. We had no outstanding borrowings against Huntington Credit Facility at fiscal year ending December 31, 2021.
10. LEASES
The operating ROU asset and operating lease liabilities as of December 31, 2022 and December 31, 2021 were as follows:
| | December 31, | | | December 31, | | |
($ in thousands) | | 2022 | | | 2021 | | Financial Statement Line Item |
Assets: | | | | | | | | | |
Operating ROU Assets | | $ | 11,014 | | | $ | 11,428 | | Leased assets |
| | | | | | | | | |
Liabilities: | | | | | | | | | |
Current | | | | | | | | | |
Operating | | $ | 3,071 | | | $ | 2,985 | | Other accrued expenses |
Noncurrent | | | | | | | | | |
Operating | | | 8,216 | | | | 8,809 | | Long-term lease |
Total leased liabilities | | $ | 11,287 | | | $ | 11,794 | | |
Maturity of our operating lease liabilities are as follows:
| | Operating | |
($ in thousands) | | Leases | |
2023 | | $ | 3,240 | |
2024 | | | 3,076 | |
2025 | | | 2,901 | |
2026 | | | 2,819 | |
2027 | | | 2,235 | |
Total lease payments | | | 14,271 | |
Less: Interest | | | (2,984 | ) |
Present value of lease liabilities | | $ | 11,287 | |
For the twelve months ended December 31, 2022 and December 31, 2021 the weighted average remaining lease term and discount rate were as follows:
| | December 31, | | | December 31, | |
| | 2022 | | | 2021 | |
Weighted-average remaining lease term (years) | | | | | | |
Operating leases | | 2.8 | | | 2.8 | |
| | | | | | |
Weighted-average discount rate | | | | | | |
Operating leases | | 1.4% | | | 1.7% | |
For the twelve months ended December 31, 2022, December 31, 2021 and December 31, 2020 the supplemental cash flow information was as follows:
| | December 31, | | | December 31, | | | December 31, | |
($ in thousands) | | 2022 | | | 2021 | | | 2020 | |
Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | | | | | |
Operating cash flows from operating leases | | $ | 1,492 | | | $ | 1,230 | | | $ | 711 | |
| | | | | | | | | | | | |
Right-of-use assets obtained in exchange for lease obligations | | | | | | | | | | | | |
Operating leases | | $ | 2,786 | | | $ | 13,186 | | | $ | 481 | |
The breakdown of rent expense for our operating leases for the twelve months ended December 31, 2022 and December 31, 2021 were as follows:
| | Twelve Months Ended | | |
| | December 31, | | | December 31, | | | December 31, | | |
($ in thousands) | | 2022 | | | 2021 | | | 2020 | | Financial Statement Line Item |
Operating lease expenses - Manufacturing & Sourcing (1) | | $ | 784 | | | $ | 813 | | | $ | 678 | | Cost of goods sold |
Operating lease expenses (1) | | | 4,595 | | | | 1,417 | | | | 433 | | Operating expenses |
Total lease expenses | | $ | 5,379 | | | $ | 2,230 | | | $ | 1,111 | | |
(1) Includes short-term lease expenses of approximately $2,166,000, $1,310,000 and $103,000 for the twelve months ended December 31, 2022, December 31, 2021 and December 31, 2020, respectively.
11. BENEFIT PLAN
We sponsor a 401(k) savings plan for eligible employees. We provide a contribution of 3% of applicable salary to the plan for all employees with greater than six months of service. Additionally, we match eligible employee contributions at a rate of 0.25%, per one percent of applicable salary contributed to the plan by the employee. This matching contribution will be made by us up to a maximum of 1% of the employee’s applicable salary for all qualified employees.
Our approximate contributions to the 401(k) Plan were as follows:
($ in thousands) | | 2022 | | | 2021 | | | 2020 | |
401(k) plan sponsor contributions | | $ | 1,798 | | | $ | 1,311 | | | $ | 961 | |
Deferred Compensation Plans
The Executive Deferred Compensation Plan, which became effective January 1, 2019, is an unfunded non-qualified deferred compensation plan in which certain executives are eligible to participate.
Under the Executive Deferred Compensation Plan, participants may elect to defer up to 75% of their base compensation and up to 100% of their bonuses, commissions, and other compensation. The deferred amounts are paid in accordance with each participant’s elections made on or before December 31 of the prior year. In addition to elective deferrals, the Executive Deferred Compensation Plan permits the Company to make discretionary contributions to eligible participants, provided that any participant who is employed on the last day of a plan year will receive a Company contribution equal to no less than 3% of the participant’s base compensation, bonus earned, and non-equity incentive plan compensation in the plan year. Company contributions will vest in accordance with the vesting schedule determined by the Committee, except in the event of the participant’s death, disability or retirement, in which case the contributions will vest 100% upon such event. Participants may elect to receive payment in a lump sum cash payment or, in the event of the participant’s retirement, in annual installments for a period of up to ten years. In the event of a participant’s termination of employment, deferred amounts will generally be paid within 60 days following the later of the date (i) of such termination or (ii) the participant attains age 60, except where such termination is due to such participant’s death, in which case deferred amounts will be paid to such participant’s beneficiary within 30 days of confirmation of the participant’s death.
The deferrals are held in a separate trust, which has been established by the Company to administer the Executive Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a "Rabbi Trust"). The assets held by the trust were approximately $335,000 and $311,000 as of December 31, 2022 and December 31, 2021, respectively, and are classified as trading securities within other assets in the accompanying consolidated balance sheets. The liabilities by the trust were approximately $120,000 and $119,000, as of December 31, 2022 and December 31, 2021, respectively, and are classified within deferred liabilities in the accompanying consolidated balance sheets. Changes in the deferred compensation assets and liabilities are charged to operating expenses in the accompanying consolidated statements of operations.
In 2020, we entered into a second deferred compensation plan (the "Dominican Plan"), which became effective August 18, 2020 and is a non-qualified deferred compensation plan for certain key employees at our Dominican Republic manufacturing facility.
Under the Dominican Plan, key employees will receive a set dollar amount, as defined in the agreement, at the later of five years following the effective date of the agreement or upon the employee attaining the age of 65. Payments are due within 30 days of the employee's retirement. If the employee terminates their employment, for any reason, prior to their retirement and five years after the effective date of the agreement, the employee is not eligible to receive a payout. The funds are accrued based on service and are not held in an investment or trust account. The total liabilities held under the Dominican Plan were approximately $187,000 and $107,000 as of December 31, 2022 and December 31, 2021, respectively, and are classified within deferred liabilities in the accompanying consolidated balance sheets.
12. TAXES
We account for income taxes in accordance with the accounting standard for "Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, deferred income taxes have been provided for the temporary differences between the financial reporting and the income tax basis of the Company’s assets and liabilities by applying enacted statutory tax rates applicable to future years to the basis differences.
A breakdown of our income tax expense (benefit) for the years ended December 31 is as follows:
($ in thousands) | | 2022 | | | 2021 | | | 2020 | |
Federal: | | | | | | | | | | | | |
Current | | $ | 5,993 | | | $ | 1,554 | | | $ | 4,942 | |
Deferred | | | (1,417 | ) | | | 1,729 | | | | 67 | |
Total Federal | | | 4,576 | | | | 3,283 | | | | 5,009 | |
| | | | | | | | | | | | |
State & local: | | | | | | | | | | | | |
Current | | | 1,415 | | | | 833 | | | | 793 | |
Deferred | | | (247 | ) | | | (176 | ) | | | 97 | |
Total State & local | | | 1,168 | | | | 657 | | | | 890 | |
| | | | | | | | | | | | |
Foreign | | | | | | | | | | | | |
Current | | | 182 | | | | 907 | | | | 102 | |
Deferred | | | (623 | ) | | | (37 | ) | | | - | |
Total Foreign | | | (441 | ) | | | 870 | | | | 102 | |
| | | | | | | | | | | | |
Total | | $ | 5,303 | | | $ | 4,810 | | | $ | 6,001 | |
A reconciliation of recorded Federal income tax expense to the expected expense computed by applying the applicable Federal statutory rate for all periods to income before income taxes follows:
| | Year Ended December 31, | |
($ in thousands) | | 2022 | | | 2021 | | | 2020 | |
Expected expense at statutory rate | | $ | 5,414 | | | $ | 5,327 | | | $ | 5,662 | |
| | | | | | | | | | | | |
Increase (decrease) in income taxes resulting from: | | | | | | | | | | | | |
Exempt income from Dominican Republic operations due to tax holiday | | | (632 | ) | | | (1,238 | ) | | | (942 | ) |
Tax Rate Differential effect of Foreign Operations | | | 160 | | | | 45 | | | | - | |
Tax on repatriated earnings from Dominican Republic operations | | | 316 | | | | 941 | | | | 438 | |
State and local income taxes | | | 734 | | | | 222 | | | | 766 | |
Foreign Tax Credit | | | (348 | ) | | | (547 | ) | | | (30 | ) |
Meals and entertainment | | | 5 | | | | 2 | | | | 27 | |
Nondeductible penalties | | | 6 | | | | 3 | | | | 20 | |
Provision to return filing adjustments and other | | | (352 | ) | | | 55 | | | | 60 | |
Total | | $ | 5,303 | | | $ | 4,810 | | | $ | 6,001 | |
| | | | | | | | | | | | |
Deferred income taxes recorded in the Consolidated Balance Sheets at December 31, 2022 and 2021 consisted of the following:
($ in thousands) | | 2022 | | | 2021 | |
Deferred tax assets: | | | | | | | | |
Asset valuation allowances and accrued expenses | | $ | 2,257 | | | $ | 239 | |
Inventories | | | 3,300 | | | | 1,564 | |
State and local income taxes | | | 293 | | | | 346 | |
Pension and deferred compensation | | | 42 | | | | 38 | |
Net operating losses | | | 794 | | | | 302 | |
163(J) Interest limitation | | | 1,077 | | | | - | |
Lease asset | | | 2,608 | | | | 2,696 | |
Total deferred tax assets | | | 10,371 | | | | 5,185 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Fixed assets | | | 4,490 | | | | 4,144 | |
Intangible assets | | | 10,262 | | | | 7,179 | |
Other assets | | | 793 | | | | 317 | |
Tollgate tax on Lifestyle earnings | | | 228 | | | | 228 | |
State and local income taxes | | | 59 | | | | 1,001 | |
Lease Liability | | | 2,545 | | | | 2,609 | |
Total deferred tax liabilities | | | 18,377 | | | | 15,478 | |
| | | | | | | | |
Net deferred tax liability | | $ | 8,006 | | | $ | 10,293 | |
We have provided Puerto Rico tollgate taxes on approximately $3.7 million of accumulated undistributed earnings of Lifestyle prior to the fiscal year ended June 30, 1994, that would be payable if such earnings were repatriated to the United States. In 2001, we received abatement for Puerto Rico tollgate taxes on all earnings subsequent to June 30, 1994; thus no other provision for tollgate tax has been made on earnings after that date. If we repatriate the earnings from Lifestyle, $227,563 of tollgate tax would be due as of December 31, 2022.
We are subject to tax examinations in various taxing jurisdictions. The earliest exam years open for examination are as follows:
| | Earliest Exam Year | |
Taxing Authority Jurisdiction: | | | |
U.S. Federal | | 2019 | |
Various U.S. States | | 2018 | |
Puerto Rico (U.S. Territory) | | 2017 | |
Canada | | 2017 | |
China | | 2019 | |
Mexico | | 2021 | |
United Kingdom | | 2021 | |
Australia | | 2021 | |
Our policy is to accrue interest and penalties on any uncertain tax position as a component of income tax expense. As of December 31, 2022, no such expenses were recognized during the year. We do not believe there will be any material changes in our uncertain tax positions over the next 12 months.
Accounting for uncertainty in income taxes requires financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. Under this guidance, income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of the standard. We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations.
13. SHAREHOLDERS' EQUITY
Repurchase of Common Stock
A summary of our previously authorized share repurchase plans, both of which are expired by their terms, is as follows:
($ in thousands, except share and per share amounts) | | 2021 | | | 2020 | |
Maximum authorized share repurchase amount (1) | | $ | 7,500 | | | $ | 7,500 | |
Date of plan's authorization by the Board | | | March 2021 | | | | February 2020 | |
Funding source | | | Working capital | | | | Working capital | |
Number of shares repurchased under the plan (shares) | | | - | | | | 129,095 | |
Amount paid for shares repurchased | | $ | - | | | $ | 2,938 | |
Weighted average price paid per share | | $ | - | | | $ | 22.76 | |
Remaining amount of shares authorized to be purchased under the plan (in dollars) | | $ | 7,500 | | | $ | 4,562 | |
| (1) | Common shares can be purchased in the open market or privately negotiated transactions over the next twelve months following the date of plan authorization. |
Our previous shareholder repurchase program terminated expired on March 4, 2022. There has not been an announcement for a new repurchase program since the expiration prior program expired in March 2022.
Preferred Shares
The Company has authorized 250,000 shares of voting preferred stock with no par value. No shares are issued or outstanding. Also, the Company has authorized 250,000 shares of non-voting preferred stock with no par value. Of these, 125,000 shares have been designated Series A non-voting convertible preferred stock with a stated value of $0.06 per share, of which no shares are issued or outstanding at December 31, 2022 and 2021, respectively.
14. SHARE-BASED COMPENSATION
On May 7, 2014, our shareholders approved the 2014 Omnibus Incentive Plan and in May 2021 this plan was amended as our shareholders authorized an additional 600,000 shares (as amended, the "2014 Plan"). The 2014 Plan includes 1,100,000 of our common shares that may be granted under various types of awards as described in the 2014 Plan. As of December 31, 2022, we were authorized to issue 526,106 shares under the 2014 Plan.
On January 24, 2021, we adopted the 2021 Inducement Option Plan (the "2021 Plan") pursuant to which 25,000 non-qualified stock options were granted to seven key employees acquired with the Acquisition. The 2021 Plan did not require shareholder approval under Nasdaq Listing Rule 5635(c). As of December 31, 2022, there were no remaining shares available to grant under the 2021 Plan.
Stock Options
The following table presents the weighted average assumptions used in the option-pricing model at the grant date for options granted during the years ended December 31:
| | 2022 | | | 2021 | |
Assumptions: | | | | | | | | |
Risk-free interest rate | | | 0.82 | % | | | 0.32 | % |
Expected dividend yield | | | 2.15 | % | | | 1.18 | % |
Expected volatility of Rocky Brand's common stock | | | 54.70 | % | | | 51.87 | % |
Expected option term (years) | | | 5.1 | | | | 5.6 | |
Weighted-average grant date fair value per share | | $ | 12.85 | | | $ | 12.16 | |
For the years ended December 31, 2022 and 2021, we recognized share-based compensation expense and the corresponding tax benefit as follows:
($ in thousands) | | 2022 | | | 2021 | |
Share-based compensation expense | | $ | 1,230 | | | $ | 1,265 | |
Tax benefit | | | 221 | | | | 192 | |
The following summarizes stock option activity for the year ended December 31, 2022:
| | | | | | | | | | Weighted | | | | | |
| | | | | | Weighted | | | Average | | | | | |
| | | | | | Average | | | Remaining | | | Aggregate | |
($ amounts are per share) | | Shares | | | Exercise Price | | | Actual Term | | | Intrinsic Value | |
Options outstanding at January 1, 2022 | | | 328,000 | | | $ | 26.94 | | | | | | | | | |
Issued | | | 85,500 | | | | 39.80 | | | | | | | | | |
Exercised | | | (26,050 | ) | | | 17.69 | | | | | | | | | |
Forfeited or expired | | | (46,014 | ) | | | 41.71 | | | | | | | | | |
Options outstanding at December 31, 2022 | | | 341,436 | | | $ | 28.87 | | | | 5.1 | | | $ | 363,595 | |
Expected to vest | | | 118,736 | | | $ | 31.70 | | | | 7.7 | | | $ | 34,364 | |
Exercisable at December 31, 2022 | | | 222,700 | | | $ | 27.37 | | | | 3.7 | | | $ | 329,231 | |
In the first quarter of 2022, our officers and certain employees were granted 54,000 options. The plans generally provided for grants with the exercise price equal to fair value on the date of grant, graduated vesting periods of up to 5 years, and lives not exceeding 10 years. For the years ended December 31, 2022, 2021, and 2020, cash received for the exercise of stock options was approximately $461,000, $825,000, and $136,000 respectively.
In the first quarter of 2022, Board of Director members were granted 31,500 stock options that vest over a year and will expire in 5 years.
Restricted Stock Units
The following table summarizes the status of the Company's restricted stock units and activity as of December 31, 2022:
| | Restricted Stock Units | |
| | | | | | Weighted-Average Grant Date | |
($ amounts are per share) | | Quantity | | | Fair Value Per Share | |
Nonvested at January 1, 2022 | | | - | | | $ | - | |
Granted | | | 1,954 | | | | 25.58 | |
Vested | | | - | | | | - | |
Forfeited | | | - | | | | - | |
Nonvested at December 31, 2022 | | | 1,954 | | | $ | 25.58 | |
As of December 31, 2022, the total unrecognized compensation cost related to non-vested stock options and restricted stock units was approximately $148,000 with a weighted-average expense recognition period of 3.8 years.
During the years ended December 31, 2022 and 2021, and 2020 we issued 10,762 shares, 6,868 shares and 10,456 shares of common stock to members of our Board of Directors, respectively.
15. 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 years ended December 31, as follows:
| | Twelve Months Ended | |
| | December 31, | |
(shares in thousands) | | 2022 | | | 2021 | | | 2020 | |
| | | | | | | | | | | | |
Basic - weighted average shares outstanding | | | 7,317 | | | | 7,283 | | | | 7,304 | |
Dilutive stock options | | | 52 | | | | 126 | | | | 33 | |
Diluted - weighted average shares outstanding | | | 7,369 | | | | 7,409 | | | | 7,337 | |
Anti-dilutive securities | | | 162 | | | | 25 | | | | 149 | |
| | | | | | | | | | | | |
16. REVENUE
Nature of Performance Obligations
Our products are distributed through three 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, and internationally, mainly Europe. 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 Outdoor Gear Store, and Lehigh business. We also sell footwear under the Rocky Brands 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 product 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 as of December 31, 2022. 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 Note 1 and Note 5 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 and other customers 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 and other customers.
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 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. This treatment is consistent with how we accounted for these costs in prior periods.
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 costs incurred to obtain a contract would be subject to this practical expedient.
Contract Liabilities
The following table provides information about contract liabilities from contracts with our customers.
| | December 31, | | | December 31, | |
($ in thousands) | | 2022 | | | 2021 | |
Contract liabilities | | $ | - | | | $ | 1,062 | |
Significant changes in the contract liabilities balance during the period are as follows:
($ in thousands) | | Contract liabilities | |
Balance, December 31, 2021 | | $ | 1,062 | |
Non-cancelable contracts with customers entered into during the period | | | - | |
Revenue recognized related to non-cancelable contracts with customers during the period | | | (1,062 | ) |
Balance, December 31, 2022 | | $ | - | |
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 18 for segment disclosures.
17. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow for the years ended December 31, as follows:
| | Twelve Months Ended | |
| | December 31, | |
($ in thousands) | | 2022 | | | 2021 | | | 2020 | |
| | | | | | | | | | | | |
Interest paid | | $ | 17,501 | | | $ | 7,930 | | | $ | 151 | |
| | | | | | | | | | | | |
Federal, state, and local income taxes paid, net | | $ | 1,930 | | | $ | 8,638 | | | $ | 4,669 | |
| | | | | | | | | | | | |
Change in contract receivables, net | | $ | 1,062 | | | $ | 4,108 | | | $ | (424 | ) |
| | | | | | | | | | | | |
Change in contract liabilities, net | | $ | (1,062 | ) | | $ | (4,520 | ) | | $ | 836 | |
| | | | | | | | | | | | |
Property, plant, and equipment purchases in accounts payable | | $ | 976 | | | $ | 2,191 | | | $ | 2,316 | |
| | | | | | | | | | | | |
18. SEGMENT INFORMATION
Reportable Segments - We have identified three reportable segments: Wholesale, Retail and Contract Manufacturing.
Wholesale. In our Wholesale segment, our products are offered in over 10,000 retail locations representing a wide range of distribution channels in the U.S., Canada, U.K. and other international markets, mainly Europe. These distribution channels vary by product line and target market 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.
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.
The following is a summary of segment results for the Wholesale, Retail, and Contract Manufacturing segments for the years ended December 31:
| | Twelve Months Ended | |
| | December 31, | |
($ in thousands) | | 2022 | | | 2021 | | | 2020 | |
NET SALES: | | | | | | | | | | | | |
Wholesale | | $ | 484,779 | | | $ | 391,070 | | | $ | 185,554 | |
Retail | | | 115,354 | | | | 94,658 | | | | 72,877 | |
Contract Manufacturing | | | 15,342 | | | | 28,499 | | | | 18,878 | |
Total Net Sales | | $ | 615,475 | | | $ | 514,227 | | | $ | 277,309 | |
| | | | | | | | | | | | |
GROSS MARGIN: | | | | | | | | | | | | |
Wholesale | | $ | 165,059 | | | $ | 140,166 | | | $ | 66,336 | |
Retail | | | 57,817 | | | | 47,792 | | | | 34,283 | |
Contract Manufacturing | | | 2,343 | | | | 6,578 | | | | 4,116 | |
Total Gross Margin | | $ | 225,219 | | | $ | 194,536 | | | $ | 104,735 | |
Segment asset information is not prepared or used to assess segment performance.
Product Group Information - The following is supplemental information on net sales by product group for the years ended
December
31:
($ in thousands) | | 2022 | | | % of Sales | | | 2021 | | | % of Sales | | | 2020 | | | % of Sales | |
Work footwear | | $ | 256,162 | | | | 41.6 | % | | $ | 280,235 | | | | 54.5 | % | | $ | 126,268 | | | | 45.5 | % |
Outdoor footwear | | | 183,121 | | | | 29.8 | | | | 76,031 | | | | 14.8 | | | | 21,074 | | | | 7.6 | |
Western | | | 108,697 | | | | 17.6 | | | | 87,425 | | | | 17.0 | | | | 61,127 | | | | 22.0 | |
Duty and commercial military footwear | | | 46,177 | | | | 7.5 | | | | 39,715 | | | | 7.7 | | | | 41,005 | | | | 14.8 | |
Military footwear | | | 15,342 | | | | 2.5 | | | | 22,767 | | | | 4.4 | | | | 18,878 | | | | 6.8 | |
Other | | | 3,581 | | | | 0.6 | | | | 5,149 | | | | 1.0 | | | | 5,575 | | | | 2.0 | |
Apparel | | | 2,395 | | | | 0.4 | | | | 2,905 | | | | 0.6 | | | | 3,382 | | | | 1.2 | |
| | $ | 615,475 | | | | 100.0 | % | | $ | 514,227 | | | | 100.0 | % | | $ | 277,309 | | | | 100.0 | % |
Net sales to foreign countries represented approximately 6.2% of net sales in 2022, 6.9% of net sales in 2021 and 0.8% of net sales in 2020.
The net book value of fixed assets located outside of the U.S. totaled
$12.6 million at
December 31, 2022, of which approx
imately $4.6 million resides in the Dominican Republic and approximatel
y $8.0 million resides in China.
19. RESTRUCTURING CHARGES
In 2022, we completed a cost savings review aimed at operating efficiencies to better position us for profitable growth. Following the integration of the Acquired Brands, we identified a number of operational synergies and cost savings opportunities, including a reduction in workforce. In addition to the accrued expenses below, we incurred approximately $1.0 million in restructuring costs that are included in operating expenses in the accompanying consolidated statements of operations for the year ended December 31, 2022.
For the year ended
December 31, 2022, the following activity was recorded:
| | Employee Severance, Benefits and | |
($ in thousands) | | Related Costs | |
Accrued expenses, January 1, 2022 | | | - | |
Restructuring charges | | $ | 1,201 | |
Cash payments | | | (820 | ) |
Accrued expenses, December 31, 2022 | | $ | 381 | |
20. COMMITMENTS AND CONTINGENCIES
We are, from time to time, a party to litigation which arises in the normal course of business. Although the ultimate resolution of pending proceedings cannot be determined, in the opinion of management, the resolution of such proceedings in the aggregate will not have a material adverse effect on our financial position, results of operations, or liquidity.
Litigation
We are currently party to litigation with a manufacturing supplier of the Acquired Brands. While it is not possible to predict the outcome of this litigation with certainty, we do not anticipate the resolution will have a material, adverse impact on our financial position. We believe that the likelihood of the resolution being materially adverse to our financial statements is remote and as such have not recorded any contingent liabilities within the accompanying Consolidated Financial Statements. In addition, we have not recorded any potential favorable resolution to the litigation due in accordance with ASC 450-30, Gain 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 in the U.S. associated with the Acquired Brands during 2021 and 2022. As a result of the misclassification of HTS codes we have paid duties in excess of the required amount. We are in the process of filing multiple post summary corrections with U.S. customs to see refunds of duties paid in excess of the correct HTS codes. As of December 31, 2022, we have the potential to recover approximately $7.7 million from overpaid duties of which we have received $3.2 million in refunds. All refunds received were and will be recognized as a reduction to the cost of goods sold as received. We are accounting for these post summary corrections as a gain contingency, and as such have not recorded these potential refunds within the accompanying unaudited condensed consolidated balance sheet due to uncertainty of collection. Any refunds received will be recognized as a reduction to the cost of goods sold when and if the refunds are received.