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Item 7. Management’s Discussion and Analysis

2025-03-17 compared with 2024-03-15 · 178 added, 152 removed, 112 unchanged (75% of the section changed)

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This Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") describes the matters that we consider to be important to understanding the results of our operations for each of the two years in the period ended December 31, 2024 and 2023 , and our capital resources and liquidity as of December 31, 2024 and 2023 .

For the discussion of the changes in our results of operations between the years ended December 31, 2022 and December 31, 2021, refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 10, 2023, which is available on the SEC's website at https://www.sec.gov/edgar/search/ and our corporate website at www.rockybrands.com .

For the discussion of the changes in our results of operations and statement of cash flows between the years ended December 31, 2023 and December 31, 2022 , refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", of our Annual Report on Form 10-K for the year ended December 31, 2023 , filed with the SEC on March 15, 2024, which is available on the SEC's website at https://www.sec.gov/edgar/search/ and our corporate website at www.rockybrands.com .

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

We then provide a review of the critical accounting policies and estimates we have made that we believe are most important to the understanding of our MD&A and our Consolidated Financial Statements.

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

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

The following discussion should be read in conjunction with our Consolidated Financial Statements and the notes thereto, included elsewhere herein.

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BUSINESS OVERVIEW

We are a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a portfolio of well recognized brand names including Rocky, Muck, Georgia Boot, Durango, XTRATUF, Lehigh, Ranger and the licensed brand Michelin.

We are a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a portfolio of well recognized brand names including Muck, Rocky, Georgia Boot, Durango, Lehigh, XTRATUF, Ranger and the licensed brand Michelin.

Our brands have a long history of representing high quality, comfortable, functional, and durable footwear, and our products are organized around six target markets:

outdoor, work, duty, commercial military, military and western.

work, outdoor, western, commercial military, duty and military.

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

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Wholesale, Retail and Contract Manufacturing.

In our Wholesale business, we distribute our products through a wide range of distribution channels representing over 10,000 retail store locations in the U.S., Canada, U.K., and other international markets such as Europe.

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., the U.K.

and other international markets such as Europe.

Our Wholesale channels vary by product line and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores, specialty retailers, and online retailers.

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Military, private label sales and any sales to customers in which we are contracted to manufacture or source a specific footwear product for a customer.

During the first quarter of 2023, we divested the Servus brand.

The gain of approximately $1.3 million on the sale of the Servus brand during the first quarter was recorded within Interest Expense and Other - net in the Consolidated Statements of Operations for the year ended December 31, 2023.

The Servus brand was sold to allow us to focus on our more profitable core brands and allocate resources toward growth and development of additional opportunities with those brands moving forward.

During the third quarter of 2023, we closed our manufacturing facility in Rock Island, Illinois.

Acquired in March of 2021 as a part of our acquisition of the performance and lifestyle footwear business of Honeywell International Inc, this facility primarily manufactured product for the Servus brand.

Following the sale of the Servus brand in the first quarter of 2023, the Rock Island facility was underutilized, prompting our decision to close the facility during the third quarter of 2023.

In 2023, we were also awarded a new multi-year contract with the U.S.

During the second quarter of 2024, we amended and restated our Original ABL Facility (as such term is defined in Note 10 - Long-Term Debt of our Consolidated Financial Statements) which resulted in a restated $175.0 million revolving credit facility and a new $50.0 million term facility.

The proceeds from this transaction were used to retire our existing senior secured term loan facility with TCW Asset Management Company, LLC as of April 26, 2024.

This transaction resulted in an expense of $2.6 million, consisting of a loss on extinguishment of term debt in the amount of $1.1 million and a $1.5 million prepayment penalty, which are included in Interest Expense and Other - net within the Consolidated Statements of Operations for the twelve months ended December 31, 2024.

See Note 10 - Long-Term Debt of our Consolidated Financial Statements for further information regarding our long-term debt.

In 2023, we were awarded a new multi-year contract with the U.S.

Military pursuant to which we will produce and ship a minimum number of pairs to the U.S.

Military through 2026, with an option to extend.

The first quarter of 2024 was the first full quarter in which shipments were made to the U.S.

Military under this multi-year contract.

The sales under this contract are included in our Contract Manufacturing segment.

We completed the sale of the NEOS brand during the third quarter of 2022.

The sale of NEOS inventory was recorded within net sales and cost of goods sold within the Consolidated Statements of Operations for the year ended December 31, 2022.

The gain on sale of the NEOS assets is recorded as a reduction of operating expenses within the Consolidated Statements of Operations for the year ended December 31, 2022.

During the first quarter of 2023, we divested the Servus brand.

The gain of approximately $1.3 million on the sale of the Servus brand was recorded within Interest Expense and Other - net in the Consolidated Statements of Operations for the year ended December 31, 2023.

The Servus brand was sold to allow us to focus on our more profitable core brands and allocate resources toward growth and development of opportunities with those brands moving forward.

During the third quarter of 2023, we closed our manufacturing facility in Rock Island, Illinois.

This facility primarily manufactured product for the Servus brand.

Following the sale of the Servus brand in the first quarter of 2023, the Rock Island facility operations were underutilized, prompting our decision to close the facility during the third quarter of 2023.

ECONOMIC CONDITIONS AND UNCERTAINTIES

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

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

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

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

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

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

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2024 FINANCIAL OVERVIEW

Net sales decreased 25.0% to $461.8 million

Gross margin increased 210 basis points to 38.7%

Operating income decreased 19.7% to $35.4 million

Net income decreased 49.1% to $10.4 million, or $1.41 per diluted share

Total debt, net of debt issuance costs, decreased 32.6% to $173.1 million

Inventory decreased 28.1% to $169.2 million

Cash provided by operating activities increased 285% to $54.5 million

We experienced a decline in sales of 25.0% to $461.8 million for the year ending December 31, 2023 compared to the year ending December 31, 2022, primarily attributable to our Wholesale segment.

The sales decline in our Wholesale segment was due to a challenging macroeconomic environment, coupled with our wholesale partners working through excess inventories.

Additionally, distribution challenges in 2021 led to delayed delivery of Fall 2021 inventory into the first half of 2022, creating a difficult year-over-year comparison for the first nine months of 2023.

While our 2023 performance was challenged by a difficult macroeconomic backdrop and a tough year-over-year comparison for our Wholesale segment, we experienced strong retail sell-through and increased performance of our own e-commerce websites, which partially offset the decrease in Wholesale sales.

During the year ending December 31, 2023, our gross margin improved 210 basis points to 38.7%.

The increase in gross margin for the year ending December 31, 2023 compared to the year ending December 31, 2022 was due to several factors.

First, higher Wholesale segment gross margins resulted from the realization of pricing actions taken the second half of 2022 and a reduction in inbound logistics costs.

Secondly, a greater proportion of Retail segment sales, which carry higher gross margins than our Wholesale and Contract Manufacturing segments, also contributed to the increase.

Operating income decreased to $35.4 million in 2023.

As a percentage of net sales, operating income was 7.7% in 2023 compared to 7.2% in 2022.

The increase in operating income as a percentage of net sales was attributed to reorganization changes made during 2023 in an effort to leverage top-line sales and decrease operating expenses.

As a percentage of net sales, our gross margin increased 210 basis points year over year while operating expenses only increased 160 basis points.

The overall increase in operating expenses as a percentage of net sales for full year 2023, when compared to the year ago period, was attributable to costs incurred prior to realizing the benefits from cost-savings reviews and operational efficiencies implemented by management through strategic initiatives, particularly in the first half of 2023.

This was partially offset by lower variable costs associated with lower net sales.

Additionally, operating expenses as a percentage of net sales decreased in the latter half of 2023 compared to the same period a year ago.

As of December 31, 2023 we held $4.5 million in cash and cash equivalents and our total indebtedness stood at $173.1 million, a reduction of $84.6 million or 32.6% when compared to December 31, 2022.

Of total debt paydown, $40.8 million of this reduction in indebtedness occurred in the fourth quarter of 2023.

This created a reduction in interest expense in the fourth quarter of 2023 over the prior period for the first time since incurring our debt, despite increased interest rates on both of our credit facilities.

The reduction in indebtedness was attributable to our strategic efforts to optimize inventory levels.

At the end of the fourth quarter, inventories totaled $169.2 million, reflecting a decrease of $66.2 million or 28.1% compared to $235.4 million a year ago.

Our business generated cash flows from operations of $73.6 million for the year ending December 31, 2023, an increase of 285%, from $19.1 million of cash flows from operations generated for the year ending December 31, 2022.

The 2023 cash flow from operations was primarily attributable to strategic inventory management, and improved collections on outstanding accounts receivable, partially offset by payments on our accounts payable.

In terms of cash flows from investing activities, we generated $17.3 million from the sale of the Servus brand, partially offset by $3.9 million in fixed assets purchases.

As noted above, cash used for financing activities included an $84.6 million debt paydown and $4.6 million dividend payment to our shareholders.

Despite facing challenges in 2023 due to a challenging macroeconomic backdrop and elevated inventory levels at several Wholesale partners, we believe the underlying fundamentals of our business and brand portfolio remain robust.

Operationally and financially, we believe we are well-positioned to make strategic investments in growth in future years.

Throughout 2023, our reported results showed improvement, driven by strong sell-through of our products, and ongoing improvements to overall inventory levels at the majority of our wholesale accounts, positively influencing our sell-in.

Our focus on product innovation, brand building, consumer connections and fulfillment capabilities, has continued to strengthen with these efforts starting to yield positive results in the second half of 2023.

Net sales decreased 1.7% to $453.8 million in 2024 compared to 2023;

Gross margin increased 70 basis points to 39.4% of net sales in 2024 versus 38.7% of net sales in 2023;

Income from operations in 2024 compared to 2023 decreased 12.1% to $31.1 million;

Interest expense decreased 19.8% to $17.0 million in 2024 over 2023;

Net income increased 9.6% to $11.4 million, or $1.52 per diluted share in 2024 compared to $10.4 million, or $1.41 per diluted share in 2023;

Total debt, net of debt issuance costs, decreased 25.7% to $128.7 million at December 31, 2024 compared to $173.1 million at December 31, 2023;

Inventory decreased 1.5% to $166.7 million at December 31, 2024 compared to $169.2 million at December 31, 2023.

During the twelve months ended December 31, 2024, we reported a decline in net sales compared to the year ended December 31, 2023, which was attributable to a decline in sales in our Wholesale reporting segment, partially offset by increases in sales in our Retail and Contract Manufacturing reporting segments.

The decline in sales in our Wholesale reporting segment was due to certain non-recurring sales in 2023, and Servus brand sales, which was divested in March 2023.

The increase in Retail sales was attributed to increased sales in our Lehigh CustomFit Platform as well as year-over-year growth in our e-Commerce business.

The increase in gross margin to 39.4 % of net sales in 2024 from 38.7% of net sales in 2023 was attributed to an increase in Wholesale gross margin of 190-basis points as well as an increase in Retail net sales as percentage of total net sales.

Our Retail reporting segment carries higher gross margins than both our Wholesale and Contract Manufacturing Reporting segments.

The increase was offset by a decrease in Retail gross margins as a percentage of net sales in 2024 compared to the prior year.

Operating income decreased 12.1% to $31.1 million for the year ended December 31, 2024 compared to $35.4 million for the year ended December 31, 2023.

The decrease in operating income was due to higher freight and logistics costs associated with higher Retail sales as well as higher marketing and other discretionary spending due to the pullback of spending in 2023.

Interest expense decreased 19.8% in 2024 compared to 2023 due to lower debt levels and lower interest rates resulting from the debt refinance that closed in April 2024.

Net income increased 9.6% to $11.4 million in 2024 from $10.4 million due to lower interest expense and lower tax expense in 2024 compared to that of 2023.

As of December 31, 2024, cash and cash equivalents were approximately $3.7 million and our total indebtedness, net of debt issuance costs, was approximately $128.7 million, a reduction of $44.4 million, or 25.7%, over our indebtedness at December 31, 2023.

Of total debt paydown, $21.7 million occurred in the fourth quarter of 2024.

Our strong sales in the second half of the year, coupled with additional cash on-hand resulting from lower interest rates and corresponding interest payments subsequent to the debt refinance in April 2024, provided excess cash flow that we were able to put towards debt repayments in the latter part of 2024.

Total inventory decreased 1.5%, or $2.5 million, to $166.7 million at December 31, 2024 compared to $169.2 million at December 31, 2023.

Our inventory on-hand decreased at December 31, 2024 by approximately $14.9 million versus the prior year, partially offset by an increase in in-transit inventory of approximately $12.6 million.

In 2024 and 2023, our business generated a positive cash flow from operating activities of $52.8 million and $73.6 million, respectively.

Generally, the cash provided from operations consists of changes in our working capital and is sufficient to fund operations in any given year.

Our positive cash flow in 2024 was offset by cash used in investing and financing activities of $3.0 million and $50.6 million, respectively, resulting in an overall decrease in cash of approximately $0.8 million in 2024.

For the year ending December 31, 2023, our positive cash flow from operations was enhanced by a positive cash flow from investing activities of $13.4 million, offset by cash used in financing activities of $88.2 million, resulting in an overall decrease in cash of approximately $1.2 million in 2023.

Excluding certain non-recurring sales in 2023, 2024 was a year of growth for Rocky from a net sales perspective.

This growth was primarily fueled by an increase in Retail sales, a combination of increases in sales in both our Lehigh CustomFit Platform and e-Commerce websites.

We invested more in marketing and other discretionary spending in 2024, creating a decrease in income from operations in 2024 compared to 2023.

Due to refinancing our long-term debt during 2024, which resulted in lower interest rates as well as lower debt levels, we achieved an increase in income before taxes in 2024 compared to that of 2023.

Analysis of Results of Operations

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Twelve Months Ended

($ in thousands)

Cost of goods sold

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Income from operations

Gross margin in 2023 was $178.6 million, or 38.7% of net sales, compared to $225.2 million, or 36.6% of net sales, in 2022.

The 210-basis point improvement was driven primarily by a 150-basis point improvement in Wholesale segment gross margins combined with a higher mix of Retail segment sales, which carry higher gross margins than the Wholesale and Contract Manufacturing segments.

Operating expenses were $143.2 million, or 31.0% of net sales, in 2023 compared to $181.2 million, or 29.4% of net sales, in 2022.

Net sales were slightly deleveraged in 2023 due to the divestures of our Servus and NEOS brands as well as elevated inventory levels at our retail partners within our Wholesale channel, resulting in a higher percentage of operating expenses of net sales in 2023 compared to 2022.

Income from operations in 2023 was $35.4 million, or 7.7% of net sales, compared to $44.0 million, or 7.2% of net sales, in 2022.

This increase was due to the increases in gross margin as a percentage of net sales noted above.

Net sales decreased $8.1 million or 1.7% for the twelve months ended December 31, 2024, due to a decrease in Wholesale net sales, partially offset by an increase in Retail and Contract Manufacturing net sales.

Gross margin in 2024 was 39.4% compared to 38.7% in 2023.

The increase in gross margin was attributed to an increase in both Wholesale and Contract Manufacturing gross margin as well as a higher mix of Retail segment net sales, which carry higher margins than our Wholesale and Contract Manufacturing segments.

Operating expenses increased $4.7 million to 32.6% of net sales in 2024 compared to 31.0% of net sales in 2023.

The increase in operating expenses was due to a $4.0 million impairment charge for the Muck trademark and an increase in outbound freight and other logistic costs associated with the increase in Retail sales.

See Note 7 - Goodwill and Other Intangible Assets of our Consolidated Financial Statements for additional information on the Muck trademark impairment.

Twelve Months Ended

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Total Net Sales

The decrease in Wholesale sales for the twelve months ended December 31, 2023 was due to elevated inventory levels at our retail partners within our Wholesale channel and a softer demand environment compared to the year ago period.

Furthermore, the twelve months ended December 31, 2023 included only three months of net sales from the Servus brand, which was divested in the first quarter of 2023 ( Note 4 ), compared to the year ago period including twelve months of net sales from the Servus brand and nine months of net sales from the NEOS brand, which was divested in the third quarter of 2022 ( Note 5 ).

Retail net sales for the twelve months ended December 31, 2023 increased due to strong growth in our direct-to-consumer e-commerce business.

We have enhanced our targeted marketing efforts, primarily through digital marketing, allowing us to increase brand awareness and engage more directly with consumers, which led to increased traffic on our branded websites throughout the year.

The decrease in Contract Manufacturing sales for the twelve months ended December 31, 2023 compared to the twelve months ended December 31, 2022 was due to the expiration of certain contracts with the U.S.

The decrease in Wholesale net sales for the twelve months ended December 31, 2024 was due to non-recurring sales that occurred during 2023 and are not expected to continue on an on-going basis.

These sales included temporarily elevated commercial military footwear sales to a single customer throughout 2023, Servus brand sales prior to its divestiture in March 2023, sales relating to the change to a distributor model in Canada in November 2023, and sales relating to the manufacturing of Servus product following the divestiture of the Servus brand.

Retail net sales for the twelve months ended December 31, 2024 increased due to growth in our Lehigh CustomFit Platform and our direct to consumer e-Commerce business.

The increase in net sales in our Lehigh CustomFit Platform was attributed to the completion of the realignment of our sales organization in the first quarter of 2024 which allowed us to expand our customer base and increase offerings to current customers.

The increase in sales under our direct to consumer e-Commerce business was due to increased targeted marketing efforts, primarily through digital marketing.

This led to increased brand awareness and allowed us to engage more directly with consumers, which resulted in increased traffic on our branded websites and increased sales compared to the prior year ago period.

The increase in Contract Manufacturing net sales for the twelve months ended December 31, 2024 was due to a multi-year contract awarded with the U.S.

Product Line Information - The following is supplemental information on net sales by product line for the years ended December 31:

($ in thousands)

Contract Manufacturing

Work footwear

Outdoor footwear

Duty and commercial military footwear

Military footwear

($ in thousands)

Contract Manufacturing

Work footwear

Outdoor footwear

Duty and commercial military footwear

Military footwear

The following information is presented on gross margin for the years ending December 31, 2024 and 2023:

Twelve Months Ended

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Total Margin $'s

The increase in Wholesale gross margin as a percentage of net sales for the twelve months ended December 31, 2023 compared to the year ago period was due to realization of pricing actions taken in 2022, as well as lower in-bound logistics costs compared to the year ago period.

Retail gross margins as a percentage of net sales decreased slightly for the twelve months ended December 31,

compared to the same period a year ago primarily due to the Lehigh business accounting for a larger percentage of Retail sales which carries lower margins.

Contract Manufacturing gross margin as a percentage of net sales decreased for the twelve months ended

due to certain private label contracts that carried lower margins.

The increase in Wholesale gross margin as a percentage of net sales for the twelve months ended December 31, 2024 compared to the twelve months ended December 31, 2023 was due to product mix as well as more favorable sourcing costs in 2024 compared to the prior year.

Additionally, we divested the Servus brand in March 2023, which carried lower gross margins than the rest of our product portfolio.

Retail gross margins as a percentage of net sales decreased for the twelve months ended

December 31, 2024

compared to the same year ago period due to increased promotional efforts across all of our retail channels in order to optimize our inventory levels.

Contract Manufacturing gross margin as a percentage of net sales increased for the twelve months ended

due to increased sales with the U.S.

Military which carried higher margins than private label sales.

Twelve Months Ended

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OPERATING EXPENSES:

Operating Expenses

General and administrative

Sales and marketing

Trademark impairment

Depreciation and amortization

Total Operating Expenses

% of Net Sales

The reduction in operating expenses for the twelve months ending December 31, 2023 was driven by lower out-bound freight expense and other variable expenses stemming from decreased sales volumes.

In addition, the decrease in operating expenses was primarily attributable to cost saving reviews and operational efficiencies achieved through strategic restructuring initiatives implemented over the past year.

The increase in operating expenses as a percentage of net sales for the twelve months ending December 31, 2024 was attributable to increased outbound freight and logistics costs associated with an increase in Retail sales as well as an increase in marketing, incentive compensation and other discretionary spending in 2024 compared to 2023.

Additionally, we recognized a $4.0 million non-cash impairment charge for the Muck trademark following our annual indefinite-lived intangibles impairment test performed in the fourth quarter of 2024.

See Note 7 - Goodwill and Other Intangible Assets of our Consolidated Financial Statements for additional information on the Muck trademark impairment.

Twelve Months Ended

($ in thousands)

INTEREST EXPENSE AND OTHER - NET:

Other (Expense) Income

The increase in other expenses is due to an increase in interest rates on the senior term loan and credit facility, partially offset by lower debt levels in 2023 compared with 2022.

Additionally, the gain of $1.3 million on the sale of the Servus brand that occurred in the first quarter of 2023 partially offset this increase.

INTEREST EXPENSE AND OTHER:

Interest expense

Loss on term loan extinguishment

Other income, net

Gain on sale of business

Total Interest Expense and Other

The decrease in interest expense was mainly attributed to lower interest rates achieved through our debt refinance completed in April 2024, as well as lower debt levels for the year ended December 31, 2024 compared to the year ago period .

The debt refinance resulted in $1.1 million loss on term loan extinguishment charge and a $1.5 million prepayment penalty which are included within Interest Expense and Other - net within the Consolidated Statements of Operations for the twelve months ended December 31, 2024.

See Note 10 - Long-Term Debt of our Consolidated Financial Statement for more information.

We completed the sale of Servus brand and related assets in March 2023 which resulted in a gain on sale of approximately $1.3 million for the year ended December 31, 2023.

Twelve Months Ended

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INCOME TAXES:

Income Tax (Benefit) Expense

Income Tax Expense

Effective Tax Rate

The increase in our effective tax rate for the twelve months ended December 31, 2023 compared to the same year ago period was driven primarily by a return to provision adjustment resulting from foreign tax credits recognized in the fourth quarter of 2023.

The effective tax rate for the twelve months ended December 31, 2024 was 19.0% compared to 26.3% for the twelve months ended December 31, 2023.

The decrease in our effective tax rate was due to a return to provision adjustment resulting from foreign tax credits recognized in the fourth quarter of 2023.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity have been our income from operations, cash provided by operating activities and borrowings under our credit facilities.

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

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

Our working capital fluctuates throughout the year as a result of our seasonal business cycle and business expansion, and is generally lowe st in the months of January through March of each year and highest during the months of May through October of each year.

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

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

Our working capital decreased to $186.6 million at December 31, 2023 , compared to $244.8 million at the end of the prior year primarily due to a decrease in inventory and accounts receivable offset by a decrease in accounts payable.

Our capital expenditures relate primarily to projects relating to our corporate offices, property, merchandising fixtures, molds and equipment associated with our manufacturing and distribution operations and for information technology.

Capital expenditures were $4.3 million for 2023 and $7.3 million in 2022.

Capital expenditures f or 2024 a re anticipated t o be approximately $5.5 million.

Our principal sources of liquidity is our income from operations, as well as access to the borrowing capacity under our ABL Facility.

We believe that we have sufficient liquidity to support our ongoing operations and to re-invest in our business to drive future growth.

As of December 31, 2024, we maintained cash and cash equivalents of $3.7 million and had $55.9 million of availability under our ABL Facility.

Our primary ongoing operating cash flow requirements are for inventory purchases and other working capital needs, capital expenditures, and payments on our credit facilities.

Our working capital consists primarily of trade receivables and inventory, offset by short-term debt and accounts payable.

Our working capital fluctuates throughout the year as a result of our seasonal business cycle and is generally lowest in the months of January through March of each year and highest during the months of May through October of each year.

Our cash generated from operations throughout the year is typically sufficient to fund our seasonal working capital requirements;

however, we have the ability to borrow on our ABL Facility as needed and as such its balance may fluctuate significantly throughout any given year.

In addition to our ABL Facility with outstanding borrowings of $95.9 million as of December 31, 2024, we also have a Term Facility with outstanding borrowings of $35.1 million as of December 31, 2024.

Our ABL Facility and Term Facility require us to maintain a minimum fixed charge coverage ratio, as defined in the agreement.

Additionally, the ABL Facility and Term Facility contain restrictions on the amount of dividend payments.

As of December 31, 2024, we were in compliance with the covenant and restrictions.

We may utilize portions of our excess cash to prepay certain amounts of long-term debt prior to maturity.

During the year ended December 31, 2024, we paid down a total of $44.2 million in debt.

Our capital expenditures relate primarily to investments in information technology, molds and equipment associated with our manufacturing and distribution operations, merchandising fixtures and projects related to our corporate offices.

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

Future minimum lease payments under non-cancelable operating leases are outlined in further detail in Note 11 of our Consolidated Financial Statements.

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

Our continued liquidity, however, is contingent upon future operating performance, cash flows and our ability to meet financial covenants under our credit facility.

For more information regarding our credit facilities please se

Cash Flows and Material Cash Requirements

Future minimum lease payments under non-cancelable operating leases are outlined in further detail in Note 11 - Leases of our Consolidated Financial Statements.

As of December 31, 2024, our material cash requirements from known contractual obligations and commitments relate primarily to our long-term debt and operating leases commitments.

See Note 10 - Long-Term Debt and Note 11 - Leases to the Consolidated Financial Statement for more information.

Based on our current expectations and forecasts of future earnings, we believe our cash generated from operations will provide sufficient liquidity to fund our operations and debt and lease obligations for the next twelve months and beyond.

The following table presents the key categories of our Consolidated Statement of Cash Flows:

Twelve Months Ended

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Operating Activities.

Cash provided by operating activities for the year ended December 31, 2023 was $73.6 million compared to $19.1 million for the year ended December 31, 2022.

Net c ash provided by operating activities for the year ended December 31, 2024 was $52.8 million compared to $73.6 million for the year ended December 31, 2023 .

Adjusting for non-cash items, net income provided a cash in-flow of $35.5 million and $22.3 million for the years ended December 31, 2024 and 2023 , respectively.

The net change in working capital and other assets and liabilities resulted in an increase to cash provided by operating activities of $51.3 million for the year ended December 31, 2023, compared to a decrease of $16.0 million for the year ended December 31, 2022.

During the year ended December 31, 2023, the net change in working capital was primarily impacted by a decrease in inventory and accounts receivable of $60.0 million and $18.2 million, respectively, partially offset by a decrease in accounts payable of $21.2 million.

The decrease in inventory during the year ended December 31, 2023 compared to the prior period was due to a concentrated effort to optimize inventory levels in 2023 through increased promotions aimed at selling discontinued inventory, lower production and purchasing.

The decrease in accounts receivable was due to collection on our outstanding accounts receivables throughout the year combined with lower sales.

The decrease in accounts payable was due to a decrease in our days payable outstanding year-over-year.

The net change in working capital and other assets and liabilities resulted in an increase to cash provided by operating activities of $17.2 million for the year ended December 31, 2024 , compared to an increase of $51.3 million for the year ended December 31, 2023 .

During the year ended December 31, 2024 , the net change in working capital was primarily impacted by an increase in accounts payable and accrued expenses of $7.7 million and $5.2 million, respectively.

The increase in accounts payable and accrued expenses during the year ended December 31, 2024 compared to the prior year was due to increased inventory purchases in the fourth quarter of 2024, compared to the fourth quarter of 2023.

The increase in inventory purchases also led to increased inventory in-transit at December 31, 2024 versus the year ago period and associated accrued duties and in-bound freight, which are included in accrued expenses and other liabilities on the Consolidated Balances Sheets at December 31, 2024 and 2023.

During the year ended December 31, 2023 inventory decreased $60.0 million, which was attributed to a concentrated effort to optimize inventory levels during 2023.

Investing Activities.

Cash provided by investing activities for the twelve months ended December 31, 2023 was primarily derived from the proceeds from sale of the Servus brand (see Note 4 ).

The principal use of net cash in 2022 was related to investments in molds and equipment associated with our manufacturing operations, investments in information technology and improvements made to our distribution facility.

Net c ash used in investing activities for the twelve months ended December 31, 2024 was primarily a result of purchases of fixed assets, specifically machinery and equipment.

Cash provided by investing activities for the twelve months ended December 31, 2023 was primarily derived from the proceeds from sale of the Servus brand.

See Note 3 - Sale of Servus Brand and Related Assets of our Consolidated Financial Statements.

Financing Activities.

Cash used in financing activities for the twelve months ended December 31, 2024 and 2023 was primarily related to payments on our revolving credit facility and term loan.

Our prior $7,500,000 share repurchase program expired on March 4, 2022.

F or additional information regarding this share repurchase p rogram, see Note 1 4 of our Consolidated Financial Statements.

We have not announced a new repurchase program since the expiration of the prior program.

Contractual Obligations and Commercial Commitments

The following table summarizes our contractual obligations at December 31, 2023 resulting from financial contracts and commitments.

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

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

Contractual Obligations at December 31, 2023:

($ in millions)

Less than 1 Year

Long-term debt (Note 10)

Long-Term Taxes payable

Minimum operating lease commitments (Note 11)

Contract Liabilities (Note 17)

Total contractual obligations

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

Any significant losses implicit in these contracts would be recognized in accordance with generally accepted accounting principles.

At December 31, 2023, no such losses existed.

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

With respect to environmental matters, costs are incurred pertaining to regulatory compliance.

Such costs have not been, and are not anticipated to become, material.

On February 24, 2025, we announced our new $7,500,000 share repurchase program.

F or additional information regarding this share repurchase p rogram, see Note 14 - Shareholder's Equity of our Consolidated Financial Statements.

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

See Note 21 of our Consolidated Financial Statements for further discussion of legal matters.

See Note 20 - Commitments and Contingencies of our Consolidated Financial Statements for further discussion of legal matters.

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

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements as of December 31, 2023.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Management believes that an understanding of these policies is important to an overall understanding of the Company's Consolidated Financial Statements.

Significant accounting policies are summarized in Note 1 to the Company's Consolidated Financial Statements.

Significant accounting policies are summarized in Note 1 - Basis of Presentation and Summary of Significant Accounting Policies of our Consolidated Financial Statements.

Revenue recognition

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

See N ote 1 and Note 17 of our Consolidated Financial Statements for additional information regarding revenues.

Allowance for Credit Losses

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

We evaluate the allowance for credit losses based on a review of current customer status and historical collection experience along with current and reasonable supportable forecasts of future economic conditions.

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

Sales returns and allowances

We record a reduction to gross sales based on estimated customer returns and allowances.

These reductions are influenced by historical experience based on customer returns and allowances.

The actual amount of sales returns and allowances realized may differ from our estimates.

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

Sales returns and allowances as a percentage of sales for the years ended December 31, 2023 and 2022 w ere 8.4% and 6.7%, respe ctively.

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

Historically, these loss provisions have not been significant as the vast majority of our inventories are considered saleable and we have been able to liquidate slow moving or obsolete inventories at amounts above cost through our factory outdoor gear stores or through various discounts to customers and e-commerce channels.

Should management encounter difficulties liquidating slow moving or obsolete inventories, additional provisions may be necessary.

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

See Note 6 of our Consolidated Financial Statements for additional information regarding inventories.

Revenue is recognized when the performance obligations under the terms of a contract with our customer are satisfied.

The performance obligation is satisfied, and revenue is recorded when control passes to the customer which is generally upon shipment to the customer or at the time of sale for our retail store customers.

Revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of our products, which is the net sales price.

The net sales price includes estimates of variable consideration for which reserves may be established.

Components of variable consideration include discounts and allowances, customer rebates, markdowns, and product returns.

These reserves are based on the amounts earned, or to be claimed, on the related sales of our products.

Elements of variable consideration including discounts and allowances and rebates are determined at contract inception and are reassessed at each reporting date, at a minimum, to reflect any change in the types of variable consideration offered to the customer.

We determine estimates of variable consideration based on evaluations of each type of variable consideration and customer contract, historical and anticipated trends, and current economic conditions.

Overall, these reserves reflect our best estimates of the amount of consideration to be earned on the related sales.

Actual amounts of consideration ultimately received may differ from our estimates.

If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net revenue and earnings in the period such variances become known.

Our estimated sales returns are based on historical customer return data and known or anticipated returns not yet received from customers.

Actual returns in any future period are inherently uncertain and thus may differ from estimates recorded.

If actual or expected future returns are significantly higher or lower than the established reserves, a reduction or increase to net revenues is recorded in the period in which the determination is made.

See Note 17 - Revenue of our Consolidated Financial Statements for additional information.

Inventories are stated at the lower of cost or net realizable value, on a first-in, first-out basis.

We reduce the carrying value of inventories to the lower of cost or net realizable value for excess and obsolete inventories based upon assumptions about future demand and market conditions.

If we estimate the net realizable value of our inventory is less than the cost of the inventory, we record an adjustment equal to the difference between the cost of the inventory and the estimated net realizable value.

The adjustment is recorded as a charge to cost of goods sold.

If changes in demand or market conditions result in reductions to the estimated net realizable value of our inventory below our previous estimate, we would further adjust the value of our inventory in the period in which we made such a determination.

Goodwill and Indefinite-Lived Intangibles

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For the market approach, we use the guideline public company method which relies upon valuation multiples derived from stock prices and enterprise values of publicly traded companies that are comparable to the reporting unit being evaluated.

The fair value of our trade names was determined based on the Income Approach using the Relief from Royalty Method.

The fair value of our trademarks was determined based on the income approach using the relief from royalty method.

This method requires us to estimate the future revenues for the related brands, the appropriate royalty rate, and the weighted average cost of capital.

After completing our annual impairment test for each reporting unit and our indefinite-lived intangible assets during the fourth quarter of 2023 and 2022, we concluded there was no impairment in either of these years.

We did not have any reporting units that were at risk of failing the first step of the goodwill impairment test.

The estimated fair values of the Wholesale reporting unit and the Retail reporting unit exceeded their carrying amounts at the date of testing by more than 20% for both 2023 and 2022.

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

We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance;

however, in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

For additional information see Note 13 of our Consolidated Financial Statements.

We did not recognize any impairment charges for goodwill during fiscal year 2024 or 2023.

During the fourth quarter of 2024, we recognized a $4.0 million impairment charge for the Muck trademark.

The charge is included within Operating Expenses within the Consolidated Statements of Operations for the twelve months ended December 31, 2024.

No impairment charges were recognized for the Company’s indefinite-lived intangible assets during fiscal year 2023.

Refer to Note 7 - Goodwill and Other Intangible Assets of our Consolidated Financial Statements for additional information on the Muck trademark impairment.

We are subject to taxation in the United States, as well as various state and foreign jurisdictions.

The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws.

Our interpretation of tax laws, regulations and policies could differ from how standard setting-bodies interpret them.

State, local or foreign jurisdictions may enact tax laws that could result in further changes to taxation and materially affect our financial position and results of operations.

On an interim basis, we estimate the annual effective tax rate and record a quarterly income tax provision in accordance with the projected annual rate.

As the year progresses, the estimate is refined based upon actual events and earnings by jurisdiction during the year.

This continual estimation process periodically results in a change to our expected effective tax rate for the year.

When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs.

RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS

Refer to Note 2 to Consolidated Financial Statements for new accounting pronouncements adopted during the current year and the expected impact of accounting pronouncements recently issued but not yet required to be adopted.

Refer to Note 2 - Accounting Standards Updates of our Consolidated Financial Statements for new accounting pronouncements adopted during the current year and the expected impact of accounting pronouncements recently issued but not yet required to be adopted.

To the extent the adoption of new accounting standards materially affects financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section of this MD&A and the Notes to Consolidated Financial Statements.

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Words such as "believe," "anticipate," "expect," "will," "may," "should," "intend," "plan," "estimate," "predict," "potential," "continue," "likely," "would," "could" and similar expressions are intended to identify forward-looking statements.

Investors are cautioned that all forward-looking statements involve risk and uncertainties including, without limitations, dependence on sales forecasts, changes in consumer demand, seasonality, impact of weather, competition, reliance on suppliers, risks inherent to international trade, changing retail trends, the loss or disruption of our manufacturing and distribution operations, cyber security breaches or disruption of our digital systems, fluctuations in foreign currency exchange rates, economic changes, as well as other factors set forth under the caption "Item 1A, Risk Factors" in this Annual Report on Form 10-K and other factors detailed from time to time in our filings with the Securities and Exchange Commission.

Risk Factors" in this Annual Report on Form 10-K and other factors detailed from time to time in our filings with the Securities and Exchange Commission.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis