ROCKY BRANDS, INC. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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 Muck, XTRATUF, Rocky, Durango, Georgia Boot, Lehigh, Ranger, and the licensed brand Michelin. Our portfolio of brands is organized into three reportable segments in which our product is distributed: Wholesale, Retail and Contract Manufacturing. The reportable segments are targeted around six distinct product lines: work, outdoor, western, duty, commercial military and military. We frequently experience significant seasonal fluctuations in our business as many of our footwear products and product lines are used by consumers in adverse weather conditions. Accordingly, average inventory levels have been highest during the second and third quarters of each year and sales have been highest in the last two quarters of the year. Our business is subject to a highly evolving and everchanging macroeconomic environment, including changes in tariffs, taxes and industry changes. We continue to monitor changes in policy impacting global trade, including tariffs, which have been dynamic, unpredictable, and subject to ongoing modification. Beginning in early 2025, pursuant to the Inte rnational Emergency Economic Powers Act ("IEEPA"), significant additional tariffs were imposed on products imported from various countries, including those countries where we primarily source our products. In February 2026, the U.S. Supreme Court invalidated certain tariffs imposed under the IEEPA and in March 2026, the U.S. Court of International Trade ordered the U.S. Customs and Border Protection Agency ("CBA") to suspend collection of the invalidated tariffs and to establish a process to refund IEEPA tariffs previously collected. As a result of this ruling, we may be eligible to receive refunds of tariffs previously paid on qualifying imports. We have paid approximately $20.5 million in tariffs for products that were subject to the invalidated IEEPA tariffs. Beginning in April 2026, we began filing refund claims with CBP related to eligible IEPPA tariff payments made. There can be no guarantee that a refund, if received, will equal the full amount of IEEPA tariffs paid, and any refund may be subject to further legal and regulatory developments. As a result of the uncertainty, we have not recorded a receivable related to the potential recovery of IEEPA tariffs paid as of March 31, 2026. Additionally, following the Supreme Court's ruling invalidating the IEEPA tariffs, the U.S. imposed a temporary 10% general tariff under Section 122 of the Trade Act of 1974. There remains substantial uncertainty regarding the potential changes or pauses to existing and newly announced tariffs, tariff levels, and whether additional tariffs or other reciprocal actions may be imposed, modified, or suspended. We have implemented, and plan to continue to implement, as needed, various mitigation strategies including adjusting the prices of our products, adjusting the countries from which we source our products and further leveraging our own manufacturing facilities in the Dominican Republic and Puerto Rico. Proposed or enacted tariffs and changes to U.S. trading policies may be restituted, paused, removed, or changed at any time and to the extent we are unable to successfully mitigate any negative resulting impacts it could adversely affect our business, financial condition, and results of operation. During the first quarter of 2026, we experienced an increase in net sales over the first quarter of 2025. This increase was attributable to an increase in net sales across all three of our reportable segments, Wholesale, Retail, and Contact Manufacturing. We continue to benefit from the strength and growth of our Retail segment with the third consecutive quarter of growth in our Retail segment net sales. Growth in our Retail segment was driven by increases across all of our Retail selling channels. The increase in net sales on our e-commerce websites and third-party marketplace platforms was driven by a continued focus on our digital marketing and expansion into new marketplaces. The increase in net sales in our Lehigh CustomFit business was attributed to expanding our customer base and product offerings. We saw a decrease in gross margin as a percentage of sales in our Wholesale and Retail segments as a result of increased product costs due to elevated tariff costs recognized during the quarter partially offset by tariff-related price increases. Our operating expenses as a percentage of net sales for the three months ending March 31, 2026 was consistent with that of the prior year period. Interest expense declined for the three months ending March 31, 2026 compared to the same period in 2025 due to continued debt repayments over the past twelve months, which have reduced the overall outstanding principal balances, as well as a decrease in interest rates. The decrease in inventory as of March 31, 2026 compared to March 31, 2025 was primarily due to our efforts to optimize our inventory position by reducing our discontinued inventory levels throughout the year. FIRST QUARTER 2026 FINANCIAL HIGHLIGHTS COMPARED TO FIRST QUARTER 2025 ● Net sales increased 9.1% to $124.4 million ● Gross margin decreased 470-basis points to 36.5% ● Inventories decreased 1.6% to $172.6 million ● Total debt decreased 5.0% to $122.2 million RESULTS OF OPERATIONS The following tables set forth, for the periods indicated, information derived from our Unaudited Condensed Consolidated Financial Statements. The discussion that follows each table should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements as well as our Annual Report on Form 10-K for the year ended December 31, 2025. Three Months Ended March 31, ($ in thousands) 2026 2025 Net sales $ 124,401 $ 114,073 Cost of goods sold 78,967 67,065 Gross margin 45,434 47,008 Operating expenses 41,799 38,302 Income from operations $ 3,635 $ 8,706 Net sales increased to $124.4 million in the first quarter of 2026 compared to $114.1 million in the first quarter of 2025. The increase in net sales in the current year quarter compared to the prior year quarter was due to an increase in net sales across all of our reportable segments: Wholesale, Retail, and Contract Manufacturing. Gross margin in the first quarter of 2026 was $45.4 million, or 36.5% of net sales, compared to $47.0 million, or 41.2% of net sales, in the first quarter of 2025. The 470-basis point decrease in gross margin was primarily driven by increased sourcing variances, mainly higher tariffs, in the first quarter of 2026 compared to the first quarter of 2025. Operating expenses for the first quarter of 2026 wer e $41.8 million, or 33.6% of net sales, compared to $38.3 million, or 33.6% of net sales, for the first quarter of 2025. Income from operations for the first quarter of 2026 was $3.6 million, or 2.9% of net sales, compared to $8.7 million, or 7.6% of net sales, in the year ago period. The decrease in income from operations was primarily driven by the decrease in gross margin for the three months ended March 31, 2026, compared to the year ago period. 14 Table of Contents Three Months Ended March 31, 2026 compared to Three Months Ended March 31, 2025 Three Months Ended March 31, ($ in thousands) 2026 2025 Inc./ (Dec.) Inc./ (Dec.) NET SALES: Wholesale $ 78,391 $ 74,784 $ 3,607 4.8 % Retail 42,699 36,641 6,058 16.5 Contract Manufacturing 3,311 2,648 663 25.0 Total Net Sales $ 124,401 $ 114,073 $ 10,328 9.1 % Wholesale net sales for the three months ended March 31, 2026 were $78.4 million compared to $74.8 million for the three months ended March 31, 2025. The increase in Wholesale net sales was due to increased demand across several key styles and brands coupled with a tariff-related price increase. Additionally, as part of a strategic initiative, we continued to build upon the lifestyle component of our outdoor category to broaden our distribution and consumer reach. Retail net sales for the three months ended March 31, 2026 were $42.7 million compared to $36.6 million for the three months ended March 31, 2025. The increase was attributed to increases in our owned e-commerce website net sales, our Lehigh CustomFit business, and third-party marketplace net sales . We upgraded our e-commerce platform during the third quarter of 2025 and have increased our investments in digital advertising, driving more traffic to our website and increasing our net sales in the first quarter of 2026 compared to the prior year period. We experienced an increase in our Lehigh CustomFit business as we continue to expand our customer base and increase product offerings. The increase in third-party marketplace platforms was attributed to increased presence within the marketplace space as well as price increases. Contract Manufacturing net sales for the three months ended March 31, 2026 were $3.3 million compared to $2.7 million for the three months ended March 31, 2025. The increase in Contract Manufacturing net sales was due to increased sales to the U.S. Military. 15 Table of Contents Three Months Ended March 31, ($ in thousands) 2026 2025 Inc./ (Dec.) GROSS MARGIN: Wholesale Margin $'s $ 26,960 $ 30,110 $ (3,150 ) Margin % 34.4 % 40.3 % (5.9 )% Retail Margin $'s $ 18,171 $ 16,745 $ 1,426 Margin % 42.6 % 45.7 % (3.1 )% Contract Manufacturing Margin $'s $ 303 $ 153 $ 150 Margin % 9.2 % 5.8 % 3.3 % Total Margin $'s $ 45,434 $ 47,008 $ (1,574 ) Margin % 36.5 % 41.2 % (4.7 )% Who lesale gross margin for the three months ended March 31, 2026 was $27.0 million, or 34.4% of net sales, compared to $30.1 million, or 40.3% of net sales, for the three months ended March 31, 2025 . The lower Wholesale gross margin in the first quarter of 2026 compared to the first quarter 2025 was due to higher tariff-related costs offset by tariff-related price increases and mitigation actions taken over the past twelve months to diversify our sourcing and leverage our own manufacturing facilities. The unfavorable tariff costs were also partially offset by an on-goin g favorable shift in our branded sales mix, with our rubber boot brands delivering stronger growth relative to the rest of the brands in our portfolio. Our rubber boots products typically yield higher gross margins than other products within our brand portfolio. Retail gross margin for the three months ended March 31, 2026 was $18.2 million, or 42.6% of net sales, compared to $16.7 million, or 45.7% of net sales, for the three months ended March 31, 2025. The decrease in Retail gross margin as a percentage of net sales was attributable to higher tariff-related costs offset by price increases. The unfavorable tariff costs were also partially offset by an on-going favorable shift in our branded sales mix, with our rubber boot brands delivering stronger growth relative to the rest of the brands in our portfolio. Our rubber boots product typically yield higher gross margins than other products within our brand portfolio. Contract Manufacturing gross margin for the three months ended March 31, 2026 was $0.3 million, or 9.2% of net sales, compared to $0.2 million, or 5.8% of net sales, for the three months ended March 31, 2025 . The increase in gross margin was driven by increased economies of scale at our Puerto Rico manufacturing facility as we increased production there. Three Months Ended March 31, ($ in thousands) 2026 2025 Inc./ (Dec.) Inc./ (Dec.) OPERATING EXPENSES $ 41,799 $ 38,302 $ 3,497 9.1 % % of Net Sales 33.6 % 33.6 % 0.0 % Operating expenses for the three months ended March 31, 2026 and March 31, 2025 were $41.8 million and $38.3 million, respectively, or 33.6% of sales. The increase in operating expenses was due to higher logistics costs associated with the increase in Retail sales. Three Months Ended March 31, ($ in thousands) 2026 2025 Inc./ (Dec.) Inc./ (Dec.) INTEREST EXPENSE AND OTHER - net $ (2,034 ) $ (2,356 ) $ 322 (13.7 )% Interest Expense and Other - net for the three months ended March 31, 2026 was $2.0 million compared to $2.4 million in the year ago period. The decrease in interest expense was due to lower debt levels as well as a decrease in interest rates. Three Months Ended March 31, ($ in thousands) 2026 2025 Inc./ (Dec.) Inc./ (Dec.) INCOME TAXES: Income Tax Expense $ 342 $ 1,409 $ (1,067 ) (75.7 )% Effective Tax Rate 21.4 % 22.2 % (0.8 )% The decrease in our effective tax rate in the first quarter of 2026 compared to the year ago period was primarily due to the mix of earnings between the United States and our international subsidiaries. 16 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Overview Our principal sources of liquidity are our income from operations, as well as access to the borrowing capacity under our ABL Facility. We beli eve that we have sufficient liquidity to support our ongoing operations and to re-invest in our business to drive future growth. As of March 31, 2026 , we maintained cash and cash equivalents of $1.7 million and had $48.5 million of availability un der 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 $99.1 million as of March 31, 2026, we also have a Term Facility with outstanding borrowings of $24.7 million as of March 31, 2026 . Our ABL Facility and Term Facility require us to maintain a minimum fixed charge coverage ratio, as defined in the ABL Agreement. Additionally, the ABL Facility and Term Facility contain restrictions on the amount of dividend payments and the amount of share repurchases of common stock. As of March 31, 2026, we were in compliance with such covenants and restrictions under the ABL Facility and Term Facility. We may utilize portions of our excess cash to prepay certain amounts of long-term debt prior to maturity. Our capital expenditures primarily relate to investments in information technology, molds and equipment associated with our manufacturing and distribution operations, merchandising fixtures, and projects related to our corporate offices. In 2025, we purchased land for the future expansion of our distribution center in Logan, Ohio and as such it is possible that a significant portion of future capital expenditures may relate to this expansion. We lease certain machinery, equipment, and manufacturing facilities under operating leases that generally provide for renewal options. As of March 31, 2026, our material cash requirements from known contractual obligations and commitments relate primarily to our long-term debt and operating leases commitments. See Note 9 - Long-Term Debt to the Unaudited Condensed Consolidated Financial Statement for more information. Based on our current expectations and forecasts of future earnings, we believe our cash generated from operations will provide sufficient liquidity to fund our operations and debt and lease obligations for the next twelve months and beyond. Cash Flows Three Months Ended March 31, ($ in millions) 2026 2025 Operating activities $ 1.9 $ 1.2 Investing activities (1.1 ) (0.7 ) Financing activities (2.0 ) (1.7 ) Net change in cash and cash equivalents $ (1.2 ) $ (1.2 ) Operating Activities. Net cash provided by operating activities was $1.9 million and $1.2 million for the three months ended March 31, 2026 and 2025, respectively. Adjusting for noncash items, net income provided a cash in-flow of $5.5 million and $8.8 million for the three months ended March 31, 2026 and 2025 , respectively. The net change in working capital and other assets and liabilities resulted in cash used by operating activities of $3.6 million and $7.6 million for the three months ended March 31, 2026 and 2025, respectively. 17 Table of Contents During the three months ended March 31, 2026, the net change in working capital was primarily impacted by an increase in accounts payable and a decrease in accrued expenses. The increase in accounts payable resulted in a source of cash of $6.8 million and the decrease in accrued expenses resulted in a use of cash of $7.0 million. The increase in accounts payable for the three months ended March 31, 2026 was a result of the timing of payments to suppliers and an increase in inventory purchases in the first quarter of 2026 compared to fourth quarter of 2025. The decrease in accrued expenses for the three months ended March 31, 2026 was a result of the tariff reductions imposed during the first quarter of 2026. During the three months ended March 31, 2025 , the net change in working capital was primarily impacted by an increase in inventory and accounts payable. An increase in inventory resulted in a use of cash of $8.8 million and an increase in accounts payable resulted in a source of cash of $5.6 million. The increase in inventory and accounts payable was the result of a strategic move to accelerate inventory receipts in March to avoid higher tariffs that did not go into effect until April 2025. Investing Activities. Net cash used in investing activities for the three months ended March 31, 2026 and 2025 was $1.1 million and $0.7 million, respectively. The use of cash in both periods was a result of capital expenditures for our manufacturing operations and information technology. Financing Activities. Net cash used in financing activities for the three months ended March 31, 2026 and 2025 was $2.0 million and $1.7 million, respectively. The net use of cash for both periods primarily related to the payment of dividends of $1.2 million for the three months ended March 31, 2026 and 2025 . On February 24, 2026, we announced a share repurchase program of up to $7,500,000 of the Company's outstanding common stock, no par value per share. We are contingently liable with respect to lawsuits, taxes and various other matters that routinely arise in the normal course of business. See Note 14 - Commitments and Contingencies of our Unaudited Condensed 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of the Company’s Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from the Company’s estimates. However, actual results may differ materially from these estimates under different assumptions or conditions. We have identified the critical accounting policies used in determining estimates and assumptions in the amounts reported in our Management Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2025 . SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995 This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our and management’s intent, belief, and expectations, such as statements concerning our future profitability and our operating and growth strategy. Words such as “believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,” “estimate,” “predict,” “potential,” “continue,” “likely,” “would,” “could” and similar expressions are intended to identify forward-looking statements. Investors are cautioned that 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, increases or changes in duties and tariffs in countries of import and export, changing retail trends, the loss or disruption of our manufacturing and distribution operations, cybersecurity 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 our Annual Report on Form 10- K for the year ended December 31, 2025 (filed March 11, 2026) 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. Therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We assume no obligation to update any forward-looking statements. 18 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable to smaller reporting companies.