# ROCKY BRANDS, INC. (RCKY) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ROCKY BRANDS, INC.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/895456/000143774925008025/rcky20241231_10k.htm
Accession: 0001437749-25-008025
Filing date: 2025-03-17
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/RCKY/
All MD&A years: /company/RCKY/mda/
Previous year: /company/RCKY/mda/fy2023/ (FY 2023)
Next year: /company/RCKY/mda/fy2025/ (FY 2025)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 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 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. The forward-looking statements in this section and other parts of this Annual Report on Form 10-K involve risks and uncertainties including statements regarding our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995" below. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements made by or on behalf of the Company.

18

Table of Contents

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, 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: 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 
$48.00
for our value priced products to
$655.00
 for our premium products. As a 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.

Our products are distributed through three distinct 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., 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. Our Retail business includes direct sales of our products to consumers through our business-to-business web platform, e-Commerce websites, third-party marketplaces and our Rocky Outdoor Gear Store. Our Contract Manufacturing segment includes sales to the U.S. Military, private label sales and any sales to customers in which we are contracted to manufacture or source a specific footwear product for a customer. 

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.

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

Our growth strategy is founded substantially on the expansion of our brands into new footwear and apparel markets. New products that we introduce may not be successful with consumers or one or more of our brands may fall out of favor with consumers. 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 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. Our development schedules for new products are difficult to predict and are subject to change as a result of shifting priorities in response to consumer preferences and competing products. If we are not able to efficiently manufacture newly developed products in quantities sufficient to support retail distribution, we may not be able to recoup our investment in the development of new products. Failure to gain market acceptance for new products that we introduce could impede our growth, reduce our profits, adversely affect the image of our brands, erode our competitive position, and result in long term harm to our business.

As the macroeconomic environment is continuously evolving, we are aware that global trends, such as inflationary pressures, are weakening consumer sentiment, negatively impacting consumer spending, and creating differing traffic patterns across channels. These conditions have led to elevated inventory levels in certain markets and an increased promotional environment. We have also experienced higher interest rates which have resulted in increased borrowing costs. There is ongoing uncertainty surrounding the global economy and macroeconomic environment, which we expect to continue and could potentially cause disruption and near-term challenges for our business.

We continue to monitor pressures on the global supply chain, which have shifted the timing of shipments across our brands, resulting in increased inventory levels outpacing our sales growth. However, we have seen improvements in transit lead times and related freight costs compared to the prior period, which have had a positive impact on the results of our operations through 2024.

2024 FINANCIAL OVERVIEW

[[GREPCENT_TABLE]]
[["\u25cf","Net sales decreased 1.7% to $453.8 million in 2024 compared to 2023;"],["\u25cf","Gross margin increased 70 basis points to 39.4% of net sales in 2024 versus 38.7% of net sales in 2023;"],["\u25cf","Income from operations in 2024 compared to 2023 decreased 12.1% to $31.1 million;"],["\u25cf","Interest expense decreased 19.8% to $17.0 million in 2024 over 2023;"]]
[[/GREPCENT_TABLE]]

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Table of Contents

[[GREPCENT_TABLE]]
[["\u25cf","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;"],["\u25cf","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; and"],["\u25cf","Inventory decreased 1.5% to $166.7 million at December 31, 2024 compared to $169.2 million at December 31, 2023."]]
[[/GREPCENT_TABLE]]

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 

The following table sets forth Consolidated Statements of Operations data as percentages of total net sales:

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended"],["","","December 31,"],["($ in thousands)","","2024","","","2023"],["NET SALES:","","$","453,772","","","$","461,833"],["Cost of goods sold","","","274,762","","","","283,235"],["Gross margin","","","179,010","","","","178,598"],["Operating expenses","","","147,944","","","","143,226"],["Income from operations","","$","31,066","","","$","35,372"]]
[[/GREPCENT_TABLE]]

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.

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended"],["","","December 31,"],["($ in thousands)","","2024","","","2023","","","Inc./ (Dec.)","","","Inc./ (Dec.)"],["NET SALES:"],["Wholesale","","$","313,340","","","$","337,019","","","$","(23,679",")","","","(7.0",")%"],["Retail","","","126,868","","","","116,960","","","","9,908","","","","8.5"],["Contract Manufacturing","","","13,564","","","","7,854","","","","5,710","","","","72.7"],["Total Net Sales","","$","453,772","","","$","461,833","","","$","(8,061",")","","","(1.7",")%"]]
[[/GREPCENT_TABLE]]

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Table of Contents

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. Military.

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

[[GREPCENT_TABLE]]
[["","","2024"],["($ in thousands)","","Wholesale","","","Retail","","","Contract Manufacturing","","","Total","","","% of Sales"],["Work footwear","","$","106,187","","","$","81,873","","","$","2,289","","","$","190,349","","","","41.9","%"],["Outdoor footwear","","","100,872","","","","29,350","","","","-","","","","130,222","","","","28.7","%"],["Western","","","74,040","","","","8,599","","","","-","","","","82,639","","","","18.2","%"],["Duty and commercial military footwear","","","31,476","","","","3,071","","","","-","","","","34,547","","","","7.6","%"],["Military footwear","","","-","","","","-","","","","11,275","","","","11,275","","","","2.5","%"],["Other","","","765","","","","3,975","","","","-","","","","4,740","","","","1.0","%"],["Total","","$","313,340","","","$","126,868","","","$","13,564","","","$","453,772","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","2023"],["($ in thousands)","","Wholesale","","","Retail","","","Contract Manufacturing","","","Total","","","% of Sales"],["Work footwear","","$","122,872","","","$","75,369","","","$","(145",")","","$","198,096","","","","42.9","%"],["Outdoor footwear","","","102,710","","","","27,714","","","","-","","","","130,424","","","","28.2","%"],["Western","","","63,108","","","","7,266","","","","-","","","","70,374","","","","15.2","%"],["Duty and commercial military footwear","","","47,222","","","","3,260","","","","-","","","","50,482","","","","10.9","%"],["Military footwear","","","-","","","","-","","","","7,999","","","","7,999","","","","1.7","%"],["Other","","","1,107","","","","3,351","","","","-","","","","4,458","","","","1.0","%"],["Total","","$","337,019","","","$","116,960","","","$","7,854","","","$","461,833","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended"],["","","December 31,"],["($ in thousands)","","2024","","","2023","","","Inc./ (Dec.)"],["GROSS MARGIN:"],["Wholesale Margin $'s","","$","117,245","","","$","119,485","","","$","(2,240",")"],["Margin %","","","37.4","%","","","35.5","%","","","1.9","%"],["Retail Margin $'s","","$","60,153","","","$","58,391","","","$","1,762"],["Margin %","","","47.4","%","","","49.9","%","","","(2.5",")%"],["Contract Manufacturing Margin $'s","","$","1,612","","","$","722","","","$","890"],["Margin %","","","11.9","%","","","9.2","%","","","2.7","%"],["Total Margin $'s","","$","179,010","","","$","178,598","","","$","412"],["Margin %","","","39.4","%","","","38.7","%","","","0.7","%"]]
[[/GREPCENT_TABLE]]

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
2024
compared to
2023

 due to increased sales with the U.S. Military which carried higher margins than private label sales.

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[[GREPCENT_TABLE]]
[["","","Twelve Months Ended"],["","","December 31,"],["($ in thousands)","","2024","","","2023","","","Inc./ (Dec.)","","","Inc./ (Dec.)"],["OPERATING EXPENSES:"],["General and administrative","","$","109,354","","","$","110,677","","","$","(1,323",")","","","(1.2",")%"],["Sales and marketing","","","27,997","","","","25,464","","","","2,533","","","","9.9"],["Trademark impairment","","","4,000","","","","-","","","","4,000","","","","100.0"],["Depreciation and amortization","","","6,593","","","","7,085","","","","(492",")","","","(6.9",")%"],["Total Operating Expenses","","$","147,944","","","$","143,226","","","$","4,718","","","","3.3","%"],["% of Net Sales","","","32.6","%","","","31.0","%","","","1.6","%"]]
[[/GREPCENT_TABLE]]

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.

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended"],["","","December 31,"],["($ in thousands)","","2024","","","2023","","","Inc./ (Dec.)","","","Inc./ (Dec.)"],["INTEREST EXPENSE AND OTHER:"],["Interest expense","","$","16,119","","","$","22,904","","","$","(6,785",")","","","(29.6",")%"],["Loss on term loan extinguishment","","","1,111","","","","-","","","","1,111","","","","(100.0",")"],["Other income, net","","","(222",")","","","(345",")","","","123","","","","(35.7",")"],["Gain on sale of business","","","-","","","","(1,341",")","","","1,341","","","","(100.0",")%"],["Total Interest Expense and Other","","$","17,008","","","$","21,218","","","$","4,210","","","","(19.8",")%"]]
[[/GREPCENT_TABLE]]

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.

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended"],["","","December 31,"],["($ in thousands)","","2024","","","2023","","","Inc./ (Dec.)","","","Inc./ (Dec.)"],["INCOME TAXES:"],["Income Tax Expense","","$","2,671","","","$","3,728","","","$","(1,057",")","","","(28.4",")%"],["Effective Tax Rate","","","19.0","%","","","26.3","%","","","(7.3",")%"]]
[[/GREPCENT_TABLE]]

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

Overview

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 - Leases of our Consolidated Financial Statements.

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Table of Contents

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:

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended"],["","","December 31,"],["($ in millions)","","2024","","","2023"],["Operating activities","","$","52.8","","","$","73.6"],["Investing activities","","","(3.0",")","","","13.4"],["Financing activities","","","(50.6",")","","","(88.2",")"],["Net change in cash and cash equivalents","","$","(0.8",")","","$","(1.2",")"]]
[[/GREPCENT_TABLE]]

Operating Activities. Net cash 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 $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. Net cash 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. 

On February 24, 2025, we announced our new $7,500,000 share repurchase program. For additional information regarding this share repurchase program, 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 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.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. ("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 judgements 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. The Company has identified the following critical accounting policies used in determining estimates and assumptions in the amounts reported. 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 - Basis of Presentation and Summary of Significant Accounting Policies of our Consolidated Financial Statements.

Revenue recognition

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

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

Goodwill and intangible assets deemed to have indefinite lives are not amortized but are evaluated for impairment annually or whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of the assets below their carrying amount. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, and unanticipated competitive activities.

We test goodwill and indefinite-lived intangible assets for impairment annually in the fourth quarter each fiscal year by quantitatively comparing the fair values of the Wholesale and Retail reporting units and indefinite-lived intangibles to their carrying amounts. There was no goodwill allocated to our Contract Manufacturing reporting unit.

For goodwill, we estimated the fair value of each reporting unit by weighing the results of the income and market approaches. These valuation approaches consider a number of factors that include, but are not limited to, prospective financial information, growth rates, discount rates, and comparable multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic factors and future profitability of our business. When performing the income approach, we utilize the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income, and other factors (such as working capital and capital expenditures). The discount rates used were based on a weighted-average cost of capital determined from relevant market comparisons and take into consideration the risk and nature of the respective reporting unit's cash flows. 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 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.

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.

Income taxes

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.

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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 - 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.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report, including Management’s Discussion and Analysis of Financial Conditions 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, 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 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. 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.