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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2024

OR

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

 

Commission File Number: 001-34382

 

 

ROCKY BRANDS, INC.

(Exact name of Registrant as specified in its charter)

 

Ohio

 

No. 31-1364046

(State or other jurisdiction of incorporation or organization)

 

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

   

39 East Canal Street, Nelsonville, Ohio 45764

(Address of principal executive offices, including zip code)

   

Registrant's telephone number, including area code: (740) 7539100

 

Title of class

 

Trading symbol

 

Name of exchange on which registered

Common Stock – No Par Value

 

RCKY

 

Nasdaq

 

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in 12b-2 of the Exchange Act.

 

 ☐ Large accelerated filer☒ Accelerated filer
   
 ☐ Non-accelerated filer Smaller reporting company
   
   Emerging growth company

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No ☒

 

There were 7,453,814 shares of the Registrant's Common Stock outstanding on November 1, 2024.

 

 

 

 
 

TABLE OF CONTENTS

 

     
     
   

Page

PART I

Financial Information

 

Item 1.

Financial Statements  
 

Condensed Consolidated Balance Sheets as of September 30, 2024 (Unaudited), December 31, 2023, and September 30, 2023 (Unaudited)

2

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2024 and 2023 (Unaudited)

3

 

Condensed Consolidated Statements of Shareholders Equity for the Three and Nine Months Ended September 30, 2024 and 2023 (Unaudited)

4

 

Condensed Consolidated Statements of Cash Flows for the NineMonths Ended September 30, 2024 and 2023 (Unaudited)

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

21

Item 4.

Controls and Procedures

21

 

 

 
PART II Other Information

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

21

Item 5.  Other Information 21

Item 6.

Exhibits

22

SIGNATURES 

23

 

1

  

 

PART I  FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

(Unaudited)

 

  

September 30,

  

December 31,

  

September 30,

 
  

2024

  

2023

  

2023

 

ASSETS:

            

CURRENT ASSETS:

            

Cash and cash equivalents

 $3,705  $4,470  $4,240 

Trade receivables – net

  77,130   77,028   97,844 

Contract receivables

  -   927   2,990 

Other receivables

  177   1,933   2,207 

Inventories – net

  171,847   169,201   194,734 

Income tax receivable

  -   1,253   2,445 

Prepaid expenses

  5,205   3,361   4,985 

Total current assets

  258,064   258,173   309,445 

LEASED ASSETS

  6,705   7,809   7,982 

PROPERTY, PLANT & EQUIPMENT – net

  50,380   51,976   53,124 

GOODWILL

  47,844   47,844   47,844 

IDENTIFIED INTANGIBLES – net

  110,521   112,618   113,321 

OTHER ASSETS

  1,503   965   1,015 

TOTAL ASSETS

 $475,017  $479,385  $532,731 
             

LIABILITIES AND SHAREHOLDERS' EQUITY:

            

CURRENT LIABILITIES:

            

Accounts payable

 $63,148  $49,840  $62,733 

Contract liabilities

  -   927   2,990 

Current portion of long-term debt

  8,361   2,650   2,704 

Accrued expenses and other liabilities

  20,845   18,112   21,275 

Total current liabilities

  92,354   71,529   89,702 

LONG-TERM DEBT

  141,929   170,480   211,190 

LONG-TERM TAXES PAYABLE

  -   169   169 

LONG-TERM LEASE

  4,232   5,461   5,715 

DEFERRED INCOME TAXES

  7,475   7,475   8,006 

DEFERRED LIABILITIES

  777   716   1,179 

TOTAL LIABILITIES

  246,767   255,830   315,961 

SHAREHOLDERS' EQUITY:

            

Common stock, no par value;

            

25,000,000 shares authorized; issued and outstanding September 30, 2024 - 7,449,020; December 31, 2023 - 7,412,480; September 30, 2023 - 7,366,201

  73,537   71,973   70,757 

Retained earnings

  154,713   151,582   146,013 

Total shareholders' equity

  228,250   223,555   216,770 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $475,017  $479,385  $532,731 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

2

 

 

 

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2024

   

2023

   

2024

   

2023

 

NET SALES

  $ 114,554     $ 125,614     $ 325,718     $ 335,881  

COST OF GOODS SOLD

    70,908       79,076       199,886       208,012  

GROSS MARGIN

    43,646       46,538       125,832       127,869  
                                 

OPERATING EXPENSES

    33,575       32,259       103,271       107,233  
                                 

INCOME FROM OPERATIONS

    10,071       14,279       22,561       20,636  
                                 

INTEREST EXPENSE AND OTHER – net

    (3,180 )     (5,649 )     (13,964 )     (15,943 )
                                 

INCOME BEFORE INCOME TAX EXPENSE

    6,891       8,630       8,597       4,693  
                                 

INCOME TAX EXPENSE

    1,612       1,803       2,011       980  
                                 

NET INCOME

  $ 5,279     $ 6,827     $ 6,586     $ 3,713  
                                 

INCOME PER SHARE

                               

Basic

  $ 0.71     $ 0.93     $ 0.89     $ 0.50  

Diluted

  $ 0.70     $ 0.93     $ 0.88     $ 0.50  
                                 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

                               
                                 

Basic

    7,449       7,366       7,432       7,355  

Diluted

    7,503       7,375       7,479       7,374  

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

3

 

 

 

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders Equity

(In thousands, except per share amounts)

(Unaudited)

 

  

Common Stock and

         
  

Additional Paid-in Capital

      

Total

 
  

Shares

      

Retained

  

Shareholders'

 
  

Outstanding

  

Amount

  

Earnings

  

Equity

 
                 

BALANCE - December 31, 2022

  7,339  $69,752  $145,721  $215,473 
                 

NINE MONTHS ENDED SEPTEMBER 30, 2023

                

Net loss

        $(398) $(398)

Dividends paid on common stock ($0.155 per share)

         (1,141)  (1,141)

Stock issued for options exercised, including tax benefits

  1  $8   -   8 

Stock compensation expense

  7   347   -   347 

BALANCE - March 31, 2023

  7,347  $70,107  $144,182  $214,289 
                 

Net loss

        $(2,715) $(2,715)

Dividends paid on common stock ($0.155 per share)

         (1,139)  (1,139)

Stock compensation expense

  7  $293   -   293 

BALANCE - June 30, 2023

  7,354  $70,400  $140,328  $210,728 
                 

Net income

        $6,827  $6,827 

Dividends paid on common stock ($0.155 per share)

         (1,142)  (1,142)

Stock issued for options exercised, including tax benefits

  4  $75   -   75 

Stock compensation expense

  8   282   -   282 

BALANCE - September 30, 2023

  7,366  $70,757  $146,013  $216,770 
                 

BALANCE - December 31, 2023

  7,412  $71,973  $151,582  $223,555 
                 

NINE MONTHS ENDED SEPTEMBER 30, 2024

                

Net income

        $2,550  $2,550 

Dividends paid on common stock ($0.155 per share)

         (1,149)  (1,149)

Stock compensation expense

  5  $339   -   339 

BALANCE - March 31, 2024

  7,417  $72,312  $152,983  $225,295 
                 

Net loss

        $(1,243) $(1,243)

Dividends paid on common stock ($0.155 per share)

         (1,151)  (1,151)

Stock issued for options exercised, including tax benefits

  -  $599   -   599 

Stock compensation expense

  6   312   -   312 

BALANCE - June 30, 2024

  7,423  $73,223  $150,589  $223,812 
                 

Net income

        $5,279  $5,279 

Dividends paid on common stock ($0.155 per share)

         (1,155)  (1,155)

Stock compensation expense

  26  $314   -   314 

BALANCE - September 30, 2024

 $7,449  $73,537  $154,713  $228,250 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

4

 

 

 

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

Nine Months Ended

 
   

September 30,

 
   

2024

   

2023

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 6,586     $ 3,713  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    7,805       8,251  

Noncash lease expense

    1,943       -  

Loss on term loan extinguishment

    1,111       -  

Provision for bad debts

    1,172       526  

Stock compensation expense

    965       922  

Amortization of debt issuance costs and loan fees

    454       640  

Loss on disposal of assets

    -       143  

Gain on sale of business

    -       (1,341 )

Change in assets and liabilities:

               

Receivables

    (1,217 )     (3,015 )

Contract receivables

    927       (2,990 )

Inventories

    (2,646 )     34,502  

Other current assets

    (1,843 )     (918 )

Other assets

    (131 )     2,959  

Accounts payable

    12,363       (8,396 )

Operating lease liability

    (1,931 )     -  

Accrued and other liabilities

    2,150       (3,315 )

Income taxes

    1,591       (3,538 )

Contract liabilities

    (927 )     2,990  

Net cash provided by operating activities

    28,372       31,133  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchase of fixed assets

    (3,170 )     (2,931 )

Proceeds from sale of business

    1,700       17,300  

Net cash (used in) provided by investing activities

    (1,470 )     14,369  
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds from revolving credit facility

    128,394       50,496  

Repayments of revolving credit facility

    (118,713 )     (66,400 )

Proceeds from long-term debt

    50,000       -  

Repayments of long-term debt

    (82,205 )     (27,738 )

Payment of debt issuance costs and loan fees

    (2,287 )     -  

Proceeds from stock options

    599       83  

Dividends paid on common stock

    (3,455 )     (3,422 )

Net cash used in financing activities

    (27,667 )     (46,981 )
                 

DECREASE IN CASH AND CASH EQUIVALENTS

    (765 )     (1,479 )
                 

CASH AND CASH EQUIVALENTS:

               

BEGINNING OF PERIOD

    4,470       5,719  

END OF PERIOD

  $ 3,705     $

4,240

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

5

 

Rocky Brands, Inc. and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

 


 

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

We are a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a portfolio of well recognized brand names including Rocky, The Original Muck Boot Company ("Muck"), Georgia Boot, Durango, XTRATUF, Lehigh, 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. In addition, as part of our strategy of outfitting consumers from head-to-toe, we market complementary branded apparel and accessories that we believe leverage the strength and positioning of each of our brands.

 

The accompanying Unaudited Condensed Consolidated Financial Statements reflect all adjustments that are necessary for a fair presentation of the financial results. All such adjustments reflected in the Unaudited Condensed Consolidated Financial Statements are considered to be of normal and recurring nature. The results of operations for the three and nine months ended September 30, 2024 and 2023 are not necessarily indicative of the results to be expected for the whole year. The  December 31, 2023 Unaudited Condensed Consolidated Balance Sheet data was derived from the audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). This Quarterly Report on Form 10-Q should be read in connection with our Annual Report on Form 10-K for the year ended  December 31, 2023, which includes all disclosures required by GAAP.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassifications

 

We have reclassified certain amounts in Note 9 - Accrued Expenses and Other Liabilities to conform to current period presentation.

 

 

2. ACCOUNTING STANDARDS UPDATES

 

Recently Issued Accounting Pronouncements

 

Rocky Brands, Inc. is currently evaluating the impact of certain ASUs on its Unaudited Condensed Consolidated Financial Statements:

 

Standard

 

Description

 

Anticipated Adoption Periods

 

Effect on Consolidated Financial Statements

ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures

 

This pronouncement requires expanded disclosures about an entity’s reportable segments, including more enhanced information about a reportable segment’s expenses, interim segment profit or loss, and how an entity’s chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocating resources.

 

Fiscal year ending December 31, 2024

 

The Company is still assessing the impact of the new accounting standard but does not expect the adoption of this standard to have a material impact on its financial statements.

ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures

 

This pronouncement requires expanded income tax disclosures primarily related to an entity's effective tax rate reconciliation and income taxes paid.

 

Q1 2025

 

The Company is still assessing the impact of the new accounting standard but does not expect the adoption of this standard to have a material impact on its financial statements.

 

In addition to the recently issued accounting pronouncements, the SEC recently issued its final rule regarding climate change disclosures. We are evaluating the impact this final rule will have on our Unaudited Condensed Consolidated Financial Statements. No other new accounting pronouncement issued or effective during the period had, or is expected to have, a material impact on our Unaudited Condensed Consolidated Financial Statements.

 

6

 

 

3. FAIR VALUE

 

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

 

 

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

 

 

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

 

 

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

 

The fair values of cash and cash equivalents, receivables, and payables approximate their carrying values because of the short-term nature of these instruments. Receivables consist primarily of amounts due from our customers, net of allowances, and expected insurance recoveries. The carrying amounts of our long-term credit facility and other short-term financing obligations also approximate fair value, as they are comparable to the available financing in the marketplace during the year. The fair value of our credit facilities is categorized as Level 2. The Company does not currently have any Level 3 assets or liabilities.

 

We hold assets and liabilities in a separate trust in connection with deferred compensation plans. The deferred compensation assets are classified as trading securities within other assets and the deferred compensation liabilities are classified within deferred liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheet. The fair value of these assets is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).

 

 

4. SALE OF SERVUS BRAND AND RELATED ASSETS

 

On March 30, 2023, we completed the sale of the Servus brand and related assets to PQ Footwear, LLC and Petroquim S.R.L. (collectively, the "Buyer"). Total consideration for this transaction was approximately $19.0 million, of which $17.3 million was received at closing. The remaining $1.7 million was received during the nine months ended September 30, 2024. The sale of the Servus brand included the sale of inventory, fixed assets, customer relationships and tradenames, all of which related to our Wholesale segment. We recorded a gain on the sale of Servus of approximately $1.3 million which is recorded within Interest Expense and Other - net on the accompanying Unaudited Condensed Consolidated Statement of Operations for the nine months ended September 30, 2023.

 

 

5. REVENUE

 

Nature of Performance Obligations

 

Our products are distributed through three distinct channels, which represent our business segments: Wholesale, Retail and Contract Manufacturing. In our Wholesale business, we distribute our products through a wide range of distribution channels representing over 10,000 retail store locations in the U.S., Canada, 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.

 

Significant Accounting Policies and Judgments

 

Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied; this generally occurs at a point in time when our product ships to the customer, which is when the transfer of control passes to the customer. 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 are established. Components of variable consideration include discounts and allowances, customer rebates, markdowns, chargebacks, 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.

 

7

 

Trade receivables represent our right to unconditional payment.

 

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

 

Current contract liabilities are performance obligations that we expect to satisfy or relieve within the next twelve months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancellable contracts before the transfer of goods or services to the customer has occurred. Our contract liability represents unconditional obligations to provide goods under non-cancellable contracts with the U.S. Military and other customers.

 

As of September 30, 2024, there are no contract receivable or contract liability balances outstanding.

 

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

 

Taxes assessed by a governmental authority that are both imposed on, and concurrent with, a specific revenue producing transaction that are collected from customers are excluded from revenue.

 

Costs associated with our manufacturer’s warranty are recognized as expense when the products are sold.

 

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

 

Contract Balances

 

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

 

   

September 30,

   

December 31,

   

September 30,

 

($ in thousands)

 

2024

   

2023

   

2023

 

Contract liabilities

  $ -     $ 927     $ 2,990  

 

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

 

($ in thousands)

 

Contract liabilities

 

Balance, December 31, 2023

  $ 927  

Non-cancelable contracts with customers entered into during the period

    -  

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

    (927 )

Balance, September 30, 2024

  $ -  

 

Disaggregation of Revenue

 

All revenues are recognized at a point in time when control of our products pass to the customer at point of shipment or point of sale for retail customers. Because all revenues are recognized at a point in time and are disaggregated by channel, our segment disclosures are consistent with disaggregation requirements. See Note 14 - Segment Information for segment disclosures.

 

 

6. TRADE RECEIVABLES

 

Trade receivables are presented net of the related allowance for credit losses of approximately $1.1 million, $1.8 million and $2.1 million at September 30, 2024 December 31, 2023 and  September 30, 2023, respectively. We calculate the allowance based on historical experience, the age of the receivables, receivable insurance status, and identification of customer accounts that are likely to prove difficult to collect due to various criteria including pending bankruptcy. However, estimates of the allowance in any future period are inherently uncertain and actual allowances may differ from these estimates. If actual or expected future allowances were significantly greater or less than established reserves, a reduction or increase to bad debt expense would be recorded in the period this determination was made. Our credit policy generally provides that trade receivables will be deemed uncollectible and written-off once we have pursued all reasonable efforts to collect on the account.

  

8

  
 

7. INVENTORY

 

Inventories are comprised of the following:

 

   

September 30,

   

December 31,

   

September 30,

 

($ in thousands)

 

2024

   

2023

   

2023

 

Raw materials

  $ 17,196     $ 16,774     $ 16,700  

Work-in-process

    929       912       1,292  

Finished goods

    153,722       151,515       176,742  

Total

  $ 171,847     $ 169,201     $ 194,734  

 

The asset associated with our returns reserve included within inventories was approximately $0.9 million, $0.8 million and $1.0 million at September 30, 2024, December 31, 2023 and September 30, 2023, respectively.

 

 

8. GOODWILL & IDENTIFIED INTANGIBLE ASSETS

 

There was no change in goodwill during the nine months ended September 30, 2024.

 

Intangible assets other than goodwill at the respective balance sheet dates consisted of the following:

 

  September 30, 2024 
  

Gross

  

Accumulated

  

Carrying

 

($ in thousands)

 

Amount

  

Amortization

  

Amount

 

Indefinite-lived intangible assets

            

Trademarks

 $78,654      $78,654 

Intangible assets subject to amortization

            

Patents

  895  $(859)  36 

Customer relationships

  41,659   (9,828)  31,831 

Total Intangible assets other than goodwill

 $121,208  $(10,687) $110,521 

 

  December 31, 2023 
  

Gross

  

Accumulated

  

Carrying

 

($ in thousands)

 Amount  Amortization  Amount 

Indefinite-lived intangible assets

            

Trademarks

 $78,654      $78,654 

Intangible assets subject to amortization

            

Patents

  895  $(845)  50 

Customer relationships

  41,659   (7,745)  33,914 

Total Intangible assets other than goodwill

 $121,208  $(8,590) $112,618 

 

  September 30, 2023 
  

Gross

  

Accumulated

  

Carrying

 

($ in thousands)

 Amount  Amortization  Amount 

Indefinite-lived intangible assets

            

Trademarks

 $78,659      $78,659 

Intangible assets subject to amortization

            

Patents

  895  $(841)  54 

Customer relationships

  41,659   (7,051)  34,608 

Total Intangible assets other than goodwill

 $121,213  $(7,892) $113,321 

 

 

9

 

The weighted average life of patents and customer relationships is 2.7 years and 11.5 years, respectively.

 

Amortization expense for intangible assets subject to amortization for each of the three months ended September 30, 2024 and 2023 was $0.7 million. Amortization expense for intangible assets subject to amortization for the nine months ended September 30, 2024 and 2023 was $2.1 million and $2.2 million, respectively.

 

As of September 30, 2024, a schedule of approximate expected remaining amortization expense related to intangible assets for the years ending December 31 is as follows:

 

  

Amortization

 

($ in thousands)

 

Expense

 

2024

 $698 

2025

  2,790 

2026

  2,788 

2027

  2,785 

2028

  2,781 

2029

  2,779 

2030+

  17,246 

Total

 $31,867 

 

 

 

9. ACCRUED EXPENSES AND OTHER LIABILTIES

 

Amounts reported in "Accrued expenses and other liabilities" within the accompanying Unaudited Condensed Consolidated Balance Sheets were:

 

   

September 30,

   

December 31,

   

September 30,

 

($ in thousands)

 

2024

   

2023

   

2023

 

Accrued Expenses and other liabilities:

                       

Accrued duties

  $ 7,183     $ 5,440     $ 6,395  

Salaries and wages

    2,925       1,204       2,685  

Operating lease liability

    2,765       2,679       2,556  

Returns liability

    1,631       -       -  

Accrued freight

    1,474       2,284       2,707  

Accrued advertising

    1,082       1,877       1,386  

Commissions

    638       904       823  

Income taxes payable

    507       -       -  

Taxes - other

    440       925       832  

Accrued interest

    -       2,104       2,280  

Other

    2,200       695       1,611  

Total accrued expenses and other liabilities

  $ 20,845     $ 18,112     $ 21,275  

 

 

10.LONG-TERM DEBT

 

On April 26, 2024, we refinanced our existing debt by amending and restating our credit agreement with Bank of America, N.A., as agent, sole lead arranger and sole bookrunner and other lenders party thereto (the "ABL Agreement"). The ABL Agreement consists of a $175.0 million asset-based lending credit facility (the "ABL Facility") and a $50.0 million term loan facility (the "Term Facility"). The ABL Agreement is collateralized by a first-lien on substantially all of the Company's domestic assets. The ABL Facility includes a separate first in, last out (FILO) tranche, which allows the Company to borrow at higher advance rates on eligible accounts receivables and inventory balances. As of  September 30, 2024, we had borrowing capacity of $50.1 million under the ABL Facility. The Term Facility provides for monthly principal payments until the date of maturity, at which date the remaining principal balance is due.

 

10

 

This transaction resulted in a $2.6 million expense within Interest Expense and Other - net in the accompanying Unaudited Combined Condensed Statements of Operations, consisting of a $1.1 million loss on term loan extinguishment and a $1.5 million term loan prepayment penalty for the nine months ended  September 30, 2024. The $1.1 million loss on term loan extinguishment is included as a noncash adjustment to net income and the $1.5 million prepayment penalty is included within Repayments of long-term debt in the accompanying Unaudited Combined Condensed Statements of Cash Flows for the nine months ended  September 30, 2024.

 

Loans under the ABL agreement bear interest at a variable rate equal to either (i) the Base Rate (as calculated in the ABL Agreement) or (ii) Term SOFR (as calculated in the ABL Agreement), plus in each case an interest margin determined by the Company's average daily availability as a percentage of the aggregate amount of revolving commitments for revolving loans and term loans, with a range of Base Rate margins and term SOFR margins, as set forth of the following chart: 

 

Revolver Pricing Level(1)

 

Average Availability as a Percentage of Commitments

 

Term SOFR Term Loan

   

Base Rate Term Loan

   

Term SOFR Revolver Loan

   

Base Rate Revolver Loan

   

Term SOFR FILO Loan

   

Base Rate FILO Loan

 

I

 

> 66.7%

    2.75 %     1.50 %     1.25 %     0.00 %     1.75 %     0.50 %

II

 

>33.3% and < or equal to 66.7%

    3.00 %     1.50 %     1.50 %     0.00 %     2.00 %     0.50 %

III

 

< or equal to 33.3%

    3.25 %     1.75 %     1.75 %     0.25 %     2.25 %     0.75 %

 

(1Until September 30, 2024, Level III applied. 

 

In connection with the ABL Agreement, we paid certain fees that were capitalized and will be amortized over the life of such agreement. 

 

Current and long-term debt under the ABL Agreement consisted of the following: 

 

  

September 30,

 

($ in thousands)

 

2024

 

Term Facility that matures in 2029 with an effective interest rate of 8.82%

 $47,213 

ABL Facility that matures in 2029:

    

SOFR borrowings with an effective interest rate of 6.76%

  105,000 

Prime borrowings with an effective interest rate of 8.47%

  470 

Total debt

  152,683 

Less: Unamortized debt issuance costs

  (2,393)

Total debt, net of debt issuance costs

  150,290 

Less: Debt maturing within one year

  (8,361)

Long-term debt

 $141,929 

 

A schedule of debt payments for the next five years is as follows:

 

 

Debt Payment

($ in thousands)

Schedule

2024

$2,090

2025

 8,361

2026

 8,361

2027

 8,361

2028

 8,361

2029

 117,149

Total

 152,683

 

Credit Facility Covenants

 

Our ABL Facility and Term Facility require us to maintain a minimum fixed charge coverage ratio, as defined in the agreement. As of September 30, 2024, we were in compliance with all credit facility covenants. The ABL Facility and Term Facility also contain restrictions on the amount of dividend payments. As of September 30, 2024, the Company was in compliance with the amounts paid on dividends in accordance with our debt facilities.

 

Retired Term Debt

 

On  March 15, 2021, we entered into a senior secured term loan facility with TCW Asset Management Company, LLC ("TCW"), as agent, for the lenders party thereto in the amount of $130.0 million (the "TCW Term Facility"). The TCW Term Facility provided for quarterly payments of principal and bore interest of LIBOR plus 7.00% through  June 30, 2021. After that date, interest was assessed quarterly based on our total leverage ratio. The total leverage ratio was calculated as (a) Total Debt to (b) EBITDA. If our total leverage ratio was greater than or equal to 4.00, the effective interest rate would have been SOFR plus 7.75% (or at our option, Prime Rate plus 6.75%). If our total leverage ratio was less than 4.00 but greater than or equal to 3.50, the effective interest rate would have been SOFR plus 7.50% (or at our option, Prime Rate plus 6.50%). If our total leverage ratio was less than 3.50 but greater than 3.00, the effective interest rate would have been SOFR plus 7.00% (or at our option, Prime Rate plus 6.00%). If our total leverage ratio was less than 3.00, the effective interest rate would have been SOFR plus 6.50% (or at our option, Prime Rate plus 5.50%). The TCW Term Facility also had a SOFR floor rate of 1.00%. In  June 2022, we entered into a second amendment with TCW to further amend the TCW Term Facility to consent to the modifications in our borrowing capacity under the Original ABL Facility as described below, and to adjust certain pricing and prepayment terms, among other things. The second amendment also modified the interest index to provide the use of SOFR to calculate interest rather than LIBOR. The effective interest rate was increased to SOFR plus 7.50% through  November 2022. In  November 2022, the TCW Term Facility was amended to increase the effective interest rate to SOFR plus 7.00% until  June 2023 and to provide certain EBITDA adjustments with respect to financial covenants, among other things. In  May 2023, we entered into a fourth amendment to the TCW Term Facility to provide certain EBITDA adjustments in respect of the financial covenants, adjust the method to calculate total debt, continue certain pricing terms, extend certain prepayment terms, and pay such lenders certain amendment fees, among other things. In  October 2023, we entered into a sixth amendment to the TCW Term Facility to provide certain EBITDA adjustments in respect of the financial covenants, adjust the performance pricing grid, adjust the total leverage ratio periodically through  June 30, 2025, among other things.

 

11

 

The TCW Term Facility was collateralized by a second-lien on accounts receivable, inventory, cash and related assets and a first-lien on substantially all other assets. The TCW Term Facility was replaced by the Term Facility that was part of the ABL Agreement in April 2024.

 

On  March 15, 2021, we also entered into a senior secured asset-based credit facility (the "Original ABL Facility") with Bank of America, N.A. as agent, for the lenders party thereto. The Original ABL Facility provided a senior secured asset-based revolving credit facility up to a principal amount of $150.0 million, which included a sub-limit for the issuance of letters of credit up to $5.0 million. The Original ABL Facility would be increased up to an additional $50.0 million at the borrowers’ request and the lenders’ option, subject to customary conditions. In  June 2022, we further amended the Original ABL Facility to temporarily increase our borrowing capacity to $200.0 million through  December 31, 2022, which thereafter was reduced to $175.0 million. In  November 2022, we entered into a third amendment to the Original ABL Facility to provide certain EBITDA adjustments with respect to our financial covenant. The Original ABL Facility included a separate first in, last out (FILO) tranche, which allowed us to borrow at higher advance rates on eligible accounts receivables and inventory balances. In  October 2023, we entered into a fifth amendment to the Original ABL Facility to provide certain EBITDA adjustments with respect to our financial covenant. 

 

The Original ABL Facility was collateralized by a first-lien on accounts receivable, inventory, cash and related assets and a second-lien on substantially all other assets. The Original ABL Facility was replaced with the ABL Facility that was part of the ABL Agreement in April 2024. Interest on the Original ABL Facility was based on the amount available to be borrowed as set forth on the following chart:

 

Revolver Pricing Level

 

Average Availability as a Percentage of Commitments

 

Base Rate

   

Term SOFR Loan

   

Base Rate for FILO

   

Term SOFR FILO Loans

 

I

 

> 66.7%

    0.00 %     1.25 %     0.50 %     1.75 %

II

 

>33.3% and < or equal to 66.7%

    0.00 %     1.50 %     0.50 %     2.00 %

III

 

< or equal to 33.3%

    0.25 %     1.75 %     0.75 %     2.25 %

 

In connection with the TCW Term Facility and the Original ABL Facility, we had to pay certain fees that were capitalized and amortized over the life of each respective loan. In addition, the Original ABL Facility required us to pay an annual collateral management fee in the amount of $75,000 due on each anniversary of the issuance date, until it matured.

 

Current and long-term debt under the Original ABL Facility and TCW Term Facility consisted of the following:

 

   

December 31,

   

September 30,

 

($ in thousands)

 

2023

   

2023

 

TCW Term Facility refinanced in April 2024 with an effective interest rate of 13.20% as of December 31, 2023 and 12.77% as of September 30, 2023

  $ 77,932     $ 88,594  

Original ABL Facility amended and restated in April 2024:

               

SOFR borrowings with an effective interest rate of 7.31% and 7.25% as of December 31, 2023 and September 30, 2023, respectively

    83,144       124,660  

Prime borrowings with an effective interest rate of 8.75% as of and December 31, 2023 and September 30, 2023

    13,938       2,737  

Total debt

    175,014       215,991  

Less: Unamortized debt issuance costs

    (1,884 )     (2,097 )

Total debt, net of debt issuance costs

    173,130       213,894  

Less: Debt maturing within one year

    (2,650 )     (2,704 )

Long-term debt

  $ 170,480     $ 211,190  

 

Retired Credit Facility Covenants

 

The TCW Term Facility contained restrictive covenants which required us to maintain a maximum total leverage ratio and a minimum fixed charge coverage ratio, as defined in the TCW Term Facility agreement. The Original ABL Facility contained a restrictive covenant which required us to maintain a fixed charge coverage ratio upon a triggering event taking place (as defined in the Original ABL Facility). During the three months ended September 30, 2023, we were in compliance with all credit facility covenants.

 

The TCW Term Facility and the Original ABL Facility also contained restrictions on the amount of dividend payments.

 

We were in compliance with all TCW Term Facility and Original ABL Facility Agreement covenants through April 26, 2024, the date on which we refinanced such debt.

 

 

11. TAXES

 

The effective tax rate for the three and nine months ended September 30, 2024 and 2023 was 23.4% and 20.9%, respectively. The effective tax rate used for interim reporting purposes is based on management’s best estimate of factors impacting the effective tax rate for the full fiscal year and includes the impact of discrete items recognized in the quarter. There can be no assurance that the effective tax rate estimated for interim financial reporting purposes will approximate the effective tax rate determined at fiscal year-end.

 

The Company files income tax returns in the U.S. for federal, state, and local purposes, and in certain foreign jurisdictions. The Company's tax years 2019 through 2023 remain open to examination by most taxing authorities.

 

Our policy is to accrue interest and penalties on any uncertain tax position as a component of income tax expense. No such expenses were recognized during the three and nine months ended September 30, 2024 and 2023. We do not believe there will be any material changes in our uncertain tax positions over the next 12 months.

 

12

 
 

12. EARNINGS PER SHARE 

 

Basic earnings per share ("EPS") is computed by dividing net income applicable to common shareholders by the weighted average number of common shares outstanding during each period. The diluted EPS computation includes common share equivalents, when dilutive.

 

A reconciliation of the shares used in the basic and diluted income per common share computation for the three and nine months ended September 30, 2024 and 2023 is as follows:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(shares in thousands)

 

2024

   

2023

   

2024

   

2023

 
                                 

Basic - weighted average shares outstanding

    7,449       7,366       7,432       7,355  

Dilutive restricted share units

    26       3       22       5  

Dilutive stock options

    28       6       25       14  

Diluted - weighted average shares outstanding

    7,503       7,375       7,479       7,374  

Anti-dilutive securities

    65       262       103       262  

 

 

13. SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental cash flow information for the nine months ended September 30, 2024 and 2023 is as follows:

 

    Nine Months Ended  
    September 30,  

($ in thousands)

 

2024

   

2023

 
                 

Interest paid

  $ 13,376     $ 10,133  
                 

Federal, state, and local income taxes paid, net

  $ 226     $ 4,661  
                 

Property, plant, and equipment noncash purchases in accounts payable

  $ 944     $ 942  
                 

Right-of-use assets obtained in exchange for operating lease liabilities, net of terminations

  $ 862     $ -  
                 

  

 

14. SEGMENT INFORMATION

 

Reportable Segments - We have identified three reportable segments: Wholesale, Retail and Contract Manufacturing.

 

Wholesale. In our Wholesale segment, our products are offered in over 10,000 retail locations representing a wide range of distribution channels in the U.S., Canada, U.K. and other international markets, mainly in Europe. These distribution channels vary by product line and target market and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores, specialty retailers and online retailers.

 

Retail. In our Retail segment, we market directly to consumers through our Lehigh business-to-business including direct sales and through our CustomFit websites, consumer e-commerce websites, third-party marketplaces and our Rocky Outdoor Gear Store. Through our outdoor gear store, we generally sell first quality or discontinued products in addition to a limited amount of factory damaged goods, which typically carry lower gross margins.

 

Contract Manufacturing. In our Contract Manufacturing segment, we include sales to the U.S. Military, private label sales and any sales to customers in which we are contracted to manufacture or source a specific footwear product for a customer.

 

Net sales to foreign countries represented approximately 4.8% and 7.5% of net sales for the three months ended September 30, 2024 and 2023, respectively. Net sales to foreign countries represented approximately 3.2% and 5.5% of net sales for the nine months ended September 30, 2024 and 2023, respectively.

 

For segment reporting purposes, management uses gross margin to evaluate segment performance and allocate resources. Operating expenses such as warehousing, distribution, marketing and other key activities supporting our operations are integrated to maximize efficiency and productivity; therefore, we do not include these expenses within our segment results, but instead review them at the consolidated level.

 

13

 
The following is a summary of segment results for the Wholesale, Retail and Contract Manufacturing segments for the  three and nine months ended September 30, 2024 and 2023 .
 
   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

($ in thousands)

 

2024

   

2023

   

2024

   

2023

 

NET SALES:

                               

Wholesale

  $ 84,033     $ 99,716     $ 232,082     $ 251,228  

Retail

    26,771       24,523       83,288       79,114  

Contract Manufacturing

    3,750       1,375       10,348       5,539  

Total Net Sales

  $ 114,554     $ 125,614     $ 325,718     $ 335,881  
                                 

GROSS MARGIN:

                               

Wholesale

  $ 31,514     $ 34,599     $ 85,977     $ 89,084  

Retail

    11,683       11,781       38,719       38,379  

Contract Manufacturing

    449       158       1,136       406  

Total Gross Margin

  $ 43,646     $ 46,538     $ 125,832     $ 127,869  

 

Segment asset information is not prepared or used to assess segment performance.

 

15. COMMITMENTS AND CONTINGENCIES 

 

Gain Contingency

 

In June 2022, we became aware of a misclassification of Harmonized Tariff Schedule (HTS) codes filed with the U.S. Customs and Border Protection (U.S. Customs) on certain products imported into the U.S. during 2021 and 2022 associated with brands acquired through an acquisition in the first quarter of 2021. As a result of the misclassification of HTS codes on these products, we believe that we have paid duties in excess of the expected amount due. We have the potential to recover the total amount of overpaid duties resulting in an estimated potential refund of approximately $7.7 million, of which we have received $5.1 million to date. No refunds were received for the nine months ended September 30, 2024 and $1.9 million in refunds were received during the nine months ended September 30, 2023. We are accounting for these post summary corrections as a gain contingency, and as such have not recorded these potential refunds within the accompanying Unaudited Condensed Consolidated Balance Sheet due to uncertainty of collection. Refunds received will be recognized as a reduction to the cost of goods sold when, and if, the refunds are received.

 
14

    
 

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

 

OVERVIEW

 

During the first nine months of 2024, we amended and restated our Original ABL Facility 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 Unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2024. See Note 10 - Long Term Debt to the Unaudited Condensed Consolidated Financial Statements for further information regarding our long-term debt.

 

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 Unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2023. Following the sale of the Servus brand, we manufactured Servus product on behalf of the buyer, pursuant to a transition services agreement. These sales were recorded within our Contract Manufacturing reporting segment and are not expected to recur on an ongoing basis. 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. 

 

In 2023, we were also 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 the option to extend. The sales under this contract are included in our Contract Manufacturing reporting segment. 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.

 

THIRD QUARTER 2024 FINANCIAL HIGHLIGHTS COMPARED TO THIRD QUARTER 2023

 

Net sales decreased 8.8% to $114.6 million;

Gross margin increased 110 basis points to 38.1%;
Inventory decreased 11.8% to $171.8 million as of September 30, 2024; and

Total debt decreased 29.7% to $150.3 million as of September 30, 2024.

 

YEAR TO DATE 2024 FINANCIAL HIGHLIGHTS COMPARED TO YEAR TO DATE 2023

 

Net sales decreased 3.0% to $325.7 million;

Gross margin increased 60 basis points to 38.6% for the; and
Operating income as a percentage of net sales increased 80 basis points to $22.6 million.

 

During the three and nine months ended September 30, 2024, compared to the same periods last year, our Wholesale segment sales decreased, due to certain nonrecurring sales, while our Retail segment sales increased, due to an increase in sales under our Lehigh CustomFit platform. Additionally, our Contract Manufacturing segment sales increased despite a decrease in private label contract sales during the three and nine months ended September 30, 2024, due to the U.S. Military contract awarded in the fourth quarter of 2023. These factors combined with an increase in Wholesale gross margin resulted in an overall increase in gross margin for both the three and nine months ended September 30, 2024 compared to the prior year periods. 

 

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, 2023.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

($ in thousands)

 

2024

   

2023

   

2024

   

2023

 

Net sales

  $ 114,554     $ 125,614     $ 325,718     $ 335,881  

Cost of goods sold

    70,908       79,076       199,886       208,012  

Gross margin

    43,646       46,538       125,832       127,869  

Operating expenses

    33,575       32,259       103,271       107,233  

Income from operations

  $ 10,071     $ 14,279     $ 22,561     $ 20,636  

 

Net sales decreased 8.8% to $114.6 million in the third quarter of 2024 compared to $125.6 million in the third quarter of 2023. The decline in net sales for the quarter ended September 30, 2024 over the prior year period was attributable to a decrease in Wholesale net sales, partially offset by an increase in Retail and Contract Manufacturing net sales. 

 

Gross margin in the third quarter of 2024 was $43.6 million, or 38.1% of net sales, compared to $46.5 million, or 37.0% of net sales, for the same period last year. The increase in gross margin as a percentage of net sales was due to Wholesale product mix as well as a higher percentage of Retail net sales, which carry higher gross margins than our Wholesale and Contract Manufacturing segments. 

 

Operating expenses for the three months ended September 30, 2024 were $33.6 million, or 29.3% of net sales, compared to $32.3 million, or 25.7% of net sales, for the three months ended September 30, 2023. The increase in operating expenses in the third quarter of 2024 compared to the third quarter of 2023 was primarily attributable to incremental brand building and advertising programs to support future growth.

 

Income from operations for the third quarter of 2024 was $10.1 million, or 8.8% of net sales, compared to $14.3 million, or 11.3% of net sales, for the same period a year ago. The decrease in income from operations was primarily driven by a decrease in net sales and increase in operating expenses offset by an increase in gross margin in the current year period.
 
Net sales decreased 3.0% to $325.7 million for the nine months ended September 30, 2024 compared to $335.9 million for the nine months ended September 30, 2023. The decline in net sales in the current year over the prior year period was attributable to a decrease in Wholesale net sales, partially offset by an increase in Retail and Contract Manufacturing net sales. 
 
Gross margin for the nine months ended September 30, 2024 was $125.8 million or 38.6% of net sales compared to $127.9 million or 38.1% of net sales for the nine months ended September 30, 2023.  The increase in gross margin as a percentage of net sales was due to Wholesale product mix as well as a higher percentage of Retail net sales, which carry higher gross margins than our Wholesale and Contract Manufacturing segments. 
 
Operating expenses for the nine months ended September 30, 2024 were $103.3 million, or 31.7% of net sales, compared to $107.2 million, or 31.9% of net sales, for the prior year period. The decrease in operating expenses as a percentage of sales for the nine months ended September 30, 2024 was primarily due to restructuring and cost-savings achieved from initiatives implemented during the first half of 2023.
 
Income from operations for the first nine months of 2024 was $22.6 million, or 6.9% of net sales, compared to $20.6 million, or 6.2% of net sales, for the same period a year ago. The increase in income from operations was primarily driven by a decrease in operating expenses and an increase in gross margin as a percent of net sales in the current year period.
 
15

 

 

 
 

Three Months Ended September 30, 2024 compared to Three Months Ended September 30, 2023

 

   

Three Months Ended

 
   

September 30,

 

($ in thousands)

 

2024

   

2023

   

Inc./ (Dec.)

   

Inc./ (Dec.)

 

NET SALES:

                               

Wholesale

  $ 84,033     $ 99,716     $ (15,683 )     (15.7 )%

Retail

    26,771     $ 24,523       2,248       9.2  

Contract Manufacturing

    3,750     $ 1,375       2,375       172.7  

Total Net Sales

  $ 114,554     $ 125,614     $ (11,060 )     (8.8 )%

 

Wholesale net sales for the three months ended September 30, 2024 were $84.0 million compared to $99.7 million for the three months ended September 30, 2023. The decrease in net sales in the current year period was attributed to non-recurring sales following the change to a distributor model in Canada in November 2023 and temporarily elevated commercial military footwear sales to a single customer throughout 2023. In addition to the aforementioned non-recurring sales, the decrease in Wholesale sales can be attributed to a more mild climate in the third quarter of 2024 compared to the prior year quarter as well as lean inventory on some key styles in the current period. 

 

Retail net sales for the three months ended September 30, 2024 were $26.8 million compared to $24.5 million for the three months ended September 30, 2023. The increase in Retail net sales for the third quarter of 2024 was due to increased sales in our Lehigh CustomFit platform as a result of completing a realignment of our sales organization which allowed us to expand our customer base and increase offerings to current customers.

 

Contract Manufacturing net sales for the three months ended September 30, 2024 were $3.8 million compared to $1.4 million for the three months ended September 30, 2023The increase was due to a multi-year contract awarded with the U.S. Military in the fourth quarter of 2023.

 

16

 

   

Three Months Ended

 
   

September 30,

 

($ in thousands)

 

2024

   

2023

   

Inc./ (Dec.)

 

GROSS MARGIN:

                       

Wholesale Margin $'s

  $ 31,514     $ 34,599     $ (3,085 )

Margin %

    37.5 %     34.7 %     2.8 %

Retail Margin $'s

  $ 11,683     $ 11,781     $ (98 )

Margin %

    43.6 %     48.0 %     (4.4 )%

Contract Manufacturing Margin $'s

  $ 449     $ 158     $ 291  

Margin %

    12.0 %     11.5 %     0.5 %

Total Margin $'s

  $ 43,646     $ 46,538     $ (2,892 )

Margin %

    38.1 %     37.0 %     1.1 %

 

Wholesale gross margin for the three months ended September 30, 2024 was $31.5 million, or 37.5% of net sales, compared to $34.6 million, or 34.7% of net sales, for the three months ended September 30, 2023. The higher Wholesale gross margins in the third quarter of 2024 compared to the third quarter 2023 was attributable to lower promotional activity in the current year period as well as opportunistic sales to certain international and key wholesale partners in the third quarter of 2023, which contributed to lower gross margins in the prior year period.

 

Retail gross margin for the three months ended September 30, 2024 was $11.7 million, or 43.6% of net sales, compared to $11.8 million, or 48.0% of net sales, for the three months ended September 30, 2023. The decrease in gross margin as a percent of net sales was attributable to our Lehigh CustomFit platform having a higher percentage of total retail sales than our e-commerce branded websites, which carry lower margin than our branded e-commerce websites.

 

Contract Manufacturing gross margin for the three months ended September 30, 2024 was $0.4 million, or 12.0% of net sales, compared to $0.2 million, or 11.5% of net sales, for the three months ended September 30, 2023. The increase in gross margin was driven by increased sales to the U.S. Military which carried higher margins than private label sales.

 

   

Three Months Ended

 
   

September 30,

 

($ in thousands)

 

2024

   

2023

   

Inc./ (Dec.)

   

Inc./ (Dec.)

 

OPERATING EXPENSES

  $ 33,575     $ 32,259     $ 1,316       4.1 %

% of Net Sales

    29.3 %     25.7 %     3.6 %        

  

Operating expenses for the three months ended September 30, 2024 were $33.6 million or 29.3% of net sales compared to $32.3 million, or 25.7% of net sales for the three months ended September 30, 2023. This increase in operating expenses was primarily attributable to incremental brand building and advertising programs to support future growth.

 

   

Three Months Ended

 
   

September 30,

 

($ in thousands)

 

2024

   

2023

   

Inc./ (Dec.)

   

Inc./ (Dec.)

 

INTEREST EXPENSE AND OTHER - net

  $ (3,180 )   $ (5,649 )   $ (2,469 )     (43.7 )%

 

Interest Expense and Other - net for the three months ended September 30, 2024 was $3.2 million compared to $5.6 million in the year ago period. The decrease in interest expense was a result of lower debt levels and lower interest rates in the third quarter of 2024 compared to the third quarter of 2023. The lower interest rates can be attributed to the refinance completed in the second quarter of 2024.

 

   

Three Months Ended

 
   

September 30,

 

($ in thousands)

 

2024

   

2023

   

Inc./ (Dec.)

   

Inc./ (Dec.)

 

Income Tax Expense

  $ 1,612     $ 1,803     $ (191 )     (10.6 )%

Effective Tax Rate

 

23.4

%     20.9 %  

2.5

%        

 

The increase in our effective tax rate in the third quarter of 2024 compared to the same year ago period was primarily driven by a shift in the mix of the Company's domestic and foreign earnings.

 

17

 

Nine Months Ended September 30, 2024 compared to Nine Months Ended September 30, 2023

 

   

Nine Months Ended

 
   

September 30,

 

($ in thousands)

 

2024

   

2023

   

Inc./ (Dec.)

   

Inc./ (Dec.)

 

NET SALES:

                               

Wholesale

  $ 232,082     $ 251,228     $ (19,146 )     (7.6 )%

Retail

    83,288       79,114       4,174       5.3  

Contract Manufacturing

    10,348       5,539       4,809       86.8  

Total Net Sales

  $ 325,718     $ 335,881     $ (10,163 )     (3.0 )%

 

Wholesale net sales for the nine months ended September 30, 2024 were $232.1 million compared to $251.2 million for the nine months ended September 30, 2023. The decline in net sales from the year ago period was primarily due to the sale of the Servus brand in March 2023, the change to our distributor model in Canada in November 2023 and temporarily elevated commercial military footwear sales to a single customer throughout 2023. 

 

Retail net sales for the nine months ended September 30, 2024 were $83.3 million compared to $79.1 million for the nine months ended September 30, 2023. The increase in Retail net sales was due to increased sales in our Lehigh CustomFit platform as we continue to expand our customer base and offerings to current customers. Additionally, we experienced growth in our e-commerce business during the nine months ended September 30, 2024 as we focused on our 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 for the nine months ended September 30, 2024 compared to the prior year ago period.

 

Contract Manufacturing net sales for the nine months ended September 30, 2024 were $10.3 million compared to $5.5 million for the nine months ended September 30, 2023. The increase was due to a multi-year contract awarded with the U.S. Military in the fourth quarter of 2023.

 

   

Nine Months Ended

 
   

September 30,

 

($ in thousands)

 

2024

   

2023

   

Inc./ (Dec.)

 

GROSS MARGIN:

                       

Wholesale Margin $'s

  $ 85,977     $ 89,084     $ (3,107 )

Margin %

    37.0 %     35.5 %     1.6 %

Retail Margin $'s

  $ 38,719     $ 38,379     $ 340  

Margin %

    46.5 %     48.5 %     (2.0 )%

Contract Manufacturing Margin $'s

  $ 1,136     $ 406     $ 730  

Margin %

    11.0 %     7.3 %     3.7 %

Total Margin $'s

  $ 125,832     $ 127,869     $ (2,037 )

Margin %

    38.6 %     38.1 %     0.5 %

 

Wholesale gross margin for the nine months ended September 30, 2024 was $86.0 million, or 37.0% of net sales, compared to $89.1 million, or 35.5% of net sales, for the nine months ended September 30, 2023. The increase in Wholesale gross margin as a percent of net sales was due to the divestiture of the Servus brand in March 2023, which carried lower gross margins than the rest of our product portfolio, as well as product mix. The increase in reported gross margin for the current year period was partially offset by a $1.3 million net tariff refund received in the first quarter of 2023.

 

Retail gross margin for the nine months ended September 30, 2024 was $38.7 million, or 46.5% of net sales, compared to $38.4 million, or 48.5% of net sales, for the nine months ended September 30, 2023. The decrease in gross margin as a percent of net sales was due to an increase in Lehigh sales as a percent of total Retail sales, which typically carry a lower margin as well as enhanced promotional efforts on our branded e-commerce websites as we continue to optimize our inventory levels.

 

Contract Manufacturing gross margin for the nine months ended September 30, 2024 was $1.1 million, or 11.0% of net sales, compared to $0.4 million, or 7.3% of net sales, for the nine months ended September 30, 2023. The increase in gross margin was driven by increased sales with the U.S. Military which carried higher margins than sales private label sales.