Traeger, Inc. (COOK) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations, and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and in other parts of this Annual Report on Form 10-K. A discussion of the year ended December 31, 2023 compared to the year ended December 31, 2022 has been reported previously in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 8, 2024, under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
Overview
Traeger is the creator and category leader of the wood pellet grill, an outdoor cooking system that ignites all-natural hardwoods to grill, smoke, bake, roast, braise, and barbecue. Our grills are versatile and easy to use, empowering cooks of all skill sets to create delicious meals with a wood-fired flavor that cannot be replicated with gas, charcoal, or electric grills. Grills are at the core of our platform and are complemented by Traeger wood pellets, rubs, sauces, and accessories.
Our marketing strategy has been instrumental in building our brand and driving customer advocacy and revenue. We have disrupted the outdoor cooking market and created a passionate community, the Traegerhood, which includes foodies, pitmasters, backyard heroes, moms and dads, professional athletes, outdoorsmen and outdoorswomen, and world-class chefs. This community, together with our various marketing initiatives, has helped to promote our brand and products to the wider consumer population and supported our efforts to redefine outdoor cooking as an experience accessible to everyone. We have an active online and social media presence and a content-rich website that drives significant customer engagement and brings our Traegerhood together. We also directly engage with our current and target customers by sponsoring and participating in a variety of events, including live shows, outdoor festivals, rodeos, music and film festivals, barbecue competitions, fishing tournaments, and retailer events. We believe the style and authenticity of our customer engagement reinforces our brand and drives new and existing customer interest in our products and community.
Our revenue is primarily generated through the sale of our wood pellet grills, consumables, and accessories. We currently offer eight series of grills – Woodridge, Ironwood, Timberline, Pro (with and without WiFIRE), and Flatrock – as well as a selection of smaller, portable grills within our Portable Series and a special Club Lineup through targeted channels. Our grills are available in a number of different sizes and can be upgraded through a variety of accessories. The majority of our grills feature WiFIRE technology, which allows users to monitor and adjust their grills remotely using our Traeger app. Our consumables include our wood pellets, which are made from natural, virgin hardwood and are available in a variety of flavors, as well as rubs and sauces. Our accessories include MEATER smart thermometers, P.A.L. Pop-And-Lock accessory rails, grill covers, liners, tools, apparel, and other ancillary items.
We sell our grills using an omnichannel distribution strategy that consists primarily of retail and DTC channels. Our retail channel covers brick-and-mortar retailers, e-commerce platforms, and multichannel retailers, who, in turn, sell our grills to their end customers. Our retailers include Ace Hardware, Amazon, Costco, The Home Depot, and Best Buy, among others, as well as a significant number of independent retailers that cater to local communities and specific categories, such as hardware, camping, outdoor, farm, ranch, barbecue, and other categories. Our DTC channel covers sales directly to customers through our website and Traeger app, as well as certain country- and region-specific Traeger or distributor websites. Our consumables and accessories are available through the same channels as our grills.
Over the last several years, we have made significant investments in our supply chain and manufacturing operations. Our supply chain includes third-party manufacturers for our grills and accessories and pellet production facilities for our wood pellets that we own or lease. We work closely with our manufacturers to evolve on design, manufacturing process, and product quality. Our grills are currently manufactured in China and Vietnam, our wood pellets are produced at facilities located in New York, Oregon, Georgia, Virginia, Texas, and Poland, and our MEATER smart thermometer accessories are currently manufactured in Taiwan. We have entered into manufacturing agreements covering the supply of substantially all of our grills and accessories, pursuant to which we make purchases on a purchase order basis. We rely on several third-party suppliers for the components used in our grills, including integrated circuits, processors, and system on chips.
Our revenue decreased by 0.3% for the year ended December 31, 2024 as compared to the year ended December 31, 2023, and was $604.1 million for the year ended December 31, 2024, down from $605.9 million for the year ended December 31, 2023. We recorded a net loss of $34.0 million for the year ended December 31, 2024, compared to a net loss of $84.4 million for the year ended December 31, 2023.
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Key Factors Affecting Our Financial Condition and Results of Operations
We believe that our financial condition and results of operations have been, and will continue to be, affected by a number of factors that present significant opportunities for us but also pose risks and challenges, including those below and in Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K.
Macroeconomic Conditions
Continuing global economic uncertainty, terrorism and conflicts, political conditions, and fiscal challenges in the United States and abroad could result in adverse macroeconomic conditions, including inflation, slower growth, or recession. We believe there is significant uncertainty regarding how macroeconomic conditions, including as a result of tariffs, sustained high levels of inflation and higher interest rates, will impact consumer demand for durable goods. While some of these conditions have negatively impacted consumer discretionary spending behavior, we continue to see demand for our products. We have, however, seen instances of consumer sensitivity to higher price points. Therefore, we have utilized promotional activity and strategic pricing action on select grills, which has primarily attributed to unit volume growth in excess of 20%, partially offset by high double-digit reduction in average selling price due to mix shift to lower priced grills, higher mix of direct import sales, and strategic pricing action on select grills for the year ended December 31, 2024 as compared to the prior year period. As a result, revenue from our grills increased by $25.4 million to $324.7 million for the year ended December 31, 2024 as compared to the prior year period.
In February and March 2025, President Trump implemented and/or reinstated tariffs and import restrictions on products from various countries, some of which went into effect on March 4, 2025. The implementation of tariffs has the potential to disrupt existing supply chains and impose additional costs on businesses in our industry. While negotiations regarding tariffs are ongoing, if the resulting environment of retaliatory tariffs or other practices of additional trade restrictions or barriers require us to increase prices for our products in the U.S., this could lead to decreased consumer demand for our products, which would negatively impact our results of operations, cash flows, and financial condition. For more information on risks to our business related to tariffs, please see Part I, Item 1A. “Risk Factors – United States trade policies that restrict imports or increase import tariffs may have a material adverse effect on our business.”
In response to these macroeconomic conditions, we have taken actions to identify and execute on cost savings initiatives, while simultaneously seeking to maintain product quality and reliability across the supply chain. For example, we have partnered with certain retailers in direct import programs, executed long-term transportation contracts, and implemented operational efficiencies across our pellet mill operations. As a result, we have experienced an increase in gross margin to 42.3% for the year ended December 31, 2024 from 36.9% for the year ended December 31, 2023. We expect continued cost savings to improve operating results in the long term, but given the uncertainty of the macroeconomic environment in the near term, including as a result of tariffs, there can be no assurance regarding the outcome of our continuing efforts to help mitigate the effects of these conditions on our business. We will continue to monitor and, if necessary, take additional action to mitigate the effects of the macroeconomic environment on our business.
Components of Results of Operations
Revenue
We derive substantially all of our revenue from the sale of grills, consumables, and accessories in North America, which includes the United States and Canada. We recognize revenue, net of product returns, for our grills, consumables, and accessories generally at the time of delivery to retailers through our retail channel and to customers through our DTC channel. Estimated product returns are recorded as a reduction of revenue at the time of recognition and are calculated based on product returns history, observable changes in return behavior, and expected returns based on sales volume and mix. We also have certain contractual programs that can give rise to elements of variable consideration, such as volume incentive rebates, with estimated amounts of credits recorded as a reduction to revenue.
Although we experience demand for our products throughout the year, there are seasonal fluctuations in our revenue. We have typically experienced moderately higher levels of sales of our grills in the first and second quarters of the year as our retailers purchase inventory in advance of warmer weather, when demand for outdoor cooking products is the highest across our key markets. Higher sales also coincide with social events and national holidays, which occur during the same warm weather timeframe. Additionally, we have typically experienced higher sales volume of our accessories during the fourth quarter of the year, due in part to seasonal holiday demand.
Gross Profit
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Gross profit reflects revenue less cost of revenue. Cost of revenue consists of product costs, including the costs of products from our third-party manufacturers, costs of components, direct and indirect manufacturing costs across all products, packaging, inbound freight and duties, warehousing and fulfillment, warranty costs, product quality testing and inspection costs, excess and obsolete inventory write-downs, cloud-hosting costs for our connected products, depreciation of tooling and manufacturing equipment, amortization of internal use software and patented technology, and certain employee-related expenses.
We calculate gross margin as gross profit divided by revenue. Several factors can impact gross margin, particularly sales channel mix and product mix. For instance, gross margin on sales through our direct import program with certain retail partners is generally higher than that of our core retail channels. If our direct import program grows or its sales outpace those of our core retail channels, and if we are able to realize greater economies of scale and freight cost savings, we would expect a favorable impact to overall gross margin over time. Additionally, gross margin on sales of certain of our products is higher than for others. If revenue from sales of wood pellets increased as a percentage of total revenue, we would expect to see an increase in overall gross margin. These favorable anticipated gross margin impacts may not be realized, or may be offset by other unfavorable gross margin factors. Additionally, any new products that we develop, or external factors beyond our control, such as duties and tariffs and costs of doing business in certain geographies, may also impact gross margin. For example, the recently imposed tariffs on foreign goods, including a 20% tariffs on imported from China, 25% tariff on steel and aluminum imports, and Canada's announcement of a retaliatory tariff on certain U.S. goods could impact our gross margin. For more information on risks to our business related to tariffs, please see Part I, Item 1A. “Risk Factors – United States trade policies that restrict imports or increase import tariffs may have a material adverse effect on our business.”
Sales and Marketing
Sales and marketing expense consists primarily of the costs associated with advertising and marketing of our products and employee-related expenses, including salaries, benefits, and stock-based compensation expense, as well as sales incentives and professional services. These costs can include print, internet, and television advertising, travel-related expenses, direct customer acquisition costs, costs related to conferences and events, and broker commissions. We anticipate that sales and marketing expense as a percentage of revenue will fluctuate from period to period based on revenue for such period and the timing of the expansion of our sales and marketing functions, as these activities may vary in scope and scale over future periods.
General and Administrative
General and administrative expense consists primarily of employee-related expenses and facilities for our executive, finance, accounting, legal, human resources, information technology, and other administrative functions. General and administrative expense also includes fees for professional services, such as external legal, accounting, information and technology services, and insurance.
In addition, general and administrative expense includes research and development expenses incurred to develop and improve our future products and processes, which primarily consist of employee- and facilities-related expenses, including salaries, benefits, and stock-based compensation expense, as well as fees for professional services, costs related to prototype tooling and materials, and software platform costs. Research and development expense was $15.2 million, $11.5 million, and $10.8 million for the year ended December 31, 2024, 2023, and 2022, respectively.
We continue to expect our general and administrative expenses, including our research and development expenses and external legal and accounting expenses, to vary as a percentage of revenue from period to period. However, as we continue to manage our investments to support our growth and develop new and enhance existing products, we expect to leverage these expenses over time as we grow our revenue.
Amortization of Intangible Assets
Amortization of intangible assets primarily consists of amortization of identified finite-lived customer relationships, distributor relationships, and trademark assets that were allocated a considerable portion of the purchase price from the corporate reorganization and acquisition of our Company in 2017, as well as the July 2021 acquisition of Apption Labs pursuant to the share purchase agreement (the “Share Purchase Agreement”). These costs are amortized on a straight-line basis over 2.5 to 25 year useful lives and, as a result, amortization expense on these assets is expected to remain stable over the coming years. Future business acquisitions may result in incremental amortization of intangible assets acquired in any such transactions.
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Change in Fair Value of Contingent Consideration
The fair values of our contingent consideration earn out obligation associated with the Apption Labs business combination is estimated based on probability adjusted present values of the consideration expected to be transferred using significant inputs. In April 2024, the Company paid the remaining $15.0 million of contingent consideration based on the achievement of certain earnings and product launch thresholds for fiscal year 2023. Prior to the final payment we would revalue the contingent consideration obligation to its fair value and record increases and decreases in fair value within the change in fair value of contingent consideration in our accompanying consolidated statements of operations and comprehensive loss. Changes in the fair value of the contingent consideration obligation resulted from changes in discount periods and rates and changes in probability assumptions with respect to the likelihood of achieving the performance targets in the Share Purchase Agreement.
Restructuring Costs
The Board approved the 2022 restructuring plan as part of its efforts to reduce our costs and drive long-term operational efficiencies due to challenging macroeconomic pressures. As part of the 2022 restructuring plan, we eliminated approximately 14% of our global headcount, suspended operations of Traeger Provisions, our premium frozen meal kit business, and postponed nearshoring efforts to manufacture product in Mexico. These actions and the associated costs were substantially completed and recognized in the third quarter of 2022 and the final costs were recognized during the third quarter of 2023.
Total Other Expense
Total other expense consists of interest expense and other income (expense), net. Interest expense includes interest and other fees associated with our Credit Facilities, Receivables Financing Agreement (each as defined below) as well as the amortization of amounts recorded within accumulated other comprehensive income prior to the dedesignation of the interest rate swap derivative contracts as a cash flow hedge. Other income (expense), net consists of any realized and unrealized gains (losses) from our interest rate swap derivative contract subsequent to the dedesignation of the swap contract from a cash flow hedge, foreign currency realized and unrealized gains and losses resulting from exchange rate fluctuations on transactions denominated in a currency other than the U.S. Dollar and the foreign currency contracts that we use to manage our exposure to foreign currency exchange rate risk related to our purchases and international operations.
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Results of Operations
The following tables summarize key components of our results of operations for the periods presented (dollars in thousands). The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future.
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Amount | % | |||||||||||
| Revenue | $ | 604,072 | $ | 605,882 | $ | (1,810) | (0.3) | % | ||||||
| Cost of revenue | 348,603 | 382,325 | (33,722) | (8.8) | % | |||||||||
| Gross profit | 255,469 | 223,557 | 31,912 | 14.3 | % | |||||||||
| Operating expense: | ||||||||||||||
| Sales and marketing | 109,656 | 108,727 | 929 | 0.9 | % | |||||||||
| General and administrative | 113,483 | 129,800 | (16,317) | (12.6) | % | |||||||||
| Amortization of intangible assets | 35,274 | 35,554 | (280) | (0.8) | % | |||||||||
| Change in fair value of contingent consideration | — | 4,698 | (4,698) | (100.0) | % | |||||||||
| Restructuring costs | — | 225 | (225) | (100.0) | % | |||||||||
| Total operating expense | 258,413 | 279,004 | (20,591) | (7.4) | % | |||||||||
| Loss from operations | (2,944) | (55,447) | (52,503) | (94.7) | % | |||||||||
| Other income (expense): | ||||||||||||||
| Interest expense | (33,500) | (31,275) | 2,225 | 7.1 | % | |||||||||
| Other income, net | 480 | 4,305 | (3,825) | (88.9) | % | |||||||||
| Total other expense | (33,020) | (26,970) | 6,050 | 22.4 | % | |||||||||
| Loss before provision (benefit) for income taxes | (35,964) | (82,417) | (46,453) | (56.4) | % | |||||||||
| Provision (benefit) for income taxes | (1,956) | 1,985 | (3,941) | (198.5) | % | |||||||||
| Net loss | $ | (34,008) | $ | (84,402) | $ | (50,394) | (59.7) | % |
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Comparison of the Year Ended December 31, 2024 and 2023
Revenue
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Revenue: | ||||||||||||||
| Grills | $ | 324,702 | $ | 299,346 | $ | 25,356 | 8.5 | % | ||||||
| Consumables | 119,299 | 114,901 | 4,398 | 3.8 | % | |||||||||
| Accessories | 160,071 | 191,635 | (31,564) | (16.5) | % | |||||||||
| Total Revenue | $ | 604,072 | $ | 605,882 | $ | (1,810) | (0.3) | % |
Revenue decreased by $1.8 million, or 0.3%, to $604.1 million for the year ended December 31, 2024 compared to $605.9 million for the year ended December 31, 2023. This decrease was driven primarily by lower sales from our accessories, partially offset by higher sales from our grill and consumables.
Revenue from our grills increased by $25.4 million, or 8.5%, to $324.7 million for the year ended December 31, 2024 compared to $299.3 million for the year ended December 31, 2023. The increase was driven primarily by unit volume growth in excess of 30%, partially offset by high double-digit reduction in average selling price. Higher unit volume was driven by the launch of our new grill offerings, effective promotional activity and strategic pricing action on select grills. The decrease in average selling price was primarily due to mix shift to lower priced grills, higher mix of direct import sales, and strategic pricing action on select grills.
Revenue from our consumables increased by $4.4 million, or 3.8%, to $119.3 million for the year ended December 31, 2024 compared to $114.9 million for the year ended December 31, 2023. The increase was driven primarily by mid single-digit increase in wood pellet sales, partially offset by low single-digit reduction in food consumable sales. Wood pellet sales increase was driven by mid single-digit increase in volume as a result of retail channel expansion, and low single-digit increase in average selling price due to strategic wholesale pricing initiatives with certain retail partners. Food consumables low single-digit reduction in sales was primarily due to lower average selling price with shift to lower priced sauce offerings, partially offset by low double-digit increase in volume as a result of retail channel expansion.
Revenue from our accessories decreased by $31.6 million, or 16.5%, to $160.1 million for the year ended December 31, 2024 compared to $191.6 million for the year ended December 31, 2023. This decrease was driven primarily by lower sales of MEATER smart thermometers and high single-digit reduction in sales of Traeger-branded accessories.
Gross Profit
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Gross profit | $ | 255,469 | $ | 223,557 | $ | 31,912 | 14.3 | % | ||||||
| Gross margin (Gross profit as a percentage of revenue) | 42.3 | % | 36.9 | % |
Gross profit increased by $31.9 million, or 14.3%, to $255.5 million for the year ended December 31, 2024 compared to $223.6 million for the year ended December 31, 2023. Gross profit as a percentage of revenue increased to 42.3% for the year ended December 31, 2024 from 36.9% for the year ended December 31, 2023. The increase in gross margin was driven primarily by favorability from freight, logistics, and other supply chain costs, lower warranty costs associated with the recall of the Flatrock flat top grill in the comparable prior year period, as well as favorability due to changes in foreign exchange rates.
Sales and Marketing
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| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Sales and marketing | $ | 109,656 | $ | 108,727 | $ | 929 | 0.9 | % | ||||||
| As a percentage of revenue | 18.2 | % | 17.9 | % |
Sales and marketing expense increased by $0.9 million, or 0.9%, to $109.7 million for the year ended December 31, 2024 compared to $108.7 million for the year ended December 31, 2023. As a percentage of revenue, sales and marketing expense increased to 18.2% for the year ended December 31, 2024 from 17.9% for the year ended December 31, 2023. The increase in sales and marketing expense was driven primarily by an increase in employee costs, travel related expenses, partially offset by lower advertising expenses.
General and Administrative
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| General and administrative | $ | 113,483 | $ | 129,800 | $ | (16,317) | (12.6) | % | ||||||
| As a percentage of revenue | 18.8 | % | 21.4 | % |
General and administrative expense decreased by $16.3 million, or 12.6%, to $113.5 million for the year ended December 31, 2024 compared to $129.8 million for the year ended December 31, 2023. As a percentage of revenue, general and administrative expense decreased to 18.8% for the year ended December 31, 2024 from 21.4% for the year ended December 31, 2023. The decrease in general and administrative expense was driven primarily by a decrease in stock-based compensation expense of $24.3 million, primarily due to the cancellation of the unearned CEO PSUs and IPO PSUs in the prior year comparable period, as well as losses on the disposal of property, plant, and equipment in the comparable prior year period, partially offset by increased employee and occupancy costs.
Change in Fair Value of Contingent Consideration
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Change in fair value of contingent consideration | $ | — | $ | 4,698 | $ | (4,698) | (100.0) | % | ||||||
| As a percentage of revenue | — | % | 0.8 | % |
Change in fair value of contingent consideration, attributable to the revalued earn out obligation associated with the Apption Labs business combination, decreased by $4.7 million for the year ended December 31, 2024 as compared to the prior year period. The change in fair value was primarily driven by the change in the likelihood of achieving the fiscal year 2023 performance targets for each period. In April 2024, the Company paid the remaining $15.0 million of contingent consideration based on the achievement of certain earnings and product launch thresholds for fiscal year 2023.
Total Other Expense
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Interest expense | $ | (33,500) | $ | (31,275) | $ | 2,225 | 7.1 | % | ||||||
| Other income, net | 480 | 4,305 | (3,825) | (88.9) | % | |||||||||
| Total other expense | $ | (33,020) | $ | (26,970) | $ | 6,050 | 22.4 | % | ||||||
| As a percentage of revenue | (5.5) | % | (4.5) | % |
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Total other expense increased by $6.1 million, or 22.4%, to $33.0 million for the year ended December 31, 2024 compared to $27.0 million for the year ended December 31, 2023. This increase was due primarily to increases in interest expense on our First Lien Term Loan Facility, a decrease in the net realized and unrealized gain position from our interest rate swap and net losses from our foreign currency contracts.
Liquidity and Capital Resources
Historically, our cash requirements have principally been for working capital purposes, capital expenditures, and debt service payments. We have funded our operations through cash flows from operating activities, cash on hand, and borrowings under our credit facilities and receivables financing agreement. Market conditions can impact the viability of these institutions. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial position.
As of December 31, 2024, we had cash and cash equivalents of $15.0 million, $125.0 million borrowing capacity under our Revolving Credit Facility (as defined below), and up to $30.0 million borrowing capacity under our Receivables Financing Agreement (as defined below). As of December 31, 2024, we had no outstanding loan amounts under the Revolving Credit Facility and had drawn down $5.0 million under the Receivables Financing Agreement. As of December 31, 2024, the total principal amount outstanding under our First Lien Term Loan Facility (as defined below) was $403.6 million. Based on our current business plan and revenue prospects, we continue to believe that our existing cash and cash equivalents, availability under our Revolving Credit Facility and Receivables Financing Agreement, and our anticipated cash flows from operating activities will be sufficient to meet our working capital and operating resource expenditure requirements for at least the next twelve months from the date of this Annual Report on Form 10-K. However, our future working capital requirements will depend on many factors, including our rate of revenue growth and profitability, the timing and size of future acquisitions, and the timing of introductions of new products and investments in our supply chain and implementation of technologies.
We may from time to time seek to raise additional equity or debt financing to support our growth or in connection with the acquisition of complementary businesses. Any equity financing we may undertake could be dilutive to our existing stockholders, and any additional debt financing we may undertake could require debt service and financial and operational requirements that could adversely affect our business. There is no assurance we would be able to obtain future financing on acceptable terms or at all.
Cash Flows
The following table sets forth cash flow data for the periods indicated therein (in thousands):
| Year-ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||
| Net cash provided by operating activities | $ | 23,888 | $ | 64,042 | |||
| Net cash used in investing activities | (12,331) | (17,378) | |||||
| Net cash used in financing activities | (26,497) | (68,298) | |||||
| Net decrease in cash, cash equivalents, and restricted cash | $ | (14,940) | $ | (21,634) |
Cash Flow from Operating Activities
Cash flows related to operating activities are dependent on net loss, non-cash adjustments to net loss, and changes in working capital. The decrease in cash provided by operating activities during the year ended December 31, 2024 compared to the year ended December 31, 2023 is primarily due to a net increase in working capital balances, partially offset by a decrease in net loss, adjusted for non-cash items, as compared to the prior year period. The net increase in working capital balances was primarily due to the increase in inventory balances in the current year period compared to the reduction of high inventory levels at the beginning of the prior year period as a result of strategic inventory management initiatives, as well as increases in accounts payable and accrued expenses in the current year period due to the seasonality and timing of our payments.
Cash Flow from Investing Activities
The decrease in cash used in investing activities during the year ended December 31, 2024 was primarily related to the prior year improvement costs for our new corporate headquarters, partially offset by proceeds received from the prior year sale of property, plant, and equipment.
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Cash Flow from Financing Activities
The decrease in cash used in financing activities during the year ended December 31, 2024 was primarily driven by the decrease in net borrowings on our Revolving Credit Facility and payment in the prior year period associated with the acquisition date fair value of contingent consideration.
Credit Facilities
On June 29, 2021, we refinanced our existing credit facilities and entered into a new first lien credit agreement, as borrower, with Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and other lenders party thereto as joint lead arrangers and joint bookrunners (the “First Lien Credit Agreement”). The First Lien Credit Agreement provides for a senior secured term loan facility (the “First Lien Term Loan Facility”), and a revolving credit facility (the “Revolving Credit Facility” and, together with the First Lien Term Loan Facility, the “Credit Facilities”). We entered into an agency transfer agreement on April 30, 2024, pursuant to which Morgan Stanley Senior Funding, Inc. succeeded Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent for the Credit Facilities. Our obligations under the First Lien Credit Agreement are substantively unchanged.
First Lien Credit Agreement
The First Lien Credit Agreement provides for a $560.0 million First Lien Term Loan Facility (including a $50.0 million delayed draw term loan) and a $125.0 million Revolving Credit Facility.
The First Lien Term Loan Facility accrues interest at a rate per annum that considers both fixed and floating components. The fixed component ranges from 3.00% to 3.25% per annum based on our Public Debt Rating (as defined in the First Lien Credit Agreement). The floating component is based on the Term SOFR (as defined in the First Lien Credit Agreement) for the relevant interest period. The First Lien Term Loan Facility requires periodic principal payments from December 2021 through June 2028, with any remaining unpaid principal and any accrued and unpaid interest due on the maturity date of June 29, 2028. As of December 31, 2024, the total principal amount outstanding on the First Lien Term Loan Facility was $403.6 million.
Loans under the Revolving Credit Facility accrue interest at a rate per annum that considers both fixed and floating components. The fixed component ranges from 2.75% to 3.25% per annum based on our most recently determined First Lien Net Leverage Ratio (as defined in the First Lien Credit Agreement). The floating component is based on the Term SOFR for the relevant interest period. The Revolving Credit Facility also has a variable commitment fee, which is based on our most recently determined First Lien Net Leverage Ratio and ranges from 0.25% to 0.50% per annum on undrawn amounts. Letters of credit may be issued under the Revolving Credit Facility in an amount not to exceed $15.0 million which, when issued, lower the overall borrowing capacity of the facility. The Revolving Credit Facility expires on June 29, 2026 and no principal payments are due before such date. As of December 31, 2024, we had no outstanding loan amounts under the Revolving Credit Facility.
Except as noted below, the Credit Facilities are collateralized by substantially all of the assets of TGP Holdings III LLC, TGPX Holdings II LLC, Traeger Pellet Grills Holdings LLC, and certain subsidiaries of Traeger Pellet Grills Holdings LLC, including intellectual property, mortgages, and the equity interest of each of these respective entities. The assets of Traeger SPE LLC (the “SPE”) , substantively consisting of our accounts receivable, collateralize the receivables financing agreement discussed below and do not collateralize the Credit Facilities. There are no guarantees from parent entities above Traeger, Inc.
The First Lien Credit Agreement contains certain affirmative and negative covenants that limit our ability to, among other things, incur additional indebtedness or liens (with certain exceptions), make certain investments, engage in fundamental changes or transactions including changes of control, transfer or dispose of certain assets, make restricted payments (including dividends), engage in new lines of business, make certain prepayments and engage in certain affiliate transactions. In addition, when we exceed the Covenant Trigger Amount (as defined in the First Lien Credit Agreement), we are subject to a financial covenant whereby we are required to maintain a Maximum First Lien Net Leverage Ratio (as defined in the First Lien Credit Agreement) not to exceed 6.20 to 1.00. As of December 31, 2024, we were in compliance with the covenants under the Credit Facilities.
Accounts Receivable Credit Facility
On November 2, 2020, we entered into a receivables financing agreement, as amended, (the “Receivables Financing Agreement”). Through the Receivables Financing Agreement, we participate in a trade receivables securitization program, administered on our behalf by MUFG Bank Ltd. Through this arrangement, we have secured short-term capital requirements financing using outstanding accounts receivables balances as collateral, which have been contributed by us to a wholly owned subsidiary, the SPE. While we provide operational services to the SPE, the receivables are owned by the SPE once contributed
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to it by us. We are the primary beneficiary and hold all equity interests of the SPE, thus we consolidate the SPE without any significant judgments.
On November 8, 2023, we entered into Amendment No. 9 to the Receivables Financing Agreement in order to extend the expiration of the facility by one year to June 27, 2025. As part of the amendment, the maximum borrowing capacity was decreased from $100.0 million to $75.0 million and allows for seasonal adjustments, at our discretion (with consent of the lenders under the Receivables Financing Agreement) to change the capacity anywhere between $30.0 million and $75.0 million. We are required to pay fixed interest on outstanding cash advances of 2.5%, a floating interest based on the CP Rate or Adjusted Term SOFR (each as defined in the Receivables Financing Agreement), and an unused capacity charge that ranges from 0.25% to 0.5%. Amendment No. 9 also implemented a new liquidity threshold at $42.5 million of liquidity. If our liquidity falls below this threshold, it may result in an increase in the required level of reserves, which would result in a reduction of our borrowing base under the Receivables Financing Agreement during such a liquidity shortfall.
On August 6, 2024, we entered into Amendment No. 10 to the Receivables Financing Agreement in order to extend the expiration of the facility to August 6, 2027. As part of the amendment, we were required to pay an upfront fee for the facility, along with a fixed interest rate on outstanding cash advances of approximately 2.6% and a floating interest rate based on the CP Rate or Adjusted Term SOFR (each as defined in the Receivables Financing Agreement). We were in compliance with the covenants under the Receivables Financing Agreement as of December 31, 2024.
As of December 31, 2024, we had drawn down $5.0 million under this facility for general corporate and working capital purposes.
Contractual Obligations
As of December 31, 2024, significant contractual obligations related to debt were $403.6 million of principal borrowings and $111.4 million of related interest, which principal borrowings will become due on the maturity date of June 29, 2028. Projected interest costs on variable rate instruments are based on market rates as of December 31, 2024. See Note 12 – Notes Payable to the accompanying consolidated financial statements for additional information regarding our Credit Facilities.
We have various lease agreements related to office space, warehouses, vehicles, and office equipment that expire at various dates through 2037. As of December 31, 2024, the future minimum rental payments under non-cancelable operating leases were $46.4 million. See Note 4 – Leases to the accompanying consolidated financial statements for additional information regarding our non-cancellable operating leases.
We also have purchase obligations consisting of agreements to purchase goods and services entered into in the ordinary course of business. As of December 31, 2024, the future minimum value of our non-cancellable unconditional purchase obligations was $7.3 million. See Note 14 – Commitments and Contingencies to the accompanying consolidated financial statements for additional information regarding our purchase obligations.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
While our significant accounting policies are described in further detail in Note 2 – Summary of Significant Accounting Policies to the accompanying consolidated financial statements included in this Annual Report on Form 10-K, we believe that the following critical accounting policies reflect our more significant judgments and estimates used that management believes are particularly important in the preparation of our consolidated financial statements and that require the use of estimates, assumptions, and judgments to determine matters that are inherently uncertain.
Revenue Recognition
We derive substantially all of our revenue from the sale of grills, consumables, and accessories as well as associated shipping charges billed to customers. We recognize revenue at the amount to which we expect to be entitled when a contract exists with a customer that specifies the goods and services to be provided at an agreed upon sales price and when the performance obligation is satisfied. The performance obligation for most of our sales transactions are considered complete
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when control transfers, which is determined when products are shipped or delivered to the customer depending on the terms of the contract. Sales are made on normal and customary short-term credit terms or upon delivery for point-of-sale transactions.
Shipping charges billed to customers are included in net sales and related shipping costs are included in cost of sales. We elected to account for shipping and handling activities performed after control has been transferred to the customer as a fulfillment cost.
We enter into contractual arrangements with customers in the form of individual customer orders which specify the goods, quantity, pricing, and associated order terms. We do not have long-term contracts that are satisfied over time. Due to the nature of the contracts, no significant judgment exists in relation to the identification of the customer contract or satisfaction of the performance obligation. We expense incremental costs of obtaining a contract due to the short-term nature of the contracts.
We have various contractual programs and practices with customers that give rise to elements of variable consideration such as customer cooperative advertising and volume incentive rebates. We estimate the variable consideration using the most likely amount method based on sales and contractual rates with each customer and record the estimated amount of credits for these programs as a reduction to revenue. Actual credits and their impact on reported revenue could differ from our estimates and could materially affect our results of operations.
We have entered into contracts with some customers that allow for credits to be claimed for certain matters of operational compliance or for returns to the retail customer from its end consumers. Credits that will be issued associated with these items are estimated using the expected value method and are based on actual historical experience and are recorded as a reduction of revenue at the time of recognition or when circumstances change resulting in a change in estimated returns. Actual credits and their respective impacts on reported revenue could differ from our estimates and could materially affect our results of operations.
Valuation of Goodwill and Acquired Intangible Assets
Intangible Assets
Finite-lived intangible assets are initially recorded at fair value and presented net of accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives. We are currently amortizing acquired intangible assets, including customer relationships, distributor relationships, business trademarks, technology, and other intangible assets over periods ranging between 2.5 years and 25 years. These assets were recognized in the purchase price allocation when we underwent a corporate restructuring and acquisition in 2017, as well as when we acquired Apption Labs in July 2021. We assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss on intangible assets exists when the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. If the carrying amount exceeds the sum of the undiscounted cash flows, an impairment charge is recognized based on the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.
Goodwill
Goodwill represents the excess of consideration transferred over the fair value of tangible and identifiable intangible net assets acquired and the liabilities assumed in a business combination. Substantially all of the our goodwill was recognized in the purchase price allocations when the Company was acquired in 2017 and when Apption Labs was acquired in July 2021, with smaller incremental amounts recognized in other business combinations. Goodwill is not amortized, but is tested for impairment at the reporting unit level annually or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. In conducting the impairment test, we first review qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. We currently operate as a single reporting unit under the guidance in Topic 350, Intangibles - Goodwill and Other.
When testing goodwill for impairment, we have the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that carrying value exceeds its fair value, we perform a quantitative goodwill impairment test. Under the quantitative goodwill impairment test, if our reporting unit’s carrying amount exceeds its fair value, we will record an impairment charge based on that difference.
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To determine reporting unit fair value as part of the quantitative test, we use a weighting of fair values derived from the income approach and the market approach. Under the income approach, we project the future cash flows and discounts these cash flows to reflect their relative risk. The cash flows used are consistent with those we use in our internal planning, which reflects actual business trends experienced and our long-term business strategy. Under the market approach, we use the guideline company method to develop valuation multiples and compare our reporting unit to similar publicly traded companies.
In order to further validate the reasonableness of fair value as determined by the income and market approaches described above, a reconciliation to market capitalization is then performed by estimating a reasonable control premium and other market factors. Future changes in the judgments, assumptions, and estimates that are used in the impairment testing for goodwill could result in significantly different estimates of fair value.
We conduct annual goodwill impairment tests in the fourth quarter of each fiscal year or whenever an indicator of impairment exists. For the annual impairment tests conducted in the fourth quarters of 2024 and 2023, we performed qualitative assessments of goodwill and determined that it was more likely than not that the fair value of goodwill was greater than its carrying value. Therefore, the quantitative impairment test was not performed and no impairment of goodwill was recorded in connection with the annual impairment tests.
During 2022, as a result of sustained decreases in our publicly quoted share price, market capitalization, and lower than expected operating results, we conducted an interim impairment analysis of its goodwill and long-lived assets. As a result of this analysis, we concluded there were no events or changes in circumstances which indicated that the carrying value of its long-lived assets may not be recoverable. However, we did identify indicators of goodwill impairment for the single reporting unit and concluded that a triggering event had occurred which required an interim goodwill impairment assessment during the second and third quarters of fiscal year 2022. The primary indicators of impairment were attributable to the adverse impacts from the macroeconomic conditions such as inflationary pressures and supply chain disruption, unfavorable demand, and the sustained decreases in our publicly quoted share price and market capitalization. As a result of these factors, our operating results were lower than expected.
We estimated the reporting unit's fair value under the income approach, which utilizes a discounted cash flow model, and the market approach, which utilizes the guideline company model. The income approach used the reporting unit's projections of estimated operating results and cash flows that were discounted using a market participant discount rate based on the weighted-average cost of capital. The main assumptions supporting the cash flow projections include, but are not limited to, revenue growth, margins, discount rate, and terminal growth rate. The financial projections reflect management's best estimate of economic and market conditions over the projected period, including forecasted revenue growth, margins, capital expenditures, depreciation, and amortization. Under the market approach, we uses the guideline company method to develop valuation multiples and compare the single reporting unit to similar publicly traded companies. As a result of the interim goodwill impairment tests, we concluded that the carrying value of the single reporting unit exceeded its fair value and recorded $222.3 million of non-cash goodwill impairment charges for the fiscal year ended December 31, 2022. Significant negative industry or economic trends, disruptions to our businesses, significant unexpected or planned changes in use of the assets, divestitures, and market capitalization declines may result in additional impairments to goodwill and other long-lived assets.
Stock-Based Compensation
We award stock-based compensation to employees, directors and executives under the Traeger, Inc. 2021 Incentive Award Plan (the “2021 Plan”). We recognize compensation expense for time-based restricted stock units (“RSUs”) on a straight-line basis over the vesting schedule. For the performance-based restricted units and shares, the compensation expense is recognized on an accelerated basis over the tranche’s requisite service period. The compensation expense related to the performance-based awards could increase or decrease depending on the estimated probability of achieving the Adjusted EBITDA goals over the requisite service period. In addition, when an award is forfeited prior to the vesting date, we will recognize an adjustment for the previously recognized expense in the period of the forfeiture, with the exception of performance-based awards for which the requisite service period has been satisfied.