McRae Industries, Inc. Reports Earnings for the Second Quarter and First Six Months of Fiscal 2008

MOUNT GILEAD, N.C., March 17 /PRNewswire-FirstCall/ -- McRae Industries, Inc. (OTC Pink Sheets: MRINA; MRINB) reported consolidated net revenues for the second quarter of fiscal 2008 of $20,773,000 as compared to $17,123,000 for the second quarter of fiscal 2007. Net earnings for the second quarter of fiscal 2008 amounted to $1,442,000, or $.64 per diluted Class A common share as compared to net earnings of $806,000, or $.38 per diluted Class A common share, for the second quarter of fiscal 2007.

Consolidated net revenues from operations for the first six months of fiscal 2008 totaled $42,078,000 as compared to $34,688,000 for the first six months of fiscal 2007. Net earnings for the first six months of fiscal 2008 amounted to $3,291,000, or $1.43 per diluted Class A common share as compared to net earnings of $2,230,000, or $1.00 per diluted Class A common share, for the first six months of fiscal 2007. The net earnings for the first six months of fiscal 2007 included $860,000, or $.33 per diluted Class A common share, related to the sale of our Florida property.

SECOND QUARTER FISCAL 2008 COMPARED TO SECOND QUARTER FISCAL 2007

Consolidated net revenues for the second quarter of fiscal 2008 totaled $20.8 million as compared to $17.1 million for the second quarter of fiscal 2007. This growth in net revenues was primarily attributable to higher U. S. Government requirements for military combat boots related to the contract awarded in May 2007 and to strong demand for our branded products, both work boots and children's footwear.

Consolidated gross profit for the second quarter of fiscal 2008 increased to $6.2 million, up from $5.0 million for the second quarter of fiscal 2007. This improvement in gross profit resulted primarily from the increase in net revenues and lower military boot per unit production costs.

Consolidated operating costs and expenses for the second quarter of fiscal 2008 were $3.9 million as compared to $3.7 million for the second quarter of fiscal 2007. Increased sales compensation costs, employee benefit charges, and advertising expenditures were partially offset by reduced research and development costs and professional fees.

As a result of the above, consolidated operating profit grew from $1.3 million for the second quarter of fiscal 2007 to $2.2 million for the second quarter of fiscal 2008.

Bar Code Business

Net revenues for the bar code business decreased from $2.7 million for the second quarter of fiscal 2007 to $2.6 million for the second quarter of fiscal 2008 as demand for our system sales and related hardware fell below budget projections.

Gross profit for the second quarter of fiscal 2008 totaled $619,000 as compared to $685,000 for the second quarter of fiscal 2007. This decrease in gross profit resulted primarily from lower net revenues.

Operating costs and expenses fell from $1.0 million for the second quarter of fiscal 2007 to $728,000 for the second quarter of fiscal 2008 primarily attributable to reduced research and development and sales compensation expenditures.

As a result of the above, the operating loss for the second quarter of fiscal 2008 amounted to $109,000 as compared to $348,000 for the second quarter of fiscal 2007.

Military Boot Business

Net revenues for the military boot business totaled $6.2 million for the second quarter of fiscal 2008 as compared to $4.2 million for the second quarter of fiscal 2007 primarily attributable to increased military boot requirements for the U. S. Government (the "Government") related to the new contract awarded in May 2007.

The contract awarded in May 2007 (the "Contract") provides for a base year and four one-year option periods. We expect total orders under the Contract of approximately $100 million, provided the Government orders near the maximum level for the full five-year period.

Gross profit for the second quarter of fiscal 2008 amounted to $1.4 million as compared to $855,000 for the second quarter of fiscal 2007. The improvement in gross profit was primarily the result of increased net revenues. Gross profit as a percentage of net revenues grew from 20% for the second quarter of fiscal 2007 to 23% for the second quarter of fiscal 2008 as higher production levels resulted in lower per unit manufacturing costs.

Operating costs and expenses increased from $252,000 for the second quarter of fiscal 2007 as compared to $318,000 the second quarter of fiscal 2008 primarily attributable to higher employee benefit costs.

As a result of the above, the operating profit for the second quarter of fiscal 2008 totaled $1.1 million as compared to $603,000 for the second quarter of fiscal 2007.

Western and Work Boot Business

Net revenues for the western and work boot business grew nearly 18%, up from $10.1 million for the second quarter of fiscal 2007 to $12.0 million for the second quarter of fiscal 2008. This increase in net revenues resulted primarily from heavy demand for our branded work boot and children's footwear products. The market for our western boot products, particularly ladies fashion boots, remained soft for the second quarter of fiscal 2008.

Gross profit for the second quarter of fiscal 2008 amounted to $4.1 million as compared to $3.4 million for the second quarter of fiscal 2007. This increase in gross profit was the result of higher net revenues as gross margins for both quarters approximated 34%.

Operating costs and expenses totaled $2.8 million for the second quarter of fiscal 2008 as compared to $2.4 million for the second quarter of fiscal 2007. This increase in operating costs resulted primarily from higher sales compensation costs, product promotion costs, trade show travel costs, and employee benefit charges, which were partially offset by reduced professional fees.

As a result of the above, the operating profit grew from $1.0 million for the second quarter of fiscal 2007 to $1.3 million for the second quarter of fiscal 2008.

FIRST SIX MONTHS FISCAL 2008 COMPARED TO FIRST SIX MONTHS FISCAL 2007

Consolidated net revenues for the first six months of fiscal 2008 totaled $42.1 million as compared to $34.7 million for the first six months of fiscal 2007. This improvement in net revenues was the result of increased requirements by the Government for military boots related to the new Contract and strong market demand for our branded work and children's footwear products.

Consolidated gross profit grew from $10.0 million for the first six months of fiscal 2007 to $12.9 million for the first six months of fiscal 2008. This increase in gross profit resulted primarily from higher net revenues. Gross profit margins increased from 29% for the first six months of fiscal 2007 to 31% for the same period of fiscal 2008 primarily attributable to a large concentration of higher margin western and work boot products in the overall sales mix.

Consolidated operating costs and expenses totaled approximately $8.0 million for the first six months of both fiscal 2008 as compared to $7.5 million for the first six months of fiscal 2007, as adjusted for the $1.1 million gain on sale of assets in the first six months of 2007. Increased expenditures for sales related compensation, facility rentals, travel costs, product promotion activities, employee benefit charges, and administrative salaries were partially offset by lower outlays for research and development, professional fees, and group health insurance costs.

As a result of the above, the consolidated operating profit amounted to $4.9 million for the first six months of fiscal 2008 as compared to $3.6 million for the first six months of fiscal 2007.

Bar Code Business

Net revenues for the bar code business were $6.1 million for the first six months of fiscal 2008 as compared to $6.7 million for the first six months of fiscal 2007. This decline was primarily attributable to the weak performance of our system sales and service business.

Gross profit for the first six months of fiscal 2008 amounted to $1.6 million as compared to $1.5 million for the first six months of fiscal 2007 This increase in gross profit was the result of higher margins associated with our new system sales service program.

Operating costs and expenses decreased from $2.0 million for the first six months of fiscal 2007 to $1.6 million for the first six months of fiscal 2008. This reduction in operating costs and expenses was primarily the result of lower expenditures for research and development, product promotion expenses, sales salaries, and group health insurance.

As a result of the above, the operating profit for the first six months of fiscal 2008 amounted to $40,000 as compared to an operating loss of $456,000 for the first six months of fiscal 2007.

Military Boot Business

Net revenues for the military boot business for the first six months of fiscal 2008 totaled $11.6 million as compared to $7.4 million for the first six months of fiscal 2007. This increase in net revenues resulted primarily from higher military combat boot requirements for the Government attributable to the Contract awarded in May 2007.

Gross profit grew to $2.3 million for the first six months of fiscal 2008, up from $1.2 million for the first six months of fiscal 2007 primarily attributable to the increase in net revenues and to lower per unit costs associated with higher and more efficient production levels.

Operating costs and expenses for the first six months of fiscal 2008 totaled $565,000 as compared to $434,000 for the first six months of fiscal 2007. This increase in operating costs and expenses was the result of higher employee benefit costs.

As a result of the above, operating profit for the first six months of fiscal 2008 amounted to $1.8 million as compared to $777,000 for the first six months of fiscal 2007.

Western and Work Boot Business

Net revenues for the western and work boot business for the first six months of fiscal 2008 totaled $23.9 million as compared to $20.6 million for the first six months of fiscal 2007. Sales of our John Deere boot products, both work boots and children's boot products, were exceptionally strong and offset the impact of a soft western boot market caused by the decline in demand for fashion western boots.

Gross profit climbed to $8.5 million for the first six months of fiscal 2008, up from $7.2 million for the first six months of fiscal 2007. This improvement in gross profit resulted primarily from the increase in net revenues as gross profit as a percentage of net revenues remained steady at 35% for both fiscal six-month periods.

Operating costs and expenses increased from $4.9 million for the first six months of fiscal 2007 to $5.6 million for the first six months of fiscal 2008. The rise in operating costs and expenses was related to greater expenditures for sales salaries and commissions, product promotion related expenses, facility costs, administrative salaries, travel expenses, and employee benefit costs, which were partially offset by lower expenditures for professional fees.

As a result of the above, the operating profit for the first six months of fiscal 2008 totaled $2.9 million as compared to $2.2 million for the first six months of fiscal 2007.

FINANCIAL CONDITION AND LIQUIDITY

Our financial condition maintained its solid position at January 26, 2008. Cash and cash equivalents totaled $13.5 million as compared to $9.2 million at July 28, 2007. Our working capital improved from $29.4 million at July 28, 2007 to $32.6 million at January 26, 2008.

We currently maintain three lines of credit with a bank totaling $7.75 million, all of which was available at January 26, 2008. One credit line totaling $1.75 million (which is restricted to one hundred percent of the outstanding receivables due from the U. S. Government) expires in January 2009. We have two $3.0 million lines of credit, one expires in November 2008 and the other expires in December 2008.

We believe that our current cash and cash equivalents, cash generated from operations, and available credit lines will be sufficient to meet our capital requirements for the remainder of fiscal 2008.

For the first six months of fiscal 2008, operating activities provided approximately $4.7 million of cash. Net earnings, as adjusted for depreciation, provided $3.5 million of cash. Accounts and notes receivable, as adjusted for valuation allowances, used approximately $1.7 million of cash, primarily attributable to the timing of collection on Government and western boot business receivables related to strong quarter demand for these products, which was partially offset by the reduction of bar code business accounts receivable as collection of strong year-end sales outpaced the current quarter sales. Reduced inventory levels, primarily associated with high seasonal sales of western and work boot products, provided approximately $3.3 million of cash. The timing of payments for fourth quarter fiscal 2007 bar code inventory accounts payable used approximately $700,000 of cash, which was partially offset by the timing of inventory payments for the footwear and western boot businesses. Income tax payments used approximately $300,000 of cash.

Investing activities for the first six months of fiscal 2008 used approximately $68,000 of cash. Capital expenditures used approximately $56,000 for various manufacturing, office and computer equipment.

Dividend payments for the first six months of fiscal 2008 used $362,000 of cash.

Forward-Looking Statements

This press release includes certain forward-looking statements. Important factors that could cause actual results or events to differ materially from those projected, estimated, assumed or anticipated in any such forward-looking statements include: the effect of competitive products and pricing, risks unique to selling goods to the Government (including variation in the Government's requirements for our products and the Government's ability to terminate its contracts with vendors), loss of key customers, acquisitions, supply interruptions, additional financing requirements, our expectations about future Government orders for military boots, loss of key management personnel, our ability to successfully develop new products and services, and the effect of general economic conditions in our markets.

McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)

January 26, July 28,
2008 2007
ASSETS
Current assets:
Cash and cash equivalents $ 13,478 $ 9,243
Accounts and notes receivable, net 11,290 9,632
Inventories, net 12,759 16,060
Income tax receivable 759 433
Prepaid expenses and other current assets 194 210
Total current assets 38,480 35,578

Property and equipment, net 1,803 1,988

Other assets:
Notes receivable 16 20
Real estate held for investment 3,300 3,340
Amount due from split-dollar life insurance 2,220 2,220
Trademarks 2,824 2,824
Other 3 3
Total other assets 8,363 8,407

Total assets $48,646 $45,973

McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)

January 26, July 28,
2008 2007
Liabilities and Shareholders' Equity

Current liabilities:

Accounts Payable $3,353 $3,810

Accrued employee benefits 601 476

Accrued payroll and payroll taxes 1,037 968

Other accrued liabilities 932 911

Total current liabilities 5,923 6,165

Shareholders' equity:

Common Stock:

Class A, $1 par; Authorized 5,000,000
shares; Issued and outstanding 2,104,924
shares, respectively 2,105 2,105

Class B, $1 par; Authorized 2,500,000
shares; Issued and outstanding 448,302
shares and 449,155 shares, respectively 448 449

Retained earnings 40,170 37,254

Total shareholders' equity 42,723 39,808

Total liabilities and shareholders'
equity $48,646 $45,973

McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)

Three Months Ended Six Months Ended
January January January January
26, 2008 27, 2007 26, 2008 27, 2007

Net revenues $20,773 $17,123 $42,078 $34,688
Cost of revenues 14,606 12,137 29,193 24,711
Gross profit 6,167 4,986 12,885 9,977

Less: Operating costs and
expenses:
Research & development 0 152 1 289

Selling, general and
administrative expenses 3,947 3,561 7,974 6,115

Earnings from operations 2,220 1,273 4,910 3,573

Other expense (income), net (142) (117) (251) (230)

Interest expense 3 3 5 5

Earnings before income taxes 2,359 1,387 5,156 3,798

Provision for income taxes 917 581 1,865 1,568

Net earnings $1,442 $806 $3,291 $2,230

Earnings per common share:
Basic earnings per share:
Class A $.78 $.46 $1.74 $1.21
Class B 0 0 0 0
Diluted earnings per share:
Class A .64 .38 1.43 1.00
Class B N/A N/A N/A N/A
Weighted average number
of common shares
outstanding:
Class A 2,104,924 2,116,751 2,104,924 2,116,751
Class B 448,921 457,603 449,038 457,603
Total 2,553,845 2,574,354 2,553,962 2,574,354

McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

Six Months Ended
January 26, January 27,
2008 2007

Net cash provided by (used in) operating
activities $4,679 $(1,294)

Cash flows from investing activities:

Proceeds from sales of assets 6 1,428

Purchase of land for investment (22) (1,598)

Capital expenditures (56) (200)

Net collections of long-term receivables 4 2

Net cash used in investing activities (68) (368)

Cash flows from financing activities:

Purchase of company stock (14) 0

Dividends paid (362) (339)

Net cash used in financing activities (376) (339)

Net increase (decrease) in cash and cash
equivalents 4,235 (2,001)

Cash and cash equivalents at beginning of
period 9,243 8,461

Cash and cash equivalents at end of period $13,478 $6,460

First Call Analyst:
FCMN Contact:

Source: McRae Industries, Inc.

CONTACT: D. Gary McRae, +1-910-439-6147, of McRae Industries, Inc.

Web site: http://www.mcraeindustries.com/

2008-03-17 16:45:58 0314356 PRNEWSWIRE