Rocky Shoes & Boots, Inc. reported results for the three months and twelve months ended December 31, 2002.
Net income increased to $1.6 million for the three months ended December 31, 2002 from $0.3 million the prior year. Net income per diluted share was a fourth quarter record, improving to $0.34 from $0.06 for fourth quarter 2001.
Net income rose to $2.8 million, or $0.62 per diluted share, for the twelve months ended December 31, 2002 from $1.5 million, or $0.34 per diluted share, the prior year. The Company recorded $1.5 million in plant closing costs during 2001 related to the realignment of its manufacturing operations. Excluding the one-time plant closing costs of $1.5 million, or $1.0 million net of tax, and a $0.4 million tax benefit to recognize tax incentives granted in conjunction with the plant relocation, net income and net income per diluted share would have been $2.1 million and $0.47, respectively, for the year 2001.
Mike Brooks, Chairman and CEO commented, “We are encouraged by our fourth quarter and annual results for 2002, and especially the solid improvement in gross margin. This enabled us to achieve substantially higher earnings for 2002 despite a challenging retail environment.”
Mr. Brooks continued, “Strong sell-through of ROCKY(R) products at retail and more favorable weather conditions occurred in fourth quarter 2002. This contributed to a 16.4% increase in branded product sales for the quarter. As a result, we entered 2003 with increased optimism regarding sales growth this year. Initial bookings for the upcoming fall and winter seasons are substantially ahead of the same period last year.”
Net sales were $25.6 million for the three months ended December 31, 2002 compared to $26.8 million for the same period in 2001. The $1.2 million decline in fourth quarter 2002 net sales was attributable to $0.1 million of boots sold to the U.S. Military during the quarter compared to $4.0 million for the same period last year. A substantial portion of the difference was offset by higher sales of the Company’s branded products, which increased 16.4% for fourth quarter 2002. Sales benefited from solid comparisons with the same period last year for occupational and Wild Wolf(TM) by ROCKY footwear, as well as strong sales of ROCKY clothing that was introduced in first quarter 2002.
Gross margin improved from 15.4% of net sales a year ago to 28.6% for fourth quarter 2002. The fourth quarter 2002 results particularly benefited from an increase in sourced products to 56.0% of net sales compared to 41.8% last year, nominal shipments of military footwear, and positive contributions from the realigned manufacturing operations. Military footwear has historically been produced at significantly lower gross margins than the Company’s other branded products. During fourth quarter 2001 improved cost and reporting systems were implemented that enabled the Company to review its inventory costing methods. As a result, the Company revised its costs, which negatively impacted gross margin for fourth quarter 2001.
Selling, general and administrative (“SG&A”) expenses were $5.1 million, or 20.0% of net sales, for fourth quarter 2002 compared with $3.8 million, or 14.0% of net sales, last year. This increase was primarily due to higher commissions on increased branded product sales, higher benefit expenses, and start-up costs for the Company’s western work boot line, which was introduced in January 2003.
Interest expense declined to $0.4 million for fourth quarter 2002 from $0.5 million the prior year. This was principally due to the 36.8% reduction in funded debt, which was $11.0 million at December 31, 2002 compared to $17.4 million on the same date in 2001. Key factors included the reduction in inventory during fourth quarter 2002 compared to the prior year combined with improvement in cash generated from operations.
Net sales declined 13.9% to $89.0 million for the year 2002 from $103.3 million the prior year. Sales were impacted by the weak national economy throughout 2002 as well as unusually warm weather conditions during the 2001-2002 fall and winter seasons that especially affected orders during the first half of 2002. In addition, net sales of military boots were $6.5 million for the year 2002 compared with $9.0 million last year.
Sales of branded products declined 12.4% for the twelve months ended December 31, 2002. Lower sales of rugged outdoor boots were partially offset by a solid increase in occupational sales. In addition, ROCKY branded clothing generated strong first-year sales.
Gross margin improved 380 basis points to 26.3% of net sales for the year 2002 compared to 22.5% of net sales in 2001. Key factors included an increase in sourced footwear to 49.2% of net sales from 41.7% in 2001, positive contributions from the realigned manufacturing operations, and lower military boot sales.
SG&A expenses increased $0.5 million to $18.7 million for the twelve months ended December 31, 2002 from $18.2 million the prior year. As a percentage of net sales, SG&A expenses rose from 17.6% to 21.0% for the year 2002 due to the decline in net sales compared to 2001, as well as higher fourth quarter benefit expenses and start-up costs for the Company’s western work boot line.
Interest expense declined 43.7% to $1.4 million for year 2002 from $2.5 million in 2001. The sharp reductions in borrowings combined with lower interest rates were the key factors.
The Company’s effective tax rate was 25.1% for the year 2002 compared to a 6.5% tax benefit the prior year. The $0.1 million tax benefit for the year 2001 was due to a $0.4 million tax benefit resulting from an abatement of Puerto Rico tollgate taxes on all earnings subsequent to June 30, 1994. Net of this adjustment, the effective tax rate was 21.9% for the year 2001. The Company’s tax rate is lower than the U.S. statutory rate primarily due to the favorable tax treatment in Puerto Rico and the Dominican Republic.
Inventory declined 16.4% during the year 2002 and was $23.2 million at December 31, 2002. Improved inventory controls resulted in positive contributions to the Company’s 2002 results. Historically, inventories begin to build in the first half of the calendar year to meet increased orders for delivery during the second half of the year.
Capital expenditures were $2.3 million for the year 2002 compared with $1.3 million for 2001. During the year 2002 the Company enhanced manufacturing capabilities in its Puerto Rico factory and upgraded sales and customer support. For the fourth quarter of 2002, capital expenditures were $0.8 million versus $0.6 million in 2001. Capital expenditures were substantially below depreciation expense for the year 2002.
In September 2002, the Board of Directors authorized the repurchase of up to 500,000 shares, representing approximately 11% of the Company’s common shares outstanding, through open market or privately negotiated transactions through December 31, 2003. Repurchased shares are funded from the Company’s operating cash flow. At December 31, 2002, the Company had repurchased 16,400 shares at an average price of $5.16 per share.
Rocky Shoes & Boots, Inc. and Subsidiaries Condensed Consolidated Statements of Operations
Three Months Ended Year Ended
December 31, December 31,
2002 2001 2002 2001
(Unaudited) (Unaudited)
Net sales $25,561,519 $26,759,512 $88,958,721 $103,319,806
Cost of goods sold 18,261,655 22,631,199 65,528,213 80,067,866
Gross margin 7,299,864 4,128,313 23,430,508 23,251,940
Selling, general
and administrative
expenses 5,126,146 3,751,908 18,661,730 18,175,943
Operating income
before plant
closing costs 2,173,718 196,505 4,768,778 5,075,997
Plant closing costs -- 200,000 -- 1,500,000
Income from
operations 2,173,718 176,505 4,768,778 3,575,997
Other income (expense):
Interest expense (366,062) (517,212) (1,404,496) (2,493,533)
Other-net 162,821 24,796 432,018 354,920
Total other (203,241) (492,416) (972,478) (2,138,613)
Income (loss) before
income taxes 1,970,477 (315,911) 3,796,300 1,437,384
Income tax (benefit) 405,253 (570,794) 953,000 (93,438)
Net income $1,565,224 $254,883 $2,843,300 $1,530,822
