October 31, 2005
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
-------------------
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 24, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-------------------
Commission file number 0-18914
R&B, INC.
Incorporated pursuant to the Laws
of the Commonwealth of Pennsylvania
-------------------
IRS - Employer Identification No. 23-2078856
3400 East Walnut Street, Colmar, Pennsylvania 18915
(215) 997-1800
-------------------
Indicate by check mark 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 such
filing requirements for the past 90 days. Yes |X| No|_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|
As of October 31, 2005 the Registrant had 17,932,259 common shares, $.01 par
value, outstanding.
Page 1 of 17
- ------------------------------------------------------------------------------
R & B, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 24, 2005
Page
Part I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Statements of Operations:
Thirteen Weeks Ended September 24, 2005
and September 25, 2004 .........................3
Thirty-nine Weeks Ended September 24, 2005
and September 25, 2004 .........................4
Balance Sheets....................................5
Statements of Cash Flows..........................6
Notes to Consolidated Financial Statements........7
Item 2. Management's Discussion and
Analysis of Results of Operations and
Financial Condition..............................11
Item 3. Quantitative and Qualitative
Disclosure about Market Risk.....................15
Item 4. Controls and Procedures..........................15
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings................................16
Item 6. Exhibits. . .....................................16
Signatures................................................17
Page 2 of 17
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Thirteen Weeks Ended
------------------------------------
September 24, September 25,
(in thousands, except per share data) 2005 2004
- ----------------------------------------------------------------------------------------------------------------
Net Sales $ 73,783 $ 64,135
Cost of goods sold 48,005 40,196
- ----------------------------------------------------------------------------------------------------------------
Gross profit 25,778 23,939
Selling, general and administrative expenses 17,769 16,315
- ----------------------------------------------------------------------------------------------------------------
Income from operations 8,009 7,624
Interest expense, net of interest income of $4 and $15 672 703
- ----------------------------------------------------------------------------------------------------------------
Income before taxes 7,337 6,921
Provision for taxes 2,724 2,519
- ----------------------------------------------------------------------------------------------------------------
Net Income $ 4,613 $ 4,402
================================================================================================================
Earnings Per Share:
Basic $0.26 $0.25
Diluted $0.25 $0.24
================================================================================================================
Average Shares Outstanding:
Basic 17,932 17,737
Diluted 18,444 18,377
See accompanying notes to consolidated financial statements.
Page 3 of 17
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Thirty-nine Weeks Ended
------------------------------------
September 24, September 25,
(in thousands, except per share data) 2005 2004
- ----------------------------------------------------------------------------------------------------------------
Net Sales $ 203,625 $ 184,417
Cost of goods sold 130,211 114,903
- ----------------------------------------------------------------------------------------------------------------
Gross profit 73,414 69,514
Selling, general and administrative expenses 51,317 46,819
- ----------------------------------------------------------------------------------------------------------------
Income from operations 22,097 22,695
Interest expense, net of interest income of $17 and $92 1,961 2,233
- ----------------------------------------------------------------------------------------------------------------
Income before taxes 20,136 20,462
Provision for taxes 7,441 7,425
- ----------------------------------------------------------------------------------------------------------------
Net Income $ 12,695 $ 13,037
================================================================================================================
Earnings Per Share:
Basic $ 0.71 $ 0.74
Diluted $ 0.69 $ 0.71
================================================================================================================
Average Shares Outstanding:
Basic 17,915 17,651
Diluted 18,452 18,343
See accompanying notes to consolidated financial statements.
Page 4 of 17
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 24, December 25,
(in thousands, except share data) 2005 2004
- -------------------------------------------------------------- --------------------- ---------------------
Assets (unaudited)
Current Assets:
Cash and cash equivalents $ 3,152 $ 7,152
Accounts receivable, less allowance for doubtful
accounts and customer credits of $23,216 and $20,575 60,472 60,962
Inventories 75,015 61,436
Deferred income taxes 8,904 8,417
Prepaids and other current assets 1,535 1,609
- -------------------------------------------------------------- --------------------- ---------------------
Total current assets 149,078 139,576
- -------------------------------------------------------------- --------------------- ---------------------
Property, Plant and Equipment, net 27,384 25,698
Goodwill 29,619 29,410
Other Assets 785 720
- -------------------------------------------------------------- --------------------- ---------------------
Total $206,866 $195,404
============================================================== ===================== =====================
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt $ 9,064 $ 9,045
Accounts payable 14,097 15,599
Accrued compensation 6,844 8,028
Other accrued liabilities 6,183 5,319
- -------------------------------------------------------------- --------------------- ---------------------
Total current liabilities 36,188 37,991
Other Long-Term Liabilities 830 -
Long-Term Debt 25,643 25,714
Deferred Income Taxes 7,752 6,472
Commitments and Contingencies
Shareholders' Equity:
Common stock, par value $.01; authorized
25,000,000 shares; issued 17,932,259 and 17,871,928 179 179
Additional paid-in capital 35,158 34,659
Cumulative translation adjustments 1,541 3,509
Retained earnings 99,575 86,880
Total shareholders' equity 136,453 125,227
- -------------------------------------------------------------- --------------------- ---------------------
Total $206,866 $195,404
============================================================== ===================== =====================
See accompanying notes to consolidated financial statements
Page 5 of 17
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Thirty-nine Weeks Ended
-----------------------------------------
September 24, September 25,
(in thousands) 2005 2004
- --------------------------------------------------------------------------------- -------------------- --------------------
Cash Flows from Operating Activities:
Net income $ 12,695 $ 13,037
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 4,194 3,388
Provision for doubtful accounts 189 220
Provision for deferred income taxes 742 925
Changes in assets and liabilities:
Accounts receivable 286 (14,112)
Inventories (11,457) (9,812)
Prepaids and other (7) (621)
Accounts payable (1,537) 6,147
Other accrued liabilities (1,405) 1,609
Other long-term liabilities (487) -
- --------------------------------------------------------------------------------- -------------------- --------------------
Cash provided by operating activities 3,213 781
- --------------------------------------------------------------------------------- -------------------- --------------------
Cash Flows from Investing Activities:
Property, plant and equipment additions (5,522) (9,223)
Purchases of short-term investments - (4,821)
Proceeds from maturities of short-term investments - 14,726
Business acquisition, net of cash acquired (1,680) -
- --------------------------------------------------------------------------------- -------------------- --------------------
Cash (used in) provided by investing activities (7,202) 682
- --------------------------------------------------------------------------------- -------------------- --------------------
Cash Flows from Financing Activities:
Repayment of term loan (8,571) (8,571)
Net proceeds from revolving credit facility 8,500 -
Proceeds from common stock issuances 60 224
- --------------------------------------------------------------------------------- -------------------- --------------------
Cash used in financing activities (11) (8,347)
- --------------------------------------------------------------------------------- -------------------- --------------------
Net Decrease in Cash and Cash Equivalents (4,000) (6,884)
Cash and Cash Equivalents, Beginning of Period 7,152 15,177
- --------------------------------------------------------------------------------- -------------------- --------------------
Cash and Cash Equivalents, End of Period $ 3,152 $ 8,293
================================================================================= ==================== ====================
Supplemental Cash Flow Information
Cash paid for interest expense $ 1,904 $ 2,324
Cash paid for income taxes $ 6,358 $ 5,997
See accompanying notes to consolidated financial statements.
Page 6 of 17
R&B, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 24, 2005 AND SEPTEMBER 25, 2004
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. However, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the thirty-nine week period ended
September 24, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2005. The Company may
experience significant fluctuations from quarter to quarter in its results of
operations due to the timing of orders placed by the Company's customers.
Generally, the second and third quarters have the highest level of customer
orders, but the introduction of new products and product lines to customers may
cause significant fluctuations from quarter to quarter. For further
information, refer to the consolidated financial statements and footnotes
thereto included in R&B, Inc.'s (the "Company") Annual Report on Form 10-K for
the year ended December 25, 2004.
2. Sales of Accounts Receivable
The Company has entered into several customer sponsored programs
administered by unrelated financial institutions that permit the Company to
sell, without recourse, certain accounts receivable at discounted rates to the
financial institutions. The Company does not retain any servicing requirements
for these accounts receivable. Transactions under these agreements are
accounted for as sales of accounts receivable following the provisions of
Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
- - A Replacement of FASB Statement 125." At September 24, 2005 and December 25,
2004, respectively, $25.9 million and $18.0 million of accounts receivable were
sold and removed from the consolidated balance sheets. Selling, general and
administrative expenses for the thirty-nine weeks ended September 24, 2005, and
September 25, 2004 include $0.8 million and $0.1 million, respectively, in
financing costs associated with these accounts receivable sales programs.
3. Inventories
Inventories include the cost of material, freight, direct labor and
overhead utilized in the processing of the Company's products. Inventories were
as follows:
September 24, December 25,
(in thousands) 2005 2004
- ----------------------- ------------------ -------------------
Bulk product $30,200 $26,407
Finished product 41,974 32,029
Packaging materials 2,841 3,000
- ----------------------- ------------------ -------------------
Total $75,015 $61,436
======================= ================== ===================
Included in Finished product as of September 24, 2005 is approximately $2.4
million in inventory held on consignment.
4. Goodwill
The Company follows the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets." Goodwill activity during the thirty-nine week period ended
September 24, 2005 is as follows: (in thousands)
Page 7 of 17
Balance, December 25, 2005 $ 29,410
Acquisition 674
Translation (465)
Balance, September 24, 2005 $ 29,619
-------------
In June 2005, the Company acquired The Automotive Edge/Hermoff (Hermoff)
for approximately $1.7 million. The consolidated results include Hermoff since
June 1, 2005. The Company has not presented pro forma results of operations for
the thirty-nine weeks ended September 24, 2005 and September 25, 2004, assuming
the acquisition had occurred at the beginning of the respective periods as
these results would not have been materially different than actual results for
the periods. The goodwill recorded as a result of the acquisition will be
revised upon final determination of the purchase price allocation.
5. Long-Term Debt
In May 2005, the Company amended its existing Revolving Credit
Facility. The amended facility expires in June 2007. The May 2005 amendment
increased the total credit facility from $10 million to $20 million. Borrowings
under the amended facility are on an unsecured basis with interest at rates
ranging from LIBOR plus 65 basis points to LIBOR plus 150 basis points based
upon the achievement of certain benchmarks related to the ratio of funded debt
to EBITDA. The interest rate at September 24, 2005 was LIBOR plus 85 basis
points (4.68%). Borrowings under the facility were $8.5 million as of September
24, 2005. There were no borrowings under the facility as of December 25, 2004.
6. Earnings Per Share
The following table sets forth the computation of basic earnings per
share and diluted earnings per share for the thirteen week and thirty-nine week
periods ended September 24, 2005 and September 25, 2004.
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------------------------------------------------------------
September 24, September 25, September 24, September 25,
(in thousands, except per share data) 2005 2004 2005 2004
- --------------------------------------------------- ------------------- ------------------ ------------------ ------------------
Numerator:
Net income ...................................... $.4,613 $ 4,402 $ 12,695 $13,037
Denominator:
Weighted average shares outstanding
uased in basic earnings per share calculation 17,932 17,737 17,915 17,651
Effect of dilutive stock options................. 512 640 537 692
------------------- ------------------ ------------------ ------------------
Adjusted weighted average shares
outstanding .................................... 18,444 18,377 18,452 18,343
=================== ================== ================== ==================
Basic earnings per share.............................. $ 0.26 $ 0.25 $ 0.71 $ 0.74
=================== ================== ================== ==================
Diluted earnings per share........................... $ 0.25 $ 0.24 $ 0.69 $ 0.71
=================== ================== ================== ==================
On February 24, 2005, the Company's Board of Directors approved a
two-for-one split of the Company's common stock, payable in the form of a stock
dividend of one share for each share held. The Board set March 15, 2005 as the
record date for the determination of the shareholders entitled to receive the
additional shares. The shares were distributed to the shareholders of record on
March 28, 2005. All earnings per share and common stock information is
presented as if the stock split occurred prior to the earliest year included in
these consolidated financial statements.
7. Stock-Based Compensation
Effective May 18, 2000 the Company amended and restated its incentive Stock
Option Plan (the "Plan"). Under the terms of the Plan, the Board of Directors
Page 8 of 17
of the Company may grant incentive stock options and non-qualified stock
options or combinations thereof to purchase up to 2,345,000 shares of common
stock to officers, directors and employees. Grants under the Plan must be made
within 10 years of the plan amendment date and are exercisable at the
discretion of the Board of Directors but in no event more than 10 years from
the date of grant. At September 24, 2005, options to acquire 290,511 shares
were available for grant under the Plan.
The Company accounts for the Plan under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees", and related interpretations. Under
APB No. 25, compensation expense is based on the difference, if any, on the
date of the grant between the fair value of the common stock and the exercise
price of the option. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation.
Thirteen Weeks Ended Thirty-nine Weeks Ended
- -------------------------------------------- -------------------------------------- ------------------------------------------
(in thousands, except per share data) September 24, September 25, September 24, September 25,
2005 2004 2005 2004
- -------------------------------------------- ----------------- ------------------- ------------------ -----------------------
Net income:
Net income, as reported $ 4,613 $ 4,402 $ 12,695 $ 13,037
Less: Stock-based employee
compensation expense, net of related tax
effects, determined under the fair value
based method for all awards (66) (35) (187) (105)
Net income, pro forma $ 4,547 $ 4,367 $ 12,508 $ 12,932
- -------------------------------------------- ----------------- ------------------- ------------------ -----------------------
Earnings per share:
Basic - as reported $ 0.26 $ 0.25 $ 0.71 $ 0.74
Basic - pro forma $ 0.25 $ 0.25 $ 0.70 $ 0.73
Diluted - as reported $ 0.25 $ 0.24 $ 0.69 $ 0.71
Diluted - pro forma $ 0.25 $ 0.24 $ 0.68 $ 0.71
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions:
2005 2004
---- ----
Expected dividend yield 0% 0%
Expected stock price volatility 47% 50%
Risk-free interest rate 3.9% 3.7%
Expected life of option 7.5 years 7.5 years
8. Related-Party Transaction
The Company has entered into a noncancelable operating lease for its
primary operating facility from a partnership in which the Company's Chief
Executive Officer and Executive Vice President are partners.
9. New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 123R, "Share-Based Payment". This Statement is a revision of
SFAS No. 123 and supersedes APB No. 25 and its related implementation
Page 9 of 17
guidance. SFAS No. 123R requires a company to measure the grant-date fair value
of equity awards given to employees in exchange for services and recognize that
cost over the period that such services are performed. SFAS No. 123R is
effective for the first annual reporting period that begins after June 15,
2005. The Company is currently evaluating the two methods of adoption allowed
by SFAS No. 123R: the modified-prospective transition method and the
modified-retrospective transition method. While the Company has not yet
determined the precise impact that this statement will have on its financial
condition and results of operations for fiscal 2006, assuming future annual
stock option awards are comparable to prior years' annual awards and the
Black-Scholes method is used to compute the value of the awards, the annualized
impact on diluted earnings per share is expected to be consistent with our pro
forma SFAS No. 123 disclosures.
In December, 2004, the FASB issued two FASB Staff Positions (FSP)
regarding the accounting implications of the American Jobs Creation Act of
2004. The Company is assessing the impact, if any, that FSP No. 109-1,
"Application of FASB Statement No. 109 'Accounting for Income Taxes' to the
Tax Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" will have on the Company's effective tax rate in 2005.
The Company does not believe that FSP No. 109-2 "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision with the American
Jobs Creation Act of 2004" will have an impact on the Company's effective tax
rate in 2005.
In December 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
Amendment of ARB No. 43, Chapter 4". SFAS No. 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material and requires that these items be recognized as current period charges.
SFAS No. 151 applies only to inventory costs incurred during periods beginning
after the effective date and also requires that the allocation of fixed
production overhead to conversion costs be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for the Company's fiscal year
beginning January 1, 2006. The Company is currently assessing the impact, if
any, of the adoption of the provisions of SFAS No. 151.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of
Non-monetary Assets, An Amendment of APB Opinion No. 29". SFAS No. 153
eliminates the exception for exchange of similar productive assets and replaces
it with a general exception for exchanges of non-monetary assets that do not
have commercial substance. SFAS No. 153 is effective for non-monetary assets
and exchanges occurring in fiscal periods beginning after June 15, 2005, the
Company's third fiscal quarter. As the Company does not engage in exchanges of
non-monetary assets, implementation of this statement did not have an impact on
its consolidated financial condition or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections". SFAS No. 154 is a replacement of APB No. 20 and FASB Statement
No.3. SFAS No. 154 provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes retrospective
application as the required method for reporting a change in accounting
principle. SFAS No. 154 provides guidance for determining whether retrospective
application of a change in accounting principle is impracticable and for
reporting a change when retrospective application is impracticable. The
reporting of a correction of an error by restating previously issued financial
statements is also addressed by SFAS No. 154. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company will adopt this pronouncement beginning in
fiscal year 2006.
Page 10 of 17
R&B, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Executive Summary
The Company is a leading supplier of original equipment dealer
"Exclusive" automotive replacement parts, fasteners and service line products
to the automotive aftermarket and household hardware to the general merchandise
markets. The Company's products are marketed under more than seventy
proprietary brand names, through its Motormite(R), Dorman(R), Allparts(TM),
Scan-Tech(TM), MPI(TM) and Pik-A-Nut(TM) businesses.
New product development is a critical success factor for the Company.
The Company continues to invest heavily in resources necessary for it to
increase its new product development efforts and to strengthen its
relationships with its customers. These investments are primarily in the form
of increased product development and awareness programs, customer service
improvements and increased customer credits and allowances. The Company
believes that this will enable it to provide an expanding array of new product
offerings and grow its revenues.
The automotive aftermarket has been consolidating over the past several
years. As a result, the Company's customers have more leverage in negotiations
and have been seeking further pricing concessions from the Company. These
requests can come in different forms depending upon the customer. Some
customers seek selling price reductions while others request extended payment
terms or larger returns of slow moving product when negotiating with the
Company. While the Company does its best to avoid such concessions, in some
cases selling prices have been adjusted downward, payment terms to customers
have been extended and returns of product have exceeded historical levels.
Product returns and selling price reductions affect the Company's profit levels
while terms extensions generally reduce operating cash flow and require
additional capital to finance the business. Management expects these trends to
continue for the foreseeable future.
In 2005, the Company agreed to consign inventory of certain product
lines on behalf of a large customer. In exchange, the Company received the
customer's commitment to transition two other product lines from other
suppliers to the Company and to continue all the programs for a minimum of two
years. The customer also agreed to purchase any inventory on consignment or to
continue to sell through it in the event that the Company is replaced as the
primary supplier of these lines after two years. The transaction did not have
a material impact on profitability or cash flow in the nine months ended
September 24, 2005. However, cash flows, gross profits and net income in future
periods will be lower than they otherwise would have been as this arrangement
will result in an increase in the time it takes for the Company to record sales
and receive cash from the customer.
The Company may experience significant fluctuations from quarter to
quarter in its results of operations due to the timing of orders placed by the
Company's customers. Generally, the second and third quarters have the highest
level of customer orders, but the introduction of new products and product
lines to customers may cause significant fluctuations from quarter to quarter.
The Company operates on a fifty-two, fifty-three week period ending on
the last Saturday of the calendar year.
Acquisition of The Automotive Edge/Hermoff
In June 2005, the Company acquired Hermoff for approximately $1.7
million. The consolidated results include Hermoff since June 1, 2005. The
Company has not presented pro forma results of operations for the thirty-nine
weeks ended
Page 11 of 17
September 24, 2005 and September 25, 2004, assuming the acquisition had
occurred at the beginning of the respective periods as these results would not
have been materially different from actual results for the periods.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of net sales represented by certain items in the Company's
Consolidated Statements of Operations:
Percentage of Net Sales
----------------------------------------------------------------------------
For the Thirteen Weeks Ended For the Thirty-nine Weeks Ended
----------------------------------------------------------------------------
September 24, September 25, September 24, September 25,
2005 2004 2005 2004
- ------------------------------------------------- ------------------ ------------------- ------------------ ------------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 65.1% 62.7% 63.9% 62.3%
- ------------------------------------------------- ------------------ ------------------- ------------------ ------------------
Gross profit 34.9% 37.3% 36.1% 37.7%
Selling, general and administrative expenses 24.0% 25.4% 25.2% 25.4%
- ------------------------------------------------- ------------------ ------------------- ------------------ ------------------
Income from operations 10.9% 11.9% 10.9% 12.3%
Interest expense, net 1.0% 1.1% 1.0% 1.2%
- ------------------------------------------------- ------------------ ------------------- ------------------ ------------------
Income before taxes 9.9% 10.8% 9.9% 11.1%
Provision for taxes 3.6% 3.9% 3.7% 4.0%
- ------------------------------------------------- ------------------ ------------------- ------------------ ------------------
Net Income 6.3% 6.9% 6.2% 7.1%
================================================= ================== =================== ================== ==================
Thirteen Weeks Ended September 24, 2005 Compared to Thirteen Weeks Ended
September 25, 2004
Net sales increased 15% to $73.8 million for the thirteen weeks ended
September 24, 2005 from $64.1 million for the same period in 2004. Excluding
Hermoff, sales increased 13% in the three months ended September 24, 2005.
Sales in 2005 are up primarily as a result of continued growth in new product
sales.
Cost of goods sold, as a percentage of sales, increased to 65.1% for
the thirteen weeks ended September 24, 2005 from 62.7% in the same period last
year. The increase in cost of sales as a percentage of sales is primarily the
result of a continued mix shift to lower margin automotive hard parts and the
impact of returns associated with line updates during the quarter.
Selling, general and administrative expenses for the thirteen weeks
ended September 24, 2005 increased $1.5 million, or 9%, to $17.8 million from
$16.3 million for the same period in 2004. This increase is the result of the
Company's decision to invest additional resources in new product development
and promotional support as well as volume-driven variable expense increases,
and inflationary increases in wages and other costs. Selling, general and
administrative expenses for the thirteen weeks ended September 24, 2005 and
September 25, 2004 include $0.4 million and $0.1 million, respectively in
financing costs associated with accounts receivable sales programs whereby the
Company sells its accounts receivable on a non-recourse basis to financial
institutions.
Interest expense, net, remained flat at $0.7 million for the thirteen
weeks ended September 24, 2005.
The Company's effective tax rate increased to 37.1% for the thirteen
weeks ended September 24, 2005 from 36.4% for the thirteen weeks ended
September 25, 2004 due to the loss of certain state tax benefits in 2005 as a
result of changes in state tax legislation.
Page 12 of 17
Thirty-nine Weeks Ended September 24, 2005 Compared to Thirty-nine Weeks Ended
September 25, 2004
Net sales increased 10% to $203.6 million for the thirty-nine weeks
ended September 24, 2005 from $184.4 million for the same period in 2004. Sales
volume in 2005 increased as a result of continued sales growth from products
introduced within the last twelve months.
Cost of goods sold, as a percentage of sales, was 63.9% for the
thirty-nine weeks ended September 24, 2005 compared to 62.3% in the same period
last year. The increase in cost of sales as a percentage of sales is primarily
the result of a continued shift in sales mix toward lower margin automotive
hard parts.
Selling, general and administrative expenses for the thirty-nine weeks
ended September 24, 2005 increased $4.5 million, or 10%, to $51.3 million from
$46.8 million for the same period in 2004. This increase is the result of the
headcount additions to increase new product development capabilities as well as
volume-driven variable expense increases, and inflationary increases in wages
and other costs. Selling, general and administrative expenses for the
thirty-nine weeks ended September 24, 2005 and September 25, 2004 include $0.8
million and $0.1 million, respectively in financing costs associated with
accounts receivable sales programs whereby the Company sells its accounts
receivable on a non-recourse basis to financial institutions.
Interest expense, net, decreased to $2.0 million for the thirty-nine
weeks ended September 24, 2005 from $2.2 million in the prior year due to a
lower effective borrowing rate as a result of repayments of the Company's
Senior Notes.
The Company's effective tax rate increased to 37.0% for the
thirty-nine weeks ended September 24, 2005 from 36.3% for the thirty-nine weeks
ended September 25, 2004 due to the loss of certain state tax benefits in 2005
as a result of changes in state tax legislation.
Liquidity and Capital Resources
Historically, the Company has financed its growth through a
combination of cash flow from operations, accounts receivable sales programs
provided by certain customers and through the issuance of senior indebtedness
through its bank credit facility and senior note agreements. At September 24,
2005, working capital was $112.9 million, total long-term debt (including the
current portion) was $34.7 million and shareholders' equity was $136.5 million.
Cash and cash equivalents as of September 24, 2005 totaled $3.2 million.
Over the past several years the Company has extended payment terms to
certain customers as a result of customer requests and market demands. These
extended terms have resulted in increased accounts receivable levels and
significant uses of cash flow. The Company participates in accounts receivable
sales programs with several customers which allow it to sell its accounts
receivable on a non-recourse basis to financial institutions to offset the
negative cash flow impact of these payment terms extensions. As of September
24, 2005 and December 25, 2004, respectively, the Company had sold $25.9
million and $18.0 million in accounts receivable under these programs and had
removed them from its balance sheets. The Company expects continued pressure to
extend its payment terms for the foreseeable future. Further extensions of
customer payment terms will result in additional uses of cash flow or increased
costs associated with the sale of accounts receivable.
Long-term debt consists primarily of $25.7 million in Senior Notes that
were originally issued in August 1998, in a private placement on an unsecured
basis ("Notes"). The Notes bear a 6.81% fixed interest rate, payable quarterly.
Annual principal payments of $8.6 million are due each August through 2008. The
Notes require, among other things, that the Company maintain certain financial
covenants relating to debt to capital ratios and minimum net worth.
In May 2005, the Company amended its existing Revolving Credit
Facility. The amended facility expires in June 2007. The May 2005 amendment
increased the total credit facility from $10 million to $20 million. Borrowings
under the amended facility are on an unsecured basis with interest at rates
ranging from LIBOR plus 65 basis points to LIBOR plus 150 basis points based
upon the achievement of certain benchmarks related to the ratio of funded debt
to EBITDA. The interest rate at September 24, 2005 was LIBOR plus 85 basis
points (4.68%). Borrowings under the facility were $8.5 million as of September
24, 2005. The loan agreement also contains covenants, the most restrictive of
which pertain to net worth and the ratio of debt to EBITDA.
Page 13 of 17
In November 2001, the Company amended certain agreements related to its
1998 acquisition of Scan-Tech USA/Sweden A.B. and related entities
("Scan-Tech") in exchange for consideration of approximately $3.2 million to be
paid in installments through December 31, 2005. The remaining amount
outstanding under this obligation was $0.5 million at September 24, 2005 and is
due to an entity controlled by the President of one of the Company's
subsidiaries.
The Company's business activities do not include the use of
unconsolidated special purpose entities, and there are no significant business
transactions that have not been reflected in the accompanying financial
statements.
The Company reported a net source of cash flow from its operating
activities of $3.2 million in the thirty-nine weeks ended September 24, 2005.
Net income adjusted for depreciation was the primary source of operating cash
flow in the thirty- nine weeks ended September 24, 2005. The primary uses of
cash flow were inventory, accounts payable and accrued liabilities which
utilized $11.5 million, $1.5 million and $1.4 million in cash, respectively.
Inventory utilized $11.5 million in cash in the nine months ended September 24,
2005 primarily as a result of inventory purchased to support new product
initiatives and $2.5 million of inventory placed on consignment to one customer
in 2005. Accounts receivable resulted in a net source of cash of only $0.3
million despite a 10% sales increase for the nine months ended September 24,
2005 as higher sales of accounts receivable under accounts receivable sales
programs offset the impact of this sales growth and the continued trend towards
longer payment terms to certain customers.
Investing activities used $7.2 million of cash in the thirty-nine weeks
ended September 24, 2005 as a result of $5.5 million in additions to property,
plant and equipment and $1.7 million in cash utilized to purchase Hermoff. The
Company's largest 2005 capital project is the automation and expansion of its
central distribution center in Warsaw, Kentucky. This project began in 2004 and
was originally expected to be completed in early 2005 at a cost of $5.0
million. Scope changes and other factors are now expected to delay completion
of the project until early 2006, and total costs are now expected to be
approximately $6.5 million. Capital spending in the thirty-nine weeks ended
September 24, 2005 also included tooling associated with new products, upgrades
to information systems, purchases of equipment designed to improve operational
efficiencies and scheduled equipment replacements.
Financing activities resulted in no net change in cash in the
thirty-nine weeks ended September 24, 2005 as proceeds of $8.5 million from the
Company's amended revolving credit facility offset cash used to make the
scheduled August 2005 repayment of $8.6 million on the Company's Senior Notes.
The Company believes that cash and cash equivalents on hand and cash
generated from operations together with its available sources of capital are
sufficient to meet its ongoing cash needs for the foreseeable future.
Foreign Currency Fluctuations
In 2004, approximately 60% of the Company's products were purchased in
a variety of foreign countries. The products generally are purchased through
purchase orders with the purchase price specified in U.S. dollars. Accordingly,
the Company does not have exposure to fluctuations in the relationship between
the dollar and various foreign currencies between the time of execution of the
purchase order and payment for the product. However, weakness in the dollar has
resulted in some materials price increase and pressure from several foreign
suppliers to increase prices further. To the extent that the dollar decreases
in value to foreign currencies in the future or the present weakness in the
dollar continues for a sustained period of time, the price of the product in
dollars for new purchase orders may increase further.
The Company makes significant purchases of product from Chinese
vendors. Until recently, the Chinese Yuan exchange rate has been fixed against
the U.S. Dollar. On July 21, 2005, the Chinese government announced an
immediate two percent (2%) revaluation of the Yuan against the U.S. Dollar and
that going forward it will allow the Yuan to fluctuate against a basket of
currencies. Most experts believe that the value of the Yuan over the long term
will increase further relative to the U.S. Dollar as a result. This will most
likely result in an increase in the cost of products that are purchased from
China. The Company is currently evaluating the impact, if any, that this action
will have on its business or results of operations.
Impact of Inflation
The Company has not generally been adversely affected by inflation,
although the Company did experience some material cost increases as a result of
raw materials shortages in 2004. These increases did not have a material impact
on the Company. The Company believes that further cost increases could
potentially be mitigated by passing along price increases to customers or
through the use of alternative suppliers or resourcing purchases to other
countries, however there can be no assurance that the Company will be
successful in such efforts.
Page 14 of 17
Cautionary Statement Regarding Forward Looking Statements
Certain statements periodically made by or on behalf of the Company and
certain statements contained herein including statements in Management's
Discussion and Analysis of Financial Condition and Results of Operation, such
as statements regarding litigation; and certain other statements contained
herein regarding matters that are not historical fact are forward looking
statements (as such term is defined in the Securities Act of 1933), and because
such statements involve risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward looking statements.
Factors that cause actual results to differ materially include but are not
limited to those factors discussed in the Company's Annual Report on Form 10-K
under "Business - Risk Factors."
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's market risk is the potential loss arising from adverse
changes in interest rates. With the exception of the Company's revolving credit
facility, long-term debt obligations are at fixed interest rates and
denominated in U.S. dollars. The Company manages its interest rate risk by
monitoring trends in interest rates as a basis for determining whether to enter
into fixed rate or variable rate agreements. Under the terms of the Company's
revolving credit facility and customer- sponsored programs to sell accounts
receivable, a change in either the lender's base rate or LIBOR would affect the
rate at which the Company could borrow funds thereunder. The Company believes
that the effect of any such change would be minimal.
Item 4. Controls and Procedures
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls
As of the date of this quarterly report, the Company evaluated the
effectiveness of the design and operation of its "disclosure controls and
procedures" ("Disclosure Controls"). This evaluation ("Controls Evaluation")
was done under the supervision and with the participation of management,
including the Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO").
Limitations on the Effectiveness of Controls
The Company's management, including the CEO and CFO, does not expect
that its Disclosure Controls or its "internal controls and procedures for
financial reporting" ("Internal Controls") will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision- making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.
Conclusions
Based upon the Controls Evaluation, the CEO and CFO have concluded
that, subject to the limitations noted above, the Disclosure Controls are
effective to timely alert management to material information relating to the
Company during the period when its periodic reports are being prepared.
In accordance with SEC requirements, the CEO and CFO note that, since
the date of the Controls Evaluation to the date of this quarterly report, there
have been no significant changes in Internal Controls or in other factors that
could significantly affect Internal Controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Page 15 of 17
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In addition to commitments and obligations which arise in the ordinary
course of business, the Company is subject to various claims and legal actions
from time to time involving contracts, competitive practices, trademark rights,
product liability claims and other matters arising out of the conduct of the
Company's business.
Item 6. Exhibits
31.1 Certification of Chief Executive Officer as required by
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer as required by
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive and Chief Financial
Officer as required by Section 906 of the Sarbanes-
Oxley Act of 2002.
Page 16 of 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
R & B, INC.
Date October 31 , 2005 \s\ Richard Berman
-------------------- -------------------------
Richard Berman
President and Chief Executive Officer
Date October 31, 2005 \s\ Mathias Barton
------------------ ---------------------------
Mathias Barton
Chief Financial Officer and
Principal Accounting Officer
Page 17 of 17