UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2006
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________to __________________________
Commission File Number: 0-18914
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R&B, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2078856
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3400 East Walnut Street, Colmar, Pennsylvania 18915
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(Address of principal executive offices) (Zip Code)
(215) 997-1800
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(Registrant's telephone number,
including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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. |X| Yes |_| No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). |_| Yes |X|No
As of May 3, 2006 the Registrant had 17,737,301 shares of common stock, $.01 par
value, outstanding.
Page 1 of 16
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R & B, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
April 1, 2006
Part I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Statements of Operations:
Thirteen Weeks Ended April 1, 2006 and March 26, 2005 ........ 3
Balance Sheets................................................ 4
Statements of Cash Flows...................................... 5
Notes to Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations and .................................10
Item 3. Quantitative and Qualitative Disclosure about Market Risk......14
Item 4. Controls and Procedures........................................14
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings..............................................15
Item 1A. Risk Factors...................................................15
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds............................................15
Item 3. Defaults Upon Senior Securities................................15
Item 4. Submission of Matters to a Vote of Security Holders............15
Item 5. Other Information..............................................15
Item 6. Exhibits.......................................................15
Signatures..............................................................16
Page 2 of 16
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Thirteen Weeks Ended
------------------------------------
April 1, March 26,
(in thousands, except per share data) 2006 2005
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Net Sales $ 68,865 $ 61,231
Cost of goods sold 44,176 38,538
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Gross profit 24,689 22,693
Selling, general and administrative expenses 18,659 16,623
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Income from operations 6,030 6,070
Interest expense, net 590 607
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Income before taxes 5,440 5,463
Provision for taxes 2,020 2,009
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Net Income $ 3,420 $ 3,454
===============================================================================
Earnings Per Share:
Basic $0.19 $0.19
Diluted $0.19 $0.19
===============================================================================
Average Shares Outstanding:
Basic 17,744 17,885
Diluted 18,158 18,449
See accompanying notes to consolidated financial statements.
Page 3 of 16
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 1, December 31,
(in thousands, except share data) 2006 2005
- -------------------------------------------------------------- --------------------- ---------------------
Assets (unaudited)
Current Assets:
Cash and cash equivalents $ 2,507 $ 2,944
Accounts receivable, less allowance for doubtful
accounts and customer credits of $23,260 and $22,728 62,547 64,778
Inventories 78,559 75,535
Deferred income taxes 9,738 9,560
Prepaids and other current assets 1,447 1,545
- -------------------------------------------------------------- --------------------- ---------------------
Total current assets 154,798 154,362
- -------------------------------------------------------------- --------------------- ---------------------
Property, Plant and Equipment, net 27,358 27,473
Goodwill 29,676 29,617
Other Assets 806 704
- -------------------------------------------------------------- --------------------- ---------------------
Total $212,638 $212,156
============================================================== ===================== =====================
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt $ 8,571 $ 8,571
Accounts payable 14,136 14,739
Accrued compensation 5,333 6,727
Other accrued liabilities 7,357 8,513
- -------------------------------------------------------------- --------------------- ---------------------
Total current liabilities 35,397 38,550
Other Long-Term Liabilities 116 626
Long-Term Debt 27,643 27,243
Deferred Income Taxes 7,266 7,195
Commitments and Contingencies
Shareholders' Equity:
Common stock, par value $.01; authorized
25,000,000 shares; issued 17,743,318 and 17,749,583 177 177
Additional paid-in capital 33,145 33,138
Cumulative translation adjustments 1,517 1,270
Retained earnings 107,377 103,957
Total shareholders' equity 142,216 138,542
- -------------------------------------------------------------- --------------------- ---------------------
Total $212,638 $212,156
============================================================== ===================== =====================
See accompanying notes to consolidated financial statements.
Page 4 of 16
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Thirteen Weeks Ended
-------------------------------------------
April 1, March 26,
(in thousands) 2006 2005
- ------------------------------------------------------------------------------ ------------------- -----------------------
Cash Flows from Operating Activities:
Net income $ 3,420 $ 3,454
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 1,622 1,326
Provision for doubtful accounts 200 38
(Benefit) provision for deferred income tax (104) 268
Changes in assets and liabilities:
Accounts receivable 2,099 4,214
Inventories (2,898) (1,701)
Prepaids and other current assets 104 601
Other assets (119) -
Accounts payable (631) (4,604)
Accrued compensation and other liabilities (2,918) (3,016)
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Cash provided by operating activities 775 580
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Cash Flows from Investing Activities:
Property, plant and equipment additions (1,502) (2,160)
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Cash used in investing activities (1,502) (2,160)
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Cash Flows from Financing Activities:
ACTIVITIES: a
Net proceeds from revolving credit facility 400 -
Proceeds from exercise of stock options 9 32
Purchase and cancellation of common stock (119) -
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Cash provided by financing activities 290 32
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Net Decrease in Cash and Cash Equivalents (437) (1,548)
Cash and Cash Equivalents, Beginning of Period 2,944 7,152
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Cash and Cash Equivalents, End of Period $ 2,507 $ 5,604
============================================================================== =================== =======================
Supplemental Cash Flow Information
Cash paid for interest expense $ 582 $ 623
Cash paid for income taxes $ 2,015 $ 1,139
See accompanying notes to consolidated financial statements.
Page 5 of 16
R&B, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEKS ENDED APRIL 1, 2006 AND MARCH 26, 2005 (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 thirteen week period ended April
1, 2006 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 30, 2006. 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 31, 2005.
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 April 1, 2006 and December 31, 2005, respectively,
$28.6 million and $23.2 million of accounts receivable were sold and removed
from the consolidated balance sheets. Selling, general and administrative
expenses for the thirteen weeks ended April 1, 2006 and March 26, 2005 include
$0.5 million and $0.3 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:
April 1, December 31,
(in thousands) 2006 2005
- ----------------------- ------------------ -------------------
Bulk product $29,946 $30,548
Finished product 45,668 42,317
Packaging materials 2,945 2,670
- ----------------------- ------------------ -------------------
Total $78,559 $75,535
======================= ================== ===================
Included in finished product as of April 1, 2006 is approximately $1.8 million
in inventory held on consignment with one customer.
4. Goodwill
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 thirteen weeks ended March 26, 2005 assuming the acquisition had occurred at
the beginning of the period as this result would not have been materially
different than actual results for the period. The goodwill recorded as a result
of the acquisition may be revised upon final determination of the purchase price
allocation.
Goodwill activity during the thirteen weeks ended April 1, 2006 related
primarily to the translation of goodwill balances from local currencies to U.S.
dollars.
Page 6 of 16
5. 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 of the Company may grant incentive stock options or 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 April 1, 2006, options to acquire 278,760 shares were
available for grant under the Plan.
Effective January 1, 2006, the Company adopted SFAS No. 123R and related
interpretations and began expensing the grant-date fair value of employee stock
options. Prior to January 1, 2006, the Company applied Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation expense was recognized in net income for employee stock options for
those options granted which had an exercise price equal to the market value of
the underlying common stock on the date of grant.
The Company adopted SFAS No. 123R using the modified prospective
transition method and therefore has not restated prior periods. Under this
transition method, compensation cost associated with employee stock options
recognized in 2006 includes amortization related to the remaining unvested
portion of stock option awards granted prior to January 1, 2006, and
amortization related to new awards granted after January 1, 2006. Prior to the
adoption of SFAS No. 123R, the Company presented tax benefits resulting from
stock-based compensation as operating cash flows in the "consolidated statements
of cash flows." SFAS No. 123R requires that cash flows resulting from tax
deductions in excess of compensation cost recognized in the financial statements
be classified as financing cash flows.
Compensation cost is recognized on a straight-line basis over the vesting
period during which employees perform related services. The compensation cost
charged against income in the first quarter of 2006 for its stock-based
compensation program was $117,000 before taxes. The compensation cost recognized
is classified as selling, general and administrative expense in the consolidated
income statement. No cost was capitalized during fiscal 2006. The Company
included a forfeiture assumption of 2.6% in the calculation of expense.
The fair value of options granted in the first quarter of 2006 was
estimated using the Black-Scholes option valuation model that used the
assumptions noted in the table below. Expected volatility and expected dividend
yield are based on the actual historical experience of the Company's stock. The
expected life represents the period of time that options granted are expected to
be outstanding and was calculated using the simplified method prescribed by the
Securities and Exchange Commission Staff Accounting Bulletin No. 107. The
risk-free rate is based on the U.S. Treasury security with terms equal to the
expected time of exercise as of the grant date.
Expected dividend yield 0%
Expected stock price volatility 47.5%
Risk-free interest rate 4.3%
Expected life of options 6.5 years
The weighted-average grant-date fair value of options granted during the
first quarter of 2006 was $4.85 per option.
Transactions under the Plan for the first quarter of 2006 were as follows:
Weighted Weighted Aggregate Intrinsic
Shares Average Price Average Value
Remaining Term
(In years)
- --------------------------------- ----------------- ----------------- -------------------- ------------------------
Balance at December 31, 2005 995,216 $ 4.80
Granted 20,000 9.15
Exercised (7,200) 1.07
Canceled (1,200) 3.02
Balance at April 1, 2006 1,006,816 $ 4.92 6.5 $ 5,346,000
- --------------------------------- ----------------- ----------------- -------------------- ------------------------
Options exercisable at April 1, 597,716 $ 2.43 5.4 $ 4,661,000
2006
- --------------------------------- ----------------- ----------------- -------------------- ------------------------
The total intrinsic value of stock options exercised during the first quarter of
2006 was $66,000.
Page 7 of 16
As of April 1, 2006, there was approximately $1.6 million of unrecognized
compensation cost related to nonvested stock options, which is expected to be
recognized over a weighted-average period of approximately 3.4 years.
Cash received from option exercises during the first quarter of 2006 was
$8,000. The total tax benefit generated from options granted prior to January 1,
2006, which were exercised during the first quarter of fiscal 2006, was
approximately $10,000 and was credited to additional paid in capital.
In November 2005, the FASB issued FSP No. FAS 123(R)-3, "Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards." This FSP provides an elective alternative transition method for
calculating the pool of excess tax benefits available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS No. 123R. Companies may take up to
one year from the effective date of the FSP to evaluate the available transition
alternatives and make a one-time election as to which method to adopt. The
Company is currently in the process of evaluating the alternative methods.
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 periods ended April 1, 2006
and March 26, 2005.
Thirteen Weeks Ended
----------------------------------------
April 1, March 26,
(in thousands, except per share data) 2006 2005
- -------------------------------------------- ---------------- --- ------------
Numerator:
Net income ................................ $ 3,420 $ 3,454
Denominator:
Weighted average shares outstanding
used in basic earnings per share calculations.. 17,744 17,885
Effect of dilutive stock options... ........... 414 564
---------------- --- ------------
Adjusted weighted average shares outstanding
diluted earnings per share.................... 18,158 18,449
================ === =============
Basic earnings per share....................... $ 0.19 $ 0.19
================ === =============
Diluted earnings per share..................... $ 0.19 $ 0.19
================ === =============
Options to purchase 193,500 shares were outstanding at April 1, 2006, but
were not included in the computation of diluted earnings per common share, as
their effect would have been antidilutive. No outstanding options at March 26,
2005 were excluded from the computation of diluted earnings per share.
Through 2005, the Company applied Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plans. Accordingly, no compensation expense for
stock options was recognized. If compensation cost for these plans had been
determined using the fair-value method prescribed by SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's net income and earnings per share
for the thirteen weeks ended March 26, 2005 would have been reduced to the
following pro forma amounts (in thousands, except per share data):
Net income, as reported $ 3,454
Less: Stock-based compensation expense, net of
related tax effects, determined under the fair value
based method for all awards (61)
--------------
Net income, pro forma $ 3,393
--------------
Earnings per share:
Basic - as reported $ 0.19
Basic - pro forma $ 0.19
Diluted - as reported $ 0.19
Diluted - pro forma $ 0.18
Page 8 of 16
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option valuation model with the following weighted
average assumptions for 2005:
Expected dividend yield 0%
Expected stock price volatility 47%
Risk-free interest rate 3.9%
Expected life of option 7.5 years
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 shareholder's 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 period included in these
consolidated financial statements.
7. Related-Party Transactions
The Company has entered into a noncancelable operating lease for its
primary operating facility from a partnership in which Richard N. Berman, the
Company's Chief Executive Officer, and Steven L. Berman, the Company's Executive
Vice President, are partners. Total rental payments each year to the partnership
under the lease arrangement were $1.3 million in 2005, $1.2 million in 2004, and
$1.2 million in 2003.
8. New Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS
No. 154, "Accounting Changes and Error Corrections". SFAS No. 154 is a
replacement of ABP No. 20 and FSAB 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 adoption of
this statement did not have an impact on the Company's consolidated financial
condition or results of operations.
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 adoption of this statement did not have a
material effect on the results of operations.
Page 9 of 16
R&B, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a leading supplier of Original Equipment (OE) Dealer
"Exclusive" automotive replacement parts, automotive hardware, brake products,
and household hardware to the automotive aftermarket and mass merchandise
markets. Dorman automotive parts and hardware are marketed under the OE
Solutions(TM), HELP!(R), AutoGrade(TM), First Stop(TM), Conduct-Tite(R),
Pik-A-Nut(R), and Scan-Tech(TM) brand names. The Company designs, packages and
markets over 73,000 different automotive replacement parts (including brake
parts), fasteners and service line products manufactured to its specifications.
The Company's products are sold under one of the seven Dorman brand names. The
Company's products are sold primarily in the United States through automotive
aftermarket retailers (such as AutoZone, Advance and O'Reilly), national,
regional and local warehouse distributors (such as Carquest and NAPA) and
specialty markets including parts manufacturers for resale under their own
private labels and salvage yards. Through its Scan-Tech and Hermoff
subsidiaries, the Company is increasing its international distribution of
automotive replacement parts, with sales into Canada, Europe, the Middle East
and the Far East.
The automotive aftermarket in which the Company competes has been growing
in size; however, the market continues to consolidate. As a result, the
Company's customers regularly seek more favorable pricing, product returns and
extended payment terms when negotiating with the Company. While the Company does
its best to avoid such concessions, in some cases payment terms to customers
have been extended and returns of product have exceeded historical levels. The
product returns and more favorable pricing primarily affect the Company's profit
levels while terms extensions generally reduce operating cash flow and require
additional capital to finance the business. Management expects both of these
trends to continue for the foreseeable future.
The Company has focused on new product development as a way to offset some
of these customer demands and as its primary vehicle for growth. As such, new
product development is a critical success factor for the Company. The Company
has invested 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
resources and awareness programs, customer service improvements and increased
customer credits and allowances. This has enabled the Company to provide an
expanding array of new product offerings and grow its revenues.
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.
Stock Split
All prior period common stock and applicable share and per share amounts
have been retroactively adjusted to reflect a two-for-one split in the form of a
stock dividend of the Company's Common Stock effective March 28, 2005.
Acquisition
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 period ended March 25, 2005, 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.
Page 10 of 16
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123R and
related interpretations and began expensing the grant-date fair value of
employee stock options. Prior to January 1, 2006, the Company applied Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation expense was recognized in net income for employee stock options
for those options granted which had an exercise price equal to the market value
of the underlying common stock on the date of grant.
The Company adopted SFAS No. 123R using the modified prospective
transition method and therefore has not restated prior periods. Under this
transition method, compensation cost associated with employee stock options
recognized in 2006 includes amortization related to the remaining unvested
portion of stock option awards granted prior to January 1, 2006,and amortization
related to new awards granted after January 1, 2006. Prior to the adoption of
SFAS No. 123R, the Company presented tax benefits resulting from stock-based
compensation as operating cash flows in the "consolidated statements of cash
flows." SFAS No. 123R requires that cash flows resulting from tax deductions in
excess of compensation cost recognized in the financial statements be classified
as financing cash flows.
Compensation cost is recognized on a straight-line basis over the
vesting period during which employees perform related services. The compensation
cost charged against income in the first quarter of 2006 for its stock-based
compensation program was $117,000 before taxes. The compensation cost recognized
is classified as selling, general and administrative expense in the consolidated
income statement. No cost was capitalized during fiscal 2006. The Company
included a forfeiture assumption of 2.6% in the calculation of expense.
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
----------------------------------------
April 1, March 26,
2006 2005
- --------------------------------------- ------------------- --------------------
Net Sales 100.0% 100.0%
Cost of goods sold 64.1 62.9
- --------------------------------------- ------------------- --------------------
Gross profit 35.9 37.1
Selling, general and administrative expenses 27.1 27.2
- --------------------------------------- ------------------- --------------------
Income from operations 8.8 9.9
Interest expense, net 0.9 1.0
- -------------------------------------- ------------------- --------------------
Income before taxes 7.9 8.9
Provision for taxes 2.9 3.3
- --------------------------------------- ------------------- --------------------
Net Income 5.0% 5.6%
======================================= =================== ====================
Thirteen Weeks Ended April 1, 2006 Compared to
Thirteen Weeks Ended March 26, 2005
Net sales increased 13% to $68.9 million for the thirteen weeks ended
April 1, 2006 from $61.2 million for the same period in 2005. Sales volume in
2006 increased as a result of continued sales growth from products introduced
within the last twenty-four months.
Cost of goods sold, as a percentage of sales, increased to 64.1%
for the thirteen weeks ended April 1, 2006 from 62.9% in the same period last
year. The Company has experienced gross margin reductions in several product
lines as a result of higher customer returns and allowances and selling price
reductions due to competitive pressures. A $0.5 million increase in the
Company's provision for excess and obsolete inventory in 2006 also increased
cost of sales and reduced gross margins in the current year.
Page 11 of 16
Selling, general and administrative expenses for the thirteen weeks
ended April 1, 2006 increased $2.1 million, or 12%, to $18.7 million from $16.6
million for the same period in 2005. This increase was 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 April 1, 2006 and March 26,
2005 include $0.5 million and $0.3 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, was the same in both periods, at $0.6 million
as the benefit of lower borrowing levels in the current year was offset by
higher interest rates on the Company's revolving credit facility.
The Company's effective tax rate increased to 37.1% for the thirteen
weeks ended April 1, 2006 from 36.8% for the thirteen weeks ended March 25, 2005
due primarily to lower earnings levels from the Company's Swedish subsidiary
where tax rates are lower than U.S. rates.
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 April 1, 2006,
working capital was $119.4 million, total long-term debt (including the current
portion and revolving credit borrowings) was $36.2 million and shareholders'
equity was $142.2 million. Cash and cash equivalents as of April 1, 2006 totaled
$2.5 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 April 1, 2006
and December 31, 2005, respectively, the Company had sold $28.6 million and
$23.2 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.
The Company maintains a $20.0 million revolving credit facility
which expires in June 2007. Borrowings under the 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 April 1, 2006 was
LIBOR plus 85 basis points (5.68%). Borrowings under the facility were $10.5
million as of April 1, 2006. The loan agreement also contains covenants, the
most restrictive of which pertain to net worth and the ratio of debt to EBITDA.
The Company is in compliance with all financial covenants contained in the Notes
and Revolving Credit Facility.
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 $0.8 million in the thirteen weeks ended April 1, 2006. Net
income, depreciation and a $2.1 million decrease in accounts receivable were the
primary sources of operating cash flow in the thirteen weeks ended April 1,
2006. The Company increased the amount of accounts receivable sold to fund
working capital needs by $5.4 million during the first quarter of 2006, which
led to the drop in accounts receivable. The primary uses of cash flow were
inventory and accrued compensation and other liabilities. Inventory increased
$2.9 million as a result of seasonal growth in stocking levels and the addition
of inventory for new product lines. Accrued compensation and other liabilities
resulted in a $2.9 million use of cash in the first quarter of 2006 as a
result of the Company's funding of employee profit sharing and incentive
payments earned in the prior year, but paid in the first quarter of 2006.
Page 12 of 16
Investing activities used $1.5 million of cash in the thirteen weeks
ended April 1, 2006 as a result of additions to property, plant and equipment.
The Company's largest 2006 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 the middle of 2006, and total costs are now expected to be
approximately $7.0 million. Capital spending in the thirteen weeks ended April
1, 2006 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 generated $0.3 million in cash in the thirteen
weeks ended April 1, 2006. The primary source of this cash flow was $0.4 million
in net borrowings under the Company's revolving credit facility.
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 2005, approximately 65% of the Company's products were purchased
from 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 increases 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. Prior to 2005, the Chinese Yuan exchange rate had been fixed against
the U.S. Dollar since 1998. In July 2005, the Chinese government announced an
immediate 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.
Since that time the Yuan has strengthened another 1% against the U.S. Dollar.
Most experts believe that the value of the Yuan will increase further relative
to the U.S. Dollar over the next few years. Such a move would most likely result
in an increase in the cost of products that are purchased from China.
Impact of Inflation
The Company has experienced increases in the cost of materials and
transportation costs as a result of raw materials shortages and commodity price
increases. 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.
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (FASB) issued
SFAS No. 154, "Accounting Changes and Error Corrections". SFAS No. 154 is a
replacement of ABP No. 20 and FSAB 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 adoption of
this statement did not have an impact on the Company's consolidated financial
condition or results of operations.
Page 13 of 16
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 adoption of this statement did not have a
material effect on the results of operations.
Cautionary Statement Regarding Forward Looking Statements
Certain statements in this document constitute "forward-looking
statements" within the meaning of the Federal Private Securities Litigation
Reform Act of 1995. While forward-looking statements sometimes are presented
with numerical specificity, they are based on various assumptions made by
management regarding future circumstances over many of which the Company has
little or no control. Forward-looking statement may be identified by words
including "anticipate," "believe," "estimate," "expect," and similar
expressions. The Company cautions readers that forward-looking statements,
including, without limitation, those relating to future business prospects,
revenues, working capital, liquidity, and income, are subject to certain risks
and uncertainties that would cause actual results to differ materially from
those indicated in the forward-looking statements. Factors that could cause
actual results to differ from forward-looking statements include but are not
limited to competition in the automotive aftermarket industry, concentration of
the Company's sales and accounts receivable among a small number of customer,
the impact of consolidation in the automotive aftermarket industry, foreign
currency fluctuations, dependence on senior management and other risks and
factors identified from time to time in the reports the Company files with the
Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected. For additional information concerning factors that could cause actual
results to differ materially from the information contained in this report,
reference is made to the information in Part I, "Item 1A, Risk Factors" in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2005.
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
The Company evaluated the effectiveness of the design and operation
of its "disclosure controls and procedures" as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended ("the Act"), as of the end of the
period covered by this Form 10-Q ("Disclosure Controls"). This evaluation
("Disclosure Controls Evaluation") was done under the supervision and with the
participation of management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO").
The Company's management, with the participation of the CEO and CFO,also
conducted an evaluation of the Company's internal control over financial
reporting, as defined in Rule 13a-15(f) of the Act, to determine whether any
changes occurred during the period ended April 1, 2006 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting ("Internal Controls Evaluation"). Limitations
on the Effectiveness of Controls
Control systems, no matter how well conceived and operated, are
designed to provide a reasonable, but not an absolute, level of 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. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected. The Company conducts periodic evaluation of its
internal controls to enhance, where necessary, its procedures and controls.
Page 14 of 161
Conclusions
Based upon the Disclosure Controls Evaluation, the CEO and CFO have
concluded that the Disclosure Controls are effective in reaching a reasonable
level of assurance that (i) information required to be disclosed by the Company
in the reports that it files or submits under the Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms and (ii) information required to be
disclosed by the Company in the reports that it files or submits under the Act
is accumulated and communicated to the Company's management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
There were no changes in internal controls over financial reporting as
defined in Rule 13a-15(f) of the Act that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to or otherwise involved in legal proceedings
that arise in the ordinary course of business, such as various claims and legal
actions involving contracts, competitive practices, trademark rights, product
liability claims and other matters arising out of the conduct of the Company's
business. In the opinion of management, none of the actions, individually or in
the aggregate, would likely have a material financial impact on the Company.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you
should carefully consider the factors discussed in Part I, "Item A, Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended December
31, 2005, which could materially affect the Company's business, financial
condition or future results. The risks described in the Company's Annual Report
on Form 10-K are not the only risks facing the Company. Additional risks and
uncertainties not currently known to the Company or that the Company currently
deems to be immaterial also may materially adversely affect the Company's
business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
10.1 Executive Bonus Plan+
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 906 of the Sarbanes-OxleyAct of 2002.
32. Certification of Chief Executive and Chief Financial Officer
as required by Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------------------------
+ Management Contracts and Compensatory Plans, Contracts or Arrangements.
Page 15 of 16
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 May 5, 2006 \s\ Richard Berman
--------------- -------------------------
Richard Berman
President and Chief Executive Officer
(Principal executive officer)
Date May 5, 2006 \s\ Mathias Barton
--------------- --------------------------
Mathias Barton
Chief Financial Officer and
Principal Accounting Officer
(Principal financial officer)
Page 16 of 16