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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-18914
R&B, INC.
Incorporated pursuant to the Laws
of the Commonwealth of Pennsylvania
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IRS - Employer Identification No. 23-2078856
3400 East Walnut Street, Colmar, Pennsylvania 18915
(215) 997-1800
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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 |_|
As of August 4, 1998 the Registrant had 8,073,820 common shares, $.01 par value,
outstanding.
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R & B, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 27, 1998
Page
Part I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Statements of Income:
Thirteen Weeks Ended June 27, 1998 and
June 28, 1997.................................3
Twenty-six Weeks Ended June 27, 1998 and
June 28, 1997..................................4
Balance Sheets .....................................5
Statements of Cash Flows ...........................6
Notes to Financial Statements ......................7
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations ..........................8
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings ................................13
Item 6. Exhibits and Reports on Form 8-K .................13
Signature ............................................14
Page 2 of 14
PART I. FINANCIAL INFORMATION
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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For the Thirteen Weeks Ended
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June 27, June 28,
(in thousands, except per share data) 1998 1997
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Net Sales $42,047 $40,959
Cost of goods sold 25,448 25,045
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Gross profit 16,599 15,914
Selling, general and administrative expenses 11,755 11,310
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Income from operations 4,844 4,604
Interest expense, net 1,083 1,055
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Income before taxes 3,761 3,549
Provision for taxes 1,373 1,296
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Net Income $ 2,388 $ 2,253
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Earnings Per Share:
Basic $0.29 $0.28
Diluted $0.28 $0.28
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Average Shares Outstanding:
Basic 8,329 8,027
Diluted 8,494 8,027
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The accompanying Notes are an integral part of these Consolidated
Financial Statements.
Page 3 of 14
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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For the Twenty-six Weeks Ended
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June 27, June 28,
(in thousands, except per share data) 1998 1997
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Net Sales $81,059 $74,258
Cost of goods sold 49,433 45,039
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Gross profit 31,626 29,219
Selling, general and administrative expenses 23,990 22,002
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Income from operations 7,636 7,217
Interest expense, net 2,023 2,155
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Income before taxes 5,613 5,062
Provision for taxes 2,049 1,848
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Net Income $ 3,564 $3,214
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Earnings Per Share:
Basic $0.43 $0.40
Diluted $0.42 $0.40
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Average Shares Outstanding:
Basic 8,317 7,997
Diluted 8,481 7,997
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The accompanying Notes are an integral part of these Consolidated
Financial Statements.
Page 4 of 14
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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June 27, December 27,
(in thousands, except share data) 1998 1997
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Assets (unaudited)
Current Assets:
Cash and cash equivalents $ 3,051 $1,601
Accounts receivable, less allowance for doubtful
accounts and customer credits of $7,253 and $7,214 36,520 37,536
Inventories 45,950 38,264
Deferred income taxes 1,186 1,186
Prepaids and other current assets 2,556 1,461
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Total current assets 89,263 80,048
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Property, Plant and Equipment, net 17,104 16,382
Intangible Assets 31,793 29,747
Other Assets 2,594 2,530
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Total $140,754 $128,707
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Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt $ 5,528 $ 6,611
Accounts payable 12,674 8,982
Accrued compensation 3,058 2,923
Other accrued liabilities 4,273 2,923
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Total current liabilities 25,533 21,439
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Long-Term Debt 45,744 44,336
Deferred Income Taxes 1,770 1,770
Commitments and Contingencies
Shareholders' Equity:
Common stock, par value $.01; authorized
25,000,000 shares; issued 8,336,532 and 8,066,543 83 81
Additional paid-in capital 33,083 30,221
Cumulative translation adjustments 117 -
Retained earnings 34,424 30,860
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Total shareholders' equity 67,707 61,162
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Total $140,754 $128,707
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The accompanying Notes are an integral part of these Consolidated
Financial Statements.
Page 5 of 14
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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For the Twenty-six Weeks Ended
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June 27, June 28,
(in thousands) 1998 1997
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Cash Flows from Operating Activities:
Net income $3,564 $3,214
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 2,439 2,196
Provision for doubtful accounts 293 183
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable 1,700 (1,855)
Inventories (4,976) 3,844
Prepaids and other current assets (878) 167
Other assets (273) (226)
Accounts payable 2,395 1,173
Other accrued liabilities 632 1,064
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Cash provided by operating activities 4,896 9,760
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Cash Flows from Investing Activities:
Property, plant and equipment additions (2,209) (1,871)
Proceeds from sale and leaseback transaction 2,118 -
Business acquisitions (980) -
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Cash used in investing activities (1,071) (1,871)
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Cash Flows from Financing Activities:
ACTIVITIES:
Net proceeds from (repayments of) revolving credit 850 (3,850)
Repayment of term loans and capitalized lease obligations (3,419) (3,031)
Proceeds from common stock issuances 194 1
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Cash used in financing activities (2,375) (6,880)
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Net Increase in Cash Equivalents 1,450 1,009
Cash and Cash Equivalents, Beginning of Period 1,601 923
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Cash and Cash Equivalents, End of Period $3,051 $1,932
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Supplemental Cash Flow Information
Cash paid for interest expense $ 1,641 $1,971
Cash paid for income taxes $ 467 $1,290
The accompanying Notes are an integral part of these Consolidated
Financial Statements.
Page 6 of 14
R&B, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 27, 1998 AND JUNE 28, 1997 (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 twenty-six week period ended June
27, 1998 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 26, 1998. For further information, refer to the
financial statements and footnotes thereto included in R&B, Inc.'s (the
"Company") Annual Report on Form 10-K for the year ended December 27, 1997.
2. 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:
June 27, December 27,
(in thousands) 1998 1997
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Bulk product $23,642 $21,800
Finished product 18,136 12,737
Packaging materials 4,172 3,727
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Total $45,950 $38,264
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3. Intangible Assets
Intangible assets consist of goodwill, patents and a non-compete
covenant. Goodwill is amortized over a period of 40 years with patents and the
non-compete covenant amortized over the specific life of each asset. At June 27,
1998, goodwill was $30.5 million, patents were $1.2 million and the non-compete
covenant was $0.2 million. Amortization of these assets was $0.7 million and
$0.6 million in the twenty-six weeks of 1998 and 1997, respectively.
4. Earnings Per Share
The company adopted Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings Per Share" in 1997. In conformity with SFAS 128, the
Company has included basic and diluted earnings per share on the face of the
Statement of Income for each period presented. The difference between basis and
diluted average shares outstanding is the dilutive effect of stock options.
5. Subsequent Event
In May 1998, the Company came to terms with a group of three insurance
companies to provide the Company with $60 million in senior, unsecured notes.
The notes carry a fixed interest rate of 6.81% and are payable in 10 years
including a four-year, interest only period. Proceeds from the notes will be
used to pay down all bank debt, fund the Champ acquisition and provide working
capital. This transaction will close on or about August 19, 1998.
Concurrent with this closing, the Company will replace the existing bank
facilities with a new $35 million, unsecured revolver from a syndicate of
commercial banks comprised of First Union and National City Bank. The revolver
has a term of five years and an interest rate equal to Libor plus 75 basis
points.
Page 7 of 14
R&B, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Over the periods presented, the Company has focused its efforts on providing
an expanding array of new product offerings and strengthening its relationships
with its customers. To that end, the Company has made significant investments to
increase market penetration, primarily in the form of product development,
customer service, customer credits and allowances, and strategic acquisitions.
The Company calculates its net sales by subtracting credits and allowances
from gross sales. Credits and allowances include costs for co-operative
advertising, product returns, discounts given to customers who purchase new
products for inclusion in their stores, and the cost of competitors' products
that are purchased from the customer in order to induce a customer to purchase
new product lines from the Company. The credits and allowances are designed to
increase market penetration and increase the num-
ber of product lines carried by customers by displacing competitors' products
within customers' stores and promoting consolidation of customers' suppliers.
The introduction of new products and product lines to customers may cause
significant fluctuations from quarter to quarter in the Company's results of
operations.
Over the periods presented, the Company has increased the percentage of
products sold to its major customers, in part due to consolidation within the
automotive aftermarket. As a general rule, sales to the Company's major
customers are at lower margins than sales to other customers.
Page 8 of 14
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 Income.
Percentage of Net Sales
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For the Thirteen Weeks Ended For the Twenty-six Weeks Ended
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June 27, June 28, June 27, June 28,
1998 1997 1998 1997
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Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 60.5 61.1 61.0 60.7
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Gross profit 39.5 38.9 39.0 39.3
Selling, general and
administrative expenses 28.0 27.6 29.6 29.6
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Income from operations 11.5 11.5 9.4 9.7
Interest expense, net 2.6 2.6 2.5 2.9
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Income before taxes 8.9 8.7 6.9 6.8
Provision for taxes 3.2 3.2 2.5 2.5
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Net income 5.7% 5 .5% 4.4% 4.3%
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Thirteen Weeks Ended June 27, 1998 Compared to
Thirteen Weeks Ended June 28, 1997
Net sales increased to $42.0 million for the thirteen weeks ended June
27,1998 from $41.0 million for the same period in 1997, an increase of 2.7%. The
acquisition of Scan-Tech accounted for $3.1 million of this increase which was
offset by a $2.1 million decrease in all other sales. This decrease resulted
primarily from changes in customer ordering patterns, the loss of five shipping
days in 1998 due to the installation of the new computer system and the
re-scheduling of product "roll-outs" from the second quarter this year into the
third and fourth quarters of 1998.
Cost of goods sold for the thirteen weeks ended June 27, 1998 increased to
$25.4 million from $25.0 million for the same period in 1997, an increase of
1.6%. As a percent of net sales, cost of goods sold for the thirteen weeks ended
June 27, 1998 decreased to 60.5% from 61.1% for the same period in 1997. This
improvement in cost of goods sold resulted from a combination of sales mix, a
price increase and reductions in cost of goods sold due to better sourcing and
more efficient packaging.
Selling, general and administrative expenses for the thirteen weeks ended
June 27, 1998 increased to $11.8 million from $11.3 million for the thirteen
weeks ended June 28, 1997, an increase of 3.9%. As a percentage of net sales,
selling general and administrative expenses increased to 28.0% from 27.6% for
the same period last year. The increase in this percentage would have been
eliminated if the customer's orders originally scheduled to ship in the second
quarter had not been rescheduled to the third and fourth quarters of 1998.
Interest expense, net, remained flat quarter over quarter at $1.1 million
and also as a percentage of net sales at 2.6% for both years.
A provision for income taxes of $1.4 million was recorded for the thirteen
weeks ended June 27, 1998 and $1.3 million was recorded for the thirteen weeks
ended June 28, 1997, an increase of 5.9%. The Company's effective tax rate
remained unchanged at 36.5% for both periods.
Page 9 of 14
Net income increased to $2.4 million for the thirteen weeks ended June 27,
1998 from $2.3 million of the thirteen weeks ended June 28, 1997, an increase of
6.0%. As a percentage of net sales, net income increased to 5.7% for the
thirteen weeks period in 1998 from 5.5% for the same period in 1997.
Twenty-six Weeks Ended June 27, 1998 Compared to
Twenty-six Weeks Ended June 28, 1997
Net sales increased to $81.1 million for the twenty-six weeks ended June 27,
1998 from $74.3 million for the same period in 1997, an increase of 9.2%. The
acquisition of Scan-Tech accounted for $6.3 million of this increase while the
remaining sales for the twenty-six weeks ended June 27, 1998 were essentially
flat with the same period in 1997 reflecting an increase of only $0.5 million.
Cost of goods sold for the twenty-six weeks ended June 27, 1998 increased to
$49.4 million from $45.0 million for the same period in 1997, an increase of
9.8%. As a percent of net sales, cost of goods sold for the twenty-six weeks
ended June 27, 1998 increased to 61.0% from 60.7% for the same period in 1997.
This percentage increase resulted from the acquisition of Scan-Tech, which
realizes relatively lower gross margins than the Company's historic levels, and
increased sales to the Company's largest customers, which have lower margins.
Selling, general and administrative expenses for the twenty-six weeks ended
June 27, 1998 increased to $24.0 million from $22.0 million for the twenty-six
weeks ended June 28, 1997, an increase of 9.0%. As a percentage of net sales,
selling, general and administrative expenses remained the same in both periods
at 29.6%. The increase of $2.0 million is primarily due to the acquisition of
Scan-Tech in addition to general increases in salaries and benefits.
Interest expense, net, decreased to $2.0 million for the twenty-six weeks
ended June 27, 1998 from $2.2 million for the twenty-six weeks ended June 28,
1997, a decrease of 6.1%. This decrease was the result of lower average
borrowings during the periods.
A provision for income taxes of $2.0 million was recorded for the twenty-six
weeks ended June 27, 1998 and $1.8 million was recorded for the twenty-six weeks
ended June 28, 1997, an increase of 10.9%. The Company's effective tax rate
remained unchanged at 36.5% for both periods.
Net income increased to $3.6 million for the twenty-six weeks ended June 27,
1998 from $3.2 million of the twenty-six weeks ended June 28, 1997, an increase
of 10.9%. As a percentage of net sales, net income increased to 4.4% for the
twenty-six weeks period in 1998 from 4.3% for the same period in 1997.
Liquidity and Capital Resources
The Company has financed its growth primarily through cash flow from its
operations and borrowings under its credit facility. Working capital was $63.7
million as of June 27, 1998 and $59.5 million as of June 28, 1997. The Company
believes that the cash generated from operations and borrowings available under
its revised revolving credit facilities will be sufficient to meet the Company's
working capital needs and to fund expansion for the foreseeable future (see Note
5 - Subsequent Event).
Net cash provided by operating activities was $4.9 million for the
twenty-six weeks ended June 27, 1998 and $9.8 million for the twenty-six weeks
ended June 28, 1997. These amounts represent net income plus depreciation,
amortization and changes in working capital. During 1998, the most significant
changes were cash generated from accounts payable and accounts receivable offset
by increases in inventories. During 1997, the most significant changes were cash
generated from inventories, accounts payable and other accrued liabilities
offset somewhat by an increase in accounts receivable.
Net cash used in investing activities amounted to $1.1 million for the
twenty-six weeks ended June 27, 1998 and $1.9 million for the twenty-six weeks
ended June 28, 1997. In 1998, the acquisition of Scan-Tech and additions to
property, plant and equipment, including the new computer system, offset by
proceeds from a sale and leaseback of the computer system to an equipment
financing company, accounted for the cash used in investing
Page 10 of 14
activities. In 1997, the additions to property, plant and equipment accounted
for all of the cash used in investing activities.
Net cash used in financing activities amounted to $2.4 million for the
twenty-six weeks ended June 27, 1998 and $6.9 million for the twenty-six weeks
ended June 28, 1997. In 1998, cash was used for repayments of term loans and
capitalized leases offset by borrowings under the revolving credit facility and
proceeds from stock issuances. In 1997, cash was used to paydown a portion of
the revolving credit facility and the continued paydown of term debt and
capitalized lease obligations.
Commercial Borrowings. In January 1995, the Company expanded its credit
facility to $60.0 million from a syndicate of commercial banks comprised of
First Union (formerly CoreStates Bank, N.A.) (Agent), the Fifth Third Bank N.A.
and a third bank who was replaced by National City Bank in 1997. The credit
facility consists of a term portion of $25.0 million (1995 Term Loan), a
revolving credit portion of $30.0 million, and a letter of credit portion of
$5.0 million used to secure the Bonds. The term portion of this facility bears
interest at a floating rate equal, at the Company's option, to Libor plus 110
basis points, or First Union's prime rate, has a seven-year term and requires
graduated amortization payments in the amount of $3.5 million in 1998 increasing
by $0.5 million each year thereafter with a final payment of $6.0 million in
2001. The revolving credit portion bears interest at a floating rate equal, at
the Company's option, to Libor plus 85 basis points, or First Union's prime
rate, and expires January 31, 2001. In April, 1996, the Company amended its
credit facility to include a new $12.0 million term loan (1996 Term Loan) with
interest at a floating rate equal, at the Company's option to Libor plus 150
basis points, or the Bank's prime rate. The loan has a five year term and is
payable in equal monthly principal payments of $200,000.
In May 1996, the Company entered into an interest rate swap agreement with
the agent bank of the syndicate of commercial banks providing the Company's
credit facility. The swap agreement has the effect of fixing the interest rate
on $11.1 million of term debt to 7.32% from a floating rate of Libor plus 110
basis points. The Company is exposed to credit loss in the event of
nonperformance under the interest rate swap agreement by the agent bank,
however, such nonperformance is not anticipated.
In December 1996, the revolving credit portion of the facility was increased
from $30.0 million to $35.0 million. Borrowings under the revolving credit
portion of the facility and the 1996 Term Loan are subject to a borrowing base
computation equal to 80% of qualified receivables and 50% of qualified
inventories, as defined. The credit facility is secured by the stock of the
Company's subsidiaries and first priority liens on the Company's and
subsidiaries assets, including accounts receivable, inventory and all other
tangible or intangible property. At June 27, 1998, the Company had borrowings of
$23.0 million under the term loans and $19.4 million under the revolving
facility and has $15.6 million of borrowing capacity under the revolving
facility.
Industrial Revenue Bonds. Construction of the Company's Warsaw, Kentucky
facility in 1990 was funded by the Bonds. The Bonds bear interest at an annual
rate of 4% payable monthly and require annual principal payments of $300,000 or
$350,000 in alternating years with the final payment due in July, 2009.
Capitalized Leases. The Company's leases for its Pennsylvania and Georgia
facilities are recorded as capitalized leases in the Company's financial
statements. During the second quarter the Company financed the purchase of its
new computer hardware and software with equipment lease financing arrangements
from a financial institution in the amount of $3.2 million. The lease is payable
over three years at $97,500 per month including interest imputed at 6.23%.
Subsequent Event
In May 1998, the Company came to terms with a group of three insurance
companies to provide the Company with $60 million in senior, unsecured notes.
The notes carry a fixed interest rate of 6.81% and are payable in 10 years
including a four-year, interest only period. Proceeds from the notes will be
used to pay down all bank debt, fund the Champ acquisition and provide working
capital. This transaction will close on or about August 19, 1998.
Page 11 of 14
Concurrent with this closing, the Company will replace the existing bank
facilities with a new $35 million, unsecured revolver from a syndicate of
commercial banks comprised of First Union and National City Bank. The revolver
has a term of five years and an interest rate equal to Libor plus 75 basis
points.
Under the terms of both agreements, the Company must maintain minimum net
worth requirements and a funded debt to capital of not greater than 60%.
Impact of Inflation
The Company has not generally been adversely affected by inflation. The
Company believes that price increases resulting from inflation generally could
be passed on to its customers, since prices charged by the Company are not set
by long-term contracts.
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 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
"Business - Investment Considerations" included in the Company's Annual Report
on Form 10-K for the year ended December 27, 1997.
Page 12 of 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In addition to commitments and obligation 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 and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K
None
Page 13 of 14
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 August 6, 1998 Richard Berman
Richard Berman
President
Date August 6, 1998 Malcolm Walter
Malcolm Walter
Chief Financial Officer and
Principal Accounting Officer
Page 14 of 14