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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 September 25, 1999
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 November 5, 1999 the Registrant had 8,206,184 common shares, $.01 par
value, outstanding.
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R & B, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 25, 1999
Page
Part I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Statements of Income:
Thirteen Weeks Ended September 25, 1999 and
September 26, 1998 3
Thirty-nine Weeks Ended September 25, 1999 and
September 26, 1998 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 ...........................9
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings ................................14
Item 6. Exhibits and Reports on Form 8-K .................14
Signature ............................................15
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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September 25, September 26,
(in thousands, except per share data) 1999 1998
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Net Sales $59,495 $44,509
Cost of goods sold 38,620 26,479
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Gross profit 20,875 18,030
Selling, general and administrative expenses 17,235 13,057
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Income from operations 3,640 4,973
Interest expense, net 1,717 1,040
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Income before taxes 1,923 3,933
Provision for taxes 663 1,430
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Net Income $ 1,260 $ 2,503
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Earnings Per Share
Basic $0.15 $0.30
Diluted 0.15 0.30
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Average Shares Outstanding
Basic 8,392 8,337
Diluted 8,462 8,438
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 Thirty-nine Weeks Ended
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September 25, September 26,
(in thousands, except per share data) 1999 1998
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Net Sales $183,459 $125,568
Cost of goods sold 115,624 75,912
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Gross profit 67,835 49,656
Selling, general and administrative expenses 54,329 37,047
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Income from operations 13,506 12,609
Interest expense, net 5,229 3,063
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Income before taxes 8,277 9,546
Provision for taxes 2,886 3,479
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Net Income $ 5,391 $ 6,067
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Earnings Per Share
Basic $0.64 $0.73
Diluted 0.64 0.72
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Average Shares Outstanding
Basic 8,369 8,323
Diluted 8,418 8,424
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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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September 25, December 26,
(in thousands, except share data) 1999 1998
(unaudited)
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Assets
Current Assets:
Cash and cash equivalent $1,936 $ 915
Accounts receivable, less allowance for doubtful
accounts and customer credits of $8,905 and $9,715 57,412 55,585
Inventories 84,958 68,401
Deferred income taxes 1,674 1,674
Prepaids and other current assets 1,729 861
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Total current assets 147,709 127,436
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Property, Plant and Equipment, net 22,558 20,761
Intangible Assets 32,493 33,640
Other Assets 3,561 2,111
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Total $206,321 $183,948
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Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt $ 2,223 $3,089
Accounts payable 23,998 18,309
Accrued compensation 2,373 2,652
Other accrued liabilities 5,931 5,766
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Total current liabilities 34,525 29,816
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Long-Term Debt 91,939 80,004
Deferred Income Taxes 2,514 2,514
Commitments and Contingencies
Shareholders' Equity:
Common stock, par value $.01; authorized
25,000,000 shares; issued 8,392,275 and 8,344,082 84 83
Additional paid-in capital 33,511 33,133
Cumulative translation adjustments (59) (18)
Retained earnings 43,807 38,416
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Total shareholders' equity 77,343 71,614
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Total $206,321 $183,948
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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 Thirty-nine Weeks Ended
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September 25, September 26,
(in thousands) 1999 1998
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Cash Flows from Operating Activities:
Net income $5,391 $6,067
Adjustments to reconcile net income to cash (used in) provided by
operating activities:
Depreciation and amortization 5,524 3,762
Provision for doubtful accounts 653 485
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable (2,480) (2,438)
Inventories (16,557) (7,284)
Prepaids and other current assets (868) (500)
Other assets (1,705) (2,349)
Accounts payable 5,648 2,564
Other accrued liabilities (114) 2,883
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Cash (used in) provided by operating activities (4,508) 3,190
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Cash Flows from Investing Activities:
Property, plant and equipment additions (5,919) (4,008)
Proceeds from sale/leaseback transaction - 2,118
Business acquisitions, net of cash acquired - (2,097)
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Cash used in investing activities (5,919) (3,987)
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Cash Flows from Financing Activities:
Net proceeds (repayment) of revolving credit 12,297 (18,500)
Repayments of term loans and capital lease obligations (1,228) (26,833)
Proceeds from senior notes - 60,000
Proceeds from common stock issuances 379 195
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Cash provided by financing activities 11,448 14,862
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Net Increase in Cash and Cash Equivalents 1,021 14,065
Cash and Cash Equivalents, Beginning of Period 915 1,601
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Cash and Cash Equivalents, End of Period $ 1,936 $15,666
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Supplemental Cash Flow Information
Cash paid for interest expense $4,931 $1,555
Cash paid for income taxes $3,027 $ 32
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 THIRTY-NINE WEEKS ENDED SEPTEMBER 25, 1999 AND SEPTEMBER 26, 1998
(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 25, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 25, 1999. 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 26, 1998.
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:
September 25, December 26,
(in thousands) 1999 1998
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Bulk product $29,102 $31,181
Finished product 49,430 31,445
Packaging materials 6,426 5,775
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Total $84,958 $68,401
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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. Accumulated
amortization at September 25, 1999 and September 26, 1998 was $5.6 million and
$4.1 million, respectively. Amortization expense of these assets was $0.4
million in the third quarter of 1999 and 1998.
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. Weighted average shares for
"diluted" earnings per share includes the assumption of the exercise of all
potentially dilutive securities ("in the money" stock options).
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 number of product lines carried by
customers by displacing competitors' products within customers' stores and
promoting consolidation of customers' suppliers.
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 timing of the introduction of new products and product
lines to customers may cause significant fluctuations from quarter to quarter.
In January of 1998, the Company acquired the outstanding stock of Scan-Tech
USA/Sweden AB and related entities ("Scan-Tech"). Headquartered in Stockholm,
Sweden, Scan-Tech is a global distributor of replacement automotive parts,
primarily Volvo and Saab.
In September 1998, the Company began its acquisition of selective assets of
the Service Line Division ("Champ") of Standard Motor Products, Inc. Champ
includes the Champ Service line, Pik-A-Nut and Everco. The acquisition was
completed in stages with the final stage (Everco) occurring in January 1999.
In October 1998, the Company acquired the assets of Allparts, Inc. Allparts
is headquartered in Louisiana, Missouri, and is a leading supplier of automotive
hydraulic brake parts to the automotive aftermarket.
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.
As a Percentage of Sales
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For the Thirteen Weeks Ended For the Thirty-nine Weeks Ended
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September 25, September 26, September 25, September 26,
1999 1998 1999 1998
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Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 64.9 59.5 63.0 60.5
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Gross profit 35.1 40.5 37.0 39.5
Selling, general and
administrative expenses 29.0 29.3 29.6 29.5
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Income from operations 6.1 11.2 7.4 10.0
Interest expense, net 2.9 2.3 2.9 2.4
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Income before taxes 3.2 8.8 4.5 7.6
Provision for taxes 1.1 3.2 1.6 2.8
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Net income 2.1% 5.6% 2.9% 4.8%
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Thirteen Weeks Ended September 25, 1999 Compared to
Thirteen Weeks Ended September 26, 1998
Net sales increased to $59.5 million for the thirteen weeks ended
September 25, 1999 from $44.5 million for the same period in 1998, an increase
of 33.7%. The acquisitions made in 1998 account for 76% of this increase or
$11.3 million.
Cost of goods sold for the thirteen weeks ended September 25, 1999
increased to $38.6 million from $26.5 million for the same period in 1998, an
increase of 45.9%. As a percent of net sales, cost of goods sold for the
thirteen weeks ended September 25, 1999 increased to 64.9% from 59.5% for the
thirteen weeks ended September 26, 1998. The reduction in gross profit
percentage is the result of an increasing portion of total revenues attributable
to the acquisitions who, by the nature of their business, carry a lower gross
margin. In addition, gross profit was negatively impacted in the third quarter
by several new product introductions which generally carry a lower margin in the
quarter in which they are introduced due to special incentives offered to the
customers.
Selling, general and administrative expenses for the thirteen weeks
ended September 25, 1999 increased to $17.2 million from $13.1 million for the
thirteen weeks ended September 26, 1998, an increase of 32.0%. As a percent of
net sales, selling, general and administrative expenses decreased slightly to
29.0% in 1999 from 29.3% in 1998. This modest decrease resulted primarily from
the relative lower rate of these expenses to net sales for the acquisitions
which now account for a higher percentage of total sales.
Interest expense, net, increased to $1.7 million for the thirteen weeks
ended September 25, 1999 from $1.0 million for the thirteen weeks ended June 27,
1998. This increase resulted from higher average debt levels in the third
quarter of 1999 relating to the funding of acquisitions made by the Company
during 1998 and the expansion in working capital assets to support the growth in
revenues.
A provision for income taxes of $0.7 million was recorded for the
thirteen weeks ended September 25, 1999 and $1.4 million for the same period in
1998. The decrease in the Company's effective tax rate from 36.4% in 1998 to
34.5% in 1999 resulted primarily from lower foreign tax rates.
Page 9 of 14
Thirty-nine Weeks Ended September 25, 1999 Compared to
Thirty-nine Weeks Ended September 26, 1998
Net sales increased to $183.5 million for the thirty-nine weeks ended
September 25, 1999 from $125.6 million for the same period in 1998, an increase
of 46.1%. The existing business accounted for 31% of this increase or $24.0
million and the remaining $33.9 million relates to the acquisitions made in
1998.
Cost of goods sold for the thirty-nine weeks ended September 25, 1999
increased to $115.6 million from $75.9 million for the same period in 1998, an
increase of 52.3%. As a percent of net sales, cost of goods sold for the
thirty-nine weeks ended September 25, 1999 increased to 63.0% from 60.5% for the
same period in 1998. This percentage increase resulted from the acquisitions,
which realize 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 thirty-nine weeks
ended September 25, 1999 increased to $54.3 million from $37.0 million for the
thirty-nine weeks ended September 26, 1998, an increase of 46.6%. As a
percentage of net sales, selling, general and administrative expenses increased
slightly to 29.6% for the Thirty-nine weeks ended September 25, 1999 from 29.5%
for the same period last in 1998. The increase is primarily due to the
acquisitions and expenses required to support the increase in sales.
Interest expense, net, increased to $5.2 million for the thirty-nine
weeks ended September 25, 1999 from $3.1 million for the thirty-nine weeks ended
September 26, 1998, an increase of 70.7%. This increase resulted from higher
average debt levels in 1999 relating to the funding of acquisitions made by the
Company during 1998 and the expansion in working capital assets to support the
growth in revenues.
A provision for income taxes of $2.9 million was recorded for the
thirty-nine weeks ended September 25, 1999 and $3.5 million was recorded for the
thirty-nine weeks ended September 26, 1998, a decrease of 17.0%. The decrease in
the Company's effective tax rate from 36.4% in 1998 to 34.9% in 1999 resulted
primarily from lower foreign tax rates.
Net income decreased from $6.1 million for the thirty-nine weeks ended
September 25, 1999 to $5.4 million for the thirty-nine weeks ended September 26,
1998, a decrease of 11.1%. As a percentage of net sales, net income decreased to
2.9% for the thirty-nine weeks period in 1999 from 4.8% for the same period in
1998.
Liquidity and Capital Resources
The Company has financed its growth through the combination of cash flow
from its operations, issuance of senior notes and borrowings under its credit
facilities. Working capital was $113.5 million as of September 25, 1999 and
$97.6 million as of December 26, 1998. The Company believes that the cash
generated from operations and borrowings available under its revolving credit
facility will be sufficient to meet the Company's working capital needs and to
fund expansion for the foreseeable future.
Net cash used in operating activities was $4.5 million for the
thirty-nine weeks ended September 25, 1999 and net cash provided was $3.2
million for the thirty-nine weeks ended September 26, 1998. These amounts
represent net income plus depreciation and amortization less changes in working
capital. During 1999, the most significant changes were increases in
inventories, accounts receivable and accounts payable resulting from the growth
in revenues. During 1998, the most significant change was an increase in
inventories.
Net cash used in investing activities amounted to $5.9 million for the
thirty-nine weeks ended September 25, 1999 and $4.0 in 1998. In 1999, additions
to plant and equipment accounted for the investing activities. In 1998, the
acquisitions of Scan-Tech and Champ and additions to property, plant and
equipment were partially offset by proceeds from a sales/leaseback transaction
relating to the Company's new computer system.
Net cash provided by financing activities amounted to $11.4 million and
$14.9 million for the thirty-nine weeks ended September 25, 1999 and September
26, 1998, respectively. In 1999, borrowings under the line of credit accounted
for the majority of the funds provided. In 1998, proceeds from the Notes were
used to pay down the revolving credit agreement and term loans.
Page 10 of 14
The Acquisition of Scan-Tech.
In January 1998, Scan-Tech was acquired with the payment of $1 million
in cash, up to 350,000 shares of the Company's common stock and assumption of
certain liabilities including approximately $0.8 million in bank debt.
The Acquisition of Champ.
In September 1998, the Company began its acquisition of selective assets
of Champ from Standard Motor Products, Inc. for approximately $2.3 million
representing the net asset value of inventories. The acquisition was completed
in stages with the final stage (Everco) occurring in January 1999 and requiring
a payment of approximately $0.3 million representing the net asset value of
inventories.
The Acquisition of Allparts.
In October 1998, the Company acquired the assets of Allparts from JPE,
Inc., for approximately $10.1 million in cash.
Senior Notes.
In August 1998, the Company completed a private placement of $60 million
in 6.81% Senior Notes due August 21, 2008 on an unsecured basis. The ten-year
Notes bear a 6.81 percent fixed interest rate, payable quarterly, with an
initial four-year interest only period.
Revolving Credit Facility.
In connection with the Notes, the Company amended its $35 million
revolving credit facility with First Union National Bank and National City Bank.
As amended, the commitment for the line was extended for a five-year term on an
unsecured basis with interest at Libor plus 125 basis points. Proceeds from the
Notes were used, among other things, to pay down the term debt portions of the
bank credit facilities previously advanced to the Company by the bank syndicate.
Borrowings under the revolving credit facility amounted to $25.8 million at
September 25, 1999 and to $13.5 million at December 26, 1998.
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. In
addition, in 1998 the Company entered into a sale/leaseback transaction relating
to its new computer system in the amount of $4.3 million.
Foreign Currency Fluctuations.
Approximately 45% 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 fluctuation 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, to the extent that the
dollar decreases in value to foreign currencies in the future, the price of the
product in dollars for new purchase orders may increase. The Company attempts to
lessen the impact of these currency fluctuations by resourcing its purchases to
other countries.
Page 11 of 14
Year 2000 Compliance
The efficient operation of the Company's business is dependent in part
on its computer software programs and operating systems ("Programs"). The
Company has been evaluating its Programs to identify potential Year 2000
compliance problems. This evaluation led to the selection and implementation of
a comprehensive enterprise resource planning package and related programs ("New
System"). This New System, installed in 1998, is used in several key areas of
the company's business including inventory purchasing and management, production
planning, forecasting, pricing, sales, shipping and financial reporting and
replaces the majority of the Company's previous Programs. Those Programs not
replaced by the New System have also been evaluated for Year 2000 compliance and
appropriate adjustments have been or will be made to bring them into compliance
either through modification or replacement. The most significant of these are
the Company's Human Resource, payroll and timekeeping systems which were
replaced with a combination of purchased software and third party services
during the first quarter of 1999.
Based on present information, the Company believes that it will be able
to achieve Year 2000 compliance through a combination of the New System and
modification to other Programs, however, no assurance can be given that these
efforts will be successful. The investment in capital expenditures to implement
the New System and the Human Resources, payroll and time keeping systems was
approximately $4.9 million and the Company estimates that the expenses
associated with modification of other Programs will not be material.
The Company maintains contingency plans for computer failures, power
outages, natural disasters, etc. Year 2000 contingency plans for
mission-critical systems have been developed and integrated with the existing
plans where appropriate. Further, in the event that any of the Company's
significant suppliers or customers do not successfully and timely achieve Year
2000 compliance, the Company's business operations could be adversely affected.
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; 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
- -Investment Considerations."
Quantitative and Qualitative Disclosure about Material 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. Market risk is estimated as the potential increase in
fair value of the Company's long- term debt obligations resulting from a
hypothetical one-percent decrease in interest rates and amounts to approximately
$3.6 million over the term of the debt. Although the Company continues to
evaluate derivative financial instruments to manage foreign currency exchange
rate changes, the Company does not currently hold derivatives for managing these
risks of for trading purposes.
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 November 8, 1999 /s/ Richard Berman
Richard Berman
President
Date November 8, 1999 /s/ Malcolm Walter
Malcolm Walter
Chief Financial Officer and
Principal Accounting Officer
Page 14 of 14