-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AsyvLQAV9tXVBbvy4H6SmKdwugZyIOTQDJjC0ABnjDfxPYkGZE3GOVNW8Pd0oI2A 1WTM1g6sSedAduz9y1XxsA== 0000868780-05-000011.txt : 20051031 0000868780-05-000011.hdr.sgml : 20051031 20051031165136 ACCESSION NUMBER: 0000868780-05-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050924 FILED AS OF DATE: 20051031 DATE AS OF CHANGE: 20051031 FILER: COMPANY DATA: COMPANY CONFORMED NAME: R & B INC CENTRAL INDEX KEY: 0000868780 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 232078856 STATE OF INCORPORATION: PA FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18914 FILM NUMBER: 051166922 BUSINESS ADDRESS: STREET 1: 3400 E WALNUT ST CITY: COLMAR STATE: PA ZIP: 18915 BUSINESS PHONE: 2159971800 MAIL ADDRESS: STREET 1: 3400 E WALNUT ST CITY: COLMAR STATE: PA ZIP: 18915 10-Q 1 sec10q103105.txt SEC FORM 10-Q FOR THIRD QUARTER 2005 October 31, 2005 - ----------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q ------------------- |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 24, 2005 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------- Commission file number 0-18914 R&B, INC. Incorporated pursuant to the Laws of the Commonwealth of Pennsylvania ------------------- IRS - Employer Identification No. 23-2078856 3400 East Walnut Street, Colmar, Pennsylvania 18915 (215) 997-1800 ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No|_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes |X| No |_| As of October 31, 2005 the Registrant had 17,932,259 common shares, $.01 par value, outstanding. Page 1 of 17 - ------------------------------------------------------------------------------ R & B, INC. AND SUBSIDIARIES INDEX TO QUARTERLY REPORT ON FORM 10-Q September 24, 2005 Page Part I -- FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) Statements of Operations: Thirteen Weeks Ended September 24, 2005 and September 25, 2004 .........................3 Thirty-nine Weeks Ended September 24, 2005 and September 25, 2004 .........................4 Balance Sheets....................................5 Statements of Cash Flows..........................6 Notes to Consolidated Financial Statements........7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition..............................11 Item 3. Quantitative and Qualitative Disclosure about Market Risk.....................15 Item 4. Controls and Procedures..........................15 Part II -- OTHER INFORMATION Item 1. Legal Proceedings................................16 Item 6. Exhibits. . .....................................16 Signatures................................................17 Page 2 of 17 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS R&B, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
For the Thirteen Weeks Ended ------------------------------------ September 24, September 25, (in thousands, except per share data) 2005 2004 - ---------------------------------------------------------------------------------------------------------------- Net Sales $ 73,783 $ 64,135 Cost of goods sold 48,005 40,196 - ---------------------------------------------------------------------------------------------------------------- Gross profit 25,778 23,939 Selling, general and administrative expenses 17,769 16,315 - ---------------------------------------------------------------------------------------------------------------- Income from operations 8,009 7,624 Interest expense, net of interest income of $4 and $15 672 703 - ---------------------------------------------------------------------------------------------------------------- Income before taxes 7,337 6,921 Provision for taxes 2,724 2,519 - ---------------------------------------------------------------------------------------------------------------- Net Income $ 4,613 $ 4,402 ================================================================================================================ Earnings Per Share: Basic $0.26 $0.25 Diluted $0.25 $0.24 ================================================================================================================ Average Shares Outstanding: Basic 17,932 17,737 Diluted 18,444 18,377
See accompanying notes to consolidated financial statements. Page 3 of 17 R&B, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
For the Thirty-nine Weeks Ended ------------------------------------ September 24, September 25, (in thousands, except per share data) 2005 2004 - ---------------------------------------------------------------------------------------------------------------- Net Sales $ 203,625 $ 184,417 Cost of goods sold 130,211 114,903 - ---------------------------------------------------------------------------------------------------------------- Gross profit 73,414 69,514 Selling, general and administrative expenses 51,317 46,819 - ---------------------------------------------------------------------------------------------------------------- Income from operations 22,097 22,695 Interest expense, net of interest income of $17 and $92 1,961 2,233 - ---------------------------------------------------------------------------------------------------------------- Income before taxes 20,136 20,462 Provision for taxes 7,441 7,425 - ---------------------------------------------------------------------------------------------------------------- Net Income $ 12,695 $ 13,037 ================================================================================================================ Earnings Per Share: Basic $ 0.71 $ 0.74 Diluted $ 0.69 $ 0.71 ================================================================================================================ Average Shares Outstanding: Basic 17,915 17,651 Diluted 18,452 18,343
See accompanying notes to consolidated financial statements. Page 4 of 17 R&B, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 24, December 25, (in thousands, except share data) 2005 2004 - -------------------------------------------------------------- --------------------- --------------------- Assets (unaudited) Current Assets: Cash and cash equivalents $ 3,152 $ 7,152 Accounts receivable, less allowance for doubtful accounts and customer credits of $23,216 and $20,575 60,472 60,962 Inventories 75,015 61,436 Deferred income taxes 8,904 8,417 Prepaids and other current assets 1,535 1,609 - -------------------------------------------------------------- --------------------- --------------------- Total current assets 149,078 139,576 - -------------------------------------------------------------- --------------------- --------------------- Property, Plant and Equipment, net 27,384 25,698 Goodwill 29,619 29,410 Other Assets 785 720 - -------------------------------------------------------------- --------------------- --------------------- Total $206,866 $195,404 ============================================================== ===================== ===================== Liabilities and Shareholders' Equity Current Liabilities: Current portion of long-term debt $ 9,064 $ 9,045 Accounts payable 14,097 15,599 Accrued compensation 6,844 8,028 Other accrued liabilities 6,183 5,319 - -------------------------------------------------------------- --------------------- --------------------- Total current liabilities 36,188 37,991 Other Long-Term Liabilities 830 - Long-Term Debt 25,643 25,714 Deferred Income Taxes 7,752 6,472 Commitments and Contingencies Shareholders' Equity: Common stock, par value $.01; authorized 25,000,000 shares; issued 17,932,259 and 17,871,928 179 179 Additional paid-in capital 35,158 34,659 Cumulative translation adjustments 1,541 3,509 Retained earnings 99,575 86,880 Total shareholders' equity 136,453 125,227 - -------------------------------------------------------------- --------------------- --------------------- Total $206,866 $195,404 ============================================================== ===================== =====================
See accompanying notes to consolidated financial statements Page 5 of 17 R&B, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the Thirty-nine Weeks Ended ----------------------------------------- September 24, September 25, (in thousands) 2005 2004 - --------------------------------------------------------------------------------- -------------------- -------------------- Cash Flows from Operating Activities: Net income $ 12,695 $ 13,037 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 4,194 3,388 Provision for doubtful accounts 189 220 Provision for deferred income taxes 742 925 Changes in assets and liabilities: Accounts receivable 286 (14,112) Inventories (11,457) (9,812) Prepaids and other (7) (621) Accounts payable (1,537) 6,147 Other accrued liabilities (1,405) 1,609 Other long-term liabilities (487) - - --------------------------------------------------------------------------------- -------------------- -------------------- Cash provided by operating activities 3,213 781 - --------------------------------------------------------------------------------- -------------------- -------------------- Cash Flows from Investing Activities: Property, plant and equipment additions (5,522) (9,223) Purchases of short-term investments - (4,821) Proceeds from maturities of short-term investments - 14,726 Business acquisition, net of cash acquired (1,680) - - --------------------------------------------------------------------------------- -------------------- -------------------- Cash (used in) provided by investing activities (7,202) 682 - --------------------------------------------------------------------------------- -------------------- -------------------- Cash Flows from Financing Activities: Repayment of term loan (8,571) (8,571) Net proceeds from revolving credit facility 8,500 - Proceeds from common stock issuances 60 224 - --------------------------------------------------------------------------------- -------------------- -------------------- Cash used in financing activities (11) (8,347) - --------------------------------------------------------------------------------- -------------------- -------------------- Net Decrease in Cash and Cash Equivalents (4,000) (6,884) Cash and Cash Equivalents, Beginning of Period 7,152 15,177 - --------------------------------------------------------------------------------- -------------------- -------------------- Cash and Cash Equivalents, End of Period $ 3,152 $ 8,293 ================================================================================= ==================== ==================== Supplemental Cash Flow Information Cash paid for interest expense $ 1,904 $ 2,324 Cash paid for income taxes $ 6,358 $ 5,997
See accompanying notes to consolidated financial statements. Page 6 of 17 R&B, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 24, 2005 AND SEPTEMBER 25, 2004 (UNAUDITED) 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. However, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the thirty-nine week period ended September 24, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2005. The Company may experience significant fluctuations from quarter to quarter in its results of operations due to the timing of orders placed by the Company's customers. Generally, the second and third quarters have the highest level of customer orders, but the introduction of new products and product lines to customers may cause significant fluctuations from quarter to quarter. For further information, refer to the consolidated financial statements and footnotes thereto included in R&B, Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December 25, 2004. 2. Sales of Accounts Receivable The Company has entered into several customer sponsored programs administered by unrelated financial institutions that permit the Company to sell, without recourse, certain accounts receivable at discounted rates to the financial institutions. The Company does not retain any servicing requirements for these accounts receivable. Transactions under these agreements are accounted for as sales of accounts receivable following the provisions of Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - - A Replacement of FASB Statement 125." At September 24, 2005 and December 25, 2004, respectively, $25.9 million and $18.0 million of accounts receivable were sold and removed from the consolidated balance sheets. Selling, general and administrative expenses for the thirty-nine weeks ended September 24, 2005, and September 25, 2004 include $0.8 million and $0.1 million, respectively, in financing costs associated with these accounts receivable sales programs. 3. Inventories Inventories include the cost of material, freight, direct labor and overhead utilized in the processing of the Company's products. Inventories were as follows: September 24, December 25, (in thousands) 2005 2004 - ----------------------- ------------------ ------------------- Bulk product $30,200 $26,407 Finished product 41,974 32,029 Packaging materials 2,841 3,000 - ----------------------- ------------------ ------------------- Total $75,015 $61,436 ======================= ================== =================== Included in Finished product as of September 24, 2005 is approximately $2.4 million in inventory held on consignment. 4. Goodwill The Company follows the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." Goodwill activity during the thirty-nine week period ended September 24, 2005 is as follows: (in thousands) Page 7 of 17 Balance, December 25, 2005 $ 29,410 Acquisition 674 Translation (465) Balance, September 24, 2005 $ 29,619 ------------- In June 2005, the Company acquired The Automotive Edge/Hermoff (Hermoff) for approximately $1.7 million. The consolidated results include Hermoff since June 1, 2005. The Company has not presented pro forma results of operations for the thirty-nine weeks ended September 24, 2005 and September 25, 2004, assuming the acquisition had occurred at the beginning of the respective periods as these results would not have been materially different than actual results for the periods. The goodwill recorded as a result of the acquisition will be revised upon final determination of the purchase price allocation. 5. Long-Term Debt In May 2005, the Company amended its existing Revolving Credit Facility. The amended facility expires in June 2007. The May 2005 amendment increased the total credit facility from $10 million to $20 million. Borrowings under the amended facility are on an unsecured basis with interest at rates ranging from LIBOR plus 65 basis points to LIBOR plus 150 basis points based upon the achievement of certain benchmarks related to the ratio of funded debt to EBITDA. The interest rate at September 24, 2005 was LIBOR plus 85 basis points (4.68%). Borrowings under the facility were $8.5 million as of September 24, 2005. There were no borrowings under the facility as of December 25, 2004. 6. Earnings Per Share The following table sets forth the computation of basic earnings per share and diluted earnings per share for the thirteen week and thirty-nine week periods ended September 24, 2005 and September 25, 2004.
Thirteen Weeks Ended Thirty-nine Weeks Ended ------------------------------------------------------------------------------- September 24, September 25, September 24, September 25, (in thousands, except per share data) 2005 2004 2005 2004 - --------------------------------------------------- ------------------- ------------------ ------------------ ------------------ Numerator: Net income ...................................... $.4,613 $ 4,402 $ 12,695 $13,037 Denominator: Weighted average shares outstanding uased in basic earnings per share calculation 17,932 17,737 17,915 17,651 Effect of dilutive stock options................. 512 640 537 692 ------------------- ------------------ ------------------ ------------------ Adjusted weighted average shares outstanding .................................... 18,444 18,377 18,452 18,343 =================== ================== ================== ================== Basic earnings per share.............................. $ 0.26 $ 0.25 $ 0.71 $ 0.74 =================== ================== ================== ================== Diluted earnings per share........................... $ 0.25 $ 0.24 $ 0.69 $ 0.71 =================== ================== ================== ==================
On February 24, 2005, the Company's Board of Directors approved a two-for-one split of the Company's common stock, payable in the form of a stock dividend of one share for each share held. The Board set March 15, 2005 as the record date for the determination of the shareholders entitled to receive the additional shares. The shares were distributed to the shareholders of record on March 28, 2005. All earnings per share and common stock information is presented as if the stock split occurred prior to the earliest year included in these consolidated financial statements. 7. Stock-Based Compensation Effective May 18, 2000 the Company amended and restated its incentive Stock Option Plan (the "Plan"). Under the terms of the Plan, the Board of Directors Page 8 of 17 of the Company may grant incentive stock options and non-qualified stock options or combinations thereof to purchase up to 2,345,000 shares of common stock to officers, directors and employees. Grants under the Plan must be made within 10 years of the plan amendment date and are exercisable at the discretion of the Board of Directors but in no event more than 10 years from the date of grant. At September 24, 2005, options to acquire 290,511 shares were available for grant under the Plan. The Company accounts for the Plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees", and related interpretations. Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant between the fair value of the common stock and the exercise price of the option. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation.
Thirteen Weeks Ended Thirty-nine Weeks Ended - -------------------------------------------- -------------------------------------- ------------------------------------------ (in thousands, except per share data) September 24, September 25, September 24, September 25, 2005 2004 2005 2004 - -------------------------------------------- ----------------- ------------------- ------------------ ----------------------- Net income: Net income, as reported $ 4,613 $ 4,402 $ 12,695 $ 13,037 Less: Stock-based employee compensation expense, net of related tax effects, determined under the fair value based method for all awards (66) (35) (187) (105) Net income, pro forma $ 4,547 $ 4,367 $ 12,508 $ 12,932 - -------------------------------------------- ----------------- ------------------- ------------------ ----------------------- Earnings per share: Basic - as reported $ 0.26 $ 0.25 $ 0.71 $ 0.74 Basic - pro forma $ 0.25 $ 0.25 $ 0.70 $ 0.73 Diluted - as reported $ 0.25 $ 0.24 $ 0.69 $ 0.71 Diluted - pro forma $ 0.25 $ 0.24 $ 0.68 $ 0.71
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 2005 2004 ---- ---- Expected dividend yield 0% 0% Expected stock price volatility 47% 50% Risk-free interest rate 3.9% 3.7% Expected life of option 7.5 years 7.5 years 8. Related-Party Transaction The Company has entered into a noncancelable operating lease for its primary operating facility from a partnership in which the Company's Chief Executive Officer and Executive Vice President are partners. 9. New Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, "Share-Based Payment". This Statement is a revision of SFAS No. 123 and supersedes APB No. 25 and its related implementation Page 9 of 17 guidance. SFAS No. 123R requires a company to measure the grant-date fair value of equity awards given to employees in exchange for services and recognize that cost over the period that such services are performed. SFAS No. 123R is effective for the first annual reporting period that begins after June 15, 2005. The Company is currently evaluating the two methods of adoption allowed by SFAS No. 123R: the modified-prospective transition method and the modified-retrospective transition method. While the Company has not yet determined the precise impact that this statement will have on its financial condition and results of operations for fiscal 2006, assuming future annual stock option awards are comparable to prior years' annual awards and the Black-Scholes method is used to compute the value of the awards, the annualized impact on diluted earnings per share is expected to be consistent with our pro forma SFAS No. 123 disclosures. In December, 2004, the FASB issued two FASB Staff Positions (FSP) regarding the accounting implications of the American Jobs Creation Act of 2004. The Company is assessing the impact, if any, that FSP No. 109-1, "Application of FASB Statement No. 109 'Accounting for Income Taxes' to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" will have on the Company's effective tax rate in 2005. The Company does not believe that FSP No. 109-2 "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision with the American Jobs Creation Act of 2004" will have an impact on the Company's effective tax rate in 2005. In December 2004, the FASB issued SFAS No. 151 "Inventory Costs, an Amendment of ARB No. 43, Chapter 4". SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material and requires that these items be recognized as current period charges. SFAS No. 151 applies only to inventory costs incurred during periods beginning after the effective date and also requires that the allocation of fixed production overhead to conversion costs be based on the normal capacity of the production facilities. SFAS No. 151 is effective for the Company's fiscal year beginning January 1, 2006. The Company is currently assessing the impact, if any, of the adoption of the provisions of SFAS No. 151. In December 2004, the FASB issued SFAS No. 153 "Exchanges of Non-monetary Assets, An Amendment of APB Opinion No. 29". SFAS No. 153 eliminates the exception for exchange of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS No. 153 is effective for non-monetary assets and exchanges occurring in fiscal periods beginning after June 15, 2005, the Company's third fiscal quarter. As the Company does not engage in exchanges of non-monetary assets, implementation of this statement did not have an impact on its consolidated financial condition or results of operations. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections". SFAS No. 154 is a replacement of APB No. 20 and FASB Statement No.3. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt this pronouncement beginning in fiscal year 2006. Page 10 of 17 R&B, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Summary The Company is a leading supplier of original equipment dealer "Exclusive" automotive replacement parts, fasteners and service line products to the automotive aftermarket and household hardware to the general merchandise markets. The Company's products are marketed under more than seventy proprietary brand names, through its Motormite(R), Dorman(R), Allparts(TM), Scan-Tech(TM), MPI(TM) and Pik-A-Nut(TM) businesses. New product development is a critical success factor for the Company. The Company continues to invest heavily in resources necessary for it to increase its new product development efforts and to strengthen its relationships with its customers. These investments are primarily in the form of increased product development and awareness programs, customer service improvements and increased customer credits and allowances. The Company believes that this will enable it to provide an expanding array of new product offerings and grow its revenues. The automotive aftermarket has been consolidating over the past several years. As a result, the Company's customers have more leverage in negotiations and have been seeking further pricing concessions from the Company. These requests can come in different forms depending upon the customer. Some customers seek selling price reductions while others request extended payment terms or larger returns of slow moving product when negotiating with the Company. While the Company does its best to avoid such concessions, in some cases selling prices have been adjusted downward, payment terms to customers have been extended and returns of product have exceeded historical levels. Product returns and selling price reductions affect the Company's profit levels while terms extensions generally reduce operating cash flow and require additional capital to finance the business. Management expects these trends to continue for the foreseeable future. In 2005, the Company agreed to consign inventory of certain product lines on behalf of a large customer. In exchange, the Company received the customer's commitment to transition two other product lines from other suppliers to the Company and to continue all the programs for a minimum of two years. The customer also agreed to purchase any inventory on consignment or to continue to sell through it in the event that the Company is replaced as the primary supplier of these lines after two years. The transaction did not have a material impact on profitability or cash flow in the nine months ended September 24, 2005. However, cash flows, gross profits and net income in future periods will be lower than they otherwise would have been as this arrangement will result in an increase in the time it takes for the Company to record sales and receive cash from the customer. The Company may experience significant fluctuations from quarter to quarter in its results of operations due to the timing of orders placed by the Company's customers. Generally, the second and third quarters have the highest level of customer orders, but the introduction of new products and product lines to customers may cause significant fluctuations from quarter to quarter. The Company operates on a fifty-two, fifty-three week period ending on the last Saturday of the calendar year. Acquisition of The Automotive Edge/Hermoff In June 2005, the Company acquired Hermoff for approximately $1.7 million. The consolidated results include Hermoff since June 1, 2005. The Company has not presented pro forma results of operations for the thirty-nine weeks ended Page 11 of 17 September 24, 2005 and September 25, 2004, assuming the acquisition had occurred at the beginning of the respective periods as these results would not have been materially different from actual results for the periods. Results of Operations The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items in the Company's Consolidated Statements of Operations:
Percentage of Net Sales ---------------------------------------------------------------------------- For the Thirteen Weeks Ended For the Thirty-nine Weeks Ended ---------------------------------------------------------------------------- September 24, September 25, September 24, September 25, 2005 2004 2005 2004 - ------------------------------------------------- ------------------ ------------------- ------------------ ------------------ Net Sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 65.1% 62.7% 63.9% 62.3% - ------------------------------------------------- ------------------ ------------------- ------------------ ------------------ Gross profit 34.9% 37.3% 36.1% 37.7% Selling, general and administrative expenses 24.0% 25.4% 25.2% 25.4% - ------------------------------------------------- ------------------ ------------------- ------------------ ------------------ Income from operations 10.9% 11.9% 10.9% 12.3% Interest expense, net 1.0% 1.1% 1.0% 1.2% - ------------------------------------------------- ------------------ ------------------- ------------------ ------------------ Income before taxes 9.9% 10.8% 9.9% 11.1% Provision for taxes 3.6% 3.9% 3.7% 4.0% - ------------------------------------------------- ------------------ ------------------- ------------------ ------------------ Net Income 6.3% 6.9% 6.2% 7.1% ================================================= ================== =================== ================== ==================
Thirteen Weeks Ended September 24, 2005 Compared to Thirteen Weeks Ended September 25, 2004 Net sales increased 15% to $73.8 million for the thirteen weeks ended September 24, 2005 from $64.1 million for the same period in 2004. Excluding Hermoff, sales increased 13% in the three months ended September 24, 2005. Sales in 2005 are up primarily as a result of continued growth in new product sales. Cost of goods sold, as a percentage of sales, increased to 65.1% for the thirteen weeks ended September 24, 2005 from 62.7% in the same period last year. The increase in cost of sales as a percentage of sales is primarily the result of a continued mix shift to lower margin automotive hard parts and the impact of returns associated with line updates during the quarter. Selling, general and administrative expenses for the thirteen weeks ended September 24, 2005 increased $1.5 million, or 9%, to $17.8 million from $16.3 million for the same period in 2004. This increase is the result of the Company's decision to invest additional resources in new product development and promotional support as well as volume-driven variable expense increases, and inflationary increases in wages and other costs. Selling, general and administrative expenses for the thirteen weeks ended September 24, 2005 and September 25, 2004 include $0.4 million and $0.1 million, respectively in financing costs associated with accounts receivable sales programs whereby the Company sells its accounts receivable on a non-recourse basis to financial institutions. Interest expense, net, remained flat at $0.7 million for the thirteen weeks ended September 24, 2005. The Company's effective tax rate increased to 37.1% for the thirteen weeks ended September 24, 2005 from 36.4% for the thirteen weeks ended September 25, 2004 due to the loss of certain state tax benefits in 2005 as a result of changes in state tax legislation. Page 12 of 17 Thirty-nine Weeks Ended September 24, 2005 Compared to Thirty-nine Weeks Ended September 25, 2004 Net sales increased 10% to $203.6 million for the thirty-nine weeks ended September 24, 2005 from $184.4 million for the same period in 2004. Sales volume in 2005 increased as a result of continued sales growth from products introduced within the last twelve months. Cost of goods sold, as a percentage of sales, was 63.9% for the thirty-nine weeks ended September 24, 2005 compared to 62.3% in the same period last year. The increase in cost of sales as a percentage of sales is primarily the result of a continued shift in sales mix toward lower margin automotive hard parts. Selling, general and administrative expenses for the thirty-nine weeks ended September 24, 2005 increased $4.5 million, or 10%, to $51.3 million from $46.8 million for the same period in 2004. This increase is the result of the headcount additions to increase new product development capabilities as well as volume-driven variable expense increases, and inflationary increases in wages and other costs. Selling, general and administrative expenses for the thirty-nine weeks ended September 24, 2005 and September 25, 2004 include $0.8 million and $0.1 million, respectively in financing costs associated with accounts receivable sales programs whereby the Company sells its accounts receivable on a non-recourse basis to financial institutions. Interest expense, net, decreased to $2.0 million for the thirty-nine weeks ended September 24, 2005 from $2.2 million in the prior year due to a lower effective borrowing rate as a result of repayments of the Company's Senior Notes. The Company's effective tax rate increased to 37.0% for the thirty-nine weeks ended September 24, 2005 from 36.3% for the thirty-nine weeks ended September 25, 2004 due to the loss of certain state tax benefits in 2005 as a result of changes in state tax legislation. Liquidity and Capital Resources Historically, the Company has financed its growth through a combination of cash flow from operations, accounts receivable sales programs provided by certain customers and through the issuance of senior indebtedness through its bank credit facility and senior note agreements. At September 24, 2005, working capital was $112.9 million, total long-term debt (including the current portion) was $34.7 million and shareholders' equity was $136.5 million. Cash and cash equivalents as of September 24, 2005 totaled $3.2 million. Over the past several years the Company has extended payment terms to certain customers as a result of customer requests and market demands. These extended terms have resulted in increased accounts receivable levels and significant uses of cash flow. The Company participates in accounts receivable sales programs with several customers which allow it to sell its accounts receivable on a non-recourse basis to financial institutions to offset the negative cash flow impact of these payment terms extensions. As of September 24, 2005 and December 25, 2004, respectively, the Company had sold $25.9 million and $18.0 million in accounts receivable under these programs and had removed them from its balance sheets. The Company expects continued pressure to extend its payment terms for the foreseeable future. Further extensions of customer payment terms will result in additional uses of cash flow or increased costs associated with the sale of accounts receivable. Long-term debt consists primarily of $25.7 million in Senior Notes that were originally issued in August 1998, in a private placement on an unsecured basis ("Notes"). The Notes bear a 6.81% fixed interest rate, payable quarterly. Annual principal payments of $8.6 million are due each August through 2008. The Notes require, among other things, that the Company maintain certain financial covenants relating to debt to capital ratios and minimum net worth. In May 2005, the Company amended its existing Revolving Credit Facility. The amended facility expires in June 2007. The May 2005 amendment increased the total credit facility from $10 million to $20 million. Borrowings under the amended facility are on an unsecured basis with interest at rates ranging from LIBOR plus 65 basis points to LIBOR plus 150 basis points based upon the achievement of certain benchmarks related to the ratio of funded debt to EBITDA. The interest rate at September 24, 2005 was LIBOR plus 85 basis points (4.68%). Borrowings under the facility were $8.5 million as of September 24, 2005. The loan agreement also contains covenants, the most restrictive of which pertain to net worth and the ratio of debt to EBITDA. Page 13 of 17 In November 2001, the Company amended certain agreements related to its 1998 acquisition of Scan-Tech USA/Sweden A.B. and related entities ("Scan-Tech") in exchange for consideration of approximately $3.2 million to be paid in installments through December 31, 2005. The remaining amount outstanding under this obligation was $0.5 million at September 24, 2005 and is due to an entity controlled by the President of one of the Company's subsidiaries. The Company's business activities do not include the use of unconsolidated special purpose entities, and there are no significant business transactions that have not been reflected in the accompanying financial statements. The Company reported a net source of cash flow from its operating activities of $3.2 million in the thirty-nine weeks ended September 24, 2005. Net income adjusted for depreciation was the primary source of operating cash flow in the thirty- nine weeks ended September 24, 2005. The primary uses of cash flow were inventory, accounts payable and accrued liabilities which utilized $11.5 million, $1.5 million and $1.4 million in cash, respectively. Inventory utilized $11.5 million in cash in the nine months ended September 24, 2005 primarily as a result of inventory purchased to support new product initiatives and $2.5 million of inventory placed on consignment to one customer in 2005. Accounts receivable resulted in a net source of cash of only $0.3 million despite a 10% sales increase for the nine months ended September 24, 2005 as higher sales of accounts receivable under accounts receivable sales programs offset the impact of this sales growth and the continued trend towards longer payment terms to certain customers. Investing activities used $7.2 million of cash in the thirty-nine weeks ended September 24, 2005 as a result of $5.5 million in additions to property, plant and equipment and $1.7 million in cash utilized to purchase Hermoff. The Company's largest 2005 capital project is the automation and expansion of its central distribution center in Warsaw, Kentucky. This project began in 2004 and was originally expected to be completed in early 2005 at a cost of $5.0 million. Scope changes and other factors are now expected to delay completion of the project until early 2006, and total costs are now expected to be approximately $6.5 million. Capital spending in the thirty-nine weeks ended September 24, 2005 also included tooling associated with new products, upgrades to information systems, purchases of equipment designed to improve operational efficiencies and scheduled equipment replacements. Financing activities resulted in no net change in cash in the thirty-nine weeks ended September 24, 2005 as proceeds of $8.5 million from the Company's amended revolving credit facility offset cash used to make the scheduled August 2005 repayment of $8.6 million on the Company's Senior Notes. The Company believes that cash and cash equivalents on hand and cash generated from operations together with its available sources of capital are sufficient to meet its ongoing cash needs for the foreseeable future. Foreign Currency Fluctuations In 2004, approximately 60% of the Company's products were purchased in a variety of foreign countries. The products generally are purchased through purchase orders with the purchase price specified in U.S. dollars. Accordingly, the Company does not have exposure to fluctuations in the relationship between the dollar and various foreign currencies between the time of execution of the purchase order and payment for the product. However, weakness in the dollar has resulted in some materials price increase and pressure from several foreign suppliers to increase prices further. To the extent that the dollar decreases in value to foreign currencies in the future or the present weakness in the dollar continues for a sustained period of time, the price of the product in dollars for new purchase orders may increase further. The Company makes significant purchases of product from Chinese vendors. Until recently, the Chinese Yuan exchange rate has been fixed against the U.S. Dollar. On July 21, 2005, the Chinese government announced an immediate two percent (2%) revaluation of the Yuan against the U.S. Dollar and that going forward it will allow the Yuan to fluctuate against a basket of currencies. Most experts believe that the value of the Yuan over the long term will increase further relative to the U.S. Dollar as a result. This will most likely result in an increase in the cost of products that are purchased from China. The Company is currently evaluating the impact, if any, that this action will have on its business or results of operations. Impact of Inflation The Company has not generally been adversely affected by inflation, although the Company did experience some material cost increases as a result of raw materials shortages in 2004. These increases did not have a material impact on the Company. The Company believes that further cost increases could potentially be mitigated by passing along price increases to customers or through the use of alternative suppliers or resourcing purchases to other countries, however there can be no assurance that the Company will be successful in such efforts. Page 14 of 17 Cautionary Statement Regarding Forward Looking Statements Certain statements periodically made by or on behalf of the Company and certain statements contained herein including statements in Management's Discussion and Analysis of Financial Condition and Results of Operation, such as statements regarding litigation; and certain other statements contained herein regarding matters that are not historical fact are forward looking statements (as such term is defined in the Securities Act of 1933), and because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward looking statements. Factors that cause actual results to differ materially include but are not limited to those factors discussed in the Company's Annual Report on Form 10-K under "Business - Risk Factors." Item 3. Quantitative and Qualitative Disclosure about Market Risk The Company's market risk is the potential loss arising from adverse changes in interest rates. With the exception of the Company's revolving credit facility, long-term debt obligations are at fixed interest rates and denominated in U.S. dollars. The Company manages its interest rate risk by monitoring trends in interest rates as a basis for determining whether to enter into fixed rate or variable rate agreements. Under the terms of the Company's revolving credit facility and customer- sponsored programs to sell accounts receivable, a change in either the lender's base rate or LIBOR would affect the rate at which the Company could borrow funds thereunder. The Company believes that the effect of any such change would be minimal. Item 4. Controls and Procedures Quarterly evaluation of the Company's Disclosure Controls and Internal Controls As of the date of this quarterly report, the Company evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" ("Disclosure Controls"). This evaluation ("Controls Evaluation") was done under the supervision and with the participation of management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Limitations on the Effectiveness of Controls The Company's management, including the CEO and CFO, does not expect that its Disclosure Controls or its "internal controls and procedures for financial reporting" ("Internal Controls") will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision- making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Conclusions Based upon the Controls Evaluation, the CEO and CFO have concluded that, subject to the limitations noted above, the Disclosure Controls are effective to timely alert management to material information relating to the Company during the period when its periodic reports are being prepared. In accordance with SEC requirements, the CEO and CFO note that, since the date of the Controls Evaluation to the date of this quarterly report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses. Page 15 of 17 PART II: OTHER INFORMATION Item 1. Legal Proceedings In addition to commitments and obligations which arise in the ordinary course of business, the Company is subject to various claims and legal actions from time to time involving contracts, competitive practices, trademark rights, product liability claims and other matters arising out of the conduct of the Company's business. Item 6. Exhibits 31.1 Certification of Chief Executive Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive and Chief Financial Officer as required by Section 906 of the Sarbanes- Oxley Act of 2002. Page 16 of 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. R & B, INC. Date October 31 , 2005 \s\ Richard Berman -------------------- ------------------------- Richard Berman President and Chief Executive Officer Date October 31, 2005 \s\ Mathias Barton ------------------ --------------------------- Mathias Barton Chief Financial Officer and Principal Accounting Officer Page 17 of 17 EX-31 2 ex31-2.txt CERTIFICATION OF CFO Exhibit 31.2 CERTIFICATION I, Mathias Barton, Chief Financial Officer and Principal Accounting Officer, certify that: 1. I have reviewed this Form 10-Q of R&B, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) for the registrant and have, a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting, and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 31, 2005 \s\ Mathias Barton Mathias Barton Chief Financial Officer EX-32 3 ex32.txt SOX CERTIFICATION OF CEO AND CFO Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This Certification is intended to accompany the Quarterly Report of R&B, Inc. (the "Company") on Form 10-Q for the period ended September 24, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"),and is given solely for the purpose of satisfying the requirements of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. To the best of their knowledge, the undersigned, in their respective capacities as set forth below, hereby certify that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. /s/ Richard N. Berman Chief Executive Officer Date: October 31, 2005 ------------------------ /s/ Mathias J. Barton Chief Financial Officer Date: October 31, 2005 ------------------------ EX-31 4 ex31-1.txt CERTIFICATION OF CEO Exhibit 31.1 CERTIFICATION I, Richard Berman, President and Chief Executive Officer, certify that: 1. I have reviewed this Form 10-Q of R&B, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) for the registrant and have, a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting, and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 31, 2005 \s\ Richard Berman Richard Berman President and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----