- -------------------------------------------------------------------------------
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, 2004
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|_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes|_| No|X|
As of November 3, 2004 the Registrant had 8,893,577 common shares, $.01 par
value, outstanding.
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Page 1 of 16
R & B, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 25, 2004
Page
Part I -- FINANCIAL INFORMATION
Item 1.Consolidated Financial Statements (unaudited)
Statements of Operations:
Thirteen Weeks Ended September 25, 2004
and September 27, 2003 ......................... 3
Thirty-nine Weeks Ended September 25, 2004
and September 27, 2003.......................... 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............................... 10
Item 3.Quantitative and Qualitative Disclosure
about Market Risk .............................. 13
Item 4.Controls and Procedures............................... 14
Part II -- OTHER INFORMATION
Item 1.Legal Proceedings.................................... 15
Item 6.Exhibits and Reports on Form 8-K..................... 15
Signatures ................................................. 16
Page 2 of 16
PART I . FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Thirteen Weeks Ended
------------------------------
September 25September 27,
(in thousands, except per share data) 2004 2003
- --------------------------------------------------------------------------------------------
Net Sales $ 64,135 $ 58,183
Cost of goods sold 40,196 37,357
- --------------------------------------------------------------------------------------------
Gross profit 23,939 20,826
Selling, general and administrative expenses 16,315 14,216
- --------------------------------------------------------------------------------------------
Income from operations 7,624 6,610
Interest expense, net of interest income of $15 and $35 703 846
- --------------------------------------------------------------------------------------------
Income before taxes 6,921 5,764
Provision for taxes 2,519 2,047
- --------------------------------------------------------------------------------------------
Net Income $ 4,402 $ 3,717
============================================================================================
Earnings Per Share:
Basic $0.50 $0.43
Diluted 0.48 0.41
============================================================================================
Average Shares Outstanding:
Basic 8,869 8,717
Diluted 9,188 9,098
See accompanying notes to consolidated financial statements.
Page 3 of 16
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Thirty-nine Weeks Ended
------------------------------
September 25, September 27,
(in thousands, except per share data) 2004 2003
- --------------------------------------------------------------------------------------------
Net Sales $ 184,417 $ 166,523
Cost of goods sold 114,903 105,916
- --------------------------------------------------------------------------------------------
Gross profit 69,514 60,607
Selling, general and administrative expenses 46,819 43,287
- --------------------------------------------------------------------------------------------
Income from operations 22,695 17,320
Interest expense, net of interest income of $92 and $150 2,233 2,621
- --------------------------------------------------------------------------------------------
Income before taxes 20,462 14,699
Provision for taxes 7,425 5,232
- --------------------------------------------------------------------------------------------
Net Income $ 13,037 $ 9,467
============================================================================================
Earnings Per Share:
Basic $1.48 $1.10
Diluted 1.42 1.05
============================================================================================
Average Shares Outstanding:
Basic 8,826 8,610
Diluted 9,172 9,026
See accompanying notes to consolidated financial statements.
Page 4 of 16
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 25, December 27,
(in thousands, except share data) 2004 2003
- ------------------------------------------------------- ---------------- ----------------
Assets (unaudited)
Current Assets:
Cash and cash equivalents $ 8,293 $ 15,177
Short-term investments - 9,905
Accounts receivable, less allowance for doubtful
accounts and customer credits of $21,923 and $17,721 57,982 44,127
Inventories 60,907 51,170
Deferred income taxes 7,680 7,493
Prepaids and other current assets 1,754 1,356
- ------------------------------------------------------- ---------------- ----------------
Total current assets 136,616 129,228
------------------------------------------------------- ---------------- ----------------
Property, Plant and Equipment, net 23,424 17,590
Goodwill 29,090 29,125
Other Assets 857 663
- ------------------------------------------------------- ---------------- ----------------
Total $189,987 $176,606
======================================================= ================ ================
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt $ 9,060 $ 8,571
Accounts payable 16,188 10,029
Accrued compensation 7,129 7,379
Other accrued liabilities 6,193 4,797
- ------------------------------------------------------- ---------------- ----------------
Total current liabilities 38,570 30,776
- ------------------------------------------------------- ---------------- ----------------
Long-Term Debt 26,188 35,213
Deferred Income Taxes 5,744 4,632
Commitments and Contingencies
Shareholders' Equity:
Common stock, par value $.01; authorized 25,000,000 shares;
issued and outstanding 8,884,733 and 8,762,994 shares 89 88
Additional paid-in capital 34,584 33,950
Cumulative translation adjustments 1,976 2,148
Retained earnings 82,836 69,799
- ------------------------------------------------------- ---------------- ----------------
Total shareholders' equity 119,485 105,985
- ------------------------------------------------------- ---------------- ----------------
Total $189,987 $176,606
======================================================= ================ ================
See accompanying notes to consolidated financial statements.
Page 5 of 16
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Thirty-nine Weeks Ended
-----------------------------------
September 25, September 27,
(in thousands) 2004 2003
- ---------------------------------------------------------------- --------------- -------------------
Cash Flows from Operating Activities:
Net income $ 13,037 $ 9,467
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 3,388 3,352
Provision for doubtful accounts 220 440
Provision for deferred income tax 925 441
Provision for non-cash stock compensation - 21
Changes in assets and liabilities:
Accounts receivable (14,112) (2,581)
Inventories (9,812) (2,190)
Prepaids and other (621) (912)
Accounts payable 6,147 (123)
Other accrued liabilities 1,609 1,405
- ---------------------------------------------------------------- --------------- -------------------
Cash provided by operating activities 781 9,320
- ---------------------------------------------------------------- --------------- -------------------
Cash Flows from Investing Activities:
Property, plant and equipment additions (9,223) (3,343)
Purchases of short-term investments (4,821) (8,114)
Proceeds from maturities of short-term investments 14,726 14,598
- ---------------------------------------------------------------- --------------- -------------------
Cash provided by investing activities 682 3,141
- ---------------------------------------------------------------- --------------- -------------------
Cash Flows from Financing Activities:
Repayment of term loans and capitalized lease obligations (8,571) (9,241)
Proceeds from common stock issuances 224 402
- ---------------------------------------------------------------- --------------- -------------------
Cash used in financing activities (8,347) (8,839)
- ---------------------------------------------------------------- --------------- -------------------
Net (Decrease) Increase in Cash and Cash Equivalents (6,884) 3,622
Cash and Cash Equivalents, Beginning of Period 15,177 5,169
- ---------------------------------------------------------------- --------------- -------------------
Cash and Cash Equivalents, End of Period $ 8,293 $ 8,791
================================================================ =============== ===================
Supplemental Cash Flow Information
Cash paid for interest expense $ 2,324 $ 2,822
Cash paid for income taxes $ 5,997 $ 2,538
See accompanying notes to consolidated financial statements.
Page 6 of 16
R&B, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 25, 2004 AND
SEPTEMBER 27, 2003 (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, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 25, 2004. 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 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, 2003.
2. Sales of Accounts Receivable
The Company entered into two 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 this agreement 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 25, 2004 and December 27, 2003, respectively, $15.6
million and $2.0 million of accounts receivable were sold and removed from the
consolidated balance sheets.
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 25, December 27,
(in thousands) 2004 2003
- ------------------- --------------- ---------------
Bulk product $26,919 $22,365
Finished product 30,908 25,906
Packaging materials 3,080 2,899
- ------------------- --------------- ---------------
Total $60,907 $51,170
=================== =============== ===============
4. 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 25, 2004 and September 27, 2003.
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------------------------------------------
September 25, September 27, September 25, September 27,
(in thousands, except per share data) 2004 2003 2004 2003
- ---------------------------------------- --------------- -------------- --------------- -------------- -
Numerator:
Net income ....................... $ 4,402 $ 3,717 $ 13,037 $ 9,467
Denominator:
Weighted average shares outstanding 8,869 8,717 8,826 8,610
Page 7 of 16
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------------------------------------------
September 25, September 27, September 25, September 27,
(in thousands, except per share data) 2004 2003 2004 2003
- ---------------------------------------- --------------- -------------- --------------- -------------- -
Effect of dilutive stock options... 319 381 346 416
--------------- -------------- --------------- -------------- -
Adjusted weighted average shares
outstanding for diluted
earnings per share 9,188 9,098 9,172 9,026
=============== ============== =============== ============== =
Basic earnings per share................ $ 0.50 $ 0.43 $ 1.48 $ 1.10
=============== ============== =============== ============== =
Diluted earnings per share.............. $ 0.48 $ 0.41 $ 1.42 $ 1.05
=============== ============== =============== ============== =
5. Stock-Based Compensation
Effective May 18, 2000 the Company amended and restated its Incentive Stock
Option Plan (the "Plan"). Under the terms of the Plan, the Board of Directors of
the Company may grant incentive stock options and non-qualified stock options or
combinations thereof to purchase up to 1,172,500 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 25, 2004, options to acquire 211,606 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 our 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
- --------------------------------------------- ------------------------------ ------------------------------
September 25, September 27, September 25, September 27,
(in thousands, except per share data) 2004 2003 2004 2003
- --------------------------------------------- -------------- --------------- -------------- --------------
Net income:
Net income, as reported $ 4,402 $ 3,717 $ 13,037 $ 9,467
Add: Stock-based employee compensation
expense, net of related tax effects,
included in the determination of net
income, as reported - - - 13
Less: Stock-based employee compensation
expense, net of related tax effects,
determined under fair value based
method for all awards ( 35) (25) (105) (52)
- --------------------------------------------- ------------- -------------- ------------- ---------------
Net income, pro forma $ 4,367 $ 3,692 $ 12,932 $ 9,428
- --------------------------------------------- -------------- --------------- -------------- --------------
Earnings per share:
Basic - as reported $ 0.50 $ 0.43 $ 1.48 $ 1.10
Basic - pro forma $ 0.49 $ 0.42 $ 1.47 $ 1.10
Diluted - as reported $ 0.48 $ 0.41 $ 1.42 $ 1.05
Diluted - pro forma $ 0.48 $ 0.41 $ 1.41 $ 1.04
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:
Page 8 of 16
2004 2003
---- ----
Expected dividend yield 0% 0%
Expected stock price volatility 50% 53%
Risk-free interest rate 3.7% 3.4%
Expected life of option 7.5 years 7.5 years
6. Related-Party Transactions
The Company has entered into a noncanceable operating lease for its
primary operating facility with a partnership in which the Company's Chief
Executive Officer and Executive Vice President are partners.
Prior to April 2003, the Company had leased its Carrollton, Georgia
facility from another partnership in which the Company's Chief Executive Officer
and Executive Vice President are partners. During 2003, the Company entered into
an agreement to terminate the lease for this facility. In connection with this
agreement, the Company paid $200,000, which was accrued in 2002, to terminate
this lease subject to the closing of the sale of the building by the partnership
to an unrelated entity.
7. New Accounting Pronouncements
In December 2003, the FASB issued Revised Interpretation FIN No. 46,
"Consolidation of Variable Interest Entities - an interpretation of Accounting
Research Bulletin No. 51." FIN No. 46 addresses the consolidation by business
enterprises of variable interest entities, as defined in the interpretation. FIN
No. 46 expands existing accounting guidance regarding when a company should
include in its financial statements the assets, liabilities and activities of
another entity. Since the Company does not have any interests in variable
interest entities, the adoption of FIN No. 46 did not have any effect on the
Company's consolidated financial condition or results of operations.
Page 9 of 16
R&B, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 thirty proprietary
brand names, through its Motormite, Dorman, Allparts, Scan-Tech, MPI and
Pik-A-Nut businesses.
New product development is a critical success factor for the Company. The
Company has invested heavily in resources necessary for it to increase its new
product development efforts and to strengthen its relationships with its
customers. These investments are primarily in the form of increased product
development and awareness programs, customer service improvements and increased
customer credits and allowances. This has enabled the Company to provide an
expanding array of new product offerings and grow its revenues.
The automotive aftermarket has been consolidating over the past several
years. As a result, many of the Company's customers have grown larger and
therefore have more leverage in negotiations with the Company. Recently,
customers have pressed for extended payment terms and returns of slow moving
product when negotiating with the Company. While the Company does its best to
avoid such concessions, in some cases payment terms to customers have been
extended and returns of product have exceeded historical levels. The product
returns primarily affect the Company's profit levels while terms extensions
generally reduce operating cash flow and require additional capital to finance
the business. Management expects both of these trends to continue for the
foreseeable future.
The Company 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.
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 25, September 27, September 25, September 27,
2004 2003 2004 2003
- -------------------------------------- --------------- -------------- -------------- ----------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 62.7% 64.2% 62.3% 63.6%
- -------------------------------------- --------------- -------------- -------------- ----------------
Gross profit 37.3% 35.8% 37.7% 36.4%
Selling, general and administrative expenses 25.4% 24.4% 25.4% 26.0%
- -------------------------------------- --------------- -------------- -------------- ----------------
Income from operations 11.9% 11.4% 12.3% 10.4%
Interest expense, net 1.1% 1.5% 1.2% 1.6%
- -------------------------------------- --------------- -------------- -------------- ----------------
Income before taxes 10.8% 9.9% 11.1% 8.8%
Provision for taxes 3.9% 3.5% 4.0% 3.1%
- -------------------------------------- --------------- -------------- -------------- ----------------
Net Income 6.9% 6.4% 7.1% 5.7%
====================================== =============== ============== ============== ================
Page 10 of 16
Thirteen Weeks Ended September 25, 2004 Compared to
Thirteen Weeks Ended September 27, 2003
Net sales increased 10% to $64.1 million for the thirteen weeks ended
September 25, 2004 from $58.2 million for the same period in 2003. Sales volume
in 2004 increased as a result of continued sales growth from products introduced
within the last twelve months. The favorable effects of foreign currency
exchange resulted in a 1% year over year increase in sales.
Cost of goods sold, as a percentage of sales, decreased to 62.7% for the
thirteen weeks ended September 25, 2004 from 64.2% in the same period last year.
The decrease in cost of goods sold as a percentage of sales is the result of a
shift in mix towards higher-margin product sales in 2004, cost reduction
initiatives and a higher sales base over which to spread fixed overhead costs in
the current year. Results in the third quarter of 2004, however, were negatively
impacted by approximately $0.7 million in incremental expediting costs to
maintain satisfactory fill rates resulting from material shortages for certain
items and higher than planned demand. The Company has taken steps to correct the
problem, but expects to incur further costs in the fourth quarter.
Selling, general and administrative expenses for the thirteen weeks
ended September 25, 2004 increased $2.1 million, or 15%, to $16.3 million from
$14.2 million for the same period in 2003. This increase is primarily due to
higher variable operating costs as a result of the 10% increase in sales in 2004
and an increase in new product development costs.
Interest expense, net, decreased to $0.7 million for the thirteen weeks
ended September 25, 2004 from $0.8 million in the prior year due to lower
borrowing levels.
The Company's effective tax rate increased to 36.4% for the thirteen
weeks ended September 25, 2004 from 35.5% for the thirteen weeks ended September
27, 2003 due to the impact of higher graduated tax rates associated with the
Company's higher earnings levels.
Thirty-nine Weeks Ended September 25, 2004 Compared to
Thirty-nine Weeks Ended September 27, 2003
Net sales increased 11% to $184.4 million for the thirty-nine weeks
ended September 25, 2004 from $166.5 million for the same period in 2003. Sales
volume in 2004 increased as a result of continued sales growth from products
introduced within the last twelve months and shipments of the Company's
Pik-A-Nut home hardware product line to K-Mart, which became a customer in the
third quarter of last year. The favorable effects of foreign currency exchange
resulted in a 1% year over year increase in sales.
Cost of goods sold, as a percentage of sales, decreased to 62.3% for
the thirty-nine weeks ended September 25, 2004 from 63.6% in the same period
last year. The decrease in cost of goods sold is the result of a shift in mix
towards higher-margin product sales in 2004, cost reduction initiatives and a
higher sales base over which to spread fixed overhead costs in the current year.
Selling, general and administrative expenses for the thirty-nine weeks
ended September 25, 2004 increased $3.5 million, or 8%, to $46.8 million from
$43.3 million for the same period in 2003. This increase is primarily due to
higher variable operating costs as a result of the 11% increase in sales in 2004
and an increase in new product development costs.
Interest expense, net, decreased to $2.2 million for the thirty-nine
weeks ended September 25, 2004 from $2.6 million in the prior year due to lower
borrowing levels.
The Company's effective tax rate increased to 36.3% for the thirty-nine
weeks ended September 25, 2004 from 35.6% for the thirty-nine weeks ended
September 27, 2003 due to the impact of higher graduated tax rates associated
with the Company's higher earnings levels.
Liquidity and Capital Resources
Historically, the Company has financed its growth through a combination
of cash flow from operations and through the issuance of senior indebtedness
through its bank credit facility and senior note agreements. At September 25,
2004, working capital was $98.0 million, total long-term debt (including the
current portion) was $35.2 million and shareholders' equity was $119.5 million.
Cash and short-term investments as of September 25, 2004, totaled $8.3 million.
Over the past two 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
Page 11 of 16
uses of cash flow. The Company participates in 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 to offset the negative cash flow impact of the payment
terms extensions. As of September 25, 2004, the Company had sold $15.6 million
in accounts receivable under these programs and removed them from its balance
sheet. 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.
The Company recently announced its decision to invest approximately $5.0
million to automate its recently-expanded central distribution facility in
Warsaw, Kentucky. This initiative, which is expected to be completed shortly
after year end, will also result in approximately $0.6 million in one-time start
up and training costs, $0.2 million of which were incurred in the three months
ended September 25, 2004. Once completed, this project is expected to generate
significant efficiency improvements and improved customer service capabilities
for the Company's Dorman business. Total capital spending in 2004 is expected to
be between $11.0 and $13.0 million as a result of the automation of the Warsaw
facility, the 77,200 square foot expansion of the Warsaw facility, increased
tooling costs for new products and other capital projects.
Long-term debt consists primarily of $34.3 million in Senior Notes that
were originally issued in August 1998, in a private placement on an unsecured
basis ("Notes"). The Notes bear a 6.81% fixed interest rate, payable quarterly.
Annual principal payments of $8.6 million are due each August through 2008. The
Notes require, among other things, that the Company maintain certain financial
covenants relating to debt to capital ratios and minimum net worth.
The Company maintains a $10.0 million Revolving Credit Facility which
expires in June 2005. Borrowings under the amended facility are on an unsecured
basis with interest at LIBOR plus 150 basis points. The loan agreement also
contains covenants, the most restrictive of which pertain to net worth and the
ratio of debt to EBITDA. In addition, the Company's Swedish subsidiary maintains
a short-term $0.7 million credit facility. There were no borrowings under either
facility as of September 25, 2004.
The Company amended certain agreements related to its 1998 acquisition of
Scan-Tech USA/Sweden A.B. and related entities ("Scan-Tech") during 2001. As a
result of this transaction, the Company purchased and canceled 250,000 shares of
its common stock issued in connection with the acquisition and canceled the earn
out provisions of the acquisition agreement in exchange for consideration of
$3.2 million to be paid by the Company in installments through December 2005.
The aggregate amount outstanding under this obligation was $0.9 million at
September 25, 2004.
The Company reported a net source of cash flow from its operating
activities of $0.8 million in the nine months ended September 25, 2004. The
primary uses of cash flow were accounts receivable and inventory, which
increased $14.1 million and $9.8 million, respectively. Accounts receivable grew
as a result of higher sales and the impact of the continuing trend towards
longer payment terms to certain customers. Inventory increased as a result of
the sales increase in 2004, and as a result of management's decision to increase
levels of inventory safety stock in the third quarter. Net income, depreciation
and a $6.1 million increase in accounts payable were the primary sources of
operating cash flow in the quarter. The payables increase was primarily the
result of higher levels of inventory purchases and capital spending in the
current year.
Investing activities generated $0.7 million of cash in the nine months
ended September 25, 2004. Additions to property, plant and equipment required
$9.2 million of cash during the first nine months of 2004. The capital additions
are the result of the Company's decision to automate and expand its central
distribution center in Warsaw, Kentucky, tooling costs associated with new
products, upgrades to information systems, purchases of equipment designed to
improve operational efficiencies and scheduled equipment replacements. The
Company purchases highly liquid corporate and government bonds with maturities
from nine months to one year to take advantage of higher earnings rates on these
investments. These investments have been classified as short-term investments as
required by generally accepted accounting principles. The Company reported a net
source of cash of $9.9 million during the period related to the net proceeds
from investments.
Financing activities required $8.3 million in cash in the nine months
ended September 25, 2004. These uses were primarily the result of the scheduled
repayment of $8.6 million on the Company's Senior Notes in August 2004.
The Company believes that cash and short-term investments 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.
Page 12 of 16
Outlook
The Company's strategic plan provides for a continued intense focus on
new product development and further expansion of its existing core businesses.
Management anticipates that these efforts will result in compounded annual sales
growth of between 3% and 8% over the next two year period. The Company may
experience significant fluctuations in its results of operations from quarter to
quarter due to the timing of new product introductions and orders placed by its
customers.
Foreign Currency Fluctuations
In 2003, approximately 60% of the Company's products were purchased from
a variety of foreign countries. The products generally are purchased through
purchase orders with the purchase price specified in U.S. dollars. Accordingly,
the Company does not have exposure to fluctuations in the relationship between
the dollar and various foreign currencies between the time of execution of the
purchase order and payment for the product. However, the recent weakness in the
dollar has resulted in pressure from several foreign suppliers to increase
prices. 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.
The Company makes significant purchases of product from Chinese vendors.
The Chinese Yuan exchange rate has been fixed against the U.S. Dollar since
1998. Recently, the Chinese government has been under increasing pressure to
revalue its currency, or to make its exchange rate more flexible. Most experts
believe that the value of the Yuan would increase relative to the U.S. Dollar if
it was revalued or allowed to float. Such a move would most likely result in an
increase in the cost of products that are purchased from China.
Impact of Inflation
The Company has not generally been adversely affected by inflation,
although recently some raw material prices have increased and overall materials
pricing pressures have become more evident. The Company believes that
significant material 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.
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. Short-term fixed income investments are
subject to interest rate and credit risk. The Company believes that the negative
effect of interest rate risk would be minimal as all investments have maturities
of one year or less. The Company's investment portfolio consists solely of
investment grade corporate and government securities to minimize credit risk.
The Company may occasionally use derivative financial instruments,
consisting of foreign currency forward purchase and sales contracts with terms
of less than one year, to hedge its exposure to changes in foreign currency
exchange. Its primary exposure to changes in foreign currency rates results from
changes in exchange rates on certain third- party trade receivables and payables
of the Company's Swedish subsidiary. There were no forward purchase or sales
contracts outstanding as of September 25, 2004.
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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, control 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 14 of 16
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 15 of 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
R & B, INC.
Date November 8, 2004 \s\ Richard Berman
-------------------- -------------------------
Richard Berman
President and Chief
Executive Officer
Date November 8, 2004 \s\ Mathias Barton
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Mathias Barton
Chief Financial Officer and
Principal Accounting Officer
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