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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 2005
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 |X| No |_|
As of April 29, 2005 the Registrant had 17,926,648 common shares, $.01 par
value, outstanding.
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Page 1 of 14
R & B, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 26, 2005
Page
Part I -- FINANCIAL INFORMATION
Item 1.Consolidated Financial Statements (unaudited)
Statements of Operations:
Thirteen Weeks Ended March 26, 2005 and March 27, 2004 . .3
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows............................. 5
Notes to Consolidated Financial Statements........... 6
Item 2.Management's Discussion and
Analysis of Results of Operations and
Financial Condition.............................. 9
Item 3.Quantitative and Qualitative Disclosure about Market Risk . .12
Item 4.Controls and Procedures. . . . . . . . . . . . . . . . . . . 12
Part II -- OTHER INFORMATION
Item 1.Legal Proceedings.................................... 13
Item 6.Exhibits. . ......................................... 13
Signatures . . . . . . . ................................... 14
Page 2 of 14
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Thirteen Weeks Ended
-----------------------------
March 26, March 27,
(in thousands, except per share data) 2005 2004
- ------------------------------------------------------------------------------
Net Sales $ 61,231 $ 56,005
Cost of goods sold 38,538 35,390
- ------------------------------------------------------------------------------
Gross profit 22,693 20,615
Selling, general and administrative expenses 16,623 14,658
- ------------------------------------------------------------------------------
Income from operations 6,070 5,957
Interest expense, net of interest income of $7 and $54 607 761
- ------------------------------------------------------------------------------
Income before taxes 5,463 5,196
Provision for taxes 2,009 1,878
- ------------------------------------------------------------------------------
Net Income $ 3,454 $ 3,318
==============================================================================
Earnings Per Share:
Basic $0.19 $0.19
Diluted $0.19 $0.18
==============================================================================
Average Shares Outstanding:
Basic 17,885 17,562
Diluted 18,449 18,312
See accompanying notes to consolidated financial statements.
Page 3 of 14
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 26, December 25,
(in thousands, except share data) 2005 2004
- --------------------------------------------------- ----------------- ---------------
Assets (unaudited)
Current Assets:
Cash and cash equivalents $ 5,604 $ 7,152
Accounts receivable, less allowance for doubtful
accounts and customer credits of $17,755 and $20,575 56,467 60,962
Inventories 64,385 61,436
Deferred income taxes 8,548 8,417
Prepaids and other current assets 988 1,609
- --------------------------------------------------- ----------------- -----------------
Total current assets 135,992 139,576
- --------------------------------------------------- ----------------- -----------------
Property, Plant and Equipment, net 26,518 25,698
Goodwill 29,233 29,410
Other Assets 686 720
- --------------------------------------------------- ----------------- -----------------
Total $192,429 $195,404
=================================================== ================= =================
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt $ 9,052 $ 9,045
Accounts payable 10,887 15,599
Accrued compensation 4,554 8,028
Other accrued liabilities 6,250 5,319
- --------------------------------------------------- ----------------- -----------------
Total current liabilities 30,743 37,991
Other Long-Term Liabilities 773 -
Long-Term Debt 25,714 25,714
Deferred Income Taxes 6,890 6,472
Commitments and Contingencies
Shareholders' Equity:
Common stock, par value $.01; authorized
25,000,000 shares; issued 17,923,648 and 17,871,928 179 179
Additional paid-in capital 35,098 34,659
Cumulative translation adjustments 2,698 3,509
Retained earnings 90,334 86,880
Total shareholders' equity 128,309 125,227
- --------------------------------------------------- ----------------- -----------------
Total $192,429 $195,404
=================================================== ================= =================
See accompanying notes to consolidated financial statements.
Page 4 of 14
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Thirteen Weeks Ended
-----------------------------------
March 26, March 27,
(in thousands) 2005 2004
- ---------------------------------------------------------------- --------------- -------------------
Cash Flows from Operating Activities:
Net income $ 3,454 $ 3,318
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 1,326 1,080
Provision for doubtful accounts 38 143
Provision for deferred income tax 268 283
Changes in assets and liabilities:
Accounts receivable 4,214 (7,530)
Inventories (1,701) 242
Prepaids and other 601 53
Accounts payable (4,604) 180
Other accrued liabilities (3,016) (1,421)
- ---------------------------------------------------------------- --------------- -------------------
Cash provided by (used in) operating activities 580 (3,652)
- ---------------------------------------------------------------- --------------- -------------------
Cash Flows from Investing Activities:
Property, plant and equipment additions (2,160) (1,762)
Purchases of short-term investments - (4,805)
Proceeds from maturities of short-term investments - 5,250
- ---------------------------------------------------------------- --------------- -------------------
Cash used in investing activities (2,160) (1,317)
- ---------------------------------------------------------------- --------------- -------------------
Cash Flows from Financing Activities:
Proceeds from common stock issuances 32 42
- ---------------------------------------------------------------- --------------- -------------------
Cash provided by financing activities 32 42
- ---------------------------------------------------------------- --------------- -------------------
Net Decrease in Cash and Cash Equivalents (1,548) (4,927)
Cash and Cash Equivalents, Beginning of Period 7,152 15,177
- ---------------------------------------------------------------- --------------- -------------------
Cash and Cash Equivalents, End of Period $ 5,604 $ 10,250
================================================================ =============== ===================
Supplemental Cash Flow Information
Cash paid for interest expense $ 623 $ 790
Cash paid for income taxes $ 1,139 $ 207
See accompanying notes to consolidated financial statements.
Page 5 of 14
R&B, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEKS ENDED MARCH 26, 2005 AND MARCH 27, 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 thirteen week period ended March
26, 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 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 March 26, 2005 and December 25, 2004,
respectively, $21.9 million and $18.0 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:
March 26, December 25,
(in thousands) 2005 2004
- ------------------- --------------- ---------------
Bulk product $25,235 $26,407
Finished product 36,398 32,029
Packaging materials 2,752 3,000
- ------------------- --------------- ---------------
Total $64,385 $61,436
=================== =============== ===============
Included in Finished product as of March 26, 2005 is approximately $1.6 million
in inventory held on consignment with one customer.
4. Earnings Per Share
The following table sets forth the computation of basic earnings per share
and diluted earnings per share for the thirteen week periods ended March 26,
2005 and March 27, 2004.
Page 6 of 14
Thirteen Weeks Ended
---------------------------------
March 26, March 27,
(in thousands, except per share data) 2005 2004
- --------------------------------------------- ------------- -------------
Numerator:
Net income ...................................$.3,454 $ 3,318
Denominator:
Weighted average shares outstanding
used in basic earnings per share calculation 17,885 17,562
Effect of dilutive stock options... ..............564 750
------------------------------
Adjusted weighted average shares outstanding
diluted earnings per share...............18,449 18,312
============= === ============= =
Basic earnings per share........................... $0.19 $ 0.19
============= === ============= =
Diluted earnings per share......................... $0.19 $ 0.18
============= === ============= =
On February 24, 2005, the Company's Board of Directors approved a
two-for-one split of the Company's common stock, payable in the form of a stock
dividend of one share for each share held. The Board set March 15, 2005 as the
record date for the determination of the shareholder's entitled to receive the
additional shares. The shares were distributed to the shareholders of record on
March 28, 2005. All earnings per share and common stock information is
presented as if the stock split occurred prior to the earliest year included in
these consolidated financial statements.
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 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 March 26, 2005, options to acquire 340,116 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 Statement of Financial Accounting Standards, ("SFAS") No. 123,
"Accounting for Stock-Based Compensation", to stock-based employee
compensation.
Thirteen Weeks Ended
- ------------------------------------------------ ------------------------------
(in thousands, except per share data) March 26, March 27,
2005 2004
- ------------------------------------------------ ----------------- ----------
Net income:
Net income, as reported $ 3,454 $ 3,318
Less: Stock-based employee compensation
expense, net of related tax effects, determined
under the fair value based method for all awards (61) (35)
Net income, pro forma $ 3,393 $ 3,283
- ------------------------------------------------ ----------------- -----------
Page 7 of 14
Earnings per share:
Basic - as reported $ 0.19 $ 0.19
Basic - pro forma $ 0.19 $ 0.19
Diluted - as reported $ 0.19 $ 0.18
Diluted - pro forma $ 0.18 $ 0.18
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% 51%
Risk-free interest rate 3.9% 3.7%
Expected life of option 7.5 years 7.5 years
6. Related-Party Transactions
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.
7. 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 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 FAS 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" and FSP No. 109-2 "Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation
Act of 2004" will have 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, the Company does not anticipate that implementation of
this statement will have an impact on its consolidated financial condition or
results of operations.
Page 8 of 14
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, 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, 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 the first quarter of 2005, the Company agreed to consign inventory for a
portion of one product line on behalf of a large customer. As part of this
transaction, the Company purchased $1.7 million of the product from the
customer and will resell it to the customer under the consigned inventory
arrangement. 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 three programs for a minimum of two years. A portion of these two
new product lines will also be handled as consigned inventory. 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 Company expects to have approximately $2.5
million of inventory on consignment with the customer once the transition of
all three product lines is completed. The transaction did not have a material
impact on profitability or cash flow in the first quarter of 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.
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:
Page 9 of 14
Percentage of Net Sales
---------------------------------
For the Thirteen Weeks Ended
---------------------------------
March 26, March 27,
2005 2004
- ---------------------------------------- ---------------- ----------------
Net Sales 100.0% 100.0%
Cost of goods sold 62.9 63.2
- ---------------------------------------- ---------------- ----------------
Gross profit 37.1 36.8
Selling, general and administrative expenses 27.2 26.2
- ---------------------------------------- ---------------- ----------------
Income from operations 9.9 10.6
Interest expense, net 1.0 1.3
- ---------------------------------------- ---------------- ----------------
Income before taxes 8.9 9.3
Provision for taxes 3.3 3.4
- ---------------------------------------- ---------------- ----------------
Net Income 5.6% 5.9%
======================================== ================ ================
Thirteen Weeks Ended March 26, 2005 Compared to Thirteen Weeks Ended March 27,
2004
Net sales increased 9% to $61.2 million for the thirteen weeks ended
March 26, 2005 from $56.0 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, remained essentially
unchanged at 62.9% for the thirteen weeks ended March 26, 2005 compared to
63.2% in the same period last year. The Company has experienced gross margin
reductions in several product lines as a result of selling price reductions due
to competitive pressures, but this has been offset by a shift in sales mix and
savings from materials resourcing initiatives.
Selling, general and administrative expenses for the thirteen weeks
ended March 26, 2005 increased $1.9 million, or 13%, to $16.6 million from
$14.7 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 March 26, 2005 and March
27, 2004 include $0.3 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 $0.6 million for the thirteen weeks
ended March 26, 2005 from $0.8 million in the prior year due to lower borrowing
levels.
The Company's effective tax rate increased to 36.8% for the thirteen
weeks ended March 26, 2005 from 36.1% for the thirteen weeks ended March 27,
2004 due to the impact of higher graduated tax rates associated with the
Company's higher earnings levels and the loss of certain state tax benefits in
2005 as a result of changes in tax legislation.
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 March 26, 2005,
working capital was $105.2 million, total long-term debt (including the current
portion) was $34.8 million and shareholders' equity was $128.3 million. Cash
and cash equivalents as of March 26, 2005 totaled $5.6 million.
Over the past three 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 March 26,
2005 and December 25, 2004, respectively, the Company had sold $21.9
Page 10 of 14
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 $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
outstanding under these facilities as of March 26, 2005.
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 March 26, 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 $0.6 million in the thirteen weeks ended March 26, 2005. The
primary uses of cash flow were accounts payable, other accrued liabilities and
inventory, which utilized $4.6 million, $3.0 million and $1.7 million in cash,
respectively. Accounts payable decreased $4.6 million in the thirteen weeks
ended March 26, 2005 as a result of the timing of the payments to suppliers and
an unusually high level of inventory and property, plant and equipment
purchases in November and December 2004, which were included in accounts
payable at year end but were paid prior to March 26, 2005. Other accrued
liabilities resulted in a $3.1 million use of cash in the first quarter of 2005
as a result of the Company's funding of employee profit sharing and incentive
payments earned in the prior year, but paid in the first quarter. Inventory
increased as a result of the addition of inventory for new product lines. Net
income, depreciation and a $4.2 million decrease in accounts receivable were
the primary sources of operating cash flow in the thirteen weeks ended
March 26, 2005. The primary reason for the accounts receivable decline was a
$3.9 million increase in accounts receivable sold to fund working capital
needs.
Investing activities used $2.2 million of cash in the thirteen weeks
ended March 26, 2005 as a result of additions to property, plant and equipment.
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 late 2005, and total costs are now expected to be
approximately $6.0 million. Capital spending in the thirteen weeks ended March
26, 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 in the form of common stock issuances as a result
of stock option exercises generated less than $0.1 million in cash in the
thirteen weeks ended March 26, 2005.
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
from a variety of foreign countries. The products generally are purchased
through purchase orders with the purchase price specified in U.S. dollars.
Accordingly, the Company does not have exposure to fluctuations in the
relationship between the dollar and various foreign currencies between the time
of execution of the purchase order and payment for the product. However,
weakness in the dollar has resulted in some materials price 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.
Page 11 of 14
The Company makes significant purchases of product from Chinese
vendors. The Chinese Yuan exchange rate has been fixed against the U.S. Dollar
since1998. 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 the Company did experience some material cost increases as a result of
raw materials shortages. 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.
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, 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.
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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.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In addition to commitments and obligation which arise in the ordinary
course of business, the Company is subject to various claims and legal actions
from time to time involving contracts, competitive practices, trademark rights,
product liability claims and other matters arising out of the conduct of the
Company's business.
Item 6. Exhibits
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
R & B, INC.
Date May 2, 2005 \s\ Richard Berman
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Richard Berman
President and Chief Executive Officer
Date May 2, 2005 \s\ Mathias Barton
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Mathias Barton
Chief Financial Officer and
Principal Accounting Officer
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