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 June 25, 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 August 1, 2005 the Registrant had 17,932,129 common shares, $.01 par value, outstanding. Page 1 of 17
R & B, INC. AND SUBSIDIARIES INDEX TO QUARTERLY REPORT ON FORM 10-Q June 25, 2005 Page Part I -- FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) Statements of Operations: Thirteen Weeks Ended June 25, 2005 and June 26, 2004..... 3 Twenty-six Weeks Ended June 25, 2005 and June 26, 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 <TABLE> R&B, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) <CAPTION> For the Thirteen Weeks Ended ----------------------------- June 25, June 26, (in thousands, except per share data) 2005 2004 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> Net Sales $ 68,611 $ 64,277 Cost of goods sold 43,668 39,317 - ---------------------------------------------------------------------------------------------------------------- Gross profit 24,943 24,960 Selling, general and administrative expenses 16,925 15,846 - ---------------------------------------------------------------------------------------------------------------- Income from operations 8,018 9,114 Interest expense, net of interest income of $6 and $23 682 769 - ---------------------------------------------------------------------------------------------------------------- Income before taxes 7,336 8,345 Provision for taxes 2,708 3,028 - ---------------------------------------------------------------------------------------------------------------- Net Income $ 4,628 $ 5,317 ================================================================================================================ Earnings Per Share: Basic $0.26 $0.30 Diluted $0.25 $0.29 ================================================================================================================ Average Shares Outstanding: Basic 17,927 17,691 Diluted 18,464 18,387 </TABLE> See accompanying notes to consolidated financial statements. Page 3 of 17
<TABLE> R&B, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) <CAPTION> For the Twenty-six Weeks Ended ------------------------------------ June 25, June 26, (in thousands, except per share data) 2005 2004 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> Net Sales $ 129,842 $ 120,282 Cost of goods sold 82,206 74,707 - ---------------------------------------------------------------------------------------------------------------- Gross profit 47,636 45,575 Selling, general and administrative expenses 33,548 30,504 - ---------------------------------------------------------------------------------------------------------------- Income from operations 14,088 15,071 Interest expense, net of interest income of $13 and $77 1,289 1,530 - ---------------------------------------------------------------------------------------------------------------- Income before taxes 12,799 13,541 Provision for taxes 4,717 4,906 - ---------------------------------------------------------------------------------------------------------------- Net Income $ 8,082 $ 8,635 ================================================================================================================ Earnings Per Share: Basic $ 0.45 $ 0.49 Diluted $ 0.44 $ 0.47 ================================================================================================================ Average Shares Outstanding: Basic 17,906 17,608 Diluted 18,457 18,325 </TABLE> See accompanying notes to consolidated financial statements. Page 4 of 17
<TABLE> R&B, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <CAPTION> June 25, December 25, (in thousands, except share data) 2005 2004 - -------------------------------------------------------------- --------------------- --------------------- <S> <C> <C> Assets (unaudited) Current Assets: Cash and cash equivalents $ 2,061 $ 7,152 Accounts receivable, less allowance for doubtful accounts and customer credits of $20,418 and $20,575 66,827 60,962 Inventories 70,521 61,436 Deferred income taxes 8,565 8,417 Prepaids and other current assets 1,290 1,609 - -------------------------------------------------------------- --------------------- --------------------- Total current assets 149,264 139,576 - -------------------------------------------------------------- --------------------- --------------------- Property, Plant and Equipment, net 27,311 25,698 Goodwill 29,424 29,410 Other Assets 720 720 - -------------------------------------------------------------- --------------------- --------------------- Total $206,719 $195,404 ============================================================== ===================== ===================== Liabilities and Shareholders' Equity Current Liabilities: Current portion of long-term debt $ 9,058 $ 9,045 Accounts payable 15,039 15,599 Accrued compensation 6,055 8,028 Other accrued liabilities 5,594 5,319 - -------------------------------------------------------------- --------------------- --------------------- Total current liabilities 35,746 37,991 Other Long-Term Liabilities 562 - Long-Term Debt 31,464 25,714 Deferred Income Taxes 7,245 6,472 Commitments and Contingencies Shareholders' Equity: Common stock, par value $.01; authorized 25,000,000 shares; issued 17,932,129 and 17,871,928 179 179 Additional paid-in capital 35,140 34,659 Cumulative translation adjustments 1,421 3,509 Retained earnings 94,962 86,880 Total shareholders' equity 131,702 125,227 - -------------------------------------------------------------- --------------------- --------------------- Total $206,719 $195,404 ============================================================== ===================== ===================== </TABLE> See accompanying notes to consolidated financial statements. Page 5 of 17
<TABLE> R&B, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) <CAPTION> For the Twenty-six Weeks Ended ----------------------------------------- June 25, June 26, (in thousands) 2005 2004 - --------------------------------------------------------------------------------- -------------------- -------------------- <S> <C> <C> Cash Flows from Operating Activities: Net income $ 8,082 $ 8,635 Adjustments to reconcile net income to cash used in operating activities: Depreciation and amortization 2,774 2,235 Provision for doubtful accounts 133 295 Provision for deferred income taxes 574 604 Changes in assets and liabilities: Accounts receivable (6,087) (18,556) Inventories (7,820) (385) Prepaids and other 293 (394) Accounts payable (576) 4,623 Other accrued liabilities (2,270) 820 Other long-term liabilities (211) - - --------------------------------------------------------------------------------- -------------------- -------------------- Cash used in operating activities (5,108) (2,123) - --------------------------------------------------------------------------------- -------------------- -------------------- Cash Flows from Investing Activities: Property, plant and equipment additions (4,113) (5,212) Purchases of short-term investments - (4,821) Proceeds from maturities of short-term investments - 9,724 Business acquisition, net of cash acquired (1,680) - - --------------------------------------------------------------------------------- -------------------- -------------------- Cash used in investing activities (5,793) (309) - --------------------------------------------------------------------------------- -------------------- -------------------- Cash Flows from Financing Activities: Net proceeds from revolving credit facility 5,750 - Proceeds from common stock issuances 60 141 - --------------------------------------------------------------------------------- -------------------- -------------------- Cash provided by financing activities 5,810 141 - --------------------------------------------------------------------------------- -------------------- -------------------- Net Decrease in Cash and Cash Equivalents (5,091) (2,291) Cash and Cash Equivalents, Beginning of Period 7,152 15,177 - --------------------------------------------------------------------------------- -------------------- -------------------- Cash and Cash Equivalents, End of Period $ 2,061 $ 12,886 ================================================================================= ==================== ==================== Supplemental Cash Flow Information Cash paid for interest expense $ 1,231 $ 1,597 Cash paid for income taxes $ 3,998 $ 2,730 See accompanying notes to consolidated financial statements. </TABLE> Page 6 of 17
R&B, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWENTY-SIX WEEKS ENDED JUNE 25, 2005 AND JUNE 26, 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 twenty-six week period ended June 25, 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 June 25, 2005 and December 25, 2004, respectively, $15.3 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: June 25, December 25, (in thousands) 2005 2004 - ----------------------- ------------------ ------------------- Bulk product $29,059 $26,407 Finished product 38,686 32,029 Packaging materials 2,776 3,000 - ----------------------- ------------------ ------------------- Total $70,521 $61,436 ======================= ================== =================== Included in Finished product as of June 25, 2005 is approximately $1.7 million in inventory held on consignment with one customer. 4. Goodwill The Company follows the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." Goodwill activity during the twenty-six week period ended June 25, 2005 is as follows: (in thousands) Balance, December 25, 2005 $ 29,410 Acquisition 480 Translation (466) ----------- Balance, June 25, 2005 $ 29,424 ----------- Page 7 of 17
In June 2005, the Company acquired The Automotive Edge/Hermoff (Hermoff) for approximately $1.7 million. The consolidated results for the thirteen and twenty-six week periods ended June 25, 2005 include Hermoff since June 1, 2005. The Company has not presented pro forma results of operations for the twenty-six weeks ended June 25, 2005 and June 26, 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 June 25, 2005 was LIBOR plus 85 basis points (4.17%). Borrowings under the facility were $5.8 million as of June 25, 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 twenty-six week periods ended June 25, 2005 and June 26, 2004. <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-six Weeks Ended _________________________________________________________________ June 25, June 26, June 25, June 26, (in thousands, except per share data) 2005 2004 2005 2004 _______________________________________________________________________________________________________________________ Numerator: <S> <C> <C> <C> <C> Net income ........................ $.4,628 $ 5,317 $ 8,082 $ 8,635 Denominator: Weighted average shares outstanding use in basic earnings per share calculation 17,927 17,691 17,906 17,608 used in basic earnings per share calculation Effect of dilutive stock options............ 537 696 551 717 --------------- ----------------- --------------- ---------------- Adjusted weighted average shares outstanding diluted earnings per share................ 18,464 18,387 18,457 18,325 =============== ================= =============== ================ Basic earnings per share......................... $ 0.26 $ 0.30 $ 0.45 $ 0.49 =============== ================= =============== ================ Diluted earnings per share....................... $ 0.25 $ 0.29 $ 0.44 $ 0.47 =============== ================= =============== ================ </TABLE> 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 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 in no event more than 10 years from the Page 8 of 17
date of grant. At June 25, 2005, options to acquire 340,511 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. <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-six Weeks Ended - ---------------------------------------- ------------------------------------- --------------------------------------- (in thousands, except per share data) June 25, June 26, June 25, June 26, 2005 2004 2005 2004 - ---------------------------------------- ------------------- ---------------- ------------------ ------------------- <S> <C> <C> <C> <C> Net income: Net income, as reported $ 4,628 $ 5,317 $ 8,082 $ 8,635 Less: Stock-based employee compensation expense, net of related tax effects, determined under the fair value based method for all (61) (35) (121) (70) awards Net income, pro forma $ 4,567 $ 5,282 $ 7,961 $ 8,565 - ---------------------------------------- ------------------- ---------------- ------------------ ------------------- Earnings per share: Basic - as reported $ 0.26 $ 0.30 $ 0.45 $ 0.49 Basic - pro forma $ 0.25 $ 0.30 $ 0.44 $ 0.49 Diluted - as reported $ 0.25 $ 0.29 $ 0.44 $ 0.47 Diluted - pro forma $ 0.25 $ 0.29 $ 0.43 $ 0.47 </TABLE> 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 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 Page 9 of 17
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, the Company does not anticipate that implementation of this statement will 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, Dorman, Allparts, Scan-Tech, MPI and Pik-A-Nut 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. As part of the agreement, 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 the 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 transaction did not have a material impact on profitability or cash flow in the six months ended June 25, 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 line updates 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 for the thirteen and twenty-six week periods ended June 25, 2005 include Hermoff since June 1, 2005. The Company has not presented pro forma results of operations for the twenty-six weeks ended June 25, 2005 and June 26, 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. Page 11 of 17
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: <TABLE> <CAPTION> Percentage of Net Sales --------------------------------------------------------------------- For the Thirteen Weeks Ended For the Twenty-six Weeks Ended --------------------------------------------------------------------- June 25, June 26, June 25, June 26, 2005 2004 2005 2004 - ------------------------------------------------ ----------------- --------------- ---------------- ---------------- <S> <C> <C> <C> <C> Net Sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 63.6% 61.2% 63.3% 62.1% - ------------------------------------------------ ----------------- --------------- ---------------- ---------------- Gross profit 36.4% 38.8% 36.7% 37.9% Selling, general and administrative expenses 24.7% 24.6% 25.8% 25.4% - ------------------------------------------------ ----------------- --------------- ---------------- ---------------- Income from operations 11.7% 14.2% 10.9% 12.5% Interest expense, net 1.0% 1.2% 1.0% 1.2% - ------------------------------------------------ ----------------- --------------- ---------------- ---------------- Income before taxes 10.7% 13.0% 9.9% 11.3% Provision for taxes 4.0% 4.7% 3.7% 4.1% - ------------------------------------------------ ----------------- --------------- ---------------- ---------------- Net Income 6.7% 8.3% 6.2% 7.2% ================================================ ================= =============== ================ ================ </TABLE> Thirteen Weeks Ended June 25, 2005 Compared to Thirteen Weeks Ended June 26, 2004 Net sales increased 7% to $68.6 million for the thirteen weeks ended June 25, 2005 from $64.3 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. Net sales for the thirteen weeks ended June 25, 2005 include $0.2 million in revenues from Hermoff, which was acquired in June 2005. Cost of goods sold, as a percentage of sales, increased to 63.6% for the thirteen weeks ended June 25, 2005 from 61.2% 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 thirteen weeks ended June 25, 2005 increased $1.1 million, or 7%, to $16.9 million from $15.8 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 June 25, 2005 and June 26, 2004 include $0.2 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 $0.1 million for the thirteen weeks ended June 25, 2005 due to lower borrowing levels. Page 12 of 17
The Company's effective tax rate increased to 36.9% for the thirteen weeks ended June 25, 2005 from 36.3% for the thirteen weeks ended June 26, 2004 due to the loss of certain state tax benefits in 2005 as a result of changes in tax legislation. Twenty-six Weeks Ended June 25, 2005 Compared to Twenty-six Weeks Ended June 26, 2004 Net sales increased 8% to $129.8 million for the twenty-six weeks ended June 25, 2005 from $120.3 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. Net sales for the twenty-six weeks ended June 25, 2005 include $0.2 million in revenues from Hermoff, which was acquired in June 2005. Cost of goods sold, as a percentage of sales, was 63.3% for the twenty-six weeks ended June 25, 2005 compared to 62.1% 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 towards lower margin automotive hard parts. Selling, general and administrative expenses for the twenty-six weeks ended June 25, 2005 increased $3.0 million, or 10%, to $33.5 million from $30.5 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 twenty-six weeks ended June 25, 2005 and June 26, 2004 include $0.5 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 $1.3 million for the twenty-six weeks ended June 25, 2005 from $1.5 million in the prior year due to lower borrowing levels. The Company's effective tax rate increased to 36.9% for the twenty-six weeks ended June 25, 2005 from 36.2% for the twenty-six weeks ended June 26, 2004 due to 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, 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 June 25, 2005, working capital was $113.5 million, total long-term debt (including the current portion) was $40.5 million and shareholders' equity was $131.7 million. Cash and cash equivalents as of June 25, 2005 totaled $2.1 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 June 25, 2005 and December 25, 2004, respectively, the Company had sold $15.3 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. 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 June 25, 2005 was LIBOR plus 85 basis points (4.17%). Borrowings under the facility were $5.8 million as of June 25, 2005. The loan agreement also contains covenants, the most restrictive of whick 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 June 25, 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 use of cash flow from its operating activities of $5.1 million in the twenty-six weeks ended June 25, 2005. The primary uses of cash flow were inventory, accounts receivable and other accrued liabilities which utilized $7.8 million, $6.1 million and $2.3 million in cash, respectively. Inventory utilized $7.8 million in cash in the six months ended June 25, 2005 as a result of seasonal inventory builds, inventory purchased to support new product initiatives and $1.7 million of inventory placed on consignment to one customer in 2005. Accounts receivable increased as a result of sales growth, the impact of the continued trend towards longer payment terms to certain customers and a $2.7 million reduction in accounts receivable sold as of June 25, 2005. The reduction in accounts receivable sold is the result of the amendment to the Company's revolving credit facility which provides more attractive borrowing rates than those available under the accounts receivable sales programs. Other accrued liabilities resulted in a $2.3 million use of cash in the six months ended June 25, 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 of 2005. Net income and depreciation were the primary sources of operating cash flow in the twenty-six weeks ended June 25, 2005. Investing activities used $5.8 million of cash in the twenty-six weeks ended June 25, 2005 as a result of $4.1 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 late 2005, and total costs are now expected to be approximately $6.0 million. Capital spending in the twenty-six weeks ended June 25, 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 generated $5.8 million in cash in the twenty-six weeks ended June 25, 2005. The largest source of cash was net proceeds of $5.8 million from the Company's amended revolving credit facility. 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 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. Page 14 of 17
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. 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. Page 15 of 17
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 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 August 1, 2005 \s\ Richard Berman ----------------- ------------------------- Richard Berman President and Chief Executive Officer Date August 1, 2005 \s\ Mathias Barton ----------------- -------------------------- Mathias Barton Chief Financial Officer and Principal Accounting Officer Page 17 of 17