DORM

Business Context and Reporting Period

This Form 10-Q covers R&B, Inc. (doing business as Dorman Products, Inc.) for the quarterly period ended June 28, 2003. The Company manufactures and distributes automotive aftermarket products, including fasteners, brake components, and suspension parts. The reporting period represents the 13-week and 26-week periods ended June 28, 2003, compared to the same periods in 2002.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 4.7% for the quarter and 1.7% for the year-to-date period. Growth was driven by foreign currency exchange benefits (approx. 2.0%) and shipments to a new brake business customer, partially offset by the elimination of revenues from the specialty fastener business sold in May 2002.
• Profitability: Net income decreased 14.3% for the quarter and 8.2% year-to-date compared to 2002. The prior year included a one-time gain of $2.1 million from the sale of the specialty fastener business and litigation settlement, which is absent in the current period.
• Operating Expenses: Selling, general, and administrative (SG&A) expenses decreased slightly for the quarter ($14.8M vs $14.9M) due to cost reduction initiatives, though inflation and new product development spending offset some savings. Year-to-date SG&A increased marginally to $29.1M.
• Interest Expense: Net interest expense declined to $0.9M for the quarter (from $1.1M) and $1.8M year-to-date (from $2.1M) due to lower borrowing levels following scheduled principal payments on Senior Notes.
• Cash Flow: Operating cash flow was minimal at $61,000 for the 26-week period. Significant cash was used to fund increases in accounts receivable ($4.8M) and inventory ($4.4M), the latter driven by seasonal builds and increased safety stocks.

Guidance, Outlook, and Risks

• Outlook: Management believes current cash, short-term investments, and operating cash flows are sufficient to meet ongoing needs. The Company continues to focus on new product development and market penetration.
• Seasonality: Results may fluctuate significantly quarter-to-quarter due to customer order timing. Historically, the second and third quarters have the highest shipment levels.
• Foreign Currency: The Company purchases approximately half of its products from foreign countries. While purchase orders are typically in U.S. dollars, a weaker dollar could increase costs for new orders. The Company mitigates this by resourcing purchases to other countries.
• Debt Covenants: The Company maintains $51.4M in Senior Notes with fixed rates and a $10.0M revolving credit facility. Both require adherence to financial covenants regarding debt-to-capital ratios and minimum net worth.
• Legal Proceedings: The Company is subject to various claims involving contracts, competitive practices, and product liability, though no specific material litigation is detailed in this filing beyond the settled 1996 matter.

Investor Verification Checklist

• One-Time Gains: Verify the impact of the $2.1M gain in 2002 on year-over-year comparisons; current results exclude this non-recurring item.
• Working Capital Trends: Monitor the $9.2M combined increase in accounts receivable and inventory, which significantly reduced operating cash flow.
• Debt Service: Confirm the Company's ability to meet the annual $8.6M principal payment on Senior Notes due in August.
• Customer Concentration: Assess the sustainability of sales growth driven by the "new customer" in the brake business segment.
• Inventory Levels: Review if the increased inventory safety stocks align with actual sales velocity to avoid future write-downs.