DORM

Business Context and Reporting Period

Company: R&B, Inc. (d/b/a Dorman Products, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 27, 2003
Business Overview: A leading supplier of original equipment dealer "exclusive" automotive replacement parts, fasteners, and service line products to the automotive aftermarket. The Company designs, packages, and markets over 70,000 products under more than 70 brand names (including Dorman, Motormite, and Pik-A-Nut). Approximately 90% of products are sold under the Company's brand names, with the remainder sold as private label or bulk. Substantially all products are manufactured by third parties.

Key Financial Metrics (Fiscal Year 2003)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 3% to $222.1 million, driven by new product introductions and shipments to new customers. This growth was partially offset by a decline in sales volume at the Swedish subsidiary due to the weak U.S. dollar.
• Profitability: Net income rose to $13.3 million (up from $12.4 million). Gross margin improved to 37.0% due to cost-saving initiatives, despite higher customer return levels and a shift toward lower-margin products.
• Expense Management: Selling, general, and administrative (SG&A) expenses remained flat at $58.2 million despite inflation and sales growth, resulting in a decline in SG&A as a percentage of sales (26.2% vs. 27.0%).
• Cash Flow: Operating cash flow surged to $20.7 million from $5.1 million. The primary driver was a $18.1 million swing in accounts receivable, which generated $4.8 million in cash in 2003 compared to a $13.3 million cash outflow in 2002.
• Debt Reduction: Long-term debt decreased by approximately $9 million due to a scheduled $8.6 million principal payment on Senior Notes, funded by cash on hand.

Guidance, Outlook, and Risks

• Outlook: Management anticipates compounded annual sales growth between 3% and 8% over the next two years, driven by new product development and expansion of core businesses.
• Customer Concentration: Sales are highly concentrated. In 2003, two customers (AutoZone and Advance) accounted for 31% of net sales. The five largest customers accounted for 70% of total accounts receivable.
• Customer Leverage: Consolidation in the aftermarket has increased customer leverage. Customers are demanding extended payment terms and higher product returns, which negatively impacts operating cash flow and profit levels.
• Foreign Currency: Approximately 60% of products are purchased from foreign countries. While purchase orders are in U.S. dollars, a weak dollar is pressuring suppliers to increase prices. A revaluation of the Chinese Yuan could also increase costs.
• Capital Expenditures: The Company plans to expand its Warsaw, Kentucky distribution center by 77,200 square feet at an estimated cost of $2.8 million.

Investor Verification Checklist

• Customer Concentration Risk: Verify the stability of relationships with AutoZone and Advance, which collectively represent nearly one-third of revenue.
• Accounts Receivable Quality: Monitor the allowance for doubtful accounts ($1.2 million) and the impact of extended payment terms on future cash flow, given that 70% of receivables are held by the top five customers.
• Product Return Reserves: Assess the adequacy of the $16.5 million reserve for customer credits, as rising return levels are a stated pressure on profit margins.
• Debt Covenants: Confirm continued compliance with financial covenants related to debt-to-capital ratios and minimum net worth under the Senior Notes and Revolving Credit Facility.
• Supply Chain Costs: Track foreign supplier pricing trends, particularly regarding the Chinese Yuan and the impact of a weak U.S. dollar on cost of goods sold.