Dorman Products, Inc. — Q2 2016 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 25, 2016; comparisons are to periods ended June 27, 2015. Amounts below are in U.S. dollars.
Business context
Dorman supplies automotive aftermarket replacement parts and fasteners, primarily in North America. The company cited strong product demand and new-product sales, while noting that customer order timing, customer consolidation and the seasonal pattern of generally higher second- and third-quarter sales can cause quarterly fluctuations.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $209.6m | $198.7m | $417.7m | $387.2m |
| Gross profit | $82.2m | $76.6m | $162.8m | $149.5m |
| Gross margin | 39.2% | 38.5% | 39.0% | 38.6% |
| Operating income | $41.0m | $36.9m | $79.9m | $70.5m |
| Operating margin | 19.6% | 18.6% | 19.1% | 18.2% |
| Net income | $26.0m | $23.1m | $50.7m | $44.5m |
| Diluted EPS | $0.75 | $0.65 | $1.46 | $1.25 |
Q2 sales grew 5%; first-half sales grew 8%. First-half net income rose 14% and diluted EPS rose 17%. Management attributed first-half sales growth mainly to a large customer’s first-quarter inventory build and strong demand, including new products. Gross-margin improvement reflected favorable sales mix and lower transportation costs; Q2 also benefited from lower excess-inventory provisions. SG&A rose to $41.2m for Q2 and $82.8m for the half, including higher variable expenses. First-half SG&A included a $0.9m doubtful-account provision related to a customer in bankruptcy and $0.8m of increased accounts-receivable program costs. The prior-year periods included ERP conversion costs of $1.0m in Q2 and $2.7m in the first half.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $36.5m, versus $34.9m a year earlier. Investing used $10.1m, primarily for capital spending; financing used $17.2m, including $16.1m of share repurchases. Cash increased $9.2m to $87.9m.
- At June 25, 2016, current assets were $489.1m and current liabilities were $78.7m; working capital was $410.4m. Inventories were $179.0m, down from $193.7m at year-end 2015. Shareholders’ equity was $552.5m.
- No borrowings were outstanding under the $30m revolving credit facility; approximately $29m remained available after letters of credit. The facility expires in June 2017, and the company reported compliance with its financial covenants. The filing reports no other debt balance.
- The company sold $257.8m of receivables during the first half through customer-sponsored programs, compared with $266.9m in the prior-year half. Related financing costs were $4.4m, versus $3.6m. Without these sales, an additional $345.0m of receivables would have been outstanding at June 25, 2016 under standard payment terms.
Outlook, risks and notable items
- Management believed available capital was adequate for at least the next twelve months, but cautioned that extended customer payment terms, weaker demand or other factors could reduce liquidity. It expected continued pressure to extend payment terms.
- No specific financial guidance was provided. Results are subject to order timing, new-product launches and customer inventory activity; management cautioned that first-half performance is not necessarily indicative of full-year results.
- Risks identified include customer concentration and consolidation, pricing and returns pressure, competition, vendor or transportation disruption, product quality and development issues, intellectual-property claims, foreign-currency and commodity movements, and cybersecurity risks.
- On July 19, 2016, after quarter-end, Dorman acquired a 40% minority interest in Powertrain Industries, Inc. for approximately $6.2m.
- The company reported that current legal proceedings were ordinary-course matters and that reasonably possible losses were immaterial. Disclosure controls were deemed effective; no material change in internal control was reported.
Important facts for investors to verify
- How much of first-half growth reflects sustainable demand versus the large customer’s inventory build, and what followed the customer consolidation?
- Whether customer payment-term extensions, receivables sales and related financing costs continue to rise; assess the impact of the $345.0m of additional receivables disclosed on a standard-payment-terms basis.
- The bankruptcy customer’s credit exposure and any further doubtful-account provisions or collection effects.
- The remaining share-repurchase authorization was $57.8m at June 25, 2016; verify subsequent repurchases and their effect on cash and share count.
- Progress and financial impact of the PTI investment, and the eventual effects of pending accounting standards, which the company said it was still evaluating.