Dorman Products, Inc. — Fiscal 2017 Form 10-K
Reporting period: Fiscal year ended December 30, 2017 (52 weeks), compared with fiscal 2016 ended December 31, 2016 (53 weeks). The filing also reports fourth-quarter results; this is an annual filing, not a standalone quarterly report.
Business context
Dorman supplies automotive aftermarket replacement parts and fasteners for passenger cars, light trucks and heavy-duty trucks. It marketed approximately 216,000 SKUs, with most products sourced from third-party manufacturers. Sales are concentrated in North America and among large aftermarket retailers and distributors.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Net sales | $903.2 million | $859.6 million | Up 5%; FY 2016 included an extra week |
| Gross profit / margin | $358.6 million / 39.7% | $338.1 million / 39.3% | Margin improved 0.4 percentage points |
| Operating income / margin | $176.2 million / 19.5% | $168.6 million / 19.6% | Income up; margin down 0.1 percentage points |
| Net income | $106.6 million | $106.0 million | Up about 1% |
| Diluted EPS | $3.13 | $3.07 | Up about 2% |
| Operating cash flow | $94.2 million | $121.5 million | Down $27.3 million |
- Cash and cash equivalents fell to $71.7 million from $149.1 million; working capital was $422.1 million versus $447.8 million.
- No borrowings were outstanding under the new $100 million revolving credit facility at year-end; approximately $99.2 million was available after letters of credit. The facility allows the company to request up to another $100 million and expires in December 2022.
- Investing activities used $94.4 million, including the MAS acquisition, supplier investment, asset acquisition and capital spending. Financing activities used $77.3 million, largely reflecting $76.1 million of share repurchases.
- FY 2017 inventory increased $25.1 million in operating cash flow, reflecting purchases to support new product launches and improve customer fill rates.
Material changes and unusual items
- Gross margin improved on favorable product mix, volume leverage and lower material prices, partly offset by lower selling prices. SG&A rose to $182.4 million, or 20.2% of sales, from $169.5 million, or 19.7%, due to variable costs, wage and benefit inflation, receivable-program costs and acquisition costs.
- The effective tax rate increased to 39.6% from 37.0%. The company recorded a provisional $4.4 million tax expense to remeasure deferred tax assets following U.S. tax reform; its assessment of other tax-law effects was ongoing.
- In October 2017, Dorman acquired MAS Automotive Distributors for total preliminary consideration of $67.3 million, including contingent consideration. MAS contributed $7.0 million of sales and an immaterial amount of net income in the reported period. Purchase accounting remained provisional; contingent payments could reach $11.7 million.
- Fourth-quarter sales were $227.7 million versus $229.1 million in 2016; net income was $22.0 million versus $28.7 million, and diluted EPS was $0.65 versus $0.83.
- Revenue growth was partly offset by the extra week in FY 2016. Dorman reported record full-year sales and net income, but net income was nearly flat year over year.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said available capital was adequate for ongoing needs for at least the next 12 months, while noting that customer payment-term extensions or weaker demand could pressure liquidity.
- Management expects continued customer pressure on pricing, product returns and payment terms. Receivable sales programs totaled $582.9 million in FY 2017 and incurred $11.4 million of financing costs; termination, higher rates or further payment-term extensions could affect cash flow and costs.
- Customer concentration is significant: four customers represented approximately 61% of FY 2017 sales; the five largest accounted for 85% of year-end net receivables. About 71% of products were purchased from foreign suppliers, with China the largest overseas source.
- Other disclosed risks include supplier disruption, import duties and currency movements, competition, product quality and warranty claims, intellectual-property disputes, transportation disruption, cyber incidents, customer consolidation, and the ability to develop and integrate acquisitions.
- Management considered current legal matters’ reasonably possible losses immaterial. The filing reports no material off-balance-sheet financing arrangements. A related-party lease for the principal operating facility cost $1.6 million in FY 2017; the Audit Committee stated its terms were no less favorable than those available from an unaffiliated party.
- The company did not anticipate cash dividends in the foreseeable future. Its share-repurchase authorization, expanded to $250 million, ran through December 31, 2018.
Important facts for investors to verify
- Whether growth and margin trends persist after accounting for FY 2016’s extra week and the limited contribution from MAS in FY 2017.
- How the MAS acquisition performs, and the final purchase-price allocation and contingent-payment outcomes.
- Customer concentration, extended payment terms, receivable-sale costs and the effect of those programs on reported operating cash flow.
- Inventory growth and cash conversion, alongside the company’s substantial repurchases and reduced cash balance.
- Final tax-reform accounting and the prospective effect of the lower U.S. corporate tax rate.