Dorman Products, Inc. — Q3 2014 Form 10-Q
Business and period: Dorman supplies replacement parts and fasteners for passenger, light-truck and heavy-truck aftermarket vehicles. This filing covers the 13 and 39 weeks ended September 27, 2014, compared with the periods ended September 28, 2013. Unless noted, amounts are in millions.
Financial performance
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Net sales | $197.8 | $178.0 | $577.5 | $494.7 |
| Gross profit | $75.9 | $69.7 | $220.5 | $194.9 |
| Gross margin | 38.4% | 39.2% | 38.2% | 39.4% |
| Operating income | $38.5 | $35.7 | $112.1 | $96.3 |
| Operating margin | 19.5% | 20.0% | 19.4% | 19.5% |
| Net income | $24.5 | $22.9 | $71.3 | $61.3 |
| Diluted EPS | $0.68 | $0.62 | $1.96 | $1.67 |
- Quarterly sales increased 11%; year-to-date sales increased 17%. Growth reflected strong demand; year-to-date growth also benefited from recently introduced products.
- Margins narrowed: management cited competitive pricing and product mix lowering selling prices. Year-to-date gross margin also faced higher excess-and-obsolete inventory provisions and transportation costs.
- SG&A rose to $37.4 million in Q3 and $108.4 million year to date, but declined as a share of sales to 18.9% and 18.8%, respectively, from 19.2% and 19.9%. Drivers included higher variable costs, product-development investment, and ERP-related costs.
Cash flow, liquidity and capital
- For the 39 weeks, operating cash flow was $47.4 million, versus $36.8 million a year earlier; investing outflow was $23.0 million versus $14.8 million; financing outflow was $40.8 million versus $1.4 million.
- Cash declined $16.4 million during the period to $44.2 million. Capital spending was $23.0 million, including $12.3 million for the ERP replacement project.
- At September 27, working capital was $356.0 million; current assets were $438.3 million and current liabilities $82.3 million. Shareholders’ equity was $445.7 million.
- No revolving-facility borrowings were outstanding. The $30 million facility had approximately $29 million available after letters of credit; it expires in June 2015. The company reported compliance with its financial covenants.
- Receivables-sale programs provided cash-flow support: $380.2 million of receivables were sold in the 39-week period, with $328.3 million of additional receivables outstanding at period-end that otherwise would have remained on the balance sheet. Associated financing costs were $5.0 million, up from $3.6 million.
- The company repurchased $39.3 million of shares under its repurchase program and $2.1 million from its 401(k) plan during the 39 weeks. On October 28, 2014, the board increased the program authorization to $100 million and extended it through December 31, 2015; approximately $60.7 million remained available after the increase.
Outlook, risks and notable items
- No specific financial guidance was provided. Management said available capital sources were adequate for ongoing cash needs for at least the next 12 months.
- Management noted that customer orders and new-product introductions can cause quarterly fluctuations, and that customer consolidation may increase pressure for pricing concessions, returns and extended payment terms.
- Q3 sales included approximately $10 million of customer stocking orders shipped ahead of the quarter-end ERP conversion. The ERP project was expected to cost approximately $38 million; $35 million had been paid through September 27.
- Key stated risks include competition, customer and receivable concentration, supplier or transportation disruption, product quality and development delays, foreign-exchange effects on sourcing costs, and order timing. A hypothetical 1 percentage-point LIBOR increase was estimated to raise annual interest and receivables-sale financing costs by approximately $3.3 million, assuming balances remained constant.
- Legal matters arising in the ordinary course were assessed by management as having an immaterial reasonably possible loss range. The company was under IRS examination for tax year 2012 and a state tax examination for 2009–2012.
- Disclosure controls were assessed as effective; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the approximately $10 million in advance customer stocking orders shifted sales from subsequent periods.
- Whether pricing pressure, product mix, inventory provisions and freight costs continue to weigh on gross margins.
- The economics and continued availability of receivables-sale programs, including rising financing costs and customer payment terms.
- Remaining ERP project costs, implementation results and any impact on operations or customer shipments.
- Share-repurchase pace and liquidity after the authorization increase, alongside the June 2015 revolving-facility expiration.
- Potential outcomes of tax examinations and the effect of sourcing costs, including any currency-related increases.