Dorman Products, Inc. — Q3 2013 Form 10-Q
Business context and reporting period
Quarter ended September 28, 2013; the filing also reports results for the 39 weeks ended that date. Dorman supplies automotive and heavy-duty truck replacement parts, primarily to the North American aftermarket. The statements are unaudited. The company cites new-product development and customer order timing as important drivers of results.
Financial performance
| Metric | 13 weeks ended Sep. 28, 2013 | 39 weeks ended Sep. 28, 2013 |
|---|---|---|
| Net sales | $178.0 million; up 14% year over year | $494.7 million; up 14% |
| Gross profit / margin | $69.7 million / 39.2% | $194.9 million / 39.4% |
| Operating income / margin | $35.7 million / 20.0% | $96.3 million / 19.5% |
| Net income | $22.9 million; diluted EPS $0.62 | $61.3 million; diluted EPS $1.67 |
| Operating cash flow | Not provided for the quarter | $36.8 million, versus $28.6 million in 2012 |
For the 39 weeks, capital spending was $12.9 million and cash used in investing was $14.8 million, including $1.9 million for an acquisition. Cash increased $20.6 million from year-end 2012 to $48.3 million. At September 28, working capital was $321.2 million and shareholders’ equity was $393.6 million. There were no revolver borrowings; of the $30 million facility, approximately $29.1 million remained available after letters of credit. The filing reports no long-term debt balance.
Changes versus comparable periods
- Q3 gross margin rose to 39.2% from 38.2%; nine-month gross margin rose to 39.4% from 37.5%. Management attributed improvement mainly to sales mix, selected price increases and lower transportation costs.
- Q3 operating income increased to $35.7 million from $31.1 million. Nine-month operating income increased to $96.3 million from $81.3 million.
- Q3 net income was $22.9 million versus $20.3 million; nine-month net income was $61.3 million versus $55.7 million. Prior-year net income included discontinued ScanTech operations ($0.6 million in Q3 and $4.5 million for the 39 weeks); 2013 results did not.
- Nine-month operating cash flow increased by $8.2 million. Higher net income and working-capital movements contributed, partly offset by the prior-year non-cash foreign-exchange gain.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management said available capital sources should meet ongoing cash needs for at least 12 months.
- Growth was primarily driven by demand for newer products. The company acquired certain assets and liabilities of Re-Involt Technologies, a hybrid battery remanufacturer, in May for approximately $3.7 million, including $1.9 million cash and estimated contingent payments of $1.8 million.
- SG&A increased with sales-related variable costs, investment in new products, ERP support and costs from a large customer’s distribution change. The customer-related costs were offset by higher net selling prices.
- Customer consolidation can increase pressure for pricing concessions, returns and longer payment terms. The company sold $296.5 million of receivables in the 39-week period and incurred $3.6 million in related financing costs; without the programs, $226.1 million of additional receivables would have been outstanding at period-end.
- Key disclosed risks include customer concentration, competition, supplier or transportation disruptions, product quality and development delays, foreign currency and cost changes, and order timing. Management reported ordinary-course legal proceedings with no likely material financial impact; disclosure controls were deemed effective.
- Major investment programs included the ERP system, expected to cost $34–$37 million through 2014, and a Kentucky warehouse expansion expected to cost about $7 million. The filing states the ERP installation at one subsidiary was completed in January 2013 and the warehouse project was expected to be completed in fall 2013.
Most important facts for investors to verify
- Whether sales growth and margin improvement persist, particularly given reliance on new-product launches and customer order timing.
- The sustainability and cash cost of receivables-sale programs, extended customer terms and customer concentration.
- Progress and final costs for the ERP and warehouse projects, and the performance of the Re-Involt acquisition and contingent payments.
- Whether customer consolidation, foreign sourcing and currency or transportation costs affect pricing and margins.