Dorman Products, Inc. — Q1 2013 Form 10-Q
Reporting period: Thirteen weeks ended March 30, 2013; comparisons are with the thirteen weeks ended March 31, 2012. Amounts are in U.S. dollars. Dorman supplies automotive and heavy-duty truck replacement parts, with over 90% of revenue from the North American automotive aftermarket.
Financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $154.4 million | $134.8 million | +15% |
| Gross profit / margin | $60.8 million / 39.4% | $50.5 million / 37.4% | Margin +2.0 pts |
| Operating income / margin | $29.9 million / 19.4% | $24.4 million / 18.1% | Income +23% |
| Net income | $19.1 million | $15.6 million | +22% |
| Diluted EPS | $0.52 | $0.43 | Continuing-operations EPS: $0.52 vs. $0.42 |
| Operating cash flow | $10.6 million | $14.0 million | Down $3.4 million |
| Capital expenditures | $2.8 million | $4.5 million |
Gross margin improved as sales shifted toward higher-margin automotive products and selected customer price increases took effect. Lower transportation and product costs were partly offset by $2.0 million of higher excess and obsolete inventory charges. SG&A rose to $30.9 million from $26.1 million, reflecting sales-related variable costs, approximately $1.0 million of additional product-development investment, $0.8 million of ERP-related depreciation and support costs, and $1.2 million of costs associated with a customer’s distribution change. The filing says the latter costs were offset by higher net selling prices.
Balance sheet, liquidity and cash flow
- Cash was $35.1 million at March 30, 2013, up from $27.7 million at December 29, 2012. Working capital was $291.2 million; shareholders’ equity was $351.9 million.
- No borrowings were outstanding under the $30 million revolving facility, which expires in June 2015. After $0.9 million of letters of credit, approximately $29.1 million remained available.
- The company reported no debt balance on its balance sheet. It reported $48,000 of net interest expense for the quarter.
- Operating cash flow declined primarily due to a $7.2 million increase in working-capital needs, partly offset by higher net income. Receivables rose with sales; payables fell due to lower inventory purchases and payment timing.
- Dorman sold $89.0 million of receivables through customer-sponsored programs during the quarter, versus $59.7 million a year earlier. Without those sales, an additional $195.5 million of receivables would have been outstanding at quarter-end. Related financing costs were $1.0 million.
- ERP replacement project spending totaled $16.3 million to date, within an estimated total project cost of $26–$29 million through 2014. A subsidiary’s implementation was completed in January 2013 without operational disruption.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said available capital should meet ongoing cash needs for at least the next twelve months.
- Management noted that customer-order timing can cause quarterly fluctuations; historically, the second and third quarters generally have the highest order levels. New product introductions can also affect results.
- Revenue growth was attributed primarily to strong demand for newer products. The medium- and heavy-duty truck line had over 250 SKUs, but contributed less than 1% of sales.
- Customer consolidation creates pressure for pricing concessions, extended payment terms and product returns, which may affect margins and working capital. The five largest customers accounted for 86% of net receivables at December 29, 2012, versus 83% at December 31, 2011.
- About 80% of products were purchased from foreign suppliers in fiscal 2012, generally in U.S. dollars. Management identified a stronger Chinese yuan as a potential source of higher product costs and said cost increases may not be fully offset by pricing, alternative suppliers or sourcing changes.
- The effective tax rate was 36.1%, down from 37.3%, helped by a $0.3 million prior-year R&D tax credit recorded after legislation was enacted in January 2013. Unrecognized tax benefits were $2.1 million, including $1.4 million that would affect the effective tax rate if recognized.
- The 2012 comparison included $2.2 million of sales and $0.3 million of net income from discontinued ScanTech operations; Q1 2013 had none. Management said current legal proceedings were not expected to have a material financial impact and reasonably possible losses were immaterial.
Most important facts for investors to verify
- Whether product-driven sales growth and gross-margin improvement can continue amid customer pricing pressure and higher inventory-obsolescence charges.
- The ongoing cost and cash-flow effects of extended customer terms and receivables-sale programs, including their financing costs and available capacity.
- Whether operating cash flow improves as working-capital demands change, and how much additional ERP spending remains.
- Customer concentration and credit exposure; the cited top-five receivables concentration is dated December 2012, not March 2013.
- Potential exposure from tax examinations and uncertain tax positions, and whether legal or other contingencies change materially.