Dorman Products, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 29, 2012 (52 weeks). This is an annual filing, not a standalone fourth-quarter filing; FY2011 had 53 weeks. Amounts below are in U.S. dollars unless noted.
Business context
Dorman supplies automotive and heavy-duty truck replacement parts, fasteners and service products, primarily to the North American aftermarket. It marketed approximately 133,000 SKUs, with most products made by third parties. Four customers—AutoZone, Advance Auto Parts, O’Reilly Auto Parts and Genuine Parts Co.—each represented over 10% of sales and together accounted for 57% of net sales.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $570.4 million | $513.4 million |
| Gross profit / gross margin | $215.2 million / 37.7% | $189.3 million / 36.9% |
| Operating income / margin | $104.2 million / 18.3% | $87.6 million / 17.1% |
| Continuing-operations net income | $66.4 million | $56.2 million |
| Net income, including discontinued operations | $71.0 million | $53.3 million |
| Diluted EPS, continuing operations | $1.82 | $1.55 |
| Cash from operations | $48.9 million | $38.1 million |
| Capital expenditures | $18.1 million | $18.1 million |
- Sales increased 11%; excluding the extra week in FY2011, management reported growth of 12%. Continuing-operations net income rose 18%.
- Gross margin improved as transportation costs declined, product mix favored higher-margin products and excess/obsolete inventory provisions were $1.0 million lower. SG&A rose 9% to $111.0 million but declined as a percentage of sales, from 19.8% to 19.4%.
- Cash and equivalents were $27.7 million, down from $50.2 million, principally following the special dividend. Working capital was $272.4 million. Total assets were $406.3 million and shareholders’ equity was $332.9 million.
- No long-term debt or revolver borrowings were outstanding. The $30 million revolving facility had approximately $29.1 million available after letters of credit; the company reported compliance with its covenants.
- Accounts receivable were $133.8 million and inventory was $145.3 million. Cash from operations less capital expenditures was approximately $30.8 million.
- The company paid a special dividend of $1.50 per share, totaling $54.7 million. It said it did not expect to pay regular or special dividends in the foreseeable future.
Fourth-quarter results
FY2012 fourth-quarter net sales were $135.0 million, compared with $135.6 million in FY2011. Income from continuing operations was $15.2 million versus $15.2 million. Total net income was $15.3 million versus $16.6 million; FY2011 fourth-quarter results included $1.5 million of income from discontinued operations. Diluted EPS was $0.42 versus $0.46.
Changes, outlook and key risks
- Management attributed growth to demand, new-product sales and investment in product development and process improvements. Vehicle age was cited as supportive aftermarket demand; the average vehicle age was 10.8 years as of December 2011.
- The company launched a medium- and heavy-duty truck parts line, with more than 235 SKUs; it generated less than 1% of FY2012 sales. No numerical FY2013 revenue or earnings guidance was provided. Management said available capital was adequate for at least the next 12 months.
- ScanTech’s international business exit was substantially liquidated in FY2012. Discontinued operations reported $4.6 million of income, including a roughly $3.0 million foreign-currency translation reclassification and a $1.4 million foreign-tax-credit benefit; these items materially affect comparison with prior-year discontinued-operation losses.
- Customer consolidation is driving pressure for lower prices, higher returns and longer payment terms. FY2012 receivables sold through customer-sponsored programs totaled $312.7 million, with $4.4 million in related financing costs; without those sales, year-end receivables would have been approximately $180.5 million higher.
- Other principal risks include customer concentration and credit exposure (the five largest customers represented 86% of year-end receivables), reliance on foreign sourcing (about 80% of purchases, with the largest portion from China), competition, product quality and warranty claims, new-product execution, currency and transportation costs, and limited retail shelf space.
- The ERP replacement project was expected to cost $21.5–$24.5 million through 2014; $15.4 million had been spent by year-end. Implementation at one subsidiary was completed in January 2013, with no operational disruption anticipated. Current legal matters were assessed by management as immaterial; the filing also reports a related-party lease with the CEO’s family partnership.
Most important facts to verify
- Underlying sales and earnings growth, including the effect of FY2011’s extra week and the one-time ScanTech gains in FY2012.
- Sustainability of gross-margin improvement amid customer pricing demands, returns and extended payment terms.
- Cash conversion and working-capital needs, including dependence on receivables-sale programs and the increase in inventory.
- Customer concentration, receivables collectability and exposure to foreign suppliers and China-related costs.
- Expected spending, timing and execution risks for the ERP project and expansion of the heavy-duty product line.
- Terms and governance of the related-party facility lease, and the impact of the special dividend on cash and future capital allocation.