Dorman Products, Inc. — Q2 2017 Form 10-Q
Reporting period: The 13 weeks ended July 1, 2017; year-to-date figures cover 26 weeks. Comparatives are the periods ended June 25, 2016. Financial statements are unaudited. Dorman supplies automotive aftermarket replacement parts, with nearly all revenue generated in North America.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $229.3m | $209.6m | $450.9m | $417.7m |
| Gross profit / margin | $90.9m / 39.6% | $82.2m / 39.2% | $179.6m / 39.8% | $162.8m / 39.0% |
| Operating income / margin | $45.0m / 19.6% | $41.0m / 19.6% | $90.0m / 20.0% | $79.9m / 19.1% |
| Net income / margin | $28.4m / 12.4% | $26.0m / 12.4% | $57.6m / 12.8% | $50.7m / 12.1% |
| Diluted EPS | $0.83 | $0.75 | $1.68 | $1.46 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $41.9m | $36.5m |
Q2 sales increased 9% and first-half sales rose 8%. Management attributed growth to stronger demand at several large customers, including demand for new products. Gross margin improved in both comparisons, which management attributed to a favorable product mix and higher-volume cost leverage. Q2 operating margin was unchanged; first-half operating margin improved.
Cash, liquidity, and capital allocation
- Cash and equivalents were $129.2m at July 1, 2017, down from $149.1m at December 31, 2016. First-half cash decreased $19.9m, versus a $9.2m increase in the prior-year period.
- Working capital was $453.4m, compared with $447.8m at year-end. Current assets included $200.4m of inventory, up from $168.9m.
- First-half operating cash flow of $41.9m included a $29.7m inventory cash use and an $18.2m cash source from higher accounts payable. Investing used $25.1m, including $11.9m of property and equipment additions, a $10.0m supplier investment, and $3.1m for the Ingalls asset acquisition. Financing used $36.8m, principally for share repurchases.
- No borrowings were outstanding on the $30m revolving facility; about $29.2m was available after letters of credit. The facility was extended to June 2018, and the company reported compliance with its covenants. Management said available capital should meet needs for at least 12 months.
- The company repurchased $35.0m of shares under its repurchase program in the first half. The program authorizes up to $250m through December 31, 2018; approximately $116.4m remained available at July 1.
Material changes, outlook, and risks
- SG&A increased to $45.9m in Q2 and $89.6m year to date. Management cited higher variable costs and wages and benefits; receivables-sale financing costs also rose. First-half financing costs for those programs were $5.6m, versus $4.4m a year earlier.
- Receivables sales totaled $299.1m in the first half, compared with $257.8m in the prior-year period. Management said customer pressure to extend payment terms is expected to continue and may require more cash or increase receivables-sale costs.
- The January 2017 Ingalls Engineering asset acquisition cost $4.8m, including estimated contingent payments tied to future sales. Dorman also bought a 33% interest in a supplier for $10.0m.
- First-half effective tax rate was 36.2%, down from 36.5%; adoption of share-based compensation guidance generated a $0.9m tax benefit. Q2’s rate was 37.1%, up from 36.5%, primarily due to higher state tax provisions.
- No specific revenue or earnings guidance was provided. Management cautioned that customer order timing and new product introductions can cause quarterly fluctuations. It cited customer consolidation and pricing, returns, and payment-term demands as pressures on margins and cash.
- Other disclosed risks include customer concentration, competition, vendor or transportation disruption, product quality and development, foreign-currency exposure, legal claims, cyberattacks, and possible new taxes or duties. Management considered current legal proceedings’ reasonably possible losses immaterial. Disclosure controls were assessed as effective.
Key facts for investors to verify
- Whether sales growth and improved gross margin persist, particularly given customer concentration and customer pricing demands.
- Whether higher inventory supports order fill rates as intended, or ties up cash; also monitor accounts payable and operating cash conversion.
- Continued use, availability, and cost of receivables-sale programs, including the impact of customer payment-term extensions and interest rates.
- Progress and returns from the Ingalls acquisition and supplier investment, including contingent acquisition payments.
- Capital allocation and liquidity after substantial share repurchases, and compliance with the revolving facility’s covenants.
- Potential tax effects and the timing of adoption of new accounting standards; management’s assessment of revenue-standard effects was not complete.