Dorman Products, Inc. — Q3 2017 Form 10-Q
Reporting period: 13 weeks ended September 30, 2017, compared with the 13 weeks ended September 24, 2016. Year-to-date comparisons cover 39 weeks. Amounts below are in millions, except per-share data and where otherwise noted.
Business context and results
Dorman supplies replacement automotive parts and fasteners, primarily to the North American aftermarket. Management identifies new-product development as a key growth driver. Results may fluctuate with customer order timing, product launches, and customer inventory activity.
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Net sales | $224.6 | $212.8 | $675.5 | $630.5 |
| Gross profit | $88.1 | $83.1 | $267.7 | $245.9 |
| Gross margin | 39.2% | 39.1% | 39.6% | 39.0% |
| SG&A expense | $45.3 | $41.5 | $134.9 | $124.4 |
| Operating income | $42.8 | $41.6 | $132.8 | $121.6 |
| Net income | $27.0 | $26.7 | $84.6 | $77.3 |
| Diluted EPS | $0.80 | $0.77 | $2.47 | $2.23 |
Financial position and cash flow
- For the 39 weeks, net sales grew 7%, net income grew about 9%, and diluted EPS rose from $2.23 to $2.47. Q3 sales increased 6%, while net income was up modestly.
- Q3 operating margin was 19.1% versus 19.6%; year-to-date it was 19.7% versus 19.3%. Year-to-date gross-margin improvement reflected favorable product mix and volume leverage. SG&A rose on higher sales-related costs, wages and benefits, and product-development investment.
- Operating cash flow was $59.4 versus $55.5 for the 39-week periods. Investing used $30.6, including capital spending, the Ingalls asset acquisition, and a supplier investment. Financing used $61.1, mainly reflecting $59.0 of share repurchases. Cash declined $32.3 to $116.8 from year-end 2016.
- Working capital was $453.5, compared with $447.8 at December 31, 2016. Current assets were $554.0 and current liabilities $100.6. The filing reports no revolving-credit borrowings; about $29.2 of the $30.0 facility was available after letters of credit. No debt balance is reported on the balance sheet.
- Inventory increased to $201.8 from $168.9, primarily to support new product launches and customer fill rates. Management said inventory had plateaued and anticipated a slight decrease over the next three months.
Material changes, outlook and risks
- Q3 sales growth reflected increased demand, partly offset by a significant inventory reduction at a large customer. Year-to-date growth reflected demand at several large customers, including new products.
- Receivables sold through customer-sponsored programs totaled $442.5 year to date, versus $366.6 in the prior-year period. Related financing costs were $8.4 versus $6.3. Management expects continued pressure to extend customer payment terms, which could require more cash or raise receivables-sale costs.
- The company acquired certain Ingalls Engineering assets in January for $4.8, including estimated contingent payments. Subsequent to quarter-end, it closed the MAS Industries acquisition for approximately $60 cash, financed from cash on hand; MAS was expected to generate approximately $40 of sales for the 12 months ending December 30, 2017. Contingent consideration and customary purchase-price adjustments were not yet determined.
- Management said available capital should cover ongoing needs for at least 12 months. No specific earnings or revenue guidance was provided. Risks cited include customer concentration and consolidation, pricing and return concessions, vendor or transport disruption, product quality and development, litigation, cyber risks, foreign exchange, and changes to receivables-sale arrangements. A 1 percentage-point rise in LIBOR or receivables-program discount rates was estimated to increase annual costs by approximately $3.7, assuming balances and sales volumes remain constant.
- Management considered current legal matters immaterial. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer inventory reductions and payment-term extensions persist, and how they affect sales, working capital, and receivables-financing costs.
- MAS Industries’ final purchase accounting, contingent consideration, integration, and realized contribution relative to the disclosed sales estimate.
- Whether higher inventory converts to sales as expected, and whether the anticipated near-term inventory decline occurs.
- Capital allocation and liquidity after the acquisitions and continued repurchases; the filing reports $59.0 of program repurchases year to date and approximately $92.4 remaining under the authorization at quarter-end.
- Potential effects of customer concentration, input and freight costs, interest rates, and the company’s ongoing accounting-standard assessments.