Dorman Products, Inc. — FY2016 Form 10-K
Business context and reporting period. Dorman supplies replacement parts and fasteners for passenger vehicles, light trucks and heavy-duty trucks, primarily in the U.S. aftermarket. It markets about 155,000 SKUs, many designed or engineered in-house. Fiscal 2016 ended December 31, 2016 and comprised 53 weeks; fiscal 2015 comprised 52 weeks. The filing also reports unaudited fourth-quarter results.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $859.6 million | $803.0 million |
| Gross profit / margin | $338.1 million / 39.3% | $308.1 million / 38.4% |
| Operating income / margin | $168.6 million / 19.6% | $146.2 million / 18.2% |
| Net income | $106.0 million | $92.3 million |
| Diluted EPS | $3.07 | $2.60 |
| Cash provided by operating activities | $121.5 million | $92.1 million |
Sales increased 7% year over year; management attributed growth to strong demand and one additional selling week. Net income rose 15%. Gross margin improved 0.9 percentage points, mainly from favorable product mix, higher-volume cost leverage and approximately $2.0 million lower inventory provisions, partly offset by lower selling prices. SG&A increased to $169.5 million, but declined as a share of sales to 19.7% from 20.2%. The effective tax rate increased to 37.0% from 36.7%.
Fourth quarter: Sales were $229.1 million, operating income $47.0 million, net income $28.7 million and diluted EPS $0.83, compared with $204.8 million, $34.4 million, $21.8 million and $0.62, respectively, in fourth-quarter 2015.
Liquidity, cash flow and capital
- Cash and cash equivalents were $149.1 million at year-end, up from $78.7 million; working capital was $447.8 million, versus $380.1 million.
- Cash from operations was $121.5 million; investing activities used $26.3 million and financing activities used $24.8 million. The resulting cash increase was $70.5 million.
- Operating cash flow benefited from lower inventory, which declined $24.9 million, while accounts receivable increased $27.8 million, primarily from higher sales and year-end receipt timing.
- No long-term debt was reported and there were no borrowings on the $30 million revolving facility. After approximately $1.0 million of letters of credit, about $29.0 million was available. The facility was due to expire in June 2017; the company reported compliance with its covenants.
- The company repurchased 430,866 shares under its program for $22.5 million during FY2016. The authorization had been expanded to $250 million and extended through December 31, 2018. Dorman said it did not intend to pay regular cash dividends.
Material changes, outlook and risks
- Management cited an older vehicle fleet and increased miles driven as supportive aftermarket trends. New-product development and process improvements were identified as key growth drivers; 4,220 unique parts were introduced in FY2016.
- Customer consolidation is increasing pressure for lower prices, product returns and extended payment terms. Management expects these pressures to continue and notes that they can reduce margins and increase working-capital needs.
- Four customers each represented more than 10% of sales and together accounted for approximately 60% of sales. The five largest customers represented 87% of accounts receivable at year-end.
- Approximately 77% of products were purchased from foreign vendors, with the largest portion sourced from China. Risks include supplier disruption, tariffs or duties, currency-related cost changes, and geopolitical or transportation disruptions.
- Receivables-sale programs provided $521.9 million of receivable sales in FY2016 and carried $8.9 million in financing costs. The company warns that termination, higher rates or further payment-term extensions could adversely affect cash flow and costs.
- In July 2016 Dorman acquired a 40% interest in supplier Powertrain Industries for $6.2 million. The agreement provides options and potential obligations to purchase the remaining interest in the future. Subsequent to year-end, the company acquired chassis-business assets for about $3.0 million and a 33% supplier interest for about $10.0 million.
- Other disclosed risks include competition, product quality and warranty claims, intellectual-property disputes, customer credit risk, cyber incidents, limited shelf space and legal proceedings. Management considered current legal matters’ reasonably possible losses immaterial. No specific earnings or sales guidance was provided.
Investor facts to verify
- How much of FY2016 sales and earnings growth reflects the extra fiscal week versus underlying volume, pricing and product mix?
- Whether customer pricing concessions, returns and payment-term extensions are affecting margins, receivable balances and cash conversion.
- The exposure and cost of the receivables-sale programs, including the effect of LIBOR or program termination.
- Progress on renewing or replacing the revolving credit facility that was scheduled to expire in June 2017.
- Terms, purchase obligations and potential returns associated with the PTI investment and the post-year-end supplier investment.
- Developments in customer concentration, foreign sourcing, tariffs, product quality and intellectual-property claims.
Audit and controls: KPMG issued an unqualified opinion on the consolidated financial statements and an unqualified opinion on internal control over financial reporting. Management reported effective disclosure controls and internal financial controls as of December 31, 2016.