Dorman Products, Inc. — Q2 2014 Form 10-Q
Reporting period: The quarter and first 26 weeks ended June 28, 2014, compared with the corresponding 2013 periods. Amounts below are in millions of dollars except per-share data.
Business context
Dorman supplies replacement parts and fasteners for passenger vehicles and trucks, primarily to the North American automotive aftermarket. It cited strong demand, large customer stocking orders and line updates, and sales from recently introduced products as drivers of growth. Its business is seasonal, with customer orders generally highest in the second and third quarters.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $196.2 | $162.3 | $379.7 | $316.7 |
| Gross profit | $73.0 | $64.4 | $144.6 | $125.2 |
| Gross margin | 37.2% | 39.7% | 38.1% | 39.5% |
| Operating income | $36.7 | $30.8 | $73.6 | $60.7 |
| Net income | $23.2 | $19.3 | $46.8 | $38.4 |
| Diluted EPS | $0.64 | $0.53 | $1.28 | $1.05 |
- Sales increased 21% in Q2 and 20% year to date. Operating income rose about 19% and 21%, respectively; net income rose about 20% and 22%.
- Gross margin declined 2.5 percentage points in Q2 and 1.4 points year to date. Management attributed the pressure to competitive pricing and mix, higher excess and obsolete inventory provisions, and increased transportation costs.
- SG&A rose in dollars but fell as a share of sales: to 18.5% from 20.7% in Q2, and to 18.7% from 20.3% year to date. Higher variable costs, product-development investment and inflation contributed to the dollar increase.
- First-half operating cash flow was $19.2, versus $21.3 a year earlier. Capital expenditures were $15.9, versus $7.1; cash used in investing totaled $15.9, and cash used in financing was $9.9, principally reflecting share repurchases. Cash decreased $6.6 to $54.0. The filing attributes lower operating cash flow primarily to an $11.4 increase in working capital, partly offset by higher net income.
Financial position and liquidity
At June 28, 2014, cash was $54.0, current assets were $453.5, current liabilities were $86.6, and working capital was $366.9. Shareholders’ equity was $451.6. The company reported no revolver borrowings; its $30.0 revolving facility expires in June 2015, with approximately $29.0 available after letters of credit. It was in compliance with its financial covenants. Management said available capital should meet ongoing cash needs for at least 12 months.
Dorman sold $258.0 of receivables through customer-sponsored programs in the first half, compared with $192.1 in the prior-year period. It reported that $319.4 of additional receivables would have been outstanding at June 28 absent those sales, based on standard payment terms. Related financing costs in SG&A were $3.2, up from $2.3.
Material developments, outlook and risks
- The company increased its share repurchase authorization to $30.0 million in May 2014. It repurchased 161,900 shares under the program in the first half, with approximately $21.5 remaining at June 28. As a subsequent event, on July 30 the board raised the authorization to $50.0 million; after additional purchases through July 28, approximately $26.9 remained.
- Capital spending included $7.9 for the ERP system in the first half. The project was expected to cost $38–$40 million through 2014; $30.5 had been paid through June 28.
- No specific full-year earnings or revenue guidance was provided. Management cautioned that quarterly results can fluctuate with customer-order timing and new product introductions.
- Key risks identified include customer concentration and consolidation, pricing and payment-term pressure, competition, supplier or transportation disruption, product quality and development delays, foreign-currency effects on sourcing costs, and customer order timing. Management noted that customers’ concessions can pressure margins and require additional working capital.
- Management said ordinary-course legal matters were not expected to have a material financial impact. The company reported $1.0 of unrecognized tax benefits, including $0.8 that could affect the effective tax rate if recognized; one state tax examination was ongoing.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth and the large stocking orders and line updates are sustainable, and how customer demand develops in the second half.
- Whether competitive pricing, product mix, inventory provisions and transportation costs continue to weigh on gross margin.
- Working-capital and liquidity exposure, including reliance on receivables sales programs and the amount of receivables sold or outstanding absent those programs.
- ERP project spending and implementation progress, alongside other capital requirements.
- Actual share repurchases under the expanded authorization and the effect on cash and share count.
- Developments in the state tax examination and any changes in legal or other contingencies.