Dorman Products, Inc. quarterly report, Q2 FY2013

Dorman Products, Inc. — Q2 2013 Form 10-Q

Reporting period: Thirteen and twenty-six weeks ended June 29, 2013; comparisons are to the periods ended June 30, 2012. Unaudited results. Dorman supplies automotive and heavy-duty replacement parts, primarily to the North American aftermarket.

Financial performance

MetricQ2 2013Q2 2012First half 2013First half 2012
Net sales$162.3m$144.2m$316.7m$279.0m
Gross profit / margin$64.4m / 39.7%$53.1m / 36.9%$125.2m / 39.5%$103.6m / 37.1%
Operating income / margin$30.8m / 19.0%$25.7m / 17.8%$60.7m / 19.2%$50.1m / 18.0%
Continuing net income$19.3m$16.1m$38.4m$31.4m
Net income, including discontinued operations$19.3m$19.7m$38.4m$35.3m
Diluted EPS$0.53$0.54$1.05$0.97

Sales grew 13% in Q2 and 14% in the first half, which management attributed mainly to strong demand for recently introduced products. Gross margins improved on favorable product mix, selected price increases and lower transportation costs; Q2 also benefited from lower excess-and-obsolete inventory charges. SG&A rose to $33.6m in Q2 and $64.5m in the first half, reflecting sales-related variable costs, greater product-development investment, ERP-related costs, and costs from a major customer’s distribution change. The latter costs were partly offset by higher net selling prices.

Cash flow, balance sheet and liquidity

  • First-half operating cash flow was $21.3m, versus $23.4m a year earlier. Investing used $9.0m, including $7.1m of property and equipment additions and $1.9m for an acquisition. Financing used $0.3m. Cash increased $12.0m during the half.
  • At June 29, 2013, cash was $39.7m; current assets were $363.8m and current liabilities $56.9m, yielding working capital of $306.9m. Shareholders’ equity was $371.5m.
  • No borrowings were outstanding on the $30m revolving credit facility; approximately $29.1m remained available after letters of credit. The facility expires in June 2015. Management said available capital should meet operating cash needs for at least 12 months.
  • The company sold $192.1m of receivables in the first half under customer-sponsored programs; $225.6m of additional receivables would have been outstanding at period-end absent the sales, based on standard payment terms. Related financing costs were $2.3m in the first half.

Material changes, outlook and risks

  • Q2 and first-half continuing income increased year over year, while reported net income declined in Q2 and grew more slowly in the first half because 2012 included ScanTech discontinued-operation income of $3.6m and $3.9m, respectively.
  • On May 17, 2013, Dorman acquired assets and assumed liabilities of an automotive-parts remanufacturer to expand its portfolio. The stated purchase price was approximately $3.7m, including $1.9m cash and $1.8m in estimated contingent payments tied to future earnings. Preliminary goodwill and intangible assets recorded were $3.6m, pending final valuation.
  • The ERP replacement project was expected to cost $29m–$32m through 2014; $16.6m had been spent by June 29, 2013. Installation at one subsidiary was completed in January without operational disruption.
  • No specific earnings or sales guidance was provided. Management cautioned that results can fluctuate with customer order timing and new-product introductions; customer ordering is generally strongest in the second and third quarters.
  • Key exposures include customer concentration and bargaining pressure, dependence on new-product development, competition, supplier and transportation-provider disruption, product quality and development delays, and foreign-currency and input-cost changes. Management reported that the five largest customers represented 86% of net receivables at December 29, 2012 (the filing does not provide a corresponding June 2013 percentage).
  • At June 29, 2013, unrecognized tax benefits were $2.1m, of which $1.5m would affect the effective tax rate if recognized; two state tax authorities were examining returns. Management considered ordinary-course legal matters’ reasonably possible losses immaterial. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.

Important facts for investors to verify

  • Whether new-product demand and improved gross margins persist, and how customer pricing and return demands affect profitability.
  • Working-capital and cash-conversion trends, including reliance on receivables-sale programs and their financing costs.
  • Acquisition valuation and contingent-payment outcomes, and progress and remaining costs for the ERP implementation.
  • Customer concentration, including updated receivables exposure for major customers, and the financial impact of customer distribution changes.
  • Potential effects of tax examinations, foreign exchange and sourcing costs; reported first-half results are not necessarily indicative of full-year results.