Dorman Products, Inc. — Q2 2018 Form 10-Q
Reporting period: Thirteen weeks ended June 30, 2018; year-to-date period covers twenty-six weeks. Comparisons are to the periods ended July 1, 2017. Dorman supplies automotive aftermarket replacement parts, primarily in North America.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $238.1M | $229.3M | $465.4M | $450.9M |
| Gross profit / margin | $92.7M / 38.9% | $90.9M / 39.6% | $181.3M / 39.0% | $179.6M / 39.8% |
| Operating income / margin | $42.8M / 18.0% | $45.0M / 19.6% | $82.8M / 17.8% | $90.0M / 20.0% |
| Net income | $34.3M | $28.4M | $65.0M | $57.6M |
| Diluted EPS | $1.03 | $0.83 | $1.95 | $1.68 |
Sales rose approximately 4% in Q2 and 3% in the first half. Net income increased about 21% and 13%, respectively, while operating income declined in both periods. The lower effective tax rate—19.9% in Q2 and 21.7% year to date, versus 37.1% and 36.2%—largely reflected the U.S. corporate tax-rate reduction under the Tax Cuts and Jobs Act.
First-half operating cash flow was $45.6M, versus $41.9M; capital expenditures were $11.4M. Investing activities used $12.0M and financing activities used $30.4M, including $27.4M of share repurchases under the repurchase program. Cash increased to $74.8M from $71.7M at fiscal year-end. Working capital was $462.0M. The company had no revolver borrowings and approximately $99.2M available after letters of credit under its $100M revolving facility, which expires in December 2022; the company reported no material debt outstanding.
Drivers and material changes
- MAS, acquired in October 2017, contributed $10M of Q2 sales and $20.2M in the first half, with an immaterial amount of first-half net income.
- First-half sales growth was partly offset by customer destocking and the effects of a brand-protection pricing policy change. Q2 growth was also partly offset by that pricing change.
- Gross margin declined year over year. Management cited lower selling prices, unfavorable product mix, and MAS acquisition-related inventory fair-value adjustments of $0.9M in Q2 and $1.8M in the first half.
- SG&A increased, reflecting MAS, product-development investment, higher wages and benefits, and a $1.1M non-cash impairment related to acquiring the remaining shares of a previously unconsolidated entity. First-half SG&A also included higher costs for receivables-sale programs.
- Product-line sales were mixed in the first half: chassis increased to $137.3M from $116.2M; powertrain to $194.4M from $190.2M; automotive body declined to $112.5M from $123.0M; and hardware was $21.2M versus $21.4M.
Outlook, risks and contingencies
No specific earnings or revenue guidance is provided. Management said available capital should meet cash needs for at least twelve months, while noting that extended customer payment terms, weaker demand, or other factors could pressure liquidity. Customer competition and demands for lower prices, longer payment terms, and more generous returns may weigh on margins and cash flow.
A 25% U.S. tariff on certain Chinese imports took effect July 6, 2018, affecting a subset of products made for Dorman in China. Management expected the 2018 impact to be not significant after mitigating actions, including potential customer price increases. Other disclosed risks include customer and receivables concentration, supplier disruption, foreign-currency movements, transportation constraints, product quality and liability claims, cyber risks, and acquisition integration. Management characterized ordinary-course legal proceedings and reasonably possible losses as immaterial. Disclosure controls were assessed as effective.
Investor verification priorities
- Assess whether margin pressure from pricing, product mix, acquisition-related costs, and customer concessions persists.
- Track receivables, customer payment terms, and reliance on receivables-sale programs: $282.1M of receivables were sold in the first half, with $6.7M of associated financing costs.
- Verify the actual impact of China-related tariffs and the effectiveness of pricing or sourcing mitigation.
- Monitor MAS integration, provisional purchase-price allocations, contingent consideration (recorded at $8.0M; maximum payment $11.7M), and acquisition-related sales and costs.
- Reconcile the cash-flow presentation: the cash-flow statement reports a $3.119M first-half cash increase, while the MD&A table reports $3.204M. The filing text does not explain the difference.