Dorman Products, Inc. — Q1 2018 Form 10-Q
Period: Thirteen weeks ended March 31, 2018; comparative period ended April 1, 2017. Unaudited consolidated results. Dorman supplies replacement automotive parts and fasteners, primarily in North America.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $227.3 million | $221.6 million | Up 3% |
| Gross profit / margin | $88.6 million / 39.0% | $88.7 million / 40.0% | Margin down 1.0 percentage point |
| SG&A | $48.6 million | $43.7 million | Up $4.9 million |
| Operating income / margin | $40.0 million / 17.6% | $45.0 million / 20.3% | Operating income down 11% |
| Net income | $30.6 million | $29.2 million | Up 5% |
| Diluted EPS | $0.93 | $0.85 | Up 9% |
| Effective tax rate | 23.7% | 35.3% | Down 11.6 percentage points |
Sales by product line: powertrain $95.2 million, chassis $67.0 million, automotive body $55.2 million and hardware $9.9 million. Chassis sales increased from $55.5 million; automotive body sales declined from $61.5 million. U.S. sales were $210.4 million and non-U.S. sales were $16.8 million.
Cash flow, liquidity and debt
- Operating cash flow was $19.8 million, down from $38.1 million. Investing used $6.3 million, primarily for capital spending; financing used $9.8 million, including $9.0 million of repurchases under the authorization.
- Cash increased to $75.3 million from $71.7 million at year-end. The cash flow statement reports a $3.7 million net increase including exchange-rate effects; management’s cash-flow discussion reports $3.7 million, while the statement’s reported components imply a $3.7 million increase.
- Working capital was $444.5 million. Current assets were $540.4 million and current liabilities $95.8 million. No borrowings were outstanding under the $100 million revolving facility; after $0.8 million of letters of credit, approximately $99.2 million remained available. The facility expires in December 2022.
- The filing reports no balance-sheet borrowings. Dorman sold $151.0 million of receivables during the quarter under customer-sponsored programs, with $3.5 million of related financing costs in SG&A. Management said the programs had capacity for additional sales.
Material changes and management commentary
- MAS Industries, acquired in October 2017, contributed $10.2 million of Q1 sales and immaterial net income. Management attributed the overall sales increase to MAS, partly offset by customer destocking and a brand-protection pricing-policy change.
- Gross margin fell because of lower overall selling prices and a $0.9 million inventory fair-value adjustment related to MAS, partly offset by lower material prices. Higher SG&A reflected MAS, increased product-development investment, higher wages and benefits, and increased receivables-program costs.
- The lower effective tax rate primarily reflected the Tax Cuts and Jobs Act, which reduced the U.S. federal corporate rate to 21% beginning in 2018. Revenue-standard adoption in Q1 had no material effect on earnings, cash flows or the balance sheet.
- Dorman introduced 1,600 products, including 330 new-to-the-aftermarket SKUs. Management identifies product development and acquisitions as growth drivers, but provided no numerical full-year guidance in this filing.
- Management expects customer pressure for extended payment terms to continue. Such terms can increase receivables and cash needs; receivables sales can offset the cash impact but carry financing costs. Management considered capital sources adequate for at least the next 12 months.
Risks, contingencies and unusual items
- Key disclosed risks include customer concentration and bargaining pressure, aftermarket competition and consolidation, foreign-exchange and sourcing-cost changes, supplier or transportation disruption, product quality and liability claims, intellectual-property disputes, cyber risks, and acquisition integration or execution.
- MAS contingent consideration was recorded at $8.1 million at quarter-end; maximum contingent payments could be $11.7 million and depend on sales thresholds through December 2020. Purchase-price allocation remained provisional.
- Management said current legal proceedings were ordinary-course matters and that reasonably possible losses were immaterial. The company had $2.4 million of net unrecognized tax benefits and $0.7 million of accrued interest related to uncertain tax positions; a state tax examination was ongoing.
- Interest-rate sensitivity: a one-percentage-point increase in LIBOR or receivables-program discount rates was estimated to increase annual interest and financing costs by approximately $3.9 million, assuming balances and sales volumes remain constant.
Facts investors should verify
- Whether sales growth excluding MAS reflects demand trends, given customer destocking and the pricing-policy impact.
- Whether gross-margin pressure and higher SG&A persist, and the extent to which product launches and MAS can offset them.
- Receivables-program usage, financing costs and customer payment-term extensions; these programs materially support liquidity.
- The filing gives differing fiscal-2017 foreign-sourcing estimates: approximately 71% in one discussion and 77% in another.
- Reconcile cash-flow presentation: the cash flow statement shows a $3.653 million cash increase after a $0.051 million exchange-rate effect, while MD&A states $3.704 million.