Dorman Products, Inc. — Q1 2016 Form 10-Q
Reporting period: Thirteen weeks ended March 26, 2016; comparison is the thirteen weeks ended March 28, 2015. Unaudited results. Dollar amounts below are in millions unless otherwise noted.
Business context
Dorman supplies replacement parts and fasteners for passenger cars, light trucks and heavy-duty trucks, primarily to the North American automotive aftermarket. Management identifies new-product development as a key growth driver. The company notes that customer ordering can cause quarter-to-quarter volatility and that sales are generally highest in the second and third quarters.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Net sales | $208.1 | $188.5 | Up 10%; attributed primarily to inventory expansion at one customer and strong demand, including for new products |
| Gross profit / margin | $80.6 / 38.7% | $72.9 / 38.7% | Margin unchanged |
| SG&A | $41.7 / 20.0% of sales | $39.2 / 20.8% of sales | Included a $0.9 provision for doubtful accounts related to a customer in bankruptcy and higher receivables-sale program costs |
| Operating income / margin | $38.9 / 18.7% | $33.7 / 17.9% | Improved |
| Net income | $24.7 | $21.3 | Up from prior year |
| Diluted EPS | $0.71 | $0.60 | Weighted average diluted shares declined to 34.7 million from 35.6 million |
| Operating cash flow | $23.9 | $23.8 | Substantially unchanged |
| Capital expenditures | $5.6 | $5.7 | Primarily tooling and information-system investment |
| Cash used in financing | $10.0 | $1.1 | Includes $9.6 spent on share repurchases under the repurchase program |
Financial position and liquidity
- Cash and equivalents were $87.0 at March 26, 2016, versus $78.7 at December 26, 2015. Working capital was $392.2, up from $380.1.
- Current assets were $484.7 and current liabilities $92.5. The balance sheet reported no borrowings; shareholders’ equity was $533.2.
- The company had a $30.0 unsecured revolving credit facility expiring June 2017. After approximately $1.0 of letters of credit, about $29.0 was available; the company reported covenant compliance.
- Management said available capital should meet operating needs for at least twelve months, while warning that extended customer payment terms or weaker demand could pressure liquidity.
- Customer-sponsored accounts-receivable programs generated sales of receivables of $135.2 during the quarter. Associated financing costs were $2.5, versus $1.7 in the prior-year quarter. The filing states that $355.2 of additional receivables would have been outstanding at March 26 had receivables not been sold, based on standard payment terms.
Material changes, outlook and risks
- Sales growth flowed through to higher operating income, while gross margin remained flat. SG&A increased, including the bad-debt provision for a customer in bankruptcy and higher receivables-sale financing costs. Prior-year SG&A included $1.7 of costs from the now-completed September 2014 ERP conversion.
- Operating cash flow was nearly unchanged year over year. Working-capital movements included a $4.5 increase in receivables and a $11.9 decrease in accounts payable; inventories decreased by $6.1.
- No specific revenue or earnings guidance was provided. Management emphasized seasonal sales patterns, customer order timing, continued pressure for extended payment terms and customer demands for pricing concessions and higher product returns.
- Risks cited include customer concentration and consolidation, competition, vendor or transportation-provider loss, product quality and development delays, intellectual-property claims, foreign currency, cyber-attacks, and changes in customer demand. Management noted that customer consolidation can pressure margins and require more working capital.
- Legal proceedings arising in the ordinary course were described as not likely to have a material financial impact; management considers reasonably possible losses immaterial. The company disclosed $1.9 of net unrecognized tax benefits, of which $1.4 would affect the effective tax rate if recognized, and a state tax examination for 2009–2012.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. New accounting standards covering revenue, inventory, leases and share-based compensation were under evaluation.
Important facts for investors to verify
- Whether sales growth, including the customer inventory expansion, is sustained and broad-based in subsequent quarters.
- The financial condition and payment behavior of the customer in bankruptcy, and any further bad-debt exposure.
- The ongoing cost and availability of receivables-sale programs, and the effect of extended customer payment terms on cash flow and reported receivables.
- Whether customer pricing and return demands, foreign sourcing costs, or currency changes affect gross margins and liquidity.
- Repurchase activity and remaining authorization: the company reported $64.3 of approximate program capacity at quarter-end, under a program authorized up to $150 million through December 31, 2016.