Dorman Products, Inc. — Q1 2015 Form 10-Q
Reporting period: Thirteen weeks ended March 28, 2015; comparison is with the thirteen weeks ended March 29, 2014. Dorman supplies automotive aftermarket replacement parts and fasteners, primarily in North America. Figures below are unaudited; dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $188.5 | $183.5 | +2.7% |
| Gross profit / margin | $72.9 / 38.7% | $71.6 / 39.0% | Profit +1.7%; margin -0.3 pp |
| SG&A | $39.2 | $34.7 | +13.1% |
| Operating income / margin | $33.7 / 17.9% | $36.9 / 20.1% | -8.9%; margin -2.2 pp |
| Net income / margin | $21.3 / 11.3% | $23.6 / 12.8% | -9.4%; margin -1.5 pp |
| Basic / diluted EPS | $0.60 / $0.60 | $0.65 / $0.64 | Lower year over year |
| Cash from operating activities | $23.8 | $11.1 | +$12.7 |
| Capital expenditures | $5.7 | $7.0 | -$1.3 |
Gross margin was pressured by lower selling prices, partly offset by lower transportation costs. SG&A increased by approximately $4.5 million, primarily including $2.8 million of incremental ERP-related costs ($1.7 million distribution, $0.6 million support and $0.5 million depreciation), plus product-development investment and inflation. The effective tax rate was 36.5%, versus 36.2%.
Liquidity, cash flow and capital
- At March 28, cash was $64.6 million; working capital was $380.6 million; shareholders’ equity was $482.6 million. Current assets were $476.7 million and current liabilities $96.1 million.
- Cash increased $16.9 million in the quarter. Operating cash flow was $23.8 million; investing activities used $5.7 million and financing activities used $1.1 million. Inventory rose $9.5 million during the quarter.
- No revolver borrowings were outstanding. The $30 million unsecured facility had approximately $29 million available after $1.0 million of letters of credit. The company reported compliance with its financial covenants.
- In April 2015, the credit facility was amended to extend its expiration to June 30, 2017 and reduce applicable borrowing margins and unused-facility fees. The amended margin varies from 65 to 250 basis points and the unused fee from 0.00% to 0.20%, based on leverage.
- Dorman sold $132.9 million of receivables during the quarter through customer-sponsored programs and disclosed that $314.6 million of additional receivables would have been outstanding at March 28 under standard payment terms. Related financing costs were $1.7 million.
- Repurchases under the public program were $0.6 million in the quarter; approximately $59.0 million remained authorized. The program is discretionary and authorized through December 31, 2015.
Changes, outlook and risks
- Sales growth was constrained by a major customer’s inventory-reduction plan and the nonrecurrence of several large first-quarter 2014 line updates.
- Management said customer consolidation continues to create pressure for lower prices, extended payment terms and increased returns, which can reduce margins and require more working capital. It cited new-product development as a key growth driver.
- Management expects the second and third quarters generally to have the highest sales and cautioned that order timing and new-product introductions can cause quarterly fluctuations. It stated that available capital should meet cash needs for at least the next twelve months. No numerical earnings or revenue guidance was provided.
- Risks identified include competition, customer and receivables concentration, supplier or transportation-provider disruption, product quality and development delays, foreign-currency and commodity-cost changes, customer order timing, cyber-attacks, and industry consolidation. A 1 percentage-point LIBOR increase was estimated to raise annual interest and receivables-program financing costs by approximately $3.1 million, assuming balances remain constant.
- Management considered ordinary-course legal matters’ reasonably possible losses immaterial. The company disclosed IRS examinations for tax years 2011–2012 and a state examination for 2009–2012; it had $1.2 million of unrecognized tax benefits and approximately $0.2 million of accrued interest related to uncertain tax positions.
- The company was evaluating the effects and transition method for the new revenue-recognition standard, then scheduled to take effect for annual periods beginning after December 15, 2016. Disclosure controls were deemed effective; no material change in internal control was reported.
Investor verification points
- Assess whether the sales increase can persist despite the major customer’s inventory reduction and the absence of prior-year line-update shipments.
- Track gross and operating margins, including whether pricing pressure and ERP-related costs continue to weigh on profitability.
- Review working-capital exposure and dependence on receivables sales programs, including the disclosed $314.6 million of additional receivables under standard terms.
- Confirm the effect of the amended credit facility, covenant headroom, tax examinations and any subsequent developments in legal or other contingencies.