Dorman Products, Inc. — Q1 2014 Form 10-Q
Reporting period: Thirteen weeks ended March 29, 2014; comparison is with the thirteen weeks ended March 30, 2013. Dorman supplies automotive replacement parts and fasteners, primarily to the North American aftermarket. Its fiscal 2014 ends December 27, 2014.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $183.5 million | $154.4 million | +19% |
| Gross profit / margin | $71.6 million / 39.0% | $60.8 million / 39.4% | Margin down 0.4 percentage points |
| Income from operations / margin | $36.9 million / 20.1% | $29.9 million / 19.4% | +23.5%; margin up 0.7 points |
| Net income | $23.6 million | $19.1 million | +23.5% |
| Diluted EPS | $0.64 | $0.52 | +23% |
| Cash from operations | $11.1 million | $10.6 million | Up $0.6 million |
| Capital expenditures | $7.0 million | $2.8 million | Up $4.2 million |
Sales growth reflected strong overall product demand, recently introduced products, and shipments of several large product-line updates. Gross margin declined due to higher estimated returns tied to certain line updates and lower overall selling prices. SG&A rose to $34.7 million from $30.9 million, including higher variable costs, about $0.7 million of added product-management and growth-support investment, and inflation. The effective tax rate was 36.2%, versus 36.1%.
Balance sheet, liquidity, and financing
- Cash was $64.0 million at March 29, 2014, up from $60.6 million at December 28, 2013. Working capital was $358.3 million; current assets were $449.4 million and current liabilities $91.1 million.
- No borrowings were outstanding under the $30 million revolving credit facility. After $0.8 million of letters of credit, approximately $29.2 million remained available. The facility expires in June 2015 and is subject to financial covenants.
- Operating cash flow was $11.1 million; investing used $7.0 million, principally for capital spending; financing used $0.7 million. Cash increased $3.4 million during the quarter.
- Inventory increased to $175.4 million from $164.4 million at year-end, with finished goods up to $109.4 million from $97.7 million. Management attributed working-capital movements primarily to higher sales and payment timing.
- The company uses customer-sponsored accounts-receivable sale programs to help fund extended customer payment terms. It sold $124.1 million of receivables in the quarter, compared with $89.0 million a year earlier; related financing costs were $1.5 million versus $1.0 million. The filing estimates that $287.1 million of additional receivables would have been outstanding at March 29 under standard payment terms.
Outlook, risks, and notable items
- No specific revenue or earnings guidance was provided. Management said available capital should meet operating cash needs for at least the next twelve months.
- Management cautioned that results can vary with customer order timing and new-product introductions; customer orders are generally highest in the second and third quarters.
- Customer consolidation can increase demands for pricing concessions, product returns, and extended payment terms, pressuring margins and requiring more working capital. Other cited risks include customer and receivable concentration, competition, supplier or transportation disruption, product-quality issues, delays in product development, and foreign-currency-related purchase-cost increases.
- A one-percentage-point increase in LIBOR was estimated to increase annual interest and receivables-program financing costs by approximately $2.9 million, assuming constant balances and sales. No derivatives were used for trading or speculation.
- Capital spending includes the ERP replacement project, expected to cost $38–$40 million through 2014; $26.1 million had been paid through March 29, including $3.4 million in Q1 2014. Management reported no material change in contractual obligations.
- Legal matters arising in the ordinary course were assessed by management as unlikely to have a material financial impact. The company had $1.0 million of unrecognized tax benefits and was under examination by one state tax authority for 2009–2010. Disclosure controls were deemed effective; no material change in internal control was reported.
Key facts for investors to verify
- Whether sales growth from demand, new products, and line updates continues, and whether product returns or lower selling prices further pressure gross margin.
- The ongoing cost and cash requirements of ERP implementation and other capital projects.
- The scale, cost, and availability of receivables sales programs, and the effect of extended customer terms and customer concentration on liquidity and credit risk.
- Whether inventory growth converts into sales without increased excess or obsolete inventory reserves.
- Developments in state tax examinations and other uncertain tax positions; the filing does not quantify a likely settlement outcome.