Dorman Products, Inc. — Fiscal 2013 Form 10-K
Business context and reporting period. Dorman supplies automotive aftermarket replacement parts and fasteners, with approximately 150,000 SKUs. Its fiscal year ended December 28, 2013 and comprised 52 weeks. The filing also reports fourth-quarter results; quarterly figures are unaudited. Amounts below are in U.S. dollars.
Financial performance and liquidity
- Fiscal 2013: Net sales were $664.5 million, up 16% from $570.4 million. Income from continuing operations was $81.9 million, up 23%; diluted continuing-operations EPS was $2.24, versus $1.82. Net income was also $81.9 million; 2012 net income included $4.6 million from discontinued operations.
- Fourth quarter: Net sales were $169.8 million versus $135.0 million in Q4 2012 (about 26% growth). Operating income was $31.6 million versus $23.0 million; continuing-operations income was $20.6 million versus $15.2 million; diluted EPS was $0.56 versus $0.42.
- Margins: Fiscal 2013 gross margin was 39.3%, up from 37.7%; operating margin was 19.3%, up from 18.3%; continuing-operations net margin was 12.3%, up from 11.6%. Higher-margin new-product mix, selected price increases and lower transportation costs supported gross-margin improvement.
- Cash flow: Operating activities provided $61.6 million, versus $48.9 million in 2012. Property and equipment additions used $24.7 million; operating cash flow less these additions was $36.9 million. Investing activities used $26.6 million, including $1.9 million for the hybrid-battery business acquisition. Cash increased by $32.9 million to $60.6 million.
- Liquidity and debt: Working capital was $340.7 million, compared with $272.4 million. The company had no borrowings or long-term debt at year-end and had $29.1 million available under its $30 million revolving facility, net of letters of credit. Shareholders’ equity was $413.6 million.
Changes versus prior period and notable items
- Growth was attributed primarily to strong demand for new products, particularly products launched in the preceding 24 months. Cost of goods sold fell to 60.7% of sales from 62.3%.
- SG&A increased approximately 20% to $133.0 million, faster than sales. Drivers included variable costs from higher sales, $3.7 million of additional product-development resources, $3.2 million of ERP-related depreciation and support costs, approximately $4.6 million in added costs after a major customer changed its distribution method, and higher receivables-program financing costs.
- Receivables sold under customer-sponsored programs totaled $406.4 million, up from $312.7 million; related financing costs rose to $5.2 million from $4.4 million. Without these sales, an additional $267.8 million of receivables would have been outstanding at year-end.
- The company acquired certain assets and assumed liabilities of Re-Involt Technologies in May 2013 for approximately $3.7 million, including $1.8 million in estimated contingent payments, and launched its hybrid-drive battery program. Heavy-duty aftermarket sales were approximately 1% of fiscal 2013 revenue.
- Capital spending included $7.4 million on the ERP project in 2013. The project was expected to cost $36–$39 million through 2014; $22.7 million had been paid through year-end. A distribution-center expansion was also completed.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance is provided. Management said available capital was sufficient for ongoing cash needs for at least the next 12 months and expected continued customer pressure on margins and payment terms.
- Key risks include customer concentration (four customers accounted for 57% of sales; the five largest represented 81% of receivables), customer consolidation and bargaining power, and extended payment terms and product returns that can reduce cash flow and profitability.
- Approximately 75% of products were sourced from foreign vendors, with China the largest overseas source. Currency movements, trade restrictions, supplier disruption and transportation costs could increase costs or interrupt supply.
- Other disclosed risks include competition, product quality and warranty claims, new-product execution, limited retailer shelf space, patent filings by original-equipment manufacturers, IT implementation, and dependence on key personnel. The company noted the Chinese yuan had risen approximately 7.9% against the U.S. dollar since January 2011.
- Management considered current legal proceedings and reasonably possible losses immaterial. The filing reports $1.2 million of gross unrecognized tax benefits and $12.5 million of future minimum operating-lease payments. The Colmar headquarters lease is with a partnership involving the CEO and his family; the Audit Committee stated its terms were no less favorable than those available from an unaffiliated party.
- The company does not plan regular dividends. A $10 million share-repurchase authorization was approved in December 2013 and expires at the end of 2014; no purchases under that program were made in 2013.
Important facts for investors to verify
- Whether new-product growth and gross-margin gains can continue while SG&A growth and customer pricing pressure remain elevated.
- How extended customer payment terms, receivables sales and customer concentration affect cash generation, financing costs and credit exposure.
- Progress, remaining cost and expected benefits of the ERP project, and the performance of the hybrid-battery and heavy-duty product lines.
- Exposure to foreign sourcing, especially China, and any changes in supplier costs, currency, trade rules or delivery reliability.
- The terms and outcomes of contingent acquisition payments, the related-party lease, tax examinations and any material developments in legal or product-liability matters.