Dorman Products, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter ended June 30, 2012 (13 weeks), with year-to-date results for the 26 weeks ended June 30, 2012. Comparatives are the corresponding periods ended June 25, 2011. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
Dorman supplies automotive replacement parts, fasteners and service-line products, primarily to the North American aftermarket. More than 90% of revenue comes from North America. Management identifies new-product development as a key growth driver and says customer order timing can cause quarterly fluctuations.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $144.2 | $127.0 | $279.0 | $247.2 |
| Gross profit / margin | $53.1 / 36.9% | $45.6 / 35.9% | $103.6 / 37.1% | $90.4 / 36.6% |
| Operating income / margin | $25.7 / 17.8% | $20.6 / 16.2% | $50.1 / 18.0% | $40.5 / 16.4% |
| Continuing-operations net income | $16.1 | $12.9 | $31.4 | $26.0 |
| Total net income | $19.7 | $12.7 | $35.3 | $25.1 |
| Diluted EPS, continuing / total | $0.44 / $0.54 | $0.35 / $0.35 | $0.86 / $0.97 | $0.71 / $0.69 |
Sales grew 14% in Q2 and 13% year to date, driven by overall demand and recently introduced products. Gross margin improved 1.0 percentage point in Q2 and 0.5 point year to date, mainly from lower transportation costs and favorable sales mix. SG&A rose to $27.4 million in Q2 and $53.5 million year to date, reflecting higher sales-related variable costs, product-development spending and inflation. The effective tax rate was 37.3% in both 2012 periods; the first-half 2011 rate was 35.6%, partly due to tax-exempt life insurance proceeds.
Cash flow, liquidity and capital
- First-half operating cash flow was $23.4 million, versus $19.1 million a year earlier. Inventory growth used $21.4 million; accounts payable provided $14.9 million, partly due to payment timing and higher inventory.
- Investing cash outflow was $9.5 million, principally for property and equipment. Financing activities provided $1.1 million. Cash rose $15.1 million to $65.2 million from year-end 2011.
- At June 30, current assets were $349.2 million and current liabilities $55.4 million; reported working capital was $293.7 million. Shareholders’ equity was $351.2 million.
- No borrowings were outstanding under the $30 million revolving credit facility, which expires in June 2013. After $0.9 million of letters of credit, approximately $29.1 million was available. The filing reports no other debt balance on the presented balance sheet.
- Customer-sponsored receivables sales totaled $154.8 million in the first half, compared with $95.1 million in the prior-year period; related financing costs were $2.0 million. Without the programs, an additional $161.1 million of receivables would have been outstanding at June 30. Management believes available capital is adequate for at least the next 12 months.
Material changes, outlook and risks
- Discontinued ScanTech business: Dorman exited and disposed of the international portion of ScanTech by June 30. First-half discontinued-operations income was $3.9 million, versus a $0.9 million loss a year earlier. The 2012 result included approximately $3.0 million of currency-translation adjustments reclassified into income following liquidation and a deferred tax asset related to foreign tax credits. Q2 discontinued income was $3.6 million. This materially contributed to total net income and EPS; continuing-operations results provide a clearer view of ongoing operations.
- ScanTech first-half sales fell to $2.9 million from $8.8 million. The company also recorded $0.8 million of reductions in prior inventory reserves from inventory sold during the first half.
- The Board declared a two-for-one stock split, distributed June 15, 2012. Share and per-share figures have been retroactively restated.
- No formal earnings or revenue guidance is provided. Management expects continued customer pressure on pricing, returns and payment terms, and says such pressure may weigh on margins and cash flow. It is pursuing efficiency, product-cost reduction and new-product initiatives.
- Risks include customer concentration and consolidation, order cancellations or rescheduling, competition, dependence on new products and key suppliers, product quality, foreign sourcing and currency-related cost pressures, and customer credit exposure. The company said roughly 80% of products were purchased from foreign suppliers in fiscal 2011 and noted that a stronger Chinese yuan could raise costs. Customer receivables concentration is material: the five largest customers represented 83% of net receivables at December 31, 2011.
- The $17.7 million ERP replacement project was expected to run through fiscal 2013; $10.6 million had been spent through June 30, including $4.0 million in 2012. A related-party lease of the primary facility, involving the CEO and family members, expires December 28, 2012; the company was pursuing a new agreement.
- Management characterized ordinary-course legal matters as immaterial in likely financial impact. Disclosure controls were judged effective as of June 30, 2012, with no material change in internal control reported.
Important facts for investors to verify
- How much of reported earnings growth reflects continuing operations versus ScanTech disposal-related gains and tax benefits.
- Whether inventory growth, receivables-sale activity and extended customer payment terms affect future operating cash generation and financing costs.
- Whether margin improvement persists as customer pricing demands, transportation costs and foreign-sourcing costs change.
- Progress and remaining spending on the ERP project, and the outcome and terms of the replacement facility lease.
- Customer concentration, the availability and terms of receivables-sale programs, and the credit-facility covenant and June 2013 renewal position.