Dorman Products, Inc. — Q1 2012 Form 10-Q
Reporting period: Thirteen weeks ended March 31, 2012; comparisons are with the thirteen weeks ended March 26, 2011. Amounts below are in millions except per-share data.
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 attributes growth to strong demand and higher sales of new products. Customer order timing can cause quarterly fluctuations; the second and third quarters are generally seasonally stronger.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $137.0 | $124.4 | +10% |
| Gross profit / margin | $51.4 / 37.5% | $45.4 / 36.5% | Margin +1.0 percentage point |
| Operating income / margin | $24.5 / 17.9% | $19.2 / 15.4% | Income +28% |
| Net income / margin | $15.6 / 11.4% | $12.4 / 10.0% | Income +26% |
| Diluted EPS | $0.85 | $0.68 | +25% |
| Effective tax rate | 36.3% | 35.2% | +1.1 percentage points |
| Operating cash flow | $14.0 | $9.2 | +$4.9 |
| Capital expenditures | $4.5 | $5.2 | -$0.7 |
Gross margin improvement reflected lower provisions for obsolete inventory and a $0.8 million reduction in ScanTech inventory reserves. SG&A rose to $26.9 million from $26.2 million, mainly from higher variable selling costs and inflation, partly offset by lower ScanTech expenses. The prior-year tax rate benefited from tax-exempt life-insurance proceeds.
Balance sheet, liquidity and debt
- At March 31, cash was $59.8 million, up from $50.2 million at year-end 2011. Working capital was $278.9 million; shareholders’ equity was $333.0 million.
- Current assets were $337.6 million and current liabilities $58.7 million. Accounts receivable were $140.1 million and inventory $117.8 million.
- No borrowings were outstanding under the $30 million revolving credit facility, which expires in June 2013. Three letters of credit totaled $1.4 million, leaving approximately $28.6 million available. The facility is subject to financial covenants.
- Operating cash flow was supported by net income and a $11.3 million increase in accounts payable. Receivables used $15.8 million of cash, reflecting sales growth and lower receivables-sale volume; inventory used $1.9 million.
- The company sold $59.7 million of receivables during the quarter, compared with $40.4 million a year earlier, incurring $0.7 million of related financing costs. Without these sales, an additional $128.2 million of receivables would have been outstanding at quarter-end under standard payment terms.
Management believes available capital is adequate for at least the next twelve months. The company reported no material change in contractual obligations during the quarter.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance is provided. Management expects continued customer pressure for lower prices, product returns and extended payment terms, which may constrain margins and cash flow. It is emphasizing efficiency, cost reduction and new-product development.
- The international ScanTech business exit was expected to be substantially complete by the end of Q2 2012. The quarter’s $0.8 million inventory-reserve release benefited cost of goods sold.
- The ERP replacement project is expected to cost about $16.1 million through fiscal 2013; $7.9 million had been spent through March 31, 2012, including $1.3 million in 2012.
- Risks highlighted include aftermarket competition and weak economic conditions, customer concentration or loss, order cancellations, customer credit and payment-term exposure, foreign suppliers and currency-related cost pressure, key-vendor or transport disruption, product quality and intellectual-property issues, and execution of new-product and IT initiatives. Approximately 80% of products were purchased from foreign suppliers in 2011; the company noted that a stronger Chinese yuan could raise future sourcing costs.
- Management said ordinary-course legal matters were not expected to have a material financial impact. The company disclosed $2.2 million of net unrecognized tax benefits, including $1.4 million that would affect the effective tax rate if recognized, and ongoing state tax examinations.
- The primary operating facility is leased from a partnership involving the CEO and family members. The lease expires December 28, 2012; renewal was being pursued. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue and margin growth persists after the benefit of the ScanTech reserve release and lower obsolete-inventory provisions.
- Receivables quality, customer concentration and the cash-flow cost of extended payment terms and receivables-sale programs.
- Execution and remaining cost of the ERP project, and completion and financial effects of the ScanTech exit.
- Facility lease renewal, tax examinations, and compliance with revolving-credit covenants.
- Share-count consistency: the balance sheet reports 18,084,877 shares issued and outstanding at March 31, while the cover reports 18,087,877 shares outstanding at April 27.