Dorman Products, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Dorman supplies automotive replacement parts and fasteners, primarily to the North American aftermarket. This filing covers the 13 and 39 weeks ended September 29, 2018, compared with the periods ended September 30, 2017. Results may fluctuate with customer order timing and new product introductions.
Key financial results
| Metric | Q3 2018 | Q3 2017 | First 39 weeks 2018 | First 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $248.0 million | $224.6 million | $713.4 million | $675.5 million |
| Gross profit / margin | $95.0 million / 38.3% | $88.1 million / 39.2% | $276.3 million / 38.7% | $267.7 million / 39.6% |
| Operating income / margin | $43.7 million / 17.6% | $42.8 million / 19.1% | $126.5 million / 17.7% | $132.8 million / 19.7% |
| Net income | $34.0 million | $27.0 million | $99.0 million | $84.6 million |
| Diluted EPS | $1.03 | $0.80 | $2.98 | $2.47 |
- Quarterly sales rose 10%; nine-month sales rose 6%. Quarterly operating income increased about 2%, while nine-month operating income declined about 5%. Net income increased about 26% and 17%, respectively; lower effective tax rates contributed to the increases.
- Gross margin declined 0.9 percentage points in both comparisons. Management attributed the pressure to acquisitions with lower margins; year-to-date factors also included lower selling prices, unfavorable product mix, and a $1.8 million MAS inventory fair-value adjustment. SG&A rose to $51.3 million in Q3 and $149.8 million year to date, reflecting acquired operations, reinvestment in product development and sales, higher wages and benefits, and higher receivables-program costs. Year-to-date SG&A also included a $1.1 million non-cash impairment charge.
- Effective tax rates were 22.3% for Q3 and 21.9% year to date, versus 37.1% and 36.5% in 2017, primarily reflecting the U.S. corporate tax-rate reduction under the Tax Cuts and Jobs Act.
- Operating cash flow was $65.2 million year to date, versus $59.4 million. Capital expenditures were $18.1 million; acquisitions used $28.0 million; share repurchases used $35.2 million. Cash declined to $53.1 million from $71.7 million at year-end 2017. Working capital was $474.1 million, versus $422.1 million.
Liquidity, debt and notable developments
- At September 29, 2018, current assets were $602.0 million and current liabilities were $127.9 million. The company reported no borrowings on its $100 million unsecured revolving credit facility, with approximately $99.2 million available after letters of credit. The agreement expires in December 2022 and permits requests for up to $100 million of additional capacity, subject to terms. The filing reports no outstanding funded debt.
- Customer-sponsored receivables programs supported liquidity: $438.6 million of receivables were sold during the first 39 weeks, with $10.0 million of related financing costs. Without sales, an additional $333.6 million of receivables would have been outstanding at period-end. Management said extended customer payment terms use cash and may increase these costs.
- Dorman acquired Flight Systems on August 31 for $27.5 million cash. Flight contributed $1.7 million of sales and immaterial net income after acquisition. Its preliminary purchase accounting included $13.3 million of goodwill and is subject to valuation completion. MAS, acquired in October 2017, contributed $30.0 million of year-to-date sales.
- The company repurchased $33.8 million of shares under its repurchase program during the first 39 weeks; approximately $42.9 million remained authorized at September 29, 2018. The program was authorized through December 31, 2018.
Outlook, risks and contingencies
- No numeric earnings or sales guidance is provided. Management expects available capital to cover ongoing cash needs for at least 12 months, while noting that weaker demand or further extensions of customer payment terms could pressure liquidity.
- U.S. tariffs on approximately $200 billion of Chinese imports were set at about 10% through December 31, 2018, rising to 25% on January 1, 2019. Management expected no material Q4 2018 gross-profit impact and said it intended to mitigate tariffs through customer price increases and supplier concessions. For fiscal 2019, it expected price increases associated with tariffs to be offset by higher tariff costs.
- Other cited risks include customer and receivables concentration, customer pricing and payment-term pressure, competition and industry consolidation, supplier or transportation disruption, product quality and liability, intellectual property claims, foreign exchange, cyberattacks, and acquisition integration. A 1 percentage-point increase in LIBOR or receivables-program discount rates was estimated to increase annual interest and financing costs by approximately $3.3 million, assuming balances and sales volumes remained constant.
- Management characterized current legal proceedings and reasonably possible losses as immaterial. Disclosure controls were considered effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether revenue growth and new-product launches continue, and how much growth reflects acquisitions versus underlying demand.
- Whether tariff mitigation, customer pricing pressure, and product mix stabilize gross margins.
- Receivables-program costs, customer payment terms, and working-capital trends, especially given the large volume of receivables sold.
- Integration and final purchase-price allocation for Flight Systems, as well as contingent consideration and acquisition-related costs.
- The cash-flow statement reports a $18.578 million net cash decrease, while the MD&A cash-flow summary reports $18.550 million; the filing text does not explain the difference.