Dorman Products, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. Dorman supplies replacement parts and fasteners for passenger, light-truck and heavy-duty vehicles, primarily to the North American automotive aftermarket. The unaudited quarter covered 13 weeks ended September 24, 2016; year-to-date figures cover 39 weeks. Comparisons are to the corresponding 2015 periods unless noted.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Net sales | $212.8 million | $210.9 million | $630.5 million | $598.1 million |
| Gross profit / margin | $83.1 million / 39.1% | $80.8 million / 38.3% | $245.9 million / 39.0% | $230.3 million / 38.5% |
| Operating income / margin | $41.6 million / 19.6% | $41.2 million / 19.6% | $121.6 million / 19.3% | $111.8 million / 18.7% |
| Net income | $26.7 million | $26.1 million | $77.3 million | $70.5 million |
| Diluted EPS | $0.77 | $0.73 | $2.23 | $1.98 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $55.5 million | $57.5 million |
Q3 sales increased 1%; year-to-date sales rose 5%. Gross margin improved in both comparisons, attributed to favorable sales mix and lower excess-inventory provisions. Year-to-date SG&A rose to $124.4 million from $118.5 million, including higher variable costs, $1.9 million more incentive compensation, a $0.9 million doubtful-account provision related to a bankrupt customer, and $1.0 million more in receivables-program costs. The prior-year period included $2.7 million of costs for a completed ERP conversion.
Cash, liquidity and capital
- Cash was $95.1 million at September 24, 2016, versus $78.7 million at December 26, 2015. Working capital was $429.3 million, up from $380.1 million.
- Year-to-date investing cash use was $21.1 million, including $14.9 million in property and equipment additions and a $6.2 million investment in PTI. Financing cash use was $17.9 million, primarily share repurchases. Cash increased $16.5 million over the period.
- There were no revolver borrowings. The $30 million unsecured facility expires June 2017; after approximately $1 million in letters of credit, $29 million was available. The company reported compliance with its covenants and no material long-term debt balance.
- Year-to-date receivables sales totaled $366.6 million, compared with $391.9 million. These programs generated $6.3 million in financing costs in 2016 year to date. The company said it could sell more receivables if needed.
- Year-to-date repurchases under the authorization totaled 329,666 shares for $16.1 million; $57.8 million remained under the program. The company also repurchased shares from its 401(k) plan.
Outlook, commentary and risks
- Management stated available capital should meet ongoing cash needs for at least 12 months, while warning that extended customer payment terms, lower demand or other factors could weaken liquidity. It expects continued pressure to extend payment terms, potentially increasing cash needs or receivables-sale costs.
- No specific revenue or earnings guidance was provided. Management cited strong demand, including for new products, as the main driver of year-to-date sales growth. It noted quarterly results can fluctuate with customer order timing and new-product launches; Q2 and Q3 are generally the strongest sales quarters.
- Customer consolidation can drive pricing concessions, longer payment terms and higher product returns, pressuring margins and working capital. Other disclosed risks include competition, vendor or transportation-provider losses, product quality and development delays, customer concentration, foreign currency changes, litigation, and cyber risks.
- The company acquired a 40% minority interest in supplier Powertrain Industries for $6.2 million. It may elect to buy the remaining shares; majority shareholders may require a purchase between July 2019 and July 2021, at a price based on an earnings multiple in the agreement.
- Management said ordinary-course legal matters were not expected to have a material financial impact. Disclosure controls were judged effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether sales growth and improved gross margin persist, particularly given order timing and the prior-year customer stocking-order benefit in Q3.
- Receivables, customer payment terms, receivables-sale volumes and associated financing costs; the company reported a doubtful-account provision tied to a customer bankruptcy.
- Cash conversion: year-to-date operating cash flow declined despite higher earnings, with receivables increasing $42.2 million and accounts payable decreasing $11.6 million.
- The potential financial commitment and purchase-price mechanics related to PTI’s remaining shares.
- Progress and expected effects of new accounting standards, including revenue recognition, inventory measurement and lease accounting; the company had not yet determined their financial impact.