Dorman Products, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter ended September 26, 2015 (13 weeks), with year-to-date comparisons covering 39 weeks. Financial amounts below are in millions of dollars unless noted. Dorman supplies replacement parts and fasteners for the automotive aftermarket; it says new-product development is a primary growth driver. Interim results may fluctuate with customer order timing, and the company generally sees higher sales in the second and third quarters.
Financial performance
| Metric | Q3 2015 | Q3 2014 | 39 weeks 2015 | 39 weeks 2014 |
|---|---|---|---|---|
| Net sales | $210.9 | $197.8 | $598.1 | $577.5 |
| Gross profit | $80.8 | $75.9 | $230.3 | $220.5 |
| Gross margin | 38.3% | 38.4% | 38.5% | 38.2% |
| Operating income | $41.2 | $38.5 | $111.8 | $112.1 |
| Operating margin | 19.6% | 19.5% | 18.7% | 19.4% |
| Net income | $26.1 | $24.5 | $70.5 | $71.3 |
| Diluted EPS | $0.73 | $0.68 | $1.98 | $1.96 |
- Q3: Sales increased 7% as reported; net income rose about 6%. Gross margin was nearly flat, while SG&A increased to $39.6 million from $37.4 million, primarily from higher variable costs and product-development investment. Effective tax rate was 36.7%, versus 36.1%.
- Year to date: Sales increased 4%, but operating income declined slightly and net income fell about 1%. SG&A rose to $118.5 million from $108.4 million. The effective tax rate increased to 36.8% from 36.3%.
- Year-to-date gross margin improved to 38.5% from 38.2%, reflecting favorable mix and lower transportation costs, partly offset by lower selling prices. SG&A included approximately $5.4 million of incremental ERP-conversion costs.
Cash flow, balance sheet and liquidity
- For the 39 weeks, operating cash flow was $57.5 million, versus $47.4 million; investing cash outflow was $18.5 million, versus $23.0 million; financing cash outflow was $7.3 million, versus $40.8 million. Cash increased $31.7 million to $79.3 million.
- Inventory rose $21.7 million from year-end to $195.3 million, which management attributed to sales growth and new-product initiatives. Capital expenditures were $16.5 million; the company also invested $2.0 million for a minority interest in a supplier.
- At September 26, 2015, working capital was $416.8 million and shareholders’ equity was $526.1 million. The current ratio was approximately 5.8, based on reported current assets and liabilities.
- No revolving-credit borrowings were outstanding. Of the $30 million unsecured facility, approximately $29 million was available after $1.0 million of letters of credit. The facility expires in June 2017; the company reported compliance with its covenants and said available capital should meet needs for at least 12 months. The filing reports no material debt balance.
- Dorman sold $391.9 million of receivables during the 39 weeks, versus $380.2 million a year earlier. The sales generated $5.4 million in financing costs. Without the programs, $339.9 million of additional receivables would have been outstanding at quarter-end, based on standard payment terms.
Management commentary, outlook and risks
- Management attributed sales growth mainly to demand for new products and, in Q3, a large customer returning to more normal purchasing after reducing inventory. Comparisons were affected by approximately $10 million of customer stock-up orders in Q3 2014 that did not recur. Year-to-date growth was also affected by a major customer’s inventory-reduction plan and fewer large product-line updates than in 2014.
- No specific earnings or revenue guidance is provided in the filing. Management expects customer pressure on pricing, payment terms and product returns to continue as the customer base consolidates; these pressures can reduce margins and increase financing needs.
- Other cited risks include customer and receivable concentration, competition, supplier or transportation disruptions, product-quality or development delays, foreign-currency and commodity-cost movements, cyberattacks, and order timing. A 1-percentage-point LIBOR increase was estimated to add approximately $3.4 million of annual expense if receivable-sale volumes and any variable-rate debt remained constant.
- After quarter-end, on October 28, 2015, the board increased the repurchase authorization from $100 million to $150 million and extended it through December 31, 2016. The filing states approximately $103.7 million remained under the expanded authorization. Year-to-date repurchases and cancellations totaled $7.3 million of cash use.
- Management said ordinary-course legal proceedings were not expected to have a material financial impact. The company reported $1.6 million of net unrecognized tax benefits, including $1.1 million that would affect the effective tax rate if recognized, and an ongoing state tax examination for 2009–2012.
- Disclosure controls were assessed as effective at a reasonable-assurance level; management reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether new-product demand and normalized customer purchasing continue, and how customer inventory behavior affects quarterly sales.
- Whether pricing concessions, returns, extended payment terms and customer consolidation pressure margins or working capital.
- The sustainability and cash-flow implications of receivable-sale programs, including their financing costs and dependence on participating institutions.
- Inventory growth, ERP-related expenses and the expected returns from product-development spending and the supplier investment.
- Execution of the expanded share-repurchase authorization and the company’s liquidity, tax and legal exposures as they develop.