Dorman Products, Inc. — Q1 2019 Form 10-Q
Reporting period: Thirteen weeks ended March 30, 2019; comparative period ended March 31, 2018. Amounts below are in U.S. dollars. Dorman supplies replacement parts and fasteners for the automotive aftermarket, primarily in North America.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $243.8 million | $227.3 million | +7% |
| Gross profit / margin | $87.5 million / 35.9% | $88.6 million / 39.0% | Profit down; margin down 3.1 percentage points |
| Operating income / margin | $29.7 million / 12.2% | $40.0 million / 17.6% | Income down 26% |
| Net income | $23.4 million | $30.6 million | Down 24% |
| Diluted EPS | $0.71 | $0.93 | Down 24% |
| Operating cash flow | $16.4 million | $19.8 million | Down $3.3 million |
Sales growth reflected acquisitions from the prior 12 months (about 2% of growth), tariff-related price increases, and a new chassis program for a major retail customer. Product-line sales included chassis growth to $77.4 million from $67.0 million and automotive body growth to $60.7 million from $55.2 million; powertrain sales were essentially flat at $95.2 million.
Gross margin pressure was attributed to tariff costs passed through to customers (about 130 basis points), acquired businesses with lower margins (about 100 basis points), site-consolidation startup inefficiencies and backlog (about 40 basis points), and higher costs associated with the new chassis program. SG&A rose to $57.8 million from $48.6 million, reflecting consolidation and integration costs, acquired operations, higher receivables-sale financing costs, and wage and benefit inflation. The effective tax rate was 21.4%, versus 23.7%.
Cash, liquidity and capital
- Cash was $40.8 million at March 30, 2019, down from $43.5 million at year-end 2018. Working capital was $500.7 million.
- Operating activities provided $16.4 million; investing activities used $8.8 million, primarily for capital expenditures; financing activities used $10.3 million, including $8.4 million of open-market share repurchases.
- Inventory increased $18.2 million during the quarter, associated with new product launches and maintaining customer fill rates during facility consolidations. Accounts payable decreased $11.1 million, partly due to payment timing.
- No revolving-credit borrowings were outstanding. The $100 million unsecured facility expires in December 2022; approximately $99.2 million was available after letters of credit. Management said available capital should meet operating needs for at least 12 months.
- The company sold $172.8 million of receivables through customer-sponsored programs during the quarter, versus $151.0 million a year earlier. Related financing costs were $4.6 million, versus $3.5 million. The filing notes that extended customer payment terms can increase cash needs and receivables-sale costs.
Outlook, developments and risks
- Management reported backlog of approximately 3% of quarterly sales, which it believes will be realized in future quarters. No specific sales or earnings guidance was provided.
- Site consolidation work included moving Montreal operations into the Portland, Tennessee distribution center and combining a Michigan production facility with Flight Systems in Pennsylvania. First-quarter costs were $5.5 million; management anticipated higher costs during 2019 as Portland consolidation continued.
- Management expected to mitigate 2019 tariff impacts primarily through price increases and supplier concessions. Tariffs were not expected to materially affect net income, but were expected to reduce gross and operating profit percentages.
- The August 2018 Flight Systems acquisition had a $27.5 million purchase price. Its purchase-price allocation remained provisional; valuations and related amounts could change as the allocation is finalized.
- Operating leases were recognized on the balance sheet upon adoption of the new lease standard. At quarter-end, lease liabilities totaled $37.1 million; adoption did not materially affect operating results or cash flows.
- Management cited customer pricing and payment-term pressure, competition, dependence on foreign suppliers, tariffs, customer concentration, product quality and development, and acquisition integration among relevant risks. It cautioned that customer order timing and new product launches can cause quarterly fluctuations.
- Management considered pending ordinary-course legal matters, after insurance, unlikely to have a material financial impact; reasonably possible losses were described as immaterial. No material risk-factor changes from the 2018 Form 10-K were reported. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether backlog converts to sales as expected and whether the new chassis program sustains growth without further margin dilution.
- Actual 2019 consolidation and integration costs, completion timing, and resulting operating efficiencies.
- Whether tariff costs are offset by price increases and supplier concessions, and the resulting effect on margins.
- Receivables-sale volumes, associated financing costs, and customer payment terms; these programs support liquidity but carry ongoing costs.
- Final Flight Systems purchase-price allocation and any changes to goodwill, intangible assets, taxes, or acquired net assets.