Dorman Products, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011, a 53-week year, compared with 52-week fiscal 2010. The filing also reports unaudited fourth-quarter results. Dorman supplies automotive aftermarket replacement parts, fasteners and service-line products; it markets approximately 128,000 products and generates over 90% of revenue from North America.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net sales | $529.3 million | $455.7 million | +16.1% (+15% excluding the extra week) |
| Gross profit / margin | $191.1 million / 36.1% | $172.9 million / 37.9% | Margin down 1.8 percentage points |
| Operating income / margin | $84.7 million / 16.0% | $74.9 million / 16.4% | Income +13.1%; margin down 0.4 points |
| Net income / net margin | $53.3 million / 10.1% | $46.1 million / 10.1% | Net income +15.5% |
| Diluted EPS | $2.93 | $2.55 | +14.9% |
| Cash from operations | $38.1 million | $30.7 million | +$7.3 million |
| Capital expenditures | $18.1 million | $11.5 million | +$6.6 million |
Fourth quarter: Sales were $139.1 million versus $122.5 million (+13.5%); operating income was $25.1 million versus $19.6 million; net income was $16.6 million versus $12.2 million; and diluted EPS was $0.91 versus $0.67.
Liquidity and debt: Year-end cash was $50.2 million, working capital $265.6 million, and shareholders’ equity $317.1 million. There was no long-term debt or revolving-facility borrowing; $28.6 million remained available under the $30 million facility after letters of credit. The company reported compliance with facility covenants. Operating cash flow less capital expenditures was approximately $20.0 million, calculated from reported figures.
Material changes and notable items
- Revenue growth reflected strong demand, new-product sales and an additional fiscal week. Management said higher sales and product development investment contributed to higher SG&A, while customer returns, sales mix and excess/obsolete inventory provisions pressured gross margin.
- FY 2011 included approximately $2.2 million of inventory and tooling write-downs in cost of goods sold and $0.4 million of asset and employee-related charges in SG&A, associated with the planned exit from ScanTech’s international business. Completion was expected by the end of Q2 2012; its North American business was to move to a U.S. distribution center.
- Receivables increased $23.0 million, a primary use of operating cash. Dorman sold $208.8 million of receivables under customer-sponsored programs, versus $104.3 million in FY 2010; related financing costs were $3.5 million versus $2.0 million.
- Capital spending included the Warsaw distribution-center expansion and an ERP replacement project. The ERP project was estimated at $14.4 million through 2013; $6.6 million had been spent through year-end 2011.
Outlook, risks and contingencies
No specific revenue, earnings or margin guidance is provided in the filing. Management expected customer pressure on pricing, returns and payment terms to continue, and identified new-product development, efficiency improvements and product-cost reduction as key responses. It stated that available capital should meet cash needs for at least the next 12 months.
- Customer concentration is substantial: four customers accounted for 55% of sales in both 2011 and 2010; the five largest represented 83% of year-end 2011 accounts receivable.
- Approximately 80% of products were sourced from foreign vendors, with the largest share from China. The filing cites foreign-sourcing, trade, transportation, fuel and currency-related cost and disruption risks; a stronger Chinese yuan could raise costs.
- Other principal risks include competition, customer consolidation and bargaining power, order timing, product quality and warranty claims, new-product execution, shelf-space limits, key-person dependence and potential legal or regulatory costs.
- Operating lease commitments totaled $10.5 million. The Colmar headquarters lease, with a partnership involving the CEO and his family, was due to expire in December 2012; renewal was being pursued. Management said the terms were no less favorable than those available from an unaffiliated party.
- Legal proceedings arose in the ordinary course of business; management did not expect them, individually or collectively, to have a material financial impact. Gross unrecognized tax benefits were $2.2 million, with tax examinations ongoing in certain jurisdictions.
Important facts for investors to verify
- Whether sales growth and new-product momentum continued after FY 2011, separating underlying growth from the extra fiscal week.
- Whether gross-margin pressure from returns, product mix, inventory provisions and sourcing costs eased or intensified.
- How extended customer payment terms, receivables sales and customer concentration affected cash conversion and financing costs.
- Progress and costs of the ScanTech exit, ERP implementation, facility expansion and Colmar lease renewal.
- Whether the expected twelve-month liquidity outlook and compliance with credit-facility covenants remain intact.
Audit and controls: KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2011.