Dorman Products, Inc. — Q2 2011 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 25, 2011, compared with the corresponding periods ended June 26, 2010. Dorman supplies automotive aftermarket replacement parts, fasteners and service-line products. The interim statements are unaudited.
Financial performance
| Metric | 13 weeks ended June 25, 2011 | Year-over-year change | 26 weeks ended June 25, 2011 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $131.6 million | +14.4% | $256.0 million | +19.6% |
| Gross profit | $46.8 million | +7.9% | $92.2 million | +13.6% |
| Gross margin | 35.5% | 37.7% prior year | 36.0% | 37.9% prior year |
| Operating income | $20.5 million | +7.1% | $39.6 million | +13.9% |
| Net income | $12.7 million | +11.0% | $25.1 million | +19.1% |
| Diluted EPS | $0.70 | $0.63 prior year | $1.38 | $1.17 prior year |
For the quarter, cost of goods sold rose to 64.5% of sales from 62.3%; operating margin was 15.5%, versus 16.6%. For the first half, cost of goods sold was 64.0% of sales versus 62.1%, and operating margin was 15.5% versus 16.3%. SG&A increased in dollars but declined as a share of sales: 20.0% versus 21.1% for the quarter and 20.5% versus 21.6% for the half-year. Net margin was 9.7% for the quarter and 9.8% for the first half.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $19.1 million, compared with $16.7 million a year earlier. Capital spending was $10.4 million, versus $4.2 million, leaving approximately $8.7 million of operating cash flow after capital expenditures.
- Cash at June 25, 2011 was $38.8 million, up from $30.5 million at December 25, 2010. Working capital was $239.1 million; shareholders’ equity was $288.7 million.
- The balance sheet reports no outstanding borrowings under the $30 million unsecured revolving facility, which expires in June 2013. Four letters of credit totaled approximately $2.0 million, leaving about $28.0 million available. The filing reports no material change in contractual obligations.
- Receivables were $102.3 million and inventory $130.0 million at quarter-end. First-half inventory growth used $9.0 million of cash; accounts payable provided $3.6 million.
- Dorman sold $95.1 million of receivables without recourse in the first half, compared with $36.4 million in the prior-year period. Associated financing costs included in SG&A were $1.8 million versus $0.6 million. Receivables sold and removed from the balance sheet were $109.4 million at June 25, 2011, compared with $77.1 million at December 25, 2010.
Changes, outlook and notable items
- Management attributed sales growth to strong overall demand and higher new-product sales. Higher transportation costs and unfavorable sales mix pressured margins in both periods; product returns also contributed to the quarterly cost increase.
- Management expects continued customer pressure for favorable pricing, returns and extended payment terms. It says further payment-term extensions could consume cash or increase receivables-sale costs. It believes available capital is adequate for ongoing needs for at least the next 12 months; the filing provides no numerical earnings or revenue guidance.
- The company expects customer order timing and new-product introductions to cause quarterly fluctuations; the second and third quarters generally have the highest order levels. Fiscal 2011 is a 53-week year ending December 31, 2011.
- First-half tax rate was 36.4%, versus 39.1%, primarily because of tax-exempt life insurance proceeds used to fund an officer’s death benefits. The quarterly rate was 37.5%, versus 39.7%, with management citing prior-year foreign losses for which no tax benefit was recorded.
- Capital projects include an ERP replacement estimated at approximately $13.0 million through 2012, with $3.9 million spent through June 25, 2011; and a Warsaw, Kentucky distribution-center expansion estimated at $8.2 million, with $6.7 million spent through that date. The building was completed in May 2011, with remaining costs expected by year-end.
- Risks identified include aftermarket competition and economic conditions, customer concentration and consolidation, order cancellations or rescheduling, foreign suppliers and currency effects, customer credit exposure, vendor or transportation disruption, limited shelf space, dependence on successful new products, product quality, litigation, and IT project execution. Management noted the Chinese yuan had appreciated approximately 4.9% against the U.S. dollar since June 2010; further appreciation could raise sourcing costs.
- Tax authorities were examining specified state tax years. At June 25, 2011, unrecognized tax benefits were $2.2 million, including $1.5 million that would affect the effective tax rate if recognized; accrued interest related to uncertain tax positions was approximately $0.8 million. Management said ordinary-course legal matters were not expected to have a material financial impact.
- The primary facility is leased from a partnership in which the CEO and family members are partners; 2011 rent payments are expected to be $1.4 million. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth and new-product momentum continue, and whether transportation, returns, mix and pricing pressures further erode gross margins.
- The cost, terms and continued availability of receivables-sale programs, and the effect of extended customer payment terms on cash generation.
- Progress and final cost of the ERP and distribution-center projects, including implementation timing and any additional spending.
- Customer and supplier concentration, customer credit quality, foreign sourcing exposure and the potential effects of further currency or input-cost changes.
- Resolution and potential financial effects of state tax examinations and uncertain tax positions, along with any developments in legal proceedings or the related-party lease.