Dorman Products, Inc. - 10-Q Filing Summary
Business Context and Reporting Period
This is a Quarterly Report on Form 10-Q for Dorman Products, Inc., a leading supplier of automotive replacement parts and hardware. The report covers the thirteen and thirty-nine weeks ended September 27, 2008. The company operates primarily in the United States, selling to automotive aftermarket retailers and warehouse distributors, with expanding international distribution through its Scan-Tech subsidiary.
Key Financial Metrics
| Metric | 13 Weeks Ended Sep 27, 2008 | 39 Weeks Ended Sep 27, 2008 |
|---|---|---|
| Net Sales | $91.2 million | $261.6 million |
| Gross Profit | $29.5 million (32.4% margin) | $84.4 million (32.2% margin) |
| Net Income | $5.0 million | $13.0 million |
| Diluted EPS | $0.28 | $0.72 |
| Operating Cash Flow (39 weeks) | $3.0 million | |
| Total Debt (Long-term + Current) | $20.96 million | |
| Cash and Equivalents | $7.1 million | |
| Working Capital | $163.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 10% in the quarter and 8% year-to-date compared to the prior year, driven by new product launches and market penetration.
- Margin Compression: Gross profit margins declined to 32.4% (quarter) and 32.2% (YTD) from 35.5% and 34.7% respectively in the prior year. This was caused by competitive pricing pressures, higher material/shipping costs, and a weaker U.S. dollar.
- Operating Expenses: Selling, general, and administrative (SG&A) expenses increased 6% in the quarter and 8% YTD. However, excluding a $1.0 million reduction in vacation expense due to a policy change in 2007, cost control remained tight relative to sales growth.
- Interest Expense: Net interest expense decreased significantly (57% in the quarter, 50% YTD) due to lower borrowing levels and interest rates.
- Effective Tax Rate: Increased to 39.0% (quarter) and 38.7% (YTD) from 37.9% and 37.8% respectively, largely due to losses at the Swedish subsidiary.
Outlook, Risks, and Management Commentary
Liquidity and Capital: The company maintains a $30.0 million revolving credit facility with approximately $7.5 million available as of September 27, 2008. Management believes current capital sources are adequate for the next twelve months. However, extended customer payment terms continue to strain working capital, necessitating the use of accounts receivable sales programs.
Market Risks:
- Customer Concentration: The five largest customers accounted for 71% of net accounts receivable as of year-end 2007.
- Foreign Currency: A significant portion of products are sourced from China. A strengthening Yuan or weakening U.S. dollar increases costs, which the company attempts to offset via price increases.
- Inflation: Rising commodity and transportation costs are impacting margins. The company expects to pass some costs to customers but cannot guarantee full offset.
Unusual Items:
- Vacation Policy Change: A 2006 policy change reduced vacation accruals in 2007, artificially inflating 2007 earnings comparisons. The 2008 results include normalized vacation expenses.
- Asset Sale: Sold catalytic converter business assets in Canada for $0.9 million in May 2008.
Investor Verification Checklist
- Verify the sustainability of revenue growth given the 3% decline in gross margin year-over-year.
- Assess the impact of the $51.1 million in accounts receivable sold under non-recourse programs on future cash flow and financing costs.
- Monitor the $20.5 million outstanding balance on the revolving credit facility and the $7.5 million remaining availability.
- Review the concentration risk associated with the top five customers representing 71% of receivables.
- Confirm the ability to pass on rising commodity and shipping costs to customers without losing market share.