Dorman Products, Inc. — Q2 2013 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 29, 2013; comparisons are to the periods ended June 30, 2012. Unaudited results. Dorman supplies automotive and heavy-duty replacement parts, primarily to the North American aftermarket.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $162.3m | $144.2m | $316.7m | $279.0m |
| Gross profit / margin | $64.4m / 39.7% | $53.1m / 36.9% | $125.2m / 39.5% | $103.6m / 37.1% |
| Operating income / margin | $30.8m / 19.0% | $25.7m / 17.8% | $60.7m / 19.2% | $50.1m / 18.0% |
| Continuing net income | $19.3m | $16.1m | $38.4m | $31.4m |
| Net income, including discontinued operations | $19.3m | $19.7m | $38.4m | $35.3m |
| Diluted EPS | $0.53 | $0.54 | $1.05 | $0.97 |
Sales grew 13% in Q2 and 14% in the first half, which management attributed mainly to strong demand for recently introduced products. Gross margins improved on favorable product mix, selected price increases and lower transportation costs; Q2 also benefited from lower excess-and-obsolete inventory charges. SG&A rose to $33.6m in Q2 and $64.5m in the first half, reflecting sales-related variable costs, greater product-development investment, ERP-related costs, and costs from a major customer’s distribution change. The latter costs were partly offset by higher net selling prices.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $21.3m, versus $23.4m a year earlier. Investing used $9.0m, including $7.1m of property and equipment additions and $1.9m for an acquisition. Financing used $0.3m. Cash increased $12.0m during the half.
- At June 29, 2013, cash was $39.7m; current assets were $363.8m and current liabilities $56.9m, yielding working capital of $306.9m. Shareholders’ equity was $371.5m.
- No borrowings were outstanding on the $30m revolving credit facility; approximately $29.1m remained available after letters of credit. The facility expires in June 2015. Management said available capital should meet operating cash needs for at least 12 months.
- The company sold $192.1m of receivables in the first half under customer-sponsored programs; $225.6m of additional receivables would have been outstanding at period-end absent the sales, based on standard payment terms. Related financing costs were $2.3m in the first half.
Material changes, outlook and risks
- Q2 and first-half continuing income increased year over year, while reported net income declined in Q2 and grew more slowly in the first half because 2012 included ScanTech discontinued-operation income of $3.6m and $3.9m, respectively.
- On May 17, 2013, Dorman acquired assets and assumed liabilities of an automotive-parts remanufacturer to expand its portfolio. The stated purchase price was approximately $3.7m, including $1.9m cash and $1.8m in estimated contingent payments tied to future earnings. Preliminary goodwill and intangible assets recorded were $3.6m, pending final valuation.
- The ERP replacement project was expected to cost $29m–$32m through 2014; $16.6m had been spent by June 29, 2013. Installation at one subsidiary was completed in January without operational disruption.
- No specific earnings or sales guidance was provided. Management cautioned that results can fluctuate with customer order timing and new-product introductions; customer ordering is generally strongest in the second and third quarters.
- Key exposures include customer concentration and bargaining pressure, dependence on new-product development, competition, supplier and transportation-provider disruption, product quality and development delays, and foreign-currency and input-cost changes. Management reported that the five largest customers represented 86% of net receivables at December 29, 2012 (the filing does not provide a corresponding June 2013 percentage).
- At June 29, 2013, unrecognized tax benefits were $2.1m, of which $1.5m would affect the effective tax rate if recognized; two state tax authorities were examining returns. Management considered ordinary-course legal matters’ reasonably possible losses immaterial. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- Whether new-product demand and improved gross margins persist, and how customer pricing and return demands affect profitability.
- Working-capital and cash-conversion trends, including reliance on receivables-sale programs and their financing costs.
- Acquisition valuation and contingent-payment outcomes, and progress and remaining costs for the ERP implementation.
- Customer concentration, including updated receivables exposure for major customers, and the financial impact of customer distribution changes.
- Potential effects of tax examinations, foreign exchange and sourcing costs; reported first-half results are not necessarily indicative of full-year results.