Dorman Products, Inc. — Q3 2012 Form 10-Q
Reporting period: Thirteen weeks ended September 29, 2012; year-to-date figures cover the thirty-nine weeks ended that date. Comparisons are with the corresponding 2011 periods. Amounts are in U.S. dollars; financial statement figures below are in millions unless noted.
Business context
Dorman supplies automotive replacement parts, fasteners and service-line products, primarily to the North American automotive aftermarket. It cited strong product demand and recently introduced products as growth drivers. Customer order timing can make results fluctuate; the second and third quarters are generally stronger. The company completed a two-for-one stock split in June 2012, and share and per-share data were restated.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Net sales | $156.4 | $130.6 | $435.4 | $377.8 |
| Gross profit | $59.7 | $48.6 | $163.4 | $139.0 |
| Operating income | $31.1 | $23.4 | $81.3 | $63.9 |
| Continuing-operations net income | $19.8 | $15.0 | $51.2 | $41.0 |
| Net income, including discontinued operations | $20.3 | $11.5 | $55.7 | $36.6 |
| Diluted EPS | $0.56 | $0.32 | $1.53 | $1.01 |
- Sales increased 20% in Q3 and 15% year to date. Q3 benefited in part from several large customer line-update shipments.
- Gross margin improved to 38.2% from 37.2% in Q3 and to 37.5% from 36.8% year to date. Management attributed the improvement to higher-margin product mix, lower transportation costs and lower excess/obsolete inventory provisions.
- Operating margin rose to 19.9% from 17.9% in Q3 and to 18.7% from 16.9% year to date. SG&A increased in dollars but fell as a share of sales, reflecting operating leverage despite added product development, variable sales costs and incentive compensation.
- Cash from operations was $28.6 million year to date, versus $30.6 million in 2011. Capital spending was $14.4 million; cash and equivalents increased to $66.1 million from $50.2 million at year-end 2011.
- At September 29, 2012, working capital was $311.6 million. The balance sheet showed no borrowings under the $30 million revolving facility; after $0.9 million of letters of credit, approximately $29.1 million remained available. Total current liabilities were $51.7 million and total shareholders’ equity was $372.3 million.
Material changes, outlook and risks
- Discontinued ScanTech operations contributed $4.5 million of year-to-date net income, versus a $4.4 million loss in 2011. The 2012 result included a $3.0 million reclassification of currency translation adjustments and a $1.5 million deferred tax asset for expected foreign tax credits; inventory reserve reductions also contributed. This makes reported net income growth stronger than continuing-operations growth.
- Accounts receivable and inventory increased year to date by $16.4 million and $18.4 million, respectively, using cash. Dorman sold $235.2 million of receivables through customer-sponsored programs, paying $3.3 million in related financing costs; without the sales, $165.8 million of additional receivables would have been outstanding at quarter-end.
- Management said available capital should meet cash needs for at least the next twelve months. No specific earnings or sales guidance was provided. The company expected continued customer pressure on pricing, returns and payment terms, and said new product development and efficiency/cost initiatives were important to growth and margin management.
- Key risks include customer concentration and consolidation, order cancellations or rescheduling, competition, dependence on new products and key vendors, foreign sourcing and currency effects, product quality, and customer credit exposure. The filing notes that the five largest customers represented 83% of net receivables at December 31, 2011; a comparable September 2012 concentration figure is not provided.
- A one-percentage-point rise in LIBOR was estimated to increase annual interest and receivables-sale financing costs by approximately $1.7 million, assuming balances and sales volumes remain constant. The CEO-related-party lease for the primary facility expires December 28, 2012; Dorman was pursuing a new lease.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. Ordinary-course legal matters were considered immaterial in potential financial impact. The company reported $2.0 million of net unrecognized tax benefits and ongoing state tax examinations.
Important facts for investors to verify
- How much of continuing sales growth came from recurring demand and new products versus Q3’s large customer line-update shipments.
- Whether gross-margin improvement and lower SG&A as a percentage of sales persist amid customer pricing and returns pressure.
- Cash conversion and working-capital trends, including rising inventory and receivables and reliance on receivables-sale programs and their financing cost.
- The sustainability and cash/tax implications of discontinued-operations gains, foreign tax credits and the ScanTech exit.
- Customer concentration, the outcome of the related-party facility lease renewal, and compliance with credit-facility covenants.