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DORM > SEC Filings for DORM > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for DORMAN PRODUCTS, INC.

Form 10-Q for DORMAN PRODUCTS, INC.


1-Aug-2014

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward Looking Statements

Certain statements in this document constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. While forward-looking statements sometimes are presented with numerical specificity, they are based on various assumptions made by management regarding future circumstances over many of which the Company has little or no control. Forward-looking statements may be identified by words including "anticipate," "believe," "estimate," "expect," and similar expressions. The Company cautions readers that forward-looking statements, including, without limitation, those relating to future business prospects, revenues, working capital, liquidity, and income, are subject to certain risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Factors that may cause actual results to differ from forward-looking statements include but are not limited to: competition in the automotive aftermarket industry, unfavorable economic conditions, loss of key suppliers, loss of third-party transportation providers, an increase in patent filings by original equipment manufacturers, quality problems, delay in the development and design of new products, space limitations on our customers' shelves, concentration of the Company's sales and accounts receivable among a small number of customers, the impact of consolidation in the automotive aftermarket industry, foreign currency fluctuations, timing and amount of customers' orders of Company's products, dependence on senior management, disruption from events beyond the Company's control and other risks and factors identified from time to time in the reports the Company files with the SEC. For additional information concerning factors that could cause actual results to differ materially from the information contained in this report, reference is made to the information in "Part I Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2013. You should not place undue reliance on forward-looking statements. Such statements speak only as to the date on which they are made, and we undertake no obligation to update publicly or revise any forward-looking statement, regardless of future developments or availability of new information.

Introduction

The following discussion and analysis, as well as other sections in this Quarterly Report on Form 10-Q, should be read in conjunction with the unaudited consolidated financial statements and footnotes thereto of Dorman Products, Inc. and its subsidiaries included in "Item 1. Financial Statements" of this Quarterly Report on Form 10-Q and with Management's Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

Overview

We are a leading supplier of replacement parts and fasteners for passenger cars, light trucks and heavy trucks in the automotive aftermarket. We distribute and market approximately 150,000 stock keeping units ("SKU's") of automotive replacement parts many of which we design and engineer. These SKU's are sold under our various brand names, under our customers' private label brands or in bulk. We believe we are the dominant aftermarket supplier of original equipment dealer "exclusive" items. Original equipment dealer "exclusive" parts are those parts which were traditionally available to consumers only from original equipment manufacturers or salvage yards. These parts include, among other parts, intake manifolds, exhaust manifolds, window regulators, radiator fan assemblies, tire pressure monitor sensors, complex electronics devices and exhaust gas recirculation (EGR) coolers.

We generate virtually all of our revenues from customers in the automotive aftermarket, primarily in the United States and Canada. Our products are sold primarily through automotive aftermarket retailers (such as AutoZone, Advance Auto Parts and O'Reilly Auto Parts), national, regional and local warehouse distributors (such as Carquest and NAPA), specialty markets and salvage yards. We distribute automotive replacement parts outside the United States, with sales into Europe, Mexico, the Middle East, Asia and Canada.

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The automotive aftermarket has benefited from some of the factors affecting the general economy, including the impact of the recent recession, continued high unemployment, and high gas prices. We believe vehicle owners have become more likely to keep their current vehicles longer and perform necessary repairs and maintenance in order to keep those vehicles well maintained as a result of these factors. According to data published by POLK, a division of IHS Automotive, the average age of vehicles was 11.4 years as of December 2013. The number of miles driven is another statistic that impacts our business. Generally, as vehicles are driven more miles, the more likely it is that parts will fail. The combination of the vehicle age increase and number of miles driven has accounted for a portion of our sales growth.

The overall automotive aftermarket in which we compete has benefited from the conditions mentioned above. However, our customer base has consolidated in recent years. As a result, our customers regularly seek more favorable pricing, product returns and extended payment terms when negotiating with us. We attempt to avoid or minimize these concessions as much as possible, but we have granted pricing concessions, extended customer payment terms and allowed a higher level of product returns in certain cases. These concessions impact our profit levels and may require additional capital to finance the business. We expect our customers to continue to exert pressure on our margins as the customer base continues to consolidate.

New product development is a critical success factor for us and is our primary vehicle for growth. We have made incremental investments to increase our new product development efforts each year since 2003 in an effort to grow our business and strengthen our relationships with our customers. The investments are primarily in the form of increased product development resources, increased customer and end-user awareness programs, and customer service improvements. These investments have enabled us to provide an expanding array of new product offerings and grow revenues at levels that exceed market growth rates.

In 2012, we introduced a new line of products to be marketed for the medium and heavy duty truck aftermarket. We believe that this market provides many of the same opportunities for growth that the automotive aftermarket has provided us over the past several years. Similar to the automotive side of our business, our focus is on Formerly Dealer Only parts. We launched the initial program with a limited offering, but have made additional investments in new product development efforts to expand our product offering. We currently have approximately 360 SKU's in our medium and heavy duty product line.

In September 2013, we launched our Hybrid Drive Battery program, which provides broad coverage for the most popular hybrid vehicles in service. Our hybrid drive battery packs are completely remanufactured and are extensively tested to ensure performance. Our hybrid drive batteries are "plug and play" direct replacements, ready to install and requiring no programming time or expense thus saving the service technicians time and the hybrid vehicle owner's money.

We may experience significant fluctuations from quarter to quarter in our results of operations due to the timing of orders placed by our customers. Generally, the second and third quarters have the highest level of customer orders. The introduction of new products and product lines to customers may cause significant fluctuations from quarter to quarter.

We operate on a fifty-two or fifty-three week fiscal year period ended on the last Saturday of the calendar year. Our 2014 fiscal year will be a fifty-two week period that will end on December 27, 2014. The fiscal year ended December 28, 2013 was also a fifty-two week period.

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Results of Operations

The following table sets forth, for the periods indicated, the percentage of net
sales represented by certain items in our Consolidated Statements of Income:



                                             Thirteen Weeks Ended                Twenty-six Weeks Ended
                                          June 28,           June 29,          June 28,           June 29,
                                            2014               2013              2014               2013
Net sales                                     100.0 %            100.0 %            100.0 %           100.0 %
Cost of goods sold                             62.8               60.3               61.9              60.5

Gross profit                                   37.2               39.7               38.1              39.5
Selling, general and administrative
expenses                                       18.5               20.7               18.7              20.3

Income from operations                         18.7               19.0               19.4              19.2
Interest expense, net                           0.0                0.1                0.0               0.1

Income from before income tax                  18.7               18.9               19.4              19.1
Provision for income taxes                      6.9                7.0                7.1               7.0

Net income                                     11.8 %             11.9 %             12.3 %            12.1 %

Thirteen Weeks Ended June 28, 2014 Compared to Thirteen Weeks Ended June 29, 2013

Net sales increased 21% to $196.2 million for the thirteen weeks ended June 28, 2014 from $162.3 million for the thirteen weeks ended June 29, 2013. Our revenue growth was primarily driven by strong overall demand for our products, the shipment of several large stocking orders and line updates to customers, and higher revenue from recently introduced products.

Gross profit was $73.0 million, or 37.2% of net sales, for the thirteen weeks ended June 28, 2014 compared to $64.4 million, or 39.7% of net sales, for the thirteen weeks ended June 29, 2013. The gross profit percentage was negatively impacted by competitive pricing pressures and mix shift that resulted in lower overall net selling prices, a $1.5 million increase in the provision for excess and obsolete inventory, and higher transportation costs.

Selling, general and administrative expenses were approximately $36.3 million for the thirteen weeks ended June 28, 2014 compared to $33.6 million for the thirteen weeks ended June 29, 2013. The increase was primarily due to higher variable costs associated with our 21% sales growth, approximately $0.5 million in additional investment in new product management and other resources to support our new product growth efforts and inflationary increases as compared to prior year. However, selling, general and administrative expenses decreased to 18.5% of net sales from 20.7% of net sales as we were able to leverage our expenses over growing net sales.

Our effective tax rate was 36.6% for the thirteen weeks ended June 28, 2014 compared to 37.0% for the thirteen weeks ended June 29, 2013.

Twenty-six Weeks Ended June 28, 2014 Compared to Twenty-six Weeks Ended June 29, 2013

Net sales increased 20% to $379.7 million for the twenty-six weeks ended June 28, 2014 from $316.7 million for the twenty-six weeks ended June 29, 2013. Our revenue growth was primarily driven by strong overall demand for our products, the shipment of several large stocking orders and line updates to customers, and higher revenue from recently introduced products.

Gross profit was $144.6 million, or 38.1% of net sales, for the twenty-six weeks ended June 28, 2014 compared to $125.2 million, or 39.5% of net sales, for the twenty-six weeks ended June 29, 2013. The gross profit percentage was negatively impacted by competitive pricing pressures and mix shift that resulted in lower overall net selling prices, a $1.1 million increase in the provision for excess and obsolete inventory, and higher transportation costs.

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Selling, general and administrative expenses were approximately $71.0 million for the twenty-six weeks ended June 28, 2014 compared to $64.5 million for the twenty-six weeks ended June 29, 2013. The spending increase was primarily due to higher variable costs associated with our 20% sales growth, approximately $1.2 million in additional investment in new product management and other resources to support our new product growth efforts and inflationary increases as compared to prior year. However, selling, general and administrative expenses decreased to 18.7% of net sales from 20.3% of net sales as we were able to leverage our expenses over growing net sales.

Our effective tax rate was 36.4% for the twenty-six weeks ended June 28, 2014 compared to 36.6% for the twenty-six weeks ended June 29, 2013.

Liquidity and Capital Resources

Historically, we have financed our growth through a combination of cash flow from operations, accounts receivable sales programs and our revolving credit facility. At June 28, 2014, working capital was $366.9 million, while shareholders' equity was $451.6 million. Cash and cash equivalents as of June 28, 2014 was $54.0 million.

Over the past several years we extended payment terms to certain customers as a result of customer requests and market demands. We participate in accounts receivable sales programs with several customers which allow us to sell our accounts receivable to financial institutions to offset the negative cash flow impact of these payment terms extensions. Without these programs, these extended terms would have resulted in increased accounts receivable and significant uses of cash flow. Pursuant to these agreements, we sold accounts receivable in the aggregate amount of $258.0 million and $192.1 million during the twenty-six weeks ended June 28, 2014 and June 29, 2013, respectively. If receivables had not been sold, $319.4 million and $267.8 million of additional receivables would have been outstanding at June 28, 2014 and December 28, 2013, respectively, based on standard payment terms.

We have a $30.0 million Revolving Credit Facility which expires in June 2015. Borrowings under the facility are on an unsecured basis with interest at rates ranging from LIBOR plus 75 basis points to LIBOR plus 250 basis points based upon the achievement of certain benchmarks related to the ratio of funded debt to EBITDA, as defined by our credit agreement. The interest rate at June 28, 2014 was LIBOR plus 75 basis points (0.90%). There were no borrowings under the facility as of June 28, 2014. As of June 28, 2014, we had two outstanding letters of credit for approximately $1.0 million in the aggregate which were issued to secure ordinary course of business transactions. Net of these letters of credit, we had approximately $29.0 million available under the facility at June 28, 2014. The credit agreement also contains covenants, the most restrictive of which pertain to net worth and the ratio of debt to EBITDA. As of June 28, 2014, we are in compliance with all financial covenants contained in the Revolving Credit Facility.

Cash Flows

Below is a table setting forth the key lines of our Consolidated Statements of
Cash Flows:



                                                           Twenty-six Weeks Ended
                                                          June 28,         June 29,
 (in thousands)                                             2014             2013
 Cash provided by operating activities                  $     19,182       $  21,310
 Cash used in investing activities                           (15,878 )        (8,983 )
 Cash used in financing activities                            (9,913 )          (344 )

 Net (decrease) increase in cash and cash equivalents   $     (6,609 )     $  11,983

Cash provided by operating activities during the twenty-six weeks ended June 28, 2014 decreased by $2.1 million compared to the twenty six weeks ended June 29, 2013 primarily due to an $11.4 million increase in working capital which was partially offset by an $8.4 million increase in net income. During the twenty-six weeks ended June 28, 2014, accounts receivable increased due to higher net sales, inventory increased due to higher net sales and additional investment in new product inventory, and accounts payable decreased due to timing of payments to our vendors.

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Investing activities used $15.9 million of cash in the twenty-six weeks ended June 28, 2014 and $9.0 million in the twenty-six weeks ended June 29, 2013. Capital spending was primarily related to the following significant projects:

In the third quarter of fiscal 2010, we began a project to replace our enterprise resource planning ("ERP") system. This project is expected to cost between $38 and $40 million for capitalized software, installation services and internal costs through 2014. Through June 28, 2014, we have paid $30.5 million for the project of which $7.9 was spent in the twenty-six weeks ended June 28, 2014 and $1.3 million was spent during the twenty-six weeks ended June 29, 2013. The installation of the new ERP system was completed at one of our subsidiaries in January 2013 without any disruption of our operations.

The remaining capital spending in each period was related to tooling associated with new products, scheduled equipment replacements, facility improvements and other capital projects.

Financing activities used $9.9 million of cash in the twenty-six weeks ended June 28, 2014 compared to $0.3 million of cash in the twenty-six weeks ended June 29, 2013. In 2014, we used approximately $10.3 million of cash to repurchase and retire 161,900 common shares in conjunction with our stock repurchase program and 30,710 common shares from our 401(k) plan. The other sources and uses of cash in each period result from stock compensation plan activities.

Based on our current operating plan, we believe that our sources of available capital are adequate to meet our ongoing cash needs for at least the next twelve months.

During the twenty-six weeks ended June 28, 2014, we experienced no material changes to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 28, 2013.

Foreign Currency Fluctuations

In fiscal 2013, approximately 75% of our products were purchased from vendors in a variety of foreign countries. The products generally are purchased through purchase orders with the purchase price specified in U.S. dollars. Accordingly, we generally do not have exposure to fluctuations in the relationship between the dollar and various foreign currencies between the time of execution of the purchase order and payment for the product. To the extent that the dollar decreases in value to foreign currencies in the future, the price of the product in dollars for new purchase orders may increase.

The largest portion of our overseas purchases comes from China. Until recently, the Chinese Yuan has increased in value relative to the U.S. Dollar. Any future increases in the value of the Yuan relative to the U.S. Dollar will likely result in an increase in the cost of products that we purchase from China.

Impact of Inflation

The overall impact of inflation has not resulted in a significant change in labor costs or the cost of general services utilized. The cost of many of the commodities that are used in our products have fluctuated over time resulting in increases and decreases in the prices of our products. In addition, we have periodically experienced increased transportation costs as a result of higher fuel prices. We will attempt to offset cost increases by passing along selling price increases to customers, using alternative suppliers and by resourcing purchases to other countries. However, there can be no assurance that we will be successful in these efforts.

New and Recently Adopted Accounting Pronouncements

Please refer to Note 11, New and Recently Adopted Accounting Pronouncements, to the Notes to Consolidated Financial Statements.

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