UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM10-Q

 

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 25, 2016April 1, 2017

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number:0-18914

 

 

Dorman Products, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania 23-2078856

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3400 East Walnut Street, Colmar, Pennsylvania 18915
(Address of principal executive offices) (Zip Code)

(215)997-1800

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    x  No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  Yes    x  No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer x  Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company)  Smaller reporting company ¨
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    ☐  Yes    ¨  Nox

As of July 25, 2016,May 1, 2017, the registrant had 34,625,95734,297,170 shares of common stock, par value $0.01 per share, outstanding.

 

 

 


DORMAN PRODUCTS, INC. AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT ON FORM10-Q

June 25, 2016April 1, 2017

 

     Page

Part I FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (unaudited)

  
 

Consolidated Statements of Income:

  
 

        Thirteen Weeks Ended June 25,April 1, 2017 and March 26, 2016andJune 27, 2015

 3
 

Twenty-six Weeks Ended June 25, 2016andJune 27, 2015Consolidated Balance Sheets

 4
 

Consolidated Balance SheetsStatements of Cash Flows

 5
 Consolidated Statements of Cash Flows6

Notes to Consolidated Financial Statements

  76

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 11

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 16

Item 4.

 

Controls and Procedures

 16

Part II OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

 17

Item 1A.

 

Risk Factors

 17

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 17

Item 3.

 

Defaults Upon Senior Securities

 17

Item 4.

 

Mine Safety Disclosures

 17

Item 5.

 

Other Information

 17

Item 6.

 

Exhibits

 18

Signatures

  19 19

Exhibit Index

  20 20

 

Page 2 of 20


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

  For the Thirteen Weeks Ended   

For the Thirteen Weeks

Ended

 

(in thousands, except per share data)

  June 25,
2016
   June 27,
2015
   April 1,
2017
   March 26,
2016
 

Net sales

  $209,573    $198,721    $221,625   $208,148 

Cost of goods sold

   127,409     122,151     132,882    127,554 
  

 

   

 

   

 

   

 

 

Gross profit

   82,164     76,570     88,743    80,594 

Selling, general and administrative expenses

   41,175     39,675     43,701    41,663 
  

 

   

 

   

 

   

 

 

Income from operations

   40,989     36,895     45,042    38,931 

Interest expense, net

   62     52  

Interest income (expense), net

   64    (57
  

 

   

 

   

 

   

 

 

Income before income taxes

   40,927     36,843     45,106    38,874 

Provision for income taxes

   14,945     13,700     15,919    14,203 
  

 

   

 

   

 

   

 

 

Net income

  $25,982    $23,143    $29,187   $24,671 
  

 

   

 

   

 

   

 

 

Earnings Per Share:

        

Basic

  $0.75    $0.65    $0.85   $0.71 

Diluted

  $0.75    $0.65    $0.85   $0.71 

Weighted Average Shares Outstanding:

        

Basic

   34,546     35,548     34,385    34,678 

Diluted

   34,626     
35,614
  
   34,479    34,734 

See accompanying Notes to Consolidated Financial Statements

 

Page 3 of 20


DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOMEBALANCE SHEETS

(UNAUDITED)

 

   For the Twenty-six Weeks Ended 

(in thousands, except per share data)

  June 25,
2016
   June 27,
2015
 

Net sales

  $417,721    $387,195  

Cost of goods sold

   254,963     237,732  
  

 

 

   

 

 

 

Gross profit

   162,758     149,463  

Selling, general and administrative expenses

   82,838     78,916  
  

 

 

   

 

 

 

Income from operations

   79,920     70,547  

Interest expense, net

   119     104  
  

 

 

   

 

 

 

Income before income taxes

   79,801     70,443  

Provision for income taxes

   29,148     25,961  
  

 

 

   

 

 

 

Net income

  $50,653    $44,482  
  

 

 

   

 

 

 

Earnings Per Share:

    

Basic

  $1.46    $1.25  

Diluted

  $1.46    $1.25  

Weighted Average Shares Outstanding:

    

Basic

   34,615     35,545  

Diluted

   34,669     
35,629
  

(in thousands, except for share data)

  April 1,
2017
   December 31,
2016
 

Assets

    

Current assets:

    

Cash and cash equivalents

  $156,344   $149,121 

Accounts receivable, less allowance for doubtful accounts and customer credits of $101,250 and $99,995

   232,924    230,526 

Inventories

   171,762    168,851 

Prepaids and other current assets

   2,972    3,116 
  

 

 

   

 

 

 

Total current assets

   564,002    551,614 
  

 

 

   

 

 

 

Property, plant and equipment, net

   88,836    88,436 

Goodwill and intangible assets, net

   32,432    29,788 

Deferred tax asset, net

   13,615    12,429 

Other assets

   39,716    29,525 
  

 

 

   

 

 

 

Total

  $738,601   $711,792 
  

 

 

   

 

 

 

Liabilities and shareholders’ equity

    

Current liabilities:

    

Accounts payable

  $71,653   $72,629 

Accrued compensation

   5,291    11,899 

Other accrued liabilities

   33,505    19,320 
  

 

 

   

 

 

 

Total current liabilities

   110,449    103,848 
  

 

 

   

 

 

 

Other long-term liabilities

   8,173    6,302 

Commitments and contingencies

    

Shareholders’ Equity:

    

Common stock, par value $0.01; authorized 50,000,000 shares; issued and outstanding 34,449,497 and 34,517,633 in 2017 and 2016, respectively

   344    345 

Additionalpaid-in capital

   44,181    44,187 

Retained earnings

   575,454    557,110 
  

 

 

   

 

 

 

Total shareholders’ equity

   619,979    601,642 
  

 

 

   

 

 

 

Total

  $738,601   $711,792 
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

Page 4 of 20


DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CASH FLOWS

(UNAUDITED)

 

(in thousands, except for share data)

  June 25,
2016
   December 26,
2015
 

Assets

    

Current assets:

    

Cash and cash equivalents

  $87,897    $78,659  

Accounts receivable, less allowance for doubtful accounts and customer credits of $81,760 and $86,986

   216,784     203,923  

Inventories

   178,972     193,725  

Prepaids and other current assets

   5,443     2,326  
  

 

 

   

 

 

 

Total current assets

   489,096     478,633  
  

 

 

   

 

 

 

Property, plant and equipment, net

   88,427     87,046  

Goodwill and intangible assets, net

   29,839     29,889  

Deferred tax asset, net

   7,642     7,557  

Other assets

   21,970     18,740  
  

 

 

   

 

 

 

Total

  $636,974    $621,865  
  

 

 

   

 

 

 

Liabilities and shareholders’ equity

    

Current liabilities:

    

Accounts payable

  $52,883    $63,967  

Accrued compensation

   7,086     10,970  

Other accrued liabilities

   18,732     23,633  
  

 

 

   

 

 

 

Total current liabilities

   78,701     98,570  
  

 

 

   

 

 

 

Other long-term liabilities

   5,724     5,259  

Commitments and contingencies

    

Shareholders’ Equity:

    

Common stock, par value $0.01; authorized 50,000,000 shares; issued and outstanding 34,621,737 and 34,863,396 in 2016 and 2015, respectively

   346     349  

Additional paid-in capital

   43,121     42,799  

Retained earnings

   509,082     474,888  
  

 

 

   

 

 

 

Total shareholders’ equity

   552,549     518,036  
  

 

 

   

 

 

 

Total

  $636,974    $621,865  
  

 

 

   

 

 

 
   For the Thirteen Weeks Ended 

(in thousands)

  April 1, 2017  March 26, 2016 

Cash Flows from Operating Activities:

   

Net income

  $29,187  $24,671 

Adjustments to reconcile net income to cash provided by operating activities:

   

Depreciation, amortization and accretion

   5,005   4,499 

Provision for doubtful accounts

   75   996 

Benefit for deferred income taxes

   (1,186  (442

Provision fornon-cash stock compensation

   653   440 

Changes in assets and liabilities:

   

Accounts receivable

   (2,473  (4,468

Inventories

   (818  6,139 

Prepaids and other current assets

   144   (405

Other assets

   (191  (1,487

Accounts payable

   (668  (11,930

Accrued compensation and other liabilities

   8,417   5,901 
  

 

 

  

 

 

 

Cash provided by operating activities

   38,145   23,914 
  

 

 

  

 

 

 

Cash Flows from Investing Activities:

   

Property, plant and equipment additions

   (5,618  (5,598

Purchase of investments

   (13,127  —   
  

 

 

  

 

 

 

Cash used in investing activities

   (18,745  (5,598
  

 

 

  

 

 

 

Cash Flows from Financing Activities:

   

Other stock related activity

   (856  (11

Purchase and cancellation of common stock

   (11,321  (9,986
  

 

 

  

 

 

 

Cash used in financing activities

   (12,177  (9,997
  

 

 

  

 

 

 

Net Increase in Cash and Cash Equivalents

   7,223   8,319 

Cash and Cash Equivalents, Beginning of Period

   149,121   78,659 
  

 

 

  

 

 

 

Cash and Cash Equivalents, End of Period

  $156,344  $86,978 
  

 

 

  

 

 

 

Supplemental Cash Flow Information

   

Cash paid for interest expense

  $61  $70 

Cash paid for income taxes

  $1,046  $2,568 

See accompanying Notes to Consolidated Financial Statements

 

Page 5 of 20


DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

   For the Twenty-six Weeks Ended 

(in thousands)

  June 25, 2016  June 27, 2015 

Cash Flows from Operating Activities:

   

Net income

  $50,653   $44,482  

Adjustments to reconcile net income to cash provided by operating activities:

   

Depreciation, amortization and accretion

   9,179    7,596  

Provision for doubtful accounts

   1,071    35  

Benefit for deferred income taxes

   (85  (1,415

Provision for non-cash stock compensation

   1,048    528  

Changes in assets and liabilities:

   

Accounts receivable

   (13,932  8,708  

Inventories

   14,753    (25,259

Prepaids and other current assets

   (1,172  (680

Other assets

   (3,230  (2,706

Accounts payable

   (11,408  8,476  

Accrued compensation and other liabilities

   (10,333  (4,910
  

 

 

  

 

 

 

Cash provided by operating activities

   36,544    34,855  
  

 

 

  

 

 

 

Cash Flows from Investing Activities:

   

Property, plant and equipment additions

   (10,118  (11,016

Purchase of equity investment

   —      (2,000
  

 

 

  

 

 

 

Cash used in investing activities

   (10,118  (13,016
  

 

 

  

 

 

 

Cash Flows from Financing Activities:

   

Other stock related activity

   (97  49  

Purchase and cancellation of common stock

   (17,091  (2,345
  

 

 

  

 

 

 

Cash used in financing activities

   (17,188  (2,296
  

 

 

  

 

 

 

Net Increase in Cash and Cash Equivalents

   9,238    19,543  

Cash and Cash Equivalents, Beginning of Period

   78,659    47,656  
  

 

 

  

 

 

 

Cash and Cash Equivalents, End of Period

  $87,897   $67,199  
  

 

 

  

 

 

 

Supplemental Cash Flow Information

   

Cash paid for interest expense

  $133   $141  

Cash paid for income taxes

  $32,053   $27,480  

See accompanying Notes to Consolidated Financial Statements

Page 6 of 20


DORMAN PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE TWENTY-SIXTHIRTEEN WEEKS ENDED JUNE 25,APRIL 1, 2017 AND MARCH 26, 2016 AND JUNE 27, 2015

(UNAUDITED)

 

1.Basis of Presentation

As used herein, unless the context otherwise requires, “Dorman”, the “Company”, “we”, “us”, or “our” refers to Dorman Products, Inc. and its subsidiaries. Our ticker symbol on the NASDAQ Global Select Market is “DORM”.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). However, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the twenty-sixthirteen weeks ended June 25, 2016April 1, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016.30, 2017. 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 net sales. The introduction of new products and product lines to customers may cause significant fluctuations from quarter to quarter. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form10-K for the fiscal year ended December 26, 2015.31, 2016.

 

2.Acquisition

On January 6, 2017, we acquired certain assets of Ingalls Engineering Company, Inc., a chassis and suspension business, primarily to expand our product portfolio. The purchase price was approximately $4.8 million, comprised of $3.1 million of cash and $1.7 million of estimated contingent payments. The contingent payment arrangement is based upon future net sales of the acquired business. In connection with this acquisition, we preliminarily recorded $2.7 million in goodwill and other intangible assets and $2.1 million of other net assets pending final valuation. All of the intangible assets resulting from the asset purchase are expected to be deductible for tax purposes. The financial results of the acquisition have been included in the Consolidated Financial Statements since the acquisition date.

3.Sales of Accounts Receivable

We have entered into several customer sponsored programs administered by unrelated financial institutions that permit us to sell certain accounts receivable at discounted rates to the financial institutions. Transactions under these agreements were accounted for as sales of accounts receivable and were removed from our Consolidated Balance Sheet at the time of the sales transactions. Pursuant to these agreements, we sold $257.8$146.0 million and $266.9$135.2 million of accounts receivable during the twenty-sixthirteen weeks ended June 25,April 1, 2017 and March 26, 2016, and June 27, 2015, respectively. If receivables had not been sold, $345.0$370.6 million and $335.9$338.3 million of additional accounts receivable would have been outstanding at June 25, 2016April 1, 2017 and December 26, 2015,31, 2016, respectively, based on standard payment terms. Selling, general and administrative expenses for each of the twenty-sixthirteen weeks ended June 25,April 1, 2017 and March 26, 2016 and June 27, 2015 included $4.4$2.5 million and $3.6 million, respectively, in financing costs associated with these accounts receivable sales programs.

 

3.4.Inventories

Inventories include the cost of material, freight, direct labor and overhead utilized in the processing of our products, and are stated at the lower of cost or market.net realizable value. Inventories were as follows:

 

(in thousands)

  June 25,
2016
   December 26,
2015
   April 1,
2017
   December 31,
2016
 

Bulk product

  $62,860    $78,533    $67,059   $72,833 

Finished product

   112,404     112,012     101,941    93,223 

Packaging materials

   3,708     3,180     2,762    2,795 
  

 

   

 

   

 

   

 

 

Total

  $178,972    $193,725    $171,762   $168,851 
  

 

   

 

   

 

   

 

 

 

Page 6 of 20


4.5.Stock-Based Compensation

Our 2008 Stock Option and Stock Incentive Plan (the “Plan”) was approved by our shareholders on May 20, 2009. Under the terms of the Plan, our Board of Directors may grant up to 2,000,000 shares of common stock in the form of shares of restricted stock, incentive stock options andnon-qualified stock options or combinations thereof to officers, directors, employees, consultants and advisors. Grants under the Plan must be made within ten years of the date the Plan was approved and stock options are exercisable upon the terms set forth in the grant agreement approved by the Board of Directors, but in no event more than ten years from the date of grant. Restricted stock vests in accordance with the terms set forth in each restricted stock agreement. At June 25, 2016, 1,537,076April 1, 2017, 1,406,394 shares were available for grant under the Plan.

Page 7 of 20


We grant restricted stock to certain employees and members of our Board of Directors. The value of restricted stock issued is based on the fair value of our common stock on the grant date. Vesting of restricted stock is conditional based on continued employment or service for a specified period and, in certain circumstances, the attainment of financial goals. We retain the restricted stock, and any dividends paid thereon, until the vesting conditions have been met. For awards with a service condition only, compensation cost related to the stock is recognized on a straight-line basis over the vesting period. For awards that have a service condition and require the attainment of financial goals, compensation cost related to the stock is calculated based upon the probable outcome of the performance conditions and is recognized over the vesting period if it is probable that the financial goals will be attained.performance period. Compensation cost related to restricted stock was $1.0$0.6 million and $0.5$0.4 million for the twenty-sixthirteen weeks ended June 25,April 1, 2017 and March 26, 2016, and June 27, 2015, respectively. The compensation costs were classified as selling, general and administrative expense in the Consolidated Statements of Income. No cost was capitalized during the twenty-six weeks ended June 25, 2016 or the twenty-six weeks ended June 27, 2015.

The following table summarizes our restricted stock activity for the twenty-sixthirteen weeks ended June 25, 2016:April 1, 2017:

 

  Shares   Weighted
Average
Price
   Shares   Weighted
Average
Price
 

Balance at December 26, 2015

   43,242    $34.49  

Balance at December 31, 2016

   145,363   $49.22 

Granted

   112,924    $45.22     57,011   $78.21 

Vested

   (23,822  $30.27     (37,637  $53.86 

Cancelled

   (240  $18.94     (276  $52.19 
  

 

     

 

   

Balance at June 25, 2016

   132,104    $44.45  

Balance at April 1, 2017

   164,461   $58.21 
  

 

     

 

   

As of June 25, 2016,April 1, 2017, there was approximately $4.9$7.8 million of unrecognized compensation cost related to nonvested restricted stock, which is expected to be recognized over a weighted-average period of 3.0approximately 2.8 years.

Cash flows resulting from tax deductions in excess of the tax effect of compensation cost recognized in the financial statements are classified as financingoperating cash flows. In accordance with ASUNo. 2016-09 (see Note 11), the excess tax benefit generated from restricted shares which vested in the thirteen weeks ended April 1, 2017 was $0.2 million and was credited to income tax expense. The excess tax benefit generated from restricted shares which vested was $0.2 million and $0.3 million in the twenty-sixthirteen weeks ended June 25,March 26, 2016 and June 27, 2015, respectively,was $0.1 million and was credited to additionalpaid-in capital.

We grant stock options to certain employees and members of the Board of Directors. We expense the grant-date fair value of stock options. Compensation cost is recognized on a straight-line basis over the vesting period for which related services are performed. The compensation cost charged against income for the twenty-sixthirteen weeks ended June 25,April 1, 2017 and March 26, 2016 and June 27, 2015 was less than $0.1 million in each period. The compensation costs were classified as selling, general and administrative expense in the Consolidated Statements of Income. No cost was capitalized during the twenty-sixthirteen weeks ended June 25, 2016 or the twenty-six weeks ended June 27, 2015. We included a forfeiture assumption of 5.4% in the calculation of expense in each of the twenty-six weeks ended June 25, 2016April 1, 2017 and June 27, 2015.March 26, 2016.

We use the Black-Scholes option valuation model to estimate the fair value of stock options granted. Expected volatility and expected dividend yield are based on the actual historical experience of our common stock. The expected life represents the period of time that options granted are expected to be outstanding and was calculated using historical option exercise data. The risk-free rate was based on a U.S. Treasury security with terms equal to the expected time of exercise as of the grant date. During the twenty-sixthirteen weeks ended June 25,April 1, 2017 and March 26, 2016, we granted 61,084 stock options. There were no55,508 and 46,684 stock options, granted in the twenty-six weeks ended June 27, 2015.respectively.

Page 7 of 20


The following table summarizes our stock option activity for the twenty-sixthirteen weeks ended June 25, 2016:April 1, 2017:

 

   Shares   Weighted
Average
Price
   Weighted
Average
Remaining Term
(In years)
   Aggregate
Intrinsic
Value
 

Balance at December 26, 2015

   40,000    $6.86      

Granted

   61,084    $44.36      
  

 

 

       

Balance at June 25, 2016

   101,084    $29.52     3.6    $2,441,178  
  

 

 

       

Options exercisable at June 25, 2016

   40,000    $6.86     1.8    $1,860,520  

   Shares   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining Term
(In years)
   Aggregate
Intrinsic
Value
 

Balance at December 31, 2016

   101,084   $29.52     

Granted

   55,508   $78.40     

Exercised

   (32,000  $6.90     
  

 

 

       

Balance at April 1, 2017

   124,592   $57.11    4.3   $3,117,895 
  

 

 

       

Options exercisable at April 1, 2017

   19,671   $27.40    3.2   $1,076,542 

Page 8 of 20


No stockThere were 32,000 options were exercised during the twenty-sixthirteen weeks ended June 25, 2016.April 1, 2017. As of June 25, 2016,April 1, 2017, there was $0.5$1.2 million of unrecognized compensation cost related tonon-vested stock options, which is expected to be recognized over a weighted-average period of 3.73.6 years.

The cash received from stock option exercises was less than $0.1 million in the thirteen weeks ended April 1, 2017. There was no cash received orgenerated from stock option exercises in the thirteen weeks ended March 26, 2016.

In accordance with ASUNo. 2016-09 (see Note 11), the excess tax benefit generated from stock options exercises in the thirteen weeks ended April 1, 2017 was $0.6 million and was credited to income tax expense. There was no excess tax benefit generated from stock option exercises in the twenty-sixthirteen weeks ended June 25, 2016 or June 27, 2015.March 26, 2016.

 

5.6.Earnings Per Share

Basic earnings per share is calculated by dividing our net income by the weighted average number of common shares outstanding during the period, excluding nonvested restricted stock which is considered to be contingently issuable. To calculate diluted earnings per share, common share equivalents are added to the weighted average number of common shares outstanding. Common share equivalents are calculated using the treasury stock method and are computed based on outstanding stock-based awards. Stock-based awards of approximately 15,70037,464 shares and 7,20073,000 shares were excluded from the calculation of diluted earnings per share as of June 25,April 1, 2017 and March 26, 2016, and June 27, 2015, respectively, as their effect would have been anti-dilutive.

The following table sets forth the computation of basic earnings per share and diluted earnings per share:

 

  Thirteen Weeks Ended   Twenty-six Weeks Ended   Thirteen Weeks Ended 

(in thousands, except per share data)

  June 25,
2016
   June 27,
2015
   June 25,
2016
   June 27,
2015
   April 1,
2017
   March 26,
2016
 

Numerator

            

Net income

  $25,982    $23,143    $50,653    $44,482    $29,187   $24,671 

Denominator:

            

Weighted average basic shares outstanding

   34,546     35,548     34,615     35,545     34,385    34,678 

Effect of stock-based compensation awards

   80     66     54     84     94    56 
  

 

   

 

   

 

   

 

   

 

   

 

 

Weighted average diluted shares outstanding

   34,626     35,614     34,669     35,629     34,479    34,734 
  

 

   

 

   

 

   

 

   

 

   

 

 

Earnings Per Share:

            

Basic

  $0.75    $0.65    $1.46    $1.25    $0.85   $0.71 

Diluted

  $0.75    $0.65    $1.46    $1.25    $0.85   $0.71 

 

6.7.Common Stock Repurchases

We periodically repurchase, at the then current market price, and cancel common stock issued to the Dorman Products, Inc. 401(k) Retirement Plan and Trust (the “401(k) Plan”). Shares are generally purchased from the 401(k) Plan when participants sell units as permitted by the 401(k) Plan or elect to leave the 401(k) Plan upon retirement, termination or other reasons. For the twenty-sixthirteen weeks ended June 25, 2016,April 1, 2017, we repurchased and cancelled 19,2803,830 shares of common stock for $1.0$0.3 million at an average price of $51.88$75.45 per share. During the fifty-twofifty-three weeks ended December 26, 2015,31, 2016, we repurchased and cancelled 33,43038,970 shares of common stock for $1.6$2.2 million at an average price of $48.14$56.66 per share.

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Our Board of Directors authorized a share repurchase program up to $150$250 million through December 31, 2016.2018. Under this program, share repurchases may be made from time to time depending on market conditions, share price, share availability and other factors at our discretion. The share repurchase program does not obligate us to acquire any specific number of shares. For the twenty-sixthirteen weeks ended June 25, 2016,April 1, 2017, we repurchased and cancelled 329,666138,900 shares of common stock for $16.1$11.0 million at an average price of $48.81$79.43 per share under this program. For the fifty-twofifty-three weeks ended December 26, 2015,31, 2016, we repurchased and cancelled 747,700430,866 shares of common stock for $35.7$22.5 million at an average price of $47.77$52.15 per share under this program. As of June 25, 2016, we have $57.8 million remaining under this program to repurchase shares.

 

7.8.Related-Party Transactions

We have anon-cancelable operating lease for our primary operating facility with a partnership in which Steven L. Berman, our Executive Chairman, and his family members, are partners. Based upon the terms of the lease, payments will be $1.6 million in fiscal 20162017 and were $1.6 million in fiscal 2015.2016. The lease with the partnership expires December 31, 2017.2022. In the opinion of our Audit Committee, the terms and rates of this lease are no less favorable than those which could have been obtained from an unaffiliated party when the lease was renewed in fiscal 2012.2016.

We are partner in a joint venture with one of our suppliers and own minority interests in three other suppliers. Each of these investments is accounted for according to the equity method. This includes a 33% minority equity interest in a supplier, which we purchased on January 27, 2017 for $10.0 million.

 

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8.9.Income Taxes

At June 25, 2016,April 1, 2017, we had $2.0$4.1 million of net unrecognized tax benefits, $1.5$2.8 million of which would affect our effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 25, 2016,April 1, 2017, we had approximately $0.3$0.2 million of accrued interest related to uncertain tax positions.

We file income tax returns in the United States, China, India and Mexico. All years before 20122013 are closed for federal tax purposes. The examination by the Internal Revenue Service for the 2011 and 2012 tax years resulted in de minimis adjustments. We are currently under examination by one state tax authority for years 2009-2012.2011-2012. Tax years before 2011 are closed for the remaining states in which we file. We filed tax returns in Sweden through 2012 and all years prior to 2009 are closed. It is reasonably possible that audit settlements, the conclusion of current examinations or the expiration of the statute of limitations could impact the Company’s unrecognized tax benefits.

 

9.10.Fair Value Disclosures

The carrying value of financial instruments such as cash, accounts receivable, accounts payable, and other current assets and liabilities approximate their fair value based on the short-term nature of these instruments.

 

10.11.New and Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASUNo. 2014-09,Revenue from Contracts with Customers,which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. As originally issued, the new standard would have been effective for annual periods beginning after December 15, 2016. The FASB has amended the standard to be effective for annual periods beginning after December 15, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluatinghave completed an initial evaluation of the effect that ASU 2014-09 willASU. Based on the evaluation conducted to date, we do not expect the adoption of the new guidance to have a material impact on our consolidated financial statements and related disclosures. Westatements. However, we have not yet selectedcompleted our assessment, especially as it relates to disclosure and presentation matters. As a transition method nor haveresult, we determinedcontinue to evaluate the effect of the standardASU will have on our consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASUNo. 2015-11, Inventory:Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. The amendments in this guidance do not apply to inventory that is measured usinglast-in,first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured usingfirst-in,first-out or average cost. Within the scope of this new guidance, an entity should measure inventory at the lower of cost and net realizable value; where, net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,

Page 9 of 20


and transportation. The new guidance iswas effective for annual periods beginning after December 15, 2016, with early adoption permitted. The new guidance must be applied on a prospective basis. Adoption of this ASU did not have a material impact on our Consolidated Financial Statements.

In January 2016, the FASB issued ASUNo. 2016-01,Financial Instruments – Overall, which relates to the recognition and measurement of financial assets and liabilities. The new guidance makes targeted improvements to GAAP impacting equity investments (other than those accounted for under the equity method or consolidated), financial liabilities accounted for under the fair value election, and presentation and disclosure requirements for financial instruments, among other changes. The new guidance is effective for annual periods beginning after December 15, 2017, with early adoption prohibited other than for certain provisions. We are evaluating the effectimpact that the new guidance will have on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASUNo. 2016-02,Leases, which replaces existing lease guidance. The ASU is intended to provide enhanced transparency and comparability by requiring lessees to recordright-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income.operations. The new guidance is effective for annual periods beginning after December 15, 2018, with early application permitted. The new standard is required to be applied with a modified retrospective approach. We are evaluating the effect that the new guidance will have on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASUNo. 2016-09,Compensation Improvement to Employee Share-Based Payment Accounting, which amends the current guidance related to stock compensation. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update to the standard iswas effective for annual periods beginning after December 15, 2016, with early application permitted. Adoption of this ASU resulted in a $0.8 million tax benefit during the thirteen weeks ended April 1, 2017. The amount of benefit, if any, in future periods will vary.

In August 2016, the FASB issued ASU2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies and provides guidance on eight cash flow classification issues and is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU2016-15 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are evaluating the effect that the new guidance will have on our consolidated financial statements and related disclosures.

11.Subsequent Events

On July 19, 2016,In January 2017, the FASB issued ASU2017-04,Simplifying the Test for Goodwill Impairment, which eliminates the need to perform a hypothetical purchase price allocation to measure goodwill impairment. ASU2017-04 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are evaluating the effect that the new guidance will have, however, we acquireddo not believe the new guidance will have a 40% minority equity interest in Powertrain Industries, Inc. (“PTI”), a leading manufacturer of driveshaftsmaterial impact on our consolidated financial statements and driveline related products, for approximately $6.2 million. PTI is headquartered in Garden Grove, CA with four driveshaft manufacturing facilities located regionally throughout the U.S.disclosures.

 

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

    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 would cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could 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 vendors, loss of third-party transportation providers, claims of intellectual property infringement, 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, unfavorable results of legal proceedings, dependence on the Company’s management team, disruption from events beyond the Company’s control, risks associated with conflict minerals, risks associated with cyber-attacks, the imposition of new taxes or duties, the termination or modification of accounts receivable sales agreements, and other risks and factors identified from time to time in the reports the Company files with the SEC. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. 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.1A Risk Factors”Factors,” in the Company’s Annual Report onForm 10-K for the fiscal year ended December 26, 2015.31, 2016. You should not place an 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 the availability of new information.

Introduction

The following discussion and analysis, as well as other sections in this Quarterly Report on Form10-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 Form10-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 Form10-K for the fiscal year ended December 26, 2015.31, 2016.

Overview

We believe we are a leading supplier of replacement parts and fasteners for passenger cars, light trucks and heavy duty trucks in the automotive aftermarket. We distribute and market approximately 150,000155,000 different 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 dominanta leading 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 devicesmodules and exhaust gas recirculation (EGR) coolers.

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

The automotive aftermarket has benefited from some of the factors affecting the general economy, including the impact of recessions, unemployment, and fluctuating 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 11.6 years as of November 2016, which is an increase from 11.5 years as of July 2015 which is an increase from 11.4 years as of June 2014 despite increasing new car sales. The number of miles driven is another important statistic that impacts our business. According to the United States Department of Transportation, the number of

Page 11 of 20


miles driven has increased each year since 2011 with miles driven having increased 3.5%3% as of November 2015December 2016 as compared to November 2014.December 2015. Generally, as vehicles are driven more miles, the more likely it is that parts will fail. We believe that the combination of the vehicle age increase and number of miles driven has contributed toaccounted for a portion of our sales growth.

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The overall automotive aftermarket in which we compete has benefited from the conditions mentioned above. However, our customer base has been consolidating for a number of years. As a result, our customers regularly seek more favorable pricing and product return provisions, 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 andend-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.

Our complex electronics program capitalizes on the growing number of electronic components being utilized on today’s Original Equipment platforms. Current production models contain an average of approximately thirty five electronic modules, with somehigh-end luxury vehicles containing over one hundred modules. Our complex electronics products are designed and developed in house and extensively tested to ensure consistent performance.

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. Our focus here is on formerly “dealer only” parts similar to the automotive side of the business. 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 820960 SKU’s in our medium and heavy duty product line.

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 net sales. The introduction of new products and product lines to customers may cause significant fluctuations from quarter to quarter.

We operate on afifty-two or fifty-three week fiscal year period ended on the last Saturday of the calendar year. Our 20162017 fiscal year will be a fifty-threefifty-two week period that will end on December 31, 2016.30, 2017. The fiscal year ended December 26, 201531, 2016 was a fifty-twofifty-three week period.

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   Thirteen Weeks Ended 
  June 25, 2016 June 27, 2015 June 25, 2016 June 27, 2015   April 1, 2017 March 26, 2016 

Net sales

  $209.6     100.0 $198.7     100.0 $417.7     100.0 $387.2     100.0  $221.6    100.0 $208.1    100.0

Cost of goods sold

  $127.4     60.8 $122.2     61.5 $255.0     61.0 $237.7     61.4  $132.9    60.0 $127.6    61.3

Gross profit

  $82.2     39.2 $76.6     38.5 $162.8     39.0 $149.5     38.6  $88.7    40.0 $80.6    38.7

Selling, general and administrative expenses

  $41.2     19.6 $39.7     19.9 $82.8     19.9 $78.9     20.4  $43.7    19.7 $41.7    20.0

Income from operations

  $41.0     19.6 $36.9     18.6 $79.9     19.1 $70.5     18.2  $45.0    20.3 $38.9    18.7

Interest expense, net

  $0.1     0.1 $0.1     0.1 $0.1     0.0 $0.1     0.0

Interest income (expense), net

  $0.1    0.1 $(0.1   (0.0%) 

Income before income taxes

  $40.9     19.5 $36.8     18.5 $79.8     19.1 $70.4     18.2  $45.1    20.4 $38.9    18.7

Provision for income taxes

  $14.9     7.1 $13.7     6.9 $29.1     7.0 $26.0     6.7  $15.9    7.2 $14.2    6.8

Net income

  $26.0     12.4 $23.1     11.6 $50.7     12.1 $44.5     11.5  $29.2    13.2 $24.7    11.9

 

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Thirteen Weeks Ended June 25, 2016April 1, 2017 Compared to Thirteen Weeks Ended June 27, 2015March 26, 2016

Net sales increased 5%6% to $209.6$221.6 million for the thirteen weeks ended June 25, 2016April 1, 2017 from $198.7$208.1 million for the thirteen weeks ended June 27, 2015. NetMarch 26, 2016. The increase in net sales growth at several of our large customers was partially offset by purchases from one large customeris primarily due to its first quarter of 2016 inventory build and the consolidation of another large customer.overall increased demand for our products, including our new products.

Gross profit margin was 39.2%40.0% of net sales for the thirteen weeks ended June 25, 2016 and 38.5%April 1, 2017 compared to 38.7% of net sales for the thirteen weeks ended June 27, 2015. The improvement inMarch 26, 2016.The increased gross profit margin was due toprimarily the result of a favorable sales mix lower transportationtowards higher margin products and leverage of costs and lower provisions for excess inventory during the thirteen weeks ended June 25, 2016 compared to the thirteen weeks ended June 27, 2015.across a higher sales volume.

Selling, general and administrative expenses were $41.2$43.7 million for the thirteen weeks ended June 25, 2016April 1, 2017 compared to $39.7$41.7 million for the thirteen weeks ended June 27, 2015.March 26, 2016. The increase during the thirteen weeks ended June 25, 2016April 1, 2017 was primarily due to increased variable costs associated with higher net sales and $0.6 million of increased incentive compensation expenses compared to the thirteen weeks ended June 27, 2015.general wage and benefit cost increases. Results for the thirteen weeks ended June 27, 2015March 26, 2016 include $1.0 million in costs associated with our now completed September 2014 ERP conversion.

Our effective tax rate was 36.5% for the thirteen weeks ended June 25, 2016 and 37.2% for the thirteen weeks ended June 27, 2015. The effective income tax rate decreased primarily due to lower provisions for state income taxes.

Twenty-six Weeks Ended June 25, 2016 Compared to Twenty-six Weeks Ended June 27, 2015

Net sales increased 8% to $417.7 million for the twenty-six weeks ended June 25, 2016 from $387.2 million for the twenty-six weeks ended June 27, 2015. The increase in net sales is primarily due to an inventory build at one customer in the first quarter of 2016 and overall strong demand for our products, including our new products.

Gross profit margin was 39.0% of net sales for the twenty-six weeks ended June 25, 2016 and 38.6% of net sales for the twenty-six weeks ended June 27, 2015. The improvement in gross profit margin was due to a favorable sales mix and lower transportation costs during the twenty-six weeks ended June 25, 2016 compared to the twenty-six weeks ended June 27, 2015.

Selling, general and administrative expenses were $82.8 million for the twenty-six weeks ended June 25, 2016 compared to $78.9 million for the twenty-six weeks ended June 27, 2015. The increase during the twenty-six weeks ended June 25, 2016 was primarily due to increased variable costs associated with higher net sales, a $0.9 million provision for doubtful accounts due to a customer that iswas in bankruptcy, and $0.8 million in increased expenses related to the accounts receivable sales program. Results for the twenty-six weeks ended June 27, 2015 include $2.7 million in costs associated with our now completed September 2014 ERP conversion.bankruptcy.

Our effective tax rate was 35.3% for the thirteen weeks ended April 1, 2017 compared to 36.5% for the twenty-sixthirteen weeks ended June 25, 2016 and 36.9% for the twenty-six weeks ended June 27, 2015.March 26, 2016. The effective income tax rate decreased primarily due to lowerincreased benefits from stock compensation expenses in accordance with our adoption of ASUNo. 2016-09 which were partially offset by higher provisions for state income taxes.

Liquidity and Capital Resources

Historically, our primary sources of liquidity have been our invested cash and the cash flowsflow we generate from our operations, including accounts receivable sales programs provided by our customers. Cash and cash equivalents at June 25, 2016April 1, 2017 increased to $87.9$156.3 million from $78.7$149.1 million at December 26, 2015.31, 2016. Working capital was $410.4$453.6 million at June 25, 2016April 1, 2017 compared to $380.1$447.8 million at December 26, 2015.31, 2016. Shareholders’ equity was $552.5$620.0 million at June 25, 2016April 1, 2017 and $518.0$601.6 million at December 26, 2015.31, 2016. 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. However, our liquidity could be negatively affected by extending payment terms to customers, a decrease in demand for our products, or other factors.

Over the past several years we have continued to extend payment terms to certain customers as a result of customer requests and market demands. These extended terms have resulted in increased accounts receivable levels and significant uses of cash flows. 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. During the twenty-sixthirteen weeks ended June 25,April 1, 2017 and March 26, 2016, and June 27, 2015, we sold approximately $257.8$146.0 million and $266.9$135.2 million, respectively, under these programs. We had the ability to sell significantly more accounts receivable under these programs if the needs of the business warranted. We expect

Page 13 of 20


continued pressure to extend our payment terms for the foreseeable future. Further extensions of customer payment terms will result in additional uses of cash flow or increased costs associated with the sales of accounts receivable.

We have a $30.0 million revolving credit facility which expires in June 2017. Borrowings under the facility are on an unsecured basis with interest at rates ranging from LIBOR plus 65 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 25, 2016April 1, 2017 was LIBOR plus 65 basis points (1.10%(1.63%). There were no borrowings under the facility as of June 25, 2016.April 1, 2017. As of June 25, 2016,April 1, 2017, we had two outstanding letters of credit for approximately $1.0$0.8 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$29.2 million available under the facility at June 25, 2016.April 1, 2017. 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 25, 2016,April 1, 2017, we were in compliance with all financial covenants contained in the revolving credit facility.

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Cash Flows

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

 

  Twenty-six Weeks Ended   Thirteen Weeks Ended 

(in thousands)

  June 25,
2016
   June 27,
2015
   April 1,
2017
   March 26,
2016
 

Cash provided by operating activities

  $36,544    $34,855    $38,145   $23,914 

Cash used in investing activities

   (10,118   (13,016   (18,745   (5,598

Cash used in financing activities

   (17,188   (2,296   (12,177   (9,997
  

 

   

 

   

 

   

 

 

Net increase in cash and cash equivalents

  $9,238    $19,543    $7,223   $8,319 
  

 

   

 

   

 

   

 

 

During the twenty-sixthirteen weeks ended June 25, 2016,April 1, 2017, cash provided by operating activities was $36.5$38.1 million primarily as a result of $50.7$29.2 million in net income,non-cash adjustments to net income of $11.2$4.5 million and a net increase in operating assets and liabilities of $25.4$4.4 million. AccountsCompared to the Consolidated Balance Sheet at December 31, 2016, accounts receivable increased $13.9$2.5 million due to timing of cash receipts. Accounts payable decreased by $0.7 million. Other assets and liabilities, net, increased sales.by $5.4 million primarily due to an increase in accrued income taxes partially offset by a decrease in accrued compensation.

During the thirteen weeks ended March 26, 2016, cash provided by operating activities was $23.9 million primarily as a result of $24.7 million in net income,non-cash adjustments to net income of $5.5 million and a net decrease in operating assets and liabilities of $6.3 million. Compared to the Consolidated Balance Sheet at December 26, 2015, accounts receivable increased $4.5 million due to increasing sales over our average days outstanding. Inventory decreased $14.8$6.1 million due to lower inventory purchases and increased net sales. Accounts payable decreased by $11.4$11.9 million due to lower inventory purchases. Other liabilities decreased by $10.3 million due to a decrease in the income taxes payable and a decrease in accrued customer rebates.

During the twenty-six weeks ended June 27, 2015, cash provided by operating activities was $34.9 million primarily as a result of $44.5 million in net income, non-cash adjustments to net income of $6.7 million and a net increase in operating assets and liabilities of $16.4 million. Accounts receivable decreased $8.7 million due to increased sales of accounts receivable which were partially offset by higher net sales. Inventory increased $25.3 million due to purchases to support sales growth and new product initiatives. Accounts payable increased $8.5 million due to increased inventory purchases and the timing of payments to our vendors. Other liabilities decreased by $4.9 million due to a decrease in the income taxes payable and a decrease in accrued customer rebates.

Investing activities used $10.1$18.7 million of cash in the twenty-sixthirteen weeks ended June 25, 2016April 1, 2017 and $13.0$5.6 million in the twenty-sixthirteen weeks ended June 27, 2015.March 26, 2016.

 

Capital spending in the twenty-sixthirteen weeks ended June 25, 2016April 1, 2017 was primarily related to $5.0$2.3 million in tooling associated with new products and $2.6$2.0 million in enhancements and upgrades to our information systems.

 

Capital spending in the twenty-sixthirteen weeks ended June 27, 2015March 26, 2016 was primarily related to $5.3$2.8 million in tooling associated with new products $2.0 million in the purchase of a minority equity interest, and $2.8$1.0 million in enhancements and upgrades to our information systems.

Additionally, during the thirteen weeks ended April 1, 2017, we used $3.1 million to acquire certain assets of Ingalls Engineering Co., Inc. and $10.0 million to acquire a minority equity interest in a supplier.

 

The remaining capital spending in both periods resulted from scheduled equipment replacements, certain facility improvements and other capital projects.

Financing activities used $17.2$12.2 million of cash in the twenty-sixthirteen weeks ended June 25, 2016April 1, 2017 and $2.3$10.0 million in the twenty-sixthirteen weeks ended June 27, 2015.March 26, 2016.

 

In the twenty-sixthirteen weeks ended June 25, 2016,April 1, 2017, we paid $16.1$11.0 million to repurchase 329,666138,900 common shares. In the twenty-sixthirteen weeks ended June 27, 2015,March 26, 2016, we paid $1.5$9.6 million to repurchase 32,900207,166 common shares.

 

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The remaining sources and uses of cash from financing activities in each period result from stock compensation plan activity and the repurchase of common stock from our 401(k) Plan.

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-sixthirteen weeks ended June 25, 2016,April 1, 2017, we experienced no material changes to our contractual obligations as disclosed in our Annual Report on Form10-K for the year ended December 26, 2015.31, 2016.

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Foreign Currency Fluctuations

In fiscal 2015,2016, approximately 71%77% 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 U.S. Dollar and various foreign currencies between the time of execution of the purchase order and payment for the product. To the extent that the U.S. Dollar changes in value relative to foreign currencies in the future, the price of the product for new purchase orders may change in equivalent U.S. Dollars.

The largest portion of our overseas purchases comes from China. During the twenty-six weeks ended June 25, 2016, theThe Chinese Yuan decreased in value relative to the U.S. Dollar by approximately 2.0%. Duringexchange rate has fluctuated over the fifty-two weeks ended December 26, 2015, the Chinese Yuan decreased in value relative to the U.S. Dollar by approximately 5.4%.past several years. Any future changes in the value of the Chinese Yuan relative to the U.S. Dollar may result in a change 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 commodities that are used in our products has fluctuated over time resulting in increases and decreases in the cost 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 sourcing purchases from 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 10,11, New and Recently Adopted Accounting Pronouncements, to the Notes to Consolidated Financial Statements.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Our market risk is the potential loss arising from adverse changes in interest rates. Substantially all of our available credit and our accounts receivable sale programs bear interest at rates tied to LIBOR. Under the terms of our revolving credit facility and customer-sponsored programs to sell accounts receivable, a change in either the lender’s base rate, LIBOR or discount rates under our accounts receivable sale programs would affect the rate at which we could access funds thereunder. A one percentage point increase in LIBOR or the discount rates under the accounts receivable sales programs would increase our interest expense on our variable rate debt, if any, and our financing costs associated with our sales of accounts receivable by approximately $3.5$3.7 million annually. This estimate assumes that our variable rate debt balance and the level of sales of accounts receivable remains constant for an annual period and the interest rate change occurs at the beginning of the period. The hypothetical changes and assumptions may be different from what actually occurs in the future.

We have not historically and do not intend to use derivative financial instruments for trading or to speculate on changes in interest rates or commodity prices. We are not exposed to any significant market risks, foreign currency exchange risk or interest rate risk from the use of derivative instruments.

Item 4. Controls and Procedures

Item 4.Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule13a-15(e). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures, as defined in Rule13a-15(e), were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter ended June 25, 2016April 1, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there was no such change during the quarter ended June 25, 2016.April 1, 2017.

Limitations on the Effectiveness of Controls

Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1.Legal Proceedings

We are a party to or otherwise involved in legal proceedings that arise in the ordinary course of business, such as various claims and legal actions involving contracts, competitive practices, intellectual property infringement, product liability claims and other matters arising out of the conduct of our business. In the opinion of management, none of the actions, individually or in the aggregate, would likely have a material financial impact on the Company and we believe the range of reasonably possible losses from current matters is immaterial.

Item 1A. Risk Factors

Item 1A.Risk Factors

You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form10-K for the year ended December 26, 2015,31, 2016, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

During the thirteen weeks ended June 25, 2016,April 1, 2017, we purchased shares of our common stock as follows:

 

Period

  Total Number
of Shares
Purchased
(1)(2)
   Average
Price Paid
per Share
   Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs (2)
   Maximum
Number (or
Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Plans
or Programs (2)
 

March 27, 2016 through April 23, 2016

   7,750    $53.93     —      $64,274,560  

April 24, 2016 through May 21, 2016

   61,448    $52.36     55,500    $61,373,905  

May 22, 2016 through June 25, 2016

   69,852    $53.27     67,000    $57,809,775  
  

 

 

     

 

 

   

Total

   139,050    $52.91     122,500    $57,809,775  
  

 

 

     

 

 

   

Period

  Total Number
of Shares
Purchased
(1) (2)
   Average
Price Paid
per Share
   Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs (2)
   Maximum
Number (or
Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the  Plans
or Programs (2)
 

December 31, 2016 through January 28, 2017

   3,501   $68.68    —     $151,430,329 

January 29, 2017 through February 25, 2017

   5,408   $74.74    —     $151,430,329 

February 26, 2017 through April 1, 2017

   145,237   $79.41    138,900   $140,397,571 
  

 

 

     

 

 

   

Total

   154,146   $79.00    138,900   $140,397,571 
  

 

 

     

 

 

   

 

(1)Includes 11,8203,830 shares purchased from the Dorman Products, Inc. 401(k) Plan and Trust (as described in Note 6 to the Notes to Consolidated Financial Statements in this Quarterly Report on Form10-Q). Also includes 4,73011,416 shares of our common stock withheld from participants for income tax withholding purposes in connection with the vesting of restricted stock grants during the period, if any.period. The restricted stock was issued to participants pursuant to our 2008 Stock Option and Incentive Plan.
(2)On December 12, 2013 we announced that our Board of Directors authorized a share repurchase program, authorizing the repurchase of up to $10 million of our outstanding common stock by the end of 2014. Through several expansionexpansions and extensions, our Board of Directors has expanded the program up to $150$250 million and expanded theextended program through December 31, 2016.2018. Under this program, share repurchases may be made from time to time depending on market conditions, share price, share availability and other factors at our discretion. The share repurchase program does not obligate us to acquire any specific number of shares. We repurchased 122,500138,900 shares under this program during the thirteen weeks ended June 25, 2016.April 1, 2017.

Item 3. Defaults Upon Senior Securities

Item 3.Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Item 4.Mine Safety Disclosures

Not Applicable

Item 5. Other Information

Item 5.Other Information

None

 

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Item 6. Exhibits

Item 6.Exhibits

 

 (a)Exhibits

The Exhibits included in this report are listed in the Exhibit Index on page 20, which is incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dorman Products, Inc.

July 28, 2016

 

Dorman Products, Inc.
May 4, 2017

/s/ Mathias J. Barton

Mathias J. Barton

President and Chief Executive Officer

(principal executive officer)

July 28, 2016

May 4, 2017

/s/ Kevin M. Olsen

Kevin M. Olsen
Senior Vice President and
Chief Financial Officer
(principal financial and accounting officer)

 

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EXHIBIT INDEX

 

10.13†Offer Letter, dated May 2, 2016, by and between the Company and Kevin Olsen. Incorporated by reference to the Exhibit filed with the Company’s Current Report on Form 8-K filed on May 25, 2016.
31.1  Certification of Chief Executive Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002 (filed with this report).
31.2  Certification of Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002 (filed with this report).
32  Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished with this report).
101  The following financial statements from the Dorman Products, Inc. Quarterly Report on Form10-Q as of and for the quarter ended June 25, 2016,April 1, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Income; (ii) the Consolidated Balance Sheets; (iii) the Consolidated Statements of Cash Flows and (iv) the Notes to Consolidated Financial Statements.

Management Contracts and Compensatory Plans, Contracts or Arrangements.

 

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