Pennsylvania | | | | Pennsylvania | | 23-2078856 | (State or other jurisdiction of | | (I.R.S. Employer | 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 ☐ 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 Regulation S-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 ☐ No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | Large accelerated filer | | ☒ | | 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 Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No As of October 24, 2016,30, 2017, the registrant had 34,613,54733,722,426 shares of common stock, par value $0.01 per share, outstanding.
Page 1Table of 21Contents
DORMAN PRODUCTS, INC. AND SUBSIDIARIES INDEX TO QUARTERLY REPORT ON FORM 10-Q September 24, 201630, 2017 2
Table of Contents Page 2 of 21
PART I. FINANCIALFINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) | | | For the Thirteen Weeks Ended | | | Thirteen Weeks Ended | | (in thousands, except per share data) | | September 24, 2016 | | | September 26, 2015 | | | September 30, 2017 | | | September 24, 2016 | | Net sales | | $ | 212,786 | | | $ | 210,928 | | | $ | 224,615 | | | $ | 212,786 | | Cost of goods sold | | | 129,641 | | | | 130,134 | | | | 136,489 | | | | 129,641 | | | | | | | | | | Gross profit | | | 83,145 | | | | 80,794 | | | | 88,126 | | | | 83,145 | | Selling, general and administrative expenses | | | 41,512 | | | | 39,554 | | | | 45,336 | | | | 41,512 | | | | | | | | | | Income from operations | | | 41,633 | | | | 41,240 | | | | 42,790 | | | | 41,633 | | Interest expense, net | | | 61 | | | | 48 | | | | | | | | | | | Interest income (expense), net | | | | 168 | | | | (61 | ) | Income before income taxes | | | 41,572 | | | | 41,192 | | | | 42,958 | | | | 41,572 | | Provision for income taxes | | | 14,877 | | | | 15,132 | | | | 15,950 | | | | 14,877 | | | | | | | | | | Net income | | $ | 26,695 | | | $ | 26,060 | | | $ | 27,008 | | | $ | 26,695 | | | | | | | | | | Earnings Per Share: | | | | | | | | | | | | | Basic | | $ | 0.77 | | | $ | 0.73 | | | $ | 0.80 | | | $ | 0.77 | | Diluted | | $ | 0.77 | | | $ | 0.73 | | | $ | 0.80 | | | $ | 0.77 | | Weighted Average Shares Outstanding: | | | | | | | | | | | | | Basic | | | 34,572 | | | | 35,514 | | | | 33,822 | | | | 34,572 | | Diluted | | | 34,672 | | | | 35,575 | | | | 33,909 | | | | 34,672 | |
See accompanying Notes to Consolidated Financial Statements 3
Table of Contents Page 3 of 21PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTSDORMAN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) | | | For the Thirty-nine Weeks Ended | | | Thirty-Nine Weeks Ended | | (in thousands, except per share data) | | September 24, 2016 | | | September 26, 2015 | | | September 30, 2017 | | | September 24, 2016 | | Net sales | | $ | 630,507 | | | $ | 598,123 | | | $ | 675,502 | | | $ | 630,507 | | Cost of goods sold | | | 384,604 | | | | 367,866 | | | | 407,781 | | | | 384,604 | | | | | | | | | | Gross profit | | | 245,903 | | | | 230,257 | | | | 267,721 | | | | 245,903 | | Selling, general and administrative expenses | | | 124,350 | | | | 118,470 | | | | 134,890 | | | | 124,350 | | | | | | | | | | Income from operations | | | 121,553 | | | | 111,787 | | | | 132,831 | | | | 121,553 | | Interest expense, net | | | 180 | | | | 152 | | | | | | | | | | | Interest income (expense), net | | | | 472 | | | | (180 | ) | Income before income taxes | | | 121,373 | | | | 111,635 | | | | 133,303 | | | | 121,373 | | Provision for income taxes | | | 44,025 | | | | 41,093 | | | | 48,671 | | | | 44,025 | | | | | | | | | | Net income | | $ | 77,348 | | | $ | 70,542 | | | $ | 84,632 | | | $ | 77,348 | | | | | | | | | | Earnings Per Share: | | | | | | | | | | | | | Basic | | $ | 2.24 | | | $ | 1.99 | | | $ | 2.48 | | | $ | 2.24 | | Diluted | | $ | 2.23 | | | $ | 1.98 | | | $ | 2.47 | | | $ | 2.23 | | Weighted Average Shares Outstanding: | | | | | | | | | | | | | Basic | | | 34,560 | | | | 35,535 | | | | 34,111 | | | | 34,560 | | Diluted | | | 34,626 | | | | 35,611 | | | | 34,202 | | | | 34,626 | |
See accompanying Notes to Consolidated Financial Statements 4
Table of Contents Page 4 of 21
DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED(UNAUDITED)
| (in thousands, except for share data) | | September 24, 2016 | | | December 26, 2015 | | | September 30, 2017 | | | December 31, 2016 | | Assets | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 95,142 | | | $ | 78,659 | | | $ | 116,789 | | | $ | 149,121 | | Accounts receivable, less allowance for doubtful accounts and customer credits of $85,797 and $86,986 | | | 245,006 | | | | 203,923 | | | Accounts receivable, less allowance for doubtful accounts and customer credits of $98,896 and $99,995 | | | | 231,094 | | | | 230,526 | | Inventories | | | 168,245 | | | | 193,725 | | | | 201,805 | | | | 168,851 | | Prepaids and other current assets | | | 4,259 | | | | 2,326 | | | | 4,348 | | | | 3,116 | | | | | | | | | | Total current assets | | | 512,652 | | | | 478,633 | | | | 554,036 | | | | 551,614 | | | | | | | | | | Property, plant and equipment, net | | | 88,384 | | | | 87,046 | | | | 89,897 | | | | 88,436 | | Goodwill and intangible assets, net | | | 29,814 | | | | 29,889 | | | | 32,489 | | | | 29,788 | | Deferred tax asset, net | | | 7,581 | | | | 7,557 | | | | 16,427 | | | | 12,429 | | Other assets | | | 29,574 | | | | 18,740 | | | | 45,169 | | | | 29,525 | | | | | | | | | | Total | | $ | 668,005 | | | $ | 621,865 | | | $ | 738,018 | | | $ | 711,792 | | | | | | | | | | Liabilities and shareholders’ equity | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | Accounts payable | | $ | 52,481 | | | $ | 63,967 | | | $ | 72,661 | | | $ | 72,629 | | Accrued compensation | | | 8,668 | | | | 10,970 | | | | 10,316 | | | | 11,899 | | Other accrued liabilities | | | 22,156 | | | | 23,633 | | | | 17,584 | | | | 19,320 | | | | | | | | | | Total current liabilities | | | 83,305 | | | | 98,570 | | | | 100,561 | | | | 103,848 | | | | | | | | | | Other long-term liabilities | | | 5,536 | | | | 5,259 | | | | 9,357 | | | | 6,302 | | Commitments and contingencies | | | | | | | | | | | | | Shareholders’ Equity: | | | | | | | | | | | | | Common stock, par value $0.01; authorized 50,000,000 shares; issued and outstanding 34,613,547 and 34,863,396 in 2016 and 2015, respectively | | | 346 | | | | 349 | | | Common stock, par value $0.01; authorized 50,000,000 shares; issued and Outstanding 33,800,763 and 34,517,633 in 2017 and 2016, respectively | | | | 338 | | | | 345 | | Additional paid-in capital | | | 43,756 | | | | 42,799 | | | | 44,492 | | | | 44,187 | | Retained earnings | | | 535,062 | | | | 474,888 | | | | 583,270 | | | | 557,110 | | | | | | | | | | Total shareholders’ equity | | | 579,164 | | | | 518,036 | | | | 628,100 | | | | 601,642 | | | | | | | | | | Total | | $ | 668,005 | | | $ | 621,865 | | | $ | 738,018 | | | $ | 711,792 | | | | | | | | | |
See accompanying Notes to Consolidated Financial Statements 5
Table of Contents Page 5 of 21
DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | | | For the Thirty-nine Weeks Ended | | | Thirty-Nine Weeks Ended | | (in thousands) | | September 24, 2016 | | September 26, 2015 | | | September 30, 2017 | | | September 24, 2016 | | Cash Flows from Operating Activities: | | | | | | | | | | | | | Net income | | $ | 77,348 | | | $ | 70,542 | | | $ | 84,632 | | | $ | 77,348 | | Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | | | | | | | Depreciation, amortization and accretion | | | 13,890 | | | 11,739 | | | | 15,968 | | | | 13,890 | | Provision for doubtful accounts | | | 1,146 | | | 85 | | | | 225 | | | | 1,146 | | Benefit for deferred income taxes | | | (24 | ) | | (2,462 | ) | | | (3,998 | ) | | | (24 | ) | Provision for non-cash stock compensation | | | 1,718 | | | 752 | | | | 2,282 | | | | 1,718 | | Changes in assets and liabilities: | | | | | | | | | | | | | Accounts receivable | | | (42,229 | ) | | 6,693 | | | | (793 | ) | | | (42,229 | ) | Inventories | | | 24,480 | | | (21,727 | ) | | | (30,990 | ) | | | 25,480 | | Prepaids and other current assets | | | (911 | ) | | (397 | ) | | | (1,232 | ) | | | (911 | ) | Other assets | | | (4,639 | ) | | (4,652 | ) | | | (5,644 | ) | | | (4,639 | ) | Accounts payable | | | (11,646 | ) | | 377 | | | | 310 | | | | (11,646 | ) | Accrued compensation and other liabilities | | | (4,627 | ) | | (3,467 | ) | | | (1,398 | ) | | | (4,627 | ) | | | | | | | | | Cash provided by operating activities | | | 55,506 | | | 57,483 | | | | 59,362 | | | | 55,506 | | | | | | | | | | Cash Flows from Investing Activities: | | | | | | | | | | | | | Property, plant and equipment additions | | | (14,890 | ) | | (16,534 | ) | | | (17,436 | ) | | | (14,890 | ) | Purchase of equity investment | | | (6,195 | ) | | (2,000 | ) | | | | | | | | | | Purchase of investments | | | | (13,128 | ) | | | (6,195 | ) | Cash used in investing activities | | | (21,085 | ) | | (18,534 | ) | | | (30,564 | ) | | | (21,085 | ) | | | | | | | | | Cash Flows from Financing Activities: | | | | | | | | | | | | | Proceeds from exercise of stock options | | | — | | | 16 | | | Other stock related activity | | | (109 | ) | | 34 | | | | (997 | ) | | | (109 | ) | Purchase and cancellation of common stock | | | (17,829 | ) | | (7,334 | ) | | | (60,133 | ) | | | (17,829 | ) | | | | | | | | | Cash used in financing activities | | | (17,938 | ) | | (7,284 | ) | | | (61,130 | ) | | | (17,938 | ) | | | | | | | | | Net Increase in Cash and Cash Equivalents | | | 16,483 | | | 31,665 | | | Net (Decrease) Increase in Cash and Cash Equivalents | | | | (32,332 | ) | | | 16,483 | | Cash and Cash Equivalents, Beginning of Period | | | 78,659 | | | 47,656 | | | | 149,121 | | | | 78,659 | | | | | | | | | | Cash and Cash Equivalents, End of Period | | $ | 95,142 | | | $ | 79,321 | | | $ | 116,789 | | | $ | 95,142 | | | | | | | | | | Supplemental Cash Flow Information | | | | | | | | | | | | | Cash paid for interest expense | | $ | 200 | | | $ | 211 | | | $ | 218 | | | $ | 200 | | Cash paid for income taxes | | $ | 46,121 | | | $ | 41,709 | | | $ | 55,713 | | | $ | 46,121 | |
See accompanying Notes to Consolidated Financial Statements 6
Table of Contents Page 6 of 21
DORMAN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THRITY-NINETHIRTY-NINE WEEKS ENDED SEPTEMBER 24, 201630, 2017 AND SEPTEMBER 26, 201524, 2016 (UNAUDITED) 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 thirty-nine weeks ended September 24, 201630, 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 Form 10-K for the fiscal year ended December 26, 2015.31, 2016. 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 $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 have completed our purchase price allocation procedures and recorded $2.8 million in goodwill and other intangible assets and $2.0 million of other net assets. 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 $366.6$442.5 million and $391.9$366.6 million of accounts receivable during the thirty-nine weeks ended September 24, 201630, 2017 and September 26, 2015,24, 2016, respectively. If receivables had not been sold, $337.3$371.7 million and $335.9$338.3 million of additional accounts receivable would have been outstanding at September 24, 201630, 2017 and December 26, 2015,31, 2016, respectively, based on standard payment terms. Selling, general and administrative expenses for the thirty-nine weeks ended September 30, 2017 and September 24, 2016 and September 26, 2015 included $6.3$8.4 million and $5.4$6.3 million, respectively, in financing costs associated with these accounts receivable sales programs. 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) | | September 24, 2016 | | | December 26, 2015 | | | September 30, 2017 | | | December 31, 2016 | | Bulk product | | $ | 62,445 | | | $ | 78,533 | | | $ | 71,406 | | | $ | 72,833 | | Finished product | | | 102,331 | | | | 112,012 | | | | 127,626 | | | | 93,223 | | Packaging materials | | | 3,469 | | | | 3,180 | | | | 2,773 | | | | 2,795 | | | | | | | | | | Total | | $ | 168,245 | | | $ | 193,725 | | | $ | 201,805 | | | $ | 168,851 | | | | | | | | | |
7
Table of Contents
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 and non-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 September 24, 2016, 1,532,85630, 2017, 1,400,009 shares were available for grant under the Plan. Page 7 of 21
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 $1.6$2.1 million and $0.7$1.6 million for the thirty-nine weeks ended September 24, 201630, 2017 and September 26, 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 thirty-nine weeks ended September 24, 2016, or the thirty-nine weeks ended September 26, 2015.respectively. The following table summarizes our restricted stock activity for the thirty-nine weeks ended September 24, 2016:30, 2017: | | Shares | | | Weighted Average Price | | Balance at December 31, 2016 | | | 145,363 | | | $ | 49.22 | | Granted | | | 69,708 | | | $ | 78.42 | | Vested | | | (49,107 | ) | | $ | 53.57 | | Cancelled | | | (5,294 | ) | | $ | 51.56 | | Balance at September 30, 2017 | | | 160,670 | | | $ | 60.48 | |
| | | | | | | | | | | Shares | | | Weighted Average Price | | Balance at December 26, 2015 | | | 43,242 | | | $ | 34.49 | | Granted | | | 117,144 | | | $ | 45.63 | | Vested | | | (23,822 | ) | | $ | 30.27 | | Cancelled | | | (240 | ) | | $ | 18.94 | | | | | | | | | | | Balance at September 24, 2016 | | | 136,324 | | | $ | 44.83 | | | | | | | | | | |
As of September 24, 2016,30, 2017, there was approximately $4.5$7.1 million of unrecognized compensation cost related to nonvested restricted stock, which is expected to be recognized over a weighted-average period of 2.9approximately 2.3 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 ASU No. 2016-09 (see Note 11), the excess tax benefit generated from restricted shares which vested in the thirty-nine weeks ended September 30, 2017 was $0.3 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 thirty-nine weeks ended September 24, 2016 and September 26, 2015, respectively,was $0.2 million and was credited to additional paid-in capital. We grant stock options to certain employees and members of theour 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 was $0.2 million and $0.1 million for the thirty-nine weeks ended September 30, 2017 and September 24, 2016, and September 26, 2015 was less than $0.1 million in each period.respectively. The compensation costs were classified as selling, general and administrative expense in the Consolidated Statements of Income. No cost was capitalized during the thirty-nine weeks ended September 24, 2016 or the thirty-nine weeks ended September 26, 2015. We included a forfeiture assumption of 5.4% in the calculation of expense in each of the thirty-nine weeks ended30, 2017 and September 24, 2016 and September 26, 2015.2016. 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 thirty-nine weeks ended September 30, 2017 and September 24, 2016, we granted 58,024 and 61,084 stock options. There were no stock options, granted in the thirty-nine weeks ended September 26, 2015.respectively. 8
Table of Contents Page 8 of 21
The following table summarizes our stock option activity for the thirty-nine weeks ended September 24, 2016:30, 2017: | | Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Term (In years) | | | Aggregate Intrinsic Value | | Balance at December 31, 2016 | | | 101,084 | | | $ | 29.52 | | | | | | | | | | Granted | | | 58,024 | | | $ | 78.58 | | | | | | | | | | Cancelled | | | (3,810 | ) | | $ | 56.72 | | | | | | | | | | Exercised | | | (32,751 | ) | | $ | 7.69 | | | | | | | | | | Balance at September 30, 2017 | | | 122,547 | | | $ | 57.74 | | | | 3.8 | | | $ | 2,098,758 | | Options exercisable at September 30, 2017 | | | 22,520 | | | $ | 31.07 | | | | 2.8 | | | $ | 913,128 | |
| | | | | | | | | | | | | | | | | | | 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 September 24, 2016 | | | 101,084 | | | $ | 29.52 | | | | 3.3 | | | $ | 3,737,400 | | | | | | | | | | | | | | | | | | | Options exercisable at September 24, 2016 | | | 40,000 | | | $ | 6.86 | | | | 1.5 | | | $ | 2,385,320 | |
No stockThere were 32,751 options were exercised during the thirty-nine weeks ended September 30, 2017. There were no options exercised in the thirty-nine weeks ended September 24, 2016. As of September 24, 2016,30, 2017, there was $0.5$1.1 million of unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of 3.53.2 years.
The cash received from stock option exercises was $0.1 million in the thirty-nine weeks ended September 30, 2017. There was no cash received orgenerated from stock option exercises in the thirty-nine weeks ended September 24, 2016. In accordance with ASU No. 2016-09 (see Note 11), the excess tax benefit generated from stock options exercised in the thirty-nine weeks ended September 30, 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 thirty-nine weeks ended September 24, 2016 or September 26, 2015.2016. 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 16,00015,413 shares and 7,00015,680 shares were excluded from the calculation of diluted earnings per share as of September 24, 201630, 2017 and September 26, 2015,24, 2016, 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 | | | Thirty-Nine Weeks Ended | | (in thousands, except per share data) | | September 30, 2017 | | | September 24, 2016 | | | September 30, 2017 | | | September 24, 2016 | | Numerator | | | | | | | | | | | | | | | | | Net income | | $ | 27,008 | | | $ | 26,695 | | | $ | 84,632 | | | $ | 77,348 | | Denominator: | | | | | | | | | | | | | | | | | Weighted average basic shares outstanding | | | 33,822 | | | | 34,572 | | | | 34,111 | | | | 34,560 | | Effect of stock-based compensation awards | | | 87 | | | | 100 | | | | 91 | | | | 66 | | Weighted average diluted shares outstanding | | | 33,909 | | | | 34,672 | | | | 34,202 | | | | 34,626 | | Earnings Per Share: | | | | | | | | | | | | | | | | | Basic | | $ | 0.80 | | | $ | 0.77 | | | $ | 2.48 | | | $ | 2.24 | | Diluted | | $ | 0.80 | | | $ | 0.77 | | | $ | 2.47 | | | $ | 2.23 | |
| | | | | | | | | | | | | | | | | | | Thirteen Weeks Ended | | | Thirty-nine Weeks Ended | | (in thousands, except per share data) | | September 24, 2016 | | | September 26, 2015 | | | September 24, 2016 | | | September 26, 2015 | | Numerator | | | | | | | | | | | | | | | | | Net income | | $ | 26,695 | | | $ | 26,060 | | | $ | 77,348 | | | $ | 70,542 | | Denominator: | | | | | | | | | | | | | | | | | Weighted average basic shares outstanding | | | 34,572 | | | | 35,514 | | | | 34,560 | | | | 35,535 | | Effect of stock-based compensation awards | | | 100 | | | | 61 | | | | 66 | | | | 76 | | | | | | | | | | | | | | | | | | | Weighted average diluted shares outstanding | | | 34,672 | | | | 35,575 | | | | 34,626 | | | | 35,611 | | | | | | | | | | | | | | | | | | | Earnings Per Share: | | | | | | | | | | | | | | | | | Basic | | $ | 0.77 | | | $ | 0.73 | | | $ | 2.24 | | | $ | 1.99 | | Diluted | | $ | 0.77 | | | $ | 0.73 | | | $ | 2.23 | | | $ | 1.98 | |
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 thirty-nine weeks ended September 24, 2016,30, 2017, we repurchased and cancelled 31,69015,130 shares of common stock for $1.7$1.1 million at an average price of $54.85$75.28 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 $1.46$2.2 million at an average price of $48.14$56.66 per share. 9
Table of Contents Our Board of Directors authorized a share repurchase program of 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 thirty-nine weeks ended September 24, 2016,30, 2017, we repurchased and cancelled 329,666782,425 shares of common stock for $16.1$59.0 million at an average price of $48.81$75.41 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 September 24, 2016, we have $57.8 million remaining under this program to repurchase shares. Page 9 of 21
7.8. | Related-Party Transactions |
We have a non-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. One member of Mr. Berman’s family also beneficially owns more than 5% of Dorman’s outstanding common stock. 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 a 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 minority interest in two other suppliers, including Powertrain Industries, Inc. (“PTI”) whom we acquired a 40%33% minority equity interest in a supplier, which we purchased on July 19, 2016January 27, 2017 for $6.2$10.0 million. PTI is a leading manufacturer of driveshafts and driveline related products and is headquartered in Garden Grove, CA with four driveshaft manufacturing facilities located regionally throughout the United States. At any time, we can elect to purchase all of remaining capital stock of PTI. Also, between July 2019 and July 2021, the majority shareholders may require us to purchase all of the remaining capital stock of PTI. In either case, the purchase price of the shares will be determined using an earnings multiple specified in the PTI purchase agreement. At September 24, 2016,30, 2017, we had $1.9$5.1 million of net unrecognized tax benefits, $1.4$3.5 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 September 24, 2016,30, 2017, we had approximately $0.2$0.3 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 20132014 are closed for federal tax purposes. We are currently under examination by one state tax authority for years 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. 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 ASU No. 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 have completed an initial evaluation of the ASU, including certain contract reviews. We are evaluatingcontinuing to assess the effect that ASU 2014-09 will haveimpact of this new standard on our business processes, business and accounting systems, and consolidated financial statements and related disclosures. WeBased 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. 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 ASU No. 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 using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-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, 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. 10
Table of Contents In January 2016, the FASB issued ASU No. 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 ASU No. 2016-02,Leases, which replaces existing lease guidance. The ASU is intended to provide enhanced transparency and comparability by requiring lessees to record right-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. Page 10 of 21
In March 2016, the FASB issued ASU No. 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. We are evaluatingAdoption of this ASU resulted in a $0.9 million tax benefit during the effect that the new guidancethirty-nine weeks ended September 30, 2017. The amount of benefit, if any, in future periods will have on our consolidated financial statements and related disclosures.vary. In August 2016, the FASB issued ASU 2016-15,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. ASU 2016-15 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. In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates the need to perform a hypothetical purchase price allocation to measure goodwill impairment. ASU 2017-04 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 do not believe the new guidance will have a material impact on our consolidated financial statements and related disclosures. In May 2017, the FASB issued Accounting Standards Update No. 2017-09, "Scope of Modification Accounting" ("ASU 2017-09"), which provides guidance on changes to share based payment awards requiring application of modification accounting under FASB Accounting Standards Codification Topic 718, "Compensation - Stock Compensation". Under this ASU, modification accounting for awards will not be required if the fair value, vesting conditions, and classifications of awards both prior to and after the modification are the same. ASU 2017-09 is effective for fiscal years and interim periods beginning after December 15, 2017; early adoption is permitted with amendments resulting from the ASU applied prospectively to awards modified after the effective date. We are evaluating the impact that the new guidance will have on our consolidated financial statements and related disclosures. On October 27, 2017, the Company announced that it has closed on the acquisition of MAS Automotive Distribution Inc., (“MAS Industries”), a privately held manufacturer of premium chassis and control arms based in Montreal, Canada, for approximately $60 million in cash at the time of closing. This payment does not include any contingent consideration or other customary purchase price adjustments which have not yet been determined. MAS Industries is expected to generate approximately $40 million of net sales for the twelve months ended December 30, 2017. The Company financed the acquisition with cash on hand. Page
11
Table of 21Contents
ITEM 2.Management’s Discussion and AnalysisAnalysis 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 on Form 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 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 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 CoCo. - 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 JanuaryNovember 2016, which is an increase from 11.5 years as of JanuaryJuly 2015 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 miles driven has increased each year since 2011 with miles driven having increased 3.5%3% as of November 2015December 2016 as compared to Page 12 of 21
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.
12
Table of Contents 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 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. 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 fivethirty-five electronic modules, with some high-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 875990 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 a fifty-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 | | | Thirty-nine Weeks Ended | | | | September 24, 2016 | | | September 26, 2015 | | | September 24, 2016 | | | September 26, 2015 | | Net sales | | $ | 212.8 | | | | 100.0 | % | | $ | 210.9 | | | | 100.0 | % | | $ | 630.5 | | | | 100.0 | % | | $ | 598.1 | | | | 100.0 | % | Cost of goods sold | | $ | 129.6 | | | | 60.9 | % | | $ | 130.1 | | | | 61.7 | % | | $ | 384.6 | | | | 61.0 | % | | $ | 367.9 | | | | 61.5 | % | Gross profit | | $ | 83.1 | | | | 39.1 | % | | $ | 80.8 | | | | 38.3 | % | | $ | 245.9 | | | | 39.0 | % | | $ | 230.3 | | | | 38.5 | % | Selling, general and administrative expenses | | $ | 41.5 | | | | 19.5 | % | | $ | 39.6 | | | | 18.7 | % | | $ | 124.4 | | | | 19.7 | % | | $ | 118.5 | | | | 19.8 | % | Income from operations | | $ | 41.6 | | | | 19.6 | % | | $ | 41.2 | | | | 19.6 | % | | $ | 121.6 | | | | 19.3 | % | | $ | 111.8 | | | | 18.7 | % | Interest expense, net | | $ | 0.0 | | | | 0.1 | % | | $ | 0.0 | | | | 0.1 | % | | $ | 0.2 | | | | 0.0 | % | | $ | 0.2 | | | | 0.0 | % | Income before income taxes | | $ | 41.6 | | | | 19.5 | % | | $ | 41.2 | | | | 19.5 | % | | $ | 121.4 | | | | 19.3 | % | | $ | 111.6 | | | | 18.7 | % | Provision for income taxes | | $ | 14.9 | | | | 7.0 | % | | $ | 15.1 | | | | 7.1 | % | | $ | 44.0 | | | | 7.0 | % | | $ | 41.1 | | | | 6.9 | % | Net income | | $ | 26.7 | | | | 12.5 | % | | $ | 26.1 | | | | 12.4 | % | | $ | 77.3 | | | | 12.3 | % | | $ | 70.5 | | | | 11.8 | % |
| | Thirteen Weeks Ended | | | Thirty-Nine Weeks Ended | | | | September 30, 2017 | | | September 24, 2016 | | | September 30, 2017 | | | September 24, 2016 | | Net sales | | $ | 224.6 | | | | 100.0 | % | | $ | 212.8 | | | | 100.0 | % | | $ | 675.5 | | | | 100.0 | % | | $ | 630.5 | | | | 100.0 | % | Cost of goods sold | | $ | 136.5 | | | | 60.8 | % | | $ | 129.6 | | | | 60.9 | % | | $ | 407.8 | | | | 60.4 | % | | $ | 384.6 | | | | 61.0 | % | Gross profit | | $ | 88.1 | | | | 39.2 | % | | $ | 83.1 | | | | 39.1 | % | | $ | 267.7 | | | | 39.6 | % | | $ | 245.9 | | | | 39.0 | % | Selling, general and administrative expenses | | $ | 45.3 | | | | 20.1 | % | | $ | 41.5 | | | | 19.5 | % | | $ | 134.9 | | | | 19.9 | % | | $ | 124.4 | | | | 19.7 | % | Income from operations | | $ | 42.8 | | | | 19.1 | % | | $ | 41.6 | | | | 19.6 | % | | $ | 132.8 | | | | 19.7 | % | | $ | 121.6 | | | | 19.3 | % | Interest income (expense), net | | $ | 0.2 | | | | 0.0 | % | | $ | 0.0 | | | | (0.1 | )% | | $ | 0.5 | | | | 0.0 | % | | $ | (0.2 | ) | | | (0.0 | )% | Income before income taxes | | $ | 43.0 | | | | 19.1 | % | | $ | 41.6 | | | | 19.5 | % | | $ | 133.3 | | | | 19.7 | % | | $ | 121.4 | | | | 19.3 | % | Provision for income taxes | | $ | 16.0 | | | | 7.1 | % | | $ | 14.9 | | | | 7.0 | % | | $ | 48.7 | | | | 7.2 | % | | $ | 44.0 | | | | 7.0 | % | Net income | | $ | 27.0 | | | | 12.0 | % | | $ | 26.7 | | | | 12.5 | % | | $ | 84.6 | | | | 12.5 | % | | $ | 77.3 | | | | 12.3 | % |
Page 13 of 21
Thirteen Weeks Ended September 24, 201630, 2017 Compared to Thirteen Weeks Ended September 26, 201524, 2016 Net sales increased 1%6% to $224.6 million for the thirteen weeks ended September 30, 2017 from $212.8 million for the thirteen weeks ended September 24, 2016 from $210.9 million2016. The increase in net sales is primarily due to overall increased demand for our products which was partially offset by the thirteen weeks ended September 26, 2015. Neteffects of a significant inventory reduction at one of our large customers. Gross profit margin was 39.2% of net sales for the thirteen weeks ended September 26, 2015 included a significant benefit from stocking orders from one of our major retail customers. Gross profit margin was30, 2017 compared to 39.1% of net sales for the thirteen weeks ended September 24, 20162016.
13
Table of Contents Selling, general and 38.3% of net salesadministrative expenses were $45.3 million for the thirteen weeks ended September 26, 2015.30, 2017 compared to $41.5 million for the thirteen weeks ended September 24, 2016. The increase in expense during the thirteen weeks ended September 30, 2017 was primarily due to increased investment in product development, variable costs associated with higher net sales and an increase in wage and benefit costs. In addition, accounts receivable sales costs increased $0.9 million due to a higher volume of receivables sold and increased interest rates associated with the program. Our effective tax rate was 37.1% for the thirteen weeks ended September 30, 2017 compared to 35.8% for the thirteen weeks ended September 24, 2016. The effective tax rate increased primarily due to higher provisions for state income taxes. Thirty-Nine Weeks Ended September 30, 2017 Compared to Thirty-Nine Weeks Ended September 24, 2016 Net sales increased 7% to $675.5 million for the thirty-nine weeks ended September 30, 2017 from $630.5 million for the thirty-nine weeks ended September 24, 2016. The increase in net sales is primarily due to overall increased demand for our products at several of our large customers, including our new products. Gross profit margin was 39.6% of net sales for the thirty-nine weeks ended September 30, 2017 and 39.0% of net sales for the thirty-nine weeks ended September 24, 2016. The improvement in gross profit margin was due to a favorable sales mix towards higher margin products and lower provisions for excess inventoryleverage of costs across a higher sales volume during the thirteenthirty-nine weeks ended September 30, 2017 compared to the thirty-nine weeks ended September 24, 2016 compared to the thirteen weeks ended September 26, 2015.2016. Selling, general and administrative expenses were $41.5 million for the thirteen weeks ended September 24, 2016 compared to $39.6 million for the thirteen weeks ended September 26, 2015. The increase during the thirteen weeks ended September 24, 2016 was primarily due to increased investments in new product development and $0.7 million in increased incentive compensation expenses compared to the thirteen weeks ended September 26, 2015. Our effective tax rate was 35.8% for the thirteen weeks ended September 24, 2016 and 36.7% for the thirteen weeks ended September 26, 2015. The effective income tax rate decreased primarily due to lower provisions for state income taxes and increased benefits for research and development tax credits.
Thirty-nine Weeks Ended September 24, 2016 Compared to Thirty-nine Weeks Ended September 26, 2015
Net sales increased 5% to $630.5$134.9 million for the thirty-nine weeks ended September 24, 2016 from $598.1 million for the thirty-nine weeks ended September 26, 2015. The increase in net sales is primarily due to overall strong demand for our products, including our new products.
Gross profit margin was 39.0% of net sales for the thirty-nine weeks ended September 24, 2016 and 38.5% of net sales for the thirty-nine weeks ended September 26, 2015. The improvement in gross profit margin was due to a favorable sales mix and lower provisions for excess inventory during the thirty-nine weeks ended September 24, 201630, 2017 compared to the thirty-nine weeks ended September 26, 2015.
Selling, general and administrative expenses were $124.4 million for the thirty-nine weeks ended September 24, 2016 compared to $118.5 million for the thirty-nine weeks ended September 26, 2015.2016. The increase in expense during the thirty-nine weeks ended September 24, 201630, 2017 was primarily due to increased variable costs associated with higher net sales $1.9and an increase in wage and benefit costs compared to the thirty-nine weeks ended September 24, 2016. In addition, accounts receivable sales costs increased $2.1 million indue to a higher volume of receivables sold and increased incentive compensation expense,interest rates associated with the program. Results for the thirty-nine weeks ended September 24, 2016 included a $0.9 million provision for doubtful accounts due to a customer that iswas in bankruptcy, and $1.0 million in increased expenses related to the accounts receivable sales program. Resultsbankruptcy.
Our effective tax rate was 36.5% for the thirty-nine weeks ended September 26, 2015 include $2.7 million in costs associated with our now completed September 2014 ERP conversion. Our effective tax rate was30, 2017 and 36.3% for the thirty-nine weeks ended September 24, 2016 and 36.8% for the thirty-nine weeks ended September 26, 2015.2016. The effective income tax rate decreasedincreased primarily due to lowerhigher provisions for state income taxes andpartially offset by increased benefits for research and development tax credits.from stock compensation expenses in accordance with our adoption of ASU No. 2016-09.
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 September 24, 2016 increased30, 2017 decreased to $95.1$116.8 million from $78.7$149.1 million at December 26, 2015.31, 2016. Working capital was $429.3$453.5 million at September 24, 201630, 2017 compared to $380.1$447.8 million at December 26, 2015.31, 2016. Shareholders’ equity was $579.2$628.1 million at September 24, 201630, 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 thirty-nine weeks ended September 24, 201630, 2017 and September 26, 2015,24, 2016, we sold approximately $366.6$442.5 million and $391.9$366.6 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 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. Page 14 of 21
We have aIn June 2017, we amended our $30.0 million revolving credit facility which expires into extend the expiration to June 2017.2018. 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 September 24, 201630, 2017 was LIBOR plus 65 basis points (1.18%(1.89%). There were no borrowings under the facility as of September 24, 2016.30, 2017. As of September 24, 2016,30, 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 September 24, 2016.30, 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 September 24, 2016,30, 2017, we were in compliance with all financial covenants contained in the revolving credit facility.
14
Table of Contents Cash Flows Below is a table setting forthThe following summarizes the key lines of ouractivities included in the Consolidated Statements of Cash Flows:
| | Thirty-Nine Weeks Ended | | (in thousands) | | September 30, 2017 | | | September 24, 2016 | | Cash provided by operating activities | | $ | 59,362 | | | $ | 55,506 | | Cash used in investing activities | | | (30,564 | ) | | | (21,085 | ) | Cash used in financing activities | | | (61,130 | ) | | | (17,938 | ) | Net (decrease) increase in cash and cash equivalents | | $ | (32,332 | ) | | $ | 16,483 | |
| | | | | | | | | | | Thirty-nine Weeks Ended | | (in thousands) | | September 24, 2016 | | | September 26, 2015 | | Cash provided by operating activities | | $ | 55,506 | | | $ | 57,483 | | Cash used in investing activities | | | (21,085 | ) | | | (18,534 | ) | Cash used in financing activities | | | (17,938 | ) | | | (7,284 | ) | | | | | | | | | | Net increase in cash and cash equivalents | | $ | 16,483 | | | $ | 31,665 | | | | | | | | | | |
During the thirty-nine weeks ended September 30, 2017, cash provided by operating activities was $59.4 million primarily as a result of $84.6 million in net income, non-cash adjustments to net income of $14.5 million and a net increase in operating assets and liabilities of $39.7 million. Compared to the Consolidated Balance Sheet at December 31, 2016, inventory increased $31.0 million due to higher inventory purchases to support new product launches and customer order fill rates. We believe inventory levels have plateaued and we anticipate inventory levels to decrease slightly over the next three months. Other assets and liabilities, net, increased by $8.3 million primarily due to an increase in long-term core inventory and payments related to accrued income taxes and accrued compensation. The change in accounts receivable and accounts payable was not material. During the thirty-nine weeks ended September 24, 2016, cash provided by operating activities was $55.5 million primarily as a result of $77.3 million in net income, non-cash adjustments to net income of $16.7 million and a net increase in operating assets and liabilities of $38.6 million. AccountsCompared to the Consolidated Balance Sheet at December 26, 2015, accounts receivable increased $42.2 million due to increased net sales.sales and lower sales of accounts receivable. Inventory decreased $25.5 million due to lower inventory purchases and the positive effects of several inventory management initiatives.increased net sales. Accounts payable decreased by $11.6 million due to lower inventory purchases. Other liabilities decreased by $4.6 million due to reductionsa decrease in the income taxes payable and compensation-related accruals. During the thirty-nine weeks ended September 26, 2015, cash provided by operating activities was $57.5 million primarily as a result of $70.5 million in net income, non-cash adjustments to net income of $10.1 million and a net increase in operating assets and liabilities of $23.2 million. Accounts receivable decreased $6.7 million due to increased sales of accounts receivable which were partially offset by higher net sales. Inventory increased $21.7 million due to purchases to support sales growth and new product initiatives. Other liabilities decreased by $3.5 million due to a reductiondecrease in accrued customer rebates.
Investing activities used $21.1$30.6 million of cash in the thirty-nine weeks ended September 24, 201630, 2017 and $18.5$21.1 million in the thirty-nine weeks ended September 26, 2015. 24, 2016. Capital spending in the thirty-nine weeks ended September 30, 2017 was primarily related to $7.8 million in tooling associated with new products and $5.8 million in enhancements and upgrades to our information systems. Capital spending in the thirty-nine weeks ended September 24, 2016 was primarily related to $8.3 million in tooling associated with new products and $3.2 million in enhancements and upgrades to our information systems, and $6.2 million to purchase a minority equity interest. Capital spending inAdditionally, during the thirty-nine weeks ended September 26, 2015 was primarily related30, 2017, we used $3.1 million to $8.4acquire certain assets of Ingalls Engineering Co., Inc. and $10.0 million in tooling associated with new products, $2.0 million in the purchase ofto acquire a minority equity interest and $4.3 million in enhancements and upgrades to our information systems.a supplier.
The remaining capital spending in both periods resulted from scheduled equipment replacements, certain facility improvements and other capital projects. Financing activities used $17.9$61.1 million of cash in the thirty-nine weeks ended September 24, 201630, 2017 and $7.3$17.9 million in the thirty-nine weeks ended September 26, 2015. 24, 2016. In the thirty-nine weeks ended September 30, 2017, we paid $59.0 million to repurchase 782,425 common shares. In the thirty-nine weeks ended September 24, 2016, we paid $16.1 million to repurchase 329,666 common shares. In the thirty-nine weeks ended September 26, 2015, we paid $7.3 million to repurchase 150,740 common shares. Page 15 of 21
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 thirty-nine weeks ended September 24, 2016,30, 2017, we experienced no material changes to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 26, 2015.31, 2016. 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. 15
Table of Contents The largest portion of our overseas purchases comes from China. During the thirty-nine weeks ended September 24, 2016, theThe Chinese Yuan decreased in value relative to the U.S. Dollar by approximately 3.2%. 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. Page 16 of 21
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 $3.7 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 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 Rule 13a-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 Rule 13a-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 September 24, 201630, 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 September 24, 2016.30, 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. 16
Table of Contents Page 17 of 21
PART II. OTHER INFORMATION 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 You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-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 Form 10-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 Issuer Purchases of Equity Securities During the thirteen weeks ended September 24, 2016,30, 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) | | June 26, 2016 through July 23, 2016 | | | 8,070 | | | $ | 57.58 | | | | — | | | $ | 57,809,775 | | July 24, 2016 through August 20, 2016 | | | 2,850 | | | $ | 62.38 | | | | — | | | $ | 57,809,775 | | August 21, 2016 through September 24, 2016 | | | 1,490 | | | $ | 64.09 | | | | — | | | $ | 57,809,775 | | | | | | | | | | | | | | | | | | | Total | | | 12,410 | | | $ | 59.46 | | | | — | | | $ | 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) | | July 2, 2017 through July 29, 2017 | | | 73,435 | | | $ | 76.46 | | | | 71,935 | | | $ | 110,930,613 | | July 30, 2017 through August 26, 2017 | | | 174,865 | | | $ | 69.67 | | | | 172,055 | | | $ | 98,930,399 | | August 27, 2017 through September 30, 2017 | | | 100,480 | | | $ | 65.76 | | | | 98,950 | | | $ | 92,430,501 | | Total | | | 348,780 | | | $ | 69.97 | | | | 342,940 | | | $ | 92,430,501 | |
(1) | Includes 12,4105,840 shares purchased from the Dorman Products, Inc. 401(k) Plan and Trust (as described in Note 67 to the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q). |
(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 extended the 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 did not repurchaserepurchased 782,425 shares under this program during the thirteenthirty-nine weeks ended September 24, 2016.30, 2017. |
Item 3. Defaults Upon Senior Securities None Item 4. Mine Safety Disclosures Not Applicable Item 5. Other Information None Page 18 of 21
Item 6. Exhibits The Exhibits included in this report are listed in the Exhibit Index on page 21,19, which is incorporated herein by reference. 17
Table of Contents Page 19 of 21
SIGNATURESEXHIBIT INDEX
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. | | | | | October 26, 2016 | | | | | /s/ Mathias J. Barton
| | | | Mathias J. Barton | | | President and Chief Executive Officer | | | (principal executive officer) | | | | | October 26, 2016 | | | | 31.1 | /s/ Kevin M. Olsen
| | | Kevin M. Olsen | | | Senior Vice President and Chief Financial Officer | | | (principal financial and accounting officer) |
Page 20 of 21
EXHIBIT INDEX
18
Table of Contents Page 21SIGNATURES
Pursuant to the requirements of 21the 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. November 1, 2017 /s/ Mathias J. Barton | Mathias J. Barton | President and Chief Executive Officer | (principal executive officer) |
November 1, 2017 /s/ Kevin M. Olsen | Kevin M. Olsen | Executive Vice President and | Chief Financial Officer | (principal financial and accounting officer) |
19 |
|
|