UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
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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
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DORMAN PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2078856
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporatio or organization)
3400 East Walnut Street, Colmar, Pennsylvania 18915
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(Address of principal executive offices) (Zip Code)
(215) 997-1800
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(Registrant's telephone number,
including area code)
Not Applicable
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(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. |X| Yes |_| No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). |_| Yes |X|No
As of May 4, 2007 the Registrant had 17,688,283 shares of common stock, $.01 par
value, outstanding.
Page 1 of 19
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2007
Page
Part I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Statements of Operations:
Thirteen Weeks Ended March 31, 2007 and April 1, 2006........3
Balance Sheets...............................................4
Statements of Cash Flows.....................................5
Notes to Consolidated Financial Statements...................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................10
Item 3. Quantitative and Qualitative Disclosure about Market Risk......14
Item 4. Controls and Procedures........................................14
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings..............................................15
Item 1A. Risk Factors...................................................15
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds............................................15
Item 3. Defaults Upon Senior Securities.................................5
Item 4. Submission of Matters to a Vote of Security Holders............15
Item 5. Other Information..............................................15
Item 6. Exhibits.......................................................15
Signatures..............................................................16
Page 2 of 19
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Thirteen Weeks Ended
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March 31, April 1,
(in thousands, except for share data) 2007 2006
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Net Sales $ 74,293 $ 68,865
Cost of goods sold 48,517 44,176
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Gross profit 25,776 24,689
Selling, general and administrative expenses 18,785 18,659
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Income from operations 6,991 6,030
Interest expense, net 527 590
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Income before taxes 6,464 5,440
Provision for taxes 2,402 2,020
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Net Income $ 4,062 $ 3,420
================================================================================================================
Earnings Per Share:
Basic $0.23 $0.19
Diluted $0.22 $0.19
================================================================================================================
Average Shares Outstanding:
Basic 17,689 17,744
Diluted 18,099 18,158
See accompanying notes to consolidated financial statements.
Page 3 of 19
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data) March 31, December 30,
2007 2006
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Assets (unaudited)
Current Assets:
Cash and cash equivalents $ 7,320 $ 5,080
Accounts receivable, less allowance for doubtful
accounts and customer credits of $27,157 and $27,601 75,345 77,187
Inventories 69,015 67,768
Deferred income taxes 10,402 10,330
Prepaids and other current assets 1,260 1,443
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Total current assets 163,342 161,808
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Property, Plant and Equipment, net 27,339 27,963
Goodwill 26,966 26,958
Other Assets 881 1,029
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Total $ 218,528 $ 217,758
================================================================ ==================== ======================
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt $ 8,652 $ 8,651
Accounts payable 12,515 12,822
Accrued compensation 4,898 6,949
Other accrued liabilities 5,846 6,582
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Total current liabilities 31,911 35,004
Long-Term Liabilities 1,304 -
Long-Term Debt 19,576 20,596
Deferred Income Taxes 8,370 8,315
Commitments and Contingencies
Shareholders' Equity:
Common stock, par value $.01; authorized
25,000,000 shares; issued 17,697,928 and 17,705,499 177 177
Additional paid-in capital 32,661 32,956
Cumulative translation adjustments 2,711 2,954
Retained earnings 121,818 117,756
Total shareholders' equity 157,367 153,843
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Total $ 218,528 $ 217,758
================================================================ ==================== ======================
See accompanying notes to consolidated financial statements.
Page 4 of 19
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Thirteen Weeks Ended
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March 31, April 1,
(in thousands) 2007 2006
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Cash Flows from Operating Activities:
Net income $ 4,062 $ 3,420
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 1,863 1,622
Provision for doubtful accounts 247 200
Benefit for deferred income tax (15) (104)
Provision for non-cash stock compensation 125 117
Changes in assets and liabilities:
Accounts receivable 1,506 2,099
Inventories (1,392) (2,898)
Prepaids and other current assets 175 104
Other assets 140 (119)
Accounts payable (325) (631)
Accrued compensation and other liabilities (1,465) (3,035)
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Cash provided by operating activities 4,921 775
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Cash Flows from Investing Activities:
Property, plant and equipment additions (1,242) (1,502)
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Cash used in investing activities (1,242) (1,502)
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Cash Flows from Financing Activities:
Repayment of long-term debt obligations (19) -
Net (repayment of) proceeds from revolving credit facility (1,000) 400
Proceeds from exercise of stock options 31 9
Other stock related activity 31 -
Purchase and cancellation of common stock (482) (119)
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Cash (used in) provided by financing activities (1,439) 290
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Net Increase (Decrease) in Cash and Cash Equivalents 2,240 (437)
Cash and Cash Equivalents, Beginning of Period 5,080 2,944
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Cash and Cash Equivalents, End of Period $ 7,320 $ 2,507
============================================================================== =================== =======================
Supplemental Cash Flow Information
Cash paid for interest expense $ 579 $ 582
Cash paid for income taxes $ 1,579 $ 2,015
See accompanying notes to consolidated financial statements.
Page 5 of 19
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEKS ENDED MARCH 31, 2007 AND APRIL 1, 2006 (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.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. However, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the thirteen week period ended March
31, 2007 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 29, 2007. We may experience significant
fluctuations from quarter to quarter in our results of operations due to the
timing of orders placed by our customers. Generally, the second and third
quarters have the highest level of customer orders, but the introduction of new
products and product lines to customers may cause significant fluctuations from
quarter to quarter. For further information, refer to the consolidated financial
statements and footnotes thereto included in our Annual Report on Form 10-K for
the year ended December 30, 2006.
Certain prior year amounts have been reclassified to conform with
current year presentation.
2. Sales of Accounts Receivable
We have entered into several customer sponsored programs administered by
unrelated financial institutions that permit us to sell, without recourse,
certain accounts receivable at discounted rates to the financial institutions.
We do not retain any servicing requirements for these accounts receivable.
Transactions under these agreements are accounted for as sales of accounts
receivable following the provisions of Statement of Financial Accounting
Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities - A Replacement of FASB Statement 125."
At March 31, 2007 and December 30, 2006, respectively, $20.5 million and $18.5
million of accounts receivable were sold and removed from the consolidated
balance sheets. Selling, general and administrative expenses for the thirteen
weeks ended March 31, 2007 and April 1, 2006 include $0.3 million and $0.5
million, respectively, in financing costs associated with these accounts
receivable sales programs.
3. Inventories
Inventories include the cost of material, freight, direct labor and
overhead utilized in the processing of our products. Inventories were as
follows:
March 31, December 30,
(in thousands) 2007 2006
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Bulk product $27,237 $27,555
Finished product 38,791 37,407
Packaging materials 2,987 2,806
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Total $69,015 $67,768
======================= ================== ===================
Included in finished product is $1.1 million and $1.0 million in inventory held
on consignment as of March 31, 2007 and December 30, 2006, respectively.
Page 6 of 19
4. Goodwill
Goodwill activity during the thirteen weeks ended March 31, 2007 related
to the translation of goodwill balances from local currencies to U.S. dollars.
5. Change in Vacation Policy
Effective December 31, 2006, we changed our vacation policy so that
vacation is earned ratably throughout the year rather than at the end of the
preceding year. This change will result in a reduction in our vacation accrual
of approximately $1.6 million in 2007. As a result, vacation expense in cost of
goods sold and selling, general and administrative expenses will be reduced
during each of the fiscal quarters in 2007. Results for the three months ended
March 31, 2007 include vacation expense reductions of $0.1 million and $0.3
million in cost of goods sold and selling, general and administrative expenses,
respectively.
6. Stock-Based Compensation
Effective May 18, 2000 we amended and restated our Incentive Stock
Option Plan (the "Plan"). Under the terms of the Plan, our Board of Directors
may grant incentive stock options or non-qualified stock options or combinations
thereof to purchase up to 2,345,000 shares of common stock to officers,
directors and employees. Grants under the Plan must be made within 10 years of
the plan amendment date and are exercisable at the discretion of the Board of
Directors, but in no event more than 10 years from the date of grant. At March
31, 2007, options to acquire 317,960 shares were available for grant under the
Plan.
Effective January 1, 2006, we adopted SFAS No. 123R "Share-Based
Payment," and related interpretations and began expensing the grant-date fair
value of employee stock options. Prior to January 1, 2006, we applied Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for our stock option plans. Accordingly,
no compensation expense was recognized in net income for employee stock options
for those options granted which had an exercise price equal to the market value
of the underlying common stock on the date of grant.
We adopted SFAS No. 123R using the modified prospective transition
method and therefore have not restated prior periods. Under this transition
method, compensation cost associated with employee stock options recognized
includes amortization related to the remaining unvested portion of stock option
awards granted prior to January 1, 2006, and amortization related to new awards
granted after January 1, 2006. Prior to the adoption of SFAS No. 123R, we
presented tax benefits resulting from stock-based compensation as operating cash
flows in the consolidated statements of cash flows. SFAS No. 123R requires that
cash flows resulting from tax deductions in excess of compensation cost
recognized in the financial statements be classified as financing cash flows.
Compensation cost is recognized on a straight-line basis over the
vesting period during which employees perform related services. The compensation
cost charged against income in the first quarter of 2007 and 2006 for our
stock-based compensation program was $125,000 and $117,000 before taxes,
respectively. The compensation cost recognized is classified as selling, general
and administrative expense in the consolidated income statement. No cost was
capitalized during fiscal 2007 and 2006. We included a forfeiture assumption of
3.5% in 2007 and 2.5% in 2006 in the calculation of expense.
The fair value of options granted in 2006 was estimated using the
Black-Scholes option valuation model that used the assumptions noted in the
table below. There were no stock options granted during the first quarter of
2007. Expected volatility and expected dividend yield are based on the actual
historical experience of our stock. The expected life represents the period of
time that options granted are expected to be outstanding and was calculated
using the simplified method prescribed by the Securities and Exchange Commission
Staff Accounting Bulletin No. 107. The risk-free rate is based on the U.S.
Treasury security with terms equal to the expected time of exercise as of the
grant date.
2006
Expected dividend yield 0%
Expected stock price volatility 45%
Risk-free interest rate 4.5%
Expected life of options 6.5 years
The weighted-average grant-date fair value of options granted during
the first quarter of 2006 was $4.85 per option.
Page 7 of 19
Transactions under the Plan were as follows:
Weighted Weighted Aggregate
Shares Average Price Average Intrinsic
Remaining Term Value
(In years)
------------------------------------------- --------------- ------------------ --------------------- ---------------------
Balance at December 30, 2006 981,950 $ 4.96
Granted - -
Exercised (51,600) 0.61
Canceled - -
Balance at March 31, 2007 930,350 $ 5.20 5.7 $ 5,916,000
------------------------------------------- --------------- ------------------ --------------------- ---------------------
Options exercisable at March 31, 2007 630,784 $ 3.39 4.9 $ 5,153,000
------------------------------------------- --------------- ------------------ --------------------- ---------------------
The total intrinsic value of stock options exercised during the first
quarter of 2007 was $559,000.
As of March 31, 2007, there was approximately $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 approximately 2.7
years.
Cash received from option exercises during the first quarter of 2007
was $31,000. The total tax benefit generated from options granted prior to
January 1, 2006, which were exercised during the first quarter of fiscal 2007,
was $186,000 and was credited to additional paid in capital.
7. Earnings Per Share
The following table sets forth the computation of basic earnings per
share and diluted earnings per share for the thirteen week periods ended March
31, 2007 and April 1, 2006.
Thirteen Weeks Ended
----------------------------------------
March 31, April 1,
(in thousands, except per share data) 2007 2006
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Numerator:
Net income .......................... $.4,062 $ 3,420
Denominator:
Weighted average shares outstanding
used in basic earnings per share calculation 17,689 17,744
Effect of dilutive stock options..... 410 414
----------------------------------------
Adjusted weighted average shares outstanding
diluted earnings per share.......... 18,099 18,158
================ === ================ =
Basic earnings per share............ $ 0.23 $ 0.19
================ === ================ =
Diluted earnings per share.......... $ 0.22 $ 0.19
================ === ================ =
Options to purchase 163,500 and 193,500 shares were outstanding at
March 31, 2007 and April 1, 2006, respectively, but were not included in the
computation of diluted earnings per common share, as their effect would have
been antidilutive.
Page 8 of 19
8. Related-Party Transactions
We have entered into a noncancelable operating lease for our primary
operating facility from a partnership in which Richard N. Berman, our Chief
Executive Officer, and Steven L. Berman, our Executive Vice President, are
partners. Total rental payments to the partnership under the lease arrangement
were $1.3 million in 2006.
9. Income Taxes
We adopted the provisions of Financial Accounting Standards Board
Interpretation No.48, "Accounting for Un- certainty in Income Taxes an
interpretation of FASB Statement No. 109"("FIN 48") effective December 31,
2006. As a result of the implementation of FIN 48, we recognized no material
adjustment in the liability for unrecognized income tax benefits. At the
adoption date of December 31, 2006, we had $1.2 million of unrecognized tax
benefits, all of which would affect our effective tax rate if recognized. At
March 31, 2007, we have $1.2 million of unrecognized tax benefits.
We recognize interest and penalties related to uncertain tax positions
in income tax expense. As of March 31, 2007, we have approximately $128,000 of
accrued interest related to uncertain tax positions.
The last year examined by the IRS was 2004, and all years up through
and including that year are closed by examination. The tax years 2003-2006
remain open to examination by the remaining major taxing jurisdictions in the
United States to which we are subject. The tax years 2002-2006 remain open to
examination in Sweden for our Swedish subsidiary.
10. New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB)
issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements. Accordingly,
SFAS No. 157 does not require any new fair value measurements. The provisions of
SFAS No. 157 are to be applied prospectively and are effective for financial
statements issued for fiscal years beginning after November 15, 2007. We are
currently evaluating what effect, if any, adoption of SFAS No. 157 will have on
our consolidated results of operations and financial position.
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
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, 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, dependence on senior management and other risks and
factors identified from time to time in the reports the Company files with the
Securities and Exchange Commission. 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, Risk Factors in the
Company's Annual Report on Form 10-K for the fiscal year ended December 30,
2006."
Page 9 of 19
Overview
We are a leading supplier of Original Equipment (OE) Dealer "Exclusive"
automotive replacement parts, automotive hardware, brake products, and household
hardware to the automotive aftermarket and mass merchandise markets. Dorman
automotive parts and hardware are marketed under the OE Solutions(TM), HELP!(R),
AutoGrade(TM), First Stop(TM), Conduct-Tite(R), Pik-A-Nut(R), and Scan-Tech(TM)
brand names. We design, package and market over 77,000 different automotive
replacement parts (including brake parts), fasteners and service line products
manufactured to our specifications. Our products are sold under one of the seven
Dorman brand names listed above. Our products are sold primarily in the United
States through automotive aftermarket retailers (such as AutoZone, Advance and
O'Reilly), national, regional and local warehouse distributors (such as Carquest
and NAPA) and specialty markets including parts manufacturers for resale under
their own private labels and salvage yards. Through our Scan-Tech and Hermoff
subsidiaries, we are increasing our international distribution of automotive
replacement parts, with sales into Canada, Europe, the Middle East and the Far
East.
The automotive aftermarket in which we compete has been growing in
size; however, the market continues to consolidate. As a result, our customers
regularly seek more favorable pricing, product returns and extended payment
terms when negotiating with us. While we do our best to avoid such concessions,
in some cases pricing concessions have been made, customer payment terms have
been extended and returns of product have exceeded historical levels. The
product returns and more favorable pricing primarily affect our profit levels
while terms extensions generally reduce operating cash flow and require
additional capital to finance the business. We expect both of these trends to
continue for the foreseeable future. Gross profit margins have declined over the
past two years as a result of this pricing pressure. Another contributing factor
in our gross profit margin decline is a shift in mix to higher-priced, but lower
gross margin products. Both of these trends are expected to continue for the
foreseeable future. We have increased our focus on efficiency improvements and
product cost reduction initiatives to offset the impact of price pressures.
In addition, we are relying on new product development as a way to
offset some of these customer demands and as our primary vehicle for growth. As
such, new product development is a critical success factor for us. We have
invested heavily in resources necessary for us to increase our new product
development efforts and to strengthen our relationships with our customers.
These investments are primarily in the form of increased product development
resources and awareness programs, customer service improvements and increased
customer credits and allowances. This has enabled us to provide an expanding
array of new product offerings and grow our revenues.
We may experience significant fluctuations from quarter to quarter in
our results of operations due to the timing of orders placed by our customers.
Generally, the second and third quarters have the highest level of customer
orders, but the introduction of new products and product lines to customers may
cause significant fluctuations from quarter to quarter. We operate on a
fifty-two, fifty-three week period ending on the last Saturday of the calendar
year.
Change in Vacation Policy
Effective December 31, 2006 (the first day of our fiscal 2007), we
changed our vacation policy so that vacation is earned ratably throughout the
year rather than at the end of the preceding year. This change will result in a
reduction in our vacation accrual of approximately $1.6 million in 2007. As a
result, vacation expense in cost of goods sold and selling, general and
administrative expenses will be reduced during each of the fiscal quarters in
2007. Results for the three months ended March 31, 2007 include vacation
expense reductions of $0.1 million and $0.3 million in cost of goods sold and
selling, general and administrative expenses, respectively.
Page 10 of 19
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 Operations:
Percentage of Net Sales
----------------------------------------
For the Thirteen Weeks Ended
Thirty-nine Weeks Ended
----------------------------------------
March 31, April 1,
2007 2006
-------------------------------------------------------------------------------
Net Sales 100.0% 100.0%
Cost of goods sold 65.3 64.1
------------------------------------------------- ------------------- ---------
Gross profit 34.7 35.9
Selling, general and administrative expenses 25.3 27.1
-------------------------------------------------------------------------------
Income from operations 9.4 8.8
Interest expense, net 0.7 0.9
-------------------------------------------------------------------------------
Income before taxes 8.7 7.9
Provision for taxes 3.2 2.9
-------------------------------------------------------------------------------
Net Income 5.5% 5.0%
===============================================================================
Thirteen Weeks Ended March 31, 2007 Compared to Thirteen Weeks Ended April 1,
2006
Sales increased 8% to $74.3 million for the first quarter ended March
31, 2007 from $68.9 million in the same period last year. Revenues increased
primarily as a result of higher new product sales. Growth in our non-automotive
products and further penetration of existing automotive product lines also
contributed to the sales increase. Approximately 1% of our 2007 net sales
increase was due to the favorable effect of foreign currency exchange.
Cost of goods sold, as a percentage of sales, increased to 65.3% for
the thirteen weeks ended March 31, 2007 from 64.1% in the same period last year.
The increase is the result of higher product return costs and initiatives
designed to maintain and increase market share for us and our customers. We
partially offset the impact of these initiatives through material cost savings
from suppliers.
Selling, general and administrative expenses for the thirteen weeks
ended March 31, 2007 increased 1% to $18.8 million from $18.7 million in the
same period last year. We were able to offset inflationary cost increases and
variable spending increases related to sales growth with cost reductions and a
$0.3 million reduction in vacation expense due to the vacation policy change
mentioned below.
Interest expense, net, decreased to $0.5 million in the thirteen weeks
ended March 31, 2007 from $0.6 million in the same period last year due to lower
overall borrowing levels.
Our effective tax rate increased slightly to 37.2% in the thirteen
weeks ended March 31, 2007 from 37.1% in the same period last year. We adopted
the provisions of Financial Accounting Standards Board Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109" effective December 31, 2006. As a result of the implementation, we
recognized no material adjustment in the liability for unrecognized income tax
benefits.
Page 11 of 19
Liquidity and Capital Resources
Historically, we have financed our growth through a combination of cash
flow from operations, accounts receivable sales programs provided by certain
customers and through the issuance of senior indebtedness through our bank
credit facility and senior note agreements. At March 31, 2007, working capital
was $131.4 million, total long-term debt (including the current portion and
revolving credit borrowings) was $28.2 million and shareholders' equity was
$157.4 million. Cash and cash equivalents as March 31, 2007 totaled $7.3
million.
Over the past several years we have extended 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 flow. We participate in accounts receivable sales programs with several
customers which allow us to sell our accounts receivable on a non-recourse basis
to financial institutions to offset the negative cash flow impact of these
payment terms extensions. As of March 31, 2007 and December 30, 2006, we had
sold $20.5 million and $18.5 million in accounts receivable under these programs
and had removed them from our balance sheets. 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 sale of accounts receivable.
We have a $30.0 million revolving credit facility that expires in June
2008. Borrowings under the facility are on an unsecured basis with interest at
rates ranging from LIBOR plus 65 basis points to LIBOR plus 150 basis points
based upon the achievement of certain benchmarks related to the ratio of funded
debt to EBITDA. The interest rate at March 31, 2007 was LIBOR plus 85 basis
points (6.17%). Borrowings under the facility were $10.5 million as of March 31,
2007. We have approximately $17.5 million available under the facility at March
31, 2007. The loan agreement also contains covenants, the most restrictive of
which pertain to net worth and the ratio of debt to EBITDA. We were in
compliance with all financial covenants contained in the Notes and Revolving
Credit Facility at March 31, 2007.
At March 31, 2007, long-term debt includes $17.2 million in Senior
Notes that were originally issued in August 1998, in a private placement on an
unsecured basis ("Notes"). The Notes bear a 6.81% fixed interest rate, payable
quarterly. Annual principal payments of $8.6 million are due in August 2007 and
August 2008. The Notes require, among other things, that we maintain certain
financial covenants relating to debt to capital ratios and minimum net worth.
We have also borrowed $0.6 million under a commercial loan granted in
connection with the opening of a new distribution facility. The principal
balance is paid monthly in equal installments through September 2013. The
outstanding balance bears interest at an annual rate of 4% payable monthly.
The loan is secured by a letter of credit issued under our revolving credit
facility.
Page 12 of 19
Our business activities do not include the use of unconsolidated
special purpose entities, and there are no significant business transactions
that have not been reflected in the accompanying financial statements.
We reported a net source of cash flow from our operating activities of
$4.9 million in the thirteen weeks ended March 31, 2007. Net income,
depreciation and a $1.5 million decrease in accounts receivable were the primary
sources of operating cash flow. Accounts receivable declined as a result of an
increase in the level of accounts receivable sold under accounts receivable
sales programs with several customers. The primary uses of cash flow were
inventory and accrued compensation and other liabilities, which increased $1.4
million and $1.5 million, respectively. Inventory increased to support higher
sales volumes in 2007 while accrued compensation and other liabilities were down
as a result of our funding of employee profit sharing and incentive payments
earned in the prior year, but paid in the first quarter of 2007.
Investing activities used $1.2 million of cash in the thirteen weeks
ended March 31, 2007 as a result of additions to property, plant and equipment.
Capital spending in 2007 consisted of tooling associated with new products,
upgrades to information systems, purchases of equipment designed to improve
operational efficiencies and scheduled equipment replacements.
Financing activities used $1.4 million in the thirteen weeks ended
March 31, 2007. The primary use of cash flow was $1.0 million in revolving
credit facility repayments.
Based on our current operating plan, we believe that our available
sources of capital under our Revolving Credit Agreement, accounts receivable
sales programs and cash generated from operations will be sufficient to meet our
ongoing cash needs for the next twelve months.
Foreign Currency Fluctuations
In 2006, approximately 67% of our products were purchased from a
variety of foreign countries. The products generally are purchased through
purchase orders with the purchase price specified in U.S. dollars. Accordingly,
we do not have exposure to fluctuations in the relationship between the dollar
and various foreign currencies between the time of execution of the purchase
order and payment for the product. However, weakness in the dollar has resulted
in some materials price increases and pressure from several foreign suppliers to
increase prices further. To the extent that the dollar decreases in value to
foreign currencies in the future or the present weakness in the dollar continues
for a sustained period of time, the price of the product in dollars for new
purchase orders may increase further.
The largest portion of our overseas purchases come from China. The
value of the Chinese Yuan has increased relative to the U.S. Dollar over 7%
since July 2005 when it was allowed to fluctuate against a basket of currencies.
Most experts believe that the value of the Yuan will increase further relative
to the U.S. Dollar over the next few years. Such a move would most likely result
in an increase in the cost of products that are purchased from China.
Impact of Inflation
We have experienced increases in the cost of materials and
transportation costs as a result of raw materials shortages and commodity price
increases. These increases did not have a material impact on us. We believes
that further cost increases could potentially be mitigated by passing along
price increases to customers or through the use of alternative suppliers or
resourcing purchases to other countries, however there can be no assurance that
we will be successful in such efforts.
Related-Party Transactions
We have a noncancelable operating lease for our primary operating
facility from a partnership in which Richard N. Berman, our Chief Executive
Officer, and Steven L. Berman, our Executive Vice President, are partners. Total
rental payments in 2006 to the partnership under the lease arrangement were $1.3
million.
Page 13 of 19
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon the consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities and the reported amounts of revenues and
expenses. We regularly evaluate our estimates and judgments, including those
related to revenue recognition, bad debts, customer credits, inventories,
goodwill and income taxes. Estimates and judgments are based upon historical
experience and on various other assumptions believed to be accurate and
reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions. We believe the
following critical accounting policies affect our more significant estimates and
judgments used in the preparation of our consolidated financial statements:
Allowance for Doubtful Accounts. The preparation of our financial
statements requires us to make estimates of the collectability of our accounts
receivable. We specifically analyze accounts receivable and historical bad
debts, customer creditworthiness, current economic trends and changes in
customer payment patterns when evaluating the adequacy of the allowance for
doubtful accounts. A significant percentage of our accounts receivable have
been, and will continue to be, concentrated among a relatively small number of
automotive retailers and warehouse distributors in the United States. Our five
largest customers accounted for 73% and 77% of net accounts receivable as of
December 30, 2006 and December 31, 2005, respectively. A bankruptcy or financial
loss associated with a major customer could have a material adverse effect on
our sales and operating results.
Revenue Recognition and Allowance for Customer Credits. Revenue is
recognized from product sales when goods are shipped, title and risk of loss
have been transferred to the customer and collection is reasonably assured. We
record estimates for cash discounts, product returns and warranties, discounts
and promotional rebates in the period of the sale ("Customer Credits"). The
provision for Customer Credits is recorded as a reduction from gross sales and
reserves for Customer Credits are shown as a reduction of accounts receivable.
Amounts billed to customers for shipping and handling are included in net sales.
Costs associated with shipping and handling are included in cost of goods sold.
Actual Customer Credits have not differed materially from estimated amounts for
each period presented.
Excess and Obsolete Inventory Reserves. We must make estimates of
potential future excess and obsolete inventory costs. We provide reserves for
discontinued and excess inventory based upon historical demand, forecasted
usage, estimated customer requirements and product line updates. We maintain
contact with our customer base in order to understand buying patterns, customer
preferences and the life cycle of our products. Changes in customer requirements
are factored into the reserves as needed.
Goodwill. We follow the provisions of SFAS No. 142, "Goodwill
and Other Intangible Assets". We employ a discounted cash flow analysis
and a market comparable approach in conducting our impairment tests. Cash flows
were discounted at 12% and an earnings multiple of 5.6 to 5.85 times EBITDA was
used when conducting these tests in 2006. As a result of the 2006 impairment
test, we wrote-off all of the goodwill of our Swedish subsidiary (Scan-Tech) in
our fiscal second quarter.
Income Taxes. We follow the liability method of accounting for deferred
income taxes. Under this method, income tax expense is recognized for the amount
of taxes payable or refundable for the current year and for the change in the
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in an entity's financial statements or tax returns. We
must make assumptions, judgments and estimates to determine our current
provision for income taxes and also our deferred tax assets and liabilities and
any valuation allowance to be recorded against a deferred tax asset. Our
judgments, assumptions and estimates relative to the current provision for
income taxes takes into account current tax laws, our interpretation of current
tax laws and possible outcomes of current and future audits conducted by tax
authorities. Changes in tax laws or our interpretation of tax laws and the
resolution of current and future tax audits could significantly impact the
amounts provided for income taxes in our consolidated financial statements. Our
assumptions, judgments and estimates relative to the value of a deferred tax
asset takes into account predictions of the amount and category of future
taxable income. Actual operating results and the underlying amount and category
of income in future years could render our current assumptions, judgments and
estimates of recoverable net deferred taxes inaccurate. Any of the assumptions,
judgments and estimates mentioned above could cause our actual income tax
obligations to differ from our estimates.
Page 14 0f 19
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB)
issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements. Accordingly,
SFAS No. 157 does not require any new fair value measurements. The provisions of
SFAS No. 157 are to be applied prospectively and are effective for financial
statements issued for fiscal years beginning after November 15, 2007. We are
currently evaluating what effect, if any, adoption of SFAS No. 157 will have
on the Company's consolidated results of operations and financial position.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Our market risk is the potential loss arising from adverse changes in
interest rates. With the exception of our revolving credit facility, long-term
debt obligations are at fixed interest rates and denominated in U.S. dollars. We
manage our interest rate risk by monitoring trends in interest rates as a basis
for determining whether to enter into fixed rate or variable rate agreements.
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 or LIBOR
would affect the rate at which we could borrow funds thereunder. We believe that
the effect of any such change would be minimal.
Item 4. Controls and Procedures
Quarterly Evaluation of Our Disclosure Controls and Internal Controls
We evaluated the effectiveness of the design and operation of our
"disclosure controls and procedures" as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended ("the Act"), as of the end of the
period covered by this Form 10-Q ("Disclosure Controls"). This evaluation
("Disclosure Controls Evaluation") was done under the supervision and with the
participation of management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO").
Our management, with the participation of the CEO and CFO, also
conducted an evaluation of our internal control over financial reporting, as
defined in Rule 13a-15(f) of the Act, to determine whether any changes occurred
during the period ended March 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting ("Internal Controls Evaluation")
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. We conduct periodic evaluation of our internal
controls to enhance, where necessary, our procedures and controls.
Conclusions
Based upon the Disclosure Controls Evaluation, the CEO and CFO have
concluded that the Disclosure Controls are effective in reaching a reasonable
level of assurance that (i) information that we are required to disclose in the
reports that we file or submit under the Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms and (ii) information that we are required to be
disclose in the reports that we file or submit under the Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
There were no changes in internal controls over financial reporting as
defined in Rule 13a-15(f) of the Act that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Page 15 of 19
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, trademark rights, 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 us.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you
should carefully consider the factors discussed in Part I, "Item A, Risk
Factors" in our Annual Report on Form 10-K for the year ended December 30, 2006,
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 Not Applicable
Item 3. Defaults Upon Senior Securities Not Applicable
Item 4. Submission of Matters to a Vote of
Security Holders Not Applicable
Item 5. Other Information Not Applicable
Item 6. Exhibits
Item 601
Exhibit
Number Title
3.1 (1) Amended and Restated Articles of Incorporation of the Company.
3.2 (1) Bylaws of the Company.
10.1 (1) Lease, dated December 1, 1990, between the Company and the
Berman Real Estate Partnership, for premises located at 3400
East Walnut Street, Colmar, Pennsylvania.
10.1.1 (3) Amendment to Lease, dated September 10, 1993, between the
Company and the Berman Real Estate Partnership, for premises
located at 3400 East Walnut Street, Colmar, Pennsylvania,
amending 10.1.
10.1.2 (4) Assignment of Lease, dated February 24, 1997, between the
Company, the Berman Real Estate Partnership and BREP 1, for
the premises located at 3400 East Walnut Street, Colmar,
Pennsylvania, assigning 10.1.
10.1..3(7) Amendment to Lease, dated April 1, 2002, between the
Company and the BREP I, for premises located at 3400 East
Walnut Street, Colmar, Pennsylvania, amending 10.1.
10.1.4 (8) Third Amended and Restated Credit Agreement dated as of July
24, 2006, between the Company and Wachovia Bank, N.A.
10.1.5 (9) Commercial Loan Agreement, dated September 27, 2006, between
the Company and the Tennessee Valley Authority.
10.3 (5)+ Dorman Products, Inc. Amended and Restated Incentive Stock
Plan.
10.4 (2)+ Dorman Products, Inc. 401(k) Retirement Plan and Trust.
10.4.1 (6)+ Amendment No. 1 to the Dorman Products, Inc. 401(k)
Retirement Plan and Trust.
10.5 (2)+ Dorman Products, Inc. Employee Stock Purchase Plan.
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 906 of the Sarbanes-Oxley Act of 2002 (filed with
this report).
32. Certification of Chief Executiv and Chief Financial Officer
as required by Section 906 of the Sarbanes-Oxley Act of 2002.
Page 16 of 19
+ Management Contracts and Compensatory Plans, Contracts or Arrangements.
(1) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 and Amendments No. 1, No. 2, and No. 3
thereto (Registration 33-37264).
(2) Incorporated by reference to the Exhibits files with the Company's Annual
Report on Form 10-K for the fiscal year ended December 26, 1992.
(3) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 and Amendment No. 1 thereto (Registration
No. 33-68740).
(4) Incorporated by reference to the Exhibits filed with the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 1996.
(5) Incorporated by reference to the Exhibits filed with the Company's Proxy
Statement for the fiscal year ended December 27, 1997.
(6) Incorporated by reference to the Exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended June 25, 1994.
(7) Incorporate by reference to the Exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarter ended June 29, 2002.
(8) Incorporated by reference to the Exhibit filed with the Company's Current
Report on Form 8-K dated May 24, 21005.
(9) Incorporated by reference to the Exhibit filed with the Company's Current
Report on Form 8-K dated September 28, 2006
Page 17 of 19
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.
Date May 8, 2007 \s\ Richard Berman
----------------------
Richard Berman
President and Chief Executive Officer
(Principal executive officer)
Date May 8, 2007 \s\ Mathias Barton
---------------------
Mathias Barton
Chief Financial Officer and
Pincipal Accounting Officer
(Principal financial officer)
Page 18 of 19
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 Bylaws of the Company
10.1 Lease, dated December 1, 1990, betweeen the Company and the Berman
Real Estate Partnership, for premises located at 3400 East Walnut Street
Colmar, Pennsylvania.
10.1.1 Amendment to Lease, dated February 24, 1997, between the Company, the
Berman Real Estate Partnershiop and BREP 1, for the premises located
at 3400 East Walnut Street, Colmar, Pennsylvania, amending 10.1.
10.1.2 Assignment of Lease, dated February 24, 1997, between the Company, the
Berman Real Estate Partnership and BREP !, for the premises located at
3400 East Walnut Street, Colmar, Pennsylvania, assigning 10.1.
10.1.3 Amendment to Lease, dated April 1, 2002, between the Company and BREP 1,
for premises located at 3400 East Walnut Street, Colmar, Pennsylvania,
amending 10.1.
10.1.4 Third Amended and Restated Credit Agreement dated as of July 24, 2006,
between the Company and Wachovia Bank, N.A.
10.1.5 Commercial Loan Agreement, dated September 27, 2006, between the
Company and the Tennessee Valley Authority.
10.3 Dorman Products, Inc. Amended and Restated Incentive Stock Plan.
10.4 Dorman Products, Inc. 401(k) Retirement Plan.
10.4.1 Amendment No.1 to the Dorman Products, Inc. 401(k) Retirement Plan and
Trust.
10.5 Dorman Products, Inc. Employee Stock Purchase Plan.
31.1 Certification of Chief Executive Officer as required by Section 302
of the Sarbanes-Oxely Act of 2002 (filed with this report)
31.2 Certification of Chief Financial Officer as required by Section 302 of
Sarbanes-Oxley Act of 2002 (filed with this report).
32. Certification of Chief Executive and Chief Financial Officer as
required by Section 906 of the Sarbanes-Oxley Act of 2002.
Page 19 0f 19