Dorman Products, Inc. - Quarter Report: 2008 June (Form 10-Q)
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
|
June 28,
2008
|
or
¨ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For
the transition period from
|
to
|
|
Commission
File Number:
|
0-18914
|
|
DORMAN
PRODUCTS, INC.
|
|
(Exact
name of registrant as specified in its
charter)
|
|
Pennsylvania
|
23-2078856
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
3400 East Walnut Street, Colmar,
Pennsylvania
|
18915
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
(215) 997-1800
|
|
(Registrant's
telephone number, including area
code)
|
|
Not Applicable
|
|
(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 ¨ (Do
not check if a smaller reporting company)
|
Smaller
reporting company ¨
|
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
July 31, 2008 the Registrant had 17,651,910 shares of common stock, $.01 par
value, outstanding.
Page 1 of
23
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
June 28,
2008
|
Page
|
||||
|
Part
I — FINANCIAL INFORMATION
|
||||
|
Item
1.
|
||||
| Statements of Operations: | ||||
|
3
|
||||
|
4
|
||||
|
5
|
||||
|
6
|
||||
|
7
|
||||
|
Item
2.
|
11
|
|||
|
Item
3.
|
||||
|
Item
4.
|
17
|
|||
|
Part
II — OTHER INFORMATION
|
||||
|
Item
1.
|
18
|
|||
|
Item
1A.
|
18
|
|||
|
Item
2.
|
18
|
|||
|
Item
3.
|
18
|
|||
|
Item
4.
|
18
|
|||
|
Item
5.
|
19
|
|||
|
Item
6.
|
19
|
|||
|
22
|
||||
|
23
|
||||
PART
I. FINANCIAL INFORMATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
|
For
the Thirteen Weeks Ended
|
||||||||
|
(in
thousands, except for share data)
|
June
28, 2008
|
June
30, 2007
|
||||||
|
Net
Sales
|
$ | 90,311 | $ | 85,796 | ||||
|
Cost
of goods sold
|
60,146 | 56,726 | ||||||
|
Gross
profit
|
30,165 | 29,070 | ||||||
|
Selling,
general and administrative expenses
|
21,469 | 19,225 | ||||||
|
Income
from operations
|
8,696 | 9,845 | ||||||
|
Interest
expense, net
|
285 | 512 | ||||||
|
Income
before taxes
|
8,411 | 9,333 | ||||||
|
Provision
for taxes
|
3,178 | 3,565 | ||||||
|
Net
Income
|
$ | 5,233 | $ | 5,768 | ||||
|
Earnings
Per Share:
|
||||||||
|
Basic
|
$ | 0.30 | $ | 0.33 | ||||
|
Diluted
|
$ | 0.29 | $ | 0.32 | ||||
|
Average
Shares Outstanding:
|
||||||||
|
Basic
|
17,692 | 17,688 | ||||||
|
Diluted
|
18,041 | 18,129 | ||||||
See
accompanying notes to consolidated financial statements.
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
|
For
the Twenty-six Weeks Ended
|
||||||||
|
(in
thousands, except for share data)
|
June
28, 2008
|
June
30, 2007
|
||||||
|
Net
Sales
|
$ | 170,436 | $ | 160,089 | ||||
|
Cost
of goods sold
|
115,568 | 105,243 | ||||||
|
Gross
profit
|
54,868 | 54,846 | ||||||
|
Selling,
general and administrative expenses
|
41,453 | 38,010 | ||||||
|
Income
from operations
|
13,415 | 16,836 | ||||||
|
Interest
expense, net
|
553 | 1,039 | ||||||
|
Income
before taxes
|
12,862 | 15,797 | ||||||
|
Provision
for taxes
|
4,947 | 5,967 | ||||||
|
Net
Income
|
$ | 7,915 | $ | 9,830 | ||||
|
Earnings
Per Share:
|
||||||||
|
Basic
|
$ | 0.45 | $ | 0.56 | ||||
|
Diluted
|
$ | 0.44 | $ | 0.54 | ||||
|
Average
Shares Outstanding:
|
||||||||
|
Basic
|
17,695 | 17,689 | ||||||
|
Diluted
|
18,064 | 18,119 | ||||||
See
accompanying notes to consolidated financial statements.
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(unaudited)
|
(in
thousands, except for share data)
|
June
28,
2008
|
December
29,
2007
|
||||||
|
Assets
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 7,492 | $ | 6,918 | ||||
|
Accounts
receivable, less allowance for doubtful accounts and customer credits of
$28,176 and $28,705
|
82,079 | 76,897 | ||||||
|
Inventories
|
87,888 | 80,565 | ||||||
|
Deferred
income taxes
|
10,306 | 10,111 | ||||||
|
Prepaids
and other current assets
|
3,103 | 1,921 | ||||||
|
Total
current assets
|
190,868 | 176,412 | ||||||
|
Property,
Plant and Equipment, net
|
25,295 | 25,680 | ||||||
|
Goodwill
|
26,645 | 26,662 | ||||||
|
Other
Assets
|
1,629 | 1,901 | ||||||
|
Total
|
$ | 244,437 | $ | 230,655 | ||||
|
Liabilities
and Shareholders' Equity
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Current
portion of long-term debt
|
$ | 8,656 | $ | 8,654 | ||||
|
Accounts
payable
|
20,902 | 18,752 | ||||||
|
Accrued
compensation
|
4,007 | 6,520 | ||||||
|
Other
accrued liabilities
|
3,781 | 4,198 | ||||||
|
Total
current liabilities
|
37,346 | 38,124 | ||||||
|
Other
Long-Term Liabilities
|
1,861 | 1,869 | ||||||
|
Long-Term
Debt
|
14,399 | 8,942 | ||||||
|
Deferred
Income Taxes
|
8,392 | 7,862 | ||||||
|
Commitments and
Contingencies
|
||||||||
|
Shareholders'
Equity:
|
||||||||
|
Common
stock, par value $.01; authorized 25,000,000 shares; issued and
outstanding 17,681,798 and 17,702,948
|
177 | 177 | ||||||
|
Additional
paid-in capital
|
32,273 | 32,591 | ||||||
|
Cumulative
translation adjustments
|
5,125 | 4,141 | ||||||
|
Retained
earnings
|
144,864 | 136,949 | ||||||
|
Total
shareholders' equity
|
182,439 | 173,858 | ||||||
|
Total
|
$ | 244,437 | $ | 230,655 | ||||
See
accompanying notes to consolidated financial statements.
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
|
For
the Twenty-six Weeks Ended
|
||||||||
|
(in
thousands)
|
June
28, 2008
|
June
30, 2007
|
||||||
|
Cash
Flows from Operating Activities:
|
||||||||
|
Net
income
|
$ | 7,915 | $ | 9,830 | ||||
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
||||||||
|
Depreciation
and amortization
|
3,814 | 3,748 | ||||||
|
Provision
for doubtful accounts
|
101 | 126 | ||||||
|
Provision
(benefit) for deferred income tax
|
335 | (55 | ) | |||||
|
Provision
for non-cash stock compensation
|
113 | 250 | ||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(4,833 | ) | (5,976 | ) | ||||
|
Inventories
|
(7,682 | ) | (979 | ) | ||||
|
Prepaids
and other current assets
|
(184 | ) | 154 | |||||
|
Other
assets
|
154 | 123 | ||||||
|
Accounts
payable
|
1,827 | 2,913 | ||||||
|
Accrued
compensation and other liabilities
|
(2,979 | ) | (1,213 | ) | ||||
|
Cash
(used in) provided by operating activities
|
(1,419 | ) | 8,921 | |||||
|
Cash
Flows from Investing Activities:
|
||||||||
|
Property,
plant and equipment additions
|
(3,603 | ) | (2,652 | ) | ||||
|
Proceeds
from sale of assets of a business
|
134 | - | ||||||
|
Cash
used in investing activities
|
(3,469 | ) | (2,652 | ) | ||||
|
Cash
Flows from Financing Activities:
|
||||||||
|
Repayment
of long-term debt
|
(41 | ) | (39 | ) | ||||
|
Net
proceeds from (repayment of) revolving credit facility
|
5,500 | (4,900 | ) | |||||
|
Proceeds
from exercise of stock options
|
22 | 38 | ||||||
|
Other
stock related activity
|
(1 | ) | 35 | |||||
|
Purchase
and cancellation of common stock
|
(452 | ) | (649 | ) | ||||
|
Cash
provided by (used in) financing activities
|
5,028 | (5,515 | ) | |||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
434 | 32 | ||||||
|
Net
Increase in Cash and Cash Equivalents
|
574 | 786 | ||||||
|
Cash
and Cash Equivalents, Beginning of Period
|
6,918 | 5,080 | ||||||
|
Cash
and Cash Equivalents, End of Period
|
$ | 7,492 | $ | 5,866 | ||||
|
Supplemental
Cash Flow Information
|
||||||||
|
Cash
paid for interest expense
|
$ | 634 | $ | 1,040 | ||||
|
Cash
paid for income taxes
|
$ | 4,938 | $ | 6,237 | ||||
See
accompanying notes to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE TWENTY-SIX WEEKS ENDED JUNE 28, 2008 AND JUNE 30, 2007
(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
twenty-six week period ended June 28, 2008 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 27, 2008. 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 29,
2007.
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 June 28, 2008 and December 29, 2007, $46.4 million
and $39.4 million, respectively, of accounts receivable were sold and removed
from the consolidated balance sheets based upon standard payment
terms. Selling, general and administrative expenses for the
twenty-six weeks ended June 28, 2008 and June 30, 2007 include $1.0 million and
$0.7 million, respectively, in financing costs associated with these accounts
receivable sales programs. During the twenty-six weeks ended June 28,
2008 and June 30, 2007, we sold $57.6 million and $44.7 million, respectively,
under these 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:
|
(in
thousands)
|
June
28,
2008
|
December
29,
2007
|
||||||
|
Bulk
product
|
$ | 35,603 | $ | 34,493 | ||||
|
Finished
product
|
49,204 | 43,212 | ||||||
|
Packaging
materials
|
3,081 | 2,860 | ||||||
|
Total
|
$ | 87,888 | $ | 80,565 | ||||
4. Acquisitions
In
September 2007, we acquired certain assets including inventory and various
intangible assets of the Consumer Products Division of Rockford Productions
Corporation (Consumer Division) for $3.4 million. The consolidated
results for the thirteen week and twenty-six week periods ended June
28, 2008 includes the results of the Consumer Division. We have not presented
pro forma results of operations as this result would not have been
materially different than actual results for the periods. In
connection with the purchase, we recorded $1.1 million in contract rights, which
are included in other assets and are being amortized over a 10 year
period.
Goodwill
activity during the twenty-six week period ended June 28, 2008 is as follows (in
thousands):
|
Balance,
December 29, 2007
|
$ | 26,662 | ||
|
Currency
translation
|
(17 | ) | ||
|
Balance,
June 28, 2008
|
$ | 26,645 |
5. Sale of
Assets
On May
15, 2008 we sold certain assets of our catalytic converter business at our
Canadian subsidiary for $0.9 million, which will be paid in monthly installments
throughout 2008. Included in Other Current Assets is $0.8 million
that remains due at June 28, 2008.
6. Change in Vacation
Policy
Effective
December 31, 2006, we changed our vacation policy so that the current year's
vacation time is earned ratably throughout the current year. Prior to
December 31, 2006, all rights to the subsequent year's vacation vested to our
employees on the last day of the previous fiscal year and the corresponding
liability was recorded in that previous year. Since employees had
vested all 2007 vacation time prior to the beginning of 2007 under the old
policy, no additional vacation time was earned in 2007 and no expense was
recorded. This change resulted in a reduction in our vacation accrual
of approximately $1.8 million in 2007. As a result, vacation expense
in cost of goods sold and selling, general and administrative expenses was
reduced during each of the fiscal quarters in 2007. Results for the
three and six months ended June 30, 2007 include vacation expense reductions of
$0.1 million and $0.2 million in cost of goods sold and $0.3 million and $0.6
million in selling, general and administrative expenses,
respectively.
7. 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 June 28, 2008, options to acquire 355,851 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. In accordance with SFAS
No. 123R, cash flows resulting from tax deductions in excess of compensation
cost recognized in the financial statements is 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 for our stock-based compensation program for the twenty-six weeks
ended June 28, 2008 and June 30, 2007 was $113,000 and $250,000
before taxes. The compensation cost charged against income for the
thirteen weeks ended June 28, 2008 and June 30, 2007 was $22,000 and $125,000
before taxes. The compensation cost recognized is classified as selling, general
and administrative expense in the consolidated statement of
operations. No cost was capitalized during 2008 and
2007. We included a forfeiture assumption of 4.6% in 2008 and 3.5% in
2007 in the calculation of expense.
We use
the Black-Scholes option valuation model to estimate the fair value of options
granted. 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. There were no stock options granted in the twenty-six weeks
ended June 28, 2008 or June 30, 2007.
Transactions
under the Plan were as follows:
|
Shares
|
Weighted
Average Price
|
Weighted
Average Remaining Term (In years)
|
Aggregate Intrinsic
Value
|
|||||||||||||
|
Balance
at December 29, 2007
|
903,150 | $ | 5.80 | |||||||||||||
|
Exercised
|
(31,450 | ) | 1.17 | |||||||||||||
|
Canceled
|
(50,000 | ) | 11.10 | |||||||||||||
|
Balance
at June 28, 2008
|
821,700 | $ | 5.66 | 4.8 | $ | 3,255,000 | ||||||||||
|
Options
exercisable at June 28, 2008
|
661,666 | $ | 4.33 | 4.1 | $ | 3,199,000 | ||||||||||
The total
intrinsic value of stock options exercised during the twenty-six weeks ended
June 28, 2008 was $294,000.
As of
June 28, 2008, there was approximately $0.6 million of unrecognized
compensation cost related to non-vested stock options, which is expected to be
recognized over a weighted-average period of approximately 3.0
years.
Cash
received from option exercises during the twenty-six weeks ended June 28, 2008
was $12,000. The excess tax benefit generated from options granted
prior to January 1, 2006, which were exercised during 2008,
was $83,000 and was credited to additional paid in
capital.
8. Earnings Per
Share
The
following table sets forth the computation of basic earnings per share and
diluted earnings per share:
|
Thirteen
Weeks Ended
|
Twenty-six
Weeks Ended
|
|||||||||||||||
|
(in
thousands, except per share data)
|
June
28,
2008
|
June
30,
2007
|
June
28,
2008
|
June
30,
2007
|
||||||||||||
|
Numerator:
|
||||||||||||||||
|
Net
income
|
$ | 5,233 | $ | 5,768 | $ | 7,915 | $ | 9,830 | ||||||||
|
Denominator:
|
||||||||||||||||
|
Weighted
average shares outstanding us use used in basic earnings
per share calculation
|
17,692 | 17,688 | 17,695 | 17,689 | ||||||||||||
|
Effect
of dilutive stock options.
|
349 | 441 | 369 | 430 | ||||||||||||
|
Adjusted
weighted average shares outstanding diluted earnings per
share
|
18,041 | 18,129 | 18,064 | 18,119 | ||||||||||||
|
Basic
earnings per share
|
$ | 0.30 | $ | 0.33 | $ | 0.45 | $ | 0.56 | ||||||||
|
Diluted
earnings per share
|
$ | 0.29 | $ | 0.32 | $ | 0.44 | $ | 0.54 | ||||||||
Options
to purchase 173,500 and 163,500 shares were outstanding at June 28, 2008 and
June 30, 2007, respectively, but were not included in the computation
of diluted earnings per common share, as their effect would have been
antidilutive.
9. Common Stock
Repurchases
Share
Repurchase Plan. On February 22, 2008, we announced that our Board of
Directors authorized the repurchase of up to 500,000 shares of our outstanding
common stock. Under this program, share repurchases may be made from
time to time depending upon market conditions, share price and availability, and
other factors at our discretion. Repurchases will take place in open
market transactions or in privately negotiated transactions in accordance with
applicable laws. During 2008, we have not made any purchases under
the plan.
Purchase
and cancellation of common stock. We periodically repurchase and cancel common
stock issued to our defined contribution profit sharing and 401(k) plan. For the
twenty-six weeks ended June 28, 2008, we repurchased and cancelled 43,719 shares
of common stock. During 2007, we repurchased and cancelled 90,205
shares of common stock.
10. 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. Based upon the terms of the lease, payments in 2008 will be
$1.4 million. Total rental payments to the partnership
under the lease arrangement were $1.3 million in 2007.
11. Income
Taxes
We
adopted the provisions of Financial Accounting Standards Board ("FASB")
Interpretation No.48, "Accounting for Un-certainty in Income Taxes an
interpretation of FASB Statement No. 109"("FIN 48" ) effective December 31,
2006. At June 28, 2008, we have $1.5 million of net unrecognized tax benefits,
$1.0 million of which would affect our effective tax rate if
recognized.
We
recognize interest and penalties related to uncertain tax positions in income
tax expense. As of June 28, 2008, we have approximately $0.3 million of accrued
interest related to uncertain tax positions.
The last
year examined by the IRS was 2005, and all years up through and including that
year are closed by examination. We are currently under
examination for tax years 2003-2006 by one state tax authority to which we are
subject to tax. The tax years 2004-2007 remain open to examination by
the remaining major taxing jurisdictions in the United States to which we are
subject. The tax years 2003-2007 remain open to examination in Sweden
for our Swedish subsidiary.
12. Comprehensive
Income
Pursuant
to the provisions of SFAS No. 130, "Reporting Comprehensive Income,"
comprehensive income includes all changes to shareholders' equity during a
period, except those resulting from investment by and distributions to
shareholders. Components of comprehensive income include net income and changes
in foreign currency translation adjustments. Total comprehensive
income was $5.2 million and $6.3 million for the thirteen weeks ended
June 28, 2008, and June 30, 2007, respectively. Total comprehensive
income was $8.9 million and $10.1 million for the
twenty-six weeks ended June 28, 2008 and June 30, 2007,
respectively.
13. New Accounting
Pronouncements
In
December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations"
("SFAS No. 141(R)"). SFAS No. 141(R) changes the requirements for an acquirer's
recognition and measurement of the assets acquired and the liabilities assumed
in a business combination. SFAS No. 141(R) is effective for annual periods
beginning after December 15, 2008 and should be applied prospectively for all
business combinations entered into after the date of adoption.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS No.
160"). SFAS No. 160 requires (i) that noncontrolling (minority) interests be
reported as a component of shareholders' equity, (ii) that net income
attributable to the parent and to the noncontrolling interest be separately
identified in the consolidated statement of operations, (iii) that changes in a
parent's ownership interest while the parent retains its controlling interest be
accounted for as equity transactions, (iv) that any retained noncontrolling
equity investment upon the deconsolidation of a subsidiary be initially measured
at fair value, and (v) that sufficient disclosures are provided that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. SFAS No. 160 is effective for annual periods
beginning after December 15, 2008 and should be applied prospectively. However,
the presentation and disclosure requirements of the statement shall be applied
retrospectively for all periods presented. The adoption of the provisions of
SFAS No. 160 is not expected to impact the Company's consolidated results of
operations and financial position.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 permits
companies to choose to measure many financial instruments and certain other
items at fair value. The objective is to improve financial reporting
by providing companies with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. We
adopted SFAS No. 159 effective December 30, 2007, which was the
beginning of our fiscal year. The adoption of SFAS No. 159 did
not have a material impact on our results of operations and financial
position.
In
September 2006, the 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. SFAS No. 157's fair value measurement requirements for
non-financial assets and liabilities that are not required or permitted to be
measured at fair value on a recurring basis have been deferred until fiscal
years beginning after November 15, 2008. We have certain
non-financial assets, such as goodwill, intangibles and other long-lived assets,
that may be remeasured to fair value on a non-recurring
basis. The adoption of SFAS No. 157 did not have a material
impact on the Company's 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 29, 2007.
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™, HELP!(R),
AutoGrade™, First
Stop™,
Conduct-Tite(R), Pik-A-Nut(R), and Scan-Tech™ brand
names. We design, package and market over 92,000 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 subsidiary, we
are increasing our international distribution of automotive replacement parts,
with sales into 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 three
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.
Acquisition
and Sale of Assets
In
September 2007, we acquired certain assets including inventory and various
intangible assets of the Consumer Products Division of Rockford Productions
Corporation (Consumer Division) for $3.4 million. The consolidated
results for the thirteen week and twenty-six week periods ended June
28, 2008 includes the results of the Consumer Division. We have not presented
pro forma results of operations as this result would not have been
materially different than actual results for the periods. In
connection with the purchase, we recorded $1.1 million in contract rights, which
are included in other assets and are being amortized over a 10 year
period.
On May
15, 2008, we sold certain assets of our Canadian subsidiary for $0.9 million,
which will be paid in monthly installments throughout 2008.
Change
in Vacation Policy
Effective
December 31, 2006, we changed our vacation policy so that the current year's
vacation time is earned ratably throughout the current year. Prior to
December 31, 2006, all rights to the subsequent year's vacation vested to our
employees on the last day of the previous fiscal year and the corresponding
liability was recorded in that previous year. Since employees had
vested all 2007 vacation time prior to the beginning of 2007 under the old
policy, no additional vacation time was earned in 2007 and no expense was
recorded. This change resulted in a reduction in our vacation accrual
of approximately $1.8 million in 2007. As a result, vacation expense
in cost of goods sold and selling, general and administrative expenses was
reduced during each of the fiscal quarters in 2007. Results for the
three and six months ended June 30, 2007 include vacation expense reductions of
$0.1 million and $0.2 million in cost of goods sold and $0.3 million and $0.6
million in selling, general and administrative expenses,
respectively.
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
|
For
the Twenty-six Weeks Ended
|
|||||||||||||||
|
June
28,
2008
|
June
30,
2007
|
June
28,
2008
|
June
30,
2007
|
|||||||||||||
|
Net
Sales
|
100.0%
|
100.0%
|
100%
|
100%
|
||||||||||||
|
Cost
of goods sold
|
|
66.6
|
66.1
|
67.8
|
65.7
|
|||||||||||
|
Gross
profit
|
33.4
|
33.9
|
32.2
|
34.3
|
||||||||||||
|
Selling,
general and administrative expenses
|
23.8
|
22.4
|
24.3
|
23.8
|
||||||||||||
|
Income
from operations
|
9.6
|
11.5
|
7.9
|
10.5
|
||||||||||||
|
Interest
expense, net
|
0.3
|
0.6
|
0.4
|
0.6
|
||||||||||||
|
Income
before taxes
|
9.3
|
10.9
|
7.5
|
9.9
|
||||||||||||
|
Provision
for taxes
|
3.5
|
4.2
|
2.9
|
3.8
|
||||||||||||
|
Net
Income
|
5.8%
|
6.7%
|
4.6%
|
6.1%
|
||||||||||||
Thirteen
Weeks Ended June 28, 2008 Compared to Thirteen Weeks Ended June 30,
2007
Sales
increased 5% to $90.3 million for the second quarter ended June 28, 2008 from
$85.8 million in the same period last year. The favorable effect of
foreign currency exchange and the acquisition of the Consumer Division accounted
for approximately 3% of the net sales increase. The remaining
increase is primarily the result of increased revenues from new
product sales.
Cost of
goods sold, as a percentage of sales, increased to 66.6% for the thirteen weeks
ended June 28, 2008 from 66.1% in the same period last year. The
increase is primarily the result of higher material costs caused by higher
commodity price increases and weakness in the U.S. dollar.
Selling,
general and administrative expenses for the thirteen weeks ended June 28, 2008
increased 12% to $21.5 million from $19.2 million in the same period last
year. The increase is the result of higher variable costs related to
our sales growth and increased staffing levels in product development,
engineering and quality control. These increases were partially
offset by incentive compensation expense which was $ 0.4 million
lower in the thirteen weeks ended June 28, 2008 than in the prior year due to
lower earnings levels in the current year. Results for the thirteen
weeks ended June 30, 2007 also include a $0.3 million reduction in
vacation expense due to the vacation policy change mentioned above.
Interest
expense, net, decreased to $0.3 million in the thirteen weeks ended June 28,
2008 from $0.5 million in the same period last year due to lower interest
rates.
Our
effective tax rate decreased to 37.8% in the thirteen weeks ended June 28, 2008
from 38.1% in the same period last year. The decrease is the
result of the reversal of $0.2 in reserves upon completion of the audit of our
2005 tax year by the Internal Revenue Service.
Twenty-six Weeks Ended June 28, 2008
Compared to Twenty-six Weeks Ended June 30, 2007
Sales
increased 6% to $170.4 million for the twenty-six weeks ended June
28, 2008 from $160.1 million in the same period last year. The
favorable effect of foreign currency exchange and the acquisition of the
Consumer Division accounted for approximately 3% of the net sales
increase. The remaining increase is primarily the
result of increased revenues from new sales.
Cost of
goods sold, as a percentage of sales, increased to 67.8% for the twenty-six
weeks ended June 28, 2008 from 65.7% in the same period last
year. The increase is the result of higher material costs caused by
higher commodity price increases and general weakness in the U.S. dollar, an
increase in customer allowances and returns and a $0.7 million increase in air
freight costs necessary to expedite product to fill past due customer
orders. Spending on air freight returned to historical levels in the
second quarter of 2008.
Selling,
general and administrative expenses for the twenty-six weeks ended June 28, 2008
increased 9% to $41.5 million from $38.0 million in the same period last
year. The increase is the result of higher variable costs related to
our sales growth and increased staffing levels in product development,
engineering and quality control. These increases were partially
offset by incentive compensation expense which was $1.2 lower in the
twenty-six weeks ended June 28, 2008 than in the prior year due to lower
earnings levels in the current year. Results for the twenty-six weeks
ended June 30, 2007 also include a $0.6 million reduction in vacation
expense due to the vacation policy change mentioned above.
Interest
expense, net, decreased to $0.6 million in the twenty-six weeks ended June 28,
2008 from $1.0 million in the same period last year due to lower interest
rates.
Our
effective tax rate increased to 38.5% in the twenty-six weeks ended June 28,
2008 from 37.8% in the same period last year. The increase is
the result of the loss of certain state tax benefits, lower earnings from our
Swedish subsidiary and a $0.1 million charge to provide a valuation allowance
against deferred tax assets of our Canadian subsidiary.
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 June 28, 2008, working capital was $153.5 million,
total long-term debt (including the current portion and revolving credit
borrowings) was $23.1 million and shareholders equity was $182.4
million. Cash and cash equivalents as of June 28, 2008 were $7.5
million.
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 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
June 28, 2008 and December 29, 2007, we had sold $46.4 million and $39.4 million
in accounts receivable under these programs and had removed them from our
balance sheets based upon standard payment terms. 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 which expires in June
2010. 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 June 28, 2008
was LIBOR plus 65 basis points (3.12%). Borrowings under the facility
were $14.0 million as of June 28, 2008. We have approximately $14.3
million available under the facility at June 28, 2008. The loan
agreement also contains covenants, the most restrictive of which pertain to net
worth and the ratio of debt to EBITDA.
At June
28, 2008, current portion of long-term debt includes $8.6 million in Senior
Notes that were originally issued in August 1998, in a private placement on an
unsecured basis ("The Notes"). The Notes bear a 6.81% fixed interest
rate which is payable quarterly. The notes mature in
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 were in compliance with all financial covenants contained in the Notes
and revolving credit facility at June 28, 2008.
We also
have outstanding $0.5 million under a commercial loan granted in connection with
the opening of a distribution facility which bears interest at 4% payable
monthly. The principal balance is paid monthly in equal installments
through September 2013. The loan is secured by a letter of credit
issued under our revolving credit facility.
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 use of cash from our operating activities of $1.4
million in the twenty-six weeks ended June 28, 2008. Net income,
depreciation and a $1.8 million increase in accounts payable were the primary
sources of operating cash flow. Accounts payable increased due to an
increase in purchase obligations outstanding to support increased inventory
levels due to sales growth. The primary uses of cash were
inventory and accounts receivable, which increased $7.7 million and $4.8
million, respectively. Inventory increased to support sales growth
and increases in safety stock levels deemed necessary to enable us to better
fill customer orders. Accounts receivable increased due to sales
growth, a promotional program that provided extended dating on second time
orders of a new product line, and the extension of payment terms to certain
customers.
Investing
activities used $3.5 million of cash in the twenty-six weeks ended June 28, 2008
primarily as a result of additions to property, plant and
equipment. Capital spending in 2008 consisted of tooling associated
with new products, upgrades to information systems and scheduled equipment
replacements.
Financing
activities generated $5.0 million of cash in the twenty-six weeks
ended June 28, 2008. The primary element of our financing activities
was $5.5 million in borrowings under our revolving credit facility.
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.
Foreign
Currency Fluctuations
In 2007,
approximately 73% 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 numerous material
price increases and continued 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 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
The
overall impact of inflation has not resulted in a significant change in labor
costs or the cost of general services utilized by the Company. We
have experienced increases in the cost of materials and transportation costs as
a result of commodity price increases. We have been able to offset a
portion of these cost increases through price increases; however, we have not
been able to do so completely. As a result, we have been forced to
generate other cost reduction activities in order to offset these cost
increases. We will attempt to mitigate further cost increases by
passing along price increases to customers, through the use of alternative
suppliers and by resourcing products to other
countries. However, there can be no assurance that we will be
successful in these 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. Based upon the
terms of the lease, payments in 2008 will be $1.4 million. Total
rental payments to the partnership under the lease arrangement were $1.3 million
in 2007.
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 71% and 73% of net
accounts receivable as of December 29, 2007 and December 30, 2006,
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 6.25 to 6.5 times EBITDA was used when conducting
these tests in 2007.
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.
Recent Accounting Pronouncements
In
December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations"
("SFAS No. 141(R)"). SFAS No. 141(R) changes the requirements for an acquirer's
recognition and measurement of the assets acquired and the liabilities assumed
in a business combination. SFAS No. 141(R) is effective for annual periods
beginning after December 15, 2008 and should be applied prospectively for all
business combinations entered into after the date of adoption.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements -an amendment of ARB No. 51" ("SFAS No. 160").
SFAS No. 160 requires (i) that noncontrolling (minority) interests be reported
as a component of shareholders' equity, (ii) that net income attributable to the
parent and to the noncontrolling interest be separately identified in the
consolidated statement of operations, (iii) that changes in a parent's ownership
interest while the parent retains its controlling interest be accounted for as
equity transactions, (iv) that any retained noncontrolling equity investment
upon the deconsolidation of a subsidiary be initially measured at fair value,
and (v) that sufficient disclosures are provided that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 is effective for annual periods beginning
after December 15, 2008 and should be applied prospectively. However, the
presentation and disclosure requirements of the statement shall be applied
retrospectively for all periods presented. The adoption of the provisions of
SFAS No. 160 is not expected to impact the Company's consolidated results of
operations and financial position.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 permits
companies to choose to measure many financial instruments and certain other
items at fair value. The objective is to improve financial reporting
by providing companies with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. We adopted SFAS
No. 159 effective December 30, 2007, which was the beginning of our fiscal
year. The adoption of SFAS No. 159 did not have a material
impact on our results of operations and financial position.
In
September 2006, the 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. SFAS No. 157's fair value measurement requirements for
non-financial assets and liabilities that are not required or permitted to be
measured at fair value on a recurring basis have been deferred until fiscal
years beginning after November 15, 2008. We have certain
non-financial assets, such as goodwill intangibles, and other long-lived assets,
that may be remeasured to fair value on a non-recurring basis. The adoption of
SFAS No. 157 did not have a material impact 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. A one
percentage point increase in LIBOR would increase our interest expense on our
variable rate debt and our financing costs associated with our sales of accounts
receivable by approximately $0.7 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.
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 June 28, 2008 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 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.
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, patent rights, 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 29, 2007, 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
The
Annual Meeting of Shareholders (the "Annual Meeting") of the Company was held on
May 22, 2008 to elect six directors.
At the
Annual Meeting the following six persons were elected to serve as Directors of
the Company, each to serve for a term of one year to expire at the next annual
meeting of shareholders and until his successor has been selected and
qualified:
Number of
Votes
|
For
|
Withhold
Authority
|
|
|
Richard
N. Berman
|
16,428,257
|
15,753
|
|
Steven
L. Berman
|
15,686,687
|
757,323
|
|
George
L. Bernstein
|
16,374,207
|
69,803
|
|
John
F. Creamer, Jr.
|
16,426,257
|
17,753
|
|
Paul
R. Lederer
|
16,376,207
|
67,803
|
|
Edgar
W. Levin
|
16,374,207
|
69,803
|
Item
5. Other Information
In a
press release dated May 15, 2008, we announced the sale of certain
assets of our catalytic converter business to Eastern Manufacturing, Inc.
("Eastern Catalytic") and entered into a joint venture agreement with Eastern
Catalytic to mutually develop, manufacture and distribute an integrated exhaust
manifold and converter product line. Total
proceeds approximately equal the book value of the assets on our
financial statements.
Under the
terms of the joint venture agreement, the Company and Eastern Catalytic will
co-develop and market a line of integrated exhaust manifolds and catalytic
converters for the traditional, retail and export automotive
channels. In addition, the arrangement will enable us to offer
Eastern Catalytic's full line of direct fit catalytic converters to the
automotive aftermarket. We will continue to maintain a Canadian
distribution facility for our Dorman-branded line of automotive aftermarket
products.
Item 6.
Exhibits
Item
601
|
Exhibit
Number
|
Title
|
|
|
3.1
(1)
|
Amended
and Restated Articles of Incorporation of the Company dated May 23,
2007.
|
|
|
3.2
(2)
|
Bylaws
of the Company.
|
|
|
4.1
|
Amended
and Restated Shareholder's Agreement dated July 1, 2006
|
|
|
10.1
(2)
|
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
(4)
|
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
(5)
|
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
(8)
|
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
(11)
|
Amendment
to Lease, dated December 12, 2007, between the Company and BREP I, for
premises located at 3400 East Walnut Street, Colmar, Pennsylvania,
amending 10.1.
|
|
|
10.2 (12)
|
Lease,
dated January 31, 2006, between the Company and First Industrial, L.P. for
premises located at 3150 Barry Drive, Portland,
Tennessee.
|
|
10.2.1
(13)
|
Amendment
to Lease, dated January 28, 2008, between the Company and First
Industrial, L.P. for premises located at 3150 Barry Drive, Portland,
Tennessee.
|
|
|
10.3
(9)
|
Third
Amended and Restated Credit Agreement dated as of July 24, 2006, between
the Company and Wachovia Bank, N.A.
|
|
|
10.3.1
(14)
|
Amendment
to Amended and Restated Credit Agreement, dated December 24, 2007, between
the Company and Wachovia Bank, N.A.
|
|
|
10.4 (10)
|
Commercial
Loan Agreement, dated September 27, 2006, between the Company and the
Tennessee Valley Authority.
|
|
|
10.5
(6)†
|
Dorman
Products, Inc. Amended and Restated Incentive Stock
Plan.
|
|
|
10.6
(3)†
|
Dorman
Products, Inc. 401(k) Retirement Plan and Trust.
|
|
|
10.6.1
(7)†
|
Amendment
No. 1 to the Dorman Products, Inc. 401(k) Retirement Plan and
Trust.
|
|
|
10.7
(3)†
|
Dorman
Products, Inc. Employee Stock Purchase Plan.
|
|
|
10.8
(15)
|
Employment
Agreement, dated April 1, 2008, between the Company and Richard N.
Berman.
|
|
|
10.9
(16)
|
Employment
Agreement, dated April 1, 2008, between the Company and Steven L.
Berman.
|
|
|
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 Executive and Chief Financial Officer as required by Section 906
of the Sarbanes-Oxley Act of 2002 (filed with this
report).
|
________________________
†
Management Contracts and Compensatory Plans, Contracts or
Arrangements.
(1) Incorporated
by reference to the Company's Current Report on Form 8-K filed on May 24,
2007.
(2) 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).
(3) 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.
(4) 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).
(5) 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.
(6)
Incorporated by reference to the Exhibits filed with the Company's Proxy
Statement for the fiscal year ended December 27, 1997.
(7) Incorporated
by reference to the Exhibits filed with the Company's Quarterly Report on Form
10-Q for the quarter ended June 25, 1994.
(8)
Incorporate by reference to the Exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarter ended June 29, 2002.
(9)
Incorporated by reference to the Exhibit filed with the Company's Current
Report on Form 8-K dated May 24, 2005.
(10)
Incorporated by reference to the Exhibit filed with the Company's Current Report
on Form 8-K dated September 28, 2006.
(11)
Incorporated by reference to the Exhibits filed with the Company's Current
Report on Form 8-K dated December 12, 2007.
(12)
Incorporated by reference to the Exhibits filed with the Company's Current
Report on Form 8-K dated February
2, 2006.
(13)
Incorporated by reference to the Exhibits filed with the Company's Current
Report on Form 8-K dated y January
29, 2008.
(14)
Incorporated by reference to the Exhibits filed with the Company's Current
Report on Form 8-K dated January
2, 2008.
(15)
Incorporated by reference to Exhibits filed with the Company's Current Report on
Form 8-K dated April 1, 2008.
(16)
Incorporated by reference to Exhibits filed with the Company's Current Report on
Form 8-K dated April 1, 2008.
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 August 1, 2008
|
\s\ Richard
Berman
|
|
Richard
Berman
|
|
|
Chairman
and Chief Executive Officer
|
|
|
(Principal
executive officer)
|
|
|
Date August 1, 2008
|
\s\ Mathias
Barton
|
|
|
Mathias
Barton
|
|
Chief
Financial Officer and
|
|
|
Principal
Accounting Officer
|
|
|
(Principal
financial officer)
|
|
3.1
|
Amended
and Restated Articles of Incorporation of the Company dated May 23,
2007.
|
|
|
3.2
|
Bylaws
of the Company.
|
|
|
4.1
|
Amended
and Restated Shareholders' dated July 1, 2006.
|
|
|
10.1
|
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
|
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
|
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
|
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
|
Amendment
to Lease, dated December 12, 2007, between the Company and BREP I, for
premises located at 3400 East Walnut Street, Colmar, Pennsylvania,
amending 10.1.
|
|
|
10.2
|
Lease,
dated January 31, 2006, between the Company and First Industrial, L.P. for
premises located at 3150 Barry Drive, Portland,
Tennessee.
|
|
|
10.2.1
|
Amendment
to Lease, dated January 28, 2008, between the Company and First
Industrial, L.P. for premises located at 3150 Barry Drive, Portland,
Tennessee.
|
|
|
10.3
|
Third
Amended and Restated Credit Agreement dated as of July 24, 2006, between
the Company and Wachovia Bank, N.A.
|
|
|
10.3.1
|
Amendment
to Amended and Restated Credit Agreement, dated December 24, 2007, between
the Company and Wachovia Bank, N.A.
|
|
|
10.4
|
Commercial
Loan Agreement, dated September 27, 2006, between the Company and the
Tennessee Valley Authority.
|
|
|
10.5
|
Dorman
Products, Inc. Amended and Restated Incentive Stock
Plan.
|
|
|
10.6
|
Dorman
Products, Inc. 401(k) Retirement Plan and Trust.
|
|
|
10.6.1
|
Amendment
No. 1 to the Dorman Products, Inc. 401(k) Retirement Plan and
Trust.
|
|
|
10.7
|
Dorman
Products, Inc. Employee Stock Purchase Plan.
|
|
|
10.8
|
Employment
Agreement, dated April 1, 2008, between the Company and Richard N.
Berman.
|
|
|
10.9
|
Employment
Agreement, dated April 1, 2008, between the Company and Steven L.
Berman.
|
|
|
Certification
of Chief Executive Officer as required by Section 302 of the
Sarbanes-Oxley Act of 2002 (filed with this report).
|
||
|
Certification
of Chief Financial Officer as required by Section 906 of the
Sarbanes-Oxley Act of 2002 (filed with this report).
|
||
|
Certification
of Chief Executive and Chief Financial Officer as required by Section 906
of the Sarbanes-Oxley Act of 2002.
|
Page
23 of 23