UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. PostalCode 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 September 30, 2006
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 (I.R.S. Employer Identification No.)
incorporation or organization)
3400 East Walnut Street,
Colmar, Pennsylvania 18915
__________________________________ ___________________________________
(Address of principal executive offices) (Zip Code)
(215) 997-1800
______________________________________________________________________________
(Registrant's telephone number, including area code)
_______________________________________________________________________________
(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 date October 31, 2006 the registrant had 17,703,828 shares of common
stock, $.01 par value, outstanding.
Page 1 of 28
DORMAN PRODUCTS, INC. stocktickerAND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON stocktickerFORM 10-Q
September 30, 2006
Page
PART I. FINANCIAL INFORMATION...............................................3
Item 1. CONSOLIDATED FINANCIAL STATEMENTS (unaudited)...............3
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen Weeks Ended September 30, 2006 and
September 24, 2005.........................................3
Thirty-nine Weeks Ended September 30, 2006 and
September 24, 2005.........................................4
CONSOLIDATED BALANCE SHEETS................................5
CONSOLIDATED STATEMENTS OF CASH FLOWS......................6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk...............................................24
Item 4. Controls and Procedures...................................24
PART II. OTHER INFORMATION.........................................25
Item 1. Legal Proceedings.......................................25
Item 1A. Risk Factors............................................25
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.........................................25
Item 3. Defaults Upon Senior Securities.........................26
Item 4. Submission of Matters to a Vote of Security Holders.....26
Item 5. Other Information.......................................26
Item 6. Exhibits................................................26
SIGNATURES ........................................................27
EXHIBITS ........................................................28
Page 2 of 28
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
_________________________________
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the
Thirteen Weeks Ended
September September
(in thousands, except per share data) 30, 2006 24, 2005
---------- ----------
Net Sales...................................... $ 74,891 $ 73,783
Cost of goods sold...................................48,714 48,005
Gross profit..................................... 26,177 25,778
Selling, general and administrative expenses.........18,370 17,769
Income from operations.............................7,807 8,009
Interest expense, net...................................576 672
Income before taxes................................7,231 7,337
Provision for taxes...................................2,682 2,724
Net Income....................................$ 4,549 $ 4,613
Earnings Per Share:
Basic.........................................$ 0.26 $ 0.26
Diluted...................................... $ 0.25 $ 0.25
Average Shares Outstanding:
Basic.............................................17,708 17,932
Diluted...........................................18,147 18,444
See accompanying notes to consolidated financial statements.
Page 3 of 28
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the
Thirty-nine Weeks Ended
September September
(in thousands, except per share data) 30, 2006 24, 2005
--------- ---------
Net Sales...........................................$ 217,943 $ 203,625
Cost of goods sold........................................140,390 130,211
Gross profit............................................77,553 73,414
Selling, general and administrative expenses...............56,362 51,317
Goodwill impairment.........................................2,897 -
Income from operations..................................18,294 22,097
Interest expense, net.......................................1,797 1,961
Income before taxes.....................................16,497 20,136
Provision for taxes.........................................7,612 7,441
Net Income........................................$ 8,885 $ 12,695
Earnings Per Share:
Basic............................................ $ 0.50 $ 0.71
Diluted...........................................$ 0.49 $ 0.69
Average Shares Outstanding:
Basic...................................................17,728 17,915
Diluted.................................................18,148 18,452
See accompanying notes to consolidated financial statements.
Page 4 of 28
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September December
(in thousands, except share data) 30, 2006 31, 2005
Assets (unaudited)
Current Assets:
Cash and cash equivalents............................................ $ 4,991 $ 2,944
Accounts receivable, less allowance for doubtful accounts and customer
credits of $26,950 and $22,728..................................... 66,729 64,778
Inventories.......................................................... 74,685 75,535
Deferred income taxes................................................ 10,133 9,560
Prepaids and other current assets.................................... 1,490 1,545
Total current assets............................................. 158,028 154,362
Property, Plant and Equipment, net........................................ 27,929 27,473
Goodwill.................................................................. 26,998 29,617
Other Assets.............................................................. 1,242 704
Total................................................................ $ 214,197 $ 212,156
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt.................................... $ 8,651 $ 8,571
Accounts payable..................................................... 12,077 14,739
Accrued compensation................................................. 7,688 6,727
Other accrued liabilities............................................ 7,389 8,513
Total current liabilities........................................ 35,805 38,550
Other Long-Term Liabilities............................................... - 626
Long-Term Debt............................................................ 22,367 27,243
Deferred Income Taxes..................................................... 7,794 7,195
Commitments and Contingencies ............................................
Shareholders' Equity:
Common stock, par value $.01; authorized 25,000,000 shares; issued
17,703,828 and 17,749,583.......................................... 177 177
Additional paid-in capital........................................... 32,895 33,138
Cumulative translation adjustments................................... 2,317 1,270
Retained earnings.................................................... 112,842 103,957
Total shareholders' equity........................................... 148,231 138,542
Total............................................................ $ 214,197 $ 212,156
See accompanying notes to consolidated financial statements.
Page 5 of 28
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Thirty-nine
Weeks Ended
__________________________
September September
(in thousands) 30, 2006 24, 2005
---------- ---------
Cash Flows from Operating Activities:
Net income ........................................$ 8,885 $ 12,695
Adjustments to reconcile net
income to cash provided by operating activities:
Depreciation and amortization..........................5,012 4,194
Goodwill impairment....................................2,897 -
Provision for doubtful accounts..........................987 189
Provision for deferred income tax.........................48 742
Non-cash stock compensation expense......................365 -
Changes in assets and liabilities:
Accounts receivable...................................(2,669) 286
Inventories............................................1,406 (11,457)
Prepaids and other current assets.........................82 (7)
Other assets............................................(575) -
Accounts payable......................................(2,815) (1,537)
Accrued compensation and other liabilities..............(114) (1,405)
Other long-term liabilities.............................(626) (487)
Cash provided by operating activities...............12,883 3,213
Cash Flows from Investing Activities:
Property, plant and equipment additions...............(5,432) (5,522)
Business acquisition, net of cash acquired - (1,680)
Cash used in investing activities...................(5,432) (7,202)
Cash Flows from Financing Activities:
Repayment of term loan................................(8,571) (8,571)
Proceeds from promissory note........................... 625 -
Net proceeds from revolving credit facility............3,150 8,500
Proceeds from exercise of stock options..................104 60
Purchase and cancellation of common stock...............(712) -
Cash used in financing activities...................(5,404) (11)
Net Increase (Decrease) in Cash and Cash Equivalents......2,047 (4,000)
Cash and Cash Equivalents, Beginning of Period............2,944 7,152
Cash and Cash Equivalents, End of Period...........$ 4,991 $ 3,152
Supplemental Cash Flow Information
Cash paid for interest expense..................$ 1,758 $ 1,904
Cash paid for income taxes......................$ 7,333 $ 6,358
See accompanying notes to consolidated financial statements.
Page 6 of 28
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 24, 2005
(UNAUDITED)
1. Basis of Presentation
Effective May 24, 2006, the Company changed its name from R&B, Inc.
to Dorman Products, Inc. (the "Company").
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 thirty-nine week period ended
September 30, 2006 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 30, 2006. The Company may
experience significant fluctuations from quarter to quarter in its results of
operations due to the timing of orders placed by the Company's 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 the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2005.
2. Sales of Accounts Receivable
The Company has entered into several customer sponsored programs
administered by unrelated financial institutions that permit the Company to
sell, without recourse, certain accounts receivable at discounted rates to the
financial institutions. The Company does 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 Extinguishments of Liabilities - A Replacement
of FASB Statement 125." At September 30, 2006 and December 31, 2005,
respectively, $25.2 million and $23.2 million of accounts receivable were sold
and removed from the consolidated balance sheets. Selling, general and
administrative expenses for the thirty-nine weeks ended September 30, 2006 and
September 24, 2005 include $1.4 million and $0.8 million, respectively, in
financing costs associated with these accounts receivable sales programs.
Page 7 of 28
3. Inventories
Inventories include the cost of material, freight, direct labor and
overhead utilized in the processing of the Company's products. Inventories were
as follows:
September December
(in thousands) 30, 2006 31, 2005
_________ ________
Bulk product.....................................$ 28,826 $ 30,548
Finished product................................. 42,889 42,317
Packaging materials.............................. 2,970 2,670
__________ ________
Total............................................ 74,685 $ 75,535
Included in finished product as of September 30, 2006 is approximately $1.1
million in inventory held on consignment with one customer.
4. Goodwill
During the second quarter of fiscal year 2006, the Company assessed the
value of the goodwill recorded at its Swedish subsidiary Scan-Tech Sweden AB
(Scan-Tech) as a result of a review of the Scan-Tech business in response to bad
debt charge offs at two large customers and the resulting loss of those
customers in the first half of the year. After completing the required analyses,
the Company concluded that the goodwill balance existing at the subsidiary was
impaired. Accordingly, an impairment charge of approximately $2.9 million, which
represents the entire goodwill balance at the subsidiary, was recorded in the
consolidated statements of operations. In addition, the Company recorded a $0.3
million charge to its provision for income taxes to write off deferred tax
assets of the subsidiary which it deemed unrealizable.
In June 2005, the Company acquired The Automotive Edge/Hermoff
(Hermoff) for approximately $1.7 million. The consolidated results include
Hermoff since June 1, 2005. The Company has not presented pro forma results of
operations for the thirty-nine weeks ended September 24, 2005 assuming the
acquisition had occurred at the beginning of the period as this result would
not have been materially different than actual results for the period.
Total goodwill recognized in connection with the acquisition was $0.9 million.
Goodwill activity for the thirty-nine weeks ended September 30, 2006
is as follows (in thousands):
Balance, December 31, 2005 $ 29,617
Goodwill impairment (2,897)
Acquisition adjustments 125
Translation 153
____________________________________________
Balance, September 30, 2006 $ 26,998
____________________________________________
5. Long-Term Debt
In July 2006, the Company amended its Revolving Credit Facility. The
amended facility extended the expiration date from June 2007 to June 2008. The
July 2006 amendment also increased the total credit facility from $20 million to
$30 million. Borrowings under the amended facility are on an unsecured basis
Page 8 of 28
with interest 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 loan agreement also contains covenants, the
most restrictive of which pertain to net worth and the ratio of debt to EBITDA.
In September 2006, the Company borrowed $625,000 under a commercial
loan granted in connection with the opening of a new distribution facility. The
principal balance will be 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 the Company's
revolving credit facility..
6. Stock-Based Compensation
Effective May 18, 2000, the Company amended and restated its incentive
Stock Option Plan (the "Plan"). Under the terms of the Plan, the Board of
Directors of the Company 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 date September 30, 2006, options to acquire 278,760
shares were available for grant under the Plan.
Effective January 1, 2006, the Company adopted SFAS No. 123R and
related interpretations and began expensing the grant-date fair value of
employee stock options. Prior to January 1, 2006, the Company applied Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for the Plan. 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.
The Company adopted SFAS No. 123R using the modified prospective
transition method and therefore has not restated prior periods. Under this
transition method, compensation cost associated with employee stock options
recognized in 2006 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, the Company 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 for the thirteen and thirty-nine week periods ended
September 30, 2006 was $122,000 and $365,000 before taxes, respectively. The
compensation cost recognized is classified as selling, general and
administrative expense in the consolidated statement of operations. No cost was
capitalized during fiscal 2006. The Company included a forfeiture assumption of
2.6% in the calculation of expense.
Page 9 of 28
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. Expected volatility and expected dividend yield are based on the
actual historical experience of the Company's common 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.
Expected dividend yield........................................ 0%
Expected stock price volatility................................ 47.1%
Risk-free interest rate........................................ 4.3%
Expected life of options....................................... 6.5 years
The weighted-average grant-date fair value of options granted during
2006 was $4.83 per option.
Transactions under the Plan for 2006 were as follows:
Weighted
Average
Weighted Remaining Term Aggregate
Shares Average Price (In years) Intrinsic Value
Balance at December 995,216 $ 4.80
31, 2005...................................
Granted.................................... 20,000 9.15
Exercised.................................. (22,400) 3.86
Canceled................................... (1,200) 3.02
Balance at September 991,616 $ 4.91 6.0 $ 5,145,000
30, 2006...................................
Options exercisable at September 30, 2006 618,716 $ 2.50 5.0 $ 4,703,000
The total intrinsic value of stock options exercised during 2006 was
$150,000.
As of date September 30, 2006, there was approximately $1.3 million
of unrecognized compensation cost related to nonvested stock options, which is
expected to be recognized over a weighted-average period of approximately 2.7
years.
Cash received from option exercises during 2006 was $86,000. The total
tax benefit generated from options granted prior to January 1, 2006, which were
exercised during 2006, was approximately $26,000 and was credited to
additional paid in capital.
In November 2005, the FASB issued FSP No. FAS 123(R)-3, "Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards." This FSP provides an elective alternative transition method for
calculating the pool of excess tax benefits available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS No. 123R. Companies may take up to
one year from the effective date of the FSP to evaluate the available transition
alternatives and make a one-time election as to which method to adopt. The
Company is currently in the process of evaluating the alternative methods.
Page 10 of 28
7. Earnings Per Share
The following table sets forth the computation of basic earnings per
share and diluted earnings per share for the thirteen and thirty-nine week
periods ended September 30, 2006 and September 24, 2005:
Thirteen Weeks Ended Thirty-nine Weeks Ended
(in thousands, except per share data) September September September September
30, 2006 24, 2005 30, 2006 24, 2005
Numerator:
Net income...................................... $ 4,549 $ 4,613 $ 8,885 $ 12,695
Denominator:
Weighted average shares outstanding used in
basic earnings per share calculation.......... 17,708 17,932 17,728 17,915
Effect of dilutive stock options................... 439 512 420 537
Adjusted weighted average shares outstanding
diluted earnings per share.................... 18,147 18,444 18,148 18,452
Basic earnings per share........................... $ 0.26 $ 0.26 $ 0.50 $ 0.71
Diluted earnings per share......................... $ 0.25 $ 0.25 $ 0.49 $ 0.69
Options to purchase 193,500 shares were outstanding at September 30,
2006, but were not included in the computation of diluted earnings per common
share, as their effect would have been antidilutive. No outstanding options at
September 24, 2005 were excluded from the computation of diluted earnings
per share.
Through 2005, the Company applied Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its stock option plans. Accordingly, no compensation expense
for stock options was recognized. If compensation cost for these plans had been
determined using the fair-value method prescribed by SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's net income and earnings per share
for the thirteen and thirty-nine weeks ended September 24, 2005 would have
been reduced to the following pro forma amounts (in thousands, except per share
data):
Thirteen Weeks Thirty-nine Weeks
Ended Ended
September September
24, 2005 24, 2005
__________ __________
Net income, as reported....................................... $ 4,613 $ 12,695
Less: Stock-based compensation expense, net of related tax
effects, determined under the fair value based method
for all awards........................................... (66) (187)
Net income, pro forma......................................... $ 4,547 $ 12,508
Earnings per share:
Basic - as reported $ 0.26 $ 0.71
Basic - pro forma $ 0.25 $ 0.70
Diluted - as reported $ 0.25 $ 0.69
Diluted - pro forma $ 0.25 $ 0.68
Page 11 of 28
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option valuation model with the following weighted
average assumptions for 2005:
Expected dividend yield................................................... 0%
Expected stock price volatility........................................... 47%
Risk-free interest rate................................................... 3.9%
Expected life of option...............................................7.5 years
On February 24, 2005, the Company's Board of Directors approved a
two-for-one split of the Company's common stock, payable in the form of a stock
dividend of one share for each share held. The Board set March 15, 2005 as the
record date for the determination of the shareholders entitled to receive the
additional shares. The shares were distributed to the shareholders of record on
March 28, 2005. All earnings per share and common stock information is
presented as if the stock split occurred prior to the earliest period included
in these consolidated financial statements.
8. Related-Party Transactions
The Company has entered into a noncancelable operating lease for its
primary operating facility from a partnership in which Richard N. Berman, the
Company's Chief Executive Officer, and Steven L. Berman, the Company's Executive
Vice President, are partners. Total rental payments in 2005 to the partnership
under the lease arrangement were $1.3 million.
9. New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued
FIN 48, "Accounting for Uncertainty in Income Taxes--an interpretation of FASB
Statement No. 109, Accounting for Income Taxes," which clarifies the accounting
for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The Interpretation
requires that the Company recognize in the financial statements, the impact of a
tax position, if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods and disclosure. The provisions of FIN 48 are effective beginning
January 1, 2007 with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Company
is currently evaluating the impact of adopting FIN 48 on the financial
statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections." SFAS No. 154 is a replacement of stocktickerABP No. 20 and
FSAB Statement No. 3. SFAS No. 154 provides guidance on the accounting for and
reporting of accounting changes and error corrections. It establishes
retrospective application as the required method for reporting a change in
accounting principle. SFAS No. 154 provides guidance for determining whether
retrospective application of a change in accounting principle is impracticable
and for reporting a change when retrospective application is impracticable. The
reporting of a correction of an error by restating previously issued financial
statements is also addressed by SFAS No. 154. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
Page 12 of 28
after December 15, 2005. The adoption of this statement did not have an
impact on the Company's consolidated financial condition or results of
operations.
In December 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
Amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs
and wasted material and requires that these items be recognized as current
period charges. SFAS No. 151 applies only to inventory costs incurred during
periods beginning after the effective date and also requires that the allocation
of fixed production overhead to conversion costs be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for the Company's fiscal
year beginning January 1, 2006. The adoption of this statement did not have a
material effect on the results of operations.
In September 2006, the SEC Office of the Chief Accountant and Divisions
of Corporation Finance and Investment Management released SAB No.
108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements," that provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The SEC staff believes that registrants should quantify errors using both a
balance sheet and an income statement approach and evaluate whether either
approach results in quantifying a misstatement that, when all relevant
quantitative and qualitative factors are considered, is material. This
pronouncement is effective for fiscal years ending after November 15, 2006.
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. The Company is currently evaluating what
effect, if any, adoption of SFAS No. 157 will have on the Company's
consolidated results of operations and financial position.
Page 13 of 28
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company is 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. The Company designs, packages and
markets over 73,000 different automotive replacement parts (including brake
parts), fasteners and service line products manufactured to its specifications.
The Company's products are sold under one of the seven Dorman brand names listed
above. The Company's 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 its Scan-Tech and Hermoff
subsidiaries, the Company is increasing its international distribution of
automotive replacement parts, with sales into Canada, Europe, the Middle East
and the Far East.
The automotive aftermarket in which the Company competes has been
growing in size; however, the market continues to consolidate. As a result, the
Company's customers regularly seek more favorable pricing, product returns and
extended payment terms when negotiating with the Company. While the Company does
its 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 the Company's profit levels while terms extensions generally
reduce operating cash flow and require additional capital to finance the
business. Management expects 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 the
Company's 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. The Company has increased its focus on efficiency
improvements and product cost reduction initiatives to offset the impact of
price pressures.
In addition, the Company is relying on new product development as a way
to offset some of these customer demands and as its primary vehicle for growth.
As such, new product development is a critical success factor for the Company.
The Company has invested heavily in resources necessary for it to increase its
new product development efforts and to strengthen its relationships with its
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 the Company to
provide an expanding array of new product offerings and grow its revenues.
Page 14 of 28
The Company may experience significant fluctuations from quarter to
quarter in its results of operations due to the timing of orders placed by the
Company's 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.
The Company operates on a fifty-two, fifty-three week period ending on
the last Saturday of the calendar year.
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 31,
2005.
Stock Split
All prior period common stock and applicable share and per share
amounts have been retroactively adjusted to reflect a two-for-one split in the
form of a stock dividend of the Company's common stock effective March 28,
2005.
Write Off of Goodwill and Deferred Tax Asset Related to Swedish Subsidiary
During the second quarter of fiscal 2006, the Company assessed the
value of the goodwill recorded at its Swedish subsidiary (Scan-Tech) as a result
of a review of the Scan-Tech business in response to bad debt charge offs at two
large customers and the resulting loss of those customers in the first half of
the year. After completing the required analyses, the Company concluded that the
goodwill balance existing at the subsidiary was impaired. Accordingly, an
impairment charge of approximately $2.9 million, which represented the entire
goodwill balance at the subsidiary, was recorded in the consolidated statements
of operations. In addition, the Company recorded a $0.3 million charge to its
provision for income taxes to write off deferred tax assets of the subsidiary
which it deemed unrealizable.
Page 15 of 28
Acquisition
In June 2005, the Company acquired The Automotive Edge/Hermoff
("Hermoff") for approximately $1.7 million. The consolidated results include
Hermoff since June 1, 2005. The Company has not presented pro forma results of
operations for the period ended September 24, 2005, assuming the acquisition
had occurred at the beginning of the respective periods, as these results would
not have been materially different than actual results for the periods.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123R and
related interpretations and began expensing the grant-date fair value of
employee stock options. Prior to January 1, 2006, the Company applied
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its 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.
The Company adopted SFAS No. 123R using the modified prospective
transition method and therefore has not restated prior periods. Under this
transition method, compensation cost associated with employee stock options
recognized in 2006 includes amortization related to the remaining unvested
portion of stock option awards granted prior to anuary 1, 2006, and amortization
related to new awards granted after January 1, 2006. Prior to the
adoption of SFAS No. 123R, the Company 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 for the thirteen and thirty-nine week periods ended
September 30, 2006 was $122,000 and $365,000 before taxes, respectively.
The compensation cost recognized is classified as selling, general and
administrative expense in the consolidated statement of operations. No cost
was capitalized during fiscal 2006. The Company included a forfeiture
assumption of 2.6% in the calculation of expense.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of net sales represented by certain items in the Company's
Consolidated Statements of Operations:
Page 16 of 28
Percentage of Net Sales Percentage of Net Sales
For the Thirteen Weeks Ended For the Thirty-nine Weeks Ended
_______________________________________________________________
September September September September
30, 2006 24, 2005 30, 2006 24, 2005
Net Sales........................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................................. 65.0 65.1 64.4 63.9
Gross profit........................................ 35.0 34.9 35.6 36.1
Selling, general and administrative expenses........ 24.6 24.0 25.9 25.2
Goodwill impairment................................. - - 1.3 -
Income from operations.............................. 10.4 10.9 8.4 10.9
Interest expense, net............................... 0.7 1.0 0.8 1.0
Income before taxes................................. 9.7 9.9 7.6 9.9
Provision for taxes................................. 3.6 3.6 3.5 3.7
Net Income.......................................... 6.1% 6.3% 4.1% 6.2%
Thirteen Weeks Ended September 30, 2006 Compared to Thirteen Weeks Ended
September 24, 2005
Net sales increased 1% to $74.9 million for the thirteen weeks ended
September 30, 2006 from $73.8 million for the same period in 2005. Sales
volume during the third quarter of 2006 was up just 1% due to general weakness
throughout the automotive aftermarket.
Cost of goods sold, as a percentage of sales, remained relatively
constant at 65.0% for the thirteen weeks ended September 30, 2006 as compared
to 65.1% in the same period last year. This resulted in a gross profit margin
of 35.0% in the third quarter of 2006.
Selling, general and administrative expenses for the thirteen weeks
ended September 30, 2006 increased $0.6 million, or 3%, to $18.4 million from
$17.8 million for the same period in 2005. This increase was the result of the
Company's decision to invest additional resources in new product development
and promotional support and inflationary increases in wages and other costs.
These increases were partially offset by a $0.5 million reduction in incentive
compensation expense in the current year due to the Company's lower earnings
levels. Selling, general and administrative expenses for the thirteen weeks
ended September 30, 2006 and September 24, 2005 include $0.4 million and
$0.4 million, respectively, in financing costs associated with accounts
receivable sales programs whereby the Company sells its accounts receivable on a
non-recourse basis to financial institutions.
Interest expense, net, was down $0.1 million in the thirteen weeks
ended September 30, 2006 due to lower borrowing levels as a result of cash
generated from operations.
The Company's effective tax rate was 37.1% for the thirteen weeks ended
September 30, 2006 and September 24, 2005.
Page 17 of 28
Thirty-nine Weeks Ended September 30, 2006 Compared to Thirty-nine Weeks Ended
September 24, 2005
Net sales increased 7% to $217.9 million for the thirty-nine weeks
ended September 30, 2006 from $203.6 million for the same period in 2005.
Sales volume in 2006 increased as a result of continued sales growth from
products introduced within the last twenty-four months.
Cost of goods sold, as a percentage of sales, increased to 64.4% for
the thirty-nine weeks ende September 30, 2006 from 63.9% in the same period
last year. The Company has experienced gross margin reductions in several
product lines as a result of higher customer returns and allowances and selling
price reductions due to competitive pressures.
Selling, general and administrative expenses for the thirty-nine weeks
ended September 30, 2006 increased $5.0 million, or 10%, to $56.4 million from
$51.3 million for the same period in 2005. This increase was the result of the
Company's decision to invest additional resources in new product development
and promotional support as well as volume-driven variable expense increases,
inflationary increases in wages and other costs, and an $0.8 million write-off
of accounts receivable in the first half of the year after the loss of two
large customers of the Company's Swedish subsidiary. Selling, general and
administrative expenses for the thirty-nine weeks ended September 30, 2006 and
September 24, 2005 include $1.4 million and $0.8 million, respectively,
in financing costs associated with accounts receivable sales programs whereby
the Company sells its accounts receivable on a non-recourse basis to
financial institutions.
As noted above, the Company recorded a $2.9 million charge in the
second quarter of 2006 to write off the goodwill of its Swedish subsidiary.
Interest expense, net, decreased to $1.8 million for the thirty-nine
weeks ended September 30, 2006 from $2.0 million in the same period last year
due to lower borrowing levels.
The Company's effective tax rate increased to 46.1% for the thirty-nine
weeks ended September 30, 2006 from 37.0% for the thirty-nine weeks ended
September 24, 2005. The increase is primarily the result of the $2.9 million
second quarter goodwill impairment charge which is not tax deductible and
therefore had no income tax benefit associated with it. In addition, the
Company's provision for income taxes for the thirty-nine weeks ended September
30, 2006 includes a $0.3 million charge to write off deferred tax assets.
Liquidity and Capital Resources
Historically, the Company has financed its 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 its
bank credit facility and senior note agreements. At September 30, 2006,
working capital was $122.2 million, total long-term debt (including the current
portion and revolving credit borrowings) was $31.0 million and shareholders'
equity was $148.2 million. Cash and cash equivalents as of September 30, 2006
totaled $5.0 million.
Page 18 of 28
Over the past several years the Company has 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. The Company participates in accounts receivable
sales programs with several customers which allow it to sell its accounts
receivable on a non-recourse basis to financial institutions to offset the
negative cash flow impact of these payment terms extensions. As of September 30,
2006 and December 31, 2005, respectively, the Company had sold $25.2 million
and $23.2 million in accounts receivable under these programs and had removed
them from its balance sheets. The Company expects continued pressure to extend
its 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.
In July 2006, the Company amended its revolving credit facility. The
amendment increased the size of the total credit facility from $20 million to
$30 million and extended the expiration date from June 2007 to 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 September 30, 2006 was LIBOR plus 85 basis
points (6.18%). Borrowings under the facility were $13.3 million as of
September 30, 2006. The loan agreement also contains covenants, the most
restrictive of which pertain to net worth and the ratio of debt to EBITDA.
The Company was in compliance with all financial covenants contained in the
Notes and Revolving Credit Facility at September 30, 2006.
At September 30, 2006, 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 each
August 2007 and August 2008. The Notes require, among other things, that the
Company maintain certain financial covenants relating to debt to capital ratios
and minimum net worth.
In September 2006, the Company borrowed $625,000 under a commercial
loan granted in connection with the opening of a new distribution facility. The
principal balance will be 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 the Company's revolving
credit facility.
The Company's 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.
The Company reported a net source of cash flow from its operating
activities of $12.9 million in the thirty-nine weeks ended September 30, 2006.
Net income, depreciation and a $1.4 million decrease in inventory were the
primary sources of operating cash flow in the thirty-nine weeks ended September
30, 2006. Inventory levels declined despite higher sales volumes as a result of
the Company's efforts to reduce vendor lead times and more accurately forecast
customer demand for its products. The primary uses of cash flow were accounts
payable and accounts receivable. Accounts payable decreased $2.8 million as a
result of lower inventory purchasing levels and the timing of payments to
suppliers. Accounts receivable grew due to a lengthening of payment terms to
certain customers.
Page 19 of 28
Investing activities used $5.4 million of cash in the thirty-nine weeks
ended September 30, 2006 as a result of additions to property, plant and
equipment. The Company's largest 2006 capital project was the automation and
expansion of its central distribution center in Warsaw, Kentucky, which was
completed in the third quarter of 2006 at a cost of approximately $7.0 million.
Capital spending in the thirty-nine weeks ended September 30, 2006 also included
tooling associated with new products, purchases of equipment to outfit our new
distribution center in Portland, Tennessee, upgrades to information systems,
purchases of equipment designed to improve operational efficiencies and
scheduled equipment replacements.
Financing activities used $5.4 million in cash in the thirty-nine weeks
ended September 30, 2006. The primary use of cash flow was a scheduled $8.6
million repayment of the Company's Senior Notes in August 2006. This repayment
was partially funded with $3.1 million in borrowings under the Company's
revolving creit facility with the rest coming from operating cash flow.
The Pension Protection Act of 2006, signed into law on August 17, 2006
(the "Act"), limits the ability of defined contribution retirement plans, like
the Company's 401(k) Plan, to mandate investment in employer securities.
The Act requires plans that hold investments in publicly traded employer
securities to permit participants to diversify account balances invested in
those securities by permitting the sale of some or all of those securities
held in the Plan. Currently, the Company's 401(k) Plan holds approximately
665,000 shares of the Company's Common Stock. The amount of cash needed to
fund the diversification will depend on the actual amount of shares that
eligible participants elect to diversify. Under the Act, the Company must make
arrangements for diversification by plan participants of approximately 351,000
shares (estimated at approximately $3.5 million based on a stock price of
$10.00 per share) no later than the end of the first quarter of 2007,
157,000 shares (estimated at approximately $1.6 million based on a stock
price of $10.00) by 2008, and another 157,000 shares (estimated at approximately
$1.6 million based on a stock price of $10.00) in 2009. The Company is currently
evaluating options available to fund this diversification.
Based on its current operating plan, the Company believes that its
available sources of capital under its Revolving Credit Agreement and accounts
receivable sales programs will be sufficient to meet its ongoing cash needs for
the next twelve months.
Foreign Currency Fluctuations
In 2005, approximately 65% of the Company's 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, the Company does 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.
Page 20 of 28
The Company makes significant purchases of product from Chinese
vendors. Prior to 2005, the Chinese Yuan exchange rate had been fixed against
the U.S. Dollar since 1998. In July 2005, the Chinese government announced an
immediate 2% revaluation of the Yuan against the U.S. Dollar and that going
forward it will allow the Yuan to fluctuate against a basket of currencies.
Since that time the Yuan has strengthened another 2% against the U.S. Dollar.
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
placecountry-regionChina.
Impact of Inflation
The Company has 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 the Company. The
Company 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 the Company will be successful in such efforts.
Related-Party Transactions
The Company has entered into a noncancelable operating lease for its
primary operating facility from a partnership in which Richard N. Berman, the
Company's Chief Executive Officer, and Steven L. Berman, the Company's Executive
Vice President, are partners. Total rental payments in 2005 to the partnership
under the lease arrangement were $1.3 million.
Critical Accounting Policies
The Company's discussion and analysis of its 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 management
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. The Company regularly evaluates its 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.
The Company believes the following critical accounting policies affect its more
significant estimates and judgments used in the preparation of its consolidated
financial statements:
Allowance for Doubtful Accounts. The preparation of the Company's
financial statements requires management to make estimates of the collectability
of its accounts receivable. Management specifically analyzes 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 the Company's
accounts receivable has been, and will continue to be, concentrated among a
Page 21 of 28
relatively small number of automotive retailers and warehouse distributors in
the United States. The Company's five largest customers accounted for 77% of
net accounts receivable as of December 31, 2005 and December 25, 2004. A
bankruptcy or financial loss associated with a major customer could have a
material adverse effect on the Company's 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. The
Company records 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. Management must make estimates
of potential future excess and obsolete inventory costs. The Company provides
reserves for discontinued and excess inventory based upon historical demand,
forecasted usage, estimated customer requirements and product line updates. The
Company maintains contact with its customer base in order to understand buying
patterns, customer preferences and the life cycle of its products. Changes in
customer requirements are factored into the reserves as needed.
Goodwill. The Company follows the provisions of SFAS No. 142, "Goodwill
and Other Intangible Assets". The Company employs a discounted cash flow
analysis and a market comparable approach in conducting its impairment tests.
Cash flows were discounted at 12% and an earnings multiple of 5.75 to 6.0 times
EBITDA was used when conducting these tests in 2005. The Company has completed
an impairment test required by SFAS No. 142, with respect to its Swedish
subsidiary (Scan-Tech), the results of which are discussed in Note 4 of the
Notes to Consolidated Financial Statements in this report.
Income Taxes. The Company follows 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
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.
The Company must make assumptions, judgments and estimates to determine its
current provision for income taxes and also its deferred tax assets and
liabilities and any valuation allowance to be recorded against a deferred tax
asset. Management's judgments, assumptions and estimates relative to the current
provision for income tax take into account current tax laws, its interpretation
of current tax laws and possible outcomes of current and future audits conducted
by tax authorities. Changes in tax laws or management's interpretation of tax
laws and the resolution of current and future tax audits could significantly
impact the amounts provided for income taxes in the Company's consolidated
financial statements. Management's assumptions, judgments and estimates relative
to the value of a deferred tax asset take 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
management's current assumptions, judgments and estimates of recoverable net
deferred taxes inaccurate. Any of the assumptions, judgments and estimates
mentioned above could cause the Company's actual income tax obligations to
differ from its estimates.
Page 22 of 28
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued
FIN 48, Accounting for Uncertainty in Income Taxes--an interpretation of FASB
Statement No. 109, Accounting for Income Taxes, which clarifies the accounting
for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The Interpretation
requires that the Company recognize in the financial statements, the impact of a
tax position, if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods and disclosure. The provisions of FIN 48 are effective beginning
January 1, 2007 with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Company
is currently evaluating the impact of adopting FIN 48 on the financial
statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections". SFAS No. 154 is a replacement of ABP No. 20 and
FSAB Statement No. 3. SFAS No. 154 provides guidance on the accounting for and
reporting of accounting changes and error corrections. It establishes
retrospective application as the required method for reporting a change in
accounting principle. SFAS No. 154 provides guidance for determining whether
retrospective application of a change in accounting principle is impracticable
and for reporting a change when retrospective application is impracticable. The
reporting of a correction of an error by restating previously issued financial
statements is also addressed by SFAS No. 154. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The adoption of this statement did not have an
impact on the Company's consolidated financial condition or results of
operations.
In December 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
Amendment of ARB No. 43, Chapter 4". SFAS No. 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material and requires that these items be recognized as current period charges.
SFAS No. 151 applies only to inventory costs incurred during periods beginning
after the effective date and also requires that the allocation of fixed
production overhead to conversion costs be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for the Company's fiscal
year beginning January 1, 2006. The adoption of this statement did not have a
material effect on the results of operations.
In September 2006, the SEC Office of the Chief Accountant and Divisions
of Corporation Finance and Investment Management released stocktickerSAB No.
108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements," that provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The SEC staff believes that registrants should quantify errors using both a
Page 23 of 28
balance sheet and an income statement approach and evaluate whether either
approach results in quantifying a misstatement that, when all relevant
quantitative and qualitative factors are considered, is material. This
pronouncement is effective for fiscal years ending after November 15, 2006.
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. The Company is 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
The Company's market risk is the potential loss arising from adverse
changes in interest rates. With the exception of the Company's revolving credit
facility, long-term debt obligations are at fixed interest rates and denominated
in U.S. dollars. The Company manages its 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 the Company's 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 the
Company could borrow funds thereunder. The Company believes that the effect of
any such change would be minimal.
Item 4. Controls and Procedures
Quarterly Evaluation of the Company's Disclosure Controls and Internal
Controls Over Financial Reporting.
The Company evaluated the effectiveness of the design and operation of
its "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 the Company's management, including the Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO").
The Company's management, with the participation of the CEO and
CFO, also conducted an evaluation of the Company's internal control over
financial reporting, as defined in Rule 13a-15(f) of the Act, to determine
whether any changes occurred during the fiscal quarter ended September 30, 2006
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
Limitations on the Effectiveness of Controls
Control systems, no matter how well conceived and operated, are
designed to provide a reasonable, but not an absolute, level of assurance that
the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected. The Company conducts periodic evaluation of its
internal controls to enhance, where necessary, its procedures and controls.
Page 24 of 28
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 required to be disclosed by the Company
in the reports that it files or submits 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 required to be
disclosed by the Company in the reports that it files or submits under the Act
is accumulated and communicated to the Company's management, including its
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, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is 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 the Company's
business. In the opinion of management, none of the actions, individually or in
the aggregate, would likely have a material financial impact on the Company.
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 the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, which could materially affect the Company's business,
financial condition or future results. The risks described in the Company's
Annual Report on Form 10-K are not the only risks facing the Company.
Additional risks and uncertainties not currently known to the Company or that
the Company currently deems to be immaterial also may materially adversely
affect the Company's business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
Page 25 of 28
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
4.1(1) Commercial Loan Agreement between the Company and Tennessee
Valley Authority dated September 27, 2006
4.2(1) Promissory Note between the Company and Tennessee Valley
Authority dated September 27, 2006.
10.1(2) Third Amended and Restated Credit Agreement, dated as of
July 24, 2006, between the Company and Wachovia Bank, N.A.
10.2(2) Seventh Amended and Restated Revolving Credit Note dated as of
July 24, 2006.
10.3(2) Surety Agreement dated as of July 24, 2006.
31.1 Certification of Chief Executive Officer as required by
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer as required by
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive and Chief Financial Officer
as required by Section 906 of the Sarbanes-Oxley Act of 2002.
-----------------------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K dated
September 27, 2006.
(2) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 27, 2006.
Page 26 of 28
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 November 3, 2006 /s/ Richard Berman
______________________________
Richard Berman
President and Chief Executive Officer
(Principal executive officer)
Date November 3, 2006 /s/ Mathias Barton
_______________________________
Mathias Barton
Chief Financial Officer and
Principal Accounting Officer
(Principal financial officer)
Page 27 of 28
Exhibits Index
4.1 Commercial Loan Agreement between the Company and the Tennessee
Valley Authority dated September 27, 2006.
4.2 Promissory Note between the Company and the Tennessee Valley
Authority dated September 27, 2006.
10.1 Third Amended and Restated Credit Agreement, dated as of
July 24, 2006, between the Company and Wachovia Bank, N.A.
10.2 Seventh Amended and Restated Revolving Credit Note dated as of
July 24, 2006.
10.3 Surety Agreement dated as of July 24, 2006.
31.1 Certification of Chief Executive Officer as required by Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer as required by
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive and Chief Financial Officer as
required by Section 906 of the Sarbanes-Oxley Act of 2002.
Page 28 of 28