Dorman Products Inc. Overcomes Obstacles to Drive Strong Earnings Growth

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While several headwinds crashed against it during the second quarter, Dorman Industries (DORM -1.93%) was able to overcome them through strong execution. This drove double-digit growth in earnings and cash flow, setting the company up for more of the same for the balance of the year.

Dorman Products results: The raw numbers

Data source: Dorman Products, Inc. YOY = year over year.

What happened with Dorman Products this quarter? 

Dorman Products was an overcomer this quarter:

• Sales were up despite lower purchases from one of the company's largest customers due to its inventory build last quarter as well as the consolidation of another big customer.
• That sales ramp, along with a favorable sales mix, lower freight costs, and a lower provision for excess inventory, drove an improvement in gross profit margin from 38.5% in last year's second quarter to 39.2% this past quarter. Those two factors combined to drive the double-digit improvement on Dorman's bottom line, leading to a 14% rise in cash flow from operations.
• Another factor driving the company's strong quarter was its ability to add new products to the mix. The company introduced 871 new product SKUs during the quarter. When combined with the 1,974 SKUs it launched so far this year, it represents a 15% improvement from last year.

What management had to say 

CEO Matt Barton, commenting on the company's results, said:

Second quarter net sales were up 5% despite several headwinds, including lower purchases from one of our larger customers due to its first quarter inventory build and the consolidation of another large customer. The team executed well on many fronts which allowed us to deliver solid double digit earnings growth.

Dorman's ability to execute on its strategy was critical this quarter. One area in particular where it is delivering impressive results is its HD solutions business. Sales were up 63% last quarter because of product expansion at a large customer account as well as broader acceptance of its products in the heavy-duty marketplace. As a result, Dorman's HD solutions product line represented nearly 2% of its total sales so far this year.

While organic growth drove results in the second quarter, Dorman is looking beyond its current capabilities to drive future growth. That desire led it to acquire a 40% stake in Powertrain Industries, which is a manufacturer of driveshafts and driveline products. In commenting on that transaction, Barton said, "We've seen rapid technological change in driveline systems, and believe that this partnership provides an immediate opportunity to emerge as a leader in driveline repair parts."

Looking forward 

Dorman fully expects its recent success to continue, with Barton saying:

We remain optimistic about the long term organic growth prospects for our business, and for the year we expect mid-to-high single-digit revenue growth and reported net income growth to be in the high single-digit to low double-digit range.