Dorman Products, Inc. — FY2019 Form 10-K
Business context and reporting period. Dorman supplies replacement parts and fasteners for passenger cars, light trucks and heavy-duty trucks, primarily in the North American automotive aftermarket. This 10-K reports the 52-week fiscal year ended December 28, 2019; the filing also provides unaudited fourth-quarter results. Dorman marketed about 78,000 unique parts. Four customers accounted for approximately 66% of annual sales.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $991.3 million | $973.7 million | +2% |
| Gross profit / margin | $339.8 million / 34.3% | $373.3 million / 38.3% | Margin down 4.0 percentage points |
| Operating income / margin | $105.8 million / 10.7% | $171.1 million / 17.6% | Income down 38% |
| Net income | $83.8 million | $133.6 million | Down 37% |
| Diluted EPS | $2.56 | $4.02 | Down 36% |
| Cash from operations | $95.3 million | $78.1 million | Up $17.2 million |
Fourth-quarter net sales were $239.6 million, down 8% from $260.3 million in Q4 2018. Operating income fell to $21.9 million from $44.6 million, and net income to $17.5 million from $34.6 million; diluted EPS was $0.54 versus $1.05.
Cash, liquidity and debt. Year-end cash was $68.4 million, working capital $534.1 million and shareholders’ equity $773.6 million. Cash used in investing activities was $29.6 million and cash used in financing activities was $40.9 million. There were no revolver borrowings; after $0.8 million of letters of credit, about $99.2 million was available under the $100 million facility. The facility expires in December 2022. Long-term debt was zero. Operating lease liabilities totaled $35.1 million. The company said available capital should cover operating needs for at least the next 12 months. No cash dividends were paid, and Dorman said it did not anticipate dividends in the foreseeable future.
Material changes and drivers
- Sales growth included about 1% from acquisitions. Base-business growth included approximately 3.5% from tariff-related price increases, partly offset by a shift in customer mix from warehouse distributors to retailers.
- Lower gross margin reflected customer mix, tariff costs passed through to customers, acquired businesses’ lower margins, and duplicated facility and operating costs during the Portland distribution-center consolidation.
- Consolidation-related start-up inefficiencies and duplicated costs totaled $25.9 million ($20.4 million in SG&A and $5.5 million in cost of goods sold). Dorman also recorded $3.0 million of acquisition-integration and accelerated-depreciation costs.
- SG&A rose to $234.0 million from $202.1 million. Accounts-receivable financing costs increased to $16.7 million from $14.5 million.
- Operating cash flow benefited from an $8.8 million decrease in accounts receivable, while inventory increased $11.0 million and accounts payable decreased $19.1 million.
Outlook, risks and unusual items
- Management expected distribution costs to return to more typical levels as the company moved through 2020 after the new Portland center became fully operational in October 2019. Dorman expected to mitigate tariffs primarily through customer price increases; it said tariffs were not expected to materially affect net income, though pass-throughs could increase sales while reducing gross and operating margins.
- The company cited an expected recovery over coming years in its key U.S. vehicle-age segment (vehicles aged 8–13 years), following a prior decline, and continued investment in new products and heavy-duty offerings. No quantified earnings or sales guidance was provided.
- Key exposures include concentrated customers and receivables, customer pressure on pricing and payment terms, foreign sourcing (about 79% of purchases; largest overseas source China), tariffs, supplier disruption, product quality and returns, competition, technology changes, and cyber and legal risks. The filing specifically noted the coronavirus outbreak in China as a potential supply-chain risk.
- Dorman recorded an estimated $2.8 million charge for import-duty misclassifications disclosed to U.S. Customs and Border Protection: $2.4 million in cost of goods sold and $0.4 million in SG&A. The amount and timing remain subject to the voluntary disclosure process; the company expected to submit an initial disclosure in the first half of 2020 and complete the process within 18 months of submission.
- MAS acquisition contingent consideration was accrued at $5.6 million, with payment dependent on sales thresholds. On January 2, 2020, Dorman acquired the remaining 60% of Power Train Industries for $18.2 million, subject to working-capital adjustments.
- The auditor issued an unqualified opinion on the financial statements and internal controls. The critical audit matter was estimating future customer product returns, within a $105.9 million accrued customer rebates and returns balance. Dorman also revised the prior-year balance-sheet classification of customer rebates and returns; it said the error was immaterial and did not affect prior-period income statements.
Important facts for investors to verify
- Whether margins recover as Portland consolidation costs abate, and how much of the 2020 cost reduction is realized.
- How customer mix, pricing concessions, tariffs and any reversal of tariff-related price increases affect sales and margins.
- Actual product returns and customer credits compared with the $105.9 million accrual, plus the outcome of the CBP duty review.
- Customer concentration, extended payment terms, receivables factoring levels and associated financing costs; Dorman sold $676.4 million of receivables in FY2019.
- Whether supply-chain conditions, including the China-related coronavirus risk identified in the filing, affect sourcing, inventory or fulfillment.