Dorman Products, Inc. — FY2020 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 U.S. aftermarket. This filing covers the 52 weeks ended December 26, 2020; it does not provide standalone fourth-quarter financial statements. The company reported one operating segment.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,092.7 million | $991.3 million |
| Gross profit / margin | $383.1 million / 35.1% | $339.8 million / 34.3% |
| Operating income / margin | $133.4 million / 12.2% | $105.8 million / 10.7% |
| Net income / net margin | $106.9 million / 9.8% | $83.8 million / 8.4% |
| Diluted EPS | $3.30 | $2.56 |
| Cash from operations | $152.0 million | $95.3 million |
- Net sales rose 10%, primarily from higher volumes, especially in the second half. Net income increased 28%.
- Gross margin improved 0.8 percentage points, reflecting better efficiencies, lower excess and obsolete inventory provisions, and absence of prior-year customer-return and customs-duty charges; COVID-related costs partly offset gains. SG&A was $249.7 million, or 22.9% of sales, versus $234.0 million, or 23.6%.
- Year-end cash was $155.6 million, versus $68.4 million; working capital was $600.3 million, versus $534.1 million. Shareholders’ equity was $853.6 million.
- No credit-facility borrowings were outstanding at year-end; $99.0 million borrowed earlier in 2020 for pandemic liquidity management was repaid in June. The $100 million revolving facility had approximately $99.2 million available, net of letters of credit, and expires in December 2022.
- Investing activities used $30.3 million; financing activities used $34.5 million. The company repurchased 439,275 shares for $36.8 million during the year.
Material changes and notable items
- COVID-19 caused a sharp early-second-quarter order decline, followed by a rapid recovery; third- and fourth-quarter sales reached company records. Pandemic-related supply-chain pressures increased freight costs. Annual new-part introductions fell to 3,479 from 5,239 in 2019.
- The company acquired the remaining 60% of Power Train Industries (PTI) in January 2020 for $18.4 million; total purchase price, including its prior investment’s fair value, was approximately $30.7 million. Revaluation of the prior stake generated a $2.5 million gain.
- Operating cash flow improved, but accounts receivable increased $67.4 million as sales rose; accrued customer rebates and returns increased $49.8 million, partly reflecting sales growth and payment timing.
- In fiscal 2020, the company sold $740.0 million of receivables through customer-sponsored programs, versus $676.4 million in 2019. Associated financing costs were $13.2 million, down from $16.7 million.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance is provided. Management expects new-product development to return to historical performance levels in 2021, while emphasizing uncertainty around COVID-19, demand and sourcing.
- Key risks include reliance on three major retailers, which generated approximately 56% of FY2020 sales; the four largest customers represented 82% of year-end receivables. The company also sources approximately 77% of products from foreign suppliers, with the largest overseas sourcing share from China.
- Other exposures include customer pricing and payment-term concessions, tariffs, freight and input costs, product quality and returns, supply disruption, technological change, and cyber risk. Management said tariffs were expected to raise sales while reducing gross and operating margins as costs were passed through; tariff relief on most affected categories expired at year-end 2020.
- Customer rebates and returns accrued were $155.8 million. The auditor identified the accrual for defective-product customer credits as a critical audit matter. The financial statement audit opinion was unqualified, as was the auditor’s opinion on internal controls.
- The company paid $2.8 million to U.S. Customs and Border Protection in June 2020 for estimated historical duty underpayments and interest; CBP had not closed its review by the filing date. Acquisition earnouts accrued were approximately $8.0 million, with maximum remaining contingent payments of $15.3 million if targets are achieved. Management considered current legal matters immaterial in likely financial impact, while noting outcomes remain uncertain.
Important facts for investors to verify
- How sales, margins and customer order trends developed after the FY2020 second-half rebound, and whether management’s 2021 product-development expectation was met.
- Whether customer credits, returns and receivable balances convert to cash as expected, particularly given customer concentration and expanded payment terms.
- How tariff changes, freight costs and overseas supplier availability affect product costs and margins.
- Whether CBP has closed its prior-disclosure review and whether acquisition earnout liabilities change as performance targets are assessed.
- Available revolving-credit capacity and the impact of LIBOR transition on the credit facility and receivables-sale programs.