Dorman Products, Inc. — Q3 2019 Form 10-Q
Reporting period: 13 weeks ended September 28, 2019; year-to-date figures cover 39 weeks. Comparisons are with the corresponding 2018 periods unless noted. Dorman supplies replacement parts and fasteners for the automotive aftermarket, primarily in North America.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Net sales | $253.8m | $248.0m | $751.8m | $713.4m |
| Gross profit | $86.9m | $95.0m | $261.6m | $276.3m |
| Gross margin | 34.2% | 38.3% | 34.8% | 38.7% |
| Operating income / margin | $27.0m / 10.6% | $43.7m / 17.6% | $83.9m / 11.2% | $126.5m / 17.7% |
| Net income | $21.3m | $34.0m | $66.2m | $99.0m |
| Diluted EPS | $0.65 | $1.03 | $2.02 | $2.98 |
| Operating cash flow | Not stated separately | Not stated separately | $59.7m | $65.2m |
- Q3 sales rose about 2%; year-to-date sales rose about 5%. Q3 growth included approximately 1% from acquisitions and about 4% from tariff effects on the base business, partly offset by customer mix shifts. Year-to-date growth included approximately 2% from acquisitions and 3% from tariffs.
- Margins and earnings fell sharply despite higher sales. Management attributed gross-margin pressure to retail-versus-warehouse-distributor customer mix, tariff pass-through, lower-margin product mix, acquisitions, and duplicate facility overhead. SG&A also increased.
- Cash and cash equivalents were $54.2m at September 28, up from $43.5m at December 29, 2018. Working capital was $529.3m, versus $488.1m. Shareholders’ equity was $772.6m.
- No revolving-credit borrowings were outstanding; approximately $99.2m of the $100m facility was available after letters of credit. The filing reports no material debt balance. The facility expires in December 2022.
- Year-to-date investing cash use was $24.7m, including $24.7m of property and equipment additions; financing cash use was $24.3m, primarily share repurchases. Cash increased $10.7m during the period.
- Accounts receivable sales were $530.7m year to date, compared with $438.6m in 2018. Associated financing costs included in SG&A were $13.6m versus $10.0m.
Material changes and management commentary
- Portland distribution-center consolidation and related ramp-up drove significant costs. Year-to-date, the company reported $17.1m of start-up inefficiencies and duplicate facility costs, plus $3.0m of site-consolidation and integration costs. The new Portland center became fully operational in October 2019.
- Management expected elevated costs to continue in Q4 2019 and distribution costs to return to more typical levels as 2020 progressed. The filing provides no clear full-year revenue or EPS guidance.
- Tariffs on Chinese imports increased costs. Dorman said it was pursuing customer price increases and supplier concessions; it expected tariffs to raise sales while reducing gross and operating margins, but not materially affect net income.
- Customer negotiations and concessions—including pricing, returns, indemnification, and extended payment terms—may pressure margins and require additional working capital. Management said available liquidity should cover needs for at least 12 months, subject to demand, payment terms, and contingencies.
- The company introduced 4,108 products year to date, including 1,316 “New to the Aftermarket” SKUs, and continued investing in heavy-duty products.
Risks, contingencies, and unusual items
- Customs disclosure: Dorman identified incorrect import classifications and voluntarily disclosed the matter to U.S. Customs and Border Protection. Management considered unpaid duties and interest probable but could not reasonably estimate the loss. It expected to complete the disclosure and pay any amount due in 2020; the outcome could materially affect future cash flows or period results.
- Share repurchases: The company repurchased 272,564 shares for $22.8m under its program during the 39-week period. The board-authorized program allows up to $400m through December 31, 2020.
- Acquisition consideration: An $8.2m long-term liability remained for contingent consideration tied to MAS sales thresholds through December 2020.
- Financial-statement revision: The company corrected an immaterial prior-period error in the balance-sheet classification of customer rebates and returns. The correction did not affect reported income or equity.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. No material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- Whether the Portland facility achieves the expected cost normalization during 2020, and how much of the reported operating pressure proves temporary.
- The final CBP assessment, including unpaid duties and interest, and its effect on cash flows and earnings.
- Whether tariff-related price increases and supplier concessions offset tariff costs without further weakening margins or demand.
- The sustainability and cost of receivables factoring, customer payment terms, and working-capital requirements.
- Progress on sales thresholds and the eventual payment associated with the $8.2m MAS contingent-consideration liability.