Dorman Products, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 27, 2021; unaudited results compared with the three months ended March 28, 2020. Dorman supplies replacement automotive parts and fasteners, primarily in the U.S. aftermarket.
Financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $288.0 million | $257.7 million | +12% |
| Gross profit / margin | $104.5 million / 36.3% | $84.8 million / 32.9% | Margin +3.4 percentage points |
| Operating income / margin | $41.7 million / 14.5% | $25.1 million / 9.7% | Margin +4.8 percentage points |
| Net income / net margin | $32.7 million / 11.4% | $22.8 million / 8.8% | Net income +44% |
| Diluted EPS | $1.02 | $0.70 | +46% |
| Cash from operations | $21.0 million | $18.6 million | +$2.4 million |
Revenue growth was organic and attributed to robust customer demand. Gross margin improved with supply-chain efficiencies and the absence of higher customer provisions recorded in Q1 2020; higher freight costs partially offset the improvement. SG&A rose to $62.9 million from $59.7 million, but declined as a share of sales to 21.8% from 23.2%, reflecting sales leverage and operational efficiencies, partly offset by wage and benefit inflation.
Liquidity, cash flow and capital
- Cash was $166.6 million at March 27, 2021, versus $155.6 million at year-end 2020. Working capital was $631.2 million, up from $600.3 million.
- Operating cash flow was $21.0 million; capital expenditures were $6.2 million. Inventory increased $39.0 million from year-end to $337.7 million, which management said supported customer fill rates.
- No revolving-credit borrowings were outstanding; $99.2 million of the $100 million facility was available after letters of credit. The facility expires in December 2022. The filing reports no default and no material change in contractual obligations.
- The company sold $209.9 million of receivables through customer-sponsored programs during the quarter, versus $151.3 million a year earlier, and recorded $2.6 million of related financing costs. Management cited these programs as a liquidity source while noting they deliver less cash upfront than collecting receivables directly.
- Share repurchases under the program totaled $3.8 million for 36,000 shares; $203.4 million remained authorized. The company believes available capital is adequate for at least the next 12 months, subject to operating and market conditions.
Changes, outlook and risks
- Q1 2020 included a $2.5 million gain associated with remeasuring Dorman’s previously held PTI interest after acquiring control. This contributed to prior-year other income; Q1 2021 reported $0.04 million of net other expense. The prior-year effective tax rate was also reduced by a PTI-related tax benefit and a foreign tax credit carry-back. The effective tax rate was 21.3% in Q1 2021 versus 17.8% in Q1 2020.
- Management provided no numerical full-year guidance in the supplied filing text. It said COVID-19’s effects on demand, sourcing, staffing and liquidity remained uncertain. Most customers and U.S. facilities remained open.
- Management expects to continue mitigating China tariffs primarily through customer price increases. Tariffs and any related pass-throughs may increase sales while pressuring gross and operating margins. Global transportation constraints and freight costs were already affecting results.
- Key stated risks include customer pricing and payment-term pressure, customer concentration, demand fluctuations, inventory availability and returns, supplier and freight constraints, COVID-19, tariffs, foreign sourcing, and reliance on new-product development. The filing reported no material change to previously disclosed risk factors.
- Contingent acquisition consideration accrued was $8.0 million; maximum potential payments were $15.6 million if performance targets are fully achieved. Management considered current legal matters immaterial in aggregate, while acknowledging that outcomes are inherently uncertain.
Important facts for investors to verify
- Whether strong demand and gross-margin improvements persist, particularly as freight, wage, tariff and sourcing costs evolve.
- Whether the $39.0 million quarterly inventory build converts into sales without elevated overstock returns or impairment.
- How continued receivables sales, customer payment terms and associated financing costs affect cash generation and liquidity.
- Whether the company’s no-borrowing position and stated 12-month liquidity assessment remain intact amid COVID-19 and operating uncertainty.
- Potential outcomes and timing of the $8.0 million accrued acquisition earnout and other contingencies.