Dorman Products, Inc. — Q3 2020 Form 10-Q
Reporting period: Third quarter ended September 26, 2020; comparisons are with the quarter ended September 28, 2019. The nine-month period is also compared with the corresponding 2019 period. Amounts are in millions except per-share data.
Business context and performance
Dorman supplies replacement parts and fasteners for passenger vehicles and trucks, primarily to the North American automotive aftermarket. Nearly all sales are to North American customers, principally in the United States. The company reported record-high sales in the third quarter, with growth primarily from higher volumes. Results include Power Train Industries (PTI), consolidated after Dorman acquired its remaining 60% ownership on January 2, 2020.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $300.6 | $253.8 | $791.5 | $751.8 |
| Gross profit | $107.8 | $86.9 | $271.7 | $261.6 |
| Gross margin | 35.9% | 34.2% | 34.3% | 34.8% |
| Income from operations | $44.8 | $27.0 | $87.5 | $83.9 |
| Operating margin | 14.9% | 10.6% | 11.0% | 11.2% |
| Net income | $34.3 | $21.3 | $70.9 | $66.2 |
| Diluted EPS | $1.06 | $0.65 | $2.19 | $2.02 |
Q3 sales increased 18.4% year over year; nine-month sales rose 5.3%. For the quarter, powertrain sales were $120.6 million, chassis $88.0 million, automotive body $74.4 million, and hardware $17.6 million. Q3 net income margin was 11.4%, versus 8.4% a year earlier.
- Cash flow: For the first nine months, operating cash flow was $145.7 million, investing cash outflow was $26.4 million, and financing cash outflow was $17.2 million. Cash increased by $102.1 million to $170.5 million.
- Liquidity: Working capital was $591.5 million at September 26, 2020. The company said available capital was adequate for at least the next 12 months based on its current operating plan.
- Debt and credit: Dorman had no revolver borrowings at quarter-end and approximately $99.2 million of availability, net of letters of credit. It had drawn $99.0 million in March as a precaution and repaid it in June. The credit facility expires in December 2022.
- Balance sheet: Total assets were $1,158.8 million and shareholders’ equity was $831.4 million at quarter-end. There were no reported borrowings under the credit agreement; operating lease liabilities were $34.4 million long term.
Material changes versus prior periods
- Q3 gross margin improved 1.7 percentage points, primarily from better productivity at the Portland, Tennessee distribution facility and lower excess and obsolete inventory provisions. SG&A fell to 21.0% of sales from 23.6%, helped by sales leverage, facility productivity, and lower travel expense.
- Nine-month gross margin declined 0.5 percentage points, mainly due to COVID-related safety and sick-leave costs and higher customer provisions. SG&A as a percentage of sales improved to 23.3% from 23.6%.
- Nine-month operating cash flow increased $86.1 million year over year, with management attributing the increase primarily to payment timing reflected in higher accounts payable and accrued liabilities, partly offset by higher receivables.
- The PTI acquisition resulted in $16.7 million of goodwill and $7.3 million of identified intangible assets. Dorman recognized a $2.5 million gain from remeasuring its previously held PTI interest; the purchase-price allocation remained provisional.
- Accounts receivable sales under customer programs were $568.3 million for the first nine months, versus $530.7 million in 2019. The company said it reduced receivables sold by $104 million in Q3, returning to historical levels.
Outlook, commentary, risks, and unusual items
- COVID-19 caused a sharp fall in orders in April, followed by recovery through Q2 and continued order growth in Q3. Customers and U.S. facilities generally remained open, but management said the pandemic’s duration and effects on demand, suppliers, staffing, inventory, and operations remained uncertain. Estimated Q3 out-of-pocket COVID-related costs reduced diluted EPS by $0.03.
- Management expected distribution costs to continue moderating toward more typical levels through the rest of 2020, subject to COVID-19 effects. The filing does not provide a clear numerical full-year earnings or sales guidance figure.
- Management cited customer pricing and return concessions, customer payment terms, tariffs, supplier dependence, demand variability, inventory forecasting, and public-health disruptions among factors that could pressure margins, cash flow, or sales. A 1 percentage-point increase in discount rates on receivables-sale programs was estimated to add about $4.9 million in annual financing costs, assuming balances and sales levels remain constant.
- Dorman completed a voluntary CBP disclosure and paid $2.8 million for estimated net underpaid duties and interest in June 2020. CBP acknowledged receipt but had not confirmed that its review was closed. Management considered other ordinary-course legal matters immaterial, while noting outcomes are uncertain.
- The board resumed share repurchases in August. On October 27, 2020, after quarter-end, it increased the program authorization by $100 million to $500 million and extended it through December 31, 2022.
Important facts for investors to verify
- Whether Q3’s strong volume growth persisted after quarter-end and how COVID-19 affected demand, supplier availability, and inventory requirements.
- Whether distribution-center productivity and gross-margin improvements continued, and whether customer rebates, returns, and pricing concessions changed.
- How much cash generation depended on the timing of payables and accrued liabilities, and on the receivables-sale programs and their financing costs.
- Whether CBP closed its review and whether PTI’s provisional purchase accounting or acquisition performance changed.
- Use of the expanded share-repurchase authorization, while tracking liquidity, credit-facility covenants, and the company’s stated risks.