Dorman Products, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. The unaudited filing covers the three and nine months ended September 25, 2021. Dorman supplies replacement parts and fasteners for passenger, light-duty and heavy-duty vehicles. On August 10, 2021, it acquired Dayton Parts, expanding its heavy-duty vehicle aftermarket business.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $348.4 million | $300.6 million | $947.1 million | $791.5 million |
| Gross profit / margin | $116.9 million / 33.5% | $107.8 million / 35.9% | $331.5 million / 35.0% | $271.7 million / 34.3% |
| Operating income / margin | $44.2 million / 12.7% | $44.8 million / 14.9% | $126.5 million / 13.4% | $87.5 million / 11.0% |
| Net income | $33.1 million | $34.3 million | $97.5 million | $70.9 million |
| Diluted EPS | $1.04 | $1.06 | $3.04 | $2.19 |
- Q3 sales grew 16%; excluding Dayton Parts, growth was 7%. Nine-month sales grew 20%, or 16% excluding Dayton Parts.
- Q3 gross margin declined 2.4 percentage points year over year. Management attributed pressure to inflation in freight, logistics and other costs, incomplete pass-through pricing during the quarter, and a 150-basis-point dilutive impact from Dayton Parts, including acquisition-related inventory fair-value adjustments.
- Nine-month gross margin improved 0.7 percentage points, helped by higher-volume fixed-cost leverage, productivity and the absence of prior-year COVID-related out-of-pocket costs; inflation and Dayton Parts inventory adjustments partly offset the gains.
- Q3 net income and diluted EPS fell year over year despite higher sales. For the nine-month period, net income and diluted EPS increased substantially.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $77.6 million, down from $145.7 million. Management cited higher inventory purchases to maintain customer fill rates; inventory was $475.5 million at September 25, compared with $298.7 million at December 26, 2020.
- Investing cash outflow was $360.8 million, including $345.5 million for Dayton Parts, net of acquired cash. Capital expenditures were $15.3 million.
- Financing cash inflow was $184.9 million. The company drew $252.4 million and repaid $3.0 million under its revolving facility, and spent $54.2 million on share repurchases.
- Cash was $57.3 million, down from $155.6 million at year-end 2020. Working capital was $390.4 million, versus $600.3 million. Management said available capital should cover ongoing needs for at least 12 months, subject to risks and assumptions.
- Debt consisted of $249.4 million drawn under a new $600 million revolving facility maturing August 2026; $349.8 million remained available after borrowings and letters of credit. The September 25 borrowing rate was 1.33%. The company reported no covenant default.
- The company sold $690.0 million of receivables through customer-sponsored programs during the first nine months, versus $568.3 million a year earlier. Related financing costs were $8.6 million for the nine months.
Outlook, risks and notable items
- No specific full-year revenue or earnings guidance is provided in the filing. Management expected higher freight, labor and material costs to continue to pressure results through the remainder of fiscal 2021, and said price increases and alternative suppliers may not fully offset inflation.
- Management said COVID-19 had not materially adversely affected operations in the first nine months, but pandemic-related supply and logistics pressures were affecting costs. Further effects on demand, staffing, sourcing, inventory and fulfillment remained possible.
- Other disclosed risks include customer pricing and payment-term demands, inventory availability and returns, reliance on suppliers and transportation providers, tariffs, interest-rate/reference-rate changes, customer concentration, competition and successful integration of acquisitions.
- Dayton Parts was acquired for $345.5 million net of acquired cash. Its preliminary purchase-price allocation included $160.4 million of identifiable intangible assets and $108.9 million of goodwill; valuations remained subject to adjustment. The acquired business contributed $27.4 million of sales and $0.3 million of net income as reported in the filing.
- Maximum potential additional contingent acquisition payments were $3.6 million. Management considered current legal matters immaterial after relevant insurance, while noting litigation outcomes are inherently uncertain.
- The company had $153.0 million remaining under its share repurchase authorization at September 25, 2021. Its disclosure controls were considered effective; Dayton Parts was excluded from the internal-control assessment while integration proceeded.
Most important facts for investors to verify
- Whether pricing actions catch up with sustained freight, labor and material inflation, and the resulting gross-margin trend.
- Inventory growth, customer fill rates and the effect of inventory investment on operating cash flow.
- Dayton Parts’ final purchase-price allocation, integration costs and contribution to sales, profit and cash generation.
- Facility borrowings, covenant headroom, receivables-sale costs and the effect of interest-rate or reference-rate changes on liquidity.