Dorman Products, Inc. — Q2 2021 Form 10-Q
Business context and period: Dorman supplies replacement automotive parts and fasteners for passenger, light-duty and heavy-duty vehicles. This filing covers the three and six months ended June 26, 2021; comparisons are with periods ended June 27, 2020. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $310.6 | $233.2 | $598.6 | $490.9 |
| Gross profit / margin | $110.1 / 35.5% | $79.1 / 33.9% | $214.6 / 35.9% | $163.9 / 33.4% |
| Operating income / margin | $40.6 / 13.1% | $17.6 / 7.6% | $82.3 / 13.7% | $42.7 / 8.7% |
| Net income | $31.6 | $13.9 | $64.3 | $36.7 |
| Diluted EPS | $0.99 | $0.43 | $2.00 | $1.13 |
| Operating cash flow | Not presented by quarter | $39.1 | $219.4 |
- Q2 sales rose 33% and first-half sales rose 22%, which management attributed to organic growth across channels, robust customer demand and the absence of prior-year government shutdowns.
- Gross margin improved year over year in both periods, supported by sales-volume leverage and productivity improvements, partly offset by higher freight costs. SG&A was $69.5 million (22.4% of sales) in Q2 and $132.4 million (22.1%) in the first half; lower expense ratios reflected leverage and fewer pandemic-related costs, partly offset by wage inflation and Dayton Parts transaction costs.
- Effective tax rates were 22.3% in Q2 and 21.8% in the first half, versus 19.9% and 18.6%, respectively, in the prior-year periods. Prior-year rates benefited from PTI-related tax items and, for the first half, a foreign tax credit carry-back claim.
- Cash and cash equivalents were $155.5 million at June 26, 2021, essentially unchanged from year-end; working capital was $642.1 million, versus $600.3 million. Current assets were $974.6 million and current liabilities $332.5 million.
- First-half operating cash flow fell to $39.1 million from $219.4 million. Management cited lower proceeds from receivables sales compared with elevated prior-year factoring and higher inventory to maintain customer fill rates. Investing used $10.2 million, mainly for capital expenditures; financing used $29.0 million, including $30.9 million of share repurchases. Cash declined $0.04 million.
- No borrowings were outstanding under the existing $100 million revolving facility; $99.2 million was available after letters of credit. The filing does not provide a separate total-debt balance. Cash interest paid in the first half was $0.14 million.
Material changes and notable items
- Inventory increased to $356.8 million from $298.7 million at fiscal year-end, a $58.0 million use of operating cash. Accounts receivable decreased to $446.2 million from $460.9 million.
- Dorman agreed on June 25, 2021 to acquire Dayton Parts for approximately $338 million, subject to customary adjustments and closing conditions; closing was expected in the second half of 2021. The proposed acquisition expands the heavy-duty vehicle aftermarket business.
- Lenders committed, subject to customary conditions, to a new $600 million revolving facility intended to replace the existing $100 million facility. Dorman may use it to fund some or all of the acquisition and related costs.
- First-half share repurchases under the public program totaled $30.9 million for 301,889 shares. Approximately $176.2 million remained authorized at June 26, 2021.
Outlook, risks and contingencies
- The filing gives no numerical full-year sales or earnings guidance. Management said available capital should meet ongoing cash needs for at least 12 months under its current operating plan.
- Management expected pandemic-related supply-network pressures, including logistical constraints, higher freight and materials costs, to continue through the rest of fiscal 2021. COVID-19 could also affect demand, staffing, sourcing, inventory and fulfillment.
- Customer requests for pricing concessions, extended payment terms and product-return provisions may pressure margins and liquidity. Dorman sold $433.7 million of receivables in the first half; related financing costs were $5.5 million. Receivables sales provide earlier cash at a discount and expose the company to financing-rate changes.
- Management identified risks including supply and transportation constraints, customer concentration and consolidation, competition, tariffs, product returns, cyber and intellectual-property risks, and acquisition completion and integration. A one-percentage-point increase in receivables-program discount rates was estimated to raise annual financing costs by about $6 million, assuming activity levels remain constant.
- Accrued contingent consideration for prior acquisitions was $10.4 million, with maximum potential payments of $16.0 million if performance targets are fully achieved. Management considered current legal matters immaterial in expected financial effect, taking insurance into account, while noting outcomes remain uncertain.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. No material change to previously reported risk factors was identified.
Important facts for investors to verify
- Whether Dayton Parts closed as expected, its final purchase consideration, financing, and integration costs and benefits.
- Whether freight, materials and wage inflation continued, and whether price increases and productivity gains offset those pressures.
- Inventory levels, customer demand and fill rates, and the effect of inventory investment on operating cash flow.
- Reliance on receivables-sale programs, associated costs and customer payment terms, including any changes in financing rates.
- Future share repurchases and liquidity after any acquisition-related borrowing under the proposed new facility.