Dorman Products, Inc. — Q2 2020 Form 10-Q
Business context and period: Dorman supplies replacement parts and fasteners for the automotive aftermarket, primarily in North America. The quarter comprised the 13 weeks ended June 27, 2020; year-to-date figures cover 26 weeks. Comparisons are with the equivalent 2019 periods.
Key financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $233.2 million | $254.2 million | $490.9 million | $498.0 million |
| Gross profit | $79.1 million | $87.1 million | $163.9 million | $174.6 million |
| Gross margin | 33.9% | 34.3% | 33.4% | 35.1% |
| Operating income | $17.6 million | $27.2 million | $42.7 million | $57.0 million |
| Net income | $13.9 million | $21.5 million | $36.7 million | $44.9 million |
| Diluted EPS | $0.43 | $0.66 | $1.13 | $1.37 |
- Q2 sales fell 8.3% year over year; management estimated COVID-19 reduced Q2 sales by approximately 14%–16%. First-half sales declined 1.4%.
- Q2 gross margin decreased 0.4 percentage points; first-half gross margin decreased 1.7 points. Management cited COVID-related costs and, for the first half, higher customer provisions in Q1.
- Q2 SG&A was $61.5 million, or 26.4% of sales, versus $59.9 million, or 23.6%, a year earlier. First-half SG&A was $121.3 million, or 24.7% of sales, versus $117.7 million, or 23.6%.
- First-half operating cash flow was $219.4 million, versus $36.5 million in 2019. The company attributed the increase largely to working-capital changes, including lower receivables associated with increased factoring. It sold $496.4 million of receivables in the first half, compared with $355.1 million a year earlier. Capital expenditures were $7.1 million; acquisition spending, net of cash acquired, was $14.3 million.
- Cash and cash equivalents were $359.6 million at June 27, 2020, versus $68.4 million at year-end 2019. Working capital was $561.1 million. The company had $99.0 million drawn on its $100 million revolving facility at June 27, leaving approximately $0.2 million available after letters of credit; it repaid the borrowing on June 29, after quarter-end, restoring $99.2 million of availability. No default was reported.
Material changes and unusual items
- COVID-19 drove a sharp April order decline, followed by recovery: May orders were flat year over year and June orders were significantly higher, according to management. Most customers and all U.S. facilities remained open, with modified operations and employee safety measures.
- Management estimated $4.9 million of incremental Q2 COVID-related out-of-pocket costs: $0.5 million affected gross profit, $4.2 million SG&A, and $0.2 million interest expense. Increased factoring during Q2 also incurred $3.3 million of costs above typical levels.
- Dorman acquired the remaining 60% of Power Train Industries (PTI) on January 2, 2020. The acquisition resulted in $16.7 million of goodwill and a $2.5 million remeasurement gain on its previously held interest, included in first-half other income. Purchase accounting remained provisional.
- The company completed its internal review of customs product misclassifications and made an initial CBP disclosure and $2.8 million payment in June. The disclosure process may continue iteratively.
- Share repurchases under the company’s program were suspended in March in response to COVID-19. First-half program repurchases totaled $5.5 million; $138.5 million remained authorized at June 27.
Outlook, commentary and risks
No quantified full-year earnings or sales guidance is provided in the filing. Management said distribution costs were returning toward typical levels as productivity improved at the expanded Portland, Tennessee facility, and expected further moderation in the second half of 2020, subject to COVID-19. Management believed available capital was adequate for at least the next 12 months but said the pandemic’s duration and impact remained uncertain.
Key risks include changes in demand and miles driven, customer concentration and pricing pressure, inventory forecasting, supplier disruption, tariffs, foreign sourcing, receivables and factoring costs, and legal or product-liability matters. The filing notes that a 1 percentage-point increase in receivables-program discount rates would increase annual financing costs and interest expense by approximately $5.7 million, assuming balances and factoring volumes remain constant. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Check how sales and order trends evolved after June, given the rapid late-quarter recovery and uncertain pandemic effects.
- Assess the sustainability of operating cash flow, which benefited substantially from increased receivables factoring; compare factoring volumes and related costs with normal levels.
- Confirm post-quarter cash, revolving-credit borrowings and availability; distinguish June 27 balance-sheet figures from the June 29 repayment and later cash disclosures.
- Track gross-margin recovery, COVID-related costs, customer provisions, and Portland distribution productivity in subsequent filings.
- Review final PTI purchase-price allocation and any changes to provisional acquired asset, liability, goodwill or tax values, as well as the final CBP disclosure outcome.