DORMAN PRODUCTS, INC. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included in Part I, Item 1 of this
Quarterly Report on Form 10-Q. As used herein, unless the context otherwise
requires, "Dorman," the "Company," "we," "us," or "our" refers to
Cautionary Statement Regarding Forward Looking Statements
This document contains certain statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to the COVID-19 pandemic, net sales, diluted earnings per share, gross profit, gross margin, selling, general and administrative expenses, income tax expense, income before income taxes, net income, cash and cash equivalents, indebtedness, liquidity, the Company's share repurchase program, the Company's outlook and distribution facility costs and productivity initiatives. Words such as "believe," "demonstrate," "expect," "estimate," "forecast," "anticipate," "should," "will" and "likely" and similar expressions identify forward-looking statements. However, the absence of these words does not mean the statements are not forward-looking. In addition, statements that are not historical should also be considered forward-looking statements.
Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date the statement was made. Such forward-looking statements are based on current expectations that involve a number of known and unknown risks, uncertainties and other factors (many of which are outside of our control) which may cause actual events to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, but are not limited to: (i) competition in the automotive aftermarket industry; (ii) unfavorable economic conditions; (iii) the loss or decrease in sales among one of our top customers; (iv) customer consolidation in the automotive aftermarket industry; (v) foreign currency fluctuations and our dependence on foreign suppliers; (vi) extending credit to customers; (vii) the loss of a key supplier; (viii) limited customer shelf space; (ix) reliance on new product development; (x) changes in automotive technology and improvements in the quality of new vehicle parts; (xi) inability to protect our intellectual property and claims of intellectual property infringement; (xii) quality problems with products after their production and sale to customers; (xiii) loss of third party transportation providers on whom we depend; (xiv) unfavorable results of legal proceedings; (xv) our executive chairman and his family owning a significant portion of the Company; (xvi) operations may be subject to quarterly fluctuations and disruptions from events beyond our control; (xvii) cyber-attacks; (xviii) imposition of taxes, duties or tariffs; (xix) the level of our indebtedness, (xx) exposure to risks related to accounts receivable; (xxi) the phaseout of LIBOR or the impact of the imposition of a new reference rate, (xxii) volatility in the market price of our common stock and potential securities class action litigation; (xxiii) losing the services of our executive officers or other highly qualified and experienced contributors; (xxiv) the inability to identify suitable acquisition candidates, complete acquisitions or integrate acquisitions successfully; and (xxv) the effects of widespread public health epidemics, including COVID-19. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected.
See the "Statement Regarding Forward Looking Statements," Part I, Item 1A, "Risk
Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended
Introduction
The following discussion and analysis, as well as other sections in this
Quarterly Report on Form 10-Q, should be read in conjunction with the unaudited
consolidated financial statements and footnotes thereto of
This Quarterly Report on Form 10-Q contains the registered and unregistered
trademarks or service marks of Dorman and are the property of
Overview
We are one of the leading suppliers of replacement parts and fasteners for
passenger cars, light trucks, and heavy duty trucks in the automotive
aftermarket industry. As of
We generate virtually all our net sales from customers in the North American
automotive aftermarket industry, primarily in
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We may experience significant fluctuations from quarter to quarter in our results of operations due to the timing of orders placed by our customers. The introduction of new products and product lines to customers, as well as business acquisitions, may also cause significant fluctuations from quarter to quarter.
Early in 2019, we began the process of transferring operations of our existing
distribution facility in
We operate on a fifty-two or fifty-three week period ending on the last Saturday
of the calendar year. Our 2020 fiscal year will be a fifty-two week period that
will end on
Impacts of COVID-19
The COVID-19 pandemic has resulted and will continue to result in significant
economic disruption, and it has and will adversely affect our business. Although
certain states have issued executive orders requiring all workers to remain at
home, unless their work is critical, essential or life-sustaining, throughout
the
In late March, we began experiencing softening customer demand as a result of government-imposed restrictions designed to slow the spread of COVID-19 and expect those trends to continue through the second quarter and potentially longer. We expect demand to continue to be soft while government-imposed restrictions to curb the spread of COVID-19 remain in place. However, it is difficult to determine the full impact that the pandemic will have on the overall demand environment and our operations.
We have taken and expect to continue to take proactive steps to manage our costs and bolster our balance sheet and cash position in light of the pandemic, including but not limited to, the following:
• As more fully described under "Liquidity and Capital Resources," at the end
of March 2020 , we drew down $99.0 million from our $100.0 million revolving
credit facility.
• We increased the level of receivables collected under our various accounts
receivable purchase agreements. Since the end of the first quarter of 2020
through April 24, 2020 , we factored $192.0 million of receivables under
these programs, with $3.7 million in financing costs associated with these
accounts receivable sales.
• We are managing inventory levels to meet reduced levels of customer demand
and forecasts. Toward the end of the first quarter of fiscal 2020, we began
to reduce our inventory purchases in light of reduced demand levels.
• We are adjusting operating costs to adjust to demand dynamics, by limiting
non-essential operating expenses, reducing labor hours where possible, and
deferring capital expenditures where we have deemed appropriate to do so.
• We announced that we temporarily suspended our share repurchase program,
noting that we may resume such repurchases at any time when we believe it
is prudent to do so and without further notice.
As a result of these actions, we have increased our cash position and, as of
Of course, at the time of this filing and as we look ahead, we are unable to determine or predict the overall impact the COVID-19 pandemic will have on our customers, vendors and suppliers or our business, results of operations, liquidity or capital resources. Significant uncertainty still exists concerning the overall magnitude of the impact and the duration of the COVID-19 pandemic. As a result, we will continue to closely monitor updates regarding the spread of COVID-19 and adjust our operations according to guidelines from local, state and federal officials. In light of the foregoing, we may take further actions that alter our business operations or that we determine are in the best interests of our employees, customers, suppliers and shareholders.
New Product Development
New product development is an important success factor for us and traditionally
has been our primary vehicle for growth. We have made incremental investments to
increase our new product development efforts each year since 2003 to grow our
business and strengthen our relationships with our customers. The investments
primarily have been in the form of increased product development resources,
increased customer and end-user awareness programs, and customer service
improvements. These investments historically have enabled us to provide an
expanding array of new product offerings and grow revenues at levels that
generally have exceeded market growth rates. As a result of these investments,
we introduced 640 new distinct SKU's to our customers and end users in the
thirteen weeks ended
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One area of focus has been our complex electronics program, which capitalizes on the growing number of electronic components being utilized on today's OE platforms. New vehicles contain an average of approximately thirty-five electronic modules, with some high-end luxury vehicles containing over one hundred modules. Our complex electronics products are designed and developed in-house and tested to help ensure consistent performance, and our product portfolio is focused on further developing our leadership position in the category.
Another area of focus has been on Dorman HD Solutions™, a line of products we
market for the medium and heavy duty truck sector of the automotive aftermarket
industry. We believe that this sector provides many of the same opportunities
for growth that the passenger car and light truck sector of the automotive
aftermarket industry has provided us. Through Dorman HD Solutions™, we
specialize in what formerly were "dealer exclusive" parts similar to how we have
approached the passenger car and light duty truck sector. During the thirteen
weeks ended
Acquisitions
Our growth is also impacted by acquisitions. For example, on
Economic Factors
The Company's financial results are also impacted by various economic and industry factors, including, but not limited to the number, age and condition of vehicles in operation ("VIO") at any one time, and miles driven by those VIO.
To begin, the Company's products are primarily purchased and installed on a
subsegment of the VIO, specifically weighted towards vehicles aged eight to
thirteen years old. Each year,
In addition, we believe that vehicle owners generally are operating their
current vehicles longer than they did several years ago, performing necessary
repairs and maintenance in order to keep those vehicles well maintained.
According to data published by
The number of miles driven is another important statistic that impacts our
business. According to the
The recent executive orders issued by certain states in response to the COVID-19
pandemic requiring workers to remain at home, unless their work is critical,
essential or life-sustaining, is having an adverse impact on work-related
travel. In addition, quarantine orders throughout the
As a result, while, prior to COVID-19, we might have expected to see additional sales growth due to the VIO and mileage trends referenced above, the impact of COVID-19 related travel restrictions is expected to adversely affect our sales growth potential and our future results, at least until such restrictions are lifted.
Brand Protection
We operate in a highly competitive market. As a result, we are continuously evaluating our approach to brand protection. For example, in the third quarter of 2019, we modified our brand protection policy, which is designed to ensure that certain products bearing the Dorman name are not advertised below certain approved pricing levels.
Discounts, Allowances and Incentives
We offer a variety of customer discounts, rebates, return allowances and other incentives. We may offer cash discounts for paying invoices in accordance with the specified discount terms of the invoice. In addition, we may offer pricing discounts based on volume purchased from us or other pricing discounts related to programs in accordance with a customer's agreement. These discounts can be in the form of "off-invoice" discounts and are immediately deducted from sales at the time of sale. For those customers that choose to receive a payment on a quarterly or annual basis instead of "off-invoice," we accrue for such payments as the related sales are made and reduce sales accordingly. Finally, rebates and discounts are provided to customers to support promotional activities such as advertising and sales force allowances, and allowances for warranty and overstock returns may also be provided.
Our customers, particularly our larger retail customers, regularly seek more favorable pricing and product return provisions, and extended payment terms when negotiating with us. We attempt to avoid or minimize these concessions as much as possible, but we have granted pricing concessions, indemnification rights, extended customer payment terms and allowed a higher level of product returns in certain cases. These
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concessions impact net sales as well as our profit levels and may require additional capital to finance the business. We expect our customers to continue to exert pressure on our margins.
New Customer Acquisition Costs
New customer acquisition costs refer to arrangements pursuant to which we incur change-over costs to induce a customer to switch from a competitor's brand. In addition, change-over costs include the costs related to removing the new customer's inventory and replacing it with our inventory, which is commonly referred to as a stock-lift. New customer acquisition costs are recorded as a reduction to revenue when incurred.
Product Warranty and Overstock Returns
Many of our products carry a lifetime limited warranty, which generally covers defects in materials or workmanship and failure to meet specifications. In addition to warranty returns, we also may permit our customers to return new, undamaged products to us within customer-specific limits in the event that they have overstocked their inventories. At the time products are sold, we accrue a liability for product warranties and overstock returns as a percentage of sales based upon estimates established using historical information on the nature, frequency and average cost of the claim and the probability of the customer return. Significant judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Revision to these estimates is made when necessary, based upon changes in these factors. We regularly study trends of such claims.
Foreign Currency
In fiscal 2019, approximately 79% of our products were purchased from suppliers
in a variety of non-
The largest portion of our overseas purchases comes from
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Impact of Inflation
The overall impact of inflation has not resulted in a significant change in labor costs or the cost of general services utilized.
The cost of many commodities that are used in our products has fluctuated over time resulting in increases and decreases in the cost of our products. In addition, we have periodically experienced increased transportation costs as a result of higher fuel prices, capacity constraints and other factors. We will attempt to offset cost increases by passing along selling price increases to customers, using alternative suppliers and sourcing purchases from other suppliers. However, there can be no assurance that we will be successful in these efforts.
Impact of Tariffs
Effective
In
Results of Operations
The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items in our Consolidated Statements of Operations:
Thirteen Weeks Ended*
(in millions) March 28, 2020 March 30, 2019
Net sales $ 257.7 100.0 % $ 243.8 100.0 %
Cost of goods sold $ 172.9 67.1 % $ 156.3 64.1 %
Gross profit $ 84.8 32.9 % $ 87.5 35.9 %Selling, general and administrative
expenses$ 59.7 23.2 %$ 57.8 23.7 % Income from operations$ 25.1 9.7 %$ 29.7 12.2 % Other income, net$ 2.6 1.0 %$ 0.0 0.0 % Income before income taxes$ 27.7 10.7 %$ 29.8 12.2 % Provision for income taxes$ 4.9 1.9 %$ 6.4 2.6 % Net income$ 22.8 8.8 %$ 23.4 9.6 %
* Percentage of sales information does not add due to rounding
Thirteen Weeks Ended
Net sales increased 6% to
Gross profit margin was 32.9% of net sales for the thirteen weeks ended
Selling, general and administrative expenses were
Other Income, net was
Our effective tax rate was 17.8% for the thirteen weeks ended
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Liquidity and Capital Resources
Historically, our primary sources of liquidity have been our invested cash and
the cash flow we generate from our operations, including accounts receivable
sales programs provided by our customers. Cash and cash equivalents at
Tariffs
Tariffs also increase our uses of cash since we pay for the tariffs upon the
arrival of our goods in
Payment Terms and Accounts Receivable Sales Programs
Over the past several years we have continued to extend payment terms to certain customers as a result of customer requests and market demands. These extended terms have resulted in increased accounts receivable levels and significant uses of cash flows. We participate in accounts receivable sales programs with several customers that allow us to sell our accounts receivable to financial institutions to offset the negative cash flow impact of these payment terms extensions. However, any sales of accounts receivable through these programs ultimately result in us receiving a lesser amount of cash upfront than if we collected those accounts receivable ourselves in due course. Moreover, prior to the London Inter-Bank Offered Rate ("LIBOR") being phased out in 2021, to the extent that any of these accounts receivable sales programs bear interest rates tied to LIBOR, as LIBOR rates increase our cost to sell our receivables also increases. See Item 3. Quantitative and Qualitative Disclosures about Market Risk for more information. Further extensions of customer payment terms will result in additional uses of cash flow or increased costs associated with the sales of accounts receivable.
During the thirteen weeks ended
Credit Agreement
In
In addition to the foregoing, and, subject to certain requirements, the credit
agreement gives us the ability to request increases in revolving credit
commitments of up to an incremental
Cash Flows
The following summarizes the activities included in the Consolidated Statements of Cash Flows:
Thirteen Weeks Ended
(in thousands) March 28, 2020 March 30, 2019
Cash provided by operating activities $ 18,590 $ 16,431
Cash used in investing activities (17,967 ) (8,838 )
Cash used in financing activities 92,802 (10,257 )
Net increase (decrease) in cash and cash equivalents $ 93,425 $ (2,664 )
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During the thirteen weeks ended
During the thirteen weeks ended
Investing activities used
• Capital spending in the thirteen weeks ended March 28, 2020 was primarily
related to $1.7 million in tooling associated with new products, and
$1.5 million in enhancements and upgrades to our information systems.
• Capital spending in the thirteen weeks ended March 30, 2019 was primarily
related to $1.5 million in tooling associated with new products and $2.6
million in enhancements and upgrades to our information systems.
• Additionally, during the thirteen weeks ended March 28, 2020 we used $18.1
million to acquire the remaining 60% of the outstanding equity of Power
Train Industries, Inc. , net of $3.5 million of cash acquired.
• The remaining capital spending in both periods resulted from scheduled
equipment replacements, certain facility improvements and other capital
projects.
Financing activities provided
• In the thirteen weeks ended March 28, 2020 , we drew down on the revolving
credit facility in the amount of $99.0 million .
• In the thirteen weeks ended March 28, 2020 , we paid $5.5 million to
repurchase 91,979 common shares. In the thirteen weeks ended March 30,
2019 , we paid $8.4 million to repurchase 101,000 common shares.
• The remaining uses of cash from financing activities in each period result
from stock compensation plan activity and the repurchase of our common
stock from our 401(k) Plan.
In light of COVID-19, during the first quarter of fiscal 2020 we temporarily suspended repurchases under the previously disclosed share repurchase program approved by our board of directors. The Company may resume its repurchase program at any time when we believe it is prudent to do so and without further notice.
During the thirteen weeks ended
New and Recently Adopted Accounting Pronouncements
Please refer to Note 16, New and Recently Adopted Accounting Pronouncements, in the Notes to Consolidated Financial Statements.
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