Item 1. Business
ITEM 1. Business.
General
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 December 26, 2020, we marketed approximately 81,000 distinct parts compared to approximately 78,000 as of December 28, 2019, many of which we designed and engineered. This number excludes private label stock keeping units and other variations in how we market, package and distribute our products, includes distinct parts of acquired companies and reflects distinct parts that have been discontinued at the end of their lifecycle. We are one of the leading aftermarket suppliers of original equipment (“OE”) “dealer exclusive” parts. Original equipment “dealer exclusive” parts are those which were traditionally available to consumers only from original equipment manufacturers or used parts from salvage yards and include, among other parts, intake manifolds, exhaust manifolds, window regulators, radiator fan assemblies, tire pressure monitor sensors, exhaust gas recirculation (EGR) coolers and complex electronics modules. Fasteners include such items as oil drain plugs, wheel bolts, and wheel lug nuts. For fiscal 2020, approximately 75% of our products were sold under brands that we own, and the remainder of our products were sold for resale under customers' private labels, other brands or in bulk. Our products are sold primarily in the United States through automotive aftermarket retailers (such as Advance Auto Parts, Inc. (“Advance”), AutoZone, Inc. (“AutoZone”), and O'Reilly Automotive, Inc. (“O’Reilly”)), including through their online platforms; national, regional and local warehouse distributors (such as Genuine Parts Co. – NAPA (“NAPA”)); and specialty markets, and salvage yards. We also distribute automotive aftermarket parts internationally, with sales primarily into Canada and Mexico, and to a lesser extent, Europe, the Middle East, and Australia.
The Automotive Aftermarket Industry
The automotive aftermarket industry has two distinct sectors: parts for passenger cars and light trucks, which accounted for projected industry sales of approximately $281.3 billion in 2020 1 , and parts for medium and heavy-duty trucks, which accounted for projected industry sales of approximately $98.8 billion in 2020 1 . We sell products primarily for passenger cars and light trucks, including those with diesel engines, and for medium and heavy-duty trucks. Two distinct groups of end-users buy replacement vehicle parts for passenger cars and light trucks: (i) individual consumers, who purchase parts to perform "do-it-yourself" repairs on their own vehicles; and (ii) professional installers, which include vehicle repair shops and dealership service departments. Individual consumers typically are supplied through retailers and the retail arms of warehouse distributors. Vehicle repair shops generally purchase parts through local independent parts wholesalers and national parts distributors. Automobile dealership service departments generally obtain parts through the distribution systems of vehicle manufacturers and specialized national and regional parts distributors.
Spending in the aftermarket for parts for passenger cars and light trucks, as well as medium and heavy-duty trucks, generally can be grouped into three categories: discretionary, maintenance, and repair. Discretionary, such as accessories and performance, tends to move in-line with consumer discretionary spending. Maintenance is composed of products and services, such as oil and oil changes, and tends to be less correlated with discretionary spending. Repair consists mainly of replacement parts that fail over time and tends to be less cyclical as it is largely comprised of parts necessary for a vehicle to function properly or safely. The majority of our products fall into the repair category.
The increasing complexity and the number of different makes and models of automobiles have resulted in a significant increase in the number of products required to service the domestic and foreign automotive fleets. Accordingly, the number of parts required to be carried by retailers and wholesale distributors has increased substantially, which is reflected in the increase in the number of distinct parts we marketed in 2020 as compared to 2019. The requirement to include more products in inventory and the significant consolidation among distributors of automotive replacement parts have in turn resulted in larger distributors. See ITEM 1A, “Risk Factors – Risks Related to Our Business – Our Industry, Operations and Competition” for information regarding the potential impacts of consolidation on our business.
1 Source: 2021 Auto Care Association Factbook
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Retailers and others who purchase automotive aftermarket parts for resale are constrained to a finite amount of space in which to display and stock products. Thus, the reputation for quality, customer serv ice, and line profitability that a supplier provides are significant factors in a retailer’s or other reseller’s decision as to which product lines to carry in the limited space available. Further, because of the efficiencies achieved through the ability to order all or part of a complete line of products from one supplier (with possible volume discounts), as opposed to satisfying the same requirements through a variety of different sources, retailers and other resellers of automotive aftermarket parts seek to purchase products from fewer but stronger suppliers.
Brands and Products
We market our products under the DORMAN ® brand name and several sub-brands, which identify products that address specific segments of the automotive aftermarket industry. In addition, across all our sub-brands, customers can find a subset of products that have been branded DORMAN ® OE FIX™ products.
Some of our most popular brands include:
DORMAN ® OE Solutions ® - A wide variety of replacement parts we introduced to the automotive aftermarket, covering many product categories across all areas of the vehicle, including fluid reservoirs, variable valve timing components, complex electronics, and integrated door lock actuators.
DORMAN ® OE FIX™ - Dorman’s distinct repair innovations that you cannot get from original equipment manufacturers, all designed to save time, money or hassle.
DORMAN ® HD Solutions™ - Heavy-duty aftermarket parts for class 4-8 vehicles. These products include lighting, cooling, engine management, wheel hardware, air tanks and cab products.
DORMAN ® HELP! ® - Broad assortment of small automotive replacement parts that are primarily sold in retail store fronts such as door handles, keyless remotes and cases and door hinge repair parts.
DORMAN ® Conduct-Tite ® - A wide array of electrical components for common repairs as well as for enthusiasts to customize and upgrade their vehicles.
We group our products into four major classes: powertrain, chassis, automotive body, and hardware. The following table represents each of the four classes as a percentage of net sales for each of the last three fiscal years:
Percentage of Net Sales
Year Ended
December 26, 2020
December 28, 2019
December 29, 2018
Powertrain
40
%
40
%
40
%
Chassis
30
%
30
%
29
%
Automotive Body
25
%
25
%
26
%
Hardware
5
%
5
%
5
%
Total
100
%
100
%
100
%
Our powertrain product line includes intake and exhaust manifolds, cooling products, harmonic balancers, fluid lines, fluid reservoirs, connectors, 4-wheel drive components and axles, drain plugs, and other engine, transmission and axle components. Chassis products include control arms, ball joints, tie-rod ends, brake hardware and hydraulics, wheel and axle hardware, suspension arms, knuckles, links, bushings, and other suspension, steering, and brake components. Our line of automotive body products includes door handles and hinges, window lift motors,
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window regulators, switches and handles, wiper components, lighting, electrical, and other interior and exterior automotive body components. Hardware products include threaded bolts, auto body and home fasteners, automotive and home electrical wiring components, and other hardwa re assortments and merchandise.
We warrant our products against certain defects in material and workmanship when used as designed on the vehicle on which it was originally installed. We offer a limited lifetime warranty on most of our products. Our standard warranty limits the end-user’s remedy to the repair or replacement of the part that is defective.
Product Development
Product development and continuous innovation are central to our business. The development of a broad range of products, many of which are not conveniently or economically available elsewhere, has enabled us to grow to our present size and is an important driver for our future growth. Our product strategy has been to design and engineer products, many of which we believe are better and easier to install and/or use than the original parts they replace, and to commercialize automotive parts for the broadest possible range of uses. New product ideas are reviewed by our product management staff and a cross-functional in-house team. The following table represents the number of distinct parts we introduced for each of the last three fiscal years:
December 26, 2020
December 28, 2019
December 29, 2018
New to the aftermarket
1,433
1,625
1,716
Line extensions
2,046
3,614
3,827
Total distinct parts introduced
3,479
5,239
5,543
In 2020, we introduced several new product categories to the aftermarket including: a new build electronic power steering rack, complete wiper motor and linkage arm assemblies, pre-pressed axles, loaded brake backing plates and flexible fuel lines. Each of these solutions gives installers and consumers additional choice when searching for reliable, affordable replacements.
Other innovative technologies we released in 2020 include climate control modules, new fuel pump driver modules and loaded knuckles, many of which are DORMAN ® OE FIX TM products providing additional durability against wear and elements to reduce potential failure points to help avoid the need for future repairs.
Our product teams also grow and expand existing categories by introducing new products that are designed to fit more vehicles, providing enhanced opportunities for aftermarket service providers to serve their customers. In 2020, we extended our lines in strategic categories such as valve covers, oil control valves, and drive shafts.
Some of our most popular innovations are those that provide vehicle owners significant savings over other repair alternatives, such as rust repair solutions. Our truck bed floor supports, differential covers and fuel tank crossmembers often eliminate the need to replace entire truck beds, axles and other large vehicle sections by facilitating direct repair of corroded components.
We also grew our lines of diesel and heavy-duty solutions in fiscal 2020, introducing hundreds of new products in categories such as nitrogen oxide sensors, LED forward lighting and diesel aftertreatment including: diesel exhaust fluid heaters and pumps and a selective catalytic reduction dosing module.
We reduced new product activity in the first half of 2020 due to uncertainties related to COVID-19. We increased new product development and commercialization in the second half of 2020 as overall market demand rebounded. As a result, we ended the year with lower new product introductions than the prior year. Development activities have returned to prior levels and we expect to return to our historical levels of performance in 2021.
Sales and Marketing
We market our products to three groups of purchasers who in turn supply individual consumers and professional installers. Our products are also available in our customers’ retail stores, on our customers’ websites, and through warehouse distributors. For the year ended December 26, 2020:
(i) approximately 58% of our net sales was generated from sales to automotive aftermarket retailers, including major chains such as Advance, AutoZone and O'Reilly;
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(ii) approximately 31 % of our net sales was generated from sales to warehouse distributors, such as NAPA, which may be local, regional or national in scope, and which also may engage in retail sales; and
(iii) approximately 11% of our net sales was generated from our heavy-duty channel and sales to special markets, which include, among others, mass merchants, such as Walmart, salvage yards and the parts distribution systems of OE parts manufacturers.
As of December 26, 2020, we had a sales and sales support team of over 110 people selling our products either directly to our customers or, with respect to certain select customers, indirectly through independent manufacturers’ representative agencies worldwide.
Our sales efforts are not directed merely at selling individual products, but more broadly towards selling our entire product portfolio. Our sales strategy includes increasing sales not only by securing new customers, but also by adding new product lines and expanding product selection within existing customers, in an effort to make our customers a destination for new-to-the-aftermarket products.
We use online catalogs, application guides, digital marketing tools, training materials, videos and additional content to describe and sell our products and other applications as well as to train our customers' sales teams. Our primary website, www.dormanproducts.com, provides a search engine that can be used to search our extensive catalog. The information on the website is not and should not be considered part of this Form 10-K and is not incorporated by reference in this Form 10-K.
As of December 26, 2020, we serviced more than 3,600 active accounts. During fiscal 2020, three customers (Advance, AutoZone and O’Reilly) each accounted for more than 10% of net sales and in the aggregate accounted for approximately 56% of net sales.
Manufacturing and Procurement
Substantially all of our products are manufactured by third parties. We engage third-party manufacturers around the world to develop and manufacture products according to our performance and design requirements, oftentimes using tooling that we own. In fiscal 2020, as a percentage of our total dollar volume of purchases, approximately 23% of our products were purchased from various suppliers throughout the United States and the balance of our products were purchased directly from suppliers outside of the United States. Our global supplier network provides access to a broad array of manufacturing capabilities and technologies while limiting our dependency on any single source of supply. While our supplier selection and sourcing programs will continue to leverage our strategic manufacturing firms for a substantial portion of our product portfolio, we also have qualified alternative sources available to provide additional support and capacity, if needed. We make a concerted effort to build and nurture strong, healthy relationships with our suppliers. In fiscal 2020, we purchased automotive products in substantial volumes from over 250 suppliers, and no single supplier accounted for more than 10% of our total product purchases in fiscal 2020.
Packaging, Inventory and Shipping
Finished products are received at one or more of our facilities, depending on the type of part. It is our practice to inspect samples of shipments based upon supplier performance. If cleared, these shipments of finished parts are logged into our computerized production tracking systems and staged for packaging, if necessary.
We employ a variety of custom-designed packaging machines which include blister sealing, skin film sealing, clamshell sealing, bagging and boxing lines. Packaged product generally contains our label (or a private label), a part number, a universal packaging bar code suitable for electronic scanning, a description of the part and, if appropriate, installation instructions. Products are also sold in bulk to automotive parts manufacturers and packagers. Computerized tracking systems, mechanical counting devices and experienced workers combine to help ensure that the proper variety and numbers of parts meet the correct packaging materials at the appropriate places and times to produce the required quantities of finished products.
Packaged inventory is stocked in the warehouse portions of our facilities and is organized to facilitate the most efficient methods of retrieving product to fill customer orders. We strive to maintain a level of inventory to adequately meet current customer order demand with additional inventory to satisfy new customer orders and special programs.
We ship our products from each of our locations by contract carrier, common carrier or parcel service. Products are generally shipped to each customer's main warehouses for redistribution within their network. In
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certain circumstances, at the request of the customer, we ship directly to the customer's warehouses, stores or other locations either via smaller direct ship orders or consolidated store orders that are cross docked.
Remanufacturing and Recycling Parts
Certain products we sell contain parts that can be recycled, or as more commonly referred to in our industry, remanufactured. We refer to the used product that is ultimately remanufactured as core. A used core is remanufactured and sold to the customer as a replacement for a unit on a vehicle. Customers and end-users that purchase remanufactured products will generally return the used core to us, which we then use in the remanufacturing process to make another finished good. Our core inventory consists of used cores purchased and held in our facilities, used cores that are in the process of being returned from our customers and end-users, and remanufactured cores held in finished goods inventory at our facilities. Our products that utilize cores include electronic control modules, hybrid batteries and complex mechatronics. We believe our remanufactured parts offer end-users an economical and safe way to maintain their cars on the road, while also reducing the impact to environment.
Competition
The automotive aftermarket industry is highly competitive. Competitive factors affecting the automotive aftermarket include price, product quality, breadth of product line, range of applications, customer service and the growth of e-commerce. Substantially all our products are subject to competition with similar products offered by other providers of automotive aftermarket repair and replacement parts. Some of these competitors are divisions and subsidiaries of companies much larger than us who possess a longer history of operations and greater financial and other resources than we do. We also face competition from OE manufacturers who sell through their dealerships many of the same replacement parts that we sell, although these manufacturers generally sell parts only for cars they produce. Our customers may also be successful in sourcing some of our products directly from our suppliers. Further, some of our private label customers also compete with us. For more information on risks relating to our competition, see ITEM 1A, “Risk Factors – Risks Related to Our Business – Our Industry, Operations and Competition.”
Seasonality
Our business can be affected by weather conditions. Extremely hot or cold weather generally results in an increase in automotive parts failure at an accelerated rate, which generally leads to an increase in our sales for the duration of the extreme weather event.
Impact of COVID-19
The COVID-19 pandemic has resulted and is expected to continue to result in significant economic disruption. COVID-19 caused state authorities to implement stringent measures to attempt to help control the spread of the virus, including business shutdowns and curtailments. Throughout the pandemic all of our U.S. facilities have remained, and currently remain, open and operating, with modified staffing in certain locations where appropriate. We have taken actions to promote the welfare of our employees by enhancing safety protocols. We have had to adjust our operations and inventory levels as demand has fluctuated due to government-imposed restrictions being imposed and then subsequently lifted or modified across the United States. As government-imposed restrictions vary and continue to change across the United States and elsewhere around the world, it remains difficult to determine the full impact that the pandemic will have on the overall demand environment as well as our ability to source parts and other materials to meet demand levels.
For a more detailed discussion of the impact of COVID-19 on our business, see “Human Capital Resources” below and ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Impacts of COVID-19.”
Patents, Trademarks and Other Intellectual Property
We own a number of patents important to our business, and we expect to continue to file patent applications to protect our research and development investments in new products. As of December 26, 2020, we held 71 patents and 16 pending patent applications, including foreign counterpart patents and foreign applications. For the United States, patents may last 20 years from the date of the patent's filing, depending upon term adjustments made by the patent office. In addition, we hold numerous trademarks in the United States and other countries. We also have licenses to intellectual property for the manufacture, use and sale of certain of our products.
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We obtain patent and other intellectual property rights used in connection with our business when practicable and appropriate. Historically, we have done so both organically, through commercial relationships and in connection with acquisitions.
For more information concerning the risks related to patents, trademarks and other intellectual property, see ITEM 1A, "Risk Factors – Risks Related to Our Business – Our Intellectual Property and Information Security.”
Human Capital Resources
General
As of December 26, 2020, we had 2,681 employees worldwide, substantially all of whom were employed full-time. Our employees are categorized by various functions. “Operations” consists of employees engaged in production, product distribution and inventory quality control. “Product Development” includes employees involved in product development and purchasing. “Quality and Engineering” consists of employees involved in internal and external quality management, manufacturing engineering, design, and testing. “Sales” includes employees employed in sales and customer service. “Administration” includes executive officers and individuals employed in finance, legal, information technology, human resources and other functions supporting our business. The following table shows employees by function and region.
December 26, 2020
U.S.
Non-U.S.
Total
Operations
1,976
37
2,013
Product Development
149
2
151
Quality and Engineering
157
35
192
Sales
141
19
160
Administration
165
-
165
Total Employees
2,588
93
2,681
None of our global employees is covered by a collective bargaining agreement. We consider our relations with our employees to be generally good.
Health and Safety
We maintain a safety culture grounded on the premise of eliminating workplace incidents, risks and hazards. We have created and implemented processes to help eliminate safety events and reduce their frequency and severity. We also review and monitor our performance closely. In response to COVID-19, we implemented and continue to implement safety measures in all our facilities to promote the welfare of our employees. For example, we enhanced safety protocols, including requiring administrative employees to work from home where applicable, and we implemented symptom screening, social distancing and robust sanitization practices at our facilities. In addition, we adopted a COVID-19 sick leave policy providing continued salary and benefits to eligible employees.
Inclusion and Diversity
We embrace the diversity of our employees, including their unique backgrounds, experiences, thoughts and talents. Employees are valued and appreciated for their distinct contributions to the growth and sustainability of our business. We strive to cultivate a culture and vision that supports and enhances our ability to recruit, develop and retain diverse talent at every level.
Talent and Development
Our talent strategy is focused on attracting the best talent, recognizing and rewarding their performance while continually developing, engaging and retaining them. We focus significant attention on attracting and retaining talented and experienced individuals to manage and support our operations, and our management team routinely reviews employee turnover rates at various levels of the organization. Management also reviews employee engagement surveys to monitor employee morale and receive feedback on a variety of issues.
Compensation
We pay our employees competitively and offer a broad range of company-paid benefits, which we believe are competitive with others in our industry and in the geographies in which we compete for talent. In certain areas of our operations, such as our warehouse and distribution centers in Portland, Tennessee and Warsaw, Kentucky, we tend
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to see higher attrit ion rates among hourly workers than in our other locations, in large part due to competition from other warehouse and distribution operations nearby. We have implemented a number of benefits to help reduce employee tu rnover at those sites, such as counseling services and establishment of an employee relief fund .
For information on risks relating to our human capital resources, see ITEM 1A, “Risk Factors – General Risk Factors – Losing the services of our executive officers or other highly qualified and experienced employees, or failing to attract and retain any of such officers or employees, could adversely affect our business.”
Available Information
Our Internet address is www.dormanproducts.com. The information on the website is not and should not be considered part of this Form 10-K and is not incorporated by reference in this Form 10-K. The website is, and is only intended to be, for reference purposes only. We make available free of charge on or through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). In addition, we will provide, at no cost, paper or electronic copies of our reports and other filings made with the SEC. Requests should be directed to: Attention: Secretary, Dorman Products, Inc., 3400 East Walnut Street, Colmar, Pennsylvania 18915.