Dorman Products, Inc. 10-Q

ITEM 1. Financial Statements DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended (in thousands, except per share data) March 27, 2021 March 28, 2020 Net sales $ 288,012 $ 257,730 Cost of goods sold 183,492 172,933 Gross profit 104,520 84,797 Selling, general and administrative expenses 62,869 59,735 Income from operations 41,651 25,062 Other (expense) income, net ( 36 ) 2,631 Income before income taxes 41,615 27,693 Provision for income taxes 8,885 4,918 Net income $ 32,730 $ 22,775 Earnings per share: Basic $ 1.02 $ 0.70 Diluted $ 1.02 $ 0.70 Weighted average shares outstanding: Basic 32,048 32,354 Diluted 32,184 32,426 See accompanying Notes to Condensed Consolidated Financial Statements 3 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED ) (in thousands, except for share data) March 27, 2021 December 26, 2020 Assets Current assets: Cash and cash equivalents $ 166,603 $ 155,576 Accounts receivable, less allowance for doubtful accounts of $ 1,210 and $ 1,260 in 2021 and 2020, respectively 452,520 460,878 Inventories 337,697 298,719 Prepaids and other current assets 9,817 7,758 Total current assets 966,637 922,931 Property, plant and equipment, net 90,699 91,009 Operating lease right-of-use assets 39,552 39,002 Goodwill 91,080 91,080 Intangible assets, net of accumulated amortization of $ 10,040 and $ 9,194 in 2021 and 2020, respectively 24,360 25,207 Deferred tax asset, net 12,173 12,450 Other assets 39,768 38,982 Total assets $ 1,264,269 $ 1,220,661 Liabilities and shareholders’ equity Current liabilities: Accounts payable $ 118,529 $ 117,878 Accrued compensation 13,169 19,711 Accrued customer rebates and returns 163,967 155,751 Other accrued liabilities 39,752 29,305 Total current liabilities 335,417 322,645 Long-term operating lease liabilities 37,226 37,083 Other long-term liabilities 4,067 3,555 Deferred tax liabilities, net 3,748 3,819 Commitments and contingencies (Note 5) Shareholders’ equity: Common stock, par value $ 0.01 ; authorized 50,000,000 shares; issued and outstanding 32,115,528 and 32,168,740 shares in 2021 and 2020, respectively 321 322 Additional paid-in capital 67,596 64,085 Retained earnings 815,894 789,152 Total shareholders’ equity 883,811 853,559 Total liabilities and shareholders' equity $ 1,264,269 $ 1,220,661 See accompanying Notes to Condensed Consolidated Financial Statements 4 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED ) Three Months Ended March 27, 2021 Common Stock Additional (in thousands, except share data) Shares Issued Par Value Paid-In Capital Retained Earnings Total Balance at December 26, 2020 32,168,740 $ 322 $ 64,085 $ 789,152 $ 853,559 Exercise of stock options 11,614 — 316 — 316 Compensation expense under Incentive Stock Plan — — 2,111 — 2,111 Purchase and cancellation of common stock ( 38,160 ) ( 1 ) ( 69 ) ( 3,904 ) ( 3,974 ) Cancellations, net of issuance of non-vested stock ( 17,599 ) — — — — Other stock-related activity, net of tax ( 9,067 ) — 1,153 ( 2,084 ) ( 931 ) Net income — — — 32,730 32,730 Balance at March 27, 2021 32,115,528 $ 321 $ 67,596 $ 815,894 $ 883,811 Three Months Ended March 28, 2020 Common Stock Additional (in thousands, except share data) Shares Issued Par Value Paid-In Capital Retained Earnings Total Balance at December 28, 2019 32,556,263 $ 326 $ 52,605 $ 720,653 $ 773,584 Exercise of stock options 10 — — — — Compensation expense under Incentive Stock Plan — — 1,214 — 1,214 Purchase and cancellation of common stock ( 96,709 ) ( 1 ) ( 175 ) ( 5,604 ) ( 5,780 ) Cancellations, net of issuance of non-vested stock ( 21,974 ) — — — — Other stock-related activity, net of tax ( 2,925 ) — ( 190 ) ( 228 ) ( 418 ) Net income — — — 22,775 22,775 Balance at March 28, 2020 32,434,665 $ 325 $ 53,454 $ 737,596 $ 791,375 See accompanying Notes to Condensed Consolidated Financial Statements 5 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended (in thousands) March 27, 2021 March 28, 2020 Cash Flows from Operating Activities: Net income $ 32,730 $ 22,775 Adjustments to reconcile net income to cash provided by operating activities: Depreciation, amortization and accretion 7,267 7,496 Gain on equity method investment — ( 2,498 ) Provision for doubtful accounts 18 14 Benefit for deferred income taxes — ( 912 ) Provision for stock-based compensation 2,111 1,214 Changes in assets and liabilities: Accounts receivable 8,338 ( 29,491 ) Inventories ( 38,978 ) 28,016 Prepaids and other current assets ( 2,017 ) 2,262 Other assets ( 1,270 ) ( 2,219 ) Accounts payable 737 ( 19,346 ) Accrued customer rebates and returns 8,215 4,471 Accrued compensation and other liabilities 3,869 6,808 Cash provided by operating activities 21,020 18,590 Cash Flows from Investing Activities: Acquisition, net of cash acquired — ( 14,462 ) Property, plant and equipment additions ( 6,207 ) ( 3,505 ) Cash used in investing activities ( 6,207 ) ( 17,967 ) Cash Flows from Financing Activities: Proceeds of revolving credit line — 99,000 Proceeds from exercise of stock options 289 — Other stock-related activity ( 932 ) ( 418 ) Purchase and cancellation of common stock ( 3,143 ) ( 5,780 ) Cash (used in) provided by financing activities ( 3,786 ) 92,802 Net Increase in Cash and Cash Equivalents 11,027 93,425 Cash and Cash Equivalents, Beginning of Period 155,576 68,353 Cash and Cash Equivalents, End of Period $ 166,603 $ 161,778 Supplemental Cash Flow Information Cash paid for interest expense $ 77 $ 20 Cash paid for income taxes $ 167 $ 62 See accompanying Notes to Condensed Consolidated Financial Statements 6 DORMAN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 27, 2021 AND MARCH 28, 2020 (UNAUDITED) 1. Basis of Presentation As used herein, unless the context requires otherwise, “Dorman,” the “Company,” “we,” “us,” or “our” refers to Dorman Products, Inc. and its subsidiaries. Our ticker symbol on the NASDAQ Global Select Market is “DORM.” The accompanying unaudited condensed consolidated financial statements have been prepared under U.S. generally accepted accounting principles (“GAAP”) for interim financial information and under the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). However, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 27, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 25, 2021 or any future period. 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 may cause significant fluctuations from quarter to quarter. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 26, 2020. 2. Business Acquisitions and Investments On January 2, 2020, we acquired the remaining outstanding stock of Power Train Industries, Inc. (“PTI”) not already owned by the Company. The total purchase price for PTI was approximately $ 30.7 million, which included $ 18.4 million paid for the remaining 60% of the outstanding stock, subject to customary purchase price adjustments, and $ 12.3 million which represents the fair value of the previously held 40 % equity interest in PTI that was acquired by the Company in 2016. As a result of the acquisition, we recorded a gain of $ 2.5 million in other (expense) income, net during the quarter ended March 28, 2020 from the increase in fair value of our original 40% interest in PTI. We previously accounted for our 40% interest as an equity-method investment. 3. Sales of Accounts Receivable We have entered several customer-sponsored programs administered by unrelated financial institutions that permit us to sell certain accounts receivable at discounted rates to the financial institutions. Transactions under these agreements were accounted for as sales of accounts receivable and the related accounts receivable were removed from our Condensed Consolidated Balance Sheet at the times of the sales transactions. Pursuant to these agreements, we sold $ 209.9 million and $ 151.3 million of accounts receivable during the three months ended March 27, 2021 and March 28, 2020, respectively. All credit terms with our customers are 365 days or less. Selling, general and administrative expenses include $ 2.6 million and $ 2.8 million during the three months ended March 27, 2021 and March 28, 2020, respectively, of financing costs associated with these accounts receivable sales programs. 4. Inventories Inventories include the cost of material, freight, direct labor and overhead utilized in the processing of our products and are stated at the lower of cost or net realizable value. Inventories were as follows: (in thousands) March 27, 2021 December 26, 2020 Bulk product $ 149,816 $ 136,726 Finished product 182,892 157,484 Packaging materials 4,989 4,509 Total $ 337,697 $ 298,719 5 . Commitments and Contingencies Acquisitions We have contingent consideration related to certain of our prior acquisitions due to the uncertainty of the ultimate amount of payment which will become due as earnout payments if performance targets are achieved. As of both March 27, 2021 and December 26, 2020, we have accrued $ 8.0 million, which represents the fair value of the estimated payments that we expect will become due in connection with these prior acquisitions based upon performance targets. If the performance targets are fully achieved, the maximum contingent payments under these agreements would be $ 15.6 million based on foreign currency exchange rates at March 27, 2021. Other Contingencies We are a party to or otherwise involved in legal proceedings that arise in the ordinary course of business, such as various claims and legal actions involving contracts, employment claims, competitive practices, intellectual property infringement, product liability claims and other matters arising out of the conduct of our business. In the opinion of management, none of the actions, individually or in the aggregate, taking into account relevant insurance coverage, would likely have a material financial impact on the Company, and we believe the range of 7 reasonably possible losses from current matters, taking into account relevant insurance coverage, is immaterial. However, legal matters are subject to inherent uncertainties, and there exists the possibility that the ultimate resolution of any of these matters could have a material adverse impact on the Company’s cash flows, financial position and results of operations in the period in which any such effects are recorded. 6 . Revenue Recognition Our primary source of revenue is from contracts with and purchase orders from customers. In many instances, our contract with a customer is the customer’s purchase order. Upon acceptance of the purchase order, a contract exists with a customer as it indicates approval and commitment of the parties, identifies the rights of both parties, identifies the payment terms, has commercial substance, and it is probable that we will collect the consideration to which we will be entitled in exchange for the goods transferred to the customer. We record estimates for cash discounts, defective and slow-moving product returns, promotional rebates, core return deposits and other discounts in the period the related product revenue is recognized (“Customer Credits”). The provision for Customer Credits is recorded as a reduction from gross sales and reserves for Customer Credits are shown as an increase of accrued customer rebates and returns. Customer Credits are estimated based on contractual provisions, historical experience, and our assessment of current market conditions. Actual Customer Credits have not differed materially from estimated amounts for each period presented. Amounts billed to customers for shipping and handling are included in net sales. Costs associated with shipping and handling are included in cost of goods sold. We have concluded that our estimates of variable consideration are not constrained. All our revenue was recognized under the point of time approach during the three months ended March 27, 2021 and March 28, 2020. We do not have significant financing arrangements with our customers, as our credit terms are all 365 days or less. Also, we do not receive noncash consideration (such as materials or equipment) from our customers to facilitate the fulfillment of our contracts. Disaggregated Revenue The following tables present our disaggregated net sales by type of major good / product line, and geography. Three Months Ended (in thousands) March 27, 2021 March 28, 2020 Powertrain $ 121,105 $ 108,142 Chassis 85,510 73,375 Automotive body 68,645 64,632 Hardware 12,752 11,581 Net sales $ 288,012 $ 257,730 Three Months Ended (in thousands) March 27, 2021 March 28, 2020 Net sales to U.S. customers $ 273,150 $ 241,392 Net sales to non-U.S. customers 14,862 16,338 Net sales $ 288,012 $ 257,730 7 . Stock-Based Compensation Restricted Stock Awards (“RSAs”) and Restricted Stock Units (“RSUs”) Vesting of RSA and RSU grants is conditional based on continued employment or service for a specified period and, in certain circumstances, the attainment of performance goals. With respect to RSA and RSU grants, we retain the shares underlying the grant, and any dividends paid thereon, until the vesting conditions have been met. For time-based RSA and RSU grants, compensation cost related to the stock is recognized on a straight-line basis over the vesting period and is calculated using the closing price per share of our common stock on the grant date. For performance-based RSA grants tied to growth in adjusted pre-tax income, compensation cost related to the award is recognized over the performance period and is calculated using the closing price per share of our common stock on the grant date and an estimate of the probable outcome of the performance conditions at each reporting date. Since March 2020, we have granted performance-based RSU grants that vest based on our total shareholder return ranking relative to the total shareholder return of the companies comprising the S&P Mid-Cap 400 Growth Index over a three-year performance period. For performance-based RSU grants tied to total shareholder return, compensation cost related to the award is recognized on a straight-line basis over the performance period and is calculated using the simulated fair value per share of our common stock based on the application of a Monte Carlo simulation model. For the three months ended March 27, 2021, we granted 17,714 performance-based RSU awards with a grant date fair value of $ 131.02 per share. Compensation cost related to RSA and RSU grants was $ 1.8 million and $ 1.0 million for the three months ended March 27, 2021 and March 28, 2020, respectively, and were included in selling, general and administrative expense in the Condensed Consolidated Statements of Operations. 8 The following table summarizes our RSA and RSU activity for the three months ended March 27, 2021: Shares Weighted Average Fair Value Balance at December 26, 2020 217,735 $ 72.77 Granted 44,976 $ 113.10 Vested ( 24,011 ) $ 63.37 Canceled ( 39,256 ) $ 74.30 Balance at March 27, 2021 199,444 $ 82.69 As of March 27, 2021, there was $ 10.9 million of unrecognized compensation cost related to unvested RSA and RSU grants that is expected to be recognized over a weighted average period of 2.6 years. Stock Options We expense the grant-date fair value of stock options as compensation cost on a straight-line basis over the vesting period for which related services are performed. The compensation cost charged against income was $ 0.3 million and $ 0.2 million for the three months ended March 27, 2021 and March 28, 2020, respectively, and included as selling, general and administrative expense in the Condensed Consolidated Statements of Operations. We use the Black-Scholes option valuation model to estimate the fair value of stock options granted. Expected volatility and expected dividend yield are based on the actual historical experience of our common stock. The expected life represents the period of time that options granted are expected to be outstanding and was calculated using historical option exercise data. The risk-free rate was based on a U.S. Treasury security with terms equal to the expected time of exercise as of the grant date. The following table summarizes our stock option activity for the three months ended March 27, 2021: Shares Weighted Average Exercise Price Weighted Average Remaining Term (In years) Aggregate Intrinsic Value Balance at December 26, 2020 250,779 $ 70.21 Granted 55,794 $ 101.45 Exercised ( 31,802 ) $ 64.07 Balance at March 27, 2021 274,771 $ 77.26 5.7 $ 7,600,381 Options exercisable at March 27, 2021 94,618 $ 73.61 3.7 $ 2,991,137 As of March 27, 2021, there was $ 3.7 million of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted average period of 3.2 years. 8 . Earnings Per Share Basic earnings per share is calculated by dividing our net income by the weighted average number of common shares outstanding during the period, excluding unvested RSAs and RSUs that are considered to be contingently issuable. To calculate diluted earnings per share, common share equivalents are added to the weighted average number of common shares outstanding. Common share equivalents are calculated using the treasury stock method and are computed based on outstanding stock-based awards. Stock-based awards of 9,000 shares and 91,273 shares were excluded from the calculation of diluted earnings per share as of March 27, 2021 and March 28, 2020, respectively, as their effect would have been anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended (in thousands, except per share data) March 27, 2021 March 28, 2020 Numerator Net income $ 32,730 $ 22,775 Denominator: Weighted average basic shares outstanding 32,048 32,354 Effect of stock-based compensation awards 136 72 Weighted average diluted shares outstanding 32,184 32,426 Earnings Per Share: Basic $ 1.02 $ 0.70 Diluted $ 1.02 $ 0.70 9 . Common Stock Repurchases We periodically repurchase, at the then-current market price, and cancel common stock issued to the Dorman Products, Inc. 401(k) Retirement Plan and Trust (the “401(k) Plan”). 401(k) Plan participants can no longer purchase shares of Dorman common stock as an 9 investment option under the 401(k) Plan. Shares are generally purchased from the 401(k) Plan when participants sell units as permitted by the 401(k) Plan or elect to leave the 401(k) Plan upon retirement, termination or other reasons. The following table summarizes the repurchase and cancellation of common stock in our 401(k) Plan : For the Three Months Ended March 27, 2021 March 28, 2020 Shares repurchased and canceled 2,160 4,730 Total cost of shares repurchased and canceled (in thousands) $ 210 $ 315 Average price per share $ 97.25 $ 66.66 Our Board of Directors has authorized the repurchase of up to $ 500 million through December 31, 2022 under a previously announced share repurchase program. Under this program, share repurchases may be made from time to time depending on market conditions, share price, share availability and other factors at our discretion. The share repurchase program does not obligate us to acquire any specific number of shares. At March 27, 2021, $ 203.4 million was available for repurchase under this share repurchase program. The following table summarizes the repurchase and cancellation of common stock under the share repurchase program: For the Three Months Ended March 27, 2021 March 28, 2020 Shares repurchased and cancelled 36,000 91,979 Total cost of shares repurchased and canceled (in thousands) $ 3,763 $ 5,465 Average price per share $ 104.53 $ 59.41 1 0 . Income Taxes At March 27, 2021, we had $ 1.1 million of net unrecognized tax benefits, all of which would lower our effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of March 27, 2021, accrued interest and penalties related to uncertain tax positions were not material. We file income tax returns in the United States, Canada, China, India, and Mexico. All years before 2017 are closed for U.S. federal tax purposes. Tax years before 2016 are closed for the states in which we file. Tax years before 2017 are closed for tax purposes in Canada. Tax years before 2017 are closed for tax purposes in China. Tax years before 2015 are closed for tax purposes in Mexico. All tax years remain open for India. 11 . Related-Party Transactions We lease our Colmar, PA facility and a portion of our Lewisberry, PA facility from entities in which Steven L. Berman, our Executive Chairman, and certain of his family members are owners. Each lease is a non-cancelable operating lease. Total rental payments to those entities under these lease arrangements will be $ 2.3 million in fiscal 2021 and were $ 1.8 million in fiscal 2020. The lease for our corporate headquarters in Colmar, PA was renewed during November 2016, effective as of January 1, 2018 , and will expire on December 31, 2022 . The lease for our Lewisberry, PA operating facility was signed in September 2020 and will expire on December 31, 2027 . In the opinion of our Audit Committee, the terms and rates of these leases were no less favorable than those which could have been obtained from an unaffiliated party when the lease for our corporate headquarters in Colmar, PA was renewed during November 2016 and when the lease for our Lewisberry, PA operating facility was signed in September 2020. We are a partner in a joint venture with one of our suppliers and own minority interests in two other suppliers. Each of these investments is accounted for according to the equity method. 1 2 . Fair Value Disclosures The carrying value of financial instruments such as cash, accounts receivable, accounts payable, and other current assets and liabilities approximate their fair value based on the short-term nature of these instruments. 10