Dorman Products Inc. has announced its financial results for the fourth quarter and fiscal year ended Dec. 28, 2019.
The company reported fourth quarter 2019 net sales of $239.6 million, down 8% compared to net sales of $260.3 million in the fourth quarter of 2018. Dorman says a primary driver of the net sales decrease in the quarter was an increase in customer return provisions (resulting in a reduction of net sales of $11.2 million) primarily from new business wins, including a recently launched premium chassis program with a large national retail customer.
Gross profit was $78.3 million in the fourth quarter compared to $96.9 million for the same quarter last year.
Net income for the fourth quarter of 2019 was $17.5 million, or 54 cents per diluted share, compared to $34.6 million, or $1.05 per diluted share, in the prior year quarter. Adjusted net income for the fourth quarter was $16.8 million, or 52 cents per diluted share, compared to $36.4 million, or $1.10 per diluted share, in the prior year quarter.
During the fourth quarter, the company recorded an estimated pre-tax charge of $2.8 million ($2.3 million after tax or $0.07 per diluted share) related to the underpayment of duties to U.S. Customs arising from the misclassification of certain imported products over a five-year period. The charge, which is expected to be one-time in nature, follows an internal review and the company’s notification to U.S. Customs of its election to submit to a voluntary prior disclosure process to rectify historical misclassifications and underpayment of duties, as previously reported in the company’s SEC filings. Since discovering the misclassifications, Dorman says it has taken corrective actions with respect to the ongoing classification of products and payment of duties.
Fiscal 2019 Financial Results
Fiscal 2019 net sales were $991.3 million, up 2% compared to $973.7 million in fiscal 2018. Net sales growth in the full year attributable to acquisitions was approximately 1%.
Net income for fiscal 2019 was $83.8 million, or $2.56 per diluted share, compared to $133.6 million, or $4.02 per diluted share in the prior year. Adjusted net income in fiscal 2019 was $86.8 million, or $2.65 per diluted share, compared to $139.4 million, or $4.20 per diluted share, in the prior year.
Kevin Olsen, Dorman Products’ president and CEO, stated, “Excluding the impact of increased customer return provisions which were primarily tied to new business wins with a large national retail customer, fourth quarter net sales were in line with our expectations and essentially flat to third quarter 2019 net sales. While fourth quarter 2019 net sales, excluding incremental customer return provisions, were down low single digits compared to fourth quarter 2018 net sales, we believe the periods are not directly comparable. Fourth quarter 2018 net sales were up 14% over fourth quarter 2017 primarily because of an increased level of new product rollouts that occurred in the fourth quarter of 2018. Operationally, we completed the move of our Portland, TN facility in the fourth quarter of 2019, and we expect inflated operating and overhead expenses to abate as we move through the first half of 2020. Operating cash flow was notably strong in the quarter as we generated $36 million of operating cash flow in the quarter, reflecting a 176% improvement over last year and one of our strongest quarters in recent history.”
Olsen continued, “We are very excited for 2020 and beyond despite 2019 being a challenging year as we worked through a number of transformative changes that we believe position us well to drive sustainable, long-term growth. We completed three major site moves this year, which we believe set us up well for increased profitability moving forward. Our growth prospects also continue to be robust. We exited 2019 with our Heavy-Duty lines growing 20% in the fourth quarter, and we were awarded another key premium chassis program for a large national customer that we expect to launch early in the second half of 2020. New products also continue to perform well, as we launched 5,239 new SKU’s in 2019, with 31% of those SKU’s being exclusive to the aftermarket. We doubled our new SKU’s for Heavy-Duty lines in 2019 and built out a fleet facing sales organization that is gaining traction by collaborating with our channel partners to increase awareness and demand. Overall, 17% of our net sales in 2019 came from new products launched in the last 24 months, showcasing our strong new product vitality. We also believe that the number of vehicles in operation (VIO) in our primary subsegment will be increasing over the next few years, which should provide a tailwind to our business. Underscoring all of this is our solid balance sheet and strong operating cash flow generation, as we remain committed to prudently deploying our capital, primarily through organic investments and strategic acquisition opportunities. As we look towards 2020, we believe we are firmly positioned to capitalize on the exciting opportunities ahead and create value for our shareholders.”
Distribution Facility Consolidation Activities
Early in 2019, Dorman began the process of transferring operations of its existing distribution facility in Portland, Tennessee, to a new, nearby larger facility. The new facility became fully operational early in the fourth quarter of 2019. Dorman says it expects this move to improve our customer service abilities and productivity and expects our distribution costs to be back to more typical levels during the second half of 2020. During fiscal 2019, we incurred approximately $25.9 million of costs ($20.5 million after tax or 63 cents per diluted share) due to start up inefficiencies and duplication of facility overhead and operating costs related to our consolidation activities, with $5.5 million ($4.4 million after tax or 13 cents per diluted share) included in gross profit and $20.4 million ($16.2 million after tax or 50 cents per diluted share) in SG&A expenses.
2020 Guidance
The company expects 2020 net sales growth between 5% to 8% over 2019 net sales. The company also expects 2020 diluted EPS of between $3.25 and $3.45 on a GAAP basis, reflecting an increase of 27% to 35% year-over-year, and adjusted diluted EPS of between $3.35 and $3.55, reflecting an increase of 26% to 34% year-over-year.
Dorman’s guidance excludes any potential impact from supply chain disruptions caused by the coronavirus outbreak given the uncertainties from this rapidly evolving situation. The guidance also assumes no changes to U.S. import tariffs currently in place and that the company does not conduct any share repurchases in 2020.
In the first quarter of 2020, Dorman says it expects to face difficult comparisons to the prior year period results, but expect its financial results to improve throughout the year as the company benefits from efficiencies at its new Portland, Tennessee, facility, new contract wins that the company expects to launch in the second half of 2020 and the continued introduction of new products.
Share Repurchases
Under its share repurchase program, Dorman repurchased 227 thousand shares of its common stock for $16.6 million at an average share price of $73.22 during the quarter ended Dec. 28, 2019. The company has $143.9 million left under its current share repurchase authorization.
