NEW PRODUCTS • NEW SOLUTIONS • NEW OPPORTUNITIES
MARKET POSITION
We are a leading supplier of replacement parts and fasteners for passenger cars, light
trucks, and heavy duty trucks in the automotive aftermarket. We distribute and market
approximately 216,000 different SKUs of automotive replacement parts and fasteners which
are sold under several DORMAN® brands (OE Solutions™, HELP!®, HD Solutions®, and our
premium chassis line Premium XL™, Premium RD™ and MAS™ brands).
Our products are sold primarily in the United States through automotive and heavy vehicle
aftermarket retailers, national, regional and local warehouse distributors, specialty markets
and salvage yards.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
2017
2016
2015
2014
2013
Fiscal Year Ended December (1)
Statement of Operations Data:
Net sales
Income from operations
Net Income
Earnings per share
Basic
Diluted
Balance Sheet Data:
Total assets
Working capital
Long-term debt
Dividends paid
$903,221
$859,604
$802,957
$751,476
$664,466
176,240
106,599
168,601
106,049
146,157
92,329
140,734
89,987
127,939
81,920
$ 3.14
$ 3.13
$ 3.07
$ 3.07
$ 2.60
$ 2.60
$ 2.50
$ 2.49
$ 2.25
$ 2.24
$765,924
422,068
$711,792
447,766
$621,865
380,063
$557,716
339,528
$510,689
315,870
—
—
—
—
—
—
—
—
—
—
Shareholders’ equity
634,807
601,642
518,036
462,061
413,641
(1) We operate on a fifty-two, fifty-three week period ending on the last Saturday of the calendar year. The fiscal year ended December 31, 2016 was a
fifty-three week period. All other fiscal years presented were fifty-two week periods.
OUR KEY DIFFERENTIATOR:
Our unique product development approach re-engineers many parts to eliminate the root
cause of OEM failures while delivering exclusive repair innovations to Service Technicians.
F I X
Air Suspension Compressors 40 SKUs Available
949-099: GM Trucks and SUVs, 2014-03
OE PROBLEM:
An air leak in the system
causes the compressor to run
continuously until it burns out.
It can also fail due to moisture
intrusion.
THERMAL
PROTECTION
SOFTWARE
OVERHEATS
UNTIL MOTOR
BURNOUT
OVERHEATS
UNTIL MOTOR
BURNOUT
F I X
THERMAL
PROTECTION
SOFTWARE
Dorman added thermal protection
software to prevent motor burnout and
an additional protective membrane to
improve weather resistance.
Camshaft Phasers 35 SKUs Available
917-250XD: Ford 2011-04, Lincoln 2011-05, Mercury 2010-06; 4.6L, 5.4L V8
OE PROBLEM:
Original rotor and vane plate
wear resulting in pressure loss
and weak performance.
REENGINEERED ROTOR
WITH PATENTED VANE
AND LOBE DESIGN
STRONGER
ALLOY PLATE
F I X
Improved rotor design and
stronger alloy locking plate
reduces friction with
smoother movement.
Variable Valve Timing Solenoids 230 SKUs Available
918-005: Buick Encore 2013, Chevrolet Cruze, Volt 2013-11, Sonic 2013-12
WEAK CENTER TUBE
OE PROBLEM:
Excessive internal part
movement results in premature
wear and poor performance in
original unit.
F I X
STRONGER
STATIONARY
TUBE
Stronger copper center stationary
tube limits internal part
movement and improves
part durability.
Stainless Steel Fuel Lines 9 SKUs Available
919-840: Chevrolet, GMC 2003-99
OE PROBLEM:
Original steel lines rust from
exposure to moisture and
corrosive road treatments.
F I X
Upgraded to stainless steel to
resist rust and corrosion.
Pre-formed sectional design
solution saves installation time.
LETTER TO SHAREHOLDERS
2017 Annual Report
To Our Shareholders,
We are pleased to announce another successful year highlighted by record sales and earn-
ings. Our success is a result of the tireless efforts of our contributors who continue to execute
our proven “New to the Aftermarket” product development strategy while ensuring high lev-
els of service to our customers and end users of our parts.
Our core mission is to identify failure prone passenger car, light truck, and heavy duty truck
parts that are only available from dealerships and make a high quality alternative available to
our customers and end users. Whenever possible, we look to remove original design flaws
and to make the repair more convenient by including everything necessary to do the job. This
approach often results in innovative solutions. This spirit of innovation is embodied in the 50
patents currently issued to Dorman, and the several pending patent applications on file at any
given time.
Our growth in revenue and earnings has created long term value for our shareholders. Our
business model generated a five year compounded annual growth rate of 10% in net sales and
13% in adjusted EPS. As a result, a $100 investment in our stock made five years ago would
be worth almost $180 at the end of 2017.
Our net sales increased 5% to $903.2 million up from $859.6 million in 2016 despite one
less selling week in fiscal 2017. Adjusted net income increased 8% to $114.7 million from
$106.0 million in the prior year while adjusted diluted earnings per share rose 10% to $3.37
from $3.07 in 2016. Please refer to the Non-GAAP Financial measures found at the end of this
annual report for a reconciliation to the corresponding GAAP measures. In addition, we re-
turned $74.7 million to our shareholders through the repurchase of 1.0 million shares of our
common stock in fiscal 2017 and, since the program’s inception in December, 2013; we have
returned $173.3 million to our shareholders.
We made progress on a number of initiatives in 2017, including:
• We delivered 4,079 new products to our customers and end users in 2017, including
1,192 “New to the Aftermarket” SKUs. This is no small feat, and requires hard work,
dedication and teamwork from approximately 400 Dorman contributors engaged in our
new product development effort, together with the best systems, processes and capa-
bilities in the Aftermarket.
• Our Heavy Duty business continues to grow as we expanded coverage and gained fur-
ther marketplace penetration. Revenues were up 31% in 2017 as a result. We now offer
more than 1,060 parts for vehicle classes VII and VIII. We will continue to invest aggres-
sively in the Heavy Duty marketplace as we remain bullish about our ability to grow in
this channel.
LETTER TO SHAREHOLDERS
2017 Annual Report
• Our complex electronics product portfolio is focused on further developing Dorman’s
leadership position in this space. Today we have over 1,000 new and remanufactured
complex electronic parts available for sale in the light, medium and heavy duty aftermar-
ket. Revenues from complex electronic parts grew 16% in 2017 and include products
such as sensors, hybrid batteries and keyless entry remotes.
• In October we acquired MAS Automotive Distribution Inc. (MAS), a premium chassis
parts and control arm company with annual revenues of approximately $40 million. The
acquisition firmly positions us a leader in the chassis and suspension categories, and
provides a perfect complement to our existing portfolio.
• Finally, I want to mention that our Warsaw, Kentucky distribution facility was named
Manufacturer of the Year by the Kentucky Association of Manufacturers in recognition of
its manufacturing excellence, innovative leadership and work in the community.
We remain bullish on the long term outlook for our business. The cornerstone of our
growth will continue to be our “New to the Aftermarket” products for customers in the North
American light, medium and heavy duty markets. To ensure profitable growth over the long-
term, we will continue to invest heavily in new product development capabilities and cus-
tomer relationships. We continue to look for opportunities to acquire businesses that enable
us to achieve our strategic objectives. We have a very thoughtful and disciplined approach as
it relates to acquisitions and believe there are ample opportunities for us to increase share-
holder value through smart acquisitions. In addition, we will continue to use share repur-
chases to increase shareholder value after other forms of investment are considered.
Our success is built upon our “culture of contribution.” The persistence and passion of our
contributors is the driving force behind our new product innovations and our proven ability to
prosper through various economic environments and industry transitions. Our culture creates
an environment where customers come first, and our contributors focus on adding value in all
they do. We are guided by this culture and our focus on creating a sustainable, profitable
business that contributes to the long term success of our shareholders, customers, and con-
tributors.
Thank you for
your continued
confidence and
support.
Steven L. Berman
Executive Chairman
Matt Barton
President
and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2017
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-18914
DORMAN PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of
incorporation or organization)
23-2078856
(I.R.S Employer
Identification No.)
3400 East Walnut Street, Colmar, Pennsylvania 18915
(Address of principal executive offices) (Zip Code)
(215) 997-1800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, $0.01 Par Value
Name of each exchange on which registered:
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", “smaller reporting company”, and
“emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☒
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of February 19, 2018 the registrant had 33,568,070 shares of common stock, $0.01 par value, outstanding. The aggregate market value of the
voting and non-voting common equity held by non-affiliates of the registrant as of July 1, 2017 was $1,948,324,106.
Certain portions of the registrant's definitive proxy statement, in connection with its Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days after December 30, 2017, are incorporated by reference into Part III of this Annual Report
on Form 10-K
DOCUMENTS INCORPORATED BY REFERENCE
1
DORMAN PRODUCTS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 30, 2017
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Registrant
Part I
Part II
Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Part III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 4.1
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Exhibits, Financial Statement Schedules
10-K Summary
Part IV
The Company’s fiscal year ends on the last Saturday of the calendar year.
References to
Fiscal 2013
Fiscal 2014
Fiscal 2015
Fiscal 2016
Fiscal 2017
Refers to the year ended
December 28, 2013
December 27, 2014
December 26, 2015
December 31, 2016
December 30, 2017
Page
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13
14
14
14
14
16
17
18
26
26
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49
52
53
53
53
54
54
55
57
2
Item 1. Business.
General
PART I
Dorman Products, Inc. was incorporated in Pennsylvania in October 1978. As used herein, unless the context
otherwise requires, “Dorman”, the “Company”, “we”, “us”, or “our” refers to Dorman Products, Inc. and its
subsidiaries.
We believe we are a leading supplier of replacement parts and fasteners for passenger cars, light trucks, and
heavy duty trucks in the automotive aftermarket. We distribute and market approximately 216,000 different stock
keeping units (“SKU’s”) of automotive replacement parts and fasteners, many of which we design and engineer. We
believe we are a leading aftermarket supplier of original equipment “dealer exclusive” items. Original equipment
“dealer exclusive” items 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.
Approximately 84% of our products are sold under brands that we own and the remainder of our products are 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”)), national, regional and local warehouse distributors
(such as Genuine Parts Co. – NAPA (“NAPA”)) and specialty markets, and salvage yards. We also distribute
automotive replacement parts internationally, with sales primarily into Canada, Mexico, Europe, the Middle East,
and Australia.
The Automotive Aftermarket
The automotive replacement parts market has two components: parts for passenger cars and light trucks,
which accounted for projected industry sales of approximately $286.9 billion in 20171, and parts for medium and
heavy duty trucks, which accounted for projected industry sales of approximately $94.2 billion in 20171. We market
products primarily for passenger cars and light trucks, including those with diesel engines and, since 2012, for
medium and heavy duty trucks. Two distinct groups of end-users buy replacement vehicle (automotive and truck)
parts: (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 the dealership service departments. The individual
consumer market is typically supplied through retailers and through the retail arms of warehouse distributors.
Vehicle repair shops generally purchase parts through local independent parts wholesalers and through 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 light vehicle aftermarket can be generally 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. The repair category consists mainly of replacement parts which 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 of automobiles 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 fleet. Accordingly, the number of parts required to
be carried by retailers and wholesale distributors has increased substantially. 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.
1 Source: 2018 Auto Care Association Factbook
3
Retailers and others who purchase aftermarket automotive repair and replacement parts for resale are
constrained to a finite amount of space in which to display and stock products. Thus, the reputation for quality,
customer service, and line profitability which a supplier enjoys are significant factors in a purchaser'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 purchasers of
automotive parts seek to purchase products from fewer but stronger suppliers.
Brands and Products
The DORMAN® Products brand name is known as a leader in the automotive and heavy duty markets.
DORMAN® is the parent brand covering a number of sub-brands within the DORMAN® portfolio.
A unique differentiator for the DORMAN® brand is our OE Fix sub-brand. OE Fix products can be found
throughout our portfolio of sub-brands and feature extensive engineering to eliminate known OE failures or allows
for the replacement of the part, not the assembly, saving time and money.
DORMAN® OE Solutions ™ - A wide variety of formerly “dealer only” replacement parts covering
many product categories including fluid reservoirs, variable value timing components, complex electronics, and
integrated door lock actuators.
DORMAN® HELP! ® - Broad assortment of formerly “dealer only” automotive replacement parts that
are primarily sold in retail store fronts such as door handles, keyless remotes and cases and door hinge repair.
DORMAN® HD Solutions™ - A line of formerly “dealer only” heavy duty aftermarket parts for class 4-8
vehicles. These products are focused on lighting, cooling, engine management, and cab products.
DORMAN® Premium Chassis - A complete premium chassis line. DORMAN® Premium XL® offers
leading low-friction technology found in today’s late model automobiles. DORMAN® Premium RD®, offers
solutions for rugged duty and fleet applications. MAS® offers replacement chassis part solutions for everyday
driving.
Other trade brands in the portfolio include: DORMAN FirstStop™, a complete offering of brake hardware
products, DORMAN® ConductTite®, electrical components and DORMAN® AutoGrade™, application specific
repair hardware.
4
We group our products into four major classes: power-train, automotive body, chassis, 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 31,
2016
December 30,
2017
December 26,
2015
Power-train
Automotive Body
Chassis
Hardware
Total
41%
27%
27%
5%
100%
40%
29%
26%
5%
100%
38%
30%
25%
7%
100%
Our power-train 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. Our line of automotive body products include door handles and hinges, window
lift motors, window regulators, switches and handles, wiper components, lighting, electrical, and other interior and
exterior automotive body components. Chassis products include control arms, brake hardware and hydraulics,
wheel and axle hardware, suspension arms, knuckles, links, bushings, and other suspension, steering, and brake
components. Hardware products include threaded bolts, auto body and home fasteners, automotive and home
electrical wiring components, and other hardware 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
warranty limits the customer’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 to our future growth. Our product strategy has been to design and engineer
products, many of which 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, as well as by members of the supply chain, sales, finance, marketing, legal, and
administrative staffs. The following table represents the number of unique parts we introduced for each of the last
three fiscal years:
New to the aftermarket
Line extensions (many of which are exclusive items)
Total unique parts introduced
1,192
2,887
4,079
1,255
2,965
4,220
1,495
3,357
4,852
2017
2016
2015
Through careful evaluation of high failure-prone parts, exacting design and precise engineering, we are
frequently able to offer products which fit a broader range of makes and models, as well as a wider range of
application years than the original equipment parts they replace. One such innovation is our replacement spare tire
hoist, which through several mechanical design changes allow us to offer a part that replaces three original
equipment parts, and now fits common domestic models over a thirteen year range.
Our new line of pre-pressed wheel hub and bearing assembly solutions have been developed to address an
ongoing technician challenge relating to providing a comprehensive part repair. We have eliminated the need for the
automotive technician to disassemble corroded/worn out components and to reuse them with new bearings. Our
solution offers a 100% new component assembly replacement which increases bay turns and optimizes the
technician’s speed of repair. Additionally, crankcase ventilation filters are another new-to the-aftermarket solution
we have pioneered, leveraging a strong team of engineers and intellectual property attorneys to redesign this
emission filter to meet stringent, regulated EPA standards. We developed, engineered and utilized a proprietary
design to create a new, patented aftermarket solution to meet the needs of the end technician. This flexibility assists
5
retailers and other purchasers in maximizing the productivity of the limited space available for each class of part
sold. Further, where possible, we improve our parts so that they are better than the parts they replace. Finally, we
make every attempt to look at the repair through the eyes of the end user, and redesign many of our items to make
installation easier, resulting in lower total cost for the repair. In addition, we often package different items in
complete kits to further aide installation and value.
Ideas for expansion of our product lines arise through a variety of sources. We maintain an in-house product
management staff that routinely generates ideas for new parts and the expansion of existing lines. Further, we
maintain an "800" telephone number and an Internet site for "new product ideas" and receive, through our sales
force, product development team, or our website, many ideas from our customers and end-users as to which types of
presently unavailable parts the ultimate consumers are seeking.
Sales and Marketing
We market our products to three groups of purchasers who in turn supply individual consumers and
professional installers. Based on net sales to our customers as of December 30, 2017:
(i) approximately 48% of our revenues were generated from sales to automotive aftermarket retailers
(such as, Advance, AutoZone and O'Reilly), local independent parts wholesalers and national general
merchandise chain retailers. We sell many of our products to virtually all major chains of automotive
aftermarket retailers;
(ii) approximately 48% of our revenues were generated from sales to automotive parts distributors (such
as NAPA), which may be local, regional or national in scope, and which may also engage in retail sales; and
(iii) the balance of our revenues (approximately 4%) are generated from international sales and sales to
special markets, which include, among others, mass merchants (such as Wal-Mart), salvage yards and the
parts distribution systems of parts manufacturers.
We use a number of different methods to sell our products. Our more than 60 person direct sales force and
sales support staff solicits purchases of our products directly from customers, as well as manages the activities of
approximately 35 independent manufacturers’ representative agencies worldwide. We use independent
manufacturers’ representative agencies to help service existing automotive retail, automotive and heavy duty parts
distribution customers, providing frequent on-site contact. We increase sales by securing new customers, by adding
new product lines and expanding product selection within existing customers. For certain of our major customers,
and our private label purchasers, we rely primarily upon the direct efforts of our sales force who, together with our
marketing department and our executive officers, coordinate the more complex pricing and ordering requirements of
these accounts.
Our sales efforts are not directed merely at selling individual products, but rather more broadly towards selling
our entire product portfolio in an effort to make our customers a destination for new to the aftermarket products.
We prepare a number of on-line catalogs, application guides, training materials and videos designed to
describe our products and other applications as well as to train our customers' sales teams in the promotion and sale
of our products. Catalogs of all our parts are available on our website.
We currently service more than 2,400 active accounts. During fiscal 2017, fiscal 2016 and fiscal 2015, four
customers (Advance, AutoZone, NAPA, and O'Reilly) each accounted for more than 10% of net sales and in the
aggregate accounted for approximately 61% of net sales in fiscal 2017, and 60% in each of fiscal 2016 and fiscal
2015.
Manufacturing and Procurement
Substantially all of our products are manufactured by third parties. We engage professional manufacturing
firms around the world to develop and manufacture products according to our performance and design
specifications, using tooling that we own. In fiscal 2017, as a percentage of our total dollar volume of purchases,
approximately 29% of our products were purchased from various suppliers throughout the United States and the
6
balance of our products were purchased directly from suppliers in a variety of foreign countries. 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. We purchase automotive products in substantial
volumes from over 210 suppliers. For fiscal 2017, no single manufacturer accounted for more than 10% of total
product purchases.
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 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 assure 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 the customer's main warehouses for redistribution within their network. In 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.
Competition
The replacement automotive parts industry is highly competitive. Various competitive factors affecting the
automotive aftermarket are price, product quality, breadth of product line, range of applications and customer
service. Substantially all of our products are subject to competition with similar products manufactured by other
manufacturers of aftermarket automotive repair and replacement parts. Some of these competitors are divisions and
subsidiaries of companies much larger than us, and possess a longer history of operations and greater financial and
other resources than we do. We also face competition from automobile 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
suppliers. Further, some of our private label customers also compete with us.
Seasonality
Our business is somewhat seasonal in nature, with the highest sales usually occurring in the spring and
summer months. In addition, our business can be affected by weather conditions. Extremely hot or cold weather
tends to enhance sales by causing automotive parts to fail at an accelerated rate.
Proprietary Rights
While we take steps to register our trademarks and copyrights when possible, we believe that our business is
not heavily dependent on such trademark and copyright registration. Similarly, while we actively seek patent
protection for the products and improvements which we develop, we do not believe that patent protection is critical
7
to the success of our business. Rather, the quality, price, customer service and availability of our product is critical
to our success.
Employees
As noted below, at December 30, 2017, we had 2,061 employees worldwide, essentially all of which were
employed full-time. “Operations” consists of employees engaged in production, inventory and 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, finance, legal and human resources. The number of employees will be
affected by planned and unplanned open positions at any point in time.
Operations
Product Development
Quality and Engineering
Sales
Administration
Total Employees
U.S.
2017
Foreign
Total
1,223
230
110
94
212
1,869
112
33
23
6
18
192
1,335
263
133
100
230
2,061
None of our global employees are covered by a collective bargaining agreement. We consider our relations
with our employees to be generally good.
Available Information
Our Internet address is www.dormanproducts.com. The information on this 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. This 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: Dorman
Products, Inc. - Office of General Counsel, 3400 East Walnut Street, Colmar, Pennsylvania 18915.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the following factors,
which could materially affect our business, financial condition or future results. The risks described below are not
the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially affect our business, financial conditions or results of operations. The risks are listed
below in no particular order.
We May Lose Business to Competitors.
Competition within the automotive aftermarket parts business is intense. We compete in North America with
both original equipment parts manufacturers and with companies that, like us, supply parts only to the automotive
aftermarket. We also face competition from automobile manufacturers who sell through their dealerships many of
the same replacement parts that we sell. Our customers may also be successful in sourcing some of our products
directly from suppliers. We expect such competition to continue. If we are unable to compete successfully in our
industry, we could lose customers.
8
Unfavorable Economic Conditions May Adversely Affect Our Business.
Adverse changes in economic conditions, including inflation, recession, or instability in the financial markets
or credit markets may either lower demand for our products or increase our operational costs, or both. Such
conditions may also materially impact our customers, suppliers and other parties with whom we do business. Our
revenue will be adversely affected if demand for our products declines. The impact of unfavorable economic
conditions may also impair the ability of our customers to pay for products they have purchased. As a result,
reserves for doubtful accounts and write-offs of accounts receivables may increase and failure to collect a significant
portion of amounts due on those receivables could have a material adverse effect on our results of operations and
financial condition.
The Loss or Decrease in Sales Among One of Our Top Customers Could Have a Substantial Negative Impact
on Our Sales and Operating Results.
A significant percentage of our sales has been, and is expected to be, concentrated among a relatively small
number of customers. During fiscal 2017, fiscal 2016 and fiscal 2015, four customers (Advance, AutoZone, NAPA
and O'Reilly) each accounted for more than 10% of net sales and in the aggregate accounted for approximately 61%
of net sales in fiscal 2017, and 60% in each of fiscal 2016 and fiscal 2015. We anticipate that this concentration of
sales among these customers will continue in the future. The loss of a significant customer or a substantial decrease
in sales to such a customer could have a material adverse effect on our sales and operating results.
Customer Consolidation in the Automotive Aftermarket May Lead to Customer Contract Terms Less
Favorable to Us Which May Negatively Impact Our Financial Results.
The automotive aftermarket has been consolidating over the past several years. By way of example, in January
2014, Advance Auto Parts acquired General Parts International, Inc. (Carquest), one of the largest automotive parts
distributors. As a result of such consolidations, many of our customers have grown larger and therefore have more
leverage in the arms-length negotiations of agreements with us for the sale of our products. Customers may require
us to provide extended payment terms and returns of slow moving product in order to obtain new, or retain existing,
business. While we attempt to avoid or minimize such concessions, in some cases payment terms to customers have
been extended and returns of product have exceeded historical levels. The product returns primarily affect our profit
levels while payment terms extensions generally reduce operating cash flow and require additional capital to finance
our business. We expect both of these trends to continue for the foreseeable future.
Our Business May be Negatively Impacted By Foreign Currency Fluctuations and Our Dependence on
Foreign Suppliers.
In fiscal 2017, approximately 71% of our products were purchased from auppliers in a variety of foreign
countries. The products generally are purchased through purchase orders with the purchase price specified in U.S.
Dollars. Accordingly, we generally do not have exposure to fluctuations in the relationship between the U.S. Dollar
and various foreign currencies between the time of execution of the purchase order and payment for the product. To
the extent that the U.S. Dollar decreases in value relative to foreign currencies in the future, the price of the product
in U.S. Dollars for new purchase orders may increase.
The largest portion of our overseas purchases is from China. However, the products generally are purchased
through purchase orders with the purchase price specified in U.S. dollars. The Chinese Yuan to U.S. Dollar
exchange rate has fluctuated over the past several years. Any future change in the value of the Chinese Yuan relative
to the U.S. Dollar may impact the cost of products that we purchase from China.
As a result of the magnitude of our foreign sourcing, our business may be subject to various risks, including
the following:
•
uncertainty caused by the elimination of import quotas and the possible imposition of additional quotas
or antidumping or countervailing duties or other retaliatory or punitive trade measures;
imposition of duties, taxes and other charges on imports;
significant devaluation of the dollar against foreign currencies;
restrictions on the transfer of funds to or from foreign countries;
•
•
•
9
•
•
political instability, military conflict or terrorism involving the United States or any of the countries
where our products are manufactured or sold, which could cause a delay in transportation or an increase
in costs of transportation, raw materials or finished product or otherwise disrupt our business operations;
and
disease, epidemics and health-related concerns could result in closed factories, reduced workforces,
scarcity of raw materials and scrutiny and embargoing of goods produced in infected areas.
If these risks limit or prevent us from acquiring products from foreign suppliers or significantly increase the
cost of our products, our operations could be seriously disrupted until alternative suppliers are found, which could
negatively impact our business.
Additionally, we recently acquired a business based in Montreal, Canada, whose operations are conducted in
both U.S. Dollar and Canadian Dollar currencies. Since our consolidated financial statements are denominated in
U.S. dollars, amounts of assets, liabilities, net sales, and other revenues and expenses denominated in local
currencies must be translated into U.S. dollars using exchange rates for the current period. As a result, foreign
currency exchange rates and fluctuations in those rates could adversely impact our financial performance.
We Extend Credit to Our Customers Who May Be Unable to Pay In the Future.
We regularly extend credit to our customers. A significant percentage of our accounts receivable have been,
and expected to continue to be concentrated among a relatively small number of automotive retailers and automotive
parts distributors in the United States. Our five largest customers accounted for 85% of total accounts receivable as
of December 30, 2017 and 87% of total accounts receivable as of December 31, 2016. Management continually
monitors the credit terms and credit limits of these and other customers. If any of these customers were unable to
pay, our business and financial condition would be adversely affected.
The Loss of a Key Supplier Could Lead to Increased Costs and Lower Profit Margins.
The majority of the products we sell are purchased from a number of foreign suppliers. If any of our key
suppliers fail to meet our needs, it may not be possible to replace such supplier without a disruption in our
operations. Furthermore, replacement of a key supplier is often at higher prices.
Limited Shelf Space May Adversely Affect Our Ability to Expand Our Product Offerings.
Since the amount of space available to a retailer and other purchasers of our products is limited, our products
compete with other automotive aftermarket products, some of which are entirely dissimilar and otherwise non-
competitive (such as car waxes and engine oil), for shelf and floor space. No assurance can be given that additional
space will be available in our customers' stores to support any expansion of the number of products that we offer.
If We Do Not Continue to Develop New Products and Bring Them to Market, Our Business, Financial
Condition and Results of Operations Could Be Materially Impacted.
The development and production of new products is often accompanied by design and production delays and
related costs typically associated with the development and production of new products. While we expect and plan
for such delays and related costs, we cannot predict with precision the time and expense required to overcome these
initial problems so that the products comply with specifications. There is a risk that we may not be able to introduce
or bring to full-scale production new products as quickly as we expected in our product introduction plans, which
could have a material adverse effect on our business, financial condition, and results of operations.
We May Be Adversely Affected By Changes in Automotive Technology and Improvements in the Quality of
New Vehicle Parts.
Our business and financial condition may be adversely impacted by changes in automotive technologies, such
as vehicles powered by fuel cells or electricity. These factors could result in less demand for our products thereby
causing a decline in our business, financial condition, and results of operations.
10
In addition, improvements in quality by original equipment manufacturers could adversely affect our business.
Generally, if original equipment parts last longer, there could be less demand for our products.
Claims of Intellectual Property Infringement by Original Equipment Manufacturers Could Adversely Affect
Our Business and Negatively Impact Our Ability to Develop New Products.
From time to time in the past we have been subject to claims that we are infringing the intellectual property
of others. We currently are the subject of such claims and it is possible that others will assert infringement claims
against us in the future. An adverse finding against us in these or similar intellectual property disputes may have a
material adverse effect on our business, financial condition and results of operations if we are not able to
successfully develop or license non-infringing alternatives. In addition, an unfavorable ruling in intellectual
property litigation could subject us to significant liability, increased legal expense, and require us to cease
developing or selling the affected products or using the affected works of authorship or trademarks. Any significant
restriction that impedes our ability to develop and commercialize our products could have a material adverse effect
on our business, financial condition and results of operations.
Quality Problems with Our Products Could Damage Our Reputation and Adversely Affect Our Business.
We have experienced, and in the future may experience, reliability, quality, or compatibility problems in
products after their production and sale to customers. Product quality problems could result in damage to our
reputation, loss of customers, a decrease in revenue, litigation, unexpected expenses, and a loss of market share. We
have invested and will continue to invest in our engineering, design, and quality infrastructure in an effort to reduce
these problems; however, there can be no assurance that we can successfully remedy all of these issues. To the
extent we experience significant quality problems in the future, our business and results of operations may be
negatively impacted.
Loss of Third-Party Transportation Providers Upon Whom We Depend or Increases in Fuel Prices Could
Increase Our Costs or Cause a Disruption in Our Operations.
We depend upon third-party transportation providers for delivery of our products to us and to our customers.
Strikes, slowdowns, transportation disruptions or other conditions in the transportation industry, including, but not
limited to, shortages of truck drivers, disruptions in rail service, port congestion, or increases in fuel prices, could
increase our costs and disrupt our operations and our ability to service our customers on a timely basis.
Unfavorable Results of Legal Proceedings Could Materially Adversely Affect Us.
We are subject to various legal proceedings and claims that have arisen out of the ordinary course of our
business which are not yet resolved and additional claims may arise in the future. Although we currently believe
that resolving all of these matters, individually or in the aggregate, will not have a material adverse impact on our
financial position, legal claims and proceedings are subject to inherent uncertainty and our view on these matters
may change in the future. Regardless of merit, litigation may be both time-consuming and disruptive to our
operations and cause significant expense and diversion of management attention. Should we fail to prevail in certain
matters, we may be faced with significant monetary damages or injunctive relief that would materially adversely
affect our business and financial condition and operating results.
Dorman’s Executive Chairman and His Family Members Own a Significant Portion of the Company.
As of January 1, 2018, Steven L. Berman, our Executive Chairman, and his family members beneficially own
approximately 20% of the Company’s outstanding common stock. As such, Mr. Berman and his family members
can influence matters requiring approval of shareholders, including the election of the Board of Directors and the
approval of significant transactions. Such concentration of ownership may have the effect of delaying, preventing or
deterring a change in control of the Company, could deprive shareholders of an opportunity to receive a premium for
their common stock as part of a sale of the Company and might ultimately affect the market price of our common
stock.
11
Our Operations, Revenues and Operating Results, and the Operations of Our Third Party Manufacturers,
Suppliers and Customers, may be Subject to Quarter to Quarter Fluctuations and Disruptions from Events
Beyond Our or Their Control.
Our operations, revenues and operating results, as well as the operations of our third party manufacturers,
suppliers and customers, may be subject to quarter to quarter fluctuations and disruptions from a variety of causes
outside of our or their control, including work stoppages, market volatility, fuel prices, acts of war, terrorism, cyber
incidents, pandemics, fire, earthquake, flooding, changes in weather patterns, weather or seasonal fluctuations or
other climate-based changes, including hurricanes or tornadoes, or other natural disasters. If a major disruption were
to occur at our operations or the operations of our third party manufacturers, suppliers or customers, it could result in
harm to people or the natural environment, delays in shipments of products to customers or suspension of
operations, any of which could have a material adverse effect on our business, revenues and operating results.
We rely extensively on our computer systems to manage inventory, process transactions and timely provide
products to our customers. Our systems are subject to damage or interruption from power outages,
telecommunications failures, computer viruses, security breaches or other catastrophic events. If our systems are
damaged or fail to function properly, we may experience loss of critical data and interruptions or delays in our
ability to manage inventories or process customer transactions. Such a disruption of our systems could negatively
impact revenue and potentially have a negative impact on our results of operations, financial condition and cash
flows.
Regulations Related to Conflict Minerals Could Adversely Impact Our Business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) contains provisions to
improve transparency and accountability concerning the supply of certain minerals, known as “conflict minerals”,
originating from the Democratic Republic of Congo (“DRC”) and adjoining countries. These rules could adversely
affect the sourcing, supply, and pricing of materials used in our products, as the number of suppliers who provide
conflict-free minerals may be limited. We may also suffer reputational harm if we determine that certain of our
products contain minerals not determined to be conflict-free or if we are unable to modify our products to avoid the
use of such materials. We may also face challenges in satisfying customers who may require that our products be
certified as containing conflict-free minerals.
Cyber-attacks or Other Breaches of Information Technology Security Could Adversely Impact Our Business
and Operations.
Cyber-attacks or other breaches of network or information technology security may cause equipment failure or
disruption to our operations. Such attacks, which include the use of malware, computer viruses and other means for
disruption or unauthorized access, on companies have increased in frequency, scope and potential harm in recent
years. While, to the best of our knowledge, we have not been subject to cyber-attacks or to other cyber incidents
which, individually or in the aggregate, have been material to our operations or financial conditions, the preventive
actions we take to reduce the risk of cyber incidents and protect our information technology and networks may be
insufficient to repel a major cyber-attack in the future. To the extent that any disruption or security breach results in
a loss or damage to our data or unauthorized disclosure of confidential information, it could cause significant
damage to our reputation, affect our relationship with our customers, suppliers and employees, and lead to claims
against us and ultimately harm our business. Additionally, we may be required to incur significant costs to protect
against damage caused by these disruptions or security breaches in the future.
Imposition of New Taxes or Customs Duties on Our Products Could Adversely Affect Our Business.
In fiscal 2017, approximately 71% of our products were purchased from suppliers in a variety of foreign
countries. Due to economic and political conditions, tax and duty rates on imported goods may be subject to
significant change. The imposition or proposed imposition of new or increased taxes or duties on our products could
increase the cost of our products or reduce overall consumption of our products, or both, particularly if tax or duty
levels increased substantially relative to those for products manufactured in the United States. The imposition of
new taxes on our products or any substantial increase in duty rates on our products could adversely affect our
business, financial condition or results of operations.
12
We are Exposed To Risks Related to Accounts Receivable Sales Agreements.
We have entered into several customer sponsored programs administered by unrelated financial institutions
that permit us to sell certain accounts receivable at discounted rates to the financial institutions. The termination of
these agreements could have a material adverse effect on our operating results and operating cash flow.
Additionally, the interest rates of these agreements are tied to LIBOR. Increases in LIBOR could have a material
adverse effect on our financial condition, results of operations and operating cash flows.
The Market Price of Our Common Stock May Be Volatile and Could Expose Us to Securities Class Action
Litigation.
The stock market and the price of our common stock may be subject to wide fluctuations based upon general
economic and market conditions. The market price for our common stock may also be affected by our ability to
meet analysts’ expectations. Failure to meet such expectations, even slightly, could have an adverse effect on the
market price of our common stock. In addition, stock market volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to the operating performance of these
companies. Downturns in the stock market may cause the price of our common stock to decline.
Following periods of volatility in the market price of a company’s securities, securities class action litigation
has often been instituted against such companies. If similar litigation were instituted against us, it could result in
substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect
on our business.
Losing the Services of Our Executive Officers or Other Highly Qualified and Experienced Contributors
Could Adversely Affect Our Business.
Our future success depends upon the continued contributions of our executive officers and senior management,
many of whom have numerous years of experience and would be extremely difficult to replace. We must also
attract and maintain experienced and highly skilled engineering, sales and marketing, finance, logistics, and
operations personnel. Competition for qualified personnel is often intense, and we may not be successful in hiring
and retaining these people. If we lose the services of these key contributors or cannot attract and retain other
qualified personnel, our business could be adversely affected.
Our growth may be impacted by acquisitions. We may not be able to identify suitable acquisition candidates,
complete acquisitions or integrate acquisitions successfully.
We may not be able to identify suitable acquisition candidates, complete acquisitions, or integrate
acquisitions successfully. Our future growth is likely to depend to some degree on our ability to acquire and
successfully integrate new businesses. We may seek additional acquisition opportunities, both to further diversify
our businesses and to penetrate or expand important product offerings or markets. There are no assurances, however,
that we will be able to successfully identify suitable candidates, negotiate appropriate terms, obtain financing on
acceptable terms, complete proposed acquisitions, successfully integrate acquired businesses, or expand into new
markets. Once acquired, operations may not achieve anticipated levels of revenues or profitability. Acquisitions
involve risks, including difficulties in the integration of the operations, technologies, services and products of the
acquired companies and the diversion of management's attention from other business concerns. Although our
management will endeavor to evaluate the risks inherent in any particular transaction, there are no assurances that
we will properly ascertain all such risks. Difficulties encountered with acquisitions may have a material adverse
effect on our business, financial condition and results of operations.
Item 1B. Unresolved Staff Comments.
None
13
Item 2. Properties.
Facilities
As of December 30, 2017 have 17 warehouse and office facilities located throughout the United States,
Canada, China, Taiwan and India.
Two of these facilities are owned and the remainder are leased. Our principal facilities are as follows:
Location
Colmar, PA
Warsaw, KY
Portland, TN
Louisiana, MO
Montreal, Quebec, Canada
Sanford, NC
Shanghai, China
Description
Corporate Headquarters
Warehouse and office
Warehouse and office
Warehouse and office
Warehouse and office
Warehouse and office
Warehouse and office
Office
Size
342,000
sq. ft.
Ownership
Leased (1)
710,500 sq. ft.
581,500 sq. ft.
90,000 sq. ft.
87,900 sq. ft.
52,000 sq. ft.
16,000 sq. ft.
Owned
Leased
Owned
Leased (2)
Leased
Leased
(1) We lease the Colmar facility from a partnership of which Steven L. Berman, Executive Chairman, and his
family members are partners. Under this lease agreement we paid rent of $4.61 per square foot ($1.6
million per year) in fiscal 2017. The rents payable will be adjusted on January 1 of each year to reflect
annual changes in the Consumer Price Index for All Urban Consumers - U.S. City Average, All Items. This
lease was renewed during November 2016, effective as of January 1, 2018, and will expire on December
31, 2022. In the opinion of the Audit Committee of our Board of Directors, the terms of this lease were no
less favorable than those which could have been obtained from an unaffiliated party when the lease was
renewed during November 2016.
(2) We lease the Montreal facility from a corporation of which an employee and his family members are
owners. Under this lease agreement we began paying rent of $7.55 per square foot ($0.7 million per year)
in October 2017. This lease will expire on October 31, 2018.
Item 3. Legal Proceedings.
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, 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, would likely have a material financial impact on the Company
and we believe the range of reasonably possible losses from current matters is immaterial.
Item 4. Mine Safety Disclosures.
Not Applicable
Item 4.1. Executive Officers of the Registrant.
Executive Officers of the Registrant.
14
The following table sets forth certain information with respect to our executive officers:
Name
Steven L. Berman
Mathias J. Barton
Jeffrey L. Darby
Michael B. Kealey
Kevin M. Olsen
Age
58
58
50
43
46
Position with the Company
Executive Chairman, Secretary and Treasurer
President, Chief Executive Officer and Director
Senior Vice President, Sales and Marketing
Executive Vice President, Commercial
Executive Vice President, Chief Financial Officer
Steven L. Berman became the Executive Chairman of the Company on September 24, 2015. Additionally,
Mr. Berman has served as a director of the Company and as Secretary and Treasurer of the Company since its
inception in 1978. From January 30, 2011 to September 24, 2015, Mr. Berman served as Chairman of the Board and
Chief Executive Officer of the Company and from October 24, 2007 to January 30, 2011, Mr. Berman served as
President of the Company. Prior to October 24, 2007, Mr. Berman served as Executive Vice President of the
Company.
Mathias J. Barton joined the Company in November 1999 as Senior Vice President, Chief Financial Officer.
He became co-President of the Company in February 2011, President in August 2013, and President and Chief
Executive Officer in September 2015. Mr. Barton was appointed to our Board of Directors in January 2014. Prior
to joining the Company, Mr. Barton was Senior Vice President and Chief Financial Officer of Central Sprinkler
Corporation, a manufacturer and distributor of automatic fire sprinklers, valves and component parts. From May
1989 to September 1998, Mr. Barton was employed by Rapidforms, Inc., a manufacturer of business forms and
other products, most recently as Executive Vice President and Chief Financial Officer.
Jeffrey L. Darby joined the Company in November 1998 as a National Account Manager. He became Senior
Vice President, Sales and Marketing in February 2011. Prior to joining the Company, Mr. Darby worked for
Federal Mogul Corporation/Moog Automotive, an automotive parts supplier, beginning in 1990.
Michael B. Kealey joined the Company in November 2002, as a Product Manager. He became Executive Vice
President, Commercial in June 2017. He previously held the positions of Senior Vice President, Product from
February 2011 through May 2017, Vice President – Product from January 2007 through January 2011, and Director
– Product Management from April 2003 through December 2006. Prior to joining the Company, Mr. Kealey was
employed by Eastern Warehouse Distributors, Inc., a distributor of automotive replacement parts, most recently as
Vice President – Purchasing.
Kevin M. Olsen joined the Company in July 2016 as Senior Vice President and Chief Financial Officer. He
became Executive Vice President, Chief Financial Officer in June 2017. Prior to joining the Company, Mr. Olsen
was Chief Financial Officer of Colfax Fluid Handling, a division of Colfax Corporation, a diversified global
manufacturing and engineering company that provides gas and fluid-handling and fabrication technology products
and services to commercial and governmental customers around the world, from January 2013 through June
2016. Prior to joining Colfax, he served in progressively responsible management roles at the Forged Products Aero
Turbine Division of Precision Castparts Corp, Crane Energy Flow Solutions, a division of Crane Co., Netshape
Technologies, Inc., and Danaher Corporation. Prior thereto, Mr. Olsen performed public accounting work at
PricewaterhouseCoopers, LLP.
15
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities.
Our shares of common stock are traded publicly on the NASDAQ Global Select Market under the ticker
symbol “DORM”. At February 19, 2018 there were 203 holders of record of our common stock. The range of high
and low sales prices for our common stock for each quarterly period of fiscal 2017 and fiscal 2016 were as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2017
Fiscal 2016
High
Low
High
Low
$
82.51 $
88.50
83.50
74.22
67.03 $
76.40
62.64
60.93
55.00 $
56.73
67.30
79.03
40.17
51.12
52.80
60.00
We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of
future dividends will be at the discretion of our board of directors and will depend upon, among other things, our
earnings, financial condition, capital requirements, level of indebtedness, and other factors that our board of
directors deems relevant.
For the information regarding our equity compensation plans, see Item 12, “Security Ownership of Certain
Beneficial Owners and Management and Related Shareholder Matters.”
Stock Performance Graph. Below is a line graph comparing the cumulative total shareholder return for our
common stock with the cumulative total shareholder return for the Automotive Parts & Accessories Peer Group of
the Morningstar Group Index (formerly Hemscott Group Index) and the NASDAQ Composite Market Index for the
period from December 31, 2012 to December 31, 2017. The Automotive Parts & Accessories Peer Group is
comprised of 140 public companies and the information was furnished by Morningstar, Inc. through Zacks
Investment Research, Inc. The graph assumes $100 invested on December 31, 2012 in our common stock and each
of the indices, and that the dividends were reinvested when and as paid. In calculating the cumulative total
shareholder returns, the companies included are weighted according to the stock market capitalization of such
companies.
16
Stock Repurchases
During the last thirteen weeks of the fiscal year ended December 30, 2017, we purchased shares of our
common stock as follows:
Maximum
Number (or
Approximate
Dollar Value)
of Shares that
May Yet Be
Purchased Under
the Plans or
Programs (2)
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs (2)
75,040 $ 86,930,743
96,400 $ 80,319,046
52,500 $ 76,702,483
223,940 $ 76,702,483
Total Number
of Shares
Purchased (1)
Average
Price Paid
per Share
75,304 $ 73.28
97,990 $ 68.56
56,848 $ 68.59
230,142 $ 70.11
Period
October 1, 2017 through October 28, 2017
October 29, 2017 through November 25, 2017
November 26, 2017 through December 30, 2017
Total
(1)
Includes 2,222 shares of our common stock withheld from participants for income tax withholding purposes in
connection with the vesting of restricted stock grants during the period. The restricted stock was issued to
participants pursuant to our 2008 Stock Option and Incentive Plan. Also includes 3,980 shares purchased
from the Dorman Products, Inc. 401(k) Plan and Trust (as described in Note 12, Capital Stock, to the Notes to
Consolidated Financial Statements included in this Annual Report on Form 10-K).
(2) On December 12, 2013 we announced that our Board of Directors authorized a share repurchase program,
authorizing the repurchase of up to $10 million of our outstanding common stock by the end of 2014.
Through several expansions and extensions, our Board of Directors has expanded the program to $250 million
and extended the program through December 31, 2018. 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. We
repurchased 1,006,365 and 430,866 shares under this program during the fiscal years ended December 30,
2017 and December 31, 2016, respectively.
Item 6. Selected Financial Data.
(in thousands, except per share data)
Statement of Operations Data:
Net sales
Income from operations
Net income
Earnings per share
Basic
Diluted
Balance Sheet Data:
Total assets
Working capital
Long-term debt
Dividends paid
Shareholders' equity
December 30,
2017
December 31,
2016
Fiscal year ended (1)
December 26,
2015
December 27,
2014
December 28,
2013
$ 903,221 $ 859,604 $ 802,957 $ 751,476 $ 664,466
127,939
81,920
168,601
$ 106,599 $ 106,049 $
146,157
92,329 $
140,734
89,987 $
176,240
$
$
3.14 $
3.13 $
3.07 $
3.07 $
2.60 $
2.60 $
2.50 $
2.49 $
2.25
2.24
$ 765,924 $ 711,792 $ 621,865 $ 557,716 $ 510,689
$ 422,068 $ 447,766 $ 380,063 $ 339,528 $ 315,870
$
—
—
$
$ 634,807 $ 601,642 $ 518,036 $ 462,061 $ 413,641
— $
— $
— $
— $
— $
— $
— $
— $
(1) We operate on a fifty-two, fifty-three week period ending on the last Saturday of the calendar year. The fiscal year ended
December 31, 2016 was a fifty-three week period. All other fiscal years presented were fifty-two week periods.
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Regarding Forward Looking Statements
Certain statements in this document constitute “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. While forward-looking statements sometimes are presented with
numerical specificity, they are based on various assumptions made by management regarding future circumstances
over many of which the Company has little or no control. Forward-looking statements may be identified by words
including “anticipate,” “believe,” “estimate,” “expect,” and similar expressions. The Company cautions readers that
forward-looking statements, including, without limitation, those relating to future business prospects, revenues,
working capital, liquidity, and income, are subject to certain risks and uncertainties that would cause actual results to
differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to
differ from forward-looking statements include but are not limited to competition in the automotive aftermarket
industry, unfavorable economic conditions, concentration of the Company’s sales and accounts receivable among a
small number of customers, the impact of consolidation in the automotive aftermarket industry, foreign currency
fluctuations, loss of key suppliers, space limitations on our customers’ shelves, delay in the development and design
of new products, improvements in new vehicle quality, claims of intellectual property infringement, quality
problems, loss of third-party transportation providers, unfavorable results of legal proceedings, concentration of
ownership, disruption from events beyond the Company’s control, risks associated with conflict minerals, risks
associated with cyber-attacks, the imposition of new taxes or duties, the termination or modification of accounts
receivable sales agreements, common stock market price volatility, loss of highly qualified Contributors, inability to
acquire other businesses, and other risks and factors identified from time to time in the reports the Company files
with the SEC. 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. For additional
information concerning factors that could cause actual results to differ materially from the information contained in
this report, reference is made to the information in “Part I, Item 1A Risk Factors.” You should not place an undue
reliance on forward-looking statements. Such statements speak only to the date on which they are made and we
undertake no obligation to update publicly or revise any forward-looking statements, regardless of future
developments or the availability of new information.
Overview
We believe we are a leading supplier of replacement parts and fasteners for passenger cars, light trucks, and
heavy duty trucks in the automotive aftermarket. We distribute and market approximately 216,000 different SKU’s
of automotive replacement parts, many of which we design and engineer. These SKU’s are sold under our various
brand names, under our customers’ private label brands or in bulk. We believe we are a leading aftermarket supplier
of original equipment “dealer exclusive” items. Original equipment “dealer exclusive” parts are those parts which
were traditionally available to consumers only from original equipment manufacturers or salvage yards. These parts
include, among other parts, intake manifolds, exhaust manifolds, window regulators, radiator fan assemblies, tire
pressure monitor sensors, complex electronics modules, and exhaust gas recirculation (EGR) coolers.
We generate virtually all of our revenues from customers in the North American automotive aftermarket,
primarily in the United States. Our products are sold primarily through automotive aftermarket retailers; national,
regional and local warehouse distributors and specialty markets; and salvage yards. We also distribute automotive
replacement parts outside the United States, with sales primarily into Canada, Mexico, Europe, the Middle East, and
Australia.
We may experience significant fluctuations from quarter to quarter in our results of operations due to the
timing of orders placed by our customers. Generally, the second and third quarters have the highest level of net
sales. The introduction of new products and product lines to customers may cause significant fluctuations from
quarter to quarter.
We operate on a fifty-two, fifty-three week period ended on the last Saturday of the calendar year. The fiscal
years ended December 30, 2017 and December 26, 2015 were fifty-two week periods. The fiscal year ended
December 31, 2016 was a fifty-three week period.
18
Business Performance
We achieved record net sales and net income in fiscal 2017. Net sales increased 5% over fiscal 2016 levels to
$903.2 million, while net income increased 1% to $106.6 million. Additionally, we generated $94.2 million of cash
flows from operations and repurchased approximately $76.1 million of our outstanding common stock. We believe
our strong financial results have been driven by continued investments in new product development, a thoughtful
approach to acquisitions, industry dynamics, and other economic factors.
New Product Development
New product development is a critical success factor for us and is our primary vehicle for growth. We have
made incremental investments to increase our new product development efforts each year since 2003 in an effort to
grow our business and strengthen our relationships with our customers. The investments are primarily in the form of
increased product development resources, increased customer and end-user awareness programs and customer
service improvements. These investments have enabled us to provide an expanding array of new product offerings
and grow revenues at levels that exceed market growth rates. As a result of these investments, we introduced 4,079
new products to our customers and end users in fiscal 2017, including 1,192 “New to the Aftermarket” SKU’s.
Our complex electronics program capitalizes on the growing number of electronic components being utilized
on today’s Original Equipment platforms. Current production models 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 extensively tested to ensure consistent performance,
and, our product portfolio is focused on further developing Dorman’s leadership position in the category.
In 2012, we introduced a new line of products to be marketed for the medium and heavy duty truck
aftermarket. We believe that this market provides many of the same opportunities for growth that the automotive
aftermarket has provided us over the past several years. Our focus here is on formerly “dealer only” parts similar to
the automotive side of the business. We launched the initial program with a limited offering, but have made
additional investments in new product development efforts to expand our product offering. We currently have
approximately 1,060 SKU’s in our medium and heavy duty product line. We will continue to invest aggressively in
the medium and heavy duty product category.
Acquisitions
Our growth is also impacted by acquisitions. For example, in October 2017, we acquired MAS Automotive
Distributors, Inc. (“MAS Industries” or “MAS”). We believe MAS is highly complementary to our business and
growth strategy. We may acquire businesses in the future to supplement our financial growth, distribution
capabilities, or product development resources.
Economic Factors
Vehicle owners operate their current vehicles longer than they did several years ago. As a result, owners
perform necessary repairs and maintenance in order to keep those vehicles well maintained. According to data
published by Polk, a division of IHS Automotive, the average age of vehicles was 11.7 years as of January 2017,
which is an increase from 11.6 years as of November 2016 despite increasing new car sales. Additionally, the
number of vehicles in operation in the United States continues to increase, growing 2.4% in 2017 to 278.6 million
from 272.0 million in 2016. Approximately 48% of vehicles in operation are 11 years old or older. Vehicle
scrappage rates have also decreased over the last several years. The number of miles driven is another important
statistic that impacts our business. According to the United States Department of Transportation, the number of
miles driven has increased each year since 2011 with miles driven having increased 1.3% as of December 2017 as
compared to December 2016. Generally, as vehicles are driven more miles, the more likely it is that parts will fail.
The combination of the factors above has accounted for a portion of our sales growth.
Competition among our customer base continues to increase. As a result, our customers regularly seek more
favorable pricing and product return provisions, and extended payment terms when negotiating with us. We attempt
19
to avoid or minimize these concessions as much as possible, but we have granted pricing concessions, extended
customer payment terms and allowed a higher level of product returns in certain cases. These concessions impact
our profit levels and may require additional capital to finance the business. We expect our customers to continue to
exert pressure on our margins.
Foreign Currency
Our recent acquisition of MAS increases our exposures to foreign currencies. MAS is headquartered in
Montreal, Canada, and its financial transactions occur in both U.S. Dollars and Canadian Dollars. Since our
consolidated financial statements are denominated in U.S. Dollars, the assets, liabilities, net sales, and expenses of
MAS which are denominated in currencies other than the U.S. Dollar must be converted into U.S. Dollars using
exchange rates for the current period. As a result, fluctuations in foreign currency exchange rates may impact our
financial results.
In fiscal 2017, approximately 71% of our products were purchased from suppliers in a variety of foreign
countries. The products generally are purchased through purchase orders with the purchase price specified in U.S.
Dollars. Accordingly, we generally do not have exposure to fluctuations in the relationship between the U.S. Dollar
and various foreign currencies between the time of execution of the purchase order and payment for the product. To
the extent that the U.S. Dollar changes in value relative to foreign currencies in the future, the price of the product
for new purchase orders may change in equivalent U.S. Dollars.
The largest portion of our overseas purchases comes from China. The Chinese Yuan to U.S. Dollar exchange
rate has fluctuated over the past several years. Any future changes in the value of the Chinese Yuan relative to the
U.S. Dollar may result in a change in the cost of products that we purchase from China. However, the cost of the
products we procure is also affected by other factors including raw material availability, labor cost, transportation
costs, and other factors.
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 by sourcing purchases from other
countries. However there can be no assurance that we will be successful in these efforts.
Results of Operations
The following table sets forth, for the periods indicated, the dollar value and percentage of net sales
represented by certain items in our Consolidated Statements of Operations:
(in millions, except percentage data)
Net sales
Cost of goods sold
Gross profit
For the Fiscal Year Ended
December 31, 2016*
December 30, 2017*
$ 903.2 100.0% $ 859.6 100.0% $ 803.0
60.7% $ 494.9
$ 544.6
60.3% $ 521.5
December 26, 2015
$ 358.6
Selling, general and administrative expenses $ 182.4
$ 176.2
Income from operations
$
Other income (expense), net
0.3
$ 176.6
Income before income taxes
$
Provision for income taxes
70.0
$ 106.6
Net income
* Percentage of sales information does not add due to rounding
39.7% $ 338.1
20.2% $ 169.5
19.5% $ 168.6
0.0% $
(0.2)
19.6% $ 168.4
7.7% $
62.3
11.8% $ 106.0
39.3% $ 308.1
19.7% $ 161.9
19.6% $ 146.2
0.0% $
(0.2)
19.6% $ 145.9
53.6
7.2% $
92.3
12.3% $
100.0%
61.6%
38.4%
20.2%
18.2%
0.0%
18.2%
6.7%
11.5%
20
Fiscal Year Ended December 30, 2017 Compared to Fiscal Year Ended December 31, 2016
Net sales increased 5% to $903.2 million in fiscal 2017 from $859.6 in fiscal 2016. Our revenue growth was
driven by overall strong demand for our products which was partially offset by an additional week of sales in fiscal
2016. Additionally, the MAS acquisition accounted for approximately $7.0 million of sales in fiscal 2017.
Gross profit margin was 39.7% in fiscal 2017 compared to 39.3% in fiscal 2016. The increased gross profit
margin was primarily due to a favorable sales mix towards higher margin products, leverage of costs across higher
sales volume, and material price decreases which were partially offset by lower overall selling prices during fiscal
2017 compared to fiscal 2016. Additionally, 2017 gross profit margin was negatively impacted by inventory fair
value adjustments related to MAS of $0.6 million.
Selling, general and administrative expenses were $182.4 million, or 20.2% of net sales, in fiscal 2017
compared to $169.5 million, or 19.7% of net sales, in fiscal 2016. The increase in expense was primarily due to
higher variable costs associated with our 5% sales growth, $5.9 million of general wage and fringe inflation, $2.5
million of increased expenses related to the accounts receivable sales program, and $1.0 million of acquisition
related costs. Provisions for doubtful accounts were $0.9 million less in fiscal 2017 compared to fiscal 2016,
partially offsetting the increases noted above.
Our effective tax rate increased to 39.6% in fiscal 2017 from 37.0% in fiscal 2016. The increase was
primarily attributable to increased provisions for state income taxes in fiscal 2017 compared to fiscal 2016 and
approximately $4.4 million of expense resulting from the revaluation of net deferred tax assets due to the adoption
of the Tax Cuts and Jobs Act.
Fiscal Year Ended December 31, 2016 Compared to Fiscal Year Ended December 26, 2015
Net sales increased 7% to $859.6 million in fiscal 2016 from $803.0 in fiscal 2015. Our revenue growth was
driven by overall strong demand for our products and an additional week of sales in fiscal 2016.
Gross profit margin was 39.3% in fiscal 2016 compared to 38.4% in fiscal 2015. The increased gross profit
margin was primarily due to a favorable sales mix towards higher margin products, leverage of costs across higher
sales volume, and approximately $2.1 million of lower inventory provisions which were partially offset by lower
overall selling prices during fiscal 2016 compared to fiscal 2015.
Selling, general and administrative expenses were $169.5 million, or 19.7% of net sales, in fiscal 2016
compared to $161.9 million, or 20.2% of net sales, in fiscal 2015. The increase in expense was primarily due to
higher variable costs associated with our 7% sales growth, $2.8 million of general wage and fringe inflation, and
$1.7 million of increased expenses related to the accounts receivable sales program. Provisions for doubtful accounts
were $2.1 million less in fiscal 2016 compared to fiscal 2015, partially offsetting the increases noted above.
Our effective tax rate increased to 37.0% in fiscal 2016 from 36.7% in fiscal 2015. The increase was
primarily attributable to increased provisions for state income taxes in fiscal 2016 compared to fiscal 2015.
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 certain customers. Cash and cash
equivalents at December 30, 2017 decreased to $71.7 million from $149.1 million at December 31, 2016. Working
capital was $422.1 million at December 30, 2017 compared to $447.8 million at December 31, 2016. Shareholders’
equity was $634.8 million at December 30, 2017 and $601.6 million at December 31, 2016. Based on our current
operating plan, we believe that our sources of available capital are adequate to meet our ongoing cash needs for at
least the next twelve months. However, our liquidity could be negatively affected by extending payment terms to
customers, a decrease in demand for our products, or other factors.
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 have significantly impacted cash flows. We participate in accounts receivable sales programs with several
21
customers which allow us to sell our accounts receivable to financial institutions to offset the negative cash flow
impact of these payment terms extensions. During fiscal 2017 and fiscal 2016, we sold approximately $582.9
million and $521.9 million, respectively, under these programs. We had the ability to sell significantly more
accounts receivable under these programs if the needs of the business warranted. We expect continued pressure to
extend our payment terms for the foreseeable future. Further extensions of customer payment terms will result in
additional uses of cash flow or increased costs associated with the sale of accounts receivable.
In December 2017, we entered into a credit agreement which will expire in December 2022. This agreement
provides for an initial revolving credit facility of $ 100.0 million and gives us the ability to request increases of up to
an incremental $ 100.0 million. This agreement replaces our previous $ 30.0 million credit agreement. Borrowings
under the facility are on an unsecured basis with interest rates ranging from LIBOR plus 65 basis points to LIBOR
plus 125 basis points based upon the ratio of consolidated funded debt to consolidated EBITDA, as defined by the
credit agreement. The interest rate at December 30, 2017 was LIBOR plus 65 basis points (2.22%). The credit
agreement also contains other covenants, including those related to the ratio of certain consolidated fixed changes to
consolidated EBITDA, capital expenditures, and share repurchases, each as defined by the credit agreement. The
new agreement also requires us to pay an unused fee of 0.10% on the average daily unused portion of the facility. As
of December 30, 2017, we were in compliance with all financial covenants contained in the credit agreement. As of
December 30, 2017, there were no borrowings under the facility and we had two outstanding letters of credit for
approximately $ 0.8 million in the aggregate which were issued to secure ordinary course of business transactions.
Net of these letters of credit, we had approximately $ 99.2 million available under the facility at December 30, 2017
Cash Flows
Below is a table setting forth the key lines of our Consolidated Statements of Cash Flows:
(in thousands)
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Effect of exchange rate changes on cash and cash
equivalents
Net (decrease) increase in cash and cash equivalents $
$
December 30,
2017
94,241 $
(94,437)
(77,271)
December 31,
2016
121,539 $
(26,254)
(24,823)
December 26,
2015
92,060
(23,821)
(37,236)
37
(77,430) $
-
70,462 $
-
31,003
During fiscal 2017, cash provided by operating activities was $94.2 million primarily as a result of $106.6
million in net income, non-cash adjustments to net income of $30.4 million and a net increase in operating assets
and liabilities of $42.7 million. Accounts receivable increased $5.7 million due to increased net sales and the timing
of cash receipts at year end. Inventory increased $25.1 million due to higher inventory purchases to support new
product launches and to improve customer fill rates. Accounts payable increased by $3.7 million due to increased
inventory and the timing of payments to our vendors. Other assets and liabilities, net, increased $15.6 million
primarily due to an increase in long-term core inventory and a decrease in customer rebates which we expect to
settle in cash.
During fiscal 2016, cash provided by operating activities was $121.5 million primarily as a result of $106.0
million in net income, non-cash adjustments to net income of $17.6 million and a net increase in operating assets
and liabilities of $2.1 million. Accounts receivable increased $27.8 million due to increased net sales and the timing
of cash receipts at year end. Inventory decreased $24.9 million due to lower inventory purchases and the effects of
several inventory management initiatives. Accounts payable increased by $8.7 million due to the timing of payments
to our vendors. Other assets and liabilities, net, increased $7.8 million primarily due to an increase in long-term core
inventory and a decrease in customer rebates which we expect to settle in cash.
During fiscal 2015, cash provided by operating activities was $92.1 million primarily as a result of $92.3
million in net income, non-cash adjustments to net income of $15.2 million and a net increase in operating assets
and liabilities of $15.4 million. Accounts receivable increased $1.1 million due to the timing of cash receipts at year
end. Inventory increased $20.2 million to support new product initiatives and sales growth. Accounts payable
increased by $5.4 million due to inventory purchases and the timing of payments to our vendors.
22
Investing activities used $94.4 million of cash in fiscal 2017, $26.3 million of cash in fiscal 2016, and $23.8
million of cash in fiscal 2015.
•
•
•
•
Capital spending in fiscal 2017 was primarily related to $11.2 million in tooling associated with new
products, $7.7 million in enhancements and upgrades to our information systems and infrastructure,
scheduled equipment replacements, certain facility improvements and other capital projects.
Capital spending in fiscal 2016 was primarily related to $10.6 million in tooling associated with new
products, $5.2 million in enhancements and upgrades to our information systems and infrastructure,
scheduled equipment replacements, certain facility improvements and other capital projects.
Capital spending in fiscal 2015 was primarily related to $11.1 million in tooling associated with new
products, $5.3 million in enhancements and upgrades to our information systems, scheduled
equipment replacements, certain facility improvements and other capital projects.
Additionally, during fiscal 2017, we used $56.9 million to acquire the outstanding shares of MAS,
$10.0 million to acquire a minority equity interest in a supplier, and $3.1 million to acquire certain
assets of Ingalls Engineering Co., Inc. During fiscal 2016, we used $6.2 million to acquire a minority
equity interest in a supplier. During fiscal 2015, we used $2.1 million to acquire a minority equity
interest in a supplier.
Cash used in financing activities was $77.3 million in fiscal 2017, $24.8 million in fiscal 2016, and $37.2
million in fiscal 2015.
•
•
On December 12, 2013 we announced that our Board of Directors authorized a share repurchase
program. This plan was amended in December 2016. In fiscal 2017, we paid $74.7 million to
repurchase 1,006,365 common shares. In fiscal 2016, we paid $22.5 million to repurchase 430,866
common shares. In fiscal 2015, we paid $35.7 million to repurchase 747,700 common shares.
The remaining sources and uses of cash from financing activities in each period result from stock
compensation plan activity and the repurchase of common stock from our 401(k) Plan.
Contractual Obligations and Commercial Commitments
We have obligations for future minimum rental and similar commitments under non-cancellable operating
leases as well as contingent obligations related to outstanding letters of credit. These obligations as of December 30,
2017 are summarized in the tables below (in thousands):
Contractual Obligations
Operating leases
Other Commercial Commitments
Letters of Credit
Payments Due by Period
Total
Less than
1 year
1-3 years
3-5 years
$ 11,670 $
$ 11,670 $
4,357 $
4,357 $
3,790 $
3,790 $
Thereafter
-
-
3,523 $
3,523 $
Amount of Commitment Expiration Per Period
Total Amount
Committed
Less than
1 year
$
$
825 $
825 $
1-3 years 3-5 years Thereafter
—
—
— $
— $
— $
— $
825 $
825 $
We have excluded from the table above contingent consideration related to the acquisition of MAS due to the
uncertainty of the amount of payment. As of December 30, 2017, the Company has accrued approximately $8.0
million which represents the fair value of the estimated payments which will become due if certain sales thresholds
are achieved through December 2020, and will be paid out in 2021(see Note 3, Business Acquisitions and
Investments, to the Consolidated Financial Statements included in this Annual Report on Form 10-K).
Additionally, we have excluded from the table above unrecognized tax benefits due to the uncertainty of the
amount and period of payment. As of December 30, 2017, the Company has gross unrecognized tax benefits of $2.3
23
million (see Note 10, Income Taxes, to the Consolidated Financial Statements included in this Annual Report on
Form 10-K).
Off-Balance Sheet Arrangements
Off-balance sheet arrangements are transactions, agreements, or other contractual arrangements with an
unconsolidated entity for which we have an obligation to the entity that is not recorded in our consolidated financial
statements. We historically have not utilized off-balance sheet financial instruments, and do not plan to utilize off-
balance sheet arrangements in the future to fund our working capital requirements, operations or growth plans.
We may issue stand-by letters of credit under the revolving credit facility. Letters of credit totaling $0.8
million were outstanding at December 30, 2017 and $1.0 million at December 31, 2016, respectively. Those letters
of credit are issued primarily to satisfy the requirements of workers compensation, general liability and other
insurance policies. Each of the outstanding letters of credit has a one-year term from the date of issuance.
Other than in connection with executing operating leases, we do not have any off-balance sheet financing that
has, or is reasonably likely to have, a material, current or future effect on our financial condition, cash flows, results
of operations, liquidity, capital expenditures or capital resources. See "Contractual Obligations and Commercial
Commitments" and Note 8, Operating Lease Commitments and Rent Expense, to the Consolidated Financial
Statements included in this Annual Report on Form 10-K for information on our operating leases.
Related-Party Transactions
We have a noncancelable operating lease for our primary operating facility from a partnership in which Steven
L. Berman, our Executive Chairman, and his family members are partners. Total annual rental payments each year
to the partnership under the lease arrangement was $1.6 million in each of fiscal 2017, fiscal 2016, and fiscal 2015.
In the opinion of our Audit Committee, the terms and rates of this lease are no less favorable than those which could
have been obtained from an unaffiliated party when the lease was renewed in November 2016.
Additionally, we have a non-cancelable operating lease for our Canadian operating facility from a corporation
of which an employee and his family members are owners. Total rental payments to the corporation under the lease
agreement were $0.1 million in fiscal 2017. We did not make any payments to the corporation in fiscal 2016 or
fiscal 2015. This lease will expire on October 31, 2018.
We are a partner in a joint venture with one of our suppliers and we own a minority interest in three other
suppliers. Purchases from these suppliers, since we acquired our investment interests were $21.4 million, $16.5
million and $9.9 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon the
Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported
amounts of revenues and expenses. We regularly evaluate our estimates and judgments, including those related to
allowance for doubtful accounts, revenue recognition, customer credits, inventories, long-lived assets, purchase
accounting, and income taxes. Estimates and judgments are based upon historical experience and on various other
assumptions believed to be accurate and reasonable under the circumstances. Actual results may differ materially
from these estimates due to different assumptions or conditions. We believe the following critical accounting
policies affect our more significant estimates and judgments used in the preparation of our Consolidated Financial
Statements.
Allowance for Doubtful Accounts. The preparation of our financial statements requires us to make estimates
of the collectability of our accounts receivable. We specifically analyze accounts receivable and historical bad debts,
customer creditworthiness, current economic trends and changes in customer payment patterns when evaluating the
adequacy of the allowance for doubtful accounts. A significant percentage of our accounts receivable has been, and
24
is expected to continue to be, concentrated among a relatively small number of automotive retailers and warehouse
distributors in the United States. Our five largest customers accounted for 85% of net accounts receivable as of
December 30, 2017 and 87% of net accounts receivable as of December 31, 2016. A bankruptcy or financial loss
associated with a major customer could have a material adverse effect on our sales and operating results.
Revenue Recognition and Allowance for Customer Credits. Revenue is recognized from product sales
when goods are shipped, title and risk of loss have been transferred to the customer and collection is reasonably
assured. We record estimates for cash discounts, product returns, promotional rebates, core return deposits and other
discounts in the period of the sale ("Customer Credits"). The provision for Customer Credits is recorded as a
reduction from gross sales and reserves for Customer Credits are shown as a reduction of accounts receivable.
Accrued customer rebates which we expect to settle in cash are classified as other accrued liabilities. 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.
Excess and Obsolete Inventory Reserves. We must make estimates of potential future excess and obsolete
inventory costs. We provide reserves for discontinued and excess inventory based upon historical demand,
forecasted usage, estimated customer requirements and product line updates. We maintain contact with our customer
base in order to understand buying patterns, customer preferences and the life cycle of our products. Changes in
customer requirements are factored into the reserves as needed.
Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets. Long-lived assets,
including property, plant, and equipment and identifiable intangibles, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The
impairment review is a two-step process. First, recoverability is measured by comparing the carrying amount of an
asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount
exceeds the estimated undiscounted future cash flows, the second step of the impairment test is performed and an
impairment charge is recognized in the amount by which the carrying amount of the asset exceeds its fair value.
Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group
classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance
sheet.
Goodwill is reviewed for impairment on an annual basis or whenever events or changes in circumstances
indicate the carrying value of the goodwill may be impaired. In regards to the annual test, we have the option to
first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination
that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine it
is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the
two-step impairment test is unnecessary. During fiscal 2017 and fiscal 2016, we assessed the qualitative factors
which could affect the fair values of our reporting units and determined that it was not more likely than not that the
fair values of each reporting unit was less than its carrying amount.
Purchase Accounting. The purchase price of an acquired business is allocated to the underlying tangible and
intangible assets acquired and liabilities assumed based upon their respective fair market values, with the excess
recorded as goodwill. Such fair market value assessments require judgements and estimates which may change over
time and may cause the final amounts to differ materially from their original estimates. Any adjustments to fair
value assessments are recorded to goodwill over the purchase price allocation period which cannot exceed twelve
months.
Income Taxes. We follow the asset and liability method of accounting for deferred income taxes. Under this
method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for
the change in the deferred tax liabilities and assets for the future tax consequences of events that have been
recognized in an entity's financial statements or tax returns. We must make assumptions, judgments and estimates to
determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation
allowance to be recorded against a deferred tax asset. Our judgments, assumptions and estimates relative to the
25
current provision for income taxes takes into account current tax laws, our interpretation of current tax laws and
possible outcomes of current and future audits conducted by tax authorities. Changes in tax laws or our
interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts
provided for income taxes in our Consolidated Financial Statements. Our assumptions, judgments and estimates
relative to the value of a deferred tax asset takes into account predictions of the amount and category of future
taxable income. Actual operating results and the underlying amount and category of income in future years could
render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the
assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from
our estimates.
New and Recently Adopted Accounting Pronouncements
Refer to Note 2, New and Recently Adopted Accounting Pronouncements, to the Notes to Consolidated
Financial Statements included in this Annual Report on Form 10-K, which is incorporated herein.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Our market risk is the potential loss arising from adverse changes in interest rates. Substantially all of our
available credit and accounts receivable sale programs bear interest rates tied to LIBOR. Under the terms of our
revolving credit facility and customer-sponsored programs to sell accounts receivable, a change in either the lender’s
base rate, LIBOR or discount rates under the accounts receivable sale programs would affect the rate at which we
could borrow funds thereunder. A one percentage point increase in LIBOR or the discount rates on the accounts
receivable sale programs would have increased our interest expense on our variable rate debt, if any, and accounts
receivable financing costs by approximately $3.8 million in fiscal 2017 and $3.4 million in fiscal 2016. This
estimate assumes that our variable rate debt balance and the level of sales of accounts receivable remains constant
for an annual period and the interest rate change occurs at the beginning of the period. The hypothetical changes
and assumptions may be different from what actually occurs in the future.
Historically we have not used, and currently do not intend to use derivative financial instruments for trading or
to speculate on changes in interest rates or commodity prices. We are not exposed to any significant market risks,
foreign currency exchange risks, or interest rate risks from the use of derivative instruments. We did not hold any
foreign exchange forward contracts at December 30, 2017.
Item 8. Financial Statements and Supplementary Data.
Our financial statement schedule that is filed with this Annual Report on Form 10-K is listed in Part IV - Item
15, “Exhibits, Financial Statement Schedules.”
26
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Dorman Products, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Dorman Products, Inc. and subsidiaries (the
Company) as of December 30, 2017 and December 31, 2016, the related consolidated statements of operations,
shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended December 30, 2017,
and the related notes and the consolidated financial statement schedule listed under Item 15(a)(2) (collectively, the
consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 30, 2017 and December 31, 2016, and the results of
its operations and its cash flows for each of the fiscal years in the three-year period ended December 30, 2017, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 30, 2017, based on
criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated February 27, 2018 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these consolidated financial statements based on our audits. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks
of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
KPMG LLP
We have served as the Company’s auditors since 2002.
Philadelphia, Pennsylvania
February 27, 2018
27
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Income from operations
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
December 30,
2017
903,221 $
544,572
358,649
182,409
176,240
348
176,588
69,989
106,599 $
For the Year Ended
December 31,
2016
859,604 $
521,530
338,074
169,473
168,601
(241)
168,360
62,311
106,049 $
December 26,
2015
802,957
494,907
308,050
161,893
146,157
(216)
145,941
53,612
92,329
$
$
$
$
3.14 $
3.13 $
3.07 $
3.07 $
2.60
2.60
33,964
34,052
34,516
34,598
35,466
35,538
See accompanying Notes to Consolidated Financial Statements.
28
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts and customer
credits of $97,193 and $99,995 in 2017 and 2016, respectively
Inventories
Prepaids and other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Deferred tax asset, net
Other assets
Total
Liabilities and shareholders' equity
Current liabilities:
Accounts payable
Accrued compensation
Other accrued liabilities
Total current liabilities
Other long-term liabilities
Deferred tax liabilities, net
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock, par value $0.01; authorized 50,000,000 shares; issued
and outstanding 33,571,524 and 34,517,633 shares in 2017 and
2016, respectively
Additional paid-in capital
Retained earnings
Total shareholders' equity
Total
December 30,
2017
December 31,
2016
$
71,691 $
149,121
241,880
212,149
7,129
532,849
92,692
65,999
22,158
7,884
44,342
765,924 $
80,218 $
12,162
18,401
110,781
13,732
6,604
230,526
168,851
3,116
551,614
88,436
28,146
1,642
12,429
29,525
711,792
72,629
11,899
19,320
103,848
6,302
-
336
44,812
589,659
634,807
765,924 $
345
44,187
557,110
601,642
711,792
$
$
$
See accompanying Notes to Consolidated Financial Statements.
29
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
Par
Value
Additional
Paid-In
Capital
Retained
Earnings
Total
(in thousands, except share data)
Balance at December 27, 2014
Exercise of stock options
Compensation expense under Incentive Stock Plan
Purchase and cancellation of common stock
Issuance of non-vested stock, net of cancellations
Other stock related activity, net of tax
Net income
Balance at December 26, 2015
Compensation expense under Incentive Stock Plan
Purchase and cancellation of common stock
Issuance of non-vested stock, net of cancellations
Other stock related activity, net of tax
Net income
Balance at December 31, 2016
Exercise of stock options
Compensation expense under Incentive Stock Plan
Purchase and cancellation of common stock
Issuance of non-vested stock, net of cancellations
Other stock related activity, net of tax
Net income
Balance at December 30, 2017
Shares
Issued
35,611,238 $
31,305
—
(781,130)
8,922
(6,939)
—
34,863,396 $
—
(469,836)
131,123
(7,050)
—
34,517,633 $
29,750
—
(1,025,475)
65,317
(15,701)
—
33,571,524 $
93
882
(1,406)
—
(183)
—
—
—
(35,911)
—
178
92,329
356 $ 43,413 $ 418,292 $ 462,061
93
—
882
—
(37,324)
(7)
—
—
(5)
—
92,329
—
349 $ 42,799 $ 474,888 $ 518,036
2,380
—
—
(24,678)
(5)
(23,827)
—
1
—
—
(145)
—
—
— 106,049 106,049
345 $ 44,187 $ 557,110 $ 601,642
31
—
—
3,162
—
—
(76,129)
(10)
(74,271)
675
1
—
(1,173)
—
221
—
— 106,599 106,599
336 $ 44,812 $ 589,659 $ 634,807
31
3,162
(1,848)
674
(1,394)
2,380
(846)
(1)
(145)
See accompanying Notes to Consolidated Financial Statements.
30
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation, amortization and accretion
Provision for doubtful accounts
Provision (benefit) from deferred income tax
Provision for non-cash stock compensation
Changes in assets and liabilities:
Accounts receivable
Inventories
Prepaids and other current assets
Other assets
Accounts payable
Accrued compensation and other liabilities
Cash provided by operating activities
Cash Flows from Investing Activities:
Property, plant and equipment additions
Acquisition, net of cash acquired
Purchase of equity investment
Cash used in investing activities
Cash Flows from Financing Activities:
Proceeds from exercise of stock options
Other stock related activity
Purchase and cancellation of common stock
Cash used in financing activities
Effect of exchange rate changes on Cash and Cash
Equivalents
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Period
Cash and Cash Equivalents, End of Period
Supplemental Cash Flow Information
Cash paid for interest expense
Cash paid for income taxes
$
$
$
December 30,
2017
For the Year Ended
December 31,
2016
December 26,
2015
$
106,599 $
106,049 $
92,329
22,224
299
4,676
3,162
(5,709)
(25,147)
(3,748)
(4,908)
3,718
(6,925)
94,241
(24,450)
(59,987)
(10,000)
(94,437)
31
(1,173)
(76,129)
(77,271)
18,907
1,221
(4,888)
2,380
(27,824)
24,874
(790)
(4,590)
8,662
(2,462)
121,539
(20,059)
—
(6,195)
(26,254)
—
(145)
(24,678)
(24,823)
37
(77,430)
149,121
71,691 $
-
70,462
78,659
149,121 $
16,186
3,260
(5,106)
882
(1,148)
(20,202)
821
(3,962)
5,389
3,611
92,060
(21,688)
—
(2,133)
(23,821)
93
(5)
(37,324)
(37,236)
-
31,003
47,656
78,659
291 $
74,647 $
266 $
62,348 $
281
57,151
See accompanying Notes to Consolidated Financial Statements.
31
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2017
1. Summary of Significant Accounting Policies
Dorman Products, Inc. ("Dorman", the "Company", “we”, “us”, or “our”) is a leading supplier of Original
Equipment (“OE”) Dealer "Exclusive" automotive replacement parts, automotive hardware and brake products to
the Automotive Aftermarket and Mass Merchandise markets. Dorman parts are marketed under the OE Solutions™,
Dorman Premium Chassis, HELP!®, AutoGrade™, Conduct-Tite®, FirstStop™ and HD Solutions™ brand names.
We operate on a fifty-two, fifty-three week period ending on the last Saturday of the calendar year. The fiscal
years ended December 30, 2017 and December 26, 2015 were fifty-two week periods. The fiscal year ended
December 31, 2016 was a fifty-three week period.
Principles of Consolidation. The Consolidated Financial Statements include our accounts and the accounts of
our wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications. Certain prior year amounts have been reclassified to conform with current-year
presentation.
Cash and Cash Equivalents. We consider all highly liquid short-term investments with original maturities of
three months or less to be cash equivalents.
Sales of Accounts Receivable. We have entered into 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 were
removed from our Consolidated Balance Sheet at the time of the sales transactions. During fiscal 2017, fiscal 2016
and fiscal 2015, we sold $582.9 million, $521.9 million and $519.2 million, respectively, pursuant to these
agreements. If receivables had not been sold, $380.8 million and $338.3 million of additional receivables would
have been outstanding at December 30, 2017 and December 31, 2016, respectively, based on standard payment
terms. Selling, general and administrative expenses include $11.4 million, $8.9 million and $7.2 million in fiscal
2017, fiscal 2016 and fiscal 2015, respectively, of financing costs associated with these accounts receivable sales
programs.
Inventories. Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-
in, first-out method. Inventories include the cost of material, freight, direct labor and overhead utilized in the
processing of our products. We provide reserves for discontinued and excess inventory based upon historical
demand, forecasted usage, estimated customer requirements and product line updates.
Property, Plant and Equipment. Property, plant and equipment are recorded at cost and depreciated over
their estimated useful lives, which range from three to thirty-nine years, using the straight-line method for financial
statement reporting purposes and accelerated methods for income tax purposes. The costs of maintenance and
repairs are expensed as incurred. Renewals and betterments are capitalized. Gains and losses on disposals are
included in operating results.
32
Estimated useful lives by major asset category are as follows:
Buildings and building improvements
Machinery, equipment and tooling
Software and computer equipment
Furniture, fixtures and leasehold improvements
10 to 39 years
3 to 10 years
3 to 10 years
3 to 15 years
Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets. Long-lived assets,
including property, plant, and equipment and identifiable intangibles, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The
impairment review is a two-step process. First, recoverability is measured by comparing the carrying amount of an
asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount
exceeds the estimated undiscounted future cash flows, the second step of the impairment test is performed and an
impairment charge is recognized in the amount by which the carrying amount of the asset exceeds its fair value.
Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group
classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance
sheet.
Goodwill is reviewed for impairment on an annual basis or whenever events or changes in circumstances
indicate the carrying value of the goodwill may be impaired. In regards to the annual test, we have the option to
first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination
that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine it
is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the
two-step impairment test is unnecessary. During fiscal 2017 and fiscal 2016, we assessed the qualitative factors
which could affect the fair values of our reporting units and determined that it was not more likely than not that the
fair values of each reporting unit was less than its carrying amount.
Purchase Accounting. The purchase price of an acquired business is allocated to the underlying tangible and
intangible assets acquired and liabilities assumed based upon their respective fair market values, with the excess
recorded as goodwill. Such fair market value assessments require judgments and estimates which may change over
time and may cause the final amounts to differ materially from their original estimates. These adjustments to fair
value assessments are recorded to goodwill over the purchase price allocation period which cannot exceed twelve
months.
Other Assets. Other assets include primarily long-term core inventory, deposits, and equity method
investments.
Certain products we sell contain parts that can be recycled, or as more commonly referred to in our industry,
remanufactured. We refer to these parts as cores. A used core is remaufactured and sold to the customer as a
replacement for a unit inside 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 a core primarily include instrument clusters, hybrid batteries,
radios, and climate control modules.
Long-term core inventory was $20.2 million and $18.5 million as of December 30, 2017 and December 31,
2016, respectively. Long-term core inventory is recorded at the lower of cost or net realizable value. Cost is
determined based on actual purchases of core inventory. We believe that the most appropriate classification of core
inventory is a long-term asset. According to guidance provided under the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification(“ASC”), current assets are defined as “assets or resources commonly
identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal
operating cycle of the business.” The determination of the long-term classification is based on our view that the
value of the cores is not expected to be consumed or realized in cash during our normal annual operating cycle.
33
We also have investments that we account for according to the equity method of accounting. The total book
value of these investments was $21.1 million as of December 30, 2017 and these investments provided us $3.3
million of income during fiscal 2017.
Other Accrued Liabilities. Other accrued liabilities include primarily accrued customer rebates which we
expect to settle in cash of $6.8 million and $7.3 million as of December 30, 2017 and December 31, 2016,
respectively. Also included are accrued commissions, accrued income taxes, insurance liabilities, product
warranties, and other current liabilities. 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 warranty limits the end-user’s remedy to the repair or replacement of the part
that is defective. Product warranty reserves, which were $0.5 million as of December 30, 2017 and December 31,
2016, are based upon actual experience and forecasts using the best historical and current claim information
available. Provisions and payments related to product warranty reserves were not material in fiscal 2017, fiscal 2016
or fiscal 2015.
Revenue Recognition and Allowance for Customer Credits. Revenue is recognized from product sales
when goods are shipped, title and risk of loss have been transferred to the customer and collection is reasonably
assured. We record estimates for cash discounts, product returns, promotional rebates, core return deposits, and
other discounts in the period of the sale ("Customer Credits"). The provision for Customer Credits is recorded as a
reduction from gross sales and reserves for Customer Credits are shown as a reduction of accounts receivable.
Accrued customer credits which we expect to settle in cash are classified as other accrued liabilities. Actual
Customer Credits have not differed materially from estimated amounts. 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.
As noted above, Customer Credits include core return deposits which are an estimate of the amount we
believe we will refund to our customers when used cores are returned to us. The price we invoice to customers for
remanufactured cores contain both the amount we charge to remanufacture the part and a deposit for the core. We
charge a core deposit to encourage the customer to return the used core to us so that it can be used in our
remanufacturing process. We allow our customers up to twenty-four months to return the used core to us. Core
return deposits are reserved based on the expected deposits to be issued to customers based on historical returns.
Research and Development. Research and development costs are expensed as incurred. Research and
development costs totaling $20.0 million in fiscal 2017, $18.9 million in fiscal 2016 and $16.8 million in fiscal 2015
have been recorded in selling, general and administrative expenses in the Consolidated Statements of Operations.
Stock-Based Compensation. At December 30, 2017 and December 31, 2016, we had one stock-based
employee compensation plan, which is described more fully in Note 12, Capital Stock. We record compensation
expense for all awards granted. The value of restricted stock issued is based on the fair value of our common stock
on the grant date. The fair value of stock options granted was determined using the Black-Scholes option valuation
model.
Income Taxes. We follow the asset and liability method of accounting for deferred income taxes. Deferred
tax assets and liabilities are determined based on the difference between the financial statement and tax bases of
assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the enacted tax
rate expected to be in effect when taxes are actually paid or recovered.
Unrecognized income tax benefits represent income tax positions taken on income tax returns that have not
been recognized in the consolidated financial statements. The Company recognizes the benefit of an income tax
position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax
examination, based solely on the technical merits of the tax position. Otherwise, no benefit is recognized. The tax
benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement. Additionally, we accrue interest and related penalties, if applicable, on all tax
exposures for which reserves have been established consistent with jurisdictional tax laws. Interest and penalties are
classified as income tax expense in the Consolidated Statements of Operations. The Company does not anticipate
material changes in the amount of unrecognized income tax benefits over the next year.
34
Concentrations of Risk. Financial instruments that potentially subject us to concentrations of credit risk
consist primarily of cash equivalents and accounts receivable. All cash equivalents are managed within established
guidelines which limit the amount which may be invested with one issuer. A significant percentage of our accounts
receivable have been, and will continue to be, concentrated among a relatively small number of automotive retailers
and warehouse distributors in the United States. Our five largest customers accounted for 85% of net accounts
receivable as of December 30, 2017 and 87% of net accounts receivable as of December 31, 2016. We continually
monitor the credit terms and credit limits to these and other customers. In fiscal 2017, approximately 71% of our
products were purchased from suppliers located in a variety of foreign countries, with the largest portion coming
from China.
Fair Value Disclosures. The carrying value of financial instruments such as cash and cash equivalents,
accounts receivable, accounts payable, and other current assets and liabilities approximate their fair value based on
the short-term nature of these instruments. Additionally, the fair value of assets acquired and liabilities assumed are
determined at the date of acquisition. We did not hold any foreign currency forward contracts at December 30, 2017
or December 31, 2016.
2. New and Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an
entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or
services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it
becomes effective. As originally issued, the new standard would have been effective for annual periods beginning
after December 15, 2016. The FASB has amended the standard to be effective for annual periods beginning after
December 15, 2017. The standard permits the use of either the retrospective or cumulative effect transition method.
We adopted the standard on December 31, 2017 using the modified retrospective transaction method and the
adoption did not have a material effect on our financial position, results of operations and internal controls over
financial reporting. Certain additional financial statement disclosures are required beginning in our 2018 quarterly
reporting, including a disaggregated view of revenue.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which changes
the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable
value. The amendments in this guidance do not apply to inventory that is measured using last-in, first-out (LIFO) or
the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured
using first-in, first-out or average cost. Within the scope of this new guidance, an entity should measure inventory at
the lower of cost and net realizable value; where, net realizable value is defined as the estimated selling prices in the
ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new
guidance was effective for annual periods beginning after December 15, 2016, with early adoption permitted. The
new guidance must be applied on a prospective basis. Adoption of this ASU did not have a material impact on our
consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall, which relates to the
recognition and measurement of financial assets and liabilities. The new guidance makes targeted improvements to
GAAP impacting equity investments (other than those accounted for under the equity method or consolidated),
financial liabilities accounted for under the fair value election, and presentation and disclosure requirements for
financial instruments, among other changes. The new guidance is effective for annual periods beginning after
December 15, 2017, with early adoption prohibited other than for certain provisions. We are evaluating the impact
that the new guidance will have on our consolidated financial statements and related disclosures, however, we do not
believe the adoption of this new guidance will have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which replaces existing lease guidance. The
ASU is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use
assets and corresponding lease liabilities on the balance sheet. The new guidance will continue to classify leases as
either finance or operating, with classification affecting the pattern of expense recognition in the statement of
operations. The new guidance is effective for annual periods beginning after December 15, 2018, with early
application permitted. The new standard is required to be applied with a modified retrospective approach. We are
evaluating the effect that the new guidance will have on our consolidated financial statements and related
disclosures.
35
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Improvement to Employee Share-Based
Payment Accounting, which amends the current guidance related to stock compensation. The updated guidance
changes how companies account for certain aspects of share-based payment awards to employees, including the
accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the
statement of cash flows. The update to the standard was effective for annual periods beginning after December 15,
2016, with early application permitted. Adoption of this ASU resulted in a $1.0 million tax benefit during fiscal
2017. The amount of benefit, if any, in future periods will vary.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, which clarifies and provides guidance on eight cash flow classification
issues and is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are
presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after
December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. We are evaluating the effect that the new guidance will have on our consolidated
financial statements and related disclosures, however, we do not believe the adoption of this new guidance will have
a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which
eliminates the need to perform a hypothetical purchase price allocation to measure goodwill impairment. ASU 2017-
04 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal
years. Early adoption is permitted, including adoption in an interim period. We are evaluating the effect that the new
guidance will have, however, we do not believe the new guidance will have a material impact on our consolidated
financial statements and related disclosures.
3. Business Acquisitions and Investments
On October 26, 2017, we acquired 100% of the outstanding stock of MAS Automotive Distribution Inc.
(“MAS Industries” or “MAS”), a privately-held manufacturer of premium chassis and control arms based in
Montreal, Canada. The purchase price was $67.3 million net of $3.3 million of cash acquired and including
contingent consideration and other purchase price adjustments.
The Company believes MAS is complementary to our business and growth strategy. We see opportunities to
leverage MAS’ existing presence in the automotive aftermarket, as well as our product development capabilities and
financial resources to accelerate the growth of MAS’ premium chassis and control arms.
We have included the results of MAS in our Consolidated Financial Statements since the acquisition date of
October 26, 2017. The Consolidated Statement of Operations for the year ended December 30, 2017 includes $7.0
million of net sales and an immaterial amount of net income related to MAS. The Consolidated Balance Sheet as of
December 30, 2017 reflects the acquisition of MAS Industries, effective October 26, 2017.
The following table summarizes the preliminary fair value of the total consideration at October 26, 2017:
(in thousands)
Cash consideration (net of $3.3 million cash received)
Contingent cash consideration
Seller liability assumed
Working capital adjustment
Total consideration assigned to net assets acquired
Total Acquisition Date
Fair Value
$
$
56,859
7,982
896
1,539
67,276
Included in the table above is $8.0 million of estimated contingent payments which represents the fair value
of the estimated payments which will become due if certain sales thresholds are achieved through December 2020.
The fair value of the contingent cash consideration was estimated by using the option pricing model framework.
The maximum contingent payment would be $11.7 million. Also excluded from the table above are working capital
and other purchase price adjustments which will be finalized in fiscal 2018 based on the MAS standalone audited
2017 financial statements.
The transaction was accounted for as a business combination under the acquisition method of accounting.
Accordingly, the assets acquired and liabilities assumed were recorded at fair value, with the remaining purchase
36
price recorded as goodwill. The following table summarizes the preliminary fair values of the assets acquired and
liabilities assumed as of October 26, 2017 (in thousands):
Current assets (net of $3.3 million cash received)
Property, plant and equipment
Intangible assets
Goodwill
Total assets acquired
Current liabilities
Long-term liabilities
Total liabilities assumed
Net assets acquired
$
$
21,756
1,615
20,440
35,624
79,435
5,691
6,468
12,159
67,276
The estimated fair value of the MAS assets acquired and liabilities assumed are provisional as of December
30, 2017 and are based on information that is currently available to the Company. Additional information about
conditions that existed as of the date of acquisition are being gathered to finalize these provisional measurements,
particularly with respect to net working capital, intangible assets, contingent liabilities, deferred income taxes and
income taxes payable. Accordingly, the measurement of the MAS assets acquired and liabilities assumed may
change significantly upon finalization of the Company’s valuations and completion of the purchase price allocation,
both of which are expected to occur no later than one year from the acquisition date.
The valuation of the intangible assets acquired and related amortization periods are as follows:
(in thousands)
Customer relationships
Tradenames
Total
Valuation
$
$
14,840
5,600
20,440
Amortization
Period (in years)
8-12
15
The preliminary fair values of the Customer relationships and Tradenames were estimated using a discounted
present value income approach. Under this method, an intangible asset’s fair value is equal to the present value of
the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining
useful life. To calculate fair value, we used cash flows discounted at rates ranging from 15% to 17%, which were
considered appropriate given the inherent risks associated with each type of asset. We believe that the level and
timing of cash flows appropriately reflect market participant assumptions.
The goodwill recognized is attributable primarily to strategic and synergistic opportunities related to existing
automotive aftermarket businesses, the assembled workforce of MAS and other factors. The goodwill is expected to
be deductible for tax purposes.
Pro Forma Financial Information (Unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the MAS acquisition as
if it had occurred as of December 27, 2015, the start of our 2016 fiscal year. The pro forma information is presented
for informational purposes only and is not necessarily indicative of the results of operations that actually would have
been achieved had the acquisition been consummated as of that time:
(in thousands)
Net sales
Net income
Diluted earnings per share
$
2017
2016
933,446 $
107,948
3.17
888,851
102,686
2.97
The 2017 unaudited pro forma net income set forth above was adjusted to include amortization of intangible
assets and to exclude the impact of the nonrecurring acquisition date fair value adjustments to inventory as well as
acquisition and financing costs of MAS which we do not believe would have occurred. The 2016 unaudited pro
forma net income set forth above was adjusted for these same adjustments as if the acquisition had occurred on
December 27, 2015.
37
On January 27, 2017 we acquired a 33% minority equity interest in a supplier for $10.0 million. We are
accounting for our interest using the equity method of accounting, as our investment gives us the ability to exercise
significant influence, but not control, over the investee.
On January 6, 2017, we acquired certain assets of Ingalls Engineering Company, Inc., a chassis and
suspension business, primarily to expand our product portfolio. The purchase price was $4.8 million, comprised of
$3.1 million of cash and $1.7 million of estimated contingent payments as of the date of acquisition. The contingent
payment arrangement is based upon future net sales of the acquired business. In connection with this acquisition, we
have completed our purchase price allocation procedures and recorded $2.8 million in goodwill and other intangible
assets and $2.0 million of other net assets. All of the intangible assets resulting from the asset purchase are expected
to be deductible for tax purposes. The financial results of the acquisition have been included in the Consolidated
Financial Statements since the acquisition date.
4. Inventories
Inventories were as follows:
(in thousands)
Bulk product
Finished product
Packaging materials
Total
5. Property, Plant and Equipment
Property, plant and equipment include the following:
December 30,
2017
82,010 $
126,827
3,312
212,149 $
December 31,
2016
72,833
93,223
2,795
168,851
$
$
(in thousands)
Buildings
Machinery, equipment and tooling
Furniture, fixtures and leasehold improvements
Software and computer equipment
Total
Less-accumulated depreciation and amortization
Property, plant and equipment, net
December 30,
2017
December 31,
2016
$
$
32,623 $
97,701
4,319
77,618
212,261
(119,569)
92,692 $
29,450
87,175
4,248
73,292
194,165
(105,729)
88,436
Depreciation and amortization expenses associated with property, plant, and equipment were $21.5 million,
$18.7 million, and $15.9 million in fiscal 2017, fiscal 2016, and fiscal 2015, respectively.
6. Goodwill and Intangible Assets
Goodwill
Goodwill included the following:
(in thousands)
Balance at beginning of period
Goodwill acquired
Balance at end of period
December 30,
2017
December 31,
2016
$
$
28,146 $
37,853
65,999 $
28,146
-
28,146
38
Intangible Assets
Intangible assets, subject to amortization, included the following:
(in thousands)
Intangible assets subject to
amortization
Tradenames
Customer relationships
Technology
Total
December 30, 2017
December 31, 2016
Weighted
Average
Amortization
Period
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
14.8
8.9
14.0
$
5,600 $
17,049
367
$ 23,016 $
62 $
5,538 $
772 16,277
343
24
858 $ 22,158 $
- $
2,000
-
2,000 $
- $
358
-
358 $
-
1,642
-
1,642
Amortization expense was $0.5 million in fiscal 2017 and $0.1 million in each of fiscal 2016 and fiscal
2015. Included in the table below is $2.1 million of annual amortization expense related to the acquisition of MAS.
The estimated future amortization expense for intangible assets is summarized as follows:
(in thousands)
2018
2019
2020
2021
2022
Thereafter
Total
7. Long-Term Debt
$
$
2,113
2,113
2,113
2,113
2,113
11,593
22,158
In December 2017, we entered into a credit agreement which will expire in December 2022. This agreement
provides for an initial revolving credit facility of $ 100.0 million and gives us the ability to request increases of up to
an incremental $ 100.0 million. This agreement replaces our previous $ 30.0 million credit agreement. Borrowings
under the facility are on an unsecured basis with interest rates ranging from LIBOR plus 65 basis points to LIBOR
plus 125 basis points based upon the ratio of consolidated funded debt to consolidated EBITDA, as defined by the
credit agreement. The interest rate at December 30, 2017 was LIBOR plus 65 basis points (2.22%). The credit
agreement also contains other covenants, including those related to the ratio of certain consolidated fixed changes to
consolidated EBITDA, capital expenditures, and share repurchases, each as defined by the credit agreement. The
new agreement also requires us to pay an unused fee of 0.10% on the average daily unused portion of the facility. As
of December 30, 2017, we were in compliance with all financial covenants contained in the credit agreement. As of
December 30, 2017, there were no borrowings under the facility and we had two outstanding letters of credit for
approximately $ 0.8 million in the aggregate which were issued to secure ordinary course of business transactions.
Net of these letters of credit, we had approximately $ 99.2 million available under the facility at December 30, 2017.
39
8. Operating Lease Commitments and Rent Expense
We lease certain equipment and operating facilities, including our primary operating facility which is leased
from a partnership described in Note 9, Related Party Transactions, under non-cancelable operating leases.
Approximate future minimum rental payments as of December 30, 2017 under these leases are summarized as
follows:
(in thousands)
2018
2019
2020
2021
2022
Thereafter
Total
$
$
4,357
1,928
1,862
1,784
1,739
-
11,670
Rent expense, including payments for short-term equipment and storage rentals, was $5.4 million in fiscal
2017, $4.2 in fiscal 2016, and $4.5 million in fiscal 2015.
9. Related Party Transactions
We have a non-cancelable operating lease for our primary operating facility from a partnership in which
Steven L. Berman, our Executive Chairman, and his family members are partners. Total rental payments each year
to the partnership under the lease arrangement were $1.6 million in each of fiscal 2017, fiscal 2016 and fiscal 2015.
This lease was renewed during November 2016, effective as of January 1, 2018, and will expire on December 31,
2022. In the opinion of our Audit Committee, the terms and rates of this lease were no less favorable than those
which could have been obtained from an unaffiliated party when the lease was renewed during November 2016.
Additionally, we have a non-cancelable operating lease for our Canadian operating facility from a corporation
of which an employee and his family members are owners. Total rental payments to the corporation under the lease
agreement were $0.1 million in fiscal 2017. We did not make any payments to the corporation in fiscal 2016 or
fiscal 2015. This lease will expire on October 31, 2018.
We are a partner in a joint venture with one of our suppliers and own minority interests in three other
suppliers. Purchases from these suppliers were $21.4 million, $16.5 million and $9.9 million in fiscal 2017, fiscal
2016 and fiscal 2015, respectively.
10. Income Taxes
U.S. Tax Reform: Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted in the United States. The
TCJA represents sweeping changes in U.S. tax law. Among the numerous changes in tax law, the TCJA
permanently reduces the U.S. corporate income tax rate to 21% beginning in 2018; allows 100% expensing for
qualified property placed in service after September 27, 2017; imposes a one-time transition tax on deferred foreign
earnings; establishes a participation exemption system by allowing a 100% dividends received deduction on
qualifying dividends paid by foreign subsidiaries; limits deductions for net interest expense; and expands the U.S.
taxation of foreign earned income to include "global intangible low taxed income".
The TCJA represents the first significant change in U.S. tax law in over 30 years. In response to the
TCJA, the Staff of the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB
No. 118") to provide guidance to registrants in applying ASC Topic 740 in connection with the TCJA. SAB No. 118
provides that in the period of enactment, the income tax effects of the TCJA may be reported as a provisional
amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be
subject to adjustment during a "measurement period". The measurement period begins in the reporting period of the
40
TCJA's enactment and ends when a registrant has obtained, prepared, and analyzed the information that was needed
in order to complete the accounting requirements under ASC Topic 740. SAB No. 118 also describes supplemental
disclosures that should accompany the provisional amounts.
As permitted by SAB No. 118, the net tax expense recorded in our financial statements for the fourth fiscal quarter
of 2017 due to the enactment of the TCJA is considered "provisional," based on reasonable estimates. We are
continuing to collect and analyze detailed information about the earnings and profits of our non-U.S. subsidiaries,
the related taxed paid and the associated impact of these items under the TCJA. We may record adjustments to
refine those estimates during the measurement period, as additional analysis is completed. Furthermore, we are
continuing to evaluate the TCJA's provisions and may prospectively adjust our financial structure and business
practices accordingly
As a result of the TCJA, we recognized a provisional tax expense of $4.4 million to remeasure our net deferred tax
assets at the lower 21% rate.
The TCJA transitions the U.S. from a worldwide tax system to a territorial tax system. Under previous law,
companies could indefinitely defer U.S. income taxation on unremitted foreign earnings. The TCJA imposes a one-
time transition tax on deferred foreign earnings of 15.5% for liquid assets and 8% for illiquid assets, payable in
defined increments over eight years. As a result of this requirement, we recognized no provisional tax expense and
will continue collecting additional information about earnings and profits of our non-U.S. subsidiaries.
The components of the income tax provision (benefit) are as follows:
(in thousands)
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Total
2017
2016
2015
$
56,641 $
8,293
379
65,313
61,251 $
5,948
-
67,199
4,582
343
(249)
4,676
69,989 $
(4,563)
(325)
-
(4,888)
62,311 $
$
55,140
3,578
-
58,718
(4,874)
(232)
-
(5,106)
53,612
The following is a reconciliation of income taxes at the statutory tax rate to the Company's effective tax rate:
Federal taxes at statutory rate
State taxes, net of federal tax benefit
Research and development tax credit
Tax reform
Other
Effective tax rate
2017
2016
2015
35.0%
3.4
(0.3)
2.5
(1.0)
39.6%
35.0%
2.2
(0.2)
-
—
37.0%
35.0%
1.8
(0.2)
-
0.1
36.7%
At December 30, 2017, we had $2.3 million of unrecognized tax benefits, $2.0 million of which would affect
our effective tax rate if recognized.
41
The following table summarizes the change in uncertain tax benefits for the three years ended December 30,
2017:
(in thousands)
Balance at beginning of year
Reductions due to lapses in statutes of limitations
Reductions due to tax positions settled
Reductions due to reversals of prior year positions
Additions based on tax positions taken during the
prior period
Additions based on tax positions taken during the
current period
Balance at end of year
$
2017
2016
2015
3,567 $
(181)
(4,543)
—
1,855 $
—
(109)
(212)
1,163
—
(177)
(20)
3,005
—
—
453
2,301 $
2,033
3,567 $
889
1,855
$
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of
December 30, 2017, we had approximately $0.7 million of accrued interest and penalties related to uncertain tax
positions.
Deferred income taxes result from timing differences in the recognition of revenue and expense for tax and
financial statement purposes. The sources of temporary differences are as follows:
(in thousands)
Assets:
Inventories
Accounts receivable
Accrued expenses
Other
Gross deferred tax assets
Liabilities:
Depreciation
Goodwill and intangible assets
Gross deferred tax liabilities
Net deferred tax assets
December 30,
2017
December 31,
2016
$
$
7,335 $
11,732
1,664
261
20,992
7,936
11,776
19,712
1,280 $
10,337
20,216
2,935
786
34,274
11,988
9,857
21,845
12,429
Based on our history of taxable income and our projection of future earnings, we believe that it is more likely
than not that sufficient taxable income will be generated in the foreseeable future to realize the remaining net
deferred tax assets.
We file income tax returns in the United States, China and Mexico. All years before 2014 are closed for
federal tax purposes. We are currently under examination by one state tax authority for years 2011-2012. Tax years
before 2011 are closed for the remaining states in which we file. We filed tax returns in Sweden through 2012 and
all years prior to 2010 are closed. It is reasonably possible that audit settlements, the conclusion of current
examinations or the expiration of the statute of limitations could impact the Company’s unrecognized tax benefits.
11. Commitments and Contingencies
Shareholders’ Agreement. A shareholders’ agreement was entered into in September 1990 and amended and
restated on July 1, 2006. Under the agreement, each of the late Richard Berman, Steven Berman, Jordan Berman,
Marc Berman, Fred Berman, Deanna Berman and additional shareholders named in the agreement has, among other
things, granted the others of them rights of first refusal, exercisable on a pro rata basis or in such other proportions
as the exercising shareholders may agree, to purchase shares of our common stock which any of them, or upon their
deaths their respective estates, proposes to sell to third parties. We have agreed with these shareholders that, upon
their deaths, to the extent that any of their shares are not purchased by any of these surviving shareholders and may
42
not be sold without registration under the Securities Act of 1933, as amended (the "1933 Act"), we will use our best
efforts to cause those shares to be registered under the 1933 Act. The expenses of any such registration will be borne
by the estate of the deceased shareholder. The additional shareholders that are a party to the agreement are trusts
affiliated with the late Richard Berman, Steven Berman, Jordan Berman, Marc Berman or Fred Berman, or each
person’s respective spouse or children.
Legal Proceedings. 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, 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, would likely have a material financial
impact on us and we believe the range of reasonably possible losses from current matters is immaterial.
12. Capital Stock
Controlling Interest by Officers, Directors and Family Members. As of December 30, 2017, Steven
Berman, the Executive Chairman of the Company, and members of his family beneficially own approximately 20%
of the outstanding shares of our common stock and can influence the election of our Board of Directors, the outcome
of most corporate actions requiring shareholder approval (including certain fundamental transactions) and the affairs
of the Company.
Undesignated Stock. We have 50,000,000 shares authorized of undesignated capital stock for future issuance.
The designation, rights and preferences of such shares will be determined by our Board of Directors.
Incentive Stock Plan. Our 2008 Stock Option and Stock Incentive Plan (the “Plan”) was approved by our
shareholders on May 20, 2009. Under the terms of the Plan, our Board of Directors may grant up to 2,000,000 shares
of common stock in the form of shares of restricted stock, incentive stock options and non-qualified stock options or
combinations thereof to officers, directors, employees, consultants and advisors. Grants under the Plan must be
made within ten years of the date the Plan was approved and stock options are exercisable upon the terms set forth in
the grant agreement approved by the Board of Directors, but in no event more than ten years from the date of grant.
At December 30, 2017, 1,399,106 shares were available for grant under the Plan.
Restricted Stock
We grant restricted stock to certain employees and members of our Board of Directors. The value of restricted
stock issued is based on the fair value of our common stock on the grant date. Vesting of restricted stock is based on
continued employment or service for a specified period and, in certain circumstances, the attainment of financial
goals. Compensation cost related to the stock is recognized on a straight-line basis over the vesting period. We retain
the restricted stock, and any dividends paid thereon, until the vesting provisions have been met. For awards with a
service condition only, compensation cost related to the stock is recognized on a straight-line basis over the vesting
period. For awards that have a service condition and require the attainment of financial goals, compensation cost
related to the stock is recognized over the vesting period if it is probable that the financial goals will be attained.
Compensation cost related to restricted stock was $2.8 million, $2.3 million and $0.9 million in fiscal 2017, fiscal
2016 and fiscal 2015, respectively. The compensation costs were classified as selling, general and administrative
expense in the Consolidated Statements of Operations. No cost was capitalized during fiscal 2017, fiscal 2016 or
fiscal 2015.
43
The following table summarizes our restricted stock activity for the three years ended December 30, 2017:
Balance at December 27, 2014
Granted
Vested
Cancelled
Balance at December 26, 2015
Granted
Vested
Cancelled
Balance at December 31, 2016
Granted
Vested
Cancelled
Balance at December 30, 2017
Shares
72,900 $
44,104 $
(38,580) $
(35,182) $
43,242 $
133,794 $
(29,002) $
(2,671) $
145,363 $
70,611 $
(56,953) $
(5,294) $
153,727 $
Weighted
Average Price
27.82
45.68
25.24
44.84
34.49
49.45
29.74
33.79
49.22
78.27
56.03
51.56
59.96
As of December 30, 2017, there was approximately $4.6 million of unrecognized compensation cost related to
nonvested restricted stock, which is expected to be recognized over a weighted-average period of approximately 2.6
years.
Cash flows resulting from tax deductions in excess of the tax effect of compensation cost recognized in the
financial statements are classified as operating cash flows. In accordance with ASU 2016-09 (see Note 2), the excess
tax benefit generated from restricted shares which vested was $0.4 million in fiscal 2017 and was credited to income
tax expense. The excess tax benefit generated from restricted shares which vested was $0.3 million in both of fiscal
2016 and fiscal 2015 and was credited to additional paid in capital.
Stock Options
We grant stock options to certain employees and members of our Board of Directors. We expense the grant-
date fair value of stock options. Compensation cost is recognized over the vesting or performance period.
Compensation cost charged against income was $0.3 million in fiscal 2017 and $0.1 million in each of fiscal 2016
and fiscal 2015, respectively. The compensation costs were classified as selling, general and administrative expense
in the Consolidated Statements of Operations. No cost was capitalized during fiscal 2017, fiscal 2016 or fiscal 2015.
We used the Black-Scholes option valuation model to estimate the fair value of stock options granted in fiscal
2017 and fiscal 2016. No stock options were granted in fiscal 2015. 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 is based on the U.S. Treasury security with terms equal to the expected time of exercise as of the grant
date. The weighted-average grant-date fair value of options granted during fiscal 2017 was $15.81 and fiscal 2016
was $8.40 per option.
The following table summarizes the weighted average valuation assumptions used to calculate the fair value of
options granted:
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life of options
2017
2016
0%
27%
1.5%
0%
26%
0.9%
3.0 years
3.0 years
44
The following table summarizes our stock option activity for the three years ended December 30, 2017:
Shares
Option Price
per Share
Weighted
Average
Remaining
Terms
(years)
Aggregate
Intrinsic
Value
Weighted
Average
Price
Balance at December 27, 2014
Exercised
Balance at December 26, 2015
Granted
Balance at December 31, 2016
Granted
Exercised
Cancelled
Balance at December 30, 2017
Options exercisable at December 30, 2017
75,000 $5.05 – $19.37 $
(35,000) $5.05 – $19.37 $
40,000 $5.67 – $7.74 $
61,084 $41.59 – $53.32 $
101,084 $5.67 – $53.32 $
58,024 $69.02 – $82.59 $
(32,751) $6.90 – $41.59 $
(3,810) $41.59 – $78.64 $
122,547 $5.67 – $82.59 $
22,520 $5.67 – $53.32 $
7.28
7.76
6.86
44.36
29.52
78.58
7.69
56.72
57.74
31.07
3.6 $1,402,012
2.6 $ 677,188
As of December 30, 2017, there was approximately $1.0 million of unrecognized compensation cost related to
nonvested stock options, which is expected to be recognized over a weighted-average period of approximately 2.9
years.
The following table summarizes information concerning currently outstanding and exercisable options at
December 30, 2017:
Range of Exercise Price
$5.67 - $24.66
$26.67 - $41.60
$41.61 - $69.01
$69.02 - $77.99
$77.80 - $82.59
Balance at December 30, 2017
Options Outstanding
Weighted
Average
Remaining
Contractual
Life (years)
Number
Outstanding
Options Exercisable
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Number
Exercisable
8,000
43,679
14,400
1,630
54,838
122,547
1.4 $
3.1 $
3.5 $
5.1 $
4.2 $
3.6 $
6.71
41.59
53.32
69.02
78.86
57.74
8,000 $
10,920 $
3,600 $
— $
— $
22,520 $
6.71
41.59
53.32
—
—
31.07
Cash received from option exercises was less than $0.1 million in fiscal 2017 and was $0.1 million in fiscal
2015, respectively. There were no option exercises during fiscal 2016. In accordance with ASU No.2016-09 (see
Note 2), the excess tax benefit generated from option exercises was $0.6 million fiscal 2017 and was credited to
income tax expense. There was no excess tax benefit generated from stock option exercises in fiscal 2016. The
excess tax benefit generated from option exercises was $0.1 million in fiscal 2015 and was credited to additional
paid in capital.
Performance-Based Long Term Award Program. The Compensation Committee of our Board of Directors
has approved the Performance-Based Long Term Award Program (the “Program”) which connects compensation for
certain of our executives to the three-year compound annual growth in our pre-tax income as defined in the Program.
For the three-year periods ending in 2015 through 2017, the Compensation Committee has the discretion to settle the
Performance-Based Long Term Award in either cash or equity. These are liability-classified awards. The
Compensation Committee elected to settle the award in equity for the three-year periods ending in fiscal 2017 and
fiscal 2016 and cash for three-year periods ending in fiscal 2015. In fiscal 2016, the Compensation Committee
modified the Program to settle the awards earned in the three-year periods ending in fiscal 2018 and beyond in
equity alone. These awards are equity-classified. Any equity payments related to the Program will be from the 2008
Stock Option and Stock Incentive Plan.
45
Employee Stock Purchase Plan. In May 2017, our shareholders’ approved the Dorman Products, Inc.
Employee Stock Purchase Plan (the ‘ESPP”), which makes available 1,000,000 shares of our common stock for sale
to eligible employees. The purpose of this plan, which is qualified under Section 423 of the Internal Revenue
Service Code of 1986, as amended, is to encourage stock ownership through payroll deductions and limited cash
contributions by our employees. These contributions are used to purchase shares of the Company’s common stock at
a 15% discount from the lower of the market price at the beginning or end of the purchase window. Share purchases
under the plan are made twice annually, beginning in March 2018. There were no shares purchased under this plan
during fiscal 2017. Compensation cost under the ESPP plan was $0.1 million in fiscal 2017.
401(k) Retirement Plan. The Dorman Products, Inc. 401(k) Retirement Plan and Trust (the “401(k) Plan”) is
a defined contribution profit sharing and 401(k) plan covering substantially all of our employees as of December 30,
2017. Annual contributions under the 401(k) Plan are determined by the Compensation Committee of our Board of
Directors. Total expense related to the 401(k) Plan was $2.7 million in fiscal 2017 and $2.5 million in each of fiscal
2016 and fiscal 2015. At December 30, 2017, the 401(k) Plan held 269,628 shares of our common stock.
Common Stock Repurchases. We periodically repurchase, at the then current market price, and cancel
common stock issued to 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.
During fiscal 2017 our Board of Directors approved the repurchase and cancellation of 19,110 shares of our
common stock for $1.4 million at an average price of $73.34 per share. During fiscal 2016, our Board of Directors
approved the repurchase and cancellation of 38,970 shares of our common stock for $2.2 million at an average price
of $56.66 per share. During fiscal 2015, our Board of Directors approved the repurchase and cancellation of 33,430
shares of our common stock for $1.6 million at an average price of $48.14 per share.
Share Repurchase Program. On December 12, 2013 we announced that our Board of Directors authorized a
share repurchase program, authorizing the repurchase of up to $10 million of our outstanding common stock by the
end of 2014. Through several expansions and extensions, our Board of Directors has expanded the program to $250
million and extended the program through December 31, 2018. 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. We repurchased
1,006,365 common shares for $74.7 million at an average price of $74.26 under this program during fiscal 2017. We
repurchased 430,866 common shares for $22.5 million at an average price of $52.15 under this program during
fiscal 2016. We repurchased 747,700 common shares for $35.7 million at an average price of $47.77 under this
program during fiscal 2015.
13. Earnings Per Share
Basic earnings per share was calculated by dividing our net income by the weighted average number of
common shares outstanding during the period, excluding nonvested restricted stock which is 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 approximately 106,000
shares, 50,000 shares and 7,500 shares were excluded from the calculation of diluted earnings per share as of
December 30, 2017, December 31, 2016 and December 26, 2015, respectively, as their effect would have been anti-
dilutive.
46
The following table sets forth the computation of basic earnings per share and diluted earnings per share:
(in thousands, except per share data)
Numerator:
Net income
Denominator:
2017
2016
2015
$ 106,599 $ 106,049 $
92,329
Weighted average basic shares outstanding
Effect of compensation awards
Weighted average diluted shares outstanding
33,964
88
34,052
34,516
82
34,598
35,466
72
35,538
Earnings Per Share:
Basic
Diluted
14. Business Segments
$
$
3.14 $
3.13 $
3.07 $
3.07 $
2.60
2.60
We have determined that our business comprises a single reportable operating segment, namely, the sale of
replacement parts for the automotive aftermarket.
During fiscal 2017, fiscal 2016 and fiscal 2015, four of our customers (Advance Auto Parts, Inc., AutoZone,
Inc., Genuine Parts Co. – NAPA, and O’Reilly Automotive, Inc.) each accounted for more than 10% of net sales and
in aggregate accounted for 61% of net sales in fiscal 2017, and 60% in each of fiscal 2016 and fiscal 2015. Net sales
to countries outside the United States, primarily to Canada, Mexico, Europe, the Middle East, and Australia in fiscal
2017, fiscal 2016 and fiscal 2015 were $55.8 million, $48.6 million and $49.8 million, respectively.
15. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly Results of Operations for the fiscal years ended
December 30, 2017 and December 31, 2016:
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in thousands, except per share amounts)
Net sales
Income from operations
Net income
Diluted earnings per share
(in thousands, except per share amounts)
Net sales
Income from operations
Net income
Diluted earnings per share
2017
$ 221,625 $ 229,262 $ 224,615 $ 227,719
43,409
21,967
0.65
44,999
28,437
0.83
42,790
27,008
0.80
45,042
29,187
0.85
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2016
$ 208,148 $ 209,573 $ 212,786 $ 229,097
47,048
28,701
0.83
40,989
25,982
0.75
41,633
26,695
0.77
38,931
24,671
0.71
47
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information
required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosures.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer,
conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of our disclosure
controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, our
Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by
this report, our disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable
assurance level.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Exchange Act Rule 13a-15(f). Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, conducted an evaluation, as of December 30, 2017, of the
effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on this evaluation, our management concluded that, as of December 30, 2017, our internal control over
financial reporting was effective.
On October 26, 2017, we completed our acquisition of MAS Automotive Distribution Inc. (“MAS”). We are
in the process of evaluating the existing controls and procedures of MAS and integrating MAS into our internal
control over financial reporting. In accordance with SEC Staff guidance permitting a company to exclude an
acquired business from management’s assessment of the effectiveness of internal control over financial reporting for
the year in which the acquisition is completed, we have excluded MAS from our assessment of the effectiveness of
internal control over financial reporting as of December 30, 2017. MAS represented $82.9 million of the Company’s
total assets as of December 30, 2017, and $7.0 million of the Company’s net sales for the year ended December 30,
2017. The scope of management’s assessment of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures as of December 30, 2017 includes all of the Company’s consolidated operations
except for those disclosure controls and procedures of MAS that are subsumed by internal control over financial
reporting.
Our independent registered public accounting firm, KPMG LLP, has issued an attestation report on our
internal control over financial reporting. Their report appears below.
Changes in Internal Control Over Financial Reporting
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, also
conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred
during the quarter ended December 30, 2017 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Based on that evaluation, other than noted above there was no
change during the quarter ended December 30, 2017.
48
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Dorman Products, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Dorman Products, Inc. and subsidiaries’ (the Company) internal control over financial reporting as
of December 30, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 30, 2017, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 30, 2017 and December 31,
2016, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the
fiscal years in the three-year period ended December 30, 2017, and related notes and the consolidated financial
statement schedule listed under Item 15(a)(2) (collectively, the consolidated financial statements), and our report
dated February 27, 2018 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired MAS Automotive Distribution Inc. (MAS) during 2017, and management excluded from its
assessment of the effectiveness of the Company’s internal control over financial reporting as of December 30, 2017,
MAS’s internal control over financial reporting associated with total assets of $82.9 million and total revenues of
$7.0 million included in the consolidated financial statements of the Company as of and for the year ended
December 30, 2017. Our audit of internal control over financial reporting of the Company also excluded an
evaluation of the internal control over financial reporting of MAS.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
49
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Philadelphia, Pennsylvania
February 27, 2018
KPMG LLP
50
Item 9B. Other Information.
None
51
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Except for the information provided in “Part I – Item 4.1 Executive Officers of the Registrant” and as set forth
below, the required information is incorporated by reference from our definitive proxy statement for our 2018
Annual Meeting of Shareholders, including, but not necessarily limited to, the sections entitled “Proposal I: Election
of Directors,” “Committees of the Board of Directors – Audit Committee” and “Section 16(a) Beneficial Ownership
Reporting Compliance”.
We have adopted a written code of ethics, "Our Values and Standards of Business Conduct," which is
applicable to all of our directors, officers and employees, including our Chief Executive Officer, Chief Financial
Officer and Principal Accounting Officer, Controller and other executive officers. We have also adopted a written
code of ethics, “Code of Ethics for Senior Financial Officers,” which applies to our Chief Executive Officer, Chief
Financial Officer, Principal Accounting Officer, Controller and any other person performing similar functions. In
accordance with the SEC's rules and regulations a copy of each code of ethics is posted on our website
www.dormanproducts.com. Dorman will provide to any person without charge, upon request, a copy of such codes
of ethics. Requests for copies of such codes of ethics should be directed to: Thomas Knoblauch, Dorman Products,
Inc., 3400 East Walnut Street, Colmar, PA 18915. We intend to disclose any changes in or waivers from our codes
of ethics on our website at www.dormanproducts.com.
Item 11. Executive Compensation.
The required information is incorporated by reference from our definitive proxy statement for our 2018
Annual Meeting of Shareholders, including, but not necessarily limited to, the sections entitled “Director
Compensation,” “Executive Compensation: Compensation Discussion and Analysis,” “Executive Compensation:
Compensation Tables,” “Risk Assessment in Compensation Policies for Employees,” and “Compensation
Committee Interlocks and Insider Participation”.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters.
Except for the information set forth below, the required information is incorporated by reference from our
definitive proxy statement for our 2018 Annual Meeting of Shareholders, including, but not necessarily limited to,
the section entitled “Security Ownership of Certain Beneficial Owners and Management”.
52
Equity Compensation Plan Information
The following table details information regarding our existing equity compensation plans as of December 30,
2017:
(c)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected
in column
(a)(1))
(a)
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(b)
Weighted-
average exercise
price of
outstanding
options, warrants
and rights
122,547 $
57.74
2,399,106
—
122,547 $
—
57.74
—
2,399,106
Plan Category
Equity compensation plans approved by
security holders
Equity compensation plans not approved by
security holders
Total
(1) This number includes 1,399,106 shares available for issuance under the 2008 Stock Option and Stock Incentive
Plan and 1,000,000 shares reserved for issuance under the Dorman Products, Inc. Employee Stock Purchase Plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The required information is incorporated by reference from our definitive proxy statement for our 2018
Annual Meeting of Shareholders, including, but not necessarily limited to, the sections entitled “Certain
Relationships and Related Transactions” and “Corporate Governance – The Board of Directors and Director
Independence”.
Item 14. Principal Accounting Fees and Services.
The required information is incorporated by reference from our definitive proxy statement for our 2018
Annual Meeting of Shareholders, including, but not necessarily limited to, the sections entitled “Principal
Accountant Fees and Services” and “Pre-Approval Policies and Procedures”.
53
Item 15. Exhibits, Financial Statement Schedules.
PART IV
(a)(1) Consolidated Financial Statements. Our Consolidated Financial Statements and related documents are
provided in Part II - Item 8, “Financial Statements and Supplementary Data” of this Annual Report on
Form 10-K:
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Operations for the fiscal years ended December 30, 2017, December 31,
2016 and December 26, 2015.
Consolidated Balance Sheets as of December 30, 2017 and December 31, 2016.
Consolidated Statements of Shareholders' Equity for the fiscal years ended December 30, 2017,
December 31, 2016 and December 26, 2015.
Consolidated Statements of Cash Flows for the fiscal years ended December 30, 2017, December 31,
2016, and December 26, 2015.
Notes to Consolidated Financial Statements.
(a)(2) Consolidated Financial Statement Schedules. The following consolidated financial statement schedule
of the Company and related documents are filed with this Annual Report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts.
(a)(3) Exhibits required by Item 601 of Regulation S-K and Item 15(b) of Form 10-K to be filed as part of this
Annual Report on Form 10-K are listed below:
Number
Title
3.1
3.2
4.1
4.2
10.1
10.1.1
10.2
10.2.1
Amended and Restated Articles of Incorporation, as amended, of the Company. Incorporated by
reference to the Exhibit 3.1 of with the Company’s Current Report on Form 8-K, filed on May 19, 2017.
Amended and Restated Bylaws of the Company. Incorporated by reference to the Exhibit filed with the
Company’s Current Report on Form 8-K filed on May 19, 2017.
Specimen Common Stock Certificate of the Company. Incorporated by reference to the Exhibit filed
with the Company’s Registration Statement on Form S-8 (Registration No. 333-160979).
Amended and Restated Shareholders' Agreement dated as of July 1, 2006. Incorporated by reference to
the Exhibit filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September
27, 2008.
Lease Agreement, dated December 29, 2012, between the Company and BREP I, for premises located at
3400 East Walnut Street, Colmar, Pennsylvania. Incorporated by reference to the Exhibit filed with the
Company’s Current Report on Form 8-K filed on November 16, 2012.
Lease renewal option, dated November 14, 2016, between the Company and BREP I, for premises
located at 3400 East Walnut Street, Colmar, Pennsylvania. Incorporated by reference to the Exhibit filed
with the Company’s Current Report on Form 8-K filed on November 14, 2016.
Industrial Building Lease, dated January 31, 2006, by and between the Company and First Industrial, LP,
for premises located at 3150 Barry Drive, Portland, Tennessee. Incorporated by reference to the Exhibit
filed with the Company's Current Report on Form 8-K filed on February 2, 2006.
Second Amendment to Industrial Building Lease, dated January 25, 2008, by and between the Company
and First Industrial, LP, for premises located at 3150 Barry Drive, Portland, Tennessee. Incorporated by
reference to the Exhibit filed with the Company's Current Report on Form 8-K filed on January 29,
2008.
54
Number
Title
10.3
10.4†
10.4.1†
10.4.2†
10.4.3†
10.4.4†
10.4.5†
10.4.6†
10.5†
10.6†
10.7†
10.7.1†
10.8†
10.9†
10.10†
Credit Agreement dated as of December 7, 2017, by and between the Company and Wells Fargo Bank,
National Association. Incorporated by reference to the Exhibit filed with the Company's Current Report
on Form 8-K filed on December 8, 2017.
Dorman Products, Inc. 2008 Stock Option and Stock Incentive Plan. Incorporated by reference to the
Exhibit filed with the Company’s Registration Statement on Form S-8 (Registration No. 333-160979).
Form of Incentive Stock Option Agreement pursuant to the Dorman Products, Inc. 2008 Stock Option
and Stock Incentive Plan. Incorporated by reference to the Exhibit filed with the Company’s Registration
Statement on Form S-8 (Registration No. 333-160979).
Form of Non-Qualified Stock Option Agreement for Officers and Other Key Employees pursuant to the
Dorman Products, Inc. 2008 Stock Option and Stock Incentive Plan. Incorporated by reference to the
Exhibit filed with the Company’s Registration Statement on Form S-8 (Registration No. 333-160979).
Form of Non-Qualified Stock Option Agreement for Outside Directors and Important Consultants and/or
Advisors pursuant to the Dorman Products, Inc. 2008 Stock Option and Stock Incentive
Plan. Incorporated by reference to the Exhibit filed with the Company’s Registration Statement on Form
S-8 (Registration No. 333-160979).
Form of Restricted Stock Agreement pursuant to the Dorman Products, Inc. 2008 Stock Option and
Stock Incentive Plan. Incorporated by reference to the Exhibit filed with the Company’s Registration
Statement on Form S-8 (Registration No. 333-160979).
Amendment No. 1 to the Dorman Products, Inc. 2008 Stock Option and Stock Incentive Plan.
Incorporated by reference to the Exhibit filed with the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 28, 2013.
Amendment No. 2 to the Dorman Products, Inc. 2008 Stock Option Plan and Stock Incentive Plan,
approved by the Company’s shareholders at the 2014 Annual Shareholders Meeting held on May 16,
2014. Incorporated by reference to the Exhibit filed with the Company’s Current Report on Form 8-K
filed on May 20, 2014.
Dorman Products, Inc. Nonqualified Deferred Compensation Plan. Incorporated by reference to the
Exhibit filed with the Company’s Current Report on Form 8-K filed on February 11, 2011.
Employment Agreement, dated April 1, 2008, between the Company and Steven L. Berman.
Incorporated by reference to the Exhibit filed with the Company’s Current Report on Form 8-K filed on
April 1, 2008.
Dorman Products, Inc. Executive Cash Bonus Plan, approved by the Company’s shareholders at the
2010 Annual Shareholders Meeting held on May 20, 2010. Incorporated by reference to the Exhibit
filed with the Company’s Current Report on Form 8-K filed on May 24, 2010.
Amendment No. 1 to the Dorman Products, Inc. Executive Cash Bonus Plan, approved by the
Company’s shareholders at the 2014 Annual Shareholders Meeting held on May 16, 2014. Incorporated
by reference to the Exhibit filed with the Company’s Current Report on Form 8-K filed on May 20,
2014.
Separation Agreement, dated February 25, 2011, between the Company and Jeffrey Darby. Incorporated
by reference to the Exhibit filed with the Company’s Annual Report on Form 10-K for the fiscal year
ended December 28, 2013.
Employment Agreement, dated December 28, 2015, between the Company and Mathias J. Barton.
Incorporated by reference to the Exhibit filed with the Company’s Current Report on Form 8-K filed on
December 28, 2015.
Amended and Restated Employment Agreement, dated December 28, 2015, between the Company and
Steven Berman. Incorporated by reference to the Exhibit filed with the Company’s Current Report on
Form 8-K filed on December 28, 2015.
55
Number
Title
10.11†
Transition, Separation & General Release Agreement, dated February 4, 2016, between the Company
and Matthew Kohnke. Incorporated by reference to the Exhibit filed with the Company’s Current
Report on Form 8-K filed on February 4, 2016.
10.12†
Offer Letter, dated May 2, 2016, between the Company and Kevin Olsen. Incorporated by reference to
the Exhibit filed with the Company’s Current Report on Form 8-K filed on May 25, 2016.
21
23
31.1
31.2
32
101
Subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive and Chief Financial Officer as required by Section 906 of the Sarbanes-
Oxley Act of 2002.
The financial statements from the Dorman Products, Inc. Annual Report on Form 10-K for the year
ended December 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) the
Consolidated Statements of Operations for the years ended December 30, 2017, December 31, 2016 and
December 26, 2015; (ii) the Consolidated Balance Sheets as of December 30, 2017 and December 31,
2016; (iii) the Consolidated Statements of Shareholders’ Equity for the years ended December 30, 2017,
December 31, 2016 and December 26, 2015; (iv) the Consolidated Statements of Cash Flows for the
years ended December 30, 2017, December 31, 2016 and December 26, 2015; and (v) the Notes to
Consolidated Financial Statements.
†
Management Contracts and Compensatory Plans, Contracts or Arrangements.
Item 16. 10-K Summary.
None
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 27, 2018
Dorman Products, Inc.
By: /s/ Mathias J. Barton
Mathias J. Barton
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Mathias J. Barton
Mathias J. Barton
/s/ Kevin M. Olsen
Kevin M. Olsen
/s/ Steven L. Berman
Steven L. Berman
/s/ John J. Gavin
John J. Gavin
/s/ Paul R. Lederer
Paul R. Lederer
/s/ Richard T. Riley
Richard T. Riley
/s/ Kelly Romano
Kelly Romano
/s/ G. Michael Stakias
G. Michael Stakias
President, Chief Executive Officer and Director
(principal executive officer)
Chief Financial Officer
(principal financial and accounting officer)
Executive Chairman
Director
Director
Director
Director
Director
Date
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
57
DORMAN PRODUCTS, INC. AND SUBSIDIARIES
Non-GAAP Financial Measures
(in thousands, except per-share amounts)
The Company’s financial results include certain financial measures not derived in accordance with generally accepted accounting
principles (GAAP). Non-GAAP financial measures should not be used as a substitute for GAAP measures, or considered in isolation,
for the purpose of analyzing our operating performance, financial position or cash flows. Additionally, these non-GAAP measures may
not be comparable to similarly titled measures reported by other companies. However, the Company has presented these non-GAAP
financial measures because management believes this presentation, when reconciled to the corresponding GAAP measure, provides
useful information to investors by offering additional ways of viewing the Company’s results, profitability trends, and underlying
growth relative to prior and future periods and to our peers. Non-GAAP financial measures may reflect adjustments for charges such
as fair value adjustments, amortization, transaction costs, and other similar expenses related to acquisitions which the Company has
determined are material as well as other items that are not related to the Company’s ongoing performance.
Adjusted Net Income:
(unaudited)
Net income (GAAP)
Pretax acquisition-related inventory fair value adjustment [1]
Pretax acquisition-related intangible assets amortization [2]
Pretax acquisition-related transaction costs [3]
Tax adjustment (related to above items) [4]
Deferred tax asset revaluation related to the TCJA [4]
Tax charge related to pre 2016 state tax matters [4]
Adjusted net income (Non-GAAP)
Adjusted Diluted Earnings Per Share:
(unaudited)
Diluted earnings per share (GAAP)
Pretax acquisition-related inventory fair value adjustment [1]
Pretax acquisition-related intangible assets amortization [2]
Pretax acquisition-related transaction costs [3]
Tax adjustment (related to above items) [4]
Deferred tax asset revaluation related to the TCJA [4]
Tax charge related to pre 2016 state tax matters [4]
Adjusted diluted earnings per share (Non-GAAP)
52 Weeks 53 Weeks
12/30/17
$
12/31/16
106,599 $
592
349
1,079
(707 )
4,361
2,400
114,673 $
106,049
-
-
-
-
-
-
106,049
$
52 Weeks 53 Weeks
12/30/17
$
12/31/16
3.13 $
0.02
0.01
0.03
(0.02 )
0.13
0.07
3.37 $
3.07
-
-
-
-
-
-
3.07
$
Weighted average diluted shares outstanding
34,052
34,598
[ 1 ] – Pre-tax acquisition-related inventory fair value adjustments result from adjusting the value of acquired inventory from historical cost to fair value.
Such costs were $0.6 million pretax (or $0.4 million after tax) and were included in Costs of Good Sold.
[ 2 ] – Pre-tax acquisition related intangible asset amortization results from allocating the purchase price of material acquisitions to the acquired tangible and
intangible assets of the acquired business and recognizing the cost of the intangible asset over the period of benefit. Exclusion of this amortization expense
facilitates more consistent comparisons of operating results over time between our newly acquired and long-held businesses, and with both acquisitive and
non-acquisitive peer companies. We believe it is important for investors to understand that such intangible assets contribute to revenue generation and that
intangible asset amortization related to past acquisitions will recur in future periods until such intangible assets have been fully amortized. Such costs were
$0.3 million pretax (or $0.2 million after tax) and were included in Selling, General and Administrative expenses.
[3] – Pre-tax acquisition related transaction costs include external costs incurred to complete and integrate a material acquisition as well as accretion
expenses related to contingent consideration obligations. Such costs were $0.8 million pretax (or $0.5 million after tax) and were included in Selling,
General and Administrative expenses.
[4] – These adjustments represent the aggregate tax effect of all nontax adjustments reflected in the table above of $0.6 million. Such items are estimated by
applying the Company’s overall estimated tax rate to the pretax amount, or, by applying a specific tax rate if one is appropriate. Also included in Provision
for Income Taxes is a revaluation of a net deferred tax asset related to the TCJA and a tax charge related to pre 2016 tax matters.
DIRECTORS
& EXECUTIVE OFFICERS
Steven L. Berman
Executive Chairman,
Secretary and Treasurer
Mathias J. Barton
Director
Chief Executive Officer
& President
John J. Gavin
Director
Former Senior Advisor,
LLR Partners, LLC.
Paul R. Lederer
Director
Retired Executive Vice President,
Federal-Mogul Corporation
Richard T. Riley
Director
Retired Executive Chairman,
Lojack Corporation
Kelly Romano
Director
Executive Advisor Board Member,
Gryphon Investors
G. Michael Stakias
Director
President & Chief Executive Officer,
Liberty Partners
Michael B. Kealey
Executive Vice President,
Commercial
Kevin M. Olsen
Chief Financial Officer
Executive Vice President
Jeffrey L. Darby
Senior Vice President,
Sales and Marketing
SENIOR VICE PRESIDENTS
David C. Cohen
Senior Vice President,
Product
Michael Dempsey
Senior Vice President,
Supply Chain
Thomas J. Knoblauch
Senior Vice President &
General Counsel
Donna Long
Senior Vice President & CIO
Clinton Shultz
Senior Vice President,
Operations & Logistics
NEW PRODUCTS • NEW SOLUTIONS
NEW OPPORTUNITIES
COMMON STOCK PRICES
Our shares of common stock are traded publicly on the NASDAQ
Global Select Market under the ticker symbol “DORM”. At February 19,
2018 there were 203 holders of record of common stock. The range of
high and low sales prices for our common stock for each quarterly
period of fiscal 2017 and fiscal 2016 are as follows:
2017
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$82.51
88.50
83.50
74.22
Low
$67.03
76.40
62.64
60.93
High
$55.00
56.73
67.30
79.03
Low
$40.17
51.12
52.80
60.00
SHAREHOLDER INFORMATION
Stock Listing
The common stock of Dorman
Products, Inc. is traded on the
NASDAQ Global Select Market under
the symbol DORM.
Number of Shareholders
At February 19, 2018, there were
203 holders of record of our
common stock.
Transfer Agent
Wells Fargo Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
Auditors
KPMG LLP
1601 Market Street
Philadelphia, PA 19103
Investor Relations
Dorman Products, Inc.
3400 E. Walnut Street
Colmar, PA 18915-1800
Phone: 215-997-1800, Ext. 5451
Fax: 215-997-1741
Web Site: www.dormanproducts.com
E-mail:
investorrelations@dormanproducts.com
Recent financial data, press releases,
reports filed with the Securities and
Exchange Commission, corporate
governance documents and historical
information are available on the
Dorman Products home page located
at www.dormanproducts.com.
If you wish to be added to our e-mail
list, visit our home page or contact
Investor Relations.