What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-01 compared with 2023-05-02 · 59 added, 52 removed, 172 unchanged (39% of the section changed)

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We are one of the leading suppliers of replacement and upgrade parts in the motor vehicle aftermarket industry, serving passenger cars, light-, medium-, and heavy-duty trucks, as well as specialty vehicles, including utility terrain vehicles (UTVs) and all-terrain vehicles (ATVs).

As of December 31, 2022, we marketed approximately 129,000 distinct parts compared to approximately 118,000 as of December 25, 2021, many of which we designed and engineered.

As of December 31, 2022, we marketed approximately 129,000 distinct parts, many of which we designed and engineered.

This number excludes private label stock-keeping units and other variations in how we market, package and distribute our products, includes distinct parts of acquired companies and reflects distinct parts that have been discontinued at the end of their lifecycle.

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We generate most of our net sales from customers in North America, primarily in the United States.

Our products are sold primarily through aftermarket retailers, including through their online platforms;

Our products are sold primarily through:

aftermarket retailers, including through their online platforms;

national, regional and local warehouse distributors and specialty markets;

and salvage yards.

We also distribute aftermarket parts outside the United States, with sales primarily into Canada and Mexico, and to a lesser extent, Europe, the Middle East and Australia.

In addition, we sell specialty vehicle products through dealers and our online platform.

We also distribute products outside the United States, with sales primarily into Canada and Mexico, and to a lesser extent, 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 as well as our ability and the ability of our suppliers to deliver products ordered by our customers.

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These investments historically have enabled us to provide an expanding array of new product offerings and grow revenues at levels that generally have exceeded market growth rates.

In the three months ended April 1, 2023, we introduced 984 new distinct parts to our customers and end-users, including 360 “New-to-the-Aftermarket” parts.

We introduced 4,443 new distinct parts to our customers and end-users in the fiscal year ended December 31, 2022, including 1,565 “New-to-the-Aftermarket” parts.

In the six months ended July 1, 2023, we introduced 1,841 new distinct parts to our customers and end-users, including 621 “New-to-the-Aftermarket” parts.

We introduced 4,443 new distinct parts

to our customers and end-users in the fiscal year ended December 31, 2022, including 1,565 “New-to-the-Aftermarket” parts.

One area of focus has been our complex electronics program, which capitalizes on the growing number of electronic components being utilized on today’s OE platforms.

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We specialize in offering parts to this sector that were traditionally only available from OE manufacturers or salvage yards, similar to how we approach the passenger car and light-duty truck sector.

During fiscal 2022, we introduced 486 distinct parts in this product line.

We expect to continue to invest in the medium- and heavy-duty product category.

A key component of our strategy is growth through acquisitions.

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We may acquire businesses in the future to supplement our financial growth, increase our customer base, add to our distribution capabilities or enhance our product development resources, among other reasons.

Economic Factors

The Company’s financial results are also impacted by various economic and industry factors, including, but not limited to the number, age and condition of vehicles in operation at any one time, and the miles driven by those vehicles.

Industry Factors

The Company’s financial results are also impacted by various industry factors, including, but not limited to the number, age and condition of vehicles in operation at any one time, and the miles driven by those vehicles.

Vehicles in Operation

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As a result, we are continuously evaluating our approach to brand, pricing and terms to our different customers and channels.

For example, we maintain a brand protection policy, which is designed to ensure that certain products bearing the Dorman name are not advertised below certain approved pricing levels.

For example, we maintain brand protection policies, which are designed to ensure that certain of our branded products are not advertised below certain approved pricing levels.

In addition, we may pursue legal remedies when we see third parties violating our intellectual property rights, including those that violate our patents, wrongfully represent our products as their own or use our product images for their own marketing efforts.

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In addition, we may offer pricing discounts based on volume purchased from us or other pricing discounts related to programs under a customer’s agreement.

These discounts can be in the form of “off-invoice” discounts and are immediately deducted from sales at the time of sale.

For those customers that choose to receive a payment on a quarterly or annual basis instead of “off-invoice,” we accrue for such payments as the related sales are made and reduce sales accordingly.

These incentives can be in the form of “off-invoice” discounts and are immediately deducted from sales at the time of sale.

For those customers that choose to receive their incentives on a quarterly or annual basis instead of “off-invoice,” we provide rebates and accrue for such payments as the related sales are made and reduce sales accordingly.

Finally, rebates and discounts are provided to customers to support promotional activities such as advertising and sales force allowances.

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Foreign Currency

Our products are purchased from suppliers in the United States and a variety of non-U.S.

Many of our products and related raw materials and components are purchased from suppliers in the United States and a variety of non-U.S.

The products generally are purchased through purchase orders with the purchase price specified in U.S.

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To the extent that the U.S.

dollar changes in value relative to those foreign currencies in the future, the prices charged by our suppliers for products under new purchase orders may change in equivalent U.S.

dollar changes in value relative to those foreign currencies in the future, the prices charged by our suppliers for goods under new purchase orders may change in equivalent U.S.

The largest portion of our overseas purchases comes from China.

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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, and transportation costs.

dollar may result in a change in the cost of goods that we purchase from China.

However, the cost of the goods we procure is also affected by other factors including raw material availability, labor cost, and transportation costs.

We have subsidiaries located outside the United States with various functional currencies.

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Impact of Labor Market and Inflationary Costs

We have experienced broad-based inflationary impacts during the three months ended April 1, 2023 as well as during the year ended December 31, 2022, due primarily to global transportation and logistics constraints, which have resulted in significantly higher transportation costs;

We have experienced broad-based inflationary impacts during the six months ended July 1, 2023 as well as during the year ended December 31, 2022, due primarily to global transportation and logistics constraints, which have resulted in significantly higher transportation costs;

material costs;

and wage inflation from an increasingly competitive labor market.

Increased freight, higher labor costs and material inflation costs may continue to negatively impact our results throughout the remainder of fiscal 2023, despite recent signs of global supply chain constraints easing and ocean freight and commodity costs lowering.

We attempt to offset inflationary pressures with cost-saving initiatives, price increases to customers and the use of alternative suppliers.

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Under the terms of the credit facility, a change in interest rates affects the rate at which we can borrow funds thereunder and also impacts the interest cost on existing borrowings.

During the three months ended April 1, 2023 as well as the year ended December 31, 2022, we saw significant increases in Term SOFR and other reference rates, which impacted our results as discussed in Results of Operations that follows.

During the six months ended July 1, 2023 as well as the year ended December 31, 2022, we saw significant increases in Term SOFR and other reference rates, which impacted our results as discussed in Results of Operations that follows.

We expect interest rates may continue to increase in the foreseeable future, increasing the costs associated with our accounts receivable sales programs and outstanding borrowings.

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The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items in our Condensed Consolidated Statements of Operations:

Three Months Ended*

(in thousands, except percentage data) April 1, 2023 March 26, 2022

Three Months Ended* Six Months Ended*

(in thousands, except percentage data) July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022

Net sales $ 480,568 100.0 % $ 417,419 100.0 % $ 947,306 100.0 % $ 818,998 100.0 %

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* Percentage of sales information may not add due to rounding

Three Months Ended April 1, 2023 Compared to Three Months Ended March 26, 2022

Net sales increased 16% to $466.7 million for the three months ended April 1, 2023 from $401.6 million for the three months ended March 26, 2022.

The increase in net sales reflected the addition of

SuperATV in October 2022, successful new product launches, and price increases to offset inflationary costs.

Net sales growth for the three months ended April 1, 2023 excluding SuperATV was 3.5%.

Gross profit margin was 31.0% of net sales for the three months ended April 1, 2023 compared to 33.2% of net sales for the three months ended March 26, 2022.

The decline in gross margin as a percentage of net sales is primarily due to the sell-through of high-cost inventory purchased in 2022 that was impacted by inflationary costs, partially offset by the favorable impacts of pricing actions and the addition of SuperATV, which has a higher gross margin percentage than the Company average.

Selling, general and administrative expenses (“SG&A”) were $126.4 million, or 27.1% of net sales, for the three months ended April 1, 2023 compared to $86.5 million, or 21.5% of net sales, for the three months ended March 26, 2022.

Three Months Ended July 1, 2023 Compared to Three Months Ended June 25, 2022

Net sales increased 15% to $480.6 million for the three months ended July 1, 2023 from $417.4 million for the three months ended June 25, 2022.

The increase in net sales was primarily driven by the addition of SuperATV, along with price increases to offset inflation and the introduction of new products to the market.

Net sales growth for the three months ended July 1, 2023 excluding SuperATV was 1%.

Gross profit margin was 34.0% of net sales for the three months ended July 1, 2023 compared to 33.9% of net sales for the three months ended June 25, 2022.

The slight increase in gross margin as a percentage of net sales is primarily due to the addition of SuperATV, which has a higher gross margin percentage than the Company average, partially offset by higher costs in the three months ended July 1, 2023 from fair value adjustments to inventory recorded in connection with the SuperATV acquisition .

Selling, general and administrative expenses (“SG&A”) were $108.3 million, or 22.5% of net sales, for the three months ended July 1, 2023 compared to $92.1 million, or 22.1% of net sales, for the three months ended June 25, 2022.

The increase in SG&A as a percentage of net sales was primarily due to the impact of higher interest rates on our customer accounts receivable factoring programs and the addition of SuperATV, which has higher SG&A expenses as a percentage of net sales than the Company average, partially offset by a decrease in the three months ended July 1, 2023 in the fair value estimate of a contingent consideration obligation for a potential earnout payment on a previous acquisition .

Our effective tax rate was 23.8% for the three months ended July 1, 2023 compared to 21.1% for the three months ended June 25, 2022.

The increase in the effective tax rate was due to an increase in state tax expense and the effect of foreign operations.

Six Months Ended July 1, 2023 Compared to Six Months Ended June 25, 2022

Net sales increased 16% to $947.3 million for the six months ended July 1, 2023 from $819.0 million for the six months ended June 25, 2022.

The increase in net sales reflected the addition of SuperATV in October 2022, the introduction of new products to the market, and price increases to offset inflation.

Net sales growth for the six months ended July 1, 2023 excluding SuperATV was 2%.

Gross profit margin was 32.5% of net sales for the six months ended July 1, 2023 compared to 33.5% of net sales for the six months ended June 25, 2022.

The decline in gross margin as a percentage of net sales was primarily due to the sell-through of high-cost inventory purchased in 2022 that was impacted by inflationary costs, partially offset by the favorable impacts of pricing actions and the addition of SuperATV, which has a higher gross margin percentage than the Company average.

SG&A expenses were $234.7 million , or 24.8% of net sales, for the six months ended July 1, 2023 compared to $178.6 million, or 21.8% of net sales, for the six months ended June 25, 2022.

SG&A expenses as a percentage of net sales also increased in the three months ended April 1, 2023 as a result of a charge recorded related to a customer bankruptcy filing.

Our effective tax rate was 12.8% for the three months ended April 1, 2023 compared to 22.7% for the three months ended March 26, 2022.

The decrease in the effective tax rate was due to favorable discrete items in the quarter, partially offset by an increase in state tax expense and the effect of foreign operations.

The increase was also impacted by higher amortization of intangible assets, and a charge recorded related to a customer bankruptcy filing, partially offset by a decrease in the six months ended July 1, 2023 in the fair value estimate of a contingent consideration obligation for a potential earnout payment on a previous acquisition.

Our effective tax rate was 22.4% for the six months ended July 1, 2023 compared to 21.9% for the six months ended June 25, 2022.

The increase in the effective tax rate was due to an increase in state tax expense and the effect of foreign operations.

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 were $33.3 million at April 1, 2023 and $46.0 million at December 31, 2022.

Working capital was $582.8 million at April 1, 2023 compared to $590.8 million at December 31, 2022.

Shareholders’ equity was $1,049.1 million at April 1, 2023 and $1,042.6 million at December 31, 2022.

Cash and cash equivalents were $35.7 million at July 1, 2023 and $46.0 million at December 31, 2022.

Working capital was $618.4 million at July 1, 2023 compared to $590.8 million at December 31, 2022.

Shareholders’ equity was $1,086.1 million at July 1, 2023 and $1,042.6 million at December 31, 2022.

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.

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Quantitative and Qualitative Disclosures about Market Risk for more information.

Further extensions

of customer payment terms would result in additional uses of cash or increased costs associated with the sales of accounts receivable.

During the three months ended April 1, 2023 and March 26, 2022, we sold $237.7 million and $275.2 million of accounts receivable, respectively, under these programs.

If receivables had not been sold over the previous twelve months, approximately $745.9 million and $722.3 million of additional accounts receivable would have been outstanding at April 1, 2023 and December 31, 2022, respectively, based on our standard payment terms.

Further extensions of customer payment terms would result in additional uses of cash or increased costs associated with the sales of accounts receivable.

During the six months ended July 1, 2023 and June 25, 2022, we sold $479.7 million and $538.1 million of accounts receivable, respectively, under these programs.

If receivables had not been sold over the previous twelve months, approximately $806.3 million and $722.3 million of additional accounts receivable would have been outstanding at July 1, 2023 and December 31, 2022, respectively, based on our standard payment terms.

We had capacity to sell more accounts receivable under these programs if the needs of the business warranted.

Further extensions of customer payment terms would result in additional uses of cash or increased costs associated with the sales of accounts receivable.

During the three months ended April 1, 2023 and March 26, 2022, factoring costs associated with these accounts receivable sales programs were $13.5 million and $4.9 million, respectively.

During the six months ended July 1, 2023 and June 25, 2022, factoring costs associated with these accounts receivable sales programs were $25.4 million and $13.2 million, respectively.

The increase in factoring costs year over year was driven by higher Term SOFR and other reference rates.

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The credit agreement matures on October 4, 2027.

As of April 1, 2023, there was $215.5 million in outstanding borrowings under the revolving credit facility, and $493.8 million in outstanding borrowings under the term loan.

As of July 1, 2023, there was $166.6 million in outstanding borrowings under the revolving credit facility, and $490.6 million in outstanding borrowings under the term loan.

Also on that date, we had three outstanding letters of credit for $1.3 million in aggregate.

Net of outstanding borrowings and letters of credit, we had $383.5 million available under the credit facility at April 1, 2023.

Net of outstanding borrowings and letters of credit, we had $432.1 million available under the credit facility at July 1, 2023.

Our credit agreement contains affirmative and negative covenants.

As of April 1, 2023, we were not in default with respect to our credit agreement.

As of July 1, 2023, we were not in default with respect to our credit agreement.

Refer to Note 7, “Long-Term Debt” to the Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for additional information.

The following summarizes the activities included in the Condensed Consolidated Statements of Cash Flows:

Three Months Ended

(in thousands) April 1, 2023 March 26, 2022

Six Months Ended

(in thousands) July 1, 2023 June 25, 2022

Cash provided by operating activities $ 92,886 $ 37,386

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Net decrease in cash and cash equivalents $ (10,368) $ (6,816)

During the three months ended April 1, 2023, cash provided by operating activities was $26.2 million compared to $23.2 million during the three months ended March 26, 2022.

The $3.0 million increase was driven by higher cash inflows for working capital, partially offset by lower income during the three months ended April 1, 2023, compared to the prior year period.

Investing activities used cash of $10.3 million and $6.7 million during the three months ended April 1, 2023 and March 26, 2022, respectively.

Financing activities used cash of $28.7 million and $22.0 million during the three months ended April 1, 2023 and March 26, 2022, respectively.

During the three months ended April 1, 2023, we repaid $23.9 million of outstanding borrowings under our revolving credit facility, and $3.1 million of our term loan balance under our credit agreement.

During the three months ended March 26, 2022, we repaid $10.0 million of outstanding borrowing under our revolving credit facility.

We also paid $9.5 million to repurchase 98,350 shares of common stock under our share repurchase plan during the three months ended March 26, 2022.

For the six months ended July 1, 2023, cash provided by operating activities increased $55.5 million over the prior year period, driven by higher cash inflows for working capital, partially offset by lower income.

Investing activities used cash of $23.2 million and $15.5 million during the six months ended July 1, 2023 and June 25, 2022, respectively.

The increase in cash used in investing activities during the six months ended July 1, 2023 over the prior year period is primarily due to higher additions for property, plant and equipment from the inclusion of SuperATV in the current year period following its acquisition in October 2022.

Financing activities during the six months ended July 1, 2023 included the repayment of $72.8 million of outstanding borrowings under our revolving credit facility, and $6.3 million of our term loan balance under our credit agreement.

During the six months ended June 25, 2022, we repaid $10.0 million of outstanding borrowing under our revolving credit facility and paid $16.1 million to repurchase 166,050 shares of common stock under our share repurchase plan.

The remaining uses of cash from financing activities in each period resulted primarily from the repurchase of our common stock from our 401(k) Plan and income tax withholding in connection with the vesting of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”).

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis