What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-31 compared with 2023-08-01 · 53 added, 56 removed, 175 unchanged (38% of the section changed)

39 unchanged sentences

New Product Development

New product development is an important success factor for us and traditionally has been our primary vehicle for growth.

New product development is an important success factor for us and has been a source of growth for us.

We have made incremental investments to increase our new product development efforts to grow our business and strengthen our relationships with 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 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.

In the nine months ended September 30, 2023, we introduced 2,820 new distinct parts to our customers and end-users, including 1,063 “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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consumers began to increase their purchases of new vehicles which over time caused the US SAAR to recover and return to more historical levels.

Consequently, we expect the VIO for vehicles aged 8 to 13 years old to continue to recover over the next several years.

Consequently, we expect the VIO for vehicles aged 8 to 13 years old to continue to recover.

In addition, we believe that vehicle owners generally are operating their current vehicles longer than they did several years ago, performing necessary repairs and maintenance to keep those vehicles well maintained.

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We expect this increase in miles driven may continue, given that certain employers have begun to lift work-from-home policies implemented during the pandemic and, consequently, consumers may return to commuting to work on a more regular basis.

However, global gasoline prices have been volatile in recent months, which may negatively impact miles driven as consumers reduce travel or seek alternative methods of transportation.

However, global gasoline prices have remained high, which may negatively impact miles driven as consumers reduce travel or seek alternative methods of transportation.

Brand Protection

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Impact of Labor Market and Inflationary 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;

We have experienced broad-based inflationary impacts during the nine months ended September 30, 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 declining ocean freight and commodity costs.

Higher labor costs and material inflation costs may continue to negatively impact our results throughout the remainder of fiscal 2023, despite signs of global supply chain constraints easing.

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

Although we have implemented pass-through price increases to offset inflationary cost impacts, the price increases have often been implemented after we have experienced higher costs resulting in a lag effect to the full recovery of these costs.

Furthermore, pricing increases that we implemented to pass through the increased costs had no added profit dollars and consequently did not fully offset the impact that the increased costs had on our gross and operating margin percentages.

There can be no assurance that we will be successful in implementing pricing increases in the future to recover increased inflationary costs.

Impact of Interest Rates

Our business is subject to interest rate risk under the terms of our customer accounts receivable sales programs, as a change in the T erm Secured Overnight Financing Rate (“Term SOFR”) or

alternative discount rate affects the cost incurred to factor eligible accounts receivable.

Our business is subject to interest rate risk under the terms of our customer accounts receivable sales programs, as a change in the T erm Secured Overnight Financing Rate (“Term SOFR”) or alternative discount rate affects the cost incurred to factor eligible accounts receivable.

Additionally, our outstanding borrowings under our credit facility bear interest at variable rates tied to Term SOFR or the applicable base rate.

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 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.

During the nine months ended September 30, 2023 and 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.

Interest rates may increase in the future or may be held steady for prolonged periods, resulting in increased costs associated with our accounts receivable sales programs and outstanding borrowings.

Impact of Tariffs

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However, in March 2022, the USTR reinstated tariff relief for certain categories of products imported from China.

The reinstated tariff relief applies retroactively to October 12, 2021 and is scheduled to expire on September 30, 2023.

The reinstated tariff relief applies retroactively to October 12, 2021 and is scheduled to expire on December 31, 2023.

The reinstated tariff relief applies to a limited number of our products and is not expected to materially impact our operating results.

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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* Six Months Ended*

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

Three Months Ended* Nine Months Ended*

(in thousands, except percentage data) September 30, 2023 September 24, 2022 September 30, 2023 September 24, 2022

Net sales $ 488,186 100.0 % $ 413,470 100.0 % $ 1,435,492 100.0 % $ 1,232,468 100.0 %

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Interest expense, net 12,215 2.5 % 2,344 0.6 % 36,733 2.6 % 5,140 0.4 %

Other income, net (396) -0.1 % (111) 0.0 % (753) -0.1 % (195) 0.0 %

Other (income) expense, net (605) -0.1 % 65 0.0 % (1,358) -0.1 % (130) -0.0 %

Income before income taxes 52,598 10.8 % 39,688 9.6 % 102,145 7.1 % 133,266 10.8 %

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* Percentage of sales information may not add due to rounding

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.

Three Months Ended September 30, 2023 Compared to Three Months Ended September 24, 2022

Net sales increased 18% to $488.2 million for the three months ended September 30, 2023 from $413.5 million for the three months ended September 24, 2022.

Net sales growth was primarily driven by the addition of SuperATV, price increases to offset inflation and the introduction of new products to the market.

Net sales growth for the three months ended September 30, 2023 excluding SuperATV was 6%.

Gross profit margin was 37.5% of net sales for the three months ended September 30, 2023 compared to 31.9% of net sales for the three months ended September 24, 2022.

The increase in gross margin as a percentage of net sales was primarily due to sales of lower-cost inventory, price increases and the addition of SuperATV, which has a higher gross margin percentage than the Company average.

Selling, general and administrative expenses (“SG&A”) were $119.0 million, or 24.4% of net sales, for the three months ended September 30, 2023 compared to $89.8 million, or 21.7% of net sales, for the three months ended September 24, 2022.

The increase in SG&A as a percentage of net sales was primarily due to the addition of SuperATV, which has higher SG&A expenses as a percentage of net sales than the Company average, an increase in variable compensation expense and the impact of higher interest rates on our customer accounts receivable factoring programs .

Our effective tax rate was 23.0% for the three months ended September 30, 2023 compared to 22.9% for the three months ended September 24, 2022.

The effective tax rate was flat, with an increase from state tax expense and the effect of foreign operations offset by discrete benefits.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 24, 2022

Net sales increased 16% to $1,435.5 million for the nine months ended September 30, 2023 from $1,232.5 million for the nine months ended September 24, 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.

Net sales growth for the nine months ended September 30, 2023 excluding SuperATV was 4%.

Gross profit margin was 34.2% of net sales for the nine months ended September 30, 2023 compared to 33.0% of net sales for the nine months ended September 24, 2022.

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

SG&A expenses were $353.7 million, or 24.6% of net sales, for the nine months ended September 30, 2023 compared to $268.4 million, or 21.8% of net sales, for the nine months ended September 24, 2022.

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.

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 nine months ended September 30, 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 22.7% for the nine months ended September 30, 2023 compared to 22.2% for the nine months ended September 24, 2022.

The increase in the effective tax rate was primarily 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 $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.

Cash and cash equivalents were $32.0 million at September 30, 2023 and $46.0 million at December 31, 2022.

Working capital was $662.3 million at September 30, 2023 compared to $590.8 million at December 31, 2022.

Shareholders’ equity was $1,128.1 million at September 30, 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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These extended terms have resulted in increased accounts receivable levels and significant uses of cash.

We participate in accounts receivable sales programs with several customers that allow us to sell our accounts receivable to financial institutions to offset the negative cash flow impact of these payment term extensions.

Where available and when we deem appropriate, we participate in accounts receivable sales programs with several customers that allow us to sell our accounts receivable to financial institutions to offset the negative cash flow impact of these payment term extensions.

However, any sales of accounts receivable through these programs ultimately result in us receiving a lesser amount of cash upfront than if we collected those accounts receivable ourselves in due course, resulting in accounts receivable factoring costs.

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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.

During the nine months ended September 30, 2023 and September 24, 2022, we sold $713.2 million and $778.1 million of accounts receivable, respectively, under these programs.

If receivables had not been sold over the previous twelve months, approximately $866.5 million and $722.3 million of additional accounts receivable would have been outstanding at September 30, 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 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.

During the nine months ended September 30, 2023 and September 24, 2022, factoring costs associated with these accounts receivable sales programs were $37.7 million and $23.0 million, respectively.

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

Credit Agreement

The Company has a credit agreement that provides a $600.0 million revolving credit facility and includes a $500.0 million term loan with quarterly amortization payment requirements.

The Company has a credit agreement that provides a $600.0 million revolving credit facility and also includes a $500.0 million term loan with quarterly amortization payment requirements.

The credit agreement matures on October 4, 2027.

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.

As of September 30, 2023, there was $119.7 million in outstanding borrowings under the revolving credit facility, and $487.5 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 $432.1 million available under the credit facility at July 1, 2023.

Net of outstanding borrowings and letters of credit, we had $479.0 million available under the credit facility at September 30, 2023.

Our credit agreement contains affirmative and negative covenants.

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

As of September 30, 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:

Six Months Ended

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

Nine Months Ended

(in thousands) September 30, 2023 September 24, 2022

Cash provided by operating activities $ 149,110 $ 29,344

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Net decrease in cash and cash equivalents $ (14,081) $ (23,347)

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.

For the nine months ended September 30, 2023, cash provided by operating activities increased $119.8 million over the prior year period, driven by cash inflows for working capital versus cash outflows from working capital in the prior year period, primarily from inventory, as well as higher income.

Investing activities used cash of $32.9 million and $23.2 million during the nine months ended September 30, 2023 and September 24, 2022, respectively.

The increase in cash used in investing activities during the nine months ended September 30, 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 nine months ended September 30, 2023 included the repayment of $119.7 million of outstanding borrowings under our revolving credit facility, and $9.4 million of our term loan balance under our credit agreement.

During the nine months ended September 24, 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