Dorman Products, Inc. 10-Q

ITEM 1. Financial Statements DORMAN PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended (in thousands, except per share data) March 30, 2024 April 1, 2023 Net sales $ 468,701 $ 466,738 Cost of goods sold 287,255 322,261 Gross profit 181,446 144,477 Selling, general and administrative expenses 127,008 126,363 Income from operations 54,438 18,114 Interest expense, net 10,605 11,953 Other expense (income), net 40 ( 357 ) Income before income taxes 43,793 6,518 Provision for income taxes 10,965 835 Net income $ 32,828 $ 5,683 Other comprehensive income: Change in foreign currency translation adjustment $ ( 1,099 ) $ 119 Comprehensive Income $ 31,729 $ 5,802 Earnings per share: Basic $ 1.05 $ 0.18 Diluted $ 1.05 $ 0.18 Weighted average shares outstanding: Basic 31,140 31,436 Diluted 31,250 31,537 See accompanying Notes to Condensed Consolidated Financial Statements 3 Table of Contents DORMAN PRODUCTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED ) (in thousands, except for share data) March 30, 2024 December 31, 2023 Assets Current assets: Cash and cash equivalents $ 34,433 $ 36,814 Accounts receivable, less allowance for doubtful accounts of $ 3,513 and $ 3,518 486,352 526,867 Inventories 619,972 637,375 Prepaids and other current assets 22,062 32,653 Total current assets 1,162,819 1,233,709 Property, plant and equipment, net 162,439 160,113 Operating lease right-of-use assets 105,714 103,476 Goodwill 443,296 443,889 Intangible assets, net 295,880 301,556 Other assets 49,989 49,664 Total assets $ 2,220,137 $ 2,292,407 Liabilities and shareholders’ equity Current liabilities: Accounts payable $ 131,478 $ 176,664 Accrued compensation 18,206 23,971 Accrued customer rebates and returns 186,332 204,495 Revolving credit facility 81,160 92,760 Current portion of long-term debt 12,500 15,625 Other accrued liabilities 35,944 33,636 Total current liabilities 465,620 547,151 Long-term debt 467,338 467,239 Long-term operating lease liabilities 93,105 91,262 Other long-term liabilities 10,233 9,627 Deferred tax liabilities, net 9,346 8,925 Commitments and contingencies (Note 7) Shareholders’ equity: Common stock, $ 0.01 par value; 50,000,000 shares authorized; 31,011,870 and 31,299,770 shares issued and outstanding in 2024 and 2023, respectively 310 313 Additional paid-in capital 102,211 101,045 Retained earnings 1,075,663 1,069,435 Accumulated other comprehensive loss ( 3,689 ) ( 2,590 ) Total shareholders’ equity 1,174,495 1,168,203 Total liabilities and shareholders' equity $ 2,220,137 $ 2,292,407 See accompanying Notes to Condensed Consolidated Financial Statements 4 Table of Contents DORMAN PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED ) Three Months Ended March 30, 2024 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total (in thousands, except share data) Shares Issued Par Value Balance at December 31, 2023 31,299,770 $ 313 $ 101,045 $ 1,069,435 $ ( 2,590 ) $ 1,168,203 Exercise of stock options 5,540 — 340 — — 340 Compensation expense under Incentive Stock Plan — — 2,931 — — 2,931 Purchase and cancellation of common stock ( 317,932 ) ( 3 ) ( 572 ) ( 26,561 ) — ( 27,136 ) Issuance of non-vested stock, net of cancellations 41,357 — — — — — Other stock-related activity, net of tax ( 16,865 ) — ( 1,533 ) ( 39 ) — ( 1,572 ) Change in foreign currency translation adjustment — — — — ( 1,099 ) ( 1,099 ) Net income — — — 32,828 — 32,828 Balance at March 30, 2024 31,011,870 $ 310 $ 102,211 $ 1,075,663 $ ( 3,689 ) $ 1,174,495 Three Months Ended April 1, 2023 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total (in thousands, except share data) Shares Issued Par Value Balance at December 31, 2022 31,430,632 $ 314 $ 88,750 $ 956,870 $ ( 3,303 ) $ 1,042,631 Exercise of stock options 15,630 — 1,049 — — 1,049 Compensation expense under Incentive Stock Plan — — 2,312 — — 2,312 Purchase and cancellation of common stock ( 5,125 ) — ( 9 ) ( 424 ) — ( 433 ) Issuance of non-vested stock, net of cancellations 52,151 1 ( 1 ) — — — Other stock-related activity, net of tax ( 23,978 ) — ( 1,685 ) ( 532 ) — ( 2,217 ) Change in foreign currency translation adjustment — — — — 119 119 Net income — — — 5,683 — 5,683 Balance at April 1, 2023 31,469,310 $ 315 $ 90,416 $ 961,597 $ ( 3,184 ) $ 1,049,144 See accompanying Notes to Condensed Consolidated Financial Statements 5 Table of Contents DORMAN PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended (in thousands) March 30, 2024 April 1, 2023 Cash Flows from Operating Activities: Net income $ 32,828 $ 5,683 Adjustments to reconcile net income to cash provided by operating activities: Depreciation, amortization and accretion 13,851 13,540 Provision for doubtful accounts 11 2,744 Provision for deferred income taxes 475 — Provision for stock-based compensation 2,931 2,334 Changes in assets and liabilities: Accounts receivable 40,454 ( 4,673 ) Inventories 17,235 68,935 Prepaids and other current assets 2,377 ( 591 ) Other assets ( 918 ) ( 2,130 ) Accounts payable ( 45,084 ) ( 34,258 ) Accrued customer rebates and returns ( 18,156 ) ( 21,683 ) Accrued compensation and other liabilities 5,976 ( 3,691 ) Cash provided by operating activities 51,980 26,210 Cash Flows from Investing Activities: Acquisition, net of cash acquired — 267 Property, plant and equipment additions ( 10,755 ) ( 10,537 ) Cash used in investing activities ( 10,755 ) ( 10,270 ) Cash Flows from Financing Activities: Payments of revolving credit line ( 11,600 ) ( 23,900 ) Payments of long-term debt ( 3,125 ) ( 3,125 ) Proceeds from exercise of stock options 340 1,049 Purchase and cancellation of common stock ( 27,609 ) ( 433 ) Other stock-related activity ( 1,573 ) ( 2,254 ) Cash used in financing activities ( 43,567 ) ( 28,663 ) Effect of exchange rate changes on Cash and Cash Equivalents ( 39 ) ( 4 ) Net Decrease in Cash and Cash Equivalents ( 2,381 ) ( 12,727 ) Cash and Cash Equivalents, Beginning of Period 36,814 46,034 Cash and Cash Equivalents, End of Period $ 34,433 $ 33,307 Supplemental Cash Flow Information Cash paid for interest expense $ 10,397 $ 11,534 Cash paid for income taxes $ 839 $ 1,055 See accompanying Notes to Condensed Consolidated Financial Statements 6 Table of Contents DORMAN PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 30, 2024 AND APRIL 1, 2023 (UNAUDITED) 1. Basis of Presentation As used herein, unless the context requires otherwise, “Dorman,” the “Company,” “we,” “us,” or “our” refers to Dorman Products, Inc. and its subsidiaries. Our ticker symbol on the NASDAQ Global Select Market is “DORM.” The accompanying unaudited condensed consolidated financial statements have been prepared under U.S. generally accepted accounting principles (“GAAP”) for interim financial information and under the rules and regulations of the U.S. Securities and Exchange Commission. However, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 30, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024 or any future period. We may experience significant fluctuations from quarter to quarter in our results of operations due to the timing of orders placed by our customers and the introduction of new products and product lines to customers. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. 2. Sales of Accounts Receivable We have entered several customer-sponsored programs administered by unrelated financial institutions that permit us to sell (factor) certain accounts receivable at discounted rates to the financial institutions. Transactions under these agreements were accounted for as sales of accounts receivable and the related accounts receivable were removed from our Condensed Consolidated Balance Sheets at the times of the sales transactions. Sales of accounts receivable under these agreements, and related factoring costs, which were included in selling, general and administrative expenses, were as follows: Three Months Ended (in thousands) March 30, 2024 April 1, 2023 Sales of accounts receivable $ 285,218 $ 237,739 Factoring costs 13,610 13,524 3. Inventories Inventories include the cost of material, freight, direct labor and overhead utilized in the processing of our products and are stated at the lower of cost or net realizable value. Inventories were as follows: (in thousands) March 30, 2024 December 31, 2023 Raw materials $ 26,431 $ 29,750 Bulk product 172,200 211,805 Finished product 412,547 387,668 Packaging materials 8,794 8,152 Total $ 619,972 $ 637,375 7 Table of Contents 4. Goodwill and Intangible Assets Goodwill Goodwill included the following: (in thousands) Light Duty Heavy Duty Specialty Vehicle Consolidated Balance at December 31, 2023 $ 313,704 $ 57,876 $ 72,309 $ 443,889 Foreign currency translation — ( 593 ) — ( 593 ) Balance at March 30, 2024 $ 313,704 $ 57,283 $ 72,309 $ 443,296 Intangible Assets Intangible assets included the following: March 30, 2024 December 31, 2023 Intangible assets subject to amortization Gross Carrying Value Accumulated Amortization Net Carrying Value Gross Carrying Value Accumulated Amortization Net Carrying Value (in thousands) Customer relationships $ 175,430 $ 34,484 $ 140,946 $ 175,430 $ 31,678 $ 143,752 Trade names 67,690 11,730 55,960 67,690 10,676 57,014 Product portfolio 107,800 11,375 96,425 107,800 9,720 98,080 Technology 2,167 1,131 1,036 2,167 1,069 1,098 Patents and other 2,230 717 1,513 2,230 618 1,612 Total $ 355,317 $ 59,437 $ 295,880 $ 355,317 $ 53,761 $ 301,556 Amortization expense was $ 5.6 million and $ 5.5 million during the three months ended March 30, 2024 and April 1, 2023, respectively. 5. Debt As of March 30, 2024 and December 31, 2023, the interest rate on the outstanding borrowings under our credit facility was 6.93 % and 6.96 %, respectively. 8 Table of Contents 6. Segment Information Segment results are as follows: For the Three Months Ended (in thousands) March 30, 2024 April 1, 2023 Net Sales: Light Duty $ 359,293 $ 348,083 Heavy Duty 57,809 67,647 Specialty Vehicle 51,599 51,008 Total $ 468,701 $ 466,738 Segment profit: Light Duty $ 57,795 $ 21,447 Heavy Duty 9 5,348 Specialty Vehicle 7,169 7,080 Total $ 64,973 $ 33,875 A reconciliation of segment profit to income before income taxes is as follows: For the Three Months Ended (in thousands) March 30, 2024 April 1, 2023 Segment profit $ 64,973 $ 33,875 Acquisition-related intangible assets amortization ( 5,484 ) ( 5,433 ) Acquisition-related transaction and other costs ( 483 ) ( 8,549 ) Executive transaction services expenses — ( 1,779 ) Pretax reduction in workforce costs ( 4,568 ) — Interest expense, net ( 10,605 ) ( 11,953 ) Other (expense) income, net ( 40 ) 357 Income before income taxes $ 43,793 $ 6,518 9 Table of Contents 7. Commitments and Contingencies Acquisitions We have contingent consideration related to acquisitions due to the uncertainty of the ultimate amount of any payments that will become due as earnout payments if performance targets are achieved. If the remaining performance targets for the acquisitions are fully achieved, the maximum additional contingent payments to be made under the transaction documents would be $ 52.0 million in aggregate. As of March 30, 2024 and December 31, 2023, we estimated that no payments are expected to become due in connection with the acquisitions, and therefore accrued no liability. The contingent consideration liability is measured each reporting period and recorded at fair value. The inputs used to calculate the fair value of the contingent consideration liability are considered to be Level 3 inputs due to the lack of relevant observable market activity and significant management judgment. The approach to valuing the contingent consideration uses unobservable factors such as projected revenues and cost of goods sold over the term of the earnout period, discounted for the period over which the contingent consideration is measured, and volatility rates. Based upon these assumptions, the contingent consideration is then valued using a Monte Carlo simulation. An increase in future revenue and gross profit may result in a higher estimated fair value, while a decrease in future revenue and gross profit may result in a lower estimated fair value of the contingent consideration liability. Other Contingencies We are a party to or otherwise involved in legal proceedings that arise in the ordinary course of business, such as various claims and legal actions involving contracts, employment claims, competitive practices, intellectual property infringement, product liability claims and other matters arising out of the conduct of our business. In the opinion of management, none of the actions, individually or in the aggregate, taking into account relevant insurance coverage, would likely have a material financial impact on the Company and we believe the range of reasonably possible losses from current matters, taking into account relevant insurance coverage, is immaterial. However, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of any of these matters could have a material adverse impact on the Company’s cash flows, financial position or results of operations in the period in which any such effects are recorded. 8. Revenue Recognition The following tables present our disaggregated revenue by geography. Three Months Ended (in thousands) March 30, 2024 April 1, 2023 Net sales to U.S. customers $ 428,855 $ 430,693 Net sales to non-U.S. customers 39,846 36,045 Total $ 468,701 $ 466,738 9. Stock-Based Compensation Restricted Stock Awards (“RSAs”) and Restricted Stock Units (“RSUs”) We issue RSUs, and, prior to January 2020 we issued RSAs, to participants in our equity plans. Performance-based RSUs granted in the three months ended March 30, 2024 included certain grants that vest based on our total shareholder return ranking relative to the Nasdaq US Benchmark Auto Parts Index over a three-year performance period (market condition), and other grants that vest based 10 Table of Contents upon achievement of return on invested capital targets over a three-year performance period (performance condition). Compensation cost related to RSA and RSU grants was $ 2.5 million and $ 1.7 million for the three months ended March 30, 2024 and April 1, 2023, respectively, and was included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. The following table summarizes our RSA and RSU activity for the three months ended March 30, 2024: Shares Weighted Average Fair Value Balance at December 31, 2023 257,554 $ 97.33 Granted 171,940 $ 99.45 Vested ( 44,435 ) $ 89.84 Canceled ( 16,085 ) $ 128.96 Balance at March 30, 2024 368,974 $ 97.83 For the three months ended March 30, 2024, we granted 32,109 performance-based RSUs containing a market condition with a grant date fair value of $ 138.58 per share. For the three months ended April 1, 2023, we granted 29,399 performance-based RSUs containing a market condition with a grant date fair value of $ 113.15 per share. As of March 30, 2024, there was $ 27.4 million of unrecognized compensation cost related to unvested RSA and RSU grants that is expected to be recognized over a weighted average period of 2.4 years. Stock Options From time to time, we grant stock options to participants in our equity plans. Compensation cost related to stock option grants was $ 0.4 million for both the three months ended March 30, 2024 and April 1, 2023, and was included as selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. The following table summarizes our stock option activity for the three months ended March 30, 2024 : Shares Weighted Average Price Weighted Average Remaining Term (years) Aggregate Intrinsic Value (in thousands) Balance at December 31, 2023 311,217 $ 86.52 Exercised ( 6,046 ) $ 62.75 Balance at March 30, 2024 305,171 $ 86.99 5.2 $ 3,193 Exercisable at March 30, 2024 195,683 $ 82.99 4.6 $ 2,844 As of March 30, 2024, there was $ 3.3 million of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted average period of 2.3 years. 10. 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 unvested RSAs which are considered to be contingently issuable. To calculate diluted earnings per share, common share equivalents are added to the weighted average number of common shares outstanding. Common share 11 Table of Contents equivalents are calculated using the treasury stock method and are computed based on outstanding stock-based awards. For the three months ended March 30, 2024 and April 1, 2023, there were approximately 319,000 shares and 237,000 shares, respectively, that were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. The following table sets forth the computation of basic earnings per share and diluted earnings per share: Three Months Ended (in thousands, except per share data) March 30, 2024 April 1, 2023 Net income $ 32,828 $ 5,683 Denominator: Weighted average basic shares outstanding 31,140 31,436 Effect of stock-based compensation awards 110 101 Weighted average diluted shares outstanding 31,250 31,537 Earnings Per Share: Basic $ 1.05 $ 0.18 Diluted $ 1.05 $ 0.18 11. Common Stock Repurchases We periodically repurchase, at the then current market price, and cancel common stock issued to the Dorman Products, Inc. 401(k) Retirement Plan and Trust (the “401(k) Plan”). 401(k) Plan participants can no longer purchase shares of Dorman common stock as an investment option under the 401(k) Plan. Shares are generally purchased by the Company from the 401(k) Plan when participants sell units as permitted by the 401(k) Plan or elect to leave the 401(k) Plan upon retirement, termination or other reasons. The following table summarizes the repurchase and cancellation of common stock by the Company for the periods indicated: Three Months Ended March 30, 2024 April 1, 2023 Shares repurchased and canceled 7,759 5,125 Total cost of shares repurchased and canceled (in thousands) $ 673 $ 434 Average price per share $ 86.77 $ 84.62 Separately, our Board of Directors has authorized the repurchase of up to $ 600 million of our common stock through December 31, 2024 under a previously announced share repurchase program and subsequent authorizations. 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 12 Table of Contents share repurchase program does not obligate us to acquire any specific number of shares. At March 30, 2024, $ 186.2 million was available for repurchase under this share repurchase program. The following table summarizes the repurchase and cancellation of common stock under the share repurchase program: Three Months Ended March 30, 2024 April 1, 2023 Shares repurchased and canceled 310,173 — Total cost of shares repurchased and canceled (in thousands) $ 26,463 $ — Average price per share $ 85.32 $ — 12. Income Taxes Our effective tax rate was 25.0 % and 12.8 % for the three months ended March 30, 2024 and April 1, 2023, respectively. The increase in the effective tax rate was primarily due to favorable discrete items applied to a lower income before income taxes in the three months ended April 1, 2023. At March 30, 2024, we had $ 4.6 million of net unrecognized tax benefits, $ 4.3 million of which would lower our effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of March 30, 2024, accrued interest and penalties related to uncertain tax positions were not material. We file income tax returns in the United States, Canada, China, India, and Mexico. The statute of limitations for tax years before 2020 is closed for U.S. federal income tax purposes. The statute of limitations for tax years before 2017 is closed for the states in which we filed. The statute of limitations for tax years before 2020 is closed for income tax purposes in Canada, China and India. The statute of limitations for tax years before 2018 is closed for income tax purposes in Mexico. 13. Related-Party Transactions Prior to December 1, 2023, we leased our Colmar, PA facility from an entity in which Steven Berman, our Non-Executive Chairman, and certain of his family members are owners. On December 1, 2023, the Colmar facility was sold to a third party, subject to our lease. We also lease a portion of our Lewisberry, PA facility from an entity in which Mr. Berman, and certain of his family members are owners. Each lease is a non-cancelable operating lease and expires December 31, 2027. We also lease our facilities in Madison, IN and Shreveport, LA, from entities in which Lindsay Hunt, our President and Chief Executive Officer, Specialty Vehicle, and certain of her family members are owners. Each lease is a non-cancelable operating lease. The leases for our operating facilities in Madison, IN and Shreveport, LA were renewed in October 2022 in connection with the acquisition of SuperATV, LLC, a leading supplier to the powersports aftermarket ("SuperATV"), and will expire on October 31, 2027. We have service agreements with counterparties that are majority-owned by a family member of Lindsay Hunt, our President and Chief Executive Officer, Specialty Vehicle. These agreements provide for various warehouse and facility-related services at agreed-upon rates. The following table represents the estimated payments for the year ending December 31, 2024 and actual payments for the year ended December 31, 2023 under the related party agreements described above: 13 Table of Contents Year Ending Year Ended (in thousands) December 31, 2024 December 31, 2023 Facility lease with Steven Berman related entities $ 715 $ 2,918 Facility lease with Lindsay Hunt related entities $ 2,757 $ 2,603 Service agreements with Lindsay Hunt related entities $ 54 $ 200 We are a partner in a joint venture with one of our suppliers and own a minority interest in two other suppliers. Two of these investments are accounted for under the equity method and one is accounted for under the cost method. 14. 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. The carrying value of borrowings under our credit facility approximates fair value because these borrowings bear interest at rates indexed to a market rate (Term SOFR). 15. New and Recently Adopted Accounting Pronouncements In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2023-07, Improvements to Reportable Segment Disclosures. The ASU requires additional disclosures about reportable segments’ significant expenses on an interim and annual basis. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 on a retrospective basis. In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. The ASU expands disclosures in the income tax rate reconciliations table and cash taxes paid and is effective for annual periods beginning after December 15, 2024. We expect to implement these new standards by their effective dates, and do not expect their adoption to have an impact on our results of operations, financial condition or cash flows. 14 Table of Contents