What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-02 compared with 2024-05-07 · 71 added, 54 removed, 186 unchanged (40% of the section changed)

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The following discussion and analysis, as well as other sections in this Quarterly Report on Form 10-Q, should be read in conjunction with the unaudited condensed consolidated financial statements and footnotes thereto of Dorman Products, Inc.

included in “ITEM 1.

included in “PART 1, ITEM 1.

Financial Statements” of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

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Light Duty, Heavy Duty, and Specialty Vehicle, consistent with the sectors of the motor vehicle aftermarket industry in which we operate.

For more information on our segments, refer to Note 8, “Segment Information,” to the Consolidated Financial Statements, included under ITEM 8.

For more information on our segments, refer to Note 8, “Segment Information,” to the Consolidated Financial Statements, included under Part II, ITEM 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2023.

As of December 31, 2023, we marketed approximately 133,000 distinct parts compared to approximately 129,000 as of December 31, 2022, many of which we designed and engineered.

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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 March 30, 2024, we introduced 1,440 new distinct parts to our customers and end-users, including 522 “New-to-the-Aftermarket” parts.

In the six months ended June 29, 2024, we introduced 3,096 new distinct parts to our customers and end-users, including 997 “New-to-the-Aftermarket” parts.

We introduced 6,106 new distinct parts to our customers and end-users in the fiscal year ended December 31, 2023, including 1,791 “New-to-the-Aftermarket” parts.

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We develop products designed to be compatible across a wide variety of makes and models to enhance both the performance and appearance of customers’ vehicles.

A key component of our strategy is growth through acquisitions, including the October 2022 acquisition of Super ATV, a leading independent supplier to the powersports aftermarket with a family of highly respected brands spanning functional accessories and upgrades, as well as replacement parts for specialty vehicles, and the August 2021 acquisition of Dayton Parts, a manufacturer of chassis and other parts designed to serve the heavy-duty vehicle sector of the aftermarket.

A key component of our strategy is growth through acquisitions, including the October 2022 acquisition of SuperATV, a leading independent supplier to the powersports aftermarket with a family of highly respected brands spanning functional accessories and upgrades, as well as replacement parts for specialty vehicles, and the August 2021 acquisition of Dayton Parts, a manufacturer of chassis and other parts designed to serve the heavy-duty vehicle sector of the aftermarket.

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.

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We expect our customers to continue to exert pressure on our margins.

New Customer Acquisition Costs

We may incur customer acquisition costs where we incur change-over costs to induce a customer to switch from a competitor’s brand, including expanding new product lines into our existing customers.

Change-over costs include the costs related to removing the new customer’s inventory and replacing it with our inventory, which is commonly referred to as a stock lift.

Customer acquisition costs are recorded as a reduction to revenue when incurred.

We may incur change-over costs to induce a customer to switch from a competitor’s brand.

These costs are recorded as a reduction to revenue when incurred.

Product Warranty and Overstock Returns

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 in the light-duty parts categories, with more limited warranties for our heavy-duty and specialty vehicle products.

We offer a limited lifetime warranty on

most of our products in the light-duty parts categories, with more limited warranties for our heavy-duty and specialty vehicle products.

In addition to warranty returns, we may permit our customers to return new, undamaged products to us within customer-specific limits if they have overstocked their inventories.

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Significant judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period.

Revision to these estimates is made when necessary, based upon changes in these factors.

Revisions to these estimates are made when necessary, based upon changes in these factors.

We regularly study trends of such claims.

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and wage inflation from an increasingly competitive labor market.

Despite signs of global supply chain constraints easing, higher labor costs and material inflation costs may continue to negatively impact our results in the future.

Uncertain global supply chain and logistics stability driven by geopolitical events, higher labor costs and material inflation costs may negatively impact our results in the future.

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

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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.

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

During the year ended December 31, 2023, we saw significant increases in Term SOFR and other reference rates and interest rates have remained elevated throughout the three months ended March 30, 2024, which impacted our results as discussed in Results of Operations that follows.

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.

Interest rates may hold steady at their current rates for prolonged periods or may increase

in the future, resulting in increased costs associated with our accounts receivable sales programs and outstanding borrowings.

During the year ended December 31, 2023, we saw significant increases in Term SOFR, and other reference rates and interest rates have remained elevated throughout the six months ended June 29, 2024, which impacted our results as discussed in Results of Operations that follows.

Impact of Tariffs

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We expect to continue mitigating the impact of tariffs primarily through, among other things, diversification of suppliers across geographies and selling price increases to offset the higher tariffs incurred.

Tariffs are not expected to have a material impact on our net income but are expected to increase net sales and lower our gross and operating profit margins.

In March 2022, the USTR reinstated tariff relief for certain categories of products imported from China that had expired.

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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) March 30, 2024 April 1, 2023

Three Months Ended* Six Months Ended*

(in thousands, except percentage data) June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023

Net sales $ 502,951 100.0 % $ 480,568 100.0 % $ 971,652 100.0 % $ 947,306 100.0 %

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Interest expense, net 10,202 2.0 % 12,565 2.6 % 20,807 2.1 % 24,518 2.6 %

Other expense (income), net 40 0.0 % (357) (0.1) %

Other (income) expense, net (136) 0.0 % (396) (0.1) % (96) 0.0 % (753) (0.1) %

Income before income taxes 62,386 12.4 % 43,029 9.0 % 106,179 10.9 % 49,547 5.2 %

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* Percentage of sales information may not add due to rounding

Three Months Ended March 30, 2024 Compared to Three Months Ended April 1, 2023

Net sales increased slightly for the three months ended March 30, 2024 compared to the prior year period, driven primarily by new product introductions and pricing actions to offset inflation.

Gross profit as a percentage of net sales increased 770 basis points compared to the prior year period primarily due to sales of lower-cost inventory, cost-saving initiatives, and pricing actions to offset inflation.

Selling, general and administrative expenses (“SG&A”) increased $0.6 million, and were flat as a percentage of net sales, for the three months ended March 30, 2024, compared to the prior year period.

SG&A for the three months ended March 30, 2024 included costs incurred in connection with a reduction in workforce action that was enacted in February 2024, net of realized savings as a result of that action, while SG&A for the three months ended April 1, 2023 included a charge recorded related to a customer bankruptcy filing.

Our effective tax rate increased to 25.0% for the three months ended March 30, 2024 from 12.8% for the three months ended April 1, 2023 primarily due to favorable discrete items applied to a lower income before income taxes in the three months ended April 1, 2023.

Three Months Ended June 29, 2024 Compared to Three Months Ended July 1, 2023

Net sales increased $22.4 million, or 5%, for the three months ended June 29, 2024 compared to the prior year period, driven primarily by volume growth in the light duty sector and new product introductions, partially offset by soft market conditions in the heavy duty and specialty vehicle sectors.

Gross profit as a percentage of net sales increased 560 basis points compared to the prior year period primarily due to easing of inflationary pressures across the businesses and favorable cost savings initiatives.

Selling, general and administrative expenses (“SG&A”) increased $18.6 million, or 270 basis points as a percentage of net sales, for the three months ended June 29, 2024, compared to the prior

In the prior year period, SG&A benefited from a $12.4 million fair value adjustment to the estimated contingent consideration related to a prior acquisition.

Our effective tax rate increased to 24.0% for the three months ended June 29, 2024 from 23.8% for the three months ended July 1, 2023.

Six Months Ended June 29, 2024 Compared to Six Months Ended July 1, 2023

Net sales increased $24.3 million, or 3%, for the six months ended June 29, 2024 compared to the prior year period, driven primarily by volume, including from new product introductions.

Gross profit as a percentage of net sales increased 670 basis points compared to the prior year period primarily due to sales of lower-cost inventory and cost savings initiatives.

Selling, general and administrative expenses (“SG&A”) increased $19.3 million, or 130 basis points as a percentage of net sales, for the six months ended June 29, 2024, compared to the prior year period.

The increase in SG&A was driven by a favorable $12.4 million fair value adjustment in the prior year period to the estimated contingent consideration obligation for an acquisition.

Our effective tax rate increased to 24.4% for the six months ended June 29, 2024 from 22.4% for the six months ended July 1, 2023 primarily due to favorable discrete items applied to a lower income before income taxes in the six months ended July 1, 2023.

Segment Operating Results

Segment operating results were as follows:

For the Three Months Ended

(in thousands) March 30, 2024 April 1, 2023

For the Three Months Ended For the Six Months Ended

(in thousands) June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023

Light Duty $ 385,358 $ 353,839 $ 744,651 $ 701,922

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Total $ 78,663 $ 54,104 $ 143,636 $ 87,979

Light Duty net sales increased $11.2 million, or 3%, for the three months ended March 30, 2024 compared to the prior year period, primarily due to new product introductions and pricing actions to offset inflation.

Light Duty segment profit as a percentage of net sales increased to 16.1% for the three months ended March 30, 2024, from 6.2% for the three months ended April 1, 2023.

This increase was primarily driven by the sell-through of lower-cost inventory and cost-saving initiatives compared to the three months ended April 1, 2023 that included a charge recorded related to a customer bankruptcy filing.

Heavy Duty net sales decreased $9.8 million, or 15%, for the three months ended March 30, 2024 compared to the prior year period.

The decrease in net sales primarily reflects lower freight industry shipping volumes in the three months ended March 30, 2024, as well as strong sales performance in the three months ended April 1, 2023 driven by customers’ inventory restocking at the end of the global pandemic.

Heavy Duty segment profit as a percentage of net sales decreased by 790 basis points for the three months ended March 30, 2024, compared to the prior year period.

This decrease was primarily driven by the sell-through of high-cost inventory, deleverage of fixed costs on lower net sales

volumes, and the impact of investments we made as part of initiatives to grow sales and improve margins on a long-term basis.

Three Months Ended June 29, 2024 Compared to Three Months Ended July 1, 2023

Light Duty net sales increased $31.5 million, or 9%, for the three months ended June 29, 2024 compared to the prior year period, primarily due to volume, including new product introductions.

Light Duty segment profit as a percentage of net sales increased to 17.1% for the three months ended June 29, 2024, from 11.6% for the three months ended July 1, 2023.

This increase was primarily driven by the sell-through of lower-cost inventory, cost-saving initiatives and favorable leverage on higher net sales compared to the three months ended July 1, 2023.

Heavy Duty net sales decreased $7.8 million, or 11%, for the three months ended June 29, 2024 compared to the prior year period.

The decrease in net sales primarily reflects lower freight industry shipping volumes in the three months ended June 29, 2024, as well as strong sales performance in the three months ended July 1, 2023 driven by customers’ inventory restocking at the end of the global pandemic.

Heavy Duty segment profit as a percentage of net sales decreased 50 basis points for the three months ended June 29, 2024, compared to the prior year period.

This decrease was primarily driven by the deleveraging of fixed costs on lower net sales, and the impact of investments we made as part of initiatives to grow sales and improve margins on a long-term basis.

Specialty Vehicle

Specialty Vehicle net sales increased $0.6 million, or 1%, for the three months ended March 30, 2024, compared to the prior year period, due to initiatives to expand our dealer footprint and drive sales to new dealers.

Specialty Vehicle segment profit as a percentage of net sales remained unchanged at 13.9% for both the three months ended March 30, 2024 and April 1, 2023.

Specialty Vehicle net sales decreased $1.3 million, or 2%, for the three months ended June 29, 2024, compared to the prior year period, due to soft sector demand negatively impacted by higher financing rates and broader economic uncertainty.

Specialty Vehicle segment profit as a percentage of net sales increased to 17.8% from 16.8% for the three months ended June 29, 2024 and July 1, 2023, respectively.

This increase was primarily driven by cost savings initiatives.

Six Months Ended June 29, 2024 Compared to Six Months Ended July 1, 2023

Light Duty net sales increased $42.7 million, or 6%, for the six months ended June 29, 2024 compared to the prior year period, primarily due to volume increases, including new product introductions.

Light Duty segment profit as a percentage of net sales increased to 16.6% for the six months ended June 29, 2024, from 8.9% for the six months ended July 1, 2023.

This increase was primarily driven by the sell-through of lower-cost inventory and cost savings initiatives.

Heavy Duty net sales decreased $17.7 million, or 13%, for the six months ended June 29, 2024 compared to the prior year period.

The decrease in net sales primarily reflects lower freight industry shipping volumes in the six months ended June 29, 2024, as well as strong sales performance in the six months ended July 1, 2023 driven by customers’ inventory restocking at the end of the global pandemic.

Heavy Duty segment profit as a percentage of net sales decreased by 410 basis points for the six months ended June 29, 2024, compared to the prior year period.

This decrease was primarily driven by the deleveraging of fixed costs on lower net sales and the impact of investments we made as part of initiatives to grow sales and improve margins on a long-term basis.

Specialty Vehicle

Specialty Vehicle net sales decreased $0.7 million, or 1%, for the six months ended June 29, 2024, compared to the prior year period, due to lower market demand, partially offset by initiatives to expand our dealer footprint and drive sales to new dealers.

Specialty Vehicle segment profit as a percentage of net sales increased to 15.9% for the six months ended June 29, 2024, from 15.4% for the six months ended July 1, 2023.

This increase was primarily driven by the sell-through of lower-cost inventory and cost savings initiatives compared to the six months ended July 1, 2023.

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.

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 facilitated through certain customers.

Key components of our liquidity and capital resources were as follows:

(in thousands) March 30, 2024 April 1, 2023

(in thousands) June 29, 2024 December 31, 2023

Cash and cash equivalents $ 47,467 $ 36,814

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Moreover, since these accounts receivable sales programs bear interest at rates tied to the Term SOFR or other reference rates, increases in these applicable rates increase our cost to sell our receivables and reduce the amount of cash we receive.

See PART I, ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk for more information.

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Sales of accounts receivable under these programs, and related factoring costs were as follows:

Three Months Ended

(in thousands) March 30, 2024 April 1, 2023

Three Months Ended Six Months Ended

(in thousands) June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023

Sales of accounts receivable $ 251,538 $ 241,937 $ 536,756 $ 479,677

Factoring costs 12,622 11,895 26,232 25,419

If receivables had not been sold over the previous twelve months, approximately $630.8 million and $526.4 million of additional accounts receivable would have been outstanding at March 30, 2024

and December 31, 2023, respectively, based on our standard payment terms.

If receivables had not been sold over the previous twelve months, approximately $805.4 million and $526.4 million of additional accounts receivable would have been outstanding at June 29, 2024 and December 31, 2023, 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.

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The credit agreement matures on October 4, 2027.

As of March 30, 2024, there was $81.2 million in outstanding borrowings under the revolving credit facility and $481.3 million in outstanding borrowings under the term loan.

As of June 29, 2024, there was $69.5 million in outstanding borrowings under the revolving credit facility and $478.1 million in outstanding borrowings under the term loan.

Also on that date, we had outstanding letters of credit for $1.5 million in aggregate.

Net of outstanding borrowings and letters of credit, we had $517.5 million available under the credit facility at March 30, 2024.

outstanding borrowings and letters of credit, we had $529.0 million available under the credit facility at June 29, 2024.

Our credit agreement contains affirmative and negative covenants.

As of March 30, 2024, we were not in default with respect to our credit agreement.

As of June 29, 2024, 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, 2023, for additional information.

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

Three Months Ended

(in thousands) March 30, 2024 April 1, 2023

Six Months Ended

(in thousands) June 29, 2024 July 1, 2023

Cash provided by operating activities $ 115,329 $ 92,886

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Effect of foreign exchange on cash and cash equivalents (58) 39

Net decrease in cash and cash equivalents $ (2,381) $ (12,727)

For the three months ended March 30, 2024, cash provided by operating activities increased $25.8 million over the prior year period, primarily driven by higher net income.

Investing activities used cash of $10.8 million and $10.3 million during the three months ended March 30, 2024 and April 1, 2023, respectively.

The increase in cash used in investing activities during the three months ended March 30, 2024 over the prior year period is primarily due to higher additions for property, plant and equipment.

Financing activities during the three months ended March 30, 2024 included $26.9 million paid to repurchase 316,285 shares of common stock under our share repurchase plan, and the repayment of $11.6 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 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.

Net increase (decrease) in cash and cash equivalents $ 10,653 $ (10,368)

For the six months ended June 29, 2024, cash provided by operating activities increased $22.4 million over the prior year period, primarily driven by higher net income, partially offset by favorable working capital in the prior year period from significant inventory reductions.

Investing activities used cash of $22.7 million and $23.2 million during the six months ended June 29, 2024 and July 1, 2023, respectively.

The decrease in cash used in investing activities during the six months ended June 29, 2024 over the prior year period is primarily due to higher additions for property, plant and equipment in the prior year period.

Financing activities during the six months ended June 29, 2024 included $51.2 million paid to repurchase 581,880 shares of common stock under our share repurchase plan, and the repayment of $23.3 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 July 1, 2023, we repaid $72.8 million of outstanding borrowings under our revolving credit facility and $6.3 million of our term loan balance under our credit agreement.

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