Dorman Products, Inc. 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the condensed consolidated financial statements and related notes thereto included in PART I, ITEM 1 of this Quarterly Report on Form 10-Q. As used herein, unless the context requires otherwise, “Dorman,” the “Company,” “we,” “us,” or “our” refers to Dorman Products, Inc. and its subsidiaries. Cautionary Statement Regarding Forward-Looking Statements Certain statements in this document constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to net sales, diluted earnings per share, gross profit, gross margin, selling, general, and administrative expenses, income tax expense, income before income taxes, net income, cash and cash equivalents, indebtedness, liquidity, the Company’s share repurchase program, the Company’s outlook, the Company’s growth opportunities and future business prospects, operational costs and productivity initiatives, inflation, tariffs, supplier diversification, price increases, long-term value, acquisitions and acquisition opportunities, investments, cost offsets, quarterly fluctuations, new product development, customer concessions, and fluctuations in foreign currency. Words such as “may,” “believe,” “demonstrate,” “expect,” “estimate,” “forecast,” “project,” “plan,” “anticipate,” “intend,” “should,” “will” and “likely” and similar expressions identify forward-looking statements. However, the absence of these words does not mean the statements are not forward-looking. In addition, statements that are not historical should also be considered forward-looking statements. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date the statements were made. Such forward-looking statements are based on current expectations that involve known and unknown risks, uncertainties, and other factors (many of which are outside of our control) that may cause actual events to be materially different from those expressed or implied by such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. Please refer to “Statement Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” located in PART I of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements. The Company is under no obligation to, and expressly disclaims any such obligation to, update any of the information in this document, including but not limited to any situation where any forward-looking statement later turns out to be inaccurate whether as a result of new information, future events, or otherwise. Introduction 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 “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, 2024. 14 Table of Contents This Quarterly Report on Form 10-Q contains the registered and unregistered trademarks or service marks of Dorman and are the property of Dorman Products, Inc. and/or its affiliates. This Quarterly Report on Form 10-Q also may contain additional trade names, trademarks, or service marks belonging to other companies. We do not intend our use or display of other parties’ trademarks, trade names, or service marks to imply, and such use or display should not be construed to imply, a relationship with or endorsement or sponsorship of us by these parties. Overview 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). We operate through three business segments: 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 Part II, ITEM 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2024. As of December 31, 2024, we marketed approximately 138,000 distinct parts compared to approximately 133,000 as of December 31, 2023, 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. Our products are sold under our various brand names, under our customers’ private label brands, or in bulk. We are one of the leading aftermarket suppliers of parts that were traditionally available to professional installers and consumers only from original equipment, or OE, manufacturers, or salvage yards. These parts include, among other parts, leaf springs, intake manifolds, exhaust manifolds, oil filters and coolers, window regulators, radiator fan assemblies, tire pressure monitor sensors, exhaust gas recirculation (EGR) coolers, driveshafts, UTV windshields, and complex electronics modules. 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; dealers; 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. 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. The introduction of new products and product lines to customers, as well as business acquisitions and changes in weather conditions, may also cause significant fluctuations from quarter to quarter. Critical Accounting Policies There have been no material changes to the Company’s critical accounting policies as described in the Annual Report on Form 10-K for the year ended December 31, 2024. New Product Development New product development is an important success factor for us and has been a source of our growth. We have made incremental investments to increase our new product development efforts to grow our business and strengthen our relationships with our customers. The investments primarily have been in the form of increased product development resources, increased customer and end-user awareness programs, and customer service improvements. These investments have enabled us to 15 Table of Contents 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 29, 2025, we introduced 1,185 new distinct parts to our customers and end-users, including 492 “New-to-the-Aftermarket” parts. We introduced 5,335 new distinct parts to our customers and end-users in the fiscal year ended December 31, 2024, including 1,659 “New-to-the-Aftermarket” parts. One area of focus for the light-duty sector has been our complex electronics program, which capitalizes on the growing number of electronic components being utilized on today’s OE platforms. New vehicles contain an average of approximately 100 electronic modules, with some high-end luxury vehicles exceeding that. Our complex electronics products are designed and developed in-house and tested to help ensure consistent performance, and our product portfolio is focused on further developing our leadership position in this category. Another area of focus has been on products we market for the heavy-duty sector. We believe that this sector provides many of the same growth opportunities that the light-duty sector has provided us. 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 light-duty sector. Within the specialty vehicle sector, we focus on providing performance parts and accessories and nondiscretionary repair parts for UTVs and ATVs. We are dedicated to developing better and more innovative materials that will be compatible across a wide variety of makes and models to enhance both the performance and appearance of customers’ vehicles. Acquisitions A key component of our strategy is growth through acquisitions. 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. 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 The Company’s products are primarily purchased and installed on a subsegment of the passenger and light-duty vehicles in operation in the United States (“VIO”), specifically weighted towards vehicles aged 7 to 14 years old. Each year, the United States seasonally adjusted annual rate (“US SAAR”) of new vehicles purchased adds a new year to the VIO. According to data from the Auto Care Association (“Auto Care”), the US SAAR experienced a decline from 2008 to 2011 as consumers purchased fewer new vehicles as a result of the Great Recession of 2008. We believe that the declining US SAAR during that period resulted in a follow-on decline in our primary VIO subsegment (7-to-14-year-old vehicles) commencing in 2016. However, following 2011 and the impact of the Great Recession of 2008, U.S. consumers began to increase their purchases of new vehicles, which over time caused the US SAAR to recover and return to more historical levels. The 7-to-14-year-old vehicle car parc has continued to grow over the past several years, which we expect will expand demand for aftermarket replacement parts as more vehicles remain in operation. 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. We believe this trend has supported an increase in VIO, which increased to 298.5 16 Table of Contents million, a 1% increase in 2024 over 2023. According to data published by Polk, a division of IHS Automotive, the average age of VIO increased to 12.8 years as of October 2024 from 12.6 years as of October 2023. Miles Driven The number of miles driven is another important statistic that impacts our business. Generally, as vehicles are driven more miles, the more likely it is that parts will fail and there will be increased demand for replacement parts, including our parts. According to the U.S. Department of Transportation, the number of miles driven through October 2024 increased 1.0% year over year in the light-duty sector. However, global gasoline prices remained high during 2024 and, if they continue, they may negatively impact miles driven as consumers reduce travel or seek alternative methods of transportation. Brand Protection We operate in a highly competitive market. As a result, we are continuously evaluating our approach to brand, pricing, and terms to our different customers and channels. 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. Discounts, Allowances, and Incentives We offer a variety of customer discounts, rebates, defective and slow-moving product returns, and other incentives. We may offer cash discounts for paying invoices in accordance with the specified discount terms of the invoice. 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 incentives can be in the form of “off-invoice” discounts that are immediately deducted from sales at the time of sale. For those customers who choose to receive their incentives on a quarterly or annual basis instead of “off-invoice,” we provide rebates and accrue for such incentives as the related sales are made and reduce sales accordingly. Additionally, rebates and discounts are provided to customers to support promotional activities such as advertising and sales force allowances. Our customers, particularly our larger retail customers, regularly seek more favorable pricing and product return provisions, and extended payment terms when negotiating with us. We attempt to avoid or minimize these concessions as much as possible, but we have granted pricing concessions, indemnification rights, and extended customer payment terms, and allowed a higher level of product returns in certain cases. These concessions impact net sales as well as our profit levels and may require additional capital to finance the business. We expect our customers to continue to exert pressure on our margins. 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 customer’s inventory of competitor products and replacing it with our products, which is commonly referred to as a stock lift. Customer acquisition costs are recorded as a reduction to revenue when incurred. 17 Table of Contents 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. 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. At the time products are sold, we accrue a liability for product warranties and overstock returns as a percentage of sales based upon estimates established using historical information on the nature, frequency, and average cost of the claim and the probability of the customer return. Significant judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Revisions to these estimates are made when necessary, based on changes in these factors. We regularly study trends of such claims. Foreign Currency Many of our products and related raw materials and components are purchased from suppliers in a variety of non-U.S. countries. The products generally are purchased through purchase orders with the purchase price specified in U.S. dollars. Accordingly, we generally do not have exposure to fluctuations in the relationship between the U.S. dollar and various foreign currencies between the time of execution of the purchase order and payment for the product. To the extent that the U.S. dollar changes in value relative to those foreign currencies in the future, the prices charged by our suppliers for goods under new purchase orders may change in equivalent U.S. dollars. The largest portion of our overseas purchases comes from China. The Chinese yuan to U.S. dollar exchange rate has fluctuated over the past several years. Any future changes in the value of the Chinese yuan relative to the U.S. dollar may result in a change in the cost of 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 costs, tariffs, and transportation costs. We have operations located outside the United States with various functional currencies. Because our consolidated financial statements are denominated in U.S. dollars, the assets, liabilities, net sales, and expenses that are denominated in currencies other than the U.S. dollar must be converted into U.S. dollars using exchange rates for the current period. As a result, fluctuations in foreign currency exchange rates may impact our financial results. Impact of Labor Market and Inflationary Costs We experienced broad-based inflationary impacts during the year ended December 31, 2023, due primarily to global transportation and logistics constraints, which resulted in significantly higher transportation costs, tariffs, material costs, and wage inflation from an increasingly competitive labor market. Certain of these increased costs in the second half of 2023 impacted our results of operations in the first half of 2024. Higher labor costs and material inflation resulting from geopolitical events, rising interest rates, disruptions to supply chain and logistics networks, and the trade policies of the U.S. or the countries where we source or sell our products 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. There can be no assurance that we will be successful in implementing such cost-saving initiatives, pricing increases, or supplier diversification in the future to offset 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 Term Secured Overnight Financing Rate (“Term SOFR”) or 18 Table of Contents 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 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. Interest rates remained elevated throughout much of 2024, but began to decline starting in the second half of 2024, and remained relatively stable throughout the first quarter of 2025. Impact of Tariffs We source the majority of our raw materials and parts from suppliers in a variety of non-U.S. countries. In 2024, approximately 72% of our products were purchased from suppliers in a variety of non-U.S. countries, with approximately 45% of our products being purchased from third-party suppliers in China. The current U.S. administration recently implemented tariffs and announced the possibility of increasing current tariffs or implementing additional ones. We expect these actions and reactionary tariff adjustments by other countries to impact our business and contribute to inflationary cost increases. As a result, we are taking actions designed to mitigate the potential impacts of these tariffs, including, but not limited to, passing along price increases to our customers and negotiating cost concessions from our suppliers where possible. Absent any changes in trade regulations, we anticipate inflationary cost increases due to these tariffs and any resulting impact on macroeconomic conditions and our business to continue throughout the remainder of 2025. There can be no assurance that the recently announced tariffs or future imposition of any tariffs, changes thereto, or actions taken by countries in response to the tariffs will not have a material adverse effect on our business, results of operations, financial condition, or liquidity in any period or that any actions we take to mitigate the impact of the tariffs will be effective. Results of Operations 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 29, 2025 March 30, 2024 Net sales $ 507,692 100.0 % $ 468,701 100.0 % Cost of goods sold 299,984 59.1 % 287,255 61.3 % Gross profit 207,708 40.9 % 181,446 38.7 % Selling, general, and administrative expenses 127,634 25.1 % 127,008 27.1 % Income from operations 80,074 15.8 % 54,438 11.6 % Interest expense, net 7,358 1.4 % 10,605 2.3 % Other (income) expense, net (1,361) (0.3) % 40 — % Income before income taxes 74,077 14.6 % 43,793 9.3 % Provision for income taxes 16,572 3.3 % 10,965 2.3 % Net income $ 57,505 11.3 % $ 32,828 7.0 % * Percentage of sales information may not add due to rounding Three Months Ended March 29, 2025, Compared to Three Months Ended March 30, 2024 Net sales increased $39.0 million, or 8.3%, for the three months ended March 29, 2025, compared to the prior year period, driven by increased customer demand and sales of new products in our Light Duty segment, partially offset by soft market conditions in the heavy duty and specialty vehicle sectors. 19 Table of Contents Gross profit as a percentage of net sales increased 220 basis points compared to the prior year period, primarily due to the sales growth noted above and favorable mix from higher sales of new products, as well as productivity, automation, and supplier diversification initiatives, which delivered cost savings. Selling, general, and administrative expenses (“SG&A”) increased $0.6 million, but decreased 200 basis points as a percentage of net sales, for the three months ended March 29, 2025, compared to the prior year period, due to favorable leverage on higher net sales in the current 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. Interest expense, net, decreased $3.2 million for the three months ended March 29, 2025, compared to the prior year period. The decrease was driven by lower outstanding principal on our revolving credit facility and term loan as a result of repayments over the last several quarters, as well as lower average Term SOFR rates in the current year period. Our effective tax rate decreased to 22.4% for the three months ended March 29, 2025, from 25.0% for the three months ended March 30, 2024, due to tax deductions related to the vesting of restricted stock units in the current year period. Segment Operating Results Segment operating results were as follows: For the Three Months Ended (in thousands) March 29, 2025 March 30, 2024 Net Sales: Light Duty $ 408,856 $ 359,293 Heavy Duty 51,680 57,809 Specialty Vehicle 47,156 51,599 Total $ 507,692 $ 468,701 Segment income (loss) from operations Light Duty $ 81,493 $ 57,795 Heavy Duty (163) 9 Specialty Vehicle 4,821 7,169 Total $ 86,151 $ 64,973 Light Duty Light Duty net sales increased $49.6 million, or 13.8%, for the three months ended March 29, 2025, compared to the prior year period, primarily due to increased customer demand and sales of new products. Light Duty segment income from operations as a percentage of net sales increased to 19.9% for the three months ended March 29, 2025, from 16.1% for the three months ended March 30, 2024. This increase was primarily driven by favorable mix driven by higher new product sales, operational excellence initiatives delivering cost-savings, and favorable leverage on higher net sales. 20 Table of Contents Heavy Duty Heavy Duty net sales decreased $6.1 million, or 10.6%, for the three months ended March 29, 2025, compared to the prior year period. The decrease in net sales primarily reflects reduced customer demand from continued market pressures in freight transportation and the trucking aftermarket. Heavy Duty segment income as a percentage of net sales decreased 30 basis points for the three months ended March 29, 2025, compared to the prior year period. This decrease was primarily driven by the deleverage of fixed costs on lower net sales volumes. Specialty Vehicle Specialty Vehicle net sales decreased $4.4 million, or 8.6%, for the three months ended March 29, 2025, compared to the prior year period, primarily due to reduced customer demand. Specialty Vehicle segment income as a percentage of net sales decreased to 10.2% from 13.9% for the three months ended March 29, 2025, and March 30, 2024, respectively. This decrease was primarily driven by the deleverage of fixed costs on lower net sales volumes. Liquidity and Capital Resources Historically, our primary source of liquidity has been 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 29, 2025 December 31, 2024 Cash and cash equivalents $ 60,612 $ 57,137 Working Capital $ 849,822 $ 805,958 Shareholders' equity $ 1,337,404 $ 1,293,470 Based on our current operating plan, we believe that our sources of available capital are adequate to meet our ongoing cash needs for at least the next twelve months. However, our liquidity could be negatively affected by tariffs, extending payment terms to customers, a decrease in demand for our products, higher interest rates, the outcome of contingencies, or other factors. See Note 7, “Commitments and Contingencies”, in the accompanying condensed consolidated financial statements for additional information regarding commitments and contingencies that may affect our liquidity. Tariffs Tariffs increase our use of cash since we pay for the tariffs upon the arrival of our goods in the United States, but we collect the cash on any pass-through price increases from our customers on a delayed basis according to the payment terms negotiated with our customers. We currently anticipate that additional liquidity needs to pay for increased tariffs on products we import can be managed through increased use of our accounts receivable sales programs with certain customers, as well as our existing revolving credit facility. Payment Terms and Accounts Receivable Sales Programs Over the past several years, we have continued to extend payment terms to certain customers as a result of customer requests and market demands. These extended terms have resulted in increased accounts receivable levels and significant uses of cash. 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 21 Table of Contents receivable ourselves in due course, resulting in accounts receivable factoring costs. 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. Further extensions of customer payment terms would result in additional uses of cash or increased costs associated with the sales of accounts receivable. Sales of accounts receivable under these programs, and related factoring costs, were as follows: Three Months Ended (in thousands) March 29, 2025 March 30, 2024 Sales of accounts receivable $ 334,170 $ 285,218 Factoring costs 14,588 13,610 If receivables had not been sold, $918.3 million and $853.6 million of additional receivables would have been outstanding at March 29, 2025, and December 31, 2024, respectively, based on 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. Credit Agreement We have a credit agreement that consists of a $600.0 million revolving credit facility and a $500.0 million term loan. The credit agreement matures on October 4, 2027, is guaranteed by the Company’s material domestic subsidiaries, and is supported by a security interest in substantially all of the Company’s material domestic subsidiaries’ personal property and assets, subject to certain exceptions. As of March 29, 2025, there was $462.5 million in outstanding borrowings under the term loan. Also on that date, we had outstanding letters of credit for $1.2 million in aggregate. Net of outstanding borrowings and letters of credit, we had $598.8 million available under the credit facility at March 29, 2025. Our credit agreement contains affirmative and negative covenants. As of March 29, 2025, 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, 2024, for additional information. Cash Flows The following summarizes the activities included in the Condensed Consolidated Statements of Cash Flows: Three Months Ended (in thousands) March 29, 2025 March 30, 2024 Cash provided by operating activities $ 51,237 $ 51,980 Cash used in investing activities (10,985) (10,755) Cash used in financing activities (36,810) (43,567) Effect of foreign exchange on cash and cash equivalents 33 (39) Net increase (decrease) in cash and cash equivalents $ 3,475 $ (2,381) For the three months ended March 29, 2025, cash provided by operating activities decreased $0.7 million over the prior year period. Investing activities used cash of $11.0 million and $10.8 million during the three months ended March 29, 2025, and March 30, 2024, respectively. 22 Table of Contents Financing activities during the three months ended March 29, 2025, included $11.8 million paid to repurchase 93,800 shares of common stock under our new share repurchase plan, and the repayments of $14.0 million of outstanding borrowings under our revolving credit facility and $6.3 million of our term loan balance under our credit agreement. During the three months ended March 30, 2024, we paid $26.9 million to repurchase 316,285 shares of common stock under our prior 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