What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-25 compared with 2022-04-25 · 79 added, 58 removed, 196 unchanged (41% of the section changed)

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the impacts of COVID-19;

competition in and the evolution of the automotive aftermarket industry;

competition in and the evolution of the motor vehicle aftermarket industry;

changes in our relationships with, or the loss of, any customers or suppliers;

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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.

We are one of the leading suppliers of replacement parts and fasteners for passenger cars and light-, medium-, and heavy-duty trucks in the automotive aftermarket industry.

We are one of the leading suppliers of replacement parts and fasteners for passenger cars and light-, medium-, and heavy-duty trucks in the motor vehicle aftermarket industry.

As of December 25, 2021, we marketed approximately

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These parts include, among other parts, leaf springs, intake manifolds, exhaust manifolds, window regulators, radiator fan assemblies, tire pressure monitor sensors, exhaust gas recirculation (EGR) coolers, and complex electronics modules.

We generate the majority of our net sales from customers in the North American automotive aftermarket industry, primarily in the United States.

Our products are sold primarily through automotive aftermarket retailers, including through their on-line platforms;

We generate the majority of our net sales from customers in the North American motor vehicle aftermarket industry, primarily in the United States.

Our products are sold primarily through aftermarket retailers, including through their on-line platforms;

national, regional and local warehouse distributors and specialty markets;

and salvage yards.

We also distribute automotive 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 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.

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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 25, 2021.

While COVID-19 did not adversely affect demand for our products for the three months ended March 26, 2022, during the period we did experience pandemic-related pressures in the global supply network that caused logistical issues, including higher freight costs, supplier lead time delays of products, and inflation with respect to materials and labor costs, which impacted our results.

We currently expect those pressures to continue to exist throughout fiscal 2022.

As countries continue to combat COVID-19, and as government-imposed regulations regarding, among other things, COVID-19 testing, vaccine mandates and related workplace restrictions change around the world, there is still a risk that the pandemic may impact the overall demand environment as well as our ability to maintain staffing at our facilities, to source parts and other materials to meet demand levels, to maintain inventory levels and to fulfill contractual requirements.

We will continue to closely monitor updates regarding the spread of COVID-19 and its variants, the distribution of vaccines developed to combat COVID-19, and applicable vaccine mandates, and we will adjust our operations according to guidelines from local, state and federal officials.

In light of the foregoing, we may take actions that alter our business operations or that we determine are in the best interests of our employees, customers, suppliers and shareholders.

New Product Development

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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 26, 2022, we introduced 707 new distinct parts to our customers and end-users, including 389 “New-to-the-Aftermarket” parts.

In the six months ended June 25, 2022, we introduced 2,596 new distinct parts to our customers and end-users, including 855 “New-to-the-Aftermarket” parts.

We introduced 4,315 new distinct parts to our customers and end-users in the fiscal year ended December 25, 2021, including 990 “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.

New vehicles contain an average of approximately 35 electronic

modules, with some high-end luxury vehicles containing over 100 modules.

New vehicles contain an average of approximately 50 electronic modules, with some high-end luxury vehicles containing over 100 modules.

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 the category.

Another area of focus has been on Dorman® HD Solutions™, a line of products we market for the medium- and heavy-duty truck sector of the automotive aftermarket industry.

We believe that this sector provides many of the same opportunities for growth that the passenger car and light-duty truck sector of the automotive aftermarket industry has provided us.

Another area of focus has been on Dorman® HD Solutions™, a line of products we market for the medium- and heavy-duty truck sector of the motor vehicle aftermarket industry.

We believe that this sector provides many of the same opportunities for growth that the passenger car and light-duty truck sector of the motor vehicle aftermarket industry has provided us.

Through Dorman® HD Solutions™, we specialize in offering heavy-duty parts that were traditionally only available from original equipment manufacturers or salvage yards, similar to how we approach the passenger car and light-duty truck sector.

Our growth is also impacted by acquisitions.

A key component of our strategy is growth through acquisitions.

For example, on August 10, 2021, we acquired Dayton Parts, a manufacturer of chassis and other parts designed to serve the heavy-duty vehicle sector of the aftermarket.

See Note 2, Business Acquisitions and Investments under Notes to Condensed Consolidated Financial Statements for additional information.

See Note 2, Business Acquisitions and Investments under Notes to Condensed Consolidated Financial Statements for

additional information.

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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According to data published by Polk, a division of IHS Automotive, the average age of VIO increased to 12.2 years as of October 2021 from 12.0 years as of October 2020 despite increasing new car sales.

Additionally, while the number of VIO in the United States increased 4% in 2021 to 291.9 million from 279.8 million in 2020, the number of VIO that are 11 years old or older decreased from 60% in 2020 to 57% in 2021.

Additionally, while the total number of VIO in the United States increased 4% in 2021 to 291.9 million from 279.8 million in 2020, the percentage of VIO that are 11 years old or older decreased from 60% in 2020 to 57% in 2021.

The number of miles driven is another important statistic that impacts our business.

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We attempt to avoid or minimize these concessions as much as possible, but we have granted pricing concessions, indemnification rights, 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.

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.

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Impact of Labor Market and Inflationary Costs

We have experienced broad-based inflationary impacts during the three months ended March 26, 2022 as well as the year ended December 25, 2021, due primarily to global transportation and logistics constraints, which have resulted in significantly higher transportation costs;

We have experienced broad-based inflationary impacts during the six months ended June 25, 2022 as well as the year ended December 25, 2021, 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.

and wage inflation from an increasingly competitive labor market.

We expect increased freight, higher labor costs and material inflation costs to continue to negatively impact our results through fiscal 2022.

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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 accounts receivable sales programs, as a change in LIBOR or alternative discount rates affects the cost incurred to factor eligible accounts receivable.

Additionally, our outstanding borrowings under our revolving credit facility bear interest at variable rates tied to LIBOR or the lender’s base rate.

Under the terms of the revolving 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 June 25, 2022, we have seen significant increases in LIBOR which have impacted our results as discussed in Results of Operations that follows.

We expect LIBOR rates will continue to increase throughout the remainder of fiscal 2022, increasing the costs associated with our accounts receivable sales programs and outstanding borrowings.

In addition, in connection with the potential phaseout of LIBOR, to the extent any financial institutions with which we deal transition from LIBOR to other reference rates, our results of operations may be affected.

While COVID-19 did not adversely affect demand for our products for the six months ended June 25, 2022, during the period we did experience pandemic-related pressures in the global supply network that caused logistical issues, including higher freight costs, supplier lead time delays of products, and inflation with respect to materials and labor costs, which impacted our results.

We currently expect those pressures to continue to exist throughout the remainder of fiscal 2022.

Impact of Tariffs

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

We expect that we will reverse tariff-related price increases previously passed along to our customers and cost concessions previously received from our suppliers as tariffs are reduced or tariff relief is granted.

Results of Operations

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Three Months Ended*

Six Months Ended*

(in thousands, except percentage data)

March 26, 2022

March 27, 2021

June 25, 2022

June 26, 2021

June 25, 2022

June 26, 2021

Cost of goods sold

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* Percentage of sales information may not add due to rounding

Three Months Ended March 26, 2022 Compared to Three Months Ended March 27, 2021

Net sales increased 39% to $401.6 million for the three months ended March 26, 2022 from $288.0 million for the three months ended March 27, 2021.

Three Months Ended June 25, 2022 Compared to Three Months Ended June 26, 2021

Net sales increased 34% to $417.4 million for the three months ended June 25, 2022 from $310.6 million for the three months ended June 26, 2021.

The increase in net sales reflected the addition of Dayton Parts;

a continuation of favorable underlying industry dynamics across our customer channels;

price increases to offset logistics, wage and commodity inflation;

and new product penetration.

Net sales growth for the three months ended March 26, 2022 excluding Dayton Parts was 21%.

Gross profit margin was 33.2% of net sales for the three months ended March 26, 2022 compared to 36.3% of net sales for the three months ended March 27, 2021.

Dayton Parts had a 140-basis-point dilutive impact on gross profit margin for the three months ended March 26, 2022.

Gross margin contraction was driven by broad-based inflationary cost impacts due to global transportation and logistics constraints as well as commodity and wage rate pressures.

These factors were partially offset by cost saving initiatives and price increases.

Selling, general and administrative expenses (“SG&A”) were $ 86.5 million, or 21.5% of net sales, for the three months ended March 26, 2022 compared to $ 62.9 million, or 21.8% of net sales, for the three months ended March 27, 2021 .

The modest decrease in SG&A expenses as a percentage of net sales was primarily due to improved leverage from the increase in net sale s noted above, partially offset by higher wage and benefits inflation as well as higher accounts receivable factoring costs .

Our effective tax rate was 22.7% for the three months ended March 26, 2022 compared to 21.3% for the three months ended March 27, 2021.

increased new product penetration, and price increases to offset rising supply chain costs, wage pressures and commodity inflation.

Net sales growth for the three months ended June 25, 2022 excluding Dayton Parts was 13%.

Gross profit margin was 33.9% of net sales for the three months ended June 25, 2022 compared to 35.5% of net sales for the three months ended June 26, 2021 .

Dayton Parts had a 110-basis-point dilutive impact on gross profit margin for the three months ended June 25, 2022.

Gross margin contraction was also driven by broad-based cost pressures due to global supply chain constraints as well as commodity and wage rate inflation.

Dorman continued to implement cost-savings initiatives and price increases to offset the inflationary cost pressures experienced during the quarter that maintained gross profit dollars but resulted in a lower gross margin percentage.

Selling, general and administrative expenses (“SG&A”) were $92.1 million, or 22.1% of net sales, for the three months ended June 25, 2022 compared to $69.5 million, or 22.4% of net sales, for the three months ended June 26, 2021.

The decrease in SG&A expenses as a percentage of net sales was primarily due to improved leverage from the increase in net sales noted above, partially offset by the impact of higher interest rates on our customer accounts receivable factoring programs, combined with higher wage and benefits inflation.

Dayton Parts had a 100-basis-point dilutive impact on SG&A expenses as a percentage of net sales for the three months ended June 25, 2022.

Our effective tax rate was 21.1% for the three months ended June 25, 2022 compared to 22.3% for the three months ended June 26, 2021.

The decrease to the effective tax rate was primarily the result of favorable discrete items recorded in the three months ended June 25, 2022 related to a change in New Jersey’s combined reporting guidance, partially offset by an increase in state tax expense and higher Canadian income tax associated with the Canadian operations acquired as part of the Dayton Parts transaction.

Six Months Ended June 25, 2022 Compared to Six Months Ended June 26, 2021

Net sales increased 37% to $819.0 million for the six months ended June 25, 2022 from $598.6 million for the six months ended June 26, 2021.

The increase in net sales reflected the addition of Dayton Parts, a continuation of favorable underlying industry dynamics across our customer channels, increased new product penetration, and price increases to offset rising supply chain costs, wage pressures and commodity inflation.

Net sales growth for the six months ended June 25, 2022 excluding Dayton Parts was 17%.

Gross profit margin was 33.5% of net sales for the six months ended June 25, 2022 compared to 35.9% of net sales for the six months ended June 26, 2021.

Dayton Parts had a 130-basis-point dilutive impact on gross profit margin for the six months ended June 25, 2022.

Gross margin contraction was also driven by broad-based cost pressures due to global supply chain constraints as well as commodity and wage rate inflation.

Dorman continued to implement cost-savings initiatives and price increases to offset the inflationary cost pressures experienced during the period that maintained gross profit dollars but resulted in a lower gross margin percentage.

Selling, general and administrative expenses (“SG&A”) were $178.6 million, or 21.8% of net sales, for the six months ended June 25, 2022 compared to $132.4 million, or 22.1% of net sales, for the six months ended June 26, 2021.

Our effective tax rate was 21.9% for the six months ended June 25, 2022 compared to 21.8% for the six months ended June 26, 2021.

The increase in the effective tax rate was due to an increase in state tax expense and higher Canadian income tax associated with the Canadian operations acquired as part of the Dayton Parts transaction, offset by favorable discrete items related to the change in New Jersey’s combined reporting guidance.

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 $53.4 million at March 26, 2022 compared to $58.8 million at December 25, 2021.

During the three months ended March 26, 2022, cash provided from operating activities was offset by share repurchases under our publicly announced repurchase program and capital expenditures.

Working capital was $435.6 million at March 26, 2022 compared to $411.5 million at December 25, 2021.

Cash and cash equivalents were $52.0 million at June 25, 2022 compared to $58.8 million at December 25, 2021.

During the six months ended June 25, 2022, cash provided from operating activities was offset by share repurchases under our publicly announced repurchase program and capital expenditures.

Working capital was $470.7 million at June 25, 2022 compared to $411.5 million at December 25, 2021.

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

During the three months ended March 26, 2022 and March 27, 2021, we sold $275.2 million and $209.9 million of accounts receivable, respectively, under these programs.

If receivables had not been sold over the previous twelve months, approximately $844.8 million and $598.8 million of additional accounts receivable would have been outstanding at March 26, 2022 and December 25, 2021, respectively, based on our standard payment terms.

During the six months ended June 25, 2022 and June 26, 2021, we sold $538.1 million and $433.7 million of accounts receivable, respectively, under these programs.

If receivables had not been sold over the previous twelve months, approximately $784.8 million and $598.8 million of additional accounts receivable would have been outstanding at June 25, 2022 and December 25, 2021, respectively, based on our standard payment terms.

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

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

During the three months ended March 26, 2022 and March 27, 2021, factoring costs associated with these accounts receivable sales programs were $4.9 million and $2.6 million, respectively.

The increase in factoring costs was primarily driven by higher LIBOR and other reference rates, and, with respect to the three months ended March 26, 2022, higher accounts receivable sold under these programs.

During the six months ended June 25, 2022 and June 26, 2021, factoring costs associated with these accounts receivable sales programs were $13.2 million and $5.5 million, respectively.

The increase in factoring costs year over year was primarily driven by higher LIBOR and other reference rates, and higher accounts receivable sold under these programs.

Credit Agreement

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The New Facility matures on August 10, 2026, is guaranteed by the Company’s material domestic subsidiaries (together with the Company, the “Credit Parties”) and is supported by a security interest in substantially all of the Credit Parties’ personal property and assets, subject to certain exceptions.

As of March 26, 2022, there was $229.4 million in outstanding borrowings under the New Facility and two outstanding letters of credit for $0.8 million in the aggregate which were issued to secure ordinary course of business transactions.

Net of outstanding borrowings and letters of credit, we had $369.8 million available under the New Facility at March 26, 2022.

As of June 25, 2022, there was $229.4 million in outstanding borrowings under the New Facility and two outstanding letters of credit for $0.8 million in the aggregate which were issued to secure ordinary course of business transactions.

Net of outstanding borrowings and letters of credit, we had $369.8 million available under the New Facility at June 25, 2022.

Refer to Note 7, “Long-Term Debt” to the Notes to Condensed Consolidated Financial Statements contained in PART II, ITEM 8 of the Company’s Annual Report on Form 10-K for the year ended December 25, 2021, for additional information.

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

Three Months Ended

Six Months Ended

(in thousands)

March 26, 2022

March 27, 2021

June 25, 2022

June 26, 2021

Cash provided by operating activities

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Effect of foreign exchange on cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

During the three months ended March 26, 2022, cash provided by operating activities was $23.2 million compared to $21.0 million during the three months ended March 27, 2021.

The $2.2 million increase was driven by higher sales of accounts receivable and higher accounts receivable collections, partially offset by timing of accounts payable payments during the three months ended March 26, 2022, as compared to the prior year.

Investing activities used cash of $6.7 million and $6.2 million during the three months ended March 26, 2022 and March 27, 2021, respectively.

During the three months ended March 26, 2022, we received $0.6 million in cash related to the post-closing net working capital adjustment related to the Dayton Parts acquisition.

Financing activities used $22.0 million of cash during the three months ended March 26, 2022, compared to $3.8 million of cash provided during the three months ended March 27, 2021.

During the three months ended March 26, 2022, we repaid $10.0 million of the New Facility borrowing and paid $9.5 million to repurchase 98,350 shares of common stock under our share repurchase plan.

During the three months ended March 27, 2021, we paid $3.0 million to repurchase 36,000 shares of common stock under the share repurchase plan.

Net decrease in cash and cash equivalents

During the six months ended June 25, 2022, cash provided by operating activities was $37.4 million compared to $39.1 million during the six months ended June 26, 2021.

The $1.7 million decrease was driven by higher cash outflows for working capital, partially offset by higher income during the six months ended June 25, 2022, compared to the prior year.

The higher cash outflows for working capital were primarily driven by higher inventory purchases to meet demand partially offset by the benefits of accounts receivable collections from higher factoring during the six months ended June 25, 2022.

Investing activities used cash of $ 15.5 million and $ 10.2 million during the six months ended June 25, 2022 and June 26, 2021 , respectively.

The increase in cash usage during the current year was driven by higher capital expenditures resulting from the addition of Dayton Parts and for added investment in our distribution network.

During the six months ended June 25, 2022 , we received $0.6 million in cash related to the post-closing net working capital adjustment related to the Dayton Parts acquisition.

Financing activities used $28.7 million and $29.0 million of cash during the six months ended June 25, 2022 and June 26, 2021, respectively.

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

During the six months ended June 26, 2021, we paid $30.9 million to repurchase 301,889 shares of common stock under our share repurchase plan.

The remaining uses of cash from financing activities in each period result primarily from the repurchase of our common stock from our 401(k) Plan and shares withheld from participants for income tax withholding purposes 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