What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-02 compared with 2022-10-24 · 95 added, 161 removed, 129 unchanged (66% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of

“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.

2 unchanged sentences

Cautionary Statement Regarding Forward-Looking Statements

This document contains certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to:

the COVID-19 pandemic;

diluted earnings per share;

gross profit;

gross margin;

general and administrative expenses;

income tax expense;

income before income taxes;

cash and cash equivalents;

indebtedness;

the Company’s share repurchase program;

the Company’s outlook;

the Company’s growth opportunities and future business prospects;

operational costs and productivity initiatives;

customs duties and mitigation of tariffs;

long-term value;

acquisitions and acquisition opportunities;

cost offsets;

quarterly fluctuations;

new product development;

customer concessions;

and fluctuations in foreign currency.

Words such as “believe,” “demonstrate,” “expect,” “estimate,” “forecast,” “anticipate,” “should,” “will” and “likely” and similar expressions identify 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 the global coronavirus pandemic, 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, customs duties and mitigation of tariffs, 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 such statements were made.

Such forward-looking statements are based on current expectations that involve a number of known and unknown risks, uncertainties and other factors (many of which are outside of our control).

Such risks, uncertainties and other factors relate to, among other things:

the impacts of COVID-19;

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

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

our ability to develop, market and sell new and existing products;

our ability to anticipate and meet customer demand;

our ability to purchase necessary materials from our suppliers and the impacts of any related logistics constraints;

financial and economic factors, such as our level of indebtedness, fluctuations in interest rates and inflation;

political and regulatory matters, such as changes in trade policy, the imposition of tariffs and climate regulation;

our ability to protect our intellectual property and defend against any claims of infringement;

and our ability to protect our information security systems and defend against cyberattacks.

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 a number of known and unknown risks, uncertainties and other factors (many of which are outside of our control) which 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.

2 unchanged sentences

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.

and its subsidiaries included in “ITEM 1.

included in “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, 2022.

3 unchanged sentences

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 motor vehicle aftermarket industry.

As of December 25, 2021, we marketed approximately

118,000 distinct parts, many of which we designed and engineered.

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).

As of December 31, 2022, we marketed approximately 129,000 distinct parts compared to approximately 118,000 as of December 25, 2021, 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 consumers only from original equipment manufacturers or salvage yards.

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 most 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;

We are one of the leading aftermarket suppliers of parts that were traditionally available to consumers only from original equipment, or OE, manufacturers or salvage yards.

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;

national, regional and local warehouse distributors and specialty markets;

3 unchanged sentences

The introduction of new products and product lines to customers, as well as business acquisitions, may also cause significant fluctuations from quarter to quarter.

Prior to October 3, 2022, we operated on a 52-53-week period ending on the last Saturday of the calendar year.

Our 2022 fiscal year under this schedule is set to be a 53-week period that will end on December 31, 2022 (“fiscal 2022”).

On October 3, 2022, our Board of Directors approved a change in Dorman’s fiscal year end from the last Saturday in December of each year to December 31 of each year.

This change will result in future years ending on December 31, consistent with fiscal 2022.

Our fiscal 2021 was a 52-week period that ended on December 25, 2021 (“fiscal 2021”).

Critical Accounting Policies

5 unchanged sentences

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 nine months ended September 24, 2022, we introduced 3,416 new distinct parts to our customers and end-users, including 1,134 “New-to-the-Aftermarket” parts.

In the three months ended April 1, 2023, we introduced 984 new distinct parts to our customers and end-users, including 360 “New-to-the-Aftermarket” parts.

We introduced 4,443 new distinct parts to our customers and end-users in the fiscal year ended December 31, 2022, including 1,565 “New-to-the-Aftermarket” parts.

2 unchanged sentences

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 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.

Another area of focus has been on 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 growth opportunities that the passenger car and light-duty truck sector of the motor vehicle aftermarket industry 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 passenger car and light-duty truck sector.

During fiscal 2022, we introduced 486 distinct parts in this product line.

We expect to continue to invest in the medium- and heavy-duty product category.

A key component of our strategy is growth through acquisitions.

On October 4, 2022, we acquired Super ATV, LLC, 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.

O n 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.

On October 4, 2022, we acquired Super ATV, LLC ("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.

See Note 2, Acquisitions 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.

Economic Factors

The Company’s financial results are also impacted by various economic and industry factors, including, but not limited to the number, age and condition of vehicles in operation at any one time, and miles driven by those vehicles.

Vehicles in Operation

6 unchanged sentences

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

Additionally, during 2022, we expect fewer new vehicles to be purchased in the near term, benefitting demand for aftermarket parts, given the lack of availability of new vehicles and increased interest rates.

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 resulted in an increase in VIO.

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 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.

We believe this trend has supported an increase in VIO, which increased to 293.4 million in 2022, a 1% increase over 2021.

According to data published by Polk, a division of IHS Automotive, the average age of VIO increased to 12.4 years as of October 2022 from 12.2 years as of October 2021.

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 the U.S.

According to the U.S.

Department of Transportation, the number of miles driven through October 2022 increased 1.5% year over year.

4 unchanged sentences

As a result, we are continuously evaluating our approach to brand, pricing and terms to our different customers and channels.

For example, in the third quarter of 2019, we modified our brand protection policy, which is designed to ensure that certain products bearing the Dorman name are not advertised below certain approved pricing levels.

For example, we maintain a brand protection policy, which is designed to ensure that certain products bearing the Dorman name 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

3 unchanged sentences

These discounts can be in the form of “off-invoice” discounts and are immediately deducted from sales at the time of sale.

For those customers that choose to receive a payment on a quarterly or annual basis instead of “off-invoice,” we accrue for such payments as the related sales are made and reduce sales

For those customers that choose to receive a payment on a quarterly or annual basis instead of “off-invoice,” we accrue for such payments as the related sales are made and reduce sales accordingly.

Finally, 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, extended customer payment terms, and allowed a higher level of product returns in certain cases.

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.

1 unchanged sentence

New Customer Acquisition Costs

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

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.

2 unchanged sentences

Many of our products carry a lifetime limited warranty, which generally covers defects in materials or workmanship and failure to meet specifications.

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

In addition to warranty returns, we also

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.

15 unchanged sentences

However, the cost of the products we procure is also affected by other factors including raw material availability, labor cost, and transportation costs.

Since our consolidated financial statements are denominated in U.S.

dollars, the assets, liabilities, net sales, and expenses which are denominated in currencies other than the U.S.

We have subsidiaries 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.

2 unchanged sentences

Impact of Labor Market and Inflationary Costs

We have experienced broad-based inflationary impacts during the nine months ended September 24, 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 three months ended April 1, 2023 as well as during the year ended December 31, 2022, due primarily to global transportation and logistics constraints, which have resulted in significantly higher transportation costs;

material costs;

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, despite recent signs of global supply chain constraints easing, which could lead to lower ocean freight and commodity costs.

Increased freight, higher labor costs and material inflation costs may continue to negatively impact our results throughout the remainder of fiscal 2023, despite recent signs of global supply chain constraints easing and ocean freight and commodity costs lowering.

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

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

Furthermore, pricing increases that we implemented to pass through the increased costs had no added profit dollars and consequently resulted in lower gross and operating margin

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

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

Impact of Interest Rates

Our business is subject to interest rate risk under the terms of our accounts receivable sales programs, as a change in LIBOR, term Secured Overnight Financing Rate (“Term SOFR”) , 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, Term SOFR, or the applicable 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 nine months ended September 24, 2022, we have seen significant increases in LIBOR, Term SOFR, and other reference rates, which have impacted our results as discussed in Results of Operations that follows.

We expect interest 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 nine months ended September 24, 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, despite recent signs of global supply chain constraints easing, which could lead to lower ocean freight and commodity costs.

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

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

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

Under the terms of the credit facility, a change in interest rates affects the rate at which we can borrow funds thereunder and also impacts the interest cost on existing borrowings.

During the three months ended April 1, 2023 as well as the year ended December 31, 2022, we saw significant increases in Term SOFR and other reference rates, which impacted our results as discussed in Results of Operations that follows.

We expect interest rates may continue to increase in the foreseeable future, increasing the costs associated with our accounts receivable sales programs and outstanding borrowings.

Impact of Tariffs

3 unchanged sentences

We expect to continue mitigating the impact of tariffs primarily through 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 to the extent that these additional costs are passed through to customers.

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 January 2020, the USTR granted temporary tariff relief for certain categories of products being imported from China.

1 unchanged sentence

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

The reinstated tariff relief applies retroactively to October 12, 2021 and will extend through December 31, 2022.

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

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

2 unchanged sentences

Three Months Ended*

Nine Months Ended*

(in thousands, except percentage data)

September 24, 2022

September 25, 2021

September 24, 2022

September 25, 2021

(in thousands, except percentage data) April 1, 2023 March 26, 2022

Net sales $ 466,738 100.0 % $ 401,579 100.0 %

Cost of goods sold 322,261 69.0 % 268,339 66.8 %

Gross profit 144,477 31.0 % 133,240 33.2 %

Selling, general and administrative expenses 126,363 27.1 % 86,528 21.5 %

1 unchanged sentence

Interest expense, net 11,953 2.6 % 1,231 0.3 %

Other expense (income), net

Other income, net (357) -0.1 % (84) 0.0 %

Income before income taxes 6,518 1.4 % 45,565 11.3 %

Provision for income taxes 835 0.2 % 10,358 2.6 %

Net income $ 5,683 1.2 % $ 35,207 8.8 %

* Percentage of sales information may not add due to rounding

Three Months Ended September 24, 2022 Compared to Three Months Ended September 25, 2021

Net sales increased 19% to $413.5 million for the three months ended September 24, 2022 from $348.4 million for the three months ended September 25, 2021.

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

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

successful new product launches;

and price increases to offset inflationary costs.

Net sales growth for the three months ended September 24, 2022 excluding Dayton Parts was 8%.

Gross profit margin was 31.9% of net sales for the three months ended September 24, 2022 compared to 33.5% of net sales for the three months ended September 25, 2021.

Dayton Parts had a 50-basis-point dilutive impact on gross profit margin for the three months ended September 24, 2022.

Gross margin contraction was also driven by broad-based inflationary cost pressures.

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

Selling, general and administrative expenses (“SG&A”) were $89.8 million, or 21.7% of net sales, for the three months ended September 24, 2022 compared to $72.7 million, or 20.9% of net sales, for the three months ended September 25, 2021.

The increase in SG&A expenses as a percentage of net sales was primarily due to the impact of higher interest rates on our customer accounts receivable factoring programs and costs incurred in connection with the SuperATV transaction , partially offset by improved leverage from the increase in net sales noted above and lower wages and benefits expenses.

Dayton Parts had a 100-basis-point dilutive impact on SG&A expenses as a percentage of net sales for the three months ended September 24, 2022.

Our effective tax rate was 22.9% for the three months ended September 24, 2022 compared to 24.0% for the three months ended September 25, 2021.

The decrease in the effective tax rate was primarily the result of favorable discrete items recorded in the three months ended September 24, 2022, partially offset by higher Canadian income tax associated with the Canadian operations acquired as part of the Dayton Parts transaction.

Nine Months Ended September 24, 2022 Compared to Nine Months Ended September 25, 2021

Net sales increased 30% to $1,232.5 million for the nine months ended September 24, 2022 from $947.1 million for the nine months ended September 25, 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 launches;

and price increases to offset inflationary costs.

Net sales growth for the nine months ended September 24, 2022 excluding Dayton Parts was 14%.

Gross profit margin was 33.0% of net sales for the nine months ended September 24, 2022 compared to 35.0% of net sales for the nine months ended September 25, 2021.

Dayton Parts had a 100-basis-point dilutive impact on gross profit margin for the nine months ended September 24, 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.

Selling, general and administrative expenses (“SG&A”) were $ 268.4 million, or 21.8% of net sales, for the nine months ended September 24, 2022 compared to $ 205.0 million, or 21.7% of net sales, for the nine months ended September 25, 2021 .

SG&A expenses as a percentage of net sales was flat compared to the prior year period as improved leverage from the increase in net sale s noted above was offset by the impact of higher interest rates on our customer accounts receivable factoring programs and higher amortization of intangible assets resulting from the Dayton Parts acquisition in August 2021 .

Our effective tax rate was 22.2% for the nine months ended September 24, 2022 compared to 22.6% for the nine months ended September 25, 2021.

The decrease in the effective tax rate was due to higher favorable discrete items in the nine months ended September 24, 2022 compared to the nine months ended September 25, 2021, partially offset by higher Canadian income tax associated with the Canadian operations acquired as part of the Dayton Parts transaction.

Three Months Ended April 1, 2023 Compared to Three Months Ended March 26, 2022

Net sales increased 16% to $466.7 million for the three months ended April 1, 2023 from $401.6 million for the three months ended March 26, 2022.

The increase in net sales reflected the addition of

SuperATV in October 2022, successful new product launches, and price increases to offset inflationary costs.

Net sales growth for the three months ended April 1, 2023 excluding SuperATV was 3.5%.

Gross profit margin was 31.0% of net sales for the three months ended April 1, 2023 compared to 33.2% of net sales for the three months ended March 26, 2022.

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

Selling, general and administrative expenses (“SG&A”) were $126.4 million, or 27.1% of net sales, for the three months ended April 1, 2023 compared to $86.5 million, or 21.5% of net sales, for the three months ended March 26, 2022.

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

SG&A expenses as a percentage of net sales also increased in the three months ended April 1, 2023 as a result of a charge recorded related to a customer bankruptcy filing.

Our effective tax rate was 12.8% for the three months ended April 1, 2023 compared to 22.7% for the three months ended March 26, 2022.

The decrease in the effective tax rate was due to favorable discrete items in the quarter, partially offset by an increase in state tax expense and the effect of foreign operations.

Liquidity and Capital Resources

Historically, our primary sources of liquidity have been our invested cash and the cash flow we generate from our operations, including accounts receivable sales programs provided by certain customers.

Cash and cash equivalents were $35.4 million at September 24, 2022 compared to $58.8 million at December 25, 2021.

During the nine months ended September 24, 2022, cash provided from operating activities was offset by share repurchases under our publicly announced repurchase program and capital expenditures.

Working capital was $503.1 million at September 24, 2022 compared to $411.5 million at December 25, 2021.

Cash and cash equivalents were $33.3 million at April 1, 2023 and $46.0 million at December 31, 2022.

Working capital was $582.8 million at April 1, 2023 compared to $590.8 million at December 31, 2022.

Shareholders’ equity was $1,049.1 million at April 1, 2023 and $1,042.6 million at December 31, 2022.

Based on our current operating plan, we believe that our sources of available capital are adequate to meet our ongoing cash needs for at least the next twelve months.

However, our liquidity could be negatively affected by extending payment terms to customers, a decrease in demand for our products, increases in interest rates (including LIBOR or other reference rates), the outcome of contingencies or other factors.

However, our liquidity could be negatively affected by extending payment terms to customers, a decrease in demand for our products, increases in 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.

Payment Terms and Accounts Receivable Sales Programs

1 unchanged sentence

These extended terms have resulted in increased accounts receivable levels and significant uses of cash.

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

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

Moreover, to the extent that any of these accounts receivable sales programs bear interest rates tied to the LIBOR, Term SOFR, or other reference rates, increases in these applicable rates increase our cost to sell our receivable.

Moreover, to the extent that any of 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.

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.

During the nine months ended September 24, 2022 and September 25, 2021, we sold $778.1 million and $690.0 million of accounts receivable, respectively, under these programs.

If receivables had not been sold over the previous twelve months, approximately $783.5 million and $598.8 million of additional accounts receivable would have been outstanding at September 24, 2022 and December 25, 2021, respectively, based on our 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.

During the three months ended April 1, 2023 and March 26, 2022, we sold $237.7 million and $275.2 million of accounts receivable, respectively, under these programs.

If receivables had not been sold over the previous twelve months, approximately $745.9 million and $722.3 million of additional accounts receivable would have been outstanding at April 1, 2023 and December 31, 2022, respectively, based on our standard payment terms.

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

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

During the nine months ended September 24, 2022 and September 25, 2021, factoring costs associated with these accounts receivable sales programs were $23.0 million and $8.6 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.

During the three months ended April 1, 2023 and March 26, 2022, factoring costs associated with these accounts receivable sales programs were $13.5 million and $4.9 million, respectively.

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

Credit Agreement

On August 10, 2021, in connection with the acquisition of Dayton Parts, we entered into a new credit agreement that provides for a $600 million revolving credit facility, including a letter of credit sub-facility of up to $60 million (the “New Facility”).

The New Facility was scheduled to mature 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 September 24, 2022 , there was $2 2 9.4 million in outstanding borrowings under the New Facility and t hree outstanding letters of credit for $ 1.0 million in the aggregate which were issued to secure ordinary course of business transactions.

Net of outstanding borrowings and letters of credit, we had $3 6 9.

6 million available under the New Facility at September 24, 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.

In connection with the acquisition of Super ATV, LLC (“SuperATV”) on October 4, 2022, Dorman entered into an Amendment No.

1 to Credit Agreement (the “Amendment”) which amended the New Facility (as amended by the Amendment, the “Amended Credit Agreement”) by and among Dorman, the lenders from time to time party thereto, and an administrative agent.

The Amendment provides for a $500.0 million term loan facility, which was used to fund the SuperATV acquisition and matures on October 4, 2027.

The Amendment also extended the maturity date of the revolving credit facility to the same date.

Refer to Note 2, “Business Acquisitions and Investments,” in the Notes to the Condensed Consolidated Financial Statements for additional information .

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

The credit agreement matures on October 4, 2027.

As of April 1, 2023, there was $215.5 million in outstanding borrowings under the revolving credit facility, and $493.8 million in outstanding borrowings under the term loan.

Also on that date, we had three outstanding letters of credit for $1.0 million in aggregate.

Net of outstanding borrowings and letters of credit, we had $383.5 million available under the credit facility at April 1, 2023.

Our credit agreement contains affirmative and negative covenants.

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

Refer to Note 7, “Long-Term Debt” to the Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for additional information.

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

Nine Months Ended

(in thousands)

September 24, 2022

September 25, 2021

Three Months Ended

(in thousands) April 1, 2023 March 26, 2022

Cash provided by operating activities $ 26,210 $ 23,214

Cash used in investing activities (10,270) (6,652)

Cash (used in) provided by financing activities

Cash used in financing activities (28,663) (21,963)

Effect of foreign exchange on cash and cash equivalents (4) 46

Net decrease in cash and cash equivalents $ (12,727) $ (5,355)

During the nine months ended September 24, 2022, cash provided by operating activities was $29.3 million compared to $77.6 million during the nine months ended September 25, 2021.

The $48.3 million decrease was driven by higher cash outflows for working capital, partially offset by higher income during the nine months ended September 24, 2022, compared to the prior year.

The higher cash outflows for working capital were primarily driven by higher inventory purchases to meet demand and provide safety stock due to global supply chain constraints, partially offset by the benefits of accounts receivable collections from higher factoring during the nine months ended September 24, 2022.

Investing activities used cash of $23.2 million and $360.8 million during the nine months ended September 24, 2022 and September 25, 2021, respectively.

During the nine months ended September 24, 2022, we received $0.6 million in cash related to the post-closing net working capital adjustment related to the Dayton Parts acquisition.

During the nine months ended September 25, 2021, we used $345.5 million to acquire Dayton Parts, net of cash acquired.

In connection with our opening of a new distribution center in Whiteland, Indiana, we expect to have increased capital expenditures in the fourth quarter of 2022 as payments are made for racking and equipment.

Financing activities used cash of $29.4 million and provided cash of $184.9 million during the nine months ended September 24, 2022 and September 25, 2021, respectively.

During the nine months ended September 24, 2022, we repaid $10.0 million of the New Facility borrowing and paid $1.5 million to repurchase 17,400 shares of common stock under our share repurchase plan.

During the nine months ended September 25, 2021, we borrowed $252.4 million under the New Facility to help fund the acquisition of Dayton Parts in August 2021, and subsequently repaid $3.0 million of that borrowing.

Additionally, during the nine months ended September 25, 2021, we paid $54.2 million to repurchase 534,507 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”).

During the three months ended April 1, 2023, cash provided by operating activities was $26.2 million compared to $23.2 million during the three months ended March 26, 2022.

The $3.0 million increase was driven by higher cash inflows for working capital, partially offset by lower income during the three months ended April 1, 2023, compared to the prior year period.

Investing activities used cash of $10.3 million and $6.7 million during the three months ended April 1, 2023 and March 26, 2022, respectively.

Financing activities used cash of $28.7 million and $22.0 million during the three months ended April 1, 2023 and March 26, 2022, respectively.

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.

During the three months ended March 26, 2022, we repaid $10.0 million of outstanding borrowing under our revolving credit facility.

We also paid $9.5 million to repurchase 98,350 shares of common stock under our share repurchase plan during the three months ended March 26, 2022.

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