Dorman Products, Inc. 10-Q

ITEM 1. Financial Statements DORMAN PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended (in thousands, except per share data) April 1, 2023 March 26, 2022 Net sales $ 466,738 $ 401,579 Cost of goods sold 322,261 268,339 Gross profit 144,477 133,240 Selling, general and administrative expenses 126,363 86,528 Income from operations 18,114 46,712 Interest expense, net 11,953 1,231 Other income, net ( 357 ) ( 84 ) Income before income taxes 6,518 45,565 Provision for income taxes 835 10,358 Net income $ 5,683 $ 35,207 Other comprehensive income: Change in foreign currency translation adjustment $ 119 $ 1,696 Comprehensive Income $ 5,802 $ 36,903 Earnings per share: Basic $ 0.18 $ 1.12 Diluted $ 0.18 $ 1.11 Weighted average shares outstanding: Basic 31,436 31,499 Diluted 31,537 31,601 See accompanying Notes to Condensed Consolidated Financial Statements 3 Table of Contents DORMAN PRODUCTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED ) (in thousands, except for share data) April 1, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 33,307 $ 46,034 Accounts receivable, less allowance for doubtful accounts of $ 1,398 and $ 1,363 429,308 427,385 Inventories 686,949 755,901 Prepaids and other current assets 40,173 39,800 Total current assets 1,189,737 1,269,120 Property, plant and equipment, net 151,541 148,477 Operating lease right-of-use assets 108,549 109,977 Goodwill 443,336 443,035 Intangible assets, net 316,999 322,409 Other assets 50,497 48,768 Total assets $ 2,260,659 $ 2,341,786 Liabilities and shareholders’ equity Current liabilities: Accounts payable $ 145,686 $ 179,819 Accrued compensation 14,606 19,490 Accrued customer rebates and returns 170,432 192,116 Revolving credit facility 215,460 239,363 Current portion of long-term debt 12,500 12,500 Other accrued liabilities 48,239 35,007 Total current liabilities 606,923 678,295 Long-term debt 479,439 482,464 Long-term operating lease liabilities 96,571 98,221 Other long-term liabilities 16,749 28,349 Deferred tax liabilities, net 11,833 11,826 Commitments and contingencies (Note 8) Shareholders’ equity: Common stock, $ 0.01 par value; 50,000,000 shares authorized; 31,469,310 and 31,430,632 shares issued and outstanding in 2023 and 2022, respectively 315 314 Additional paid-in capital 90,416 88,750 Retained earnings 961,597 956,870 Accumulated other comprehensive loss ( 3,184 ) ( 3,303 ) Total shareholders’ equity 1,049,144 1,042,631 Total liabilities and shareholders' equity $ 2,260,659 $ 2,341,786 See accompanying Notes to Condensed Consolidated Financial Statements 4 Table of Contents DORMAN PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED ) Three Months Ended April 1, 2023 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total (in thousands, except share data) Shares Issued Par Value Balance at December 31, 2022 31,430,632 $ 314 $ 88,750 $ 956,870 $ ( 3,303 ) $ 1,042,631 Exercise of stock options 15,630 — 1,049 — — 1,049 Compensation expense under Incentive Stock Plan — — 2,312 — — 2,312 Purchase and cancellation of common stock ( 5,125 ) — ( 9 ) ( 424 ) — ( 433 ) Issuance of non-vested stock, net of cancellations 52,151 1 ( 1 ) — — — Other stock-related activity, net of tax ( 23,978 ) — ( 1,685 ) ( 532 ) — ( 2,217 ) Other comprehensive income — — — — 119 119 Net income — — — 5,683 — 5,683 Balance at April 1, 2023 31,469,310 $ 315 $ 90,416 $ 961,597 $ ( 3,184 ) $ 1,049,144 Three Months Ended March 26, 2022 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total (in thousands, except share data) Shares Issued Par Value Balance at December 25, 2021 31,607,509 $ 316 $ 77,451 $ 856,409 $ ( 1,440 ) $ 932,736 Exercise of stock options 2,478 — — — — — Compensation expense under Incentive Stock Plan — — 2,152 — — 2,152 Purchase and cancellation of common stock ( 111,114 ) ( 1 ) ( 200 ) ( 10,716 ) — ( 10,917 ) Cancellation of non-vested stock, net of issuances ( 2,511 ) — 377 — — 377 Other stock-related activity, net of tax ( 16,446 ) — ( 874 ) ( 977 ) — ( 1,851 ) Other comprehensive income — — — — 1,696 1,696 Net income — — — 35,207 — 35,207 Balance at March 26, 2022 31,479,916 $ 315 $ 78,906 $ 879,923 $ 256 $ 959,400 See accompanying Notes to Condensed Consolidated Financial Statements 5 Table of Contents DORMAN PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended (in thousands) April 1, 2023 March 26, 2022 Cash Flows from Operating Activities: Net income $ 5,683 $ 35,207 Adjustments to reconcile net income to cash provided by operating activities: Depreciation, amortization and accretion 13,540 9,743 Provision for doubtful accounts 2,744 29 Provision for stock-based compensation 2,334 2,152 Changes in assets and liabilities: Accounts receivable ( 4,673 ) 16,727 Inventories 68,935 ( 33,034 ) Prepaids and other current assets ( 591 ) ( 853 ) Other assets ( 2,130 ) ( 1,976 ) Accounts payable ( 34,258 ) ( 12,392 ) Accrued customer rebates and returns ( 21,683 ) 7,202 Accrued compensation and other liabilities ( 3,691 ) 409 Cash provided by operating activities 26,210 23,214 Cash Flows from Investing Activities: Acquisition, net of cash acquired 267 595 Property, plant and equipment additions ( 10,537 ) ( 7,247 ) Cash used in investing activities ( 10,270 ) ( 6,652 ) Cash Flows from Financing Activities: Payments of revolving credit line ( 23,900 ) ( 10,000 ) Payments of long-term debt ( 3,125 ) — Proceeds from exercise of stock options 1,049 — Purchase and cancellation of common stock ( 433 ) ( 10,752 ) Other stock-related activity ( 2,254 ) ( 1,211 ) Cash used in financing activities ( 28,663 ) ( 21,963 ) Effect of exchange rate changes on Cash and Cash Equivalents ( 4 ) 46 Net Decrease in Cash and Cash Equivalents ( 12,727 ) ( 5,355 ) Cash and Cash Equivalents, Beginning of Period 46,034 58,782 Cash and Cash Equivalents, End of Period $ 33,307 $ 53,427 Supplemental Cash Flow Information Cash paid for interest expense $ 11,534 $ 999 Cash paid for income taxes $ 1,055 $ 712 See accompanying Notes to Condensed Consolidated Financial Statements 6 Table of Contents DORMAN PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED APRIL 1, 2023 AND MARCH 26, 2022 (UNAUDITED) 1. Basis of Presentation As used herein, unless the context requires otherwise, “Dorman,” the “Company,” “we,” “us,” or “our” refers to Dorman Products, Inc. and its subsidiaries. Our ticker symbol on the NASDAQ Global Select Market is “DORM.” The accompanying unaudited condensed consolidated financial statements have been prepared under U.S. generally accepted accounting principles (“GAAP”) for interim financial information and under the rules and regulations of the U.S. Securities and Exchange Commission. However, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended April 1, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023 or any future period. We may experience significant fluctuations from quarter to quarter in our results of operations due to the timing of orders placed by our customers and the introduction of new products and product lines to customers. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. 2. Acquisitions On October 4, 2022 (the “Closing Date”), Dorman acquired 100 % of the issued and outstanding equity interests of Super ATV, LLC ("SuperATV") (the “Transaction”), for aggregate consideration of $ 509.8 million (net of $ 6.8 million cash acquired), plus a potential earn-out payment to the sellers of SuperATV not to exceed $ 100 million in the aggregate, which remains subject to the achievement by SuperATV of certain revenue and gross margin targets in the years ending December 31, 2023 and December 31, 2024. In the three months ended April 1, 2023, we received $ 0.3 million in cash as proceeds from the closing net working capital adjustments. SuperATV is 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. The Transaction was accounted for as a business combination under the acquisition method of accounting. We have allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill, as of December 31, 2022, is based upon preliminary information and is subject to change within the permitted measurement period (up to one year from the acquisition date) as additional information concerning final asset and liability valuations is obtained. The fair values that remain preliminary include tax-related liabilities and contingent liabilities. Any material adjustments to the estimates based upon new information identified during the measurement period will be reflected as of the date of the acquisition. 7 Table of Contents The table below details the fair values of the assets acquired and the liabilities assumed at the acquisition date, including applicable measurement period adjustments: (in thousands) Accounts receivable $ 3,317 Inventories 90,428 Prepaids and other current assets 5,293 Property, plant and equipment 23,776 Goodwill 247,474 Identifiable intangible assets 157,500 Operating lease right-of-use assets 11,661 Other Assets 3,001 Accounts payable ( 7,436 ) Accrued compensation ( 2,086 ) Accrued customer rebates and returns ( 1,609 ) Other current liabilities ( 8,726 ) Long-term operating lease liabilities ( 9,508 ) Other long-term liabilities ( 3,307 ) Net cash consideration $ 509,778 The financial results of the Transaction have been included in the consolidated financial statements since the date of acquisition. 3. Sales of Accounts Receivable We have entered several customer-sponsored programs administered by unrelated financial institutions that permit us to sell (factor) certain accounts receivable at discounted rates to the financial institutions. Transactions under these agreements were accounted for as sales of accounts receivable and the related accounts receivable were removed from our Condensed Consolidated Balance Sheets at the times of the sales transactions. Under these agreements, we sold $ 237.7 million and $ 275.2 million of accounts receivable during the three months ended April 1, 2023 and March 26, 2022, respectively. Selling, general and administrative expenses include factoring costs associated with these accounts receivable sales programs of $ 13.5 million and $ 4.9 million during the three months ended April 1, 2023 and March 26, 2022, respectively. The increase in factoring costs for the three months ended April 1, 2023 compared to the prior year period was driven by higher interest rates during the three months ended April 1, 2023. 4. Inventories Inventories include the cost of material, freight, direct labor and overhead utilized in the processing of our products and are stated at the lower of cost or net realizable value. Inventories were as follows: (in thousands) April 1, 2023 December 31, 2022 Raw materials $ 30,839 $ 34,267 Bulk product 200,491 234,871 Finished product 446,544 478,032 Packaging materials 9,075 8,731 Total $ 686,949 $ 755,901 8 Table of Contents 5. Goodwill and Intangible Assets Goodwill Goodwill included the following: (in thousands) Balance at December 31, 2022 $ 443,035 Measurement period adjustments for SuperATV acquisition 233 Foreign currency translation 68 Balance at April 1, 2023 $ 443,336 Intangible Assets Intangible assets included the following: April 1, 2023 December 31, 2022 Intangible assets subject to amortization Gross Carrying Value Accumulated Amortization Net Carrying Value Gross Carrying Value Accumulated Amortization Net Carrying Value (in thousands) Customer relationships $ 175,430 $ 24,156 $ 151,274 $ 175,430 $ 21,643 $ 153,787 Trade names 67,690 7,469 60,221 67,690 6,370 61,320 Product Portfolio 107,800 4,644 103,156 107,800 2,953 104,847 Technology 2,167 882 1,285 2,167 820 1,347 Patents and Other 1,430 367 1,063 1,430 322 1,108 Total $ 354,517 $ 37,518 $ 316,999 $ 354,517 $ 32,108 $ 322,409 Amortization expense was $ 5.5 million and $ 3.0 million during the three months ended April 1, 2023 and March 26, 2022, respectively. 6. Debt As of April 1, 2023 and December 31, 2022, the weighted average interest rate on the outstanding borrowings under our credit facility was 6.41 % and 5.78 %, respectively. 7. Commitments and Contingencies Acquisitions We have contingent consideration related to an acquisition due to the uncertainty of the ultimate amount of any payments that will become due as earnout payments if performance targets are achieved. If the remaining performance targets for the acquisition are fully achieved, the maximum additional contingent payments to be made under the transaction documents would be $ 100.0 million in aggregate. As of April 1, 2023, we accrued $ 20.5 million, representing the fair value of the estimated payments that we expect could become due in connection with the transaction. For the three months ended April 1, 2023, we recorded a charge of $ 0.5 million of accretion on the estimated payment liability, with the charge included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. Other Contingencies We are a party to or otherwise involved in legal proceedings that arise in the ordinary course of business, such as various claims and legal actions involving contracts, employment claims, competitive practices, intellectual property infringement, product liability claims and other matters arising out of the conduct of our business. In the opinion of management, none of the actions, 9 Table of Contents individually or in the aggregate, taking into account relevant insurance coverage, would likely have a material financial impact on the Company and we believe the range of reasonably possible losses from current matters, taking into account relevant insurance coverage, is immaterial. However, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of any of these matters could have a material adverse impact on the Company’s cash flows, financial position or results of operations in the period in which any such effects are recorded. 8. Revenue Recognition The following tables present our disaggregated revenue by type of major good / product line, and geography. Three Months Ended (in thousands) April 1, 2023 March 26, 2022 Powertrain $ 171,035 $ 152,228 Chassis 188,864 160,862 Motor Vehicle body 91,159 73,280 Hardware 15,680 15,209 Total $ 466,738 $ 401,579 Three Months Ended (in thousands) April 1, 2023 March 26, 2022 Net sales to U.S. customers $ 430,693 $ 373,618 Net sales to non-U.S. customers 36,045 27,961 Total $ 466,738 $ 401,579 9. Stock-Based Compensation Restricted Stock Awards (“RSAs”) and Restricted Stock Units (“RSUs”) We issue RSAs and RSUs to participants in our equity plans in the form of time-based RSAs and RSUs and performance-based RSAs and RSUs. Compensation cost related to RSA and RSU grants was $ 1.7 million and $ 1.6 million for the three months ended April 1, 2023 and March 26, 2022, respectively, and was included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. The following table summarizes our RSA and RSU activity for the three months ended April 1, 2023: Shares Weighted Average Fair Value Balance at December 31, 2022 238,922 $ 92.07 Granted 93,944 $ 98.02 Vested ( 59,382 ) $ 77.02 Canceled ( 8,392 ) $ 81.56 Balance at April 1, 2023 265,092 $ 97.88 For the three months ended April 1, 2023, we granted 29,399 performance-based RSUs with a grant date fair value of $ 113.15 per share. For the three months ended March 26, 2022, we granted 23,995 performance-based RSUs with a grant date fair value of $ 111.31 per share. 10 Table of Contents As of April 1, 2023, there was $ 20.2 million of unrecognized compensation cost related to unvested RSA and RSU grants that is expected to be recognized over a weighted average period of 2.6 years. Stock Options We grant stock options to participants in our equity plans. Compensation cost related to stock option grants was $ 0.4 million for both the three months ended April 1, 2023 and March 26, 2022, and was included as selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. The following table summarizes our stock option activity for the three months ended April 1, 2023 : Shares Weighted Average Price Weighted Average Remaining Term (years) Aggregate Intrinsic Value (in thousands) Balance at December 31, 2022 268,119 $ 84.03 Granted 76,784 $ 91.28 Canceled ( 1,113 ) $ 96.36 Exercised ( 21,702 ) $ 72.85 Balance at April 1, 2023 322,088 $ 86.47 6.1 $ 1,935 Exercisable at April 1, 2023 133,913 $ 80.31 5.0 $ 1,398 As of April 1, 2023, there was $ 5.7 million of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted average period of 3.2 years. 10. Earnings Per Share Basic earnings per share was calculated by dividing our net income by the weighted average number of common shares outstanding during the period, excluding unvested RSAs which are considered to be contingently issuable. To calculate diluted earnings per share, common share equivalents are added to the weighted average number of common shares outstanding. Common share equivalents are calculated using the treasury stock method and are computed based on outstanding stock-based awards. For the three months ended April 1, 2023 and March 26, 2022, there were approximately 237,000 shares and 27,000 shares, respectively, that were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. 11 Table of Contents The following table sets forth the computation of basic earnings per share and diluted earnings per share: Three Months Ended (in thousands, except per share data) April 1, 2023 March 26, 2022 Net income $ 5,683 $ 35,207 Denominator: Weighted average basic shares outstanding 31,436 31,499 Effect of stock-based compensation awards 101 102 Weighted average diluted shares outstanding 31,537 31,601 Earnings Per Share: Basic $ 0.18 $ 1.12 Diluted $ 0.18 $ 1.11 11. Common Stock Repurchases We periodically repurchase, at the then current market price, and cancel common stock issued to the Dorman Products, Inc. 401(k) Retirement Plan and Trust (the “401(k) Plan”). 401(k) Plan participants can no longer purchase shares of Dorman common stock as an investment option under the 401(k) Plan. Shares are generally purchased by the Company from the 401(k) Plan when participants sell units as permitted by the 401(k) Plan or elect to leave the 401(k) Plan upon retirement, termination or other reasons. The following table summarizes the repurchase and cancellation of common stock by the Company for the periods indicated: Three Months Ended April 1, 2023 March 26, 2022 Shares repurchased and canceled 5,125 12,764 Total cost of shares repurchased and canceled (in thousands) $ 434 $ 1,388 Average price per share $ 84.62 $ 108.74 Separately, our Board of Directors has authorized the repurchase of up to $ 600 million of our common stock through December 31, 2024 under a previously announced share repurchase program and subsequent authorizations. Under this program, share repurchases may be made from time to time depending on market conditions, share price, share availability and other factors at our discretion. The share repurchase program does not obligate us to acquire any specific number of shares. At April 1, 2023, $ 228.0 million was available for repurchase under this share repurchase program. The following table summarizes the repurchase and cancellation of common stock under the share repurchase program: Three Months Ended April 1, 2023 March 26, 2022 Shares repurchased and canceled — 98,350 Total cost of shares repurchased and canceled (in thousands) $ — $ 9,529 Average price per share $ — $ 96.89 12. Income Taxes At April 1, 2023, we had $ 3.4 million of net unrecognized tax benefits, all of which would lower our effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of April 1, 2023, accrued interest and penalties related to uncertain tax positions were not material. 12 Table of Contents We file income tax returns in the United States, Canada, China, India, and Mexico. The statute of limitations for tax years before 2019 is closed for U.S. federal income tax purposes. The statute of limitations for tax years before 2018 is closed for the states in which we file. The statute of limitations for tax years before 2019 is closed for income tax purposes in Canada, China, and India. The statute of limitations for tax years before 2017 is closed for income tax purposes in Mexico. 13. Related-Party Transactions We lease our Colmar, PA facility and a portion of our Lewisberry, PA facility from entities in which Steven L. Berman, our Non-Executive Chairman, and certain of his family members are owners. Each lease is a non-cancelable operating lease. Total rental payments to those entities under these lease arrangements will be $ 2.9 million in fiscal 2023 and were $ 2.5 million in fiscal 2022. The lease for our corporate headquarters in Colmar, PA was renewed in December 2022, effective as of January 1, 2023, and will expire on December 31, 2027. The lease for our Lewisberry, PA operating facility was signed in September 2020 and will expire on December 31, 2027. We are a partner in a joint venture with one of our suppliers and own a minority interest in two other suppliers. Two of these investments are accounted for under the equity method and one is accounted for under the cost method. 14. Fair Value Disclosures The carrying value of financial instruments such as cash and cash equivalents, accounts receivable, accounts payable, and other current assets and liabilities approximate their fair value based on the short-term nature of these instruments. The carrying value of borrowings under our credit facility approximates fair value because borrowings under our credit facility bear interest at rates indexed to a market rate (Term SOFR). 13 Table of Contents