Dorman Products Inc

Previous wording

The following discussion and analysis, as well as other sections in this Quarterly Report on Form 10-Q, should be read in conjunction with the unaudited condensed consolidated financial statements and footnotes thereto of Dorman Products, Inc. included in “ITEM 1. Financial Statements” of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Current wording

The following discussion and analysis, as well as other sections in this Quarterly Report on Form 10-Q, should be read in conjunction with the unaudited condensed consolidated financial statements and footnotes thereto of Dorman Products, Inc. included in “PART 1, ITEM 1. Financial Statements” of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Previous wording

We are one of the leading suppliers of replacement and upgrade parts in the motor vehicle aftermarket industry, serving passenger cars, light-, medium-, and heavy-duty trucks, as well as specialty vehicles, including utility terrain vehicles (UTVs) and all-terrain vehicles (ATVs). We operate through three business segments: Light Duty, Heavy Duty, and Specialty Vehicle, consistent with the sectors of the motor vehicle aftermarket industry in which we operate. For more information on our segments, refer to Note 8, “Segment Information,” to the Consolidated Financial Statements, included under ITEM 8.

Current wording

We are one of the leading suppliers of replacement and upgrade parts in the motor vehicle aftermarket industry, serving passenger cars, light-, medium-, and heavy-duty trucks, as well as specialty vehicles, including utility terrain vehicles (UTVs) and all-terrain vehicles (ATVs). We operate through three business segments: Light Duty, Heavy Duty, and Specialty Vehicle, consistent with the sectors of the motor vehicle aftermarket industry in which we operate. For more information on our segments, refer to Note 8, “Segment Information,” to the Consolidated Financial Statements, included under Part II, ITEM 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2023.

Previous wording

In the three months ended March 30, 2024, we introduced 1,440 new distinct parts to our customers and end-users, including 522 “New-to-the-Aftermarket” parts. We introduced 6,106 new distinct parts to our customers and end-users in the fiscal year ended December 31, 2023, including 1,791 “New-to-the-Aftermarket” parts.

Current wording

In the six months ended June 29, 2024, we introduced 3,096 new distinct parts to our customers and end-users, including 997 “New-to-the-Aftermarket” parts. We introduced 6,106 new distinct parts to our customers and end-users in the fiscal year ended December 31, 2023, including 1,791 “New-to-the-Aftermarket” parts.

Previous wording

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

Current wording

A key component of our strategy is growth through acquisitions, including the October 2022 acquisition of SuperATV, a leading independent supplier to the powersports aftermarket with a family of highly respected brands spanning functional accessories and upgrades, as well as replacement parts for specialty vehicles, and the August 2021 acquisition of Dayton Parts, a manufacturer of chassis and other parts designed to serve the heavy-duty vehicle sector of the aftermarket. We may acquire businesses in the future to supplement our financial growth, increase our customer base, add to our distribution capabilities or enhance our product development resources, among other reasons.

Previous wording

We may incur customer acquisition costs where we incur change-over costs to induce a customer to switch from a competitor’s brand, including expanding new product lines into our existing customers. Change-over costs include the costs related to removing the new customer’s inventory and replacing it with our inventory, which is commonly referred to as a stock lift. Customer acquisition costs are recorded as a reduction to revenue when incurred.

Current wording

We may incur change-over costs to induce a customer to switch from a competitor’s brand. These costs are recorded as a reduction to revenue when incurred.

Previous wording

We warrant our products against certain defects in material and workmanship when used as designed on the vehicle on which it was originally installed. We offer a limited lifetime warranty on most of our products in the light-duty parts categories, with more limited warranties for our heavy-duty and specialty vehicle products. In addition to warranty returns, we may permit our customers to return new, undamaged products to us within customer-specific limits if they have overstocked their inventories. At the time products are sold, we accrue a liability for product warranties and overstock returns as a percentage of sales based upon estimates established using historical information on the nature, frequency and average cost of the claim and the probability of the customer return. Significant judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Revision to these estimates is made when necessary, based upon changes in these factors. We regularly study trends of such claims.

Current wording

We warrant our products against certain defects in material and workmanship when used as designed on the vehicle on which it was originally installed. We offer a limited lifetime warranty on most of our products in the light-duty parts categories, with more limited warranties for our heavy-duty and specialty vehicle products. In addition to warranty returns, we may permit our customers to return new, undamaged products to us within customer-specific limits if they have overstocked their inventories. At the time products are sold, we accrue a liability for product warranties and overstock returns as a percentage of sales based upon estimates established using historical information on the nature, frequency and average cost of the claim and the probability of the customer return. Significant judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Revisions to these estimates are made when necessary, based upon changes in these factors. We regularly study trends of such claims.

Previous wording

We experienced broad-based inflationary impacts during the year ended December 31, 2023, notably in the first six months of the year, due primarily to global transportation and logistics constraints, which resulted in significantly higher transportation costs; tariffs; material costs; and wage inflation from an increasingly competitive labor market. Despite signs of global supply chain constraints easing, higher labor costs and material inflation costs may continue to negatively impact our results in the future. We attempt to offset inflationary pressures with cost-saving initiatives, price increases to customers and the use of alternative suppliers. There can be no assurance that we will be successful in implementing pricing increases in the future to recover increased inflationary costs.

Current wording

We experienced broad-based inflationary impacts during the year ended December 31, 2023, notably in the first six months of the year, due primarily to global transportation and logistics constraints, which resulted in significantly higher transportation costs; tariffs; material costs; and wage inflation from an increasingly competitive labor market. Uncertain global supply chain and logistics stability driven by geopolitical events, higher labor costs and material inflation costs may negatively impact our results in the future. We attempt to offset inflationary pressures with cost-saving initiatives, price increases to customers and the use of alternative suppliers. There can be no assurance that we will be successful in implementing pricing increases in the future to recover increased inflationary costs.

Previous wording

Our business is subject to interest rate risk under the terms of our customer accounts receivable sales programs, as a change in the Term Secured Overnight Financing Rate (“Term SOFR”) or 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. Interest rates may hold steady at their current rates for prolonged periods or may increase in the future, resulting in increased costs associated with our accounts receivable sales programs and outstanding borrowings. During the year ended December 31, 2023, we saw significant increases in Term SOFR and other reference rates and interest rates have remained elevated throughout the three months ended March 30, 2024, which impacted our results as discussed in Results of Operations that follows.

Current wording

Our business is subject to interest rate risk under the terms of our customer accounts receivable sales programs, as a change in the Term Secured Overnight Financing Rate (“Term SOFR”) or 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. Interest rates may hold steady at their current rates for prolonged periods or may increase in the future, resulting in increased costs associated with our accounts receivable sales programs and outstanding borrowings. During the year ended December 31, 2023, we saw significant increases in Term SOFR, and other reference rates and interest rates have remained elevated throughout the six months ended June 29, 2024, which impacted our results as discussed in Results of Operations that follows.

Previous wording

In the third quarter of 2018, the Office of the United States Trade Representative (USTR) began imposing additional tariffs on products imported from China, including many of our products, ranging from 7.5% to 25%. The tariffs enacted to date increase the cost of many of the products that are manufactured for us in China. We have taken several actions to mitigate the impact of the tariffs including, but not limited to, price increases to our customers and cost concessions from our suppliers. We expect to continue mitigating the impact of tariffs primarily through, among other things, diversification of suppliers across geographies and selling price increases to offset the higher tariffs incurred. Tariffs are not expected to have a material impact on our net income but are expected to increase net sales and lower our gross and operating profit margins.

Current wording

In the third quarter of 2018, the Office of the United States Trade Representative (USTR) began imposing additional tariffs on products imported from China, including many of our products, ranging from 7.5% to 25%. The tariffs enacted to date increase the cost of many of the products that are manufactured for us in China. We have taken several actions to mitigate the impact of the tariffs including, but not limited to, price increases to our customers and cost concessions from our suppliers. We expect to continue mitigating the impact of tariffs primarily through, among other things, diversification of suppliers across geographies and selling price increases to offset the higher tariffs incurred.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

Heavy Duty net sales decreased $9.8 million, or 15%, for the three months ended March 30, 2024 compared to the prior year period. The decrease in net sales primarily reflects lower freight industry shipping volumes in the three months ended March 30, 2024, as well as strong sales performance in the three months ended April 1, 2023 driven by customers’ inventory restocking at the end of the global pandemic.

Current wording

Heavy Duty net sales decreased $7.8 million, or 11%, for the three months ended June 29, 2024 compared to the prior year period. The decrease in net sales primarily reflects lower freight industry shipping volumes in the three months ended June 29, 2024, as well as strong sales performance in the three months ended July 1, 2023 driven by customers’ inventory restocking at the end of the global pandemic.

Previous wording

Heavy Duty segment profit as a percentage of net sales decreased by 790 basis points for the three months ended March 30, 2024, compared to the prior year period. This decrease was primarily driven by the sell-through of high-cost inventory, deleverage of fixed costs on lower net sales volumes, and the impact of investments we made as part of initiatives to grow sales and improve margins on a long-term basis.

Current wording

Heavy Duty segment profit as a percentage of net sales decreased 50 basis points for the three months ended June 29, 2024, compared to the prior year period. This decrease was primarily driven by the deleveraging of fixed costs on lower net sales, and the impact of investments we made as part of initiatives to grow sales and improve margins on a long-term basis.

Previous wording

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

Current wording

Specialty Vehicle segment profit as a percentage of net sales increased to 17.8% from 16.8% for the three months ended June 29, 2024 and July 1, 2023, respectively. This increase was primarily driven by cost savings initiatives.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

Historically, our primary sources of liquidity have been our invested cash and the cash flow we generate from our operations, including accounts receivable sales programs facilitated through certain customers. Key components of our liquidity and capital resources were as follows:

Previous wording

Over the past several years, we have continued to extend payment terms to certain customers as a result of customer requests and market demands. These extended terms have resulted in increased accounts receivable levels and significant uses of cash. Where available and when we deem appropriate, we participate in accounts receivable sales programs with several customers that allow us to sell our accounts receivable to financial institutions to offset the negative cash flow impact of these payment term extensions. However, any sales of accounts receivable through these programs ultimately result in us receiving a lesser amount of cash upfront than if we collected those accounts receivable ourselves in due course, resulting in accounts receivable factoring costs. Moreover, since these accounts receivable sales programs bear interest at rates tied to the Term SOFR or other reference rates, increases in these applicable rates increase our cost to sell our receivables and reduce the amount of cash we receive. See ITEM 3. Quantitative and Qualitative Disclosures about Market Risk for more information. Further extensions of customer payment terms would result in additional uses of cash or increased costs associated with the sales of accounts receivable.

Current wording

Over the past several years, we have continued to extend payment terms to certain customers as a result of customer requests and market demands. These extended terms have resulted in increased accounts receivable levels and significant uses of cash. Where available and when we deem appropriate, we participate in accounts receivable sales programs with several customers that allow us to sell our accounts receivable to financial institutions to offset the negative cash flow impact of these payment term extensions. However, any sales of accounts receivable through these programs ultimately result in us receiving a lesser amount of cash upfront than if we collected those accounts receivable ourselves in due course, resulting in accounts receivable factoring costs. Moreover, since these accounts receivable sales programs bear interest at rates tied to the Term SOFR or other reference rates, increases in these applicable rates increase our cost to sell our receivables and reduce the amount of cash we receive. See PART I, ITEM 3. Quantitative and Qualitative Disclosures about Market Risk for more information. Further extensions of customer payment terms would result in additional uses of cash or increased costs associated with the sales of accounts receivable.

Previous wording

If receivables had not been sold over the previous twelve months, approximately $630.8 million and $526.4 million of additional accounts receivable would have been outstanding at March 30, 2024 and December 31, 2023, respectively, based on our standard payment terms. We had capacity to sell more accounts receivable under these programs if the needs of the business warranted.

Current wording

If receivables had not been sold over the previous twelve months, approximately $805.4 million and $526.4 million of additional accounts receivable would have been outstanding at June 29, 2024 and December 31, 2023, respectively, based on our standard payment terms. We had capacity to sell more accounts receivable under these programs if the needs of the business warranted.

Previous wording

The Company has a credit agreement that provides a $600.0 million revolving credit facility and also includes a $500.0 million term loan with quarterly amortization payment requirements. The credit agreement matures on October 4, 2027. As of March 30, 2024, there was $81.2 million in outstanding borrowings under the revolving credit facility and $481.3 million in outstanding borrowings under the term loan. Also on that date, we had outstanding letters of credit for $1.3 million in aggregate. Net of outstanding borrowings and letters of credit, we had $517.5 million available under the credit facility at March 30, 2024.

Current wording

The Company has a credit agreement that provides a $600.0 million revolving credit facility and also includes a $500.0 million term loan with quarterly amortization payment requirements. The credit agreement matures on October 4, 2027. As of June 29, 2024, there was $69.5 million in outstanding borrowings under the revolving credit facility and $478.1 million in outstanding borrowings under the term loan. Also on that date, we had outstanding letters of credit for $1.5 million in aggregate. Net of outstanding borrowings and letters of credit, we had $529.0 million available under the credit facility at June 29, 2024.

Previous wording

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

Current wording

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

Previous wording

Investing activities used cash of $10.8 million and $10.3 million during the three months ended March 30, 2024 and April 1, 2023, respectively. The increase in cash used in investing activities during the three months ended March 30, 2024 over the prior year period is primarily due to higher additions for property, plant and equipment.

Current wording

Investing activities used cash of $22.7 million and $23.2 million during the six months ended June 29, 2024 and July 1, 2023, respectively. The decrease in cash used in investing activities during the six months ended June 29, 2024 over the prior year period is primarily due to higher additions for property, plant and equipment in the prior year period.

Previous wording

Financing activities during the three months ended March 30, 2024 included $26.9 million paid to repurchase 316,285 shares of common stock under our share repurchase plan, and the repayment of $11.6 million of outstanding borrowings under our revolving credit facility and $3.1 million of our term loan balance under our credit agreement. During the three months ended April 1, 2023, we repaid $23.9 million of outstanding borrowings under our revolving credit facility and $3.1 million of our term loan balance under our credit agreement. 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”).

Current wording

Financing activities during the six months ended June 29, 2024 included $51.2 million paid to repurchase 581,880 shares of common stock under our share repurchase plan, and the repayment of $23.3 million of outstanding borrowings under our revolving credit facility and $6.3 million of our term loan balance under our credit agreement. During the six months ended July 1, 2023, we repaid $72.8 million of outstanding borrowings under our revolving credit facility and $6.3 million of our term loan balance under our credit agreement. The remaining uses of cash from financing activities in each period resulted primarily from the repurchase of our common stock from our 401(k) Plan and income tax withholding in connection with the vesting of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”).