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Dorman Products, Inc. - Quarter Report: 2022 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 24, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission file number: 0-18914

 

Dorman Products, Inc.

(Exact name of registrant as specified in its charter)

 

 

Pennsylvania

 

23-2078856

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

3400 East Walnut Street, Colmar, Pennsylvania

 

18915

(Address of principal executive offices)

 

(Zip Code)

(215) 997-1800

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.01 per share

 

DORM

 

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No

As of October 20, 2022 the registrant had 31,418,575 shares of common stock, par value $0.01 per share, outstanding.


 

 

DORMAN PRODUCTS, INC. AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 24, 2022

 

 

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

ITEM 2.

 

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

 

15

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

22

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

23

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

24

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

24

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

24

 

 

 

 

 

ITEM 3.

 

Defaults Upon Senior Securities

 

24

 

 

 

 

 

ITEM 4.

 

Mine Safety Disclosures

 

24

 

 

 

 

 

ITEM 5.

 

Other Information

 

24

 

 

 

 

 

ITEM 6.

 

Exhibits

 

24

 

 

 

 

 

Exhibit Index

 

 

 

26

 

 

 

 

 

Signatures

 

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in thousands, except per share data)

 

September 24, 2022

 

 

September 25, 2021

 

 

September 24, 2022

 

 

September 25, 2021

 

Net sales

 

$

413,470

 

 

$

348,426

 

 

$

1,232,468

 

 

$

947,073

 

Cost of goods sold

 

 

281,559

 

 

 

231,572

 

 

 

825,792

 

 

 

615,574

 

Gross profit

 

 

131,911

 

 

 

116,854

 

 

 

406,676

 

 

 

331,499

 

Selling, general and administrative expenses

 

 

89,814

 

 

 

72,663

 

 

 

268,400

 

 

 

205,049

 

Income from operations

 

 

42,097

 

 

 

44,191

 

 

 

138,276

 

 

 

126,450

 

Interest expense, net

 

 

2,344

 

 

 

733

 

 

 

5,140

 

 

 

918

 

Other expense (income), net

 

 

65

 

 

 

(95

)

 

 

(130

)

 

 

(334

)

Income before income taxes

 

 

39,688

 

 

 

43,553

 

 

 

133,266

 

 

 

125,866

 

Provision for income taxes

 

 

9,087

 

 

 

10,449

 

 

 

29,553

 

 

 

28,414

 

Net income

 

$

30,601

 

 

$

33,104

 

 

$

103,713

 

 

$

97,452

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

$

(2,112

)

 

$

 

 

$

(2,415

)

 

$

 

Comprehensive Income

 

$

28,489

 

 

$

33,104

 

 

$

101,298

 

 

$

97,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.97

 

 

$

1.04

 

 

$

3.30

 

 

$

3.06

 

Diluted

 

$

0.97

 

 

$

1.04

 

 

$

3.29

 

 

$

3.04

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

31,411

 

 

 

31,692

 

 

 

31,444

 

 

 

31,895

 

Diluted

 

 

31,545

 

 

 

31,842

 

 

 

31,561

 

 

 

32,039

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

3


 

DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

(in thousands, except for share data)

 

September 24, 2022

 

 

December 25, 2021

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,435

 

 

$

58,782

 

Accounts receivable, less allowance for doubtful accounts of $1,388 and $1,326

 

 

433,229

 

 

 

472,764

 

Inventories

 

 

677,898

 

 

 

531,988

 

Prepaids and other current assets

 

 

30,456

 

 

 

13,048

 

Total current assets

 

 

1,177,018

 

 

 

1,076,582

 

Property, plant and equipment, net

 

 

122,106

 

 

 

114,864

 

Operating lease right-of-use assets

 

 

92,440

 

 

 

59,029

 

Goodwill

 

 

195,725

 

 

 

197,332

 

Intangible assets, net

 

 

169,046

 

 

 

178,809

 

Other assets

 

 

44,873

 

 

 

46,503

 

Total assets

 

$

1,801,208

 

 

$

1,673,119

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

199,180

 

 

$

177,389

 

Accrued compensation

 

 

15,523

 

 

 

26,636

 

Accrued customer rebates and returns

 

 

199,779

 

 

 

188,080

 

Revolving credit facility

 

 

229,360

 

 

 

239,360

 

Other accrued liabilities

 

 

30,036

 

 

 

33,583

 

Total current liabilities

 

 

673,878

 

 

 

665,048

 

Long-term operating lease liabilities

 

 

83,983

 

 

 

52,443

 

Other long-term liabilities

 

 

5,159

 

 

 

4,916

 

Deferred tax liabilities, net

 

 

17,147

 

 

 

17,976

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 50,000,000 shares authorized; 31,419,392 and

   31,607,509 shares issued and outstanding in 2022 and 2021, respectively

 

 

314

 

 

 

316

 

Additional paid-in capital

 

 

85,374

 

 

 

77,451

 

Retained earnings

 

 

939,208

 

 

 

856,409

 

Accumulated other comprehensive loss

 

 

(3,855

)

 

 

(1,440

)

Total shareholders’ equity

 

 

1,021,041

 

 

 

932,736

 

Total liabilities and shareholders' equity

 

$

1,801,208

 

 

$

1,673,119

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 


4


 

DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

 

Three Months Ended September 24, 2022

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

Shares

Issued

 

 

Par

Value

 

 

Additional Paid-In

Capital

 

 

Retained

Earnings

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Total

 

Balance at June 25, 2022

 

 

31,425,224

 

 

$

314

 

 

$

82,192

 

 

$

910,194

 

 

$

(1,743

)

 

$

990,957

 

Exercise of stock options

 

 

169

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

14

 

Compensation expense under Incentive Stock Plan

 

 

 

 

 

 

 

 

2,472

 

 

 

 

 

 

 

 

 

2,472

 

Purchase and cancellation of common stock

 

 

(14,700

)

 

 

 

 

 

(26

)

 

 

(1,496

)

 

 

 

 

 

(1,522

)

Issuance of non-vested stock, net of cancellations

 

 

9,626

 

 

 

 

 

 

812

 

 

 

 

 

 

 

 

 

812

 

Other stock-related activity, net of tax

 

 

(927

)

 

 

 

 

 

(90

)

 

 

(91

)

 

 

 

 

 

(181

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,112

)

 

 

(2,112

)

Net income

 

 

 

 

 

 

 

 

 

 

 

30,601

 

 

 

 

 

 

30,601

 

Balance at September 24, 2022

 

 

31,419,392

 

 

$

314

 

 

$

85,374

 

 

$

939,208

 

 

$

(3,855

)

 

$

1,021,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 25, 2021

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

Shares

Issued

 

 

Par

Value

 

 

Additional Paid-In

Capital

 

 

Retained

Earnings

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Total

 

Balance at June 26, 2021

 

 

31,891,890

 

 

$

319

 

 

$

71,947

 

 

$

820,719

 

 

$

 

 

$

892,985

 

Exercise of stock options

 

 

2,260

 

 

 

 

 

 

173

 

 

 

 

 

 

 

 

 

173

 

Compensation expense under Incentive Stock Plan

 

 

 

 

 

 

 

 

1,721

 

 

 

 

 

 

 

 

 

1,721

 

Purchase and cancellation of common stock

 

 

(234,044

)

 

 

(2

)

 

 

(421

)

 

 

(22,941

)

 

 

 

 

 

(23,364

)

Issuance of non-vested stock, net of cancellations

 

 

(537

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other stock-related activity, net of tax

 

 

(866

)

 

 

 

 

 

(95

)

 

 

 

 

 

 

 

 

(95

)

Net income

 

 

 

 

 

 

 

 

 

 

 

33,104

 

 

 

 

 

 

33,104

 

Balance at September 25, 2021

 

 

31,658,703

 

 

$

317

 

 

$

73,325

 

 

$

830,882

 

 

$

 

 

$

904,524

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 24, 2022

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

Shares

Issued

 

 

Par

Value

 

 

Additional Paid-In

Capital

 

 

Retained

Earnings

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Total

 

Balance at December 25, 2021

 

 

31,607,509

 

 

$

316

 

 

$

77,451

 

 

$

856,409

 

 

$

(1,440

)

 

$

932,736

 

Exercise of stock options

 

 

17,455

 

 

 

 

 

 

971

 

 

 

 

 

 

 

 

 

971

 

Compensation expense under Incentive Stock Plan

 

 

 

 

 

 

 

 

6,742

 

 

 

 

 

 

 

 

 

6,742

 

Purchase and cancellation of common stock

 

 

(201,135

)

 

 

(2

)

 

 

(362

)

 

 

(19,353

)

 

 

 

 

 

(19,717

)

Issuance of non-vested stock, net of cancellations

 

 

13,847

 

 

 

 

 

 

1,189

 

 

 

 

 

 

 

 

 

1,189

 

Other stock-related activity, net of tax

 

 

(18,284

)

 

 

 

 

 

(617

)

 

 

(1,561

)

 

 

 

 

 

(2,178

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,415

)

 

 

(2,415

)

Net income

 

 

 

 

 

 

 

 

 

 

 

103,713

 

 

 

 

 

 

103,713

 

Balance at September 24, 2022

 

 

31,419,392

 

 

$

314

 

 

$

85,374

 

 

$

939,208

 

 

$

(3,855

)

 

$

1,021,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 25, 2021

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

Shares

Issued

 

 

Par

Value

 

 

Additional Paid-In

Capital

 

 

Retained

Earnings

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Total

 

Balance at December 26, 2020

 

 

32,168,740

 

 

$

322

 

 

$

64,085

 

 

$

789,152

 

 

$

 

 

$

853,559

 

Exercise of stock options

 

 

19,606

 

 

 

 

 

 

909

 

 

 

 

 

 

 

 

 

909

 

Compensation expense under Incentive Stock Plan

 

 

 

 

 

 

 

 

6,212

 

 

 

 

 

 

 

 

 

6,212

 

Purchase and cancellation of common stock

 

 

(539,075

)

 

 

(5

)

 

 

(970

)

 

 

(53,638

)

 

 

 

 

 

(54,613

)

Issuance of non-vested stock, net of cancellations

 

 

19,984

 

 

 

 

 

 

2,493

 

 

 

 

 

 

 

 

 

2,493

 

Other stock-related activity, net of tax

 

 

(10,552

)

 

 

 

 

 

596

 

 

 

(2,084

)

 

 

 

 

 

(1,488

)

Net income

 

 

 

 

 

 

 

 

 

 

 

97,452

 

 

 

 

 

 

97,452

 

Balance at September 25, 2021

 

 

31,658,703

 

 

$

317

 

 

$

73,325

 

 

$

830,882

 

 

$

 

 

$

904,524

 

See accompanying Notes to Condensed Consolidated Financial Statements

5


DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

Nine Months Ended

 

(in thousands)

 

September 24, 2022

 

 

September 25, 2021

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

103,713

 

 

$

97,452

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

31,131

 

 

 

24,931

 

Provision for doubtful accounts

 

 

80

 

 

 

61

 

Benefit for deferred income taxes

 

 

(546

)

 

 

(414

)

Provision for stock-based compensation

 

 

6,742

 

 

 

6,212

 

Payment of contingent consideration

 

 

 

 

 

(2,418

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

39,325

 

 

 

20,746

 

Inventories

 

 

(146,278

)

 

 

(97,156

)

Prepaids and other current assets

 

 

(7,228

)

 

 

(7,216

)

Other assets

 

 

157

 

 

 

(3,639

)

Accounts payable

 

 

17,887

 

 

 

20,456

 

Accrued customer rebates and returns

 

 

11,712

 

 

 

23,786

 

Accrued compensation and other liabilities

 

 

(27,351

)

 

 

(5,200

)

Cash provided by operating activities

 

 

29,344

 

 

 

77,601

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Acquisition, net of cash acquired

 

 

595

 

 

 

(345,483

)

Property, plant and equipment additions

 

 

(23,780

)

 

 

(15,274

)

Cash used in investing activities

 

 

(23,185

)

 

 

(360,757

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds of revolving credit line

 

 

 

 

 

252,360

 

Payments of revolving credit line

 

 

(10,000

)

 

 

(3,000

)

Payment of contingent consideration

 

 

 

 

 

(7,982

)

Payment of debt issuance costs

 

 

 

 

 

(4,215

)

Proceeds from exercise of stock options

 

 

971

 

 

 

909

 

Purchase and cancellation of common stock

 

 

(19,717

)

 

 

(54,272

)

Other stock-related activity

 

 

(664

)

 

 

1,055

 

Cash (used in) provided by financing activities

 

 

(29,410

)

 

 

184,855

 

Effect of exchange rate changes on Cash and Cash Equivalents

 

 

(96

)

 

 

(12

)

Net Decrease in Cash and Cash Equivalents

 

 

(23,347

)

 

 

(98,313

)

Cash and Cash Equivalents, Beginning of Period

 

 

58,782

 

 

 

155,576

 

Cash and Cash Equivalents, End of Period

 

$

35,435

 

 

$

57,263

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for interest expense

 

$

4,366

 

 

$

567

 

Cash paid for income taxes

 

$

49,670

 

 

$

37,500

 

 

See accompanying Notes to Condensed Consolidated Financial Statements 

6


DORMAN PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 24, 2022 AND SEPTEMBER 25, 2021

(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 and nine months ended September 24, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022 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 25, 2021. 

2.

Business Acquisitions and Investments

DPL Holding Corporation (“Dayton Parts”)

On August 10, 2021, we acquired 100% of the equity interests of Dayton Parts, a manufacturer of chassis and other parts designed to serve the heavy-duty vehicle sector of the aftermarket, for a purchase price of $344.9 million in cash (net of $8.8 million of acquired cash) after certain customary post-acquisition purchase price adjustments. In the nine months ended September 24, 2022, we received $0.6 million in cash as proceeds from the closing net working capital adjustments. The acquisition was funded by cash on hand and borrowings under our revolving credit facility.

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.

During the year ended December 25, 2021, we recorded measurement period adjustments of approximately $2.1 million to decrease goodwill, $0.6 million to decrease the purchase price due to customary net working capital adjustments, $0.1 million to increase other current liabilities, and $1.6 million to decrease deferred tax liabilities. Our measurement period adjustments for Dayton Parts were complete as of December 25, 2021.

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

 

$

23,216

 

Inventories

 

 

79,625

 

Prepaids and other current assets

 

 

2,302

 

Property, plant and equipment

 

 

29,900

 

Goodwill

 

 

106,816

 

Identifiable intangible assets

 

 

160,400

 

Operating lease right-of-use assets

 

 

21,248

 

Other assets

 

 

848

 

Accounts payable

 

 

(11,970

)

Accrued compensation

 

 

(2,784

)

Other current liabilities

 

 

(7,604

)

Long-term operating lease liabilities

 

 

(18,444

)

Deferred tax liabilities

 

 

(38,665

)

Net cash consideration

 

$

344,888

 

 

7


 

The estimated valuation of the intangible assets acquired, and related amortization periods are as follows:

 

(in thousands)

 

Fair Value

 

 

Amortization Period (in years)

 

Customer relationships

 

$

124,100

 

 

 

20

 

Product portfolio

 

 

25,300

 

 

 

20

 

Trade names

 

 

11,000

 

 

 

10

 

Total

 

$

160,400

 

 

 

 

 

The fair values assigned to intangible assets were estimated by discounting expected cash flows based on the relief from royalty and multi-period excess earnings valuation methodologies. These valuation methods rely on management judgment, including expected future cash flows resulting from existing customer relationships, customer attrition rates, contributory effects of other assets utilized in the business, royalty rates and other factors.

The goodwill recognized is attributable primarily to strategic and synergistic opportunities related to the Company’s and Dayton Parts’ existing aftermarket businesses, the assembled workforce of Dayton Parts and other factors. The goodwill is not expected to be deductible for tax purposes.

The unaudited pro forma information for the periods set forth below gives effect to the Dayton Parts acquisition as if it had occurred as of December 29, 2019.

The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition been consummated as of that time.

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in thousands)

 

September 25, 2021

 

 

September 25, 2021

 

Net sales

 

$

371,408

 

 

$

1,070,238

 

Net income

 

$

37,089

 

 

$

108,016

 

Diluted earnings per share

 

$

1.16

 

 

$

3.37

 

The financial results of the acquisition have been included in the unaudited condensed consolidated financial statements since the date of acquisition.

Super ATV, LLC (“SuperATV”)

On October 4, 2022 (the “Closing Date”), Dorman acquired 100% of the issued and outstanding equity interests of SuperATV (the “Transaction”), for aggregate consideration of $490 million, subject to certain customary adjustments based on, among other things, the amount of cash, debt and working capital in the business of SuperATV as of the closing of the Transaction, 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 fiscal years 2023 and 2024. 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.

We have not completed the detailed valuation work necessary to determine the estimates of the fair value of the acquired assets and assumed liabilities. As a result, we have not determined the preliminary allocation of the purchase price. We also have not completed the detailed analysis to present the pro forma financial information for the combined businesses. As such, both the preliminary allocation of the purchase price as well as the pro forma financial information will be included in our future filings.

In connection with the closing of the Transaction, Dorman entered into Amendment No. 1 to Credit Agreement (the “Amendment”) which amended Dorman’s Credit Agreement, dated as of August 10, 2021 (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 matures on October 4, 2027 and is guaranteed by Dorman’s material domestic subsidiaries (together with Dorman, 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. Proceeds of the loans borrowed under the Amended Credit Agreement on the Closing Date were used to fund the transactions contemplated by the Purchase Agreement. The Amendment also extended the maturity date of the revolving credit facility to October 4, 2027.

8


Borrowings under the Amended Credit Agreement bear interest at a rate per annum equal to, at Dorman’s option, either a term Secured Overnight Financing Rate (“Term SOFR”) (subject to a 0.00% floor) or a base rate (as defined in the Amended Credit Agreement), in each case plus an applicable margin of, initially (i) in the case of Term SOFR loans, 1.50% or (ii) in the case of base rate loans, 0.50%. The applicable margin for (i) base rate loans ranges from 0.000% to 1.000% per annum and (ii) for Term SOFR loans ranges from 1.000% to 2.000% per annum, in each case, based on the Total Net Leverage Ratio (as defined in the Amended Credit Agreement). The commitment fee under the Amended Credit Agreement is initially equal to 0.20% and thereafter ranges from 0.125% to 0.250% based on the Total Net Leverage Ratio (as defined in the Amended Credit Agreement).

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 $240.0 million and $256.3 million of accounts receivable during the three months ended September 24, 2022 and September 25, 2021, respectively, and $778.1 million and $690.0 million of accounts receivable during the nine months ended September 24, 2022 and September 25, 2021 respectively. Selling, general and administrative expenses include factoring costs associated with these accounts receivable sales programs of $9.8 million and $3.1 million during the three months ended September 24, 2022 and September 25, 2021, respectively, and $23.0 million and $8.6 million during the nine months ended September 24, 2022 and September 25, 2021, respectively. The increase in factoring costs for the three and nine months ended September 24, 2022 compared to the prior year periods was primarily driven by higher LIBOR and other reference rates, and higher accounts receivable sold under these programs during the nine months ended September 24, 2022.

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)

 

September 24, 2022

 

 

December 25, 2021

 

Raw materials

 

$

16,407

 

 

$

12,746

 

Bulk product

 

 

251,778

 

 

 

225,879

 

Finished product

 

 

400,456

 

 

 

287,415

 

Packaging materials

 

 

9,257

 

 

 

5,948

 

Total

 

$

677,898

 

 

$

531,988

 

9


 

 

5.

Leases

During the nine months ended September 24, 2022, we entered into a warehouse and distribution services agreement with a third-party that requires us to reimburse the service provider for substantially all of its facility costs applicable to the warehouse where services are provided. This agreement resulted in a deemed new lease for the company for accounting purposes. The lease commenced on March 1, 2022 and runs through February 28, 2034. The lease includes fixed rental payments as well as variable payments for operating expenses that will be billed based on actual costs.

Upon the lease commencement date, we recorded an operating lease right of use asset of $35.1 million, a short-term operating lease liability (included in other accrued liabilities in the consolidated balance sheet) of $2.0 million, and a long-term operating lease liability of $33.1 million.

The following table summarizes the maturities of the lease liability for our new deemed lease as of September 24, 2022:

(in thousands)

 

September 24, 2022

 

Remainder of 2022

 

$

774

 

2023

 

 

3,160

 

2024

 

 

3,239

 

2025

 

 

3,320

 

2026

 

 

3,403

 

2027 and thereafter

 

 

27,001

 

Total remaining fixed lease payments

 

$

40,897

 

 

 

6.

Goodwill and Intangible Assets

Goodwill

Goodwill included the following:

(in thousands)

 

 

 

 

Balance at December 25, 2021

 

$

197,332

 

Foreign currency translation

 

 

(1,607

)

Balance at September 24, 2022

 

$

195,725

 

 

Intangible Assets

Intangible assets included the following:

 

 

 

September 24, 2022

 

 

December 25, 2021

 

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

 

$

148,188

 

 

$

18,460

 

 

$

129,728

 

 

$

149,150

 

 

$

12,139

 

 

$

137,011

 

Trade names

 

 

17,760

 

 

 

3,873

 

 

 

13,887

 

 

 

17,760

 

 

 

2,592

 

 

 

15,168

 

Product Portfolio

 

 

25,300

 

 

 

1,409

 

 

 

23,891

 

 

 

25,300

 

 

 

460

 

 

 

24,840

 

Technology

 

 

2,167

 

 

 

757

 

 

 

1,410

 

 

 

2,167

 

 

 

571

 

 

 

1,596

 

Other

 

 

430

 

 

 

300

 

 

 

130

 

 

 

430

 

 

 

236

 

 

 

194

 

Total

 

$

193,845

 

 

$

24,799

 

 

$

169,046

 

 

$

194,807

 

 

$

15,998

 

 

$

178,809

 

 

Amortization expense was $3.0 million and $1.2 million during the three months ended September 24, 2022 and September 25, 2021, respectively and $9.1 million and $2.9 million during the nine months ended September 24, 2022 and September 25, 2021, respectively. 

7.

Revolving Credit Facility

As of September 24, 2022 and December 25, 2021, the interest rate on the outstanding borrowings under our revolving credit facility was 4.73% and 1.35%, respectively. 

10


8.

Commitments and Contingencies

Acquisitions

We have contingent consideration related to a prior 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 prior acquisition are fully achieved, the maximum additional contingent payments to be made under the related acquisition agreement would be $3.6 million in the aggregate.

As of September 24, 2022, we accrued $1.6 million, representing the fair value of the estimated payments that we expect could become due in connection with the prior acquisition based on discussions with the applicable counterparty. For the three and nine months ended September 24, 2022, we increased this accrual by $1.6 million, with the charge included in Selling, General and Administration expenses.

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, 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 and results of operations in the period in which any such effects are recorded.

9.

Revenue Recognition

Our primary source of revenue is from contracts with and purchase orders from customers. In most instances, our contract with a customer is the customer’s purchase order. Upon acceptance of the purchase order, a contract exists with a customer as a sales agreement indicates approval and commitment of the parties, identifies the rights of both parties, identifies the payment terms, and has commercial substance. At this point, we believe it is probable that we will collect the consideration to which we will be entitled in exchange for the goods transferred to the customer.

We record estimates for cash discounts, defective and slow-moving product returns, promotional rebates, core return deposits and other discounts in the period the related product revenue is recognized (“Customer Credits”). The provision for Customer Credits is recorded as a reduction from gross sales and reserves for Customer Credits are shown as an increase of accrued customer rebates and returns. Customer Credits are estimated based on contractual provisions, historical experience, and our assessment of current market conditions. Actual Customer Credits have not differed materially from estimated amounts for each period presented. Amounts billed to customers for shipping and handling are included in net sales. Costs associated with shipping and handling are included in cost of goods sold. We have concluded that our estimates of variable consideration are not constrained.

All our revenue was recognized under the point of time approach during the nine months ended September 24, 2022 and September 25, 2021. Also, we do not have significant financing arrangements with our customers. Our credit terms are all less than one year. Lastly, we do not receive noncash consideration (such as materials or equipment) from our customers to facilitate the fulfillment of our contracts.

Disaggregated Revenue

The following tables present our disaggregated revenue by type of major good / product line, and geography.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in thousands)

 

September 24, 2022

 

 

September 25, 2021

 

 

September 24, 2022

 

 

September 25, 2021

 

Powertrain

 

$

153,773

 

 

$

136,770

 

 

$

462,556

 

 

$

386,732

 

Chassis

 

 

174,707

 

 

 

118,273

 

 

 

513,301

 

 

 

302,219

 

Automotive body

 

 

72,717

 

 

 

78,477

 

 

 

215,764

 

 

 

214,180

 

Hardware

 

 

12,273

 

 

 

14,906

 

 

 

40,847

 

 

 

43,942

 

Total

 

$

413,470

 

 

$

348,426

 

 

$

1,232,468

 

 

$

947,073

 

 

 

11


 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in thousands)

 

September 24, 2022

 

 

September 25, 2021

 

 

September 24, 2022

 

 

September 25, 2021

 

Net sales to U.S. customers

 

$

380,842

 

 

$

328,315

 

 

$

1,138,683

 

 

$

896,545

 

Net sales to non-U.S. customers

 

 

32,628

 

 

 

20,111

 

 

 

93,785

 

 

 

50,528

 

Total

 

$

413,470

 

 

$

348,426

 

 

$

1,232,468

 

 

$

947,073

 

 

10.

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 RSA’s and RSU’s and performance-based RSA’s and RSU’s.

Compensation cost related to RSA and RSU grants was $1.8 million and $1.4 million for the three months ended September 24, 2022 and September 25, 2021, respectively, and $5.1 million and $4.5 million for the nine months ended September 24, 2022 and September 25, 2021, respectively, and was included in selling, general and administrative expense in the Condensed Consolidated Statements of Operations.

The following table summarizes our RSA and RSU activity for the nine months ended September 24, 2022:

 

 

Shares

 

 

Weighted

Average

Fair Value

 

Balance at December 25, 2021

 

 

206,677

 

 

$

85.97

 

Granted

 

 

100,517

 

 

$

100.66

 

Vested

 

 

(53,569

)

 

$

83.49

 

Canceled

 

 

(40,002

)

 

$

83.51

 

Balance at September 24, 2022

 

 

213,623

 

 

$

93.97

 

For the nine months ended September 24, 2022, we granted 23,995 performance-based RSUs with a grant date fair value of $111.31 per share. For the nine months ended September 25, 2021, we granted 17,714 performance-based RSUs with a grant date fair value of $131.02 per share.

As of September 24, 2022, there was $13.2 million of unrecognized compensation cost related to unvested RSA and RSU grants that is expected to be recognized over a weighted average period of 2.2 years.

Stock Options

We grant stock options to participants in our equity plans. The compensation cost charged against income was $0.5 million and $0.3 million for the three months ended September 24, 2022 and September 25, 2021, respectively, and $1.3 million and $0.9 million for the nine months ended September 24, 2022 and September 25, 2021, respectively, and was included as selling, general and administrative expense in the Condensed Consolidated Statements of Operations.

The following table summarizes our stock option activity for the nine months ended September 24, 2022:

 

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Term

(In years)

 

 

Aggregate

Intrinsic

Value

 

Balance at December 25, 2021

 

233,396

 

 

$

77.85

 

 

 

 

 

 

 

 

 

Granted

 

78,574

 

 

$

97.16

 

 

 

 

 

 

 

 

 

Canceled

 

(11,236

)

 

$

77.45

 

 

 

 

 

 

 

 

 

Expired

 

(663

)

 

$

101.45

 

 

 

 

 

 

 

 

 

Exercised

 

(31,141

)

 

$

71.78

 

 

 

 

 

 

 

 

 

Balance at September 24, 2022

 

268,930

 

 

$

84.16

 

 

 

5.6

 

 

$

1,793,436

 

Exercisable at September 24, 2022

 

95,927

 

 

$

76.08

 

 

 

4.2

 

 

$

929,436

 

 

As of September 24, 2022, there was $3.4 million of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted average period of 2.9 years.

12


Employee Stock Purchase Plan (“ESPP”)

During the nine months ended September 24, 2022 and September 25, 2021, we purchased 13,327 shares and 31,462 shares, respectively, under the ESPP. Compensation cost related to the ESPP was $0.2 million and $0.0 million for the three months ended September 24, 2022 and September 25, 2021, respectively, and $0.3 million and $0.7 million for the nine months ended September 24, 2022 and September 25, 2021, respectively.

11.

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. Stock-based awards that were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive totaled approximately 31,000 shares and 19,000 shares for the three months ended September 24, 2022 and September 25, 2021, respectively, and 32,000 shares and 16,000 shares for the nine months ended September 24, 2022 and September 25, 2021, respectively.

The following table sets forth the computation of basic earnings per share and diluted earnings per share:

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in thousands, except per share data)

 

September 24, 2022

 

 

September 25, 2021

 

 

September 24, 2022

 

 

September 25, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

30,601

 

 

$

33,104

 

 

$

103,713

 

 

$

97,452

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic shares outstanding

 

 

31,411

 

 

 

31,692

 

 

 

31,444

 

 

 

31,895

 

Effect of stock-based compensation awards

 

 

134

 

 

 

150

 

 

 

117

 

 

 

144

 

Weighted average diluted shares outstanding

 

 

31,545

 

 

 

31,842

 

 

 

31,561

 

 

 

32,039

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.97

 

 

$

1.04

 

 

$

3.30

 

 

$

3.06

 

Diluted

 

$

0.97

 

 

$

1.04

 

 

$

3.29

 

 

$

3.04

 

 

12.

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

 

 

Nine Months Ended

 

 

September 24, 2022

 

 

September 25, 2021

 

 

September 24, 2022

 

 

September 25, 2021

 

Shares repurchased and canceled

 

 

 

 

1,426

 

 

 

20,385

 

 

 

4,568

 

Total cost of shares repurchased and canceled (in thousands)

$

 

 

$

146

 

 

$

2,140

 

 

$

462

 

Average price per share

$

 

 

$

102.62

 

 

$

104.99

 

 

$

101.16

 

 

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, including a $100 million increase and two-year extension in July 2022. 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 September 24, 2022, $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

 

 

Nine Months Ended

 

 

September 24, 2022

 

 

September 25, 2021

 

 

September 24, 2022

 

 

September 25, 2021

 

Shares repurchased and canceled

 

14,700

 

 

 

232,618

 

 

 

180,750

 

 

 

534,507

 

Total cost of shares repurchased and canceled (in thousands)

$

1,523

 

 

$

23,218

 

 

$

17,577

 

 

$

54,152

 

Average price per share

$

103.57

 

 

$

99.81

 

 

$

97.24

 

 

$

101.31

 

13


 

 

13.

Income Taxes

At September 24, 2022, we had $1.4 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 September 24, 2022, accrued interest and penalties related to uncertain tax positions were not material.

We file income tax returns in the United States, Canada, China, India, and Mexico. The statute of limitations for tax years before 2017 is closed for U.S. federal income tax purposes. The statute of limitations for tax years before 2017 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.

14.

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 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 $2.4 million in fiscal 2022 and were $2.3 million in fiscal 2021. The lease for our corporate headquarters in Colmar, PA was renewed during November 2016, effective as of January 1, 2018, and will expire on December 31, 2022. The Company is currently in discussions with the landlord of the Colmar facility for an extension of the lease term. 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 minority interest investments in two other suppliers. One of these investments is accounted for under the equity method and one is accounted for under the cost method.

15.

Fair Value Disclosures

The carrying value of financial instruments such as cash, accounts receivable, accounts payable, debt under our revolving credit facility, and other current assets and liabilities approximate their fair value based on the short-term nature of these instruments.

 

14


 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the condensed consolidated financial statements and related notes thereto included in PART I, ITEM 1 of this Quarterly Report on Form 10-Q. As used herein, unless the context requires otherwise, “Dorman,” the “Company,” “we,” “us,” or “our” refers to Dorman Products, Inc. and its subsidiaries.

Cautionary Statement Regarding Forward-Looking Statements

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; 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 “believe,” “demonstrate,” “expect,” “estimate,” “forecast,” “anticipate,” “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.

Please refer to “Statement Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” located in Part I of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements. The Company is under no obligation to, and expressly disclaims any such obligation to, update any of the information in this document, including but not limited to any situation where any forward-looking statement later turns out to be inaccurate whether as a result of new information, future events or otherwise.

Introduction

The following discussion and analysis, as well as other sections in this Quarterly Report on Form 10-Q, should be read in conjunction with the unaudited condensed consolidated financial statements and footnotes thereto of Dorman Products, Inc. and its subsidiaries 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 25, 2021.

This Quarterly Report on Form 10-Q contains the registered and unregistered trademarks or service marks of Dorman and are the property of Dorman Products, Inc. and/or its affiliates. This Quarterly Report on Form 10-Q also may contain additional trade names, trademarks or service marks belonging to other companies. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with or endorsement or sponsorship of us by these parties.

Overview

We are one of the leading suppliers of replacement 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

15


118,000 distinct parts, 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; national, regional and local warehouse distributors and specialty markets; and salvage yards. We also distribute aftermarket parts outside the United States, with sales primarily into Canada and Mexico, and to a lesser extent, Europe, the Middle East and Australia.

We may experience significant fluctuations from quarter to quarter in our results of operations due to the timing of orders placed by our customers as well as our ability and the ability of our suppliers to deliver products ordered by our customers. The introduction of new products and product lines to customers, as well as business acquisitions, 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

There have been no material changes to the Company’s critical accounting policies as described in the Annual Report on Form 10-K for the year ended December 25, 2021.

New Product Development

New product development is an important success factor for us and traditionally has been our primary vehicle for growth. We have made incremental investments to increase our new product development efforts to grow our business and strengthen our relationships with our customers. The investments primarily have been in the form of increased product development resources, increased customer and end-user awareness programs, and customer service improvements. These investments 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. We introduced 4,315 new distinct parts to our customers and end-users in the fiscal year ended December 25, 2021, including 990 “New-to-the-Aftermarket” parts.

One area of focus has been our complex electronics program, which capitalizes on the growing number of electronic components being utilized on today’s OE platforms. New vehicles contain an average of approximately 50 electronic modules, with some high-end luxury vehicles containing over 100 modules. Our complex electronics products are designed and developed in-house and tested to help ensure consistent performance, and our product portfolio is focused on further developing our leadership position in the category.

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

Acquisitions

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

16


functional accessories and upgrades, as well as replacement parts for specialty vehicles. On August 10, 2021, we acquired Dayton Parts, a manufacturer of chassis and other parts designed to serve the heavy-duty vehicle sector of the aftermarket. See Note 2, Business Acquisitions and Investments under Notes to Condensed Consolidated Financial Statements for additional information. 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

The Company’s products are primarily purchased and installed on a subsegment of the passenger and light-duty vehicles in operation in the United States (“VIO”), specifically weighted towards vehicles aged 8 to 13 years old. Each year, the United States seasonally adjusted annual rate (“US SAAR”) of new vehicles purchased adds a new year to the VIO. According to data from the Auto Care Association (“Auto Care”), the US SAAR experienced a decline from 2008 to 2011 as consumers purchased fewer new vehicles as a result of the Great Recession of 2008. We believe that the declining US SAAR during that period resulted in a follow-on decline in our primary VIO subsegment (8 to 13-year-old vehicles) commencing in 2016. However, following 2011 and the impact of the Great Recession of 2008, U.S. consumers began to increase their purchases of new vehicles which over time caused the US SAAR to recover and return to more historical levels. 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.

Miles Driven

The number of miles driven is another important statistic that impacts our business. Generally, as vehicles are driven more miles, the more likely it is that parts will fail and there will be increased demand for replacement parts, including our parts. According the U.S. Department of Transportation, the number of miles driven through October 2021 increased 11.2% year over year. We expect this increase in miles driven may continue, given that certain employers have begun to lift work-from-home policies implemented during the pandemic and, consequently, consumers may return to commuting to work on a more regular basis. However, global gasoline prices have been volatile in recent months, which may negatively impact miles driven as consumers reduce travel or seek alternative methods of transportation.

Brand Protection

We operate in a highly competitive market. As a result, we are continuously evaluating our approach to brand, pricing and terms to our different customers and channels. For example, 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.

Discounts, Allowances and Incentives

We offer a variety of customer discounts, rebates, defective and slow-moving product returns and other incentives. We may offer cash discounts for paying invoices in accordance with the specified discount terms of the invoice. In addition, we may offer pricing discounts based on volume purchased from us or other pricing discounts related to programs under a customer’s agreement. These 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

17


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. These concessions impact net sales as well as our profit levels and may require additional capital to finance the business. We expect our customers to continue to exert pressure on our margins.

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. 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. New customer acquisition costs are recorded as a reduction to revenue when incurred.

Product Warranty and Overstock Returns

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. 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.

Foreign Currency

Our products are purchased from suppliers in the United States and a variety of non-U.S. countries. The products generally are purchased through purchase orders with the purchase price specified in U.S. dollars. Accordingly, we generally do not have exposure to fluctuations in the relationship between the U.S. dollar and various foreign currencies between the time of execution of the purchase order and payment for the product.

To the extent that the U.S. dollar changes in value relative to those foreign currencies in the future, the prices charged by our suppliers for products under new purchase orders may change in equivalent U.S. dollars. The largest portion of our overseas purchases comes from China. The Chinese yuan to U.S. dollar exchange rate has fluctuated over the past several years. Any future changes in the value of the Chinese yuan relative to the U.S. dollar may result in a change in the cost of products that we purchase from China. 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. dollar must be converted into U.S. dollars using exchange rates for the current period. As a result, fluctuations in foreign currency exchange rates may impact our financial results.

Impact of Labor Market and Inflationary Costs

We 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; tariffs; 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. 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

18


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.

COVID-19

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.

Impact of Tariffs

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 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.

In January 2020, the USTR granted temporary tariff relief for certain categories of products being imported from China. The tariff relief granted by the USTR expired on most categories of products being imported from China at the end of 2020. 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 to a limited number of our products and is not expected to materially impact our operating results.

 

 

 

 

 

 

 

 

 

 

19


 

Results of Operations

The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items in our Condensed Consolidated Statements of Operations:

 

 

Three Months Ended*

 

 

Nine Months Ended*

 

(in thousands, except percentage data)

 

September 24, 2022

 

 

September 25, 2021

 

 

September 24, 2022

 

 

September 25, 2021

 

Net sales

 

$

413,470

 

 

 

100.0

%

 

$

348,426

 

 

 

100.0

%

 

$

1,232,468

 

 

 

100.0

%

 

$

947,073

 

 

 

100.0

%

Cost of goods sold

 

 

281,559

 

 

 

68.1

%

 

 

231,572

 

 

 

66.5

%

 

 

825,792

 

 

 

67.0

%

 

 

615,574

 

 

 

65.0

%

Gross profit

 

 

131,911

 

 

 

31.9

%

 

 

116,854

 

 

 

33.5

%

 

 

406,676

 

 

 

33.0

%

 

 

331,499

 

 

 

35.0

%

Selling, general and administrative expenses

 

 

89,814

 

 

 

21.7

%

 

 

72,663

 

 

 

20.9

%

 

 

268,400

 

 

 

21.8

%

 

 

205,049

 

 

 

21.7

%

Income from operations

 

 

42,097

 

 

 

10.2

%

 

 

44,191

 

 

 

12.7

%

 

 

138,276

 

 

 

11.2

%

 

 

126,450

 

 

 

13.4

%

Interest expense, net

 

 

2,344

 

 

 

0.6

%

 

 

733

 

 

 

0.2

%

 

 

5,140

 

 

 

0.4

%

 

 

918

 

 

 

0.1

%

Other expense (income), net

 

 

65

 

 

 

-0.0

%

 

 

(95

)

 

 

-0.0

%

 

 

(130

)

 

 

-0.0

%

 

 

(334

)

 

 

-0.0

%

Income before income taxes

 

 

39,688

 

 

 

9.6

%

 

 

43,553

 

 

 

12.5

%

 

 

133,266

 

 

 

10.8

%

 

 

125,866

 

 

 

13.3

%

Provision for income taxes

 

 

9,087

 

 

 

2.2

%

 

 

10,449

 

 

 

3.0

%

 

 

29,553

 

 

 

2.4

%

 

 

28,414

 

 

 

3.0

%

Net income

 

$

30,601

 

 

 

7.4

%

 

$

33,104

 

 

 

9.5

%

 

$

103,713

 

 

 

8.4

%

 

$

97,452

 

 

 

10.3

%

* 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. 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.

20


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 sales 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.

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. 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.

Payment Terms and Accounts Receivable Sales Programs

Over the past several years, we have continued to extend payment terms to certain customers as a result of customer requests and market demands. These extended terms have resulted in increased accounts receivable levels and significant uses of cash. 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. 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.

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. 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.

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.

21


As of September 24, 2022, there was $229.4 million in outstanding borrowings under the New Facility and three 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 $369.6 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.

Cash Flows

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

 

Cash provided by operating activities

 

$

29,344

 

 

$

77,601

 

Cash used in investing activities

 

 

(23,185

)

 

 

(360,757

)

Cash (used in) provided by financing activities

 

 

(29,410

)

 

 

184,855

 

Effect of foreign exchange on cash and cash equivalents

 

 

(96

)

 

 

(12

)

Net decrease in cash and cash equivalents

 

$

(23,347

)

 

$

(98,313

)

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”).

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risk is the potential loss arising from adverse changes in interest rates. All our available accounts receivable sales programs and credit incur factoring costs (sales programs) or bear interest (borrowings) at rates tied to LIBOR or alternative discount rates.

22


Under the terms of our customer-sponsored programs to sell accounts receivable, a change in LIBOR, Term SOFR, or other reference rates could affect the discount rate and the amount of factoring costs we incur, and the amount of cash we receive upon the sales of accounts receivable under these programs. A one-percentage-point increase in the discount rates on the accounts receivable sales programs would have increased our factoring costs for the three and nine months ended September 24, 2022 by approximately $2.1 million and $6.2 million, respectively.

Under the terms of the New Facility, a change in either the base rate or LIBOR would affect the rate at which we could borrow funds thereunder. A one-percentage-point increase in LIBOR or base rate would have increased our interest expense on our variable rate debt under the New Facility by approximately $0.6 million and $1.8 million for the three and nine months ended September 24, 2022, respectively.

ITEM 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level.

On August 10, 2021, we completed our acquisition of DPL Holding Corporation (“Dayton Parts”). We have evaluated the existing controls and procedures of Dayton Parts and integrated Dayton Parts into our internal control over financial reporting as of September 24, 2022. Refer to Note 2 to the Condensed Consolidated Financial Statements for additional information.

Changes in Internal Control Over Financial Reporting

Except for the integration of Dayton Parts into our internal control over financial reporting as of September 24, 2022 noted above, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act), that occurred during the three months ended September 24, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Control systems, no matter how well-conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls.

23


PART II. OTHER INFORMATION

The information set forth under Note 8, “Commitments and Contingencies,” to the Notes to Condensed Consolidated Financial Statements contained in PART I, ITEM 1 of this report is incorporated herein by reference.

ITEM 1A. Risk Factors

There have been no material changes in our risk factors from the risks previously reported in PART 1, ITEM 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 25, 2021. You should carefully consider the factors discussed in PART I, ITEM 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 25, 2021, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

During the three months ended September 24, 2022, we purchased shares of our common stock as follows: 

Period

 

Total Number

of Shares

Purchased

 

 

Average

Price Paid

per Share

 

 

Total Number

of Shares

Purchased as

Part of Publicly

Announced

Plans or

Programs (3)

 

 

Maximum

Number

(or Approximate

Dollar Value)

of Shares that

May Yet Be Purchased

Under the Plans or Programs (3)

 

June 26, 2022 through July 23, 2022

 

 

2,200

 

 

$

115.08

 

 

 

2,200

 

 

$

229,258,567

 

July 24, 2022 through August 20, 2022 (1)

 

 

12,973

 

 

$

101.43

 

 

 

12,500

 

 

$

227,989,218

 

August 21, 2022 through September 24, 2022 (2)

 

 

171

 

 

$

90.73

 

 

 

 

 

$

227,989,218

 

Total

 

 

15,344

 

 

 

 

 

 

 

14,700

 

 

$

227,989,218

 

(1)

Includes 473 shares of our common stock withheld from participants for income tax withholding purposes in connection with the vesting of restricted stock awards (“RSAs”) during the period. The RSAs were granted to participants in prior periods pursuant to our 2018 Stock Option and Stock Incentive Plan (the “2018 Plan”).

(2)

Includes 171 shares of our common stock withheld from participants for income tax withholding purposes in connection with the vesting of RSAs during the period. The RSAs were granted to participants in prior periods pursuant to the 2018 Plan.

(3)

On December 12, 2013 we announced that our Board of Directors authorized a share repurchase program, authorizing the repurchase of up to $10 million of our outstanding common stock by the end of 2014. Through several actions taken since that time, including most recently in July 2022, our Board of Directors has expanded the program to $600 million and extended the program through December 31, 2024. Amounts shown assume that the program expansion was effective at the beginning of the period indicated. 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.

 

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. Mine Safety Disclosures

Not Applicable

ITEM 5. Other Information

None

ITEM 6. Exhibits

 

(a)

Exhibits

24


 

The Exhibits included in this report are listed in the Exhibit Index on page 26, which is incorporated herein by reference.

25


EXHIBIT INDEX

 

2.1

 

 

Unit Purchase Agreement, dated August 17, 2022, by and among Dorman Products, Inc., Super ATV, LLC, the Sellers listed on the signature pages thereto, and Lindsay Hunt, in her capacity as the Sellers’ Representative. Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on August 18, 2022. +

 

2.1.1

 

Amendment, dated as of October 4, 2022 to Unit Purchase Agreement, dated August 17, 2022, by and among Dorman Products, Inc., Super ATV, LLC, the Sellers listed on the signature pages thereto, and Lindsay Hunt, in her capacity as the Sellers’ Representative. Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on October 4, 2022 . +

 

10.1

 

Amendment No. 1 to Credit Agreement, dated October 4, 2022 by and among Dorman Products, Inc., the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 4, 2022. +

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

 

 

 

32

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished with this report). **

 

 

 

101

 

The following financial statements from the Dorman Products, Inc. Quarterly Report on Form 10-Q as of and for the quarter ended September 24, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Balance Sheets; (iii) Condensed Consolidated Statements of Shareholders’ Equity; (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements.

 

 

 

104

 

The cover page from the Company’s Quarterly Report on Form 10-Q as of and for the quarter ended September 24, 2022, formatted in Inline XBRL (included as Exhibit 101).

 

*

 

Filed herewith

 

 

 

**

 

Furnished herewith

 

+

The schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish a copy of such schedules and exhibits, or any section thereof, to the SEC upon request

 

 

26


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dorman Products, Inc.

October 24, 2022

 

/s/ Kevin M. Olsen

Kevin M. Olsen

President, Chief Executive Officer

(principal executive officer)

 

 October 24, 2022

 

/s/ David M. Hession

David M. Hession

Senior Vice President and

Chief Financial Officer

(principal financial and accounting officer)


 

27