Dorman Products, Inc. - Quarter Report: 2023 April (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
_____________________
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended April 1, 2023
OR
| o | 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 incorporation or organization) | (I.R.S. Employer 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. x Yes o 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). x Yes o 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 | x | Accelerated filer | o | ||||||||
| Non-accelerated filer | o | Smaller reporting company | o | ||||||||
| Emerging growth company | o | ||||||||||
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of April 27, 2023, the registrant had 31,468,334 shares of common stock, par value $0.01 per share, outstanding.
DORMAN PRODUCTS, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
April 1, 2023
| Page | ||||||||
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
DORMAN PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
| Three Months Ended | |||||||||||
| (in thousands, except per share data) | April 1, 2023 | March 26, 2022 | |||||||||
| Net sales | $ | 466,738 | $ | 401,579 | |||||||
| Cost of goods sold | 322,261 | 268,339 | |||||||||
| Gross profit | 144,477 | 133,240 | |||||||||
| Selling, general and administrative expenses | 126,363 | 86,528 | |||||||||
| Income from operations | 18,114 | 46,712 | |||||||||
| Interest expense, net | 11,953 | 1,231 | |||||||||
| Other income, net | (357) | (84) | |||||||||
| Income before income taxes | 6,518 | 45,565 | |||||||||
| Provision for income taxes | 835 | 10,358 | |||||||||
| Net income | $ | 5,683 | $ | 35,207 | |||||||
| Other comprehensive income: | |||||||||||
| Change in foreign currency translation adjustment | $ | 119 | $ | 1,696 | |||||||
| Comprehensive Income | $ | 5,802 | $ | 36,903 | |||||||
| Earnings per share: | |||||||||||
| Basic | $ | 0.18 | $ | 1.12 | |||||||
| Diluted | $ | 0.18 | $ | 1.11 | |||||||
| Weighted average shares outstanding: | |||||||||||
| Basic | 31,436 | 31,499 | |||||||||
| Diluted | 31,537 | 31,601 | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
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DORMAN PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| (in thousands, except for share data) | April 1, 2023 | December 31, 2022 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 33,307 | $ | 46,034 | |||||||
Accounts receivable, less allowance for doubtful accounts of $1,398 and $1,363 | 429,308 | 427,385 | |||||||||
| Inventories | 686,949 | 755,901 | |||||||||
| Prepaids and other current assets | 40,173 | 39,800 | |||||||||
| Total current assets | 1,189,737 | 1,269,120 | |||||||||
| Property, plant and equipment, net | 151,541 | 148,477 | |||||||||
| Operating lease right-of-use assets | 108,549 | 109,977 | |||||||||
| Goodwill | 443,336 | 443,035 | |||||||||
| Intangible assets, net | 316,999 | 322,409 | |||||||||
| Other assets | 50,497 | 48,768 | |||||||||
| Total assets | $ | 2,260,659 | $ | 2,341,786 | |||||||
| Liabilities and shareholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 145,686 | $ | 179,819 | |||||||
| Accrued compensation | 14,606 | 19,490 | |||||||||
| Accrued customer rebates and returns | 170,432 | 192,116 | |||||||||
| Revolving credit facility | 215,460 | 239,363 | |||||||||
| Current portion of long-term debt | 12,500 | 12,500 | |||||||||
| Other accrued liabilities | 48,239 | 35,007 | |||||||||
| Total current liabilities | 606,923 | 678,295 | |||||||||
| Long-term debt | 479,439 | 482,464 | |||||||||
| Long-term operating lease liabilities | 96,571 | 98,221 | |||||||||
| Other long-term liabilities | 16,749 | 28,349 | |||||||||
| Deferred tax liabilities, net | 11,833 | 11,826 | |||||||||
| Commitments and contingencies (Note 8) | |||||||||||
| Shareholders’ equity: | |||||||||||
Common stock, $0.01 par value; 50,000,000 shares authorized; 31,469,310 and 31,430,632 shares issued and outstanding in 2023 and 2022, respectively | 315 | 314 | |||||||||
| Additional paid-in capital | 90,416 | 88,750 | |||||||||
| Retained earnings | 961,597 | 956,870 | |||||||||
| Accumulated other comprehensive loss | (3,184) | (3,303) | |||||||||
| Total shareholders’ equity | 1,049,144 | 1,042,631 | |||||||||
| Total liabilities and shareholders' equity | $ | 2,260,659 | $ | 2,341,786 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements
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DORMAN PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
| Three Months Ended April 1, 2023 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||||||||||||||
| (in thousands, except share data) | Shares Issued | Par Value | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 31,430,632 | $ | 314 | $ | 88,750 | $ | 956,870 | $ | (3,303) | $ | 1,042,631 | ||||||||||||||||||||||||
| Exercise of stock options | 15,630 | — | 1,049 | — | — | 1,049 | |||||||||||||||||||||||||||||
| Compensation expense under Incentive Stock Plan | — | — | 2,312 | — | — | 2,312 | |||||||||||||||||||||||||||||
| Purchase and cancellation of common stock | (5,125) | — | (9) | (424) | — | (433) | |||||||||||||||||||||||||||||
| Issuance of non-vested stock, net of cancellations | 52,151 | 1 | (1) | — | — | — | |||||||||||||||||||||||||||||
| Other stock-related activity, net of tax | (23,978) | — | (1,685) | (532) | — | (2,217) | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 119 | 119 | |||||||||||||||||||||||||||||
| Net income | — | — | — | 5,683 | — | 5,683 | |||||||||||||||||||||||||||||
| Balance at April 1, 2023 | 31,469,310 | $ | 315 | $ | 90,416 | $ | 961,597 | $ | (3,184) | $ | 1,049,144 | ||||||||||||||||||||||||
| Three Months Ended March 26, 2022 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||||||||||||||
| (in thousands, except share data) | Shares Issued | Par Value | |||||||||||||||||||||||||||||||||
| Balance at December 25, 2021 | 31,607,509 | $ | 316 | $ | 77,451 | $ | 856,409 | $ | (1,440) | $ | 932,736 | ||||||||||||||||||||||||
| Exercise of stock options | 2,478 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Compensation expense under Incentive Stock Plan | — | — | 2,152 | — | — | 2,152 | |||||||||||||||||||||||||||||
| Purchase and cancellation of common stock | (111,114) | (1) | (200) | (10,716) | — | (10,917) | |||||||||||||||||||||||||||||
| Cancellation of non-vested stock, net of issuances | (2,511) | — | 377 | — | — | 377 | |||||||||||||||||||||||||||||
| Other stock-related activity, net of tax | (16,446) | — | (874) | (977) | — | (1,851) | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 1,696 | 1,696 | |||||||||||||||||||||||||||||
| Net income | — | — | — | 35,207 | — | 35,207 | |||||||||||||||||||||||||||||
| Balance at March 26, 2022 | 31,479,916 | $ | 315 | $ | 78,906 | $ | 879,923 | $ | 256 | $ | 959,400 | ||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
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DORMAN PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three Months Ended | |||||||||||
| (in thousands) | April 1, 2023 | March 26, 2022 | |||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net income | $ | 5,683 | $ | 35,207 | |||||||
| Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||
| Depreciation, amortization and accretion | 13,540 | 9,743 | |||||||||
| Provision for doubtful accounts | 2,744 | 29 | |||||||||
| Provision for stock-based compensation | 2,334 | 2,152 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | (4,673) | 16,727 | |||||||||
| Inventories | 68,935 | (33,034) | |||||||||
| Prepaids and other current assets | (591) | (853) | |||||||||
| Other assets | (2,130) | (1,976) | |||||||||
| Accounts payable | (34,258) | (12,392) | |||||||||
| Accrued customer rebates and returns | (21,683) | 7,202 | |||||||||
| Accrued compensation and other liabilities | (3,691) | 409 | |||||||||
| Cash provided by operating activities | 26,210 | 23,214 | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Acquisition, net of cash acquired | 267 | 595 | |||||||||
| Property, plant and equipment additions | (10,537) | (7,247) | |||||||||
| Cash used in investing activities | (10,270) | (6,652) | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Payments of revolving credit line | (23,900) | (10,000) | |||||||||
| Payments of long-term debt | (3,125) | — | |||||||||
| Proceeds from exercise of stock options | 1,049 | — | |||||||||
| Purchase and cancellation of common stock | (433) | (10,752) | |||||||||
| Other stock-related activity | (2,254) | (1,211) | |||||||||
| Cash used in financing activities | (28,663) | (21,963) | |||||||||
| Effect of exchange rate changes on Cash and Cash Equivalents | (4) | 46 | |||||||||
| Net Decrease in Cash and Cash Equivalents | (12,727) | (5,355) | |||||||||
| Cash and Cash Equivalents, Beginning of Period | 46,034 | 58,782 | |||||||||
| Cash and Cash Equivalents, End of Period | $ | 33,307 | $ | 53,427 | |||||||
| Supplemental Cash Flow Information | |||||||||||
| Cash paid for interest expense | $ | 11,534 | $ | 999 | |||||||
| Cash paid for income taxes | $ | 1,055 | $ | 712 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements
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DORMAN PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 1, 2023 AND MARCH 26, 2022
(UNAUDITED)
1. Basis of Presentation
As used herein, unless the context requires otherwise, “Dorman,” the “Company,” “we,” “us,” or “our” refers to Dorman Products, Inc. and its subsidiaries. Our ticker symbol on the NASDAQ Global Select Market is “DORM.”
The accompanying unaudited condensed consolidated financial statements have been prepared under U.S. generally accepted accounting principles (“GAAP”) for interim financial information and under the rules and regulations of the U.S. Securities and Exchange Commission. However, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended April 1, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023 or any future period. We may experience significant fluctuations from quarter to quarter in our results of operations due to the timing of orders placed by our customers and the introduction of new products and product lines to customers. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
2. Acquisitions
On October 4, 2022 (the “Closing Date”), Dorman acquired 100% of the issued and outstanding equity interests of Super ATV, LLC ("SuperATV") (the “Transaction”), for aggregate consideration of $509.8 million (net of $6.8 million cash acquired), plus a potential earn-out payment to the sellers of SuperATV not to exceed $100 million in the aggregate, which remains subject to the achievement by SuperATV of certain revenue and gross margin targets in the years ending December 31, 2023 and December 31, 2024. In the three months ended April 1, 2023, we received $0.3 million in cash as proceeds from the closing net working capital adjustments. SuperATV is a leading independent supplier to the powersports aftermarket with a family of highly respected brands spanning functional accessories and upgrades, as well as replacement parts for specialty vehicles.
The Transaction was accounted for as a business combination under the acquisition method of accounting. We have allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill, as of December 31, 2022, is based upon preliminary information and is subject to change within the permitted measurement period (up to one year from the acquisition date) as additional information concerning final asset and liability valuations is obtained. The fair values that remain preliminary include tax-related liabilities and contingent liabilities. Any material adjustments to the estimates based upon new information identified during the measurement period will be reflected as of the date of the acquisition.
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The table below details the fair values of the assets acquired and the liabilities assumed at the acquisition date, including applicable measurement period adjustments:
| (in thousands) | |||||
| Accounts receivable | $ | 3,317 | |||
| Inventories | 90,428 | ||||
| Prepaids and other current assets | 5,293 | ||||
| Property, plant and equipment | 23,776 | ||||
| Goodwill | 247,474 | ||||
| Identifiable intangible assets | 157,500 | ||||
| Operating lease right-of-use assets | 11,661 | ||||
| Other Assets | 3,001 | ||||
| Accounts payable | (7,436) | ||||
| Accrued compensation | (2,086) | ||||
| Accrued customer rebates and returns | (1,609) | ||||
| Other current liabilities | (8,726) | ||||
| Long-term operating lease liabilities | (9,508) | ||||
| Other long-term liabilities | (3,307) | ||||
| Net cash consideration | $ | 509,778 | |||
The financial results of the Transaction have been included in the consolidated financial statements since the date of acquisition.
3. Sales of Accounts Receivable
We have entered several customer-sponsored programs administered by unrelated financial institutions that permit us to sell (factor) certain accounts receivable at discounted rates to the financial institutions. Transactions under these agreements were accounted for as sales of accounts receivable and the related accounts receivable were removed from our Condensed Consolidated Balance Sheets at the times of the sales transactions. Under these agreements, we sold $237.7 million and $275.2 million of accounts receivable during the three months ended April 1, 2023 and March 26, 2022, respectively. Selling, general and administrative expenses include factoring costs associated with these accounts receivable sales programs of $13.5 million and $4.9 million during the three months ended April 1, 2023 and March 26, 2022, respectively. The increase in factoring costs for the three months ended April 1, 2023 compared to the prior year period was driven by higher interest rates during the three months ended April 1, 2023.
4. Inventories
Inventories include the cost of material, freight, direct labor and overhead utilized in the processing of our products and are stated at the lower of cost or net realizable value. Inventories were as follows:
| (in thousands) | April 1, 2023 | December 31, 2022 | |||||||||
| Raw materials | $ | 30,839 | $ | 34,267 | |||||||
| Bulk product | 200,491 | 234,871 | |||||||||
| Finished product | 446,544 | 478,032 | |||||||||
| Packaging materials | 9,075 | 8,731 | |||||||||
| Total | $ | 686,949 | $ | 755,901 | |||||||
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5. Goodwill and Intangible Assets
Goodwill
Goodwill included the following:
| (in thousands) | |||||
| Balance at December 31, 2022 | $ | 443,035 | |||
| Measurement period adjustments for SuperATV acquisition | 233 | ||||
| Foreign currency translation | 68 | ||||
| Balance at April 1, 2023 | $ | 443,336 | |||
Intangible Assets
Intangible assets included the following:
| April 1, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
| Intangible assets subject to amortization | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||
| Customer relationships | $ | 175,430 | $ | 24,156 | $ | 151,274 | $ | 175,430 | $ | 21,643 | $ | 153,787 | ||||||||||||||||||||||||||
| Trade names | 67,690 | 7,469 | 60,221 | 67,690 | 6,370 | 61,320 | ||||||||||||||||||||||||||||||||
| Product Portfolio | 107,800 | 4,644 | 103,156 | 107,800 | 2,953 | 104,847 | ||||||||||||||||||||||||||||||||
| Technology | 2,167 | 882 | 1,285 | 2,167 | 820 | 1,347 | ||||||||||||||||||||||||||||||||
| Patents and Other | 1,430 | 367 | 1,063 | 1,430 | 322 | 1,108 | ||||||||||||||||||||||||||||||||
| Total | $ | 354,517 | $ | 37,518 | $ | 316,999 | $ | 354,517 | $ | 32,108 | $ | 322,409 | ||||||||||||||||||||||||||
Amortization expense was $5.5 million and $3.0 million during the three months ended April 1, 2023 and March 26, 2022, respectively.
6. Debt
As of April 1, 2023 and December 31, 2022, the weighted average interest rate on the outstanding borrowings under our credit facility was 6.41% and 5.78%, respectively.
7. Commitments and Contingencies
Acquisitions
We have contingent consideration related to an acquisition due to the uncertainty of the ultimate amount of any payments that will become due as earnout payments if performance targets are achieved. If the remaining performance targets for the acquisition are fully achieved, the maximum additional contingent payments to be made under the transaction documents would be $100.0 million in aggregate.
As of April 1, 2023, we accrued $20.5 million, representing the fair value of the estimated payments that we expect could become due in connection with the transaction. For the three months ended April 1, 2023, we recorded a charge of $0.5 million of accretion on the estimated payment liability, with the charge included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
Other Contingencies
We are a party to or otherwise involved in legal proceedings that arise in the ordinary course of business, such as various claims and legal actions involving contracts, employment claims, competitive practices, intellectual property infringement, product liability claims and other matters arising out of the conduct of our business. In the opinion of management, none of the actions,
9
individually or in the aggregate, taking into account relevant insurance coverage, would likely have a material financial impact on the Company and we believe the range of reasonably possible losses from current matters, taking into account relevant insurance coverage, is immaterial. However, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of any of these matters could have a material adverse impact on the Company’s cash flows, financial position or results of operations in the period in which any such effects are recorded.
8. Revenue Recognition
The following tables present our disaggregated revenue by type of major good / product line, and geography.
| Three Months Ended | |||||||||||
| (in thousands) | April 1, 2023 | March 26, 2022 | |||||||||
| Powertrain | $ | 171,035 | $ | 152,228 | |||||||
| Chassis | 188,864 | 160,862 | |||||||||
| Motor Vehicle body | 91,159 | 73,280 | |||||||||
| Hardware | 15,680 | 15,209 | |||||||||
| Total | $ | 466,738 | $ | 401,579 | |||||||
| Three Months Ended | |||||||||||
| (in thousands) | April 1, 2023 | March 26, 2022 | |||||||||
| Net sales to U.S. customers | $ | 430,693 | $ | 373,618 | |||||||
| Net sales to non-U.S. customers | 36,045 | 27,961 | |||||||||
| Total | $ | 466,738 | $ | 401,579 | |||||||
9. Stock-Based Compensation
Restricted Stock Awards (“RSAs”) and Restricted Stock Units (“RSUs”)
We issue RSAs and RSUs to participants in our equity plans in the form of time-based RSAs and RSUs and performance-based RSAs and RSUs.
Compensation cost related to RSA and RSU grants was $1.7 million and $1.6 million for the three months ended April 1, 2023 and March 26, 2022, respectively, and was included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
The following table summarizes our RSA and RSU activity for the three months ended April 1, 2023:
| Shares | Weighted Average Fair Value | ||||||||||
| Balance at December 31, 2022 | 238,922 | $ | 92.07 | ||||||||
| Granted | 93,944 | $ | 98.02 | ||||||||
| Vested | (59,382) | $ | 77.02 | ||||||||
| Canceled | (8,392) | $ | 81.56 | ||||||||
| Balance at April 1, 2023 | 265,092 | $ | 97.88 | ||||||||
For the three months ended April 1, 2023, we granted 29,399 performance-based RSUs with a grant date fair value of $113.15 per share. For the three months ended March 26, 2022, we granted 23,995 performance-based RSUs with a grant date fair value of $111.31 per share.
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As of April 1, 2023, there was $20.2 million of unrecognized compensation cost related to unvested RSA and RSU grants that is expected to be recognized over a weighted average period of 2.6 years.
Stock Options
We grant stock options to participants in our equity plans. Compensation cost related to stock option grants was $0.4 million for both the three months ended April 1, 2023 and March 26, 2022, and was included as selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
The following table summarizes our stock option activity for the three months ended April 1, 2023:
| Shares | Weighted Average Price | Weighted Average Remaining Term (years) | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
| Balance at December 31, 2022 | 268,119 | $ | 84.03 | ||||||||||||||||||||
| Granted | 76,784 | $ | 91.28 | ||||||||||||||||||||
| Canceled | (1,113) | $ | 96.36 | ||||||||||||||||||||
| Exercised | (21,702) | $ | 72.85 | ||||||||||||||||||||
| Balance at April 1, 2023 | 322,088 | $ | 86.47 | 6.1 | $ | 1,935 | |||||||||||||||||
| Exercisable at April 1, 2023 | 133,913 | $ | 80.31 | 5.0 | $ | 1,398 | |||||||||||||||||
As of April 1, 2023, there was $5.7 million of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted average period of 3.2 years.
10. Earnings Per Share
Basic earnings per share was calculated by dividing our net income by the weighted average number of common shares outstanding during the period, excluding unvested RSAs which are considered to be contingently issuable. To calculate diluted earnings per share, common share equivalents are added to the weighted average number of common shares outstanding. Common share equivalents are calculated using the treasury stock method and are computed based on outstanding stock-based awards.
For the three months ended April 1, 2023 and March 26, 2022, there were approximately 237,000 shares and 27,000 shares, respectively, that were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive.
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The following table sets forth the computation of basic earnings per share and diluted earnings per share:
| Three Months Ended | |||||||||||
| (in thousands, except per share data) | April 1, 2023 | March 26, 2022 | |||||||||
| Net income | $ | 5,683 | $ | 35,207 | |||||||
| Denominator: | |||||||||||
| Weighted average basic shares outstanding | 31,436 | 31,499 | |||||||||
| Effect of stock-based compensation awards | 101 | 102 | |||||||||
| Weighted average diluted shares outstanding | 31,537 | 31,601 | |||||||||
| Earnings Per Share: | |||||||||||
| Basic | $ | 0.18 | $ | 1.12 | |||||||
| Diluted | $ | 0.18 | $ | 1.11 | |||||||
11. Common Stock Repurchases
We periodically repurchase, at the then current market price, and cancel common stock issued to the Dorman Products, Inc. 401(k) Retirement Plan and Trust (the “401(k) Plan”). 401(k) Plan participants can no longer purchase shares of Dorman common stock as an investment option under the 401(k) Plan. Shares are generally purchased by the Company from the 401(k) Plan when participants sell units as permitted by the 401(k) Plan or elect to leave the 401(k) Plan upon retirement, termination or other reasons. The following table summarizes the repurchase and cancellation of common stock by the Company for the periods indicated:
| Three Months Ended | |||||||||||
| April 1, 2023 | March 26, 2022 | ||||||||||
| Shares repurchased and canceled | 5,125 | 12,764 | |||||||||
| Total cost of shares repurchased and canceled (in thousands) | $ | 434 | $ | 1,388 | |||||||
| Average price per share | $ | 84.62 | $ | 108.74 | |||||||
Separately, our Board of Directors has authorized the repurchase of up to $600 million of our common stock through December 31, 2024 under a previously announced share repurchase program and subsequent authorizations. Under this program, share repurchases may be made from time to time depending on market conditions, share price, share availability and other factors at our discretion. The share repurchase program does not obligate us to acquire any specific number of shares. At April 1, 2023, $228.0 million was available for repurchase under this share repurchase program. The following table summarizes the repurchase and cancellation of common stock under the share repurchase program:
| Three Months Ended | |||||||||||
| April 1, 2023 | March 26, 2022 | ||||||||||
| Shares repurchased and canceled | — | 98,350 | |||||||||
| Total cost of shares repurchased and canceled (in thousands) | $ | — | $ | 9,529 | |||||||
| Average price per share | $ | — | $ | 96.89 | |||||||
12. Income Taxes
At April 1, 2023, we had $3.4 million of net unrecognized tax benefits, all of which would lower our effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of April 1, 2023, accrued interest and penalties related to uncertain tax positions were not material.
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We file income tax returns in the United States, Canada, China, India, and Mexico. The statute of limitations for tax years before 2019 is closed for U.S. federal income tax purposes. The statute of limitations for tax years before 2018 is closed for the states in which we file. The statute of limitations for tax years before 2019 is closed for income tax purposes in Canada, China, and India. The statute of limitations for tax years before 2017 is closed for income tax purposes in Mexico.
13. Related-Party Transactions
We lease our Colmar, PA facility and a portion of our Lewisberry, PA facility from entities in which Steven L. Berman, our Non-Executive Chairman, and certain of his family members are owners. Each lease is a non-cancelable operating lease. Total rental payments to those entities under these lease arrangements will be $2.9 million in fiscal 2023 and were $2.5 million in fiscal 2022. The lease for our corporate headquarters in Colmar, PA was renewed in December 2022, effective as of January 1, 2023, and will expire on December 31, 2027. The lease for our Lewisberry, PA operating facility was signed in September 2020 and will expire on December 31, 2027.
We are a partner in a joint venture with one of our suppliers and own a minority interest in two other suppliers. Two of these investments are accounted for under the equity method and one is accounted for under the cost method.
14. Fair Value Disclosures
The carrying value of financial instruments such as cash and cash equivalents, accounts receivable, accounts payable, and other current assets and liabilities approximate their fair value based on the short-term nature of these instruments. The carrying value of borrowings under our credit facility approximates fair value because borrowings under our credit facility bear interest at rates indexed to a market rate (Term SOFR).
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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
Certain statements in this document constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to the global coronavirus pandemic, net sales, diluted earnings per share, gross profit, gross margin, selling, general and administrative expenses, income tax expense, income before income taxes, net income, cash and cash equivalents, indebtedness, liquidity, the Company’s share repurchase program, the Company’s outlook, the Company’s growth opportunities and future business prospects, operational costs and productivity initiatives, inflation, customs duties and mitigation of tariffs, long-term value, acquisitions and acquisition opportunities, investments, cost offsets, quarterly fluctuations, new product development, customer concessions, and fluctuations in foreign currency. Words such as “may,” “believe,” “demonstrate,” “expect,” “estimate,” “forecast,” “project,” “plan,” “anticipate,” “intend,” “should,” “will” and “likely” and similar expressions identify forward-looking statements. However, the absence of these words does not mean the statements are not forward-looking. In addition, statements that are not historical should also be considered forward-looking statements. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date the statements were made. Such forward-looking statements are based on current expectations that involve a number of known and unknown risks, uncertainties and other factors (many of which are outside of our control) which may cause actual events to be materially different from those expressed or implied by such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected.
Please refer to “Statement Regarding Forward-Looking Statements” and “Item 1A. 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. included in “ITEM 1. Financial Statements” of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
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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 and upgrade parts in the motor vehicle aftermarket industry, serving passenger cars, light-, medium-, and heavy-duty trucks, as well as specialty vehicles, including utility terrain vehicles (UTVs) and all-terrain vehicles (ATVs). As of December 31, 2022, we marketed approximately 129,000 distinct parts compared to approximately 118,000 as of December 25, 2021, many of which we designed and engineered. This number excludes private label stock-keeping units and other variations in how we market, package and distribute our products, includes distinct parts of acquired companies and reflects distinct parts that have been discontinued at the end of their lifecycle. Our products are sold under our various brand names, under our customers’ private label brands or in bulk. We are one of the leading aftermarket suppliers of parts that were traditionally available to consumers only from original equipment, or OE, 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, UTV windshields, and complex electronics modules.
We generate most of our net sales from customers in North America, primarily in the United States. Our products are sold primarily through aftermarket retailers, including through their online platforms; dealers; 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.
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 31, 2022.
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 three months ended April 1, 2023, we introduced 984 new distinct parts to our customers and end-users, including 360 “New-to-the-Aftermarket” parts. We introduced 4,443 new distinct parts to our customers and end-users in the fiscal year ended December 31, 2022, including 1,565 “New-to-the-Aftermarket” parts.
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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 products we market for the medium- and heavy-duty truck sector of the motor vehicle aftermarket industry. We believe that this sector provides many of the same growth opportunities that the passenger car and light-duty truck sector of the motor vehicle aftermarket industry has provided us. We specialize in offering parts to this sector that were traditionally only available from OE manufacturers or salvage yards, similar to how we approach the passenger car and light-duty truck sector. During fiscal 2022, we introduced 486 distinct parts in this product line. We expect to continue to invest in the medium- and heavy-duty product category.
Acquisitions
A key component of our strategy is growth through acquisitions. On October 4, 2022, we acquired Super ATV, LLC ("SuperATV"), a leading independent supplier to the powersports aftermarket with a family of highly respected brands spanning functional accessories and upgrades, as well as replacement parts for specialty vehicles. See Note 2, Acquisitions under Notes to Condensed Consolidated Financial Statements for additional information. We may acquire businesses in the future to supplement our financial growth, increase our customer base, add to our distribution capabilities or enhance our product development resources, among other reasons.
Economic Factors
The Company’s financial results are also impacted by various economic and industry factors, including, but not limited to the number, age and condition of vehicles in operation at any one time, and the 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.
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 supported an increase in VIO, which increased to 293.4 million in 2022, a 1% increase over 2021. According to data published by Polk, a division of IHS Automotive, the average age of VIO increased to 12.4 years as of October 2022 from 12.2 years as of October 2021.
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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 to the U.S. Department of Transportation, the number of miles driven through October 2022 increased 1.5% 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, we maintain a brand protection policy, which is designed to ensure that certain products bearing the Dorman name are not advertised below certain approved pricing levels. In addition, we may pursue legal remedies when we see third parties violating our intellectual property rights, including those that violate our patents, wrongfully represent our products as their own or use our product images for their own marketing efforts.
Discounts, Allowances and Incentives
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 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 and extended customer payment terms, and allowed a higher level of product returns in certain cases. These concessions impact net sales as well as our profit levels and may require additional capital to finance the business. We expect our customers to continue to exert pressure on our margins.
New Customer Acquisition Costs
We may incur customer acquisition costs where we incur change-over costs to induce a customer to switch from a competitor’s brand, including expanding new product lines into our existing customers. Change-over costs include the costs related to removing the new customer’s inventory and replacing it with our inventory, which is commonly referred to as a stock lift. 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
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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.
We have subsidiaries located outside the United States with various functional currencies. Because our consolidated financial statements are denominated in U.S. dollars, the assets, liabilities, net sales, and expenses that are denominated in currencies other than the U.S. dollar must be converted into U.S. 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 three months ended April 1, 2023 as well as during the year ended December 31, 2022, due primarily to global transportation and logistics constraints, which have resulted in significantly higher transportation costs; tariffs; material costs; and wage inflation from an increasingly competitive labor market. Increased freight, higher labor costs and material inflation costs may continue to negatively impact our results throughout the remainder of fiscal 2023, despite recent signs of global supply chain constraints easing and ocean freight and commodity costs lowering. We attempt to offset inflationary pressures with cost-saving initiatives, price increases to customers and the use of alternative suppliers. Although we have implemented pass-through price increases to offset inflationary cost impacts, the price increases have often been implemented after we have experienced higher costs resulting in a lag effect to the full recovery of these costs. Furthermore, pricing increases that we implemented to pass through the increased costs had no added profit dollars and consequently did not fully offset the impact that the increased costs had on our gross and operating margin percentages. There can be no assurance that we will be successful in implementing pricing increases in the future to recover increased inflationary costs.
Impact of Interest Rates
Our business is subject to interest rate risk under the terms of our customer accounts receivable sales programs, as a change in the Term Secured Overnight Financing Rate (“Term SOFR”) or
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alternative discount rate affects the cost incurred to factor eligible accounts receivable. Additionally, our outstanding borrowings under our credit facility bear interest at variable rates tied to Term SOFR or the applicable base rate. Under the terms of the credit facility, a change in interest rates affects the rate at which we can borrow funds thereunder and also impacts the interest cost on existing borrowings. During the three months ended April 1, 2023 as well as the year ended December 31, 2022, we saw significant increases in Term SOFR and other reference rates, which impacted our results as discussed in Results of Operations that follows. We expect interest rates may continue to increase in the foreseeable future, increasing the costs associated with our accounts receivable sales programs and outstanding borrowings.
Impact of Tariffs
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.
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 is scheduled to expire on September 30, 2023. The reinstated tariff relief applies to a limited number of our products and is not expected to materially impact our operating results.
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* | |||||||||||||||||||||||
| (in thousands, except percentage data) | April 1, 2023 | March 26, 2022 | |||||||||||||||||||||
| Net sales | $ | 466,738 | 100.0 | % | $ | 401,579 | 100.0 | % | |||||||||||||||
| Cost of goods sold | 322,261 | 69.0 | % | 268,339 | 66.8 | % | |||||||||||||||||
| Gross profit | 144,477 | 31.0 | % | 133,240 | 33.2 | % | |||||||||||||||||
| Selling, general and administrative expenses | 126,363 | 27.1 | % | 86,528 | 21.5 | % | |||||||||||||||||
| Income from operations | 18,114 | 3.9 | % | 46,712 | 11.6 | % | |||||||||||||||||
| Interest expense, net | 11,953 | 2.6 | % | 1,231 | 0.3 | % | |||||||||||||||||
| Other income, net | (357) | -0.1 | % | (84) | 0.0 | % | |||||||||||||||||
| Income before income taxes | 6,518 | 1.4 | % | 45,565 | 11.3 | % | |||||||||||||||||
| Provision for income taxes | 835 | 0.2 | % | 10,358 | 2.6 | % | |||||||||||||||||
| Net income | $ | 5,683 | 1.2 | % | $ | 35,207 | 8.8 | % | |||||||||||||||
*Percentage of sales information may not add due to rounding
Three Months Ended April 1, 2023 Compared to Three Months Ended March 26, 2022
Net sales increased 16% to $466.7 million for the three months ended April 1, 2023 from $401.6 million for the three months ended March 26, 2022. The increase in net sales reflected the addition of
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SuperATV in October 2022, successful new product launches, and price increases to offset inflationary costs. Net sales growth for the three months ended April 1, 2023 excluding SuperATV was 3.5%.
Gross profit margin was 31.0% of net sales for the three months ended April 1, 2023 compared to 33.2% of net sales for the three months ended March 26, 2022. The decline in gross margin as a percentage of net sales is primarily due to the sell-through of high-cost inventory purchased in 2022 that was impacted by inflationary costs, partially offset by the favorable impacts of pricing actions and the addition of SuperATV, which has a higher gross margin percentage than the Company average.
Selling, general and administrative expenses (“SG&A”) were $126.4 million, or 27.1% of net sales, for the three months ended April 1, 2023 compared to $86.5 million, or 21.5% of net sales, for the three months ended March 26, 2022. The increase in SG&A as a percentage of net sales was primarily due to the impact of higher interest rates on our customer accounts receivable factoring programs and the addition of SuperATV, which has higher SG&A expenses as a percentage of net sales than the Company average. SG&A expenses as a percentage of net sales also increased in the three months ended April 1, 2023 as a result of a charge recorded related to a customer bankruptcy filing.
Our effective tax rate was 12.8% for the three months ended April 1, 2023 compared to 22.7% for the three months ended March 26, 2022. The decrease in the effective tax rate was due to favorable discrete items in the quarter, partially offset by an increase in state tax expense and the effect of foreign operations.
Liquidity and Capital Resources
Historically, our primary sources of liquidity have been our invested cash and the cash flow we generate from our operations, including accounts receivable sales programs provided by certain customers. Cash and cash equivalents were $33.3 million at April 1, 2023 and $46.0 million at December 31, 2022. Working capital was $582.8 million at April 1, 2023 compared to $590.8 million at December 31, 2022. Shareholders’ equity was $1,049.1 million at April 1, 2023 and $1,042.6 million at December 31, 2022.
Based on our current operating plan, we believe that our sources of available capital are adequate to meet our ongoing cash needs for at least the next twelve months. However, our liquidity could be negatively affected by extending payment terms to customers, a decrease in demand for our products, increases in interest rates, the outcome of contingencies or other factors. See Note 7, “Commitments and Contingencies”, in the accompanying condensed consolidated financial statements for additional information regarding commitments and contingencies that may affect our liquidity.
Payment Terms and Accounts Receivable Sales Programs
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 term extensions. However, any sales of accounts receivable through these programs ultimately result in us receiving a lesser amount of cash upfront than if we collected those accounts receivable ourselves in due course, resulting in accounts receivable factoring costs. Moreover, to the extent that any of these accounts receivable sales programs bear interest at rates tied to the Term SOFR or other reference rates, increases in these applicable rates increase our cost to sell our receivables and reduce the amount of cash we receive. See ITEM 3. Quantitative and Qualitative Disclosures about Market Risk for more information. Further extensions
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of customer payment terms would result in additional uses of cash or increased costs associated with the sales of accounts receivable.
During the three months ended April 1, 2023 and March 26, 2022, we sold $237.7 million and $275.2 million of accounts receivable, respectively, under these programs. If receivables had not been sold over the previous twelve months, approximately $745.9 million and $722.3 million of additional accounts receivable would have been outstanding at April 1, 2023 and December 31, 2022, respectively, based on our standard payment terms. We had capacity to sell more accounts receivable under these programs if the needs of the business warranted. Further extensions of customer payment terms would result in additional uses of cash or increased costs associated with the sales of accounts receivable.
During the three months ended April 1, 2023 and March 26, 2022, factoring costs associated with these accounts receivable sales programs were $13.5 million and $4.9 million, respectively. The increase in factoring costs year over year was driven by higher Term SOFR and other reference rates.
Credit Agreement
The Company has a credit agreement that provides a $600.0 million revolving credit facility and includes a $500.0 million term loan with quarterly amortization payment requirements. The credit agreement matures on October 4, 2027. As of April 1, 2023, there was $215.5 million in outstanding borrowings under the revolving credit facility, and $493.8 million in outstanding borrowings under the term loan. Also on that date, we had three outstanding letters of credit for $1.0 million in aggregate. Net of outstanding borrowings and letters of credit, we had $383.5 million available under the credit facility at April 1, 2023.
Our credit agreement contains affirmative and negative covenants. As of April 1, 2023, we were not in default with respect to our credit agreement.
Refer to Note 7, “Long-Term Debt” to the Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for additional information.
Cash Flows
The following summarizes the activities included in the Condensed Consolidated Statements of Cash Flows:
| Three Months Ended | |||||||||||
| (in thousands) | April 1, 2023 | March 26, 2022 | |||||||||
| Cash provided by operating activities | $ | 26,210 | $ | 23,214 | |||||||
| Cash used in investing activities | (10,270) | (6,652) | |||||||||
| Cash used in financing activities | (28,663) | (21,963) | |||||||||
| Effect of foreign exchange on cash and cash equivalents | (4) | 46 | |||||||||
| Net decrease in cash and cash equivalents | $ | (12,727) | $ | (5,355) | |||||||
During the three months ended April 1, 2023, cash provided by operating activities was $26.2 million compared to $23.2 million during the three months ended March 26, 2022. The $3.0 million increase was driven by higher cash inflows for working capital, partially offset by lower income during the three months ended April 1, 2023, compared to the prior year period.
Investing activities used cash of $10.3 million and $6.7 million during the three months ended April 1, 2023 and March 26, 2022, respectively.
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Financing activities used cash of $28.7 million and $22.0 million during the three months ended April 1, 2023 and March 26, 2022, respectively. During the three months ended April 1, 2023, we repaid $23.9 million of outstanding borrowings under our revolving credit facility, and $3.1 million of our term loan balance under our credit agreement. During the three months ended March 26, 2022, we repaid $10.0 million of outstanding borrowing under our revolving credit facility. We also paid $9.5 million to repurchase 98,350 shares of common stock under our share repurchase plan during the three months ended March 26, 2022. The remaining uses of cash from financing activities in each period resulted primarily from the repurchase of our common stock from our 401(k) Plan and income tax withholding in connection with the vesting of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”).
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risk is the potential loss arising from adverse changes in interest rates. Accounts receivable factored under our customer-sponsored accounts receivable sales programs bear interest at rates tied to Term SOFR or alternative discount rates and result in us incurring costs as those accounts receivable are factored. Additionally, interest expense from our variable rate debt is impacted by reference rates.
Under the terms of our customer-sponsored programs to sell accounts receivable, a change in the reference rate would affect the amount of financing 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 Term SOFR or the discount rates on the accounts receivable sales programs would have increased our factoring costs and reduced the amount of cash we would have received by approximately $2.1 million for both the three months ended April 1, 2023 and March 26, 2022.
Under the terms of our credit agreement, a change in the reference rate or the lender’s base rate would affect the rate at which we could borrow funds thereunder. A one-percentage-point increase in the reference rate or base rate would have increased our interest expense on our variable rate debt under our credit agreement by approximately $1.8 million and $0.6 million for the three months ended April 1, 2023 and March 26, 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 October 4, 2022, we completed our acquisition of Super ATV, LLC ("SuperATV"). We are in the process of evaluating the existing controls and procedures of SuperATV and integrating SuperATV into our internal control over financial reporting. In accordance with SEC Staff guidance permitting a company to exclude an acquired business from management’s assessment of the effectiveness of internal control over financial reporting for a period of one year following the date on which the acquisition is completed, we have excluded SuperATV from our assessment of the effectiveness of internal control over financial reporting as of April 1, 2023. Refer to Note 2 to the Condensed Consolidated Financial Statements for additional information.
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Changes in Internal Control Over Financial Reporting
Except for the acquisition of SuperATV 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 April 1, 2023, that 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.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
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 31, 2022. 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 31, 2022, 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 April 1, 2023, 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 (4) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (4) | |||||||||||||||||||
| January 1, 2023 through January 28, 2023 (1) | 222 | $ | 84.50 | — | $ | 227,989,218 | |||||||||||||||||
| January 29, 2023 through February 25, 2023 (2) | 1,078 | $ | 93.38 | — | $ | 227,989,218 | |||||||||||||||||
| February 26, 2023 through April 1, 2023(3) | 6,761 | $ | 83.36 | — | $ | 227,989,218 | |||||||||||||||||
| Total | 8,061 | — | $ | 227,989,218 | |||||||||||||||||||
(1)Includes 222 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 2008 Stock Option and Stock Incentive Plan (the “2008 Plan”).
(2)Includes 1,078 shares purchased from the 401(k) Plan.
(3)Includes 2,714 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 2008 Plan and our 2018 Stock Option and Stock Incentive Plan. Also includes 4,047 shares purchased from the 401(k) Plan.
(4)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. 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.
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ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Mine Safety Disclosures
Not Applicable
ITEM 5. Other Information
None
ITEM 6. Exhibits
(a)Exhibits
The Exhibits included in this report are listed in the Exhibit Index on page 25, which is incorporated herein by reference.
EXHIBIT INDEX
| 3.1 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32 | |||||
| 101 | The following financial statements from the Dorman Products, Inc. Quarterly Report on Form 10-Q as of and for the quarter ended April 1, 2023, 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 April 1, 2023, formatted in Inline XBRL (included as Exhibit 101). | ||||
* Filed herewith
** Furnished herewith
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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.
May 2, 2023
| /s/ Kevin M. Olsen | |||||
| Kevin M. Olsen | |||||
| President, Chief Executive Officer | |||||
| (principal executive officer) | |||||
May 2, 2023
| /s/ David M. Hession | |||||
| David M. Hession | |||||
| Senior Vice President and | |||||
| Chief Financial Officer | |||||
| (principal financial and accounting officer) | |||||
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