Dorman Products, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended July 1, 2023, compared with periods ended June 25, 2022. Dorman supplies replacement and upgrade parts for motor vehicles and specialty vehicles. The results include SuperATV, acquired October 4, 2022.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $480.6 million | $417.4 million | $947.3 million | $819.0 million |
| Gross margin | 34.0% | 33.9% | 32.5% | 33.5% |
| Operating income | $55.2 million | $49.5 million | $73.3 million | $96.2 million |
| Net income | $32.8 million | $37.9 million | $38.5 million | $73.1 million |
| Diluted EPS | $1.04 | $1.20 | $1.22 | $2.32 |
Q2 sales increased 15%; excluding SuperATV, growth was 1%. First-half sales increased 16%; excluding SuperATV, growth was 2%. Q2 gross margin edged higher, while first-half margin declined. Net interest expense rose to $12.6 million in Q2 and $24.5 million in the first half, from $1.6 million and $2.8 million, respectively. SG&A was $108.3 million in Q2 and $234.7 million in the first half. Net margin was 6.8% in Q2 and 4.1% in the first half, versus 9.1% and 8.9% a year earlier.
Cash flow, debt and liquidity
- First-half operating cash flow was $92.9 million, versus $37.4 million. Inventory reduction provided $113.3 million of cash; capital expenditures were $23.3 million.
- Cash was $35.7 million at July 1, 2023, down from $46.0 million at year-end. Working capital was $618.4 million.
- At July 1, the company reported $166.6 million outstanding on its revolver and $490.6 million on its term loan; $432.1 million remained available under the $600 million credit facility, net of borrowings and letters of credit. The facility matures October 4, 2027; the company reported no covenant default.
- The weighted-average rate on credit-facility borrowings was 6.95%, versus 5.78% at December 31, 2022. First-half cash interest paid was $26.7 million, compared with $2.3 million.
- First-half cash used in financing was $80.1 million, including $72.8 million of revolver repayments and $6.3 million of term-loan repayments. Management stated available capital should meet operating needs for at least the next 12 months.
Material changes and management commentary
- Management attributed sales growth to SuperATV, new products and pricing actions. The company introduced 1,841 distinct parts in the first half, including 621 new-to-the-aftermarket parts.
- First-half gross margin fell as higher-cost inventory purchased in 2022 flowed through cost of sales; pricing actions and SuperATV’s higher gross margin partly offset the impact.
- SG&A rose as a share of sales, reflecting higher receivables-factoring costs from increased interest rates, SuperATV’s expense profile, higher intangible amortization and a customer-bankruptcy-related charge. A lower estimated acquisition earnout liability partly offset these items.
- Factoring costs were $25.4 million in the first half, up from $13.2 million. The company sold $479.7 million of receivables under customer programs. These programs provide liquidity but reduce upfront cash proceeds.
- Management cited ongoing exposure to inflation in freight, labor and materials, tariffs, customer pricing and return demands, interest rates, foreign exchange, customer payment terms, and fluctuations in customer orders and supplier deliveries. It said cost increases may continue to pressure results and pricing recovery may lag or be incomplete.
- Acquisition earnout liabilities were valued at $8.0 million at July 1, down from $20.0 million at year-end, including a $12.4 million fair-value decrease recognized as a benefit in SG&A. Maximum remaining contingent payments across acquisitions could reach $102.0 million if performance targets are met.
- No specific financial guidance was provided in the supplied filing text. Management noted quarterly results may fluctuate and stated that SuperATV was excluded from the internal-control effectiveness assessment during the permitted post-acquisition period.
Important facts for investors to verify
- How much of future sales and earnings growth comes from SuperATV versus organic growth, and how the acquisition performs against earnout targets.
- Whether gross margins recover as higher-cost inventory clears, and whether pricing and cost-saving actions adequately address inflation, tariffs and customer concessions.
- The impact of variable interest rates on both debt expense and receivables factoring costs, and continued reliance on receivables-sale programs.
- The size and effects of the customer-bankruptcy charge, and any further changes to acquisition valuations or contingent consideration.
- Integration of SuperATV into internal controls; the filing states it was excluded from the company’s assessment as of July 1, 2023.