Dorman Products, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 25, 2022. Dorman supplies replacement parts for passenger cars and light-, medium- and heavy-duty trucks, primarily in the North American aftermarket. Results include Dayton Parts, acquired in August 2021; prior-year comparable periods do not.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $417.4 million | $310.6 million | $819.0 million | $598.6 million |
| Gross profit | $141.5 million | $110.1 million | $274.8 million | $214.6 million |
| Gross margin | 33.9% | 35.5% | 33.5% | 35.9% |
| Operating income | $49.5 million | $40.6 million | $96.2 million | $82.3 million |
| Net income | $37.9 million | $31.6 million | $73.1 million | $64.3 million |
| Diluted EPS | $1.20 | $0.99 | $2.32 | $2.00 |
| Operating cash flow | Not presented by quarter | $37.4 million | $39.1 million |
Revenue rose 34% in Q2 and 37% in the first half; excluding Dayton Parts, growth was 13% and 17%, respectively. Chassis sales were a major contributor, increasing to $177.7 million in Q2 from $98.6 million and to $338.6 million in the first half from $184.0 million. Operating income increased 22% in Q2 and 17% in the first half, while net income increased 20% and 14%, respectively.
Gross margin contracted 1.6 percentage points in Q2 and 2.4 points for the first half. Management attributed the pressure to Dayton Parts’ dilution and higher freight, supply-chain, material and wage costs. Price increases and cost actions helped preserve gross-profit dollars but, management said, pass-through pricing carried a lag and did not add profit dollars. SG&A was $92.1 million (22.1% of sales) in Q2 and $178.6 million (21.8%) in the first half; improved sales leverage was partly offset by wage inflation and increased receivable-factoring costs.
Cash, liquidity and debt
- Cash was $52.0 million at June 25, 2022, versus $58.8 million at December 25, 2021. Working capital was $470.7 million, up from $411.5 million.
- Operating cash flow was $37.4 million, down from $39.1 million, primarily due to greater working-capital outflows, including inventory purchases. Capital expenditures were $16.1 million; cash used in investing was $15.5 million.
- Revolving credit borrowings were $229.4 million, down from $239.4 million at year-end; the facility rate was 3.25%, versus 1.35%. The $600 million facility had $369.8 million of availability after borrowings and letters of credit.
- Inventory increased to $634.8 million from $532.0 million. Dorman reported that first-half cash uses included $16.1 million of share repurchases under its program and $10.0 million of revolver repayments.
- Receivable factoring costs rose to $13.2 million for the first half from $5.5 million. Dorman sold $538.1 million of receivables under these programs during the period.
Management believed available capital was adequate for ongoing needs over at least the next 12 months, while noting liquidity could be affected by customer payment terms, demand, interest rates and contingencies.
Outlook, risks and other notable items
- The filing provides no specific numerical earnings or revenue guidance. Management expected higher freight, labor and material costs, supply-chain pressures, COVID-related logistics disruptions and higher interest rates to continue through fiscal 2022.
- Management cited competition, customer pricing and return demands, supplier and logistics constraints, inflation, tariffs, interest rates, foreign currency movements, and cybersecurity among business risks. It expected LIBOR or other reference-rate increases to raise both borrowing and factoring costs. A one-percentage-point rate increase would have added approximately $4.1 million to first-half factoring costs and $1.2 million to first-half interest expense, based on the filing’s sensitivity estimates.
- Dayton Parts was acquired for approximately $344.9 million in cash in August 2021. Management identified acquisition integration and the acquired business’s dilutive impact on margins as relevant considerations. Dayton Parts was excluded from management’s internal-control effectiveness assessment during the permitted post-acquisition period.
- On July 21, 2022, the board increased the share-repurchase authorization by $100 million and extended it through December 31, 2024, bringing the total authorization to $600 million. At June 25, $129.5 million remained under the prior authorization.
- Management considered current legal matters’ reasonably possible losses, net of insurance, immaterial, but noted legal outcomes are inherently uncertain and could adversely affect results or cash flows. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Track whether price increases and cost-saving measures can catch up with inflation and reverse gross-margin contraction.
- Assess inventory growth, working-capital requirements, customer payment terms and reliance on receivable factoring as rates rise.
- Evaluate Dayton Parts’ contribution to sales, profitability, integration progress and internal-control integration.
- Confirm liquidity and covenant or facility headroom as debt costs and repurchases affect cash.
- Review subsequent filings for updated outlook, legal matters, and the pace and terms of share repurchases.