Dorman Products, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Dorman supplies replacement parts and fasteners for the vehicle aftermarket. This unaudited quarterly report covers the three and nine months ended September 24, 2022; comparison periods ended September 25, 2021. Dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $413.5 | $348.4 | $1,232.5 | $947.1 |
| Gross profit / margin | $131.9 / 31.9% | $116.9 / 33.5% | $406.7 / 33.0% | $331.5 / 35.0% |
| Operating income / margin | $42.1 / 10.2% | $44.2 / 12.7% | $138.3 / 11.2% | $126.5 / 13.4% |
| Net income | $30.6 | $33.1 | $103.7 | $97.5 |
| Diluted EPS | $0.97 | $1.04 | $3.29 | $3.04 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $29.3 | $77.6 |
- Growth and margins: Q3 sales rose 19%; sales excluding Dayton Parts rose 8%. Nine-month sales rose 30%; excluding Dayton Parts, they rose 14%. Gross margin contracted 1.6 percentage points in Q3 and 2.0 points year to date.
- Cash and working capital: Cash was $35.4 at September 24, down from $58.8 at December 25, 2021. Working capital was $503.1, up from $411.5. Nine-month operating cash flow fell $48.3 year over year, principally due to working-capital outflows, including inventory purchases.
- Debt and liquidity: The revolving facility had $229.4 outstanding and $369.6 available, net of letters of credit, at September 24. Its stated interest rate was 4.73%, versus 1.35% at December 25, 2021. Management said available capital should meet ongoing cash needs for at least 12 months, subject to business and market conditions.
- Other financial items: Factoring costs were $9.8 in Q3 and $23.0 for nine months, versus $3.1 and $8.6 in the comparative periods. Capital expenditures were $23.8 for nine months.
Material changes and management commentary
- Sales growth reflected Dayton Parts, favorable aftermarket conditions, new product launches, and price increases. Chassis sales were a notable contributor: $174.7 in Q3 versus $118.3 a year earlier; the filing attributes some growth to Dayton Parts.
- Management said broad-based inflation, freight and logistics costs, materials, tariffs, and wage pressures reduced margins. Price increases and cost savings helped maintain gross-profit dollars but did not prevent margin-percentage declines; price increases also followed cost increases with a lag.
- Higher interest rates increased both borrowing costs and the cost of receivables factoring. A one-percentage-point increase in factoring discount rates would have increased factoring costs by approximately $2.1 in Q3 and $6.2 year to date. A one-point increase in borrowing rates would have increased variable-debt interest expense by approximately $0.6 and $1.8, respectively.
- Inventory increased to $677.9 from $532.0 at fiscal year-end, as the company bought inventory to meet demand and maintain supply-chain safety stock.
- The company introduced 3,416 new distinct parts in the first nine months, including 1,134 new-to-the-aftermarket parts.
Outlook, acquisitions, and risks
- No numerical full-year earnings or sales guidance is stated in the supplied filing text. Management expected freight, labor, and material inflation to continue to pressure results through fiscal 2022, while noting that easing supply constraints could lower some freight and commodity costs. Management also expected interest rates to continue rising during the remainder of fiscal 2022.
- On October 4, 2022, after quarter-end, Dorman acquired SuperATV for aggregate consideration of $490, subject to customary adjustments, plus a potential earn-out of up to $100 tied to 2023 and 2024 revenue and gross-margin targets. The company had not completed purchase-price allocation or pro forma financial information.
- To fund the acquisition, Dorman entered into a $500 term-loan facility maturing October 4, 2027; the revolving facility’s maturity was also extended to that date. The term loan is secured and guaranteed as described in the filing. These are post-quarter-end financing and acquisition developments, not balances included in the September 24 balance sheet.
- Other risks highlighted include customer payment-term extensions, customer pricing and return demands, supply and logistics constraints, customer or supplier concentration changes, tariffs, foreign currency, and cybersecurity. Management considered current legal matters immaterial in aggregate, while acknowledging legal outcomes are inherently uncertain.
- The board approved changing the fiscal year-end to December 31. The 2022 fiscal year was already scheduled to end December 31 as a 53-week year.
Investor facts to verify
- How much of reported sales growth and margin dilution reflects Dayton Parts versus underlying business performance.
- Whether pricing and cost actions can catch up with inflation, freight, labor, and tariff expenses, and whether gross margins stabilize.
- Inventory conversion, operating cash flow, and the ongoing cost and availability of receivables factoring as interest rates change.
- SuperATV’s final purchase-price allocation, acquired performance, earn-out likelihood, and resulting leverage and interest costs.
- Whether customer concessions, payment terms, product returns, or supply constraints materially change working-capital needs or profitability.