Dorman Products, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended April 1, 2023; comparisons are with the three months ended March 26, 2022, except balance-sheet comparisons, which are with December 31, 2022. Dorman supplies replacement and upgrade parts for motor vehicles and specialty vehicles. The quarter includes SuperATV, acquired in October 2022.
Key financial metrics
| Metric | Q1 2023 | Prior comparable quarter |
|---|---|---|
| Net sales | $466.7 million | $401.6 million |
| Gross profit / margin | $144.5 million / 31.0% | $133.2 million / 33.2% |
| Operating income / margin | $18.1 million / 3.9% | $46.7 million / 11.6% |
| Net income / diluted EPS | $5.7 million / $0.18 | $35.2 million / $1.11 |
| Cash from operations | $26.2 million | $23.2 million |
| Cash and cash equivalents | $33.3 million | $46.0 million at Dec. 31, 2022 |
| Total debt, including current portion | Approximately $707.4 million | Approximately $734.3 million at Dec. 31, 2022 |
| Working capital | $582.8 million | $590.8 million at Dec. 31, 2022 |
Cash used in investing activities was $10.3 million, including $10.5 million of property and equipment additions. Financing activities used $28.7 million, including $23.9 million of revolver repayments and $3.1 million of term-loan repayments. Cash declined by $12.7 million during the quarter. Management said available capital is adequate for operating needs for at least the next 12 months, subject to risks described in the filing.
Material changes and operating results
- Sales grew 16% year over year, reflecting SuperATV, new product launches and pricing actions. Sales growth excluding SuperATV was 3.5%.
- Gross margin declined 2.2 percentage points. Management attributed the decrease primarily to selling through higher-cost inventory purchased in 2022; pricing and SuperATV’s higher gross margin partly offset the pressure.
- SG&A increased to $126.4 million from $86.5 million and to 27.1% of sales from 21.5%. Drivers included higher factoring costs, SuperATV, and a customer bankruptcy-related charge; the filing does not specify the amount of that charge.
- Net interest expense rose to $12.0 million from $1.2 million. The weighted average rate on credit-facility borrowings was 6.41%, compared with 5.78% at year-end 2022.
- Factoring costs increased to $13.5 million from $4.9 million, despite lower receivables sold ($237.7 million versus $275.2 million), primarily because of higher interest rates. The company reported $745.9 million of additional receivables would have been outstanding at quarter-end if receivables had not been sold over the preceding 12 months.
- Inventory fell to $686.9 million from $755.9 million at year-end. Operating cash flow was higher year over year, helped by working-capital cash inflows, partly offset by lower income.
- The effective tax rate was 12.8%, down from 22.7%, reflecting favorable discrete items partly offset by state taxes and foreign operations.
Outlook, risks and unusual items
- The filing provides no specific quarterly or full-year revenue or earnings guidance. Management notes quarterly results may fluctuate with customer order timing, product launches and supplier delivery capacity.
- Management said freight, labor and material inflation may continue to pressure results through the remainder of 2023. Price increases, cost savings and alternative suppliers are mitigation measures, but price increases may lag costs and have not fully offset margin effects.
- Higher interest rates increase both variable-rate debt expense and the cost of factoring receivables. A one-percentage-point rate increase would have increased quarterly factoring costs and reduced cash proceeds by approximately $2.1 million; it would have increased quarterly interest expense on variable-rate debt by approximately $1.8 million.
- SuperATV acquisition consideration was approximately $509.8 million, net of cash acquired, with possible earnout payments of up to $100 million tied to 2023 and 2024 revenue and gross-margin targets. Dorman accrued $20.5 million as the estimated fair value of expected payments; purchase-price allocations remain subject to measurement-period adjustments.
- Tariffs on certain China-sourced products add costs; management expects to mitigate them primarily through pricing and supplier concessions. The filing states tariffs are not expected to materially affect net income, but may increase sales while reducing gross and operating margins.
- Management considers current legal matters’ reasonably possible losses immaterial after insurance, but notes legal outcomes remain uncertain and could adversely affect results, cash flows or financial position.
- Disclosure controls were judged effective at a reasonable-assurance level. SuperATV was excluded from the internal-control-over-financial-reporting assessment during the permitted post-acquisition period and was being integrated.
Important facts for investors to verify
- Whether SuperATV meets the earnout targets and how final acquisition valuations or liabilities change.
- Whether sales growth excluding SuperATV continues and whether the business can recover gross and operating margins.
- Trends in factoring costs, customer payment terms, receivables sold and interest rates.
- Progress in reducing higher-cost inventory and sustaining operating cash generation.
- Effects of inflation, tariffs, customer concessions, and the undisclosed customer-bankruptcy charge on subsequent results.
- Remaining revolver availability was $383.5 million at April 1, 2023; verify liquidity and covenant compliance as conditions change. The company reported no credit-agreement default at quarter-end.