Dorman Products, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023, compared with the three and nine months ended September 24, 2022. Dorman supplies replacement and upgrade parts for motor vehicles and specialty vehicles. Results include SuperATV, acquired October 4, 2022, for the full 2023 periods but not the comparable 2022 periods.
Key financial results
Amounts in millions, except per-share data and margins.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $488.2 | $413.5 | $1,435.5 | $1,232.5 |
| Gross profit / margin | $183.2 / 37.5% | $131.9 / 31.9% | $491.2 / 34.2% | $406.7 / 33.0% |
| Operating income / margin | $64.2 / 13.2% | $42.1 / 10.2% | $137.5 / 9.6% | $138.3 / 11.2% |
| Net income | $40.5 | $30.6 | $79.0 | $103.7 |
| Diluted EPS | $1.28 | $0.97 | $2.50 | $3.29 |
| Net interest expense | $12.2 | $2.3 | $36.7 | $5.1 |
Performance, cash flow, and liquidity
- Q3 sales rose 18%; management attributed growth to SuperATV, price increases and new products. Sales excluding SuperATV grew 6%. Nine-month sales rose 16%, or 4% excluding SuperATV.
- Q3 gross margin expanded 5.6 percentage points, reflecting lower-cost inventory sold, pricing and SuperATV’s higher margins. Nine-month margin improved 1.2 points, partly offset by the sell-through of higher-cost inventory acquired or purchased in 2022.
- SG&A was $119.0 million, or 24.4% of sales, in Q3 and $353.7 million, or 24.6%, for the first nine months. The higher expense ratios reflected SuperATV, factoring costs and other items; year-to-date SG&A also included higher amortization and a customer-bankruptcy charge. The filing does not provide the bankruptcy charge amount.
- Net income increased 32% in Q3 but declined 24% year to date. Year-to-date operating income was nearly flat, while substantially higher interest expense reduced pretax income.
- Operating cash flow was $149.1 million for the nine months, versus $29.3 million a year earlier. Management cited working-capital inflows, particularly from inventory, and higher income. Capital expenditures were $32.9 million; cash declined $14.1 million to $32.0 million.
- Inventory fell to $625.6 million from $755.9 million at December 31, 2022. Accounts receivable increased to $484.4 million from $427.4 million.
- Working capital was $662.3 million. At September 30, 2023, revolving borrowings were $119.7 million and term-loan borrowings were $487.5 million; $479.0 million of credit-facility capacity remained available, net of letters of credit. The facility matures October 2027, and the company reported no covenant default.
Material changes and unusual items
- Factoring costs on customer receivables rose to $37.7 million for the first nine months from $23.0 million, primarily due to higher interest rates. The company sold $713.2 million of receivables through these programs during the period.
- The company recorded a $13.4 million fair-value decrease in acquisition contingent consideration, partly offset by $0.4 million of accretion, for a net $13.0 million liability reduction. The estimated liability was $7.0 million at quarter-end; maximum additional contingent payments across acquisitions were $102.0 million if targets are achieved.
- Q3 SG&A included a $13.4 million benefit from the contingent-consideration fair-value adjustment. Management’s discussion also identifies the customer-bankruptcy charge as a year-to-date SG&A factor, without quantifying it.
- Management reported inflationary pressure from transportation, tariffs, materials and wages, and said these costs may continue to weigh on results. Pricing, cost-saving initiatives and alternative suppliers are mitigation efforts, with no assurance that pricing will fully recover inflation.
Outlook, risks, and other disclosures
The filing provides no specific numerical earnings or revenue guidance. Management said available capital should meet ongoing cash needs for at least the next 12 months, while noting that extended customer terms, weaker demand, higher rates and contingencies could adversely affect liquidity. Other identified exposures include customer pricing and return demands, tariffs, supplier and logistics costs, foreign currency, and variable-rate debt and receivables factoring. A one-percentage-point rate increase would have added approximately $5.3 million to nine-month variable-rate debt interest expense and $6.0 million to nine-month factoring costs, based on the filing’s sensitivity analysis.
Management stated that current legal matters are not expected to have a material financial impact, taking insurance into account, but noted the inherent uncertainty of litigation. No material risk-factor changes were reported. Disclosure controls were considered effective; SuperATV was excluded from the internal-control-over-financial-reporting assessment during the permitted post-acquisition period. A compensation clawback policy was adopted October 25, 2023.
Important facts for investors to verify
- How much sales growth and margin improvement persists apart from SuperATV, price increases and inventory-cost effects.
- Whether inventory reductions and working-capital cash inflows are sustainable, given rising receivables and extended customer payment terms.
- The continuing cost of factoring receivables and variable-rate debt if interest rates remain elevated.
- The outcome of acquisition earnout targets, contingent consideration estimates and the unquantified customer-bankruptcy charge.
- SuperATV integration progress and the timing of its inclusion in the company’s internal-control assessment.