Dorman ( DORM ) Q4 2025 Earnings Call Transcript

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<h2>Date</h2>
<p>Thursday, Feb. 26, 2026 at 8:00 a.m. ET</p>
<h2>Call participants</h2>
<ul>
<li>President and CEO — Kevin Olsen</li>
<li>Chief Financial Officer — David Hession</li>
</ul>
<h2>Takeaways</h2>
<ul>
<li>Net Sales -- $538 million, up approximately 1% year over year, driven by pricing initiatives, with volume impacted by a significant order pattern shift from a large customer.</li>
<li>Adjusted Gross Margin -- 42.6%, increased 90 basis points year over year, supported by shipment of more pre-tariff, lower-cost inventory and supplier diversification.</li>
<li>Adjusted Operating Income -- $93 million, flat year over year, with margin declining slightly to 17.4% due to tariff-related cost increases and higher wage and benefit costs.</li>
<li>Adjusted Diluted EPS -- $2.17, down 1% year over year, but at the high end of prior guidance.</li>
<li>Operating Cash Flow -- $42 million, a sequential increase of $30 million from Q3, reflecting improved cash management despite ongoing tariff impacts.</li>
<li>Full Year Net Sales -- $2.13 billion, up 6% year over year, attributed to light-duty segment strength and effective tariff pricing actions.</li>
<li>Full Year Adjusted Diluted EPS -- $8.87, a 24% increase, with approximately $1.25 attributed to tariff timing benefit.</li>
<li>Full Year Operating Margin -- 17.8%, up 170 basis points, led by tariff-related timing effects and productivity initiatives.</li>
<li>Net Debt -- $391 million at year-end, a reduction of $42 million year over year.</li>
<li>Net Leverage Ratio -- 0.89x adjusted EBITDA versus 1.12x the previous year.</li>
<li>Liquidity -- $648 million, a $6 million increase year over year.</li>
<li>Share Repurchases -- $25 million deployed during the quarter, following resumed activity.</li>
<li>Light-Duty Segment Net Sales -- $429 million in Q4, up slightly, with mid-single-digit POS growth but volume affected by a major customer's inventory adjustment.</li>
<li>Heavy-Duty Segment Net Sales -- Up 6% year over year in Q4; operating margin expanded 130 basis points, driven by tariff timing and new business wins.</li>
<li>Specialty Vehicle Segment Sales -- Flat year over year in Q4, with pricing actions offsetting soft demand; operating margin declined due to increased wage and benefits costs.</li>
<li>2026 Sales Growth Guidance -- Expected in the 7%-9% range overall, with similar growth anticipated across all segments.</li>
<li>2026 Adjusted Diluted EPS Guidance -- $8.10-$8.50, representing a 6%-12% increase on a tariff-adjusted comparable basis.</li>
<li>2026 Operating Margin Guidance -- 15%-16% for the year, trending toward a normalized, high teens rate exiting the year.</li>
<li>2026 Tax Rate Guidance -- Approximately 23.5%, with potential quarterly variation due to discrete items.</li>
<li>Supply from China -- Reduced below 40% of spend in 2025, expected to further decline to approximately 30% in 2026 as part of sourcing diversification.</li>
</ul>
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<h2>Risks</h2>
<ul>
<li>Hession stated, "our full year operating cash flow was down 51% in 2025 compared to 2024," with free cash flow dropping 61% due to higher tariff-related inventory costs.</li>
<li>Olsen said, "we expect operating margin will reduce temporarily in the first quarter," as higher-cost, tariff-affected inventory is recognized before normalization in the second half of 2026.</li>
<li>Management highlighted ongoing uncertainty, noting, "The recent IEEPA ruling by the Supreme Court last week and the new Section 122 global tariffs announced over the weekend have added additional complexity and uncertainty," with guidance assuming tariff levels consistent with prior periods.</li>
<li>A noncash goodwill impairment charge of approximately $51 million after taxes was recorded in Q4, tied to pressure in the trucking and freight industry, and reflected in GAAP results.</li>
</ul>
<h2>Summary</h2>
<p>Dorman Products (<a href="/quote/nasdaq/dorm/">DORM</a> +1.62%) reported modest top-line growth in the fourth quarter, primarily fueled by price-driven gains and strategic product initiatives, but shipment volume was dampened by a major customer shifting order patterns to reduce inventory. Margin expansion in the quarter was realized through pre-tariff inventory benefits and disciplined expense control, though operating margin and earnings were pressured by increased tariff costs and higher labor expenses. The company executed notable supply chain diversification, lowering reliance on China, and ended the year with reduced net debt and enhanced liquidity, enabled by robust cash generation late in the year. For 2026, Dorman issued a top-line growth outlook of 7%-9% across all segments and guided to temporary operating margin contraction in the first half, followed by normalization as lower-cost inventory cycles through and automation, as well as sourcing initiatives, yield expected savings. The management team explicitly noted that current guidance does not incorporate potential impacts from new tariff regimes or future IEEPA-related adjustments, underscoring persistent macro uncertainty.</p>
<ul>
<li>Hession estimated the 2025 tariff effect as "a full year impact of approximately $1.25 to our adjusted diluted EPS," clarifying that reported growth benefited from tariff timing.</li>
<li>Olsen noted, "orders were down from that customer nearly 40% from the third quarter," contextualizing the Q4 slowdown as temporary and likely to normalize in Q2 2026.</li>
<li>Product innovation remains a priority, with Olsen highlighting a "record year for new product sales," especially in complex electronics, driving both segment competitiveness and above-market organic growth.</li>
<li>Olsen commented on M&amp;A, stating, "new opportunities. We're hopeful that the coming quarters will bring more activity," indicating potential for renewed inorganic growth pursuits given stronger cash flow expectations for 2026.</li>
<li>The company reinforced its asset-light, cash-generative model as a buffer against ongoing trade volatility, with Olsen stating, "we have the playbook to handle the timing nuances" of inflation and tariffs.</li>
</ul>
<h2>Industry glossary</h2>
<ul>
<li>POS (Point of Sale): The measure of sell-through sales from distributors to end customers, indicating real market demand at the retail level.</li>
<li>FIFO Accounting: Inventory accounting method where costs of earliest goods purchased are recognized first, affecting margin timing when input costs shift.</li>
<li>Complex Electronics: Aftermarket vehicle components requiring advanced engineering and software capability, often with higher average selling prices and margins compared to mechanical parts.</li>
<li>IEEPA: International Emergency Economic Powers Act, referenced regarding tariff and global trade policy impacts on sourcing and pricing.</li>
<li>SKUs: Stock Keeping Units; unique product identifiers essential for tracking new product launches and portfolio breadth in the auto parts market.</li>
</ul>
<h2>Full Conference Call Transcript</h2>
<p>Kevin will provide a quick overview, along with an update on each of our business segments and their respective markets. Then David will review the consolidated results before turning it back over to Kevin for our outlook and closing remarks. After that, we'll open the call for questions. By now, everyone should have access to our earnings release and earnings call presentation, which are available on the Investor Relations portion of our website at dormanproducts.com. Before we begin, I'd like to remind everyone that our prepared remarks, earnings release and investor presentation include forward-looking statements within the meaning of federal securities laws.</p>
<p>We advise the listeners to review the risk factors and cautionary statements in our most recent 10-Q, 10-K and earnings release for important material assumptions, expectations and factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. We'll also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our earnings release and in the appendix to this earnings call presentation, both of which can be found on the Investor Relations section of Dorman's website.</p>
<p>Finally, during the Q&amp;A portion of today's call, we ask that participants limit themselves to 1 question with 1 follow-up and to rejoin the queue if they have additional questions. And with that, I'll turn the call over to Kevin.</p>
<p>Kevin Olsen: Thanks, Alex. Good morning, and thank you for joining our Fourth Quarter 2025 Earnings Call. As Alex mentioned, I'll start with our achievements in 2025, a high-level review of the results for Q4 and updates for each of our segments before turning it over to David. Let me start on Slide 3. As you'll recall, in last year's Q4 earnings call, we laid out a clear set of strategic priorities for 2025, critical areas where we plan to commit time, resources and investments to advance our long-term goals. I'm pleased to report that we delivered on what we said we would do. First, innovation.</p>
<p>We had an exceptional year with record sales from new products, launching thousands of new SKUs, including some home runs like the electronic power steering rack, along with many singles, doubles and triples. We also made meaningful investments in our product development function. Our current new product pipeline is as strong as it's ever been with a growing mix of opportunities involving complex electronic solutions, an area where we believe we have a distinct competitive advantage. Innovation remains the lifeblood of Dorman and the progress we made this year positions us extremely well for the future. Second, operational excellence. We advanced productivity across the organization, including deploying new automation technologies in our distribution centers.</p>
<p>These initiatives improved service levels for customers, enhanced availability for end users and generated tangible savings. We see continued opportunity here, and we'll keep driving efficiency and performance across our facilities. Third, supply chain excellence. Despite a complex tariff environment, we executed as planned. In 2025, we further diversified our global sourcing footprint, meeting our goal to reduce supply from China to below 40%. Strengthening supply chain resilience remains a key priority, and we continue to build deep strategic relationships with suppliers around the world. 2026, we expect our supply from China will further be reduced to approximately 30% of our total spend. Fourth, channel expansion. In both heavy-duty and specialty vehicle, we expanded our reach and won new business.</p>
<p>With Dayton, we drove wins by leaning into categories where we had competitive advantages. And with SuperATV, we expanded our dealer network and nondiscretionary portfolio. And finally, strategic growth. While M&amp;A activity in the aftermarket was quiet overall in 2025, we capitalized on organic growth opportunities across each of our segments and end markets with category and customer wins. On the M&amp;A front, we deepened relationships with potential sellers and continue to evaluate new opportunities. We're hopeful that the coming quarters will bring more activity to the M&amp;A market. Overall, our priorities were clear, and we executed with discipline.</p>
<p>We're proud of what we achieved in 2025 and even more confident in the foundation we built for continued growth and value creation. Turning to Slide 4. These accomplishments translated into outstanding financial performance for the year. Let me cover a few of the highlights. Net sales reached $2.13 billion, up 6% year-over-year. Growth was driven by strong demand in our light-duty segment during the first half as well as successful execution of our tariff-related pricing initiatives in the back half. While broader market conditions presented some headwinds for heavy-duty and specialty vehicle, the teams executed on their commercialization initiatives during the year. We also delivered meaningful margin expansion and earnings growth for 2025.</p>
<p>Although cash flow was impacted by increased tariffs, our earnings strength and cash management strategy allowed us to continue investing in the business, further strengthen the balance sheet and return capital to our shareholders. Our achievements and performance in 2025 are the direct result of the hard work and dedication that our contributors bring to Dorman every day. So I'd like to take a minute to thank and recognize everyone across the organization who worked tirelessly to navigate through the dynamic changes and challenges faced throughout the year, all while driving innovation, delivering operational improvements and putting our customers and end users at the forefront of everything we do.</p>
<p>I'm proud of the talented team we have at Dorman and what we've accomplished together. I look forward to building on the success in 2026. Speaking of talent, I also want to welcome Charles Rayfield as our new CFO. Charles comes to Dorman with extensive CFO experience in both privately held and publicly traded companies. I know a few of you have had the opportunity to make quick introductions, and we're looking forward to having Charles on our future calls and getting out on the road in coming quarters. Next, on Slide 5, let me touch on the high-level results for the fourth quarter. Consolidated net sales were $538 million, up slightly from Q4 2024, but below our internal expectations.</p>
<p>Our tariff-related pricing actions supported modest growth. However, shipment volume was down year-over-year due to a larger customer adjusting their ordering patterns in the quarter, which I'll cover in a moment. Despite lower-than-expected net sales in the fourth quarter, gross margins exceeded our expectations, allowing us to deliver adjusted diluted EPS for the year at the high end of our guidance range. A couple of factors I'll highlight contributed to this result. First, we shipped more pre-tariff lower cost inventory, driven in part by lower-than-expected volume in the quarter. Second, our team did a nice job managing expenses across the organization. Together, these drivers allowed us to report adjusted diluted earnings per share of $2.17 for the quarter.</p>
<p>As we anticipated, cash generation improved seque