Executive Summary / Key Takeaways

• Dorman Products ($DORM) demonstrates robust financial performance, with Q3 2025 net sales up 7.9% year-over-year and adjusted diluted EPS growing 34%, primarily driven by tariff-related pricing actions and strong Light Duty demand.
• The company's strategic focus on innovation, particularly in complex electronics and OE Fix solutions, and a diversified, resilient supply chain (targeting 30-40% China sourcing by year-end 2025) are key competitive differentiators.
• While Light Duty continues to excel, Heavy Duty and Specialty Vehicle segments face market pressures, though strategic investments in new products and channel expansion are positioning them for future rebound and long-term margin targets.
• Dorman maintains a strong balance sheet with a net leverage ratio of 0.92x adjusted EBITDA and robust liquidity, providing flexibility to manage tariff impacts and pursue strategic growth initiatives, including M&A.
• The company reaffirmed its 2025 guidance, expecting net sales growth of 7-9% and adjusted diluted EPS of $8.60-$8.90, but anticipates Q4 gross margin compression as higher tariff costs on inventory are recognized.

Aftermarket Powerhouse: Innovation and Strategic Resilience

Dorman Products, Inc., founded in 1918, has established itself as a leading supplier of replacement and upgrade parts in the motor vehicle aftermarket industry. The company's core business revolves around providing solutions for passenger cars, light-, medium-, and heavy-duty trucks, as well as specialty vehicles like UTVs and ATVs. Dorman's overarching strategy is deeply rooted in innovation, operational excellence, and strategic diversification, particularly in its supply chain, which has been a critical response to evolving global trade dynamics.

The company operates within a favorable macroeconomic backdrop for the aftermarket. The vehicle parc in the United States, particularly the sweet spot of 7-to-14-year-old vehicles, continues to grow, expanding demand for replacement parts. The average age of vehicles in operation increased to 12.80 years as of October 2024, up from 12.60 years in October 2023. Additionally, miles driven in the light-duty sector increased 1% year-over-year through October 2024. These trends underscore a sustained demand for vehicle maintenance and repair, forming a solid foundation for Dorman's nondiscretionary product portfolio, which has historically proven inelastic to price changes.

A pivotal moment in Dorman's recent history was the introduction of Section 301 tariffs on Chinese imports in 2018 and 2019. This challenge spurred a significant strategic pivot towards diversifying its supply chain. Dorman has actively reduced its reliance on China, aiming for approximately 30% to 40% of its products to be sourced from China by the end of 2025, with roughly 30% from the U.S. and the remainder from other global regions. This deliberate diversification enhances supply chain resilience and flexibility, providing a competitive advantage in a volatile trade environment.

Technological Edge: Driving Differentiated Solutions

Dorman's competitive moat is significantly strengthened by its relentless focus on technological differentiation and innovation, particularly through its "OE Fix" solutions and expanding complex electronics portfolio. The company's in-house engineering and design capabilities allow it to develop parts that often surpass original equipment (OE) standards or address inherent flaws in OE designs. In the nine months ended September 27, 2025, Dorman introduced 4,357 new distinct parts, including 1,199 "New-to-the-Aftermarket" parts. These new products are typically higher-margin offerings and are crucial drivers of growth.

A prime example of Dorman's technological leadership is the recently launched electronic power steering rack for specific Ram truck models (2013-2024). This product is the first aftermarket option manufactured new, offering significant upgrades over the original manufacturer's part. Its electronics have been redesigned with added service protection and an improved layout to reduce heat and electrical interference. Furthermore, protective coatings have been applied to resist contamination from water, salt, and dust. This innovation provides tangible benefits to end-users through enhanced reliability and simpler, seamless installation without the need for dealer programming. For investors, this translates into premium pricing opportunities, extended product exclusivity due to technical complexity, and a stronger competitive position against OE parts.

In the Specialty Vehicle segment, Dorman continues to innovate with products like the 4-inch long travel kit for Polaris XD 1500 models. This kit widens the vehicle's wheelbase by a total of 8 inches, providing greater stability and control on rough terrain, specifically designed for utility applications. This focus on performance and utility-focused nondiscretionary parts broadens Dorman's market reach and caters to evolving end-user needs. The strategic intent behind these R&D initiatives is to consistently deliver superior, problem-solving products that command higher value, reinforce brand loyalty, and expand Dorman's addressable market, thereby contributing directly to sustained revenue growth and margin expansion.

Competitive Landscape and Strategic Positioning

Dorman operates in a highly competitive automotive aftermarket, facing both large, diversified players and niche specialists. Key competitors include AutoZone (AZO), O'Reilly Automotive (ORLY), Genuine Parts Company (GPC), and LKQ Corporation (LKQ). Dorman differentiates itself through its specialized product portfolio, particularly in hard-to-find and complex parts, and its "OE Fix" methodology.

Compared to retail-centric giants like AutoZone and O'Reilly, Dorman's strength lies in its wholesale distribution model and deep technical expertise. While AutoZone and O'Reilly boast extensive retail networks and rapid consumer access, Dorman's focus on specialized, high-quality replacement parts, often with patented features, allows it to compete effectively in technical depth where these broader retailers may have gaps. Dorman's gross profit margin of 40.88% (TTM) and operating profit margin of 15.75% (TTM) demonstrate solid profitability, which compares favorably to the industry average EV/EBITDA of 8.61x.

Against Genuine Parts Company, Dorman's automotive-specific innovation and agility in new product development provide an edge, as GPC's broader industrial focus can dilute its automotive-specific expertise. Dorman's ability to supply new, original-equipment-style parts contrasts with LKQ's emphasis on recycled and remanufactured components. While LKQ offers cost-effective alternatives, Dorman's focus on reliability and performance for complex systems often commands a premium and offers longer lifespans, contributing to stronger gross margins. Dorman's diversified supply chain, targeting 30-40% China sourcing, positions it favorably against competitors who may have higher concentrations in specific regions, mitigating tariff-related risks.

Financial Performance and Operational Momentum

Dorman delivered a strong financial performance in the third quarter of 2025, building on positive momentum from earlier in the year. Consolidated net sales for Q3 2025 reached $543.7 million, an increase of 7.9% year-over-year. This growth was primarily fueled by tariff-related pricing actions and solid mid-single-digit point-of-sale (POS) growth. For the nine months ended September 27, 2025, net sales increased by $117 million, or 7.9%, to $1.59 billion.

Profitability saw significant expansion in Q3 2025, with adjusted gross margin increasing 390 basis points to 44.4%. This was largely due to the timing dynamics of pricing actions taking effect on inventory purchased before higher tariffs were recognized, alongside benefits from supplier diversification and a favorable mix of new products. Adjusted operating income rose 30% year-over-year to $111 million, expanding the adjusted operating margin by 340 basis points to 20.5%. Adjusted diluted EPS grew 34% year-over-year to $2.62.

The Light Duty segment was a primary driver of this performance, with net sales increasing 9.3% in Q3 2025 to $430.3 million. Its segment operating margin expanded to 23.7% from 19.0% in the prior year, benefiting from pricing actions and supplier diversification. The Heavy Duty segment saw net sales grow 5.7% to $63.0 million, driven by tariff-related pricing and new business wins, though operating margin remained stable at 4.5% due to lower manufacturing productivity. The Specialty Vehicle segment experienced a slight net sales decrease to $50.4 million due to reduced customer demand, and its operating margin declined to 12.8% from 17.0%, impacted by lower manufacturing productivity following a proactive production reduction in Q1 2025.

Liquidity and Capital Allocation

Dorman maintains a robust financial position, providing significant flexibility. As of September 27, 2025, net debt stood at $401 million, with a healthy net leverage ratio of 0.92x adjusted EBITDA. Total liquidity was strong at $654 million, an increase from $642 million at the end of 2024.

Cash flow generation, however, has been impacted by the timing of tariff costs. Operating cash flow for Q3 2025 was $12 million, and free cash flow was $2 million, reflecting investments in higher-cost inventory due to tariffs. The company utilizes customer-sponsored accounts receivable sales programs, with sales of accounts receivable totaling $341.01 million in Q3 2025 and $1.03 billion for the nine months ended September 27, 2025. Factoring costs associated with these programs were $14.59 million and $43.74 million, respectively.

Dorman's long-term capital allocation strategy remains consistent: prioritize debt management, invest internally for the highest returns, pursue strategic mergers and acquisitions, and opportunistically repurchase shares. While share repurchases were paused in Q2 and Q3 2025 due to tariff and trade uncertainty, a new $500 million stock repurchase plan was authorized in October 2024, effective January 1, 2025, through December 2027. The company's strong balance sheet provides the "dry powder" to manage higher inventory costs and execute its growth initiatives.

Outlook and Guidance for 2025

Dorman has reaffirmed its strong outlook for 2025, reflecting confidence in its operational model and strategic initiatives. The company expects net sales growth to be in the range of 7% to 9% over 2024. Adjusted diluted EPS is projected to be between $8.60 and $8.90, representing a significant increase of 21% to 25% compared to 2024. This guidance is based on currently enacted tariffs, with management noting that any material changes could lead to further updates.

For modeling purposes, Dorman anticipates a full-year tax rate of approximately 23.5%. A key dynamic for the remainder of the year is the expected gross margin compression in Q4 2025. This is due to Dorman's FIFO accounting methodology, where the higher tariff-related costs on inventory purchased in Q2 will begin to impact the cost of goods sold in Q4, offsetting the positive impact of price increases recognized in Q3.

Looking longer term, Dorman has set clear operating margin targets for its segments. The Heavy Duty segment aims for a mid-teens operating margin profile, while the Specialty Vehicle business targets a high-teens margin profile. Overall, Dorman envisions itself as a high-teens operating margin business. These targets underscore the company's commitment to driving efficiency and leveraging its strategic investments as market conditions normalize.

Risks and Challenges

Despite a strong performance, Dorman faces several pertinent risks. The ongoing uncertainty surrounding tariffs and trade dynamics remains a significant concern, potentially impacting costs, demand, and the broader macroeconomic environment. While Dorman has implemented pass-through price increases to offset tariff costs, there is no assurance that these will fully mitigate the impact or that customers will not exert further pressure on margins.

Market conditions in the Heavy Duty and Specialty Vehicle segments continue to present challenges. The trucking and freight market remains difficult to predict, with delayed repairs and soft demand impacting performance. In Specialty Vehicle, weakened consumer sentiment due to tariffs and higher interest rates could persist, affecting discretionary spending.

Interest rate fluctuations pose another risk, as changes in Term SOFR can increase factoring costs for accounts receivable sales programs and impact interest expense on variable-rate debt. A one-percentage-point increase in Term SOFR could increase factoring costs by approximately $2.80 million and interest expense by $1.10 million for a three-month period. Dorman also operates in a highly competitive market, where customers, particularly larger retailers, consistently seek more favorable pricing and payment terms, which could affect net sales and profit levels.

Conclusion

Dorman Products stands as a resilient and innovative force in the automotive aftermarket, strategically positioned for long-term value creation. The company's proactive diversification of its supply chain, coupled with a robust innovation engine delivering complex electronic and OE Fix solutions, forms a formidable competitive advantage. This technological leadership, alongside a focus on nondiscretionary repair parts, underpins its ability to generate strong financial results even amidst economic uncertainties.

While near-term challenges persist in the Heavy Duty and Specialty Vehicle segments, and tariff dynamics introduce some volatility, Dorman's strong balance sheet, disciplined capital allocation, and clear long-term margin targets provide a solid foundation. The company's strategic responses to market pressures, including new product development and channel expansion, are expected to drive future growth. For discerning investors, Dorman's blend of operational excellence, technological differentiation, and financial prudence presents a compelling investment thesis, poised to capitalize on the enduring demand for vehicle maintenance and repair.