Prepared remarks
Good morning. My name is Nikki, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dorman Products Second Quarter 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. I will now turn the call over to Alex Whitelam, Vice President of Investor Relations. Please go ahead.
Thank you. Good morning, everyone. Welcome to Dorman's Second Quarter 2026 Earnings Conference Call. I'm joined by Kevin Olsen, Dorman's Chairman, President and Chief Executive Officer, and Charles Rayfield, Dorman's Chief Financial Officer. Kevin will begin with a high-level overview of the quarter and current business environment, along with our segment level performance and market trends. Charles will walk through our second quarter financial results in more detail, discuss cash flow and capital allocation as well as our updated guidance before turning it back to Kevin for 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 our website at investors.dormanproducts.com. Before we begin, I would like to remind everyone that our prepared remarks, earnings release and investor presentation include forward-looking statements within the meaning of federal securities laws. We advise 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 our website. Throughout the presentation, we'll discuss the impact of the IEEPA tariff refunds that we received in the second quarter. I point everyone to the schedule we've included in the appendix of our presentation, which details the refunds' impact on our results. And with that, I'll turn the call over to Kevin.
Thanks, Alex, and good morning, everyone. Thank you for joining us today. I'll begin with a brief overview of our second quarter results, spend some time on the current business environment and provide commentary on the performance and key trends we're seeing across our business segments. I'll then turn it over to Charles. Turning to Slide 3. We delivered a strong second quarter with record sales, earnings and robust cash flow generation. Our results were positively impacted by the recovery of IEEPA tariff costs, which Charles will cover in just a moment. We continue to be well positioned to make strategic investments that will allow us to drive medium- to long-term growth. Following recent developments, we believe the tariff landscape has stabilized, which is positive for Dorman and our customers. With an overall lower tariff environment, we began making targeted price reductions in the quarter, which we expect will continue through the back half of the year. Consolidated net sales were $545 million in the second quarter, up approximately 1% compared to the same period last year. Net sales were impacted by the pricing actions I just mentioned, which we started in the quarter. High level, the fundamentals of our industry and our leadership position within the aftermarket remains strong. I'll cover our end markets in the coming slides. Jumping to the bottom line. Adjusted diluted earnings per share for the quarter was a record $3.08, up 50% compared to the second quarter of 2025. Given our performance through the first half of the year and the targeted pricing actions we are taking as a result of a more stable tariff environment, we are updating our full year 2026 guidance. We now expect year-over-year net sales growth of 3% to 5% and adjusted diluted earnings per share to be in the range of $8.50 to $8.80. Charles will walk through the guidance change in more detail in a moment. Turning to Slide 4 and our Light Duty segment. Net sales were flat year-over-year at $424 million as we started reducing pricing with tariff costs coming down. Volume was lower in the quarter, but keep in mind, we were comparing against a strong 10% year-over-year growth in Q2 of 2025. Looking more broadly across our top customers. POS from a total dollars perspective was again up in the mid-single-digit range, which includes inflation embedded in the overall price at the counter. I'd also mention that the Light Duty business has done an excellent job recently capturing business wins in new categories. We expect this will drive increased volume growth in the back half of the year and through 2027. Operating margin expanded 620 basis points year-over-year to 24.7%, driven by refund dynamics. Year-to-date, operating margin was 19.4%, which is more in line with our normalized rate as the IEEPA refund impact was less significant. From an industry perspective, the foundational drivers of the Light Duty aftermarket remain positive. The average age of Light Duty vehicles now sits at 12.9 years, and vehicle miles traveled continue to increase for the quarter and trailing 12-month periods. Overall, these fundamentals support sustained demand for repair and replacement parts over the long haul. In addition to these macro trends, we continue to keep a close eye on our broad end user base. During the quarter, we saw some modest pressure continue on categories that tend to be DIY focused and are relatively discretionary. But keep in mind, this is a smaller portion of our overall portfolio as we skew more to the DIFM customer. And the vast majority of our product portfolio is nondiscretionary in nature. This larger makeup of our portfolio was more stable, and again, POS was consistent in the quarter. Stepping back, our innovation strategy continues to drive significant value for our customers and end users. One recent product launch that highlights this is our new aluminum oil pan for a broad set of Ford F-150s. The original OE part is made with plastic and prone to warping and leaking, creating a well-defined pain point for end users and technicians. Our patented OE fix solution is built from rugged, high-pressure die cast aluminum, delivering a more durable, longer-lasting repair at an attractive aftermarket price. Additionally, we've included a convenient magnet drain plug, which helps prevent harmful metal debris from damaging the engine, and we've designed the plug with an angled mount boss that enables a complete drain. This is exactly the type of product that reinforces Dorman's leadership in aftermarket innovation and I want to congratulate the Light Duty team on another excellent OE fix launch. Turning to Slide 5. In our Heavy Duty segment, net sales increased approximately 7% year-over-year to $66 million, driven by the full year impact of last year's pricing actions, along with business wins in certain categories and channels. Operating margin improved 340 basis points to 4.2%. Excluding the refund benefit, Heavy Duty's comparable operating margin of 2.3% was up 150 basis points on net sales leverage. While the commercialization and infrastructure investments we've made over the last several years position the Heavy Duty segment for long-term growth, they also create an inherent hurdle on the margin front. We expect those investments will help us drive higher volume with an eventual freight market rebound, offset increased costs and allow us to return to our targeted margin profile for the business. On the broader sector, market conditions remain challenged. The great freight recession continued through the second quarter with higher fuel costs and general inflation further weighing on consumer sentiment and freight demand. While freight rates have begun to rebound as fewer fleet operators remain in the market, we do not expect meaningful trucking mileage or tonnage growth in 2026. That said, and as we highlighted on our last call, we continue to see OE dealers increasingly focused on improving revenue and profitability through their service centers with new and used vehicle sales lower year-over-year. Aftermarket partnerships allow these dealers an opportunity to drive improved margin, which is a prime opportunity for us to offer high-quality solutions at aftermarket price points. Needless to say, we're leaning into this channel further. We're also leaning into product and category expansion within our Heavy Duty segment, especially for solutions above the frame. We recently launched a number of newly aftermarket products, including a hydrocarbon injection nozzle that is designed to restore critical dosing functionality within the vehicle's emission system. We've also broadened our fluid reservoir portfolio with the introduction of new power steering and windshield washer reservoirs, providing additional coverage for high population applications. And finally, we introduced 2 new LED headlight assemblies for a broad range of international models. These are 3 great examples where we're diversifying our portfolio and providing more solutions to expand our relationship with fleets across North America. Congrats to the Dayton team for driving innovation across the business. Turning to Slide 6 in our Specialty Vehicles segment. Net sales were down 1% year-over-year to $54 million. Slightly softer customer demand was partially offset by pricing initiatives in certain categories. Consumer sentiment in our specialty vehicle business remains sensitive to macroeconomic conditions, and we believe higher fuel prices, along with broader inflationary pressures weighed on volume during the quarter. Operating margin expanded 880 basis points to 26.1%. Excluding the refund benefit, comparable adjusted operating income margin for Specialty Vehicle was 17.8% in the quarter or 50 basis points above the same period last year, which highlights that the team did a nice job improving their overall margin profile. We're also expanding Super ATV's presence outside the United States, which we believe will support growth over the long term. While this initiative will take some time to materialize, we're encouraged with our trajectory and the opportunities ahead of us. On the broader specialty vehicle market, we continue to see consumer demand shift across the overall sector. Specifically for the second quarter, new vehicle sales continued to increase, but the growth came from 2 different types of vehicles and different consumers. First, more affluent riders are driving growth for cab models, which come with more features pre-installed and typically have lower attachment rates at the dealer. At the same time, we're seeing continued growth in newly launched models that are geared towards entry-level and less affluent riders. As we highlighted on our last call, these models offer significant opportunities for upgrades and repairs. Overall, our large and growing set of solutions allows us to win with all types of riders and vehicles. I'd also mention that ridership remains strong and riders are holding on to their vehicles longer. To that end, we're purposely expanding our portfolio of nondiscretionary repair-oriented solutions for older models still in service, given the elongated repair cycle occurring today. Finally, we're seeing some of the new OEs who have entered the market in recent years continue to launch new models. This broader field of machines provides Super ATV with opportunities to expand their portfolio. One new product that highlights this opportunity well is the Super ATV vented windshield developed for the CFMoto Z10 platform. CFMoto continues to offer riders lower price point vehicles with reputable quality. Recently, CFMoto launched a new sport line with their Z10 platform, and our team was one of the first to market with purpose-built, highly desired upgrade in a vented windshield. The vented design offers comfort, especially in the summer riding months for riders looking for protection from dust and debris in demanding conditions. Speed to market continues to be one of SuperATV's core strengths. Congratulations to the team on another strong product launch. With that, I'll turn it over to Charles to cover our results in more detail. Charles?
Thanks, Kevin. Turning to Slide 7. I'll walk through our consolidated financial performance for the second quarter. Total net sales for Q2 were a record at $545 million, up approximately 1% compared to the prior year period. As Kevin noted, top line growth was driven by the Heavy Duty segment, partially offset by lower volume in Light Duty and Specialty Vehicle. Year-to-date, our sales were up 2% compared to the same period in 2025. Adjusted gross margin in the quarter was 46.1%, up 550 basis points compared to last year's second quarter. Excluding the refund benefit, comparable gross margin in the quarter was 38%. Year-to-date, gross margin was 41.1%. Adjusted SG&A expense as a percentage of net sales was 23.8%, down 50 basis points year-over-year. Adjusted operating income in the quarter was $122 million and adjusted operating margin was 22.3%, up 600 basis points compared to the prior year period. Excluding the refund benefit, comparable adjusted operating margin was 14.2%, down 210 basis points from prior year, largely on volume deleverage in Light Duty. Year-to-date, the adjusted operating income margin was more in line with our normalized performance, given the IEEPA refund impact was less significant. Looking forward, we remain focused on driving margin improvements through our supplier diversification, productivity and automation initiatives. Adjusted diluted EPS was $3.08, up 50% year-over-year. The one-time impact of the IEEPA refund contributed approximately $1.18, representing the recovery of IEEPA tariff costs recognized in Q4 2025 and Q1 2026. Excluding this impact, comparable adjusted diluted EPS was $1.90 for the quarter. Again, our year-to-date performance was more in line with our prior year. As mentioned previously, there are some schedules in the appendix section of the investor presentation that outline these impacts. In addition, lower interest expense and a reduction in shares outstanding were also positive contributors to our EPS growth. On Slide 8, operating cash flow for the quarter was $153 million and free cash flow was $144 million. The business did an excellent job driving working capital improvements, which delivered comparable free cash flow of approximately $62 million, exclusive of the IEEPA refund. The strong underlying cash generation and expanded balance sheet capacity provides us with flexibility to reduce costs and deploy capital to drive strategic growth over the medium and long term. On the capital allocation front, we deployed $47 million during the quarter on opportunistic share repurchases and retired approximately 398,000 shares at an average price of approximately $118 per share. Going forward, we have $363 million remaining on our share repurchase authorization, which extends through 2027. Turning to Slide 9. Our balance sheet remains strong. And during the quarter, we further expanded our liquidity position and balance sheet capacity by refinancing our debt instruments. As previously announced in early June, we amended our credit agreement to increase our revolving credit facility from $600 million to $800 million, which extends maturity to 2031. We also used the proceeds from the issuance of $450 million in senior unsecured notes due in 2034 to repay our prior term loan, which was slated to mature in October of 2027. Our financing provides us with substantial capacity to make meaningful investments in our long-term growth strategy. Following the debt refinancing, we ended the quarter with net debt of approximately $318 million and total liquidity of $931 million. Our total net leverage ratio at the end of Q2 was 0.69x our adjusted EBITDA, which positions us extremely well to invest in the business, pursue strategic M&A opportunities and return capital to shareholders through opportunistic share repurchases. Turning to Slide 10. As Kevin mentioned, we are updating our full year 2026 guidance. I'd also point you to our schedules in the appendix that cover our guidance in more detail, which include reconciliations of the comparable figures discussed today. On the top line, we now expect a net sales growth of 3% to 5% compared to our prior guidance of 7% to 9%. The reduction reflects our performance in the first half of the year and the targeted pricing actions we are taking as a result of a more stable tariff environment. On the bottom line, we now expect total adjusted diluted EPS to be in the range of $8.50 to $8.80, up from our prior range of $8.10 to $8.50. The increase to our guidance range is primarily due to the one-time refund benefit of approximately $0.30. This represents the recovery of IEEPA tariff costs recognized in the fourth quarter of 2025. Excluding this benefit, our comparable adjusted diluted EPS range is $8.20 to $8.50. The midpoint of this range of $8.35 is up 10% over last year's comparable base of $7.62 and up 17% on a 2-year stack. Let me also provide some additional color on the remainder of the year, which we believe provides a strong foundation for 2027 and beyond. For net sales, we expect our second half growth rate to be in the mid-single-digit range compared to the same period in 2025. This growth will largely be volume driven from the new business wins that Kevin mentioned earlier. Across the segments, we expect Light Duty to be in this range with Heavy Duty slightly above and Specialty Vehicles slightly below. On the margin front, we're now targeting a full year adjusted operating income margin of approximately 15.5% to 16.5%, up from our previous expectations of 15% to 16%. Given the timing dynamics around our pricing actions, we now expect gross margins to exit the year at a more normalized rate of approximately 40%. And finally, we expect adjusted diluted EPS for the back half of 2026 to be in the range of $3.85 to $4.15 up 9% to 17% over the comparable second half adjusted diluted EPS of $3.54 in 2025. Again, barring any unforeseen market challenges, we expect these rates to serve as a structural base to grow from in 2027. With that, I'll now turn the call back over to Kevin to conclude.
Thanks, Charles. Let me close by reinforcing a few points. First, we're pleased with our second quarter results, which included record earnings and exceptionally strong cash generation. More importantly, our long-term outlook remains unchanged. The structural drivers of the aftermarket demand, growing vehicle age, rising vehicle miles traveled and the largely nondiscretionary nature of our portfolio remain firmly in place. In addition to the stabilizing tariff environment, we believe our diversified supplier network, our innovation engine and the strength of our balance sheet position us well for the future. We appreciate your continued interest and support. And with that, we'll open the call up for questions.
Questions and answers
We will take our first question from Scott Stember with ROTH.
Maybe we could take a step back and just talk about the price reductions that are going to your customers. Can you give a little sense of whether this is just related to the IEEPA refund that you received? Also, you mentioned this continuing through the end of this year— is this a transitory measure just to address the IEEPA benefit that you got? I'm trying to get a sense of how we should be thinking about pricing for '27, whether it will return to a normalized range.
Good question, Scott. Let me discuss the tariffs at a high level and walk back to 2018, 2019. Our tariff philosophy has always been to treat this as a pass-through cost. Whether tariffs go up, we mitigate what we can and pass along the balance. And vice versa, if tariff costs come down, we pass those back to our customers. We have always taken that approach. When it comes to IEEPA, when we got into the second quarter, refunds started being issued to us for the IEEPA refund, and it became clear that the replacement tariff was going to be a Section 301 tariff. And as a reminder, Section 301 tariffs have been with us since 2018 and 2019. So we're very familiar with that tariff. The difference being IEEPA was what we would consider a stacking tariff. A large portion of our portfolio is subject to 232 tariffs, which are the auto part tariff and the steel and aluminum tariff. IEEPA stacked on top of that. Section 301 is different, whereas if a part is subject to 232, 301 doesn't apply. When we step back, that for us meant a much lower tariff environment going forward. So in the second quarter, we started to reduce pricing. To your question — it's a one-time price reduction to reflect the ongoing tariff costs. We still have tariffs in the business, Section 232, and there is a component of the business that is subject to Section 301. The pricing will remain in place for those tariffs, but not for IEEPA, which allowed us to reduce pricing. So if you go back to the prepared comments, as you think about 2027, as Charles mentioned, the financial profile of the business as we move through the back half of the year will be much more normalized than what you're all used to. And in terms of growth, as we look at the back half of the year, if you take the implied guidance that we put out there for the full year of 3% to 5% growth in a lower price environment, that would imply that unit growth will be fairly strong in the back half of the year. And that's being driven by new business wins that we've discussed previously that will come online in the back half and new product launches, which continue to be very strong. So that will continue through 2027. I hope that answers your question.
And just a quick follow-up before I jump back into the queue. If you look at DIY versus DIFM, you did mention that DIY products are seeing a little bit more softness. Is there an accelerating trend there? Or is there anything that we should be concerned about going forward on that front?
Another good question, Scott. First, our overall POS rates for at least the last three quarters have been relatively stable. So I don't think anything we're seeing is an accelerating trend. The DIFM channel has been more resilient. Our customers, the owners of 13-year-old vehicles, are under pressure with inflationary aspects in the economy. That's been in place for quite some time. When you step back and look at our portfolio, the vast majority is nondiscretionary. For the most part, people need their cars to run safely and reliably for most of our major repairs.
Our next question comes from Jeff Lick with Stephens.
Congrats on a nice quarter managing a pretty dynamic environment here. Kevin, building on some of Scott's points, the 3% to 5% growth versus the prior 7% to 9%, obviously the prior guide was based on a pricing structure that doesn't exist. I'm curious on an apples-to-apples basis, if you'd give any color as to what changed there, if at all? And then as it relates to the lower pricing, that's good in terms of elasticity. How long do you think it might take where you might actually see some benefits in things like DIY because you do have lower prices throughout the chain now?
Thanks, Jeff. I'll start with the first part of your question. We took the guide down from 7% to 9% to 3% to 5% for the full year. That reduction reflects a couple of things. One, the performance in the first half, which includes some lower volume. And as Kevin mentioned, some pricing reductions we discussed in response to the tariff environment coming down. Secondly, it's reflective of pricing reductions that we're expecting to take through the back half of the year. Again, that's a response to the reduction in tariff costs that we've seen as those costs are largely passed through. We're guiding second half sales growth to the mid-single-digit range, which is largely volume driven from the new business wins Kevin mentioned earlier as well as new product introductions.
On the elasticity question, hypothetically, if pricing comes down for the end user, we do expect an uptick in some categories. There are certain categories and parts that are more discretionary and will be more elastic. But for the most part, the vast majority of our portfolio is inelastic. Also, we don't control end-user pricing directly; we set pricing to our customers who then control end-user pricing. We continue to see mid-single-digit POS for the portfolio, and as we think about the back half, we don't anticipate that changing. Our unit growth will be aided by new business wins and new product launches.
And then just a quick follow-up. Any updates on the large customer that was retrenching and how that is progressing? Is that normalized now?
Yes, that's become more normalized. That situation was back in the fourth quarter, and we've seen more normalized order rates in comparison to sellout since then.
We will move next with David Lantz with Wells Fargo.
Curious if we can dive into gross margin in a little more detail and talk about some of the Q3 and Q4 puts and takes. And then one clarification. You mentioned the 40% exit rate for gross margins. Just want to confirm that that's a Q4 comment as opposed to full-year 2026?
Yes, David. On a comparable basis, excluding the refund for the second quarter, gross margins were 38%. We expected Q1 to be the highest tariff load we had and expected it to start coming down in Q2, which we saw. We're seeing much more normalized rates. There are still tariffs in the business, but at lower levels as we go through the back part of the year. Kevin mentioned exiting the year at 40%; that's a fourth quarter comment. We think that's a structural rate as we exit the year and enter into 2027. We feel positive about that aspect.
That's helpful. On the SG&A front, 50 basis points of leverage in the quarter is really strong. Curious about assumptions for the back half in light of the mid-single-digit top line expectation?
Good question. We had good operational leverage in SG&A in Q2. Looking through the back half with our sales guide, there's likely to be a little bit of SG&A deleverage, but not a meaningful change in dollar spend. Dollars are relatively consistent and that will normalize as we go into 2027, but you should expect some deleverage in the back part of the year.
We will move next with Bret Jordan with Jefferies.
The $82 million in free cash contribution from the tariff refund, do your customers ask you for outright cash back on your refunds? Or can you make it up just on pricing as you sort of get through the lower tariff rates?
Good question, Bret. We don't disclose specific commercial actions or agreements with any specific customers. We continue to partner closely with all of our customers. Beginning in Q2 and through the second half, we're going to have lower pricing on a go-forward basis to match the current tariff environment, and that's all baked into the guide. I'm not going to talk specifically about specific customer agreements.
And then on M&A, the balance sheet is quite liquid and operations are solid. Is M&A activity heating up? What scope would you consider in the current environment?
Good question. We're definitely seeing more pipeline activity than in the last few years. A couple reasons: the tariff environment being more stable has contributed to that, interest rates seem to have settled, and potential sellers have reset with more rational valuations. We view that as favorable going forward. Our M&A strategy hasn't changed; it continues to be a meaningful piece of our capital allocation strategy.
Our next question comes from Tristan Thomas-Martin with BMO Capital Markets.
Thanks for all the tariff appendices discussed in the press release. At a high level, can you go through the moving pieces of how the $1.18 tariff refund benefit in the quarter translates to a $0.30 cap on the increase in guidance?
Good question, Tristan. The $1.18 relates to refunds we received for charges that we took prior to Q2 2026. We began paying tariffs throughout 2025 and capitalized many of those costs in inventory, which flowed through the P&L in late 2025 and into 2026. We saw heavier loads in Q1. The $1.18 attempts to back out the prior period components, so what remains in Q2 is a more comparable cost basis. The $0.30 is related to the time period before 2026; that's related to the fourth quarter of 2025 and the costs incurred in that time period.
For Light Duty, when you called out lower volume, does that mean down year-over-year or a deceleration from prior quarters?
Tristan, think of it this way: the first half was going to be a difficult comp. We were comparing against very strong shipment growth last year — Q2 2025 was 10% growth — so the shipment dynamic last year was strong and eased as we moved into this year. Q2 2025 was a high watermark for us from a total shipment standpoint, so it's a tough comp.
And then one more on Specialty Vehicles. I get the high-end dynamic, but curious what you're seeing with attach rates at some of these new entry-level products the OEMs are launching?
We're seeing higher attach rates with the lower-end machines because they are more decontented. Higher-end machines, which come with more features pre-installed, have lower attach rates at the dealer. There's a broad spectrum out there. High-end consumers buy machines with full enclosures and more accessories, while lower-end consumers present more opportunities for upgrades. We believe price points will come down over time to address the lower-end segment, and we have a broad portfolio to serve both high-end and lower-end vehicles.
We will move next with Justin Ages with CJS Securities.
Could you please elaborate on some of the Heavy Duty wins that you noted in the quarter? And then are you seeing any indications of things beginning to improve in Heavy Duty in general?
Good question. We highlighted new products and wins focused above the frame, and we're starting to get traction there. We're very strong below the frame in the undercarriage of commercial vehicles, and a large part of our strategy has been to penetrate the above-frame market, which we're beginning to do successfully and seeing in the results. Regarding the overall market, freight rates are starting to rebound, which is positive. However, there's no meaningful forecasted increase in mileage or tonnage for 2026. We remain focused on being a better, more productive operator, priming the flywheel of new products and above-frame solutions, and attacking channels where we're not very penetrated. The opportunity is large.
This concludes our Q&A session and today's conference call. Thank you for your participation. You may now disconnect.