Dorman Products, Inc. Aktie

Good morning and thank you for standing by. Welcome to Dorman Products First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded.

I would now like to turn the conference over to Alex Whitelam, Vice President of Investor Relations. Thank you, sir. Please go ahead.

Thank you. Good morning, everyone. Welcome to Dorman's First 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 share our segment level performance and market trends. Charles will then walk through our first quarter financial results in more detail, discuss capital allocation and then turn 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 the Investor Relations portion of our website at 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 in the Investor Relations section of Dorman's website. Finally, during the Q&A portion of today's call, we ask that participants limit themselves with one question, one follow-up, and rejoin the queue if they have additional questions.

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 first quarter results and then provide commentary on the performance and key trends we're seeing across our business segments.

Turning to Slide 3. We delivered solid performance in the first quarter with results that were largely in line with our expectations. Consolidated net sales were $529 million, representing an increase of 4% compared to the first quarter of last year. The year-over-year growth was primarily driven by pricing actions implemented across the business, partially offset by lower volumes compared to the exceptionally strong first quarter we experienced in 2025.

Adjusted operating margin for the quarter was 12.1%, down 490 basis points compared to the prior year period. This margin performance reflects the highest levels of tariff-related costs that we expect to see in 2026. Again, due to our use of FIFO, the costs recognized in this year's first quarter are associated with the inventory we purchased last year when tariff rates peaked in the earlier stages of the tariff implementation.

Similarly, the sourcing, productivity and automation initiatives that we executed over the last several months and continue to drive today are expected to support improved margin performance as we move through the balance of the year. Adjusted EBITDA margin, a new metric we've included this quarter was 15.2%, down 440 basis points compared to the same period last year. This decrease is driven by lower operating margins, as I just covered. Please see the reconciliation in our appendix for details on this metric.

Adjusted diluting earnings per share for the quarter was also in line with expectations at $1.57, down approximately 22% year-over-year. As we've discussed over the last several quarters, this decline was primarily driven by higher levels of tariff-related costs that were recognized in our cost of goods sold during the quarter. Cash generation continued to improve sequentially as expected with operating cash flow in the quarter of $44 million.

We also invested in opportunistic share repurchases, deploying $51 million in the quarter, a record for our company. Charles will cover this in more detail shortly. Overall, we began the year with solid performance and met our expectations. Combined with our positive outlook for the remainder of the year, we have reaffirmed our 2026 guidance.

Turning to Slide 4 in our Light Duty segment. Net sales increased approximately 4% year-over-year, driven primarily by the pricing actions we undertook in 2025. Volume was lower compared to last year's first quarter, but let me highlight a few driving factors. First, this year's performance was up against a difficult comparison to last year's first quarter, where we drove exceptionally strong 14% year-over-year growth in net sales. Looking back over the last 2 years combined, we delivered 18% growth in net sales.

Second, ordering patterns with the customer we discussed on our last call began to normalize during the quarter. Lastly, I'd call out that we estimate POS with our large customers was up mid-single digits in the quarter. While there was inflation embedded in that growth, we remain confident in the non-discretionary nature of our portfolio, and we'll continue to monitor the overall economic conditions of our end users and the impact that the ongoing geopolitical tensions are having on the broader economy.

Operating margin performance in the quarter was consistent with our outlook as Q1 2026 reflected the highest level of tariff expense. As the ongoing benefits of our supplier diversification, productivity and automation initiatives are recognized, we expect Light Duty's margin performance to improve as the year progresses. From a market perspective, underlying Light Duty fundamentals remain positive, with vehicle miles traveled increasing year-over-year in the first quarter. Also, higher used vehicle values are impacting consumers' buying decisions, which we believe will result in extended vehicle life and support sustained aftermarket demand for repair and replacement parts.

In addition, Light Duty trucks and SUVs continue to represent a growing portion of the VIO, providing further opportunity for product portfolio expansion with higher average selling prices. A good example of how our innovation strategy supports this opportunity is our OE fix air suspension compressor for a broad set of GM SUV models. This product addresses a common OEM failure mode caused by overheating, which can lead to cascading failures throughout the air suspension system. Our patent-pending design improves heat dissipation by approximately 25%, incorporates thermal protection and utilizes proprietary software to optimize performance and reliability.

By delivering an upgraded repair solution designed to last longer and at an attractive aftermarket price point, products like this not only create value for installers and end users, but also reinforce Dorman's leadership in product innovation. Just an excellent job by our Light Duty team to deliver another OE fixed solution.

Turning to Slide 5 in our Heavy Duty segment. Net sales increased approximately 12% compared to last year's first quarter, driven by pricing initiatives and the year-over-year impact of certain commercialization initiatives we have installed in the business. While the dollar change is relatively small, operating margin improved 110 basis points versus the prior year. I'll also point out that the lower overall margin reflects tariff-related costs that were elevated in the first quarter of 2026.

With the impact that tariffs will have on our margins this year, along with the infrastructure investments we've made in the business, we're not expecting significant year-over-year incremental operating margin improvement in 2026. That said, we'll continue to appropriately manage the business in the short term while executing on our strategy to drive a significantly improved operating margin profile for Heavy Duty over the long term.

On the broader sector, market conditions remain challenged. The great freight recession continued through the first quarter and geopolitical tensions created further economic uncertainty for consumer demand. As a result, near-term visibility remains limited, and we are not expecting meaningful growth in freight tonnage throughout the year.

However, we continue to capture market share in certain channels such as the OE dealer network, where there has been an increased appetite for aftermarket solutions. Overall, we continue to see opportunities for growth. We remain focused on balancing our approach with cost discipline and strategic investment that will allow us to continue capitalizing on these opportunities when the market improves.

As a great example, we are encouraged by the opportunity we see within our diesel aftertreatment portfolio, which we believe represents a meaningful long-term growth driver for the Heavy Duty segment. Modern diesel engines rely on diesel exhaust fluid or DEF systems to meet increasingly stringent emissions regulations. These systems are subject to high failure rates due to harsh operating conditions, temperature extremes and sensor degradation, making reliable aftermarket solutions critical for fleet uptime.

Through our Dayton Parts brand, where we offer one of the most comprehensive portfolios of replacement parts for diesel after treatment, including DEF, headers and pumps. Our solutions provide plug-and-play installation and meet or exceed OE performance at an aftermarket price. These products are built with durable materials, subjected to extensive testing and incorporate best-in-class sensor technology designed for long service life.

As the installed base of DEF-equipped vehicles continues to age and fleet acceptance of aftermarket solutions increase, we believe our leadership in after-treatment systems positions us exceptionally well to serve fleet customers and capture incremental share over time. Congratulations to our Dayton Parts team for bringing this opportunity to market.

Turning to Slide 6 and our Specialty Vehicles segment. Net sales were flat year-over-year as pricing actions in certain categories offset slightly lower volume year-over-year. Keep in mind that from a seasonality standpoint, Q1 is typically the slowest quarter of the year. Operating margin performance was in line with our expectations, reflecting higher tariff-related costs. We're also investing in our expanded dealer network to drive more wallet share and optimize our footprint.

From a market perspective, we are seeing early signs of stabilization as we enter the 2026 riding season with new vehicle sales increasing year-over-year in the first quarter. We also continue to see strong engagement with our ridership as attendance at the national UTV-ATV events remain high. Additionally, we're seeing new lower-cost entry-level vehicles entering the market that offer improved opportunities for aftermarket enhancements.

One new product that illustrates this opportunity well is the power steering kit developed for the new Polaris RANGER 500 platform. As many of you know, Polaris recently introduced the RANGER 500 as a more stripped-down cost-effective utility vehicle designed to appeal to a broad customer base, including fleet users, recreational riders and first-time buyers. By design, this platform ships with more basic features, which creates an attractive opportunity for the aftermarket to enhance functionality and performance to accessories and add-on components.

Power steering is a good example. While the RANGER 500 does not include power steering as standard equipment, demand for steering assist remains high, particularly among users operating in rough terrain or using the vehicle for work applications. Super ATV power steering kit provides a bolt-on solution that significantly reduces steering effort and feedback, improving control and reducing operator fatigue. This system is engineered for easier installation and features sealed input and output shafts along with water tight connectors designed to withstand harsh riding environments. Congratulations to the team at Super ATV for being the first to bring this solution to market.

With that, I'll turn it over to Charles to cover our results in more detail. Charles?

Thanks, Kevin. First, let me say it's been great getting to know a number of our analysts and investors since joining the company in January, and I'm looking forward to spending more time with all of you in the future.

Turning now to Slide 7. I'll walk through our consolidated financial performance for the first quarter. Total net sales for the quarter were $529 million, up 4% compared to the prior year period. The increase was primarily driven by pricing actions across our segments, partially offset by volume declines versus last year, where we had an exceptionally strong quarter from a volume standpoint. As Kevin mentioned, compared to Q1 of 2024, our 2-year net sales growth rate was a strong 18%.

Adjusted gross margin was in line with our expectations of 36%, down 490 basis points compared to last year's first quarter. As the company has previously covered, our pricing initiatives have been implemented to address a range of incremental costs, including tariffs, while considering the competitive dynamic of our parts in the marketplace. This has resulted in a negative impact to our overall margin profile in the short term. That said, we expect our margin profile will meaningfully improve as the year progresses for 2 main reasons.

First, as we discussed previously, this first quarter had the highest level of tariff expense we'll see in 2026, given the inventory we sold was associated with the highest level of duties that were levied in 2025. Second, we anticipate that our supplier diversification, productivity and automation initiatives will make significant contributions to our margin profile as the year moves forward. While our teams did an excellent job managing discretionary costs during the quarter, our adjusted operating income margin was 12.1%, down in conjunction with our gross margin. Adjusted diluted EPS was $1.57, driven by lower operating income, partially offset by lower interest expense and lower shares due to repurchases.

Turning to Slide 8. Operating cash flow for the quarter was $44 million and free cash flow was $35 million. As you can see on this slide, our cash flow improved sequentially from Q4 2025 and has rebounded nicely from this time last year when our cash payments for tariffs peaked in the middle of 2025. I'll add that we've reduced inventory significantly year-over-year, and we remain on track to generate a more normalized level of free cash flow for the year.

On the capital allocation front, we deployed more than $51 million in the quarter to retire approximately 435,000 shares at an average price of approximately $118 a share. This represented a quarterly record level of repurchases for our company and also our view that there was a dislocation in the market valuation for our stock, which prompted us to utilize our strong balance sheet to return capital to our shareholders. We currently have $408 million remaining in share repurchase authorization, which extends through 2027.

Turning to Slide 9. Our long-term capital allocation strategy remains unchanged. We first review our debt levels and leverage ratios, then we deploy capital on internal initiatives as this is where we see our greatest returns. Next, we invest in M&A, which continues to be a key component of our growth strategy. Finally, we will continue to return capital to our shareholders through opportunistic share repurchases. With this consistent approach, we've deployed $1.8 billion of capital since 2020 and expect that our overall strategy will continue to drive long-term growth.

Turning to Slide 10. Our balance sheet remains a significant strength for Dorman. We ended the quarter with net debt of approximately $413 million and total liquidity of $627 million. Our total net leverage ratio at the end of the quarter was 0.99x our adjusted EBITDA, demonstrating our ample flexibility to support the business, manage through tariff-related working capital demands and continue investing in strategic growth opportunities. As we highlighted on the previous slide, our target net leverage ratio is less than 2x adjusted EBITDA and approximately 3x for the 12 months following an acquisition.

Turning to Slide 11. We are reaffirming our full-year 2026 guidance. We continue to expect net sales growth in the range of 7% to 9%, driven by the full-year impact of our pricing initiatives, along with a modest level of volume growth that we expect to be primarily in the back half of the year. Looking across the segments, we expect all 3 segments to directionally perform within this range. We also continue to expect adjusted operating margin to be in the range of 15% to 16% for the full-year with a more normalized high teens rate as we exit the year.

Adjusted diluted EPS for 2026 is expected to be in the range of $8.10 to $8.50. This guidance includes the expected impact of tariffs enacted as of May 4, 2026. Due to uncertainty around the recovery of IEEPA tariffs previously paid, our guidance excludes any impact from the potential IEEPA tariff refunds. Additionally, our guidance does not include any potential tariff changes after May 4, 2026, future acquisitions or divestitures or additional share repurchases. Lastly, we continue to expect a full-year tax rate of approximately 23.5%.

With that, I'll now turn the call back over to Kevin to conclude. Kevin?

Thanks, Charles. I'll just reiterate what we've said throughout the call. Our first quarter performance was solid and in line with our expectations. While uncertainty persists in the broader economic landscape, we remain confident in our strategic positioning, our ability to navigate near-term challenges and our long-term growth opportunities driven by innovation, operational discipline and our leadership position in the aftermarket.

We appreciate your continued interest and support. With that, we'll open the call up for questions. Operator?

[Operator Instructions]. Our first question comes from the line of Jeff Lake with Stephens.

Kevin, I was wondering if you could maybe just elaborate a little more, provide a little more color as the year plays out. Obviously, this is probably one of the trickier quarters you're going to face selling the most tariff-affected inventory from last year with the FIFO and then obviously, you had the added wrinkle of the major customer disruption. I was wondering as you just think through as you step Q2, Q3, Q4, how that's going to progress?

Then maybe if you could weave in anything with regards to complex electronic parts and product innovation, that would be great.

A lot there, Jeff, but let me give that a shot. Good questions. Jeff, let me start with the sales progression. You mentioned the dislocation we had with a large customer that we mentioned in the fourth quarter. I'll just comment that as we entered the quarter, we saw some dislocation continued, but as we exited the quarter, it was more normal rates and ordering patterns kind of fell more in line with the out-the-door POS sales.

When you look at the overall growth rate, you got to keep in mind that last year, particularly in the first half was an extremely strong volume growth period for us. Light Duty grew 14% in the first quarter last year, so a very difficult comp. The first half of the year was up about 12% in light duty. We know that growth from a year-over-year perspective will be challenged in the first half. As we exit the back half, we're still very comfortable with our 7% to 9% full-year guide as we have a full-year of the pricing initiatives in play. We also have a lot of new business coming online as well as continued new product launches. We still feel very comfortable with that guide.

In terms of the margin progression, as we've said multiple times that Q1 was going to be our most difficult quarter as the tariff rates coming through our P&L because of FIFO will be the highest. As we move through the year, those tariff rates reduce because they were the highest when they first implemented starting back in April of last year. Also, all the initiatives that we undertook since April of last year in terms of further diversification, productivity initiatives, dealing with our supplier community, those also have to go through FIFO.

We have very good visibility to what that looks like going forward because of FIFO. We feel confident that we'll continue to see margin progression as we move through the quarters. As we said in the guidance, operating margin should be in that 15% to 16% for the full-year, and we expect to exit Q4 at a higher rate in the high teens area, which is kind of back to normal levels.

Then anything further on just the complex parts and innovation? Is the environment just moving along at a linear pace? Or are you seeing it maybe step up a little more exponential?

Yes. Great question, Jeff, and I didn't address that first time through. Complex electronics in the first quarter met our expectations. It's a category that continues to -- the growth continues to outpace our overall portfolio, and we expect that to continue. We did highlight a few new products that we launched in the quarter that have complex electronics embedded in them. Yes, it's a category we're going to continue to invest in, and it will continue to grow at an outsized pace in the overall portfolio. That is our expectation.

Our next question comes from the line of Scott Stember with ROTH Capital.

Maybe talk about the Heavy Duty. We've seen granted coming off of a low base, but we've seen a nice recovery here in sales, but the margins -- you talked about the margin recovery just really not being there for the most part for this year. Maybe just give us an idea of when you're putting through price increases for tariffs, are you able to get all of it in this segment like you are in light duty?

Then maybe just talk about the level of investments that we should expect in new product development there.

Yes. Good question, Scott. I'd tell you that the tariff -- we continue to pass tariffs through in all 3 of our segments. Heavy Duty is no different. We will see early on in the process of passing through some margin dilution as we continue to -- we have to continue to be competitive where we have competitors. You just get some margin percent compression if you pass through dollar for dollar. In general, that's been our approach. We're able to recover the tariffs, but you do see some margin compression, and we did kind of call that out in the prepared remarks.

Growth in the quarter was very strong, up 12%. Some of that was due to tariff pricing, but we also did see some nice share gains in the quarter. We expect that to continue. However, as we also said in our prepared remarks, we're not expecting the market to recover at this point just based on some of the freight indexes that we're looking at. We don't have any major expectation. We're going to continue to focus on taking share where we can take share and working on driving productivity initiatives throughout the business and driving new product launches and commercialization through that channel, which we've had some good success, but we still have a long road ahead of us there.

Then related to tariffs, a lot has changed in the first quarter with the IES going away, the 232s changing and the 122s coming in. It sounds, at least from the tenor of your comments regarding guidance that the changes there were essentially net neutral. Is that correct?

Yes, Scott, that's correct. When the IES went away, the Section 122, which is essentially 10% across the board came into play. There just wasn't a major change either way just based on how the HTS codes are applied. Most of our codes now are Section 232, whether that's the steel and aluminum tariff or the auto parts tariff on top of the 122 tariffs.

Now, as everyone knows that there will be a new tariff regime coming into place when the Section 122s expire later in the summer. We don't know what that's going to look like. Our assumption is basically it's going to be roughly in the same neighborhood as it is today.

Our next question comes from the line of David Lantz with Wells Fargo.

POS for large customers grew mid-single digit in Q1, but curious if you could talk about how that trended through the quarter, what you're seeing quarter-to-date and expectation through 2026?

David, I'd say the progression was very similar of POS, up mid-single digit in the quarter. Frankly, it's been very similar to what we saw in Q3 of last year and Q4 of last year, so not a lot changed. This continues to be very solid out-the-door growth at our customers. No real change in progression. I'll say that April is very much in line with what we saw in the first quarter.

To answer the second part of your question, our expectation is similar as we move through the rest of the year.

Then considering the really healthy balance sheet, curious how you're thinking about M&A through the balance of 2026 with potential tuck-ins or geographic expansion?

Yes. I mean M&A, as we talk quite a bit about, it continues to be a large part of our strategy, our growth strategy. I would tell you that as we look at our pipeline today across all 3 segments, it continues to be very healthy. I would say that deal activity was muted or has been muted since liberation day, at least in our industry. I think we're now starting to see that loosen up a little bit as there's more understanding of the impact of tariffs on different companies, different parts of the industry. We expect deal activity to pick up as we move through 2026 and into 2027.

Our strategy in terms of the segments has not changed. I mean when we look at Light Duty, we're very interested to continue to geographically expand our business there and continue to enhance our technological capabilities. In Specialty Vehicle, we continue to look to expand geographically. We also look to grow our portfolio of brands through a series of tuck-ins, still very highly fragmented space.

In Heavy Duty kind of similarly where there are opportunities in the Heavy Duty market. We're a very small player in a very large market for us to enter different segments of that space via tuck-in acquisitions.

Our next question comes from the line of Bret Jordan with Jefferies.

On the single-digit POS, could you sort of carve out what is actual price versus units? I guess, specifically within units, could you comment on the chassis category? Did it benefit from any seasonal demand creation this winter?

Bret, I'll first answer. I mean, we don't -- historically, we've never broken out price versus units for competitive reasons. I will say, look, the POS, there is certainly inflation embedded in those numbers just based on the tariff impact across the industry. There's no question about that. I would say that it's remained relatively steady the last 3 quarters and into April.

We don't specifically comment on any specific category, but I will say in regards to chassis question, look, it was a good solid year in terms of the weather. Weather, as you know, does impact certain categories more than others and undercar. -- chassis is certainly one of those. That season really starts late in the first quarter into the second quarter, and so far, we feel really good about that category. I think we had certainly a good winter with a lot of precipitation that helps that category from a growth perspective.

Could you give us a sort of idea of what you paid in IEEPA last year just in case we could get a windfall out of that this year?

Yes. Look, I'll tell you that we've just started the process of recovery on IEEPA, and it's still too early to tell how everything is going to settle out and whether or not there'll be any appeals. It doesn't appear that there's going to be at this point. At this point, we're not going to disclose it because we need to work through the process, and we don't want to get ahead of ourselves because it's just such an unprecedented situation. More to come, Brett, as that plays out.

Our next question comes from the line of Justin Ages with CJS Securities.

This is Will on for Justin. A lot of my questions have been asked, but you noted light trucks and SUVs is a growing portion of prime vehicles in operation. Can you give us some more color on how that breaks down further with electric vehicles?

Well, let me just clarify for electric vehicles, are you talking about in heavy and specialty or light duty?

Light duty.

Light Duty, yes, certainly. Light Duty right now, from a VIO perspective in North America, Light Duty is still less than 2% of the VIO, slightly larger portion of that we would consider alternative drivetrains like hybrid. The vast, vast majority is still ICE, and it's going to take a very long time for that mix to change substantially. Irregardless, we continue to be drivetrain agnostic, right? Our technologies and our capabilities can address any drivetrain. We see a lot of opportunities across the new drivetrains. Obviously, in a hybrid, there's 2 drivetrains. There's a lot more addressable content. We're comfortable with whatever drivetrain becomes prevalent in the future from a BIO perspective.

Ladies and gentlemen, this concludes our Q&A session and today's conference call. We would like to thank you for your participation. You may now disconnect.

Good morning, and thank you for standing by. Welcome to the Dorman Products Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I would now like to turn the conference over to Alex Whitelam, Vice President of Investor Relations. Thank you, sir. Please go ahead.

Thank you. Good morning, everyone. Welcome to Dorman's Fourth Quarter 2025 Earnings Conference Call. I'm joined by Kevin Olsen, Dorman's Chief Executive Officer; and David Hession, Dorman's Chief Financial Officer. Additionally, Charles Rayfield, who will officially step into the role of Chief Financial Officer following our upcoming filing of the 2025 10-K is in attendance. 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. 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. Finally, during the Q&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.

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. 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. 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. 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&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&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&A market. Overall, our priorities were clear, and we executed with discipline. 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. 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. 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. 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. As we anticipated, cash generation improved sequentially with $42 million in operating cash flow in Q4. Additionally, we further strengthened our balance sheet and returned $25 million to shareholders through share repurchases.

Finally, we are issuing 2026 guidance that demonstrates our confidence in delivering strong top line growth through innovation and commercialization initiatives and reflects the timing impacts relating to tariffs. I'll walk through that outlook in more detail shortly. So while there are several moving parts in the quarter, I'm pleased with our year-end results and have confidence in our team's ability to continue executing on our strategy and drive strong long-term profitable growth. Next, let me provide our results and market observations for each of our business segments while highlighting some of our recent accomplishments in each.

Turning to Slide 6. I'll begin with our light-duty business. Net sales in the fourth quarter were $429 million, up slightly over the same period in 2024. We estimate that POS at our large customers was up mid-single digits year-over-year for the fourth quarter. And when you look at POS over the entirety of 2025, it directionally aligned with net sales. As I just mentioned, the team did an excellent job executing on our pricing initiatives. This helped offset lower shipment volume resulting from a larger customer that significantly shifted their ordering pattern during the quarter to reduce inventory. Also, keep in mind that last year's fourth quarter was exceptionally strong with execution on a number of large programs. As it relates to the specific customer ordering change, we expect to see continued order fluctuations in the first quarter of 2026, with stabilization returning in the second quarter. Overall, we believe the nondiscretionary nature of our product portfolio and our new product development strategy will allow us to drive outperformance over the long term.

Next, we drove stronger-than-expected gross margin, given more lower cost pre-tariff inventory shipped during the quarter, partially as a result of lower-than-expected volume. We also drove continued savings with our ongoing supplier diversification and productivity initiatives. Operating margin was down slightly year-over-year, largely because of the higher factoring costs related to tariffs. Looking more broadly at the light-duty market, macro trends continue to remain positive with VIO and vehicle miles traveled increasing year-over-year. Additionally, OEM platform changes continue to present opportunities for our new product development strategy, especially in complex electronics.

On this point, we continue to invest in our complex electronic capabilities as EV, hybrid and ICE vehicles are increasingly being equipped with more digital systems. We have the infrastructure and expertise to address complex electronic failures with more than 15 years of experience with data logging, electronics design and co-development to provide our customers with sophisticated software-enabled solutions. Our current new product pipeline includes the highest proportion of complex electronics in our history.

As an example of this, we recently launched a fuel pump driver module for a wide range of Toyota and Lexus models. Assembled in the U.S., this solution is precision engineered to replace the original equipment module, which can fail after exposure to heat and environmental elements. Fuel pump driver module showcases Dorman's ability to apply OEM-level electronics engineering and manufacturing in high-volume applications. With more than 2.5 million vehicles in operation across Toyota and Lexus platforms. This module allows us to bring our advanced power electronics capabilities to drivers looking for extended vehicle life with an easy-to-install and cost-effective solution. Great job by our product development team for identifying and bringing this opportunity to market.

Next, let me turn to Slide 7 for our heavy-duty business. Net sales grew 6% year-over-year in the fourth quarter despite continued pressure in the trucking and freight industry. The heavy-duty team did a nice job executing on the pricing front while also driving more business wins. Operating margin expanded 130 basis points year-over-year as a result of the timing around tariffs, similar to our light-duty business. We remain focused on improving both our commercial and operational execution in the heavy-duty segment to achieve our long-term goal of mid-teens operating margin.

Looking across the sector, the great freight recession continued in the fourth quarter, where tariff and general market uncertainty continue to add pressure on the trucking and freight industry. That said, softer new vehicle sales across the last several years have led to an increase in the average heavy-duty vehicle age, a trend which we expect to continue for the next several years. All in all, there continues to be mixed signals within the market, making it hard to predict the timing of rebound. But we're tracking it closely, controlling what we can control and investing where appropriate to capitalize on business wins.

One example of this would be the recent expansion of our medium-duty product offering and omnichannel approach. Medium-duty vehicles are typically part of larger fleets focused on last-mile delivery. used in ports, large campuses, industrial settings and for deliveries to our homes and businesses. These are high mileage vehicles, making many stops, so they experience quite a bit of wear and tear. Historically, fleet managers will rely on their dealer relationships for key repairs in their medium-duty fleet. However, through our wholesale distribution network and direct sales relationships, we're approaching this channel with improved focus to provide fleet managers with more optionality and cost savings while maintaining these critical assets.

On Slide 8, I'll provide an overview of the Specialty Vehicle segment. Top line growth in the fourth quarter was flat year-over-year with pricing initiatives on certain categories offsetting softer spending in the overall segment. Operating margin was down year-over-year in the fourth quarter, primarily due to increased wage and benefit expenses. I'd note that the overall change in profit dollars is relatively low, and the team did a nice job managing expenses in specific areas of the business that are more controllable.

Again, longer term, we are targeting a high teens margin profile for the business, supported by expanding new product pipeline, especially with nondiscretionary parts. While market challenges persist, UTV and ATV ridership remains strong. This condition remained consistent through 2025. So we're not seeing an impact to overall end-user demand for these products, just timing delays in purchases. New machine sales are also rebounding in the 2024 and 2025 levels and dealers have generally rightsized their vehicle inventory positions. We expect that as economic conditions improve, riders will resume enhancing and repairing their vehicles.

On the new product development front, SuperATV continues to demonstrate its speed and agility in bringing solutions to the evolving aftermarket. We recently launched a 4-inch and 6-inch portal gear lift for the CF Moto UForce U10. As CF Moto's newest high-demand UTV hit the market, SuperATV was the first and currently the only manufacturer to deliver portal lift solutions for this model. Our portals enable riders to customize and elevate performance with the durability and capability SuperATV is known for. This patented early to market position reinforces our strategic advantage, the ability to evaluate new vehicle platforms quickly, engineer high-quality components and release fully tested products ahead of competitors. Congrats to the SuperATV team on another successful launch.

With that, I'll turn it over to David to cover our results in more detail. David?

Thanks, Kevin. Turning to Slide 9. Let me provide more detail on our consolidated results. Net sales in the fourth quarter were $538 million, up $4 million or approximately 1% year-over-year. As Kevin highlighted, our net sales performance across the enterprise was largely driven by our pricing initiatives. In addition to the tough comparison we had in Q4 2024, where we had strong growth, volume this year was impacted by a larger customer that significantly changed their ordering pattern during the quarter to reduce inventory. That said, we believe these timing shifts will normalize through the second quarter of 2026. Adjusted gross margin came in higher than expected for the quarter at 42.6%. This was a 90 basis point increase compared to last year's fourth quarter.

As Kevin mentioned, this margin expansion was driven by more pre-tariff lower cost inventory shipped during the quarter, partially as a result of lower-than-expected volume. Supplier diversification and productivity initiatives across the organization also contributed to our strong margin performance. Adjusted SG&A expense as a percentage of net sales was 25.2%, up 100 basis points compared to the same period last year. The uptick was largely tied to increased expenses related to funding the higher tariffs, along with higher wage and benefit costs in the quarter.

Adjusted operating income was $93 million and flat compared to last year's fourth quarter. Adjusted operating margin was 17.4%, down slightly compared to the same period. As we discussed in prior quarters, there has been continued pressure on the trucking and freight industry impacting our heavy-duty segment. As a result, we recorded a noncash goodwill impairment charge in the fourth quarter of approximately $51 million after taxes. This is reflected in our GAAP results included in our press release, but has been adjusted out in adjusted diluted EPS. With that, adjusted diluted EPS in the fourth quarter was $2.17, down 1% year-over-year, but up against a very strong fourth quarter 2024. Interest expense was lower on debt reduction, and our tax rate was lower in the fourth quarter of 2024 due to discrete items that did not repeat this year.

Let me quickly cover our full year results on Slide 10. As Kevin mentioned in our 2025 highlights, net sales increased 6% year-over-year with the first half driven by strong demand in our light-duty business and our pricing initiatives related to tariffs driving our performance in the second half. New products saw a record year of sales and the commercialization initiatives we've discussed throughout the year were positive drivers of our top line results. Operating income increased 17% over 2024 and operating margins were up 170 basis points to 17.8%. Again, this margin performance was driven by tariff-related timing dynamics, along with the supplier diversification and productivity initiatives driven by our segments.

Let me also provide some additional color on our earnings. Adjusted diluted EPS was $8.87 for 2025, a 24% increase compared to the year prior. Now with full visibility of the impacts that the additional tariffs had on our results for the year, we thought it would be helpful to quantify this impact for the investment community. When including the timing dynamics of price and costs, along with the onetime miscellaneous expenses associated with tariffs, we estimate a full year impact of approximately $1.25 to our adjusted diluted EPS. While this is purely an estimate, we thought it would help contextualize pre-tariff comparison to 2024 and set a framework for our 2026 guidance, which Kevin will cover in a moment.

Turning to our cash flow on Slide 11. As we expected, cash generation improved sequentially from Q3 to Q4. While tariffs continue to impact our inventory spend, we drove $42 million in operating cash flow during the quarter, a $30 million improvement from Q3. This allowed us to repay $16 million of debt and resume our share repurchases with approximately $25 million deployed in the fourth quarter. While we covered this extensively throughout the year, our full year operating cash flow was down 51% in 2025 compared to 2024. With capital expenditures essentially consistent, free cash flow was down 61% year-over-year. Again, the majority of this decline was tied to higher cost inventory as a result of tariffs.

Looking ahead in 2026, we expect operating and free cash flow to continue improving before normalizing in the back half of the year. I'll reinforce that we ended 2025 with a strong balance sheet and liquidity position. Throughout the year, we successfully managed tariffs and higher cost inventory with our asset-light operating model and cash management, all while investing in key organic growth opportunities for the organization.

As you can see on Slide 12, net debt was $391 million at the end of the year, which was down $42 million compared to the same time the year prior. Our net leverage ratio was 0.89x adjusted EBITDA compared to 1.12x at the end of 2024. And finally, our total liquidity was $648 million at the end of 2025, up from $642 million at the end of the prior year. I'll conclude by commenting how proud I am of the work our team has done to build the financial foundation that the company sits on today and look forward to seeing where Kevin, Charles and all my fellow contributors take Dorman into the future. To the analysts and investors that I've had the pleasure of working with over the past 7 years, thank you for all of your support and confidence in our team.

With that, I'll turn it back to Kevin to cover guidance before we get into the Q&A.

Thanks, David. Let me dive into the guidance we are providing for 2026 on Slide 13. As we discussed in our Q2 and Q3 earnings calls, tariffs created timing nuances related to when price and costs took effect on our results. This created a tale of 2 halves in 2025, where the first half was on a typical price and inventory cost schedule and then pricing took effect in the second half without the associated higher cost inventory selling through. As we discussed today, this continued into the fourth quarter as we shipped out less inventory with the highest levels of tariffs. Therefore, we expect to see the higher cost inventory hit more in the first half of 2026 before normalizing later in the year.

Starting with the top line. We expect total net sales growth to be in the range of 7% to 9% for the year and directionally the same range for each of the segments. This growth target reflects both a modest level of volume improvement over 2025, along with the impact of pricing. Two factors to keep in mind. First, we had a strong first half of 2025 from a volume perspective. Second, as we've covered in our last several calls, 2025 only saw increased tariff pricing begin to take effect in Q3. So the full year impact is a positive.

Let me provide a bit of additional color around cadence for the year. From a margin perspective, we expect operating margin will reduce temporarily in the first quarter, but we expect our margin profile will meaningfully improve through the back half of the year. This is because of the FIFO lag on reduced costs from lower tariffs, along with our continued supplier diversification, productivity and automation initiatives driving more savings throughout the year.

For the full year, we expect to deliver an operating margin in the range of 15% to 16% with a more normalized high teens rate as we exit 2026. As a reference point, if you look back to our performance in 2023, with the inflationary environment following the global pandemic, we had a similar situation where the business began the year with subdued margins and then finished the year strong. We're expecting a similar cadence with operating margins this year. Point is we've managed through inflationary cycles before, and we have the playbook to handle the timing nuances. Next, for 2026, we expect a full year tax rate of approximately 23.5%. This could vary from quarter-to-quarter as discrete items are recognized. Finally, for adjusted diluted earnings per share, we expect 2026 to be in the range of $8.10 to $8.50.

Let me provide some additional context around this range. As David mentioned, we estimate that the additional tariffs that took effect in 2025 had an impact of $1.25 on our full year adjusted diluted EPS. Excluding this benefit, our adjusted diluted EPS would have been approximately $7.62 or a 7% increase over 2024. And our 2026 EPS guidance range represents a growth rate of 6% to 12% on a comparable basis. Again, this is purely an estimate, but we felt it was important to help outline the overall impact tariffs have had on the business. From a cadence perspective, we expect that EPS will see the toughest year-over-year comparison in the first quarter, with growth rates normalizing towards the end of the year. I'll mention that this is more color than we ordinarily provide. But given the complexities and nuances with the timing impacts of tariffs and price, we hope it might be helpful context as we think about 2026.

All this said, we continue to live in an environment with significant uncertainty as it relates to tariffs and global trade dynamics. 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. For clarity, our guidance today reflects an assumption that future tariff levels will remain generally consistent with those that were in place prior to the IEEPA ruling, and therefore, we expect the overall impact to our business will likely be directionally the same. Additionally, our guidance does not reflect any potential IEEPA-based tariff refunds that may be issued or claimed in the future. Should any material changes to tariffs or trade disruptions significantly impact our business or alter our expectations, we may look to update our guidance.

Just to finish up on Slide 14, I'd like to reiterate my congratulations to our entire team for delivering strong performance in 2025 and operationally executing exactly what we said we would do. While there are a number of moving parts in 2026, our guidance reflects our ability to navigate through the challenges tariffs have presented and deliver strong long-term growth for our shareholders. We'll continue driving innovation for our customers and end users, further improving our commercial and operational execution and strategically investing in opportunities where we can win in our respective markets. We value your partnership, and thank you for your support.

Finally, I wanted to take a moment to thank and recognize David as this will be his last earnings call. Since joining the company in 2019, David has played an integral role in our success, helping lead through a global pandemic, supply chain disruptions and 2 rounds of tariffs. Now I understand why you're retiring. In all seriousness, David, your mark on Dorman will be felt for a long time. So thank you for your service, and we wish you all the best in retirement.

With that, I would like to now open the call up for questions. Operator?

[Operator Instructions] Our first question comes from Scott Stember from ROTH Capital.

David, congrats on your retirement, and it was great working with you.

Thanks, Scott. It's been a pleasure. I appreciate it.

So beyond the tariff noise within the guidance, I'm just trying to make sure I get a sense of how, I guess, the light-duty business is doing. It sounds like mid-single-digit POS growth. There was a lot of pricing in there as well. But I know you typically don't parse this out, but I'm just trying to get a sense of what volume looks like on a POS basis. Just trying to get a sense of how you guys are matching up with what the O'Reilly's and the AutoZone's are saying.

Yes, Scott. Yes, thanks for the question. Good question. Look, the light-duty business, the macros remain very strong. I mean the sweet spot of the vehicle, the 7- to 14-year-old vehicle continues to increase. Miles driven continue to be up. The age of the vehicle now is approaching 13 years. So overall, we see a very constructive environment as we go into 2026. As you said, our POS was up mid-single digit in the quarter, very similar to what we saw in the third quarter. So not a lot of change there. The one dynamic, obviously, that we pointed out in our prepared remarks was, obviously, sales were down a bit as it related to POS because of the one customer who changed their order patterns in the fourth quarter. But other than that, we remain real constructive on the aftermarket here as we move into 2026.

Got it. And your guidance for 7% to 9% growth for the year, very robust. Obviously, it sounds like there'll be some additional pricing actions coming through. But maybe talk about POS versus sell-in. Are we basically saying that you would expect that POS would be up in that mid- to high single-digit range for the year?

Yes. I mean we're assuming roughly mid-single-digit POS as we move through 2026. There is -- you mentioned new pricing. I'll just clarify that a little bit. It's more of a wrap of the pricing, a full year impact of the pricing that we already put in place in 2025. So there will be a bit of a favorable benefit to that. Outside of that, we'll see POS growth that will drive our sales growth on top of new product. So we had -- as we mentioned in our prepared remarks, we had a very robust year in 2025 from a new product standpoint. As a matter of fact, we had a record year for new product sales, which will carry over and we'll get a large bump from a full year impact of that. And we're anticipating another real strong year for new product sales as well.

Our next question comes from Bret Jordan from Jefferies LLC.

When we look at the inventory growth year-over-year, could you sort of parse out what of that is in tariff price, units versus cost in that inventory?

Yes, Bret, the largest proportion of inventory growth that you've seen really starting at midyear at Liberation Day is the higher tariff cost. There is some additional lift there just because volume was up, but also we did purchase ahead of the tariffs that temporarily lifted our inventory levels as well. But the largest component is increased cost from tariffs.

Okay. And then I guess when you think about the customer base ex the advanced math, about the POS, the cadence through the quarter, and I guess maybe if you could give us any color on early '26. Are you seeing the underlying traction improving at the sort of end user demand?

Yes. So as we mentioned, Bret, POS was very similar in the fourth quarter that we saw in the third quarter. And as we rounded into 2026, January was essentially in line with what we saw in the fourth quarter, and we did see a modest uptick in February. As you know, March is a pretty key month for the aftermarket as we get ready for the spring selling season. So obviously, we're hoping that, that continues that progress that we saw in February.

Our next question comes from Jeff Lick from Stephens Inc.

David, best of luck.

Thanks, Jeff.

So if you just look at the exit rate of sales. Light-duty flat, heavy-duty 5% and specialty 0. What gives you confidence? Your guidance of 7% to 9% assumes there's going to be quite an acceleration. I was wondering if maybe you could just give a little more granularity. And then am I right to interpret that you're still going to see some tariff benefit in Q1 and Q2? And then maybe if you could peel back. You also made a comment, Kevin, I think, to Scott's question about POS sales with the customer with the auto -- the order pattern change, were they actually down then? So maybe just kind of what gives you -- the 7% to 9% implies an acceleration. So maybe just a little more granularity.

Yes. Sure. So full year sales growth in 2025 was about 6%. What happened in the fourth quarter, Jeff, I'm glad you brought this up. We had one of our largest customers shift their order patterns in the fourth quarter as they're going through some supply chain and distribution center consolidation. If that -- if we saw order rates kind of continue like we did in the third quarter, we would have been well within the guidance that we issued to TheStreet. Just to give you a little context, orders were down from that customer nearly 40% from the third quarter. That's obviously not going to continue as we move through 2026. We see -- we're going to continue to see some disruption early this year, which we've seen that starting to normalize.

And as we exit the first quarter, we should be back to more normal ordering patterns as it relates to POS. So if you kind of take that and you add that to the new product, which always will drive above-market growth for us, which it has historically. And then the pricing, the full year wrap of the pricing, we'll get a full year of that, whereas in 2025, that really didn't start taking effect until midway through the third quarter. You add those kind of together, we're pretty confident with the sales guide that we put out there.

And then just as a follow-up on gross margin. So if I'm correct in recalling, you guys have use pricing increases to increase dollar for dollar as opposed to percentage. So naturally, you're going to recoup the gross profit dollar, but that implies your gross margin will be down with that kind of pricing strategy. So am I correct then that the bigger impact as these -- as the COGS catch up will be Q1 and Q2 and then I guess, margin would be down in Q3 and Q4, but just not as much. Is that fair?

Well, it's why we gave some additional clarification, Jeff, to the margin outlook, which we haven't done historically. So when you think about -- you are correct, when we did pass through tariff pricing, it was dollar for dollar, and that will have an impact on margin percentages, but not margin dollars, as you point out. We've guided to an operating margin percent of 15% to 16% for full year 2026 with exiting at a higher rate than that, high teens. Just for some context, back in 2024, before tariffs were implemented, our operating margin was 16%. So we believe as we work through this higher tariff inventory in the first half, we have visibility to kind of the cost in our -- that has built up in our inventory.

On top of that, when -- after Liberation Day, we obviously went right to work on negotiating better prices from our suppliers, further diversifying our supply chain, going from higher tariff regions to lower tariff regions, working on productivity initiatives. All those savings essentially are baked into the inventory and will come through in the back half of the year. Remember, any time we either have a cost increase to an input cost or cost decrease, it usually takes about 7 to 8 months to work its way through our inventory because of FIFO accounting. And that's what's causing a lot of the confusion with our numbers.

I also point out that if you step back and kind of take out the timing issues of 2025 and 2026, our implied guidance for 2026, 2-year growth rate will be about 15% compared to 2024, the 2-year stack. EPS growth will be about 16.5% over 2024. So again, if you kind of step back and take out all the timing noise, those are really the levels that we have historically driven, and we continue to believe that we can continue to drive those levels of growth going forward.

That's awesome. Listen, I really appreciate the color and granularity and I'm sure everyone else does as well.

You got it.

Our next question comes from Tristan Thomas-Martin from BMO Capital Markets.

A broader kind of question. You called out like complex electronics growth. How should we think about kind of like your content TAM on an EV versus an ICE vehicle?

Okay. So I'll start off -- good question, by the way, Tristan. I'll say that we're -- as we view ICE vehicles or pure plug-in electric vehicles, I guess that's what you're calling an EV or hybrid vehicles, we're drivetrain agnostic. So whatever the drivetrain is going to be, we have the capability to develop parts that fail for either of those drivetrains or systems. As we look at complex electronics, it continues to be a larger and larger portion of our portfolio, whether that be ICE, plug-in electric or hybrid. And so I -- and if we look at the product funnel, our new product opportunities looking out 3 years. Complex Electronics is the highest proportion of that funnel than it's ever been, which, as we've talked about before, we believe that is our competitive moat as we look around at competition around the aftermarket. So it's obviously -- we view it as a very favorable dynamic. And obviously, Complex Electronics carry a much higher ASP than a pure mechanical part.

Yes. And then just switching to specialty vehicles. I think you used the term rebound in your kind of slides and script. So how are you thinking about kind of new vehicle kind of end market sales in '26?

Yes, good question. We didn't -- I don't think we call the market rebound. I think what we said was new vehicle sales have rebounded a bit, which they have. Hopefully, that trend continues. And we see that inventory in the dealer channel has stabilized and we believe at healthy levels. So listen, we're not waiting or banking on a big market rebound. We're just working on the factors that we can control, continue to expand our footprint, particularly on the West Coast, which we've had a lot of success with, continue to drive new product development growth, particularly on the nondiscretionary repair side, which has been a big initiative of ours and taking market share. We're just -- and frankly, controlling our costs. The market will be the market. I can't control that. But we feel real confident in the actions that we've taken to continue to look to drive growth. When the market does return, I think we're going to be very well positioned.

Got it. David, enjoy the retirement.

Thank you, Tristan. Appreciate it.

Our next question comes from David Lantz from Wells Fargo.

David, congratulations again.

Thank you. I appreciate it.

So light-duty order fluctuations are expected to continue in Q1, but I just wanted to make sure the message is that segment sales should still grow in the quarter and then accelerate through the year from there. And then within the 7% to 9% top line sales for the year, curious if you can parse out how you think your subsegment performance will shake out relative to each of the broader categories.

Yes. I mean -- David, I'll say that we didn't break out how much is going to be price and volume in the 7% to 9%. I think I've covered in general, why we're comfortable with the growth guidance that we put out there. Look, I mean, not a lot has changed. I mean we feel that we've got good growth opportunities in all 3 segments. Light-duty, new product development, as I said before, we had a record year in 2025. We think we're going to have another strong year in 2026. Ordering patterns from our large customer will come back into line. We see very solid growth in the LV business in 2026, and we got the pricing ramp that I mentioned earlier.

You have some similar dynamics, frankly, in the other 2 segments. In heavy duty, I'll just kind of remind everyone that heavy duty is probably the least exposed to tariff. But we've seen a couple of good quarters of growth. We had 6% growth in the fourth quarter. Again, we're not calling a rebound in the market for sure. We're just going to focus on the things that we can control and continue to take market share and deal with any tariff pricing that we're exposed to in that market, too. So that will drive a little bit of the uptick. And same with specialty vehicle. I kind of covered that on Tristan's calls, but we continue to drive further market share gains as we expand in underserved regions in the country and continue to drive new product development growth, which we've been successful with. So that's what gives us the confidence to hit the guide that we put out there.

Got it. That's helpful. And then on the balance sheet, it's really healthy. So curious if you can walk through how you're thinking about M&A in 2026 between potential tuck-in opportunities and geographic expansion and then balancing that with share repurchases.

Yes. Look, our capital deployment strategy really hasn't changed. I mean, first, we're going to look at debt levels. We've obviously paid down significant levels of debt since our previous large acquisition of SuperATV and our leverage ratios are very moderate levels right now. Second, we look to invest in organic growth, new product development. That obviously is our highest area of returns, and we're going to continue to invest there. And third, as you point out, we look to deploy capital for M&A.

We have a lot of dry powder right now given our debt structure and our leverage and our -- frankly, our cash flow, which we really haven't talked about yet, but cash flow was much improved in the fourth quarter as compared to the third quarter. We generated about $76 million of free cash flow last year in 2025, well below what we would normally generate due to the tariffs. As you -- as we look at 2026 from a free cash flow standpoint, I think we'll be -- you can kind of look back to 2024, more normal levels of free cash flow. We generated close to $200 million. So I think we're expecting a more normalized free cash flow year as we move forward.

And then if M&A opportunities don't present themselves, we look to return capital to shareholders. And historically, we've done that opportunistically through share repurchases and which we resumed here in the fourth quarter of 2025. So look, just in general, on the M&A front, I'd say that as we pointed out in our prepared remarks, 2025 was a real quiet year, I mean, for obvious reasons. I think with all the turmoil with tariffs, it was kind of tough for companies to get a good handle on what valuations should be. I think that's kind of getting behind us now. And so I think we'll see a much higher level of activity here in 2026.

Our next question comes from Gary Prestopino from Barrington Research.

Kevin, you're doing real well with Complex Electronics, new products and all that. And at times, I think you've been a little bit reticent to talk about just the growth that's being contributed there by the new products. But if you could give us an idea on your top line, is it 50 basis points, 100 basis points, 200 basis points? It seems that is going to be, I think, a key driver of growth going forward. And then I have a follow-up on Complex Electronics.

Yes, Gary, I'd point you to -- look, historically, we have not broken out how -- for competitive reasons, and I think you hope you can understand that, the scale of our Complex Electronics portfolio we believe we have a competitive moat there, and we really like to protect that moat. And in terms of new product, I'll point you to -- we continue to launch thousands of SKUs. That will come out in the 10-K that will be issued on Friday, tomorrow. But you'll see a nice growth in SKUs. We continue to point out, we did highlight from a new product sales growth dollars was a record in 2025.

And I think we continue to drive increased throughput. The amount of the funnel that we have, that's our forward-looking repair opportunity funnel continues, as we've talked about publicly, it's the highest that it's been historically. We feel real good. Look, Gary, you look back at our growth trajectory over the last 5, 6, 7 years, as we've said, we feel real comfortable that we can deliver outsized growth compared to market. The aftermarket has grown anywhere from 3% to 4% historically. We've delivered between 7% and 8% growth historically. We believe we can continue to do that.

Okay. That's fair. And then I just -- in the context of, and I think another question was raised about the TAM on complex electronics, but I think it was more or less directed towards the EV side. I mean, in general, what are you seeing as far as that TAM goes across all the vehicles in operation? I mean, are you seeing the need for a doubling of what you can provide to the market on a complex electronics side as cars get more technologically advanced?

Yes. I'm not going to -- yes, Gary, very good question, and it is related to the one I answered earlier. I would say that I'll reference back to what I mentioned earlier. As we look forward to repair opportunities, we have pretty good headlights as to what's failing in the marketplace. And when you look at that universe of opportunities, Complex Electronics continues to be a larger and larger proportion of that universe. And that's going to continue, right? I mean, if you look at the technology that's on vehicles coming off the line today, it's much different than it was 5 years ago, 10 years ago for sure. So those repair opportunities are going to continue to grow. I'm not going to really comment on the doubling, but I will tell you that one of our major focuses is how do we continue to increase our throughput there and how do we reduce our development time on Complex Electronics. And because we're going to see more and more electromechanical part opportunities in the future.

Okay. David, best of luck and hit them straight in your retirement.

Thanks, Gary. I appreciate it. I've enjoyed working with you.

All right. Have a good one.

Thanks.

Our next question comes from Justin Ages from CJS Securities.

Congrats on the retirement, David.

Thanks. I appreciate it.

Question on heavy duty. It's been a couple of quarters now where you've highlighted some new business wins. So I just wanted to dig in a little bit what's driving those new business wins? And how should we think about -- is it coming as share gains? Or is it new products? Just want a little more color on that.

Yes. Great question, Justin. It's a combination of both, right? We did mention that we do have a bit of a lift in the fourth quarter from tariff pricing, but the majority of that gain is due to competitive wins. And that comes in the way of just share gain execution in the marketplace, but also new product development. As we've talked about before, one of the reasons why we really like the heavy-duty platform and Dayton products in particular, was that we could port over our new product development process and really drive outsized growth there. I think -- and that takes some time as we need to get that flywheel going, which we've been doing. So we're really comfortable in terms of our prospects of growth as we continue to build out our portfolio and our categories with above frame products. And so yes, it's why -- it's one of the major reasons why we really like the heavy-duty business, the opportunity to drive new product development growth.

Great. And then on margin, in '25, you highlighted outside of pricing increases, some productivity initiatives that helped margins expand. And you mentioned them into '26 as well. So I just wanted to get a little more color on what some of those productivity and automation initiatives are that you're looking towards.

Yes, sure. I mean there's a suite of things, Justin. Great question. I mean if you think about -- I mentioned earlier, obviously, we're -- first and foremost, as tariffs have come into the frame again, we're obviously looking to get the best acquisition cost that we can around the globe. So we're constantly in negotiation with our manufacturing partners around the world. Secondly, we have now built a global supply chain team that is very capable around the world in many different countries. We're able to look to optimal manufacturing locations that -- where we get the best value proposition overall, kind of cost, quality, price proposition. So we continue to do that.

And lastly, as you mentioned, productivity in our -- kind of inside our 4 walls would be -- we made some significant investments in automating our DCs, which is a high cost for us. Those investments have been very successful. We continue to see great productivity being driven on the direct labor front. That will continue. We view that as early innings, frankly, in terms of where we are on the automation curve. So we'll continue to focus on that as we move forward. And then we're constantly looking to look to ways to increase productivity in all of our functions around the business. For instance, we drove outsized new product development growth and SKU growth this year without adding that commensurate level of resources. And that's process improvement, tools, better tools, better organizational structure. So we're going to continue to look to do things like that to drive productivity.

Our next question comes from Bret Jordan from Jefferies LLC.

Just a quick follow-up on Complex Electronics. You talked about the ASP being higher. Given the lack of aftermarket competitors in that space, is the gross margin substantially higher as well?

Yes. Good question, Bret. I think we've -- yes, we've talked about this previously. Look, certainly, it depends on the ASP. But in most cases, when we're just competing against the OE, that's going to be our highest level of gross margin percentage, just in general, whether it's a Complex Electronic or not. So obviously, we look to maximize margins where we have a high level of investment like we do in Complex Electronics, we're clearly looking to make sure that we make those commensurate returns as well. So yes, in a lot of cases, it's a high level of gross margin.

That concludes the question-and-answer session, and this concludes today's conference call. Thank you for joining. You may now disconnect.

Good morning, and thank you for standing by. Welcome to the Dorman Products Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I'd now like to turn the conference over to Alex Whitelam, Vice President of Investor Relations. Thank you, sir. Please go ahead.

Thank you. Good morning, everyone. Welcome to Dorman's Third Quarter 2025 Earnings Conference Call. I'm joined by Kevin Olsen, Dorman's Chief Executive Officer; and David Hession, Dorman's Chief Financial Officer. 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 and our guidance before turning it back over 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 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. 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 in the Investor Relations section of Dorman's website. Finally, during the Q&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.

Thanks, Alex. Good morning, and thank you for joining our third quarter 2025 earnings call. As Alex mentioned, I'll start with a high-level review of the results along with an update on our segments and market observations for each before turning it over to David. Let me start on Slide 3. First, I'd like to thank our contributors for all their hard work and dedication this year, which allowed us to execute exceptionally well and deliver for our customers. In the third quarter, we drove strong top and bottom line growth. Consolidated net sales were $544 million for Q3, up 7.9% year-over-year. This growth was primarily driven by tariff-related pricing actions that took effect in the quarter, which we covered in detail during our last earnings call. Additionally, we saw solid POS growth in the quarter which was up mid-single digits year-over-year.

As we expected and discussed previously, we delivered strong margin growth in the quarter. This was largely driven by the timing dynamics of pricing and costs associated with tariffs. As a reminder, while the majority of our price increase went into effect in the third quarter, the inventory that we purchased in Q2 comes with higher tariff-related costs that will begin to impact our income statement in the fourth quarter of this year. As a result, we expect a lower gross margin in Q4 compared to Q3.

Adjusted operating margin for Q3 2025 was 20.5%, a 340 basis point increase over last year's third quarter. Adjusted diluted EPS grew 34% year-over-year to $2.62 which, again, was driven by our growth, margin expansion and the timing dynamics of pricing and costs related to tariffs. Finally, operating cash flow was $12 million, and free cash flow was $2 million in the quarter. While this is a slight improvement over Q2, our cash flow continues to be impacted by higher tariff costs. David will discuss this in more detail shortly.

So while there were some timing subtleties within the quarter, we're pleased with our performance and expect to continue delivering strong year-over-year growth for our shareholders. Next, I'll provide our results for each of our business segments. I'll also dive into our market observations and share some highlights for each. Starting on Slide 4, our Light Duty business had another strong quarter with net sales increasing 9% year-over-year in Q3. The growth was primarily driven by tariff-related pricing actions that took effect in the third quarter. POS more closely aligned with our net sales up mid-single digits year-over-year. And similar to last quarter, we're not seeing any significant oversupply in the inventory data we have from our largest customers.

On the margin front, Light Duty delivered a 470 basis point gain in operating margin, driven primarily by tariff-related pricing as well as the impact of our supplier diversification initiatives. Looking across the Light Duty market, macro trends continue to remain positive. The vehicle miles traveled increasing year-over-year. However, uncertainty in the market related to tariffs and trade dynamics continues to persist. We're closely monitoring the environment and continue to work with our suppliers and customers as part of our overall tariff mitigation strategy. And while it appears that inflationary pricing has started to reach our end users, we remain confident in our ability to drive long-term growth as nondiscretionary repair parts have historically performed well through various economic cycles.

We also thought it would be helpful to provide some business insights and highlight new products and updates across our segments. In the Light Duty business, we recently launched an electronic power steering rack for specific Ram truck models from 2013 to 2024. This is a first aftermarket part and the only available option in the independent aftermarket that is manufactured new. This product is a great example of our capabilities within complex electronics given the functionality and integration of various systems throughout the vehicle.

The EPS rack is an OE fixed component with significant upgrades compared to the original manufacturers part and designed to ensure a long, reliable service life. Electronics within have been redesigned with added service protection and an improved layout to reduce heat and electrical interference. Additionally, protective coatings have been applied to resist contamination from water, salt dust and other harmful contaminants. It has also been designed for simple, seamless installation with no dealer programming needed. This product is a culmination of extensive complex cross-functional work with our engineering teams. So I'd like to congratulate everyone involved. Next, let me turn to Slide 5 for updates on our Heavy Duty business.

Net sales grew 6% year-over-year in the third quarter. While market conditions continue to pressure the segment, the team executed on the pricing front and drove volume through new business wins. The benefit of higher net sales growth in the quarter was offset by lower manufacturing productivity, impacting margins, which were flat year-over-year. Longer term, we remain focused on driving a mid-teens operating margin profile for the Heavy Duty segment. Digging more into the broader trucking and freight market, it remains difficult to predict an inflection point. While we're pleased with the recent net sales growth over the last 2 quarters, we continue to see mixed signals across our customer channels, but we're hopeful that the worst is behind us, we'll see a turn in the coming quarters.

Despite the headwinds, we continue to execute key initiatives to best position the business for the eventual rebound of the trucking and freight market. As an example, we just launched our redesigned website with an improved e-commerce platform that helps customers identify the right parts for the right applications and get our products to the right locations on time. We expect a new site, which has been designed with the next generation of heavy-duty repair professionals in mind will enable us to scale and be even more competitive with the help of its user-friendly interface and modernize look and feel.

On Slide 6, I'll provide an overview of the Specialty Vehicle segment. Top line growth was relatively flat year-over-year with continued market pressures in the quarter, including weak consumer sentiment from tariffs and interest rates remaining at higher levels. Operating margin was impacted by lower manufacturing productivity in the quarter as we proactively reduced production in our Chinese manufacturing facility in Q1 following a ramp-up of production in Q4 of 2024 to get ahead of tariffs. Long term, we are targeting a high-teens margin profile for the business. We remain focused on our innovative strategy and continuing to develop new products for both the current park and next-generation vehicles.

Despite the challenging consumer sentiment during the quarter, UTV and ATV ridership remains strong, which is a continuation of the positive trends we've seen in prior quarters. We expect that as the economy continues to stabilize and interest rates further decline, riders will increase their spending on their vehicles. OEs have also commented that machine inventory is starting to normalize, which should bring stability to the end market. Speaking of new products, I wanted to highlight the 4-inch long travel kit that we introduced for Polaris XD 1500 models. This bundle widens the vehicle's wheelbase by a total of 8 inches, providing more stability and control on rough terrain.

The kit is designed for more of a utility application, allowing operators to improve the rides that fit the work they do on a daily basis. This is a great example of a solution design for those utilizing their vehicles for work, not just play. We continue to expand our portfolio of nondiscretionary utility-focused products to broaden our reach with new users. With that, I'll turn it over to David to cover our results in more detail. David?

Thanks, Kevin. Let me start with our consolidated results for the third quarter on Slide 7. Net sales in the third quarter were $544 million, up 7.9% year-over-year. As Kevin outlined, our net sales growth was driven primarily by tariff-related pricing initiatives. Positive macro trends in our Light Duty business and the success of our innovation strategy across all 3 segments remain foundational to the strong momentum of the overall business. Adjusted gross margin for the quarter was 44.4%, a 390 basis point increase compared to last year's third quarter.

As Kevin mentioned, this margin expansion was driven by the timing dynamics of when price and costs related to tariffs are recognized in our income statement. Additionally, our supplier diversification efforts contributed to margin improvement in the quarter. We remain on track to reach our goal of reducing our overall supply from China to 30% to 40% as we exit 2025. Adjusted SG&A expense as a percentage of net sales was 23.9%, up 50 basis points compared to the same period last year. Adjusted operating income was $111 million for the third quarter, up 30% compared to last year's third quarter.

Adjusted operating margin expanded 340 basis points to 20.5%, primarily from the improvement in gross margin I just discussed. Finally, adjusted diluted EPS in the third quarter was $2.62, a 34% increase year-over-year. In addition to the increase in operating income, lower interest expense positively impacted our adjusted diluted EPS growth, offsetting a higher comparable effective tax rate, given favorable discrete items in last year's third quarter. Turning to our cash flow on Slide 8. For the third quarter, our cash flow was impacted by the higher cost inventory, affected by tariffs. This led to operating cash flow of $12 million and free cash flow of $2 million in the quarter, which was a decline from last year, but a modest improvement from last quarter.

We expect that free cash flow will rebound in the coming quarters. With tariff and trade uncertainty impacting parts of our business, we maintained our pause on share repurchases through the quarter. As always, we'll continue to monitor market conditions, along with the cash needs of the business and opportunistically repurchase shares to return capital to our shareholders as part of our broader capital allocation strategy, which remains unchanged. We also believe we remain well positioned to fund our strategic growth initiatives, given our strong liquidity position, which I'll cover on the next slide.

Slide 9 reiterates what we've been saying for a number of quarters now. Our asset-light nature and long track record of generating strong levels of cash flow have enabled the liquidity position and balance sheet capacity that allow us to manage higher cost inventory while still investing in strategic growth opportunities. As you can see, at the end of the quarter, net debt was $401 million and our net leverage ratio was 0.92x adjusted EBITDA. Additionally, our total liquidity was $654 million at the end of September, up from $642 million at the end of 2024. Again, we expect the strength of our balance sheet will stand as a competitive advantage and a key driver of our success going forward.

Finally, let me discuss our guidance for 2025 on Slide 10. With our strong performance through the first 9 months, we have reaffirmed our net sales and EPS guidance ranges for the year. Our guidance for 2025 is based on the tariffs that are currently enacted. Should any material changes to tariffs or trade disruptions significantly impact our business or alter our expectations, we may look to update our guidance prior to year-end. Starting with top line. We expect net sales growth to be in the range of 7% to 9% over 2024. And for adjusted diluted EPS, we expect a range of $8.60 to $8.90 or an increase of 21% to 25% compared to last year.

Finally, for modeling purposes and additional clarity on the final quarter of the year, we expect that Q4 will see a reduced gross margin percentage compared to this quarter as tariffs begin to impact our cost of goods sold. Also, we expect the full year tax rate will land at approximately 23.5%. With that, I'll now turn it back over to Kevin to conclude. Kevin?

Thanks, David. Just to finish up, I'd like to commend the team on delivering strong top and bottom line performance in the quarter and year-to-date. Our results reflect the hard work and dedication of our contributors all around the globe who are managing exceptionally well in the dynamic economic environment. Our business is well positioned to deliver strong performance in 2025 and we're pleased with the opportunities ahead. With that, I would now like to open the call up for questions. Operator?

[Operator Instructions] Your first question comes from the line of Scott Stember of ROTH Capital.

Last week, one of your bigger customers commented that they were starting to see some elasticity issues, notably on the DIY side. Are you seeing any change in behavior, whether it's DIY or DIFM related to elasticity? Or is it too soon to say at this point?

Scott, it's Kevin. Good question. Look, I'm not going to comment on what our customers say. But I will tell you how we're looking at it, really solid quarter, growth up 9% in Light Duty, 8% overall. POS was solid in the quarter. New continues to be a strong driver of growth. Macros continue to look solid in terms of the sweet spot of the vehicle, miles, age of the vehicle. But keep in mind that our portfolio differs quite a bit from a lot of our customers and a lot of our other folks in the supplier community, we have a heavy nondiscretionary majority of our parts. So either your car is not going to run or it's not going to run safely. So we have some benchmarks as well. We went through the 2018 and '19 time frame where we had some inflation. We went through the time period of 2023 and -- 2022, '23 when we had that inflationary period, and we raised prices and what we generally see over time is our portfolio is generally inelastic and performs pretty well because of the nondiscretionary nature of it.

Got it. And then last question before I jump back into the queue on margins. Typically, when price increases go through to cover tariffs, usually there's some optical distortion on the margin line. But it seems that you guys at least recently have been comfortable that you could keep margins relatively flat because of some of the self-help stuff that you have going on. Is that narrative still in play? And just trying to get a sense of where we should look at margins as we go forward in the next couple of quarters.

Yes. Look, really strong quarter for margins. We've reached 20% operating margin. But as David said in his prepared remarks, we do expect some compression as we move into the fourth quarter with the dynamic of the tariffs coming through COGS, cost of goods sold. But there are a lot of activities that we've also talked about that we anticipate reading through, whether that be cost initiatives, whether that be productivity improvements in our DCs and throughout the business, frankly. And longer term, we continue to see this business as a high-teens operating margin business.

Your next question comes from the line of Jeff Lick of Stephens Inc.

Congrats on a nice quarter. Kevin, I was wondering if you could just maybe address the trajectory of Light Duty, up 9.3%, with price increases relative to the 10.1% and 13.8% it was up the previous 2 quarters. Just any additional color, clarity on what was driving that? That would be great.

Look, it was -- Jeff, we view it as a very solid quarter in Light Duty, 9% sales growth. POS was very solid in the quarter. New products continue to drive exceptional growth there. We don't see that stopping. As I mentioned before, the macroeconomic environment still looks very good there in terms of the sweet spot of the 7- to 14-year-old vehicle continues to rise. Miles driven continue to increase. I think the age of the vehicle now is around 12.8 years old. So when we step back and we look at it, given the nondiscretionary nature of our portfolio there, we feel really good about driving future growth.

And Jeff, to add a little color. I'm sorry, to add a little color there. The Q3 was 9.3% was real consistent with the second quarter, and it's pretty consistent with the first quarter as well because if you look at the first quarter, it had a very easy comp. So pretty consistent growth through the year on Light Duty business.

Just a quick follow-up on the kind of the dynamics of price increases. I was just curious as let's just say you guys decide, hey, you're going to take a 4% price increase, which obviously goes to your customer, who then, in turn, will pass that along in 1 way, shape or form to the end user. How does that dynamic play out? Is it typically that your customer is going to take your price increase and just pass that on percent -- at the same percentage? Or what's the dynamic there?

Yes. I mean, look, I really can't comment on how our customers are going to react to potential price increase from us or any other -- any other supplier. All I can tell you, Jeff, is kind of how we handle it. It's a multifaceted approach, right? I mean -- and it's really in line with historical practices that I talked about earlier. We've been through this before in '18, '19 and '22, '23. First, we have a very defined strategy to diversify our supply chain, which we've made a lot of progress on over the years. We're a much different company than we were from that respect from 6, 7 years ago. We negotiate with our suppliers, right? I mean, obviously, these are our supply partners around the globe. And so we obviously look to get the best price value combination we can from our supply base. And then as I mentioned earlier, we continue to look at productivity initiatives across the company.

And when that's all said and done, we'll work with our customers to strategically implement price increases. But beyond that, Jeff, I really can't comment on what our customers are going to do from that standpoint.

Your next question comes from the line of Tristan Thomas-Martin of BMO Capital Markets.

First Brands has been all over the news. How should we think about kind of like product overlap or any other overlap? And then what could it be potentially in terms of the opportunity for you guys?

Yes. Thanks for the question, Tristan. It's a good one. I'll start out by saying that we don't view ourselves as a comparison to First Brands. And then I'll also point out from the Dorman perspective, we have a very healthy balance sheet and liquidity. And I think we're carrying less than 1x leverage at this point. We don't engage in any off-balance sheet financing. We only participate in the customer-sponsored factoring programs with our largest customers, and frankly, we've been doing that for decades. We do have publicly secured debt, but we haven't speculatively financed our receivables or frankly, any other working capital assets.

And to kind of address your question straight on. I mean, we do have some categories that overlap with First Brands, but not in a material way. It's really around the edges. And of course, we stand ready to help our customers that if they need help from this situation as we always do.

Okay. And then just one on specialty vehicles. I was just wondering you introduced the new long travel suspension for the XD1500. Do you see any change in aftermarket attachment rate on newer vehicles, such as the XD 1500, that OEMs are focused a little bit more on factory accessories versus maybe some older more mature vehicles that don't have the same OEM kind of accessory split?

Yes. I mean, clearly, when you have less contented models, that's a good thing for us. And frankly, with price points being what they are, and they've increased so much over the years, we view that as a good dynamic going forward because I think we'll start to see a lot more entry price point models in the future. So I'd tell you that the specialty vehicle market continues. Look, we're very -- we love the business. Rider enthusiasm continues to remain high. We do surveys of dealers and riders consistently. But the discretionary side of that business has definitely felt more impact, which is roughly half the business. And that's why we continue to double down on nondiscretionary repair parts in that business, which we've really expanded that portfolio since the acquisition a few years ago.

Your next question comes from the line of Bret Jordan of Jefferies.

I think you said that your POS was up mid-single digits. Is that units or is that POS dollars out the door of the customer? I guess if we can sort of look at the Q3, how much of the growth was price versus pieces?

Yes, Bret, that's dollars. And we've always quoted POS in dollar terms. Hope you can appreciate that we don't and have never disclosed unit growth for competitive reasons. It could really put us in a situation with some customers that they could triangulate price increases. So we don't disclose that. I'll only say that POS growth in the quarter was very solid, particularly as we look at it compared to Q2. And look, as I said before, the nondiscretionary nature of our portfolio bodes well in a period of increasing inflation. We've seen it before. It's not our first time going through a period like this.

Yes. So I guess when you think about your customers have sort of thrown out same-SKU inflation between 2.5% -- at least 3% and then 4%, where do you sort of [Technical Difficulty] that low mid-single digit, is the right number?

You broke up a little bit there, Bret. I will -- I think I got the gist of your question though. I mean -- at the end of the day, I can't comment on what my -- our customers that are publicly out there have very different product offerings than we do in terms of DIY, and we tend to -- the majority of our portfolio is, as you know, hard parts, much more DIFM, professional content. So it's not a real good compare trying to compare some of our customers to our portfolio.

Okay. And then a question on supply chain. I think you're saying you expect to be 30% to 40% China by year-end. What's the supply chain map going to look like? I mean a few years ago, you were 70% China. Are there other countries that are concentrated, I think, sort of how diverse [Technical Difficulty] too?

Look, right now, yes, I mean, we've said previously that right now, we're about 30% to 40% China depending on the mix, roughly 30% in the U.S. and the balance is rest of the world. I think we're -- as we move forward, you'll probably see a little bit less than that indexing towards China. But to be honest, I think we feel pretty good about the nature of the footprint now. Even with regard to all these very fluid situation around tariffs, we're very diversified. And frankly, we have a very robust supply chain, much more robust than we did 6, 7 years ago. So I think we can handle anything that's thrown at us on the trade front, given where we are and frankly, if we need to pivot, we have the experience to do that. We have the know-how and the tools and the experience to do that.

It seems like some of your margin benefit has been sort of shifting the supply chain. Is the rest of the world cheaper than your prior average? Or is it -- where are you picking up this margin from sort of revamping the supply chain?

Well, I mean there's certainly been some of that as we've -- over the years, Bret, I mean, it seems like we've been in a constant flux since 2018, '19. But listen, we're never going to move to a region where we become uncompetitive. I mean, so that's always a part of the calculus in terms of the cost, but there's a lot of other things that factor in there, too, in terms of the quality, the value that the supplier offers, the lead times. So there's a lot that goes into that equation. But at the end of the day, the moves we made we feel comfortable that we can remain competitive in this environment.

Your next question comes from the line of David Lantz of Wells Fargo.

I guess considering strong Light Duty sales and a sequential improvement in Heavy Duty and Specialty Vehicle trends, curious if you could just talk about your share position across those segments in Q3.

Yes. Sure. I mean, listen, in Light Duty, we continue to believe we're taking share. If you look at the overall market growth statistics that we look at over the years, anywhere between 3% and 4% historically. We've consistently outperformed that. And that's really driven by our new product efforts, particularly new to the aftermarket, where that part only exists in the OE channel the day before we launch it. And that's been a huge driver of growth. I'd say in Heavy Duty, we did see some nice growth in the quarter. So some positive signs. Some of that growth was driven by tariff pricing, but we also had some key customer wins. That -- we have a very small share in a large TAM and heavy duty. So we feel we have a lot of runway to go in that space.

And in specialty, again, when you look at our overall share position, it's pretty small in a fairly large market. So we like the runway. It's why we like the space. And I would tell you that just in terms of share performance, we believe we're outperforming the overall market, although we're not happy with flat sales growth, we believe that the rest of the market has been down. So we do believe we're taking share. We think it's a combination of the initiatives that we've undertaken, whether that be expanding our nondiscretionary repair portfolio or geographic expansion. We've seen a lot of success in that regard.

Got it. That's helpful. And then the balance sheet is really healthy. So curious if you could talk about your appetite for M&A and what the pipeline looks like today?

Yes. Great question. Look, we have different acquisition strategies across the different segments. I think if you look at -- and I'll just remind you what those are. In Light Duty, we're always looking for potential technology acquisition as the vehicles continue to technologically advance. We want to make sure we stay ahead of that curve as we have in years past. And geographic expansion remains a priority for that segment. If you look at Specialty Vehicle, a lot -- highly fragmented market. As you know, we have a fairly small share of that market. So we view that as right for brand and product portfolio acquisition plays. And in Heavy Duty, we're still a small player in a very large market.

There are a lot of channel -- channel plays where today we have opportunity that acquisition will really help us penetrate some of those channels in a much greater way. I would tell you that the funnel looks very strong. We consistently work the funnel, but I will tell you that targets -- the amount of actionable targets has been a bit slowed. I think it's slowed by the tariff situation. I think a lot of potential sellers are probably waiting to see how the tariffs impact their business, whether that be for pricing or margins or demand, what have you. I think once that shakes out, I think there'll be a lot more activity on the other side of that.

Yes. And just a little comment on the balance sheet. The leverage right now in the quarter was 0.92x. So strong balance sheet. We view that we've got the dry powder to not only absorb the higher cost of inventory but also execute against the M&A program, which Kevin outlined.

Your next question comes from the line of Justin Ages of CJS Securities.

I wanted to follow up on the comment about First Brands. So I think we're aware about the customer-sponsored factory. Have you seen any or had any conversations about terms that you guys -- the terms that might be changing as a result of that? Or completely unrelated and then the terms are pretty clear set?

Yes. Just the terms are pretty clear, and we don't see any indication that there's going to be any change in the terms.

Okay. That's helpful. And then on the Light Duty, can you give us some color on the amount of time, like the lead time for the power steering product that you outlined. Just want to get a sense of from idea to get to market how long that took?

Well, that's a loaded question, but it's also a great question. For that particular product, I mean, we have been in the market with an electronic power steering rack for a different making model, starting about 18 to 24 months ago. But if I look at total development time on a part like that, it's substantial. Certainly a lot longer than a purely mechanical part, as you can imagine. There's a safety component to that part, there's an electronic -- complex electronics component to that part. So it's a much longer cycle time on that part. And obviously, as a result, has a much higher selling price than a pure mechanical part.

Your next question comes from the line of Gary Prestopino with Barrington Research.

Could you guys give us some idea on specialty, what the mix is of nondiscretionary versus discretionary and at this point and how that has shifted since the acquisition?

Gary, sure, absolutely. It's roughly about 50-50 right now, and it was materially less than that when we acquired the business. So it's moved up quite a bit. And I think we're very well positioned for when that market does recover. The pure accessory side and then the brake fix or nondiscretionary repair to drive oversized growth compared to market when we do start seeing the recovery and the geographic expansion, which I talked about before, too, we've seen some great progress there as well.

Yes, that's what I wanted to hit on, too. I mean the geographic expansion, as I recall, you said you were west of the Mississippi, you were pretty light with dealerships. Can you maybe help us out as to how that is going in terms of picking up new dealerships without getting too specific, I mean, overall growth in dealership would be helpful.

Yes, that's a great question, Gary. We have been very focused on that. And we've added -- I'll just -- I'll put it this way. We've added a significant amount of new dealer relationships out West. Now our focus is on driving more share of wallet within those dealerships. So first step, getting in the dealers, getting relationship established and now we're driving share of wallet gains there.

Your last question comes from the line of Scott Stember of ROTH Capital.

Just a quick follow-up on tariffs. Has there been any meaningful change to your exposure from a geographic standpoint, whether it's India, China or any other country, since the last time you guys gave an update?

Boy, Scott, that's a great question. I'm not -- I think the answer is yes. from last quarter. Certainly, we've seen some changes. But there's a lot of headline news around tariffs that actually haven't made their way into law or implementation. So it's hard for me to -- it's changed so much. It's been so fluid, Scott. It's hard for me to pinpoint an exact date. But look, I'll just summarize it this way. Where we sit right now, we feel well positioned to handle the current tariff environment or any other potential changes that might come down the pipe, particularly as we look at how we compare competitive set. We feel like we have a footprint that is as competitive as anyone else out there in the aftermarket. And so I think we can handle any changes that come our way. And I'll characterize it as manageable at this point.

Got it. That's great.

There are no further questions at this time. Ladies and gentlemen, this concludes today's earnings call. We thank you for participating. You may now disconnect.

Good morning, and thank you for standing by. Welcome to the Dorman Products' Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I'd now like to turn the conference over to Alex Whitelam, Vice President of Investor Relations. Thank you, sir. Please go ahead.

Thank you. Good morning, everyone. Welcome to Dorman's Second Quarter 2025 Earnings Conference Call. I'm joined by Kevin Olsen, Dorman's Chief Executive Officer; and David Hession, Dorman's Chief Financial Officer. Kevin will provide a quick overview of our recent performance, share our views across the business and provide our updated guidance. Then David will review the quarterly results and Kevin will then provide closing remarks before opening 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.

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 the Investor Relations section of Dorman's website. Finally, during the Q&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.

Thanks, Alex. Good morning, and thank you for joining our second quarter 2025 earnings call. As Alex mentioned, I'll start with a high-level review of the results, along with observations within each of our segments, and then provide our updated guidance for 2025. Turning to Slide 3. I would like to briefly discuss our recent performance. David will provide more details, but we had another outstanding quarter. the top and bottom line results that exceeded our expectations. Consolidated net sales for the second quarter grew 8% year-over-year to $541 million. Strong volume growth from increased customer demand, especially within the light-duty business led our top line growth. We also saw positive signs in our heavy-duty business with slight year-over-year growth resulting from new business wins.

Weak consumer sentiment persisted through the second quarter, impacting our specialty vehicle business, but the team continues to do an excellent job managing through this downturn and positioning the business for future sales growth. We also delivered solid margin expansion in the quarter. Adjusted operating margin for Q2 2025 was 16.3%, 70 basis point increase over last year's second quarter. Light Duty business was also the primary driver behind this margin improvement, largely due to strong demand in the quarter as well as ongoing supply diversification, productivity and automation initiatives. The net sales growth and margin expansion we achieved resulted in a 23% year-over-year increase in adjusted diluted EPS, which was $2.06 for the quarter. And finally, operating cash flow in Q2 was $9 million, which was impacted by higher tariff costs and additional investments in inventory to support demand. David will discuss this in more detail shortly.

So overall, we're pleased with our results in the second quarter and through the first half of 2025 that's helped shape our expectations for continued momentum through the full year. Let me take a few minutes to cover our observations across each of our segments. I'll start with the Light Duty business on Slide 4. As I mentioned, the underlying macro trends remain positive. Vehicle miles traveled climbed higher year-over-year. And according to the latest industry reports, the average age of light-duty vehicles has increased to 12.8 years. These underlying factors led to strong volume growth year-over-year. We continue to see strong performance out of the new products that we've recently launched, especially those that are new to the aftermarket or address flaws in OE parts. These products typically drive higher sales and margins, and in some cases, include patented features that provide a competitive advantage.

Also, keep in mind that the majority of our product portfolio is nondiscretionary in nature, which has enabled us to perform well throughout various economic cycles. Additionally, we view our asset-light model and the flexibility of our diversified supply chain to be key competitive advantages as we navigate through uncertainty in various trade and economic environments. In our heavy-duty segment, market pressures impacting the trucking and freight industry continued through the second quarter, especially as tariffs created uncertainty in the broader economy. Despite these market pressures, we achieved positive net sales growth in the quarter with new business wins. Looking forward, we remain cautious as market indicators continue to fluctuate and the trucking and freight industry remains somewhat unpredictable.

That said, we believe the long-term investments we've made in our product portfolio and productivity initiatives as well as improvements we're making in the customers' front-end experience will help drive sales growth and margin expansion when the sector begins to stabilize. In Specialty Vehicle, reluctant consumer spending continued to impact our performance through the second quarter. However, as we saw in the first quarter, we continue to see strong engagement with our UTV and ATV ridership, especially at the enthusiast events across the country we attend throughout the year. We expect that as the broader economy strengthens over time, the specialty vehicle business will continue to outpace the market of our expanded product portfolio, including nondiscretionary parts and new dealer relationships.

Next, let's move on to Slide 5, and I'll spend some time talking about our updated guidance for 2025. Considering the impact of tariffs on our financials, we are covering guidance upfront in our discussion today. Before we get into the numbers, we felt it was important that we reiterate the actions we're taking to mitigate tariffs. As we discussed on our last call, our approach to managing tariffs is multifacet and largely in line with the approach we've taken when faced with inflationary environments in the past. First, we continue to diversify our supplier base accelerate tariff cost reductions to our sourcing strategies. Second, we're driving solid savings by leveraging our scale and the deep relationships we have with our suppliers around the globe. Third, we're continuing to drive cost savings internally through automation and productivity initiatives.

And finally, we've been deliberate in our approach to implementing price increases to cover the net remaining costs from tariffs. We've been surgical on this front, keeping in mind the impact such price increases could have on our customers, their business and our end users. These price increases will go into effect in the third quarter. In light of our strong performance through the first half of the year, our improved outlook for the remainder of 2025 and the expected impact of pricing costs resulting from tariffs, we have increased our net sales and EPS guidance for the year. Please keep in mind that while we stand on more solid ground today compared to our earnings call last quarter, the trade situation remains fluid. Our updated guidance for 2025 is based on the tariffs that are currently enacted. We may update our annual guidance in the future should any material changes to tariffs or trade disruptions significantly impact our business or alter our expectations.

Starting with the top line. We now expect net sales growth to be in the range of 7% to 9% over 2024. This is an increase from our previous growth guidance of 3% to 5%. The increase in the range is comprised of 3 factors: First, our performance through the first half of the year has outpaced our original expectations, driven by strong volume demand and the positive underlying light-duty macro trends. Second, we are expecting incremental year-over-year volume growth through the remainder of the year based on continuing positive market conditions for our light duty business. Finally, as I just mentioned, part of our approach to mitigating the impact of higher tariff costs was working directly with our customers on pricing. This was a critical step in the process to help maintain our high level of service and fund the higher cost of inventory that was capitalized on our balance sheet immediately at purchase. Keep in mind, there are customer notification periods when a price increase goes into effect. So we'll see the contribution of higher prices begin to make an impact in the third quarter 2025.

Next, on the earnings front, we now expect adjusted diluted EPS to be in the range of $8.60 to $8.90, an increase from our previous guide of $7.55 to $7.85. Let me spend a few minutes on the nuances around this increase, including the timing dynamics and the role tariffs play in the change. As a reminder, we utilized a FIFO accounting methodology and our inventory turns approximately twice a year. This generally results in a 6-month timing lag between when cash is used to pay for inventory when the higher cost is recognized in our profit and loss statement. As it relates to this year, while the increase in tariff costs on the inventory we purchased in Q2 had an immediate impact on our cash flow and balance sheet. The increase in cost of goods sold for this inventory isn't expected to start impacting our P&L until Q4. Unlike cost of goods sold, net sales are recognized when incurred.

And as we mentioned, new pricing on tariffs will go into effect in Q3. Therefore, we expect tariff pricing to have a positive effect on net sales in Q3 without the impact of tariffs on cost of goods sold, resulting in a higher than normal gross margin level. Then in Q4, we expect to see gross margin come back down as we begin to recognize tariff costs and cost of goods sold that counter the effect of tariff pricing. As a result, we expect that the increase in our EPS range will be slightly weighted more to Q3 than Q4. Please note this additional color is to help align our view of the next 2 quarters with our analysts and investors for clarity, given the highly nuanced nature of tariffs and our current situation. With that, I'll turn it over to David to cover our results in more detail. David?

Thanks, Kevin. Let me kick off with our results for the second quarter on Slide 6. Consolidated net sales in the second quarter were $541 million, up 8% year-over-year. As Kevin mentioned, our net sales growth was driven by solid customer demand in our light duty business, fueled by continuing positive macro trends and the strength of new products. Adjusted gross margin for the quarter was 40.6%, a 100 basis point increase compared to last year's second quarter. This margin expansion was a result of higher sales and a favorable mix of new products along with our cost savings across the enterprise, driven by our supplier diversification, productivity and automation initiatives. Adjusted SG&A expense as a percentage of net sales was 24.3%, up 30 basis points compared to the same period last year. Adjusted operating income was $88 million for the second quarter, up 12% compared to the second quarter of 2024.

Adjusted operating margin expanded 70 basis points to 16.3%, largely from the gross margin improvement I just discussed. Finally, adjusted diluted EPS in the second quarter was $2.06 up 23% compared to last year's second quarter. In addition to our operating income expansion, lower debt, a slightly favorable tax rate and share count reduction from share repurchases over the last 12 months have all positively contributed to our adjusted diluted EPS growth. Next, let me provide updates on each of our business segments, starting with Light duty on Slide 7. Our Light Duty business had another strong quarter with net sales increasing 10% year-over-year in Q2. The growth was driven by strong customer demand, especially for our new products with positive macro trends continuing through the second quarter.

During the quarter, we delivered on certain customer programs, which resulted in higher shipment growth in the quarter compared to POS. That said, we're not seeing any significant overstocking from the inventory stock level data we received from our top customers. On the margin front, Light Duty did a nice job expanding margins. Segment operating margin increased to 18.5% for the quarter, a 140 basis point improvement over last year's Q2. This margin improvement was driven by supplier diversification new product mix and cost savings from our ongoing automation and productivity initiatives, along with higher leverage from our net sales growth. Now I'll turn to heavy duty on Slide 8. Market conditions broadly remained soft across the freight and trucking industry as tariffs continue to prolong the economic uncertainty that has weighed on the heavy-duty sector. Despite these market pressures, our business grew 1% for the quarter.

This growth was largely the result of new business wins in categories where we believe we're gaining share. While we've seen positive signs within our customer base, uncertainty remains in the broader freight and trucking industry. Segment operating margin was slightly positive in the quarter at 80 basis points, down year-over-year largely on lower volume from the trucking and freight recession, along with the investments we've made in the business to drive long-term growth. While we were pleased with the new business wins in the second quarter, we expect we will see more significant margin improvement once higher level of sales return as the market rebounds. We believe the investments we've made in new product development, productivity initiatives in enhancing the front-end experience for our customers, position us well to drive market share gains and margin expansion as the business operates with greater efficiency.

Moving to Slide 9. The specialty vehicle team did a nice job managing market challenges with weakened consumer sentiment and tariffs and economic uncertainty. While net sales declined 3% compared to last year's second quarter, we continue to see participation at various enthusiast events in UTV and ATV ridership activity and engagement remaining strong overall. We expect that as the broader economy stabilizes, and as consumer borrowing rates improve, riders will come off the sidelines to invest in new machines requiring upgrades and retooling and repairing their existing machines. We also expect our expanded portfolio of new products, along with our broader access across the dealer channel will help us better reach our customers to continue to capture market share. Despite market pressures in the quarter, the specialty vehicle team did an excellent job on the margin front. We remain focused on continuing to drive higher volume, diversifying our supply chain and executing on our productivity initiatives to expand our margins in this business.

Turning to cash flow on Slide 10. During the quarter, our cash flow was impacted by the investment we made in additional inventory to support our customers along with higher costs resulting from tariffs. As Kevin mentioned, higher tariff costs that started in April were immediately capitalized in our balance sheet. This led to operating cash flow of $9 million compared with $63 million in Q2 2024 and $51 million in Q1 2025. Given the uncertainty created in the market at the beginning of the quarter due to tariffs, we paused share repurchases to preserve our cash position. We also saw slightly reduced capital expenditures in the quarter as a result of timing, which led to slightly positive free cash flow. I think it's important to note that the liquidity position that we've built up over the last several years has positioned us well to manage this significant cost increase while maintaining our ability to fund the business.

Please note that our long-term capital allocation strategy has not changed. We'll continue to manage our debt levels and leverage ratio, then look to invest internally as that is where we get our greatest returns. We'll also continue to pursue strategic growth through mergers and acquisitions. And finally, we'll continue to opportunistically repurchase shares to return capital to our investors. On Slide 11, we highlight much of what we've already covered over the last 2 quarters, which is that we believe we have the balance sheet capacity and liquidity to manage higher tariff costs and continue to invest in strategic growth opportunities. As you can see, net debt was $406 million, and our net leverage ratio was 1x adjusted EBITDA at the end of the quarter. Additionally, our total liquidity was $656 million at the end of the quarter, up from $642 million at the end of 2024. Again, we expect the strength of our balance sheet will prove to be a competitive advantage and a key driver of our success as we work our way through this current cycle.

With that, I'll now turn it back over to Kevin to conclude. Kevin?

Thanks, David. I'll finish up on Slide 12 before we move into Q&A. Just to reiterate what has already been said. We had a strong second quarter, and we're pleased with our performance through the first half of the year. While uncertainty exists, we believe our business is well positioned to deliver significant growth in 2025 and we're excited for what lies ahead. With a more diversified supply base, strong relationships with our customers and end users, a leading product portfolio and a strong financial profile, we feel as though Dorman has never been better positioned for the future. We'll continue focusing on what we can control and driving long-term growth. With that, I would now like to open up the call for questions. Operator?

[Operator Instructions] Your first question comes from Scott Stember with ROTH Capital Partners.

This is Jack on for Scott. I wanted to ask about the heavy duty segment, specifically about what are the incremental margins for every dollar of sales recovery as I see it, it turned positive this quarter? And also, like what are normalized heavy-duty margins? When do you kind of expect this to get back to the normalized level?

Thanks, Jack. It's Kevin. Great question. I believe we've talked a little bit about this in the past, but in our heavy-duty business, we're weighted more on the manufacturing side versus being much more asset light in the other 2 segments. So when volume is challenged in heavy-duty, we do face more absorption issues. So when we do have growth, like you mentioned in the quarter, we will leverage that very well. When we get back to kind of normalized levels, we expect this business to be a mid teen operating profit business. And we have -- before the downturn, we were demonstrating those levels.

Great. And then just on tariffs, what do you see kind of the impact by segment, if you can break that out? I guess, notably in specialty and heavy duty, has that been more difficult to get prices -- price increases through more than light duty?

Let me just -- it's Kevin again, Jack. I'll just characterize the tariff impact by the segments, we're not disclosing the specific impacts by segment. I would say that on the light-duty side, we have a very diversified supply chain there. So we believe we have less exposure than the overall aftermarket in general. So we think compared to a comp set, we're at a competitive advantage because of that. Heavy-duty really is a very modest impact from tariffs. So when we kind of look at around the industry and who we compare to, we believe we're very well positioned. And similar situation in Specialty Vehicles segment, we do have exposure to China, but we also have a large manufacturing footprint in Madison, Indiana. And when we look at that industry, it's very heavily weighted to China. So we think we're in a good competitive situation there as well.

Your next question comes from Bret Jordan with Jefferies.

Could you talk a little bit more about light duty, the customer POS sort of sell-in versus sell-out? I think you said it wasn't dramatically different, but was there any bias to buy inventory ahead of price increases?

So overall, Bret, POS in the quarter, we did have a gap in terms of sell-in and sell-out. Sell-out or POS, as we talked about in the past was actually low single digit in the quarter. But there was a lot of nuance to that. We had a very difficult comp as we look at last year, it was very strong in the second quarter last year. But when you look at it for kind of a sequential basis, POS was very similar in dollars to where it's been the last few quarters. When you adjust for that comp issue, Bret, POS was more in line with the sell-in growth, which has been obviously very strong. I mentioned inventory, as you know, we do receive customer inventory data, and it really tells us it's in line with historical levels, particularly when you look at the inventory turns so we haven't seen any major changes there. We haven't seen any significant buy ahead of the tariffs so far.

Okay. Great. And then I think you commented on new to the aftermarket product launch. I mean talk about sort of the [Technical Difficulty] there?

We lost you, Bret. I missed that question.

The cadence [Technical Difficulty] electronics.

Yes. Bret, still, could you try repeating that again? You're not coming through.

Okay. The Starlink systems don't work as well. We should talk...

Yes. I guess the...

New to the aftermarket -- can you hear me okay?

A little bit. Yes, go ahead, try it again.

The pipeline of new to the aftermarket, the OE fixed product and complex electronics.

Yes. All right. Great question. When we look ahead, the funnel of new products is very robust. It's as strong as we've seen it. And when we look at the composition of that funnel, obviously, as we've talked many times in the past, the composition of that funnel is becoming more and more complex, a lot more complex electronic components, which for us, we obviously like to see -- we believe that as a significant competitive advantage for us. So it remains a big part of our strategy to go after complex electronic components.

Your next question comes from Justin Ages with CJS Securities.

It's actually Jeremy on for Justin. Another solid quarter in margin growth for light duty. I know you guys touched on it briefly, but can you elaborate a little more on some of the initiatives that continue to drive this margin growth?

Yes, it's David. Yes, the margin growth for the business has been a strong focus over the last several years, and we've had great progress, the drivers of it are supply chain diversification. It's diversifying our supply chain, productivity in our distribution centers and across the organization as well as automation effort. Pretty consistent with what we've been talking about the last several quarters and we continue to drive those solid results.

Yes. I'll also add that new product has been a significant driver. It's a huge focus for us, particularly new to the aftermarket parts, which again are only available through Dorman and the OE dealer network. Those typically are our highest margin products when we bring them to market, or it can be OE fix where we're actually designing out the original flaw in the OE part. So that continued focus and the continued growth of the sweet spot, which is the 8 -- 7- to 14-year-old vehicle has continued to be able to drive accretive margins for us.

I appreciate it. And then switching gears a little, would you just talk and give us some more detail on how you guys are thinking about the capital allocation strategy?

Yes, it's a great question. So the capital allocation strategy is consistent with what it's been over the last several years. The first thing we do is look to manage our debt, our leverage targets up against our internal target of 2x, 3x in the first year following an acquisition. So after we look at that, the first place we'll look at internal investment where we get our greatest returns. Second is strategic and M&A mergers and acquisitions. And then third, opportunistically, we look to get shares -- to buy back shares and get capital back to our shareholders. So like I said, that's the allocation strategy pretty consistent with what it's been.

Ladies and gentlemen, we have reached the end of the question-and-answer session. This will conclude today's call. Thank you all for joining. You may now disconnect.