Dorman Products, Inc. 10-Q

ITEM 1. Financial Statements DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended (in thousands, except per share data) September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Net sales $ 300,620 $ 253,796 $ 791,532 $ 751,762 Cost of goods sold 192,819 166,872 519,786 490,199 Gross profit 107,801 86,924 271,746 261,563 Selling, general and administrative expenses 63,028 59,961 184,288 177,637 Income from operations 44,773 26,963 87,458 83,926 Other (expense) income, net ( 17 ) 33 2,317 90 Income before income taxes 44,756 26,996 89,775 84,016 Provision for income taxes 10,497 5,688 18,856 17,803 Net income $ 34,259 $ 21,308 $ 70,919 $ 66,213 Earnings per share: Basic $ 1.06 $ 0.66 $ 2.19 $ 2.03 Diluted $ 1.06 $ 0.65 $ 2.19 $ 2.02 Weighted average shares outstanding: Basic 32,281 32,522 32,317 32,656 Diluted 32,371 32,594 32,394 32,738 See accompanying Notes to Condensed Consolidated Financial Statements 3 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED ) (in thousands, except for share data) September 26, 2020 December 28, 2019 Assets Current assets: Cash and cash equivalents $ 170,502 $ 68,353 Accounts receivable, less allowance for doubtful accounts of $ 1,202 and $ 957 405,312 391,810 Inventories 283,292 280,813 Prepaids and other current assets 11,769 13,614 Total current assets 870,875 754,590 Property, plant and equipment, net 94,217 101,837 Operating lease right-of-use assets 35,925 32,198 Goodwill 91,148 74,458 Intangible assets, net 26,054 21,305 Deferred tax asset, net 4,281 4,336 Other assets 36,333 52,348 Total assets $ 1,158,833 $ 1,041,072 Liabilities and shareholders’ equity Current liabilities: Accounts payable $ 112,757 $ 90,437 Accrued compensation 17,731 9,782 Accrued customer rebates and returns 130,592 105,903 Other accrued liabilities 18,320 14,380 Total current liabilities 279,400 220,502 Long-term operating lease liabilities 34,433 29,730 Other long-term liabilities 9,629 13,297 Deferred tax liabilities, net 4,006 3,959 Commitments and contingencies Shareholders’ Equity: Common stock, par value $ 0.01 ; authorized 50,000,000 shares; issued and outstanding 32,304,686 and 32,558,168 in 2020 and 2019, respectively 324 326 Additional paid-in capital 56,893 52,605 Retained earnings 774,148 720,653 Total shareholders’ equity 831,365 773,584 Total liabilities and shareholders' equity $ 1,158,833 $ 1,041,072 See accompanying Notes to Condensed Consolidated Financial Statements 4 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED ) Three Months Ended September 26, 2020 Common Stock Additional (in thousands, except share data) Shares Issued Par Value Paid-In Capital Retained Earnings Total Balance at June 27, 2020 32,440,413 $ 326 $ 55,406 $ 751,400 $ 807,132 Exercise of stock options 2,886 — — — — Compensation expense under Incentive Stock Plan — — 1,248 — 1,248 Purchase and cancellation of common stock ( 135,787 ) ( 1 ) ( 244 ) ( 11,203 ) ( 11,448 ) Issuance of non-vested stock, net of cancellations ( 2,937 ) ( 1 ) — — ( 1 ) Other stock related activity, net of tax 111 — 483 ( 308 ) 175 Net income — — — 34,259 34,259 Balance at September 26, 2020 32,304,686 $ 324 $ 56,893 $ 774,148 $ 831,365 Three Months Ended September 28, 2019 Common Stock Additional (in thousands, except share data) Shares Issued Par Value Paid-In Capital Retained Earnings Total Balance at June 29, 2019 32,781,331 $ 328 $ 51,514 $ 698,490 $ 750,332 Exercise of stock options 85 — — — — Compensation expense under Incentive Stock Plan — — 986 — 986 Purchase and cancellation of common stock — — — — — Issuance of non-vested stock, net of cancellations 6,593 — — — — Other stock related activity, net of tax ( 456 ) — 51 ( 85 ) ( 34 ) Net income — — — 21,308 21,308 Balance at September 28, 2019 32,787,553 $ 328 $ 52,551 $ 719,713 $ 772,592 Nine Months Ended September 26, 2020 Common Stock Additional (in thousands, except share data) Shares Issued Par Value Paid-In Capital Retained Earnings Total Balance at December 28, 2019 32,556,263 $ 326 $ 52,605 $ 720,653 $ 773,584 Exercise of stock options 2,896 — — — — Compensation expense under Incentive Stock Plan — — 3,966 — 3,966 Purchase and cancellation of common stock ( 234,116 ) ( 2 ) ( 421 ) ( 16,890 ) ( 17,313 ) Issuance of non-vested stock, net of cancellations ( 14,782 ) — 504 — 504 Other stock related activity, net of tax ( 5,575 ) — 239 ( 534 ) ( 295 ) Net income — — — 70,919 70,919 Balance at September 26, 2020 32,304,686 $ 324 $ 56,893 $ 774,148 $ 831,365 Nine Months Ended September 28, 2019 Common Stock Additional (in thousands, except share data) Shares Issued Par Value Paid-In Capital Retained Earnings Total Balance at December 29, 2018 33,004,861 $ 330 $ 47,861 $ 679,432 $ 727,623 Exercise of stock options 11,995 — 31 — 31 Compensation expense under Incentive Stock Plan — — 3,033 — 3,033 Purchase and cancellation of common stock ( 290,274 ) ( 3 ) ( 522 ) ( 23,814 ) ( 24,339 ) Issuance of non-vested stock, net of cancellations 70,885 1 867 — 868 Other stock related activity, net of tax ( 9,914 ) — 1,281 ( 2,118 ) ( 837 ) Net income — — — 66,213 66,213 Balance at September 28, 2019 32,787,553 $ 328 $ 52,551 $ 719,713 $ 772,592 See accompanying Notes to Condensed Consolidated Financial Statements 5 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended (in thousands) September 26, 2020 September 28, 2019 Cash Flows from Operating Activities: Net income $ 70,919 $ 66,213 Adjustments to reconcile net income to cash provided by operating activities: Depreciation, amortization and accretion 22,544 21,011 Gain on equity method investment ( 2,498 ) — Provision for doubtful accounts 197 33 Benefit for deferred income taxes ( 1,154 ) ( 302 ) Provision for stock-based compensation 4,069 3,033 Changes in assets and liabilities: Accounts receivable ( 11,685 ) 28,276 Inventories 3,093 ( 12,231 ) Prepaids and other current assets 1,360 ( 10,174 ) Other assets ( 1,923 ) 1,976 Accounts payable 20,334 ( 28,444 ) Accrued customer rebates and returns 24,690 ( 8,312 ) Accrued compensation and other liabilities 15,773 ( 1,429 ) Cash provided by operating activities 145,719 59,650 Cash Flows from Investing Activities: Acquisition, net of cash acquired ( 14,308 ) — Property, plant and equipment additions ( 12,061 ) ( 24,656 ) Cash used in investing activities ( 26,369 ) ( 24,656 ) Cash Flows from Financing Activities: Proceeds of revolving credit line 99,000 — Payments of revolving credit line ( 99,000 ) — Other stock related activity 112 57 Purchase and cancellation of common stock ( 17,313 ) ( 24,339 ) Cash used in financing activities ( 17,201 ) ( 24,282 ) Net Increase in Cash and Cash Equivalents 102,149 10,712 Cash and Cash Equivalents, Beginning of Period 68,353 43,458 Cash and Cash Equivalents, End of Period $ 170,502 $ 54,170 Supplemental Cash Flow Information Cash paid for interest expense $ 680 $ 116 Cash paid for income taxes $ 19,575 $ 28,454 See accompanying Notes to Condensed Consolidated Financial Statements 6 DORMAN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 26, 2020 AND SEPTEMBER 28, 2019 (UNAUDITED) 1. Basis of Presentation As used herein, unless the context requires otherwise, “Dorman,” the “Company,” “we,” “us,” or “our” refers to Dorman Products, Inc. and its subsidiaries. Our ticker symbol on the NASDAQ Global Select Market is “DORM.” The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). However, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 26, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending 2020 or any future period. We may experience significant fluctuations from quarter to quarter in our results of operations due to the timing of orders placed by our customers. The introduction of new products and product lines to customers may cause significant fluctuations from quarter to quarter. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019. Certain prior year amounts have been reclassified to conform with current year presentation. 2. Business Acquisitions and Investments On January 2, 2020, we acquired the remaining 60 % of the outstanding stock of Power Train Industries, Inc. (“PTI”), a privately-held supplier of parts to the automotive aftermarket, based in Reno, Nevada. The total consideration paid for PTI was approximately $ 30.7 million, which included $ 18.4 million paid for the remaining 60% of the outstanding stock, subject to customary purchase price adjustments, and $ 12.3 million which represents the fair value of the previously held 40 % equity interest in PTI that was acquired by the Company in 2016. As a result of the acquisition, we recorded a gain of approximately $ 2.5 million in Other (expense) income, net during the nine months ended September 26, 2020 from the increase in fair value of the previously owned 40% interest in PTI. We previously accounted for our 40% interest as an equity-method investment. The transaction was accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired, and liabilities assumed were recorded at fair value, with the remaining purchase price recorded as goodwill. In connection with this acquisition, we recorded $ 16.7 million in goodwill, $ 7.3 million of identified intangibles, and $ 6.7 million of other assets, net, consisting of $ 3.5 million of cash, $ 2.0 million of accounts receivable, $ 5.6 million of inventory, and ($ 4.4 million) of net other assets and liabilities. The estimated fair value of the PTI assets acquired and liabilities assumed are provisional as of September 26, 2020 and are based on information that is currently available. Additional information about conditions that existed as of the date of acquisition are being gathered to finalize these provisional measurements, particularly with respect to net working capital and income taxes payable. Accordingly, the measurement of the PTI assets acquired and liabilities assumed may change upon completion of the purchase price allocation, both of which are expected to occur no later than one year from the acquisition date. The valuation of the intangible assets acquired and related amortization periods are as follows: (in thousands) Valuation Amortization Period (in years) Customer relationships $ 4,600 15 Trade names 700 5 Technology 1,800 8 Other 190 5 Total $ 7,290 The fair values of the customer relationships and trade names were estimated using an income approach based on the present value of future cash flows. The goodwill recognized is attributable primarily to strategic and synergistic opportunities related to existing automotive aftermarket businesses, the assembled workforce of PTI and other factors. The goodwill is not expected to be deductible for tax purposes. The financial results of the acquisition have been included in the condensed consolidated financial statements since the date of acquisition. 7 3. Sales of Accounts Receivable We have entered several customer sponsored programs administered by unrelated financial institutions that permit us to sell certain accounts receivable at discounted rates to the financial institutions. Transactions under these agreements were accounted for as sales of accounts receivable and the related accounts receivable were removed from our Condensed Consolidated Balance Sheet at the times of the sales transactions. Pursuant to these agreements, we sold $ 568.3 million and $ 530.7 million of accounts receivable during the nine months ended September 26, 2020 and September 28, 2019, respectively. All credit terms with our customers are 365 days or less. If receivables had not been sold over the previous twelve months, $ 489.5 million and $ 437.9 million of additional accounts receivable would have been outstanding at September 26, 2020 and December 28, 2019, respectively, based on our standard payment terms. Financing costs associated with these accounts receivable sales programs were $ 1.3 million and $ 4.3 million during the three months ended September 26, 2020 and September 28, 2019, respectively. Financing costs associated with these accounts receivable sales programs were $ 10.9 million and $ 13.6 million during the nine months ended September 26, 2020 and September 28, 2019, respectively. These costs were classified as selling, general and administrative expense in the Condensed Consolidated Statements of Operations. 4. Inventories Inventories include the cost of material, freight, direct labor and overhead utilized in the processing of our products and are stated at the lower of cost or net realizable value. Inventories were as follows: (in thousands) September 26, 2020 December 28, 2019 Bulk product $ 131,622 $ 114,308 Finished product 146,967 161,866 Packaging materials 4,703 4,639 Total $ 283,292 $ 280,813 5 . Goodwill and Intangible Assets Goodwill Goodwill included the following: (in thousands) September 26, 2020 December 28, 2019 Balance at beginning of period $ 74,458 $ 72,606 Goodwill acquired 16,690 — Measurement period adjustments — 1,852 Balance at end of period $ 91,148 $ 74,458 Intangible Assets Intangible assets included the following: September 26, 2020 December 28, 2019 Intangible assets subject to amortization Weighted Average Amortization Period Gross Carrying Value Accumulated Amortization Net Carrying Value Gross Carrying Value Accumulated Amortization Net Carrying Value (in thousands) Trade names 10.8 $ 6,760 $ 1,432 $ 5,328 $ 6,060 $ 975 $ 5,085 Customer relationships 8.9 25,050 6,530 18,520 20,450 4,698 15,752 Technology 7.8 2,167 261 1,906 367 74 293 Other 3.6 430 130 300 240 65 175 Total $ 34,407 $ 8,353 $ 26,054 $ 27,117 $ 5,812 $ 21,305 Amortization expense was $ 0.8 million and $ 0.7 million for the three months ended September 26, 2020 and September 28, 2019, respectively, and $ 2.5 million and $ 2.0 million for the nine months ended September 26, 2020 and September 28, 2019, respectively . 6 . Debt In March 2020, Dorman took proactive steps to increase its cash position and preserve financial flexibility in light of uncertainties from the COVID-19 pandemic by drawing down $ 99.0 million from its revolving credit facility available under its credit agreement. On June 29, 2020, the first day of our fiscal third quarter, the Company repaid the $ 99.0 million of outstanding borrowings under this revolving credit facility. T he average interest rate while the debt was outstanding was 1.41 %. 8 As of September 26, 2020, there were no borrowings under the credit agreement and two outstanding letters of credit for approximately $ 0.8 million in the aggregate which were issued to secure ordinary course of business transactions. Net of these letters of credit, there was approximately $ 99.2 million available under the credit agreement at September 26, 2020. As of September 26, 2020, we were no t in default in respect to the credit agreement and paid $ 0.2 million and $ 0.4 million in interest during the three and nine months ended September 26, 2020, respectively. 7. Commitments and Contingencies CBP Matter During 2019, we commenced a voluntary disclosure process in which we committed to disclosing to United States Customs & Border Protection (“CBP”) certain product misclassifications and reimbursing CBP for any resulting underpayment of duties that were identified as part of a voluntary internal review conducted by the Company. The Company recorded an estimated liability of $ 2.8 million in its Statement of Operations for the year ended December 28, 2019, which represents the Company’s estimated underpayment of duties, after deducting its estimated overpayment of duties, to CBP due to misclassifications over the prior five-year period, which is the applicable statute of limitations, plus applicable interest. In June 2020, we completed our internal review and submitted our prior disclosure statement to CBP, along with payment of $ 2.8 million for underpaid duties and interest. CBP has acknowledged receipt of our prior disclosure submission but has not yet communicated that our prior disclosure submission is closed. We intend to work cooperatively with CBP in connection with its review of our prior disclosure submission. Other Contingencies We are a party to or otherwise involved in legal proceedings that arise in the ordinary course of business, such as various claims and legal actions involving contracts, employment claims, competitive practices, intellectual property infringement, product liability claims and other matters arising out of the conduct of our business. In the opinion of management, none of the actions, individually or in the aggregate, taking into account relevant insurance coverage, would likely have a material financial impact on the Company, and we believe the range of reasonably possible losses from current matters, taking into account relevant insurance coverage, is immaterial. However, legal matters are subject to inherent uncertainties, and there exists the possibility that the ultimate resolution of any of these matters could have a material adverse impact on the Company’s cash flows, financial position and results of operations in the period in which any such effects are recorded. 8 . Revenue Recognition Our primary source of revenue is from contracts with and purchase orders from customers. Revenue is recognized from product sales when goods are shipped, title and risk of loss and control have been transferred to the customer, and collection is probable. We estimate the transaction price at the inception of a contract or upon fulfilling a purchase order, including any variable consideration, and will update the estimate for changes in circumstances. We record estimates for cash discounts, product returns, promotional rebates, core (i.e., remanufactured parts) return deposits and other discounts (“customer rebates and returns”) in the period the related product revenue is recognized. The provision for customer rebates and returns is recorded as a reduction of gross sales. Our obligation associated with customer rebates and returns is classified as a current liability on our condensed consolidated balance sheets (“accrued customer rebates and returns”). Actual customer rebates and returns have not differed materially from estimated amounts for each period presented. Amounts billed to customers for shipping and handling are included in net sales. Costs associated with shipping and handling are included in cost of goods sold. We have concluded that our estimates of variable consideration are not constrained under revenue recognition requirements in accordance with GAAP. All our revenue was recognized under the point of time approach during the nine months ended September 26, 2020 and September 28, 2019, respectively. We do not have significant financing arrangements with our customers, as our credit terms are all 365 days or less. Also, we do not receive noncash consideration (such as materials or equipment) from our customers to facilitate the fulfillment of our contracts. Disaggregated Revenue The following tables present our disaggregated net sales by type of major good / product line, and geography. Three Months Ended Nine Months Ended (in thousands) September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Powertrain $ 120,565 $ 104,756 $ 323,396 $ 299,730 Chassis 87,977 70,787 227,273 228,446 Automotive body 74,445 65,468 197,624 189,174 Hardware 17,633 12,785 43,239 34,412 Net sales $ 300,620 $ 253,796 $ 791,532 $ 751,762 Three Months Ended Nine Months Ended (in thousands) September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Net sales to U.S. customers $ 280,330 $ 238,466 $ 744,285 $ 701,778 Net sales to non-U.S. customers 20,290 15,330 47,247 49,984 Net sales $ 300,620 $ 253,796 $ 791,532 $ 751,762 9 9 . Stock-Based Compensation Restricted Stock and Restricted Stock Units (“RSUs”) Vesting of restricted stock and RSU awards is conditional based on continued employment or service for a specified period and, in certain circumstances, the attainment of performance goals. With respect to restricted stock and RSU awards, we retain the shares underlying the award, and any dividends paid thereon, until the vesting conditions have been met. For time-based restricted stock and RSU awards, compensation cost related to the stock is recognized on a straight-line basis over the vesting period and is calculated using the closing price per share of our common stock on the grant date. For performance-based restricted stock and RSU awards tied to growth in adjusted pre-tax income, compensation cost related to the award is recognized over the performance period and is calculated using the closing price per share of our common stock on the grant date and an estimate of the probable outcome of the performance conditions at each reporting date. Since 2019, we have granted performance-based restricted stock and RSU awards that vest based on our total shareholder return ranking relative to the total shareholder return of the companies comprising the S&P Mid-Cap 400 Growth Index over a three-year performance period. For performance-based restricted stock and RSU awards tied to total shareholder return, compensation cost related to the award is recognized on a straight-line basis over the performance period and is calculated using the simulated fair value per share of our common stock based on the application of a Monte Carlo simulation model. Compensation cost related to restricted stock and RSU awards was $ 1.0 million and $ 0.8 million for the three months ended September 26, 2020 and September 28, 2019, respectively, and $ 3.0 million and $ 2.3 million for the nine months ended September 26, 2020 and September 28, 2019, respectively. The compensation costs were classified as selling, general and administrative expense in the Condensed Consolidated Statements of Operations. The following table summarizes our restricted stock and RSU award activity for the nine months ended September 26, 2020: Shares Weighted Average Price Balance at December 28, 2019 177,491 $ 76.70 Granted 82,905 $ 63.02 Vested ( 25,314 ) $ 70.89 Cancelled ( 27,703 ) $ 77.41 Balance at September 26, 2020 207,379 $ 71.84 As of September 26, 2020, there was $ 7.9 million of unrecognized compensation cost related to unvested restricted stock and RSU awards that is expected to be recognized over a weighted-average period of approximately 2.5 years. Cash flows resulting from tax deductions in excess of the tax effect of compensation cost recognized in the financial statements are classified as operating cash flows. The excess tax benefit generated from restricted stock and RSU awards that vested was not significant during the nine months ended September 26, 2020 and September 28, 2019, respectively. Stock Options We expense the grant-date fair value of stock options as compensation on a straight-line basis over the vesting period for which related services are performed. The compensation cost charged against income was $ 0.3 million and $ 0.2 million for the three months ended September 26, 2020 and September 28, 2019, respectively, and $ 0.8 million and $ 0.5 million for the nine months ended September 26, 2020 and September 28, 2019, respectively. The compensation costs were classified as Selling, general and administrative expense in the Condensed Consolidated Statements of Operations. No cost was capitalized during the nine months ended September 26, 2020 or September 28, 2019. We use the Black-Scholes option valuation model to estimate the fair value of stock options granted. Expected volatility and expected dividend yield are based on the actual historical experience of our common stock. The expected life represents the period of time that options granted are expected to be outstanding and was calculated using historical option exercise data. The risk-free rate was based on a U.S. Treasury security with terms equal to the expected time of exercise as of the grant date. During the nine months ended September 26, 2020 and September 28, 2019, we granted 109,352 and 38,670 stock options, respectively. 10 The following table summarizes our stock option activity for the nine months ended September 26, 2020: Shares Weighted Average Exercise Price Weighted Average Remaining Term (In years) Aggregate Intrinsic Value Balance at December 28, 2019 181,712 $ 70.78 Granted 109,352 $ 63.25 Forfeited ( 8,764 ) $ 65.24 Exercised ( 6,630 ) $ 56.52 Balance at September 26, 2020 275,670 $ 68.32 4.7 $ 4,695,637 Options exercisable at September 26, 2020 99,017 $ 65.99 2.2 $ 1,917,351 O ptions to purchase 6,630 and 35,401 shares of common stock were exercised during the nine months ended September 26, 2020 and September 28, 2019, respectively. As of September 26, 2020, there was $ 2.7 million of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted-average period of 2.9 years. Cash received from stock option exercises was not significant during the nine months ended September 26, 2020 and September 28, 2019. There was no excess tax benefit generated from stock options exercised in the nine months ended September 26, 2020 or September 28, 2019. Employee Stock Purchase Plan In May 2017, our shareholders approved the Dorman Products, Inc. Employee Stock Purchase Plan (the “ESPP”), which provides up to 1,000,000 shares of our common stock for sale to eligible employees. The purpose of the ESPP, which is qualified under Section 423 of the Internal Revenue Service Code of 1986, as amended, is to encourage stock ownership through payroll deductions and limited cash contributions by our employees. These contributions are used to purchase shares of the Company’s common stock at a 15 % discount from the lower of the market price at the beginning or end of the purchase window. There were no shares purchased under the ESPP plan during the three months ended September 26, 2020 and September 28, 2019 as a result of the timing of the end of the purchase windows. There were 10,735 shares and 13,669 shares purchased under the ESPP plan during the nine months ended September 26, 2020, and nine months ended September 28, 2019, respectively. During both the three months ended September 26, 2020 and September 28, 2019, compensation cost under the ESPP was $ 0.1 million . During both the nine months ended September 26, 2020 and September 28, 2019, compensation cost under the ESPP was $ 0.3 million and $ 0.2 million, respectively. 10 . Earnings Per Share Basic earnings per share is calculated by dividing our net income by the weighted average number of common shares outstanding during the period, which exclude unvested restricted stock and shares of our common stock underlying RSUs and stock options that are considered to be contingently issuable. To calculate diluted earnings per share, common share equivalents are added to the weighted average number of common shares outstanding. Common share equivalents are calculated using the treasury stock method and are computed based on outstanding stock-based awards. Stock-based awards of 141,000 shares and 96,000 shares were excluded from the calculation of diluted earnings per share as of September 26, 2020 and September 28, 2019, respectively, as their effect would have been anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended Nine Months Ended (in thousands, except per share data) September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Numerator Net income $ 34,259 $ 21,308 $ 70,919 $ 66,213 Denominator: Weighted average basic shares outstanding 32,281 32,522 32,317 32,656 Effect of stock-based compensation awards 90 72 77 82 Weighted average diluted shares outstanding 32,371 32,594 32,394 32,738 Earnings Per Share: Basic $ 1.06 $ 0.66 $ 2.19 $ 2.03 Diluted $ 1.06 $ 0.65 $ 2.19 $ 2.02 11 . Common Stock Repurchases We periodically repurchase, at the then current market price, and cancel shares of Dorman common stock issued to the Dorman Products, Inc. 401(k) Retirement Plan and Trust (the “401(k) Plan”). 401(k) Plan participants can no longer purchase shares of Dorman common stock as an 11 investment option under the 401(k) Plan. Shares are purchased from the 401(k) Plan when participants sell units as permitted by the 401(k) Plan or elect to leave the 401(k) Plan upon retirement, termination or other reasons. For the nine months ended September 26, 2020 , we repurchased and cancelled 15,280 shares of common stock held in the 401(k) Plan for $ 1.1 million at an average price of $ 73.49 per share. During the year ended December 28, 2019 , we repurchased and cancelled 22,380 shares of common stock held in the 401(k) Plan for $ 1.9 million at an average price of $ 87.26 per share. Our Board of Directors authorized a share repurchase program of up to $ 400 million through December 31, 2020 . Under this program, share repurchases may be made from time to time depending on market conditions, share price, share availability and other factors at our discretion. The share repurchase program does not obligate us to acquire any specific number of shares. For the nine months ended September 26, 2020, we repurchased and cancelled 218,836 shares of common stock for $ 16.2 million at an average price of $ 73.99 per share under this program. For the year ended December 28, 2019, we repurchased and cancelled 499,564 shares of common stock for $ 39.4 million at an average price of $ 78.84 per share under this program. At September 26, 2020, $ 127.7 million was available for repurchase under this share repurchase program. On October 27, 2020, the Company’s Board of Directors approved a resolution to increase and extend its share repurchase program by an additional $ 100 million, raising the aggregate authorization under the program to $ 500 million and extending it through December 31, 2022 . 12 . Related-Party Transactions We have a non-cancelable operating lease for a facility housing our corporate headquarters and a distribution center with a partnership in which Steven L. Berman, our Executive Chairman, and other members of the Berman family, are partners. Based upon the terms of the lease, payments will be $ 1.6 million in fiscal 2020 and were $ 1.6 million in fiscal 2019. This lease will expire on December 31, 2022 . The right-of-use asset and total lease liabilities related to this lease were both $ 3.5 million as of September 26, 2020. In the opinion of our Audit Committee, the terms and rates of this lease are no less favorable than those which could have been obtained from an unaffiliated party when the lease was renewed in November 2016. As of September 30, 2020, the beginning of our fourth quarter, another company in which Steven L. Berman, our Executive Chairman, and other members of the Berman family, are owners (the “Berman Real Estate Company”), acquired from an unaffiliated third-party owner the real estate and building which we were leasing from such third-party owner. In connection with the Berman Real Estate Company’s acquisition, we entered into a new non-cancelable operating lease agreement with the Berman Real Estate Company to continue leasing the facility. In the opinion of our Audit Committee, the terms and rates of this lease are no less favorable than those which could have been obtained from an unaffiliated party when the lease was entered into in September 2020. We also have non-cancelable operating leases with a limited liability company in which certain of the former owners of PTI are members. The leases were entered into prior to the January 2, 2020 acquisition of PTI by the Company, and they are used in the PTI business. Based upon the terms of the leases, aggregate payments thereunder will be $ 0.3 million in fiscal 2020. We are a partner in a joint venture with one of our suppliers and own minority interests in two other suppliers. Each of these investments is accounted for according to the equity method. 13 . Income Taxes At September 26, 2020, we had $ 1.1 million of net unrecognized tax benefits, $ 1.0 million of which would lower our effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 26, 2020, we had approximately $ 0.1 million of accrued interest and penalties related to uncertain tax positions. We file income tax returns in the United States, Canada, China, India, and Mexico. All years before 2016 are closed for United States federal tax purposes. Tax years before 2015 are closed for the states in which we file. Tax years before 2017 are closed for tax purposes in Canada. Tax years before 2016 are closed for tax purposes in China. Tax years before 2015 are closed for tax purposes in Mexico. All tax years remain open for India. 14 . Fair Value Disclosures The carrying value of financial instruments such as cash, accounts receivable, accounts payable, and other current assets and liabilities approximate their fair value based on the short-term nature of these instruments. 15 . New and Recently Adopted Accounting Pronouncements In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment , which eliminates the need to perform a hypothetical purchase price allocation to measure goodwill impairment. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. We adopted this ASU effective December 29, 2019 , the beginning of our 2020 fiscal year. Adoption of this ASU did not have a material impact on our condensed consolidated financial statements and related disclosures. In June 2016, the FASB issued ASU 2016-13 , Financial Instruments – Credit Losses , which was subsequently amended in November 2018 through ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments Credit Losses. ASU 2016-13 requires entities to estimate lifetime expected credit losses for trade and other receivables, net investments in leases, financial receivables, debt securities and other instruments, which will result in earlier recognition of credit losses. Further, the new credit loss model will affect how entities in all industries estimate their allowance for loss receivables that are current with respect to their payment terms. ASU 2016-13 is effective for companies beginning with fiscal years beginning after December 15, 2019. We adopted this ASU effective December 29, 2019 , the beginning of our 2020 fiscal year. Adoption of this ASU did not have a material impact on our condensed consolidated financial statements and related disclosures. 12