What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-22 compared with 2020-02-26 · 162 added, 155 removed, 135 unchanged (70% of the section changed)

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See the “Statement Regarding Forward-Looking Statements” above and PART I, ITEM 1A, “Risk Factors” in this Annual Report on Form 10-K for additional information regarding forward-looking statements and the factors that could cause actual results to differ materially from those anticipated in the forward-looking statements.

In ITEM 7, we discuss fiscal 2020 and 2019 results and comparisons of fiscal 2020 results to fiscal 2019 results.

Discussions of fiscal 2018 results and comparisons of fiscal 2019 results to fiscal 2018 results can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in PART II, ITEM 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019.

We are one of the leading suppliers of replacement parts and fasteners for passenger cars, light trucks, and heavy-duty trucks in the automotive aftermarket industry.

As of December 28, 2019, we marketed approximately 78,000 unique parts as compared to approximately 77,000 as of December 29, 2018, many of which we designed and engineered.

Unique parts exclude private label stock keeping units (“SKU’s”) and other variations in how we market, package and distribute our products, but include unique parts of acquired companies.

As of December 26, 2020, we marketed approximately 81,000 distinct parts compared to approximately 78,000 as of December 28, 2019, many of which we designed and engineered.

This number excludes private label stock keeping units and other variations in how we market, package and distribute our products, includes distinct parts of acquired companies and reflects distinct parts that have been discontinued at the end of their lifecycle.

Our products are sold under our various brand names, under our customers’ private label brands or in bulk.

We are one of the leading aftermarket suppliers of OE “dealer exclusive” parts.

OE “dealer exclusive” parts are those parts which were traditionally available to consumers only from original equipment manufacturers or salvage yards.

These parts include, among other parts, intake manifolds, exhaust manifolds, window regulators, radiator fan assemblies, tire pressure monitor sensors, complex electronics modules, and exhaust gas recirculation (EGR) coolers.

OE “dealer exclusive” parts are those parts that were traditionally available to consumers only from OE manufacturers or salvage yards.

These parts include, among other parts, intake manifolds, exhaust manifolds, window regulators, radiator fan assemblies, tire pressure monitor sensors, exhaust gas recirculation (EGR) coolers, and complex electronics modules.

We generate virtually all our net sales from customers in the North American automotive aftermarket industry, primarily in the United States.

Our products are sold primarily through automotive aftermarket retailers, including through their on-line platforms;

national, regional and local warehouse distributors and specialty markets, and salvage yards.

national, regional and local warehouse distributors and specialty markets;

and salvage yards.

We also distribute automotive aftermarket parts outside the United States, with sales primarily into Canada and Mexico, and to a lesser extent, Europe, the Middle East and Australia.

We may experience significant fluctuations from quarter to quarter in our results of operations due to the timing of orders placed by our customers.

We may experience significant fluctuations from quarter to quarter in our results of operations due to the timing of orders placed by our customers as well as our ability and the ability of our suppliers to deliver products ordered by our customers.

The introduction of new products and product lines to customers, as well as business acquisitions, may also cause significant fluctuations from quarter to quarter.

We were engaged in several site consolidation activities during the year ended December 28, 2019.

Most significantly, we completed the consolidation of our Montreal facility (acquired in fiscal 2017 as part of the acquisition of MAS Automotive Distributors, Inc.

(“MAS Industries” or “MAS”)) into our new 800,000 square foot distribution center in Portland, Tennessee.

Additionally, we transferred our existing distribution operations in Portland, Tennessee to the new facility and also completed the consolidation of an existing production facility in Michigan with our facility in Pennsylvania operated by our subsidiary, Flight Systems Automotive Group L.L.C.

(“Flight Systems” or “Flight”).

During the year ended December 28, 2019, we incurred $3.0 million of costs primarily related to acquisition integration and accelerated depreciation, $2.8 million of which was included in selling, general and administrative expenses and $0.2 million of which was included in gross profit.

Additionally, during the year ended December 28, 2019, we incurred $25.9 million of costs related to start up inefficiencies and duplication of facility overhead and operating costs primarily related to our Portland facility consolidation activities, of which $20.4 million was included in selling, general and administrative expenses and $5.5 million was included in gross profit.

As a part of our Portland consolidation activities, our new Portland distribution center became fully operational in October 2019.

We expect our distribution costs to be back to more typical levels as we move through 2020.

Early in 2019, we began the process of transferring operations of our existing distribution facility in Portland, Tennessee to a new, larger facility nearby.

The new 800,000 square foot facility became fully operational in October 2019.

In the second quarter of 2019, we began incurring additional costs related to start-up inefficiencies and duplication of facility overhead and operating costs primarily related to those facility consolidation activities.

We began implementing productivity initiatives in the fourth quarter of 2019 to address those inefficiencies and costs while at the same time expanding the facility to cover an aggregate of approximately 1 million square feet, which expansion was completed in June 2020.

During 2020, we implemented initiatives to improve productivity levels at the new facility, which resulted in distribution costs returning to levels more in-line with our expectations.

We operate on a fifty-two, fifty-three week period ended on the last Saturday of the calendar year.

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Business Performance Summary

Net sales increased 2% to $991.3 million in fiscal 2019 from $973.7 million in fiscal 2018, while net income decreased 37% to $83.8 million in fiscal 2019 from $133.6 million in fiscal 2018.

Additionally, we generated cash flows from operations of $95.3 million in fiscal 2019 and repurchased approximately $143.9 million of our outstanding common stock.

Net sales increased 10% to $1,092.7 million in fiscal 2020 from $991.3 million in fiscal 2019, while net income increased 28% to $106.9 million in fiscal 2020 from $83.8 million in fiscal 2019.

Additionally, in fiscal 2020 we generated cash flows from operations of $152.0 million and repurchased 439,275 common shares under our share repurchase program for $36.8 million.

Impacts of COVID-19

The COVID-19 pandemic has resulted and is expected to continue to result in significant economic disruption.

Since COVID-19 was declared a pandemic in early 2020, state orders shutting down or restricting business operations to contain the spread of COVID-19 have generally exempted automotive repair and the related supply and distribution of parts as those businesses have generally been classified as critical, essential or life-sustaining.

Therefore, the vast majority of our retail and wholesale customers have been and currently remain open for business.

In turn, all of our U.S.

facilities have also remained, and currently remain, open and operating, with modified staffing in certain locations where appropriate.

We have taken actions to promote the welfare of our employees by enhancing safety protocols, including requiring administrative employees to work from home where applicable and implementing symptom screening, social distancing and robust sanitization practices at our facilities.

We also have adopted a COVID-19 sick leave policy providing continued salary and benefits to eligible employees.

We have had to adjust our operations and inventory levels as demand has fluctuated due to government-imposed restrictions being imposed and then subsequently lifted or modified across the United States.

In late March 2020, we began experiencing softening customer demand as a result of government-imposed restrictions designed to slow the spread of COVID-19.

While customer orders dropped significantly early in the second quarter of 2020 due to government-imposed restrictions, we saw a rapid recovery as the second quarter progressed with June orders up above June 2019 levels.

We continued to see an increase in orders in the third and fourth quarters of 2020, with third and fourth quarter net sales reaching record highs for the Company.

At the same time, these favorable results were partially offset by increased freight costs due to global supply chain pressures and industry constraints related to the ongoing COVID-19 pandemic.

As government-imposed restrictions vary and continue to change across the United States and elsewhere around the world, it remains difficult to determine the full impact that the pandemic will have on the overall demand environment as well as our ability to source parts and other materials to meet demand levels.

Correspondingly, to the extent there may be fluctuations in demand or delays or increased costs impacting our ability to source parts and other materials, it remains difficult to determine the full impact that the pandemic will have on various aspects of our operations, including, but not limited to, inventory levels, our ability to fulfill contractual requirements and staffing at our facilities.

At the time of this filing and as we look ahead, we are unable to determine or predict the overall impact the COVID-19 pandemic will have on our customers, vendors and suppliers or our business, results of operations, liquidity or capital resources.

Significant uncertainty still exists concerning the overall magnitude of the impact and the duration of the COVID-19 pandemic.

As a result, we will continue to closely monitor updates regarding the spread of COVID-19 and its variants and the distribution of vaccines developed to combat COVID-19, and we will adjust our operations according to guidelines from local, state and federal officials.

In light of the foregoing, we may take further actions that alter our business operations or that we determine are in the best interests of our employees, customers, suppliers and shareholders.

New Product Development

New product development is an important success factor for us and traditionally has been our primary vehicle for growth.

We have made incremental investments to increase our new product development efforts each year since 2003 to grow our business and strengthen our relationships with our customers.

We have made incremental investments to increase our new product development efforts to grow our business and strengthen our relationships with our customers.

The investments primarily have been in the form of increased product development resources, increased customer and end-user awareness programs, and customer service improvements.

These investments historically have enabled us to provide an expanding array of new product offerings and grow revenues at levels that generally have exceeded market growth rates.

As a result of these investments, we introduced 5,239 new products to our customers and end users in fiscal 2019, including 1,625 “New-to-the-Aftermarket” SKU’s.

One area of focus has been our complex electronics program, which capitalizes on the growing number of electronic components being utilized on today’s original equipment platforms.

In fiscal 2020, we introduced 3,479 new distinct parts to our customers and end-users, including 1,433 “New-to-the-Aftermarket” parts.

We reduced new product activity in the first half of 2020 due to uncertainties related to COVID-19 but increased new product development and commercialization in the second half of 2020 as overall market demand rebounded.

As a result, we ended the year with lower new product introductions than the prior year.

Development activities have returned to prior levels and we expect to return to our historical levels of performance in 2021.

Please see ITEM 1, “Business – Product Development” for a year-over-year comparison of new product introductions.

One area of focus has been our complex electronics program, which capitalizes on the growing number of electronic components being utilized on today’s OE platforms.

New vehicles contain an average of approximately thirty-five electronic modules, with some high-end luxury vehicles containing over one hundred modules.

Our complex electronics products are designed and developed in-house and tested to help ensure consistent performance, and our product portfolio is focused on further developing our leadership position in the category.

complex electronics product s are designed and developed in- house and tested to help ensure consi stent performance, and our product portfolio is focused on further developing our leadership position in the category.

Another area of focus has been on Dorman ® HD Solutions™, a line of products we market for the medium and heavy-duty truck sector of the automotive aftermarket industry.

We believe that this sector provides many of the same opportunities for growth that the passenger car and light truck sector of the automotive aftermarket industry has provided us.

Through Dorman HD Solutions™, we specialize in what formerly were “dealer only” parts similar to how we have approached the passenger car and light duty truck sector.

During fiscal 2019, we introduced 1,027 SKU’s in this product line.

We expect to continue to invest aggressively in the medium and heavy duty product category.

In addition to product development, our growth has been impacted by acquisitions.

In August 2018, we acquired Flight Systems.

Additionally, in October 2017, we acquired MAS.

We believe Flight and MAS are highly complementary to our business and growth strategy.

We may acquire businesses in the future to supplement our financial growth, distribution capabilities, product development resources or to diversify our revenue base.

Through Dorman ® HD Solutions™, we specialize in what formerly were “dealer exclusive” parts similar to how we have approached the passenger car and light-duty truck sector.

During fiscal 2020, we introduced 458 distinct parts in this product line.

We expect to continue to invest in the medium and heavy-duty product category.

Part of our strategy is to grow our business through acquisitions.

For example, on January 2, 2020, we acquired the remaining 60% of the outstanding stock of Power Train Industries, Inc.

(“PTI”) and in August 2018, we acquired Flight Systems Automotive Group L.L.C.

We believe PTI and Flight are highly complementary to our business and growth strategy.

We may acquire businesses in the future to supplement our financial growth, increase our customer base, add to our distribution capabilities or enhance our product development resources, among other reasons.

Economic Factors

The Company’s financial results are impacted by various economic and industry factors, including, but not limited to the number, age and condition of vehicles in operation (“VIO”) at any one time, and miles driven by those VIO.

To begin, the Company’s products are primarily purchased and installed on a subsegment of the VIO, specifically weighted towards vehicles aged eight to thirteen years old.

Each year, the United States seasonally adjusted annual rate (“US SAAR”) of new vehicles purchased adds a new year to the US VIO.

According to data from the Auto Care Association (“Auto Care”), the US SAAR experienced a decline from 2008 to 2011 as consumers purchased fewer new vehicles as a result of the Great Recession.

We believe that the declining US SAAR during that period resulted in a follow-on decline in our primary US VIO subsegment (eight to thirteen-year-old vehicles) commencing in 2016.

However, following 2011 and the impact the Great Recession US consumers began to increase their purchases of new vehicles which over time caused the US SAAR to recover and return to

more historical levels.

Consequently, we expect the US VIO for vehicles aged eight to thirteen years old to recover over the next several years.

In addition, we believe that vehicle owners generally are operating their current vehicles longer than they did several years ago, performing necessary repairs and maintenance in order to keep those vehicles well maintained.

The Company’s financial results are also impacted by various economic and industry factors, including, but not limited to the number, age and condition of vehicles in operation at any one time, and miles driven by those vehicles.

Vehicles in Operation

The Company’s products are primarily purchased and installed on a subsegment of the passenger and light duty vehicles in operation in the United States (“VIO”), specifically weighted towards vehicles aged 8 to 13 years old.

Each year, the United States seasonally adjusted annual rate (“US SAAR”) of new vehicles purchased adds a new year to the VIO.

According to data from the Auto Care Association (“Auto Care”), the US SAAR experienced a decline from 2008 to 2011 as consumers purchased fewer new vehicles as a result of the Great Recession of 2008.

We believe that the declining US SAAR during that period resulted in a follow-on decline in our primary VIO subsegment (8 to 13-year-old vehicles) commencing in 2016.

However, following 2011 and the impact of the Great Recession of 2008, U.S.

consumers began to increase their purchases of new vehicles which over time caused the US SAAR to recover and return to more historical levels.

Consequently, subject to any potential impacts from COVID-19, we expect the VIO for vehicles aged 8 to 13 years old to continue to recover over the next several years.

We believe this trend has resulted in an increase in VIO.

According to data published by Polk, a division of IHS Automotive, the average age of VIO increased to 12.0 years as of October 2020 from 11.9 years as of October 2019 despite increasing new car sales.

Additionally, the number of VIO in the United States continues to increase, growing 2% in 2019 to 290.0 million from 285.7 million in 2018.

Approximately 57% of vehicles in operation are 11 years old or older.

Additionally, while the number of VIO in the United States decreased 4% in 2020 to 279.8 million from 290.0 million in 2019, the number of VIO that are 11 years old or older increased from 57% in 2019 to 60% in 2020.

Vehicle scrappage rates have also decreased over the last several years.

Finally, the number of miles driven is another important statistic that impacts our business.

According to the United States Department of Transportation, the number of miles driven has increased each year since 2011 with miles driven having increased 0.9% as of November 2019 as compared to November 2018.

Generally, as vehicles are driven more miles, the more likely it is that parts will fail.

The combination of the factors above has accounted for a portion of our sales growth and is expected to impact our future results.

The COVID-19 pandemic in general, as well as restrictions imposed by certain states in response to the COVID-19 pandemic, are adversely impacting work-related and personal travel.

In fact, according the U.S.

Department of Transportation, the number of miles driven through October 2020 has decreased 13.9% year over year due to the impacts of the COVID-19 pandemic.

We believe that demand for our products is negatively impacted by the decrease to miles driven, resulting in a reduction in vehicle maintenance and reduced demand for our parts.

As a result, while, prior to COVID-19, we might have expected to see additional sales growth due to the VIO and mileage trends referenced above, the impact of COVID-19 may adversely affect our sales growth potential and our future results.

Brand Protection

We operate in a highly competitive market.

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For example, in the third quarter of 2019, we modified our brand protection policy, which is designed to ensure that certain products bearing the Dorman name are not advertised below certain approved pricing levels.

Discounts, Allowances, and Incentives

We offer a variety of customer discounts, rebates, defective and slowing moving product returns and other incentives.

We may offer cash discounts for paying invoices in accordance with the specified discount terms of the invoice.

In addition, we may offer pricing discounts based on volume purchased from us or other pricing discounts related to programs under a customer’s agreement.

These discounts can be in the form of “off-invoice” discounts and are immediately deducted from sales at the time of sale.

For those customers that choose to receive a payment on a quarterly or annual basis instead of “off-invoice,” we accrue for such payments as the related sales are made and reduce sales accordingly.

Finally, rebates and discounts are provided to customers to support promotional activities such as advertising and sales force allowances.

Our customers, particularly our larger retail customers, regularly seek more favorable pricing and product return provisions, and extended payment terms when negotiating with us.

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We expect our customers to continue to exert pressure on our margins.

New Customer Acquisition Costs

New customer acquisition costs refer to arrangements under which we incur change-over costs to induce a customer to switch from a competitor’s brand.

Change-over costs include the costs related to removing the new customer’s inventory and replacing it with our inventory, which is commonly referred to as a stock-lift.

New customer acquisition costs are recorded as a reduction to revenue when incurred.

Product Warranty and Overstock Returns

Many of our products carry a lifetime limited warranty, which generally covers defects in materials or workmanship and failure to meet specifications.

In addition to warranty returns, we also may permit our customers to return new, undamaged products to us within customer-specific limits if they have overstocked their inventories.

At the time products are sold, we accrue a liability for product warranties and overstock returns as a percentage of sales based upon estimates established using historical information on the nature, frequency and average cost of the claim and the probability of the customer return.

Significant judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period.

Revision to these estimates is made when necessary, based upon changes in these factors.

We regularly study trends of such claims.

Foreign Currency

In fiscal 2019, approximately 79% of our products were purchased from suppliers in a variety of non-U.S.

Our products are purchased from suppliers in the United States and a variety of non-U.S.

The products generally are purchased through purchase orders with the purchase price specified in U.S.

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However, the cost of the products we procure is also affected by other factors including raw material availability, labor cost, and transportation costs.

Our acquisition of MAS increased our exposure to foreign currencies.

MAS was headquartered in Montreal, Canada, and its financial transactions occur in both U.S.

Dollars and Canadian Dollars.

Since our consolidated financial statements are denominated in U.S.

Dollars, the assets, liabilities, net sales, and expenses of MAS which are denominated in currencies other than the U.S.

Dollar must be converted into U.S.

Dollars using exchange rates for the current period.

As a result, fluctuations in foreign currency exchange rates may impact our financial results.

In early 2019, we completed the consolidation of our Montreal facility into our new Portland, Tennessee facility, which reduced our Canadian Dollar exposure.

Impact of Inflation

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The cost o f many commodities that are used in our products has fluctuated over time resulting in increases and decreases in the cost of our products.

In addition, we have periodically experienced increased transportation costs as a result of higher fuel prices, capacity constraints and other factors.

We will attempt to offset cost increases by passing along selling price increases to customers, using alternative suppliers and sourcing purchases from other suppliers .

In addition, we have periodically experienced increased transportation costs as a result of higher fuel prices, capacity constra ints and other factors.

We attempt to offset cost increases by passing along selling price increases to customers and using alternative suppliers .

However, there can be no assurance that we will be successful in these efforts.

Impact of Tariffs

Effective September 24, 2018, the Office of the United States Trade Representative (USTR) imposed an additional tariff on approximately $200 billion worth of Chinese imports.

The tariff was approximately 10% as of December 29, 2018.

Effective for shipments departing China on or after May 10, 2019, the USTR increased this tariff to 25%.

In addition, effective September 1, 2019, the USTR imposed a fourth tranche of tariffs on approximately $300 billion worth of Chinese imports with a tariff rate of 15%.

Effective the third quarter of 2018, the Office of the United States Trade Representative (USTR) imposed three additional tranches of tariffs on approximately $250 billion worth of Chinese imports.

Tariffs ranged from 10% to 25% depending on the commodity.

Effective for shipments departing China on or after May 10, 2019, the USTR modified the tranches to impose tariffs of 25% for all commodities.

In addition, effective September 1, 2019, the USTR imposed the fourth tranche of tariffs on approximately $300 billion worth of Chinese imports with a tariff rate of 15%, which was reduced to 7.5% in February 2020.

The tariffs enacted to date will increase the cost of many products that are manufactured for us in China.

We are taking several actions to mitigate the impact of the tariffs including, but not limited to, price increases to our customers and cost concessions from our suppliers.

We have taken several actions to mitigate the impact of the tariffs including, but not limited to, price increases to our customers and cost concessions from our suppliers.

We expect to continue mitigating the impact of tariffs in fiscal 2020 primarily through selling price increases to offset the higher tariffs incurred.

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tariffs on Chinese goods in exchange for Chinese pledges to, among other things, purchase more of American farm, energy and manufactured goods.

In addition, the USTR has granted tariff relief for certain categories of products being imported from China.

In addition, the USTR has granted temporary tariff relief for certain categories of products being imported from China.

However, the tariff relief granted by the USTR expired on most categories of products being imported from China at the end of 2020 and has not been extended.

We expect that we will reverse tariff-related price increases previously passed along to our customers and cost concessions previously received from our suppliers as such tariffs are reduced or such other relief is granted.

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For the Fiscal Year Ended

(in millions, except percentage data)

December 28, 2019

(in thousands, except percentage data)

December 26, 2020

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Income from operations

Other (expense) income, net

Other income (expense), net

Income before income taxes

Provision for income taxes

* Percentage of sales information does not add due to rounding

* Percentage of sales information may not add due to rounding

Fiscal Year Ended December 26, 2020 Compared to Fiscal Year Ended December 28, 2019

Net sales increased 2% to $991.3 million in fiscal 2019 from $973.7 in fiscal 2018.

Acquisitions contributed to 1% of the sales growth.

The remaining growth experienced by our base business was attributable to approximately a 3.5% increase as a result of tariff-related pricing increases, partially offset by a shift in customer mix from warehouse distributor customers to retail customers.

Net sales increased 10% to $1,092.7 million in fiscal 2020 from $991.3 million in fiscal 2019.

The increase in net sales was primarily organic and driven by increased volumes, particularly in the second half of 2020.

Gross profit margin was 35.1% of net sales in fiscal 2020 compared to 34.3% of net sales in fiscal 2019.

The gross profit margin declined primarily as a result of a change in customer mix from warehouse distributor to retail customers, the pass-through of tariff costs to our customers, acquisitions completed in the last 12 months which carry lower gross margins compared to our historical levels, and redundant overhead costs as a result the duplication of facility and operating costs related to our distribution center consolidation in Portland, Tennessee.

Selling, general and administrative expenses were $234.0 million, or 23.6% of net sales, in fiscal 2019 compared to $202.1 million, or 20.8% of net sales, in fiscal 2018 .

The increase in selling, general and administrative expense during the year was primarily due to $ 20.4 million of expenses associated with start-up inefficiencies and the duplication of facility and operating costs related to our distribution center consolidation in Portland, Tennessee and higher factoring costs due to increased sales of accounts receivable.

Our effective tax rate decreased to 20.8% in fiscal 2019 from 21.9% in fiscal 2018.

The effective tax rate decreased primarily due to lower income of foreign entities included within the consolidated U.S.

Fiscal Year Ended December 29, 2018 Compared to Fiscal Year Ended December 30, 2017

Net sales increased 8% to $973.7 million in fiscal 2018 from $903.2 in fiscal 2017.

Our revenue growth was driven by overall strong demand for our products and the inclusion of revenue from acquired businesses.

In fiscal 2018, approximately $48.3 million of net sales were attributed to acquisitions.

Our growth was partially offset by negative effects of a brand protection policy implemented in the fourth quarter of 2017.

Gross profit margin was 38.3% in fiscal 2018 compared to 39.7% in fiscal 2017.

The decreased gross profit margin was primarily the result of the impact of acquisitions which carry lower gross margins compared to our historical levels.

Additionally, the 2018 gross profit margin was negatively impacted by a $2.0 million inventory fair value adjustment resulting from business acquisitions, lower overall selling prices and an unfavorable shift in mix towards lower margin products.

Gross margin expansion was driven by improved efficiencies, as well as lower provisions for excess and obsolete inventory as part of our ongoing efforts to streamline our end-to-end supply chain processes.

Additionally, we benefitted from the absence of certain charges that impacted gross margin in the prior year, including increased customer return provisions and a charge related to a historical underpayment of customs duties.

These benefits were partially offset by out-of-pocket costs related to the COVID-19 pandemic.

Selling, general and administrative expenses were $ 249.7 million , or 22.9% of net sales, in fiscal 2020 compared to $ 234.0 million, or 23.6% of net sales, in fiscal 2019 .

The increase in expense was primarily due to the inclusion of the expenses of acquired operations, amortization expense of acquired intangible assets, reinvestment of tax savings in product development and sales organizations, an increase in wage and benefit costs and increased costs associated with our accounts receivable sales program.

Our effective tax rate decreased to 21.9% in fiscal 2018 from 39.6% in fiscal 2017.

The decrease was attributable to the Tax Cuts and Jobs Act enacted in the United States in December 2017, which lowered the U.S.

Corporate federal income tax rate to 21% beginning in 2018.

The decrease in selling, general and administrative expense as a percentage of net sales during the period was primarily due to improved leverage from the $10 1.4 million increase in net sales compared to the prior year, productivity improvements in our Portland distribution facility, as well as reduced travel expenses stemming from COVID-19 restrictions.

These decreases were partially offset by higher incentive compensation and employee stock purchase plan expenses compared to the prior year.

Other Income, net was $2.4 million in fiscal 2020 which includes a gain of $2.5 million recognized as the difference between the carrying value of our previously held equity method investment in PTI and the implied fair value when we acquired PTI fully in January 2020.

Our effective tax rate increased to 21.3% in fiscal 2020 from 20.8% in fiscal 2019.

The effective tax rate increased primarily due to an increase in state income tax and higher income of foreign entities included within the consolidated U.S.

Liquidity and Capital Resources

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See Note 11, “Commitments and Contingencies”, in the accompanying consolidated financial statements for additional information regarding commitments and contingencies that may affect our liquidity.

Tariffs increase our uses of cash since we pay for the tariffs upon the arrival of our goods in the United States but collect the cash on any passthrough price increases from our customers on a delayed basis according to the payment terms negotiated with our customers.

Payment Terms and Accounts Receivable Sales Programs

Over the past several years we have continued to extend payment terms to certain customers as a result of customer requests and market demands.

These extended terms have resulted in increased accounts receivable levels and significant uses of cash flows.

Tariffs also increase our uses of cash since we pay for the tariffs upon the arrival of our goods in the United States but collect the cash on any passthrough price increases from our customers on a delayed basis according to the payment terms negotiated with our customers.

We participate in accounts receivable sales programs with several customers which allow us to sell our accounts receivable to financial institutions to offset the negative cash flow impact of these payment terms extensions.

However, any sales of accounts receivable through these programs ultimately result in us receiving a lesser amount of cash upfront than if we collected those accounts receivable ourselves in due course.

Moreover, prior to LIBOR being phased out in 2021, to the extent that any of these accounts receivable sales programs bear interest rates tied to LIBOR, as LIBOR rates increase our cost to sell our receivables also increase.

Quantitative and Qualitative Disclosures about Market Risk for more information.

We participate in accounts receivable sales programs with several customers that allow us to sell our accounts receivable to financial institutions to offset the negative cash flow impact of these payment terms extensions.

However, any sales of accounts receivable through these programs ultimately result in us receiving a lesser amount of cash than if we collected those accounts receivable ourselves in due course.

Moreover, to the extent that any of these accounts receivable sales programs bear interest rates tied to the London Inter-Bank Offered Rate (“LIBOR”), as LIBOR rates increase our cost to sell our receivables also increases.

See ITEM 7A, “Quantitative and Qualitative Disclosures about Market Risk” for more information.

During fiscal 2020 and fiscal 2019, we sold approximately $740.0 million and $676.4 million, respectively, under these programs.

We had the ability to sell significantly more accounts receivable under these

programs if the needs of the business warranted.

Further extensions of customer payment terms will result in additional uses of cash flow or increased costs associated with the sales of accounts receivable.

In December 2017, we entered into a credit agreement that will expire in December 2022.

The credit agreement provides for an initial revolving credit facility of $100.0 million and, subject to certain requirements, gives us the ability to request increases of up to an incremental $100.0 million.

The credit agreement replaced our previous $30.0 million facility.

If receivables had not been sold, $505.1 million and $437.9 million of additional receivables would have been outstanding at December 26, 2020 and December 28, 2019, respectively, based on standard payment terms.

We had capacity to sell more accounts receivable under these programs if the needs of the business warranted, whether due to continued impacts of COVID-19 or other factors.

Further extensions of customer payment terms would result in additional uses of cash flow or increased costs associated with the sales of accounts receivable.

Credit Agreement

We have a credit agreement, expiring in December 2022, that provides for a revolving credit facility of $100.0 million and, subject to certain requirements, gives us the ability to request increases in revolving credit commitments of up to an additional $100.0 million.

Borrowings under the credit agreement are on an unsecured basis.

At the Company’s election, the interest rate applicable to revolving credit loans under the credit agreement will be either (1) the Prime Rate as announced by Wells Fargo from time to time, (2) an Adjusted LIBOR Market Index Rate as measured by the LIBOR Market Index Rate plus the Applicable Margin which fluctuates between 65 basis points and 125 basis points based on the ratio of the Company’s Consolidated Funded Debt to Consolidated EBITDA, or (3) an Adjusted LIBOR Rate as measured by the LIBOR Rate plus the Applicable Margin which fluctuates between 65 basis points and 125 basis points based on the ratio of the Company’s Consolidated Funded Debt to Consolidated EBITDA.

At the Company’s election, the interest rate applicable to borrowings under the credit agreement will be either (1) the Prime Rate as announced by Wells Fargo from time to time, (2) an Adjusted LIBOR Market Index Rate as measured by the LIBOR Market Index Rate plus the Applicable Margin which fluctuates between 65 basis points and 125 basis points based on the ratio of the Company’s Consolidated Funded Debt to Consolidated EBITDA, or

(3) an Adjusted LIBOR Rate as measured by the LIBOR Rate plus the Applicable Margin which fluctuates between 65 basis points and 125 basis points based on the ratio of the Company’s Consolidated Funded Debt to Consolidated EBITDA.

The interest rate at December 26, 2020 was LIBOR plus 65 basis points ( 0.80% ).

During the occurrence and continuance of an event of default, all outstanding revolving credit loans will bear interest at a rate per annum equal to 2.00% in excess of the greater of (1) the Prime Rate or (2) the Adjusted LIBOR Market Index Rate then applicable .

The credit agreement also contains covenants, including those related to the ratio of certain consolidated fixed cha r ges to consolidated EBITDA, capital expenditures, and share repurchases, each as defined by the credit agreement.

As of December 26 , 2020, we were not in default in respect to the credit agreement.

The credit agreement also contains covenants, including those related to the ratio of certain consolidated fixed charges to consolidated EBITDA, capital expenditures, and share repurchases, each as defined by the credit agreement.

The credit agreement also requires us to pay an unused fee of 0.10% on the average daily unused portion of the facility, provided the unused fee will not be charged on the first $30 million of the revolving credit facility.

As of December 28, 2019, there were no borrowings under the credit agreement and we had two outstanding letters of credit for approximately $0.8 million in the aggregate which were issued to secure ordinary course of business transactions.

The credit agreement also requires us to pay a fee of 0.10% on the average daily unused portion of the facility , provided the fee will not be charged on the first $30 million of the revolving credit facility .

As of December 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, we had approximately $ 99.2 million available under the credit agreement at December 26, 2020 .

Below is a table setting forth the key lines of our Consolidated Statements of Cash Flows:

For the Fiscal Year Ended

(in thousands)

December 26, 2020

December 28, 2019

Cash provided by operating activities

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Cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

During fiscal 2019, cash provided by operating activities was $95.3 million, primarily as a result of $83.8 million in net income, non-cash adjustments to net income of $30.1 million and a net increase in operating assets and liabilities of $18.5 million.

Net increase in cash and cash equivalents

During fiscal 2020, cash provided by operating activities was $152.0 million, primarily as a result of $106.9 million in net income, non-cash adjustments to net income of $28.1 million and a net decrease in working capital of $16.5 million.

Accrued customer rebates and returns increased $49.8 million due to higher sales volume in the second half of 2020 and timing of payments to customers.

Accounts payable increased by $25.3 million due to the timing of payments to our vendors.

Accounts receivable increased $67.4 million due to higher net sales.

Inventory increased $12.3 million due to higher inventory purchases to support new product launches and maintain customer fill rates.

Other assets and liabilities, net, decreased $21.1 million in fiscal 2020 primarily due to higher incentive compensation accruals.

Accounts receivable decreased $8.8 million due to the timing and factoring of receivables during the year.

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Other assets and liabilities, net, increased $6.3 million.

During fiscal 2018, cash provided by operating activities was $78.1 million, primarily as a result of $133.6 million in net income, non-cash adjustments to net income of $31.2 million and a net increase in operating assets and liabilities of $86.7 million.

Accounts receivable increased $61.4 million due to increased net sales, which were partially offset by increased accounts receivable sales.

Inventory increased $46.8 million due to higher inventory purchases to avoid potentially higher tariffs, to support new product launches and maintain customer fill rates as we consolidated facilities.

Accounts payable increased by $27.0 million due to increased inventory and the timing of payments to our vendors.

Other assets and liabilities, net, increased $0.2 million.

During fiscal 2017, cash provided by operating activities was $94.2 million, primarily as a result of $106.6 million in net income, non-cash adjustments to net income of $30.4 million and a net increase in operating assets

and liabilities of $ 42.7 million.

Accounts receivable increased $ 5.7 million due to increased net sales and the timing of cash receipts at year end.

Inventory increased $ 25.1 million due to higher inventory purchases to support new product launches and to improve customer fill rates.

Accounts payable increased by $ 3.7 million due to increased inventory and the timing of payments to our vendors.

Other assets and liabilities, net, increased $ 15.6 million primarily due to an increase in long-term core inventory and a decrease in customer rebates that we expect ed to settle in cash.

Investing activities used $29.6 million of cash in fiscal 2019, $59.1 million of cash in fiscal 2018, and $94.4 million of cash in fiscal 2017.

Capital spending in fiscal 2019 was primarily related to $7.8 million in tooling associated with new products, $6.3 million in enhancements and upgrades to our information systems and infrastructure, scheduled equipment replacements, certain facility improvements and other capital projects.

Capital spending in fiscal 2018 was primarily related to $8.5 million in tooling associated with new products, $6.8 million in enhancements and upgrades to our information systems and infrastructure, scheduled equipment replacements, certain facility improvements and other capital projects.

Capital spending in fiscal 2017 was primarily related to $11.2 million in tooling associated with new products, $7.7 million in enhancements and upgrades to our information systems, scheduled equipment replacements, certain facility improvements and other capital projects.

During fiscal 2018, we used $27.5 million to acquire all of the outstanding equity of Flight Systems and $5.0 million to acquire a minority interest in a vehicle diagnostic tool developer.

During fiscal 2017, we used $56.9 million to acquire the outstanding shares of MAS, $10.0 million to acquire a minority equity interest in a supplier, and $3.1 million to acquire certain assets of a chassis and suspension business.

Cash used in financing activities was $40.9 million in fiscal 2019, $46.9 million in fiscal 2018, and $77.3 million in fiscal 2017.

On December 12, 2013 we announced that our Board of Directors authorized a share repurchase program.

In fiscal 2019, we paid $39.4 million to repurchase 499,564 common shares.

In fiscal 2018, we paid $43.4 million to repurchase 622,223 common shares.

In fiscal 2017, we paid $74.7 million to repurchase 1,006,365 common shares.

The remaining uses of cash from financing activities in each period result from stock compensation plan activity and the repurchase of shares of our common stock held in a fund in our 401(k) Plan.

Investing activities used $30.3 million and $29.6 million of cash in fiscal 2020 and 2019, respectively.

Capital spending in fiscal 2020 primarily consisted of $5.6 million in tooling associated with new products, $5.9 million in enhancements and upgrades to our information systems and infrastructure, scheduled equipment replacements, certain facility improvements and other capital projects.

Capital spending in fiscal 2019 primarily consisted of $7.8 million in tooling associated with new products, $6.3 million in enhancements and upgrades to our information systems and infrastructure, scheduled equipment replacements, certain facility improvements and other capital projects.

During fiscal 2020, we used $14.8 million (net of cash acquired) to acquire the remaining equity in PTI.

Cash used in financing activities was $34.5 million and $40.9 million in fiscal 2020 and fiscal 2019, respectively.

In fiscal 2020, we paid $36.8 million to repurchase 439,275 common shares under our share repurchase program.

In fiscal 2019, we paid $39.4 million to repurchase 499,564 common shares under the program.

The remaining uses of cash from financing activities in each period result s from stock compensation plan activity and the repurchase of shares of our common stock held in a fund under our 401(k) Plan.

401(k) Plan participants can no longer purchase shares of Dorman common stock as an investment option under the 401(k) Plan.

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Letters of Credit

We have excluded from the table above contingent consideration related to the acquisition of MAS due to the uncertainty of the amount of payment.

As of December 28, 2019, the Company has accrued approximately $5.6 million which represents the fair value of the estimated payments which will become due if certain sales thresholds are achieved through December 2020 and will be paid out in 2021.

We have excluded the $2.8 million estimated accrual related to the underpayment of duties to the United States Customs & Border Protection since the ultimate resolution of this matter is uncertain and is not expected to be resolved within the next twelve months (see Note 11, Commitments and Contingencies included in this annual report Form 10-K).

We have excluded from the table above contingent consideration related to acquisitions due to the uncertainty of the amount of payment.

As of December 26, 2020, the Company has accrued approximately $8.0 million which represents the fair value of the estimated payments that will become due in connection with certain prior acquisitions if performance targets are achieved.

Additionally, we have excluded from the table above unrecognized tax benefits due to the uncertainty of the amount and period of payment.

As of December 28, 2019, the Company has gross unrecognized tax benefits of $2.3 million (see Note 10, Income Taxes, to the Consolidated Financial Statements included in this Annual Report on Form 10-K).

As of December 26, 2020, the Company has gross unrecognized tax benefits of $1.1 million.

(see Note 10, Income Taxes, to the Consolidated Financial Statements included in this Annual Report on Form 10-K).

Off-Balance Sheet Arrangements

Off-balance sheet arrangements are transactions, agreements, or other contractual arrangements with an unconsolidated entity for which we have an obligation to the entity that is not recorded in our consolidated financial statements.

We historically have not utilized off-balance sheet financial instruments, and do not plan to utilize off-balance sheet arrangements in the future to fund our working capital requirements, operations or growth plans.

We historically have not utilized off-balance sheet financial instruments, and currently do not plan to utilize off-balance sheet arrangements in the future to fund our working capital requirements, operations or growth plans.

We may issue stand-by letters of credit under our credit agreement.

Letters of credit totaling $0.8 million were outstanding at each of December 28, 2019 and December 29, 2018.

Letters of credit totaling $0.8 million were outstanding at both December 26, 2020 and December 28, 2019.

Those letters of credit are issued primarily to satisfy the requirements of workers compensation, general liability and other insurance policies.

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Related-Party Transactions

We have a non-cancelable operating lease for our primary operating facility from a partnership in which Steven L.

We have two non-cancelable operating leases for operating facilities from companies in which Steven L.

Berman, our Executive Chairman, and his family members are partners.

Total annual rental payments each year to the partnership under the lease arrangement were $1.6 million in each of fiscal 2019, fiscal 2018, and fiscal 2017.

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.

Total annual rental payments each year to those companies under the lease arrangements were $1.8 million and $1.6 million in fiscal 2020 and fiscal 2019, respectively.

In the opinion of our Audit Committee, the terms and rates of these leases are no less favorable than those which could have been obtained from an unaffiliated party when the leases were entered into and/or renewed.

We are a partner in a joint venture with one of our suppliers and we own a minority interest in two other suppliers .

Purchases from these companies, since we acquired our investment interests were $23.2 million in fiscal 2019 and $20.3 million in fiscal 2018 and $16.5 million in fiscal 2017.

Purchases from these companies , since we acquired our investment interests were $ 10.7 million in fiscal 2020 and $ 23.2 million in fiscal 2019 .

Critical Accounting Policies

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generally accepted accounting principles.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported

amounts of revenues and expenses.

We regularly evaluate our estimates and judgments, including those related to revenue recognition, customer rebates and returns, inventories, long-lived assets and purchase accounting.

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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 reasonably assured.

We record estimates for cash discounts, product returns, promotional rebates, core return deposits and other discounts in the period of the sale ("Customer Credits").

The provision for Customer Credits is recorded as a reduction from gross sales and reserves for Customer Credits are shown as an increase in accrued customer rebates and returns, which is included in current liabilities.

Actual Customer Credits have not differed materially from estimated amounts for each period presented.

We record estimates for cash discounts, defective and slow-moving product returns, promotional rebates, core return deposits, and other discounts in the period of the sale ("Customer Credits").

The provision for Customer Credits is recorded as a reduction from gross sales and reserves for Customer Credits are shown as an increase of accrued customer rebates and returns, which is included in current liabilities.

Customer Credits are estimated based on contractual provisions, historical experience, and our assessment of current market conditions.

Historically, actual Customer Credits have not differed materially from estimated amounts.

Amounts billed to customers for shipping and handling are included in net sales.

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We provide reserves for discontinued and excess inventory based upon historical demand, forecasted usage, estimated customer requirements and product line updates.

We maintain contact with our customer base in order to understand buying patterns, customer preferences and the life cycle of our products.

We maintain contact with our customer base to understand buying patterns, customer preferences and the life cycle of our products.

Changes in customer requirements are factored into the reserves, as needed.

Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets .

Long-lived assets, including property, plant, and equipment and amortizable identifiable intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

The impairment review is a two-step process.

First, recoverability is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset.

If the carrying amount exceeds the estimated undiscounted future cash flows, the second step of the impairment test is performed and an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds its fair value.

Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill is reviewed for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value of the goodwill may be impaired.

In regards to the annual test, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.

During fiscal 2019 and fiscal 2018, we assessed the qualitative factors which could affect the fair values of our reporting units and determined that it was not more likely than not that the fair values of each reporting unit was less than its carrying amount.

Purchase Accounting .

The purchase price of an acquired business is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based upon their respective fair market values, with any excess recorded as goodwill.

Such fair market value assessments require judgements and estimates which may change over time and may cause the final amounts to differ materially from their original estimates.

Such fair market value assessments require judgements and estimates which may change over time and may cause the final amounts to differ materially from original estimates.

Any adjustments to fair value assessments are recorded to goodwill over the purchase price allocation period which cannot exceed twelve months from the date of acquisition.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis