Dorman Products, Inc. 10-K

ITEM 8. Financial Statements and Supplementary Data. Our financial statement schedule that is filed with this Annual Report on Form 10-K is listed in PART IV – ITEM 15, “Exhibits, Financial Statement Schedules.” 35 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Dorman Products, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Dorman Products, Inc. and subsidiaries (the Company) as of December 26, 2020 and December 28, 2019, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three‑year period ended December 26, 2020, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 26, 2020 and December 28, 2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 26, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 26, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of December 30, 2018, due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) and ASU 2018-11, Leases (Topic 842) : Targeted Improvements. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 36 Accrual for customer credits for defective product returns As disclosed in Notes 1 and 12 to the consolidated financial statements, the Company estimates customer credits for defective product returns and other items. The accrual for customer credits to be issued for defective product returns includes assumptions about the length of time between when a sale occurs and a credit is issued. The provision for customer credits is reflected in the consolidated financial statements as a reduction from gross sales and accruals for customer credits are a portion of accrued customer rebates and returns. At December 26, 2020, accrued customer rebates and returns were $155,751 thousand. We identified the evaluation of the accrual for customer credits for defective product returns as a critical audit matter. Subjective auditor judgment was required to evaluate the Company’s determination of the impact of market conditions on the length of time between when a sale occurs and a credit is issued for defective product returns. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process to record the accrual for customer credits for defective product returns. This included a control related to the determination of the impact of market conditions on the length of time between when a sale occurs and a credit is issued for defective product returns. We assessed the Company’s accrual for customer credits for defective product returns by evaluating (1) the historical relationship between sales and customer credits for defective product returns, (2) the Company’s internal data, (3) certain external market data, and (4) a sample of executed third-party contracts. We inquired of personnel within the Company’s quality control department regarding the impact of current market conditions on the length of time between when a sale occurs and a credit is issued for defective product returns. We analyzed a sample of customer credits issued after year-end and evaluated their effect on the accrual. /s/ KPMG LLP We have served as the Company’s auditor since 2002. Philadelphia, Pennsylvania February 22, 2021 37 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended (in thousands, except per share data) December 26, 2020 December 28, 2019 December 29, 2018 Net sales $ 1,092,748 $ 991,329 $ 973,705 Cost of goods sold 709,632 651,504 600,424 Gross profit 383,116 339,825 373,281 Selling, general and administrative expenses 249,743 233,997 202,138 Income from operations 133,373 105,828 171,143 Other income (expense), net 2,363 ( 21 ) ( 8 ) Income before income taxes 135,736 105,807 171,135 Provision for income taxes 28,866 22,045 37,533 Net income $ 106,870 $ 83,762 $ 133,602 Earnings per share: Basic $ 3.31 $ 2.57 $ 4.04 Diluted $ 3.30 $ 2.56 $ 4.02 Weighted average shares outstanding: Basic 32,280 32,606 33,097 Diluted 32,373 32,688 33,207 See accompanying Notes to Consolidated Financial Statements. 38 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 26, 2020 December 28, 2019 Assets Current assets: Cash and cash equivalents $ 155,576 $ 68,353 Accounts receivable, less allowance for doubtful accounts of $ 1,260 and $ 957 in 2020 and 2019, respectively 460,878 391,810 Inventories 298,719 280,813 Prepaids and other current assets 7,758 13,614 Total current assets 922,931 754,590 Property, plant and equipment, net 91,009 101,837 Operating lease right-of-use assets 39,002 32,198 Goodwill 91,080 74,458 Intangible assets, net 25,207 21,305 Deferred tax asset, net 12,450 4,336 Other assets 38,982 52,348 Total assets $ 1,220,661 $ 1,041,072 Liabilities and shareholders' equity Current liabilities: Accounts payable $ 117,878 $ 90,437 Accrued compensation 19,711 9,782 Accrued customer rebates and returns 155,751 105,903 Other accrued liabilities 29,305 14,380 Total current liabilities 322,645 220,502 Long-term operating lease liabilities 37,083 29,730 Other long-term liabilities 3,555 13,297 Deferred tax liabilities, net 3,819 3,959 Commitments and contingencies (Note 11) Shareholders' equity: Common stock, par value $ 0.01 ; authorized 50,000,000 shares; issued and outstanding 32,168,740 and 32,558,168 shares in 2020 and 2019, respectively 322 326 Additional paid-in capital 64,085 52,605 Retained earnings 789,152 720,653 Total shareholders' equity 853,559 773,584 Total liabilities and shareholders' equity $ 1,220,661 $ 1,041,072 See accompanying Notes to Consolidated Financial Statements. 39 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Additional (in thousands, except share data) Shares Issued Par Value Paid-In Capital Retained Earnings Total Balance at December 30, 2017 33,571,524 $ 336 $ 44,812 $ 589,659 $ 634,807 Exercise of stock options 10,572 — 200 — 200 Compensation expense under Incentive Stock Plan — — 3,460 — 3,460 Purchase and cancellation of common stock ( 648,503 ) ( 7 ) ( 1,167 ) ( 44,177 ) ( 45,351 ) Issuance of non-vested stock, net of cancellations 83,891 1 1,798 — 1,799 Other stock related activity, net of tax ( 12,623 ) — ( 1,242 ) 348 ( 894 ) Net income — — — 133,602 133,602 Balance at December 29, 2018 33,004,861 330 47,861 679,432 727,623 Exercise of stock options 14,227 — 123 — 123 Compensation expense under Incentive Stock Plan — — 3,077 — 3,077 Purchase and cancellation of common stock ( 521,944 ) ( 5 ) ( 939 ) ( 40,395 ) ( 41,339 ) Issuance of non-vested stock, net of cancellations 69,826 1 1,376 — 1,377 Other stock related activity, net of tax ( 10,707 ) — 1,107 ( 2,146 ) ( 1,039 ) Net income — — — 83,762 83,762 Balance at December 28, 2019 32,556,263 326 52,605 720,653 773,584 Exercise of stock options 27,787 — 1,184 — 1,184 Compensation expense under Incentive Stock Plan — — 7,586 — 7,586 Purchase and cancellation of common stock ( 462,635 ) ( 5 ) ( 833 ) ( 37,838 ) ( 38,676 ) Issuance of non-vested stock, net of cancellations 53,572 1 3,462 — 3,463 Other stock related activity, net of tax ( 6,247 ) — 81 ( 533 ) ( 452 ) Net income — — — 106,870 106,870 Balance at December 26, 2020 32,168,740 $ 322 $ 64,085 $ 789,152 $ 853,559 See accompanying Notes to Consolidated Financial Statements. 40 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended (in thousands) December 26, 2020 December 28, 2019 December 29, 2018 Cash Flows from Operating Activities: Net income $ 106,870 $ 83,762 $ 133,602 Adjustments to reconcile net income to cash provided by operating activities: Depreciation, amortization and accretion 32,307 25,915 28,391 Gain on equity method investment ( 2,498 ) — — Provision (benefit) for doubtful accounts 316 39 ( 570 ) (Benefit) provision from deferred income taxes ( 9,599 ) 1,058 ( 58 ) Provision for stock-based compensation 7,586 3,077 3,460 Changes in assets and liabilities: Accounts receivable ( 67,369 ) 8,810 ( 61,413 ) Inventories ( 12,334 ) ( 10,956 ) ( 46,835 ) Prepaids and other current assets 5,353 ( 7,659 ) ( 853 ) Other assets ( 3,975 ) 1,672 ( 3,897 ) Accounts payable 25,251 ( 19,079 ) 26,957 Accrued customer rebates and returns 49,849 9,016 ( 5,173 ) Accrued compensation and other liabilities 20,209 ( 349 ) 4,501 Cash provided by operating activities 151,966 95,306 78,112 Cash Flows from Investing Activities: Acquisitions, net of cash acquired ( 14,808 ) — ( 28,040 ) Property, plant and equipment additions ( 15,450 ) ( 29,560 ) ( 26,106 ) Purchase of investments — — ( 5,000 ) Cash used in investing activities ( 30,258 ) ( 29,560 ) ( 59,146 ) Cash Flows from Financing Activities: Proceeds of revolving credit line 99,000 — — Payments of revolving credit line ( 99,000 ) — — Contingent consideration payments — — ( 2,036 ) Other stock related activity 3,007 365 249 Proceeds from exercise of stock options 1,184 123 201 Purchase and cancellation of common stock ( 38,676 ) ( 41,339 ) ( 45,352 ) Cash used in financing activities ( 34,485 ) ( 40,851 ) ( 46,938 ) Effect of exchange rate changes on Cash and Cash Equivalents — — ( 261 ) Net Increase (Decrease) in Cash and Cash Equivalents 87,223 24,895 ( 28,233 ) Cash and Cash Equivalents, Beginning of Period 68,353 43,458 71,691 Cash and Cash Equivalents, End of Period 155,576 $ 68,353 $ 43,458 Supplemental Cash Flow Information Cash paid for interest expense $ 753 $ 338 $ 250 Cash paid for income taxes $ 28,341 $ 28,923 $ 30,453 See accompanying Notes to Consolidated Financial Statements. 41 DORMAN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 2020 1. Summary of Significant Accounting Policies Dorman Products, Inc. ("Dorman", the "Company", “we”, “us”, or “our”) is a supplier of replacement parts and fasteners for passenger cars, light trucks, and heavy-duty trucks in the automotive aftermarket industry. We operate on a fifty-two, fifty-three week period ending on the last Saturday of the calendar year. The fiscal years ended December 26, 2020 (“fiscal 2020”), December 28, 2019 (“fiscal 2019”) and December 29, 2018 (“fiscal 2018”) were each fifty-two week periods. Principles of Consolidation . The Consolidated Financial Statements include our accounts and the accounts of our wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates in the Preparation of Financial Statements . The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents . We consider all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. Sales of Accounts Receivable . We have entered into 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 programs were accounted for as sales of accounts receivable and were removed from our Consolidated Balance Sheet at the time of the sales transactions. During fiscal 2020, fiscal 2019 and fiscal 2018, we sold $ 740.0 million, $ 676.4 million and $ 604.7 million, respectively, under these programs. Selling, general and administrative expenses include $ 13.2 million, $ 16.7 million and $ 14.5 million in fiscal 2020, fiscal 2019 and fiscal 2018, respectively, of financing costs associated with these accounts receivable sales programs. Inventories . Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method. Inventories include the cost of material, freight, direct labor and overhead utilized in the processing of our products. We provide reserves for discontinued and excess inventory based upon historical demand, forecasted usage, estimated customer requirements and product line updates. Property, Plant and Equipment . Property, plant and equipment are recorded at cost and depreciated over their estimated useful lives, which range from 3 to 39 years , using the straight-line method for financial statement reporting purposes and accelerated methods for income tax purposes. The costs of maintenance and repairs are expensed as incurred. Renewals and betterments are capitalized. Gains and losses on disposals are included in operating results. Estimated useful lives by major asset category are as follows: Buildings and building improvements 10 to 39 years Machinery, equipment and tooling 3 to 7 years Software and computer equipment 3 to 10 years Furniture, fixtures and leasehold improvements 7 to 39 years 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 42 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 regard 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 2020 and fiscal 2019, 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 value of our 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 the excess recorded as goodwill. Such fair market value assessments require judgments and estimates which may change over time and may cause the final amounts to differ materially from their original estimates. These 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. Other Assets . Other assets include primarily long-term core inventory, deposits, and equity method investments. Certain products we sell contain parts that can be recycled, or as more commonly referred to in our industry, remanufactured. We refer to these parts as cores. A used core is remanufactured and sold to the customer as a replacement for a unit inside a vehicle. Customers and end-users that purchase remanufactured products will generally return the used core to us, which we then use in the remanufacturing process to make another finished good. Our core inventory consists of used cores purchased and held in our facilities, used cores that are in the process of being returned from our customers and end-users, and remanufactured cores held in finished goods inventory at our facilities. Our products that utilize a core primarily include instrument clusters, hybrid batteries, radios, and climate control modules. Long-term core inventory was $ 19.6 million and $ 22.8 million as of December 26, 2020 and December 28, 2019, respectively. Long-term core inventory is recorded at the lower of cost or net realizable value. Cost is determined based on actual purchases of core inventory. We believe that the most appropriate classification of core inventory is a long-term asset. According to guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), current assets are defined as “assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.” The determination of the long-term classification is based on our view that the value of the cores is not expected to be consumed or realized in cash during our normal annual operating cycle. We have investments that we account for according to the equity method of accounting. The total book value of these investments was $ 8.5 million and $ 19.3 million as of December 26, 2020 and December 28, 2019, respectively. These investments provided us $ 1.3 million, $ 3.2 million and $ 2.2 million of income during fiscal 2020, fiscal 2019, and fiscal 2018, respectively. In January 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 of which we held equity investments with a fair value of $ 12.3 million. Additionally, in fiscal 2018 we purchased an investment that we account for according to the cost method of accounting. The carrying book value of this investment was $ 5.0 million as of December 26, 2020. Other Accrued Liabilities. Other accrued liabilities include primarily accrued commissions, accrued income taxes, insurance liabilities, product warranties, and other current liabilities. We warrant our products against certain defects in material and workmanship when used as designed on the vehicle on which it was originally installed. We offer a limited lifetime warranty on most of our products. Our warranty limits the end-user’s remedy to the repair or replacement of the part that is defective. Product warranty reserves, were immaterial as of December 26, 2020 and December 28, 2019, and are based upon experience and forecasts using the best historical and current claim information available. Provisions and payments related to end-user product warranty reserves were not material in fiscal 2020, fiscal 2019 or fiscal 2018. 43 Revenue Recognition and Accrued Customer Rebates and Returns . 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, 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. Actual Customer Credits have not differed materially from estimated amounts. 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. As noted above, Customer Credits include core return deposits which are an estimate of the amount we believe we will refund to our customers when used cores are returned to us. The price we invoice to customers for remanufactured cores contain both the amount we charge to remanufacture the part and a deposit for the core. We charge a core deposit to encourage the customer to return the used core to us so that it can be used in our remanufacturing process. We allow our customers up to twenty-four months to return the used core to us. Core return deposits are reserved based on the expected deposits to be issued to customers based on historical returns. Research and Development . Research and development costs are expensed as incurred. Research and development costs totaling $ 20.7 million in fiscal 2020, $ 21.0 million in fiscal 2019 and $ 20.1 million in fiscal 2018 have been recorded in selling, general and administrative expenses in the Consolidated Statements of Operations. Stock-Based Compensation . At December 26, 2020 and December 28, 2019, we had awards outstanding under two stock-based employee compensation plans, which are described more fully in Note 13, Capital Stock. We record compensation expense for all awards granted. The value of restricted stock and restricted stock units issued is based on the fair value of our common stock on the grant date. For performance-based restricted stock awards tied to growth in adjusted pre-tax income, compensation costs related to the stock 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 as of the reporting date. The fair value of performance-based restricted stock and performance-based restricted stock units, for which the performance measure is total shareholder return, was determined using a Monte Carlo simulation model. The fair value of stock options granted was determined using the Black-Scholes option valuation model on the grant date. Income Taxes . We follow the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the enacted tax rate expected to be in effect when taxes are actually paid or recovered. Unrecognized income tax benefits represent income tax positions taken on income tax returns that have not been recognized in the consolidated financial statements. The Company recognizes the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit is recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Additionally, we accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. Interest and penalties are classified as income tax expense in the Consolidated Statements of Operations. The Company does not anticipate material changes in the amount of unrecognized income tax benefits over the next year. Concentrations of Risk . Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents and accounts receivable. All cash equivalents are managed within established guidelines which limit the amount that may be invested with one issuer. A significant percentage of our accounts receivable have been, and will continue to be, concentrated among a relatively small number of automotive retailers and warehouse distributors in the United States. Our four largest customers accounted for 82 % and 80 % of net accounts receivable as of December 26, 2020 and December 28, 2019, respectively. We continually monitor the credit terms and credit limits to these and other customers. In fiscal 2020 and fiscal 2019, approximately 77 % and 79 %, respectively, of our products were purchased from suppliers located in a variety of foreign countries, with the largest portion coming from China. 44 Fair Value Disclosures . The carrying value of financial instruments such as cash and cash equivalents, accounts receivable, accounts payable, and other current assets and liabilities approximate their fair value based on the short-term nature of these instruments. Additionally, the fair value of assets acquired and liabilities assumed are determined at the date of acquisition. Contingent consideration associated with an acquisition is recorded at fair value at the acquisition date and is adjusted to fair value at each reporting period. 2. 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. Early adoption is permitted, including adoption in an interim period. 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. 3. Business Acquisitions and Investments Power Train Industries, Inc. On January 2, 2020, we acquired the remaining 60 % of the outstanding stock of PTI. The total purchase price 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 income (expense), net during the year ended December 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. Our measurement period adjustments for PTI were complete as of December 26, 2020. 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. 45 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. Flight Systems Automotive Group L.L.C. On August 31, 2018, we acquired 100 % of the outstanding stock of Flight Systems Automotive Group L.L.C. (“Flight Systems” or “Flight”), a privately-held manufacturer and remanufacturer of complex automotive electronics and diesel fuel system components, based in Lewisberry, Pennsylvania. The purchase price was $ 27.5 million. We believe complex electronics components represent important growth opportunities for us and Flight’s product portfolio delivers valuable alternatives to aftermarket professionals. 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 $ 7.4 million in goodwill, $ 4.1 million of identified intangibles, and $ 16.0 million of other net assets, primarily $ 2.0 million of accounts receivables, $ 8.4 million of inventory, $ 4.4 million of fixed assets, and $ 1.2 million of net other assets and liabilities. During the year ended December 28, 2019, we recorded measurement and period adjustments of approximately $ 1.9 million to increase goodwill, $ 0.7 million to decrease inventory, and $ 1.2 million to decrease identified intangibles. These measurement period entries are included in the balances above. Our measurement period adjustments for Flight were complete as of December 28, 2019. The valuation of the intangible assets acquired and related amortization periods are as follows: (in thousands) Valuation Amortization Period (in years) Customer relationships $ 3,400 8 Tradenames 460 5 Other 240 5 Total $ 4,100 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. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. The goodwill recognized is attributable primarily to strategic and synergistic opportunities related to existing automotive aftermarket businesses, the assembled workforce of Flight and other factors. The goodwill is expected to be deductible for tax purposes. The financial results of the acquisition have been included in the Consolidated Financial Statements since the date of acquisition. 4. Inventories Inventories were as follows: (in thousands) December 26, 2020 December 28, 2019 Bulk product $ 136,726 $ 114,308 Finished product 157,484 161,866 Packaging materials 4,509 4,639 Total $ 298,719 $ 280,813 46 5. Property, Plant and Equipment Property, plant and equipment include the following: (in thousands) December 26, 2020 December 28, 2019 Buildings $ 37,676 $ 37,513 Machinery, equipment and tooling 131,853 126,663 Furniture, fixtures and leasehold improvements 5,468 5,308 Software and computer equipment 84,922 80,397 Total 259,919 249,881 Less-accumulated depreciation and amortization ( 168,910 ) ( 148,044 ) Property, plant and equipment, net $ 91,009 $ 101,837 Depreciation and amortization expenses associated with property, plant, and equipment were $ 26.6 million, $ 25.4 million, and $ 25.4 million in fiscal 2020, fiscal 2019, and fiscal 2018, respectively. 6. Leases We determine whether an arrangement is a lease at inception. This determination generally depends on whether the arrangement conveys the right to control the use of an identified fixed asset explicitly or implicitly for a period of time in exchange for consideration. Control of an underlying asset is conveyed if we obtain the rights to direct the use of and to obtain substantially all of the economic benefit from the use of the underlying asset. We have operating leases for distribution centers, sales offices and certain warehouse and office equipment. Our operating leases have remaining lease terms of 1 to 11 years , many of which include one or more renewal options. We consider these renewal options in determining the lease term used to establish our right-of-use assets and lease liabilities when it is determined that it is reasonably certain that the renewal option will be exercised. Substantially all of our equipment leases and some of our real estate leases have terms of less than one year. Some of our operating lease agreements include variable lease costs, primarily taxes, insurance, common area maintenance or increases in rental costs related to inflation. Operating leases are included in the right-of-use lease assets, other current liabilities and long-term lease liabilities on the Consolidated Balance Sheet. Right-of-use assets and lease liabilities are recognized at each lease’s commencement date based on the present values of its lease payments over its respective lease term. When a borrowing rate is not explicitly available for a lease, our incremental borrowing rate is used based on information available at the lease’s commencement date to determine the present value of its lease payments. The incremental borrowing rate is not a commonly quoted rate and is derived through a combination of inputs including our credit rating and the impact of full collateralization. The incremental borrowing rate is based on our collateralized borrowing capabilities over a similar term of the lease payments. We utilized the consolidated group borrowing rate for all leases as we operate a centralized treasury operation. Operating lease payments are recognized on a straight-line basis over the lease term. We had no finance leases as of December 26, 2020 or December 28, 2019. Practical Expedients and Accounting Policy Elections In accordance with the guidance on leases and as permitted by the FASB, we have elected to use certain practical expedients and policy elections. - We have elected to include both lease and non-lease components as a single lease component, as non-lease components of contracts have not historically been material. - We have elected to account for leases with terms of one year or less as short-term leases and, as such, are not included in the right-of-use assets or lease liabilities. As of December 26, 2020 and December 28, 2019, there were no material variable lease costs or sublease income. Cash paid for operating leases was $ 7.7 million and $ 6.0 million during fiscal 2020 and fiscal 2019, respectively, which are classified in operating activities on the Consolidated Statements of Cash Flows. The following table summarizes the lease expense: 47 For the Year Ended (in thousands) December 26, 2020 December 28, 2019 Operating lease expense $ 7,732 $ 7,362 Short-term lease expense 3,647 4,547 Total lease expense $ 11,379 $ 11,909 Supplemental balance sheet information related to our operating leases is as follows: (in thousands) December 26, 2020 December 28, 2019 Operating lease right-of-use assets $ 39,002 $ 32,198 Other accrued liabilities $ 5,470 $ 5,348 Long-term operating lease liabilities 37,083 29,730 Total operating lease liabilities $ 42,553 $ 35,078 Weighted average remaining lease term (years) 8.94 10.83 Weighted average discount rate 5.55 % 6.32 % The following table summarizes the maturities of our lease liabilities for all operating leases as of December 26, 2020: (in thousands) December 26, 2020 2021 $ 7,346 2022 6,777 2023 5,041 2024 4,859 2025 4,581 2026 and thereafter 23,998 Total lease payments 52,602 Less: Imputed interest ( 10,049 ) Present value of lease liabilities $ 42,553 For the year ended December 29, 2018, minimum rental payments under operating leases were recognized on a straight-line basis over the term of the lease including any periods of free rent. Rent expense for operating leases, including short-term equipment and storage rentals, was $ 6.9 million in fiscal 2018. 7. Goodwill and Intangible Assets Goodwill Goodwill included the following: (in thousands) December 26, 2020 December 28, 2019 Balance at beginning of period $ 74,458 $ 72,606 Goodwill acquired 16,622 — Measurement period adjustment — 1,852 Balance at end of period $ 91,080 $ 74,458 48 Intangible Assets Intangible assets, subject to amortization, included the following: December 26, 2020 December 28, 2019 Intangible assets subject to amortization Weighted Average Amortization Period (years) Gross Carrying Value Accumulated Amortization Net Carrying Value Gross Carrying Value Accumulated Amortization Net Carrying Value (dollars in thousands) Customer relationships 8.7 $ 25,050 $ 7,141 $ 17,909 $ 20,450 $ 4,698 $ 15,752 Trade names 10.6 6,760 1,585 5,175 6,060 975 5,085 Technology 7.6 2,167 323 1,844 367 74 293 Other 3.4 430 151 279 240 65 175 Total $ 34,407 $ 9,200 $ 25,207 $ 27,117 $ 5,812 $ 21,305 Amortization expense associated with intangible assets was $ 3.4 million, $ 2.6 million and $ 2.3 million in fiscal 2020, fiscal 2019 and fiscal 2018, respectively. The estimated future amortization expense for intangible assets as of December 26, 2020, is summarized as follows: (in thousands) 2021 $ 3,384 2022 3,384 2023 3,384 2024 3,240 2025 3,062 Thereafter 8,753 Total $ 25,207 8. Long-Term Debt 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 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. During the occurrence and continuance of an event of default, as defined in the credit agreement, 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 charges to consolidated EBITDA, capital expenditures, and share repurchases, each as defined by the credit agreement. As of December 26, 2020, we were no t in default in respect to the credit agreement. 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. 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, which borrowings were made earlier in the year to help manage liquidity in light of the COVID-19 pandemic. Additionally, we paid $ 0.4 million in interest during the year. The average interest rate while the debt was outstanding was 1.41 %. As of December 26, 2020 and December 28, 2019, we had 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 as of December 26, 2020. 49 9. Related Party Transactions We lease our Colmar, PA facility and a portion of our Lewisberry, PA facility from entities in which Steven L. Berman, our Executive Chairman, and certain of his family members are owners. Each lease is a non-cancelable operating lease. Total rental payments to those entities under these lease arrangements were $ 1.8 million, $ 1.6 million, and $ 1.6 million in fiscal 2020, fiscal 2019 and fiscal 2018, respectively. The lease for our corporate headquarters in Colmar, PA was renewed during November 2016, effective as of January 1, 2018 , and will expire on December 31, 2022 . The lease for our Lewisberry, PA operating facility was signed in September 2020 and will expire on December 31, 2027 . In the opinion of our Audit Committee, the terms and rates of these leases were no less favorable than those which could have been obtained from an unaffiliated party when the lease for our corporate headquarters in Colmar, PA was renewed during November 2016 and when the lease for our Lewisberry, PA operating facility was signed in September 2020. We are a partner in a joint venture with one of our suppliers and own a minority interest in two other suppliers. Purchases from these companies, and from PTI prior to our full acquisition on January 2, 2020 were $ 10.7 million, $ 23.2 million and $ 20.3 million in fiscal 2020, fiscal 2019 and fiscal 2018, respectively. 10. Income Taxes The components of the income tax provision (benefit) are as follows: (in thousands) 2020 2019 2018 Current: Federal $ 33,698 $ 19,090 $ 33,362 State 4,276 2,091 2,618 Foreign 491 ( 194 ) 1,611 38,465 20,987 37,591 Deferred: Federal ( 8,475 ) 2,084 1,398 State ( 893 ) ( 280 ) 186 Foreign ( 231 ) ( 746 ) ( 1,642 ) ( 9,599 ) 1,058 ( 58 ) Total $ 28,866 $ 22,045 $ 37,533 The following is a reconciliation of income taxes at the statutory tax rate to the Company's effective tax rate: 2020 2019 2018 Federal taxes at statutory rate 21.0 % 21.0 % 21.0 % State taxes, net of federal tax benefit 2.0 1.3 1.3 Research and development tax credit ( 0.6 ) ( 0.5 ) ( 0.4 ) Federal permanent items ( 0.2 ) ( 0.3 ) ( 0.1 ) Effect of foreign operations 0.1 ( 1.1 ) ( 0.2 ) Other ( 1.0 ) 0.4 0.3 Effective tax rate 21.3 % 20.8 % 21.9 % At December 26, 2020, we had $ 1.1 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. 50 The following table summarizes the change in unrecognized tax benefits for the three years ended December 26, 2020: (in thousands) 2020 2019 2018 Balance at beginning of year $ 2,301 $ 2,390 $ 2,301 Reductions due to lapses in statutes of limitations — ( 200 ) ( 95 ) Reductions due to tax positions settled ( 1,308 ) — ( 368 ) Reductions due to reversals of prior year positions ( 202 ) ( 28 ) ( 4 ) Additions based on tax positions taken during the current period 269 139 556 Balance at end of year $ 1,060 $ 2,301 $ 2,390 We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of December 26, 2020, accrued interest and penalties related to unrecognized tax benefits were immaterial. Deferred income taxes result from timing differences in the recognition of revenue and expense between tax and financial statement purposes. The sources of temporary differences are as follows: (in thousands) December 26, 2020 December 28, 2019 Assets: Inventories $ 11,346 $ 9,545 Accounts receivable 16,452 10,695 Operating lease liability 9,352 7,273 Accrued expenses 3,550 1,974 Foreign tax credits 631 844 Total deferred tax assets 41,331 30,331 Valuation allowance ( 1,256 ) ( 844 ) Net deferred tax assets 40,075 29,487 Liabilities: Depreciation 10,586 10,296 Goodwill and intangible assets 12,419 11,742 Operating lease right of use asset 8,560 6,656 Other ( 121 ) 416 Gross deferred tax liabilities 31,444 29,110 Net deferred tax assets $ 8,631 $ 377 Based on our history of taxable income and our projection of future earnings, we believe that it is more likely than not that sufficient taxable income will be generated in the foreseeable future to realize the remaining net deferred tax assets. We file income tax returns in the United States, Canada, China, India, and Mexico. All years before 2017 are closed for U.S. federal tax purposes. Tax years before 2016 are closed for the states in which we file. Tax years before 2017 are closed for tax purposes in Canada. Tax years before 2017 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. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020 in response to the COVID-19 pandemic. The CARES Act, among other things, allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The CARES Act also includes provisions relating to increased interest expense deductibility, refundable payroll tax credits, deferment of employer social security payments, and technical corrections to tax depreciation methods for qualified improvement property. Most significant to the Company is the accelerated depreciation on qualified improvement property. The Company continues to monitor Coronavirus-related Federal and state relief opportunities. 51 11. Commitments and Contingencies Shareholders’ Agreement . A shareholders’ agreement was entered into in September 1990 and amended and restated on July 1, 2006. Under the agreement, each of the late Richard Berman, Steven Berman, Jordan Berman, Marc Berman, Fred Berman, Deanna Berman and additional shareholders named in the agreement has, among other things, granted the others of them rights of first refusal, exercisable on a pro rata basis or in such other proportions as the exercising shareholders may agree, to purchase shares of our common stock which any of them, or upon their deaths their respective estates, proposes to sell to third parties. We have agreed with these shareholders that, upon their deaths, to the extent that any of their shares are not purchased by any of these surviving shareholders and may not be sold without registration under the Securities Act of 1933, as amended (the "1933 Act"), we will use our best efforts to cause those shares to be registered under the 1933 Act. The expenses of any such registration will be borne by the estate of the deceased shareholder. The additional shareholders that are a party to the agreement are trusts affiliated with the late Richard Berman, Steven Berman, Jordan Berman, Marc Berman or Fred Berman, or each person’s respective spouse or children. CBP Matter . During 2019, we commenced a voluntary disclosure process in which we committed to disclosing to U.S. 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. Acquisitions. We have contingent consideration related to certain of our prior acquisitions due to the uncertainty of the ultimate amount of payment which will become due as earnout payments if performance targets are achieved. As of December 26, 2020 and December 28, 2019, we have accrued approximately $ 8.0 million and $ 5.6 million, respectively, which represents the fair value of the estimated payments that will become due in connection with these prior acquisitions if performance targets are achieved. During fiscal 2020 we increased this accrual by $ 2.4 million, primarily due to updates to the net sales attributable to the earnout period. In fiscal 2019, we reduced this accrual by $ 2.3 million, primarily due to updates in the assumptions used for forecasted net sales attributable to the earnout period. This accrual balance change during fiscal 2018 was immaterial. The changes in the accrual balance during fiscal 2020, fiscal 2019, and fiscal 2018 were included in Selling, General and Administrative expenses in each of the respective periods. If the performance targets are fully achieved, the remaining maximum contingent payments under these agreements would be $ 15.3 million. 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. 12. Revenue Recognition Business Description We are a supplier of replacement parts and fasteners for passenger cars, light trucks, and heavy-duty trucks in the automotive aftermarket. We group our products into four major classes: powertrain, automotive body, chassis, and hardware. Our products are sold primarily in the United States through automotive aftermarket retailers, including through their online platforms, national and regional local warehouse distributors and specialty markets, and salvage yards. We also distribute automotive replacement parts internationally, with sales primarily into Canada, Mexico, Europe, the Middle East, and Australia. 52 Our primary source of revenue is from contracts with and purchase orders from customers. In most instances, our contract with a customer is the customer’s purchase order. Upon acceptance of the purchase order, a contract exists with a customer as a sales agreement indicates approval and commitment of the parties, identifies the rights of both parties, identifies the payment terms, has commercial substance, and it is probable that we will collect the consideration to which we will be entitled in exchange for the goods transferred to the customer. For certain customers, we may also enter into a sales agreement which outlines pricing considerations as well as the framework of terms and conditions which apply to future purchase orders for that customer. In these situations, our contract with the customer is both the sales agreement as well as the specific customer purchase order. As our contract with a customer is typically for a single transaction or customer purchase order, the duration of the contract is typically one year or less. As a result, we have elected to apply certain practical expedients and omit certain disclosures of remaining performance obligations for contracts which have an initial term of one year or less as permitted by the FASB. 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 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, defective and slow-moving product returns, promotional rebates, core return deposits and other discounts in the period the related product revenue is recognized (“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. Customer Credits are estimated based on contractual provisions, historical experience, and our assessment of current market conditions. Actual Customer Credits 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 according to the definition in the new standard. All of our revenue was recognized under the point of time approach in accordance with U.S. generally accepted accounting principles during fiscal 2020, fiscal 2019 and fiscal 2018. Also, we do not have significant financing arrangements with our customers, as our credit terms are all less than one year . Lastly, we do not receive noncash consideration (such as materials or equipment) from our customers to facilitate the fulfillment of our contracts. Practical Expedients and Accounting Policy Elections In accordance with the guidance on revenue recognition and as permitted by the FASB, we have elected to use certain practical expedients and policy elections, as follows: - We have elected to not adjust the promised amount of consideration for the effects of a significant financing component as we expect, at contract inception, that the period between when we transfer a promised good or service to the customer and when the customer pays for that good or service will be one year or less. - We have elected to expense costs to obtain a contract as incurred when the expected period of benefit, and therefore the amortization period, is one year or less. - We have elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity for a customer, including sales, use, value-added, excise and various other taxes. - We have elected to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfilment activity rather than a separate performance obligation. 53 Disaggregated Revenue The following tables present our disaggregated net sales by type of major good / product line, and geography. For the Year Ended (in thousands) December 26, 2020 December 28, 2019 December 29, 2018 Powertrain $ 442,221 $ 395,975 $ 393,979 Chassis 324,399 297,350 278,584 Automotive Body 266,699 251,506 256,344 Hardware 59,429 46,498 44,798 Net Sales $ 1,092,748 $ 991,329 $ 973,705 For the Year Ended (in thousands) December 26, 2020 December 28, 2019 December 29, 2018 Net Sales to U.S. Customers $ 1,031,183 $ 929,908 $ 913,181 Net Sales to Non-U.S. Customers 61,565 61,421 60,524 Net Sales $ 1,092,748 $ 991,329 $ 973,705 During fiscal 2020, three customers (Advance, AutoZone and O’Reilly) each accounted for more than 10% of net sales and in the aggregate accounted for 56 % of net sales in fiscal 2020. In fiscal 2019 and fiscal 2018, four customers (Advance, AutoZone, NAPA, and O'Reilly) each accounted for more than 10% of net sales and in the aggregate accounted for approximately 66 % in fiscal 2019 and 63 % in fiscal 2018. 13. Capital Stock Controlling Interest by Officers, Directors and Family Members . As of both December 26, 2020 and December 28, 2019, Steven Berman, the Executive Chairman of the Company, and members of his family beneficially owned approximately 18 % of the outstanding shares of our common stock and can influence matters requiring approval of shareholders, including the election of the Board of Directors and the approval of significant transactions. Undesignated Stock . We have 50,000,000 shares authorized of undesignated capital stock for future issuance. The designation, rights and preferences of such shares will be determined by our Board of Directors. Incentive Stock Plan . Prior to May 16, 2018, we issued stock compensation grants under our 2008 Stock Option and Stock Incentive Plan. On May 16, 2018 , our shareholders approved our 2018 Stock Option and Stock Incentive Plan (the “2018 Plan” or the “Plan”), which supersedes our 2008 Stock Option and Stock Incentive Plan. All future stock compensation grants will be issued under the 2018 Plan. Under the terms of the Plan, our Board of Directors may grant up to 1,200,000 shares of common stock in the form of shares of restricted stock, restricted stock units, stock appreciation rights and stock options, or combinations thereof, to officers, directors, employees, consultants and advisors. Grants under the Plan must be made within ten years of the date the Plan was approved. Stock options are exercisable upon the terms set forth in each grant agreement approved by the Board of Directors, but in no event more than ten years from the date of grant. Restricted stock and restricted stock units vest in accordance with the terms set forth in each applicable award agreement approved by our Board of Directors. At December 26, 2020, 853,471 shares were available for grant under the Plan. Restricted Stock Awards and Restricted Stock Units Prior to March 2020, we issued awards of restricted stock to certain employees and members of our Board of Directors. Grants were made in the form of time-based restricted stock awards and performance-based restricted stock awards. For all restricted stock awards, we retain the restricted stock, and any dividends paid thereon, until the vesting restrictions have been met. For time-based restricted stock awards, compensation cost 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. Prior to 2019, we issued performance-based restricted stock awards tied to growth in adjusted pre-tax income. Compensation costs related to those awards 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 as of the reporting date. In 2019, we introduced performance-based restricted stock awards that vest based on our total shareholder return ranking relative to the S&P Mid-Cap 400 Growth Index over a three-year performance period. For those awards, compensation cost is recognized on a straight-line basis over the 54 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. This valuation technique includes estimating the movement of stock prices and the effects of volatility, interest rates and dividends. Beginning in March 2020, we began issuing restricted stock units to certain employees and members of our Board of Directors. For time-based restricted stock units, compensation cost 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. Also, in March 2020, we began issuing performance-based restricted stock units that vest based on our total shareholder return ranking relative to the S&P Mid-Cap 400 Growth Index over a three-year performance period. For performance-based restricted stock units tied to total shareholder return, compensation cost 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 as discussed in the paragraph above. The following table summarizes the weighted average valuation assumptions used to calculate the fair value of total shareholder return performance-based restricted stock awards and performance-based restricted stock units granted: For the Years Ended December 26, 2020 December 28, 2019 Share price $ 61.68 $ 82.03 Expected dividend yield 0.0 % 0.0 % Expected stock price volatility 31.5 % 27.7 % Risk-free interest rate 0.9 % 2.5 % Expected life 2.8 years 2.8 years The share price is the company’s closing share price as of the valuation date. The risk-free rate is based on the U.S. Treasury security with terms equal to the expected time of vesting as of the grant date. The weighted-average grant-date fair value of total shareholder return performance-based restricted stock units granted during fiscal 2020 was $ 65.09 . Compensation cost related to performance-based and time-based restricted stock awards and restricted stock units was $ 3.2 million, $ 2.1 million and $ 2.6 million in fiscal 2020, fiscal 2019 and fiscal 2018, respectively. The compensation costs were classified as selling, general and administrative expense in the Consolidated Statements of Operations. No cost was capitalized during fiscal 2020, fiscal 2019 or fiscal 2018. The following table summarizes our restricted stock awards and restricted stock unit activity for the three years ended December 26, 2020: Shares Weighted Average Price Balance at December 30, 2017 153,727 $ 59.94 Granted 89,798 $ 73.51 Vested ( 45,707 ) $ 62.56 Cancelled ( 27,081 ) $ 75.39 Balance at December 29, 2018 170,737 $ 63.94 Granted 92,396 $ 81.92 Vested ( 41,586 ) $ 55.72 Cancelled ( 44,056 ) $ 58.03 Balance at December 28, 2019 177,491 $ 76.70 Granted 83,875 $ 64.66 Vested ( 27,477 ) $ 71.25 Cancelled ( 16,154 ) $ 76.44 Balance at December 26, 2020 217,735 $ 72.77 As of December 26, 2020, there was approximately $ 6.9 million of unrecognized compensation cost related to unvested restricted stock and unvested restricted stock units, which is expected to be recognized over a weighted-average period of approximately 2.3 years. 55 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 awards and restricted stock units was immaterial for all periods presented. Stock Options We grant stock options to certain employees. We expense the grant-date fair value of stock options as compensation cost over the vesting or performance period. Compensation cost charged against income for stock options was $ 1.0 million , $ 0.7 million and $ 0.5 million in fiscal 2020, fiscal 2019 and fiscal 2018, respectively . The compensation costs were classified as selling, general and administrative expense in the Consolidated Statements of Operations. No cost was capitalized during fiscal 2020, fiscal 2019 or fiscal 2018. We used 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 is based on the U.S. Treasury security with terms equal to the expected time of exercise as of the grant date. The following table summarizes the weighted average valuation assumptions used to calculate the fair value of options granted and the associated weighted-average grant-date fair values: For the Years Ended December 26, 2020 December 28, 2019 December 29, 2018 Expected dividend yield 0 % 0 % 0 % Expected stock price volatility 29 % 28 % 27 % Risk-free interest rate 0.8 % 2.3 % 2.6 % Expected life of options 5.3 5.4 years 3.0 years Weighted-average grant-date fair value $ 17.84 $ 24.32 $ 15.88 The following table summarizes our stock option activity for the three years ended December 26, 2020: Shares Option Price per Share Weighted Average Price Weighted Average Remaining Terms (years) Aggregate Intrinsic Value Balance at December 30, 2017 122,547 $5.67 – $82.59 $ 57.74 Granted 81,995 $68.93 – $82.94 $ 73.84 Exercised ( 15,113 ) $5.67 – $78.64 $ 39.38 Cancelled ( 960 ) $ 72.55 $ 72.55 Balance at December 29, 2018 188,469 $7.74 – $82.94 $ 66.14 Granted 44,025 $73.72 – $84.93 $ 81.84 Exercised ( 38,009 ) $7.74 – $78.76 $ 58.96 Cancelled ( 12,773 ) $41.59 – $82.94 $ 75.52 Balance at December 28, 2019 181,712 $41.59 – $82.94 $ 70.78 Granted 109,352 $61.68 – $83.06 $ 63.25 Exercised ( 31,521 ) $41.59 – $82.94 $ 50.77 Cancelled ( 8,764 ) $61.68 – $74.21 $ 65.24 Balance at December 26, 2020 250,779 $41.59 – $84.93 $ 70.21 4.9 $ 4,847,742 Options exercisable at December 26, 2020 78,066 $41.59 – $84.93 $ 72.06 2.5 $ 1,366,281 As of December 26, 2020, there was approximately $ 2.3 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of approximately 2.8 years. 56 Cash received from option exercises was $ 1.2 million, $ 0.1 million, and $ 0.2 million in fiscal 2020, fiscal 2019 and fiscal 2018, respectively. The tax benefit generated from option exercises was immaterial for all periods presented. 2020 20192018 Employee Stock Purchase Plan. In May 2017, our shareholders approved the Dorman Products, Inc. Employee Stock Purchase Plan (the “ESPP”), which makes available 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. Beginning in March 2018, share purchases under the plan are made twice annually. There were 79,089 shares, 21,200 shares and 21,173 shares purchased under this plan during fiscal 2020, fiscal 2019 and fiscal 2018, respectively. Compensation cost under the ESPP plan was $ 3.3 million, $ 0.3 million and $ 0.4 million in fiscal 2020, fiscal 2019 and fiscal 2018, respectively. The tax benefit generated from ESPP purchases was $ 0.5 million in 2020. There was no tax benefit generated from ESPP purchases in fiscal 2019 or fiscal 2018. 401(k) Retirement Plan . The Dorman Products, Inc. 401(k) Retirement Plan and Trust (the “401(k) Plan”) is a defined contribution profit sharing and 401(k) plan covering substantially all of our employees as of December 26, 2020. Annual company contributions under the 401(k) Plan are determined by the Compensation Committee of our Board of Directors. Total expense related to the 401(k) Plan was $ 3.6 million, $ 3.1 million and $ 4.3 million in fiscal 2020, fiscal 2019 and fiscal 2018, respectively. At December 26, 2020, the 401(k) Plan held 195,368 shares of our common stock. Common Stock Repurchases. We periodically repurchase, at the then current market price, and cancel common stock issued to the 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. Shares are generally 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. The following table summarizes the repurchase and cancellation of common stock: For the Years Ended December 26, 2020 December 28, 2019 December 29, 2018 Shares repurchased and cancelled 23,360 22,380 26,280 Total cost of shares repurchased and cancelled (in millions) $ 1.9 $ 1.9 $ 2.0 Average price per share $ 81.12 $ 87.26 $ 74.79 Share Repurchase Program . On December 12, 2013 we announced that our Board of Directors authorized a share repurchase program, authorizing the repurchase of up to $ 10 million of our outstanding common stock by the end of 2014. Through several expansions and extensions, our Board of Directors has expanded the program up to $ 500 million and extended the program through December 31, 2022 . 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. At December 26, 2020, $ 207.1 million was available for repurchase under this program. The following table summarizes the repurchase and cancellation of common stock: For the Years Ended December 26, 2020 December 28, 2019 December 29, 2018 Shares repurchased and cancelled 439,275 499,564 622,223 Total cost of shares repurchased and cancelled (in millions) $ 36.8 $ 39.4 $ 43.4 Average price per share $ 83.73 $ 78.84 $ 69.73 14. Earnings Per Share Basic earnings per share was calculated by dividing our net income by the weighted average number of common shares outstanding during the period, excluding unvested restricted stock and unvested restricted stock units which are considered to be contingently issuable. To calculate diluted earnings per share, common share 57 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 o utstanding stock-based awards. Stock-based awards of approximately 35,975 shares, 92,000 shares and 116,000 shares were excluded from the calculation of diluted earnings per share as of December 26, 2020 , December 28, 2019 and December 29, 2018 , respectively, as their effect would have been anti-dilutive. The following table sets forth the computation of basic earnings per share and diluted earnings per share: For the Year Ended (in thousands, except per share data) December 26, 2020 December 28, 2019 December 29, 2018 Numerator: Net income $ 106,870 $ 83,762 $ 133,602 Denominator: Weighted average basic shares outstanding 32,280 32,606 33,097 Effect of compensation awards 93 82 110 Weighted average diluted shares outstanding 32,373 32,688 33,207 Earnings Per Share: Basic $ 3.31 $ 2.57 $ 4.04 Diluted $ 3.30 $ 2.56 $ 4.02 15. Business Segments We have determined that our business comprises a single reportable operating segment, namely, the sale of replacement parts and fasteners for passenger cars, light trucks, and heavy-duty trucks in the automotive aftermarket industry. Net sales to countries outside the United States, primarily to Canada and Mexico, and to a lesser extent into Europe, the Middle East, and Australia, in fiscal 2020, fiscal 2019 and fiscal 2018 were $ 61.6 million, $ 61.4 million and $ 60.5 million, respectively. 58 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None