What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-26 compared with 2020-10-29 · 130 added, 161 removed, 127 unchanged (70% of the section changed)

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Such forward-looking statements are based on current expectations that involve a number of known and unknown risks, uncertainties and other factors (many of which are outside of our control) which may cause actual events to be materially different from those expressed or implied by such forward-looking statements.

These risks, uncertainties and other factors include, but are not limited to:

(i) competition in the automotive aftermarket industry;

(ii) unfavorable economic conditions;

These risks, uncertainties and other factors include, but are not limited to (i) the age, condition and number of vehicles that need servicing;

(ii) competition in the automotive aftermarket industry;

(iii) the loss or decrease in sales among one of our top customers;

(iv) customer consolidation in the automotive aftermarket industry;

(v) foreign currency fluctuations and our dependence on foreign suppliers;

(vi) extending credit to customers;

(vii) the loss of a key supplier;

(viii) limited customer shelf space;

(ix) reliance on new product development;

(x) changes in automotive technology and improvements in the quality of new vehicle parts;

(xi) inability to protect our intellectual property and claims of intellectual property infringement;

(xii) quality problems with products after their production and sale to customers;

(xiii) loss of third-party transportation providers on whom we depend;

(xiv) unfavorable results of legal proceedings;

(xv) our executive chairman and his family owning a significant portion of the Company;

(xvi) operations may be subject to quarterly fluctuations and disruptions from events beyond our control;

(xvii) cyber-attacks;

(xviii) imposition of taxes, duties or tariffs;

(xix) the level of our indebtedness;

(iv) price competition;

(v) limited customer shelf space;

(vi) customer consolidation;

(vii) widespread public health epidemics, including COVID-19;

(viii) failure to maintain sufficient inventory or anticipate changes in customer demand;

(ix) excess overstock inventory-related returns;

(x) the inability to purchase raw materials, components and other items from our suppliers;

(xi) the availability and cost of third-party transportation providers;

(xii) reliance on new product development;

(xiii) changes in, or restrictions on access to, automotive technology;

(xiv) quality problems with our products;

(xv) inability to protect our intellectual property;

(xvi) claims of intellectual property infringement;

(xvii) failure to maintain the value of our brands;

(xviii) cyber-attacks;

(xix) foreign currency fluctuations and dependence on foreign suppliers;

(xx) exposure to risks related to accounts receivable;

(xxi) the phaseout of LIBOR or the impact of the imposition of a new reference rate;

(xxii) volatility in the market price of our common stock and potential securities class action litigation;

(xxiii) losing the services of our executive officers or other highly qualified and experienced contributors;

(xxiv) the inability to identify suitable acquisition candidates, complete acquisitions or integrate acquisitions successfully;

(xxv) the effects of widespread public health epidemics, including COVID-19;

and (xxvi) the failure to maintain sufficient inventory to meet customer demand or failure to anticipate future changes in customer demands.

(xxi) changes in U.S.

trade policy, including the imposition of tariffs;

(xxii) the level of our indebtedness;

(xxiii) risks related to accounts receivable sales agreements;

(xxiv) the phaseout of LIBOR or the impact of the imposition of a new reference rate;

(xxv) our executive chairman and his family owning a significant portion of the Company;

(xxvi) unfavorable economic conditions;

(xxvii) quarterly fluctuations and disruptions from events beyond our control;

(xxviii) unfavorable results of legal proceedings;

(xxix) volatility in the market price of our common stock and potential securities class action litigation;

(xxx) losing the services of our executive officers or other highly qualified and experienced Contributors;

(xxxi) the inability to identify suitable acquisition candidates, complete acquisitions or integrate acquisitions successfully;

(xxxii) changes in tax laws;

(xxxiii) global climate change and related regulations;

(xxxiv) violations of anti-bribery laws;

and (xxxv) import and export control and economic sanctions laws and regulations.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected.

See the “Statement Regarding Forward Looking Statements,” Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019 and Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q 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.

See the “Statement Regarding Forward Looking Statements,” PART I, ITEM 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2020 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.

The Company is under no obligation to, and expressly disclaims any such obligation to, update any of the information in this document, including but not limited to any situation where any forward-looking statement later turns out to be inaccurate whether as a result of new information, future events or otherwise.

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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 distinct stock keeping units (“SKU’s”) as compared to approximately 77,000 as of December 29, 2018, many of which we designed and engineered.

This number excludes private label SKU’s and other variations in how we market, package and distribute our products, includes distinct SKU’s of acquired companies, and reflects distinct SKU’s 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.

As of December 26, 2020, we marketed approximately 81,000 distinct parts, 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.

We are one of the leading aftermarket suppliers of original equipment (“OE”) “dealer exclusive” parts.

OE “dealer exclusive” parts are those parts which 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, complex electronics modules and exhaust gas recirculation (EGR) coolers.

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 online platforms, 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.

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

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.

In the second quarter of 2020, the productivity levels at the new facility improved and costs began returning to typical levels, in-line with our expectations.

We expect our distribution costs to continue to moderate back to more typical levels as we move through the remainder of 2020, subject to the impact of COVID-19.

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

Fasteners include such items as oil drain plugs, wheel bolts, and wheel lug nuts.

For the year ended December 26, 2020, approximately 75% of our products were sold under brands that we own, and the remainder of our products were sold for resale under customers' private labels, other brands or in bulk.

Our products are sold primarily in the United States

through automotive aftermarket retailers (such as Advance Auto Parts, Inc.

(“Advance”), AutoZone, Inc.

(“AutoZone”), and O'Reilly Automotive, Inc.

(“O’Reilly”)), including through their online platforms;

national, regional and local warehouse distributors (such as Genuine Parts Co.

– NAPA (“NAPA”));

and specialty markets, and salvage yards.

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

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

Our 2020 fiscal year will be a fifty-two-week period that will end on December 26, 2020.

Our fiscal 2019 was a fifty-two-week period that ended on December 28, 2019.

Our 2021 fiscal year will be a fifty-two-week period that will end on December 25, 2021 (“fiscal 2021”).

Our fiscal 2020 was a fifty-two-week period that ended on December 26, 2020 (“fiscal 2020”).

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, 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.

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.

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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 social distancing and robust sanitization practices at our facilities.

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.

As previously disclosed, in late March, 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 in April due to government-imposed restrictions, we saw a rapid recovery as the second quarter progressed with May orders flat to prior year and June orders up significantly above prior year.

We continued to see an increase in orders in the third quarter, where sales performance reached a record high for the Company.

However, as government-imposed restrictions vary across the United States and continue to change , it remains difficult to determine the full impact that the pandemic will have on the overall demand environment.

Correspondingly, to the extent there may be fluctuations in demand as a result of the pandemic, 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.

Dorman’s balance sheet remains healthy and strong, enabling us to take the following actions in the third quarter:

We decreased the levels of receivables collected under our factoring program by $104 million, returning to historical levels, with total factoring costs down $3 million from the same quarter last year.

In June 2020 we repaid the $99.0 million drawdown that we made under our revolving credit facility at the end of March 2020 to enhance our liquidity.

During the first quarter of fiscal 2020, we suspended share repurchases under our share repurchase program in light of COVID-19;

however, we resumed such repurchases in August 2020.

As a result of these actions, as of September 26, 2020, we had no amounts drawn under our revolving credit facility (excluding $0.8 million of issued but undrawn letters of credit) and approximately $170.5 million in cash and cash equivalents.

We believe that our asset-light model and level of liquidity position us well to navigate the current economic disruption associated with the ongoing COVID-19 pandemic.

During the third quarter, we estimate a negative impact of $0.03 to diluted EPS for out-of-pocket costs related to the 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 adjust our operations according to guidelines from local, state and federal officials.

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.

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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 2,310 new distinct SKU’s t o our customers and end users during the nine months ended September 26, 2020 , including 1,000 n ew-to-the-aftermarket SKU’s.

We introduced 5,239 distinct SKU’s to our customers and end users in the fiscal year ended December 28, 2019 , including 1,625 new-to-the-aftermarket SKU’s.

In the three months ended March 27, 2021, we introduced 658 new distinct parts to our customers and end-users, including 203 “New-to-the-Aftermarket” parts.

We introduced 3,479 distinct parts to our customers and end-users in the fiscal year ended December 26, 2020, including 1,433 “New-to-the-Aftermarket” parts.

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.

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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 the nine months ended September 26, 2020, we introduced 367 SKU’s in this product line.

During the three months ended March 27, 2021, we introduced 29 distinct parts in this product line.

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

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Economic Factors

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 (“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.

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 US VIO subsegment (eight to thirteen-year-old vehicles) commencing in 2016.

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

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.

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 COVID-19 pandemic in general, as well as executive orders issued by certain states in response to the COVID-19 pandemic are having an adverse impact on work-related and personal travel.

In fact, according to a report cited by the Auto Care Association, data indicates that the number of miles driven daily was down 44% as of May 1, 2020 when compared to February 2, 2020.

However, the low point in the number of miles driven daily was down 57% as of mid-April when compared to February 2, 2020, and the number of miles driven daily has slowly increased since that low point.

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.

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We operate in a highly competitive market.

As a result, we are continuously evaluating our approach to brand protection.

As a result, we are continuously evaluating our approach to brand, pricing and terms to our different customers and channels.

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, return allowances and other 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.

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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, and allowances for warranty and overstock returns may also be provided.

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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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.

In addition, 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.

Change-over costs include the costs related to removing the new customer’s existing inventory (purchased from their previous supplier) and replacing it with Dorman inventory, which is commonly referred to as a stock-lift.

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

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Foreign Currency

Our products are purchased from suppliers in the U.S.

and 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.

Accordingly, we generally do not have exposure to fluctuations in the relationship between the U.S.

dollar and various foreign currencies between the time of execution of the purchase order and payment for the product.

To the extent the U.S.

dollar and various foreign currencies between the time of execution of the purchase order and payment for the

To the extent that the U.S.

dollar changes in value relative to foreign currencies in the future, the price of the product for new purchase orders may change in equivalent U.S.

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Impact of Inflation

The overall impact of inflation has not resulted in a significant change in labor costs or the cost of general services utilized.

The overall impact of inflation has not historically resulted in a significant change in labor costs or the cost of general services utilized.

The cost of 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.

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 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.

In the third quarter of 2018, the Office of the United States Trade Representative (USTR) began imposing additional tariffs on products imported from China, including many of our products, ranging from 7.5% to 25%.

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

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 2021 primarily through selling price increases to offset the higher tariffs incurred.

Tariffs are not expected to have a material impact on our net income but are expected to increase net sales and lower our gross and operating profit margins to the extent that these additional costs are passed through to customers.

In January 2020, the U.S.

and Chinese governments signed a trade deal that reduced some U.S.

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.

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

In January 2020, the USTR 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 generally 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.

Results of Operations

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Three Months Ended*

Nine Months Ended*

(in millions)

September 26, 2020

September 28, 2019

September 26, 2020

September 28, 2019

March 27, 2021

March 28, 2020

Cost of goods sold

Selling, general and administrative

Selling, general and administrative expenses

Income from operations

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Provision for income taxes

* Amounts and percentage of sales information does not add due to rounding

Three Months Ended September 26, 2020 Compared to Three Months Ended September 28, 2019

Net sales increased 18.4% to $300.6 million for the three months ended September 26, 2020 from $253.8 million for the three months ended September 28, 2019.

The increase in net sales was primarily organic and driven by increased volumes during the quarter.

Gross profit margin was 35.9% of net sales for the three months ended September 26, 2020 compared to 34.2% of net sales for the three months ended September 28, 2019.

The gross profit margin was higher primarily due to improved productivity at our Portland, TN distribution facility as well as lower provisions for excess and obsolete inventory as our efforts to improve our end-to-end supply chain began to show results.

Selling, general and administrative expenses were $63.0 million, or 21.0% of net sales, for the three months ended September 26, 2020 compared to $60.0 million, or 23.6% of net sales, for the three months ended September 28, 2019.

Approximately 270 basis points of the decrease in selling, general and administrative expense as a percentage of net sales was due to improved leverage from the $47 million increase in net sales as compared to the third quarter of 2019.

Additionally, the Company drove operating cost savings from productivity improvements in our Portland, TN distribution facility, as well as reduced travel expenses stemming from COVID-19 restrictions.

Our effective tax rate was 23.5% for the three months ended September 26, 2020 compared to 21.1% for the three months ended September 28, 2019.

The increase in effective tax rate in the third quarter of 2020 is primarily due to the impact of foreign operations.

Nine Months Ended September 26, 2020 Compared to Nine Months Ended September 28, 2019

Net sales increased 5.3% to $791.5 million for the nine months ended September 26, 2020 from $751.8 million for the nine months ended September 28, 2019.

The increase in net sales was primarily organic and driven by increased volumes specifically within the third quarter.

Gross profit margin was 34.3% of net sales for the nine months ended September 26, 2020 compared to 34.8% of net sales for the nine months ended September 28, 2019.

The gross profit margin was lower primarily due to incremental costs associated with COVID-19, including costs related to safety measures implemented at our sites and our COVID-19 sick leave policy, and higher customer provisions in 2020 as compared to 2019.

Selling, general and administrative expenses were $184.3 million, or 23.3% of net sales, for the nine months ended September 26, 2020 compared to $177.6 million, or 23.6% of net sales, for the nine months ended September 28, 2019.

The decrease in selling, general and administrative expense as a percentage of net sales during the period was primarily due to productivity improvements in our Portland distribution facility, as well as reduced travel expenses stemming from COVID-19 restrictions.

Other Income, net was $2.3 million for the nine months ended September 26, 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 was 21.0% for the nine months ended September 26, 2020 compared to 21.2% for the nine months ended September 28, 2019.

* Percentage of sales information may not add due to rounding

Three Months Ended March 27, 2021 Compared to Three Months Ended March 28, 2020

Net sales increased 12% to $288.0 million for the three months ended March 27, 2021 from $257.7 million for the three months ended March 28, 2020.

The increase in net sales was all organic and driven by robust customer demand.

Gross profit margin was 36.3% of net sales for the three months ended March 27, 2021 compared to 32.9% of net sales for the three months ended March 28, 2020.

Gross margin expansion was driven by increased efficiencies as part of the Company’s ongoing efforts to streamline its end-to-end supply chain processes.

Additionally, the Company benefitted from the absence of increased customer provisions that impacted gross margin in the three months ended March 28, 2020.

These benefits were partially offset by increased freight costs due to global transportation and logistics constraints.

Selling, general and administrative expenses were $62.9 million, or 21.8% of net sales, for the three months ended March 27, 2021 compared to $59.7 million, or 23.2% of net sales, for the three months ended March 28, 2020.

Approximately 170 basis points of the decrease in SG&A as a percentage of net sales was due to improved leverage from the $30 million increase in net sales in the three months ended March 27, 2021 as compared to the three months ended March 28, 2020.

Additionally, the Company drove increased operational efficiencies, which were partially offset by increased wage and benefit inflation as compared to the prior year quarter.

Our effective tax rate was 21.3% for the three months ended March 27, 2021 compared to 17.8% for the three months ended March 28, 2020.

The lower effective tax rate for the three months ended March 28, 2020 was the result of a tax benefit related to the write-off of a deferred tax liability associated with PTI upon our acquisition of the controlling interest in January 2020, and a foreign tax credit carry-back claim.

Liquidity and Capital Resources

Historically, our primary sources of liquidity have been our invested cash and the cash flow we generate from our operations, including accounts receivable sales programs provided by our customers.

Cash and cash equivalents at September 26, 2020 increased to $170.5 million from $68.4 million at December 28, 2019.

Cash and cash equivalents at March 27, 2021 increased to $166.6 million from $155.6 million at December 26, 2020.

The increase primarily related to cash provided from operating activities.

Working capital was $591.5 million at September 26, 2020 compared to $534.1 million at December 28, 2019.

Working capital was $631.2 million at March 27, 2021 compared to $600.3 million at December 26, 2020.

Based on our current operating plan, we believe that our sources of available capital are adequate to meet our ongoing cash needs for at least the next twelve months.

However, our liquidity could be negatively affected by extending payment terms to customers, a decrease in demand for our products, the outcome of contingencies or other factors, including the impact of the COVID-19 pandemic.

See Note 7, “Commitments and Contingencies”, in the accompanying condensed consolidated financial statements for additional information regarding commitments and contingencies that may affect our liquidity.

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.

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

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Quantitative and Qualitative Disclosures about Market Risk for more information.

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

During the nine months ended September 26, 2020 and September 28, 2019, we sold approximately $568.3 million and $530.7 million of accounts receivable, respectively, under these programs.

The increase in sales of accounts receivable reflects our efforts to enhance our liquidity in the second quarter of 2020 in light of COVID-19.

In the third quarter of 2020, we decreased the levels of receivables sold under these programs by $104 million, returning to more historical levels.

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

During the three months ended March 27, 2021 and March 28, 2020, we sold $209.9 million and $151.3 million of accounts receivable, respectively, under these programs.

If receivables had not been sold over the previous twelve months, approximately $511 million and $505 million of additional accounts receivable would have been outstanding at March 27, 2021 and December 26, 2020, respectively, based on our standard payment terms.

We have capacity to sell increased levels of accounts receivable under our available programs if liquidity needs arise, whether due to continued impacts of COVID-19 or other factors.

3 unchanged sentences

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 September 26, 2020 was LIBOR plus 65 basis points (0.80%).

The interest rate at March 27, 2021 was LIBOR plus 65 basis points (0.76%).

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 charges to consolidated EBITDA, capital expenditures, and share repurchases, each as defined by the credit agreement.

As of March 27, 2021, we were not 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.

In March 2020, we took proactive steps to increase our cash position and preserve financial flexibility in light of uncertainties from the COVID-19 pandemic by drawing down $99.0 million from the revolving credit facility.

Early in the third quarter of 2020, we repaid the $99.0 million of outstanding borrowings under this revolving credit facility.

As of September 26, 2020, 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.

Net of these letters of credit, there was approximately $99.2 million available under the credit agreement at September 26, 2020.

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

We paid $0.2 million and $0.4 million in interest during the three and nine months ended September 26, 2020, respectively.

As of March 27, 2021, there were no borrowings under the credit agreement and two outstanding letters of credit for $0.8 million in the aggregate which were issued to secure ordinary course of business transactions.

Net of these letters of credit, we had $99.2 million available under the credit agreement at March 27, 2021.

The following summarizes the activities included in the Condensed Consolidated Statements of Cash Flows:

Nine Months Ended

Three Months Ended

(in thousands)

September 26, 2020

September 28, 2019

March 27, 2021

March 28, 2020

Cash provided by operating activities

Cash used in investing activities

Cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

During the nine months ended September 26, 2020, cash provided by operating activities was $145.7 million compared to cash provided by operating activities of $59.7 million during the nine months ended September 26, 2019.

The $86 million increase was driven by the favorable effects of higher accounts payable and accrued liabilities, due to the timing of payments, partially offset by the negative effects of higher accounts receivable during the nine months ended September 26, 2020.

Investing activities used cash of $ 26.4 million and $24.7 million during the nine months ended September 26, 2020 and September 28, 2019, respectively.

Cash usage for investing activities was $1.7 million higher during the nine months ended September 26, 2020, as lower cash used for capital expenditures was more than offset by cash used for the acquisition of PTI.

Financing activities used $17.2 million of cash during the nine months ended September 26, 2020 compared to $24.3 million of cash used during the nine months ended September 28, 2019.

During the nine months ended September 26, 2020, we paid $16.2 million to repurchase 218,836 common shares under our share repurchase plan.

During the nine months ended September 28, 2019, we paid $22.8 million to repurchase 272,564 common shares under the share repurchase plan.

Cash (used in) provided by financing activities

Net increase in cash and cash equivalents

During the three months ended March 27, 2021, cash provided by operating activities was $21.0 million compared to cash provided by operating activities of $18.6 million during the three months ended March 28, 2020.

The $2.4 million increase was driven by an increase in net income of $9.9 million, higher proceeds from accounts receivable mostly attributable to higher factoring, and lower outflows from accounts payable and accrued liabilities, due to the timing of payments, partially offset by higher inventory to maintain customer fill rates during the three months ended March 27, 2021.

Investing activities used cash of $ 6.2 million and $18.0 million during the three months ended March 27, 2021 and March 28, 2020 , respectively.

During the three months ended March 28, 2020 we used $18.1 million to acquire the remaining 60% of the outstanding equity of PTI , net of $3.5 million of cash acquired.

Financing activities used $3.8 million of cash during the three months ended March 27, 2021, compared to $92.8 million of cash provided during the three months ended March 28, 2020.

During the three months ended March 27, 2021, we paid $3.0 million to repurchase 36,000 common shares under our share repurchase plan.

During the three months ended March 28, 2020, we paid $5.5 million to repurchase 91,979 common shares under the share repurchase plan.

During the three months ended March 28, 2020, we drew down $99.0 million on our revolving credit facility, which was later repaid during the third quarter of 2020.

The remaining uses of cash from financing activities in each period result primarily from the repurchase of our common stock from our 401(k) Plan.

In light of COVID-19, during the first quarter of fiscal 2020, we temporarily suspended repurchases under the previously disclosed share repurchase program approved by our board of directors.

We resumed our repurchase program in August 2020.

During the nine months ended September 26, 2020, we experienced no material changes to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 28, 2019.

New and Recently Adopted Accounting Pronouncements

Please refer to Note 15, New and Recently Adopted Accounting Pronouncements, in the Notes to Condensed Consolidated Financial Statements.

During the three months ended March 27, 2021, we experienced no material changes to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 26, 2020.

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-Q

Item 2. Management’s Discussion and Analysis