What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-22 · 92 added, 123 removed, 174 unchanged (55% of the section changed)

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Discussions of fiscal 2019 results and comparisons of fiscal 2020 results to fiscal 2019 results can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in PART II, ITEM 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2020.

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.

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

As of December 25, 2021, we marketed approximately 118,000 distinct parts compared to approximately 81,000 as of December 26, 2020, many of which we designed and engineered.

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

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

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

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

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

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

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The introduction of new products and product lines to customers, as well as business acquisitions, may also 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.

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

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

The fiscal years ended December 26, 2020 (“fiscal 2020”), December 28, 2019 (“fiscal 2019”) and December 29, 2018 (“fiscal 2018”) were fifty-two week periods.

We operate on a 52-53-week period ended on the last Saturday of the calendar year.

The fiscal years ended December 25, 2021 (“fiscal 2021”), December 26, 2020 (“fiscal 2020”) and December 28, 2019 (“fiscal 2019”) were 52-week periods.

Business Performance Summary

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Impacts of COVID-19

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

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

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

In turn, all of our U.S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

While COVID-19 did not adversely affect demand for our products for the year ended December 25, 2021, during the period we did experience pandemic-related pressures in the global supply network that caused logistical issues, including higher freight costs, supplier lead time delays of products, and inflation with respect to materials and labor costs, which impacted our results.

We currently expect those pressures to continue to exist into fiscal 2022.

As countries continue to combat COVID-19, and as government-imposed regulations regarding, among other things, COVID-19 testing, vaccine mandates and related workplace restrictions change around the world, there is still a risk that the pandemic may impact the overall demand environment as well as our ability to maintain staffing at our facilities, to source parts and other materials to meet demand levels, to maintain inventory levels and to fulfill contractual requirements.

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

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

New Product Development

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In fiscal 2021, we introduced 4,315 new distinct parts to our customers and end-users, including 990 “New-to-the-Aftermarket” parts.

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

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

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

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

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

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

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

New vehicles contain an average of approximately 35 electronic modules, with some high-end luxury vehicles containing over 100 modules.

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

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

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During fiscal 2021, we introduced 87 distinct parts in this product line.

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

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

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

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

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

We expect to continue to invest in the medium- and heavy-duty product category, as evidenced by our acquisition of Dayton Parts in fiscal 2021.

Our growth is also impacted by acquisitions.

For example, on August 10, 2021, we acquired Dayton Parts, a manufacturer of chassis and other parts designed to serve the heavy-duty vehicle sector of the aftermarket.

See Note 2, Business Acquisitions and Investments under Notes to Consolidated Financial Statements for additional information.

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

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According to data published by Polk, a division of IHS Automotive, the average age of VIO increased to 12.2 years as of October 2021 from 12.0 years as of October 2020 despite increasing new car sales.

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 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.

Additionally, while the number of VIO in the United States increased 4% in 2021 to 291.9 million from 279.8 million in 2020, the number of VIO that are 11 years old or older decreased from 60% in 2020 to 57 % in 2021.

The number of miles driven is another important statistic that impacts our business.

According the U.S.

Department of Transportation, the number of miles driven through October 2021 increased 11.2% year over year.

Generally, as vehicles are driven more miles, the more likely it is that parts will fail and there will be increased demand for replacement parts, including our parts.

Brand Protection

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Discounts, Allowances, and Incentives

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

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

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

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

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

These discounts can be in the

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

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

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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.

dollar changes in value relative to those foreign currencies in the future, the prices charged by our suppliers for products under new purchase orders may change in equivalent U.S.

The largest portion of our overseas purchases comes from China.

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

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

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

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

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

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

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

dollar must be converted into U.S.

dollars using exchange rates for the current period.

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

Impact of Labor Market and Inflationary Costs

We have experienced broad-based inflationary impacts during the year ended December 25, 2021, due primarily to global transportation and logistics constraints, which have resulted in significantly higher

transportation costs;

material costs ;

and wage inflation from an increasingly competitive labor market.

We expect increased freight, higher labor costs and material inflation costs to continue to negatively impact our results through fiscal 2022 .

We attempt to offset inflationary pressures with cost saving initiatives, price increases to customers and the use of alternative suppliers.

Although we have implemented pass-through price increases to offset inflationary cost impacts, the price increases have often been implemented after we have experienced higher costs resulting in a lag effect to the full recovery of these costs.

Furthermore, pricing increases that we implemented to pass through the increased costs had no added profit dollars and consequently resulted in lower gross and operating margin percentages .

There can be no assurance that we will be successful in implementing pricing increases in the future to recover increased inflationary costs.

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.

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 the 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 2020 primarily through selling price increases to offset the higher tariffs incurred.

We expect to continue mitigating the impact of tariffs 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 temporary tariff relief for certain categories of products being imported from China.

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

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

In January 2020, the USTR granted temporary tariff relief for certain categories of products being imported from China.

The tariff relief granted by the USTR expired on most categories of products being imported from China at the end of 2020.

However, the USTR has publicly stated that it is considering reinstating temporary tariff relief on a subset of the previously exempt categories of products imported from China after October 12, 2021 following its review of public comments submitted to the USTR prior to December 1, 2021.

As of the date of this filing, the USTR has not reinstated exemptions from tariffs on the subset of previously exempt categories of products imported from China.

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 tariffs are reduced or tariff relief is granted.

Results of Operations

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Income from operations

Other income (expense), net

Interest expense, net

Other income, net

Income before income taxes

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Net sales increased 23% to $1,345.2 million in fiscal 2021 from $1,092.7 million in fiscal 2020.

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

The increase in net sales reflected the addition of Dayton Parts as well as robust customer demand across all our product channels.

Year-over-year net sales growth excluding Dayton Parts for fiscal 2021 was 16%.

The absence of the government imposed shut-downs that negatively impacted fiscal 2020 was also a significant contributor to the year-over-year growth.

Gross profit margin was 34.4% of net sales in fiscal 2021 compared to 35.1% of net sales in fiscal 2020.

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

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

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

Gross margin contraction was driven by broad-based inflationary impacts due to global transportation and logistics constraints and higher costs from fair value adjustments to inventory recorded in connection with the Dayton Parts acquisition in fiscal 2021.

These factors were partially offset by cost saving initiatives and price increases.

Additionally, we benefitted from the absence of out-of-pocket costs incurred due to the COVID-19 pandemic in fiscal 2020.

Selling, general and administrative expenses were $291.4 million, or 21.7% of net sales, in fiscal 2021 compared to $249.7 million, or 22.9% of net sales, in fiscal 2020.

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

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

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

The decrease in SG&A as a percentage of net sales was due to the operating leverage from the $252.5 million increase in net sales in fiscal 2021 as compared to fiscal 2020.

Additionally, we saw benefits in SG&A as a percentage of net sales from the absence of out-of-pocket costs related to the COVID-19 pandemic incurred in fiscal 2020.

These benefits were partially offset by wage and benefits inflation and costs related to the completion of the Dayton Parts acquisition and subsequent integration activities in fiscal 2021.

Our effective tax rate increased to 22.5% in fiscal 2021 from 21.3% in fiscal 2020.

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

The higher effective tax rate for fiscal 2021 was the result of higher state tax expense and nondeductible transaction costs related to the Dayton Parts acquisition.

The lower fiscal 2020 effective tax rate was the result of a nontaxable book gain and the write-off of a deferred tax liability in connection with our acquisition of the controlling interest in Power Train Industries, Inc.

(“PTI”) 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 certain customers.

Cash and cash equivalents at December 26, 2020 increased to $155.6 million from $68.4 million at December 28, 2019.

Cash and cash equivalents at December 25, 2021 decreased to $58.8 million from $155.6 million at December 26, 2020.

Working capital was $411.5 million at December 25, 2021 compared to $600.3 million at December 26, 2020.

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

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

We participate in accounts receivable sales programs with several customers that allow us to sell our accounts receivable to financial institutions to offset the

negative cash flow impact of these payment terms extensions.

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

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

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

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

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

During fiscal 2021 and fiscal 2020 , we sold approximately $ 935.8 million and $ 740.0 million, resp ectively, under these programs.

If receivables had not been sold, $ 598.8 million and $ 505.1 million of additional receivables would have been outstanding at December 25, 2021 and December 26, 2020 , respectively, based on standard payment terms.

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

We had capacity to sell more accounts receivable under these programs if the needs of the business warranted.

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

Credit Agreement

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

Borrowings under the credit agreement are on an unsecured basis.

At the Company’s election, the interest rate applicable to 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.

On August 10, 2021, in connection with the acquisition of Dayton Parts, we entered into a new credit agreement that provides for a $600 million revolving credit facility, including a letter of credit sub-facility of up to $60 million (the “New Facility”).

The New Facility replaced our previous $100 million revolving credit facility.

The New Facility matures on August 10, 2026, is guaranteed by the Company’s material domestic subsidiaries (together with the Company, the “Credit Parties”) and is supported by a security interest in substantially all of the Credit Parties’ personal property and assets, subject to certain exceptions.

Borrowings under the New Facility bear interest at a rate per annum equal to, at the Company’s option, either a LIBOR rate (subject to a 0.00% floor) or a base rate, in each case plus an applicable margin of, initially (i) in the case of LIBOR rate, 1.250% or (ii) in the case of base rate loans, 0.250%.

The applicable margin for (i) base rate loans ranges from 0.000% to 1.000% per annum and (ii) for LIBOR loans ranges from 1.000% to 2.000% per annum, in each case, based on the Total Net Leverage Ratio (as defined in the New Facility).

The interest rate at December 25, 2021 was LIBOR plus 125 basis points (1.35%).

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

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

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

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

As of December 26, 2020 , there were no borrowings under the credit agreement and two outstanding letters of credit for approximately $ 0.8 million in the aggregate which were issued to secure ordinary course of business transactions.

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

The commitment fee is initially equal to 0.150% and thereafter ranges from 0.125% to 0.250% based on the Total Net Leverage Ratio.

The New Facility contains affirmative and negative covenants, including, but not limited to, covenants regarding capital expenditures, share repurchases, and financial covenants related to the ratio of consolidated interest expense to consolidated EBITDA and the ratio of total net indebtedness to consolidated EBITDA, each as defined by the New Facility.

As of December 25, 2021, we were not in default with respect to the credit agreement.

As of December 25, 2021, there was $239.4 million in outstanding borrowings under the New Facility 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 outstanding borrowings and letters of credit, we had $359.8 million available under the New Facility at December 25, 2021.

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

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Cash used in investing activities

Cash used in financing activities

Net increase in cash and cash equivalents

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

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

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

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

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

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

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

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

Inventory increased $11.0 million due to higher inventory purchases to support new product launches and maintain customer fill rates as we consolidated facilities.

Accounts payable decreased by $19.1 million due to the timing of payments to our vendors.

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

Cash provided by (used in) financing activities

Effect of foreign exchange on cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

During fiscal 2021, cash provided by operating activities was $100.3 million compared to $152.0 million during fiscal 2020.

The $51.7 million decrease was driven by higher inventory purchases in the

current year to maintain customer fill rates and meet continued strong demand , partially offset by higher proceeds from accounts receivable due to higher sales of accounts receivable during the year.

Investing activities used $365.3 million and $30.3 million of cash in fiscal 2021 and 2020, respectively.

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

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

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

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

During fiscal 2021, we used $345.5 million to acquire Dayton Parts, net of cash acquired, and during fiscal 2020, we used $14.8 million to acquire the remaining 60% of the outstanding equity of PTI, net of cash acquired.

Financing activities provided cash of $168.2 million in fiscal 2021 and used cash of $34.5 million in fiscal 2020.

During fiscal 2021, we borrowed $252.4 million under the New Facility to help fund the acquisition of Dayton Parts in August 2021, and subsequently repaid $13.0 million of that borrowing during fiscal 2021.

Additionally, during fiscal 2021, we paid $61.5 million to repurchase 604,628 common shares under our share repurchase plan.

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

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

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

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

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.

Contractual Obligations and Commercial Commitments

We have obligations for future minimum rental payments and similar commitments under non-cancellable operating leases as well as contingent obligations related to outstanding letters of credit.

These obligations as of December 26, 2020 are summarized in the tables below (in thousands):

Payments Due by Period

Contractual Obligations

Operating leases

Amount of Commitment Expiration Per Period

Other Commercial Commitments

Letters of Credit

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

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

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

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

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

Off-Balance Sheet Arrangements

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

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

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

Total annual rental payments each year to those companies under the lease arrangements were $2.3 million and $1.8 million in fiscal 2021 and fiscal 2020, respectively.

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

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

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

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

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

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

Refer to Note 2 to the Consolidated Financial Statements for additional information.

New and Recently Adopted Accounting Pronouncements

Refer to Note 2, New and Recently Adopted Accounting Pronouncements, to the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, which is incorporated herein.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis