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.” 39 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 25, 2021 and December 26, 2020, the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 25, 2021, 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 25, 2021 and December 26, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 25, 2021, 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 25, 2021, 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, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. 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 matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate 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 critical audit matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 40 Accrual for customer credits for defective product returns As disclosed in Notes 1 and 11 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 25, 2021, accrued customer rebates and returns were $188,080 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. Fair value of customer relationships intangible asset As discussed in Note 2 to the consolidated financial statements, on August 10, 2021, the Company acquired 100% of the equity interests of Dayton Parts (“Dayton”), in a business combination. The Company acquired a customer relationships intangible asset associated with the generation of future income from Dayton’s existing customers. The estimated acquisition-date fair value for the customer relationships intangible asset was approximately $124,100 thousand. The Company used a multiperiod excess earnings valuation methodology to determine the estimated fair value of the customer relationships intangible asset. We identified the evaluation of the estimated fair value of the customer relationships intangible asset acquired in the Dayton business combination as a critical audit matter. There was a high degree of subjective auditor judgment related to certain assumptions used in the valuation model. These assumptions included the forecasted revenue growth rates, customer attrition rate, and the discount rate applied. In addition, valuation professionals with specialized skill and knowledge were also required to perform sensitivity analyses to assist us in determining the significant assumptions used to value the customer relationships intangible asset, assess certain assumptions, and evaluate evidence obtained. 41 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 acquisition-date valuation process, including controls related to the development of the above assumptions. We evaluated the amount and timing of forecasted revenue growth rates used by the Company by comparing them to publicly available information for comparable companies, industry reports, and historical results. We involved valuation professionals with specialized skills and knowledge, who assisted in: • performing sensitivity analyses over the Company’s assumptions used to determine the estimated fair value of the customer relationships intangible asset to assess the impact of changes in those assumptions on the Company’s determination of fair value • evaluating the expected customer attrition rate used in the determination of fair value, by comparing it to an independently developed attrition rate using historical sales data • assessing the discount rate used in the determination of fair value, by comparing it to a discount rate that was independently developed using publicly available market data for comparable entities. /s/ KPMG LLP We have served as the Company’s auditor since 2002. Philadelphia, Pennsylvania February 22, 2022 42 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME For the Year Ended (in thousands, except per share data) December 25, 2021 December 26, 2020 December 28, 2019 Net sales $ 1,345,249 $ 1,092,748 $ 991,329 Cost of goods sold 882,333 709,632 651,504 Gross profit 462,916 383,116 339,825 Selling, general and administrative expenses 291,365 249,743 233,997 Income from operations 171,551 133,373 105,828 Interest expense, net 2,162 599 231 Other income, net ( 377 ) ( 2,962 ) ( 210 ) Income before income taxes 169,766 135,736 105,807 Provision for income taxes 38,234 28,866 22,045 Net income $ 131,532 $ 106,870 $ 83,762 Other comprehensive income: Change in foreign currency translation adjustment $ ( 1,440 ) $ — $ — Comprehensive Income $ 130,092 $ 106,870 $ 83,762 Earnings per share: Basic $ 4.13 $ 3.31 $ 2.57 Diluted $ 4.12 $ 3.30 $ 2.56 Weighted average shares outstanding: Basic 31,810 32,280 32,606 Diluted 31,961 32,373 32,688 See accompanying Notes to Consolidated Financial Statements. 43 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 25, 2021 December 26, 2020 Assets Current assets: Cash and cash equivalents $ 58,782 $ 155,576 Accounts receivable, less allowance for doubtful accounts of $ 1,326 and $ 1,260 472,764 460,878 Inventories 531,988 298,719 Prepaids and other current assets 13,048 7,758 Total current assets 1,076,582 922,931 Property, plant and equipment, net 114,864 91,009 Operating lease right-of-use assets 59,029 39,002 Goodwill 197,332 91,080 Intangible assets, net 178,809 25,207 Deferred tax asset, net — 12,450 Other assets 46,503 38,982 Total assets $ 1,673,119 $ 1,220,661 Liabilities and shareholders' equity Current liabilities: Accounts payable $ 177,389 $ 117,878 Accrued compensation 26,636 19,711 Accrued customer rebates and returns 188,080 155,751 Revolving credit facility 239,360 — Other accrued liabilities 33,583 29,305 Total current liabilities 665,048 322,645 Long-term operating lease liabilities 52,443 37,083 Other long-term liabilities 4,916 3,555 Deferred tax liabilities, net 17,976 3,819 Commitments and contingencies (Note 10) Shareholders' equity: Common stock, par value $ 0.01 ; authorized 50,000,000 shares; issued and outstanding 31,607,509 and 32,168,740 shares in 2021 and 2020, respectively 316 322 Additional paid-in capital 77,451 64,085 Retained earnings 856,409 789,152 Accumulated other comprehensive loss ( 1,440 ) — Total shareholders' equity 932,736 853,559 Total liabilities and shareholders' equity $ 1,673,119 $ 1,220,661 See accompanying Notes to Consolidated Financial Statements. 44 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Additional Accumulated Other (in thousands, except share data) Shares Issued Par Value Paid-In Capital Retained Earnings Comprehensive Loss Total 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 Exercise of stock options 41,700 — 2,455 — — 2,455 Compensation expense under Incentive Stock Plan — — 8,228 — — 8,228 Purchase and cancellation of common stock ( 617,080 ) ( 6 ) ( 1,111 ) ( 61,639 ) — ( 62,756 ) Issuance of non-vested stock, net of cancellations 28,914 — 3,261 — — 3,261 Other stock related activity, net of tax ( 14,765 ) — 533 ( 2,636 ) — ( 2,103 ) Other comprehensive loss — — — — ( 1,440 ) ( 1,440 ) Net income — — — 131,532 — 131,532 Balance at December 25, 2021 31,607,509 $ 316 $ 77,451 $ 856,409 $ ( 1,440 ) $ 932,736 See accompanying Notes to Consolidated Financial Statements. 45 DORMAN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended (in thousands) December 25, 2021 December 26, 2020 December 28, 2019 Cash Flows from Operating Activities: Net income $ 131,532 $ 106,870 $ 83,762 Adjustments to reconcile net income to cash provided by operating activities: Depreciation, amortization and accretion 35,193 32,307 25,915 Gain on equity method investment — ( 2,498 ) — Provision for doubtful accounts 181 316 39 (Benefit) provision from deferred income taxes ( 11,970 ) ( 9,599 ) 1,058 Provision for stock-based compensation 8,228 7,586 3,077 Payment of contingent consideration ( 2,418 ) — — Changes in assets and liabilities: Accounts receivable 10,918 ( 67,369 ) 8,810 Inventories ( 153,823 ) ( 12,334 ) ( 10,956 ) Prepaids and other current assets ( 2,680 ) 5,353 ( 7,659 ) Other assets ( 5,004 ) ( 3,975 ) 1,672 Accounts payable 47,000 25,251 ( 19,079 ) Accrued customer rebates and returns 31,275 49,849 9,016 Accrued compensation and other liabilities 11,906 20,209 ( 349 ) Cash provided by operating activities 100,338 151,966 95,306 Cash Flows from Investing Activities: Acquisitions, net of cash acquired ( 345,483 ) ( 14,808 ) — Property, plant and equipment additions ( 19,840 ) ( 15,450 ) ( 29,560 ) Cash used in investing activities ( 365,323 ) ( 30,258 ) ( 29,560 ) Cash Flows from Financing Activities: Proceeds of revolving credit line 252,360 99,000 — Payments of revolving credit line ( 13,000 ) ( 99,000 ) — Payment of contingent consideration ( 7,982 ) — — Payment of debt issuance costs ( 4,215 ) — — Other stock related activity 1,266 3,007 365 Proceeds from exercise of stock options 2,455 1,184 123 Purchase and cancellation of common stock ( 62,649 ) ( 38,676 ) ( 41,339 ) Cash provided by (used in) financing activities 168,235 ( 34,485 ) ( 40,851 ) Effect of exchange rate changes on Cash and Cash Equivalents ( 44 ) — — Net (Decrease) Increase in Cash and Cash Equivalents ( 96,794 ) 87,223 24,895 Cash and Cash Equivalents, Beginning of Period 155,576 68,353 43,458 Cash and Cash Equivalents, End of Period 58,782 $ 155,576 $ 68,353 Supplemental Cash Flow Information Cash paid for interest expense $ 1,782 $ 753 $ 338 Cash paid for income taxes $ 46,225 $ 28,341 $ 28,923 See accompanying Notes to Consolidated Financial Statements. 46 DORMAN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 25, 2021 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 and light-, medium-, and heavy-duty trucks in the automotive aftermarket industry. We operate on a 52-53-week period ending 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 each 52-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 (“GAAP”) 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 2021, fiscal 2020 and fiscal 2019, we sold $ 935.8 million, $ 740.0 million and $ 676.4 million, respectively, under these programs. Selling, general and administrative expenses include financing costs associated with these accounts receivable sales programs of $ 11.7 million, $ 13.2 million and $ 16.7 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Financing costs are impacted both by interest rates and the timing of when accounts receivable are sold in comparison to the original due dates of those accounts receivable. 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 the 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 47 Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets . Long-lived assets, including property, plant, and equipment and amortizable identifiable intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The impairment review is a two-step process. First, recoverability is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds the estimated undiscounted future cash flows, the second step of the impairment test is performed, and an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds its fair value. The assets and liabilities of a disposal group classified as held for sale 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 would no longer be depreciated. 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. For 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 2021 and fiscal 2020, we assessed the qualitative factors which could affect the fair values of our reporting unit 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 12 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 $ 20.8 million and $ 19.6 million as of December 25, 2021 and December 26, 2020, 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 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 $ 9.4 million and $ 8.5 million as of December 25, 2021 and December 26, 2020, respectively. These investments provided us $ 4.6 million, $ 1.3 million and $ 3.2 million of income during fiscal 2021, fiscal 2020, and fiscal 2019, respectively. In January 2020, we 48 acquired the remaining 60 % of the outstanding stock of Power Train Industrie s, 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, we have 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 both December 25, 2021 and 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 25, 2021 and December 26, 2020 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 2021, fiscal 2020 or fiscal 2019. 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 contains 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 $ 23.1 million, $ 20.7 million and $ 21.0 million have been recorded in selling, general and administrative expenses in the Consolidated Statements of Operations for fiscal 2021, fiscal 2020, and fiscal 2019, respectively. Stock-Based Compensation . At December 25, 2021 and December 26, 2020, we had awards outstanding under two stock-based employee compensation plans, which are described more fully in Note 12, Capital Stock. We record compensation expense for all awards granted. The value of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) issued was based on the fair value of our common stock on the grant date. For performance-based RSAs 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 RSUs, for which the performance measure is total shareholder return, is determined using a Monte Carlo simulation model. The fair value of stock options granted is 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 49 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 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 71 % and 82 % of net accounts receivable as of December 25, 2021 and December 26, 2020, respectively. We continually monitor the credit terms and credit limits to these and other customers. In fiscal 2021 and fiscal 2020, approximately 74 % and 77 %, respectively, of our products were purchased from suppliers located in a variety of foreign countries, with the largest portion coming from China. 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. Business Acquisitions and Investments DPL Holding Corporation (“Dayton Parts”) On August 10, 2021, we acquired 100 % of the equity interests of Dayton Parts, a manufacturer of chassis and other parts designed to serve the heavy-duty vehicle sector of the aftermarket for a purchase price of $ 344.9 million in cash (net of $ 8.8 million of acquired cash), after certain customary post-acquisition purchase price adjustments. The acquisition was funded by cash on hand as well as through the refinancing of our revolving credit facility discussed further in Note 7. The transaction was accounted for as a business combination under the acquisition method of accounting. We have allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. During the year ended December 25, 2021, we recorded measurement and period adjustments of approximately $ 2.1 million to decrease goodwill, $ 0.6 million to decrease the purchase price due to customary net working capital adjustments, $ 0.1 million to increase other current liabilities, and $ 1.6 million to decrease deferred tax liabilities. Our measurement period adjustments for Dayton Parts were complete as of December 25, 2021 . 50 The table below details the fair values of the assets acquired and the liabilities assumed at the acquisition date , including applicable measurement period adjustments : (in thousands) Accounts receivable $ 23,216 Inventories 79,625 Prepaids and other current assets 2,302 Property, plant and equipment 29,900 Goodwill 106,816 Identifiable intangible assets 160,400 Operating lease right-of-use assets 21,248 Other assets 848 Accounts payable ( 11,970 ) Accrued compensation ( 2,784 ) Other current liabilities ( 7,604 ) Long-term operating lease liabilities ( 18,444 ) Deferred tax liabilities ( 38,665 ) Net cash consideration $ 344,888 The estimated valuation of the intangible assets acquired, and related amortization periods are as follows: (in thousands) Fair Value Amortization Period (in years) Customer relationships $ 124,100 20 Product portfolio 25,300 20 Trade names 11,000 10 Total $ 160,400 The fair values assigned to intangible assets were estimated by discounting expected cash flows based on the relief from royalty and multi-period excess earnings valuation methodologies. These valuation methods rely on management judgment, including expected future cash flows resulting from existing customer relationships, customer attrition rates, contributory effects of other assets utilized in the business, royalty rates and other factors. The goodwill recognized is attributable primarily to strategic and synergistic opportunities related to the Company’s and Dayton Parts’ existing automotive aftermarket businesses, the assembled workforce of Dayton Parts 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 consolidated financial statements since the date of acquisition. The net sales and net income of Dayton Parts included in the consolidated financial statements for the fiscal year ended December 25, 2021 were $ 78.0 million and $ 0.0 million, respectively. The unaudited pro forma information for the periods set forth below gives effect to the Dayton Parts acquisition as if it had occurred as of December 28, 2019, the beginning of the fiscal 2020 period. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition been consummated as of that time. For the Year Ended (in thousands, unaudited) December 25, 2021 December 26, 2020 Net sales $ 1,468,415 $ 1,260,077 Net income $ 147,090 $ 100,334 Diluted earnings per share $ 4.60 $ 3.10 51 The fiscal 2021 unaudited pro forma net income set forth above was adjusted to exclude the impact of acquisition date fair value adjustments to inventory, and to also remove acquisition-related transaction costs. The 2020 unaudited pro forma net income was adjusted to include the impact of these items. 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. 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 Consolidated Financial Statements since the date of acquisition . 3. Inventories Inventories were as follows: (in thousands) December 25, 2021 December 26, 2020 Raw materials $ 12,746 $ — Bulk product 225,879 136,726 Finished product 287,415 157,484 Packaging materials 5,948 4,509 Total $ 531,988 $ 298,719 52 4. Property, Plant and Equipment Property, plant and equipment include the following: (in thousands) December 25, 2021 December 26, 2020 Buildings $ 58,788 $ 37,676 Machinery, equipment and tooling 146,999 131,853 Furniture, fixtures and leasehold improvements 7,303 5,468 Software and computer equipment 90,471 84,922 Total 303,561 259,919 Less-accumulated depreciation and amortization ( 188,697 ) ( 168,910 ) Property, plant and equipment, net $ 114,864 $ 91,009 Depreciation and amortization expenses associated with property, plant, and equipment were $ 26.3 million, $ 26.6 million, and $ 25.4 million in fiscal 2021, fiscal 2020, and fiscal 2019, respectively. 5. 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 the asset and to obtain substantially all of the economic benefit from its use. 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 10 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 commonly quoted 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 material finance leases as of December 25, 2021 or December 26, 2020. Practical Expedients and Accounting Policy Elections We have made certain accounting policy elections and are using certain practical expedients permitted under GAAP, as follows: • Include both lease and non-lease components as a single lease component, as non-lease components of contracts have not historically been material. • 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 25, 2021 and December 26, 2020 there were no material variable lease costs or sublease income. Cash paid for operating leases was $ 9.2 million, $ 7.7 million and $ 6.0 million during 53 fiscal 2021 , 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 : For the Year Ended (in thousands) December 25, 2021 December 26, 2020 December 28, 2019 Operating lease expense $ 9,549 $ 7,732 $ 7,362 Short-term lease expense 3,172 3,647 4,547 Total lease expense $ 12,721 $ 11,379 $ 11,909 Supplemental balance sheet information related to our operating leases is as follows: (in thousands) December 25, 2021 December 26, 2020 Operating lease right-of-use assets $ 59,029 $ 39,002 Other accrued liabilities $ 10,065 $ 5,470 Long-term operating lease liabilities 52,443 37,083 Total operating lease liabilities $ 62,508 $ 42,553 Weighted average remaining lease term (years) 7.55 8.94 Weighted average discount rate 3.73 % 5.55 % The following table summarizes the maturities of our lease liabilities for all operating leases as of December 25, 2021: (in thousands) December 25, 2021 2022 $ 12,097 2023 10,388 2024 8,933 2025 7,374 2026 7,293 Thereafter 26,867 Total lease payments 72,952 Less: Imputed interest ( 10,444 ) Present value of lease liabilities $ 62,508 In February of 2022, we signed a binding letter of intent for warehouse and distribution services that increases future lease payments for operating leases by a total of approximately $ 53 million over 12 years . 6. Goodwill and Intangible Assets Goodwill Goodwill included the following: (in thousands) December 25, 2021 December 26, 2020 Balance at beginning of period $ 91,080 $ 74,458 Goodwill acquired 108,945 16,622 Measurement period adjustments for Dayton acquisition ( 2,130 ) — Foreign currency translation ( 563 ) — Balance at end of period $ 197,332 $ 91,080 54 Intangible Assets Intangible assets, subject to amortization, included the following: December 25, 2021 December 26, 2020 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 18.6 $ 149,150 $ 12,139 $ 137,011 $ 25,050 $ 7,141 $ 17,909 Trade names 10.0 17,760 2,592 15,168 6,760 1,585 5,175 Product Portfolio 19.9 25,300 460 24,840 — — — Technology 6.9 2,167 571 1,596 2,167 323 1,844 Other 2.7 430 236 194 430 151 279 Total $ 194,807 $ 15,998 $ 178,809 $ 34,407 $ 9,200 $ 25,207 Amortization expense associated with intangible assets was $ 6.5 million, $ 3.4 million and $ 2.6 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. The estimated future amortization expense for intangible assets as of December 25, 2021, is summarized as follows: (in thousands) 2022 $ 11,954 2023 11,954 2024 11,810 2025 11,453 2026 10,418 Thereafter 121,220 Total $ 178,809 7. Long-Term Debt 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 and 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 commitment fee is initially equal to 0.150 % and thereafter ranges from 0.125 % to 0.250 % based on the Total Net Leverage Ratio. As of December 25, 2021, the interest rate on the outstanding borrowings under the New Facility was 1.35 % and the commitment fee was 0.15 %. 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 New Facility. 55 8. 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 $ 2.3 million, $ 1.8 million, and $ 1.6 million in fiscal 2021, fiscal 2020 and fiscal 2019, 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 . 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 $ 18.9 million, $ 10.7 million and $ 23.2 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. 9. Income Taxes The components of the income tax provision (benefit) are as follows: For the Year Ended (in thousands) December 25, 2021 December 26, 2020 December 28, 2019 Current: Federal $ 43,374 $ 33,698 $ 19,090 State 5,755 4,276 2,091 Foreign 1,075 491 ( 194 ) 50,204 38,465 20,987 Deferred: Federal ( 9,609 ) ( 8,475 ) 2,084 State ( 1,368 ) ( 893 ) ( 280 ) Foreign ( 993 ) ( 231 ) ( 746 ) ( 11,970 ) ( 9,599 ) 1,058 Total $ 38,234 $ 28,866 $ 22,045 The following is a reconciliation of income taxes at the statutory tax rate to the Company's effective tax rate: For the Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Federal taxes at statutory rate 21.0 % 21.0 % 21.0 % State taxes, net of federal tax benefit 2.1 2.0 1.3 Research and development tax credit ( 0.4 ) ( 0.6 ) ( 0.5 ) Federal permanent items — ( 0.2 ) ( 0.3 ) Effect of foreign operations ( 0.2 ) 0.1 ( 1.1 ) Other — ( 1.0 ) 0.4 Effective tax rate 22.5 % 21.3 % 20.8 % At December 25, 2021, we had $ 1.2 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. 56 The following table summarizes the change in unrecognized tax benefits for the three years ended December 25, 2021: For the Year Ended (in thousands) December 25, 2021 December 26, 2020 December 28, 2019 Balance at beginning of year $ 1,060 $ 2,301 $ 2,390 Reductions due to lapses in statutes of limitations — — ( 200 ) Reductions due to tax positions settled — ( 1,308 ) — Reductions due to reversals of prior year positions ( 30 ) ( 202 ) ( 28 ) Additions based on tax positions taken during the current period 174 269 139 Balance at end of year $ 1,204 $ 1,060 $ 2,301 We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of December 25, 2021, 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 25, 2021 December 26, 2020 Assets: Inventories $ 13,689 $ 11,346 Accounts receivable 18,589 16,452 Operating lease liability 14,526 9,352 Accrued expenses 7,515 3,671 Net operating losses 1,892 304 Foreign tax credits 469 631 State tax credits 819 625 Capital loss carryforward 467 — Total deferred tax assets 57,966 42,381 Valuation allowance ( 1,837 ) ( 1,256 ) Net deferred tax assets 56,129 41,125 Liabilities: Depreciation 14,541 10,586 Goodwill and intangible assets 45,522 12,419 Operating lease right of use asset 13,733 8,560 Other 309 929 Gross deferred tax liabilities 74,105 32,494 Net deferred tax (liabilities) assets $ ( 17,976 ) $ 8,631 A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. When determining the amount of net deferred tax assets that are more likely than not to be realized, the Company assesses all positive and negative evidence. This evidence includes, but is not limited to, prior earnings history, expected future earnings, carryback and carryforward periods and the feasibility of ongoing tax strategies that could potentially enhance the likelihood of the realization of the deferred tax asset. Management has determined it was necessary to establish a valuation allowance against the foreign tax credits, various state tax credits and a capital loss from investment. 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. During the year, we adjusted the valuation allowance against the deferred tax assets noted above by $ 0.6 million primarily due to the increase in capital loss carryforward. 57 As of December 25, 2021, the Company has tax-effected net operating loss carryforwards of $ 1.7 million and $ 0.2 million for U.S federal and state jurisdictions, respectively. Tax-effected federal net operating losses of $ 0.1 million begin to expire in 2035 . The remaining federal net operating losses do not expire. The state net operating loss carryforwards expire in various years starting in 2037 . 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 2017 are closed for the states in which we file. Tax years before 2018 are closed for tax purposes in Canada. Tax years before 2018 are closed for tax purposes in China. Tax years before 2016 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. 10. 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. We have cooperated with CBP in connection with its review of our prior disclosure submission, including providing additional information as requested. CBP has not yet communicated that its review of our prior disclosure submission is completed. 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. During the fiscal year ended December 25, 2021, we paid $ 10.4 million in contingent consideration in connection with prior acquisitions based upon performance targets. As of December 26, 58 2020 , we had accrued approximately $ 8.0 million, which represent ed our estimate at the time of the fair value of the estimated payments that w ould have become due in connection with these prior acquisitions if performance targ ets are achieved. C hanges in the accrual balance during fiscal 2020 and fiscal 2019 were included in Selling, General and Administrative expenses in each of the respecti ve periods. If the remaining performance targets are fully achieved, the maximum additional contingent payments to be made under the related acquisition agreements would be $ 3.6 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. 11. Revenue Recognition Business Description We are a supplier of replacement parts and fasteners for passenger cars and light-, medium- 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. 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, and has commercial substance. At this point, we believe 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 that 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 that have an initial term of one year or less as permitted by GAAP. 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 59 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 constraine d according to the definition in the standard. All of our revenue was recognized under the point of time approach during fiscal 2021, fiscal 2020 and fiscal 2019. Also, we do not have significant financing arrangements with our customers. 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 We have made certain accounting policy elections and are using certain practical expedients permitted under GAAP, as follows: • 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. • Expense costs to obtain a contract as incurred when the expected period of benefit, and therefore the amortization period, is one year or less. • 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. • 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. 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 25, 2021 December 26, 2020 December 28, 2019 Powertrain $ 539,235 $ 442,221 $ 395,975 Chassis 458,986 324,399 297,350 Automotive Body 288,599 266,699 251,506 Hardware 58,429 59,429 46,498 Net Sales $ 1,345,249 $ 1,092,748 $ 991,329 For the Year Ended (in thousands) December 25, 2021 December 26, 2020 December 28, 2019 Net Sales to U.S. Customers $ 1,269,050 $ 1,031,183 $ 929,908 Net Sales to Non-U.S. Customers 76,199 61,565 61,421 Net Sales $ 1,345,249 $ 1,092,748 $ 991,329 During fiscal 2021 and fiscal 2020, three customers each accounted for more than 10% of net sales and in the aggregate accounted for 54 % and 56 % of net sales in fiscal 2021 and fiscal 2020, respectively. In fiscal 2019, four customers each accounted for more than 10% of net sales and in the aggregate accounted for approximately 66 % of net sales. 12. Capital Stock Controlling Interest by Officers, Directors and Family Members . As of December 25, 2021 and December 26, 2020, Steven Berman, the Executive Chairman of the Company, and members of his family 60 beneficially own ed approximately 17 % and 18 % of the outstanding shares of our common stock , respectively and c ould 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 25, 2021, 727,834 shares were available for grant under the Plan. Restricted Stock Awards (“RSAs”) and Restricted Stock Units (“RSUs”) Prior to March 2020, we issued RSAs to certain employees and members of our Board of Directors. Grants were made in the form of time-based RSAs and performance-based RSAs. For all RSAs, we retain the restricted stock, and any dividends paid thereon, until the vesting restrictions have been met. For time-based RSAs, 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 RSAs 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 RSAs 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 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 RSUs to certain employees and members of our Board of Directors. For time-based RSUs, 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 RSUs 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 RSUs 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. 61 The following table summarizes the weighted average valuation assumptions used to calculate the fair value of total shareholder return performance-based RSAs and performance-based RSUs granted: For the Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Share price $ 101.45 $ 61.68 $ 82.03 Expected dividend yield 0.0 % 0.0 % 0.0 % Expected stock price volatility 38.9 % 31.5 % 27.7 % Risk-free interest rate 0.2 % 0.9 % 2.5 % Expected life 2.8 years 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 RSAs and RSU’s granted during fiscal 2021, fiscal 2020, and fiscal 2019 were $ 131.02 , $ 65.09 , and $ 81.44 , respectively. Compensation cost related to performance-based and time-based RSAs and RSUs was $ 6.1 million, $ 3.2 million and $ 2.1 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively, and was included in selling, general and administrative expense in the Consolidated Statements of Operations. No cost was capitalized during fiscal 2021, fiscal 2020 or fiscal 2019. The following table summarizes our RSA and RSU activity for the three years ended December 25, 2021: Shares Weighted Average Fair Value Balance at December 29, 2018 170,737 $ 63.94 Granted 92,396 $ 81.92 Vested ( 41,586 ) $ 55.72 Canceled ( 44,056 ) $ 58.03 Balance at December 28, 2019 177,491 $ 76.70 Granted 83,875 $ 64.66 Vested ( 27,477 ) $ 71.25 Canceled ( 16,154 ) $ 76.44 Balance at December 26, 2020 217,735 $ 72.77 Granted 81,694 $ 106.23 Vested ( 45,970 ) $ 70.62 Canceled ( 46,782 ) $ 74.85 Balance at December 25, 2021 206,677 $ 85.97 As of December 25, 2021, there was approximately $ 9.7 million of unrecognized compensation cost related to unvested RSAs and RSUs, which is expected to be recognized over a weighted-average period of approximately 2.3 years. Cash flows resulting from tax deductions in excess of the tax effect of compensation cost recognized in the financial statements are classified as operating cash flows. The excess tax benefit generated from RSAs and RSUs 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 $ 1.3 million , $ 1.0 million and $ 0.7 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively, and was included in selling, general and administrative expense in the Consolidated Statements of Operations. No cost was capitalized during fiscal 2021, fiscal 2020 or fiscal 2019. 62 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 Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Expected dividend yield 0 % 0 % 0 % Expected stock price volatility 34 % 29 % 28 % Risk-free interest rate 0.7 % 0.8 % 2.3 % Expected life of options 5.3 years 5.3 years 5.4 years Weighted-average grant-date fair value $ 31.68 $ 17.84 $ 24.32 The following table summarizes our stock option activity for the three years ended December 25, 2021: Shares Option Price per Share Weighted Average Price Weighted Average Remaining Terms (years) Aggregate Intrinsic Value (in thousands) 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 Canceled ( 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 Canceled ( 8,764 ) $61.68 – $74.21 $ 65.24 Balance at December 26, 2020 250,779 $41.59 – $84.93 $ 70.21 Granted 59,578 $95.98 – $103.61 $ 101.36 Exercised ( 67,504 ) $41.59 – $82.94 $ 70.04 Canceled ( 9,457 ) $61.68 – $101.45 $ 79.02 Balance at December 25, 2021 233,396 $61.68 – $103.61 $ 77.85 5.5 $ 6,664 Exercisable at December 25, 2021 70,488 $61.68 – $84.93 $ 73.40 4.1 $ 2,328 As of December 25, 2021, there was approximately $ 1.7 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of approximately 2.3 years. Cash received from option exercises was $ 2.5 million, $ 1.2 million, and $ 0.1 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. The tax benefit generated from option exercises was immaterial for all periods presented. 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 were 63 made twice annually, with the purchase windows being April to September and October to March. In 2021, the decision was made to modify the timing of those two purchase windows to align them with the calendar year. As a result, beginning January 2022, the two purchase windows are January to June and July to December. In order to effectuate that alignment, the purchase window beginning in October 2021 was shortened from six months to three months and ended December 2021. There were 40,303 shares , 79,089 shares and 21,200 shares purchased under this plan during fiscal 2021 , fiscal 2020 and fiscal 2019 , respectively. Compensation cost under the ESPP plan was $ 0.9 million , $ 3.3 million and $ 0.3 million in fiscal 2021 , fiscal 2020 and fiscal 2019 , respectively. The tax benefit generated from ESPP purchases was immaterial in fiscal 2021, fiscal 2020, and fiscal 2019, respectively . Common Stock Repurchases. We periodically repurchase, at the then current market price, and cancel common stock issued to the Dorman Products, Inc. 401(k) Plan and Trust (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 Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Shares repurchased and canceled 11,452 23,360 22,380 Total cost of shares repurchased and canceled (in thousands) $ 1,172 $ 1,895 $ 1,953 Average price per share $ 102.38 $ 81.12 $ 87.26 At December 25, 2021, the 401(k) Plan held 183,916 shares of our common stock. 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 25, 2021, $ 145.6 million was available for repurchase under this program. The following table summarizes the repurchase and cancellation of common stock : For the Years Ended December 25, 2021 December 26, 2020 December 28, 2019 Shares repurchased and canceled 605,628 439,275 499,564 Total cost of shares repurchased and canceled (in thousands) $ 61,583 $ 36,781 $ 39,387 Average price per share $ 101.68 $ 83.73 $ 78.84 401(k) Retirement Plans . The 401(k) Plan and the Dayton Parts, LLC 401(k) Savings Plan (the “Dayton 401(k) Plan”) are both defined contribution profit sharing and 401(k) plans that together cover substantially all of our employees as of December 25, 2021. Annual company contributions under both the 401(k) Plan and Dayton 401(k) Plan are discretionary in nature, in accordance with the respective plan documents. Total expense related to the 401(k) Plan and Dayton 401(k) Plan were $ 6.3 million, $ 5.7 million and $ 4.5 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. 13. 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 RSAs which are considered to be contingently issuable. To calculate diluted earnings per share, common share equivalents are added to the 64 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 14,250 shares, 35,975 shares and 92,000 shares were excluded from the calculation of diluted earnings per share for fiscal 2021 , fiscal 2020 and fiscal 2019 , 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 25, 2021 December 26, 2020 December 28, 2019 Numerator: Net income $ 131,532 $ 106,870 $ 83,762 Denominator: Weighted average basic shares outstanding 31,810 32,280 32,606 Effect of compensation awards 151 93 82 Weighted average diluted shares outstanding 31,961 32,373 32,688 Earnings Per Share: Basic $ 4.13 $ 3.31 $ 2.57 Diluted $ 4.12 $ 3.30 $ 2.56 14. 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 and, light-, medium-, 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 2021, fiscal 2020 and fiscal 2019 were $ 76.2 million, $ 61.6 million and $ 61.4 million, respectively. Net long-lived assets outside the United States, consisting of net property, plant and equipment was $ 1.0 million as of December 25, 2021. There were no long-lived assets outside of the United States as of December 26, 2020. 65 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None