What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-25 compared with 2021-10-25 · 144 added, 166 removed, 110 unchanged (74% of the section changed)

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Cautionary Statement Regarding Forward-Looking Statements

This document contains certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to the COVID-19 pandemic, net sales, diluted earnings per share, gross profit, gross margin, selling, general and administrative expenses, income tax expense, income before income taxes, net income, cash and cash equivalents, indebtedness, liquidity, the Company’s share repurchase program, the Company’s outlook and distribution facility costs and productivity initiatives.

This document contains certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to:

the COVID-19 pandemic;

diluted earnings per share;

gross profit;

gross margin;

general and administrative expenses;

income tax expense;

income before income taxes;

cash and cash equivalents;

indebtedness;

the Company’s share repurchase program;

the Company’s outlook;

the Company’s growth opportunities and future business prospects;

operational costs and productivity initiatives;

customs duties and mitigation of tariffs;

long-term value;

acquisitions and acquisition opportunities;

cost offsets;

quarterly fluctuations;

new product development;

customer concessions;

and fluctuations in foreign currency.

Words such as “believe,” “demonstrate,” “expect,” “estimate,” “forecast,” “anticipate,” “should,” “will” and “likely” and similar expressions identify forward-looking statements.

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In addition, statements that are not historical should also be considered forward-looking statements.

Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date the statement was made.

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

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

(ii) competition in the automotive aftermarket industry;

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

(iv) price competition;

(v) limited customer shelf space;

(vi) customer consolidation;

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

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

(ix) excess overstock inventory-related returns;

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

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

(xii) reliance on new product development;

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

(xiv) quality problems with our products;

(xv) inability to protect our intellectual property;

(xvi) claims of intellectual property infringement;

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

(xviii) cyber-attacks;

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

(xx) exposure to risks related to accounts receivable;

(xxi) changes in U.S.

trade policy, including the imposition of tariffs;

(xxii) the level of our indebtedness;

(xxiii) risks related to accounts receivable sales agreements;

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

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

(xxvi) unfavorable economic conditions;

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

(xxviii) unfavorable results of legal proceedings;

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

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

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

(xxxii) changes in tax laws;

(xxxiii) global climate change and related regulations;

(xxxiv) violations of anti-bribery laws;

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

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

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

Securities and Exchange Commission (“SEC”) for additional information regarding forward-looking statements and the factors that could cause actual results to differ materially from those anticipated in the forward-looking statements.

Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date such statements were made.

Such forward-looking statements are based on current expectations that involve a number of known and unknown risks, uncertainties and other factors (many of which are outside of our control).

Such risks, uncertainties and other factors relate to, among other things:

the impacts of COVID-19;

competition in and the evolution of the automotive aftermarket industry;

changes in our relationships with, or the loss of, any customers or suppliers;

our ability to develop, market and sell new and existing products;

our ability to anticipate and meet customer demand;

our ability to purchase necessary materials from our suppliers and the impacts of any related logistics constraints;

financial and economic factors, such as our level of indebtedness, fluctuations in interest rates and inflation;

political and regulatory matters, such as changes in trade policy, the imposition of tariffs and climate regulation;

our ability to protect our intellectual property and defend against any claims of infringement;

and our ability to protect our information security systems and defend against cyberattacks.

Please refer to “Statement Regarding Forward-Looking Statements” and “Item 1A.

Risk Factors” located in Part I of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.

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

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and its subsidiaries included in “ITEM 1.

Financial Statements” of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited

consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2020 .

Financial Statements” of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2021.

This Quarterly Report on Form 10-Q contains the registered and unregistered trademarks or service marks of Dorman and are the property of Dorman Products, Inc.

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We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with or endorsement or sponsorship of us by these parties.

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

As of December 26, 2020, we marketed approximately 81,000 distinct parts, many of which we designed and engineered.

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.

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

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

Original equipment “dealer exclusive” parts are those which were traditionally available to consumers only from original equipment manufacturers or used parts from salvage yards and include, among other parts, intake manifolds, exhaust manifolds, window regulators, radiator fan assemblies, tire pressure monitor sensors, exhaust gas recirculation (EGR) coolers and complex electronics modules.

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

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

Our products are sold primarily in the United States through automotive aftermarket retailers (such as Advance Auto Parts, Inc., AutoZone, Inc., and O'Reilly Automotive, Inc.), including through their online platforms;

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

and specialty markets, and salvage yards.

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

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

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

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

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

We are one of the leading aftermarket suppliers of parts that were traditionally available to consumers only from original equipment manufacturers or salvage yards.

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;

national, regional and local warehouse distributors and specialty markets;

and salvage yards.

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

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

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

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

Our 2022 fiscal year will be a 53-week period that will end on December 31, 2022 (“fiscal 2022”).

Our fiscal 2021 was a 52-week period that ended on December 25, 2021 (“fiscal 2021”).

Critical Accounting Policies

There have been no material changes to the Company’s critical accounting policies as described in the Annual Report on Form 10-K for the year ended December 25, 2021.

While COVID-19 did not have a material adverse effect on our business operations for the nine months ended September 25, 2021, during the period we did observe pandemic-related pressures on the global supply network that caused logistical issues, including higher freight costs and inflation with respect to materials costs, which impacted our results.

We currently expect those pressures to continue to exist for the remainder of the fiscal year.

While COVID-19 did not adversely affect demand for our products for the three months ended March 26, 2022, 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 throughout 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.

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

In the nine months ended September 25, 2021 , excluding Dayton Parts, we introd uced 3,345 new distinct parts t o our customers and end- users , including 649 “New-to-the-A ftermarket ” parts .

We introduced 3,479 distinct part s to our customers and end- users in the fiscal year ended December 26, 2020 , including 1,433 “N ew-to-th e- A ftermarket ” parts .

One area of expanded development focus has been our complex electronics program, which we believe will help us capitalize on the increase of advanced computing and sensing components being utilized on today’s OE platforms.

Current generation vehicles now contain an average of approximately 100 electronic modules, with some high-end luxury vehicles containing over 200 modules.

Our complex electronics products are designed and developed in-house and tested using proprietary equipment that simulates the on-vehicle operating environment to verify performance.

We continue to make investments in technology and people to enhance our electronics design capabilities, expand our complex electronics product portfolio and further develop our leadership position in the category.

Another area of focus has been on products we market for the medium- and heavy-duty truck sector of the automotive aftermarket industry.

Our recent acquisition of Dayton Parts, a manufacturer of chassis and other parts for medium- and heavy-duty vehicles, is one of the ways in which we have sought to further our strategy of expansion in this sector.

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

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

During the nine months ended September 25, 2021, excluding Dayton Parts, we introduced 74 distinct parts in this product line.

In the three months ended March 26, 2022, we introduced 707 new distinct parts to our customers and end-users, including 389 “New-to-the-Aftermarket” parts.

We introduced 4,315 new distinct parts to our customers and end-users in the fiscal year ended December 25, 2021, including 990 “New-to-the-Aftermarket” parts.

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

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.

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

Through Dorman® HD Solutions™, we specialize in offering heavy-duty parts that were traditionally only available from original equipment manufacturers or salvage yards, similar to how we approach the passenger car and light-duty truck sector.

Our growth is also impacted by acquisitions.

For example, on August 10, 2021, we acquired Dayton Parts.

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 Condensed Consolidated Financial Statements for additional information.

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Economic Factors

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

Impact of Labor Market and Inflationary Costs

We have experienced broad-based inflationary impacts during the nine months ended September 25, 2021, due primarily to:

global transportation and logistics constraints, which have resulted in significantly higher transportation 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 for the remainder of the fiscal year.

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

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

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

Vehicles in Operation

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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, adversely impacted work-related and personal travel throughout 2020 and into early 2021.

However, as a result of easing restrictions, the number of miles driven has shown a recent increase compared to prior year levels.

In fact, according the U.S.

Department of Transportation, the number of miles driven through July 2021 has increased 12.8% year over year.

We believe that demand for our products generally correlates to miles driven, as the more miles a vehicle is driven, the more likely it is that parts will fail.

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

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.

However, global gasoline prices have increased significantly in recent months, which may negatively impact miles driven as consumers reduce travel or seek alternative methods of transportation.

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

We operate in a highly competitive market.

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

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

Discounts, Allowances and Incentives

We offer a variety of customer discounts, rebates, 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.

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

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

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

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

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The Chinese yuan to U.S.

dollar exchange rate has fluctuated over the past

several years.

dollar exchange rate has fluctuated over the past several years.

Any future changes in the value of the Chinese yuan relative to the U.S.

dollar may result in a change in the cost of products that we purchase from China in the future.

dollar may result in a change in the cost of products that we purchase from China.

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

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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 three months ended March 26, 2022 as well as 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

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

We expect to continue mitigating the impact of tariffs in fiscal 2021 primarily through selling price increases to offset the higher tariffs incurred.

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.

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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 stated it is considering reinstating temporary tariff relief on certain categories of products imported after October 12, 2021 following its review of comments submitted to the USTR prior to December 1, 2021.

However, in March 2022, the USTR reinstated tariff relief for certain categories of products imported from China.

The reinstated tariff relief applies retroactively to October 12, 2021 and will extend through December 31, 2022.

The reinstated tariff relief applies to a limited number of our products and is not expected to materially impact our operating results.

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.

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Three Months Ended*

Nine Months Ended*

(in millions)

September 25, 2021

September 26, 2020

September 25, 2021

September 26, 2020

(in thousands, except percentage data)

March 26, 2022

March 27, 2021

Cost of goods sold

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* Percentage of sales information may not add due to rounding

Three Months Ended September 25, 2021 Compared to Three Months Ended September 26, 2020

Net sales increased 16% to $348.4 million for the three months ended September 25, 2021 from $300.6 million for the three months ended September 26, 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 for the three months ended September 25, 2021 excluding Dayton Parts was 7%.

Gross profit margin was 33.5% of net sales for the three months ended September 25, 2021 compared to 35.9% of net sales for the three months ended September 26, 2020.

Dayton Parts had a 150 basis points dilutive impact on gross margin in the three months ended September 25, 2021, primarily due to higher costs in the three months ended September 25, 2021 from fair value adjustments to inventory recorded in connection with the Dayton Parts acquisition.

We also experienced broad-based inflationary impacts due to global transportation and logistics constraints.

Although pass-through price increases we have implemented are expected to largely offset these inflationary impacts on a go-forward basis, we did not experience a full quarter of these price increases for the three months ended September 25, 2021.

increases implemented to pass through the increased costs had no added profit and consequently resulted in a lower gross margin.

Selling, general and administrative expenses (“SG&A”) were $72.7 million, or 20.9% of net sales, for the three months ended September 25, 2021 compared to $63.0 million, or 21.0% of net sales, for the three months ended September 26, 2020.

The decrease in SG&A expenses as a percentage of net sales was primarily due to leverage from the increase in net sales, partially offset by wage and benefits inflation and costs related to the completion of the Dayton Parts acquisition and subsequent integration activities in the three months ended September 25, 2021.

Our effective tax rate was 24.0% for the three months ended September 25, 2021 compared to 23.5% for the three months ended September 26, 2020.

The lower effective tax rate for the three months ended September 26, 2020 was the result of lower state tax expense and a nontaxable book gain associated with the PTI acquisition.

Nondeductible transaction costs related to the Dayton Parts acquisition also contributed to the higher effective tax rate for the three months ended September 25, 2021.

Nine Months Ended September 25, 2021 Compared to Nine Months Ended September 26, 2020

Net sales increased 20% to $947.1 million for the nine months ended September 25, 2021 from $791.5 million for the nine months ended September 26, 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 the nine months ended September 25, 2021 was 16%.

The absence of the government imposed shut-downs that negatively impacted the nine months ended September 26, 2020 was also a significant contributor to the year-over-year growth.

Gross profit margin was 35.0% of net sales for the nine months ended September 25, 2021 compared to 34.3% of net sales for the nine months ended September 26, 2020.

Gross margin expansion was driven by fixed cost leverage from higher sales volume and improved efficiencies as we continued to drive productivity savings in our end-to-end supply chain processes.

Additionally, we benefitted from the absence of out-of-pocket costs incurred due to the COVID-19 pandemic in the nine months ended September 26, 2020.

These benefits were partially offset 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 the nine months ended September 25, 2021.

Selling, general and administrative expenses were $205.0 million, or 21.7% of net sales, for the nine months ended September 25, 2021 compared to $184.3 million, or 23.3% of net sales, for the nine months ended September 26, 2020.

The decrease in SG&A as a percentage of net sales was due to the operating leverage from the $155.6 million increase in net sales for the nine months ended September 25, 2021 as compared to the nine months ended September 26, 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 the nine months ended September 26, 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 the nine months ended September 25, 2021.

Our effective tax rate was 22.6% for the nine months ended September 25, 2021 compared to 21.0% for the nine months ended September 26, 2020.

The lower effective tax rate for the nine months ended September 26, 2020 was the result of lower state tax expense, a tax benefit related to a nontaxable book gain and the write-off of a deferred tax liability associated with PTI upon our acquisition of the controlling interest in January 2020, and a foreign tax credit carry-back claim.

Nondeductible transaction costs related to the Dayton Parts acquisition also contributed to the higher effective tax rate for the nine months ended September 25, 2021.

Three Months Ended March 26, 2022 Compared to Three Months Ended March 27, 2021

Net sales increased 39% to $401.6 million for the three months ended March 26, 2022 from $288.0 million for the three months ended March 27, 2021.

The increase in net sales reflected the addition of Dayton Parts;

a continuation of favorable underlying industry dynamics across our customer channels;

price increases to offset logistics, wage and commodity inflation;

and new product penetration.

Net sales growth for the three months ended March 26, 2022 excluding Dayton Parts was 21%.

Gross profit margin was 33.2% of net sales for the three months ended March 26, 2022 compared to 36.3% of net sales for the three months ended March 27, 2021.

Dayton Parts had a 140-basis-point dilutive impact on gross profit margin for the three months ended March 26, 2022.

Gross margin contraction was driven by broad-based inflationary cost impacts due to global transportation and logistics constraints as well as commodity and wage rate pressures.

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

Selling, general and administrative expenses (“SG&A”) were $ 86.5 million, or 21.5% of net sales, for the three months ended March 26, 2022 compared to $ 62.9 million, or 21.8% of net sales, for the three months ended March 27, 2021 .

The modest decrease in SG&A expenses as a percentage of net sales was primarily due to improved leverage from the increase in net sale s noted above, partially offset by higher wage and benefits inflation as well as higher accounts receivable factoring costs .

Our effective tax rate was 22.7% for the three months ended March 26, 2022 compared to 21.3% for the three months ended March 27, 2021.

The increase in the effective tax rate was due to an increase in state tax expense and higher Canadian income tax associated with the Canadian operations acquired as part of the Dayton Parts transaction.

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 sponsored by our customers.

Additionally, we have utilized borrowings under revolving lines of credit, as needed, to fund Company objectives.

Cash and cash equivalents were $57.3 million at September 25, 2021 compared to $155.6 million at December 26, 2020.

During the nine months ended September 25, 2021, strong cash provided from operating activities was more than offset by cash used to fund the Dayton Parts acquisition, share repurchases under our publicly announced repurchase program and capital expenditures.

Working capital was $390.4 million at September 25, 2021 compared to $600.3 million at December 26, 2020.

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 were $53.4 million at March 26, 2022 compared to $58.8 million at December 25, 2021.

During the three months ended March 26, 2022, cash provided from operating activities was offset by share repurchases under our publicly announced repurchase program and capital expenditures.

Working capital was $435.6 million at March 26, 2022 compared to $411.5 million at December 25, 2021.

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

However, our liquidity could be

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

However, our liquidity could be negatively affected by extending payment terms to customers, a decrease in demand for our products, increases in interest rates (including LIBOR or other reference rates), the outcome of contingencies or other factors.

Payment Terms and Accounts Receivable Sales Programs

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

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

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

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 upfront 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”) or other reference rates, increases in these applicable rates increase our cost to sell our receivable.

Quantitative and Qualitative Disclosures about Market Risk for more information.

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

During the nine months ended September 25, 2021 and September 26, 2020, we sold $690.0 million and $568.3 million of accounts receivable, respectively, under these programs.

If receivables had not been sold over the previous twelve months, approximately $381 million and $505 million of additional accounts receivable would have been outstanding at September 25, 2021 and December 26, 2020, respectively, based on our standard payment terms.

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

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

During the three months ended March 26, 2022 and March 27, 2021, we sold $275.2 million and $209.9 million of accounts receivable, respectively, under these programs.

If receivables had not been sold over the previous twelve months, approximately $844.8 million and $598.8 million of additional accounts receivable would have been outstanding at March 26, 2022 and December 25, 2021, respectively, based on our standard payment terms.

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 or increased costs associated with the sales of accounts receivable.

During the three months ended March 26, 2022 and March 27, 2021, factoring costs associated with these accounts receivable sales programs were $4.9 million and $2.6 million, respectively.

The increase in factoring costs was primarily driven by higher LIBOR and other reference rates, and, with respect to the three months ended March 26, 2022, higher accounts receivable sold under these programs.

Credit Agreement

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 interest rate at September 25, 2021 was LIBOR plus 125 basis points (1.33%).

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 September 25, 2021, we were not in default with respect to the credit agreement.

As of September 25, 2021, there was $249.4 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 $349.8 million available under the New Facility at September 25, 2021.

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.

As of March 26, 2022, there was $229.4 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 $369.8 million available under the New Facility at March 26, 2022.

Refer to Note 7, “Long-Term Debt” to the Notes to Condensed Consolidated Financial Statements contained in PART II, ITEM 8 of the Company’s Annual Report on Form 10-K for the year ended December 25, 2021, for additional information.

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

Nine Months Ended

Three Months Ended

(in thousands)

September 25, 2021

September 26, 2020

March 26, 2022

March 27, 2021

Cash provided by operating activities

Cash used in investing activities

Cash provided by (used in) financing activities

Cash used in financing activities

Effect of foreign exchange on cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

During the nine months ended September 25, 2021, cash provided by operating activities was $77.6 million compared to $145.7 million during the nine months ended September 26, 2020.

The $68.1 million decrease was driven by higher inventory purchases to maintain customer fill rates, as compared to the prior year, partially offset by higher proceeds from accounts receivable due to higher sales of accounts receivable in the nine months ended September 25, 2021.

Investing activities used cash of $360.8 million and $26.4 million during the nine months ended September 25, 2021 and September 26, 2020, respectively.

During the nine months ended September 25, 2021, we used $345.5 million to acquire Dayton Parts, net of cash acquired and during the nine months ended September 26, 2020 we used $14.3 million to acquire the remaining 60% of the outstanding equity of PTI, net of cash acquired.

Financing activities used $184.9 million of cash during the nine months ended September 25, 2021, compared to $17.2 million of cash provided during the nine months ended September 26, 2020.

During the nine months ended September 25, 2021, we borrowed $252.4 million under the New Facility to help fund the acquisition of Dayton Parts in August 2021, and subsequently repaid $3.0 million of that borrowing during the nine months ended September 25, 2021.

Additionally, during the nine months ended September 25, 2021, we paid $54.2 million to repurchase 534,507 common shares under our share repurchase plan.

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

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

During the three months ended March 26, 2022, cash provided by operating activities was $23.2 million compared to $21.0 million during the three months ended March 27, 2021.

The $2.2 million increase was driven by higher sales of accounts receivable and higher accounts receivable collections, partially offset by timing of accounts payable payments during the three months ended March 26, 2022, as compared to the prior year.

Investing activities used cash of $6.7 million and $6.2 million during the three months ended March 26, 2022 and March 27, 2021, respectively.

During the three months ended March 26, 2022, we received $0.6 million in cash related to the post-closing net working capital adjustment related to the Dayton Parts acquisition.

Financing activities used $22.0 million of cash during the three months ended March 26, 2022, compared to $3.8 million of cash provided during the three months ended March 27, 2021.

During the three months ended March 26, 2022, we repaid $10.0 million of the New Facility borrowing and paid $9.5 million to repurchase 98,350 shares of common stock under our share repurchase plan.

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

The remaining uses of cash from financing activities in each period result primarily from the repurchase of our common stock from our 401(k) Plan and shares withheld from participants for income tax withholding purposes in connection with the vesting of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”).

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis