DORMAN PRODUCTS, INC. "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the Consolidated Financial Statements and related notes thereto included in PART II, ITEM 8 of this Annual Report on Form 10-K. The matters discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve significant risks and uncertainties. See the "Statement Regarding Forward-Looking Statements" above and PART I, ITEM 1A, "Risk Factors" in this Annual Report on Form 10-K 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. In ITEM 7, we discuss fiscal 2021 and 2020 results and comparisons of fiscal 2021 results to fiscal 2020 results. Discussions of fiscal 2019 results and comparisons of fiscal 2020 results to fiscal 2019 results can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in PART II, ITEM 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 26, 2020 .
Overview
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 ofDecember 25, 2021 , we marketed approximately 118,000 distinct parts compared to approximately 81,000 as ofDecember 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. 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 OE "dealer exclusive" parts. OE "dealer exclusive" parts are those parts that were traditionally available to consumers only from OE manufacturers or salvage yards. These parts include, among other parts, 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 inthe 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 outsidethe United States , with sales primarily intoCanada andMexico , and to a lesser extent,Europe , theMiddle East andAustralia . 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 ended on the last Saturday of the calendar year. The fiscal years endedDecember 25, 2021 ("fiscal 2021"),December 26, 2020 ("fiscal 2020") andDecember 28, 2019 ("fiscal 2019") were 52-week periods.
Business Performance Summary
Net sales increased 23% to$1,345.2 million in fiscal 2021 from$1,092.7 million in fiscal 2020, while net income increased 23% to$131.5 million in fiscal 2021 from$106.9 million in fiscal 2020. Additionally, in fiscal 2021 we generated cash flows from operations of$100.3 million and repurchased 605,628 common shares under our share repurchase program for$61.6 million . 30 --------------------------------------------------------------------------------
Impacts of COVID-19
In lateMarch 2020 , we began experiencing softening customer demand as a result of government-imposed restrictions designed to slow the spread of COVID-19. While customer orders dropped significantly early in the second quarter of 2020 due to government-imposed restrictions, we saw a rapid recovery as the second quarter progressed with June orders up aboveJune 2019 levels. While COVID-19 did not adversely affect demand for our products for the year endedDecember 25, 2021 , during the period we did experience pandemic-related pressures in the global supply network that caused logistical issues, including higher freight costs, supplier lead time delays of products, and inflation with respect to materials and labor costs, which impacted our results. We currently expect those pressures to continue to exist into fiscal 2022. As countries continue to combat COVID-19, and as government-imposed regulations regarding, among other things, COVID-19 testing, vaccine mandates and related workplace restrictions change around the world, there is still a risk that the pandemic may impact the overall demand environment as well as our ability to maintain staffing at our facilities, to source parts and other materials to meet demand levels, to maintain inventory levels and to fulfill contractual requirements. We will continue to closely monitor updates regarding the spread of COVID-19 and its variants, the distribution of vaccines developed to combat COVID-19, and applicable vaccine mandates, and we will adjust our operations according to guidelines from local, state and federal officials. In light of the foregoing, we may take actions that alter our business operations or that we determine are in the best interests of our employees, customers, suppliers and shareholders.
New Product Development
New product development is an important success factor for us and traditionally has been our primary vehicle for growth. We have made incremental investments to increase our new product development efforts to grow our business and strengthen our relationships with our customers. The investments primarily have been in the form of increased product development resources, increased customer and end-user awareness programs, and customer service improvements. These investments historically have enabled us to provide an expanding array of new product offerings and grow revenues at levels that generally have exceeded market growth rates.
In fiscal 2021, we introduced 4,315 new distinct parts to our customers and end-users, including 990 "New-to-the-Aftermarket" parts. Please see ITEM 1, "Business - Product Development" for a year-over-year comparison of new product introductions.
One area of focus has been our complex electronics program, which capitalizes on the growing number of electronic components being utilized on today's OE platforms. New vehicles contain an average of approximately 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 truck sector of the automotive aftermarket industry has provided us. 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 fiscal 2021, we introduced 87 distinct parts in this product line. We expect to continue to invest in the medium- and heavy-duty product category, as evidenced by our acquisition ofDayton Parts in fiscal 2021. 31 --------------------------------------------------------------------------------
Acquisitions
Our growth is also impacted by acquisitions. For example, onAugust 10, 2021 , we acquiredDayton Parts , a manufacturer of chassis and other parts designed to serve the heavy-duty vehicle sector of the aftermarket. See Note 2, Business Acquisitions and Investments under Notes to Consolidated Financial Statements for additional information. We may acquire businesses in the future to supplement our financial growth, increase our customer base, add to our distribution capabilities or enhance our product development resources, among other reasons. Economic Factors
The Company's financial results are also impacted by various economic and industry factors, including, but not limited to the number, age and condition of vehicles in operation at any one time, and miles driven by those vehicles.
Vehicles in Operation
The Company's products are primarily purchased and installed on a subsegment of the passenger and light duty vehicles in operation inthe United States ("VIO"), specifically weighted towards vehicles aged 8 to 13 years old. Each year,the United States seasonally adjusted annual rate ("US SAAR") of new vehicles purchased adds a new year to the VIO. According to data from theAuto Care Association ("Auto Care"), the US SAAR experienced a decline from 2008 to 2011 as consumers purchased fewer new vehicles as a result of the Great Recession of 2008. We believe that the declining US SAAR during that period resulted in a follow-on decline in our primary VIO subsegment (8 to 13-year-old vehicles) commencing in 2016. However, following 2011 and the impact of the Great Recession of 2008,U.S. consumers began to increase their purchases of new vehicles which over time caused the US SAAR to recover and return to more historical levels. Consequently, subject to any potential impacts from COVID-19, we expect the VIO for vehicles aged 8 to 13 years old to continue to recover over the next several years. In addition, we believe that vehicle owners generally are operating their current vehicles longer than they did several years ago, performing necessary repairs and maintenance to keep those vehicles well maintained. We believe this trend has resulted in an increase in VIO. According to data published by Polk, a division ofIHS Automotive , the average age of VIO increased to 12.2 years as ofOctober 2021 from 12.0 years as ofOctober 2020 despite increasing new car sales. Additionally, while the number of VIO inthe 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.
Miles Driven
The number of miles driven is another important statistic that impacts our business. According theU.S. Department of Transportation , the number of miles driven throughOctober 2021 increased 11.2% year over year. Generally, as vehicles are driven more miles, the more likely it is that parts will fail and there will be increased demand for replacement parts, including our parts.
Brand Protection
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 slow-moving
product returns and other incentives. We may offer cash discounts for paying
invoices in accordance with the specified discount terms of the invoice. In
addition, we may offer pricing discounts based on volume purchased from us or
other pricing discounts related to programs under a customer's agreement. These
discounts can be in the
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form of "off-invoice" discounts and are immediately deducted from sales at the
time of sale. For those customers that choose to receive a payment on a
quarterly or annual basis instead of "off-invoice," we accrue for such payments
as the related sales are made and reduce sales accordingly. Finally, rebates and
discounts are provided to customers to support promotional activities such as
advertising and sales force allowances.
Our customers, particularly our larger retail customers, regularly seek more
favorable pricing and product return provisions, and extended payment terms when
negotiating with us. We attempt to avoid or minimize these concessions as much
as possible, but we have granted pricing concessions, indemnification rights,
extended customer payment terms, and allowed a higher level of product returns
in certain cases. These concessions impact net sales as well as our profit
levels and may require additional capital to finance the business. We expect our
customers to continue to exert pressure on our margins.
New Customer Acquisition Costs
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 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.
Product Warranty and Overstock Returns
Many of our products carry a lifetime limited warranty, which generally covers defects in materials or workmanship and failure to meet specifications. In addition to warranty returns, we also may permit our customers to return new, undamaged products to us within customer-specific limits if they have overstocked their inventories. At the time products are sold, we accrue a liability for product warranties and overstock returns as a percentage of sales based upon estimates established using historical information on the nature, frequency and average cost of the claim and the probability of the customer return. Significant judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Revision to these estimates is made when necessary, based upon changes in these factors. We regularly study trends of such claims.
Foreign Currency
Our products are purchased from suppliers inthe United States and a variety of non-U.S. countries. The products generally are purchased through purchase orders with the purchase price specified inU.S. dollars. Accordingly, we generally do not have exposure to fluctuations in the relationship between theU.S. dollar and various foreign currencies between the time of execution of the purchase order and payment for the product. To the extent that theU.S. dollar changes in value relative to those foreign currencies in the future, the prices charged by our suppliers for products under new purchase orders may change in equivalentU.S. dollars. The largest portion of our overseas purchases comes fromChina . The Chinese yuan toU.S. dollar exchange rate has fluctuated over the past several years. Any future changes in the value of the Chinese yuan relative to theU.S. dollar may result in a change in the cost of products that we purchase fromChina . However, the cost of the products we procure is also affected by other factors including raw material availability, labor cost, and transportation costs. Since our consolidated financial statements are denominated inU.S. dollars, the assets, liabilities, net sales, and expenses which are denominated in currencies other than theU.S. dollar must be converted intoU.S. dollars using exchange rates for the current period. As a result, fluctuations in foreign currency exchange rates may impact our financial results.
Impact of Labor Market and Inflationary Costs
We have experienced broad-based inflationary impacts during the year ended
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transportation costs; tariffs; 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
In the third quarter of 2018, theOffice of the United States Trade Representative (USTR) began imposing additional tariffs on products imported fromChina , including many of our products, ranging from 7.5% to 25%. The tariffs enacted to date increase the cost of many of the products that are manufactured for us inChina . 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 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. InJanuary 2020 , the USTR granted temporary tariff relief for certain categories of products being imported fromChina . The tariff relief granted by the USTR expired on most categories of products being imported fromChina at the end of 2020. However, the USTR has publicly stated that it is considering reinstating temporary tariff relief on a subset of the previously exempt categories of products imported fromChina afterOctober 12, 2021 following its review of public comments submitted to the USTR prior toDecember 1, 2021 . As of the date of this filing, the USTR has not reinstated exemptions from tariffs on the subset of previously exempt categories of products imported fromChina . We expect that we will reverse tariff-related price increases previously passed along to our customers and cost concessions previously received from our suppliers as tariffs are reduced or tariff relief is granted.
Results of Operations
The following table sets forth, for the periods indicated, the dollar value and percentage of net sales represented by certain items in our Consolidated Statements of Operations:
For the Fiscal Year Ended
(in thousands, except percentage data) December 25, 2021 December 26, 2020
Net sales $ 1,345,249 100.0 % $ 1,092,748 100.0 %
Cost of goods sold 882,333 65.6 % 709,632 64.9 %
Gross profit 462,916 34.4 % 383,116 35.1 %
Selling, general and administrative expenses 291,365 21.7 % 249,743 22.9 %
Income from operations 171,551 12.8 % 133,373 12.2 %
Interest expense, net 2,162 0.2 % 599 0.1 %
Other income, net (377 ) 0.0 % (2,962 ) -0.3 %
Income before income taxes 169,766 12.6 % 135,736 12.4 %
Provision for income taxes 38,234 2.8 % 28,866 2.6 %
Net income $ 131,532 9.8 % $ 106,870 9.8 %
* Percentage of sales information may not add due to rounding
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Fiscal Year Ended
Net sales increased 23% to$1,345.2 million in fiscal 2021 from$1,092.7 million in fiscal 2020. The increase in net sales reflected the addition ofDayton Parts as well as robust customer demand across all our product channels. Year-over-year net sales growth excludingDayton Parts for fiscal 2021 was 16%. The absence of the government imposed shut-downs that negatively impacted fiscal 2020 was also a significant contributor to the year-over-year growth. Gross profit margin was 34.4% of net sales in fiscal 2021 compared to 35.1% of net sales in fiscal 2020. Gross margin contraction was driven by broad-based inflationary impacts due to global transportation and logistics constraints and higher costs from fair value adjustments to inventory recorded in connection with the Dayton Parts acquisition in fiscal 2021. These factors were partially offset by cost saving initiatives and price increases. Additionally, we benefitted from the absence of out-of-pocket costs incurred due to the COVID-19 pandemic in fiscal 2020. Selling, general and administrative expenses were$291.4 million , or 21.7% of net sales, in fiscal 2021 compared to$249.7 million , or 22.9% of net sales, in fiscal 2020. The decrease in SG&A as a percentage of net sales was due to the operating leverage from the$252.5 million increase in net sales in fiscal 2021 as compared to fiscal 2020. Additionally, we saw benefits in SG&A as a percentage of net sales from the absence of out-of-pocket costs related to the COVID-19 pandemic incurred in fiscal 2020. These benefits were partially offset by wage and benefits inflation and costs related to the completion of the Dayton Parts acquisition and subsequent integration activities in fiscal 2021. Our effective tax rate increased to 22.5% in fiscal 2021 from 21.3% in fiscal 2020. The higher effective tax rate for fiscal 2021 was the result of higher state tax expense and nondeductible transaction costs related to the Dayton Parts acquisition. The lower fiscal 2020 effective tax rate was the result of a nontaxable book gain and the write-off of a deferred tax liability in connection with our acquisition of the controlling interest inPower Train Industries, Inc. ("PTI") inJanuary 2020 , and a foreign tax credit carry-back claim.
Liquidity and Capital Resources
Historically, our primary sources of liquidity have been our invested cash and the cash flow we generate from our operations, including accounts receivable sales programs provided by certain customers. Cash and cash equivalents atDecember 25, 2021 decreased to$58.8 million from$155.6 million atDecember 26, 2020 . Working capital was$411.5 million atDecember 25, 2021 compared to$600.3 million atDecember 26, 2020 . Shareholders' equity was$932.7 million atDecember 25, 2021 and$853.6 million atDecember 26, 2020 . Based on our current operating plan, we believe that our sources of available capital are adequate to meet our ongoing cash needs for at least the next twelve months. However, our liquidity could be negatively affected by extending payment terms to customers, a decrease in demand for our products, the outcome of contingencies or other factors. See Note 10, "Commitments and Contingencies", in the accompanying consolidated financial statements for additional information regarding commitments and contingencies that may affect our liquidity.
Tariffs
Tariffs increase our uses of cash since we pay for the tariffs upon the arrival of our goods inthe United States but collect the cash on any passthrough price increases from our customers on a delayed basis according to the payment terms negotiated with our customers.
Payment Terms and Accounts Receivable Sales Programs
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. We participate in accounts receivable sales programs with several
customers that allow us to sell our accounts receivable to financial
institutions to offset the
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negative cash flow impact of these payment terms extensions. However, any sales
of accounts receivable through these programs ultimately result in us receiving
a lesser amount of cash than if we collected those accounts receivable ourselves
in due course. Moreover, to the extent that any of these accounts receivable
sales programs bear interest rates tied to the London Inter-Bank Offered Rate
("LIBOR"), as LIBOR rates increase our cost to sell our receivables also
increases. See ITEM 7A, "Quantitative and Qualitative Disclosures about Market
Risk" for more information. During fiscal 2021 and fiscal 2020, we sold
approximately $935.8 million and $740.0 million , respectively, under these
programs. If receivables had not been sold, $598.8 million and $505.1 million of
additional receivables would have been outstanding at December 25, 2021 and
December 26, 2020 , respectively, based on standard payment terms. We had
capacity to sell more accounts receivable under these programs if the needs of
the business warranted. Further extensions of customer payment terms would
result in additional uses of cash flow or increased costs associated with the
sales of accounts receivable.
Credit Agreement
On August 10, 2021 , in connection with the acquisition of Dayton Parts , we
entered into a new credit agreement that provides for a $600 million revolving
credit facility, including a letter of credit sub-facility of up to $60 million
(the "New Facility"). The New Facility replaced our previous $100 million
revolving credit facility. The New Facility matures on August 10, 2026 , is
guaranteed by the Company's material domestic subsidiaries (together with the
Company, the "Credit Parties") and is supported by a security interest in
substantially all of the Credit Parties' personal property and assets, subject
to certain exceptions.
Borrowings under the New Facility bear interest at a rate per annum equal to, at
the Company's option, either a LIBOR rate (subject to a 0.00% floor) or a base
rate, in each case plus an applicable margin of, initially (i) in the case of
LIBOR rate, 1.250% or (ii) in the case of base rate loans, 0.250%. The
applicable margin for (i) base rate loans ranges from 0.000% to 1.000% per annum
and (ii) for LIBOR loans ranges from 1.000% to 2.000% per annum, in each case,
based on the Total Net Leverage Ratio (as defined in the New Facility). The
interest rate at December 25, 2021 was LIBOR plus 125 basis points (1.35%). The
commitment fee is initially equal to 0.150% and thereafter ranges from 0.125% to
0.250% based on the Total Net Leverage Ratio.
The New Facility contains affirmative and negative covenants, including, but not
limited to, covenants regarding capital expenditures, share repurchases, and
financial covenants related to the ratio of consolidated interest expense to
consolidated EBITDA and the ratio of total net indebtedness to consolidated
EBITDA, each as defined by the New Facility.
As of December 25, 2021 , we were not in default with respect to the credit
agreement. As of December 25, 2021 , there was $239.4 million in outstanding
borrowings under the New Facility and two outstanding letters of credit for $0.8
million in the aggregate which were issued to secure ordinary course of business
transactions. Net of outstanding borrowings and letters of credit, we had $359.8
million available under the New Facility at December 25, 2021 .
Cash Flows
Below is a table setting forth the key lines of our Consolidated Statements of
Cash Flows:
For the Fiscal Year Ended
(in thousands) December 25, 2021 December 26, 2020
Cash provided by operating activities $ 100,338 $ 151,966
Cash used in investing activities (365,323 ) (30,258 )
Cash provided by (used in) financing
activities 168,235 (34,485 )
Effect of foreign exchange on cash and cash
equivalents (44 ) -
Net (decrease) increase in cash and cash
equivalents $ (96,794 ) $ 87,223
During fiscal 2021, cash provided by operating activities was $100.3 million
compared to $152.0 million during fiscal 2020. The $51.7 million decrease was
driven by higher inventory purchases in the
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current year to maintain customer fill rates and meet continued strong demand,
partially offset by higher proceeds from accounts receivable due to higher sales
of accounts receivable during the year.
Investing activities used
• Capital spending in fiscal 2021 primarily consisted of
tooling associated with new products, $5.7 million in enhancements and
upgrades to our information systems and infrastructure, scheduled
equipment replacements, certain facility improvements and other
capital projects.
• Capital spending in fiscal 2020 primarily consisted of $5.6 million in
tooling associated with new products, $5.9 million inenhancements and
upgrades to our information systems and infrastructure, scheduled
equipment replacements, certain facility improvements and other
capital projects.
• During fiscal 2021, we used $345.5 million to acquire Dayton Parts ,
net of cash acquired, and during fiscal 2020, we used $14.8 million to
acquire the remaining 60% of the outstanding equity of PTI, net of
cash acquired.
Financing activities provided cash of
• During fiscal 2021, we borrowed $252.4 million under the New Facility
to help fund the acquisition of Dayton Parts in August 2021 , and
subsequently repaid $13.0 million of that borrowing during fiscal
2021. Additionally, during fiscal 2021, we paid $61.5 million to
repurchase 604,628 common shares under our share repurchase plan.
• In fiscal 2020, we paid
shares under the program.
• The remaining uses of cash from financing activities in each period
results from stock compensation plan activity and the repurchase of
shares of our common stock held in a fund under our 401(k) Plan.
401(k) Plan participants can no longer purchase shares of Dorman
common stock as an investment option under the 401(k) Plan.Shares are
generally purchased from the 401(k) Plan when participants sell units
as permitted by the 401(k) Plan or elect to leave the 401(k) Plan upon
retirement, termination or other reasons.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements are transactions, agreements, or other contractual arrangements with an unconsolidated entity for which we have an obligation to the entity that is not recorded in our consolidated financial statements. We historically have not utilized off-balance sheet financial instruments, and currently do not plan to utilize off-balance sheet arrangements in the future to fund our working capital requirements, operations or growth plans. We may issue stand-by letters of credit under our credit agreement. Letters of credit totaling$0.8 million were outstanding at bothDecember 25, 2021 andDecember 26, 2020 . Those letters of credit are issued primarily to satisfy the requirements of workers compensation, general liability and other insurance policies. Each of the outstanding letters of credit has a one-year term from the date of issuance.
We do not have any off-balance sheet financing that has, or is reasonably likely to have, a material, current or future effect on our financial condition, revenues, expenses, cash flows, results of operations, liquidity, capital expenditures or capital resources.
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We have two non-cancelable operating leases for operating facilities from companies in whichSteven L. Berman , our Executive Chairman, and his family members are owners. Total annual rental payments each year to those companies under the lease arrangements were$2.3 million and$1.8 million in fiscal 2021 and fiscal 2020, respectively. We are a partner in a joint venture with one of our suppliers and we own a minority interest in two other suppliers. Purchases from these companies, since we acquired our investment interests were$18.9 million in fiscal 2021 and$10.7 million in fiscal 2020. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon the Consolidated Financial Statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. We regularly evaluate our estimates and judgments, including those related to revenue recognition, customer rebates and returns, inventories, long-lived assets and purchase accounting. Estimates and judgments are based upon historical experience and on various other assumptions believed to be accurate and reasonable under the circumstances. Actual results may differ materially from these estimates due to different assumptions or conditions. We believe the following critical accounting policies affect our more significant estimates and judgments used in the preparation of our Consolidated Financial Statements. 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. Historically, 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. Excess and Obsolete Inventory Reserves. We must make estimates of potential future excess and obsolete inventory costs. We provide reserves for discontinued and excess inventory based upon historical demand, forecasted usage, estimated customer requirements and product line updates. We maintain contact with our customer base to understand buying patterns, customer preferences and the life cycle of our products. Changes in customer requirements are factored into the reserves, as needed. 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 any 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 original estimates. Any adjustments to fair value assessments are recorded to goodwill over the purchase price allocation period which cannot exceed twelve months from the date of acquisition. Refer to Note 2 to the Consolidated Financial Statements for additional information.
New and Recently Adopted Accounting Pronouncements
None noted.
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