DORMAN PRODUCTS, INC. "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the condensed consolidated financial statements and related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q. As used herein, unless the context requires otherwise, "Dorman," the "Company," "we," "us," or "our" refers toDorman Products, Inc. and its subsidiaries.
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. Words such as "believe," "demonstrate," "expect," "estimate," "forecast," "anticipate," "should," "will" and "likely" and similar expressions identify forward-looking statements. However, the absence of these words does not mean the statements are not forward-looking. 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) competition in the automotive aftermarket industry; (ii) unfavorable economic conditions; (iii) the loss or decrease in sales among one of our top customers; (iv) customer consolidation in the automotive aftermarket industry; (v) foreign currency fluctuations and our dependence on foreign suppliers; (vi) extending credit to customers; (vii) the loss of a key supplier; (viii) limited customer shelf space; (ix) reliance on new product development; (x) changes in automotive technology and improvements in the quality of new vehicle parts; (xi) inability to protect our intellectual property and claims of intellectual property infringement; (xii) quality problems with products after their production and sale to customers; (xiii) loss of third-party transportation providers on whom we depend; (xiv) unfavorable results of legal proceedings; (xv) our executive chairman and his family owning a significant portion of the Company; (xvi) operations may be subject to quarterly fluctuations and disruptions from events beyond our control; (xvii) cyber-attacks; (xviii) imposition of taxes, duties or tariffs; (xix) the level of our indebtedness; (xx) exposure to risks related to accounts receivable; (xxi) the phaseout of LIBOR or the impact of the imposition of a new reference rate; (xxii) volatility in the market price of our common stock and potential securities class action litigation; (xxiii) losing the services of our executive officers or other highly qualified and experienced contributors; (xxiv) the inability to identify suitable acquisition candidates, complete acquisitions or integrate acquisitions successfully; (xxv) the effects of widespread public health epidemics, including COVID-19; and (xxvi) the failure to maintain sufficient inventory to meet customer demand or failure to anticipate future changes in customer demands. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. See the "Statement Regarding Forward Looking Statements," Part I, Item 1A, "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 28, 2019 and Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q for additional information regarding forward-looking statements and the factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. 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.
Introduction
The following discussion and analysis, as well as other sections in this Quarterly Report on Form 10-Q, should be read in conjunction with the unaudited condensed consolidated financial statements and footnotes thereto ofDorman Products, Inc. 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 endedDecember 28, 2019 . This Quarterly Report on Form 10-Q contains the registered and unregistered trademarks or service marks of Dorman and are the property ofDorman Products, Inc. and/or its affiliates. This Quarterly Report on Form 10-Q also may contain additional trade names, trademarks or service marks belonging to other companies. 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. Overview 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 ofDecember 28, 2019 , we marketed approximately 78,000 distinct stock keeping units ("SKU's") as compared to approximately 77,000 as ofDecember 29, 2018 , many of which we designed and engineered. This number excludes private label SKU's and other variations in how we market, package and distribute our products, includes distinct SKU's of acquired companies, and reflects distinct SKU's that have been discontinued at the end of their lifecycle. Our products are sold under our various brand names, under our customers' private label brands or in bulk. We are one of the leading aftermarket suppliers of original equipment ("OE") "dealer exclusive" parts. OE "dealer exclusive" parts are those parts which were traditionally available to consumers only from OE manufacturers or salvage yards. These parts include, among other parts: intake manifolds, exhaust manifolds, window regulators, radiator fan assemblies, tire pressure monitor sensors, complex electronics modules and exhaust gas recirculation (EGR) coolers. We generate virtually all our net sales from customers in the North American automotive aftermarket industry, primarily inthe United States . Our products are sold primarily through automotive aftermarket retailers, including through their online platforms, national, regional and 13 -------------------------------------------------------------------------------- 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. The introduction of new products and product lines to customers, as well as business acquisitions, also may cause significant fluctuations from quarter to quarter. Early in 2019, we began the process of transferring operations of our existing distribution facility inPortland, Tennessee to a new, larger facility nearby. The new 800,000 square foot facility became fully operational inOctober 2019 . In the second quarter of 2019, we began incurring additional costs related to start up inefficiencies and duplication of facility overhead and operating costs primarily related to those facility consolidation activities. We began implementing productivity initiatives in the fourth quarter of 2019 to address those inefficiencies and costs while at the same time expanding the facility to cover an aggregate of approximately 1 million square feet, which expansion was completed inJune 2020 . In the second quarter of 2020, the productivity levels at the new facility improved and costs began returning to typical levels, in-line with our expectations. We expect our distribution costs to continue to moderate back to more typical levels as we move through the remainder of 2020, subject to the impact of COVID-19. We operate on a fifty-two or fifty-three-week period ending on the last Saturday of the calendar year. Our 2020 fiscal year will be a fifty-two-week period that will end onDecember 26, 2020 . Our fiscal 2019 was a fifty-two-week period that ended onDecember 28, 2019 . Impacts of COVID-19 The COVID-19 pandemic has resulted and is expected to continue to result in significant economic disruption. Since COVID-19 was declared a pandemic, state orders shutting down or restricting business operations to contain the spread of COVID-19 have generally exempted automotive repair and the related supply and distribution of parts as those businesses have generally been classified as critical, essential or life-sustaining. Therefore, the vast majority of our retail and wholesale customers have been and currently remain open for business. In turn, all of ourU.S. facilities have also remained, and currently remain, open and operating, with modified staffing in certain locations where appropriate. We have taken actions to promote the welfare of our employees by enhancing safety protocols, including requiring administrative employees to work from home where applicable and implementing social distancing and robust sanitization practices at our facilities. We also have adopted a COVID-19 sick leave policy providing continued salary and benefits to eligible employees. We have had to adjust our operations and inventory levels as demand has fluctuated due to government-imposed restrictions being imposed and then subsequently lifted or modified acrossthe United States . As previously disclosed, in late March, we began experiencing softening customer demand as a result of government-imposed restrictions designed to slow the spread of COVID-19. While customer orders dropped significantly in April due to government-imposed restrictions, we saw a rapid recovery as the second quarter progressed with May orders flat to prior year and June orders up significantly above prior year. We continued to see an increase in orders in the third quarter, where sales performance reached a record high for the Company. However, as government-imposed restrictions vary acrossthe United States and continue to change, it remains difficult to determine the full impact that the pandemic will have on the overall demand environment. Correspondingly, to the extent there may be fluctuations in demand as a result of the pandemic, it remains difficult to determine the full impact that the pandemic will have on various aspects of our operations, including, but not limited to, inventory levels, our ability to fulfill contractual requirements and staffing at our facilities.
Dorman's balance sheet remains healthy and strong, enabling us to take the following actions in the third quarter:
• We decreased the levels of receivables collected under our factoring
program by $104 million , returning to historical levels, with total
factoring costs down $3 million from the same quarter last year.
• In
revolving credit facility at the end of March 2020 to enhance our
liquidity.
• During the first quarter of fiscal 2020, we suspended share repurchases
under our share repurchase program in light of COVID-19; however, we
resumed such repurchases in
As a result of these actions, as ofSeptember 26, 2020 , we had no amounts drawn under our revolving credit facility (excluding$0.8 million of issued but undrawn letters of credit) and approximately$170.5 million in cash and cash equivalents. We believe that our asset-light model and level of liquidity position us well to navigate the current economic disruption associated with the ongoing COVID-19 pandemic.
During the third quarter, we estimate a negative impact of
At the time of this filing and as we look ahead, we are unable to determine or predict the overall impact the COVID-19 pandemic will have on our customers, vendors and suppliers or our business, results of operations, liquidity or capital resources. Significant uncertainty still exists concerning the overall magnitude of the impact and the duration of the COVID-19 pandemic. As a result, we will continue to closely monitor updates regarding the spread of COVID-19 and adjust our operations according to guidelines from local, state and federal officials. In light of the foregoing, we may take further actions that alter our business operations or that we determine are in the best interests of our employees, customers, suppliers and shareholders.
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 each year since 2003 to grow our
business and strengthen our relationships with our customers. The investments
primarily have been in the form of increased product development resources,
increased customer and end-user awareness programs, and customer service
improvements. These investments historically have enabled us to provide an
expanding array of new product offerings and grow revenues at levels that
generally have exceeded market growth rates. As a result of these
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investments, we introduced 2,310 new distinct SKU's to our customers and end
users during the nine months ended September 26, 2020 , including 1,000
new-to-the-aftermarket SKU's. We introduced 5,239 distinct SKU's to our
customers and end users in the fiscal year ended December 28, 2019 , including
1,625 new-to-the-aftermarket SKU's.
One area of focus has been our complex electronics program, which capitalizes on
the growing number of electronic components being utilized on today's OE
platforms. New vehicles contain an average of approximately thirty-five
electronic modules, with some high-end luxury vehicles containing over one
hundred modules. 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 the nine months
ended September 26, 2020 , we introduced 367 SKU's in this product line. We
expect to continue to invest in the medium and heavy-duty product category.
Acquisitions
Our growth is also impacted by acquisitions. For example, onJanuary 2, 2020 , we acquired the remaining 60% of the outstanding stock ofPower Train Industries, Inc. ("PTI"). 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 ("VIO") at any one time, and miles driven by those VIO.
To begin, the Company's products are primarily purchased and installed on a subsegment of the VIO, specifically weighted towards vehicles aged eight to thirteen years old. Each year,the United States seasonally adjusted annual rate ("US SAAR") of new vehicles purchased adds a new year to the US VIO. 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 US VIO subsegment (eight to thirteen-year-old vehicles) commencing in 2016. However, following 2011 and the impact the Great Recession of 2008, US consumers began to increase their purchases of new vehicles which over time caused the US SAAR to recover and return to more historical levels. Consequently, we expect the US VIO for vehicles aged eight to thirteen years old to recover over the next several years. In addition, we believe that vehicle owners generally are operating their current vehicles longer than they did several years ago, performing necessary repairs and maintenance in order to keep those vehicles well maintained. According to data published byPolk , a division ofIHS Automotive , the average age of VIO increased to 11.9 years as ofOctober 2019 from 11.8 years as ofOctober 2018 despite increasing new car sales. Additionally, the number of VIO inthe United States continues to increase, growing 2% in 2019 to 290.0 million from 285.7 million in 2018. Approximately 57% of vehicles in operation are 11 years old or older. Vehicle scrappage rates have also decreased over the last several years.
The number of miles driven is another important statistic that impacts our
business. According to the
The COVID-19 pandemic in general, as well as executive orders issued by certain states in response to the COVID-19 pandemic are having an adverse impact on work-related and personal travel. In fact, according to a report cited by theAuto Care Association , data indicates that the number of miles driven daily was down 44% as ofMay 1, 2020 when compared toFebruary 2, 2020 . However, the low point in the number of miles driven daily was down 57% as of mid-April when compared toFebruary 2, 2020 , and the number of miles driven daily has slowly increased since that low point. As a result, while, prior to COVID-19, we might have expected to see additional sales growth due to the VIO and mileage trends referenced above, the impact of COVID-19 may adversely affect our sales growth potential and our future results.
Brand Protection
We operate in a highly competitive market. As a result, we are continuously
evaluating our approach to brand protection. 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.
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Discounts, Allowances and Incentives
We offer a variety of customer discounts, rebates, return allowances and other incentives. We may offer cash discounts for paying invoices in accordance with the specified discount terms of the invoice. In addition, we may offer pricing discounts based on volume purchased from us or other pricing discounts related to programs under a customer's agreement. These discounts can be in the form of "off-invoice" discounts and are immediately deducted from sales at the time of sale. For those customers that choose to receive a payment on a quarterly or annual basis instead of "off-invoice," we accrue for such payments as the related sales are made and reduce sales accordingly. Finally, rebates and discounts are provided to customers to support promotional activities such as advertising and sales force allowances, and allowances for warranty and overstock returns may also be provided. 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. In addition, change-over costs include the costs related to removing the new customer's inventory and replacing it with our inventory, which is commonly referred to as a stock-lift. 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 in theU.S. 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 theU.S. dollar changes in value relative to foreign currencies in the future, the price of the product for 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.
Impact of Inflation
The overall impact of inflation has not resulted in a significant change in labor costs or the cost of general services utilized.
The cost of many commodities that are used in our products has fluctuated over time resulting in increases and decreases in the cost of our products. In addition, we have periodically experienced increased transportation costs as a result of higher fuel prices, capacity constraints and other factors. We will attempt to offset cost increases by passing along selling price increases to customers, using alternative suppliers and sourcing purchases from other suppliers. However, there can be no assurance that we will be successful in these efforts.
Impact of Tariffs
Effective the third quarter of 2018, theOffice of the United States Trade Representative (USTR) imposed three additional tranches of tariffs on approximately$250 billion worth of Chinese imports. Tariffs ranged from 10% to 25% depending on the commodity. Effective for shipments departingChina on or afterMay 10, 2019 , the USTR modified the tranches to impose tariffs of 25% for all commodities. In addition, effectiveSeptember 1, 2019 , the USTR imposed the fourth tranche of tariffs on approximately$300 billion worth of Chinese imports with a tariff rate of 15%, which was reduced to 7.5% inFebruary 2020 . The tariffs enacted to date will increase the cost of many products that are manufactured for us inChina . We are taking several actions to mitigate the impact of the tariffs including, but not limited to, price increases to our customers and cost concessions from our suppliers. We expect to continue mitigating the impact of tariffs in fiscal 2020 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 , theU.S. and Chinese governments signed a trade deal that reduced someU.S. tariffs on Chinese goods in exchange for Chinese pledges to, among other things, purchase more of American farm, energy and manufactured goods. In addition, the USTR has granted tariff relief for certain categories of products being imported fromChina . We expect that we will reverse tariff-related price increases previously passed along to our customers and lose cost concessions previously received from our suppliers on future purchases as such tariffs are reduced or such other relief is granted. 16
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Results of Operations
The following table sets forth, for the periods indicated, the percentage of net
sales represented by certain items in our Condensed Consolidated Statements of
Operations:
Three Months Ended* Nine Months Ended*
(in millions) September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019
Net sales $ 300.6 100.0 % $ 253.8 100.0 % $ 791.5 100.0 % $ 751.8 100.0 %
Cost of goods sold $ 192.8 64.1 % $ 166.9 65.8 % $ 519.8 65.7 % $ 490.2 65.2 %
Gross profit $ 107.8 35.9 % $ 86.9 34.2 % $ 271.7 34.3 % $ 261.6 34.8 %
Selling, general and
administrative
expenses $ 63.0 21.0 % $ 60.0 23.6 % $ 184.3 23.3 % $ 177.6 23.6 %
Income from operations $ 44.8 14.9 % $ 27.0 10.6 % $ 87.5 11.0 % $ 83.9 11.2 %
Other (expense) income,
net $ (0.0 ) 0.0 % $ 0.0 0.0 % $ 2.3 0.3 % $ 0.1 0.0 %
Income before income
taxes $ 44.8 14.9 % $ 27.0 10.6 % $ 89.8 11.3 % $ 84.0 11.2 %
Provision for income
taxes $ 10.5 3.5 % $ 5.7 2.2 % $ 18.9 2.4 % $ 17.8 2.4 %
Net income $ 34.3 11.4 % $ 21.3 8.4 % $ 70.9 9.0 % $ 66.2 8.8 %
* Amounts and percentage of sales information does not add due to rounding
Three Months Ended
Net sales increased 18.4% to$300.6 million for the three months endedSeptember 26, 2020 from$253.8 million for the three months endedSeptember 28, 2019 . The increase in net sales was primarily organic and driven by increased volumes during the quarter. Gross profit margin was 35.9% of net sales for the three months endedSeptember 26, 2020 compared to 34.2% of net sales for the three months endedSeptember 28, 2019 . The gross profit margin was higher primarily due to improved productivity at ourPortland, TN distribution facility as well as lower provisions for excess and obsolete inventory as our efforts to improve our end-to-end supply chain began to show results. Selling, general and administrative expenses were$63.0 million , or 21.0% of net sales, for the three months endedSeptember 26, 2020 compared to$60.0 million , or 23.6% of net sales, for the three months endedSeptember 28, 2019 . Approximately 270 basis points of the decrease in selling, general and administrative expense as a percentage of net sales was due to improved leverage from the$47 million increase in net sales as compared to the third quarter of 2019. Additionally, the Company drove operating cost savings from productivity improvements in ourPortland, TN distribution facility, as well as reduced travel expenses stemming from COVID-19 restrictions. Our effective tax rate was 23.5% for the three months endedSeptember 26, 2020 compared to 21.1% for the three months endedSeptember 28, 2019 . The increase in effective tax rate in the third quarter of 2020 is primarily due to the impact of foreign operations.
Nine Months Ended
Net sales increased 5.3% to$791.5 million for the nine months endedSeptember 26, 2020 from$751.8 million for the nine months endedSeptember 28, 2019 . The increase in net sales was primarily organic and driven by increased volumes specifically within the third quarter. Gross profit margin was 34.3% of net sales for the nine months endedSeptember 26, 2020 compared to 34.8% of net sales for the nine months endedSeptember 28, 2019 . The gross profit margin was lower primarily due to incremental costs associated with COVID-19, including costs related to safety measures implemented at our sites and our COVID-19 sick leave policy, and higher customer provisions in 2020 as compared to 2019. Selling, general and administrative expenses were$184.3 million , or 23.3% of net sales, for the nine months endedSeptember 26, 2020 compared to$177.6 million , or 23.6% of net sales, for the nine months endedSeptember 28, 2019 . The decrease in selling, general and administrative expense as a percentage of net sales during the period was primarily due to productivity improvements in ourPortland distribution facility, as well as reduced travel expenses stemming from COVID-19 restrictions. Other Income, net was$2.3 million for the nine months endedSeptember 26, 2020 which includes a gain of$2.5 million recognized as the difference between the carrying value of our previously held equity method investment in PTI and the implied fair value when we acquired PTI fully inJanuary 2020 .
Our effective tax rate was 21.0% for the nine months ended
Liquidity and Capital Resources
Historically, our primary sources of liquidity have been our invested cash and the cash flow we generate from our operations, including accounts receivable sales programs provided by our customers. Cash and cash equivalents atSeptember 26, 2020 increased to$170.5 million from$68.4 million atDecember 28, 2019 . The increase primarily related to cash provided from operating activities. Working capital was$591.5 million atSeptember 26, 2020 compared to$534.1 million atDecember 28, 2019 . Based on our current operating plan, we believe that our sources of available capital are adequate to meet our ongoing cash needs for at least the next twelve months. However, our liquidity could be negatively affected by extending payment terms to customers, a decrease in demand for our products, the outcome of contingencies or other factors, including the impact of the COVID-19 pandemic. See Note 7, "Commitments and Contingencies", in the accompanying condensed consolidated financial statements for additional information regarding commitments and contingencies that may affect our liquidity. 17
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Tariffs
Tariffs also 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 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"), as LIBOR rates increase
our cost to sell our receivables also increases. See Item 3. Quantitative and
Qualitative Disclosures about Market Risk for more information. Further
extensions of customer payment terms will result in additional uses of cash flow
or increased costs associated with the sales of accounts receivable.
During the nine months ended September 26, 2020 and September 28, 2019 , we sold
approximately $568.3 million and $530.7 million of accounts receivable,
respectively, under these programs. The increase in sales of accounts receivable
reflects our efforts to enhance our liquidity in the second quarter of 2020 in
light of COVID-19. In the third quarter of 2020, we decreased the levels of
receivables sold under these programs by $104 million , returning to more
historical levels. We have capacity to sell increased levels of accounts
receivable under our available programs if liquidity needs arise, whether due to
continued impacts of COVID-19 or other factors.
Credit Agreement
We have a credit agreement, expiring inDecember 2022 , that provides for a revolving credit facility of$100.0 million and, subject to certain requirements, gives us the ability to request increases in revolving credit commitments of up to an additional$100.0 million . Borrowings under the credit agreement are on an unsecured basis. At the Company's election, the interest rate applicable to borrowings under the credit agreement will be either (1) the Prime Rate as announced by Wells Fargo from time to time, (2) an Adjusted LIBOR Market Index Rate as measured by the LIBOR Market Index Rate plus the Applicable Margin which fluctuates between 65 basis points and 125 basis points based on the ratio of the Company's Consolidated Funded Debt to Consolidated EBITDA, or (3) an Adjusted LIBOR Rate as measured by the LIBOR Rate plus the Applicable Margin which fluctuates between 65 basis points and 125 basis points based on the ratio of the Company's Consolidated Funded Debt to Consolidated EBITDA. The interest rate atSeptember 26, 2020 was LIBOR plus 65 basis points (0.80%). During the occurrence and continuance of an event of default, all outstanding revolving credit loans will bear interest at a rate per annum equal to 2.00% in excess of the greater of (1) the Prime Rate or (2) the Adjusted LIBOR Market Index Rate then applicable. The credit agreement also contains covenants, including those related to the ratio of certain consolidated fixed charges to consolidated EBITDA, capital expenditures, and share repurchases, each as defined by the credit agreement. The credit agreement also requires us to pay a fee of 0.10% on the average daily unused portion of the facility, provided the fee will not be charged on the first$30 million of the revolving credit facility.
In
As ofSeptember 26, 2020 , there were no borrowings under the credit agreement and we had two outstanding letters of credit for approximately$0.8 million in the aggregate which were issued to secure ordinary course of business transactions. Net of these letters of credit, there was approximately$99.2 million available under the credit agreement atSeptember 26, 2020 .
As of
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