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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission file number: 0-18914

 

Dorman Products, Inc.

(Exact name of registrant as specified in its charter)

 

 

Pennsylvania

 

23-2078856

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

3400 East Walnut Street, Colmar, Pennsylvania

 

18915

(Address of principal executive offices)

 

(Zip Code)

(215) 997-1800

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.01 per share

 

DORM

 

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No

As of July 27, 2020, the registrant had 32,439,313 shares of common stock, par value $0.01 per share, outstanding.

 


DORMAN PRODUCTS, INC. AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 27, 2020

 

 

 

 

 

Page

Part I — FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations:

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended June 27, 2020 and June 29, 2019

 

3

 

 

 

 

 

 

 

    Twenty-Six Weeks Ended June 27, 2020 and June 29, 2019

 

4

 

 

 

 

 

 

 

Consolidated Balance Sheets

 

5

 

 

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

24

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

24

 

 

 

 

 

Part II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

25

 

 

 

 

 

Item 1A.

 

Risk Factors

 

25

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

25

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

26

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

26

 

 

 

 

 

Item 5.

 

Other Information

 

26

 

 

 

 

 

Item 6.

 

Exhibits

 

26

 

 

 

 

 

Exhibit Index

 

 

 

27

 

 

 

 

 

Signatures

 

 

 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

Thirteen Weeks Ended

 

(in thousands, except per share data)

 

June 27, 2020

 

 

June 29, 2019

 

Net sales

 

$

233,182

 

 

$

254,175

 

Cost of goods sold

 

 

154,034

 

 

 

167,027

 

Gross profit

 

 

79,148

 

 

 

87,148

 

Selling, general and administrative expenses

 

 

61,525

 

 

 

59,925

 

Income from operations

 

 

17,623

 

 

 

27,223

 

Other (expense) income, net

 

 

(297

)

 

 

27

 

Income before income taxes

 

 

17,326

 

 

 

27,250

 

Provision for income taxes

 

 

3,441

 

 

 

5,751

 

Net income

 

$

13,885

 

 

$

21,499

 

Earnings Per Share:

 

 

 

 

 

 

 

 

Basic

 

$

0.43

 

 

$

0.66

 

Diluted

 

$

0.43

 

 

$

0.66

 

Weighted Average Shares Outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

32,269

 

 

 

32,588

 

Diluted

 

 

32,338

 

 

 

32,676

 

 

See accompanying Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

Twenty-Six Weeks Ended

 

(in thousands, except per share data)

 

June 27, 2020

 

 

June 29, 2019

 

Net sales

 

$

490,912

 

 

$

497,966

 

Cost of goods sold

 

 

326,967

 

 

 

323,327

 

Gross profit

 

 

163,945

 

 

 

174,639

 

Selling, general and administrative expenses

 

 

121,260

 

 

 

117,676

 

Income from operations

 

 

42,685

 

 

 

56,963

 

Other income, net

 

 

2,334

 

 

 

57

 

Income before income taxes

 

 

45,019

 

 

 

57,020

 

Provision for income taxes

 

 

8,359

 

 

 

12,115

 

Net income

 

$

36,660

 

 

$

44,905

 

Earnings Per Share:

 

 

 

 

 

 

 

 

Basic

 

$

1.13

 

 

$

1.37

 

Diluted

 

$

1.13

 

 

$

1.37

 

Weighted Average Shares Outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

32,312

 

 

 

32,722

 

Diluted

 

 

32,388

 

 

 

32,811

 

 

See accompanying Notes to Consolidated Financial Statements

 

 

 

4


DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

(in thousands, except for share data)

 

June 27, 2020

 

 

December 28, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

359,558

 

 

$

68,353

 

Accounts receivable, less allowance for doubtful accounts of $1,117 and $957

 

 

241,901

 

 

 

391,810

 

Inventories

 

 

274,821

 

 

 

280,813

 

Prepaids and other current assets

 

 

10,420

 

 

 

13,614

 

Total current assets

 

 

886,700

 

 

 

754,590

 

Property, plant and equipment, net

 

 

95,886

 

 

 

101,837

 

Operating lease right-of-use assets

 

 

36,034

 

 

 

32,198

 

Goodwill

 

 

91,155

 

 

 

74,458

 

Intangible assets, net

 

 

26,901

 

 

 

21,305

 

Deferred tax asset, net

 

 

3,886

 

 

 

4,336

 

Other assets

 

 

39,087

 

 

 

52,348

 

Total

 

$

1,179,649

 

 

$

1,041,072

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

83,752

 

 

$

90,437

 

Accrued compensation

 

 

9,559

 

 

 

9,782

 

Accrued customer rebates and returns

 

 

113,460

 

 

 

105,903

 

Revolving credit line

 

 

99,000

 

 

 

-

 

Other accrued liabilities

 

 

19,870

 

 

 

14,380

 

Total current liabilities

 

 

325,641

 

 

 

220,502

 

Long-term operating lease liabilities

 

 

34,175

 

 

 

29,730

 

Other long-term liabilities

 

 

9,005

 

 

 

13,297

 

Deferred tax liabilities, net

 

 

3,696

 

 

 

3,959

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.01; authorized 50,000,000 shares; issued and

   outstanding 32,440,413 and 32,558,168 in 2020 and 2019, respectively

 

 

326

 

 

 

326

 

Additional paid-in capital

 

 

55,406

 

 

 

52,605

 

Retained earnings

 

 

751,400

 

 

 

720,653

 

Total shareholders’ equity

 

 

807,132

 

 

 

773,584

 

Total

 

$

1,179,649

 

 

$

1,041,072

 

 

See accompanying Notes to Consolidated Financial Statements

 

 


5


DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

 

 

Thirteen Weeks Ended June 27, 2020

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

Shares

Issued

 

 

Par

Value

 

 

Paid-In

Capital

 

 

Retained

Earnings

 

 

Total

 

Balance at March 28, 2020

 

 

32,434,665

 

 

$

325

 

 

$

53,454

 

 

$

737,596

 

 

$

791,375

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation expense under Incentive Stock Plan

 

 

 

 

 

 

 

1,504

 

 

 

 

 

1,504

 

Purchase and cancellation of common stock

 

 

(1,620

)

 

 

(1

)

 

 

(2

)

 

 

(83

)

 

 

(86

)

Issuance of non-vested stock, net of cancellations

 

 

10,129

 

 

 

2

 

 

 

504

 

 

 

 

 

 

506

 

Other stock related activity, net of tax

 

 

(2,761

)

 

 

 

 

 

(54

)

 

 

2

 

 

 

(52

)

Net income

 

 

 

 

 

 

 

 

 

 

 

13,885

 

 

 

13,885

 

Balance at June 27, 2020

 

 

32,440,413

 

 

$

326

 

 

$

55,406

 

 

$

751,400

 

 

$

807,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended June 29, 2019

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

Shares

Issued

 

 

Par

Value

 

 

Paid-In

Capital

 

 

Retained

Earnings

 

 

Total

 

Balance at March 30, 2019

 

 

32,942,013

 

 

$

329

 

 

$

49,890

 

 

$

691,488

 

 

$

741,707

 

Exercise of stock options

 

 

196

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation expense under Incentive Stock Plan

 

 

 

 

 

 

 

 

1,132

 

 

 

 

 

 

1,132

 

Purchase and cancellation of common stock

 

 

(175,184

)

 

 

(2

)

 

 

(315

)

 

 

(14,387

)

 

 

(14,704

)

Issuance of non-vested stock, net of cancellations

 

 

16,099

 

 

 

1

 

 

 

867

 

 

 

 

 

 

868

 

Other stock related activity, net of tax

 

 

(1,793

)

 

 

 

 

 

(60

)

 

 

(110

)

 

 

(170

)

Net income

 

 

 

 

 

 

 

 

 

 

 

21,499

 

 

 

21,499

 

Balance at June 29, 2019

 

 

32,781,331

 

 

$

328

 

 

$

51,514

 

 

$

698,490

 

 

$

750,332

 

 

 

 

Twenty-Six Weeks Ended June 27, 2020

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

Shares

Issued

 

 

Par

Value

 

 

Paid-In

Capital

 

 

Retained

Earnings

 

 

Total

 

Balance at December 28, 2019

 

 

32,556,263

 

 

$

326

 

 

$

52,605

 

 

$

720,653

 

 

$

773,584

 

Exercise of stock options

 

 

10

 

 

 

 

 

 

 

 

 

Compensation expense under Incentive Stock Plan

 

 

 

 

 

 

2,718

 

 

 

 

 

2,718

 

Purchase and cancellation of common stock

 

 

(98,329

)

 

 

(1

)

 

 

(177

)

 

 

(5,687

)

 

 

(5,865

)

Issuance of non-vested stock, net of cancellations

 

 

(11,845

)

 

 

1

 

 

 

504

 

 

 

 

 

505

 

Other stock related activity, net of tax

 

 

(5,686

)

 

 

 

 

 

(244

)

 

 

(226

)

 

 

(470

)

Net income

 

 

 

 

 

 

 

 

 

 

 

36,660

 

 

 

36,660

 

Balance at June 27, 2020

 

 

32,440,413

 

 

$

326

 

 

$

55,406

 

 

$

751,400

 

 

$

807,132

 

 

 

 

Twenty-Six Weeks Ended June 29, 2019

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

Shares

Issued

 

 

Par

Value

 

 

Paid-In

Capital

 

 

Retained

Earnings

 

 

Total

 

Balance at December 29, 2018

 

 

33,004,861

 

 

$

330

 

 

$

47,861

 

 

$

679,432

 

 

$

727,623

 

Exercise of stock options

 

 

11,910

 

 

 

 

 

 

31

 

 

 

 

 

 

31

 

Compensation expense under Incentive Stock Plan

 

 

 

 

 

 

 

 

2,047

 

 

 

 

 

 

2,047

 

Purchase and cancellation of common stock

 

 

(290,274

)

 

 

(3

)

 

 

(522

)

 

 

(23,814

)

 

 

(24,339

)

Issuance of non-vested stock, net of cancellations

 

 

64,292

 

 

 

1

 

 

 

867

 

 

 

 

 

 

868

 

Other stock related activity, net of tax

 

 

(9,458

)

 

 

 

 

 

1,230

 

 

 

(2,033

)

 

 

(803

)

Net income

 

 

 

 

 

 

 

 

 

 

 

44,905

 

 

 

44,905

 

Balance at June 29, 2019

 

 

32,781,331

 

 

$

328

 

 

$

51,514

 

 

$

698,490

 

 

$

750,332

 

 

See accompanying Notes to Consolidated Financial Statements

6


DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Twenty-Six Weeks Ended

 

(in thousands)

 

June 27, 2020

 

 

June 29, 2019

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

36,660

 

 

$

44,905

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

15,035

 

 

 

14,097

 

Gain on equity method investment

 

 

(2,498

)

 

 

-

 

Provision for doubtful accounts

 

 

105

 

 

 

21

 

Benefit for deferred income taxes

 

 

(1,074

)

 

 

(64

)

Provision for stock-based compensation

 

 

2,718

 

 

 

2,047

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

151,818

 

 

 

21,500

 

Inventories

 

 

11,564

 

 

 

(21,235

)

Prepaids and other current assets

 

 

2,462

 

 

 

(11,200

)

Other assets

 

 

(4,779

)

 

 

2,238

 

Accounts payable

 

 

(8,665

)

 

 

(6,925

)

Accrued customer rebates and returns

 

 

7,557

 

 

 

(7,345

)

Accrued compensation and other liabilities

 

 

8,498

 

 

 

(1,491

)

Cash provided by operating activities

 

 

219,401

 

 

 

36,548

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Acquisition, net of cash acquired

 

 

(14,308

)

 

 

-

 

Property, plant and equipment additions

 

 

(7,143

)

 

 

(17,335

)

Cash used in investing activities

 

 

(21,451

)

 

 

(17,335

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Net proceeds of revolving credit line

 

 

99,000

 

 

 

-

 

Other stock related activity

 

 

120

 

 

 

92

 

Purchase and cancellation of common stock

 

 

(5,865

)

 

 

(24,339

)

Cash provided by (used in) financing activities

 

 

93,255

 

 

 

(24,247

)

Net Increase (Decrease) in Cash and Cash Equivalents

 

 

291,205

 

 

 

(5,034

)

Cash and Cash Equivalents, Beginning of Period

 

 

68,353

 

 

 

43,458

 

Cash and Cash Equivalents, End of Period

 

$

359,558

 

 

$

38,424

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for interest expense

 

$

433

 

 

$

90

 

Cash paid for income taxes

 

$

1,750

 

 

$

21,730

 

 

See accompanying Notes to Consolidated Financial Statements 

7


DORMAN PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED JUNE 27, 2020 AND JUNE 29, 2019

(UNAUDITED)

1.

Basis of Presentation

As used herein, unless the context otherwise requires, “Dorman,” the “Company,” “we,” “us,” or “our” refers to Dorman Products, Inc. and its subsidiaries. Our ticker symbol on the NASDAQ Global Select Market is “DORM.”

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). However, they do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the thirteen and twenty-six weeks ended June 27, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending 2020 or any future period. 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 may cause significant fluctuations from quarter to quarter. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019. 

Certain prior year amounts have been reclassified to conform with current year presentation.

2.

Business Acquisitions and Investments

Power Train Industries, Inc.

On January 2, 2020, we acquired the remaining 60% of the outstanding stock of Power Train Industries, Inc. (“PTI”), a privately-held supplier of parts to the automotive aftermarket, based in Reno, Nevada. The total consideration paid for PTI was approximately $30.7 million, which included $18.4 million paid for the remaining 60% of the outstanding stock, subject to customary purchase price adjustments, and $12.3 million which represents the fair value of the previously held 40% equity interest in PTI that was acquired by the Company in 2016. As a result of the acquisition, we recorded a gain of approximately $2.5 million in Other Income in the twenty-six weeks ended June 27, 2020 as a result of the increase in fair value of the previously owned 40% interest in PTI. We previously accounted for our 40% interest as an equity-method investment. 

The transaction was accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired, and liabilities assumed were recorded at fair value, with the remaining purchase price recorded as goodwill.

In connection with this acquisition, we recorded $16.7 million in goodwill, $7.3 million of identified intangibles, and $6.7 million of other assets, net, primarily $3.5 million of cash, $2.0 million of accounts receivable, $5.6 million of inventory, and ($4.4 million) of net other assets and liabilities.

The estimated fair value of the PTI assets acquired and liabilities assumed are provisional as of June 27, 2020 and are based on information that is currently available. Additional information about conditions that existed as of the date of acquisition are being gathered to finalize these provisional measurements, particularly with respect to net working capital and income taxes payable. Accordingly, the measurement of the PTI assets acquired and liabilities assumed may change upon completion of the purchase price allocation, both of which are expected to occur no later than one year from the acquisition date.

The valuation of the intangible assets acquired and related amortization periods are as follows:

(in thousands)

 

Valuation

 

 

Amortization Period (in years)

 

Customer relationships

 

$

4,600

 

 

 

15

 

Tradenames

 

 

700

 

 

 

5

 

Technology

 

 

1,800

 

 

 

8

 

Other

 

 

190

 

 

 

5

 

Total

 

$

7,290

 

 

 

 

 

The fair values of the Customer relationships and Tradenames were estimated using a discounted present value income approach.

The goodwill recognized is attributable primarily to strategic and synergistic opportunities related to existing automotive aftermarket businesses, the assembled workforce of PTI and other factors. The goodwill is not expected to be deductible for tax purposes.

The financial results of the acquisition have been included in the Consolidated Financial Statements since the date of acquisition. 

8


3.

Sales of Accounts Receivable

We have entered into several customer sponsored programs administered by unrelated financial institutions that permit us to sell certain accounts receivable at discounted rates to the financial institutions. Transactions under these agreements were accounted for as sales of accounts receivable and the related accounts receivable were removed from our Consolidated Balance Sheet at the time of the sales transactions. Pursuant to these agreements, we sold $496.4 million and $355.1 million of accounts receivable during the twenty-six weeks ended June 27, 2020 and June 29, 2019, respectively. All of our credit terms with our customers are 365 days or less. If receivables had not been sold over the previous twelve months, $571.7 million and $437.9 million of additional accounts receivable would have been outstanding at June 27, 2020 and December 28, 2019, respectively, based on standard payment terms. Financing costs associated with these accounts receivable sales programs were $6.8 million and $4.7 million in the thirteen weeks ended June 27, 2020 and June 29, 2019, respectively. Financing costs associated with these accounts receivable sales programs were $9.6 million and $9.3 million in the twenty-six weeks ended June 27, 2020 and June 29, 2019, respectively. The financing costs associated with our accounts receivable sales programs were classified as selling, general and administrative expense in the Consolidated Statements of Operations.

4.

Inventories

Inventories include the cost of material, freight, direct labor and overhead utilized in the processing of our products and are stated at the lower of cost or net realizable value. Inventories were as follows:

 

(in thousands)

 

June 27,

2020

 

 

December 28,

2019

 

Bulk product

 

$

106,968

 

 

$

114,308

 

Finished product

 

 

163,311

 

 

 

161,866

 

Packaging materials

 

 

4,542

 

 

 

4,639

 

Total

 

$

274,821

 

 

$

280,813

 

 

5.

Leases

We adopted ASU No. 2016-02, Leases, on December 30, 2018, the beginning of our fiscal 2019, using the modified retrospective approach. We determine whether an arrangement is a lease at inception. This determination generally depends on whether the arrangement conveys the right to control the use of an identified fixed asset explicitly or implicitly for a period of time in exchange for consideration. Control of an underlying asset is conveyed if we obtain the rights to direct the use of and to obtain substantially all of the economic benefit from the use of the underlying asset. Some of our leases include both lease and non-lease components which are accounted for as a single lease component as we have elected the practical expedient. Some of our operating lease agreements include variable lease costs, primarily taxes, insurance, common area maintenance or increases in rental costs related to inflation. Substantially all of our equipment leases and some of our real estate leases have terms of less than one year and, as such, are accounted for as short-term leases as we have elected the practical expedient.

Operating leases are included in the right-of-use lease assets, other current liabilities and long-term lease liabilities on the Consolidated Balance Sheet. Right-of-use assets and lease liabilities are recognized at each lease’s commencement date based on the present values of its lease payments over its respective lease term. When a borrowing rate is not explicitly available for a lease, our incremental borrowing rate is used based on information available at the lease’s commencement date to determine the present value of its lease payments. Operating lease payments are recognized on a straight-line basis over the lease term. We had no financing leases as of June 27, 2020.

We have operating leases for distribution centers, sales offices and certain warehouse and office equipment. Our leases have remaining lease terms of 1 to 11 years, many of which include one or more renewal options. We consider these renewal options in determining the lease term used to establish our right-of-use assets and lease liabilities when it is determined that it is reasonably certain that the renewal option will be exercised.

As of June 27, 2020, there were no material variable lease costs or sublease income. Cash paid for operating leases was $4.0 million and $2.5 million in the twenty-six weeks ended June 27, 2020 and June 29, 2019, respectively, which is classified in operating activities. The following table summarizes the lease expense for the twenty-six weeks ended June 27, 2020 and June 29, 2019:

 

 

 

Thirteen Weeks Ended

 

 

Twenty-Six Weeks Ended

 

(in thousands)

 

June 27, 2020

 

 

 

 

June 29, 2019

 

 

June 27, 2020

 

 

 

 

June 29, 2019

 

Operating lease expense

 

$

2,001

 

 

 

 

$

1,869

 

 

$

3,930

 

 

 

 

$

3,797

 

Short-term lease expense

 

 

976

 

 

 

 

 

1,272

 

 

 

2,062

 

 

 

 

 

2,342

 

Total lease expense

 

$

2,977

 

 

 

 

$

3,141

 

 

$

5,992

 

 

 

 

$

6,139