Dorman Products, Inc. - Quarter Report: 2015 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 27, 2015

OR

For the transition period from                      to                     

Commission file number: 0-18914

Dorman Products, Inc.

(Exact name of registrant as specified in its charter)

(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)

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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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    x  No

As of July 27, 2015, the registrant had 35,617,348 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, 2015

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

See accompanying Notes to Consolidated Financial Statements

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DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

See accompanying Notes to Consolidated Financial Statements

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DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

See accompanying Notes to Consolidated Financial Statements

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DORMAN PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See accompanying Notes to Consolidated Financial Statements

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DORMAN PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE TWENTY-SIX WEEKS ENDED JUNE 27, 2015 AND JUNE 28, 2014

(UNAUDITED)

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 of 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 twenty-six weeks ended June 27, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 26, 2015. We may experience significant fluctuations from quarter to quarter in our results of operations due to the timing of orders placed by our customers. Generally, the second and third quarters have the highest level of net sales. 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 27, 2014.

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

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 were removed from our Consolidated Balance Sheet at the time of the sales transactions. Pursuant to these agreements, we sold $266.9 million and $258.0 million of accounts receivable during the twenty-six weeks ended June 27, 2015 and June 28, 2014, respectively. If receivables had not been sold, $348.8 million and $298.9 million of additional accounts receivable would have been outstanding at June 27, 2015 and December 27, 2014, respectively, based on standard payment terms. Selling, general and administrative expenses for the twenty-six weeks ended June 27, 2015 and June 28, 2014 included $3.6 million and $3.2 million, respectively, in financing costs associated with these accounts receivable sales programs.

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 market. Cost is determined by the first-in, first-out method. Inventories were as follows:

Our 2008 Stock Option and Stock Incentive Plan (the “Plan”) was approved by our shareholders on May 20, 2009. Under the terms of the Plan, our Board of Directors may grant up to 2,000,000 shares of common stock in the form of shares of restricted stock, incentive stock options and non-qualified stock options or combinations thereof to officers, directors, employees, consultants and advisors. Grants under the Plan must be made within ten years of the date the Plan was approved and stock options are exercisable upon the terms set forth in the grant agreement approved by the Board of Directors, but in no event more than ten years from the date

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of grant. Restricted stock vests in accordance with the terms set forth in each restricted stock agreement. At June 27, 2015, 1,679,336 shares were available for grant under the Plan.

We grant restricted stock to certain employees and members of our Board of Directors. The value of restricted stock issued is based on the fair value of our common stock on the grant date. Vesting of restricted stock is conditional based on continued employment or service for a specified period and in certain circumstances, the attainment of financial goals. We retain the restricted stock, and any dividends paid thereto, until the vesting conditions have been met. For awards with a service condition only, compensation cost related to restricted stock is recognized on a straight-line basis over the vesting period. For awards that have a service condition and require the attainment of financial goals, compensation cost related to restricted stock is recognized over the vesting period if it is probable that the financial goals will be attained. Compensation cost related to restricted stock was $0.5 million and $1.0 million for the twenty-six weeks ended June 27, 2015 and June 28, 2014, respectively.

The following table summarizes our restricted stock activity for the twenty-six weeks ended June 27, 2015:

As of June 27, 2015, there was approximately $2.8 million of unrecognized compensation cost related to nonvested restricted stock, which is expected to be recognized over a weighted-average period of approximately 1.5 years.

Cash flows resulting from tax deductions in excess of the tax effect of compensation cost recognized in the financial statements are classified as financing cash flows. The excess tax benefit generated from restricted shares which vested in the twenty-six weeks ended June 27, 2015 and the twenty-six weeks ended June 28, 2014 was $0.3 million in each period and was credited to additional paid-in capital.

We grant stock options to certain employees and members of the Board of Directors. We expense the grant-date fair value of stock options. Compensation cost is recognized on a straight-line basis over the vesting period for which related services are performed. The compensation cost charged against income for the twenty-six weeks ended June 27, 2015 and June 28, 2014 was less than $0.1 million in each period. The compensation costs were classified as selling, general and administrative expense in the Consolidated Statements of Income. No cost was capitalized during the twenty-six weeks ended June 27, 2015 or the twenty-six weeks ended June 28, 2014.

No stock options were granted during the twenty-six weeks ended June 27, 2015 or June 28, 2014. Historically, we have used the Black-Scholes option valuation model to estimate the fair value of stock options granted.

The following table summarizes our stock option activity for the twenty-six weeks ended June 27, 2015:

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The total intrinsic value of stock options exercised in the twenty-six weeks ended June 27, 2015 was $1.2 million. As of June 27, 2015, there was less than $0.1 million of unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of less than one year.

Cash received from option exercises was approximately $0.3 million in the twenty-six weeks ended June 28, 2014. The excess tax benefit generated from options which were exercised in the twenty-six ended June 28, 2014 was $0.1 million, and was credited to additional paid-in capital. There was no cash received or excess tax benefit generated in the twenty-six weeks ended June 27, 2015.

Basic earnings per share is calculated by dividing our net income by the weighted average number of common shares outstanding during the period, excluding nonvested restricted stock which is considered to be contingently issuable. To calculate diluted earnings per share, common share equivalents are added to the weighted average number of common shares outstanding. Common share equivalents are calculated using the treasury stock method and are computed based on outstanding stock-based awards. However, in periods when the price of our stock-based awards, by grant, is greater than our average stock price during the period, those common share equivalents are considered anti-dilutive and are excluded from the calculation of diluted earnings per share. Approximately 7,200 shares from stock-based awards were considered anti-dilutive as of June 27, 2015. No stock-based awards were considered anti-dilutive as of June 28, 2014.

The following table sets forth the computation of basic earnings per share and diluted earnings per share:

We periodically repurchase, at the then current market price, and cancel common stock issued to the Dorman Products, Inc. 401(k) Retirement Plan and Trust (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. For the twenty-six weeks ended June 27, 2015, we repurchased and cancelled 17,370 shares of common stock for $0.8 million at an average price of $46.94 per share. During the fifty-two weeks ended December 27, 2014, we repurchased and cancelled 61,830 shares of common stock for $3.1 million at an average price of $50.71 per share.

The Board of Directors has authorized a share repurchase program, authorizing the repurchase of up to $100 million of our outstanding common stock through December 31, 2015. Under this program, share repurchases may be made from time to time depending on market conditions, share price, share availability and other factors at our discretion. The share repurchase program does not obligate us to acquire any specific number of shares. For the twenty-six weeks ended June 27, 2015, we repurchased and cancelled 32,900 shares of common stock for $1.5 million at an average price of $46.64 per share under this program. For the fifty-two weeks ended December 27, 2014, we repurchased and cancelled 855,600 shares of common stock for $40.4 million at an average price of $47.20 per share under this program. At June 27, 2015, we had approximately $58.1 million remaining under the program.

We have a non-cancelable operating lease for our primary operating facility with a partnership in which Steven L. Berman, our Chief Executive Officer, and his family members, are partners. Based upon the terms of the lease, payments will be approximately $1.5 million in fiscal 2015 and were $1.5 million in fiscal 2014. The lease with the partnership expires December 31, 2017. In the opinion of our Audit Committee, the terms and rates of this lease are no less favorable than those which could have been obtained from an unaffiliated party.

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At June 27, 2015, we had $1.6 million of net unrecognized tax benefits, $1.1 million of which would affect our effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 27, 2015, we had approximately $0.2 million of accrued interest related to uncertain tax positions.

We file income tax returns in the United States, China and Mexico. All years before 2011 are closed for federal tax purposes. The examination by the Internal Revenue Service for the 2011 and 2012 tax years resulted in de minimis adjustments. We are currently under examination by one state tax authority for the years 2009-2012. Tax years before 2010 are closed for the remaining states in which we file. We filed tax returns in Sweden through 2012 and all years prior to 2008 are closed. It is reasonably possible that audit settlements, the conclusion of current examinations or the expiration of the statute of limitations could impact the Company’s unrecognized tax benefits.

The carrying value of financial instruments such as cash, accounts receivable, accounts payable, and other current assets and liabilities approximate their fair value based on the short-term nature of these instruments.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. As originally issued, the new standard would have been effective for annual periods beginning after December 15, 2016. The FASB has amended the standard to be effective for annual periods beginning after December 15, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The amendments in this guidance do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out or average cost. Within the scope of this new guidance, an entity should measure inventory at the lower of cost and net realizable value; where, net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance is effective for annual periods beginning after December 15, 2016, with early adoption permitted. The new guidance must be applied on a prospective basis. We are evaluating the effect that the new guidance will have on our consolidated financial statements and related disclosures.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward Looking Statements

Certain statements in this document constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. While forward-looking statements sometimes are presented with numerical specificity, they are based on various assumptions made by management regarding future circumstances over many of which the Company has little or no control. Forward-looking statements may be identified by words including “anticipate,” “believe,” “estimate,” “expect,” and similar expressions. The Company cautions readers that forward-looking statements, including, without limitation, those relating to future business prospects, revenues, working capital, liquidity, and income, are subject to certain risks and uncertainties that would cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to differ from forward-looking statements include but are not limited to competition in the automotive aftermarket industry, unfavorable economic conditions, loss of key suppliers, loss of third-party transportation providers, an increase in patent filings by original equipment manufacturers, quality problems, delay in the development and design of new products, space limitations on our customers’ shelves, concentration of the Company’s sales and accounts receivable among a small number of customers, the impact of consolidation in the automotive aftermarket industry, foreign currency fluctuations, timing and amount of customers’ orders of Company’s products, dependence on senior management, disruption from events beyond the Company’s control, risks associated with conflict minerals, risks associated with cyber-attacks and other risks and factors identified from time to time in the reports the Company files with the SEC. For additional information concerning factors that could cause actual results to differ materially from the information contained in this report, reference is made to the information in “Part I Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2014. You should not place undue reliance on forward-looking statements. Such statements speak only as to the date on which they are made, and we undertake no obligation to update publicly or revise any forward-looking statement, regardless of future developments or availability of new information.

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 consolidated financial statements and footnotes thereto of Dorman 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 ended December 27, 2014.

Overview

We are a leading supplier of replacement parts and fasteners for passenger cars, light trucks and heavy duty trucks in the automotive aftermarket. We distribute and market approximately 140,000 stock keeping units (“SKU’s”) of automotive replacement parts many of which we design and engineer. These SKU’s are sold under our various brand names, under our customers’ private label brands or in bulk. We believe we are the dominant aftermarket supplier of original equipment “dealer exclusive” items. Original equipment “dealer exclusive” parts are those parts which were traditionally available to consumers only from original equipment 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 devices and exhaust gas recirculation (EGR) coolers.

We generate virtually all of our revenues from customers in the United States and Canada. Our products are sold primarily through automotive aftermarket retailers (such as Advance Auto Parts, AutoZone and O’Reilly Auto Parts), national, regional and local warehouse distributors (such as Genuine Parts Co - NAPA), specialty markets and salvage yards. We also distribute automotive replacement parts to customers in Europe, Mexico, the Middle East and Asia.

The automotive aftermarket has benefited from some of the factors affecting the general economy, including the impact of recessions, unemployment, and fluctuating gas prices. We believe vehicle owners have become more likely to keep their current vehicles longer and perform necessary repairs and maintenance in order to keep those vehicles well maintained as a result of these factors. According to data published by AutoCare Association, the average age of vehicles was 11.5 years as of May 2015 despite increasing new car sales. The number of miles driven is another important statistic that impacts our business. According to the United States Department of Transportation, the number of miles driven has increased each year since 2011, including a 1.7% increase in 2014 over 2013 levels. Generally, as vehicles are driven more miles, the more likely it is that parts will fail. The combination of the vehicle age increase and number of miles driven has accounted for a portion of our sales growth.

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The overall automotive aftermarket in which we compete has benefited from the conditions mentioned above. However, our customer base has consolidated in recent years. As a result, our customers regularly seek more favorable pricing, product returns 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, extended customer payment terms and allowed a higher level of product returns in certain cases. These concessions impact our profit levels and may require additional capital to finance the business. We expect our customers to continue to exert pressure on our margins as the customer base continues to consolidate.

New product development is a critical success factor for us and is our primary vehicle for growth. We have made incremental investments to increase our new product development efforts each year since 2003 in an effort to grow our business and strengthen our relationships with our customers. The investments are primarily in the form of increased product development resources, increased customer and end-user awareness programs and customer service improvements. These investments have enabled us to provide an expanding array of new product offerings and grow revenues at levels that exceed market growth rates.

Our complex electronics program capitalizes on the growing number of electronic components being utilized on today’s Original Equipment platforms. Current production models 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 extensively tested to ensure consistent performance. These products are direct replacements, and are typically “plug and play”, meaning that they are ready to install and require no additional on-board programming, saving the service technician time and the vehicle owner’s money.

In 2012, we introduced a new line of products to be marketed for the medium and heavy duty truck aftermarket. We believe that this market provides many of the same opportunities for growth that the automotive aftermarket has provided us over the past several years. Our focus here is on Formerly Dealer Only parts as it is on the automotive side of the business. We launched the initial program with a limited offering, but have made additional investments in new product development efforts to expand our product offering. We currently have approximately 635 SKU’s in our medium and heavy duty product line.

We may experience significant fluctuations from quarter to quarter in our results of operations due to the timing of orders placed by our customers. Generally, the second and third quarters have the highest level of net sales. The introduction of new products and product lines to customers may cause significant fluctuations from quarter to quarter.

We operate on a fifty-two or fifty-three week fiscal year period ended on the last Saturday of the calendar year. Our 2015 fiscal year will be a fifty-two week period that will end on December 26, 2015. The fiscal year ended December 27, 2014 was also a fifty-two week period.

Results of Operations

The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items in our Consolidated Statements of Income:

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Thirteen Weeks Ended June 27, 2015 Compared to Thirteen Weeks Ended June 28, 2014

Net sales increased 1% to $198.7 million for the thirteen weeks ended June 27, 2015 from $196.2 million for the thirteen weeks ended June 28, 2014. Our revenue growth rate was negatively impacted by an inventory reduction plan at one major customer which continued during the thirteen weeks ended June 27, 2015 and the shipment of several large line updates in the thirteen weeks ended June 28, 2014 that did not recur in the thirteen weeks ended June 27, 2015.

Gross profit was $76.6 million, or 38.5% of net sales, for the thirteen weeks ended June 27, 2015 compared to $73.0 million, or 37.2% of net sales, for the thirteen weeks ended June 28, 2014. The increased gross profit margin was primarily due to a favorable sales mix and lower transportation costs which were partially offset by higher provisions for excess inventory during the thirteen weeks ended June 27, 2015 as compared to the thirteen weeks ended June 28, 2014.

Selling, general and administrative expenses were approximately $39.7 million for the thirteen weeks ended June 27, 2015 compared to $36.3 million for the thirteen weeks ended June 28, 2014. The increase during the thirteen weeks ended June 27, 2015 was primarily due to approximately $1.9 million of incremental costs associated with the ERP conversion, consisting of $1.0 million in increased distribution costs, $0.4 million in support costs, and $0.5 million in additional depreciation expense. We expect the increased distribution costs to continue to decline in the second half of 2015 while the additional support costs and depreciation expenses are expected to continue. The remaining increase is due to additional investments in new product development initiatives and inflationary increases during the thirteen weeks ended June 27, 2015 as compared to the thirteen weeks ended June 28, 2014.

Our effective tax rate was 37.2% for the thirteen weeks ended June 27, 2015 compared to 36.6% for the thirteen weeks ended June 28, 2014. The effective tax rate increased primarily due to higher provisions for state income taxes.

Twenty-six Weeks Ended June 27, 2015 Compared to Twenty-six Weeks Ended June 28, 2014

Net sales increased 2% to $387.2 million for the twenty-six weeks ended June 27, 2015 from $379.7 million for the twenty-six weeks ended June 28, 2014. Our revenue growth rate was negatively impacted by an inventory reduction plan at one major customer which continued during the twenty-six weeks ended June 27, 2015 and the shipment of several large line updates in the twenty-six weeks ended June 28, 2014 which did not recur in the twenty-six weeks ended June 27, 2015.

Gross profit was $149.5 million, or 38.6% of net sales, for the twenty-six weeks ended June 27, 2015 compared to $144.6 million, or 38.1% of net sales, for the twenty-six weeks ended June 28, 2014. The increased gross profit margin was primarily due to a favorable sales mix and lower transportation costs which were partially offset by lower overall selling prices during the twenty-six weeks ended June 27, 2015 as compared to the twenty-six weeks ended June 28, 2014.

Selling, general and administrative expenses were approximately $78.9 million for the twenty-six weeks ended June 27, 2015 compared to $71.0 million for the twenty-six weeks ended June 28, 2014. The increase during the twenty-six weeks ended June 27, 2015 was primarily due to approximately $4.7 million of incremental costs associated with the ERP conversion, consisting of $2.7 million in increased distribution costs, $1.0 million in support costs, and $1.0 million in additional depreciation expense. The remaining increase is due to additional investments in new product development initiatives and inflationary increases during the twenty-six weeks ended June 27, 2015 as compared to the twenty-six weeks ended June 28, 2014.

Our effective tax rate was 36.9% for the twenty-six weeks ended June 27, 2015 compared to 36.4% for the twenty-six weeks ended June 28, 2014. The effective tax rate increased primarily due to higher provisions for state income taxes.

Liquidity and Capital Resources

Historically, we have financed our growth through a combination of cash flow from operations, accounts receivable sales programs and our revolving credit facility. At June 27, 2015, working capital was $398.7 million, while shareholders’ equity was $504.8 million. Cash and cash equivalents as of June 27, 2015 was $67.2 million.

Over the past several years we extended 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 which allow us to sell our accounts receivable to financial institutions to offset the negative cash flow impact of these payment terms extensions. Without these programs, these extended terms would have resulted in increased accounts receivable and significant uses of cash flow. Pursuant to these agreements, we sold accounts receivable in the aggregate amount of $266.9 million and $258.0 million during the twenty-six weeks ended June 27, 2015 and June 28, 2014 respectively. If receivables had not been sold, $348.8 million and $298.9 million of additional receivables would have been outstanding at June 27, 2015 and December 27, 2014, respectively, based on standard payment terms.

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We have a $30.0 million revolving credit facility which expires in June 2017. Borrowings under the facility are on an unsecured basis with interest at rates ranging from LIBOR plus 65 basis points to LIBOR plus 250 basis points based upon the achievement of certain benchmarks related to the ratio of funded debt to EBITDA, as defined by our credit agreement. The interest rate at June 27, 2015 was LIBOR plus 65 basis points (0.84%). There were no borrowings under the facility as of June 27, 2015. As of June 27, 2015, we had two outstanding letters of credit for approximately $1.0 million in the aggregate which were issued to secure ordinary course of business transactions. Net of these letters of credit, we had approximately $29.0 million available under the facility at June 27, 2015. The credit agreement also contains covenants, the most restrictive of which pertain to net worth and the ratio of debt to EBITDA. As of June 27, 2015, we were in compliance with all financial covenants contained in the revolving credit facility.

Cash Flows

Below is a table setting forth the key lines of our Consolidated Statements of Cash Flows:

Cash provided by operating activities during the twenty-six weeks ended June 27, 2015 was $34.9 million. Net income was $44.5 million compared to $46.8 million in the twenty-six weeks ended June 28, 2014. During the twenty-six weeks ended June 27, 2015 accounts receivable declined by $8.7 million due to increased sales of receivables which were partially offset by higher net sales. Additionally, inventory increased by $25.3 million due to purchases to support sales growth and new product initiatives, and, accounts payable increased $8.5 million due to increased inventory purchases and the timing of payments to our vendors during the twenty-six weeks ended June 27, 2015.

Investing activities used $13.0 million of cash in the twenty-six weeks ended June 27, 2015 and $15.9 million in the twenty-six weeks ended June 28, 2014. Capital spending was primarily related to tooling associated with new products, enhancements and upgrades to information systems including our new ERP system, scheduled equipment replacements, certain facility improvements and other capital projects. The new ERP system was implemented in two phases, the last of which was completed on September 29, 2014. We capitalized $37.9 million related to the project through December 27, 2014, of which $7.9 million was spent in the twenty-six weeks ended June 28, 2014. During the twenty-six weeks ended June 27, 2015, we spent $2.0 million to purchase a minority equity interest.

Financing activities used $2.3 million of cash in the twenty-six weeks ended June 27, 2015 and $9.9 million in the twenty-six weeks ended June 28, 2014. The net use of cash in each period resulted from the repurchase of our common stock and stock plan activities. During the twenty-six weeks ended June 27, 2015 and June 26, 2014 we used $2.3 million and $10.3 million, respectively, to purchase and retire shares of our common stock.

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.

During the twenty-six weeks ended June 27, 2015, we experienced no material changes to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 27, 2014.

Foreign Currency Fluctuations

In fiscal 2014, approximately 73% of our products were purchased from vendors in a variety of foreign countries. The products generally are purchased through purchase orders with the purchase price specified in U.S. dollars. Accordingly, we generally do not have exposure to fluctuations in the relationship between the dollar and various foreign currencies between the time of execution of the purchase order and payment for the product. To the extent that the dollar decreases in value to foreign currencies in the future, the price of the product in dollars for new purchase orders may increase.

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The largest portion of our overseas purchases comes from China. During the twenty-six weeks ended June 27, 2015, the Chinese Yuan increased in value relative to the U.S. Dollar by approximately 0.7%. During the fifty-two weeks ended December 27, 2014, the Chinese Yuan decreased in value relative to the U.S. Dollar by approximately 0.3%. Significant changes in the value of the Yuan relative to the U.S. Dollar may result in changes to the cost of products that we purchase from China.

Impact of Inflation

The cost of many of the commodities that are used in our products have fluctuated over time resulting in increases and decreases in the prices of our products. In addition, we have periodically experienced increased transportation costs as a result of higher fuel prices. Inflation may also increase our labor costs and the cost of general services utilized. We will attempt to offset cost increases by passing along selling price increases to customers, using alternative suppliers and by resourcing purchases to other countries. However, there can be no assurance that we will be successful in these efforts.

New and Recently Adopted Accounting Pronouncements

Please refer to Note 10, New and Recently Adopted Accounting Pronouncements, to the Notes to Consolidated Financial Statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risk is the potential loss arising from adverse changes in interest rates. Substantially all of our borrowing capacity and our accounts receivable sale programs bear interest at rates tied to LIBOR. Under the terms of our revolving credit facility and customer-sponsored programs to sell accounts receivable, a change in either the lender’s base rate, LIBOR or discount rates under our accounts receivable sale programs would affect the rate at which we could access funds thereunder. Hypothetically, a one percentage point increase in LIBOR would increase our interest expense on our variable rate debt, if any, and our financing costs associated with our sales of accounts receivable by approximately $3.5 million annually. This estimate assumes that our variable rate debt balance and the level of sales of accounts receivable remains constant for an annual period and the interest rate change occurs at the beginning of the period. The hypothetical changes and assumptions may be different from what actually occurs in the future.

We have not historically and do not intend to use derivative financial instruments for trading or to speculate on changes in interest rates or commodity prices. We are not exposed to any significant market risks, foreign currency exchange risk or interest rate risk from the use of derivative instruments.

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter ended June 27, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there was no such change during the quarter ended June 27, 2015.

Limitations on the Effectiveness of Controls

Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls.

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PART II. OTHER INFORMATION

We are a party to or otherwise involved in legal proceedings that arise in the ordinary course of business, such as various claims and legal actions involving contracts, competitive practices, patent rights, trademark rights, product liability claims and other matters arising out of the conduct of our business. In the opinion of management, none of the actions, individually or in the aggregate, would likely have a material financial impact on the Company and we believe the range of reasonably possible losses from current matters is immaterial.

Item 1A. Risk Factors

You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 27, 2014, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

During the thirteen weeks ended June 27, 2015, we purchased shares of our common stock as follows:

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

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Item 5. Other Information

None

Item 6. Exhibits

The Exhibits included in this report are listed in the Exhibit Index on page 20, which is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX

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