Other information about leases is as follows:
| | Three Months Ended
June 30,
| |
| | 2019 | |
Lease term and discount rate | | | |
Weighted-average remaining lease term (years): | | | |
Finance leases | | | 3.1
| |
Operating leases | | | 12.4
| |
Weighted-average discount rate: | | | | |
Finance leases | | | 5.0
| %
|
Operating leases | | | 5.6
| %
|
| | Three Months Ended June 30, | |
| | 2020 | | | 2019 | |
Lease term and discount rate | | | | | | |
Weighted-average remaining lease term (years): | | | | | | |
Finance leases | | | 3.4 | | | | 3.1 | |
Operating leases | | | 11.7 | | | | 12.4 | |
Weighted-average discount rate: | | | | | | | | |
Finance leases | | | 5.6 | % | | | 5.0 | % |
Operating leases | | | 5.9 | % | | | 5.6 | % |
11.
10. Accounts Receivable Discount Programs
The Company uses receivable discount programs with certain customers and their respective banks. Under these programs, the Company may sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow the Company to accelerate receipt of payment on customers’ receivables.
The following is a summary of accounts receivable discount programs:
| | Three Months Ended June 30, | | | Three Months Ended June 30, | |
| | 2019 | | | 2018 | | | 2020 | | | 2019 | |
Receivables discounted | | $ | 96,854,000 | | | $ | 86,785,000 | | | $ | 111,360,000 | | | $ | 96,854,000 | |
Weighted average days | | 346 | | | 334 | | | | 345 | | | | 346 | |
Annualized weighted average discount rate | | 3.9 | % | | 4.1 | % | | | 2.5 | % | | | 3.9 | % |
Amount of discount recognized as interest expense | | $ | 3,649,000 | | | $ | 3,324,000 | | | $ | 2,686,000 | | | $ | 3,649,000 | |
12.
11. Net Loss Perper Share
Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss income per share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options and warrants, which would result in the issuance of incremental shares of common stock.stock to the extent such impact is not anti-dilutive.
The following presents a reconciliation of basic and diluted net loss per share:
| | Three Months Ended June 30, | | |
| | 2019 | | | 2018 | | | Three Months Ended June 30, | |
| | | | | | | | 2020 | | | 2019 | |
Net loss | | $ | (6,151,000 | ) | | $ | (5,495,000 | ) | | $ | (3,012,000 | ) | | $ | (6,151,000 | ) |
Basic shares | | 18,822,178 | | | 18,895,847 | | | | 18,976,178 | | | | 18,822,178 | |
Effect of potentially dilutive securities | | | - | | | | - | | | | - | | | | - | |
Diluted shares | | | 18,822,178 | | | | 18,895,847 | | | | 18,976,178 | | | | 18,822,178 | |
Net loss per share: | | | | | | | | | | | | | | |
| | | | | | | | | |
Basic net loss per share | | $ | (0.33 | ) | | $ | (0.29 | ) | | $ | (0.16 | ) | | $ | (0.33 | ) |
| | | | | | | | | |
Diluted net loss per share | | $ | (0.33 | ) | | $ | (0.29 | ) | | $ | (0.16 | ) | | $ | (0.33 | ) |
Potential common shares that would have the effect of increasing diluted net income per share or decreasing diluted net loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted net loss per share. For the three months ended June 30, 20192020 and 2018,2019, there were 1,520,8112,133,786 and 1,380,598,1,520,811, respectively, of potential common shares not included in the calculation of diluted net loss per share because their effect was anti-dilutive.
12. Income Taxes
The Company recorded an income tax benefit of $1,730,000,$1,022,000, or an effective tax rate of 22.0%25.3%, and $1,447,000,$1,730,000, or an effective tax rate of 20.8%22.0%, for the three months ended June 30, 20192020 and 2018,2019, respectively. The estimated effective tax rate for the entire year is based on current estimatesthree months ended June 30,2020, was primarily impacted by non-deductible executive compensation under Internal Revenue Code Section 162(m) and any changes to those estimates in future periods could result in an effective tax rateforeign income taxed at rates that is materiallyare different from the current estimate.federal statutory rate.
The Company remainscontinues to record a valuation allowance against its foreign deferred tax assets as a result of its non-U.S. net operating loss carry-forwards and non-U.S. research and development credits in connection with its acquisitions due to the uncertainty of their utilization in future periods. Should the actual amount differ from the Company’s estimates, the amount of the valuation allowance could be impacted. Realization of deferred tax assets from its U.S. operations is dependent upon the Company’s ability to generate sufficient future taxable income. Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the Company’s net deferred tax assets. The Company makes these estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s future plans. A valuation allowance is established when the Company believes it is not more likely than not all or some of a deferred tax assets will be realized. In evaluating the Company’s ability to recover deferred tax assets within the jurisdiction in which they arise, the Company considers all available positive and negative evidence.
At June 30,2020, the Company is not under examination in any jurisdiction and the years ended March 31,2019,2018,2017, and 2016 remain subject to examination for the fiscal years beginning with March 31, 2016.examination. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.
14.13. Financial Risk Management and Derivatives
Purchases and expenses denominated in currencies other than the U.S. dollar, which are primarily related to the Company’s overseas facilities, expose the Company to market risk from material movements in foreign exchange rates between the U.S. dollar and the foreign currencies. The Company’s primary risk exposure is from fluctuations in the value of the Mexican peso and to a lesser extent the Chinese yuan. To mitigate these risks, the Company enters into forward foreign currency exchange contracts to exchange U.S. dollars for these foreign currencies. The extent to which forward foreign currency exchange contracts are used is modified periodically in response to the Company’s estimate of market conditions and the terms and length of anticipated requirements.
The Company enters into forward foreign currency exchange contracts in order to reduce the impact of foreign currency fluctuations and not to engage in currency speculation. The use of derivative financial instruments allows the Company to reduce its exposure to the risk that the eventual cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in exchange rates between the U.S. dollar and the foreign currencies. The Company does not hold or issue financial instruments for trading purposes. The Company designates forward foreign currency exchange contracts are designated for forecasted expenditure requirements to fund foreign operations.
The Company had forward foreign currency exchange contracts with a U.S. dollar equivalent notional value of $35,021,000$36,307,000 and $32,524,000$42,052,000 at June 30, 20192020 and March 31, 2019,2020, respectively. These contracts generally have a term of one year or less, at rates agreed at the inception of the contracts. The counterparty to this derivative transaction is a major financial institution with investment grade credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the potential unrealized gains (which offset currency fluctuations adverse to the Company) in any such contract should this counterparty fail to perform as contracted. Any changes in the fair values of forward foreign currency exchange contracts are reflected in current period earnings and accounted for as an increase or offset to general and administrative expenses.
The following shows the effect of derivative instruments on the condensed consolidated statements of operations:
Derivatives Not Designated as Hedging Instruments | | Gain (Loss) Recognized within General and Administrative Expenses | |
Three Months Ended June 30, | |
|
2019 | | | 2018 | |
Forward foreign currency exchange contracts | | $ | 35,000 | | | $ | (2,666,000 | ) |
| | Gain Recognized within General and Administrative Expenses | |
Derivatives Not Designated as | | Three Months Ended June 30, | |
Hedging Instruments | | 2020 | | | 2019 | |
Forward foreign currency exchange contracts | | $ | 2,832,000 | | | $ | 35,000 | |
The fair value of the forward foreign currency exchange contracts of $242,000$3,452,000 and $207,000 are$6,284,000 is included in prepaid and other current assetsliabilities in the condensed consolidated balance sheets at June 30, 20192020 and March 31, 2019,2020, respectively. The changes in the fair values of forward foreign currency exchange contracts are included in other liabilities in the condensed consolidated statements of cash flows for the three months ended June 30, 20192020 and 2018.2019.
15.14. Fair Value Measurements
The following summarizes financial assets and liabilities measured at fair value, by level within the fair value hierarchy:
| | June 30, 2019 | | | March 31, 2019 | | | June 30, 2020 | | | March 31, 2020 | |
| | | | | Fair Value Measurements Using Inputs Considered as | | | | | | Fair Value Measurements Using Inputs Considered as | | | | | | Fair Value Measurements Using Inputs Considered as | | | | | | Fair Value Measurements Using Inputs Considered as | |
| | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Short-term investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mutual funds | | $ | 2,074,000 | | | $ | 2,074,000 | | | - | | | - | | | $ | 3,273,000 | | | $ | 3,273,000 | | | - | | | - | | | $ | 1,061,000 | | | $ | 1,061,000 | | | $ | - | | | $ | - | | | $ | 850,000 | | | $ | 850,000 | | | $ | - | | | $ | - | |
Prepaid expenses and other current assets | | | | | | | | | | | | | | | | | | | | | | | | | |
Forward foreign currency exchange contracts | | 242,000 | | | - | | | $ | 242,000 | | | - | | | 207,000 | | | - | | | $ | 207,000 | | | - | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accrued liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Short-term contingent consideration | | 2,982,000 | | | - | | | - | | | $ | 2,982,000 | | | 2,816,000 | | | - | | | - | | | $ | 2,816,000 | | | | 2,076,000 | | | | - | | | | - | | | | 2,076,000 | | | | 2,190,000 | | | | - | | | | - | | | | 2,190,000 | |
Other current liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred compensation | | 2,074,000 | | | 2,074,000 | | | - | | | - | | | 3,273,000 | | | 3,273,000 | | | - | | | - | | | | 1,061,000 | | | | 1,061,000 | | | | - | | | | - | | | | 850,000 | | | | 850,000 | | | | - | | | | - | |
Forward foreign currency exchange contracts | | | | 3,452,000 | | | | - | | | | 3,452,000 | | | | - | | | | 6,284,000 | | | | - | | | | 6,284,000 | | | | - | |
Other liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term contingent consideration | | 1,988,000 | | | - | | | - | | | 1,988,000 | | | 1,905,000 | | | - | | | - | | | 1,905,000 | | | | 530,000 | | | | - | | | | - | | | | 530,000 | | | | 463,000 | | | | - | | | | - | | | | 463,000 | |
Short-term Investments and Deferred Compensation
The Company’s short-term investments, which fund its deferred compensation liabilities, consist of investments in mutual funds. These investments are classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis.
Forward Foreign Currency Exchange Contracts
The forward foreign currency exchange contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers. During the three months ended June 30, 2019 and 2018, a gain of $35,000 and a loss of $2,666,000, respectively, were recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts.dealers (See Note 13).
Contingent Consideration
In December 2018, the Company completed the acquisition of certain assets and assumption of certain liabilities from Mechanical Power Conversion, LLC (“E&M”). In connection with this acquisition, the Company is contingently obligated to make additional payments to the former owners of E&M up to an aggregate of $5,200,000 over the next 2-3three years.
In January 2019, the Company completed the acquisition of all the equity interests of Dixie Electric, Ltd (“Dixie”).Dixie. In connection with this acquisition, the Company is contingently obligated to make additional payments to the former owners of Dixie up to $1,130,000 over the next two years.
The Company’s contingent consideration is recorded in accrued expenses and other liabilities in its condensed consolidated balance sheets at June 30, 20192020 and March 31, 2019,2020, and is a Level 3 liability measured at fair value.
E&M Research and Development (“R&D”) Event Milestone
The fair value of the two-year R&D event milestone based on technology development and transfer was $2,230,000$1,200,000 and $1,130,000 at June 30, 20192020 and March 31,2020, respectively, determined using a probability weighted discounted cash flow method with the following assumptions commensurate with the term of the contingent consideration: (i) a risk-free interest rate ranging from 1.84% to 2.06%, (ii) counter party risk discount rate ranging from 5.84% to 6.06%, and (iii) total probability of 90% to 100%.consideration. Any subsequent changes in the fair value of the contingent consideration liability will be recorded in current period earnings as a general and administrative expense.
The assumptions used to determine the fair value is as follows:
| | June 30, 2020 | |
Risk free interest rate | | | 0.18 | % |
Counter party rate | | | 6.70 | % |
Probability | | | 100.00 | % |
E&M Gross Profit Earn-out Consideration
The fair value of the three-year gross profit earn-out consideration was $1,770,000$1,350,000 and $1,230,000 at June 30, 20192020 and March 31,2020, respectively, determined using a Monte Carlo Simulation Model. Any subsequent changes in the fair value of the contingent consideration liability will be recorded in current period earnings as a general and administrative expense.
The assumptions used to determine the fair value is as follows:
| | June 30, 20192020 | |
Risk free interest rate | | | 1.75 0.16 | % |
Counter party rate | | | 5.75 6.70 | % |
Expected volatility (1) | | | 30.00 37.00 | % |
Weighted average cost of capital (1) | | | 16.00 13.30 | % |
(1) | The range for expected volatility was 32.5% to 42.5% and the range for the weighted average cost of capital was 12.5% to 14.0%. |
Dixie Revenue Earn-out Consideration
The fair value of the two-year revenue earn-out consideration was $970,000$56,000 and $293,000 at June 30, 20192020 and March 31, 2020, respectively, determined using a Monte Carlo Simulation Model.
The assumptions used to determine the fair value is as follows:
| | | |
Risk free interest rate | | | 1.83 0.16 | % |
Counter party rate | | | 4.00 10.55 | % |
Revenue volatility (1) | | | 9.00 6.50 | %
|
Revenue discount rate (1) | | | 6.00 2.00 | %
|
Weighted average cost of capital Asset volatility (1) | | | 15.00 41.00 | %
|
(1) | The range for revenue volatility was 5.5% to 7.5%, 1.5% to 2.5% for the revenue discount rate, and 36% to 46% for asset volatility. |
Any subsequent changes in the fair value of the contingent consideration liability will be recorded in current period earnings as a general and administrative expense.
The following table summarizes the activity for financial assets and liabilities utilizing Level 3 fair value measurements:
|
| Three Months Ended June 30, |
|
2019 |
Contingent Consideration |
Beginning balance | | $ | 4,721,000 | |
Newly issued | | | - | |
Changes in revaluations of contingent consideration included in earnings | | | 249,000 | |
Exercises/settlements (1) | | | - | |
Net transfers in (out) of Level 3 | | | - | |
Ending balance | | $ | 4,970,000 | |
| | Three Months Ended June 30, | |
| | 2020 | | | 2019 | |
| | Contingent Consideration | | | Contingent Consideration | |
Beginning balance | | $ | 2,653,000 | | | $ | 4,721,000 | |
Changes in revaluations of contingent consideration included in earnings | | | (47,000 | ) | | | 249,000 | |
Ending balance | | $ | 2,606,000 | | | $ | 4,970,000 | |
During the three months ended June 30, 2019,2020, the Company had no other significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loan, term loan and other long-term liabilities approximate their fair value based on the variable nature of interest rates and current rates for instruments with similar characteristics.
16.
15. Share-based Payments
Stock Options
The Company granted options to purchase 341,825 shares of common stock during the three months ended June 30,2020.The Company did not0t grant any options to purchase shares of common stock during the three months ended June 30,2019. The Company granted options to purchase 241,800 shares of common stock during the three months ended June 30, 2018. The cost associated with stock options is estimated using the Black-Scholes option-pricing model. This model requires the input of subjective assumptions including the expected volatility of the underlying stock and the expected holding period of the option. These subjective assumptions are based on both historical and other information. Changes in the values assumed and used in the model can materially affect the estimate of fair value.
The following assumptions were used to derive the weighted average fair value of the stock options granted:
| | Three Months Ended June 30, | | | Three Months Ended June 30, | |
| | 2019 | | | 2018 | | | 2020 | |
Weighted average risk free interest rate | | - | % | | 2.82 | % | | | 0.44 | % |
Weighted average expected holding period (years) | | - | | | 5.95 | | | | 5.97 | |
Weighted average expected volatility | | - | % | | 43.98 | % | | | 44.92 | % |
Weighted average expected dividend yield | | - | | | - | | | | - | |
Weighted average fair value of options granted | | $ | - | | | $ | 8.70 | | | $ | 6.43 | |
The following is a summary of stock option transactions:
| | Number of Shares | | | Weighted Average Exercise Price | | | Number of Shares | | | Weighted Average Exercise Price | |
Outstanding at March 31, 2019 | | 1,337,165 | | | $ | 17.58 | | |
Outstanding at March 31, 2020 | | | | 1,536,123 | | | $ | 18.18 | |
Granted | | - | | | $ | - | | | | 341,825 | | | $ | 15.14 | |
Exercised | | - | | | $ | - | | | | (3,000 | ) | | $ | 6.62 | |
Forfeited | | | (1,000 | ) | | $ | 19.00 | | | | (11,509 | ) | | $ | 24.20 | |
Outstanding at June 30, 2019 | | | 1,336,165 | | | $ | 17.58 | | |
Outstanding at June 30, 2020 | | | | 1,863,439 | | | $ | 17.60 | |
At June 30, 2019,2020, options to purchase 230,921722,577 shares of common stock were unvested at the weighted average exercise price of $21.22.$17.51.
At June 30, 2019,2020, there was $2,144,000$4,498,000 of total unrecognized compensation expense related to unvested stock option awards. Compensation expense related to unvested stock option awards will be recognized over a weighted average vesting period of approximately 1.72.3 years.
Restricted Stock Units and Restricted Stock (collectively “RSUs”)
The Company did not grant any shares of RSUs duringDuring the three months ended June 30, 2019. During the three months ended June 30, 2018,2020, the Company granted 78,400112,293 shares of RSUs with an estimated grant date fair value of $1,490,000, which was$1,701,000 based on the closing market price on the grant date. The Company did 0t grant any shares of RSUs during the three months ended June 30,2019.
The following is a summary of non-vested RSUs:
| | Number of Shares | | | Weighted Average Grant Date Fair Value | |
Outstanding at March 31, 2019 | | | 243,134 | | | $ | 21.75 | |
Granted | | | - | | | $ | - | |
Vested | | | (58,488 | ) | | $ | 23.99 | |
Forfeited | | | - | | | $ | - | |
Outstanding at June 30, 2019 | | | 184,646 | | | $ | 21.05 | |
| | Number of Shares | | | Weighted Average Grant Date Fair Value | |
Outstanding at March 31, 2020 | | | 201,983 | | | $ | 20.06 | |
Granted | | | 112,293 | | | $ | 15.15 | |
Vested | | | (43,929 | ) | | $ | 22.63 | |
Outstanding at June 30, 2020 | | | 270,347 | | | $ | 17.60 | |
At June 30, 2019,2020, there was $2,107,000$3,839,000 of unrecognized compensation expense related to these awards, which will be recognized over the remaining vesting period of approximately 1.72.3 years.
17. Accumulated Other Comprehensive Loss
The following summarizes changes in accumulated other comprehensive income loss:
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | |
| | Unrealized Gain on Short-Term Investments | | | Foreign Currency Translation | | | Total | | | Unrealized Gain on Short-Term Investments | | | Foreign Currency Translation | | | Total | |
Balance at March 31, 2019 and 2018 | | $ | - | | | $ | (6,887,000 | ) | | $ | (6,887,000 | ) | | $ | 746,000 | | | $ | (6,174,000 | ) | | $ | (5,428,000 | ) |
Cumulative-effect adjustment | | | - | | | | - | | | | - | | | | (746,000 | ) | | | - | | | | (746,000 | ) |
Balance at April 1, 2019 and 2018 | | $ | - | | | $ | (6,887,000 | ) | | $ | (6,887,000 | ) | | $ | - | | | $ | (6,174,000 | ) | | $ | (6,174,000 | ) |
Other comprehensive income (loss), net of tax | | | - | | | | 599,000 | | | | 599,000 | | | | - | | | | (715,000 | ) | | | (715,000 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of tax | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Balance at June 30, 2019 and 2018 | | $ | - | | | $ | (6,288,000 | ) | | $ | (6,288,000 | ) | | $ | - | | | $ | (6,889,000 | ) | | $ | (6,889,000 | ) |
18.16. Commitments and Contingencies
Warranty Returns
The Company allows its customers to return goods that their customersconsumers have returned to them, whether or not the returned item is defective (“warranty returns”). The Company accrues an estimate of its exposure to warranty returns based on a historical analysis of the level of this type of return as a percentage of total unit sales. Amounts charged to expense for these warranty returns are considered in arriving at the Company’s net sales.
The following summarizes the changes in the warranty return accrual:
| | Three Months Ended June 30, | | | Three Months Ended June 30, | |
| | 2019 | | | 2018 | | | 2020 | | | 2019 | |
Balance at beginning of period | | $ | 19,475,000 | | | $ | 16,646,000 | | | $ | 18,300,000 | | | $ | 19,475,000 | |
Charged to expense/additions | | 23,185,000 | | | 23,893,000 | | |
Charged to expense | | | | 23,089,000 | | | | 23,185,000 | |
Amounts processed | | | (26,842,000 | ) | | | (25,996,000 | ) | | | (19,197,000 | ) | | | (26,842,000 | ) |
Balance at end of period | | $ | 15,818,000 | | | $ | 14,543,000 | | | $ | 22,192,000 | | | $ | 15,818,000 | |
Contingencies
The Company is subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding the Company’s business. Following an audit in fiscal 2019, the U.S. Customs and Border Protection stated that it believed that the Company owed additional duties of approximately $17 million from 2011 through mid-2018 relating to products that it imported from Mexico. The Company does not believe that this amount is correct and believes that it has numerous defenses and intends to dispute this amount vigorously. The Company cannot assure that the U.S. Customs and Border Protection will agree or that it will not need to accrue or pay additional amounts in the future.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis presents factors that Motorcar Parts of America, Inc. and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with our March 31, 20192020 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 28, 2019.15, 2020.
Disclosure Regarding Private Securities Litigation Reform Act of 1995
This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our future performance that involve risks and uncertainties. Various factors could cause actual results to differ materially from those expressed or implied by such statements. These factors include, but are not limited to: the current and future impacts of the COVID-19 public health crisis; concentration of sales to a small number of customers; changes in the financial condition of or our relationship with any of our major customers; increases in the average accounts receivable collection period; the loss of sales to customers; delays in payments by customers; the increasing customer pressure for lower prices and more favorable payment and other terms; lower revenues than anticipated from new and existing contracts; the increasing demands on our working capital; the significant strain on working capital associated with large inventory purchases from customers; lower efficiency or production due to stay at home orders issued by governments due to COVID-19 concerns; any meaningful difference between expected production needs and ultimate sales to our customers; investments in operational changes or acquisitions; our ability to obtain any additional financing we may seek or require; our ability to maintain positive cash flows from operations; potential future changes in our previously reported results as a result of the identification and correction of errors in our accounting policies or procedures or the material weaknesses in our internal controls over financial reporting; our failure to meet the financial covenants or the other obligations set forth in our credit agreement and the lenders’ refusal to waive any such defaults; increases in interest rates; the impact of high gasoline prices; consumer preferences and general economic conditions; increased competition in the automotive parts industry including increased competition from Chinese and other offshore manufacturers; difficulty in obtaining Used Cores and component parts or increases in the costs of those parts; political, criminal or economic instability in any of the foreign countries where we conduct operations; currency exchange fluctuations; potential tariffs, unforeseen increases in operating costs; risks associated with cyber-attacks; risks associated with conflict minerals; the impact of new accounting pronouncements and tax laws and interpretations thereof; uncertainties affecting our ability to estimate our tax rate and other factors discussed herein and in our other filings with the Securities and Exchange Commission (the “SEC”). These and other risks and uncertainties may cause our actual results to differ materially and adversely from those expected in any forward-looking statements. Readers are directed to risks and uncertainties identified below under “Risk Factors” and elsewhere in this report for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Management Overview
We have been focused on implementing a multi-pronged platform for growth within the non-discretionary automotive aftermarket for the replacement parts and diagnostic testing industry, through organic growth and acquisitions. Our investments in infrastructure and human resources, including the consolidation of our distribution center in Mexico and the significant expansion of manufacturing capacity, are expected to be transformative and scalable. As a result, gross profit and net income continues to behave been impacted, and our future performance and opportunities should be considered with these factors in mind.
NewOur products introduced through our growth strategies noted above include:include (i) turbochargers through an acquisition in July 2016;rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake powercalipers, brake boosters, in August 2016; (iii) the design and manufacture ofbrake master cylinders, and (iv) diagnostics systems for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles through an acquisition in July 2017; (iv) the design and manufacture ofother products, which include diagnostics systems, advanced power emulators (ACused for the development of electric vehicles and DC)aerospace applications, and custom power electronic products for quality control in the automotivedevelopment and aerospace industries through an acquisition in December 2018;production of electric vehicles and (v) alternators and starters for medium truck, farm, and marine applications through an acquisition in January 2019.turbochargers.
Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for segment reporting, we have identified our chief operating decision maker (“CODM”), reviewed the documents used by the CODM, and understand how such documents are used by the CODM to make financial and operating decisions. We have determined through this review process that due to recent acquisitions, our business comprises three separate operating segments. Two of the operating segments meet all of the aggregation criteria, and are aggregated. The remaining operating segment does not meet the quantitative thresholds for individual disclosure. Since this immaterial operating segment meets the aggregation criteria of ASC 280,disclosure and we have combined our operating segments into a single reportable segment.
Impact of the Novel Coronavirus (“COVID-19”)
The recent outbreak of the COVID-19 pandemic has spread globally and created significant volatility, uncertainty and economic disruption in many countries, including the countries in which we operate. National, state and local governments in these countries have implemented a variety of measures in response to the COVID-19 pandemic that have the effect of restricting or limiting, among other activities, the operations of certain businesses.
We experienced a significant reduction in customer demand for our products during April 2020, but sales have substantially recovered; however; at this time, we are unable to predict accurately the ultimate long-term impact that COVID-19 will have on our business and financial condition. While the near-term outook appears positive, any additional government shut-downs would negatively impact our business and financial condition. There have been no serious outbreaks in any of our production facilities. If there was a serious outbreak in any of our production facilities, our production capabilities would be negativey impacted.
Our business has continued to operate as we have been declared an essential business; however, we have experienced disruption in our global supply chain as a result of the ongoing impact of COVID-19 at all of our facilities as well as our supply partners. In addition, we experienced inefficiencies at our Mexico and Asian production and distribution facilities due to a shutdown for a brief period. The implementation of additional personnel safety measures, required throughout our production facilities, negatively affects our production efficiencies. These personnel safety measures included adding an additional shift in conjunction with reducing the number of hours in the existing shift, greater spacing (less personnel) in production areas and sanitizing procedures between shifts. High-risk employees at all of our facilities have been required to remain at home; however, they continue to receive their compensation. We also implemented safe work practices across all of our facilities, including work from home rules, staggered shifts, Plexiglas barriers, and many other safety precautions. Our employees have embraced the challenges of working remotely, continuing to operate effectively through constant communication with team members.
Enhanced levels of communication at all levels within the organization are critical to address the ever-changing landscape brought on by COVID-19, especially with most of our office staff continuing to work from home. Such efforts have included, weekly board check-in meetings, daily executive committee meetings, as needed, and regular town hall style communications with all employees.
To date, we have incurred increased costs as a result of COVID-19, including increased employee costs, such as expanded benefits and frontline incentives, and other operating costs, such as costs associated with the provision of personal protective equipment, which have negatively impacted our profitability. These expanded benefits, supply costs and other COVID-19 related costs resulted in approximately $2,295,000 of total expense included in cost of goods sold and operating expenses in the condensed consolidated statements of operations for the three months ended June 30, 2020. We have received approximately $365,000 in payments from the Canadian Government under the Canadian Emergency Wage Subsidy program and our Asian subsidiaries have received approximately $93,000 from their local government assistance programs. These payments are included in cost of goods sold and operating expenses in the condensed consolidated statements of operations for the three months ended June 30, 2020. In addition, we deferred the employer’s share of social security taxes of $369,000, which is included in other liabilities in the condensed consolidated balance sheet at June 30, 2020.
Due to the seriousness of the COVID-19 pandemic and the unknown impact at the time on our business, we conserved cash wherever practicable. We implemented furloughs, layoffs, and salary reductions. Salary decreases affected 175 employees, ranging from 5% - 50% of base pay. In addition, we implemented a worldwide travel ban and controls on all other expenses, including a freeze on hiring and salary increases.
Results of Operations for the Three Months Ended June 30, 20192020 and 20182019
The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.
The following summarizes certain key operating data:
| | Three Months Ended June 30, | |
| | 2019 | | | 2018 | |
Gross profit percentage | | | 16.1 | % | | | 17.8 | % |
Cash flow used in operations | | $ | (18,379,000 | ) | | $ | (924,000 | ) |
Finished goods turnover (annualized) (1) | | | 2.3 | | | | 3.1 | |
| | Three Months Ended June 30, | |
| | 2020 | | | 2019 | |
Gross profit percentage | | | 14.0 | % | | | 16.1 | % |
Cash flow provided by (used in) operations | | $ | 22,388,000 | | | $ | (18,379,000 | ) |
Finished goods turnover (annualized) (1) | | | 2.5 | | | | 2.3 | |
(1) | Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost of goods sold for the quarter by 4 and dividing the result by the average between beginning and ending finished goods inventory values, which includes all on-hand core inventory, for the fiscal quarter. We believe this provides a useful measure of our ability to turn our inventory into revenues. |
Net Sales and Gross Profit
The following summarizes net sales and gross profit:
| | Three Months Ended June 30, | | | Three Months Ended June 30, | |
| | 2019 | | | 2018 | | | 2020 | | | 2019 | |
Net sales | | $ | 109,148,000 | | | $ | 91,668,000 | | | $ | 95,356,000 | | | $ | 109,148,000 | |
Cost of goods sold | | 91,565,000 | | | 75,316,000 | | | | 81,969,000 | | | | 91,565,000 | |
Gross profit | | 17,583,000 | | | 16,352,000 | | | | 13,387,000 | | | | 17,583,000 | |
Gross profit percentage | | 16.1 | % | | 17.8 | % | | | 14.0 | % | | | 16.1 | % |
Net Sales. Our net sales for the three months ended June 30, 2019 increased2020 decreased by $17,480,000,$13,792,000, or 19.1%12.6%, to $109,148,000$95,356,000 compared towith net sales for the three months ended June 30, 20182019 of $91,668,000, reflecting continued growth for our rotating electrical products, wheel hub products, brake power booster products, and diagnostic equipment. In addition,$109,148,000. This decrease in our net sales were positively impactedwas due primarily to the negative economic effects of the COVID-19 pandemic partially offset by $5,258,000the expansion of our automotive aftermarket brake-related product offerings introduced in connection with acquisitions completed during the latterlater part of fiscal 2019.2020, which contributed net sales of $2,925,000 during the three months ended June 30, 2020.
Gross Profit.Our gross profit was $13,387,000, or 14.0% of net sales for the three months ended June 30, 2020 compared with $17,583,000, or 16.1% of net sales for the three months ended June 30, 2019 compared2019. Our gross profit was negatively impacted by $1,840,000, or 1.9%, due to $16,352,000 or 17.8% of net sales for the three months ended June 30, 2018. COVID-19 related costs.
The gross profit was impacted by a non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value and resulted in a write-down of $4,564,000$1,384,000 compared to $2,626,000with $4,564,000 for the three months ended June 30, 2020 and 2019, respectively.
Our gross profit for the three months ended June 30, 2020 and 2018,2019 was also impacted by: (i) transition expenses in connection with the expansion of our operations in Mexico of $3,301,000 and $1,354,000, respectively, for remanufactured cores held at customers’ locations, which are included in contract assets.(ii) amortization of core premiums paid to customers related to new business of $1,223,000 and $1,108,000, respectively, and (iii) return accruals related to new business of $307,000 and $100,000, respectively.
In addition, gross profit for the three months ended June 30, 2019 was further impacted by (i) transition expenses of $1,354,000 in connection with the expansion of our operations in Mexico, (ii) $1,108,000 of amortization of core buy-back premiums paid to customers related to new business, (iii) net tariff costs of $1,067,000 paid for products sold before price increases were effective, (iv) costnot passed through to customers, and (ii) costs of $426,000 in connection with the cancellation of a customer contract, and (v) $100,000contract.
Gross profit for the three months ended June 30, 2018 was impacted by (i) transition expenses of $1,755,000 in connection with the expansion of our operations in Mexico, (ii) $1,175,000 of customer allowances related to new business, and (iii) $967,000 of amortization of core buy-back premiums paid to customers related to new business.Contents
Operating Expenses
The following summarizes operating expenses:
| | Three Months Ended June 30, | | | Three Months Ended June 30, | |
| | 2019 | | | 2018 | | | 2020 | | | 2019 | |
General and administrative | | $ | 12,000,000 | | | $ | 12,091,000 | | | $ | 6,870,000 | | | $ | 12,000,000 | |
Sales and marketing | | 4,919,000 | | | 4,392,000 | | | | 4,200,000 | | | | 4,919,000 | |
Research and development | | 2,372,000 | | | 1,736,000 | | | | 1,942,000 | | | | 2,372,000 | |
| | | | | | | | | |
Percent of net sales | | | | | | | | | | | | | | |
| | | | | | | | | |
General and administrative | | 11.0 | % | | 13.2 | % | | | 7.2 | % | | | 11.0 | % |
Sales and marketing | | 4.5 | % | | 4.8 | % | | | 4.4 | % | | | 4.5 | % |
Research and development | | 2.2 | % | | 1.9 | % | | | 2.0 | % | | | 2.2 | % |
General and Administrative. Our general and administrative expenses for the three months ended June 30, 20192020 were $12,000,000,$6,870,000, which represents a decrease of $91,000,$5,130,000, or 0.8%42.8%, from general and administrative expenses for the three months ended June 30, 20182019 of $12,091,000.$12,000,000. This decrease was due to (i) $35,000a non-cash gain of $2,832,000 compared towith a loss of $2,666,000non-cash gain $35,000 recorded due to the change in the fair value of the forward foreign currency exchange contracts during the three months ended June 30, 2020 and 2019, and 2018, respectively, and (ii) a non-cash gain of $1,985,000 compared with a non-cash gain of $502,000 recorded due to the remeasurement of foreign currency-denominated lease liabilities during the three months ended June 30, 2019. These decreases were partially offset by (i) $1,233,000 of increased2020 and 2019, respectively, and (iii) $910,000 from decreased professional services, (ii) $783,000 of general and administrative expenses attributable to our fiscal 2019 acquisitions, (iii) $385,000 of increased amortization of intangible assets in connection with our fiscal 2019 acquisitions, (iv) $327,000 of increased general and administrative expenses at our offshore locations to support our growth initiatives, and (v) $287,000 for personnel to support our growth initiatives.services.
Sales and Marketing. Our sales and marketing expenses for the three months ended June 30, 2019 increased $527,000,2020 decreased $719,000, or 12.0%14.6%, to $4,919,000$4,200,000 from $4,392,000$4,919,000 for the three months ended June 30, 20182019 primarily due to our cost-cutting measures in connection with COVID-19. These decreases in sales and marketing expenses attributable to our fiscal 2019 acquisitions.expense were as follows: (i) $408,000 from decreased travel, (ii) $157,000 from decreased marketing expense in connection with new business, (iii) $125,000 from decreased employee-related expenses.
Research and Development. Our research and development expenses increaseddecreased by $636,000,$430,000, or 36.3%18.1%, to $1,942,000 for the three months ended June 30, 2020 from $2,372,000 for the three months ended June 30, 2019 from $1,736,000 for the three months ended June 30, 2018. The increase wasprimarily due primarily to (i) $368,000 for personnel to support our growth initiatives, (ii) $212,000 ofcost-cutting measures in connection with COVID-19. These decreases in research and development expenses attributable to our fiscal 2019 acquisitions,were as follows: (i) $181,000 from decreased supplies and (iii) $43,000 of increased outside services to support our growth initiatives.(ii) $165,000 from decreased employee-related expenses.
Interest Expense
Interest Expense, net. Our interest expense, net for the three months ended June 30, 2019 increased $1,098,000,2020 decreased $1,764,000, or 21.6%28.6%, to $6,173,000$4,409,000 from $5,075,000$6,173,000 for the three months ended June 30, 2018. The increase in2019, primarily due to lower interest expense was due primarily to (i) increased average outstanding borrowings in connection with our growth initiatives and as we build our inventory levels to support anticipated higher sales and (ii) an increase in the utilization of our accounts receivable discount programs.rates.
Provision for Income Taxes
Income Tax. We recorded an income tax benefit of $1,022,000, or an effective tax rate of 25.3%, and an income tax benefit of $1,730,000, or an effective tax rate of 22.0%, and $1,447,000, or an effective tax rate of 20.8%, for the three months ended June 30, 20192020 and 2018,2019, respectively. The estimated effective tax rate for the entire year is based on current estimatesthree months ended June 30, 2020, was primarily impacted by non-deductible executive compensation under Internal Revenue Code Section 162(m) and any changes to those estimates in future periods could result in an effective tax rateforeign income taxed at rates that is materiallyare different from the current estimate.federal statutory rate.
Liquidity and Capital Resources
Overview
We had working capital (current assets minus current liabilities) of $69,069,000$87,410,000 and $73,528,000,$90,624,000, a ratio of current assets to current liabilities of 1.2:1.0 and 1.3:1.0 at June 30, 20192020 and March 31, 2019,2020, respectively. The decrease in working capital was due primarily to increased borrowing under our credit facility.
We generated cash during the three months ended June 30, 20192020 from operations and the use of receivable discount programsprograms. As we manage through the impacts of the COVID-19 pandemic, we have access to our existing cash, as well as from our available credit facility. The cash generated from these activities was primarily used for our growth initiatives andfacilities to build our inventory levels to support anticipated higher sales.
In June 2019, we entered into a second amendment to the credit facility, which, among other things, increased our revolving loan facility from $200,000,000 to $238,620,000.
meet short-term liquidity needs. We believe our cash and cash equivalents, short-term investments, use of receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our expected future working capital needs, repayment of the current portion of our term loans, and lease and capital expenditure obligations over the next 12 months.
Share Repurchase Program
As of June 30, 2019,2020, $15,692,000 of the $37,000,000 authorized share repurchase program had been utilized and $21,308,000 remained available to repurchase shares, subject to the limit in our credit facility. Our credit facility permits the payment of up to $20,000,000 of dividends and share repurchases per fiscal year, subject to a minimum availability threshold and pro forma compliance with financial covenants. We retired the 675,561 shares repurchased under this program through June 30, 2019.2020. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.
Cash Flows
The following summarizes cash flows as reflected in the condensed consolidated statements of cash flows:
| | Three Months Ended June 30, | | | Three Months Ended June 30, | |
| | 2019 | | | 2018 | | | 2020 | | | 2019 | |
Cash provided by (used in): | | | | | | | |
Cash flows provided by (used in): | | | | | | | |
Operating activities | | $ | (18,379,000 | ) | | $ | (924,000 | ) | | $ | 22,388,000 | | | $ | (18,379,000 | ) |
Investing activities | | (2,668,000 | ) | | (1,701,000 | ) | | | (3,038,000 | ) | | | (2,668,000 | ) |
Financing activities | | 22,328,000 | | | 1,955,000 | | | | (41,674,000 | ) | | | 22,328,000 | |
Effect of exchange rates on cash and cash equivalents | | | 15,000 | | | | (137,000 | ) | | | 172,000 | | | | 15,000 | |
Net increase (decrease) in cash and cash equivalents | | $ | 1,296,000 | | | $ | (807,000 | ) | |
Net (decrease) increase in cash and cash equivalents | | | $ | (22,152,000 | ) | | $ | 1,296,000 | |
| | | | | | | | | | | | | | |
Additional selected cash flow data: | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 2,379,000 | | | $ | 1,586,000 | | | $ | 2,551,000 | | | $ | 2,379,000 | |
Capital expenditures | | 3,976,000 | | | 1,546,000 | | | | 2,983,000 | | | | 3,976,000 | |
Net cash used inprovided by operating activities was $18,379,000 and $924,000$22,388,000 during the three months ended June 30, 2019 and 2018, respectively. Our2020 compared with net cash used in operating activities continue to be significantly impacted by our growth initiatives, including our product line expansion. Operating activities for the three months ended June 30, 2019 include (i) expenses incurred in connection with the expansion of our Mexico operations, (ii) the build-up of inventory to support anticipated higher sales, (iii) payments made to customers for core buy-backs made in connection with new business expansion, and (iv) a less significant decrease in accounts receivable$18,379,000 during the three months ended June 30, 20192019. The significant change in our operating activities was due to increased collections of accounts receivable and a less significant increase in our inventory as comparedwe continue to manage our inventory levels during the three months ended June 30, 2018.2020.
Net cash used in investing activities was $2,668,000$3,038,000 and $1,701,000$2,668,000 during the three months ended June 30, 20192020 and 2018,2019, respectively, due primarily to increaseddecreased purchases of plant and equipment for our current operations and the expansion of our operations in Mexico. This increase was partially offset byIn addition, we generated cash from the redemption of short-term investments during the three months ended June 30, 2019.
Net cash provided byused in financing activities was $22,328,000 and $1,955,000$41,674,000 during the three months ended June 30, 2019 and 2018, respectively,2020 compared with net cash provided by financing activities $22,328,000 during the three months ended June 30, 2019. The significant change in our financing activities was due mainly to increased net borrowingsrepayments under our credit facility.facility during the three months ended June 30, 2020 compared with borrowing under our credit facility during the three months ended June 30, 2019.
Capital Resources
Credit Facility
We are a party to a $230,000,000$268,620,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $200,000,000$238,620,000 revolving loan facility, subject to borrowing base restrictions, a $20,000,000$24,000,000 sublimit for borrowings by Canadian borrowers, and a $15,000,000$20,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $30,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 5, 2023. The Credit Facility permits the payment of up to $20,000,000 of dividends and share repurchases per fiscal year, subject to a minimum availability threshold and pro forma compliance with financial covenants. In connection with the Credit Facility, the lenders have a security interest in substantially all of our assets.
In June 2019, we entered into a second amendment to the Credit Facility (the “Second Amendment”). The Second Amendment, among other things, (i) increased the total size of the Revolving Facility to $238,620,000, (ii) modified the fixed charge coverage ratio financial covenant, (iii) modified the definition of “Consolidated EBITDA”, (iv) modified the borrowing base definition to, among other things, include brake-related products as eligible inventory, (v) increased the letter of credit sublimit to $20,000,000, (vi) increased the Canadian revolving sublimit and swing line sublimit to $24,000,000, (vii) increased the swing line sublimit to $23,862,000, (viii) permitted up to $5,000,000 of sale and lease back transactions per fiscal year, (ix) increased the permitted amount of certain capital expenditures, (x) increased the permitted amount of operating lease obligations per fiscal year, and (xi) increased certain other covenant-related baskets. We capitalized $889,000 of new debt issuance costs in connection with the Second Amendment.
The Term Loans require quarterly principal payments of $937,500 beginning October 1, 2018.$937,500. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.25%, 2.50% or 2.75% or a reference rate plus a margin of 1.25%, 1.50% or 1.75%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on our Term Loans and Revolving Facility was 5.19%2.93% and 5.16%2.94%, respectively, as ofat June 30, 20192020, respectively, and 5.24% as of4.34% and 3.64% at March 31, 2019.2020, respectively.
The Credit Facility, among other things, requires us to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all financial covenants as of June 30, 2019.2020.
The following summarizes the financial covenants required under the Credit Facility:
| | Calculation as of June 30, 2019 | | | Financial covenants required under the Credit Facility | | | Financial covenants required under the Credit Facility | | | Calculation as of June 30, 2020 | |
Maximum senior leverage ratio | | 2.36 | | | 3.00 | | | | 3.00 | | | | 1.82 | |
Minimum fixed charge coverage ratio | | 1.34 | | | 1.10 | | | | 1.10 | | | | 1.38 | |
While we made payments to our Revolving Facility of $40,000,000, in light of COVID-19, we elected not to further pay down our Revolving Facility and accumulated cash of $27,464,000 as of June 30, 2020. Our credit arrangement only allows up to $6,000,000 of credit for cash when computing the senior leverage ratio. If we had paid down the Revolving Facility with cash on hand, our senior leverage ratio would have been 1.62. In addition to other covenants, the Credit Facility places limits on our ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by us and our subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.
We had $135,400,000$112,000,000 and $110,400,000$152,000,000 outstanding under the Revolving Facility at June 30, 20192020 and March 31, 2019,2020, respectively. In addition, $4,039,000$5,679,000 was outstanding for letters of credit at June 30, 2019.2020. At June 30, 2019,2020, after certain contractual adjustments, $72,400,000$85,097,000 was available under the Revolving Facility.
Receivable Discount Programs
We use receivable discount programs with certain customers and their respective banks. Under these programs, we have options to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow us to accelerate receipt of payment on customers’ receivables. While these arrangements have reduced our working capital needs, there can be no assurance that these programs will continue in the future. Interest expense resulting from these programs would increase if interest rates rise, if utilization of these discounting arrangements expands, if customers extend their payment to us, or if the discount period is extended to reflect more favorable payment terms to customers.
The following is a summary of the receivable discount programs:
| | Three Months Ended June 30, | | | Three Months Ended June 30, | |
| | 2019 | | | 2018 | | | 2020 | | | 2019 | |
Receivables discounted | | $ | 96,854,000 | | | $ | 86,785,000 | | | $ | 111,360,000 | | | $ | 96,854,000 | |
Weighted average days | | 346 | | | 334 | | | | 345 | | | | 346 | |
Annualized weighted average discount rate | | 3.9 | % | | 4.1 | % | | | 2.5 | % | | | 3.9 | % |
Amount of discount recognized as interest expense | | $ | 3,649,000 | | | $ | 3,324,000 | | | $ | 2,686,000 | | | $ | 3,649,000 | |
Off-Balance Sheet Arrangements
At June 30, 2019,2020, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.
Capital Expenditures and Commitments
Capital Expenditures
Our total capital expenditures, including finance leases and non-cash capital expenditures were $4,653,000$5,088,000 and $1,546,000$4,653,000 for the three months ended June 30, 20192020 and 2018,2019, respectively. These capital expenditures primarily include the purchase of equipment for our current operations and the expansion of our operations in Mexico. We expect to incur approximately $7,000,000$6,300,000 of capital expenditures for our current operations and approximately $18,000,000$11,000,000 for continued expansion of our operations in Mexico during fiscal 2020.2021. We have used and expect to continue using our working capital and additionalother available capital lease obligationsresources to financefund these capital expenditures.
Litigation
There have been no material changes to our litigation matters that are presented in our Annual Report on Form 10-K for the year ended March 31, 2019,2020, which was filed on June 28, 2019.15, 2020.
Critical Accounting Policies
There have been no material changes to our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2019,2020, which was filed on June 28, 2019,15, 2020, except as discussed below.
New Accounting Pronouncements Recently Adopted
Leases
In February 2016, the FASB issued new guidance that requires balance sheet recognition of a lease asset and lease liability by lessees for all leases, other than leases with a term of 12 months or less if the short-term lease exclusion expedient is elected. The new guidance also requires new disclosures providing additional qualitative and quantitative information about the amounts recorded in the financial statements. The new guidance requires a modified retrospective approach with optional practical expedients. The FASB provided entities with an additional transition method, which allows an entity to apply this guidance as of the beginning of the period of adoption instead of the beginning of the earliest comparative period presented in the entity’s financial statements. We adopted this guidance on April 1, 2019 using the additional transition method. We also elected certain practical expedients permitted under the transition guidance, including the package of practical expedients, which allowed us not to reassess lease classification for leases that commenced prior to the adoption date. In addition, we elected to exempt leases with an initial term of 12 months or less from balance sheet recognition and, for all classes of assets, combining non-lease components with lease components.
Upon adoption, we recorded operating lease liabilities of $53,043,000 and corresponding operating lease assets of $50,773,000. The difference between the operating lease assets and liabilities recognized on our consolidated balance sheet primarily related to accrued rent on existing leases that were offset against the operating lease asset upon adoption. There was an immaterial reclassification of non-lease components to finance lease assets and finance lease liabilities upon adoption due to our election to combine non-lease components with lease components. The adoption of the new guidance did not have any impact on our rent expense and consolidated statement of cash flows. However, we have material nonfunctional currency leases that could have a material impact on our consolidated statements of operations. As required for other monetary liabilities, lessees shall remeasure a foreign currency-denominated lease liability using the exchange rate at each reporting date, but the lease assets are nonmonetary assets measured at historical rates, which are not affected by subsequent changes in the exchange rates. We recorded a gain of $502,000 in general and administrative expenses in connection with the remeasurement of foreign currency-denominated lease liabilities during the three months ended June 30, 2019. See Note 10 for additional discussion of the adoption of ASC 842 and the impact on our financial statements.
New Accounting Pronouncements Not Yet Adopted
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued an accounting pronouncement related to the measurement of credit losses on financial instruments. This pronouncement, along with a subsequent ASUAccounting Standards Updates (“ASU”) issued to clarify certain provisions of the new guidance, changes the impairment model for most financial assets and will requirerequires the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We plan to adoptThe adoption of this pronouncementguidance on April 1, 2020 increased our required disclosures for our fiscal year beginning April 1, 2020. We are currently evaluating the impact this guidance willexpected credit losses but did not have a material effect on our condensed consolidated financial statements, as well as any impacts on our business processes, systems and internal controls.statements.
Prior to April 1, 2020, accounts receivable were recorded at cost less an allowance for doubtful accounts. The net amount of accounts receivable and corresponding allowance for doubtful accounts were presented in the condensed consolidated balance sheets. We maintain an allowance for uncollectible accounts receivable for estimated losses resulting from the failure or inability of its customers to make required payments. Furthermore, receivable balances were assessed quarterly for impairment and an allowance was recorded if the receivable was considered impaired. Subsequent to April 1, 2020, accounts receivable are recorded at amortized cost less an allowance for credit losses that are not expected to be recovered. The net amount of accounts receivable and corresponding allowance for credit losses are presented separately in the condensed consolidated balance sheets. We maintain an allowances for credit losses resulting from the expected failure or inability of our customers to make required payments. We recogniz the allowance for credit losses at inception and reassess quarterly based on the asset’s expected collectability. The allowance is based on multiple factors including historical experience with bad debts, the credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, such as COVID-19, as well as expectations of conditions in the future, if applicable. Our allowance for credit losses is based on the assessment of the collectability of assets pooled together with similar risk characteristics.
We pool our receivables based on the shared risk characteristics of our customers. We record a provision for expected credit losses using a loss-rate method based on the ratio of our historical write-offs to our average trade accounts receivable. At each reporting period, we will assess whether financial assets in a pool continue to display similar risk characteristics. If particular receivables no longer display risk characteristics that are similar to those of the receivables in the pool, we may determine that we need to move those receivables to a different pool or perform an individual assessment of expected credit losses for those specific receivables.
Fair Value Measurements
In August 2018, the FASB issued guidance,, which changes the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures.disclosures, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The standardamendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 measurements, and the narrative description of measurement uncertainty should be applied prospectively only for the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively applied to all periods presented upon their effective date. The adoption of this guidance on April 1, 2020 modified certain of our disclosures for our Level 3 fair value measurements but did not have an impact on our condensed consolidated financial statements.
Reference Rate Reform
In March 2020, the FASB issued guidance that, for a limited time, eases the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We will apply these amendments prospectively. The adoption of this guidance on April 1, 2020 did not have an impact on our condensed consolidated financial statements for the three months ended June 30, 2020.
New Accounting Pronouncements Not Yet Adopted
Income Taxes
In December 2019, the FASB issued guidance that simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application. This guidance is effective for financial statements issued forannual and interim periods in fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019.2020. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our condensed consolidated financial statements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K as of March 31, 2019,2020, which was filed with the SEC on June 28, 2019.15, 2020.
Evaluation of Disclosure Controls and Procedures
OurWe have established disclosure controls and procedures designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including our chief executive officer, chief financial officer, and chief accounting officer, as appropriate to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”)chief executive officer, chief financial officer, and Chief Accounting Officer (“CAO”), evaluatedchief accounting officer, we have conducted an evaluation of the effectiveness of our disclosure controls and procedures (asas defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2019.. Based on this evaluation, our CEO, CFOchief executive officer, chief financial officer, and CAOchief accounting officer concluded that ourMPA’s disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2019 as a result of the material weakness described in our Annual Report on Form 10-K and below.
A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
As disclosed in more detail in Item 9A. “Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019, we identified the following material weakness in internal control over financial reporting:
| (1) | We did not perform a sufficient review of certain accounting policies and lacked oversight of the compliance with those policies, which resulted in inconsistent application, inadequate analysis and deficient documentation to support the financial statement presentation and disclosures over certain accounts, including inventory. |
| (2) | Our lack of sufficient technical accounting resources resulted in inadequate oversight of process level controls of one of our subsidiaries. |
Management’s Remediation Efforts
We have designed and begun to implement several steps, as further described below, to remediate the material weakness described in this Item 4 and enhance our overall control environment.
| 1. | Management plans to hire and has hired additional finance and accounting personnel with the requisite experience and skill levels, supplemented by third-party technical accounting resources, sufficient to enable the proper and timely review of accounting analyses and memos in various technical areas. |
| 2. | Management will continue to formalize the assessment and documentation of the Company’s accounting and financial reporting policies and procedures and enhance controls over the monitoring of compliance with those accounting policies and procedures. |
| 3. | Management will enhance the accounting and internal control training program provided to staff of new and existing subsidiaries. Management will enhance its internal control processes to continuously monitor the subsidiaries’ compliance with and documentation of the Company’s accounting and financial reporting policies and procedures, including internal control over financial reporting. |
| 4. | Management has enhanced and will continue to enhance the risk assessment process and design of internal control over financial reporting at its subsidiary. |
The actions that we are taking are subject to ongoing review by our management, including our CEO, CFO and CAO, as well as Audit Committee oversight. Management expects the remediation plan to extend over multiple financial reporting periods throughout fiscal year 2020. The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal year 2020.
While the foregoing measures are intended to effectively remediate the material weakness described in this Item 4, it is possible that additional remediation steps will be necessary. As such, as we continue to evaluate and implement our plan to remediate the material weakness, management may decide to take additional measures to address the material weakness or modify the remediation steps described above. Until the material weakness is remediated, we plan to continue to perform additional analyses and other procedures to help ensure that our consolidated financial statements are prepared in accordance with GAAP.
Inherent Limitations on Effectiveness of Controls
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required.
Internal control over financial reporting includes those policies and procedures that:
1. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;Company;
2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the companyCompany are being made only in accordance with authorizations of management and directors of the company;Company; and
3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’sCompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
We are taking actions to remediate the material weakness relating to our internal controls over financial reporting, as described above. Additionally, during the quarter ended June 30, 2019, the Company adopted a comprehensive new lease standard which superseded previous lease guidance and, as a result, changes were made to related business processes and control activities in order to monitor and maintain appropriate controls over financial reporting. Except as discussed above, thereThere have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that occurred during the three months ended June 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
There have been no material changes to our litigation matters that are presented in our Annual Report on Form 10-K for the year ended March 31, 2019,2020, which was filed on June 28, 2019.15, 2020.
There have been no material changes in the risk factors set forth in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended March 31, 2019,2020, filed on June 28, 2019.15, 2020.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Limitation on Payment of Dividends and Share Repurchases
The Credit Facility permits the payment of up to $20,000,000 of dividends and share repurchases per fiscal year, subject to a minimum availability threshold and pro forma compliance with financial covenants.
Purchases of Equity Securities by the Issuer
Shares repurchased during the three months ended June 30, 20192020 were as follows:
Periods | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Approximate
Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) | | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
April 1 - April 30, 2019: | | | | | | | | | | | | | |
April 1 - April 30, 2020: | | | | | | | | | | | | | |
Open market and privately negotiated purchases | | - | | | $ | - | | | - | | | $ | 21,308,000 | | | | - | | | $ | - | | | | - | | | $ | 21,308,000 | |
May 1 - May 31, 2019: | | | | | | | | | | | | | |
May 1 - May 31, 2020: | | | | | | | | | | | | | | | | | |
Open market and privately negotiated purchases | | - | | | $ | - | | | - | | | 21,308,000 | | | | - | | | $ | - | | | | - | | | | 21,308,000 | |
June 1 - June 30, 2019: | | | | | | | | | | | | | |
June 1 - June 30, 2020: | | | | | | | | | | | | | | | | | |
Open market and privately negotiated purchases | | | - | | | $ | - | | | | - | | | | 21,308,000 | | | | - | | | $ | - | | | | - | | | | 21,308,000 | |
Total | | | 0 | | | | | | | 0 | | | $ | 21,308,000 | | | | 0 | | | | | | | | 0 | | | $ | 21,308,000 | |
(1) | As of June 30, 2019,2020, $15,692,000 of the $37,000,000 authorized share repurchase program had been utilized and $21,308,000 remained available to repurchase shares, subject to the limit in our Credit Facility. We retired the 675,561 shares repurchased under this program through June 30, 2019.2020. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions. |
None.
Number
| | Description of Exhibit
| | Method of Filing
|
3.1 | | Certificate of Incorporation of the Company | | Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form SB-2 declared effective on March 22, 1994 (the “1994 Registration Statement”). |
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3.2 | | Amendment to Certificate of Incorporation of the Company | | Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (No. 33-97498) declared effective on November 14, 1995. |
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| | Amendment to Certificate of Incorporation of the Company | | Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1997. |
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| | Amendment to Certificate of Incorporation of the Company | | Incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1998 (the “1998 Form 10-K”). |
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| | Amendment to Certificate of Incorporation of the Company | | Incorporated by reference to Exhibit C to the Company’s proxy statement on Schedule 14A filed with the SEC on November 25, 2003. |
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| | Amended and Restated By-Laws of Motorcar Parts of America, Inc. | | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on August 24, 2010. |
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| | Certificate of Amendment of the Certificate of Incorporation of the Company | | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on April 17, 2014. |
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| | Amendment to the Amended and Restated By-Laws of Motorcar Parts of America, Inc., as adopted on June 9, 2016 | | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 14, 2016. |
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| | Amendment to the Amended and Restated By-Laws of the Company | | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on February 22, 2017. |
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| | 2003 Long Term Incentive Plan | | Incorporated by reference to Exhibit 4.9 to the Company’s Registration Statement on Form S-8 filed with the SEC on April 2, 2004. |
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| | 2004 Non-Employee Director Stock Option Plan | | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A for the 2004 Annual Shareholders Meeting. |
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| | 2010 Incentive Award Plan | | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on December 15, 2010. |
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| | Amended and Restated 2010 Incentive Award Plan | | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 5, 2013. |
Number | | Description of Exhibit
| | Method of Filing
|
| | Second Amended and Restated 2010 Incentive Award Plan | | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 3, 2014. |
| | | | |
| | 2014 Non-Employee Director Incentive Award Plan | | Incorporated by reference to Appendix B to the Proxy Statement on Schedule 14A filed on March 3, 2014. |
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| | Third Amended and Restated 2010 Incentive Award Plan | | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on November 20, 2017. |
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| | Fourth Amended and Restated 2010 Incentive Award Plan | | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on July 24, 2020. |
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| | Amendment No. 4 to Employment Agreement, dated as of May 21, 2020, between Motorcar Parts of America, Inc., and Selwyn Joffe | | Filed herewith. |
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| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | | Filed herewith. |
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| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | | Filed herewith. |
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| | Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | | Filed herewith. |
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| | Certifications of Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | | Filed herewith. |
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101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document). | | |
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101.SCM | | Inline XBRL Taxonomy Extension Schema Document | | |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | |
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104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | |
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.
| MOTORCAR PARTS OF AMERICA, INC. |
| | |
Dated: August 9, 2019 10, 2020 | By: | /s/ David Lee |
| | David Lee |
| | Chief Financial Officer |
| | |
Dated: August 9, 2019 10, 2020 | By: | /s/ Kevin Daly Kamlesh Shah |
| | Kevin Daly Kamlesh Shah |
| | Chief Accounting Officer |