UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-Q


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


FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019
2020


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


FOR THE TRANSITION PERIOD FROM       TO


Commission File No. 001-33861


MOTORCAR PARTS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)


New York 11-2153962
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)


2929 California Street, Torrance, California 90503
(Address of principal executive offices) (Zip Code)


Registrant’s telephone number, including area code: (310) 212-7910


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

Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per shareMPAAThe Nasdaq Global Select Market


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


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


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


Large accelerated filer ☐
Accelerated filer ☑
Non-accelerated filer ☐
Smaller reporting company ☐
 
Emerging growth company ☐


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


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


There were 18,958,43019,050,147 shares of Common Stock outstanding at November 5, 2019.2, 2020.






MOTORCAR PARTS OF AMERICA, INC.


TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION 
 
Item 1. Financial Statements (unaudited)
4
 
Condensed Consolidated Balance Sheets
4
 
Condensed Consolidated Statements of OperationsIncome
5
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
6
 
Condensed Consolidated Statements of Shareholders’ Equity
7
 
Condensed Consolidated Statements of Cash Flows
8
 
Notes to Condensed Consolidated Financial Statements
9
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
3233
 
Item 4. Controls and Procedures
32
33
PART II — OTHER INFORMATION 
 
Item 1. Legal Proceedings
35
 
Item 1A. Risk Factors
35
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
35
 
Item 5. Other Information
35
 
Item 6. Exhibits
36
 
SIGNATURES
38



MOTORCAR PARTS OF AMERICA, INC.

GLOSSARY


The following terms are frequently used in the text of this report and have the meanings indicated below.


“Used Core” — An automobile part which has previously been used in the operation of a vehicle. Generally, the Used Core is an original equipment (“OE”) automobile part installed by the vehicle manufacturer and subsequently removed for replacement. Used Cores contain salvageable parts which are an important raw material in the remanufacturing process. We obtain most Used Cores by providing credits to our customers for Used Cores returned to us under our core exchange program. Our customers receive these Used Cores from consumers who deliver a Used Core to obtain credit from our customers upon the purchase of a newly remanufactured automobile part. When sufficient Used Cores are not available from our customers, we purchase Used Cores from core brokers, who are in the business of buying and selling Used Cores. The Used Cores purchased from core brokers or returned to us by our customers under the core exchange program, and which have been physically received by us, are part of our raw material and work-in-process inventory. Used Cores returned by consumers to our customers but not yet returned to us are classified as contract assets until we physically receive these Used Cores.


“Remanufactured Core” — The Used Core underlying an automobile part that has gone through the remanufacturing process and through that process has become part of a newly remanufactured automobile part. The remanufacturing process takes a Used Core, breaks it down into its component parts, replaces those components that cannot be reused and reassembles the salvageable components of the Used Core and additional new components into a remanufactured automobile part. Remanufactured Cores held for sale at our customer locations are included in long-term contract assets. The Remanufactured Core portion of stock adjustment returns are classified as contract assets until we physically receive them.them


.
PART I — FINANCIAL INFORMATION


Item 1.
Financial Statements


MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets


 September 30, 2019 March 31, 2019  September 30, 2020  March 31, 2020 
ASSETS (Unaudited)    (Unaudited)    
Current assets:           
Cash and cash equivalents $6,455,000  $9,911,000  $20,887,000  $49,616,000 
Short-term investments  2,192,000   3,273,000   1,237,000   850,000 
Accounts receivable — net  69,914,000   56,015,000   91,088,000   91,748,000 
Inventory — net  250,667,000   233,726,000 
Inventory unreturned  8,684,000   8,469,000 
Contract assets (see Note 5)  19,471,000   22,183,000 
Income tax receivable  10,205,000   10,009,000 
Inventory  240,018,000   234,680,000 
Contract assets  33,309,000   20,332,000 
Prepaid expenses and other current assets  8,846,000   9,296,000   10,463,000   11,890,000 
Total current assets  376,434,000   352,882,000   397,002,000   409,116,000 
Plant and equipment — net  40,723,000   35,151,000   49,893,000   44,957,000 
Operating lease assets (see Note 9)  49,262,000   - 
Operating lease assets  68,530,000   53,029,000 
Long-term deferred income taxes  10,237,000   9,746,000   18,706,000   18,950,000 
Long-term contract assets (see Note 5)  224,329,000   221,876,000 
Goodwill  3,205,000   3,205,000 
Intangible assets — net  7,493,000   8,431,000 
Long-term contract assets  234,590,000   239,540,000 
Goodwill and intangible assets — net  9,077,000   9,598,000 
Other assets  875,000   1,071,000   1,638,000   1,839,000 
TOTAL ASSETS $712,558,000  $632,362,000  $779,436,000  $777,029,000 
LIABILITIES AND SHAREHOLDERS’ EQUITY        
LIABILITIES AND SHAREHOLDERS' EQUITY        
Current liabilities:                
Accounts payable $85,307,000  $92,461,000 
Accrued liabilities  14,318,000   14,604,000 
Accounts payable and accrued liabilities $121,550,000  $95,083,000 
Customer finished goods returns accrual  23,621,000   22,615,000   27,561,000   25,326,000 
Contract liabilities (see Note 8)  24,064,000   30,599,000 
Contract liabilities  44,657,000   27,911,000 
Revolving loan  144,000,000   110,400,000   94,000,000   152,000,000 
Other current liabilities  4,852,000   4,990,000   5,154,000   9,390,000 
Operating lease liabilities (see Note 9)  4,487,000   - 
Operating lease liabilities  6,228,000   5,104,000 
Current portion of term loan  3,678,000   3,685,000   3,678,000   3,678,000 
Total current liabilities  304,327,000   279,354,000   302,828,000   318,492,000 
Term loan, less current portion  22,299,000   24,187,000   18,624,000   20,462,000 
Long-term contract liabilities (see Note 8)  49,327,000   40,889,000 
Long-term contract liabilities  90,223,000   92,101,000 
Long-term deferred income taxes  130,000   257,000   75,000   79,000 
Long-term operating lease liabilities (see Note 9)  47,925,000   - 
Long-term operating lease liabilities  72,959,000   61,425,000 
Other liabilities  7,205,000   7,920,000   6,732,000   8,950,000 
Total liabilities  431,213,000   352,607,000   491,441,000   501,509,000 
Commitments and contingencies              
Shareholders’ equity:        
Preferred stock; par value $.01 per share, 5,000,000 shares authorized; none issued  -   - 
Series A junior participating preferred stock; par value $.01 per share, 20,000 shares authorized; none issued
  -   - 
Common stock; par value $.01 per share, 50,000,000 shares authorized; 18,944,886 and 18,817,400 shares issued and outstanding at September 30, 2019 and March 31, 2019, respectively
  189,000   188,000 
Shareholders' equity:        
Preferred stock; par value $0.01 per share, 5,000,000 shares authorized; NaN issued  0   0 
Series A junior participating preferred stock; par value $0.01 per share, 20,000 shares authorized; NaN issued  0   0 
Common stock; par value $0.01 per share, 50,000,000 shares authorized; 19,026,587 and 18,969,380 shares issued and outstanding at September 30, 2020 and March 31, 2020, respectively  190,000   190,000 
Additional paid-in capital  216,430,000   215,047,000   220,588,000   218,581,000 
Retained earnings  71,445,000   71,407,000   76,289,000   64,117,000 
Accumulated other comprehensive loss  (6,719,000)  (6,887,000)  (9,072,000)  (7,368,000)
Total shareholders’ equity  281,345,000   279,755,000 
Total shareholders' equity  287,995,000   275,520,000 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $712,558,000  $632,362,000  $779,436,000  $777,029,000 


The accompanying notes to condensed consolidated financial statements are an integral part hereof.



MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of OperationsIncome
(Unaudited)


 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
  
Three Months Ended
September 30,
  
Six Months Ended
September 30,
 
 2019 2018 2019 2018  2020  2019  2020  2019 
                     
                     
Net sales $150,374,000  $127,939,000  $259,522,000  $219,607,000  $154,730,000  $150,374,000  $250,086,000  $259,522,000 
Cost of goods sold  113,801,000   102,228,000   205,366,000   177,544,000   115,004,000   113,801,000   196,973,000   205,366,000 
Gross profit  36,573,000   25,711,000   54,156,000   42,063,000   39,726,000   36,573,000   53,113,000   54,156,000 
Operating expenses:                                
General and administrative  14,285,000   8,997,000   26,285,000   21,088,000   12,518,000   12,483,000   24,205,000   25,020,000 
Sales and marketing  5,448,000   4,537,000   10,367,000   8,929,000   4,326,000   5,448,000   8,526,000   10,367,000 
Research and development  2,148,000   1,784,000   4,520,000   3,520,000   1,972,000   2,148,000   3,914,000   4,520,000 
Foreign exchange impact of lease liabilities and forward contracts  (3,985,000)  1,802,000   (8,802,000)  1,265,000 
Total operating expenses  21,881,000   15,318,000   41,172,000   33,537,000   14,831,000   21,881,000   27,843,000   41,172,000 
Operating income  14,692,000   10,393,000   12,984,000   8,526,000   24,895,000   14,692,000   25,270,000   12,984,000 
Interest expense, net  6,523,000   5,699,000   12,696,000   10,774,000   3,614,000   6,523,000   8,023,000   12,696,000 
Income (loss) before income tax expense (benefit)  8,169,000   4,694,000   288,000   (2,248,000)
Income tax expense (benefit)  1,980,000   1,181,000   250,000   (266,000)
                
Net income (loss) $6,189,000  $3,513,000  $38,000  $(1,982,000)
Basic net income (loss) per share $0.33  $0.19  $0.00  $(0.10)
Diluted net income (loss) per share $0.32  $0.18  $0.00  $(0.10)
Income before income tax expense  21,281,000   8,169,000   17,247,000   288,000 
Income tax expense  6,097,000   1,980,000   5,075,000   250,000 
Net income $15,184,000  $6,189,000  $12,172,000  $38,000 
Basic net income per share $0.80  $0.33  $0.64  $0.00 
Diluted net income per share $0.78  $0.32  $0.63  $0.00 
Weighted average number of shares outstanding:Weighted average number of shares outstanding:                             
Basic  18,903,182   18,878,674   18,862,901   18,887,214   19,022,414   18,903,182   18,999,461   18,862,901 
Diluted  19,217,327   19,319,465   19,246,599   18,887,214   19,345,311   19,217,327   19,289,765   19,246,599 


The accompanying notes to condensed consolidated financial statements are an integral part hereof.



MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)


 
Three Months Ended
September 30,
  
Six Months Ended
September 30,
  
Three Months Ended
September 30,
  
Six Months Ended
September 30,
 
 2019  2018  2019  2018  2020  2019  2020  2019 
                        
            
Net income (loss) 
$
6,189,000
  
$
3,513,000
  
$
38,000
  
$
(1,982,000
)
Net income $15,184,000  $6,189,000  $12,172,000  $38,000 
Other comprehensive (loss) income, net of tax:                            
Foreign currency translation (loss) gain  
(431,000
)
  
(2,000
)
  
168,000
   
(717,000
)
  (441,000)  (431,000)  (1,704,000)  168,000 
Total other comprehensive (loss) income, net of tax  
(431,000
)
  
(2,000
)
  
168,000
   
(717,000
)
  (441,000)  (431,000)  (1,704,000)  168,000 
Comprehensive income (loss) 
$
5,758,000
  
$
3,511,000
  
$
206,000
  
$
(2,699,000
)
Comprehensive income $14,743,000  $5,758,000  $10,468,000  $206,000 


The accompanying notes to condensed consolidated financial statements are an integral part hereof.



MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)


 Common Stock          Common Stock             
 Shares  Amount  
Additional
Paid-in
Capital
Common
Stock
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  Total  Shares  Amount  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income Loss
  Total 
                               
Balance at March 31, 2019  18,817,400  $188,000  $215,047,000  $71,407,000  $(6,887,000) $279,755,000 
Balance at March 31, 2020  18,969,380  $190,000  $218,581,000  $64,117,000  $(7,368,000) $275,520,000 
Compensation recognized under employee stock plans  -   -   988,000   -   -   988,000   -   0   1,043,000   0   0   1,043,000 
Exercise of stock options  3,000   0   20,000   0   0   20,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
  36,872   1,000   (363,000)  -   -   (362,000)  29,953   0   (207,000)  0   0   (207,000)
Foreign currency translation  -   -   -   -   599,000   599,000   -   0   0   0   (1,263,000)  (1,263,000)
Net loss  -   -   -   (6,151,000)  -   (6,151,000)  -   0   0   (3,012,000)  0   (3,012,000)
Balance at June 30, 2019  18,854,272  $189,000  $215,672,000  $65,256,000  $(6,288,000) $274,829,000 
Balance at June 30, 2020  19,002,333  $190,000  $219,437,000  $61,105,000  $(8,631,000) $272,101,000 
Compensation recognized under employee stock plans  -   -   1,053,000   -   -   1,053,000   -   0   1,218,000   0   0   1,218,000 
Exercise of stock options  52,800   -   405,000   -   -   405,000   6,000   0   73,000   0   0   73,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
  37,814   -   (700,000)  -   -   (700,000)  18,254   0   (140,000)  0   0   (140,000)
Foreign currency translation  -   -   -   -   (431,000)  (431,000)  -   0   0   0   (441,000)  (441,000)
Net income  -   -   -   6,189,000   -   6,189,000   -   0   0   15,184,000   0   15,184,000 
Balance at September 30, 2019  18,944,886  $189,000  $216,430,000  $71,445,000  $(6,719,000) $281,345,000 
Balance at September 30, 2020  19,026,587  $190,000  $220,588,000  $76,289,000  $(9,072,000) $287,995,000 


 Common Stock              Common Stock             
 Shares  Amount  
Additional
Paid-in
Capital
Common
Stock
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  Total  Shares  Amount  
Additional
Paid-in
Capital
Common
Stock
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  Total 
                                    
Balance at March 31, 2018  18,893,102  $189,000  $213,609,000  $78,510,000  $(5,428,000) $286,880,000 
Cumulative-effect adjustment for the adoption of ASU 2016-01  -   -   -   746,000   (746,000)  - 
Balance at April 1, 2018
  18,893,102  $189,000  $213,609,000  $79,256,000  $(6,174,000) $286,880,000 
Balance at March 31,2019  18,817,400  $188,000  $215,047,000  $71,407,000  $(6,887,000) $279,755,000 
Compensation recognized under employee stock plans  -   -   941,000   -   -   941,000   -   0   988,000   0   0   988,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
  23,006   -   (192,000)  -   -   (192,000)  36,872   1,000   (363,000)  0   0   (362,000)
Foreign currency translation  -   -   -   -   (715,000)  (715,000)  -   0   0   0   599,000   599,000 
Net loss  -   -   -   (5,495,000)  -   (5,495,000)  -   0   0   (6,151,000)  0   (6,151,000)
Balance at June 30, 2018  18,916,108  $189,000  $214,358,000  $73,761,000  $(6,889,000) $281,419,000 
Balance at June 30, 2019  18,854,272  $189,000  $215,672,000  $65,256,000  $(6,288,000) $274,829,000 
Compensation recognized under employee stock plans  -   -   1,180,000   -   -   1,180,000   -   0   1,053,000   0   0   1,053,000 
Exercise of stock options  39,032   1,000   243,000   -   -   244,000   52,800   0   405,000   0   0   405,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
  8,152   -   (128,000)  -   -   (128,000)  37,814   0   (700,000)  0   0   (700,000)
Repurchase and cancellation of treasury stock, including fees  (163,815)  (2,000)  (4,060,000)  -   -   (4,062,000)
Foreign currency translation  -   -   -   -   (2,000)  (2,000)  -   0   0   0   (431,000)  (431,000)
Net income  -   -   -   3,513,000   -   3,513,000   -   0   0   6,189,000   0   6,189,000 
Balance at September 30, 2018  18,799,477  $188,000  $211,593,000  $77,274,000  $(6,891,000) $282,164,000 
Balance at September 30, 2019  18,944,886  $189,000  $216,430,000  $71,445,000  $(6,719,000) $281,345,000 


The accompanying notes to condensed consolidated financial statements are an integral part hereof.



MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)


 
Six Months Ended
September 30,
  
Six Months Ended
September 30,
 
 2019 2018  2020  2019 
Cash flows from operating activities:           
Net income (loss) $38,000  $(1,982,000)
Adjustments to reconcile net income (loss) to net cash used in operating activities:        
Net income $12,172,000  $38,000 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:        
Depreciation and amortization  3,631,000   2,834,000   5,233,000   4,619,000 
Amortization of intangible assets  988,000   384,000 
Amortization and write-off of debt issuance costs  383,000   647,000 
Amortization of interest on contract liabilities, net  478,000   513,000 
Amortization of interest  767,000   861,000 
Amortization of core premiums paid to customers  2,741,000   2,217,000 
Noncash lease expense  2,431,000   -   3,410,000   2,431,000 
Loss due to the change in the fair value of the contingent consideration  123,000   - 
Loss due to the remeasurement of lease liabilities  637,000   - 
(Gain) loss due to the change in the fair value of the contingent consideration  (65,000)  123,000 
Foreign exchange impact of lease liabilities and forward contracts  (8,802,000)  1,265,000 
Gain on short-term investments  (136,000)  (180,000)  (195,000)  (136,000)
Net provision for inventory reserves  6,656,000   5,285,000   5,281,000   6,656,000 
Net provision for customer payment discrepancies  721,000   274,000 
Net provision for doubtful accounts  106,000   206,000 
Net provision for customer payment discrepancies and credit losses  421,000   827,000 
Deferred income taxes  (638,000)  (667,000)  447,000   (638,000)
Share-based compensation expense  2,041,000   2,121,000   2,261,000   2,041,000 
Loss on disposal of plant and equipment  3,000   11,000   1,000   3,000 
Changes in operating assets and liabilities, net of effects of acquisitions:        
Changes in operating assets and liabilities:        
Accounts receivable  (14,672,000)  6,598,000   661,000   (14,672,000)
Inventory  (23,254,000)  (32,380,000)  (9,685,000)  (23,469,000)
Inventory unreturned  (215,000)  (1,592,000)
Income tax receivable  (200,000)  (3,595,000)
Prepaid expenses and other current assets  506,000   (658,000)  1,200,000   306,000 
Other assets  182,000   (79,000)  297,000   182,000 
Accounts payable and accrued liabilities  (6,600,000)  17,840,000   22,745,000   (6,600,000)
Customer finished goods returns accrual  1,005,000   2,156,000   2,217,000   1,005,000 
Contract assets, net  261,000   (8,773,000)  (10,735,000)  (1,956,000)
Contract liabilities, net  1,405,000   2,724,000   14,368,000   1,405,000 
Operating lease liabilities  (2,107,000)  -   (3,027,000)  (2,107,000)
Other liabilities  (509,000)  1,904,000   (2,383,000)  (1,137,000)
Net cash used in operating activities  (26,736,000)  (6,409,000)
Net cash provided by (used in) operating activities  39,330,000   (26,736,000)
Cash flows from investing activities:                
Purchase of plant and equipment  (6,943,000)  (5,259,000)  (6,810,000)  (6,943,000)
Proceeds from sale of plant and equipment  26,000   -   0   26,000 
Change in short-term investments  1,216,000   (222,000)  (192,000)  1,216,000 
Net cash used in investing activities  (5,701,000)  (5,481,000)  (7,002,000)  (5,701,000)
Cash flows from financing activities:                
Borrowings under revolving loan  42,000,000   35,200,000   0   42,000,000 
Repayments of revolving loan  (8,400,000)  (36,294,000)  (58,000,000)  (8,400,000)
Borrowings under term loan  -   13,594,000 
Repayments of term loan  (1,875,000)  (782,000)  (1,875,000)  (1,875,000)
Payments for debt issuance costs  (901,000)  (1,757,000)  0   (901,000)
Payments on finance lease obligations  (1,108,000)  (711,000)  (1,183,000)  (1,108,000)
Exercise of stock options  405,000   244,000   93,000   405,000 
Cash used to net share settle equity awards  (1,062,000)  (320,000)  (347,000)  (1,062,000)
Repurchase of common stock, including fees  -   (4,062,000)
Net cash provided by financing activities  29,059,000   5,112,000 
Net cash (used in) provided by financing activities  (61,312,000)  29,059,000 
Effect of exchange rate changes on cash and cash equivalents  (78,000)  (96,000)  255,000   (78,000)
Net decrease in cash and cash equivalents  (3,456,000)  (6,874,000)  (28,729,000)  (3,456,000)
Cash and cash equivalents — Beginning of period  9,911,000   13,049,000   49,616,000   9,911,000 
Cash and cash equivalents — End of period $6,455,000  $6,175,000  $20,887,000  $6,455,000 
Supplemental disclosures of cash flow information:                
Cash paid for interest, net $11,859,000  $9,534,000  $7,339,000  $11,859,000 
Cash paid for income taxes, net of refunds  -   3,263,000   1,436,000   0 
Cash paid for operating leases  3,538,000   -   5,323,000   3,538,000 
Cash paid for finance leases  1,249,000   -   1,359,000   1,249,000 
Plant and equipment acquired under finance leases  2,308,000  $-   1,847,000   2,308,000 
Assets acquired under operating leases  1,497,000   -   15,564,000   1,497,000 
Non-cash capital expenditures  2,085,000   0 


The accompanying notes to condensed consolidated financial statements are an integral part hereof.



MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 20192020
(Unaudited)


1.
1. Company Background and Organization


Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading supplier of automotive aftermarket non-discretionary replacement parts and diagnostic equipment. These replacement parts are primarily sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). The Company’s diagnostic equipment primarily serves the global automotive component and powertrain testing market. The Company’s products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, and brake master cylinders, and (iv) brake calipers (introduced in August 2019),diagnostics and (v) other products. Other products, include: (i) turbochargers, (ii) brake power boosters, (iii)which include diagnostics systems, (iv)advanced power emulators (ACused for the development of electric vehicles and DC),aerospace applications, and (v) custom power electronic products.products for quality control in the development and production of electric vehicles and turbochargers.


The Company primarily ships its products from its facilities and various third party-party warehouse distribution centers in North America.America, including the Company’s 410,000 square foot distribution center in Tijuana, Mexico.


Pursuant to the guidance provided under the Financial Accounting StatementStandards Board (“FASB”) Accounting Standards Codification (“ASC”) for segment reporting, the Company has identified its chief operating decision maker (“CODM”), reviewed the documents used by the CODM, and understands how such documents are used by the CODM to make financial and operating decisions. The Company has determined through this review process that its business comprises three3 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 the Company has combined its operating segments into one1 reportable segment.


In January 2019,Impact of the Novel Coronavirus (“COVID-19”)

The outbreak of the COVID-19 pandemic has led to adverse impacts on the U.S. and global economies and created uncertainty regarding the potential effects on the Company’s employees, supply chain, operations, and customer demand. The COVID-19 pandemic could impact the Company’s operations and the operations of its customers, suppliers, and vendors because of quarantines, facility closures, travel, and logistics restrictions. The extent to which the COVID-19 pandemic impacts the Company completedwill depend on numerous factors and future developments, which are highly uncertain and cannot be predicted, including, but not limited to: (i) the acquisitionseverity of all the equity interestsvirus, (ii) the duration of Dixie Electric, Ltd (“Dixie”). Duringa “second wave” or additional spikes, (iii) the three months ended September 30, 2019,effects of the pandemic on customers, suppliers, and vendors, (iv) the remedial actions and stimulus measures adopted by local, state and federal governments, and (v) the extent to which normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, the Company finalizedmay continue to experience adverse impacts to its business because of an economic recession or depression that has occurred or may occur in the purchase price allocationfuture. At this time, the Company is unable to predict accurately the ultimate long-term impact the COVID-19 pandemic will have on its business and financial condition.

2. Basis of Dixie without any material adjustments.Presentation and New Accounting Pronouncements

2.Basis of Presentation and New Accounting Pronouncements


Basis of Presentation


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q.10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended September 30, 20192020 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2020.2021. This report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2019,2020, which are included in the Company’s Annual Report on Form 10-K10-K filed with the Securities and Exchange Commission (“SEC”) on June 28, 2019.15,2020.


9
The accompanying condensed consolidated financial statements have been prepared on a consistent basis with, and there have been no material changes to, except as noted below, the accounting policies described in Note 3,2, Summary of Significant Accounting Policies, to the consolidated financial statements that are presented in the Company’s Annual Report on Form 10-K10-K for the fiscal year ended March 31, 2019.2020.


9
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. The Company adopted this guidance on April 1, 2019 using the additional transition method. The Company also elected certain practical expedients permitted under the transition guidance, including the package of practical expedients, which allowed it not to reassess lease classification for leases that commenced prior to the adoption date. In addition, the Company 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, the Company 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 the Company’s condensed consolidated balance sheets 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 the Company’s election to combine non-lease components with lease components. The adoption of the new guidance did not have any impact on the Company’s rent expense and condensed consolidated statement of cash flows. However, the Company has material nonfunctional currency leases that could have a material impact on the Company’s condensed 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. The Company recorded losses of $1,139,000 and $637,000 in general and administrative expenses in connection with the remeasurement of foreign currency-denominated lease liabilities during the three and six months ended September 30, 2019, respectively. See Note 9 for additional discussion of the adoption of ASC 842 and the impact on the Company’s 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 Accounting Standards Updates (“ASU”) issued to clarify certain provisions of the new guidance, changeschanged 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 beare 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 effectiveThe adoption of this guidance on April 1,2020 increased the Company’s required disclosures for fiscal years,its expected credit losses but did not have a material effect on its condensed consolidated financial 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 interim periods within those fiscal years, beginning after December 15, 2019.doubtful accounts were presented in the condensed consolidated balance sheets. The Company plansmaintains allowances for uncollectible accounts receivable for estimated losses resulting from the failure or inability of its customers to adopt this pronouncementmake required payments. Furthermore, receivable balances were assessed quarterly for its fiscal year beginningimpairment and an allowance was recorded if the receivable was considered impaired. Subsequent to April 1, 2020.2020, 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. The Company maintains allowances for credit losses resulting from the expected failure or inability of its customers to make required payments. The Company recognizes the allowance for credit losses at inception and reassess quarterly based on the asset’s expected collectability. The allowance is currently evaluatingbased on multiple factors including historical experience with bad debts, the impact this guidance will have on its consolidated financial statements,credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, such as COVID-19, as well as any impactsexpectations of conditions in the future, if applicable. The Company’s allowance for credit losses is based on the assessment of the collectability of assets pooled together with similar risk characteristics.

The Company records a provision for expected credit losses using a loss-rate method based on the ratio of its business processes, systems and internal controls.historical write-offs to its average trade accounts receivable. At each reporting period, the Company assesses 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, the Company may determine that it needs 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 changeschanged 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 the Company’s disclosures for its Level 3 fair value measurements but did not have an impact on its consolidated financial statements.

10
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 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. The Company will apply these amendments prospectively. The adoption of this guidance on April 1,2020 did not have an impact on the Company’s condensed consolidated financial statements for the three and six months ended September 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 for fiscal years,annual and for interim periods within thosein fiscal years beginning after December 15, 2019.2020. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.


3.Accounts Receivable — Net

goods and services. Accounts receivable — net includes offset accounts related to customer payment discrepancies, returned goods authorizations (“RGA”RGAs”) issued for in-transit unit returns, and potential bad debts.allowances for credit losses. The Company believes its credit risk with respect to trade accounts receivable is limited due to its credit evaluation process and the long-term nature of its relationships with its largest customers. The Company utilizes a historical loss rate method, adjusted for any changes in economic conditions or risk characteristics, to estimate its expected credit losses each period. When developing an estimate of expected credit losses, the Company considers all available relevant information regarding the collectability of cash flows, including historical information, current conditions, and reasonable and supportable forecasts of future economic conditions over the contractual life of the receivable. The historical loss rate method considers past write-offs of trade accounts receivable over a period commensurate with the initial term of the Company’s contracts with its customers. The Company recognizes the allowance for credit losses at inception and reassesses quarterly based on management’s expectation of the asset’s collectability. The Company’s accounts receivable are short-term in nature and written off only when all collection attempts have failed. The Company uses receivable discount programs with certain customers and their respective banks (see Note 10).


Accounts receivable — net is comprised of the following:


 September 30, 2019  March 31, 2019  September 30, 2020  March 31, 2020 
Accounts receivable — trade
 
$
86,974,000
  
$
75,847,000
  $109,443,000  $109,164,000 
Allowance for bad debts 
(4,187,000
)
 
(4,100,000
)
Allowance for credit losses  (483,000)  (4,252,000)
Customer payment discrepancies 
(1,169,000
)
 
(854,000
)
  (1,059,000)  (1,040,000)
Customer returns RGA issued  
(11,704,000
)
  
(14,878,000
)
  (16,813,000)  (12,124,000)
Less: total accounts receivable offset accounts
  
(17,060,000
)
  
(19,832,000
)
Total accounts receivable — net
 
$
69,914,000
  
$
56,015,000
  $91,088,000  $91,748,000 


4.Inventory
11

Inventory–
Table of Contents
The following table provides a roll-forward of the allowance for credit losses that is deducted from accounts receivable to present the net amount expected to be collected. During the six months ended September 30, 2020, the Company wrote off amounts previously fully reserved for in connection the bankruptcy filing of one of its customers in fiscal 2016.

 Six Months Ended 
  September 30, 2020 
Balance at beginning of period $4,252,000 
Provision for expected credit losses  228,000 
Recoveries  (100,000)
Amounts written off charged against the allowance  (3,897,000)
Balance at end of period $483,000 

4. Inventory

Inventory is comprised of the following:


 September 30, 2019 March 31, 2019  September 30, 2020  March 31, 2020 
Inventory - net     
Inventory      
Raw materials $104,180,000  $95,757,000  $106,790,000  $99,360,000 
Work-in-process  4,720,000   3,502,000   8,527,000   3,906,000 
Finished goods  154,901,000   146,366,000   128,101,000   135,601,000 
  263,801,000   245,625,000   243,418,000   238,867,000 
Less allowance for excess and obsolete inventory  (13,134,000)  (11,899,000)  (13,752,000)  (13,208,000)
Total inventory - net $250,667,000  $233,726,000 
Inventory — net  229,666,000   225,659,000 
Inventory unreturned $8,684,000  $8,469,000   10,352,000   9,021,000 
Total inventory $240,018,000  $234,680,000 
5.Contract Assets


5. Contract Assets

During the three and six months ended September 30, 2020, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $892,000 and $2,276,000, respectively.

Contract assets are comprised of the following:


 September 30, 2019  March 31, 2019  September 30, 2020  March 31, 2020 
Short-term contract assetsShort-term contract assets          
Cores expected to be returned by customers 
$
11,776,000
  
$
14,671,000
  $26,021,000  $12,579,000 
Upfront payments to customers 
3,312,000
  
3,101,000
   1,618,000   2,865,000 
Core premiums paid to customers  
4,383,000
   
4,411,000
   5,670,000   4,888,000 
Total short-term contract assets 
$
19,471,000
  
$
22,183,000
  $33,309,000  $20,332,000 
              
Long-term contract assetsLong-term contract assets            
Remanufactured cores held at customers’ locations 
$
203,024,000
  
$
196,914,000
 
Remanufactured cores held at customers' locations $209,366,000  $217,616,000 
Upfront payments to customers 
1,234,000
  
2,775,000
   435,000   589,000 
Core premiums paid to customers 
14,502,000
  
16,618,000
   19,220,000   15,766,000 
Long-term core inventory deposits  
5,569,000
   
5,569,000
   5,569,000   5,569,000 
Total long-term contract assets 
$
224,329,000
  
$
221,876,000
  $234,590,000  $239,540,000 


6.
6. Significant Customer and Other Information


Significant Customer Concentrations


The largest customers accounted for the following  total percentage of net sales:


 
Three Months Ended
September 30,
  
Six Months Ended
September 30,
  
Three Months Ended
September 30,
  
Six Months Ended
September 30
 
 2019  2018  2019  2018  2020  2019  2020  2019 
Net sales                        
Customer A 41% 39% 40% 38%  45%  41%  45%  40%
Customer B 20% 26% 21% 24%  21%  20%  23%  21%
Customer C 23% 20% 22% 22%  23%  23%  20%  22%


The largest customers accounted for the following total percentage of accounts receivable – trade:


 September 30, 2019  March 31, 2019  September 30, 2020  March 31,2020 
Accounts receivable - trade            
Customer A 33% 34%  42%  28%
Customer B 15% 18%  20%  14%
Customer C 23% 16%  18%  33%


Geographic and Product Information


The Company’s products are sold predominantly sold in the U.S. and accounted for the following total percentagepercentages of net sales:


 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
  
Three Months Ended
September 30,
  
Six Months Ended
September 30
 
 2019 2018 2019 2018  2020  2019  2020  2019 
Rotating electrical products  77%  80%  76%  79%  80%  77%  77%  76%
Wheel hub products  15%  14%  16%  16%  12%  15%  14%  16%
Brake caliper products  3%  -%  2%  -%
Brake master cylinders products  1%  2%  2%  2%
Brake related products  7%  6%  8%  6%
Other products  4%  4%  4%  3%  1%  2%  1%  2%
  100%  100%  100%  100%  100%  100%  100%  100%


Significant Supplier Concentrations


The Company had no suppliers that accounted for more than 10% of inventory purchases for the three and six months ended September 30, 20192020 and 2018.2019.


7.
7. Debt


The Company is 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 currently permits the payment of up to $20,000,000$30,000,000 of dividends and share repurchases perfor this 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 the assets of the Company.


In June 2019, the Company 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. The Company capitalized $901,000 of new debt issuance costs in connection with the Second Amendment, which is included in prepaid and other current assets in the condensed consolidated balance sheet at September 30, 2019.

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 the Company’s Term Loans and Revolving Facility was 4.86%2.91% at September 30, 2020, and 4.84%4.34% and 3.64%, respectively, at September 30, 2019, respectively, and 5.24% at March 31, 2019.2020.


The Credit Facility, among other things, requires the Company to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all financial covenants at September 30, 2020.

The Company had cash of $20,887,000at September 30, 2019.

2020 and paid down its outstanding debt by $59,875,000 during the six months ended September 30, 2020. However, the Credit Facility only allows up to $6,000,000 of credit for cash when computing the senior leverage ratio.In addition to other covenants, the Credit Facility places limits on the Company’s 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 the Company and its subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.


The following summarizes information about the Term Loans at:Loans:


 September 30, 2019  March 31, 2019  September 30, 2020  March 31, 2020 
Principal amount of term loan 
$
26,250,000
  
$
28,125,000
  $22,500,000  $24,375,000 
Unamortized financing fees  
(273,000
)
  
(253,000
)
  (198,000)  (235,000)
Net carrying amount of term loan 
25,977,000
  
27,872,000
   22,302,000   24,140,000 
Less current portion of term loan  
(3,678,000
)
  
(3,685,000
)
  (3,678,000)  (3,678,000)
Long-term portion of term loan 
$
22,299,000
  
$
24,187,000
  $18,624,000  $20,462,000 


Future repayments of the Term Loans are as follows:


Year Ending March 31,
      
2020 - remaining six months $1,875,000 
2021  3,750,000 
2021 - remaining six months $1,875,000 
2022  3,750,000   3,750,000 
2023  3,750,000   3,750,000 
2024  13,125,000   13,125,000 
Total payments $26,250,000  $22,500,000 


The Company had $144,000,000$94,000,000 and $110,400,000$152,000,000 outstanding under the Revolving Facility at SeptemberSeptember 30, 20192020 and March 31, 2019,2020, respectively. In addition, $4,039,000$5,963,000 was outstanding for letters of credit at SeptemberSeptember 30, 2019.2020. At September 30, 2019,2020, after certain contractual adjustments, $74,029,000$97,046,000 was available under the Revolving Facility.


8.
8. Contract Liabilities


Contract liabilities are comprised of the following:


 September 30, 2019  March 31, 2019  September 30, 2020  March 31, 2020 
Short-term contract liabilitiesShort-term contract liabilities          
Customer core returns accruals $16,254,000  $4,126,000 
Customer allowances earned 
$
10,365,000
  
$
12,755,000
   14,839,000   13,844,000 
Customer core returns accruals 
3,973,000
  
3,933,000
 
Customer deposits 
1,377,000
  
2,674,000
   2,142,000   1,365,000 
Core bank liability  564,000   528,000 
Accrued core payment, net  
8,349,000
   
11,237,000
   10,858,000   8,048,000 
Total short-term contract liabilities 
$
24,064,000
  
$
30,599,000
  $44,657,000  $27,911,000 
              
Long-term contract liabilitiesLong-term contract liabilities            
Customer core returns accruals 
$
38,841,000
  
$
25,722,000
  $68,745,000  $77,927,000 
Customer allowances earned  449,000   542,000 
Core bank liability  17,696,000   7,556,000 
Accrued core payment, net  
10,486,000
   
15,167,000
   3,333,000   6,076,000 
Total long-term contract liabilities 
$
49,327,000
  
$
40,889,000
  $90,223,000  $92,101,000 
9.Leases


9. Leases

The Company leases various facilities in North America and Asia under operating leases expiring through December 2032.August 2033. The Company has two non-cancellable lease agreementsmaterial nonfunctional currency leases that could have a material impact on the Company’s condensed consolidated statements of income. As required for two buildings in Mexico which were executed, but had not commenced as of September 30, 2019, and accordingly were not included in the operating lease assets and operatingother monetary liabilities, lessees remeasure foreign currency-denominated lease liabilities as of September 30, 2019. Total commitments forusing the 15-year lease terms of these agreements is $25,542,000.The Company also has finance leases for certain office and manufacturing equipment, which generally range from three to five years.

The Company determines if an arrangement contains a leaseexchange rate at inception. Lease assets and lease liabilities are recorded based oneach reporting date, but the present value of lease payments over the lease term, which includes the minimum unconditional term of the lease. Certain of the Company’s leases include options to extend the leases for up to five years.  When the Company has the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that it will exercise the option, the option is considered in determining the classification and measurement of the lease. The lease assets are recorded net of any lease incentives received. Leasenonmonetary assets measured at historical rates and are tested for impairmentnot affected by subsequent changes in the same manner as long-lived assets usedexchange rates. The Company recorded a gain of $1,618,000 and a loss of $1,139,000 in operations.

As the rate implicit for eachforeign exchange impact of its leases is not readily determinable, the Company uses its incremental borrowing rate, based on the information available at the lease commencement date, for each of its leases in determining the present value of its expected lease payments. The Company’s incremental borrowing rate is determined by analyzingliabilities and combining an applicable risk-free rate, a financial spread adjustment and any lease specific adjustment. Certain leases contain provisions for property-related costs that are variable in nature for which the Company is responsible, including common area maintenance and other property operating services, which are expensed as incurred and not includedforward contracts in the determinationcondensed consolidated statements of income in connection with the remeasurement of foreign currency-denominated lease liabilities during the three months ended September 30, 2020 and 2019, respectively. The Company recorded a gain of $3,603,000 and a loss of $637,000 in foreign exchange impact of lease assetsliabilities and forward contracts in the condensed consolidated statements of income in connection with the remeasurement of foreign currency-denominated lease liabilities. These costs are calculated based on a variety of factors including property values, taxliabilities during the six months ended September 30, 2020 and utility rates, property services fees, and other factors. The Company records rent expense for operating leases, some of which have escalating rent payments, on a straight-line basis over the lease term.2019, respectively.

Balance sheet information for leases is as follows:


 
 September 30, 2019    September 30, 2020  March 31, 2020 
Leases Classification   Classification      
Assets:            
Operating Operating lease assets $49,262,000 Operating lease assets $68,530,000  $53,029,000 
Finance Plant and equipment  7,079,000 Plant and equipment  7,506,000   6,922,000 
Total leased assets   $56,341,000   $76,036,000  $59,951,000 
               
Liabilities:               
Current               
Operating Operating lease liabilities $4,487,000 Operating lease liabilities $6,228,000  $5,104,000 
Finance Other current liabilities  2,036,000 Other current liabilities  2,333,000   2,059,000 
Long-term               
Operating Long-term operating lease liabilities  47,925,000 Long-term operating lease liabilities  72,959,000   61,425,000 
Finance Other liabilities  4,149,000 Other liabilities  4,299,000   3,905,000 
Total lease liabilities   $58,597,000   $85,819,000  $72,493,000 


15
Lease cost recognized in the condensed consolidated statementstatements of operationsincome is as follows:


 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
  
Three Months Ended
September 30,
  
Six Months Ended
September 30,
 
 2019 2019  2020  2019  2020  2019 
Lease cost                 
Operating lease cost $1,987,000  $3,885,000  $2,877,000  $1,987,000  $5,560,000  $3,885,000 
Short-term lease cost  295,000   698,000   337,000   295,000   654,000   698,000 
Variable lease cost  157,000   287,000   230,000   157,000   373,000   287,000 
Finance lease cost:                        
Amortization of finance lease assets  372,000   730,000   428,000   372,000   841,000   730,000 
Interest on finance lease liabilities  73,000   141,000   93,000   73,000   176,000   141,000 
Total lease cost $2,884,000  $5,741,000  $3,965,000  $2,884,000  $7,604,000  $5,741,000 


Maturities of lease commitments at September 30, 20192020 were as follows:


Maturity of lease liabilities Operating Leases Finance Leases Total  Operating Leases  Finance Leases  Total 
2020 - remaining six months $3,799,000  $1,172,000  $4,971,000 
2021  6,957,000   2,074,000   9,031,000 
2021 - remaining six months $5,521,000  $1,310,000  $6,831,000 
2022  6,168,000   1,740,000   7,908,000   10,348,000   2,438,000   12,786,000 
2023  4,968,000   1,131,000   6,099,000   9,269,000   1,800,000   11,069,000 
2024  4,866,000   472,000   5,338,000   8,102,000   1,026,000   9,128,000 
2025  8,095,000   618,000   8,713,000 
Thereafter  47,268,000   113,000   47,381,000   69,261,000   87,000   69,348,000 
Total lease payments  74,026,000   6,702,000   80,728,000   110,596,000   7,279,000   117,875,000 
Less amount representing interest  (21,614,000)  (517,000)  (22,131,000)  (31,409,000)  (647,000)  (32,056,000)
Present value of lease liabilities $52,412,000  $6,185,000  $58,597,000  $79,187,000  $6,632,000  $85,819,000 

Other information about leases is as follows:


  
Six Months Ended
September 30,
2019
2020		 
Lease term and discount rate   
Weighted-average remaining lease term (years): 
Finance leases  3.43.3 
Operating leases  12.011.5 
Weighted-average discount rate: 
Finance leases  4.85.6%
Operating leases  5.65.9%

10.Accounts Receivable Discount Programs


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.


16
The following is a summary of accounts receivable discount programs:


 
Six Months Ended
September 30,
  
Six Months Ended
September 30,
 
 2019  2018  2020  2019 
Receivables discounted 
$
205,882,000
  
$
191,849,000
  $222,310,000  $205,882,000 
Weighted average days 
346
  
338
   341   346 
Annualized weighted average discount rate 
3.6
%
 
4.1
%
  2.3%  3.6%
Amount of discount recognized as interest expense 
$
7,196,000
  
$
7,441,000
  $4,781,000  $7,196,000 
11.Net Income (Loss) Per Share


11. Net Income per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) 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 to the extent the effectsuch impact is not anti-dilutive.


The following presents a reconciliation of basic and diluted net income (loss) per share:


  
Three Months Ended
September 30,
  
Six Months Ended
September 30,
 
  2019  2018  2019  2018 
             
Net income (loss) $6,189,000  $3,513,000  $38,000  $(1,982,000)
Basic shares  18,903,182   18,878,674   18,862,901   18,887,214 
Effect of potentially dilutive securities  314,145   440,791   383,698   - 
Diluted shares  19,217,327   19,319,465   19,246,599   18,887,214 
Net income (loss) per share:                
                 
Basic net income (loss) per share $0.33  $0.19  $0.00  $(0.10)
                 
Diluted net income (loss) per share $0.32  $0.18  $0.00  $(0.10)
  
Three Months Ended
September 30,
  
Six Months Ended
September 30,
 
  2020  2019  2020  2019 
Net income
 $15,184,000  $6,189,000  $12,172,000  $38,000 
Basic shares  19,022,414   18,903,182   18,999,461   18,862,901 
Effect of potentially dilutive securities  322,897   314,145   290,304   383,698 
Diluted shares  19,345,311   19,217,327   19,289,765   19,246,599 
Net income per share:
                
                 
Basic net income per share
 $0.80  $0.33  $0.64  $0.00 
                 
Diluted net income per share
 $0.78  $0.32  $0.63  $0.00 

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 income (loss) per share. For the three  months ended September 30, 20192020 and 2018,2019, there were 1,221,7441,500,066 and 746,094,1,221,744  respectively, of potential common shares not included in the calculation of diluted net income (loss) per share because their effect was anti-dilutive. For the six months ended September 30, 20192020 and 2018,2019, there were 1,166,4321,500,066 and 1,504,794,1,166,432, respectively, of potential common shares not included in the calculation of diluted net income (loss) per share because their effect was anti-dilutive.


12.
12. Income Taxes


The Company recorded an income tax expense of $1,980,000,$6,097,000, or an effective tax rate of 24.2%28.6%, and $1,181,000,$1,980,000, or an effective tax rate of 25.2%24.2%, for the three months ended September 30, 20192020 and 2018,2019, respectively. The Company recorded an income tax expense of $250,000,$5,075,000, or an effective tax rate of 86.8%29.4%, and an income tax benefit of $266,000,$250,000, or an effective tax rate of 11.8%86.8%, for the six months ended September 30, 20192020 and 2018,2019, respectively. The effective tax rates for the three and six months ended September 30, 2019,2020, were primarily impacted by non-deductible executive compensation under Internal Revenue Code Section 162(m) and foreign income taxed at rates that are different from the federal statutory rate.

17
The Company continues to record a valuation allowances recordedallowance 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 July 2017estimates, 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 January 2019 acquisitions.liabilities and any valuation allowance recorded against the Company’s net deferred tax assets. The effective tax rate isCompany makes these estimates and judgments about its future taxable income that are based on current projectionsassumptions 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 September 30,2020, the Company is not under examination in any changes in future periods could result in an effective tax rate that is materially different fromjurisdiction and the current estimate.

The Company remainsyears ended March 31, 2016 through 2020 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.


13.
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 $36,791,000$35,305,000 and $32,524,000$42,052,000 at September 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 reflectedincluded in current period earningsforeign exchange impact of lease liabilities and accounted for as an increase or offset to general and administrative expenses.forward contracts in the condensed consolidated statements of income.

The following shows the effect of derivative instruments on the condensed consolidated statements of operations:income:



Derivatives Not Designated as
Hedging Instruments

Gain (Loss) Recognized within General and Administrative Expenses 
Three Months Ended
September 30,
  
Six Months Ended
September 30,
 
2019  2018  
2019
  
2018
 
Forward foreign currency exchange contracts $(663,000) $1,898,000  $(628,000) $(768,000)
 
Gain (Loss) Recognized as Foreign Exchange Impact of Lease Liabilities
and Forward Contracts
 
  
Derivatives Not Designated as
 
Three Months Ended
September 30,
  
Six Months Ended
September 30,
 
Hedging Instruments 2020  2019  2020  2019 
Forward foreign currency exchange contracts $2,367,000  $(663,000) $5,199,000  $(628,000)


The fair value of the forward foreign currency exchange contracts of $421,000$1,085,000 and $6,284,000 is included in other current liabilities in the condensed consolidated balance sheetsheets at September 30, 2019. The fair value of the forward foreign currency exchange contracts of $207,000 is included in prepaid2020 and other current assets in the condensed consolidated balance sheet at March 31, 2019,2020, respectively. The changes in the fair values of forward foreign currency exchange contracts are included in otherforeign exchange impact of lease liabilities and forward contracts in the condensed consolidated statements of cash flows for the six months ended September 30, 20192020 and 2018.2019.

18
14.Fair Value Measurements

14. Fair Value Measurements

The following summarizes financial assets and liabilities measured at fair value, by level within the fair value hierarchy:


 September 30, 2019  March 31, 2019  September 30, 2020  March 31, 2020 


Fair Value

Fair Value Measurements
Using Inputs Considered as
     Fair Value

Fair Value Measurements
Using Inputs Considered as

    
Fair Value Measurements
Using Inputs Considered as
     
Fair Value Measurements
Using Inputs Considered as
 
Level 1

Level 2

Level 3Level 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 
$
2,192,000
  
$
2,192,000
  
-
  
-
  
$
3,273,000
  
$
3,273,000
  
-
  
-
  $1,237,000  $1,237,000  $0  $0  $850,000  $850,000  $0  $0 
Prepaid expenses and other current assets                        
Forward foreign currency exchange contracts 
-
  
-
  
-
  
-
  
207,000
  
-
  
$
207,000
  
-
 
                                                        
Liabilities                                                        
Accrued liabilities                                                        
Short-term contingent consideration 
2,721,000
  
-
  
-
  
$
2,721,000
  
2,816,000
  
-
  
-
  
$
2,816,000
   2,030,000   0   0   2,030,000   2,190,000   0   0   2,190,000 
Other current liabilities                                                        
Deferred compensation 
2,192,000
  
2,192,000
  
-
  
-
  
3,273,000
  
3,273,000
  
-
  
-
   1,237,000   1,237,000   0   0   850,000   850,000   0   0 
Forward foreign currency exchange contracts 
421,000
  
-
  
$
421,000
  
-
  
-
  
-
  
-
  
-
   1,085,000   0   1,085,000   0   6,284,000   0   6,284,000   0 
Other liabilities                                                        
Long-term contingent consideration 
2,130,000
  
-
  
-
  
2,130,000
  
1,905,000
  
-
  
-
  
1,905,000
   558,000   0   0   558,000   463,000   0   0   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 (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 three years.a three-year period.

In January 2019, the Company completed the acquisition of all the equity interests of 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.a two-year period.


The Company’s contingent consideration is recorded in accrued expenses and other liabilities in its condensed consolidated balance sheets at September 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 $2,270,000$1,220,000 and $1,130,000 at September 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 1.71% to 1.88%, (ii) counter party risk discount rate ranging from 5.71% to 5.88%, 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.


19
The assumptions used to determine the fair value is as follows:

September 30, 2020
Risk free interest rate0.10%
Counter party rate6.70%
Probability100.00%

E&M Gross Profit Earn-out Consideration


The fair value of the three-year gross profit earn-out consideration was $1,950,000$1,360,000 and $1,230,000 at September 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:


  September 30, 20192020 
Risk free interest rate  1.610.12%
Counter party rate  5.616.70%
Expected volatility (1)  28.0040.00%
Weighted average cost of capital (1)  15.5013.50%

(1)The range for expected volatility was 35% to 45% and the range for the weighted average cost of capital was 13% to 14%.

Dixie Revenue Earn-out Consideration


The fair value of the two-year revenue earn-out consideration was $631,000$8,000 and $293,000 at September 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:


  
September 30, 20192020
 
Risk free interest rate  1.720.10%
Counter party rate  4.006.63%
Revenue volatility (1)  8.004.50%
Revenue discount rate (1)  5.002.00%
Weighted average cost of capitalAsset volatility (1)  13.9030.00%

(1)The range for revenue volatility was 3.5% to 5.5%, 1.5% to 2.5% for the revenue discount rate, and 25% to 35% 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:


 Contingent Consideration  
Three Months Ended
September 30,
  
Six Months Ended
September 30,
 
 
Three Months Ended
September 30, 2019
 
Six Months Ended
September 30, 2019
 
Contingent Consideration 2020  2019  2020  2019 
Beginning balance $4,970,000  $4,721,000  $2,606,000  $4,970,000  $2,653,000  $4,721,000 
Changes in revaluations of contingent consideration included in earnings  (119,000)  130,000   (18,000)  (119,000)  (65,000)  130,000 
Ending balance $4,851,000  $4,851,000  $2,588,000  $4,851,000  $2,588,000  $4,851,000 


During the three and six months ended September 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.

15.Share-based Payments


15. Share-based Payments

Stock Options


The Company granted options to purchase 300,039345,423 and 245,400300,039 shares of common stock during the six months ended September 30, 2020 and 2019, and 2018, respectively. 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:


 
Six Months Ended
September 30,
  
Six Months Ended
September 30,
 
 2019 2018  2020  2019 
Weighted average risk free interest rate  1.77%  2.82%  0.44%  1.77%
Weighted average expected holding period (years)  5.70   5.94   5.96   5.70 
Weighted average expected volatility  42.51%  43.98%  44.90%  42.51%
Weighted average expected dividend yield  -   -   0   0 
Weighted average fair value of options granted $8.28  $8.71  $6.43  $8.28 


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  300,039  $19.75   345,423  $15.16 
Exercised  (52,800) $7.67   (9,000) $10.32 
Forfeited  (5,171) $20.62   (23,280) $21.97 
Outstanding at September 30, 2019  1,579,233  $18.31 
Outstanding at September 30, 2020  1,849,266  $17.60 


At September 30, 2019,2020, options to purchase 522,677616,682 shares of common stock were unvested at thea weighted average exercise price of $20.37.$17.13.

At September 30, 2019,2020, there was $4,037,000$3,893,000 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 2.22.1 years.


21
Restricted Stock Units and Restricted Stock (collectively “RSUs”)


During the six months ended September 30, 20192020 and 2018,2019, the Company granted 79,851212,293 and 78,40079,851 shares of RSUs, respectively, with an estimated grant date fair value of $3,503,000 and $1,591,000, and $1,490,000, respectively, which was based on the closing market price on the grant date.


The following is a summary of non-vested RSUs:


 
Number of
Shares
  
Weighted Average
Grant Date Fair
Value
  
Number of
Shares
  
Weighted Average
Grant Date Fair
Value
 
Outstanding at March 31, 2019 
243,134
  
$
21.75
 
Outstanding at March 31, 2020  201,983  $20.06 
Granted 
79,851
  
$
19.93
   212,293  $16.50 
Vested 
(133,488
)
 
$
21.11
   (70,294) $21.61 
Forfeited  
(1,101
)
 
$
21.40
   (3,347) $16.98 
Outstanding at September 30, 2019  
188,396
  
$
21.44
 
Outstanding at September 30, 2020  340,635  $17.55 


At September 30, 2019,2020, there was $3,175,000$4,932,000 of unrecognized compensation expense related to these awards, which will be recognized over the remaining vesting period of approximately 2.11.7 years.

16.Accumulated Other Comprehensive Loss

The following summarizes changes in accumulated other comprehensive loss:

  Three Months Ended September 30, 2019  Three Months Ended September 30, 2018 
  
Unrealized
Gain
on Short-Term
Investments
  
Foreign
Currency
Translation
  Total  
Unrealized
Gain
on Short-Term
Investments
  
Foreign
Currency
Translation
  Total 
Balance at June 30, 2019 and 2018 $-  $(6,288,000) $(6,288,000) $-  $(6,889,000) $(6,889,000)
Other comprehensive loss, net of tax  -   (431,000)  (431,000)  -   (2,000)  (2,000)
Amounts reclassified from accumulated other comprehensive loss, net of tax
  -   -   -   -   -   - 
Balance at September 30, 2019 and 2018 $-  $(6,719,000) $(6,719,000) $-  $(6,891,000) $(6,891,000)

  Six Months Ended September 30, 2019  Six Months Ended September 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  
-
   
168,000
   
168,000
   
-
   
(717,000
)
  
(717,000
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
  
-
   
-
   
-
   
-
   
-
   
-
 
Balance at September 30, 2019 and 2018 
$
-
  
$
(6,719,000
)
 
$
(6,719,000
)
 
$
-
  
$
(6,891,000
)
 
$
(6,891,000
)


16. Commitments and Contingencies
21
17.Commitments and Contingencies


Warranty Returns


The Company allows its customers to return goods that their consumers 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
September 30,
  
Six Months Ended
September 30,
  
Three Months Ended
September 30,
  
Six Months Ended
September 30,
 
 2019  2018  2019  2018  2020  2019  2020  2019 
Balance at beginning of period 
$
15,818,000
  
$
14,543,000
  
$
19,475,000
  
$
16,646,000
  $22,192,000  $15,818,000  $18,300,000  $19,475,000 
Charged to expense/additions 
32,531,000
  
30,860,000
  
55,716,000
  
54,753,000
 
Charged to expense  30,872,000   32,531,000   53,961,000   55,716,000 
Amounts processed  
(31,774,000
)
  
(28,993,000
)
  
(58,616,000
)
  
(54,989,000
)
  (30,565,000)  (31,774,000)  (49,762,000)  (58,616,000)
Balance at end of period 
$
16,575,000
  
$
16,410,000
  
$
16,575,000
  
$
16,410,000
  $22,499,000  $16,575,000  $22,499,000  $16,575,000 


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 or other restrictions 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. WeAs a result, gross profit and net income have incurredbeen impacted, and are continuing to incur expenses related to this transition.our future performance and opportunities should be considered with these factors in mind.

In addition, we are expanding our position within the diagnostic testing industry with applications for internal combustion engines, electric vehicles, and applications for the aerospace industry.

New products introduced through our growth strategies noted above include: (i) turbochargers through an acquisition in July 2016; (ii) brake power boosters in August 2016; (iii) the design and manufacture of 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 of advanced power emulators (AC and DC) and custom power electronic products for the automotive and aerospace industries through an acquisition in December 2018; and (v) alternators and starters for medium truck, farm, and marine applications through an acquisition in January 2019. In addition, we expanded our automotive aftermarket brake product offerings with the introduction of brake calipers in August 2019.

Our products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, and brake master cylinders, and (iv) brake calipers (introduced in August 2019),diagnostics and (v) other products. Other products, include: (i) turbochargers, (ii) brake power boosters, (iii)which include diagnostics systems, (iv) advanced power emulators (ACused for the development of electric vehicles and DC),aerospace applications, and (v) custom power electronic products.products for quality control in the development and production of electric vehicles and 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 onea single reportable segment.


23
Impact of the Novel Coronavirus (“COVID-19”)

The 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 subsequently 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 outlook appears positive, any additional government shutdowns or the duration of a “second wave” or additional spikes could negatively impact our business and financial condition. There have been no serious outbreaks in any of our production facilities; however, a serious outbreak could affect our production capabilities.

Our business has continued to operate as we have been declared an essential business; however, we have experienced some disruption in our global supply chain as a result of the ongoing impact of COVID-19. In addition, we experienced inefficiencies in our operations due to the implementation of additional personnel safety measures throughout our facilities, which negatively affects our operating 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 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, board check-in meetings and 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. During the three and six months ended September 30, 2020, these expanded benefits, supply costs and other COVID-19 related costs resulted in $2,048,000 and $4,343,000, respectively, of total expense included in cost of goods sold and operating expenses in the condensed consolidated statements of income. During the three and six months ended September 30, 2020, we received $484,000 and $849,000, respectively, in payments from the Canadian Government under the Canadian Emergency Wage Subsidy program and our Asian subsidiaries received $44,000 and $137,000, respectively, from their local government assistance programs. These payments are included in cost of goods sold and operating expenses in the condensed consolidated statements of income. In addition, we deferred the employer’s share of social security taxes of $812,000, which is included in other liabilities in the condensed consolidated balance sheet at September 30, 2020.

Due to the seriousness of the COVID-19 pandemic and the unknown impact at this 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. Salaries for all affected employees were reinstated at various dates through September 30, 2020. In addition, we implemented a worldwide travel ban and controls on all other expenses, including a freeze on hiring and salary increases.

24
Results of Operations for the Three Months Ended September 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 
 
Three Months Ended
September 30,
  September 30, 
 2019 2018  2020  2019 
Gross profit percentage  24.3%  20.1%  25.7%  24.3%
Cash flow used in operations $(8,357,000) $(5,485,000)
Cash flow provided by (used in) operations $16,942,000  $(8,357,000)
Finished goods turnover (annualized) (1)  2.8   3.9   3.5   2.8 


(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 
 
Three Months Ended
September 30,
  September 30, 
 2019 2018  2020  2019 
Net sales $150,374,000  $127,939,000  $154,730,000  $150,374,000 
Cost of goods sold  113,801,000   102,228,000   115,004,000   113,801,000 
Gross profit  36,573,000   25,711,000   39,726,000   36,573,000 
Gross profit percentage  24.3%  20.1%  25.7%  24.3%


Net Sales. Our net sales for the three months ended September 30, 20192020 increased by $22,435,000,$4,356,000, or 17.5%2.9%, to $150,374,000$154,730,000 compared towith net sales for the three months ended September 30, 20182019 of $127,939,000, reflecting continued growth$150,374,000. Net sales for our rotating electrical and wheel hub products. In August 2019, we expanded our automotive aftermarket brakethe three months ended September 30, 2020 include $12,779,000 in core revenue due to a realignment of inventory at two customer distribution centers with expected future sales benefits as product offerings with the introduction of brake calipers, which contributed net sales of $4,572,000 during the second quarter. In addition, our netmix changes. Net sales were positivelynegatively impacted by $5,893,000 in connection with acquisitions completed duringdue to challenges related to the latter part of fiscal 2019.COVID-19 pandemic.


Gross Profit.Our gross profit was $39,726,000, or 25.7% of net sales, for the three months ended September 30, 2020 compared with $36,573,000, or 24.3% of net sales, for the three months ended September 30, 2019 compared2019. Our gross profit was negatively impacted by $1,533,000, or 1.0%, due to $25,711,000, or 20.1% of net salesCOVID-19 related costs.

The gross profit was also impacted by (i) a $2,847,000 benefit for revised tariff costs during the three months ended September 30, 2018.  The gross profit was impacted by a2020 and (ii) 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. These quarterly revaluationsvalue and gain due to realignment of inventory at two customer distribution centers, which resulted in a net gain of $3,499,000 during the three months ended September 30, 2020 compared with a write-down of $2,908,000 which impacted gross margin by 1.9%, compared with $6,221,000, which impacted gross margin by 4.9%, for the three months ended September 30, 2019 and 2018, respectively.2019.


Our gross profit for the three months ended September 30, 2020 and 2019 and 2018 was furtheralso impacted byby: (i) transition expenses in connection with the expansion of our operations intoin Mexico of $4,054,000 and $2,327,000, respectively, and $1,833,000, respectively, (ii) amortization of core buy-back premiums paid to customers related to new business of $1,518,000 and $1,109,000, and $1,015,000, respectively, (iii) customer allowances related to new businessrespectively.

25
In addition, gross profit for the three months ended September 30, 2019 was impacted by cost recovery of $293,000 in connection with the cancellation of a customer contract,. and customer allowances related to new business of $242,000.


Operating Expenses


The following summarizes operating expenses:


 Three Months Ended 
 
Three Months Ended
September 30,
  September 30, 
 2019 2018  2020  2019 
General and administrative $14,285,000  $8,997,000  $12,518,000  $12,483,000 
Sales and marketing  5,448,000   4,537,000   4,326,000   5,448,000 
Research and development  2,148,000   1,784,000   1,972,000   2,148,000 
Foreign exchange impact of lease liabilities and forward contracts  (3,985,000)  1,802,000 
        
Percent of net sales                
        
General and administrative  9.5%  7.0%  8.1%  8.3%
Sales and marketing  3.6%  3.5%  2.8%  3.6%
Research and development  1.4%  1.4%  1.3%  1.4%
Foreign exchange impact of lease liabilities and forward contracts  (2.6)%  1.2%


General and Administrative. Our general and administrative expenses for the three months ended September 30, 20192020 were $14,285,000,$12,518,000, which represents an increase of $5,288,000,$35,000, or 58.8%0.3%, from general and administrative expenses for the three months ended September 30, 20182019 of $8,997,000. This$12,483,000. The increase was due to (i) a non-cash $663,000 loss compared with a non-cash gain of $1,898,000 recorded due to the change in the fair value of the forward foreign currency exchange contracts during the three months ended September 30, 2019 and 2018, respectively, (ii) a non-cash loss of $1,139,000 due to the remeasurement of foreign currency-denominated lease liabilities, (iii) $565,000 of general and administrative expenses attributable to our fiscal 2019 acquisitions, (iv) $489,000 of expense was from expanded benefits, supply costs and other COVID-19 related costs, which were partially offset by $323,000 in connection with our internal controls remediation efforts,decreased professional services and (v) $219,000 of increased amortization of intangible assets$196,000 in connection with our fiscal 2019 acquisitions.decreased travel.


Sales and Marketing. Our sales and marketing expenses for the three months September 30, 2019 increased $911,000,2020 decreased $1,122,000, or 20.1%20.6%, to $5,448,000$4,326,000 from $4,537,000$5,448,000 for the three months ended September 30, 20182019 primarily due to $632,000 ofour cost-cutting measures in connection with COVID-19. These decreases in sales and marketing expense were as follows: (i) $390,000 from decreased travel, (ii) $279,000 of decreased advertising and marketing expense, (iii) $277,000 from decreased employee-related expenses, attributable to our fiscal 2019 acquisitions and $281,000 for personnel to support our growth initiatives.(iv) $91,000 of decreased trade shows expense.


Research and Development. Our research and development expenses increaseddecreased by $364,000,$176,000, or 20.4%8.2%, to $1,972,000 for the three months ended September 30, 2020 from $2,148,000 for the three months ended September 30, 2019 from $1,784,000primarily due to our cost-cutting measures in connection with COVID-19.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts. The remeasurement of our foreign currency-denominated lease liabilities resulted in a non-cash gain of $1,618,000 and a non-cash loss $1,139,000 for the three months ended September 30, 2018. The increase was2020 and 2019, respectively, due primarily to $238,000movements in foreign exchange rates. In addition, the forward foreign currency exchange contracts resulted in a non-cash gain of research$2,367,000 and development expenses attributablea non-cash loss $663,000 for the three months ended September 30, 2020 and 2019, respectively, due to our fiscal 2019 acquisitions and $123,000 for personnel to support our growth initiatives.the changes in their fair values.

Interest Expense


Interest Expense, net. Our interest expense, net for the three months ended September 30, 2019 increased $824,000,2020 decreased $2,909,000, or 14.5%44.6%, to $6,523,000$3,614,000 from $5,699,000$6,523,000 for the three months ended September 30, 2018. The increase in2019, primarily due to lower interest expense was due primarily to increasedrates and lower average outstanding borrowings in connection withbalances under our growth initiatives. This increase was partially offset by a decrease in the weighted average discount rate from our accounts receivable discount programs.credit facility.


Provision for Income Taxes


Income Tax. We recorded an income tax expense of $6,097,000, or an effective tax rate of 28.6%, and $1,980,000, or an effective tax rate of 24.2%, and $1,181,000, or an effective tax rate of 25.2%, for the three months ended September 30, 20192020 and 2018,2019, respectively. The effective tax rate is based on current projectionsfor the three months September 30, 2020, was primarily impacted by non-deductible executive compensation under Internal Revenue Code Section 162(m) and any changes 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.


26
Results of Operations for the Six Months Ended September 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:


 Six Months Ended 
 
Six Months Ended
September 30,
  September 30, 
 2019 2018  2020  2019 
Gross profit percentage  20.9%  19.2%  21.2%  20.9%
Cash flow used in operations $(26,736,000) $(6,409,000)
Cash flow provided by (used in) operations $39,330,000  $(26,736,000)
Finished goods turnover (annualized) (1)  2.7   3.7   3.0   2.7 


(1)
Annualized finished goods turnover for the fiscal period is calculated by multiplying cost of goods sold for the period by 2 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 period. 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:


 Six Months Ended 
 
Six Months Ended
September 30,
  September 30, 
 2019  2018  2020  2019 
Net sales 
$
259,522,000
  
$
219,607,000
  $250,086,000  $259,522,000 
Cost of goods sold 
205,366,000
  
177,544,000
   196,973,000   205,366,000 
Gross profit 
54,156,000
  
42,063,000
   53,113,000   54,156,000 
Gross profit percentage 
20.9
%
 
19.2
%
  21.2%  20.9%


Net Sales. Our net sales for the six months ended September 30, 2019 increased2020 decreased by $39,915,000,$9,436,000, or 18.2%3.6%, to $259,522,000$250,086,000 compared to net sales for the six months ended September 30, 2018 of $219,607,000, reflecting continued growth across all of our product lines. In addition, ourwith net sales for the six months ended September 30, 2019 were positively impacted by (i) $11,151,000 in connection with acquisitions completed during the latter part of fiscal 2019 and (ii) our expansion of automotive aftermarket brake product offerings with the introduction of brake calipers in August 2019, which contributed$259,522,000. Our net sales were negatively impacted due to challenges related to the COVID-19 pandemic partially offset by $12,779,000 in core revenue due to a realignment of $4,572,000.inventory at two customer distribution centers with expected future sales benefits as product mix changes.


Gross Profit.Our gross profit was $53,113,000, or 21.2% of net sales, for the six months ended September 30, 2020 compared with $54,156,000, or 20.9% of net sales, for the six months ended September 30, 2019 compared2019. Our gross profit was negatively impacted by $3,373,000, or 1.3%, due to $42,063,000, or 19.2% of net salesCOVID-19 related costs.

The gross profit was also impacted by (i) a $2,847,000 benefit for revised tariff costs during the six months ended September 30, 2018.  The gross profit was impacted by a2020 and (ii) 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. These quarterly revaluationsvalue and gain due to realignment of inventory at two customer distribution centers, which resulted in a net gain of $2,115,000 during the six months ended September 30, 2020 compared with a write-down of $7,472,000 which impacted gross margin by 2.9%, compared with $8,847,000, which impacted gross margin by 4.0%, for the six months ended September 30, 2019 and 2018, respectively.2019.


Our gross profit for the six months ended September 30, 2020 and 2019 and 2018 was furtheralso impacted byby: (i) transition expenses in connection with the expansion of our operations intoin Mexico of $3,681,000$7,355,000 and $3,588,000,$3,681,000, respectively, (ii) amortization of core buy-back premiums paid to customers related to new business of $2,217,000$2,741,000 and $1,982,000,$2,217,000, respectively, and (iii) customer allowances and return accruals related to new business of $307,000 and $342,000, and $2,373,000, respectively. respectively.

In addition, gross profit for the six months ended September 30, 2019 was impacted by (i) net tariff costs of $1,067,000 paid for products sold before price increases were effectivenot passed through to customers, and (ii) cost of $133,000 in connection with the cancellation of a customer contract.contract.


Operating Expenses


The following summarizes operating expenses:


 Six Months Ended 
 
Six Months Ended
September 30,
  September 30, 
 2019 2018  2020  2019 
           
General and administrative $26,285,000  $21,088,000  $24,205,000  $25,020,000 
Sales and marketing  10,367,000   8,929,000   8,526,000   10,367,000 
Research and development  4,520,000   3,520,000   3,914,000   4,520,000 
Foreign exchange impact of lease liabilities and forward contracts  (8,802,000)  1,265,000 
        
Percent of net sales                
        
General and administrative  10.1%  9.6%  9.7%  9.6%
Sales and marketing  4.0%  4.1%  3.4%  4.0%
Research and development  1.7%  1.6%  1.6%  1.7%
Foreign exchange impact of lease liabilities and forward contracts  (3.5)%  0.5%


General and Administrative. Our general and administrative expenses for the six months ended September 30, 20192020 were $26,285,000,$24,205,000, which represents an increasea decrease of $5,197,000,$815,000, or 24.6%3.3%, from general and administrative expenses for the six months ended September 30, 20182019 of $21,088,000.$25,020,000. This increasedecrease in general and administrative expense was due to (i) $1,348,000 of general and administrative expenses attributable to our fiscal 2019 acquisitions, (ii) $1,278,000 of increased$1,233,000 in decreased professional services (iii) a non-cash loss of $637,000 due to the remeasurement of foreign currency-denominated lease liabilities, (iv) $604,000 of increased amortization of intangible assetsand $372,000 in connection with our fiscal 2019 acquisitions, (v) $489,000 of expense in connection with our internal control remediation efforts, (vi) $381,000 for personnel to support our growth initiatives,decreased travel. This decrease was partially offset by expanded benefits, supply costs and (vii) $278,000 of increased general and administrative expenses at our offshore locations to support our growth initiatives.other COVID-19 related costs.


Sales and Marketing. Our sales and marketing expenses for the six months ended September 30, 2019 increased $1,438,000,2020 decreased $1,841,000, or 16.1%17.8%, to $10,367,000$8,526,000 from $8,929,000$10,367,000 for the six months ended September 30, 2018. This increase was2019 primarily due primarily to (i) $1,252,000 ofour cost-cutting measures in connection with COVID-19. These decreases in sales and marketing expense were as follows: (i) $798,000 from decreased travel, (ii) $559,000 from decreased advertising and marketing expense, (iii) $401,000 from decreased employee-related expenses, attributable to our fiscal 2019 acquisitions, (ii) $422,000 for personnel to support our growth initiatives, and (iii) $239,000 of increased commissions. These increases were partially offset by $280,000(iv) $170,000 of decreased trade shows expenses and $146,000 of decreased marketing expense in connection with new business.expense.


Research and Development. Our research and development expenses increaseddecreased by $1,000,000,$606,000, or 28.4%13.4%, to $3,914,000 for the six months ended September 30, 2020 from $4,520,000 for the six months ended September 30, 2019 from $3,520,000primarily due to our cost-cutting measures in connection with COVID-19. This decrease in research and development was due to $403,000 of decreased employee-related expenses and $88,000 of decreased expense for our sample library.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts. The remeasurement of our foreign currency denominated lease liabilities resulted in a non-cash gain of $3,603,000 and a non-cash loss $637,000 for the six months ended September 30, 2018. The increase was2020 and 2019, respectively, due to movements in foreign exchange rates. In addition, the forward foreign currency exchange contracts resulted in a non-cash gain of $5,199,000 and a non-cash loss $628,000 for the six months ended September 30, 2020 and 2019, respectively, due primarily to (i) $490,000 for personnel to support our growth initiatives, (ii) $450,000 of research and development expenses attributable to our fiscal 2019 acquisitions, and (iii) $68,000 of increased outside services to support our growth initiatives.the changes in their fair values.


Interest Expense


Interest Expense, net. Our interest expense, net for the six months ended September 30, 2019 increased $1,922,000,2020 decreased $4,673,000, or 17.8%36.8%, to $12,696,000$8,023,000 from $10,774,000$12,696,000 for the six months ended September 30, 2018. The increase in2019, primarily due to lower interest expense was due primarily to increasedrates and lower average outstanding borrowings in connection withbalances under our growth initiatives and as we build our inventory levels to support anticipated higher sales. This increase was partially offset by a decrease in the weighted average discount rate from our accounts receivable discount programs.credit facility.


Provision for Income Taxes


Income Tax. We recorded an income tax expense of $5,075,000, or an effective tax rate of 29.4%, and $250,000, or an effective tax rate of 86.8%, and an income tax benefit of $266,000, or an effective tax rate of 11.8%, for the six months ended September 30, 20192020 and 2018,2019, respectively. The effective tax rates wererate for the six months ended September 30, 2020, was primarily impacted by valuation allowances recorded in connection with our July 2017non-deductible executive compensation under Internal Revenue Code Section 162(m) and January 2019 acquisitions. The effective tax rate is based on current projections and any changes 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 $72,107,000$94,174,000 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 September 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 six months ended September 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 September 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 currently permits the payment of up to $20,000,000$30,000,000 of dividends and share repurchases perfor this 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 September 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:


 
Six Months Ended
September 30,
  Six Months Ended 
 2019 2018  September 30, 
Cash flow provided by (used in):     
 2020  2019 
Cash flows provided by (used in):      
Operating activities $(26,736,000) $(6,409,000) $39,330,000  $(26,736,000)
Investing activities  (5,701,000)  (5,481,000)  (7,002,000)  (5,701,000)
Financing activities  29,059,000   5,112,000   (61,312,000)  29,059,000 
Effect of exchange rates on cash and cash equivalents  (78,000)  (96,000)  255,000   (78,000)
        
Net decrease in cash and cash equivalents $(3,456,000) $(6,874,000) $(28,729,000) $(3,456,000)
                
Additional selected cash flow data:                
Depreciation and amortization $4,619,000  $3,218,000  $5,233,000  $4,619,000 
Capital expenditures  6,943,000   5,259,000   6,810,000   6,943,000 


29
Net cash used inprovided by operating activities was $26,736,000 and $6,409,000$39,330,000 during the six months ended September 30, 2019 and 2018, respectively. Our2020 compared with net cash flow provided by (used in)used in operating activities continueof $26,736,000 during the six months ended September 30, 2019. The significant change in our operating activities for the current year was due to beincreased operating results (net income plus the net add-back for non-cash transactions in earnings) and an increase in average days outstanding of accounts payable balances. In addition, our prior year operating activities were significantly impacted by our growth initiatives, including our new expanded footprint and product line expansion. Cash flow provided by (used in) operating activities for the six months ended September 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, (iv) an increase in accounts receivable during the six months ended September 30, 2019 as compared to a decrease during the six months ended September 30, 2018, and (v) a decrease in accounts payable and accrued liabilities during the six months ended September 30, 2019 as compared to an increase during the six months ended September 30, 2018.lines.


Net cash used in investing activities was $5,701,000$7,002,000 and $5,481,000$5,701,000 during the six months ended September 30, 20192020 and 2018,2019, respectively, due primarily to increased purchasesthe redemption of equipment forshort-term investments during the prior year.

Net cash used in financing activities was $61,312,000 during the six months ended September 30, 2020 compared with net cash provided by financing activities $29,059,000 during the six months ended September 30, 2019. The significant change in our current operations andfinancing activities was due to reducing our outstanding debt by $59,875,000 during the six months ended September 30, 2020 compared with borrowing to support our growth initiatives, including the expansion of our operations in Mexico. This increase was partially offset by the redemption of short-term investmentsMexico and our product line expansion during the six months ended September 30, 2019.

Net cash provided by financing activities was $29,059,000 and $5,112,000 during the six months ended September 30, 2019 and 2018, respectively, due mainly to increased net borrowings under our credit facility. In addition, during the six months ended September 30, 2018 we used $4,062,000 for share repurchases.


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 currently permits the payment of up to $20,000,000$30,000,000 of dividends and share repurchases perfor this 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 $901,000 of new debt issuance costs in connection with the Second Amendment, which is included in prepaid and other current assets in the condensed consolidated balance sheet at September 30, 2019.

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 4.86% and 4.84%2.91%, at September 30, 2019,2020, and 4.34% and 3.64%, respectively and 5.24% at March 31, 2019.2020.


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 September 30, 2019.2020.


The following summarizes the financial covenants required under the Credit Facility:


 
Calculation as of
September 30, 2019
  
Financial covenants
required under the
Credit Facility
  
Financial covenants
required under the
Credit Facility
  
Calculation as of
September 30, 2020
 
Maximum senior leverage ratio 2.33  3.00   3.00   1.56 
Minimum fixed charge coverage ratio 1.46  1.10   1.10   1.35 


We had cash of $20,887,000 at September 30, 2020 and paid down our outstanding debt by $59,875,000 during the six months ended September 30, 2020. However, the Credit Facility only allows up to $6,000,000 of credit for cash when computing the senior leverage ratio. Our senior leverage ratio would have been 1.43 had we paid down the Revolving Facility with cash on hand. 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.


30
We had $144,000,000$94,000,000 and $110,400,000$152,000,000 outstanding under the Revolving Facility at September 30, 20192020 and March 31, 2019,2020, respectively. In addition, $4,039,000$5,963,000 was outstanding for letters of credit at September 30, 2019.2020. At September 30, 2019,2020, after certain contractual adjustments, $74,029,000$97,046,000 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:


 Six Months Ended 
 
Six Months Ended
September 30,
  September 30, 
 2019  2018  2020  2019 
Receivables discounted 
$
205,882,000
  
$
191,849,000
  $222,310,000  $205,882,000 
Weighted average days 
346
  
338
   341   346 
Annualized weighted average discount rate 
3.6
%
 
4.1
%
  2.3%  3.6%
Amount of discount recognized as interest expense
 
$
7,196,000
  
$
7,441,000
  $4,781,000  $7,196,000 

Off-Balance Sheet Arrangements


At September 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 $9,251,000$8,798,000 and $5,259,000$9,251,000 for the six months ended September 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 $7,125,000$4,900,000 of capital expenditures for our current operations and approximately $15,000,000$12,400,000 for continued expansion of our operations in Mexico duringfor the full fiscal 2020.year 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.


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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 condensed 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 condensed consolidated statement of cash flows. However, we have material nonfunctional currency leases that could have a material impact on our condensed 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 losses of $1,139,000 and $637,000 in general and administrative expenses in connection with the remeasurement of foreign currency-denominated lease liabilities during the three and six months ended September 30, 2019, respectively. 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, changeschanged 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 beginningexpected credit losses but did not have a material effect on our condensed consolidated financial statements.

Prior to April 1, 2020.2020, 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 currently evaluatingrecorded 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 impact this guidance will havecondensed consolidated balance sheets. We maintain an allowance for credit losses resulting from the expected failure or inability of our customers to make required payments. We recognize the allowance for credit losses at inception and reassess quarterly based on our consolidated financial statements,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 any impactsexpectations 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 record a provision for expected credit losses using a loss-rate method based on the ratio of our business processes, systems and internal controls.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 changeschanged 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 consolidated financial statements.

32
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 and six months ended September 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 for fiscal years,annual and for interim periods within thosein fiscal years beginning after December 15, 2019.2020. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our 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.


Item 4.
Controls and Procedures


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 September 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 September 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 is in the process of hiring 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;

33
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. 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 September 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



PART II — OTHER INFORMATION


Item 1.
Legal Proceedings


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.


Item 1A.
Risk Factors


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, except as discussed below.


There is uncertainty surrounding potential legal, regulatory and policy changes by a new presidential administration in the United States that may directly affect the Company and the global economy.

We face regulatory and tax uncertainties due to the U.S. presidential election on November 3, 2020. The nature, timing, economic, and political effects of any potential change to the current legal and regulatory framework affecting us remain highly uncertain. Uncertainty surrounding future changes may adversely affect our operating environment and have an adverse impact on our business, financial condition, results of operations and growth prospects.

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


Limitation on Payment of Dividends and Share Repurchases


The Credit Facility currently permits the payment of up to $20,000,000$30,000,000 of dividends and share repurchases perfor this 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 September 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)
 
                     
July 1 - July 31, 2019:         
July 1 - July 31, 2020:            
Open market and privately negotiated purchases  -  $-   -  $21,308,000   -  $-   -  $21,308,000 
August 1 - August 31, 2019:                
August 1 - August 31, 2020:                
Open market and privately negotiated purchases  -  $-   -   21,308,000   -  $-   -   21,308,000 
September 1 - September 30, 2019:                
September 1 - September 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 September 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 September 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.


Item 5.
Other Information


None.

Item 6.
Exhibits
Item 6.          Exhibits


(a)
Exhibits:


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”).
     
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.
     
3.3
 
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.
     
3.4
 
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”).
     
3.5
 
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.
     
3.6
 
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.
     
3.7
 
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.
     
3.8
 
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.
     
3.9
 
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.
     
4.1
 
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.
4.2
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.
     
4.3
4.2		 
2010 Incentive Award Plan
 
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on December 15, 2010.
     
4.4
4.3		 
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
     
4.5
4.4		 
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.
     
4.6
4.5		 
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.
     
4.7
4.6		 
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.
4.7Fourth 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.
10.1Amendment No. 4 to Employment Agreement, dated as of May 21, 2020, between Motorcar Parts of America, Inc., and Selwyn Joffe
Incorporated by reference to exhibit 10.1 to the Quarterly Report filed on August 10, 2020.
     
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
 
Filed herewith.
     
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
 
Filed herewith.
     
31.3
 
Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
 
Filed herewith.
     
32.1
 
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.
     
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).		  
     
101.SCM
 Inline XBRL Taxonomy Extension Schema Document  
     
101.CAL
 Inline XBRL Taxonomy Extension Calculation Linkbase Document  
     
101.DEF
 Inline XBRL Taxonomy Extension Definition Linkbase Document  
     
101.LAB
 Inline XBRL Taxonomy Extension Label Linkbase Document  
     
101.PRE
 Inline XBRL Taxonomy Extension Presentation Linkbase Document  
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)



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.



MOTORCAR PARTS OF AMERICA, INC.
   
Dated: November 12, 2019
9, 2020
By:
/s/ David Lee

 
David Lee

 
Chief Financial Officer
   
Dated: November 12, 2019
9, 2020
By:
/s/ Kevin Daly
Kamlesh Shah

 
Kevin Daly
Kamlesh Shah

 
Chief Accounting Officer



38