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 SEPTEMBERJUNE 30, 20202021

☐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 classTrading 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 19,050,14719,119,059 shares of Common Stock outstanding at NovemberAugust 2, 2020.2021.





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 IncomeOperations
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
2322
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
3329
 
Item 4. Controls and Procedures
3329
PART II — OTHER INFORMATION 
 
Item 1. Legal Proceedings
3531
 
Item 1A. Risk Factors
3531
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
3531
 
Item 5. Other Information
3531
 
Item 6. Exhibits
3632
 
SIGNATURES
3834


2
Table of Contents
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 themthem.

3
Table of Contents
.
PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

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

 September 30, 2020  March 31, 2020  June 30, 2021  March 31, 2021 
ASSETS (Unaudited)     (Unaudited)    
Current assets:            
Cash and cash equivalents $20,887,000  $49,616,000  $24,883,000  $15,523,000 
Short-term investments  1,237,000   850,000   1,823,000   1,652,000 
Accounts receivable — net  91,088,000   91,748,000   54,019,000   63,122,000 
Inventory  240,018,000   234,680,000   320,685,000   302,913,000 
Contract assets  33,309,000   20,332,000   26,264,000   26,940,000 
Prepaid expenses and other current assets  10,463,000   11,890,000   13,307,000   12,706,000 
Total current assets  397,002,000   409,116,000   440,981,000   422,856,000 
Plant and equipment — net  49,893,000   44,957,000   53,287,000   53,854,000 
Operating lease assets  68,530,000   53,029,000   87,924,000   71,513,000 
Long-term deferred income taxes  18,706,000   18,950,000   19,150,000   19,381,000 
Long-term contract assets  234,590,000   239,540,000   293,158,000   270,213,000 
Goodwill and intangible assets — net  9,077,000   9,598,000   8,194,000   8,534,000 
Other assets  1,638,000   1,839,000   1,246,000   1,531,000 
TOTAL ASSETS $779,436,000  $777,029,000  $903,940,000  $847,882,000 
LIABILITIES AND SHAREHOLDERS' EQUITY                
Current liabilities:                
Accounts payable and accrued liabilities $121,550,000  $95,083,000  $141,451,000  $152,735,000 
Customer finished goods returns accrual  27,561,000   25,326,000   35,261,000   31,524,000 
Contract liabilities  44,657,000   27,911,000   40,988,000   41,072,000 
Revolving loan  94,000,000   152,000,000   103,000,000   84,000,000 
Other current liabilities  5,154,000   9,390,000   5,774,000   6,683,000 
Operating lease liabilities  6,228,000   5,104,000   5,434,000   6,439,000 
Current portion of term loan  3,678,000   3,678,000   3,670,000   3,678,000 
Total current liabilities  302,828,000   318,492,000   335,578,000   326,131,000 
Term loan, less current portion  18,624,000   20,462,000   15,804,000   16,786,000 
Long-term contract liabilities  90,223,000   92,101,000   153,504,000   125,223,000 
Long-term deferred income taxes  75,000   79,000   76,000   73,000 
Long-term operating lease liabilities  72,959,000   61,425,000   85,889,000   70,551,000 
Other liabilities  6,732,000   8,950,000   7,862,000   7,973,000 
Total liabilities  491,441,000   501,509,000   598,713,000   546,737,000 
Commitments and contingencies        0   0 
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 
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; 19,101,092 and 19,045,386 shares issued and outstanding at June 30, 2021 and March 31, 2021, respectively
  191,000   190,000 
Additional paid-in capital  220,588,000   218,581,000   224,445,000   223,058,000 
Retained earnings  76,289,000   64,117,000   86,454,000   85,593,000 
Accumulated other comprehensive loss  (9,072,000)  (7,368,000)  (5,863,000)  (7,696,000)
Total shareholders' equity  287,995,000   275,520,000   305,227,000   301,145,000 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $779,436,000  $777,029,000  $903,940,000  $847,882,000 

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

4
Table of Contents

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

 
Three Months Ended
September 30,
  
Six Months Ended
September 30,
  
Three Months Ended
June 30,
 
 2020  2019  2020  2019  2021  2020 
                  
                  
Net sales $154,730,000  $150,374,000  $250,086,000  $259,522,000  $149,034,000  $95,356,000 
Cost of goods sold  115,004,000   113,801,000   196,973,000   205,366,000   125,463,000   81,969,000 
Gross profit  39,726,000   36,573,000   53,113,000   54,156,000   23,571,000   13,387,000 
Operating expenses:                        
General and administrative  12,518,000   12,483,000   24,205,000   25,020,000   12,486,000   11,687,000 
Sales and marketing  4,326,000   5,448,000   8,526,000   10,367,000   5,368,000   4,200,000 
Research and development  1,972,000   2,148,000   3,914,000   4,520,000   2,501,000   1,942,000 
Foreign exchange impact of lease liabilities and forward contracts  (3,985,000)  1,802,000   (8,802,000)  1,265,000   (2,533,000)  (4,817,000)
Total operating expenses  14,831,000   21,881,000   27,843,000   41,172,000   17,822,000   13,012,000 
Operating income  24,895,000   14,692,000   25,270,000   12,984,000   5,749,000   375,000 
Interest expense, net  3,614,000   6,523,000   8,023,000   12,696,000   3,941,000   4,409,000 
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 
Income (loss) before income tax expense (benefit)  1,808,000   (4,034,000)
Income tax expense (benefit)  947,000   (1,022,000)
Net income (loss) $861,000  $(3,012,000)
Basic net income (loss) per share $0.05  $(0.16)
Diluted net income (loss) per share $0.04  $(0.16)
Weighted average number of shares outstanding:                        
Basic  19,022,414   18,903,182   18,999,461   18,862,901   19,054,481   18,976,178 
Diluted  19,345,311   19,217,327   19,289,765   19,246,599   19,659,057   18,976,178 

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

5
Table of Contents

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,
 
 2020  2019  2020  2019 
             
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  (441,000)  (431,000)  (1,704,000)  168,000 
Total other comprehensive (loss) income, net of tax  (441,000)  (431,000)  (1,704,000)  168,000 
Comprehensive income $14,743,000  $5,758,000  $10,468,000  $206,000 
 
Three Months Ended
June 30,
 
  2021  2020 
       
Net income (loss) $861,000  $(3,012,000)
Other comprehensive income (loss), net of tax:        
Foreign currency translation gain (loss)  1,833,000   (1,263,000)
Total other comprehensive income (loss), net of tax  1,833,000   (1,263,000)
Comprehensive income (loss) $2,694,000  $(4,275,000)

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

6
Table of Contents

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

 Common Stock              Common Stock             
 Shares  Amount  
Additional
Paid-in
Capital
  
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, 2020  18,969,380  $190,000  $218,581,000  $64,117,000  $(7,368,000) $275,520,000 
Balance at March 31, 2021
  19,045,386  $190,000  $223,058,000  $85,593,000  $(7,696,000) $301,145,000 
Compensation recognized under employee stock plans  -   0   1,043,000   0   0   1,043,000   -   0   1,576,000   0   0   1,576,000 
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  29,953   0   (207,000)  0   0   (207,000)
Foreign currency translation  -   0   0   0   (1,263,000)  (1,263,000)
Net loss  -   0   0   (3,012,000)  0   (3,012,000)
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  -   0   1,218,000   0   0   1,218,000 
Exercise of stock options  6,000   0   73,000   0   0   73,000 
Exercise of stock options, net of shares withheld for employee taxes  19,837   0   354,000   0   0   354,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  18,254   0   (140,000)  0   0   (140,000)  35,869   1,000   (543,000)  0   0   (542,000)
Foreign currency translation  -   0   0   0   (441,000)  (441,000)  -   0   0   0   1,833,000   1,833,000 
Net income  -   0   0   15,184,000   0   15,184,000   -   0   0   861,000   0   861,000 
Balance at September 30, 2020  19,026,587  $190,000  $220,588,000  $76,289,000  $(9,072,000) $287,995,000 
Balance at June 30, 2021
  19,101,092  $191,000  $224,445,000  $86,454,000  $(5,863,000) $305,227,000 

 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
  
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 
Compensation recognized under employee stock plans  -   0   988,000   0   0   988,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  36,872   1,000   (363,000)  0   0   (362,000)
Foreign currency translation  -   0   0   0   599,000   599,000 
Net loss  -   0   0   (6,151,000)  0   (6,151,000)
Balance at June 30, 2019  18,854,272  $189,000  $215,672,000  $65,256,000  $(6,288,000) $274,829,000 
Balance at 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  -   0   1,053,000   0   0   1,053,000   -   0   1,043,000   0   0   1,043,000 
Exercise of stock options  52,800   0   405,000   0   0   405,000   3,000   0   20,000   0   0   20,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  37,814   0   (700,000)  0   0   (700,000)  29,953   0   (207,000)  0   0   (207,000)
Foreign currency translation  -   0   0   0   (431,000)  (431,000)  -   0   0   0   (1,263,000)  (1,263,000)
Net income  -   0   0   6,189,000   0   6,189,000 
Balance at September 30, 2019  18,944,886  $189,000  $216,430,000  $71,445,000  $(6,719,000) $281,345,000 
Net loss  -   0   0   (3,012,000)  0   (3,012,000)
Balance at June 30, 2020
  19,002,333  $190,000  $219,437,000  $61,105,000  $(8,631,000) $272,101,000 

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

7
Table of Contents

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

 
Six Months Ended
September 30,
  
Three Months Ended
June 30,
 
 2020  2019  2021  2020 
Cash flows from operating activities:            
Net income $12,172,000  $38,000 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:        
Net income (loss) $861,000  $(3,012,000)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:        
Depreciation and amortization  5,233,000   4,619,000   3,145,000   2,551,000 
Amortization of interest  767,000   861,000   414,000   312,000 
Amortization of core premiums paid to customers  2,741,000   2,217,000   2,531,000   1,223,000 
Amortization of finished goods premiums paid to customers  146,000   0 
Noncash lease expense  3,410,000   2,431,000   1,791,000   1,686,000 
(Gain) loss due to the change in the fair value of the contingent consideration  (65,000)  123,000 
Gain due to the change in the fair value of the contingent consideration  (60,000)  (47,000)
Foreign exchange impact of lease liabilities and forward contracts  (8,802,000)  1,265,000   (2,533,000)  (4,817,000)
Gain on short-term investments  (195,000)  (136,000)  (5,000)  (155,000)
Net provision for inventory reserves  5,281,000   6,656,000   3,141,000   2,074,000 
Net provision for customer payment discrepancies and credit losses  421,000   827,000   229,000   30,000 
Deferred income taxes  447,000   (638,000)  358,000   465,000 
Share-based compensation expense  2,261,000   2,041,000   1,576,000   1,043,000 
Loss on disposal of plant and equipment  1,000   3,000   33,000   0 
Changes in operating assets and liabilities:                
Accounts receivable  661,000   (14,672,000)  9,020,000   25,847,000 
Inventory  (9,685,000)  (23,469,000)  (20,625,000)  (8,034,000)
Prepaid expenses and other current assets  1,200,000   306,000   281,000   (2,898,000)
Other assets  297,000   182,000   297,000   219,000 
Accounts payable and accrued liabilities  22,745,000   (6,600,000)  (10,183,000)  6,478,000 
Customer finished goods returns accrual  2,217,000   1,005,000   3,698,000   1,621,000 
Contract assets, net  (10,735,000)  (1,956,000)  (24,857,000)  (6,076,000)
Contract liabilities, net  14,368,000   1,405,000   27,880,000   4,620,000 
Operating lease liabilities  (3,027,000)  (2,107,000)  (1,259,000)  (1,416,000)
Other liabilities  (2,383,000)  (1,137,000)  (618,000)  674,000 
Net cash provided by (used in) operating activities  39,330,000   (26,736,000)
Net cash (used in) provided by operating activities  (4,739,000)  22,388,000 
Cash flows from investing activities:                
Purchase of plant and equipment  (6,810,000)  (6,943,000)  (1,922,000)  (2,983,000)
Proceeds from sale of plant and equipment  0   26,000 
Change in short-term investments  (192,000)  1,216,000   (167,000)  (55,000)
Net cash used in investing activities  (7,002,000)  (5,701,000)  (2,089,000)  (3,038,000)
Cash flows from financing activities:                
Borrowings under revolving loan  0   42,000,000   32,000,000   0 
Repayments of revolving loan  (58,000,000)  (8,400,000)  (13,000,000)  (40,000,000)
Repayments of term loan  (1,875,000)  (1,875,000)  (938,000)  (938,000)
Payments for debt issuance costs  0   (901,000)  (1,102,000)  0 
Payments on finance lease obligations  (1,183,000)  (1,108,000)  (678,000)  (549,000)
Exercise of stock options  93,000   405,000   354,000   20,000 
Cash used to net share settle equity awards  (347,000)  (1,062,000)  (542,000)  (207,000)
Net cash (used in) provided by financing activities  (61,312,000)  29,059,000 
Net cash provided by (used in) financing activities  16,094,000   (41,674,000)
Effect of exchange rate changes on cash and cash equivalents  255,000   (78,000)  94,000   172,000 
Net decrease in cash and cash equivalents  (28,729,000)  (3,456,000)
Net increase (decrease) in cash and cash equivalents  9,360,000   (22,152,000)
Cash and cash equivalents — Beginning of period  49,616,000   9,911,000   15,523,000   49,616,000 
Cash and cash equivalents — End of period $20,887,000  $6,455,000  $24,883,000  $27,464,000 
Supplemental disclosures of cash flow information:                
Cash paid for interest, net $7,339,000  $11,859,000  $3,521,000  $4,234,000 
Cash paid for income taxes, net of refunds  1,436,000   0   1,550,000   447,000 
Cash paid for operating leases  5,323,000   3,538,000   2,472,000   2,574,000 
Cash paid for finance leases  1,359,000   1,249,000   775,000   632,000 
Plant and equipment acquired under finance leases  1,847,000   2,308,000   230,000   1,427,000 
Assets acquired under operating leases  15,564,000   1,497,000   15,718,000   15,564,000 
Non-cash capital expenditures  2,085,000   0   206,000   678,000 

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

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MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
SeptemberJune 30, 20202021
(Unaudited)

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 test solutions 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 test solutions and 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, brake rotors, brake pads, and brake master cylinders, and (iv) diagnostics and other products, which include diagnosticsturbochargers and test solutions and diagnostic equipment used for electric vehicle powertrain development and manufacturing including electric motor test systems, e-axle test systems, advanced power emulators, charging unit test systems, test systems for alternators, starters, belt starter generators and bench-top testers used forby the development of electric vehicles and aerospace applications, and custom power electronic products for quality control in the development and production of electric vehicles and turbochargers.automotive retail segment.

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

Pursuant to the guidance provided under the Financial Accounting Standards 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 3 separate operating segments. Two of the operating segments meet all the aggregation criteria, and are aggregated. The remaining operating segment does not meet the quantitative thresholds for individual disclosure and the Company has combined its operating segments into 1 reportable segment.

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

The outbreak of the COVID-19COVID-19 pandemic has ledcontinues to adverse impacts onadversely impact the U.S. and global economies and created– creating uncertainty regarding the potential effects on the Company’s employees, supply chain, operations, and customer demand. The COVID-19COVID-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-19COVID-19 pandemic impacts the Company will depend on numerous factors and future developments, which are highly uncertain and cannot be predicted, including, but not limited to: (i) the severity of the virus, (ii) the occurrence and duration of a “second wave” or additional spikes in infections, (iii) the effects of the pandemic on customers, suppliers, and vendors, (iv) the remedial actions and stimulus measures adopted by local, state and federal governments, (v) the availability and (v)acceptance of vaccines, and (vi) the extent to which normal economic and operating conditions can resume. Even after the COVID-19COVID-19 pandemic has subsided, the Company may continue to experience adverse impacts to its business because of an economic recession or depression that has occurred or may occur in the future. 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 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 June 30,2020 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31,2021. 2022. This report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31,2020, 2021, which are included in the Company’s Annual Report on Form 10-K10-K filed with the Securities and Exchange Commission (“SEC”) on June 15,2020.14, 2021.

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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 22,, 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 31,2020. 2021.

NewRecently Adopted Accounting Pronouncements Recently 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, changed the impairment model for most financial assets and requires the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities are 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. The adoption of this guidance on April 1,2020 increased the Company’s required disclosures for 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 doubtful accounts were presented in the condensed consolidated balance sheets. The Company maintains allowances for uncollectible accounts receivable for estimated losses resulting from the failure or inability of its customers to make required payments. Furthermore, receivable balances were assessed quarterly for impairment and an allowance was recorded if the receivable was considered impaired. Subsequent to April 1, 2020, accounts receivable are recorded at amortized cost less an allowance for credit losses that are not expected to be recovered. The net amount of accounts receivable and corresponding allowance for credit losses are presented separately in the condensed consolidated balance sheets. 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 based on multiple factors including historical experience with bad debts, the credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, such as COVID-19, as well as expectations of conditions in the future, if applicable. 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 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 changed the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments 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.

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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 annual and interim periods in fiscal years beginning after December 15, 2020. EarlyThe adoption is permitted. The Company is currently evaluating the impactof this guidance willon April 1, 2021 did not have any material impact on itsthe Company’s consolidated financial statements.

3. Accounts Receivable — Net

The Company has trade accounts receivable that result from the sale of goods and services. Accounts receivable — net includes offset accounts related to allowances for credit losses, customer payment discrepancies, and returned goods authorizations (“RGAs”) issued for in-transit unit returns, and allowances for credit losses.returns. 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, 2020  March 31, 2020  June 30, 2021  March 31, 2021 
Accounts receivable — trade $109,443,000  $109,164,000  $67,212,000  $81,549,000 
Allowance for credit losses  (483,000)  (4,252,000)  (273,000)  (348,000)
Customer payment discrepancies  (1,059,000)  (1,040,000)  (797,000)  (752,000)
Customer returns RGA issued  (16,813,000)  (12,124,000)  (12,123,000)  (17,327,000)
Total accounts receivable — net $91,088,000  $91,748,000  $54,019,000  $63,122,000 

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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 sixthree months ended SeptemberJune 30, 2020, the Company wrote off amounts previously fully reserved for in connection with the bankruptcy filing of one of its customers in fiscal 2016.customers.

 Six Months Ended  
Three Months Ended
June 30,
 
 September 30, 2020  2021  2020 
Balance at beginning of period $4,252,000  $348,000  $4,252,000 
Provision for expected credit losses  228,000   (36,000)  170,000 
Recoveries  (100,000)  0   (100,000)
Amounts written off charged against the allowance  (3,897,000)  (39,000)  (3,897,000)
Balance at end of period $483,000  $273,000  $425,000 

4. Inventory

Inventory is comprised of the following:

 September 30, 2020  March 31, 2020  June 30, 2021  March 31, 2021 
Inventory            
Raw materials $106,790,000  $99,360,000  $140,109,000  $128,190,000 
Work-in-process  8,527,000   3,906,000   7,189,000   5,233,000 
Finished goods  128,101,000   135,601,000   173,725,000   168,184,000 
  243,418,000   238,867,000   321,023,000   301,607,000 
Less allowance for excess and obsolete inventory  (13,752,000)  (13,208,000)  (13,945,000)  (13,246,000)
Inventory — net  229,666,000   225,659,000   307,078,000   288,361,000 
Inventory unreturned  10,352,000   9,021,000   13,607,000   14,552,000 
Total inventory $240,018,000  $234,680,000  $320,685,000  $302,913,000 

5. Contract Assets

During the three and six months ended SeptemberJune 30, 2021 and 2020, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $892,000984,000 and $2,276,0001,384,000, respectively.

Contract assets are comprised of the following:

 September 30, 2020  March 31, 2020  June 30, 2021  March 31, 2021 
Short-term contract assets            
Cores expected to be returned by customers $26,021,000  $12,579,000  $15,024,000  $17,657,000 
Upfront payments to customers  1,618,000   2,865,000   533,000   684,000 
Finished goods premiums paid to customers  644,000   405,000 
Core premiums paid to customers  5,670,000   4,888,000   10,063,000   8,194,000 
Total short-term contract assets $33,309,000  $20,332,000  $26,264,000  $26,940,000 
                
Long-term contract assets        
        
Remanufactured cores held at customers' locations $209,366,000  $217,616,000  $243,389,000  $229,918,000 
Upfront payments to customers  435,000   589,000   398,000   486,000 
Finished goods premiums paid to customers  3,191,000   2,731,000 
Core premiums paid to customers  19,220,000   15,766,000   40,611,000   31,509,000 
Long-term core inventory deposits  5,569,000   5,569,000   5,569,000   5,569,000 
Total long-term contract assets $234,590,000  $239,540,000  $293,158,000  $270,213,000 

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6. Significant Customer and Other Information

Significant Customer Concentrations

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

 
Three Months Ended
September 30,
  
Six Months Ended
September 30
  
Three Months Ended
June 30,
 
 2020  2019  2020  2019  2021  2020 
Net sales                  
Customer A  45%  41%  45%  40%  34%  45%
Customer B  21%  20%  23%  21%  20%  26%
Customer C  23%  23%  20%  22%  31%  17%

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

 September 30, 2020  March 31,2020  June 30, 2021  March 31,2021 
Accounts receivable - trade            
Customer A  42%  28%  43%  50%
Customer B  20%  14%  24%  23%
Customer C  18%  33%  1%  0 

Geographic and Product Information

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

 
Three Months Ended
September 30,
  
Six Months Ended
September 30
  
Three Months Ended
June 30,
 
 2020  2019  2020  2019  2021  2020 
Product line      
Rotating electrical products  80%  77%  77%  76%  67%  72%
Wheel hub products  12%  15%  14%  16%  14%  18%
Brake related products  7%  6%  8%  6%  16%  9%
Other products  1%  2%  1%  2%  3%  1%
  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 SeptemberJune 30, 20202021 and 2019.2020.

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7. Debt

The Company is party to a $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 $238,620,000 revolving loan facility, subject to borrowing base restrictions, a $24,000,000 sublimit for borrowings by Canadian borrowers, and a $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 $30,000,000$29,430,000 of dividends and share repurchases for this fiscal year 2022, subject to 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 May 2021, the Company entered into a third amendment to the Credit Facility (the “Third Amendment”). The Third Amendment, among other things, (i) extended the maturity date to May 28, 2026 from June 5, 2023, (ii) modified the fixed charge coverage ratio financial covenant, and (iii) modified the definition of “Consolidated EBITDA”. The Company capitalized $1,102,000 of new debt issuance costs in connection with the Third Amendment.
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The Term Loans require quarterly principal payments of $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 2.91% 2.60% and 2.59%, respectively, at SeptemberJune 30, 20202021, and 4.34%2.62% and 3.64%, respectively, at March 31, 20202021.

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 SeptemberJune 30, 2020.2021.

The Company had cash of $20,887,00024,883,000 at SeptemberJune 30, 2020 and paid down its outstanding debt by $59,875,000 during the six months ended September 30, 2020. However,2021, 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:

  September 30, 2020  March 31, 2020 
Principal amount of term loan $22,500,000  $24,375,000 
Unamortized financing fees  (198,000)  (235,000)
Net carrying amount of term loan  22,302,000   24,140,000 
Less current portion of term loan  (3,678,000)  (3,678,000)
Long-term portion of term loan $18,624,000  $20,462,000 
  June 30, 2021  March 31, 2021 
Principal amount of Term Loans $19,687,000  $20,625,000 
Unamortized financing fees  (213,000)  (161,000)
Net carrying amount of Term Loans  19,474,000   20,464,000 
Less current portion of Term Loans  (3,670,000)  (3,678,000)
Long-term portion of Term Loans $15,804,000  $16,786,000 

Future repayments of the Term Loans are as follows:

Year Ending March 31,      
2021 - remaining six months $1,875,000 
2022  3,750,000 
2022 - remaining nine months
 $2,812,000 
2023  3,750,000   3,750,000 
2024  13,125,000   3,750,000 
2025  3,750,000 
2026  3,750,000 
Thereafter  1,875,000 
Total payments $22,500,000  $19,687,000 

The Company had $94,000,000103,000,000 and $152,000,00084,000,000 outstanding under the Revolving Facility at SeptemberJune 30, 20202021 and March 31, 20202021, respectively. In addition, $5,963,0006,444,000 was outstanding for letters of credit at SeptemberJune 30, 20202021. At SeptemberJune 30, 20202021, after certain contractual adjustments, $97,046,00095,323,000 was available under the Revolving Facility.

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8. Contract Liabilities

Contract liabilities are comprised of the following:

 September 30, 2020  March 31, 2020  June 30, 2021  March 31, 2021 
Short-term contract liabilities            
Customer core returns accruals $16,254,000  $4,126,000  $12,350,000  $12,710,000 
Customer allowances earned  14,839,000   13,844,000   17,298,000   16,513,000 
Customer deposits  2,142,000   1,365,000   2,735,000   2,234,000 
Finished goods liabilities  2,424,000   1,883,000 
Core bank liability  564,000   528,000   1,597,000   1,585,000 
Accrued core payment, net  10,858,000   8,048,000   4,584,000   6,147,000 
Total short-term contract liabilities $44,657,000  $27,911,000  $40,988,000  $41,072,000 
                
Long-term contract liabilities                
Customer core returns accruals $68,745,000  $77,927,000  $132,469,000  $103,719,000 
Customer allowances earned  449,000   542,000   245,000   313,000 
Finished goods liabilities  2,668,000   2,678,000 
Core bank liability  17,696,000   7,556,000   16,499,000   16,903,000 
Accrued core payment, net  3,333,000   6,076,000   1,623,000   1,610,000 
Total long-term contract liabilities $90,223,000  $92,101,000  $153,504,000  $125,223,000 

9. Leases

The Company leases various facilities in North America and Asia under operating leases expiring through August 20332033.. The Company has material nonfunctional currency leases that could have a material impact on the Company’s condensed consolidated statements of income.operations. As required for other monetary liabilities, lessees remeasure foreign currency-denominated lease liabilities using the exchange rate at each reporting date, but the lease assets are nonmonetary assets measured at historical rates and are not affected by subsequent changes in the exchange rates. TheIn connection with the remeasurement of these leases, the Company recorded a gaingains of $$1,618,0002,795,000 and a loss of $$1,139,0001,985,000 during the three months ended June 30, 2021 and 2020, respectively. These gains are included in foreign“foreign exchange impact of lease liabilities and forward contractscontracts” in the condensed 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 liabilities and forward contracts in the condensed consolidated statements of income in connection with the remeasurement of foreign currency-denominated lease liabilities during the six months ended September 30, 2020 and 2019, respectively.operations.

Balance sheet information for leases is as follows:

   September 30, 2020  March 31, 2020 
LeasesClassification      Classification June 30, 2021  March 31, 2021 
Assets:              
OperatingOperating lease assets $68,530,000  $53,029,000 
Operating lease assets
 $87,924,000  $71,513,000 
FinancePlant and equipment  7,506,000   6,922,000 
Plant and equipment
  8,592,000   8,852,000 
Total leased assets  $76,036,000  $59,951,000   $96,516,000  $80,365,000 
                  
Liabilities:                  
Current                  
OperatingOperating lease liabilities $6,228,000  $5,104,000 
Operating lease liabilities
 $5,434,000  $6,439,000 
FinanceOther current liabilities  2,333,000   2,059,000 
Other current liabilities
  2,584,000   2,640,000 
Long-term                  
OperatingLong-term operating lease liabilities  72,959,000   61,425,000 
Long-term operating lease liabilities
  85,889,000   70,551,000 
FinanceOther liabilities  4,299,000   3,905,000 
Other liabilities
  4,606,000   4,995,000 
Total lease liabilities  $85,819,000  $72,493,000   $98,513,000  $84,625,000 

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Lease cost recognized in the condensed consolidated statements of incomeoperations is as follows:

 Three Months Ended 
 
Three Months Ended
September 30,
  
Six Months Ended
September 30,
  June 30, 
 2020  2019  2020  2019  2021  2020 
Lease cost                  
Operating lease cost $2,877,000  $1,987,000  $5,560,000  $3,885,000  $3,042,000  $2,683,000 
Short-term lease cost  337,000   295,000   654,000   698,000   376,000   317,000 
Variable lease cost  230,000   157,000   373,000   287,000   281,000   143,000 
Finance lease cost:                        
Amortization of finance lease assets  428,000   372,000   841,000   730,000   499,000   413,000 
Interest on finance lease liabilities  93,000   73,000   176,000   141,000   97,000   83,000 
Total lease cost $3,965,000  $2,884,000  $7,604,000  $5,741,000  $4,295,000  $3,639,000 

Maturities of lease commitments at SeptemberJune 30, 20202021 were as follows:

Maturity of lease liabilities Operating Leases  Finance Leases  Total  Operating Leases  Finance Leases  Total 
2021 - remaining six months $5,521,000  $1,310,000  $6,831,000 
2022  10,348,000   2,438,000   12,786,000 
2022 - remaining nine months
 $7,807,000  $2,246,000  $10,053,000 
2023  9,269,000   1,800,000   11,069,000   11,351,000   2,404,000   13,755,000 
2024  8,102,000   1,026,000   9,128,000   9,968,000   1,610,000   11,578,000 
2025  8,095,000   618,000   8,713,000   10,041,000   1,118,000   11,159,000 
2026  10,320,000   432,000   10,752,000 
Thereafter  69,261,000   87,000   69,348,000   75,101,000   0   75,101,000 
Total lease payments  110,596,000   7,279,000   117,875,000   124,588,000   7,810,000   132,398,000 
Less amount representing interest  (31,409,000)  (647,000)  (32,056,000)  (33,265,000)  (620,000)  (33,885,000)
Present value of lease liabilities $79,187,000  $6,632,000  $85,819,000  $91,323,000  $7,190,000  $98,513,000 

Other information about leases is as follows:

September 30, 2020
Lease term and discount rate
Weighted-average remaining lease term (years):
Finance leases3.3
Operating leases11.5
Weighted-average discount rate:
Finance leases5.6%
Operating leases5.9%
  June 30, 2021  March 31, 2021 
Lease term and discount rate      
Weighted-average remaining lease term (years):      
Finance leases  3.2   3.4 
Operating leases  11.0   11.1 
Weighted-average discount rate:        
Finance leases  5.3%  5.3%
Operating leases  5.7%  5.9%

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.

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The following is a summary of accounts receivable discount programs:

 
Six Months Ended
September 30,
  
Three Months Ended
June 30,
 
 2020  2019  2021  2020 
Receivables discounted $222,310,000  $205,882,000  $146,669,000  $111,360,000 
Weighted average days  341   346   329   345 
Annualized weighted average discount rate  2.3%  3.6%  1.8%  2.5%
Amount of discount recognized as interest expense $4,781,000  $7,196,000  $2,473,000  $2,686,000 


11. Net Income (Loss) 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, which would result in the issuance of incremental shares of common stock to the extent such 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,
 
  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 
  
Three Months Ended
June 30,
 
  2021  2020 
Net income (loss) $861,000  $(3,012,000)
Basic shares  19,054,481   18,976,178 
Effect of potentially dilutive securities  604,576   0 
Diluted shares  19,659,057   18,976,178 
Net income (loss) per share:        
         
Basic net income (loss) per share $0.05  $(0.16)
         
Diluted net income (loss) per share $0.04  $(0.16)

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 SeptemberJune 30, 20202021 and 2019,2020, there were 1,500,066634,832 and 1,221,744  respectively, of potential common shares not included in the calculation of diluted net income per share because their effect was anti-dilutive. For the six months ended September 30, 2020 and 2019, there were 1,500,066 and 1,166,4322,133,786, respectively, of potential common shares not included in the calculation of diluted net income (loss) per share because their effect was anti-dilutive.

12. Income Taxes

The Company recorded income tax expense of $6,097,000,$947,000, or an effective tax rate of 28.6%52.4%, and $1,980,000,an income tax benefit of $1,022,000, or an effective tax rate of 24.2%25.3%, for the three months ended SeptemberJune 30, 20202021 and 2019, respectively. The Company recorded 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%, for the six months ended September 30, 2020, and 2019, respectively. The effective tax ratesrate for the three and six months ended SeptemberJune 30, 2020, were2021, was primarily impacted by non-deductible executive compensation under Internal Revenue Code Section 162(m) and(i) specific jurisdictions that the Company does not expect to recognize benefit of losses, (ii) foreign income taxed at rates that are different from the federal statutory rate.rate, and (iii) non-deductible executive compensation under Internal Revenue Code Section 162(m).

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The Company continues to record a valuation allowance againstand its subsidiaries file income tax returns in the U.S. federal, various state, and foreign deferred tax assets as a resultjurisdictions with varying statutes of its non-U.S. net operating loss carry-forwards and non-U.S. research and development credits in connection with its acquisitions due to the uncertainty of their utilization in future periods. Should the actual amount differ from the Company’s estimates, the amount of the valuation allowance could be impacted. Realization of deferred tax assets from its U.S. operations is dependent upon the Company’s ability to generate sufficient future taxable income. Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the Company’s net deferred tax assets. The Company makes these estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s future plans. A valuation allowance is established when the Company believes it is not more likely than not all or some of a deferred tax assets will be realized. In evaluating the Company’s ability to recover deferred tax assets within the jurisdiction in which they arise, the Company considers all available positive and negative evidence.

limitations. At September June 30,2020, 2021, the Company is not under examination in any jurisdiction, and remain subject to examination from the years ended March 31, 2016 through 2020 remain subject to examination.2017. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.

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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 for forecasted expenditure requirements to fund foreign operations.

The Company had forward foreign currency exchange contracts with a U.S. dollar equivalent notional value of $35,305,00043,620,000 and $42,052,00041,819,000 at September June 30,2020 2021 and March 31, 202131,2020,, 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 included in foreign“foreign exchange impact of lease liabilities and forward contractscontracts” in the condensed consolidated statements of income.operations.

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

 
Gain (Loss) Recognized as Foreign Exchange Impact of Lease Liabilities
and Forward Contracts
  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,
  
Three Months Ended
June 30,
 
Hedging Instruments 2020  2019  2020  2019  2021  2020 
Forward foreign currency exchange contracts $2,367,000  $(663,000) $5,199,000  $(628,000) $(262,000) $2,832,000 

The fair value of the forward foreign currency exchange contracts of $$1,085,0001,167,000 and $$6,284,0001,429,000 is included in prepaid and other current liabilitiesassets in the condensed consolidated balance sheets at September June 30,2020 2021 and March 31,2020, 2021, respectively. The changes in the fair values of forward foreign currency exchange contracts are included in foreign“foreign exchange impact of lease liabilities and forward contractscontracts” in the condensed consolidated statements of cash flows for the sixthree months ended September June 30,2020 2021 and 20202019..

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14. Fair Value Measurements

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

 September 30, 2020  March 31, 2020  June 30, 2021  March 31, 2021 
    
Fair Value Measurements
Using Inputs Considered as
     
Fair Value Measurements
Using Inputs Considered as
     
Fair Value Measurements
Using Inputs Considered as
     
Fair Value Measurements
Using Inputs Considered as
 
 Fair Value  Level 1  Level 2  Level 3  Fair Value  Level 1  Level 2  Level 3  Fair Value  Level 1  Level 2  Level 3  Fair Value  Level 1  Level 2  Level 3 
Assets                                                
Short-term investments                                                
Mutual funds $1,237,000  $1,237,000  $0  $0  $850,000  $850,000  $0  $0  $1,823,000  $1,823,000  $0  $0  $1,652,000  $1,652,000  $0  $0 
Prepaid expenses and other current assets                                
Forward foreign currency exchange contracts  1,167,000   0   1,167,000   0   1,429,000   0   1,429,000   0 
                                                                
Liabilities                                                                
Accrued liabilities                                                                
Short-term contingent consideration  2,030,000   0   0   2,030,000   2,190,000   0   0   2,190,000   850,000   0   0   850,000   910,000   0   0   910,000 
Other current liabilities                                                                
Deferred compensation  1,237,000   1,237,000   0   0   850,000   850,000   0   0   1,823,000   1,823,000   0   0   1,652,000   1,652,000   0   0 
Forward foreign currency exchange contracts  1,085,000   0   1,085,000   0   6,284,000   0   6,284,000   0 
Other liabilities                                
Long-term contingent consideration  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 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 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, 2020 and March 31, 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 $1,220,000 and $1,130,000 at September 30,2020 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. 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.

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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 $1,360,000850,000 and $1,230,000910,000 at September June 30,2020 2021 and March 31, 202131,2020,, 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:

  SeptemberJune 30, 20202021 
Risk free interest rate  0.120.06%
Counter party rate  6.703.00%
Expected volatility (1)  40.0030-40%
Weighted average cost of capital (1)  13.5013-15.5%
(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-outCompany’s contingent consideration was $8,000is recorded in accounts payable and $293,000accrued liabilities in its condensed consolidated balance sheets at SeptemberJune 30, 20202021 and March 31, 2020, respectively, determined using2021, and is a Monte Carlo Simulation Model.Level 3 liability measured at fair value.

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

September 30, 2020
Risk free interest rate0.10%
Counter party rate6.63%
Revenue volatility (1)4.50%
Revenue discount rate (1)2.00%
Asset volatility (1)30.00%
(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.

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The following table summarizes the activity for financial assets and liabilities utilizing Level 3 fair value measurements:

 
Three Months Ended
September 30,
  
Six Months Ended
September 30,
  
Three Months Ended
June 30,
 
Contingent Consideration 2020  2019  2020  2019  2021  2020 
Beginning balance $2,606,000  $4,970,000  $2,653,000  $4,721,000  $910,000  $2,653,000 
Changes in revaluations of contingent consideration included in earnings  (18,000)  (119,000)  (65,000)  130,000   (60,000)  (47,000)
Ending balance $2,588,000  $4,851,000  $2,588,000  $4,851,000  $850,000  $2,606,000 

During the three and six months ended September June 30, 202130,2020,, 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

Stock Options

During the three months ended June 30, 2021, 0 options to purchase shares of the Company’s common stock were granted. The Company granted options to purchase 345,423 and 300,039341,825 shares of common stock during the sixthree months ended SeptemberJune 30, 2020 and 2019, 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.2020.

The following assumptions were used to derive the weighted average fair value of the stock options granted:

 
Six Months Ended
September 30,
 
  2020  2019 
Weighted average risk free interest rate  0.44%  1.77%
Weighted average expected holding period (years)  5.96   5.70 
Weighted average expected volatility  44.90%  42.51%
Weighted average expected dividend yield  0   0 
Weighted average fair value of options granted $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, 2020  1,536,123  $18.18 
Outstanding at March 31, 2021  1,744,885  $17.51 
Granted  345,423  $15.16   0  $0 
Exercised  (9,000) $10.32   (21,270) $18.24 
Forfeited  (23,280) $21.97   (900) $17.90 
Outstanding at September 30, 2020  1,849,266  $17.60 
Outstanding at June 30, 2021  1,722,715  $17.50 

At SeptemberJune 30, 2020,2021, options to purchase 616,682420,746 shares of common stock were unvested at a weighted average exercise price of $17.13.$17.30.

At SeptemberJune 30, 2020,2021, there was $3,893,000$2,221,000 of total unrecognized compensation expense related to unvested stock option awards. Compensation expense related to unvested stock option awards will be recognized over athe weighted average remaining vesting period of approximately 2.11.6 years.

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

During the sixthree months ended September June 30,2020 2021 and 2019,2020, the Company granted 212,293218,673 and 79,851112,293 shares of RSUs, respectively, with an estimated grant date fair value of $3,503,000 and $1,591,000, respectively, 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, 2020  201,983  $20.06 
Outstanding at March 31, 2021  354,484  $17.22 
Granted  212,293  $16.50   218,673  $22.27 
Vested  (70,294) $21.61   (59,483) $16.62 
Forfeited  (3,347) $16.98   0  $0 
Outstanding at September 30, 2020  340,635  $17.55 
Outstanding at June 30, 2021  513,674  $19.44 

At SeptemberJune 30, 2020,2021, there was $4,932,000$6,738,000 of unrecognized compensation expense related to these awards, which will be recognized over the weighted average remaining vesting period of approximately 1.72.0 years.

Performance Stock Units (“PSUs”)

In June 2021, the Company granted performance-based PSUs to its executives, which typically cliff vest after three-years subject to continued employment. These awards are contingent and granted separately for each of the following metrics: adjusted EBITDA, net sales, and relative total shareholder return (“TSR”). Compensation cost is determined at the grant date and recognized on a straight-line basis over the requisite service period to the extent the conditions are deemed probable. The number of shares earned at the end of the three-year period will vary, based only on actual performance, from 0%% to 150% of the target number of PSUs granted. PSUs are not considered issued or outstanding ordinary shares of the Company.

Adjusted EBITDA and net sales are considered performance conditions. The Company will reassess the probability of achieving each performance condition separately each reporting period. TSR is considered a market condition because it measures the Company’s return against the performance of the Russell 3000, excluding companies classified as financials and real estate, over a given period of time. Compensation cost related to the TSR award will not be adjusted even if the market condition is not met.

The Company calculated the fair value of the PSUs for each component individually. The fair value of PSUs subject to performance conditions is equal to the closing stock price on the grant date. The fair value of PSUs subject to the market condition is determined using the Monte Carlo valuation model.

The following table summarizes the assumptions used in determining the fair value of the TSR awards:

 
Three Months Ended
June 30,
 
  2021 
Risk free interest rate  0.47%
Expected life in years  3 
Expected volatility of MPA common stock  53.70%
Expected average volatility of peer companies  59.30%
Average correlation coefficient of peer companies  26.70%
Expected dividend yield  0 
Grant date fair value $26.89 


The following is a summary of non-vested PSUs:

  
Number of
Shares
  
Weighted Average
Grant Date Fair
Value
 
Outstanding at March 31, 2021  0  $0 
Granted  84,593  $23.19 
Vested  0  $0 
Forfeited  0  $0 
Outstanding at June 30, 2021  84,593  $23.19 

At June 30, 2021, there was $1,939,000 of unrecognized compensation expense related to these awards, which will be recognized over the weighted average remaining vesting period of approximately 3.0 years.

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16. 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  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
June 30,
 
 2020  2019  2020  2019  2021  2020 
Balance at beginning of period $22,192,000  $15,818,000  $18,300,000  $19,475,000  $21,093,000  $18,300,000 
Charged to expense  30,872,000   32,531,000   53,961,000   55,716,000   27,261,000   23,089,000 
Amounts processed  (30,565,000)  (31,774,000)  (49,762,000)  (58,616,000)  (28,344,000)  (19,197,000)
Balance at end of period $22,499,000  $16,575,000  $22,499,000  $16,575,000  $20,010,000  $22,192,000 

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.


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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 20202021 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 15, 2020.14, 2021.

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; 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; supply chain delays or stoppages due to shipping delays; 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 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 test solutions and diagnostic testingequipment industry, through organic growth and acquisitions. Our investments in infrastructure and human resources includingduring the consolidation of our distribution center in Mexico andpast few years reflects the significant expansion of manufacturing capacity are expectedto support multiple product lines and continues to be transformative and scalable. AsThese investments included (i) the opening of a result, gross profit410,000 square foot distribution center, (ii) two buildings totaling 372,000 square feet for remanufacturing and net income have been impacted,core sorting of brake calipers, and (iii) the realignment of production at our future performance and opportunities should be considered with these factorsinitial 312,000 square foot facility in mind.Mexico.

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, brake rotors, brake pads, and brake master cylinders, and (iv) diagnostics and other products, which include diagnosticsturbochargers and test solutions and diagnostic equipment used for electric vehicle powertrain development and manufacturing including electric motor test systems, e-axle test systems, advanced power emulators, charging unit test systems, test systems for alternators, starters, belt starter generators and bench-top testers used forby the development of electric vehicles and aerospace applications, and custom power electronic products for quality control in the development and production of electric vehicles and turbochargers.automotive retail segment.

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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 our business comprises three separate operating segments. Two of the operating segments meet all the aggregation criteria, and are aggregated. The remaining operating segment does not meet the quantitative thresholds for individual disclosure and we have combined our operating segments into a single reportable segment.

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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 implementedcontinue to implement 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, wecontinue to experience disruptions with worldwide supply chain and logistics services. 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 in infections 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 We experienced inefficiencies in our operations due to the implementation of additional personnel safety measures throughout our facilities, which negatively affects our operating efficiencies.facilities. These personnel safety measures includedinclude 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, additional board check-in meetings and executive committee meetings, as needed, and regular town hall style communications with all employees.

To date, we have incurred increasedWe continue to incur 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 SeptemberJune 30, 2021 and 2020, these expanded benefits, supply costs and other COVID-19 related costs resulted in $2,048,000$854,000 and $4,343,000,$2,295,000, respectively, of total expense included in cost of goods sold and operating expenses in the condensed consolidated statements of income.operations.  During the three and six months ended SeptemberJune 30, 2021 and 2020, our Asian subsidiaries received $23,000 and $93,000, respectively, from their local assistance programs. During the three months ended June 30, 2020, we received $484,000 and $849,000, respectively,$365,000, 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.program. These payments are included inrecorded as a reduction of 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.operations.

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Results of Operations for the Three Months Ended SeptemberJune 30, 20202021 and 20192020

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 
  September 30, 
  2020  2019 
Gross profit percentage  25.7%  24.3%
Cash flow provided by (used in) operations $16,942,000  $(8,357,000)
Finished goods turnover (annualized) (1)  3.5   2.8 
 
Three Months Ended
June 30,
 
  2021  2020 
Cash flow (used in) provided by operations $(4,739,000) $22,388,000 
Finished goods turnover (annualized) (1)  4.5   3.4 

(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 non-core finished goods inventory values which includes all on-hand core inventory, for the fiscal quarter. Annualized finished goods turnover for the three months ended June 30, 2020 has been updated to conform to the current year presentation for non-core finished goods turnover. 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 
 September 30,  
Three Months Ended
June 30,
 
 2020  2019  2021  2020 
Net sales $154,730,000  $150,374,000  $149,034,000  $95,356,000 
Cost of goods sold  115,004,000   113,801,000   125,463,000   81,969,000 
Gross profit  39,726,000   36,573,000   23,571,000   13,387,000 
Gross profit percentage  25.7%  24.3%  15.8%  14.0%

Net Sales. Our net sales for the three months ended SeptemberJune 30, 2020 increased by $4,356,000,2021 were $149,034,000, which represents an increase of $53,678,000, or 2.9%56.3%, to $154,730,000 compared with net sales forfrom the three months ended SeptemberJune 30, 20192020 of $150,374,000.$95,356,000. Net sales for the three months ended September 30, 2020 include $12,779,000 in core revenuequarter increased across all product lines due to strong demand for our products. We continue to experience a realignmentnumber of inventory at two customer distribution centerschallenges related to the global COVID-19 pandemic, including disruptions with expected future sales benefits as product mix changes. Networldwide supply chain and logistics services. Our prior year net sales were negativelyalso impacted due to challenges related toby the COVID-19 pandemic.

Gross Profit.Our gross profit was $39,726,000,$23,571,000, or 25.7%15.8% of net sales, for the three months ended SeptemberJune 30, 20202021 compared with $36,573,000,$13,387,000, or 24.3%14.0% of net sales, for the three months ended SeptemberJune 30, 2019.2020.  Our gross profit was negatively impacted by $1,533,000,(i) growth initiatives in connection with the expansion of our new product lines, in addition to the transition costs discussed below, and (ii) inflationary costs related to the global pandemic, including disruptions with worldwide supply chain, logistics services, and related higher freight costs. Higher freight costs impacted gross profit by approximately $2,990,000, or 1.0%,2.0%. We also incurred additional expenses of $1,771,000 and $1,840,000 due to COVID-19 related costs.

The gross profit was also impacted by (i) a $2,847,000 benefitcosts for revised tariff costsinefficiencies in the supply chain, wages and personal protective equipment during the three months ended SeptemberJune 30, 2021 and 2020, respectively.

Our gross profit for the three months ended June 30, 2021 and 2020 was also impacted by: (i) transition expenses in connection with the expansion of our operations in Mexico of $1,947,000 and $3,301,000, respectively, and (ii) amortization of core premiums paid to customers related to new business of $2,531,000and $1,223,000, respectively.

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In addition, gross profit was impacted by (i) non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value, and gain due to realignment of inventory at two customer distribution centers, which resulted in a net gainwrite-down of $3,499,000 during the three months ended September 30, 2020$984,000 compared with a write-down$1,384,000, and (ii) customer allowances and return accruals related to new business of $2,908,000$146,000 and $307,000 for the three months ended SeptemberJune 30, 2019.

Our gross profit for the three months ended September 30,2021 and 2020, and 2019 was also impacted by: (i) transition expenses in connection with the expansion of our operations in Mexico of $4,054,000 and $2,327,000, respectively, and (ii) amortization of core premiums paid to customers related to new business of $1,518,000 and $1,109,000, respectively.

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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 
 September 30,  
Three Months Ended
June 30,
 
 2020  2019  2021  2020 
General and administrative $12,518,000  $12,483,000  $12,486,000  $11,687,000 
Sales and marketing  4,326,000   5,448,000   5,368,000   4,200,000 
Research and development  1,972,000   2,148,000   2,501,000   1,942,000 
Foreign exchange impact of lease liabilities and forward contracts  (3,985,000)  1,802,000   (2,533,000)  (4,817,000)
                
Percent of net sales                
                
General and administrative  8.1%  8.3%  8.4%  12.3%
Sales and marketing  2.8%  3.6%  3.6%  4.4%
Research and development  1.3%  1.4%  1.7%  2.0%
Foreign exchange impact of lease liabilities and forward contracts  (2.6)%  1.2%  (1.7)%  (5.1)%

General and Administrative. Our general and administrative expenses for the three months ended SeptemberJune 30, 20202021 were $12,518,000,$12,486,000, which represents an increase of $35,000,$799,000, or 0.3%6.8%, from generalthe three months ended June 30, 2020 of $11,687,000. General and administrative expenses decreased to 8.4% of net sales for the three months ended SeptemberJune 30, 2019 of $12,483,000.2021 compared with 12.3% in the prior year. The increase in general and administrative expense was primarily due to (i) $997,000 of increased costs at our offshore locations, primarily resulting from expanded benefits, supply costsour expansion in Mexico, (ii) $533,000 of increased share-based compensation due to equity grants made to employees in June 2021, and other(iii) $468,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 related costs, whichpandemic. These increases in general and administrative expenses were partially offset by $323,000 in$1,396,000 decreased professional services and $196,000 in decreased travel.services.

Sales and Marketing. Our sales and marketing expenses for the three months Septemberended June 30, 2020 decreased $1,122,000,2021 were $5,368,000, which represents an increase of $1,168,000, or 20.6%27.8%, to $4,326,000 from $5,448,000 for the three months ended SeptemberJune 30, 20192020 of $4,200,000. The increase in sales and marketing expense was primarily due to our cost-cutting measures in connection withthe prior year in response to COVID-19. These decreasesincreases in sales and marketing expense during the three months ended June 30, 2021 were as follows:primarily due to (i) $390,000 from decreased travel,$407,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, (ii) $279,000$338,000 of decreasedincreased advertising and marketing expense, (iii) $277,000 from decreased employee-related expenses,$258,000 of increased commissions, and (iv) $91,000$136,000 of decreased trade shows expense.increased travel.

Research and Development. Our research and development expenses decreased by $176,000, or 8.2%, to $1,972,000 for the three months ended SeptemberJune 30, 20202021 were $2,501,000, which represents an increase of $559,000, or 28.8%, from $2,148,000 for the three months ended SeptemberJune 30, 20192020 of $1,942,000. The increase in research and development expense was primarily due to our cost-cutting measures in connection withthe prior year in response to COVID-19. These increases in research and development expenses during the three months ended June 30, 2021 were primarily due to (i) $319,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, (ii) $145,000 of increased samples for our library, and (iii) $78,000 of increased outside services.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts. The remeasurement of our foreign currency-denominated lease liabilities resulted in a non-cash gaingains of $1,618,000$2,795,000 and a non-cash loss $1,139,000$1,985,000 for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, due to movements in foreign exchange rates. In addition, the forward foreign currency exchange contracts resulted in a non-cash gainloss of $2,367,000$262,000 and a non-cash loss $663,000gain of $2,832,000 for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, due to the changes in their fair values.

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Interest Expense

Interest Expense, net. Our interest expense, net, for the three months ended SeptemberJune 30, 2020 decreased $2,909,000,2021 was $3,941,000, which represents a decrease of $468,000, or 44.6%10.6%, to $3,614,000 from $6,523,000 for the three months ended SeptemberJune 30, 2019,2020 of $4,409,000. The decrease in interest expense was primarily due to lower interest rates and lower average outstanding balances under our credit facility.

Provision for Income Taxes

Income Tax. We recorded income tax expense of $6,097,000,$947,000, or an effective tax rate of 28.6%52.4%, and $1,980,000,an income tax benefit of $1,022,000, or an effective tax rate of 24.2%25.3%, for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The effective tax rate for the three months Septemberended June 30, 2020,2021 was primarily impacted by non-deductible executive compensation under Internal Revenue Code Section 162(m) and(i) specific jurisdictions that we do not expect to recognize the benefit of losses, (ii) foreign income taxed at rates that are different from the federal statutory rate.

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Results of Operations for the Six Months Ended September 30, 2020rate, and 2019

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

(1)Annualized finished goods turnover for the 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 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 
  September 30, 
  2020  2019 
Net sales $250,086,000  $259,522,000 
Cost of goods sold  196,973,000   205,366,000 
Gross profit  53,113,000   54,156,000 
Gross profit percentage  21.2%  20.9%

Net Sales. Our net sales for the six months ended September 30, 2020 decreased by $9,436,000, or 3.6%, to $250,086,000 compared with net sales for the six months ended September 30, 2019 of $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 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. Our gross profit was negatively impacted by $3,373,000, or 1.3%, due to COVID-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, 2020 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 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 for the six months ended September 30, 2019.

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

In addition, gross profit for the six months ended September 30, 2019 was impacted by net tariff costs of $1,067,000 not passed through to customers, and cost of $133,000 in connection with the cancellation of a customer contract.

Operating Expenses

The following summarizes operating expenses:

 Six Months Ended 
  September 30, 
  2020  2019 
       
General and administrative $24,205,000  $25,020,000 
Sales and marketing  8,526,000   10,367,000 
Research and development  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  9.7%  9.6%
Sales and marketing  3.4%  4.0%
Research and development  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, 2020 were $24,205,000, which represents a decrease of $815,000, or 3.3%, from general and administrative expenses for the six months ended September 30, 2019 of $25,020,000. This decrease in general and administrative expense was due to $1,233,000 in decreased professional services and $372,000 in decreased travel. This decrease was partially offset by expanded benefits, supply costs and other COVID-19 related costs.

Sales and Marketing. Our sales and marketing expenses for the six months September 30, 2020 decreased $1,841,000, or 17.8%, to $8,526,000 from $10,367,000 for the six months ended September 30, 2019 primarily due to our 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, and (iv) $170,000 of decreased trade shows expense.

Research and Development. Our research and development expenses decreased by $606,000, or 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 primarily 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, 2020 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 the changes in their fair values.

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Interest Expense

Interest Expense, net. Our interest expense, net for the six months ended September 30, 2020 decreased $4,673,000, or 36.8%, to $8,023,000 from $12,696,000 for the six months ended September 30, 2019, primarily due to lower interest rates and lower average outstanding balances under our credit facility.

Provision for Income Taxes

Income Tax. We recorded 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%, for the six months ended September 30, 2020 and 2019, respectively. The effective tax rate for the six months ended September 30, 2020, was 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..

Liquidity and Capital Resources

Overview

We had working capital (current assets minus current liabilities) of $94,174,000$105,403,000 and $90,624,000,$96,725,000, a ratio of current assets to current liabilities of 1.3:1.0, at SeptemberJune 30, 20202021 and March 31, 2020,2021, respectively. The increase in working capital was due primarily to the buildup of our inventory to meet anticipated future demand.

We generated cash during the sixthree months ended SeptemberJune 30, 20202021 from operations and the use of our receivable discount programs.programs and credit facility. As we manage through the impacts of the COVID-19 pandemic, we have access to our existing cash, as well as our available credit facilities to 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

Our board of directors approved a stock repurchase program of up to $37,000,000 of our common stock. As of SeptemberJune 30, 2020, $15,692,000 of2021, $16,831,000 was utilized and $20,169,000 remains available to repurchase shares under 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 $30,000,000 of dividends and share repurchases for this fiscal year, subject to pro forma compliance with financial covenants. Credit Facility. We retired the 675,561730,521 shares repurchased under this program through SeptemberJune 30, 2020.2021. 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.

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Cash Flows

The following summarizes cash flows as reflected in the condensed consolidated statements of cash flows:

 Six Months Ended 
 September 30,  
Three Months Ended
June 30,
 
 2020  2019  2021  2020 
Cash flows provided by (used in):            
Operating activities $39,330,000  $(26,736,000) $(4,739,000) $22,388,000 
Investing activities  (7,002,000)  (5,701,000)  (2,089,000)  (3,038,000)
Financing activities  (61,312,000)  29,059,000   16,094,000   (41,674,000)
Effect of exchange rates on cash and cash equivalents  255,000   (78,000)  94,000   172,000 
        
Net decrease in cash and cash equivalents $(28,729,000) $(3,456,000)
Net increase (decrease) in cash and cash equivalents $9,360,000  $(22,152,000)
                
Additional selected cash flow data:                
Depreciation and amortization $5,233,000  $4,619,000  $3,145,000  $2,551,000 
Capital expenditures  6,810,000   6,943,000   1,922,000   2,983,000 

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Net cash used in operating activities was $4,739,000 during the three months ended June 30, 2021 compared with net cash provided by operating activities was $39,330,000of $22,388,000 during the sixthree months ended SeptemberJune 30, 2020 compared with net cash used in operating activities of $26,736,000 during the six months ended September 30, 2019.2020. The significant change in our operating activities for the current year was due to (i) the buildup of our inventory to meet anticipated future demand, (ii) the paydown of our accounts payable balances, and (iii) increased 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 significantlycontinue to be impacted, to a lesser extent, by our growth initiatives, including our new expanded footprint and product lines.

Net cash used in investing activities was $7,002,000$2,089,000 and $5,701,000$3,038,000 during the sixthree months ended SeptemberJune 30, 2021 and 2020, and 2019, respectively,respectively. The significant change in our investing activities was due primarily to decreased capital expenditures as we near the redemptioncompletion of short-term investments during the prior year.our expansion in Mexico.

Net cash provided by financing activities was $16,094,000 during the three months ended June 30, 2021 compared with net cash used in financing activities was $61,312,000$41,674,000 during the sixthree months ended SeptemberJune 30, 2020 compared with net cash provided by financing activities $29,059,000 during the six months ended September 30, 2019.2020. The significant change in our financing activities was due mainly to reducingadditional borrowings under our outstanding debt by $59,875,000credit facility during the sixthree months ended SeptemberJune 30, 20202021 compared with borrowing to supportrepayments under our growth initiatives, including the expansion of our operations in Mexico and our product line expansioncredit facility during the sixthree months ended SeptemberJune 30, 2019.2020.

Capital Resources

Credit Facility

We are party to a $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 $238,620,000 revolving loan facility, subject to borrowing base restrictions, a $24,000,000 sublimit for borrowings by Canadian borrowers, and a $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 $30,000,000$29,430,000 of dividends and share repurchases for this fiscal year 2022, subject to 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 May 2021, we entered into a third amendment to the Credit Facility (the “Third Amendment”). The Third Amendment, among other things, (i) extended the maturity date to May 28, 2026 from June 5, 2023, (ii) modified the fixed charge coverage ratio financial covenant, and (iii) modified the definition of “Consolidated EBITDA”. We capitalized $1,102,000 of new debt issuance costs in connection with the Third Amendment.

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The Term Loans require quarterly principal payments of $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 2.91%, at September 30, 2020,2.60% and 4.34% and 3.64%2.59%, respectively, at June 30, 2021, and 2.62% at March 31, 2020.2021.

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 SeptemberJune 30, 2020.2021.

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

 
Financial covenants
required under the
Credit Facility
  
Calculation as of
September 30, 2020
  
Financial covenants
 required under the
 Credit Facility
 
Calculation as of
June 30, 2021
Maximum senior leverage ratio  3.00   1.56                                   3.00                                  1.57
Minimum fixed charge coverage ratio  1.10   1.35                                   1.10                                  1.34

We had cash of $20,887,000$24,883,000 at SeptemberJune 30, 2020 and paid down our outstanding debt by $59,875,000 during the six months ended September 30, 2020. However,2021, 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 1.431.51 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.

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We had $94,000,000$103,000,000 and $152,000,000$84,000,000 outstanding under the Revolving Facility at SeptemberJune 30, 20202021 and March 31, 2020,2021, respectively. In addition, $5,963,000$6,444,000 was outstanding for letters of credit at SeptemberJune 30, 2020.2021. At SeptemberJune 30, 2020,2021, after certain contractual adjustments, $97,046,000$95,323,000 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 
 September 30,  
Three Months Ended
June 30,
 
 2020  2019  2021  2020 
Receivables discounted $222,310,000  $205,882,000  $146,669,000  $111,360,000 
Weighted average days  341   346   329   345 
Annualized weighted average discount rate  2.3%  3.6%  1.8%  2.5%
Amount of discount recognized as interest expense $4,781,000  $7,196,000  $2,473,000  $2,686,000 

Off-Balance Sheet Arrangements

At SeptemberJune 30, 2020,2021, 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.

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Capital Expenditures and Commitments

Capital Expenditures

Our total capital expenditures, including finance leases and non-cash capital expenditures were $8,798,000$1,622,000 and $9,251,000$5,088,000 for the sixthree months ended SeptemberJune 30, 20202021 and 2019,2020, 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 $4,900,000$12,300,000 of capital expenditures for our current operations and approximately $12,400,000$4,000,000 for continued expansion of our operations in Mexico for the full fiscal year 2021.2022. We have used and expect to continue using our working capital and other available capital resources to fund 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, 2020,2021, which was filed on June 15, 2020.14, 2021.

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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, 2020,2021, which was filed on June 15, 2020,14, 2021, except as discussed below.

NewRecently Adopted Accounting Pronouncements Recently 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, changed the impairment model for most financial assets and requires 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. The adoption of this guidance on April 1, 2020 increased our required disclosures for our expected credit losses but did not have a material effect on our 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 doubtful accounts were presented in the condensed consolidated balance sheets. We maintain an allowance for uncollectible accounts receivable for estimated losses resulting from the failure or inability of its customers to make required payments. Furthermore, receivable balances were assessed quarterly for impairment and an allowance was recorded if the receivable was considered impaired. Subsequent to April 1, 2020, accounts receivable are recorded at amortized cost less an allowance for credit losses that are not expected to be recovered. The net amount of accounts receivable and corresponding allowance for credit losses are presented separately in the condensed consolidated balance sheets. We maintain an 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 the asset’s expected collectability. The allowance is based on multiple factors including historical experience with bad debts, the credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, such as COVID-19, as well as expectations of conditions in the future, if applicable. Our allowance for credit losses is based on the assessment of the collectability of assets pooled together with similar risk characteristics.

We record a provision for expected credit losses using a loss-rate method based on the ratio of our historical write-offs to our average trade accounts receivable. At each reporting period, we will assess whether financial assets in a pool continue to display similar risk characteristics. If particular receivables no longer display risk characteristics that are similar to those of the receivables in the pool, we may determine that we need to move those receivables to a different pool or perform an individual assessment of expected credit losses for those specific receivables.

Fair Value Measurements

In August 2018, the FASB issued guidance, which changed the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments 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.

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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 annual and interim periods in fiscal years beginning after December 15, 2020. EarlyThe adoption is permitted. We are currently evaluating the impactof this guidance willon April 1, 2021 did not have any material impact 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, 2020,2021, which was filed with the SEC on June 15, 2020.14, 2021.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We 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, chief financial officer, and chief accounting officer, we have conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our chief executive officer, chief financial officer, and chief accounting officer concluded that MPA’s disclosure controls and procedures were effective as of SeptemberJune 30, 2020.2021.

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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;

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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 Company are being made only in accordance with authorizations of management and directors of the Company; and
 
3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’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

There 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 SeptemberJune 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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, 2020,2021, which was filed on June 15, 2020.14, 2021.

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, 2020,2021, filed on June 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.14, 2021.

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 $30,000,000$29,430,000 of dividends and share repurchases for this fiscal year 2022, subject to pro forma compliance with financial covenants.

Purchases of Equity Securities by the Issuer

Shares repurchased during the three months ended SeptemberJune 30, 20202021 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, 2020:            
April 1 - April 30, 2021:            
Open market and privately negotiated purchases  -  $-   -  $21,308,000   -  $-   -  $20,169,000 
August 1 - August 31, 2020:                
May 1 - May 31, 2021:                
Open market and privately negotiated purchases  -  $-   -   21,308,000   -  $-   -   20,169,000 
September 1 - September 30, 2020:                
June 1 - June 30, 2021:                
Open market and privately negotiated purchases  -  $-   -   21,308,000   -  $-   -   20,169,000 
                
Total  0       0  $21,308,000   0       0  $20,169,000 

(1)As of SeptemberJune 30, 2020, $15,692,000 of2021, $16,831,000 was utilized and $20,169,000 remains available to repurchase shares under 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 675,561730,521 shares repurchased under this program through SeptemberJune 30, 2020.2021. 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.

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Item 6.          Exhibits
Item 6.Exhibits

(a)Exhibits:

Number Description of Exhibit Method of Filing
3.1
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
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.
     
4.2
2010 Incentive Award Plan
 
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on December 15, 2010.
     
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.

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Number Description of Exhibit Method of Filing
     
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.
     
4.5
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.
     
4.6
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.
     
4.7
Fourth Amended and Restated 2010 Incentive Award Plan
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on July 24, 2020.
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.
     
31.110.1
Amendment No. 5 to Employment Agreement, dated as of June 18, 2021, between Motorcar Parts of America, Inc., and Selwyn Joffe
Filed herewith.
 
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
     
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)


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SIGNATURES

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

 MOTORCAR PARTS OF AMERICA, INC.
   
Dated: NovemberAugust 9, 20202021By:/s/ David Lee
  David Lee
  Chief Financial Officer
   
Dated: NovemberAugust 9, 20202021By:/s/ Kamlesh Shah
  Kamlesh Shah
  Chief Accounting Officer

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