14. Accumulated Other Comprehensive Income (Loss)
The following summarizes changes in accumulated other comprehensive income (loss):
15. Acquisitions
On July 21, 2016, the Company completed the acquisition of certain assets and assumption of certain liabilities of Zor Industries USA LLC (“ZOR”), a privately held manufacturer and remanufacturer of turbochargers based in Winchester, Virginia. The acquisition was consummated pursuant to an asset purchase agreement for an initial purchase price of $600,000, subject to certain working capital adjustments. The assets and results of operations of ZOR were not significant to the Company’s consolidated financial position or results of operations, and thus pro forma information is not presented.
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, 2016 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 14, 2016, as amended by the Form 10-K/A filed with the SEC on July 29, 2016.
Disclosure Regarding Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements with respect to our future performance that involve risks and uncertainties. Various factors could cause actual results to differ materially from those projected in such statements. These factors include, but are not limited to: 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, 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 achieve positive cash flows from operations, potential future changes in our previously reported results as a result of the identification and correction of errors in our accounting policies or procedures or the potential material weaknesses in our internal controls over financial reporting, our failure to meet the financial covenants or the other obligations set forth in our credit agreement and the lenders’ refusal to waive any such defaults, increases in interest rates, the impact of high gasoline prices, consumer preferences and general economic conditions, increased competition in the automotive parts industry including increased competition from Chinese and other offshore manufacturers, difficulty in obtaining Used Cores and component parts or increases in the costs of those parts, political, criminal or economic instability in any of the foreign countries where we conduct operations, currency exchange fluctuations, unforeseen increases in operating costs, risks associated with cyber-attacks
,
risks associated with conflict minerals, and other factors discussed herein and in our other filings with the SEC.
Management Overview
We are a leading manufacturer, remanufacturer, and distributor of aftermarket automotive parts for import and domestic cars, light trucks, heavy duty, agricultural and industrial applications.
We sell our products predominantly in North America to the largest auto parts retail and traditional warehouse chains and to major automobile manufacturers for both their aftermarket programs and their OES programs.
Our current products include
(i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake master cylinders, and (iv) other products which include turbochargers and brake power boosters. We added turbochargers with our acquisition in July 2016. We began selling brake power boosters in August 2016.
The aftermarket for automobile parts is divided into two markets. The first is the DIY market, which is generally serviced by the large retail chain outlets. Consumers who purchase parts from the DIY channel generally install parts into their vehicles themselves. In most cases, this is a less expensive alternative than having the repair performed by a professional installer. The second is the professional installer market, commonly known as the DIFM market. This market is generally serviced by the traditional warehouse distributors, the dealer networks, and the commercial divisions of retail chains. Generally, the consumer in this channel is a professional parts installer.
Our products are distributed to both the DIY and DIFM markets.
Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), for segment reporting, we have identified our chief executive officer as our chief operating decision maker (“CODM”), have 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 we have one reportable segment for purposes of recording and reporting our financial results.
Results of Operations for the Three Months Ended September 30, 2016 and 2015
The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.
The following summarizes certain key operating data:
|
|
Three Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Gross profit percentage
|
|
|
28.2
|
%
|
|
|
23.8
|
%
|
Cash flow (used in) provided by operations
|
|
$
|
(8,477,000
|
)
|
|
$
|
15,843,000
|
|
Finished goods turnover (annualized) (1)
|
|
|
5.9
|
|
|
|
7.0
|
|
(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 for the fiscal quarter. We believe this provides a useful measure of our ability to turn our inventory into revenues.
|
Net Sales and Gross Profit
The following summarizes net sales and gross profit:
|
|
Three Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
108,836,000
|
|
|
$
|
91,670,000
|
|
Cost of goods sold
|
|
|
78,178,000
|
|
|
|
69,850,000
|
|
Gross profit
|
|
|
30,658,000
|
|
|
|
21,820,000
|
|
Gross profit percentage
|
|
|
28.2
|
%
|
|
|
23.8
|
%
|
Net Sales
. Our net sales for the three months ended September 30, 2016 increased by $17,166,000, or 18.7%, to $108,836,000 compared to net sales for the three months ended September 30, 2015 of $91,670,000. The increase in our net sales was across all existing product lines. This increase was partially offset by allowances and returns related to new business as discussed below in the Gross Profit paragraph.
Gross Profit.
Our gross profit percentage increased to 28.2% for the three months ended September 30, 2016 from 23.8% for the three months ended September 30, 2015. This increase was due primarily to overall lower per unit costs from an increased volume of purchases and production resulting in better absorption of overhead. This increase in our gross profit was partially offset by $3,547,000 for customer allowances and initial return and stock adjustment accruals related to new business less a cost of goods sold offset of $213,000, and a cost of goods sold impact of $16,000 for start-up costs incurred related to our launch of brake power boosters. Our gross profit for the three months ended September 30, 2015 was impacted by $10,075,000 for customer allowances related to new business less a cost of goods sold offset of $809,000, and a cost of goods sold impact of $145,000 for inventory step-up amortization.
Operating Expenses
The following summarizes operating expenses:
|
|
Three Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
General and administrative
|
|
$
|
9,869,000
|
|
|
$
|
18,219,000
|
|
Sales and marketing
|
|
|
2,707,000
|
|
|
|
2,632,000
|
|
Research and development
|
|
|
905,000
|
|
|
|
646,000
|
|
|
|
|
|
|
|
|
|
|
Percent of net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
9.1
|
%
|
|
|
19.9
|
%
|
Sales and marketing
|
|
|
2.5
|
%
|
|
|
2.9
|
%
|
Research and development
|
|
|
0.8
|
%
|
|
|
0.7
|
%
|
General and Administrative.
Our general and administrative expenses for the three months ended September 30, 2016 were $9,869,000, which represents a decrease of $8,350,000, or 45.8%, from general and administrative expenses for the three months ended September 30, 2015 of $18,219,000. The reduction was primarily due to $9,930,000 of decreased legal expense as compared to the three months ended September 30, 2015, which included $9,250,000 accrued for the litigation settlement in the bankruptcy cases related to the discontinued subsidiaries. This decrease was partially offset by (i) $663,000 of increased general and administrative expenses at our offshore locations which was due primarily to fluctuations in Asian foreign currency exchange rates, (ii) $491,000 of increased share-based compensation, and (iii) $224,000 of increased loss due to the change in the fair value of the warrant liability.
Sales and Marketing
. Our sales and marketing expenses for the three months ended September 30, 2016 increased $75,000, or 2.8%, to $2,707,000 from $2,632,000 for the three months ended September 30, 2015. The increase was due primarily to our growth initiatives, partially offset by decreased commissions.
Research and Development
. Our research and development expenses increased by $259,000, or 40.1%, to $905,000 for the three months ended September 30, 2016 from $646,000 for the three months ended September 30, 2015, due primarily to our growth initiatives.
Interest Expense
Interest Expense, net.
Our interest expense, net for the three months ended September 30, 2016 increased $576,000, or 22.0%, to $3,189,000 from $2,613,000 for the three months ended September 30, 2015. The increase in interest expense was due primarily to higher interest rates on (i) our accounts receivable discount programs and (ii) higher average outstanding balances on our revolving facility.
Provision for Income Taxes
Income Tax
. We recorded income tax expense for the three months ended September 30, 2016 of $4,845,000, or an effective tax rate of 34.6%, and an income tax benefit for the three months ended September 30, 2015 of $898,000, or an effective tax rate of 39.2%.
Our income tax rate for the three months ended September 30, 2016 was positively impacted by $199,000 of excess tax benefits as a result of the early adoption of the FASB’s new guidance on share-based compensation. In addition,
the income tax rates for all periods are increased by (i) the inclusion of state income taxes, (ii) non-deductible executive compensation under Internal Revenue Code Section 162(m), and (iii) the non-deductible expense in connection with the fair value adjustments on the warrants
.
These increases in all periods were partially offset by the benefit of lower statutory tax rates in foreign taxing jurisdictions.
Results of Operations for the Six Months Ended September 30, 2016 and 2015
The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.
The following summarizes certain key operating data:
|
|
Six Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Gross profit percentage
|
|
|
26.3
|
%
|
|
|
26.9
|
%
|
Cash flow (used in) provided by operations
|
|
$
|
(22,316,000
|
)
|
|
$
|
19,177,000
|
|
Finished goods turnover (annualized) (1)
|
|
|
6.0
|
|
|
|
6.6
|
|
(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 non-core finished goods inventory values 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,
|
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
194,248,000
|
|
|
$
|
177,505,000
|
|
Cost of goods sold
|
|
|
143,199,000
|
|
|
|
129,694,000
|
|
Gross profit
|
|
|
51,049,000
|
|
|
|
47,811,000
|
|
Gross profit percentage
|
|
|
26.3
|
%
|
|
|
26.9
|
%
|
Net Sales
. Our net sales for the six months ended September 30, 2016 increased by $16,743,000, or 9.4%, to $194,248,000 compared to net sales for the six months ended September 30, 2015 of $177,505,000. The increase in our net sales was across all existing product lines. This increase was partially offset by allowances and returns related to new business as discussed below in the Gross Profit paragraph.
Gross Profit.
Our gross profit percentage decreased to 26.3% for the six months ended September 30, 2016 from 26.9% for the six months ended September 30, 2015. Our gross profit for the six months ended September 30, 2016 was impacted by $11,957,000 for customer allowances and initial return and stock adjustment accruals related to new business less a cost of goods sold offset of $568,000, and a cost of goods sold impact of $140,000 for start-up costs incurred related to our launch of brake power boosters. Our gross profit for the six months ended September 30, 2015 was impacted by $10,863,000 for customer allowances related to new business less a cost of goods sold offset of $809,000, and a cost of goods sold impact of $145,000 for inventory step-up amortization.
Operating Expenses
The following summarizes operating expenses:
|
|
Six Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
General and administrative
|
|
$
|
13,494,000
|
|
|
$
|
29,579,000
|
|
Sales and marketing
|
|
|
5,341,000
|
|
|
|
4,912,000
|
|
Research and development
|
|
|
1,774,000
|
|
|
|
1,382,000
|
|
|
|
|
|
|
|
|
|
|
Percent of net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
6.9
|
%
|
|
|
16.7
|
%
|
Sales and marketing
|
|
|
2.7
|
%
|
|
|
2.8
|
%
|
Research and development
|
|
|
0.9
|
%
|
|
|
0.8
|
%
|
General and Administrative.
Our general and administrative expenses for the six months ended September 30, 2016 were $13,494,000, which represents a decrease of $16,085,000, or 54.4%, from general and administrative expenses for the six months ended September 30, 2015 of $29,579,000. The reduction was primarily due to (i) $12,319,000 of decreased legal expense as compared to the six months ended September 30, 2015, which included $9,250,000 accrued for the litigation settlement in the bankruptcy cases related to the discontinued subsidiaries and (ii) a $4,765,000 gain recorded due to the change in the fair value of the warrant liability during the six months ended September 30, 2016 compared to a loss of $1,742,000 recorded during the six months ended September 30, 2015. These decreases were partially offset by (i) $837,000 of increased loss recorded due to the change in the fair value of the forward foreign currency exchange contracts, (ii) $820,000 of increased general and administrative expenses at our offshore locations which was due primarily to fluctuations in Asian foreign currency exchange rates, and (iii) $704,000 of increased share-based compensation.
Sales and Marketing
. Our sales and marketing expenses for the six months ended September 30, 2016 increased $429,000, or 8.7%, to $5,341,000 from $4,912,000 for the six months ended September 30, 2015. The increase was due primarily to our growth initiatives, partially offset by decreased commissions.
Research and Development
. Our research and development expenses increased by $392,000, or 28.4%, to $1,774,000 for the six months ended September 30, 2016 from $1,382,000 for the six months ended September 30, 2015, due primarily to our growth initiatives.
Interest Expense
Interest Expense, net.
Our interest expense, net for the six months ended September 30, 2016 decreased $5,042,000, or 45.6%, to $6,008,000 from $11,050,000 for the six months ended September 30, 2015. The decrease in interest expense was due primarily to (i) the write-off of previous debt issuance costs of $5,108,000 in connection with the financing agreement which was terminated when we entered into a new credit facility in June 2015 and (ii) lower interest rates and lower average outstanding balances on our loans. These decreases in interest expense were partially offset by higher interest rates on our accounts receivable discount programs during the six months ended September 30, 2016.
Provision for Income Taxes
Income Tax
. Our income tax expense
for the six months ended September 30, 2016 and 2015 was $7,781,000, or an effective tax rate of 31.8%, and $370,000, or an effective tax rate of 41.7%, respectively. Our income tax rate for the six months ended September 30, 2016 was positively impacted by (i) a non-taxable gain in connection with the fair value adjustments on the warrants compared to a non-deductible loss for the six months ended September 30, 2015 and (ii) $590,000 of excess tax benefits as a result of the early adoption of the FASB’s new guidance on share-based compensation. In addition,
the income tax rates for all periods are increased by the inclusion of state income taxes and non-deductible executive compensation under Internal Revenue Code Section 162(m)
.
These increases in all periods were partially offset by the benefit of lower statutory tax rates in foreign taxing jurisdictions.
Liquidity and Capital Resources
Overview
At September 30, 2016, we had working capital of $3,860,000, a ratio of current assets to current liabilities of 1.03:1.00, and cash of $5,452,000, compared to working capital of $8,702,000, a ratio of current assets to current liabilities of 1.10:1.00, and cash of $21,897,000 at March 31, 2016. We generated cash during the six months ended September 30, 2016 from the use of receivable discount programs with certain of our major customers and from our credit facility. The cash generated from these activities was used primarily to make payments for certain customer allowances in connection with new business and
to
build our inventory levels to support higher sales.
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, capital lease commitments, and capital expenditure obligations over the next 12 months.
Share Repurchase Program
On June 9, 2016, our board of directors approved a stock repurchase program of up to $10,000,000 of our outstanding common stock, at prices deemed appropriate by management. This program replaces our existing $5,000,000 repurchase program, announced in March 2010, pursuant to which we had purchased 67,347 shares for a total of $389,000, which leaves $9,611,000 available for repurchases under the new stock repurchase program.
Cash Flows
The following summarizes cash flows as reflected in the consolidated statements of cash flows:
|
|
Six Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(22,316,000
|
)
|
|
$
|
19,177,000
|
|
Investing activities
|
|
|
(3,464,000
|
)
|
|
|
(6,669,000
|
)
|
Financing activities
|
|
|
9,448,000
|
|
|
|
(41,858,000
|
)
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(113,000
|
)
|
|
|
(182,000
|
)
|
Net decrease in cash and cash equivalents
|
|
$
|
(16,445,000
|
)
|
|
$
|
(29,532,000
|
)
|
Additional selected cash flow data:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,770,000
|
|
|
$
|
1,431,000
|
|
Capital expenditures
|
|
|
2,594,000
|
|
|
|
2,730,000
|
|
Net cash used in operating activities was $22,316,000 during the six months ended September 30, 2016 compared to net cash provided by operating activities of $19,177,000 during the six months ended September 30, 2015. The significant changes in our operating activities were due primarily to (i) an increase in accounts receivable during the six months ended September 30, 2016 compared to a decrease during the six months ended September 30, 2015, (ii) payments made in connection with new business, and (iii) increased inventory levels to support our future growth.
Net cash used in investing activities was $3,464,000 and $6,669,000 during the six months ended September 30, 2016 and 2015, respectively. This change was due primarily to a decrease in cash used for the acquisition of certain assets and assumption of certain liabilities during the six months ended September 30, 2016 as compared to the six months ended September 30, 2015.
Net cash provided by financing activities was $9,448,000 during the six months ended September 30, 2016 compared to net cash used in financing activities during the six months ended September 30, 2015 of $41,858,000. This change was due mainly to (i) the net repayment of our long-term debt
in connection with the financing agreement which was terminated when we entered into a new credit facility in June 2015, (ii)
the payment of debt issuance costs associated with this new credit facility, and (iii) fewer stock options exercised during the six months ended September 30, 2016 as compared to the six months ended September 30, 2015.
Capital Resources
Debt
We are party to the following credit agreements.
Credit Facility
We are a party to a $125,000,000 senior secured financing (the “Credit Facility”) with the lenders party thereto, and PNC Bank, National Association, as administrative agent, consisting of (i) a $100,000,000 revolving loan facility, subject to borrowing base restrictions and a $15,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $25,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 3, 2020. In connection with the Credit Facility, the lenders were granted a security interest in substantially all of our assets. Our Credit Facility permits the payment of up to $10,000,000 of dividends per calendar year, subject to a minimum availability threshold and pro forma compliance with financial covenants.
In May 2016, we entered into a consent and second amendment to the Credit Facility (the “Second Amendment”) which, among other things, (i) increased the borrowing capacity of the Revolving Facility from $100,000,000 to $120,000,000, subject to certain borrowing base restrictions and a $15,000,000 sublimit for letters of credit, (ii) amended the definition and calculation of consolidated EBITDA, (iii) increased the maximum of amount of capital expenditures, and (iv) made certain other amendments and modifications.
The Term Loans require quarterly principal payments of $781,250. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.50%, 2.75% or 3.00% or a reference rate plus a margin of 1.50%, 1.75% or 2.00%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.25% to 0.375%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on our Term Loans and Revolving Facility was 3.28% and 4.21%, respectively, at September 30, 2016 compared to 2.94% and 3.53%, respectively, at March 31, 2016.
The Credit Facility, among other things, requires us to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all financial covenants as of September 30, 2016.
The following summarizes the financial covenants required under the Credit Facility:
|
|
Calculation as of
September 30, 2016
|
|
|
Financial covenants
required per the Credit
Facility
|
|
Maximum senior leverage ratio
|
|
|
0.46
|
|
|
|
2.50
|
|
Minimum fixed charge coverage ratio
|
|
|
1.37
|
|
|
|
1.05
|
|
In addition to other covenants, the Credit Facility places limits on our ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by us and our subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.
We had $19,000,000 and $7,000,000 outstanding under the Revolving Facility at September 30, 2016 and March 31, 2016, respectively. In addition, $260,000 was reserved for standby letters of credit for workers’ compensation insurance and $600,000 for commercial letters of credit at September 30, 2016. At September 30, 2016, $100,140,000, subject to certain adjustments, was available under the Revolving Facility.
WX Agreement
In August 2012, we entered into a Revolving Credit/Strategic Cooperation Agreement (the “WX Agreement”) with Wanxiang America Corporation (the “Supplier”) and the discontinued subsidiaries. In connection with the WX Agreement, we also issued a warrant (the “Supplier Warrant”) to the Supplier to purchase up to 516,129 shares of our common stock for an initial exercise price of $7.75 per share exercisable at any time after August 22, 2014 and on or prior to September 30, 2017. The exercise price is subject to adjustments, among other things, for sales of common stock by us at a price below the exercise price.
The fair value of the Supplier Warrant using level 3 inputs and the Monte Carlo simulation model was $10,878,000 and $15,643,000 at September 30, 2016 and March 31, 2016, respectively. These amounts are included in other liabilities in the consolidated balance sheets. The warrant liability continues to be classified as a noncurrent liability at September 30, 2016 as we do not expect to settle this amount in cash. During the three months ended September 30, 2016 and 2015, a loss of $824,000 and $600,000, respectively, were recorded in general and administrative expenses due to the change in the fair value of this warrant liability. During the six months ended September 30, 2016 and 2015, a gain of $4,765,000 and a loss of $1,742,000, respectively, were recorded in general and administrative expenses due to the change in the fair value of this warrant liability.
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 allows 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,
|
|
|
|
2016
|
|
|
2015
|
|
Receivables discounted
|
|
$
|
167,670,000
|
|
|
$
|
167,905,000
|
|
Weighted average days
|
|
|
341
|
|
|
|
342
|
|
Annualized weighted average discount rate
|
|
|
2.8
|
%
|
|
|
2.2
|
%
|
Amount of discount as interest expense
|
|
$
|
4,408,000
|
|
|
$
|
3,452,000
|
|
Off-Balance Sheet Arrangements
At September 30, 2016, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.
Capital Expenditures and Commitments
Capital Expenditures
Our capital expenditures were $2,594,000 and $2,730,000 for the six months ended September 30, 2016 and 2015, respectively. These capital expenditures represent the purchase of equipment for our office, manufacturing and warehouse facilities. We expect our fiscal 2017 capital expenditures to be in the range of $4,000,000 to $5,000,000 to support our current operations. In addition, we expect to invest additional amounts in connection with the expansion of our operations in Mexico, and are currently finalizing the timing and amount of such initiatives. We expect to use our working capital and incur additional capital lease obligations to finance these capital expenditures.
Related Party Transactions
There have been no material changes to our related party transactions that are presented in our Annual Report on Form 10-K for the year ended March 31, 2016, which was filed on June 14, 2016, and as amended by the Form 10-K/A filed with the SEC on July 29, 2016.
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, 2016, which was filed on June 14, 2016, and as amended by the Form 10-K/A filed with the SEC on July 29, 2016.
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, 2016, which was filed on June 14, 2016, except as discussed below.
Recently Adopted Accounting Standards
Share-based Compensation
In March 2016, the FASB issued guidance that simplifies several aspects of the accounting for share-based payment transactions and states that, among other things, all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement and an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.
The new guidance is effective for interim and annual reporting periods beginning after December 15, 2016 with early adoption permitted. We early adopted this guidance effective April 1, 2016 which resulted in a cumulative-effect adjustment of $892,000 through retained earnings and current deferred tax assets to record excess tax benefits not previously recognized. We have also elected to account for forfeitures as they occur using the modified retrospective approach which did not have any material impact on our consolidated balance sheets. In addition, we are now required to present excess tax benefits as an operating activity (combined with other income tax cash flows) on the statements of cash flows rather than as a financing activity and have elected to adopt this change prospectively.
Extraordinary Items
In January 2015, the FASB issued guidance that simplifies income statement presentation by eliminating the concept
of extraordinary items. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. There was no impact on our consolidated financial statements from the adoption of this guidance.
Accounting Standards Not Yet Adopted
Revenue Recognition
In May 2014, the FASB issued guidance codified in ASC 606, “Revenue Recognition - Revenue from Contracts with Customers”, which amends the guidance in the former ASC 605, “Revenue Recognition”. The new guidance is effective for annual periods beginning after December 15, 2016, and interim periods within that reporting period for a public company. A full or modified retrospective transition method is required. In August 2015, the FASB delayed the effective date by one year to annual periods beginning after December 15, 2017, and interim periods within that reporting period for a public company.
Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently evaluating the impact the provisions of this guidance will have on our consolidated financial statements.
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
In August 2014, the FASB issued guidance which requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and management’s plans that are intended to mitigate those conditions. The new guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.
We do not expect any impact on our financial position, results of operations or cash flows from the adoption of this guidance.
Inventory
In July 2015, the FASB issued guidance that requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.
We are currently evaluating the impact the provisions of this guidance will have on our consolidated financial statements.
Income Taxes
In November 2015, the FASB issued guidance that requires deferred tax liabilities and assets to be classified as noncurrent in the consolidated balance sheet.
The guidance is effective for fiscal years beginning after
December 15, 2016 including interim periods within those fiscal years with early adoption permitted. A reporting entity should apply the amendment prospectively or retrospectively.
We are
currently evaluating the impact the provisions of this guidance will have on our consolidated financial statements.
Financial Instruments
In January 2016, the FASB issued guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.
The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. A reporting entity should apply the new guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We are
currently evaluating the impact the provisions of this guidance will have on our consolidated financial statements.
Leases
In February 2016, the FASB issued new guidance that requires balance sheet recognition of a right-of-use asset and lease liability by lessees for operating leases. The new guidance also requires new disclosures providing additional qualitative and quantitative information about the amounts recorded in the financial statements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new guidance requires a modified retrospective approach with optional practical expedients. We are currently evaluating the impact the provisions of this guidance will have on our consolidated financial statements.
Statement of Cash Flows
In August 2016, the FASB issued guidance which adds and/or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new guidance is intended to reduce diversity in practice in how certain transactions are presented and classified in the statement of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact the provisions of this guidance will have on our consolidated statements of cash flows.