The accompanying condensed notes to consolidated financial statements are an integral part hereof.
The accompanying condensed notes to consolidated financial statements are an integral part hereof.
The accompanying condensed notes to consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
The accompanying condensed notes to consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed
Notes to Consolidated Financial Statements
June 30, 2017
(Unaudited)
Basis of Presentation
The accompanying unaudited 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. 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 months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2018. 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, 2017, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2017, as amended by the Form 10-K/A filed with the SEC on July 31, 2017.
The accompanying 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 2, Summary of Significant Accounting Policies, to the consolidated financial statements that are presented in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2017.
1. Company Background and Organization
Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading manufacturer, remanufacturer, and distributor of aftermarket automotive parts. These replacement parts are sold for use on vehicles after initial vehicle purchase. These automotive parts are 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 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. The Company added turbochargers with its acquisition in July 2016. The Company began selling brake power boosters in August 2016. As a result of the Company’s acquisition in July 2017, its business will include developing and selling diagnostic equipment.
The Company obtains used automotive parts, commonly known as Used Cores, primarily from its customers under the Company’s core exchange program. It also purchases Used Cores from vendors (core brokers). The customers grant credit to the consumer when the used part is returned to them, and the Company in turn provides a credit to the customers upon return to the Company. These Used Cores are an essential material needed for the remanufacturing operations.
The Company has remanufacturing, warehousing and shipping/receiving operations for automotive parts in North America and Asia. In addition, the Company utilizes various third party warehouse distribution centers in North America.
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 executive officer as its chief operating decision maker (“CODM”), has 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 it has one reportable segment for purposes of recording and reporting its financial results.
2. New Accounting Pronouncements
New Accounting Pronouncements Not Yet Adopted
Revenue Recognition
In May 2014, the FASB issued guidance codified in ASC 606, “Revenue Recognition - Revenue from Contracts with Customers” (“ASC 606”), which amends the guidance in the former ASC 605, “Revenue Recognition”. ASC 606 is effective for annual periods beginning after December 15, 2016, and interim periods within that reporting period for a public company. The Company may elect either a full retrospective transition method, which requires the restatement of all periods presented, or a modified retrospective transition method, which requires a cumulative effect recognized as of the date of initial application to be used in transition. 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.
Accordingly, the updated standard is effective for the Company as of April 1, 2018 and the Company does not plan to early adopt. The Company is currently in the process of determining whether it will utilize the full or modified retrospective method of adoption allowed by the new standard and the impact on its consolidated financial statements and footnote disclosures. The Company will continue to provide enhanced disclosures as it continues its assessment.
Due to the impact the new standard may have on the Company’s business processes, systems, and controls, a project team has been formed to evaluate and guide the implementation process. To date, the Company has performed a preliminary assessment of key customer contracts and is in the process of comparing historical accounting policies and practices to the new standard, including (i) assessing the current net-of-core value revenue recognition policy, and whether the performance obligation(s) related to the sale of its products will include both the core and unit value; (ii) the assessment of potential variable consideration including the accounting for return rights, the core exchange program, warranty and various allowances provided to its customers; (iii) the classification of assets and liabilities related to core assets and liabilities and customer allowances, and (iv) principal versus agent considerations as amended through Accounting Standards Update (“ASU”) 2016-08, “Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)”. The Company has also developed a method to finalize the assessments on key customer contracts and incorporate the remaining contracts into the assessment. The Company continues to evaluate the impact ASC 606, related amendments and interpretive guidance will have on its 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. The Company is currently evaluating the impact of the provisions of this guidance to its 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. The Company will adopt this guidance in the first quarter of fiscal 2020. The Company is currently evaluating the impact the provisions of this guidance will have on its consolidated financial statements, but expects that it will result in a significant increase to its long-term assets and liabilities on the consolidated balance sheets.
Business Combinations
In January 2017, the FASB issued guidance which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
A reporting entity should apply the amendment prospectively
. The Company is currently evaluating the impact the provisions of this guidance will have on its consolidated financial statements.
Goodwill Impairment
In January 2017, the FASB issued guidance which simplifies the test for goodwill impairment. This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. This guidance must be applied on a prospective basis.
The Company is currently evaluating the impact the provisions of this guidance will have on its consolidated financial statements.
Modifications to Share-Based Payment Awards
In May 2017, the FASB issued guidance to provide clarity and reduce (i) the diversity in practice and (ii) the cost and complexity when applying the accounting guidance for equity-based compensation to a change to the terms or conditions of a share-based payment award. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. This guidance should be applied prospectively to an award modified on or after that adoption date. The Company is currently evaluating the impact the provisions of this guidance will have on its consolidated financial statements.
3. Goodwill and Intangible Assets
Goodwill
The following summarizes the changes in the Company’s goodwill:
|
|
Three Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
2,551,000
|
|
|
$
|
2,053,000
|
|
Goodwill acquired
|
|
|
-
|
|
|
|
-
|
|
Translation adjustment
|
|
|
-
|
|
|
|
-
|
|
Impairment
|
|
|
-
|
|
|
|
-
|
|
Balance at end of period
|
|
$
|
2,551,000
|
|
|
$
|
2,053,000
|
|
Intangible Assets
The following is a summary of acquired intangible assets subject to amortization:
|
|
|
June 30, 2017
|
|
|
March 31, 2017
|
|
|
Weighted
Average
Amortization
Period
|
|
Gross Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Value
|
|
|
Accumulated
Amortization
|
|
Intangible assets subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
11 years
|
|
$
|
705,000
|
|
|
$
|
207,000
|
|
|
$
|
705,000
|
|
|
$
|
191,000
|
|
Customer relationships
|
13 years
|
|
|
5,900,000
|
|
|
|
2,550,000
|
|
|
|
5,900,000
|
|
|
|
2,421,000
|
|
Total
|
|
|
$
|
6,605,000
|
|
|
$
|
2,757,000
|
|
|
$
|
6,605,000
|
|
|
$
|
2,612,000
|
|
Amortization expense for acquired intangible assets is as follows:
|
|
Three Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
$
|
145,000
|
|
|
$
|
145,000
|
|
The estimated future amortization expense for acquired intangible assets subject to amortization is as follows:
Year Ending March 31,
|
|
|
|
|
2018 - remaining nine months
|
|
|
$
|
435,000
|
|
2019
|
|
|
|
580,000
|
|
2020
|
|
|
|
580,000
|
|
2021
|
|
|
|
580,000
|
|
2022
|
|
|
|
580,000
|
|
Thereafter
|
|
|
|
1,093,000
|
|
Total
|
|
|
$
|
3,848,000
|
|
4. Accounts Receivable — Net
Included in accounts receivable — net are significant offset accounts related to customer allowances earned, customer payment discrepancies, returned goods authorizations (“RGA”) issued for in-transit unit returns, estimated future credits to be provided for Used Cores returned by the customers and potential bad debts. Due to the forward looking nature and the different aging periods of certain estimated offset accounts, the offset accounts may not, at any point in time, directly relate to the balances in the accounts receivable-trade account.
Accounts receivable — net is comprised of the following:
|
|
June 30, 2017
|
|
|
March 31, 2017
|
|
Accounts receivable — trade
|
|
$
|
69,864,000
|
|
|
$
|
76,902,000
|
|
Allowance for bad debts
|
|
|
(4,131,000
|
)
|
|
|
(4,140,000
|
)
|
Customer allowances earned
|
|
|
(8,543,000
|
)
|
|
|
(7,880,000
|
)
|
Customer payment discrepancies
|
|
|
(807,000
|
)
|
|
|
(751,000
|
)
|
Customer returns RGA issued
|
|
|
(15,233,000
|
)
|
|
|
(12,710,000
|
)
|
Customer core returns accruals
|
|
|
(31,446,000
|
)
|
|
|
(25,404,000
|
)
|
Less: total accounts receivable offset accounts
|
|
|
(60,160,000
|
)
|
|
|
(50,885,000
|
)
|
Total accounts receivable — net
|
|
$
|
9,704,000
|
|
|
$
|
26,017,000
|
|
Warranty Returns
The Company allows its customers to return goods that their customers have returned to them, whether or not the returned item is defective (“warranty returns”). The Company accrues an estimate of its exposure to warranty returns based on a historical analysis of the level of this type of return as a percentage of total unit sales. Amounts charged to expense for these warranty returns are considered in arriving at the Company’s net sales. At June 30, 2017 and March 31, 2017, the Company’s total warranty return accrual was $12,849,000 and $14,286,000, respectively, of which $5,215,000 and $5,303,000, respectively, was included in the customer returns RGA issued balance in the above table for expected credits to be issued against accounts receivable and $7,634,000 and $8,983,000, respectively, was included in the customer finished goods returns accrual in the consolidated balance sheets for estimated future warranty returns.
The following summarizes the changes in the Company’s warranty return accrual:
|
|
Three Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
14,286,000
|
|
|
$
|
10,845,000
|
|
Charged to expense/additions
|
|
|
22,206,000
|
|
|
|
22,694,000
|
|
Amounts processed
|
|
|
(23,643,000
|
)
|
|
|
(21,980,000
|
)
|
Balance at end of period
|
|
$
|
12,849,000
|
|
|
$
|
11,559,000
|
|
5. Inventory
Inventory is comprised of the following:
|
|
June 30, 2017
|
|
|
March 31, 2017
|
|
Non-core inventory
|
|
|
|
|
|
|
Raw materials
|
|
$
|
22,537,000
|
|
|
$
|
21,515,000
|
|
Work-in-process
|
|
|
673,000
|
|
|
|
641,000
|
|
Finished goods
|
|
|
62,124,000
|
|
|
|
48,337,000
|
|
|
|
|
85,334,000
|
|
|
|
70,493,000
|
|
Less allowance for excess and obsolete inventory
|
|
|
(3,088,000
|
)
|
|
|
(2,977,000
|
)
|
Total
|
|
$
|
82,246,000
|
|
|
$
|
67,516,000
|
|
|
|
|
|
|
|
|
|
|
Inventory unreturned
|
|
$
|
7,701,000
|
|
|
$
|
7,581,000
|
|
Long-term core inventory
|
|
|
|
|
|
|
|
|
Used cores held at the Company's facilities
|
|
$
|
35,325,000
|
|
|
$
|
38,713,000
|
|
Used cores expected to be returned by customers
|
|
|
11,590,000
|
|
|
|
11,752,000
|
|
Remanufactured cores held in finished goods
|
|
|
33,981,000
|
|
|
|
27,667,000
|
|
Remanufactured cores held at customers' locations (1)
|
|
|
185,426,000
|
|
|
|
185,938,000
|
|
|
|
|
266,322,000
|
|
|
|
264,070,000
|
|
Less allowance for excess and obsolete inventory
|
|
|
(1,596,000
|
)
|
|
|
(1,148,000
|
)
|
Total
|
|
$
|
264,726,000
|
|
|
$
|
262,922,000
|
|
|
|
|
|
|
|
|
|
|
Long-term core inventory deposits
|
|
$
|
5,569,000
|
|
|
$
|
5,569,000
|
|
(1)
|
Remanufactured cores held at customers’ locations represent the core portion of the Company’s customers’ finished goods at the Company’s customers’ locations.
|
6. Significant Customer and Other Information
Significant Customer Concentrations
The Company’s largest customers accounted for the following total percentage of net sales:
|
|
Three Months Ended
June 30,
|
|
Sales
|
|
2017
|
|
|
2016
|
|
Customer A
|
|
|
40
|
%
|
|
|
52
|
%
|
Customer B
|
|
|
25
|
%
|
|
|
14
|
%
|
Customer C
|
|
|
16
|
%
|
|
|
21
|
%
|
Customer D
|
|
|
8
|
%
|
|
|
3
|
%
|
The Company’s largest customers accounted for the following total percentage of accounts receivable—trade:
Accounts receivable - trade
|
|
June 30, 2017
|
|
|
March 31, 2017
|
|
Customer A
|
|
|
28
|
%
|
|
|
33
|
%
|
Customer B
|
|
|
14
|
%
|
|
|
18
|
%
|
Customer C
|
|
|
10
|
%
|
|
|
12
|
%
|
Customer D
|
|
|
24
|
%
|
|
|
16
|
%
|
Geographic and Product Information
The Company’s products are predominantly sold in the U.S. and accounted for the following total percentage of net sales:
|
|
Three Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Rotating electrical products
|
|
|
78
|
%
|
|
|
72
|
%
|
Wheel hub products
|
|
|
18
|
%
|
|
|
22
|
%
|
Brake master cylinders products
|
|
|
3
|
%
|
|
|
6
|
%
|
Other products
|
|
|
1
|
%
|
|
|
-
|
%
|
|
|
|
100
|
%
|
|
|
100
|
%
|
Significant Supplier Concentrations
The Company had no suppliers that accounted for more than 10% of inventory purchases for the three months ended June 30, 2017 and 2016.
7. Debt
The Company has the following credit agreements.
Credit Facility
The Company is party to a $145,000,000 senior secured financing, as amended, (the “Credit Facility”) with the lenders party thereto, and PNC Bank, National Association, as administrative agent, consisting of (i) a $120,000,000 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 the assets of the Company. The 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. This amount was increased to $15,000,000 under the April 2017 amendment to the Credit Facility.
In April 2017, the Company entered into a consent and fourth amendment to the Credit Facility (the “Fourth Amendment”) which, among other things, (i) increased the borrowing base limit with respect to inventory located in Mexico, (ii) amended the definition and calculation of consolidated EBITDA to raise the limitation on the add-back for non-capitalized transaction expenses related to the expansion of operations in Mexico, (iii) increased the annual limit on permitted stock repurchases and dividends, and (iv) modifies certain other baskets (including increasing certain baskets for permitted acquisitions) and thresholds to, among other things, further accommodate the expansion of operations in Mexico.
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 the Company’s Term Loans and Revolving Facility was 3.56% and 4.65%, respectively, at June 30, 2017 and 3.29% and 3.55%, respectively, at March 31, 2017.
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 as of June 30, 2017.
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 Company’s Term Loans at:
|
|
June 30, 2017
|
|
|
March 31, 2017
|
|
Principal amount of term loan
|
|
$
|
19,531,000
|
|
|
$
|
20,312,000
|
|
Unamortized financing fees
|
|
|
(316,000
|
)
|
|
|
(313,000
|
)
|
Net carrying amount of term loan
|
|
|
19,215,000
|
|
|
|
19,999,000
|
|
Less current portion of term loan
|
|
|
(3,060,000
|
)
|
|
|
(3,064,000
|
)
|
Long-term portion of term loan
|
|
$
|
16,155,000
|
|
|
$
|
16,935,000
|
|
Future repayments of the Company’s Term Loans are as follows:
Year Ending March 31,
|
|
|
|
|
2018 - remaining nine months
|
|
|
|
2,343,000
|
|
2019
|
|
|
|
3,125,000
|
|
2020
|
|
|
|
3,125,000
|
|
2021
|
|
|
|
10,938,000
|
|
Total payments
|
|
|
$
|
19,531,000
|
|
The Company had $15,000,000 and $11,000,000 outstanding under the Revolving Facility at June 30, 2017 and March 31, 2017, 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 June 30, 2017. At June 30, 2017, $104,140,000, subject to certain adjustments, was available under the Revolving Facility.
WX Agreement
In August 2012, the Company 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, the Company also issued a warrant (the “Supplier Warrant”) to the Supplier to purchase up to 516,129 shares of the Company’s 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 the Company 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 $10,586,000 and $11,879,000 at June 30, 2017 and March 31, 2017, 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 June 30, 2017 as the Company does not expect to settle this amount in cash. During the three months ended June 30, 2017 and 2016, a gain of $1,293,000 and $5,589,000, respectively, were recorded in general and administrative expenses due to the change in the fair value of this warrant liability.
8. Accounts Receivable Discount Programs
The Company uses receivable discount programs with certain customers and their respective banks. Under these programs, the Company may sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow the Company to accelerate receipt of payment on customers’ receivables.
The following is a summary of the Company’s accounts receivable discount programs:
|
|
Three Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Receivables discounted
|
|
$
|
86,520,000
|
|
|
$
|
80,649,000
|
|
Weighted average days
|
|
|
342
|
|
|
|
341
|
|
Annualized weighted average discount rate
|
|
|
3.1
|
%
|
|
|
2.7
|
%
|
Amount of discount as interest expense
|
|
$
|
2,522,000
|
|
|
$
|
2,068,000
|
|
9. Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options and warrants, which would result in the issuance of incremental shares of common stock.
The following presents a reconciliation of basic and diluted net income per share:
|
|
Three Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,626,000
|
|
|
$
|
7,508,000
|
|
Basic shares
|
|
|
18,655,304
|
|
|
|
18,545,621
|
|
Effect of potentially dilutive securities
|
|
|
766,048
|
|
|
|
939,317
|
|
Diluted shares
|
|
|
19,421,352
|
|
|
|
19,484,938
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.41
|
|
|
$
|
0.40
|
|
Diluted net income per share
|
|
$
|
0.39
|
|
|
$
|
0.39
|
|
The effect of dilutive options excludes 111,172 shares subject to options with exercise prices ranging from $30.31 to $34.17 per share for the three months ended June, 30, 2017 and 1,100 shares subject to options with an exercise price of $34.17 per share for the three months ended June 30, 2016, which were anti-dilutive.
10. Income Taxes
The Company recorded income tax expense for the three months ended June 30, 2017 and 2016 of $4,316,000, or an effective tax rate of 36.1%, and $2,936,000, or an effective tax rate of 28.1%. The income tax rates for all periods were positively impacted by
(i)
non-taxable gains in connection with the fair value adjustment on the warrants, (ii) excess tax benefits on share-based compensation of $170,000 and $391,000
for the three months ended June 30, 2017 and 2016, respectively, and (iii) the benefit of lower statutory tax rates in foreign taxing jurisdictions. These positive impacts to income tax rates for all periods were partially offset by state income taxes and non-deductible executive compensation under Internal Revenue Code Section 162(m).
The Company is not under examination in any jurisdiction and the years ended March 31, 2017, 2016, and 2015 remain subject to examination. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.
11. 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 facilities overseas, 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 forward foreign currency exchange contracts are designated for forecasted expenditure requirements to fund foreign operations.
The Company had forward foreign currency exchange contracts with a U.S. dollar equivalent notional value of $26,808,000 and $26,880,000 at June 30, 2017 and March 31, 2017, respectively. These contracts generally have a term of one year or less, at rates agreed at the inception of the contracts. The counterparty to this derivative transaction is a major financial institution with investment grade credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the potential unrealized gains (which offset currency fluctuations adverse to the Company) in any such contract should this counterparty fail to perform as contracted. Any changes in the fair values of forward foreign currency exchange contracts are reflected in current period earnings and accounted for as an increase or offset to general and administrative expenses.
The following shows the effect of the Company’s derivative instruments on its consolidated statements of operations:
Derivatives Not Designated as
Hedging Instruments
|
|
Gain (Loss) Recognized within General
and Administrative Expenses
|
|
Three Months Ended
June 30,
|
|
2017
|
|
|
2016
|
|
Forward foreign currency exchange contracts
|
|
$
|
1,052,000
|
|
|
$
|
(679,000
|
)
|
The fair value of the forward foreign currency exchange contracts of $1,479,000 and $427,000 is included in prepaid and other current assets in the consolidated balance sheets at June 30, 2017 and March 31, 2017, respectively.
12. Fair Value Measurements
The following summarizes the Company’s financial assets and liabilities measured at fair value, by level within the fair value hierarchy:
|
|
|
June 30, 2017
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
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
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
$
|
2,407,000
|
|
|
$
|
2,407,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
2,140,000
|
|
|
$
|
2,140,000
|
|
|
|
-
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign currency exchange contracts
|
|
|
|
1,479,000
|
|
|
|
-
|
|
|
$
|
1,479,000
|
|
|
|
-
|
|
|
|
427,000
|
|
|
|
-
|
|
|
$
|
427,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
|
2,407,000
|
|
|
|
2,407,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,140,000
|
|
|
|
2,140,000
|
|
|
|
-
|
|
|
|
-
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
|
|
10,586,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
10,586,000
|
|
|
|
11,879,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
11,879,000
|
|
Short-term Investments and Deferred Compensation
The Company’s short-term investments, which fund its deferred compensation liabilities, consist of investments in mutual funds. These investments are classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis.
Forward Foreign Currency Exchange Contracts
The forward foreign currency exchange contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers. During the three months ended June 30, 2017 and 2016, a gain of $1,052,000 and a loss of $679,000, respectively, were recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts.
Warrant Liability
The Company estimates the fair value of the warrant liability using level 3 inputs and the Monte Carlo simulation model at each balance sheet date. This warrant liability is included in other liabilities in the consolidated balance sheets.
Any subsequent changes from the initial recognition in the fair value of the warrant liability are recorded in current period earnings as a general and administrative expense.
During the three months ended June 30, 2017 and 2016, a gain of $1,293,000 and $5,589,000, respectively, were recorded in general and administrative expenses due to the change in the fair value of this warrant liability.
The following assumptions were used to determine the fair value of the Supplier Warrant:
|
|
Supplier Warrant
|
|
Risk free interest rate
|
|
|
1.03
|
%
|
Expected life in years
|
|
|
0.25
|
|
Expected volatility
|
|
|
27.20
|
%
|
Dividend yield
|
|
|
-
|
|
Probability of future financing
|
|
|
0
|
%
|
The risk free interest rate used was based on U.S. treasury-note yields with terms commensurate with the remaining term of the warrant. The expected life is based on the remaining contractual term of the warrant and the expected volatility is based on the Company’s daily historical volatility over a period commensurate with the remaining term of the warrant.
The following summarizes the activity for Level 3 fair value measurements:
|
|
Three Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
11,879,000
|
|
|
$
|
-
|
|
|
$
|
15,643,000
|
|
|
$
|
330,000
|
|
Newly issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total (gain) loss included in net income (loss)
|
|
|
(1,293,000
|
)
|
|
|
-
|
|
|
|
(5,589,000
|
)
|
|
|
(16,000
|
)
|
Exercises/settlements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net transfers in (out) of Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
$
|
10,586,000
|
|
|
$
|
-
|
|
|
$
|
10,054,000
|
|
|
$
|
314,000
|
|
During the three months ended June 30, 2017, the Company had no 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.
13. Share-based Payments
Stock Options
The Company granted options to purchase 163,100 and 182,800 shares of common stock during the three months ended June 30, 2017 and 2016, respectively. The cost associated with stock options is estimated using the Black-Scholes option-pricing model. This model requires the input of subjective assumptions including the expected volatility of the underlying stock and the expected holding period of the option. These subjective assumptions are based on both historical and other information. Changes in the values assumed and used in the model can materially affect the estimate of fair value.
The following assumptions were used to derive the weighted average fair value of the stock options granted:
|
|
Three Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average risk free interest rate
|
|
|
1.90
|
%
|
|
|
1.39
|
%
|
Weighted average expected holding period (years)
|
|
|
5.82
|
|
|
|
5.85
|
|
Weighted average expected volatility
|
|
|
47.36
|
%
|
|
|
47.41
|
%
|
Weighted average expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Weighted average fair value of options granted
|
|
$
|
12.69
|
|
|
$
|
13.08
|
|
The following is a summary of stock option transactions:
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at March 31, 2017
|
|
|
1,036,359
|
|
|
$
|
14.92
|
|
Granted
|
|
|
163,100
|
|
|
$
|
27.40
|
|
Exercised
|
|
|
(28,951
|
)
|
|
$
|
10.15
|
|
Forfeited
|
|
|
(667
|
)
|
|
$
|
29.66
|
|
Outstanding at June 30, 2017
|
|
|
1,169,841
|
|
|
$
|
16.77
|
|
At June 30, 2017, options to purchase 359,639 shares of common stock were unvested at the weighted average exercise price of $28.60.
At June 30, 2017, there was $4,338,000 of total unrecognized compensation expense related to unvested stock option awards. The compensation expense is expected to be recognized over a weighted average vesting period of approximately 2.3 years.
Restricted Stock Units (“RSU’s”)
During the three months ended June 30, 2017 and 2016, the Company granted 60,000 and 42,876 shares of RSU’s, respectively, with an estimated grant date fair value of $1,644,000 and $1,224,000, respectively, which was based on the closing market price on the grant date.
The following is a summary of non-vested RSU’s:
|
|
Number of
Shares
|
|
|
Weighted Average
Grant Date Fair
Value
|
|
Non-vested at March 31, 2017
|
|
|
126,277
|
|
|
$
|
28.26
|
|
Granted
|
|
|
60,000
|
|
|
$
|
27.40
|
|
Vested
|
|
|
(43,843
|
)
|
|
$
|
25.62
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
Non-vested at June 30, 2017
|
|
|
142,434
|
|
|
$
|
28.71
|
|
At June 30, 2017, there was $3,532,000 of unrecognized compensation expense related to these awards, which will be recognized over the remaining vesting period of approximately 2.3 years.
14. Accumulated Other Comprehensive Income (Loss)
The following summarizes changes in accumulated other comprehensive income (loss):
|
|
Three Months Ended June 30, 2017
|
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Total
|
|
Balance at beginning of period
|
|
$
|
528,000
|
|
|
$
|
(7,969,000
|
)
|
|
$
|
(7,441,000
|
)
|
|
$
|
332,000
|
|
|
$
|
(5,184,000
|
)
|
|
$
|
(4,852,000
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
56,000
|
|
|
|
229,000
|
|
|
|
285,000
|
|
|
|
22,000
|
|
|
|
(535,000
|
)
|
|
|
(513,000
|
)
|
Amounts reclassified from accumulated other comprehensive loss, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at end of period
|
|
$
|
584,000
|
|
|
$
|
(7,740,000
|
)
|
|
$
|
(7,156,000
|
)
|
|
$
|
354,000
|
|
|
$
|
(5,719,000
|
)
|
|
$
|
(5,365,000
|
)
|
15. Share Repurchase Program
As of June 30, 2017, the Company’s board of directors had approved a stock repurchase program of up to $15,000,000 of its common stock. As of June 30, 2017, $4,358,000 of the $15,000,000 had been utilized and $10,642,000 remained available to repurchase shares under the authorized share repurchase program. The Company retired the 69,261 shares repurchased under this program during the three months ended June 30, 2017. The Company’s share repurchase program does not obligate it to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.
16. Subsequent Events
Credit Facility
In July 2017, the Company entered into a fifth amendment to the Credit Facility (the “Fifth Amendment”) which, among other things, amended the definition of permitted acquisitions, permitted indebtedness, and pledge agreements.
Acquisition
In July 2017, the Company completed the acquisition of all the equity interests of D&V Electronics Ltd. (“D&V”), a privately held developer and manufacturer of leading edge diagnostics systems for laboratory, endurance, and production based in Ontario, Canada. The acquisition was consummated pursuant to a share purchase agreement dated July 18, 2017. The assets and results of operations of D&V were not significant to the Company’s consolidated financial position or results of operations, and thus pro forma information is not presented.