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

Form 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021

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

FOR THE TRANSITION PERIOD FROM       TO

Commission File No. 001-33861

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
MPAA
The 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 19,204,617 shares of Common Stock outstanding at November 2, 2021.



MOTORCAR PARTS OF AMERICA, INC.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
 
 
4
 
4
 
5
 
6
 
7
 
8
 
9
 
23
 
33
 
33
     
PART II — OTHER INFORMATION
 
 
35
 
35
 
35
 
35
 
36
 
38

MOTORCAR PARTS OF AMERICA, INC.

GLOSSARY

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

“Used Core” — An automobile part which has previously been used in the operation of a vehicle. Generally, the Used Core is an original equipment (“OE”) automobile part installed by the vehicle manufacturer and subsequently removed for replacement. Used Cores contain salvageable parts, which are an important raw material in the remanufacturing process. We obtain most Used Cores by providing credits to our customers for Used Cores returned to us under our core exchange programs. 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 programs, and which have been physically received by us, are part of our raw material and work-in-process inventory. Used Cores returned by consumers to our customers but not yet returned to us are classified as contract assets until we physically receive these Used Cores.

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

PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements

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

 
September 30, 2021
   
March 31, 2021
 
ASSETS
 
(Unaudited)
       
Current assets:
           
Cash and cash equivalents
 
$
17,911,000
   
$
15,523,000
 
Short-term investments
   
2,072,000
     
1,652,000
 
Accounts receivable — net
   
60,663,000
     
63,122,000
 
Inventory
   
330,494,000
     
302,913,000
 
Contract assets
   
32,329,000
     
26,940,000
 
Prepaid expenses and other current assets
   
12,952,000
     
12,706,000
 
Total current assets
   
456,421,000
     
422,856,000
 
Plant and equipment — net
   
51,236,000
     
53,854,000
 
Operating lease assets
   
84,576,000
     
71,513,000
 
Long-term deferred income taxes
   
19,861,000
     
19,381,000
 
Long-term contract assets
   
305,991,000
     
270,213,000
 
Goodwill and intangible assets — net
   
7,713,000
     
8,534,000
 
Other assets
   
1,414,000
     
1,531,000
 
TOTAL ASSETS
 
$
927,212,000
   
$
847,882,000
 
LIABILITIES AND SHAREHOLDERS'  EQUITY
               
Current liabilities:
               
Accounts payable and accrued liabilities
 
$
127,991,000
   
$
152,735,000
 
Customer finished goods returns accrual
   
34,539,000
     
31,524,000
 
Contract liabilities
   
49,843,000
     
41,072,000
 
Revolving loan
   
120,000,000
     
84,000,000
 
Other current liabilities
   
6,638,000
     
6,683,000
 
Operating lease liabilities
   
6,033,000
     
6,439,000
 
Current portion of term loan
   
3,670,000
     
3,678,000
 
Total current liabilities
   
348,714,000
     
326,131,000
 
Term loan, less current portion
   
14,877,000
     
16,786,000
 
Long-term contract liabilities
   
162,007,000
     
125,223,000
 
Long-term deferred income taxes
   
74,000
     
73,000
 
Long-term operating lease liabilities
   
83,998,000
     
70,551,000
 
Other liabilities
   
7,295,000
     
7,973,000
 
Total liabilities
   
616,965,000
     
546,737,000
 
Commitments and contingencies
               
Shareholders' equity:
               
Preferred stock; par value $0.01 per share, 5,000,000 shares authorized; none issued
   
-
     
-
 
Series A junior participating preferred stock; par value $0.01 per share, 20,000 shares authorized; none issued
   
-
     
-
 
Common stock; par value $0.01 per share, 50,000,000 shares authorized; 19,172,755 and 19,045,386 shares issued and outstanding at September 30, 2021 and March 31, 2021, respectively
   
192,000
     
190,000
 
Additional paid-in capital
   
225,170,000
     
223,058,000
 
Retained earnings
   
90,137,000
     
85,593,000
 
Accumulated other comprehensive loss
   
(5,252,000
)
   
(7,696,000
)
Total shareholders' equity
   
310,247,000
     
301,145,000
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
927,212,000
   
$
847,882,000
 

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

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

 
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
   
2021
   
2020
   
2021
   
2020
 
                         
Net sales
 
$
175,548,000
   
$
154,730,000
    $ 324,582,000     $ 250,086,000  
Cost of goods sold
   
139,597,000
     
115,004,000
      265,060,000
      196,973,000
 
Gross profit
    35,951,000
      39,726,000
      59,522,000
      53,113,000
 
Operating expenses:
                               
General and administrative
   
14,465,000
     
12,518,000
      26,951,000
      24,205,000
 
Sales and marketing
   
5,520,000
     
4,326,000
      10,888,000
      8,526,000
 
Research and development
   
2,495,000
     
1,972,000
      4,996,000
      3,914,000
 
Foreign exchange impact of lease liabilities and forward contracts
   
3,917,000
   
(3,985,000
)
    1,384,000     (8,802,000 )
Total operating expenses
   
26,397,000
     
14,831,000
      44,219,000
      27,843,000
 
Operating income
   
9,554,000
     
24,895,000
      15,303,000
      25,270,000
 
Interest expense, net
   
3,620,000
     
3,614,000
      7,561,000
      8,023,000
 
Income before income tax expense
   
5,934,000
     
21,281,000
    7,742,000
      17,247,000
 
Income tax expense
   
2,251,000
     
6,097,000
    3,198,000
      5,075,000
 
Net income
 
$
3,683,000
   
$
15,184,000
  $ 4,544,000     $ 12,172,000  
Basic net income per share
 
$
0.19
   
$
0.80
  $ 0.24     $ 0.64  
Diluted net income per share
 
$
0.19
   
$
0.78
  $ 0.23     $ 0.63  
Weighted average number of shares outstanding:
                               
Basic
   
19,135,356
     
19,022,414
      19,094,904
      18,999,461
 
Diluted
   
19,619,774
     
19,345,311
      19,638,045
      19,289,765
 

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

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

   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
 
2021
   
2020
   
2021
   
2020
 
                         
Net income
 
$
3,683,000
   
$
15,184,000
    $ 4,544,000     $ 12,172,000  
Other comprehensive income (loss), net of tax:
                               
Foreign currency translation gain (loss)
   
611,000
     
(441,000
)
    2,444,000
      (1,704,000 )
Total other comprehensive income (loss), net of tax
   
611,000
     
(441,000
)
    2,444,000
      (1,704,000 )
Comprehensive income
 
$
4,294,000
   
$
14,743,000
    $ 6,988,000     $ 10,468,000  

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

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

 
Common Stock
                         
   
Shares
   
Amount
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
 
                                     
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
   
-
     
-
     
1,576,000
     
-
     
-
     
1,576,000
 
Exercise of stock  options, net of shares withheld for employee taxes
   
19,837
     
-
     
354,000
     
-
     
-
     
354,000
 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
   
35,869
     
1,000
     
(543,000
)
   
-
     
-
     
(542,000
)
Foreign currency translation
   
-
     
-
     
-
     
-
     
1,833,000
     
1,833,000
 
Net income
   
-
     
-
     
-
     
861,000
     
-
     
861,000
 
Balance at June 30, 2021
   
19,101,092
   
$
191,000
   
$
224,445,000
   
$
86,454,000
   
$
(5,863,000
)
 
$
305,227,000
 
Compensation recognized under employee stock plans
 
-
      -
      1,851,000
      -
      -
      1,851,000
 
Exercise of stock options, net of shares withheld for employee taxes
    7,860
      -
      78,000
      -
      -
      78,000
 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
   
63,803
     
1,000
      (1,204,000 )    
-
     
-
      (1,203,000 )
Foreign currency translation
    -
      -
      -
      -
      611,000
      611,000
 
Net income
    -
      -
      -
      3,683,000
      -
      3,683,000
 
Balance at September 30, 2021
    19,172,755
    $ 192,000     $ 225,170,000     $ 90,137,000     $ (5,252,000 )   $ 310,247,000  

 
Common Stock
                         
   
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
 
Compensation recognized under employee stock plans
   
-
     
-
     
1,043,000
     
-
     
-
     
1,043,000
 
 Exercise of stock options
    3,000       -       20,000       -       -       20,000  
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
   
29,953
     
-
     
(207,000
)
   
-
     
-
     
(207,000
)
Foreign currency translation
   
-
     
-
     
-
     
-
     
(1,263,000
)
   
(1,263,000
)
Net loss
   
-
     
-
     
-
     
(3,012,000
)
   
-
     
(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
    -       -       1,218,000       -       -       1,218,000  
Exercise of stock options
    6,000       -       73,000       -       -       73,000  
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
    18,254       -       (140,000 )     -       -       (140,000 )
Foreign currency translation
   
-
      -       -       -       (441,000 )     (441,000 )
Net income
    -
      -
      -
      15,184,000
      -
      15,184,000
 
Balance at September 30, 2020
    19,026,587
    $ 190,000     $ 220,588,000     $ 76,289,000     $ (9,072,000 )   $ 287,995,000  

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

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

 
Six Months Ended
September 30,
 
   
2021
   
2020
 
Cash flows from operating activities:
           
Net income
 
$
4,544,000
   
$
12,172,000
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Depreciation and amortization
   
6,364,000
     
5,233,000
 
Amortization of interest
   
856,000
     
767,000
 
Amortization of core premiums paid to customers
   
5,543,000
     
2,741,000
 
Amortization of finished goods premiums paid to customers
   
324,000
     
-
 
Noncash lease expense
   
3,656,000
     
3,410,000
 
Loss (gain) due to the change in the fair value of the contingent consideration
   
70,000
     
(65,000
)
Foreign exchange impact of lease liabilities and forward contracts
   
1,384,000
     
(8,802,000
)
Gain on short-term investments
   
(175,000
)
   
(195,000
)
Net provision for inventory reserves
   
6,305,000
     
5,281,000
 
Net provision for customer payment discrepancies and credit losses
   
961,000
     
421,000
 
Deferred income taxes
   
(434,000
)
   
447,000
 
Share-based compensation expense
   
3,427,000
     
2,261,000
 
Loss on disposal of plant and equipment
   
34,000
     
1,000
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
1,403,000
     
661,000
 
Inventory
   
(34,185,000
)
   
(9,685,000
)
Prepaid expenses and other current assets
   
(859,000
)
   
1,200,000
 
Other assets
   
108,000
     
297,000
 
Accounts payable and accrued liabilities
   
(21,512,000
)
   
22,745,000
 
Customer finished goods returns accrual
   
3,005,000
     
2,217,000
 
Contract assets, net
   
(47,006,000
)
   
(10,735,000
)
Contract liabilities, net
   
45,087,000
     
14,368,000
 
Operating lease liabilities
   
(2,701,000
)
   
(3,027,000
)
Other liabilities
   
(538,000
)
   
(2,383,000
)
Net cash (used in) provided by operating activities
   
(24,339,000
)
   
39,330,000
 
Cash flows from investing activities:
               
Purchase of plant and equipment
   
(3,238,000
)
   
(6,810,000
)
Change in short-term investments
   
(245,000
)
   
(192,000
)
Net cash used in investing activities
   
(3,483,000
)
   
(7,002,000
)
Cash flows from financing activities:
               
Borrowings under revolving loan
   
57,000,000
     
-
 
Repayments of revolving loan
   
(21,000,000
)
   
(58,000,000
)
Repayments of term loan
   
(1,875,000
)
   
(1,875,000
)
Payments for debt issuance costs
   
(1,102,000
)
   
-
 
Payments on finance lease obligations
   
(1,427,000
)
   
(1,183,000
)
Exercise of stock options
   
432,000
     
93,000
 
Cash used to net share settle equity awards
   
(1,745,000
)
   
(347,000
)
Net cash provided by (used in) financing activities
   
30,283,000
     
(61,312,000
)
Effect of exchange rate changes on cash and cash equivalents
   
(73,000
)
   
255,000
 
Net increase (decrease) in cash and cash equivalents
   
2,388,000
     
(28,729,000
)
Cash and cash equivalents — Beginning of period
   
15,523,000
     
49,616,000
 
Cash and cash equivalents  — End of period
 
$
17,911,000
   
$
20,887,000
 
Supplemental disclosures of cash flow information:
               
Cash paid for interest, net
 
$
6,654,000
   
$
7,339,000
 
Cash paid for income taxes, net of refunds
   
4,525,000
     
1,436,000
 
Cash paid for operating leases
   
5,207,000
     
5,323,000
 
Cash paid for finance leases
   
1,613,000
     
1,359,000
 
Plant and equipment acquired under finance leases
   
252,000
     
1,847,000
 
Assets acquired under operating leases
   
15,953,000
     
15,564,000
 
Non-cash capital expenditures
   
198,000
     
2,085,000
 

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

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2021
(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) other products, which include turbochargers 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 by the automotive retail segment.

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 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 the Company has combined its operating segments into one reportable segment.

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

The outbreak of the COVID-19 pandemic continues to adversely impact the U.S. and global economies – creating uncertainty regarding the potential effects on the Company’s employees, supply chain, operations, and customer demand. The COVID-19 pandemic could impact the Company’s operations and the operations of its customers, suppliers, and vendors because of quarantines, facility closures, travel, and logistics restrictions. The extent to which the COVID-19 pandemic impacts the Company 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 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 acceptance of vaccines, and (vi) the extent to which normal economic and operating conditions can resume. Even after the COVID-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.

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. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 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, 2021, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2021.

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 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, 2021.

Recently Adopted Accounting Pronouncements

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. The adoption of this guidance on April 1, 2021 did not have any material impact on the 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. 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, 2021
   
March 31, 2021
 
Accounts receivable — trade
 
$
75,775,000
   
$
81,549,000
 
Allowance for credit losses
   
(326,000
)
   
(348,000
)
Customer payment discrepancies
   
(1,176,000
)
   
(752,000
)
Customer returns RGA issued
   
(13,610,000
)
   
(17,327,000
)
Total accounts receivable — net
 
$
60,663,000
   
$
63,122,000
 

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

 
Six Months Ended
September 30,
 
 
 
2021
   
2020
 
Balance at beginning of period
 
$
348,000
   
$
4,252,000
 
Provision for expected credit losses
   
17,000
   
228,000
 
Recoveries
   
-
     
(100,000
)
Amounts written off charged against the allowance
   
(39,000
)
   
(3,897,000
)
Balance at end of period
 
$
326,000
   
$
483,000
 

4. Inventory

Inventory is comprised of the following:

 
 
September 30, 2021
   
March 31, 2021
 
Inventory
           
Raw materials
 
$
149,460,000
   
$
128,190,000
 
Work-in-process
   
8,297,000
     
5,233,000
 
Finished goods
   
173,096,000
     
168,184,000
 
 
   
330,853,000
     
301,607,000
 
Less allowance for excess and obsolete inventory
   
(14,163,000
)
   
(13,246,000
)
Inventory — net
   
316,690,000
     
288,361,000
 
Inventory unreturned
   
13,804,000
     
14,552,000
 
Total inventory
 
$
330,494,000
   
$
302,913,000
 

5. Contract Assets

During the three months ended September 30, 2021 and 2020, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $1,687,000 and $892,000, respectively. During the six months ended September 30, 2021 and 2020, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $2,671,000 and $2,276,000, respectively.

Contract assets are comprised of the following:

 
 
September 30, 2021
   
March 31, 2021
 
Short-term contract assets
           
Cores expected to be returned by customers
 
$
19,704,000
   
$
17,657,000
 
Upfront payments to customers
   
577,000
     
684,000
 
Finished goods premiums paid to customers
   
631,000
     
405,000
 
Core premiums paid to customers
   
11,417,000
     
8,194,000
 
Total short-term contract assets
 
$
32,329,000
   
$
26,940,000
 
                 
Remanufactured cores held at customers' locations
 
$
248,902,000
   
$
229,918,000
 
Upfront payments to customers
   
357,000
     
486,000
 
Finished goods premiums paid to customers
   
3,062,000
     
2,731,000
 
Core premiums paid to customers
   
48,101,000
     
31,509,000
 
Long-term core inventory deposits
   
5,569,000
     
5,569,000
 
 Total long-term contract assets
 
$
305,991,000
   
$
270,213,000
 

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,
 
 
 
2021
   
2020
   
2021
   
2020
 
Net sales
                       
Customer A
   
40
%
   
45
%
   
37
%
   
45
%
Customer B
   
17
%
   
21
%
   
18
%
   
23
%
Customer C
   
30
%
   
23
%
   
30
%
   
20
%

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

 
September 30, 2021
 
March 31, 2021
 
Accounts receivable - trade
       
Customer A
   
37
%
   
50
%
Customer B
   
19
%
   
23
%
Customer C     10 %
    - %

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,
 
 
 
2021
   
2020
   
2021
   
2020
 
Product line
                               
Rotating electrical products
   
73
%
   
80
%
   
71
%
   
77
%
Wheel hub products
   
11
%
   
12
%
   
12
%
   
14
%
Brake related products
   
14
%
   
7
%
   
15
%
   
8
%
Other products
   
2
%
   
1
%
   
2
%
   
1
%
 
   
100
%
   
100
%
   
100
%
   
100
%

Significant Supplier Concentrations

The Company had no suppliers that accounted for more than 10% of inventory purchases for the three and six months ended September 30, 2021 and 2020.

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 $29,430,000 of dividends and share repurchases for 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.

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 2.84% at September 30, 2021, and 2.62% at March 31, 2021.

The Credit Facility, among other things, requires the Company to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all financial covenants at September 30, 2021.

The Company had cash of $17,911,000 at September 30, 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, 2021
   
March 31, 2021
 
Principal amount of Term Loans
 
$
18,750,000
   
$
20,625,000
 
Unamortized financing fees
   
(203,000
)
   
(161,000
)
Net carrying amount of Term Loans
   
18,547,000
     
20,464,000
 
Less current portion of Term Loans
   
(3,670,000
)
   
(3,678,000
)
Long-term portion of Term Loans
 
$
14,877,000
   
$
16,786,000
 

Future repayments of the Term Loans are as follows:

Year Ending March 31,
     
2022 - remaining six months
 
$
1,875,000
 
2023
   
3,750,000
 
2024
   
3,750,000
 
2025
   
3,750,000
 
2026
   
3,750,000
 
Thereafter
   
1,875,000
 
Total payments
 
$
18,750,000
 

The Company had $120,000,000 and $84,000,000 outstanding under the Revolving Facility at September 30, 2021 and March 31, 2021, respectively. In addition, $6,694,000 was outstanding for letters of credit at September 30, 2021. At September 30, 2021, after certain contractual adjustments, $90,935,000 was available under the Revolving Facility.

8. Contract Liabilities

Contract liabilities are comprised of the following:

 
 
September 30, 2021
   
March 31, 2021
 
Short-term contract liabilities
           
Customer core returns accruals
 
$
16,176,000
   
$
12,710,000
 
Customer allowances earned
   
23,302,000
     
16,513,000
 
Customer deposits
   
3,515,000
     
2,234,000
 
Finished goods liabilities
   
1,956,000
     
1,883,000
 
Core bank liability
   
1,609,000
     
1,585,000
 
Accrued core payment
   
3,285,000
     
6,147,000
 
      Total short-term contract liabilities
 
$
49,843,000
   
$
41,072,000
 
 
               
Long-term contract liabilities
               
Customer core returns accruals
 
$
142,647,000
   
$
103,719,000
 
Customer allowances earned
   
177,000
     
313,000
 
Finished goods liabilities
   
1,980,000
     
2,678,000
 
Core bank liability
   
16,092,000
     
16,903,000
 
Accrued core payment
   
1,111,000
     
1,610,000
 
      Total long-term contract liabilities
 
$
162,007,000
   
$
125,223,000
 

9. Leases

The Company leases various facilities in North America and Asia under operating leases expiring through August 2033. The Company has material nonfunctional currency leases that could have a material impact on the Company’s condensed consolidated statements of income. 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. In connection with the remeasurement of these leases, the Company recorded a loss of $1,746,000 and a gain of $1,618,000 during the three months ended September 30, 2021 and 2020, respectively, and gains of $1,049,000 and $3,603,000 during the six months ended September 30, 2021 and 2020, respectively. These amounts are included in “foreign exchange impact of lease liabilities and forward contracts” in the condensed consolidated statements of income.

Balance sheet information for leases is as follows:

Leases
 
Classification
 
September 30, 2021
   
March 31, 2021
 
Assets:
 
 
           
Operating
 
Operating lease assets
 
$
84,576,000
   
$
71,513,000
 
Finance
 
Plant and equipment
   
8,036,000
     
8,852,000
 
Total leased assets
 
 
 
$
92,612,000
   
$
80,365,000
 
 
 
 
               
Liabilities:
 
 
               
Current
 
 
               
Operating
 
Operating lease liabilities
 
$
6,033,000
   
$
6,439,000
 
Finance
 
Other current liabilities
   
2,439,000
     
2,640,000
 
Long-term
 
 
               
Operating
 
Long-term operating lease liabilities
   
83,998,000
     
70,551,000
 
Finance
 
Other liabilities
   
4,020,000
     
4,995,000
 
Total lease liabilities
 
 
 
$
96,490,000
   
$
84,625,000
 

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

   
Three Months Ended
      Six Months Ended     
 
 
September 30,
    September 30,
 
 
 
2021
   
2020
     2021
     2020
 
Lease cost
                       
Operating lease cost
 
$
3,149,000
   
$
2,877,000
    $ 6,191,000      $ 5,560,000  
Short-term lease cost
   
375,000
     
337,000
      751,000       654,000  
Variable lease cost
   
210,000
     
230,000
      491,000       373,000  
Finance lease cost:
                               
Amortization of finance lease assets
   
565,000
     
428,000
      1,064,000       841,000  
Interest on finance lease liabilities
   
89,000
     
93,000
      186,000       176,000  
Total lease cost
 
$
4,388,000
   
$
3,965,000
     $ 8,683,000      $ 7,604,000  

Maturities of lease commitments at September 30, 2021 by fiscal year were as follows:

Maturity of lease liabilities
 
Operating Leases
   
Finance Leases
   
Total
 
2022 - remaining six months
 
$
5,184,000
   
$
1,418,000
   
$
6,602,000
 
2023
   
11,400,000
     
2,414,000
     
13,814,000
 
2024
   
9,964,000
     
1,612,000
     
11,576,000
 
2025
   
10,044,000
     
1,118,000
     
11,162,000
 
2026
   
10,320,000
     
432,000
     
10,752,000
 
Thereafter
   
75,101,000
     
-
     
75,101,000
 
Total lease payments
   
122,013,000
     
6,994,000
     
129,007,000
 
Less amount representing interest
   
(31,982,000
)
   
(535,000
)
   
(32,517,000
)
Present value of lease liabilities
 
$
90,031,000
   
$
6,459,000
   
$
96,490,000
 

Other information about leases is as follows:

 
 
September 30, 2021
   
March 31, 2021
 
Lease term and discount rate
           
Weighted-average remaining lease term (years):
           
Finance leases
   
3.1
     
3.4
 
Operating leases
   
10.8
     
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.


The following is a summary of accounts receivable discount programs:

 
 
Six Months Ended
September 30,
 
 
 
2021
   
2020
 
Receivables discounted
 
$
268,410,000
   
$
222,310,000
 
Weighted average days
   
333
     
341
 
Annualized weighted average discount rate
   
1.8
%
   
2.3
%
Amount of discount recognized as interest expense
 
$
4,432,000
   
$
4,781,000
 

11. 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, 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 per share:

 
 
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
 
 
2021
   
2020
   
2021
   
2020
 
Net income
 
$
3,683,000
   
$
15,184,000
 
$
4,544,000
   
$
12,172,000
 
Basic shares
   
19,135,356
     
19,022,414
     
19,094,904
     
18,999,461
 
Effect of potentially dilutive securities
   
484,418
     
322,897
     
543,141
     
290,304
 
Diluted shares
   
19,619,774
     
19,345,311
     
19,638,045
     
19,289,765
 
Net income per share:
                               
Basic net income per share
 
$
0.19
   
$
0.80
 
$
0.24
   
$
0.64
 
Diluted net income per share
 
$
0.19
   
$
0.78
 
$
0.23
   
$
0.63
 

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 per share. For the three months ended September 30, 2021 and 2020, there were 915,778 and 1,500,066, 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, 2021 and 2020, there were 707,660 and 1,500,066, respectively, of potential common shares not included in the calculation of diluted net income per share because their effect was anti-dilutive.

12. Income Taxes

The Company recorded income tax expense of $2,251,000, or an effective tax rate of 37.9%, and $6,097,000, or an effective tax rate of 28.6%, for the three months ended September 30, 2021 and 2020, respectively. The Company recorded income tax expense of $3,198,000, or an effective tax rate of 41.3%, and $5,075,000, or an effective tax rate of 29.4%, for the six months ended September 30, 2021 and 2020, respectively. Effective tax rates are based on current projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate. The effective tax rates for the three and six months ended September 30, 2021, were primarily impacted by (i) foreign income taxed at rates that are different from the federal statutory rate, (ii) non-deductible executive compensation under Internal Revenue Code Section 162(m), and (iii) specific jurisdictions that the Company does not expect to recognize benefit of losses.

The Company and its subsidiaries file income tax returns in the U.S. federal, various state, and foreign jurisdictions with varying statutes of limitations. At September 30, 2021, the Company is not under examination in any jurisdiction, and remain subject to examination from the years ended March 31, 2017. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.

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 $45,133,000 and $41,819,000 at September 30, 2021 and March 31, 2021, 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 exchange impact of lease liabilities and forward contracts” in the condensed consolidated statements of income.

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

 
(Loss) Gain Recognized as Foreign Exchange Impact of Lease Liabilities and Forward Contracts
 
  
Derivatives Not Designated as
 
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
Hedging Instruments
 
2021
   
2020
    2021
   
2020
 
Forward foreign currency exchange contracts
 
$
(2,171,000
)
 
$
2,367,000
   
$
(2,433,000
)
 
$
5,199,000
 

The fair value of the forward foreign currency exchange contracts of $1,004,000 is included in other current liabilities in the condensed consolidated balance sheet at September 30, 2021. The fair value of the forward foreign currency exchange contracts of $1,429,000 is included in prepaid and other current assets in the condensed consolidated balance sheet at March 31, 2021, respectively. The changes in the fair values of forward foreign currency exchange contracts are included in “foreign exchange impact of lease liabilities and forward contracts” in the condensed consolidated statements of cash flows for the six months ended September 30, 2021 and 2020.

14. Fair Value Measurements

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

 
September 30, 2021
   
March 31, 2021
 
         
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
 
$
2,072,000
   
$
2,072,000
   
$
-
   
$
-
   
$
1,652,000
   
$
1,652,000
   
$
-
   
$
-
 
Prepaid expenses and other current assets
                                                               
Forward foreign currency exchange contracts
   
-
     
-
     
-
     
-
     
1,429,000
     
-
     
1,429,000
     
-
 
                                                                 
Liabilities
                                                               
Accrued liabilities
                                                               
Short-term contingent consideration
   
980,000
     
-
     
-
     
980,000
     
910,000
     
-
     
-
     
910,000
 
Other current liabilities
                                                               
Deferred compensation
   
2,072,000
     
2,072,000
     
-
     
-
     
1,652,000
     
1,652,000
     
-
     
-
 
Forward foreign currency exchange contracts
    1,004,000
      -
      1,004,000
      -
      -
      -
      -
      -
 

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.

E&M Gross Profit Earn-out Consideration

The fair value of the three-year gross profit earn-out consideration was $980,000 and $910,000 at September 30, 2021 and March 31, 2021, respectively, determined using a Monte Carlo Simulation Model. Any subsequent changes in the fair value of the contingent consideration liability will be recorded in current period earnings as a general and administrative expense.

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

 
 
September 30, 2021
 
Risk free interest rate
   
0.04
%
Counter party rate
   
2.93
%
Expected volatility
   
30-40
%
Weighted average cost of capital
   
12.5-15.0
%

The Company’s contingent consideration is recorded in accounts payable and accrued liabilities in its condensed consolidated balance sheets at September 30, 2021 and March 31, 2021, and is a Level 3 liability measured at fair value.

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,
 
Contingent Consideration
 
2021
   
2020
   
2021
   
2020
 
Beginning balance
 
$
850,000
   
$
2,606,000
   
$
910,000
   
$
2,653,000
 
Changes in revaluations of contingent consideration included in earnings
   
130,000
     
(18,000
)
   
70,000
     
(65,000
)
Ending balance
 
$
980,000
   
$
2,588,000
   
$
980,000
   
$
2,588,000
 

During the three and six months ended September 30, 2021, 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 six months ended September 30, 2021, no options to purchase shares of the Company’s common stock were granted. The Company granted options to purchase 345,423 shares of common stock during the six months ended September 30, 2020.

The following is a summary of stock option transactions:

 
 
Number of
Shares
   
Weighted Average
Exercise Price
 
Outstanding at March 31, 2021
   
1,744,885
   
$
17.51
 
Granted
   
-
   
$
-
 
Exercised
   
(29,130
)
 
$
16.01
 
Forfeited
   
(2,592
)
 
$
19.46
 
Outstanding at September 30, 2021
   
1,713,163
   
$
17.53
 

At September 30, 2021, options to purchase 320,104 shares of common stock were unvested at a weighted average exercise price of $16.53.

At September 30, 2021, there was $1,832,000 of total unrecognized compensation expense related to unvested stock option awards. Compensation expense related to unvested stock option awards will be recognized over the weighted average remaining vesting period of approximately 1.4 years.

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

During the six months ended September 30, 2021 and 2020, the Company granted 218,928 and 212,293 shares of RSUs, 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
 
Outstanding at March 31, 2021
   
354,484
   
$
17.22
 
Granted
   
218,928
   
$
22.27
 
Vested
   
(184,434
)
 
$
17.84
 
Forfeited
   
(1,442
)
 
$
19.57
 
Outstanding at September 30, 2021
   
387,536
   
$
19.76
 

At September 30, 2021, there was $5,411,000 of unrecognized compensation expense related to these awards, which will be recognized over the weighted average remaining vesting period of approximately 1.9 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:


 
Six Months Ended
September 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
   
-
 
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
   
-
   
$
-
 
Granted
   
84,593
   
$
23.19
 
Vested
   
-
   
$
-
 
Forfeited
   
-
   
$
-
 
Outstanding at September 30, 2021
   
84,593
   
$
23.19
 

At September 30, 2021, there was $1,774,000 of unrecognized compensation expense related to these awards, which will be recognized over the weighted average remaining vesting period of approximately 2.7 years.

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,
 
 
 
2021
   
2020
   
2021
   
2020
 
Balance at beginning of period
 
$
20,010,000
   
$
22,192,000
   
$
21,093,000
   
$
18,300,000
 
Charged to expense
   
30,837,000
     
30,872,000
     
58,098,000
     
53,961,000
 
Amounts processed
   
(29,972,000
)
   
(30,565,000
)
   
(58,316,000
)
   
(49,762,000
)
Balance at end of period
 
$
20,875,000
   
$
22,499,000
   
$
20,875,000
   
$
22,499,000
 

Contingencies

The Company is subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding the Company’s business. Following an audit in fiscal 2019, the U.S. Customs and Border Protection stated that it believed that the Company owed additional duties of approximately $17 million from 2011 through mid-2018 relating to products that it imported from Mexico. The Company does not believe that this amount is correct and believes that it has numerous defenses and intends to dispute this amount vigorously. The Company cannot assure that the U.S. Customs and Border Protection will agree or that it will not need to accrue or pay additional amounts in the future.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis presents factors that Motorcar Parts of America, Inc. and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with our March 31, 2021 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 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 a multi-pronged platform for growth within the non-discretionary automotive aftermarket for the replacement parts and test solutions and diagnostic equipment industry. Our investments in infrastructure and human resources during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines and continues to be transformative and scalable. These investments included (i) the opening of a 410,000 square foot distribution center, (ii) two buildings totaling 372,000 square feet for remanufacturing and core sorting of brake calipers, and (iii) the realignment of production at our initial 312,000 square foot facility in 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) other products, which include turbochargers 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 by the automotive retail segment.

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.

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

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 continue to implement a variety of measures in response that have the effect of restricting or limiting, among other activities, the operations of certain businesses.

We continue 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 emergence and spread of new variants of the virus, including the delta variant, the likelihood of a resurgence of positive cases, the development, availability and public acceptance of effective treatments and vaccines, the speed at which such vaccines are administered, the efficacy of current vaccines against evolving strains or variants of the virus, 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. We experienced inefficiencies in operations due to the implementation of additional personnel safety measures throughout our facilities. These personnel safety measures include 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.

We continue to incur costs as a result of COVID-19, including employee costs, such as expanded benefits and frontline incentives, and other operating costs associated with the provision of personal protective equipment, which have negatively impacted our profitability. These expanded benefits, supply costs and other COVID-19 related costs resulted in total expense, included in cost of goods sold and operating expenses in the condensed consolidated statements of income, of $955,000 and $2,048,000 during the three months ended September 30, 2021 and 2020, respectively, and $1,809,000 and $4,343,000 during the six months ended September 30, 2021 and 2020, respectively. Our Asian subsidiaries received $48,000 and $44,000 from their local assistance programs during the three months ended September 30, 2021 and 2020, respectively, and $71,000 and $137,000 during the six months ended September 30, 2021 and 2020, respectively. We received payments from the Canadian Government under the Canadian Emergency Wage Subsidy program of $484,000 and $849,000 during the three and six months ended September 30, 2020, respectively. These payments are recorded as a reduction of cost of goods sold and operating expenses in the condensed consolidated statements of income.

Results of Operations for the Three Months Ended September 30, 2021 and 2020

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,
 
   
2021
   
2020
 
Cash flow (used in) provided by operations
 
$
(19,600,000
)
 
$
16,942,000
 
Finished goods turnover (annualized) (1)
   
4.8
     
5.0
 



(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. Annualized finished goods turnover for the three months ended September 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,
 
   
2021
   
2020
 
Net sales
 
$
175,548,000
   
$
154,730,000
 
Cost of goods sold
   
139,597,000
     
115,004,000
 
Gross profit
   
35,951,000
     
39,726,000
 
Gross profit percentage
   
20.5
%
   
25.7
%

Net Sales. Our net sales for the three months ended September 30, 2021 were $175,548,000, which represents an increase of $20,818,000, or 13.5%, from the three months ended September 30, 2020 of $154,730,000. While our net sales for the quarter increased across all product lines due to strong demand for our products, we continue to experience a number of challenges related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services. Net sales for the three months ended September 30, 2021 and 2020 include $13,740,000 and $12,779,000, respectively, in core revenue due to a realignment of inventory at certain customer distribution centers. We expect this realignment will benefit future sales as product mix changes.

Gross Profit. Our gross profit was $35,951,000, or 20.5% of net sales, for the three months ended September 30, 2021 compared with $39,726,000, or 25.7% of net sales, for the three months ended September 30, 2020. Our gross profit was impacted by (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. During the three months ended September 30, 2021, higher freight costs impacted gross profit by approximately $3,085,000, or 1.7%. During the three months ended September 30, 2021, we also incurred additional expenses of $2,367,000 due to COVID-19 related costs for inefficiencies in the supply chain, increased salaries associated with COVID-19 vulnerable employee pay, and personal protective equipment. During the three months ended September 30, 2020, we incurred additional expenses of $1,533,000 due to increased salaries associated with COVID-19 bonuses, vulnerable employee pay, and personal protective equipment in connection with the COVID-19 pandemic.

Our gross profit for the three months ended September 30, 2021 and 2020 was also impacted by (i) transition expenses in connection with the expansion of our brake-related operations in Mexico of $797,000 and $4,054,000, respectively, and (ii) amortization of core premiums paid to customers related to new business of $3,012,000 and $1,518,000, respectively.

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 customer distribution centers, which resulted in a net gain of $3,175,000 for the three months ended September 30, 2021 compared with a net gain of $3,499,000 for the three months ended September 30, 2020, (ii) customer allowances related to new business of $178,000 for the three months ended September 30, 2021, and (iii) a $2,847,000 benefit for revised tariff costs during the three months ended September 30, 2020.

Operating Expenses

The following summarizes operating expenses:

   
Three Months Ended
September 30,
 
   
2021
   
2020
 
General and administrative
 
$
14,465,000
   
$
12,518,000
 
Sales and marketing
   
5,520,000
     
4,326,000
 
Research and development
   
2,495,000
     
1,972,000
 
Foreign exchange impact of lease liabilities and forward contracts
   
3,917,000
     
(3,985,000
)
                 
Percent of net sales
               
                 
General and administrative
   
8.2
%
   
8.1
%
Sales and marketing
   
3.1
%
   
2.8
%
Research and development
   
1.4
%
   
1.3
%
Foreign exchange impact of lease liabilities and forward contracts
   
2.2
%
   
(2.6
)%

General and Administrative. Our general and administrative expenses for the three months ended September 30, 2021 were $14,465,000, which represents an increase of $1,947,000, or 15.6%, from the three months ended September 30, 2020 of $12,518,000. The increase in general and administrative expense was primarily due to (i) $746,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, (ii) $633,000 of increased share-based compensation due to equity grants made to employees in June 2021, (iii) $390,000 of increased costs at our offshore locations, primarily resulting from our expansion in Mexico, and (iv) $332,000 of increased expense resulting from foreign currency transactions. These increases in general and administrative expenses were partially offset by $569,000 of decreased professional services during the three months ended September 30, 2021.

Sales and Marketing. Our sales and marketing expenses for the three months ended September 30, 2021 were $5,520,000, which represents an increase of $1,194,000, or 27.6%, from the three months ended September 30, 2020 of $4,326,000. These increases in sales and marketing expense during the three months ended September 30, 2021 were primarily due to (i) $373,000 of increased commissions due to higher sales, (ii) $341,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, and (iii) $412,000 of aggregate increased marketing in connection with new business, advertising, and travel expense.

Research and Development. Our research and development expenses for the three months ended September 30, 2021 were $2,495,000, which represents an increase of $523,000, or 26.5%, from the three months ended September 30, 2020 of $1,972,000. These increases in research and development expenses during the three months ended September 30, 2021 were primarily due to (i) $462,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, and (ii) $40,000 of increased samples for our core library.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts. Our foreign exchange impact of lease liabilities and forward contracts for the three months ended September 30, 2021 was a non-cash loss of $3,917,000, which represents an increase in expense of $7,902,000, or 198.3%, from the non-cash gain for three months ended September 30, 2020 of $3,985,000. This increase was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities which resulted in a non-cash loss of $1,746,000 compared with a non-cash gain of $1,618,000 for the three months ended September 30, 2021 and 2020, respectively, due to movements in foreign exchange rates and (ii) the forward foreign currency exchange contracts which resulted in a non-cash loss of $2,171,000 compared with a non-cash gain of $2,367,000 for the three months ended September 30, 2021 and 2020, respectively, due to the changes in their fair values.

Interest Expense

Interest Expense, net. Our interest expense for the three months ended September 30, 2021 of $3,620,000, was in line with interest expense for the three months ended September 30, 2020 of $3,614,000.

Provision for Income Taxes

Income Tax. We recorded income tax expense of $2,251,000, or an effective tax rate of 37.9%, and $6,097,000, or an effective tax rate of 28.6%, for the three months ended September 30, 2021 and 2020, respectively. Effective tax rates are based on current projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate. The effective tax rate for the three months ended September 30, 2021 was primarily impacted by (i) foreign income taxed at rates that are different from the federal statutory rate, (ii) non-deductible executive compensation under Internal Revenue Code Section 162(m), and (iii) specific jurisdictions that we do not expect to recognize the benefit of losses.

Results of Operations for the Six Months Ended September 30, 2021 and 2020

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,
 
   
2021
   
2020
 
Cash flow (used in) provided by operations
 
$
(24,339,000
)
 
$
39,330,000
 
Finished goods turnover (annualized) (1)
   
4.6
     
4.2
 



(1)
Annualized finished goods turnover for the fiscal period is calculated by multiplying cost of goods sold for the period by 2 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the fiscal period. Annualized finished goods turnover for the six months ended September 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:

   
Six Months Ended
September 30,
 
   
2021
   
2020
 
Net sales
 
$
324,582,000
   
$
250,086,000
 
Cost of goods sold
   
265,060,000
     
196,973,000
 
Gross profit
   
59,522,000
     
53,113,000
 
Gross profit percentage
   
18.3
%
   
21.2
%

Net Sales. Our net sales for the six months ended September 30, 2021 were $324,582,000, which represents an increase of $74,496,000, or 29.8%, from the six months ended September 30, 2020 of $250,086,000. While our net sales for the quarter increased across all product lines due to strong demand for our products, we continue to experience a number of challenges related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services. Net sales for the six months ended September 30, 2021 and 2020 include $13,740,000 and $12,779,000, respectively, in core revenue due to a realignment of inventory at certain customer distribution centers. We expect this realignment will benefit our future sales as product mix changes. Our prior year net sales were also impacted by the COVID-19 pandemic.

Gross Profit. Our gross profit was $59,522,000, or 18.3% of net sales, for the six months ended September 30, 2021 compared with $53,113,000, or 21.2% of net sales, for the six months ended September 30, 2020. Our gross profit was impacted by (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. During the six months ended September 30, 2021, higher freight costs impacted gross profit by approximately $6,075,000, or 1.9%. During the six months ended September 30, 2021, we also incurred additional expenses of $4,138,000 due to COVID-19 related costs for inefficiencies in the supply chain, increased salaries associated with COVID-19 vulnerable employee pay, and personal protective equipment. During the six months ended September 30, 2020, we incurred additional expenses of $3,373,000 due to increased salaries associated with COVID-19 bonuses, vulnerable employee pay, and personal protective equipment in connection with the COVID-19 pandemic.

Our gross profit for the six months ended September 30, 2021 and 2020 was also impacted by (i) transition expenses in connection with the expansion of our brake-related operations in Mexico of $2,744,000 and $7,355,000, respectively, and (ii) amortization of core premiums paid to customers related to new business of $5,543,000 and $2,741,000, respectively.

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 customer distribution centers, which resulted in a net gain of $2,191,000 and $2,115,000 for the six months ended September 30, 2021 and 2020, respectively, (ii) customer allowances and return accruals related to new business of $324,000 and $307,000 for the six months ended September 30, 2021 and 2020, respectively, and (iii) a $2,847,000 benefit for revised tariff costs during the six months ended September 30, 2020.

Operating Expenses

The following summarizes operating expenses:

   
Six Months Ended
September 30,
 
   
2021
   
2020
 
             
General and administrative
 
$
26,951,000
   
$
24,205,000
 
Sales and marketing
   
10,888,000
     
8,526,000
 
Research and development
   
4,996,000
     
3,914,000
 
Foreign exchange impact of lease liabilities and forward contracts
   
1,384,000
     
(8,802,000
)
                 
Percent of net sales
               
                 
General and administrative
   
8.3
%
   
9.7
%
Sales and marketing
   
3.4
%
   
3.4
%
Research and development
   
1.5
%
   
1.6
%
Foreign exchange impact of lease liabilities and forward contracts
   
0.4
%
   
(3.5
)%

General and Administrative. Our general and administrative expenses for the six months ended September 30, 2021 were $26,951,000, which represents an increase of $2,746,000, or 11.3%, from the six months ended September 30, 2020 of $24,205,000, however, general and administrative expenses as a percentage of net sales decreased to 8.3% for the six months ended September 30, 2021 from 9.7% for the prior year. The increase in general and administrative expense was primarily due to (i) $1,387,000 of increased costs at our offshore locations, primarily resulting from our expansion in Mexico, (ii) $1,214,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, (iii) $1,166,000 of increased share-based compensation due to equity grants made to employees in June 2021, and (iv) $392,000 of increased expense resulting from foreign currency transactions. These increases in general and administrative expenses were partially offset by $1,965,000 of decreased professional services.

Sales and Marketing. Our sales and marketing expenses for the six months ended September 30, 2021 were $10,888,000, which represents an increase of $2,362,000, or 27.7%, from the six months ended September 30, 2020 of $8,526,000. This increase in sales and marketing expense during the six months ended September 30, 2021 was primarily due to (i) $748,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, (ii) $664,000 of increased marketing in connection with new business and advertising expense, (iii) $631,000 of increased commissions due to higher sales, and (iv) $222,000 of increased travel.

Research and Development. Our research and development expenses for the six months ended September 30, 2021 were $4,996,000, which represents an increase of $1,082,000, or 27.6%, from the six months ended September 30, 2020 of $3,914,000. This increase in research and development expenses during the six months ended September 30, 2021 was primarily due to (i) $781,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, (ii) $185,000 of increased samples for our core library, and (iii) $101,000 of increased outside services.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts. Our foreign exchange impact of lease liabilities and forward contracts for the six months ended September 30, 2021 was a non-cash loss of $1,384,000, which represents an increase in expense of $10,186,000, or 115.7%, from the non-cash gain for six months ended September 30, 2020 of $8,802,000. This increase was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities which resulted in non-cash gains of $1,049,000 compared with $3,603,000 for the six months ended September 30, 2021 and 2020, respectively, due to movements in foreign exchange rates and (ii) the forward foreign currency exchange contracts which resulted in a non-cash loss of $2,433,000 compared with a non-cash gain of $5,199,000 for the six months ended September 30, 2021 and 2020, respectively, due to the changes in their fair values.

Interest Expense

Interest Expense, net. Our interest expense, net, for the six months ended September 30, 2021 was $7,561,000, which represents a decrease of $462,000, or 5.8%, from the six months ended September 30, 2020 of $8,023,000. The decrease in interest expense was primarily due to lower interest rates and lower average outstanding balances under our credit facility, partially offset by lower interest income on our cash balances.

Provision for Income Taxes

Income Tax. We recorded income tax expense of $3,198,000, or an effective tax rate of 41.3%, and $5,075,000, or an effective tax rate of 29.4%, for the six months ended September 30, 2021 and 2020, respectively. Effective tax rates are based on current projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate. The effective tax rate for the six months ended September 30, 2021 was primarily impacted by (i) foreign income taxed at rates that are different from the federal statutory rate, (ii) non-deductible executive compensation under Internal Revenue Code Section 162(m), and (iii) specific jurisdictions that we do not expect to recognize the benefit of losses.

Liquidity and Capital Resources

Overview

We had working capital (current assets minus current liabilities) of $107,707,000 compared with $96,725,000, a ratio of current assets to current liabilities of 1.3:1.0, at September 30, 2021 and March 31, 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 six months ended September 30, 2021 from the use of our receivable discount 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 September 30, 2021, $16,831,000 was utilized and $20,169,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility. We retired the 730,521 shares repurchased under this program through September 30, 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.

Cash Flows

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

   
Six Months Ended
September 30,
 
   
2021
   
2020
 
Cash flows (used in) provided by:
           
Operating activities
 
$
(24,339,000
)
 
$
39,330,000
 
Investing activities
   
(3,483,000
)
   
(7,002,000
)
Financing activities
   
30,283,000
     
(61,312,000
)
Effect of exchange rates on cash and cash equivalents
   
(73,000
)
   
255,000
 
Net increase (decrease) in cash and cash equivalents
 
$
2,388,000
   
$
(28,729,000
)
                 
Additional selected cash flow data:
               
Depreciation and amortization
 
$
6,364,000
   
$
5,233,000
 
Capital expenditures
   
3,238,000
     
6,810,000
 

Net cash used in operating activities was $24,339,000 during the six months ended September 30, 2021 compared with net cash provided by operating activities of $39,330,000 during the six months ended September 30, 2020. The significant change in our operating activities was due to (i) a decrease in our accounts payable compared with an increase in the prior year, (ii) the buildup of our inventory to meet anticipated future demand, and (iii) increased operating results (net income plus the net add-back for non-cash transactions in earnings). In addition, our operating activities continue to be impacted, to a lesser extent, by our growth initiatives, including our expanded footprint and product lines.

Net cash used in investing activities was $3,483,000 and $7,002,000 during the six months ended September 30, 2021 and 2020, respectively. The significant change in our investing activities was due primarily to decreased capital expenditures as we near the completion of our expansion in Mexico.

Net cash provided by financing activities was $30,283,000 during the six months ended September 30, 2021 compared with net cash used in financing activities $61,312,000 during the six months ended September 30, 2020. The significant change in our financing activities was due mainly to additional net borrowings under our credit facility during the six months ended September 30, 2021 to support the investment in our inventory and growth initiatives compared with repayments under our credit facility during the six months ended September 30, 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 $29,430,000 of dividends and share repurchases for 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.

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 2.84% at September 30, 2021, and 2.62% at March 31, 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 September 30, 2021.

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

   
Financial covenants required under the Credit Facility
   
Calculation as of
September 30, 2021
 
Maximum senior leverage ratio
   
3.00
     
1.95
 
Minimum fixed charge coverage ratio
   
1.10
     
1.37
 

We had cash of $17,911,000 at September 30, 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 1.89 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.

We had $120,000,000 and $84,000,000 outstanding under the Revolving Facility at September 30, 2021 and March 31, 2021, respectively. In addition, $6,694,000 was outstanding for letters of credit at September 30, 2021. At September 30, 2021, after certain contractual adjustments, $90,935,000 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,
 
   
2021
   
2020
 
Receivables discounted
 
$
268,410,000
   
$
222,310,000
 
Weighted average days
   
333
     
341
 
Annualized weighted average discount rate
   
1.8
%
   
2.3
%
Amount of discount recognized as interest expense
 
$
4,432,000
   
$
4,781,000
 

Off-Balance Sheet Arrangements

At September 30, 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.

Capital Expenditures and Commitments

Capital Expenditures

Our total capital expenditures, including finance leases and non-cash capital expenditures were $2,829,000 and $8,798,000 for the six months ended September 30, 2021 and 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 $13,500,000 of capital expenditures for our current operations and continued expansion of our operations in Mexico for the remainder of our fiscal year 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, 2021, which was filed on June 14, 2021.

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

Recently Adopted Accounting Pronouncements

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. The adoption of this guidance on April 1, 2021 did not have any material impact on our consolidated financial statements.