Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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, 2020 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 15, 2020.
Disclosure Regarding Private Securities Litigation Reform Act of 1995
This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our future performance that involve risks and uncertainties. Various factors could cause actual results to differ materially from those expressed or implied by such statements. These factors include, but are not limited to: the current and future impacts of the COVID-19 public health crisis; concentration of sales to a small number of customers; changes in the financial condition of or our relationship with any of our major customers; increases in the average accounts receivable collection period; the loss of sales to customers; delays in payments by customers; the increasing customer pressure for lower prices and more favorable payment and other terms; lower revenues than anticipated from new and existing contracts; the increasing demands on our working capital; the significant strain on working capital associated with large inventory purchases from customers; lower efficiency or production due to stay at home orders or other restrictions issued by governments due to COVID-19 concerns; any meaningful difference between expected production needs and ultimate sales to our customers; investments in operational changes or acquisitions; our ability to obtain any additional financing we may seek or require; our ability to maintain positive cash flows from operations; our failure to meet the financial covenants or the other obligations set forth in our credit agreement and the lenders’ refusal to waive any such defaults; increases in interest rates; the impact of high gasoline prices; consumer preferences and general economic conditions; increased competition in the automotive parts industry including increased competition from Chinese and other offshore manufacturers; difficulty in obtaining Used Cores and component parts or increases in the costs of those parts; political, criminal or economic instability in any of the foreign countries where we conduct operations; currency exchange fluctuations; potential tariffs, unforeseen increases in operating costs; risks associated with cyber-attacks; risks associated with conflict minerals; the impact of new tax laws and interpretations thereof; uncertainties affecting our ability to estimate our tax rate and other factors discussed herein and in our other filings with the Securities and Exchange Commission (the “SEC”). These and other risks and uncertainties may cause our actual results to differ materially and adversely from those expected in any forward-looking statements. Readers are directed to risks and uncertainties identified below under “Risk Factors” and elsewhere in this report for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Management Overview
We have been focused on implementing a multi-pronged platform for growth within the non-discretionary automotive aftermarket for the replacement parts and diagnostic testing industry, through organic growth and acquisitions. Our investments in infrastructure and human resources, including the consolidation of our distribution center in Mexico and the significant expansion of manufacturing capacity, are expected to be transformative and scalable. As a result, gross profit and net income have been impacted, and our future performance and opportunities should be considered with these factors in mind.
Our products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, and brake master cylinders, and (iv) diagnostics and other products, which include diagnostics systems, advanced power emulators used for the development of electric vehicles and aerospace applications, and custom power electronic products for quality control in the development and production of electric vehicles and turbochargers.
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 outbreak of the COVID-19 pandemic has spread globally and created significant volatility, uncertainty and economic disruption in many countries, including the countries in which we operate. National, state and local governments in these countries have implemented a variety of measures in response to the COVID-19 pandemic that have the effect of restricting or limiting, among other activities, the operations of certain businesses.
We experienced a significant reduction in customer demand for our products during April 2020, but sales have subsequently recovered. However, at this time, we are unable to predict accurately the ultimate long-term impact that COVID-19 will have on our business and financial condition. While the near-term outlook appears positive, any additional government shutdowns or the duration of a “second wave” or additional spikes could negatively impact our business and financial condition. There have been no serious outbreaks in any of our production facilities; however, a serious outbreak could affect our production capabilities.
Our business has continued to operate as we have been declared an essential business; however, we have experienced some disruption in our global supply chain as a result of the ongoing impact of COVID-19. In addition, we experienced inefficiencies in our operations due to the implementation of additional personnel safety measures throughout our facilities, which negatively affects our operating efficiencies. These personnel safety measures included adding an additional shift in conjunction with reducing the number of hours in the existing shift, greater spacing (less personnel) in production areas and sanitizing procedures between shifts. High-risk employees at all of our facilities have been required to remain at home; however, they continue to receive their compensation. We also implemented safe work practices across all of our facilities, including work from home rules, staggered shifts, Plexiglas barriers, and many other safety precautions. Our employees have embraced the challenges of working remotely, continuing to operate through constant communication with team members.
Enhanced levels of communication at all levels within the organization are critical to address the ever-changing landscape brought on by COVID-19, especially with most of our office staff continuing to work from home. Such efforts have included, board check-in meetings and executive committee meetings, as needed, and regular town hall style communications with all employees.
To date, we have incurred increased costs as a result of COVID-19, including increased employee costs, such as expanded benefits and frontline incentives, and other operating costs, such as costs associated with the provision of personal protective equipment, which have negatively impacted our profitability. During the three and six months ended September 30, 2020, these expanded benefits, supply costs and other COVID-19 related costs resulted in $2,048,000 and $4,343,000, respectively, of total expense included in cost of goods sold and operating expenses in the condensed consolidated statements of income. During the three and six months ended September 30, 2020, we received $484,000 and $849,000, respectively, in payments from the Canadian Government under the Canadian Emergency Wage Subsidy program and our Asian subsidiaries received $44,000 and $137,000, respectively, from their local government assistance programs. These payments are included in cost of goods sold and operating expenses in the condensed consolidated statements of income. In addition, we deferred the employer’s share of social security taxes of $812,000, which is included in other liabilities in the condensed consolidated balance sheet at September 30, 2020.
Due to the seriousness of the COVID-19 pandemic and the unknown impact at this time on our business, we conserved cash wherever practicable. We implemented furloughs, layoffs, and salary reductions. Salary decreases affected 175 employees, ranging from 5% - 50% of base pay. Salaries for all affected employees were reinstated at various dates through September 30, 2020. In addition, we implemented a worldwide travel ban and controls on all other expenses, including a freeze on hiring and salary increases.
Results of Operations for the Three Months Ended September 30, 2020 and 2019
The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.
The following summarizes certain key operating data:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Gross profit percentage
|
|
|
25.7
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%
|
|
|
24.3
|
%
|
Cash flow provided by (used in) operations
|
|
$
|
16,942,000
|
|
|
$
|
(8,357,000
|
)
|
Finished goods turnover (annualized) (1)
|
|
|
3.5
|
|
|
|
2.8
|
|
(1)
|
Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost of goods sold for the quarter by 4 and dividing the result by the average between beginning and ending finished goods inventory values, which includes all on-hand core inventory, for the fiscal quarter. We believe this provides a useful measure of our ability to turn our inventory into revenues.
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Net Sales and Gross Profit
The following summarizes net sales and gross profit:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
154,730,000
|
|
|
$
|
150,374,000
|
|
Cost of goods sold
|
|
|
115,004,000
|
|
|
|
113,801,000
|
|
Gross profit
|
|
|
39,726,000
|
|
|
|
36,573,000
|
|
Gross profit percentage
|
|
|
25.7
|
%
|
|
|
24.3
|
%
|
Net Sales. Our net sales for the three months ended September 30, 2020 increased by $4,356,000, or 2.9%, to $154,730,000 compared with net sales for the three months ended September 30, 2019 of $150,374,000. Net sales for the three months ended September 30, 2020 include $12,779,000 in core revenue due to a realignment of inventory at two customer distribution centers with expected future sales benefits as product mix changes. Net sales were negatively impacted due to challenges related to the COVID-19 pandemic.
Gross Profit. Our gross profit was $39,726,000, or 25.7% of net sales, for the three months ended September 30, 2020 compared with $36,573,000, or 24.3% of net sales, for the three months ended September 30, 2019. Our gross profit was negatively impacted by $1,533,000, or 1.0%, due to COVID-19 related costs.
The gross profit was also impacted by (i) a $2,847,000 benefit for revised tariff costs during the three months ended September 30, 2020 and (ii) non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value and gain due to realignment of inventory at two customer distribution centers, which resulted in a net gain of $3,499,000 during the three months ended September 30, 2020 compared with a write-down of $2,908,000 for the three months ended September 30, 2019.
Our gross profit for the three months ended September 30, 2020 and 2019 was also impacted by: (i) transition expenses in connection with the expansion of our operations in Mexico of $4,054,000 and $2,327,000, respectively, and (ii) amortization of core premiums paid to customers related to new business of $1,518,000 and $1,109,000, respectively.
In addition, gross profit for the three months ended September 30, 2019 was impacted by cost recovery of $293,000 in connection with the cancellation of a customer contract, and customer allowances related to new business of $242,000.
Operating Expenses
The following summarizes operating expenses:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
General and administrative
|
|
$
|
12,518,000
|
|
|
$
|
12,483,000
|
|
Sales and marketing
|
|
|
4,326,000
|
|
|
|
5,448,000
|
|
Research and development
|
|
|
1,972,000
|
|
|
|
2,148,000
|
|
Foreign exchange impact of lease liabilities and forward contracts
|
|
|
(3,985,000
|
)
|
|
|
1,802,000
|
|
|
|
|
|
|
|
|
|
|
Percent of net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
8.1
|
%
|
|
|
8.3
|
%
|
Sales and marketing
|
|
|
2.8
|
%
|
|
|
3.6
|
%
|
Research and development
|
|
|
1.3
|
%
|
|
|
1.4
|
%
|
Foreign exchange impact of lease liabilities and forward contracts
|
|
|
(2.6
|
)%
|
|
|
1.2
|
%
|
General and Administrative. Our general and administrative expenses for the three months ended September 30, 2020 were $12,518,000, which represents an increase of $35,000, or 0.3%, from general and administrative expenses for the three months ended September 30, 2019 of $12,483,000. The increase in general and administrative expense was from expanded benefits, supply costs and other COVID-19 related costs, which were partially offset by $323,000 in decreased professional services and $196,000 in decreased travel.
Sales and Marketing. Our sales and marketing expenses for the three months September 30, 2020 decreased $1,122,000, or 20.6%, to $4,326,000 from $5,448,000 for the three months ended September 30, 2019 primarily due to our cost-cutting measures in connection with COVID-19. These decreases in sales and marketing expense were as follows: (i) $390,000 from decreased travel, (ii) $279,000 of decreased advertising and marketing expense, (iii) $277,000 from decreased employee-related expenses, and (iv) $91,000 of decreased trade shows expense.
Research and Development. Our research and development expenses decreased by $176,000, or 8.2%, to $1,972,000 for the three months ended September 30, 2020 from $2,148,000 for the three months ended September 30, 2019 primarily due to our cost-cutting measures in connection with COVID-19.
Foreign Exchange Impact of Lease Liabilities and Forward Contracts. The remeasurement of our foreign currency-denominated lease liabilities resulted in a non-cash gain of $1,618,000 and a non-cash loss $1,139,000 for the three months ended September 30, 2020 and 2019, respectively, due to movements in foreign exchange rates. In addition, the forward foreign currency exchange contracts resulted in a non-cash gain of $2,367,000 and a non-cash loss $663,000 for the three months ended September 30, 2020 and 2019, respectively, due to the changes in their fair values.
Interest Expense
Interest Expense, net. Our interest expense, net for the three months ended September 30, 2020 decreased $2,909,000, or 44.6%, to $3,614,000 from $6,523,000 for the three months ended September 30, 2019, primarily due to lower interest rates and lower average outstanding balances under our credit facility.
Provision for Income Taxes
Income Tax. We recorded income tax expense of $6,097,000, or an effective tax rate of 28.6%, and $1,980,000, or an effective tax rate of 24.2%, for the three months ended September 30, 2020 and 2019, respectively. The effective tax rate for the three months September 30, 2020, was primarily impacted by non-deductible executive compensation under Internal Revenue Code Section 162(m) and foreign income taxed at rates that are different from the federal statutory rate.
Results of Operations for the Six Months Ended September 30, 2020 and 2019
The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.
The following summarizes certain key operating data:
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Gross profit percentage
|
|
|
21.2
|
%
|
|
|
20.9
|
%
|
Cash flow provided by (used in) operations
|
|
$
|
39,330,000
|
|
|
$
|
(26,736,000
|
)
|
Finished goods turnover (annualized) (1)
|
|
|
3.0
|
|
|
|
2.7
|
|
(1)
|
Annualized finished goods turnover for the period is calculated by multiplying cost of goods sold for the period by 2 and dividing the result by the average between beginning and ending finished goods inventory values, which includes all on-hand core inventory, for the period. We believe this provides a useful measure of our ability to turn our inventory into revenues.
|
Net Sales and Gross Profit
The following summarizes net sales and gross profit:
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
250,086,000
|
|
|
$
|
259,522,000
|
|
Cost of goods sold
|
|
|
196,973,000
|
|
|
|
205,366,000
|
|
Gross profit
|
|
|
53,113,000
|
|
|
|
54,156,000
|
|
Gross profit percentage
|
|
|
21.2
|
%
|
|
|
20.9
|
%
|
Net Sales. Our net sales for the six months ended September 30, 2020 decreased by $9,436,000, or 3.6%, to $250,086,000 compared with net sales for the six months ended September 30, 2019 of $259,522,000. Our net sales were negatively impacted due to challenges related to the COVID-19 pandemic partially offset by $12,779,000 in core revenue due to a realignment of inventory at two customer distribution centers with expected future sales benefits as product mix changes.
Gross Profit. Our gross profit was $53,113,000, or 21.2% of net sales, for the six months ended September 30, 2020 compared with $54,156,000, or 20.9% of net sales, for the six months ended September 30, 2019. Our gross profit was negatively impacted by $3,373,000, or 1.3%, due to COVID-19 related costs.
The gross profit was also impacted by (i) a $2,847,000 benefit for revised tariff costs during the six months ended September 30, 2020 and (ii) non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value and gain due to realignment of inventory at two customer distribution centers, which resulted in a net gain of $2,115,000 during the six months ended September 30, 2020 compared with a write-down of $7,472,000 for the six months ended September 30, 2019.
Our gross profit for the six months ended September 30, 2020 and 2019 was also impacted by: (i) transition expenses in connection with the expansion of our operations in Mexico of $7,355,000 and $3,681,000, respectively, (ii) amortization of core premiums paid to customers related to new business of $2,741,000 and $2,217,000, respectively, and (iii) customer allowances and return accruals related to new business of $307,000 and $342,000, respectively.
In addition, gross profit for the six months ended September 30, 2019 was impacted by net tariff costs of $1,067,000 not passed through to customers, and cost of $133,000 in connection with the cancellation of a customer contract.
Operating Expenses
The following summarizes operating expenses:
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
24,205,000
|
|
|
$
|
25,020,000
|
|
Sales and marketing
|
|
|
8,526,000
|
|
|
|
10,367,000
|
|
Research and development
|
|
|
3,914,000
|
|
|
|
4,520,000
|
|
Foreign exchange impact of lease liabilities and forward contracts
|
|
|
(8,802,000
|
)
|
|
|
1,265,000
|
|
|
|
|
|
|
|
|
|
|
Percent of net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
9.7
|
%
|
|
|
9.6
|
%
|
Sales and marketing
|
|
|
3.4
|
%
|
|
|
4.0
|
%
|
Research and development
|
|
|
1.6
|
%
|
|
|
1.7
|
%
|
Foreign exchange impact of lease liabilities and forward contracts
|
|
|
(3.5
|
)%
|
|
|
0.5
|
%
|
General and Administrative. Our general and administrative expenses for the six months ended September 30, 2020 were $24,205,000, which represents a decrease of $815,000, or 3.3%, from general and administrative expenses for the six months ended September 30, 2019 of $25,020,000. This decrease in general and administrative expense was due to $1,233,000 in decreased professional services and $372,000 in decreased travel. This decrease was partially offset by expanded benefits, supply costs and other COVID-19 related costs.
Sales and Marketing. Our sales and marketing expenses for the six months September 30, 2020 decreased $1,841,000, or 17.8%, to $8,526,000 from $10,367,000 for the six months ended September 30, 2019 primarily due to our cost-cutting measures in connection with COVID-19. These decreases in sales and marketing expense were as follows: (i) $798,000 from decreased travel, (ii) $559,000 from decreased advertising and marketing expense, (iii) $401,000 from decreased employee-related expenses, and (iv) $170,000 of decreased trade shows expense.
Research and Development. Our research and development expenses decreased by $606,000, or 13.4%, to $3,914,000 for the six months ended September 30, 2020 from $4,520,000 for the six months ended September 30, 2019 primarily due to our cost-cutting measures in connection with COVID-19. This decrease in research and development was due to $403,000 of decreased employee-related expenses and $88,000 of decreased expense for our sample library.
Foreign Exchange Impact of Lease Liabilities and Forward Contracts. The remeasurement of our foreign currency denominated lease liabilities resulted in a non-cash gain of $3,603,000 and a non-cash loss $637,000 for the six months ended September 30, 2020 and 2019, respectively, due to movements in foreign exchange rates. In addition, the forward foreign currency exchange contracts resulted in a non-cash gain of $5,199,000 and a non-cash loss $628,000 for the six months ended September 30, 2020 and 2019, respectively, due primarily to the changes in their fair values.
Interest Expense
Interest Expense, net. Our interest expense, net for the six months ended September 30, 2020 decreased $4,673,000, or 36.8%, to $8,023,000 from $12,696,000 for the six months ended September 30, 2019, primarily due to lower interest rates and lower average outstanding balances under our credit facility.
Provision for Income Taxes
Income Tax. We recorded income tax expense of $5,075,000, or an effective tax rate of 29.4%, and $250,000, or an effective tax rate of 86.8%, for the six months ended September 30, 2020 and 2019, respectively. The effective tax rate for the six months ended September 30, 2020, was primarily impacted by non-deductible executive compensation under Internal Revenue Code Section 162(m) and foreign income taxed at rates that are different from the federal statutory rate.
Liquidity and Capital Resources
Overview
We had working capital (current assets minus current liabilities) of $94,174,000 and $90,624,000, a ratio of current assets to current liabilities of 1.3:1.0 at September 30, 2020 and March 31, 2020, respectively.
We generated cash during the six months ended September 30, 2020 from operations and the use of receivable discount programs. 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
As of September 30, 2020, $15,692,000 of the $37,000,000 authorized share repurchase program had been utilized and $21,308,000 remained available to repurchase shares, subject to the limit in our credit facility. Our credit facility currently permits the payment of up to $30,000,000 of dividends and share repurchases for this fiscal year, subject to pro forma compliance with financial covenants. We retired the 675,561 shares repurchased under this program through September 30, 2020. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.
Cash Flows
The following summarizes cash flows as reflected in the condensed consolidated statements of cash flows:
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
39,330,000
|
|
|
$
|
(26,736,000
|
)
|
Investing activities
|
|
|
(7,002,000
|
)
|
|
|
(5,701,000
|
)
|
Financing activities
|
|
|
(61,312,000
|
)
|
|
|
29,059,000
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
255,000
|
|
|
|
(78,000
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(28,729,000
|
)
|
|
$
|
(3,456,000
|
)
|
|
|
|
|
|
|
|
|
|
Additional selected cash flow data:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
5,233,000
|
|
|
$
|
4,619,000
|
|
Capital expenditures
|
|
|
6,810,000
|
|
|
|
6,943,000
|
|
Net cash provided by operating activities was $39,330,000 during the six months ended September 30, 2020 compared with net cash used in operating activities of $26,736,000 during the six months ended September 30, 2019. The significant change in our operating activities for the current year was due to increased operating results (net income plus the net add-back for non-cash transactions in earnings) and an increase in average days outstanding of accounts payable balances. In addition, our prior year operating activities were significantly impacted by our growth initiatives, including our new expanded footprint and product lines.
Net cash used in investing activities was $7,002,000 and $5,701,000 during the six months ended September 30, 2020 and 2019, respectively, due to the redemption of short-term investments during the prior year.
Net cash used in financing activities was $61,312,000 during the six months ended September 30, 2020 compared with net cash provided by financing activities $29,059,000 during the six months ended September 30, 2019. The significant change in our financing activities was due to reducing our outstanding debt by $59,875,000 during the six months ended September 30, 2020 compared with borrowing to support our growth initiatives, including the expansion of our operations in Mexico and our product line expansion during the six months ended September 30, 2019.
Capital Resources
Credit Facility
We are party to a $268,620,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $238,620,000 revolving loan facility, subject to borrowing base restrictions, a $24,000,000 sublimit for borrowings by Canadian borrowers, and a $20,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $30,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 5, 2023. The Credit Facility currently permits the payment of up to $30,000,000 of dividends and share repurchases for this fiscal year, 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.
The Term Loans require quarterly principal payments of $937,500. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.25%, 2.50% or 2.75% or a reference rate plus a margin of 1.25%, 1.50% or 1.75%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on our Term Loans and Revolving Facility was 2.91%, at September 30, 2020, and 4.34% and 3.64%, respectively at March 31, 2020.
The Credit Facility, among other things, requires us to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all financial covenants as of September 30, 2020.
The following summarizes the financial covenants required under the Credit Facility:
|
|
Financial covenants
required under the
Credit Facility
|
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Calculation as of
September 30, 2020
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Maximum senior leverage ratio
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3.00
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1.56
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Minimum fixed charge coverage ratio
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1.10
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1.35
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We had cash of $20,887,000 at September 30, 2020 and paid down our outstanding debt by $59,875,000 during the six months ended September 30, 2020. However, the Credit Facility only allows up to $6,000,000 of credit for cash when computing the senior leverage ratio. Our senior leverage ratio would have been 1.43 had we paid down the Revolving Facility with cash on hand. In addition to other covenants, the Credit Facility places limits on our ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by us and our subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.
We had $94,000,000 and $152,000,000 outstanding under the Revolving Facility at September 30, 2020 and March 31, 2020, respectively. In addition, $5,963,000 was outstanding for letters of credit at September 30, 2020. At September 30, 2020, after certain contractual adjustments, $97,046,000 was available under the Revolving Facility.
Receivable Discount Programs
We use receivable discount programs with certain customers and their respective banks. Under these programs, we have options to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow us to accelerate receipt of payment on customers’ receivables. While these arrangements have reduced our working capital needs, there can be no assurance that these programs will continue in the future. Interest expense resulting from these programs would increase if interest rates rise, if utilization of these discounting arrangements expands, if customers extend their payment to us, or if the discount period is extended to reflect more favorable payment terms to customers.
The following is a summary of the receivable discount programs:
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Six Months Ended
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September 30,
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2020
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2019
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Receivables discounted
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$
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222,310,000
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$
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205,882,000
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Weighted average days
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341
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346
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Annualized weighted average discount rate
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2.3
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%
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3.6
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%
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Amount of discount recognized as interest expense
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$
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4,781,000
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$
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7,196,000
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Off-Balance Sheet Arrangements
At September 30, 2020, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.
Capital Expenditures and Commitments
Capital Expenditures
Our total capital expenditures, including finance leases and non-cash capital expenditures were $8,798,000 and $9,251,000 for the six months ended September 30, 2020 and 2019, respectively. These capital expenditures primarily include the purchase of equipment for our current operations and the expansion of our operations in Mexico. We expect to incur approximately $4,900,000 of capital expenditures for our current operations and approximately $12,400,000 for continued expansion of our operations in Mexico for the full fiscal year 2021. We have used and expect to continue using our working capital and other available capital resources to fund these capital expenditures.
Litigation
There have been no material changes to our litigation matters that are presented in our Annual Report on Form 10-K for the year ended March 31, 2020, which was filed on June 15, 2020.
Critical Accounting Policies
There have been no material changes to our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2020, which was filed on June 15, 2020, except as discussed below.
New Accounting Pronouncements Recently Adopted
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued an accounting pronouncement related to the measurement of credit losses on financial instruments. This pronouncement, along with a subsequent Accounting Standards Updates (“ASU”) issued to clarify certain provisions of the new guidance, changed the impairment model for most financial assets and requires the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The adoption of this guidance on April 1, 2020 increased our required disclosures for our expected credit losses but did not have a material effect on our condensed consolidated financial statements.
Prior to April 1, 2020, accounts receivable were recorded at cost less an allowance for doubtful accounts. The net amount of accounts receivable and corresponding allowance for doubtful accounts were presented in the condensed consolidated balance sheets. We maintain an allowance for uncollectible accounts receivable for estimated losses resulting from the failure or inability of its customers to make required payments. Furthermore, receivable balances were assessed quarterly for impairment and an allowance was recorded if the receivable was considered impaired. Subsequent to April 1, 2020, accounts receivable are recorded at amortized cost less an allowance for credit losses that are not expected to be recovered. The net amount of accounts receivable and corresponding allowance for credit losses are presented separately in the condensed consolidated balance sheets. We maintain an allowance for credit losses resulting from the expected failure or inability of our customers to make required payments. We recognize the allowance for credit losses at inception and reassess quarterly based on the asset’s expected collectability. The allowance is based on multiple factors including historical experience with bad debts, the credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, such as COVID-19, as well as expectations of conditions in the future, if applicable. Our allowance for credit losses is based on the assessment of the collectability of assets pooled together with similar risk characteristics.
We record a provision for expected credit losses using a loss-rate method based on the ratio of our historical write-offs to our average trade accounts receivable. At each reporting period, we will assess whether financial assets in a pool continue to display similar risk characteristics. If particular receivables no longer display risk characteristics that are similar to those of the receivables in the pool, we may determine that we need to move those receivables to a different pool or perform an individual assessment of expected credit losses for those specific receivables.
Fair Value Measurements
In August 2018, the FASB issued guidance, which changed the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 measurements, and the narrative description of measurement uncertainty should be applied prospectively only for the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively applied to all periods presented upon their effective date. The adoption of this guidance on April 1, 2020 modified certain of our disclosures for our Level 3 fair value measurements but did not have an impact on our consolidated financial statements.
Reference Rate Reform
In March 2020, the FASB issued guidance that, for a limited time, eases the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We will apply these amendments prospectively. The adoption of this guidance on April 1, 2020 did not have an impact on our condensed consolidated financial statements for the three and six months ended September 30, 2020.
New Accounting Pronouncements Not Yet Adopted
Income Taxes
In December 2019, the FASB issued guidance that simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application. This guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.