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, 2020

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 19,050,147 shares of Common Stock outstanding at November 2, 2020.







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 program. Our customers receive these Used Cores from consumers who deliver a Used Core to obtain credit from our customers upon the purchase of a newly remanufactured automobile part. When sufficient Used Cores are not available from our customers, we purchase Used Cores from core brokers, who are in the business of buying and selling Used Cores. The Used Cores purchased from core brokers or returned to us by our customers under the core exchange program, and which have been physically received by us, are part of our raw material and work-in-process inventory. Used Cores returned by consumers to our customers but not yet returned to us are classified as contract assets until we physically receive these Used Cores.

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

.
PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements

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

 
September 30, 2020
   
March 31, 2020
 
ASSETS
 
(Unaudited)
       
Current assets:
           
Cash and cash equivalents
 
$
20,887,000
   
$
49,616,000
 
Short-term investments
   
1,237,000
     
850,000
 
Accounts receivable — net
   
91,088,000
     
91,748,000
 
Inventory
   
240,018,000
     
234,680,000
 
Contract assets
   
33,309,000
     
20,332,000
 
Prepaid expenses and other current assets
   
10,463,000
     
11,890,000
 
Total current assets
   
397,002,000
     
409,116,000
 
Plant and equipment — net
   
49,893,000
     
44,957,000
 
Operating lease assets
   
68,530,000
     
53,029,000
 
Long-term deferred income taxes
   
18,706,000
     
18,950,000
 
Long-term contract assets
   
234,590,000
     
239,540,000
 
Goodwill and intangible assets — net
   
9,077,000
     
9,598,000
 
Other assets
   
1,638,000
     
1,839,000
 
TOTAL ASSETS
 
$
779,436,000
   
$
777,029,000
 
LIABILITIES AND SHAREHOLDERS'  EQUITY
               
Current liabilities:
               
Accounts payable and accrued liabilities
 
$
121,550,000
   
$
95,083,000
 
Customer finished goods returns accrual
   
27,561,000
     
25,326,000
 
Contract liabilities
   
44,657,000
     
27,911,000
 
Revolving loan
   
94,000,000
     
152,000,000
 
Other current liabilities
   
5,154,000
     
9,390,000
 
Operating lease liabilities
   
6,228,000
     
5,104,000
 
Current portion of term loan
   
3,678,000
     
3,678,000
 
Total current liabilities
   
302,828,000
     
318,492,000
 
Term loan, less current portion
   
18,624,000
     
20,462,000
 
Long-term contract liabilities
   
90,223,000
     
92,101,000
 
Long-term deferred income taxes
   
75,000
     
79,000
 
Long-term operating lease liabilities
   
72,959,000
     
61,425,000
 
Other liabilities
   
6,732,000
     
8,950,000
 
Total liabilities
   
491,441,000
     
501,509,000
 
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; 19,026,587 and 18,969,380 shares issued and outstanding at September 30, 2020 and March 31, 2020, respectively
   
190,000
     
190,000
 
Additional paid-in capital
   
220,588,000
     
218,581,000
 
Retained earnings
   
76,289,000
     
64,117,000
 
Accumulated other comprehensive loss
   
(9,072,000
)
   
(7,368,000
)
Total shareholders' equity
   
287,995,000
     
275,520,000
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
779,436,000
   
$
777,029,000
 

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,
 
   
2020
   
2019
   
2020
   
2019
 
                         
                         
Net sales
 
$
154,730,000
   
$
150,374,000
   
$
250,086,000
   
$
259,522,000
 
Cost of goods sold
   
115,004,000
     
113,801,000
     
196,973,000
     
205,366,000
 
Gross profit
   
39,726,000
     
36,573,000
     
53,113,000
     
54,156,000
 
Operating expenses:
                               
General and administrative
   
12,518,000
     
12,483,000
     
24,205,000
     
25,020,000
 
Sales and marketing
   
4,326,000
     
5,448,000
     
8,526,000
     
10,367,000
 
Research and development
   
1,972,000
     
2,148,000
     
3,914,000
     
4,520,000
 
Foreign exchange impact of lease liabilities and forward contracts
   
(3,985,000
)
   
1,802,000
     
(8,802,000
)
   
1,265,000
 
Total operating expenses
   
14,831,000
     
21,881,000
     
27,843,000
     
41,172,000
 
Operating income
   
24,895,000
     
14,692,000
     
25,270,000
     
12,984,000
 
Interest expense, net
   
3,614,000
     
6,523,000
     
8,023,000
     
12,696,000
 
Income before income tax expense
   
21,281,000
     
8,169,000
     
17,247,000
     
288,000
 
Income tax expense
   
6,097,000
     
1,980,000
     
5,075,000
     
250,000
 
Net income
 
$
15,184,000
   
$
6,189,000
   
$
12,172,000
   
$
38,000
 
Basic net income per share
 
$
0.80
   
$
0.33
   
$
0.64
   
$
0.00
 
Diluted net income per share
 
$
0.78
   
$
0.32
   
$
0.63
   
$
0.00
 
Weighted average number of shares outstanding:
                               
Basic
   
19,022,414
     
18,903,182
     
18,999,461
     
18,862,901
 
Diluted
   
19,345,311
     
19,217,327
     
19,289,765
     
19,246,599
 

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,
 
 
2020
   
2019
   
2020
   
2019
 
                         
Net income
 
$
15,184,000
   
$
6,189,000
   
$
12,172,000
   
$
38,000
 
Other comprehensive (loss) income, net of tax:
                               
Foreign currency translation (loss) gain
   
(441,000
)
   
(431,000
)
   
(1,704,000
)
   
168,000
 
Total other comprehensive (loss) income, net of tax
   
(441,000
)
   
(431,000
)
   
(1,704,000
)
   
168,000
 
Comprehensive income
 
$
14,743,000
   
$
5,758,000
   
$
10,468,000
   
$
206,000
 

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, 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
 

 
Common Stock
                         
   
Shares
   
Amount
   
Additional
Paid-in
Capital
Common
Stock
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
 
                                     
Balance at March 31,2019
   
18,817,400
   
$
188,000
   
$
215,047,000
   
$
71,407,000
   
$
(6,887,000
)
 
$
279,755,000
 
Compensation recognized under employee stock plans
   
-
     
-
     
988,000
     
-
     
-
     
988,000
 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
   
36,872
     
1,000
     
(363,000
)
   
-
     
-
     
(362,000
)
Foreign currency translation
   
-
     
-
     
-
     
-
     
599,000
     
599,000
 
Net loss
   
-
     
-
     
-
     
(6,151,000
)
   
-
     
(6,151,000
)
Balance at June 30, 2019
   
18,854,272
   
$
189,000
   
$
215,672,000
   
$
65,256,000
   
$
(6,288,000
)
 
$
274,829,000
 
Compensation recognized under employee stock plans
   
-
     
-
     
1,053,000
     
-
     
-
     
1,053,000
 
Exercise of stock options
   
52,800
     
-
     
405,000
     
-
     
-
     
405,000
 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
   
37,814
     
-
     
(700,000
)
   
-
     
-
     
(700,000
)
Foreign currency translation
   
-
     
-
     
-
     
-
     
(431,000
)
   
(431,000
)
Net income
   
-
     
-
     
-
     
6,189,000
     
-
     
6,189,000
 
Balance at September 30, 2019
   
18,944,886
   
$
189,000
   
$
216,430,000
   
$
71,445,000
   
$
(6,719,000
)
 
$
281,345,000
 

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,
 
   
2020
   
2019
 
Cash flows from operating activities:
           
Net income
 
$
12,172,000
   
$
38,000
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
   
5,233,000
     
4,619,000
 
Amortization of interest
   
767,000
     
861,000
 
Amortization of core premiums paid to customers
   
2,741,000
     
2,217,000
 
Noncash lease expense
   
3,410,000
     
2,431,000
 
(Gain) loss due to the change in the fair value of the contingent consideration
   
(65,000
)
   
123,000
 
Foreign exchange impact of lease liabilities and forward contracts
   
(8,802,000
)
   
1,265,000
 
Gain on short-term investments
   
(195,000
)
   
(136,000
)
Net provision for inventory reserves
   
5,281,000
     
6,656,000
 
Net provision for customer payment discrepancies and credit losses
   
421,000
     
827,000
 
Deferred income taxes
   
447,000
     
(638,000
)
Share-based compensation expense
   
2,261,000
     
2,041,000
 
Loss on disposal of plant and equipment
   
1,000
     
3,000
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
661,000
     
(14,672,000
)
Inventory
   
(9,685,000
)
   
(23,469,000
)
Prepaid expenses and other current assets
   
1,200,000
     
306,000
 
Other assets
   
297,000
     
182,000
 
Accounts payable and accrued liabilities
   
22,745,000
     
(6,600,000
)
Customer finished goods returns accrual
   
2,217,000
     
1,005,000
 
Contract assets, net
   
(10,735,000
)
   
(1,956,000
)
Contract liabilities, net
   
14,368,000
     
1,405,000
 
Operating lease liabilities
   
(3,027,000
)
   
(2,107,000
)
Other liabilities
   
(2,383,000
)
   
(1,137,000
)
Net cash provided by (used in) operating activities
   
39,330,000
     
(26,736,000
)
Cash flows from investing activities:
               
Purchase of plant and equipment
   
(6,810,000
)
   
(6,943,000
)
Proceeds from sale of plant and equipment
   
-
     
26,000
 
Change in short-term investments
   
(192,000
)
   
1,216,000
 
Net cash used in investing activities
   
(7,002,000
)
   
(5,701,000
)
Cash flows from financing activities:
               
Borrowings under revolving loan
   
-
     
42,000,000
 
Repayments of revolving loan
   
(58,000,000
)
   
(8,400,000
)
Repayments of term loan
   
(1,875,000
)
   
(1,875,000
)
Payments for debt issuance costs
   
-
     
(901,000
)
Payments on finance lease obligations
   
(1,183,000
)
   
(1,108,000
)
Exercise of stock options
   
93,000
     
405,000
 
Cash used to net share settle equity awards
   
(347,000
)
   
(1,062,000
)
Net cash (used in) provided by financing activities
   
(61,312,000
)
   
29,059,000
 
Effect of exchange rate changes on cash and cash equivalents
   
255,000
     
(78,000
)
Net decrease in cash and cash equivalents
   
(28,729,000
)
   
(3,456,000
)
Cash and cash equivalents — Beginning of period
   
49,616,000
     
9,911,000
 
Cash and cash equivalents  — End of period
 
$
20,887,000
   
$
6,455,000
 
Supplemental disclosures of cash flow information:
               
Cash paid for interest, net
 
$
7,339,000
   
$
11,859,000
 
Cash paid for income taxes, net of refunds
   
1,436,000
     
-
 
Cash paid for operating leases
   
5,323,000
     
3,538,000
 
Cash paid for finance leases
   
1,359,000
     
1,249,000
 
Plant and equipment acquired under finance leases
   
1,847,000
     
2,308,000
 
Assets acquired under operating leases
   
15,564,000
     
1,497,000
 
Non-cash capital expenditures
   
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, 2020
(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 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 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, 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.

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

Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for segment reporting, the Company has identified its chief operating decision maker (“CODM”), reviewed the documents used by the CODM, and understands how such documents are used by the CODM to make financial and operating decisions. The Company has determined through this review process that its business comprises 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 has led to adverse impacts on the U.S. and global economies and created 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 duration of a “second wave” or additional spikes, (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, and (v) 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. At this time, the Company is unable to predict accurately the ultimate long-term impact the COVID-19 pandemic will have on its business and financial condition.

2. Basis of Presentation and New Accounting Pronouncements

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. 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, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2021. This report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2020, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 15, 2020.

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, 2020.

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 are required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The adoption of this guidance on April 1, 2020 increased the Company’s required disclosures for its expected credit losses but did not have a material effect on its condensed consolidated financial statements.

Prior to April 1, 2020, accounts receivable were recorded at cost less an allowance for doubtful accounts. The net amount of accounts receivable and corresponding allowance for doubtful accounts were presented in the condensed consolidated balance sheets. The Company maintains allowances for uncollectible accounts receivable for estimated losses resulting from the failure or inability of its customers to make required payments. Furthermore, receivable balances were assessed quarterly for impairment and an allowance was recorded if the receivable was considered impaired. Subsequent to April 1, 2020, accounts receivable are recorded at amortized cost less an allowance for credit losses that are not expected to be recovered. The net amount of accounts receivable and corresponding allowance for credit losses are presented separately in the condensed consolidated balance sheets. The Company maintains allowances for credit losses resulting from the expected failure or inability of its customers to make required payments. The Company recognizes the allowance for credit losses at inception and reassess quarterly based on the asset’s expected collectability. The allowance is based on multiple factors including historical experience with bad debts, the credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, such as COVID-19, as well as expectations of conditions in the future, if applicable. The Company’s allowance for credit losses is based on the assessment of the collectability of assets pooled together with similar risk characteristics.

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

Fair Value Measurements

In August 2018, the FASB issued guidance, which changed the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 measurements, and the narrative description of measurement uncertainty should be applied prospectively only for the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively applied to all periods presented upon their effective date. The adoption of this guidance on April 1, 2020 modified certain of the Company’s disclosures for its Level 3 fair value measurements but did not have an impact on its consolidated financial statements.

Reference Rate Reform

In March 2020, the FASB issued guidance that, for a limited time, eases the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company will apply these amendments prospectively. The adoption of this guidance on April 1, 2020 did not have an impact on the Company’s condensed consolidated financial statements for the three and six months ended September 30, 2020.

New Accounting Pronouncements Not Yet Adopted

Income Taxes

In December 2019, the FASB issued guidance that simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application. This guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its 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 customer payment discrepancies, returned goods authorizations (“RGAs”) issued for in-transit unit returns, and allowances for credit losses. The Company believes its credit risk with respect to trade accounts receivable is limited due to its credit evaluation process and the long-term nature of its relationships with its largest customers. The Company utilizes a historical loss rate method, adjusted for any changes in economic conditions or risk characteristics, to estimate its expected credit losses each period. When developing an estimate of expected credit losses, the Company considers all available relevant information regarding the collectability of cash flows, including historical information, current conditions, and reasonable and supportable forecasts of future economic conditions over the contractual life of the receivable. The historical loss rate method considers past write-offs of trade accounts receivable over a period commensurate with the initial term of the Company’s contracts with its customers. The Company recognizes the allowance for credit losses at inception and reassesses quarterly based on management’s expectation of the asset’s collectability. The Company’s accounts receivable are short-term in nature and written off only when all collection attempts have failed. The Company uses receivable discount programs with certain customers and their respective banks (see Note 10).

Accounts receivable — net is comprised of the following:

 
 
September 30, 2020
   
March 31, 2020
 
Accounts receivable — trade
 
$
109,443,000
   
$
109,164,000
 
Allowance for credit losses
   
(483,000
)
   
(4,252,000
)
Customer payment discrepancies
   
(1,059,000
)
   
(1,040,000
)
Customer returns RGA issued
   
(16,813,000
)
   
(12,124,000
)
Total accounts receivable — net
 
$
91,088,000
   
$
91,748,000
 

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 the bankruptcy filing of one of its customers in fiscal 2016.

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

4. Inventory

Inventory is comprised of the following:

 
 
September 30, 2020
   
March 31, 2020
 
Inventory
           
Raw materials
 
$
106,790,000
   
$
99,360,000
 
Work-in-process
   
8,527,000
     
3,906,000
 
Finished goods
   
128,101,000
     
135,601,000
 
 
   
243,418,000
     
238,867,000
 
Less allowance for excess and obsolete inventory
   
(13,752,000
)
   
(13,208,000
)
Inventory — net
   
229,666,000
     
225,659,000
 
Inventory unreturned
   
10,352,000
     
9,021,000
 
Total inventory
 
$
240,018,000
   
$
234,680,000
 

5. Contract Assets

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

Contract assets are comprised of the following:

 
 
September 30, 2020
   
March 31, 2020
 
Short-term contract assets
           
Cores expected to be returned by customers
 
$
26,021,000
   
$
12,579,000
 
Upfront payments to customers
   
1,618,000
     
2,865,000
 
Core premiums paid to customers
   
5,670,000
     
4,888,000
 
Total short-term contract assets
 
$
33,309,000
   
$
20,332,000
 
 
               
Long-term contract assets
               
Remanufactured cores held at customers' locations
 
$
209,366,000
   
$
217,616,000
 
Upfront payments to customers
   
435,000
     
589,000
 
Core premiums paid to customers
   
19,220,000
     
15,766,000
 
Long-term core inventory deposits
   
5,569,000
     
5,569,000
 
 Total long-term contract assets
 
$
234,590,000
   
$
239,540,000
 

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
 
 
 
2020
   
2019
   
2020
   
2019
 
Net sales
                       
Customer A
   
45
%
   
41
%
   
45
%
   
40
%
Customer B
   
21
%
   
20
%
   
23
%
   
21
%
Customer C
   
23
%
   
23
%
   
20
%
   
22
%

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

 
 
September 30, 2020
   
March 31,2020
 
Accounts receivable - trade
           
Customer A
   
42
%
   
28
%
Customer B
   
20
%
   
14
%
Customer C
   
18
%
   
33
%

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
 
 
 
2020
   
2019
   
2020
   
2019
 
Rotating electrical products
   
80
%
   
77
%
   
77
%
   
76
%
Wheel hub products
   
12
%
   
15
%
   
14
%
   
16
%
Brake related products
   
7
%
   
6
%
   
8
%
   
6
%
Other products
   
1
%
   
2
%
   
1
%
   
2
%
 
   
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, 2020 and 2019.

7. Debt

The Company is party to a $268,620,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $238,620,000 revolving loan facility, subject to borrowing base restrictions, a $24,000,000 sublimit for borrowings by Canadian borrowers, and a $20,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $30,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 5, 2023. The Credit Facility currently permits the payment of up to $30,000,000 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 the assets of the Company.

The Term Loans require quarterly principal payments of $937,500. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.25%, 2.50% or 2.75% or a reference rate plus a margin of 1.25%, 1.50% or 1.75%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on the Company’s Term Loans and Revolving Facility was 2.91% at September 30, 2020, and 4.34% and 3.64%, respectively, at March 31, 2020.

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, 2020.

The Company had cash of $20,887,000 at September 30, 2020 and paid down its 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. In addition to other covenants, the Credit Facility places limits on the Company’s ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by the Company and its subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.

The following summarizes information about the Term Loans:

 
 
September 30, 2020
   
March 31, 2020
 
Principal amount of term loan
 
$
22,500,000
   
$
24,375,000
 
Unamortized financing fees
   
(198,000
)
   
(235,000
)
Net carrying amount of term loan
   
22,302,000
     
24,140,000
 
Less current portion of term loan
   
(3,678,000
)
   
(3,678,000
)
Long-term portion of term loan
 
$
18,624,000
   
$
20,462,000
 

Future repayments of the Term Loans are as follows:

Year Ending March 31,
     
2021 - remaining six months
 
$
1,875,000
 
2022
   
3,750,000
 
2023
   
3,750,000
 
2024
   
13,125,000
 
Total payments
 
$
22,500,000
 

The Company 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.

8. Contract Liabilities

Contract liabilities are comprised of the following:

 
 
September 30, 2020
   
March 31, 2020
 
Short-term contract liabilities
           
Customer core returns accruals
 
$
16,254,000
   
$
4,126,000
 
Customer allowances earned
   
14,839,000
     
13,844,000
 
Customer deposits
   
2,142,000
     
1,365,000
 
Core bank liability
   
564,000
     
528,000
 
Accrued core payment, net
   
10,858,000
     
8,048,000
 
       Total short-term contract liabilities
 
$
44,657,000
   
$
27,911,000
 
 
               
Long-term contract liabilities
               
Customer core returns accruals
 
$
68,745,000
   
$
77,927,000
 
Customer allowances earned
   
449,000
     
542,000
 
Core bank liability
   
17,696,000
     
7,556,000
 
Accrued core payment, net
   
3,333,000
     
6,076,000
 
       Total long-term contract liabilities
 
$
90,223,000
   
$
92,101,000
 

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. The Company recorded a gain of $1,618,000 and a loss of $1,139,000 in foreign exchange impact of lease liabilities and forward contracts in the condensed consolidated statements of income in connection with the remeasurement of foreign currency-denominated lease liabilities during the three months ended September 30, 2020 and 2019, respectively. The Company recorded a gain of $3,603,000 and a loss of $637,000 in foreign exchange impact of lease liabilities and forward contracts in the condensed consolidated statements of income in connection with the remeasurement of foreign currency-denominated lease liabilities during the six months ended September 30, 2020 and 2019, respectively.

Balance sheet information for leases is as follows:

 
  
 
September 30, 2020
   
March 31, 2020
 
Leases
Classification
           
Assets:
 
           
Operating
Operating lease assets
 
$
68,530,000
   
$
53,029,000
 
Finance
Plant and equipment
   
7,506,000
     
6,922,000
 
Total leased assets
 
 
$
76,036,000
   
$
59,951,000
 
 
 
               
Liabilities:
 
               
Current
 
               
Operating
Operating lease liabilities
 
$
6,228,000
   
$
5,104,000
 
Finance
Other current liabilities
   
2,333,000
     
2,059,000
 
Long-term
 
               
Operating
Long-term operating lease liabilities
   
72,959,000
     
61,425,000
 
Finance
Other liabilities
   
4,299,000
     
3,905,000
 
Total lease liabilities
 
 
$
85,819,000
   
$
72,493,000
 

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

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

Maturities of lease commitments at September 30, 2020 were as follows:

Maturity of lease liabilities
 
Operating Leases
   
Finance Leases
   
Total
 
2021 - remaining six months
 
$
5,521,000
   
$
1,310,000
   
$
6,831,000
 
2022
   
10,348,000
     
2,438,000
     
12,786,000
 
2023
   
9,269,000
     
1,800,000
     
11,069,000
 
2024
   
8,102,000
     
1,026,000
     
9,128,000
 
2025
   
8,095,000
     
618,000
     
8,713,000
 
Thereafter
   
69,261,000
     
87,000
     
69,348,000
 
Total lease payments
   
110,596,000
     
7,279,000
     
117,875,000
 
Less amount representing interest
   
(31,409,000
)
   
(647,000
)
   
(32,056,000
)
Present value of lease liabilities
 
$
79,187,000
   
$
6,632,000
   
$
85,819,000
 

Other information about leases is as follows:

 
 
September 30, 2020
 
Lease term and discount rate
     
Weighted-average remaining lease term (years):
     
Finance leases
   
3.3
 
Operating leases
   
11.5
 
Weighted-average discount rate:
       
Finance leases
   
5.6
%
Operating leases
   
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,
 
 
 
2020
   
2019
 
Receivables discounted
 
$
222,310,000
   
$
205,882,000
 
Weighted average days
   
341
     
346
 
Annualized weighted average discount rate
   
2.3
%
   
3.6
%
Amount of discount recognized as interest expense
 
$
4,781,000
   
$
7,196,000
 

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,
 
 
 
2020
   
2019
   
2020
   
2019
 
Net income
 
$
15,184,000
   
$
6,189,000
   
$
12,172,000
   
$
38,000
 
Basic shares
   
19,022,414
     
18,903,182
     
18,999,461
     
18,862,901
 
Effect of potentially dilutive securities
   
322,897
     
314,145
     
290,304
     
383,698
 
Diluted shares
   
19,345,311
     
19,217,327
     
19,289,765
     
19,246,599
 
Net income per share:
                               
                                 
Basic net income per share
 
$
0.80
   
$
0.33
   
$
0.64
   
$
0.00
 
                                 
Diluted net income per share
 
$
0.78
   
$
0.32
   
$
0.63
   
$
0.00
 

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, 2020 and 2019, there were 1,500,066 and 1,221,744  respectively, of potential common shares not included in the calculation of diluted net income per share because their effect was anti-dilutive. For the six months ended September 30, 2020 and 2019, there were 1,500,066 and 1,166,432, 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 $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 Company recorded income tax expense of $5,075,000, or an effective tax rate of 29.4%, and $250,000, or an effective tax rate of 86.8%, for the six months ended September 30, 2020 and 2019, respectively. The effective tax rates for the three and six months ended September 30, 2020, were 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.

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

At September 30, 2020, the Company is not under examination in any jurisdiction and the years ended March 31, 2016 through 2020 remain subject to examination. 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 $35,305,000 and $42,052,000 at September 30, 2020 and March 31, 2020, respectively. These contracts generally have a term of one year or less, at rates agreed at the inception of the contracts. The counterparty to this derivative transaction is a major financial institution with investment grade credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the potential unrealized gains (which offset currency fluctuations adverse to the Company) in any such contract should this counterparty fail to perform as contracted. Any changes in the fair values of forward foreign currency exchange contracts are included in foreign 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:

 
Gain (Loss) Recognized as Foreign Exchange Impact of Lease Liabilities
and Forward Contracts
 
  
Derivatives Not Designated as
 
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
Hedging Instruments
 
2020
   
2019
   
2020
   
2019
 
Forward foreign currency exchange contracts
 
$
2,367,000
   
$
(663,000
)
 
$
5,199,000
   
$
(628,000
)

The fair value of the forward foreign currency exchange contracts of $1,085,000 and $6,284,000 is included in other current liabilities in the condensed consolidated balance sheets at September 30, 2020 and March 31, 2020, 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, 2020 and 2019.

14. Fair Value Measurements

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

 
September 30, 2020
   
March 31, 2020
 
         
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
 
$
1,237,000
   
$
1,237,000
   
$
-
   
$
-
   
$
850,000
   
$
850,000
   
$
-
   
$
-
 
                                                                 
Liabilities
                                                               
Accrued liabilities
                                                               
Short-term contingent consideration
   
2,030,000
     
-
     
-
     
2,030,000
     
2,190,000
     
-
     
-
     
2,190,000
 
Other current liabilities
                                                               
Deferred compensation
   
1,237,000
     
1,237,000
     
-
     
-
     
850,000
     
850,000
     
-
     
-
 
Forward foreign currency exchange contracts
   
1,085,000
     
-
     
1,085,000
     
-
     
6,284,000
     
-
     
6,284,000
     
-
 
Other liabilities
                                                               
Long-term contingent consideration
   
558,000
     
-
     
-
     
558,000
     
463,000
     
-
     
-
     
463,000
 

Short-term Investments and Deferred Compensation

The Company’s short-term investments, which fund its deferred compensation liabilities, consist of investments in mutual funds. These investments are classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis.

Forward Foreign Currency Exchange Contracts

The forward foreign currency exchange contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers (See Note 13).

Contingent Consideration

In December 2018, the Company completed the acquisition of certain assets and assumption of certain liabilities from Mechanical Power Conversion, LLC (“E&M”). In connection with this acquisition, the Company is contingently obligated to make additional payments to the former owners of E&M up to an aggregate of $5,200,000 over a three-year period.

In January 2019, the Company completed the acquisition of all the equity interests of Dixie. In connection with this acquisition, the Company is contingently obligated to make additional payments to the former owners of Dixie up to $1,130,000 over a two-year period.

The Company’s contingent consideration is recorded in accrued expenses and other liabilities in its condensed consolidated balance sheets at September 30, 2020 and March 31, 2020, and is a Level 3 liability measured at fair value.

E&M Research and Development (“R&D”) Event Milestone

The fair value of the two-year R&D event milestone based on technology development and transfer was $1,220,000 and $1,130,000 at September 30, 2020 and March 31, 2020, respectively, determined using a probability weighted discounted cash flow method with the following assumptions commensurate with the term of the contingent consideration. Any subsequent changes in the fair value of the contingent consideration liability will be recorded in current period earnings as a general and administrative expense.

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

 
 
September 30, 2020
 
Risk free interest rate
   
0.10
%
Counter party rate
   
6.70
%
Probability
   
100.00
%

E&M Gross Profit Earn-out Consideration

The fair value of the three-year gross profit earn-out consideration was $1,360,000 and $1,230,000 at September 30, 2020 and March 31, 2020, respectively, determined using a Monte Carlo Simulation Model. Any subsequent changes in the fair value of the contingent consideration liability will be recorded in current period earnings as a general and administrative expense.

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

 
 
September 30, 2020
 
Risk free interest rate
   
0.12
%
Counter party rate
   
6.70
%
Expected volatility (1)
   
40.00
%
Weighted average cost of capital (1)
   
13.50
%

(1)
The range for expected volatility was 35% to 45% and the range for the weighted average cost of capital was 13% to 14%.

Dixie Revenue Earn-out Consideration

The fair value of the two-year revenue earn-out consideration was $8,000 and $293,000 at September 30, 2020 and March 31, 2020, respectively, determined using a Monte Carlo Simulation Model.

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

 
 
September 30, 2020
 
Risk free interest rate
   
0.10
%
Counter party rate
   
6.63
%
Revenue volatility (1)
   
4.50
%
Revenue discount rate (1)
   
2.00
%
Asset volatility (1)
   
30.00
%

(1)
The range for revenue volatility was 3.5% to 5.5%, 1.5% to 2.5% for the revenue discount rate, and 25% to 35% for asset volatility.

Any subsequent changes in the fair value of the contingent consideration liability will be recorded in current period earnings as a general and administrative expense.

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
 
2020
   
2019
   
2020
   
2019
 
Beginning balance
 
$
2,606,000
   
$
4,970,000
   
$
2,653,000
   
$
4,721,000
 
Changes in revaluations of contingent consideration included in earnings
   
(18,000
)
   
(119,000
)
   
(65,000
)
   
130,000
 
Ending balance
 
$
2,588,000
   
$
4,851,000
   
$
2,588,000
   
$
4,851,000
 

During the three and six months ended September 30, 2020, the Company had no other significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loan, term loan and other long-term liabilities approximate their fair value based on the variable nature of interest rates and current rates for instruments with similar characteristics.

15. Share-based Payments

Stock Options

The Company granted options to purchase 345,423 and 300,039 shares of common stock during the six months ended September 30, 2020 and 2019, respectively. The cost associated with stock options is estimated using the Black-Scholes option-pricing model. This model requires the input of subjective assumptions including the expected volatility of the underlying stock and the expected holding period of the option. These subjective assumptions are based on both historical and other information. Changes in the values assumed and used in the model can materially affect the estimate of fair value.

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

 
Six Months Ended
September 30,
 
 
 
2020
   
2019
 
Weighted average risk free interest rate
   
0.44
%
   
1.77
%
Weighted average expected holding period (years)
   
5.96
     
5.70
 
Weighted average expected volatility
   
44.90
%
   
42.51
%
Weighted average expected dividend yield
   
-
     
-
 
Weighted average fair value of options granted
 
$
6.43
   
$
8.28
 

The following is a summary of stock option transactions:

 
 
Number of
Shares
   
Weighted Average
Exercise Price
 
Outstanding at March 31, 2020
   
1,536,123
   
$
18.18
 
Granted
   
345,423
   
$
15.16
 
Exercised
   
(9,000
)
 
$
10.32
 
Forfeited
   
(23,280
)
 
$
21.97
 
Outstanding at September 30, 2020
   
1,849,266
   
$
17.60
 

At September 30, 2020, options to purchase 616,682 shares of common stock were unvested at a weighted average exercise price of $17.13.

At September 30, 2020, there was $3,893,000 of total unrecognized compensation expense related to unvested stock option awards. Compensation expense related to unvested stock option awards will be recognized over a weighted average vesting period of approximately 2.1 years.

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

During the six months ended September 30, 2020 and 2019, the Company granted 212,293 and 79,851 shares of RSUs, respectively, with an estimated grant date fair value of $3,503,000 and $1,591,000, respectively, based on the closing market price on the grant date.

The following is a summary of non-vested RSUs:

 
 
Number of
Shares
   
Weighted Average
Grant Date Fair
Value
 
Outstanding at March 31, 2020
   
201,983
   
$
20.06
 
Granted
   
212,293
   
$
16.50
 
Vested
   
(70,294
)
 
$
21.61
 
Forfeited
   
(3,347
)
 
$
16.98
 
Outstanding at September 30, 2020
   
340,635
   
$
17.55
 

At September 30, 2020, there was $4,932,000 of unrecognized compensation expense related to these awards, which will be recognized over the remaining vesting period of approximately 1.7 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,
 
 
 
2020
   
2019
   
2020
   
2019
 
Balance at beginning of period
 
$
22,192,000
   
$
15,818,000
   
$
18,300,000
   
$
19,475,000
 
Charged to expense
   
30,872,000
     
32,531,000
     
53,961,000
     
55,716,000
 
Amounts processed
   
(30,565,000
)
   
(31,774,000
)
   
(49,762,000
)
   
(58,616,000
)
Balance at end of period
 
$
22,499,000
   
$
16,575,000
   
$
22,499,000
   
$
16,575,000
 

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, 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
%
   
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.

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
)