MOTORCAR PARTS OF AMERICA INC 10-Q

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. 4 Table of Contents 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. 5 Table of Contents 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. 6 Table of Contents 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. 7 Table of Contents 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. 8 Table of Contents 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 . 9 Table of Contents 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. 10 Table of Contents 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 11 Table of Contents 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 12 Table of Contents 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. 13 Table of Contents 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 S eptember 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 S eptember 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 S eptember 30, 2020 and March 31, 2020 , respectively. In addition, $ 5,963,000 was outstanding for letters of credit at S eptember 30, 2020 . At September 30, 2020 , after certain contractual adjustments, $ 97,046,000 was available under the Revolving Facility. 14 Table of Contents 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 15 Table of Contents 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. 16 Table of Contents 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. 17 Table of Contents 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. 18 Table of Contents 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. 19 Table of Contents 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. 20 Table of Contents 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. 21 Table of Contents 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. 22 Table of Contents