MOTORCAR PARTS OF AMERICA INC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains forward-looking statements, including, without limitation, our expectations and statements regarding our outlook and future revenues, expenses, results of operations, liquidity, plans, strategies and objectives of management and any assumptions underlying any of the foregoing. Our actual results may differ significantly from those projected in the forward-looking statements. Our forward-looking statements and factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in the section titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” of this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update the forward-looking statements or our risk factors for any reason. Management Overview We have a multi-pronged platform for growth within the non-discretionary automotive aftermarket for the replacement parts and test solutions and diagnostic equipment industry, through organic growth and acquisitions. Our investments in infrastructure and human resources, including the opening of our new 410,000 square foot distribution center, the realignment of our production sites, and the significant expansion of manufacturing capacity for multiple product lines, continues to be transformative and scalable. New products introduced through our growth strategies include: (i) the addition of brake calipers in August 2019; (ii) alternators and starters for heavy-duty truck, industrial, marine, and agriculture applications, through an acquisition in January 2019; (iii) brake power boosters in August 2016; and (iv) turbochargers through an acquisition in July 2016. In addition, our test solutions and diagnostic equipment include: (a) the design and manufacture of test solutions and diagnostic equipment for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles through an acquisition in July 2017 and (b) the design and manufacture of advanced power emulators (AC and DC) and custom power electronic products for the automotive and aerospace industries through an acquisition in December 2018. Impact of the Novel Coronavirus (“COVID-19”) The COVID-19 pandemic has spread globally and created significant volatility, uncertainty and economic disruption in many countries, including the countries in which we operate. National, state and local governments in these countries have implemented a variety of measures in response 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. Although the demand for our products has substantially recovered, we continue to experience disruptions with worldwide supply chain and logistics services . We are unable to predict accurately the ultimate long-term impact that COVID-19 will have on our business and financial condition. While the near-term outlook appears positive, any additional government shutdowns or 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 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. 25 Table of Contents 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 fiscal 2021, these expanded benefits, supply costs and other COVID-19 related costs resulted in $7,316,000 of total expense included in cost of goods sold and operating expenses in the consolidated statements of operations. During fiscal 2021, we received $1,130,000, in payments from the Canadian Government under the Canadian Emergency Wage Subsidy program and our Asian subsidiaries received $171,000 from their local government assistance programs. These payments are recorded as a reduction of cost of goods sold and operating expenses in the consolidated statements of operations. In addition, we deferred the employer’s share of social security taxes of $1,170,000, of which $585,000 is included in accrued liabilities and $585,000 is included in other liabilities in the consolidated balance sheet at March 31, 2021 . Due to the seriousness of the COVID-19 pandemic and the unknown future impact on our business, we conserved liquidity wherever practicable, implemented a worldwide travel ban, and put additional controls on all expenses. Initially, we implemented furloughs, layoffs, and salary reductions, which were reinstated as of September 30, 2020. Segment Reporting 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. Critical Accounting Policies We prepare our consolidated financial statements in accordance with generally accepted accounting principles, or GAAP, in the United States. Our significant accounting policies are discussed in detail below and in Note 2 of the notes to consolidated financial statements. In preparing our consolidated financial statements, we use estimates and assumptions for matters that are inherently uncertain. We base our estimates on historical experiences and reasonable assumptions. Our use of estimates and assumptions affect the reported amounts of assets, liabilities and the amount and timing of revenues and expenses we recognize for and during the reporting period. Actual results may differ from our estimates. Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not currently aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of our assets or liabilities as of March 31, 2021. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. Our remanufacturing operations include core exchange programs for the core portion of the finished good. The Used Cores that we acquire and are returned to us from our customers are a necessary raw material for remanufacturing. We also offer our customers marketing and other allowances that impact revenue recognition. These elements of our business give rise to more complex accounting than many businesses our size or larger. 26 Table of Contents Recently Adopted Accounting Pronouncements Measurement of Credit Losses on Financial Instruments In June 2016, the FASB issued an accounting pronouncement related to the measurement of credit losses on financial instruments. This pronouncement, along with a subsequent Accounting Standards Updates (“ASU”) issued to clarify certain provisions of the new guidance, changed the impairment model for most financial assets and requires the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The adoption of this guidance on April 1, 2020 increased our disclosures for our expected credit losses but did not have a material effect on our 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 consolidated balance sheets. We maintained an allowance for uncollectible accounts receivable for estimated losses resulting from the failure or inability of our 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 in the consolidated balance sheets. We maintain an allowance for credit losses resulting from the expected failure or inability of our customers to make required payments. We recognize the allowance for credit losses at inception and reassess quarterly based on the asset’s expected collectability. The allowance is based on multiple factors including historical experience with bad debts, the credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, such as COVID-19, as well as expectations of conditions in the future, if applicable. Our allowance for credit losses is based on the assessment of the collectability of assets pooled together with similar risk characteristics. We record a provision for expected credit losses using a loss-rate method based on the ratio of our historical write-offs to our average trade accounts receivable. At each reporting period, we will assess whether financial assets in a pool continue to display similar risk characteristics. If particular receivables no longer display risk characteristics that are similar to those of the receivables in the pool, we may determine that we need to move those receivables to a different pool or perform an individual assessment of expected credit losses for those specific receivables. Fair Value Measurements In August 2018, the FASB issued guidance which changed the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 measurements, and the narrative description of measurement uncertainty are applied prospectively only for the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively applied to all periods presented upon their effective date. The adoption of this guidance on April 1, 2020 modified certain of our disclosures for our Level 3 fair value measurements but did not have an impact on our consolidated financial statements. Reference Rate Reform In March 2020, the FASB issued guidance that, for a limited time, eases the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We will apply these amendments prospectively. The adoption of this guidance on April 1, 2020 did not have an impact on our consolidated financial statements for the year ended March 31, 2021. 27 Table of Contents 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 adoption of this guidance on April 1, 2021 is not expected to have any material impact on our consolidated financial statements. Inventory Inventory is comprised of: (i) Used Core and component raw materials, (ii) work-in-process, and (iii) remanufactured and purchased finished goods. Used Core, component raw materials, and purchased finished goods are stated at the lower of average cost or net realizable value. Work-in-process is in various stages of production and is valued at the average cost of Used Cores and component raw materials issued to work orders still open, including allocations of labor and overhead costs. Historically, work-in-process inventory has not been material compared to the total inventory balance. Remanufactured finished goods include: (i) the Used Core cost and (ii) the cost of component raw materials, and allocations of labor and variable and fixed overhead costs (the “Unit Cost”). The allocations of labor and variable and fixed overhead costs are based on the actual use of the production facilities over the prior 12 months which approximates normal capacity. This method prevents the distortion in allocated labor and overhead costs that would occur during short periods of abnormally low or high production. In addition, we exclude certain unallocated overhead such as severance costs, duplicative facility overhead costs, start-up costs, training, and spoilage from the calculation and expenses these unallocated overhead as period costs. Purchased finished goods also include an allocation of fixed overhead costs. The estimate of net realizable value is subjective and based on our judgment and knowledge of current industry demand and management’s projections of industry demand. The estimates may, therefore, be revised if there are changes in the overall market for our products or market changes that in our judgment, impact our ability to sell or liquidate potentially excess or obsolete inventory. Net realizable value is determined at least quarterly as follows: • Net realizable value for finished goods by customer by product line are determined based on the agreed upon selling price with the customer for a product in the trailing 12 months. We compare the average selling price, including any discounts and allowances, to the finished goods cost of on-hand inventory less any reserve for excess and obsolete inventory. Any reduction of value is recorded as cost of goods sold in the period in which the revaluation is identified. • Net realizable value for Used Cores are determined based on current core purchase prices from core brokers to the extent that core purchases in the trailing 12 months are significant. Remanufacturing consumes, on average, more than one Used Core for each remanufactured unit produced since not all Used Cores are reusable. The yield rates depend upon both the product and customer specifications. We purchase Used Cores from core brokers to supplement our yield rates and Used Cores not returned under the core exchange programs. We also consider the net selling price our customers have agreed to pay for Used Cores that are not returned under our core exchange programs to assess whether Used Core cost exceeds Used Core net realizable value on a by customer by product line basis. Any reduction of core cost is recorded as cost of goods sold in the period in which the revaluation is identified. 28 Table of Contents • We record an allowance for potentially excess and obsolete inventory based upon recent sales history, the quantity of inventory on-hand, and a forecast of potential use of the inventory. We periodically review inventory to identify excess quantities and part numbers that are experiencing a reduction in demand. Any part numbers with quantities identified during this process are reserved for at rates based upon our judgment, historical rates, and consideration of possible scrap and liquidation values which may be as high as 100% of cost if no liquidation market exists for the part. As a result of this process, we recorded reserves for excess and obsolete inventory of $13,246,000 and $13,208,000 at March 31, 2021 and 2020, respectively. We record vendor discounts as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold. Inventory Unreturned Inventory unreturned represents our estimate, based on historical data and prospective information provided directly by the customer, of finished goods shipped to customers that we expect to be returned, under our general right of return policy, after the balance sheet date. Inventory unreturned includes only the Unit Cost of a finished good. The return rate is calculated based on expected returns within the normal operating cycle, which is generally one year. As such, the related amounts are classified in current assets. Inventory unreturned is valued in the same manner as our finished goods inventory. Contract Assets Contract assets consists of: (i) the core portion of the finished goods shipped to customers, (ii) upfront payments to customers in connection with customer contracts, (iii) core premiums paid to customers, (iv) finished goods premiums paid to customers, and (v) long-term core inventory deposits. Remanufactured Cores held at customers’ locations as a part of the finished goods sold to the customer are classified as long-term contract assets. These assets are valued at the lower of cost or net realizable value of Used Cores on hand (See Inventory above). For these Remanufactured Cores, we expect the finished good containing the Remanufactured Core to be returned under our general right of return policy or a similar Used Core to be returned to us by the customer, under our core exchange programs in each case, for credit. Remanufactured Cores and Used Cores returned by consumers to our customers but not yet returned to us are classified as “Cores expected to be returned by customers”, which are included in short-term contract assets until we physically receive them during our normal operating cycle, which is generally one year. Upfront payments to customers represent the marketing allowances, such as sign-on bonuses, slotting fees, and promotional allowances provided to our customers. These allowances are recognized as an asset and amortized over the appropriate period of time as a reduction of revenue if we expect to generate future revenues associated with the upfront payment. If we do not expect to generate additional revenue, then the upfront payment is recognized in the consolidated statements of operations when payment occurs as a reduction of revenue. Upfront payments expected to be amortized during our normal operating cycle, which is generally one year, are classified as short-term contract assets. Core premiums paid to customers represent the difference between the Remanufactured Core acquisition price paid to customers generally in connection with new business, and the related Used Core cost, which is treated as an asset and recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered. We consider, among other things, the length of our largest ongoing customer relationships, duration of customer contracts, and the average life of vehicles on the road in determining the appropriate period of time over which to amortize these premiums. These core premiums are amortized over a period typically ranging from six to eight years, adjusted for specific circumstances associated with the arrangement. Core premiums are recorded as long-term contract assets. Core premiums expected to be amortized within our normal operating cycle, which is generally one year, are classified as short-term contract assets. 29 Table of Contents Finished goods premiums paid to customers represent the difference between the finished good acquisition price paid to customers, generally in connection with new business, and the related finished good cost, which is treated as an asset and recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered. We consider, among other things, the length of our largest ongoing customer relationships, duration of customer contracts, and the average life of vehicles on the road in determining the appropriate period of time over which to amortize these premiums. Finished goods premiums are amortized over a period typically ranging from six to eight years, adjusted for specific circumstances associated with the arrangement. Finished goods premiums are recorded as long-term contract assets. Finished goods premiums expected to be amortized within our normal operating cycle, which is generally one year, are classified as short-term contract assets. Long-term core inventory deposits represent the cost of Remanufactured Cores we have purchased from customers, which are held by the customers and remain on the customers’ premises. The costs of these Remanufactured Cores were established at the time of the transaction based on the then current cost. The selling value of these Remanufactured Cores was established based on agreed upon amounts with these customers. We expect to realize the selling value and the related cost of these Remanufactured Cores should our relationship with a customer end, a possibility that we consider remote based on existing long-term customer agreements and historical experience. Revenue Recognition Revenue is recognized when performance obligations under the terms of a contract with our customers are satisfied; generally, this occurs with the transfer of control of our products. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Revenue is recognized net of all anticipated returns, marketing allowances, volume discounts, and other forms of variable consideration . Revenue is recognized either when products are shipped or when delivered, depending on the applicable contract terms. Bill and hold shipments are shipped out to the customer as ex-works; in which the customer makes arrangements and is responsible for their shipping cost. No freight or shipping costs are accrued for revenue under the terms of shipments made as ex-works. The price of a finished remanufactured product sold to customers is generally comprised of separately invoiced amounts for the Remanufactured Core included in the product (“Remanufactured Core value”) and the unit portion included in the product (“Unit Value”), for which revenue is recorded based on our then current price list, net of applicable discounts and allowances. The Remanufactured Core value is recorded as a net revenue based upon the estimate of Used Cores that will not be returned by the customer for credit. These estimates are subjective and based on management’s judgment and knowledge of historical, current, and projected return rates. As reconciliations are completed with the customers the actual rates at which Used Cores are not being returned may differ from the current estimates. This may result in periodic adjustments of the estimated contract asset and liability amounts recorded and may impact the projected revenue recognition rates used to record the estimated future revenue. These estimates may also be revised if there are changes in contractual arrangements with customers, or changes in business practices. A significant portion of the remanufactured automotive parts sold to customers are replaced by similar Used Cores sent back for credit by customers under the core exchange programs (as described in further detail below). The number of Used Cores sent back under the core exchange programs is generally limited to the number of similar Remanufactured Cores previously shipped to each customer. Revenue Recognition — Core Exchange Programs Full price Remanufactured Cores: When remanufactured products are shipped, certain customers are invoiced for the Remanufactured Core value of the product at the full Remanufactured Core sales price. For these Remanufactured Cores, revenue is only recognized based upon an estimate of the rate at which these customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the core exchange programs. The remainder of the full price Remanufactured Core value invoiced to these customers is established as a long-term contract liability rather than being recognized as revenue in the period the products are shipped as we expect these Remanufactured Cores to be returned for credit under our core exchange programs. 30 Table of Contents Nominal price Remanufactured Cores: Certain other customers are invoiced for the Remanufactured Core value of the product shipped at a nominal (generally $0.01 or less) Remanufactured Core price. For these nominal Remanufactured Cores, revenue is only recognized based upon an estimate of the rate at which these customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the core exchange programs. Revenue amounts are calculated based on contractually agreed upon pricing for these Remanufactured Cores for which the customers are not returning similar Used Cores. The remainder of the nominal price Remanufactured Core value invoiced to these customers is established as a long-term contract liability rather than being recognized as revenue in the period the products are shipped as we expect these Remanufactured Cores to be returned for credit under our core exchange programs. Revenue Recognition; General Right of Return Customers are allowed to return goods that their end-user customers have returned to them, whether or not the returned item is defective (warranty returns). In addition, under the terms of certain agreements and industry practice, customers from time to time are allowed stock adjustments when their inventory of certain product lines exceeds the anticipated sales to end-user customers (stock adjustment returns). Customers have various contractual rights for stock adjustment returns, which are typically less than 5% of units sold. In some instances, a higher level of returns is allowed in connection with significant restocking orders. The aggregate returns are generally limited to less than 20% of unit sales. The allowance for warranty returns is established based on a historical analysis of the level of this type of return as a percentage of total unit sales. The allowance for stock adjustment returns is based on specific customer inventory levels, inventory movements, and information on the estimated timing of stock adjustment returns provided by customers. Stock adjustment returns do not occur at any specific time during the year. The return rate for stock adjustments is calculated based on expected returns within the normal operating cycle, which is generally one year. The Unit Value of the warranty and stock adjustment returns are treated as reductions of revenue based on the estimations made at the time of the sale. The Remanufactured Core value of warranty and stock adjustment returns are provided for as indicated in the paragraph “Revenue Recognition – Core Exchange Programs”. As is standard in the industry, we only accept returns from on-going customers. If a customer ceases doing business with us, we have no further obligation to accept additional product returns from that customer. Similarly, we accept product returns and grant appropriate credits to new customers from the time the new customer relationship is established. Contract Liability Contract liability consists of: (i) customer allowances earned, (ii) accrued core payments, (iii) customer core returns accruals, (iv) core bank liability, (v) finished goods liabilities, and (vi) customer deposits. Customer allowances earned includes all marketing allowances provided to customers. Such allowances include sales incentives and concessions. Voluntary marketing allowances related to a single exchange of product are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered. Other marketing allowances, which may only be applied against future purchases, are recorded as a reduction to revenues in accordance with a schedule set forth in the relevant contract. Sales incentive amounts are recorded based on the value of the incentive provided. Customer allowances to be provided to customers within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. 31 Table of Contents Accrued core payments represent the sales price of Remanufactured Cores purchased from customers, generally in connection with new business, which are held by these customers and remain on their premises. The sales price of these Remanufactured Cores will be realized when our relationship with a customer ends, a possibility that we consider remote based on existing long-term customer agreements and historical experience. The payments to be made to customers for purchases of Remanufactured Cores within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. Customer core returns accruals represent the full and nominally priced Remanufactured Cores shipped to our customers. When we ship product, we recognize an obligation to accept a similar Used Core sent back under the core exchange programs based upon the Remanufactured Core price agreed upon by us and our customer. The contract liability related to Used Cores returned by consumers to our customers but not yet returned to us are classified as short-term contract liabilities until we physically receive these Used Cores as they are expected to be returned during our normal operating cycle, which is generally one year and the remainder are recorded as long-term contract liabilities. The core bank liability represents the full Remanufactured Core sales price for cores returned under our core exchange programs. The payment for these returned cores are made over a contractual repayment period pursuant to our agreement with this customer. Payments to be made within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. Finished goods liabilities represents the agreed upon price of finished goods acquired from customers, generally in connection with new business. The payment for these finished goods are made over a contractual repayment period pursuant to our agreement with the customer. Payments to be made within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. Customer deposits represent the receipt of prepayments from customers for the obligation to transfer goods or services in the future. We classify these customer deposits as short-term contract liabilities as we expect to satisfy these obligations within our normal operating cycle, which generally one year. Customer Finished Goods Returns Accrual The customer finished goods returns accrual represents our estimate of our exposure to customer returns, including warranty returns, under our general right of return policy to allow customers to return items that their end user customers have returned to them and from time to time, stock adjustment returns when the customers’ inventory of certain product lines exceeds the anticipated sales to end-user customers. The customer finished goods returns accrual represents the Unit Value of the estimated returns and is classified as a current liability due to the expectation that these returns will occur within the normal operating cycle of one year. Our customer finished goods returns accrual was $31,524,000 and $25,326,000 at March 31, 2021 and 2020, respectively. The increase in the customer finished goods returns accrual resulted from higher sales during the fourth quarter of fiscal 2021 compared with the same period of the prior year. Income Taxes We account for income taxes using the liability method, which measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The resulting asset or liability is adjusted to reflect changes in the tax laws as they occur. A valuation allowance is provided to reduce deferred tax assets when it is more likely than not that a portion of the deferred tax asset will not be realized. Realization of deferred tax assets is dependent upon our ability to generate sufficient future taxable income. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We make these estimates and judgments about our future taxable income that are based on assumptions that are consistent with our future plans. A valuation allowance is established when we believe it is not more likely than not all or some of a deferred tax assets will be realized. In evaluating our ability to recover deferred tax assets within the jurisdiction in which they arise, we consider all available positive and negative evidence. Deferred tax assets arising primarily as a result of net operating loss carry-forwards and research and development credits in connection with our Canadian operations have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods. Should the actual amount differ from our estimate, the amount of our valuation allowance could be impacted. 32 Table of Contents We have made an accounting policy election to recognize the U.S. tax effects of global intangible low-taxed income as a component of income tax expense in the period the tax arises. Results of Operations 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 for the periods indicated: Fiscal Years Ended March 31, 2021 2020 2019 Cash flows provided by (used in) operations $ 56,089,000 $ 18,795,000 $ (40,328,000 ) Finished goods turnover (1) 4.1 4.1 4.9 (1) Finished goods turnover is calculated by dividing the cost of goods sold for the year by the average between beginning and ending non-core finished goods inventory values, for each fiscal year. Fiscal 2020 and 2019 have been updated to conform to the current year presentation for non-core finished goods turnover. We believe that this provides a useful measure of our ability to turn our inventory into revenues. Fiscal 2021 Compared with Fiscal 2020 Net Sales and Gross Profit The following summarizes net sales and gross profit: Fiscal Years Ended March 31, 2021 2020 Net sales $ 540,782,000 $ 535,831,000 Cost of goods sold 431,321,000 417,431,000 Gross profit 109,461,000 118,400,000 Gross profit percentage 20.2 % 22.1 % Net Sales . Our net sales for fiscal 2021 were $540,782,000, which represents an increase of $4,951,000, or 0.9%, from fiscal 2020 of $535,831,000. Sales for fiscal 2021 included $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. This increase in sales was partially offset by the negative impact from a number of factors related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services. Sales mix for fiscal 2021 compared with fiscal 2020 for: (i) rotating electrical products represented 72.8% compared with 73.3%, (ii) wheel hubs products represented 15.6% compared with 14.9%; (iii) brake-related products represented 9.7% compared with 8.9%; and (iv) test solutions and diagnostic equipment and other products represented 1.9% compared with 2.9% . 33 Table of Contents Gross Profit. Our gross profit was $109,461,000, or 20.2% of net sales, for fiscal 2021 compared with $118,400,000, or 22.1% of net sales, for fiscal 2020. Our gross profit was impacted by the global COVID-19 pandemic, including disruptions with worldwide supply chain, logistics services, and related higher freight costs. Higher freight costs impacted gross profit by approximately $1,785,000, or 0.3%. Additionally, our gross profit was further impacted by $5,268,000, or 1.0%, due to COVID-19 related costs for wages and personal protective equipment. Our gross profit for fiscal 2021 and fiscal 2020 was also impacted by: (i) transition expenses in connection with the expansion of our operations in Mexico of $16,353,000 and $8,337,000, respectively, and (ii) amortization of core premiums paid to customers related to new business of $6,590,000 and $4,501,000, respectively. In addition, gross profit was impacted by (i) a $3,561,000 benefit for revised tariff costs for fiscal 2021, (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 a gain due to realignment of inventory at two customer distribution centers, which resulted in a net write-down of $209,000 for fiscal 2021 compared with a write-down of $10,799,000 for fiscal 2020, (iii) customer allowances and return accruals related to new business of $408,000 and $1,065,000, and (iv) net tariff costs of $332,000 and $1,067,000 not passed through to customers for fiscal 2021 and fiscal 2020, respectively. Our prior year gross profit was impacted by cost of $133,000 in connection with the cancellation of a customer contract. Operating Expenses The following summarizes operating expenses: Fiscal Years Ended March 31, 2021 2020 General and administrative $ 53,847,000 $ 53,224,000 Sales and marketing 18,024,000 21,037,000 Research and development 8,563,000 9,200,000 Foreign exchange impact of lease liabilities and forward contracts (17,606,000 ) 18,201,000 Percent of net sales General and administrative 10.0 % 9.9 % Sales and marketing 3.3 % 3.9 % Research and development 1.6 % 1.7 % Foreign exchange impact of lease liabilities and forward contracts (3.3 )% 3.4 % General and Administrative. Our general and administrative expenses for fiscal 2021 were $53,847,000, which represents an increase of $623,000, or 1.2%, from fiscal 2020 of $53,224,000. The increase in general and administrative expense was primarily due to increased costs for our expansion in Mexico and other COVID-19 related costs, such as supply costs and expanded benefits to employees. In addition, our general and administrative expenses increased due to (i) $1,824,000 of increased share-based compensation expense and bonus expense due to headcount increase and improved results and (ii) $343,000 of increased expense due to changes in revaluations of contingent consideration. These increases were partially offset by (i) $3,718,000 of decreased professional services due to our concerted efforts to implement new more efficient systems and enhance our in house resources, (ii) $1,933,000 of increased gain resulting from foreign currency transactions, and (iii) $768,000 of decreased travel resulting from the COVID-19 pandemic. Sales and Marketing . Our sales and marketing expenses for fiscal 2021 were $18,024,000, which represents a decrease of $3,013,000, or 14.3%, from fiscal 2020 of $21,037,000. The decrease in sales and marketing expense was primarily due to our cost-cutting measures in response to COVID-19. These decreases in sales and marketing expense were primarily due to (i) $1,362,000 from decreased travel, (ii) $848,000 of decreased trade shows expense, (iii) $665,000 from decreased advertising and marketing expense, and (iv) $421,000 from decreased employee-related expenses. These decreases in sales and marketing for fiscal 2021 were partially offset by $362,000 of increased commissions. 34 Table of Contents Research and Development . Our research and development expenses for fiscal 2021 were $8,563,000, which represents a decrease of $637,000, or 6.9%, from fiscal 2020 of $9,200,000. The decrease in research and development expense was primarily due to our cost-cutting measures in response to COVID-19. These decreases in research and development were primarily due to (i) $447,000 of decreased employee-related expenses, (ii) $134,000 of decreased travel, and (iii) $96,000 of decreased outside services. 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 $9,893,000 compared with a non-cash loss of $11,710,000 for fiscal 2021 and fiscal 2020, respectively, due to movements in foreign exchange rates. In addition, the changes in the fair values of forward foreign currency exchange contracts resulted in a non-cash gain of $7,713,000 compared with a non-cash loss of $6,491,000 for fiscal 2021 and fiscal 2020, respectively. Interest Expense Interest Expense, net. Our interest expense, net for fiscal 2021 was $15,770,000, which represents a decrease of $9,269,000, or 37.0%, from fiscal 2020 of $25,039,000. This decrease in interest expense was 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 $9,387,000, or an effective tax rate of 30.4%, for fiscal 2021 compared with a benefit of $1,011,000, or an effective tax rate of 12.2%, for fiscal 2020. The effective tax rate for fiscal 2021, was primarily impacted by foreign income taxed at rates that are different from the federal statutory rate and non-deductible executive compensation under Internal Revenue Code Section 162(m). In addition, the effective tax rate for fiscal 2020 was impacted by net operating loss carry-backs in connection with the CARES Act. Fiscal 2020 Compared with Fiscal 2019 Net Sales and Gross Profit The following summarizes net sales and gross profit: Fiscal Years Ended March 31, 2020 2019 Net sales $ 535,831,000 $ 472,797,000 Cost of goods sold 417,431,000 383,623,000 Gross profit 118,400,000 89,174,000 Gross profit percentage 22.1 % 18.9 % Net Sales . Our net sales for fiscal 2020 increased by $63,034,000, or 13.3%, to $535,831,000 compared with net sales for fiscal 2019 of $472,797,000, reflecting continued growth across all of our product lines. In addition, our net sales for fiscal 2020 were positively impacted by: (i) our expansion of automotive aftermarket brake product offerings with the introduction of brake calipers in August 2019, which contributed net sales of $28,118,000 and (ii) $19,663,000 due to the full-year impact of acquisitions completed during the latter part of fiscal 2019. Sales mix for fiscal 2020 compared with fiscal 2019 for: (i) rotating electrical products represented 73.3% compared with 78.9%, (ii) wheel hubs products represented 14.9% compared with 15.7%; (iii) brake-related products represented 8.9% compared with 3.1%; and (iv) test solutions and diagnostic equipment and other products represented 2.9% compared with 2.3% . 35 Table of Contents Gross Profit. Our gross profit was $118,400,000, or 22.1% of net sales for fiscal 2020 compared with $89,174,000, or 18.9% of net sales for fiscal 2019. The gross profit margin increase of 3.2% was primarily due to a lower non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves and lower customer allowances related to new business for fiscal 2020 as compared with fiscal 2019. T he 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, resulted in a write-down of $10,799,000, which impacted gross margin by 2.0%, compared with $18,843,000, which impacted gross margin by 4.0%, for fiscal 2020 and fiscal 2019, respectively. Our gross profit for fiscal 2020 and fiscal 2019 was further impacted by: (i) transition expenses in connection with the expansion of our operations in Mexico of $8,337,000 and $ 8,178,000 , respectively, (ii) amortization of core premiums paid to customers related to new business of $4,501,000 and $4,127,000, respectively, (iii) customer allowances and return accruals related to new business of $1,065,000 and $6,042,000, respectively, and (iv) net tariff costs of $1,067,000 and $1,526,000, respectively, which were paid for products sold before price increases were effective. Gross profit for fiscal 2020 was further impacted by a cost of $133,000 incurred in connection with the cancellation of a customer contract . In addition, gross profit for fiscal 2019 was impacted by core sales of $7,753,000, less related cost of goods sold of $7,750,000, and a cost of $767,000 incurred in connection with the cancellation of a customer contract, and a cost of goods sold impact of $104,000 for inventory step-up in connection with our December 2018 acquisition. Operating Expenses The following summarizes operating expenses: Fiscal Years Ended March 31, 2020 2019 General and administrative $ 53,224,000 $ 45,000,000 Sales and marketing 21,037,000 19,542,000 Research and development 9,200,000 8,014,000 Foreign exchange impact of lease liabilities and forward contracts 18,201,000 972,000 Percent of net sales General and administrative 9.9 % 9.5 % Sales and marketing 3.9 % 4.1 % Research and development 1.7 % 1.7 % Foreign exchange impact of lease liabilities and forward contracts 3.4 % 0.2 % General and Administrative. Our general and administrative expenses for fiscal 2020 were $53,224,000, which represents an increase of $8,224,000, or 18.3%, from fiscal 2019 of $45,000,000. This increase was primarily due to: (i) $2,888,000 of increased bonus and other incentives, (ii) $1,485,000 of general and administrative expenses due to the full-year impact of our fiscal 2019 acquisitions, (iii) $1,315,000 of expense in connection with our internal control remediation efforts, (iv) $1,206,000 for personnel to support our growth initiatives, (v) $1,204,000 of increased professional services, (vi) $789,000 in aggregate foreign currency transaction losses, (vii) $571,000 of increased amortization of intangible assets in connection with our fiscal 2019 acquisitions, and (viii) $544,000 of increased depreciation expense. These increases were partially offset by a decrease in share-based compensation expense of $1,423,000. Sales and Marketing . Our sales and marketing expenses for fiscal 2020 were $21,037,000, which represents an increase of $1,495,000, or 7.7%, from fiscal 2019 of $19,542,000. The increase was due primarily to: (i) $2,261,000 of increased sales and marketing expenses due to the full-year impact of our fiscal 2019 acquisitions and (ii) $722,000 for personnel to support our growth initiatives. These increases in sales and marketing expenses were partially offset by: (i) $701,000 of decreased marketing expenses related to product changeovers in connection with new business, (ii) $401,000 of decreased trade shows expenses, and (iii) $291,000 of decreased travel. 36 Table of Contents Research and Development . Our research and development expenses for fiscal 2020 were $9,200,000, which represents an increase of $1,186,000, or 14.8%, from fiscal 2019 of $8,014,000. The increase was primarily due to: (i) $866,000 of increased research and development expenses due to the full year impact of our fiscal 2019 acquisitions and (ii) $474,000 for personnel to support our growth initiatives. These increases were partially offset by $221,000 of decreased supplies. Foreign Exchange Impact of Lease Liabilities and Forward Contracts . The remeasurement of our foreign currency-denominated lease liabilities resulted in a non-cash loss of $11,710,000 for fiscal 2020 due to movements in foreign exchange rates. We adopted the new lease guidance on April 1, 2019. In addition, the changes in the fair values of the forward foreign currency exchange contracts resulted in non-cash losses of $6,491,000 and $972,000 for fiscal 2020 and fiscal 2019, respectively. Interest Expense Interest Expense, net. Our interest expense, net for fiscal 2020 was $25,039,000, which represents an increase of $1,812,000, or 7.8%, from fiscal 2019 of $23,227,000. The increase in interest expense was primarily due to increased average outstanding borrowings to support our growth initiatives , including our product line expansion and our inventory levels . The increased utilization of our accounts receivable discount programs was offset by a decrease in the weighted average discount rate from these programs. Provision for Income Taxes Income Tax . We recorded an income tax benefit of $1,011,000, or an effective tax rate of 12.2%, for fiscal 2020 compared with income tax expense $268,000, or an effective tax rate of (3.5%), fiscal 2019. The effective tax rate for fiscal 2020 was impacted by net operating loss carry-backs in connection with the CARES Act. In addition, the effective tax rate for each year was impacted by (i) valuation allowances, (ii) the impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m), and (iii) 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 $96,725,000 and $90,624,000, a ratio of current assets to current liabilities of 1.3:1.0, at March 31, 2021 and 2020, respectively. The increase in working capital was due primarily to the buildup of our inventory to meet anticipated future demand partially offset by the associated increase in our accounts payable balances . In addition, we used cash and collections of accounts receivable balances to pay down our credit facility during fiscal 2021. We generated cash during fiscal 2021 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. 37 Table of Contents Cash Flows The following summarizes cash flows as reflected in the consolidated statements of cash flows: Fiscal Years Ended March 31, 2021 2020 2019 Cash provided by (used in): Operating activities $ 56,089,000 $ 18,795,000 $ (40,328,000 ) Investing activities (14,214,000 ) (11,594,000 ) (22,610,000 ) Financing activities (76,567,000 ) 32,153,000 59,936,000 Effect of exchange rates on cash and cash equivalents 599,000 351,000 (136,000 ) Net (decrease) increase in cash and cash equivalents $ (34,093,000 ) $ 39,705,000 $ (3,138,000 ) Additional selected cash flow data: Depreciation and amortization $ 11,144,000 $ 9,561,000 $ 7,329,000 Capital expenditures 13,942,000 14,156,000 11,149,000 Fiscal 2021 Compared with Fiscal 2020 Net cash provided by operating activities was $56,089,000 and $18,795,000 for fiscal 2021 and fiscal 2020, respectively. The significant change in our operating activities for the current year was due to (i) increased collections of accounts receivable, (ii) the buildup of our inventory to meet anticipated future demand partially offset by the associated increase in our accounts payable balances, and (iii) increased operating results (net income plus the net add-back for non-cash transactions in earnings). In addition, our operating activities continued to be significantly impacted by our growth initiatives, including our new expanded footprint and product lines. Net cash used in investing activities was $14,214,000 and $11,594,000 for fiscal 2021 and fiscal 2020, respectively. The change was due primarily to the redemption of short-term investments during the prior year. Net cash used in financing activities was $76,567,000 for fiscal 2021 compared with net cash provided by financing activities $32,153,000 for fiscal 2020. The significant change in our financing activities resulted from the pay down of our debt by $71,750,000 for fiscal 2021 compared with borrowing to support our growth initiatives, including the expansion of our operations in Mexico and our product line expansion for fiscal 2020. Fiscal 2020 Compared with Fiscal 2019 Net cash provided by operating activities was $18,795,000 during fiscal 2020 compared with net cash used in operating activities of $40,328,000 during fiscal 2019. Our operating activities were significantly impacted by our growth initiatives, including our product line expansion, and our inventory levels. Net cash used in investing activities was $11,594,000 and $22,610,000 during fiscal 2020 and fiscal 2019, respectively. This change was due primarily to no acquisition-related activities and redemptions of short-term investments partially offset by increased purchases of plant and equipment for our current operations and the expansion of our operations in Mexico during fiscal 2020 . Net cash provided by financing activities was $32,153,000 and $59,936,000 during fiscal 2020 and fiscal 2019, respectively. The significant change in our financing activities during fiscal 2020 as compared with fiscal 2019 was due mainly to lower net borrowings under our credit facility partially offset by the payment of $1,955,000 in contingent consideration liabilities during fiscal 2020. In addition, during fiscal 2019, we used $4,062,000 for share repurchases. 38 Table of Contents Capital Resources Debt We are party to a $268,620,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $238,620,000 revolving loan facility, subject to borrowing base restrictions, a $24,000,000 sublimit for borrowings by Canadian borrowers, and a $20,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $30,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 5, 2023. The Credit Facility currently permits the payment of up to $30,000,000 of dividends and share repurchases for fiscal year 2021, subject to pro forma compliance with financial covenants. In connection with the Credit Facility, the lenders have a security interest in substantially all of our assets. The Term Loans require quarterly principal payments of $937,500. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.25%, 2.50% or 2.75% or a reference rate plus a margin of 1.25%, 1.50% or 1.75%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on our Term Loans and Revolving Facility was 2.62% at March 31, 2021, and 4.34% and 3.64%, respectively, at March 31, 2020. The Credit Facility, among other things, requires us to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all financial covenants as of March 31, 2021. Our Consolidated EBITDA for the purposes of bank covenant calculations was $73,519,000 for fiscal 2021. On May 28, 2021, we entered into a third amendment to the Amended Credit Facility (the “Third Amendment”). The Third Amendment, among other things, (i) extends the maturity date to May 28, 2026 from June 5, 2023, (ii) modifies the fixed charge coverage ratio financial covenant, and (iii) modifies the definition of “Consolidated EBITDA”. The modifications to the financial covenants were effective as of March 31, 2021. The following summarizes the financial covenants required under the Credit Facility: Financial covenants required per the Credit Facility Calculation as of March 31, 2021 Maximum senior leverage ratio 3.00 1.46 Minimum fixed charge coverage ratio 1.10 1.26 We had cash of $15,523,000 at March 31, 2021 and paid down our outstanding debt by $71,750,000 during fiscal 2021. In addition to other covenants, the Credit Facility places limits on our ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by us and our subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements. We had $84,000,000 and $152,000,000 outstanding under the Revolving Facility at March 31, 2021 and 2020, respectively. In addition, $6,193,000 was outstanding for letters of credit at March 31, 2021. At March 31, 2021, after certain contractual adjustments, $125,296,000 was available under the Revolving Facility. Receivable Discount Programs We use receivable discount programs with certain customers and their respective banks. Under these programs, we have options to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow us to accelerate receipt of payment on customers’ receivables. While these arrangements have reduced our working capital needs, there can be no assurance that these programs will continue in the future. Interest expense resulting from these programs would increase if interest rates rise, if utilization of these discounting arrangements expands, if customers extend their payment to us, or if the discount period is extended to reflect more favorable payment terms to customers. 39 Table of Contents The following is a summary of the receivable discount programs: Fiscal Years Ended March 31, 2021 2020 Receivables discounted $ 491,285,000 $ 461,484,000 Weighted average days 334 346 Weighted average discount rate 2.1 % 3.3 % Amount of discount as interest expense $ 9,513,000 $ 14,780,000 Off-Balance Sheet Arrangements At March 31, 2021, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes. Multi-year Customer Agreements We have or are renegotiating long-term agreements with many of our major customers. Under these agreements, which in most cases have initial terms of at least four years, we are designated as the exclusive or primary supplier for specified categories of our products. Because of the very competitive nature of the market and the limited number of customers for these products, our customers have sought and obtained price concessions, significant marketing allowances and more favorable delivery and payment terms in consideration for our designation as a customer’s exclusive or primary supplier. These incentives differ from contract to contract and can include (i) the issuance of a specified amount of credits against receivables in accordance with a schedule set forth in the relevant contract, (ii) support for a particular customer’s research or marketing efforts provided on a scheduled basis, (iii) discounts granted in connection with each individual shipment of product, and (iv) other marketing, research, store expansion or product development support. These contracts typically require that we meet ongoing performance standards. Our contracts with our customers expire at various dates through December 2024. While these longer-term agreements strengthen our customer relationships, the increased demand for our products often requires that we increase our inventories and personnel. Customer demands that we purchase their Remanufactured Core inventory also require the use of our working capital. The marketing and other allowances we typically grant our customers in connection with our new or expanded customer relationships adversely impact the near-term revenues, profitability and associated cash flows from these arrangements. However, we believe the investment we make in these new or expanded customer relationships will improve our overall liquidity and cash flow from operations over time. Share Repurchase Program Our board of directors approved a stock repurchase program of up to $37,000,000 of our common stock. During fiscal 2021 and 2019, we repurchased 54,960 and 163,815 shares of our common stock, respectively, for $1,139,000 and $4,062,000, respectively. During fiscal 2020 we did not repurchase any shares of our common stock. As of March 31, 2021, $16,831,000 was utilized and $20,169,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility. We retired the 730,521 shares repurchased under this program through March 31, 2021. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions. 40 Table of Contents Subsequent Event Credit Facility On May 28, 2021, we entered into a third amendment to the Amended Credit Facility (the “Third Amendment”). The Third Amendment, among other things, (i) extends the maturity date to May 28, 2026 from June 5, 2023, (ii) modifies the fixed charge coverage ratio financial covenant, and (iii) modifies the definition of “Consolidated EBITDA”. The modifications to the financial covenants were effective as of March 31, 2021. Capital Expenditures and Commitments Our total capital expenditures, including capital leases and non-cash capital expenditures, were $16,806,000 for fiscal 2021 and $19,511,000 for fiscal 2020. These capital expenditures primarily include the purchase of equipment for our current operations and the expansion of our operations in Mexico. We expect to incur approximately $12,300,000 of capital expenditures for our current operations and approximately $4,000,000 for continued expansion of our operations in Mexico during fiscal 2022. We have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures. Contractual Obligations The following summarizes our contractual obligations and other commitments as of March 31, 2021 and the effect such obligations could have on our cash flows in future periods: Less than 1 to 3 3 to 5 More than 5 Contractual Obligations Total 1 year years years years Finance lease obligations (1) $ 8,343,000 $ 2,962,000 $ 3,853,000 $ 1,528,000 $ - Operating lease obligations (2) 127,006,000 10,406,000 21,156,000 20,344,000 75,100,000 Revolving loan (3) 84,000,000 - - - 84,000,000 Term loan (4) 22,109,000 4,282,000 8,152,000 7,791,000 1,884,000 Accrued core payment (5) 8,062,000 6,358,000 1,408,000 296,000 - Core bank liability (6) 20,184,000 2,018,000 4,036,000 4,036,000 10,094,000 Finished goods liabilities (7) 4,700,000 1,958,000 2,742,000 - - Unrecognized tax benefits (8) - - - - - Other long-term obligations (9) 64,025,000 25,874,000 15,542,000 9,656,000 12,953,000 Total $ 338,429,000 $ 53,858,000 $ 56,889,000 $ 43,651,000 $ 184,031,000 (1) Finance lease obligations represent amounts due under finance leases for various types of equipment. (2) Operating lease obligations represent amounts due for rent under our leases for all our facilities, certain equipment, and our Company automobile. During the first quarter of fiscal 2022, we renewed the lease for our corporate headquarters in Torrance, California for an additional 10-year period. We have included the future minimum lease payments of this renewal as a contractual obligation although this lease was not included in the operating lease assets and operating lease liabilities as of March 31, 2021. (3) Our revolving loan obligations are under our current Credit Facility that matures on June 5, 2023. On May 28, 2021, we entered into the Third Amendment, which among other things, extended the maturity date of the Credit Facility to May 28, 2026 from June 5, 2023. Accordingly, we have reflected the maturity date in the payments of contractual obligations above. This debt is classified as a short term liability on our balance sheet as we expect to use our working capital to repay the amounts outstanding under our revolving loan. 41 Table of Contents (4) Term loan obligations represent the amounts due for principal payments as well as interest payments to be made. Interest payments were calculated based upon the interest rate for our term loan using the LIBOR option at March 31, 2021, which was 2.62%. On May 28, 2021, we entered into the Third Amendment, which among other things, extended the maturity date of the Credit Facility to May 28, 2026 from June 5, 2023. Accordingly, we have reflected the payment of our term loan through this date. (5) Accrued core payment represents the amounts due for principal of $7,757,000 and interest payments of $305,000 to be made in connection with the purchases of Remanufactured Cores from our customers, which are held by these customers and remain on their premises. (6) The core bank liability represents the amounts due for principal of $18,488,000 and interest payments of $1,696,000 to be made in connection with the return of Used Cores from our customers. (7) Finished goods liabilities represents the amounts due for principal of $4,561,000 and interest payments of $139,000 to be made in connection with the purchase of finished goods from our customers. (8) We are unable to reliably estimate the timing of future payments related to uncertain tax position liabilities at March 31, 2021; therefore, future tax payment accruals related to uncertain tax positions in the amount of $1,104,000 have been excluded from the table above. (9) Other long-term obligations represent commitments we have with certain customers to provide marketing allowances in consideration for multi-year customer agreements to provide products over a defined period. We are not obligated to provide these marketing allowances should our business relationships end with these customers.