What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-02-09 · 77 added, 161 removed, 142 unchanged (63% of the section changed)

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difficulty in obtaining Used Cores and component parts or increases in the costs of those parts;

supply chain delays or stoppages due to shipping delays;

political, criminal or economic instability in any of the foreign countries where we conduct operations;

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Management Overview

We have been focused on implementing a multi-pronged platform for growth within the non-discretionary automotive aftermarket for the replacement parts and diagnostic testing industry, through organic growth and acquisitions.

Our investments in infrastructure and human resources, including the consolidation of our distribution center in Mexico and the significant expansion of manufacturing capacity, are expected to be transformative and scalable.

As a result, gross profit and net income have been impacted, and our future performance and opportunities should be considered with these factors in mind.

Our products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, and brake master cylinders, and (iv) diagnostics and other products, which include diagnostics systems, advanced power emulators used for the development of electric vehicles and aerospace applications, and custom power electronic products for quality control in the development and production of electric vehicles and turbochargers.

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 during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines and continues to be transformative and scalable.

These investments included (i) the opening of a 410,000 square foot distribution center, (ii) two buildings totaling 372,000 square feet for remanufacturing and core sorting of brake calipers, and (iii) the realignment of production at our initial 312,000 square foot facility in Mexico.

Our products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, brake rotors, brake pads, and brake master cylinders, and (iv) other products, which include turbochargers and test solutions and diagnostic equipment used for electric vehicle powertrain development and manufacturing including electric motor test systems, e-axle test systems, advanced power emulators, charging unit test systems, test systems for alternators, starters, belt starter generators and bench-top testers used by the automotive retail segment.

Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for segment reporting, we have identified our chief operating decision maker (“CODM”), reviewed the documents used by the CODM, and understand how such documents are used by the CODM to make financial and operating decisions.

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

The outbreak of the COVID-19 pandemic has spread globally and created significant volatility, uncertainty and economic disruption in many countries, including the countries in which we operate.

National, state and local governments in these countries have implemented a variety of measures in response to the COVID-19 pandemic that have the effect of restricting or limiting, among other activities, the operations of certain businesses.

We experienced a significant reduction in customer demand for our products during April 2020.

Although the demand for our products has substantially recovered, we continue to experience disruptions with worldwide supply chain and logistics services .

The COVID-19 pandemic has spread globally and created significant volatility, uncertainty and economic disruption in many countries, including the countries in which we operate.

National, state and local governments in these countries continue to implement a variety of measures in response that have the effect of restricting or limiting, among other activities, the operations of certain businesses.

We continue to experience disruptions with worldwide supply chain and logistics services .

We are unable to predict accurately the ultimate long-term impact that COVID-19 will have on our business and financial condition.

While the near-term outlook appears positive, any additional government shutdowns or the duration of the “second wave” or additional spikes could negatively impact our business and financial condition.

While the near-term outlook appears positive, any additional government shutdowns or additional spikes in infections 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.

We experienced inefficiencies in operations due to the implementation of additional personnel safety measures throughout our facilities.

These personnel safety measures include adding an additional shift in conjunction with reducing the number of hours in the existing shift, greater spacing (less personnel) in production areas and sanitizing procedures between shifts.

High-risk employees at all of our facilities have been required to remain at home;

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Enhanced levels of communication at all levels within the organization are critical to address the ever-changing landscape brought on by COVID-19, especially with most of our office staff continuing to work from home.

Such efforts have included, board check-in meetings and executive committee meetings, as needed, and regular town hall style communications with all employees.

To date, we have incurred increased costs as a result of COVID-19, including increased employee costs, such as expanded benefits and frontline incentives, and other operating costs, such as costs associated with the provision of personal protective equipment, which have negatively impacted our profitability.

During the three and nine months ended December 31, 2020, these expanded benefits, supply costs and other COVID-19 related costs resulted in $1,610,000 and $5,953,000, respectively, of total expense included in cost of goods sold and operating expenses in the condensed consolidated statements of income.

During the three and nine months ended December 31, 2020, we received $281,000 and $1,130,000, respectively, in payments from the Canadian Government under the Canadian Emergency Wage Subsidy program and our Asian subsidiaries received $24,000 and $161,000, respectively, from their local government assistance programs.

These payments are recorded as a reduction of cost of goods sold and operating expenses in the condensed consolidated statements of income.

In addition, we deferred the employer’s share of social security taxes of $1,170,000, of which $585,000 is included in accounts payable and accrued liabilities and $585,000 is included in other liabilities in the condensed consolidated balance sheet at December 31, 2020.

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.

Results of Operations for the Three Months Ended December 31, 2020 and 2019

Such efforts have included, additional board check-in meetings and executive committee meetings, as needed, and regular town hall style communications with all employees.

We continue to incur costs as a result of COVID-19, including employee costs, such as expanded benefits and frontline incentives, and other operating costs associated with the provision of personal protective equipment, which have negatively impacted our profitability.

During the three months ended June 30, 2021 and 2020, these expanded benefits, supply costs and other COVID-19 related costs resulted in $854,000 and $2,295,000, respectively, of total expense included in cost of goods sold and operating expenses in the condensed consolidated statements of operations.

During the three months ended June 30, 2021 and 2020, our Asian subsidiaries received $23,000 and $93,000, respectively, from their local assistance programs.

During the three months ended June 30, 2020, we received $365,000, in payments from the Canadian Government under the Canadian Emergency Wage Subsidy program.

These payments are recorded as a reduction of cost of goods sold and operating expenses in the condensed consolidated statements of operations.

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

The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.

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Three Months Ended

Cash flow provided by operations

Cash flow (used in) provided by operations

Finished goods turnover (annualized) (1)

Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost of goods sold for the quarter by 4 and dividing the result by the average between beginning and ending finished goods inventory values, which includes all on-hand core inventory, for the fiscal quarter.

Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost of goods sold for the quarter by 4 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the fiscal quarter.

Annualized finished goods turnover for the three months ended June 30, 2020 has been updated to conform to the current year presentation for non-core finished goods turnover.

We believe this provides a useful measure of our ability to turn our inventory into revenues.

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Gross profit percentage

Our net sales for the three months ended December 31, 2020 decreased by $3,006,000, or 2.4%, to $122,568,000 compared with net sales for the three months ended December 31, 2019 of $125,574,000.

Sales for the quarter were impacted by a number of factors related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services— resulting in order delays of approximately $17,000,000, which are expected to be realized between the current fiscal fourth quarter and the first quarter of the new fiscal year.

Our net sales for the three months ended June 30, 2021 were $149,034,000, which represents an increase of $53,678,000, or 56.3%, from the three months ended June 30, 2020 of $95,356,000.

Net sales for the quarter increased across all product lines due to strong demand for our products.

We continue to experience a number of challenges related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services.

Our prior year net sales were also impacted by the COVID-19 pandemic.

Gross Profit.

Our gross profit was $24,241,000, or 19.8% of net sales, for the three months ended December 31, 2020 compared with $27,661,000, or 22.0% of net sales, for the three months ended December 31, 2019.

Our gross profit was impacted by the global COVID-19 pandemic, including disruptions with worldwide supply chain, logistics services, and related higher freight costs.

Additionally, our gross profit was further impacted by $1,052,000, or 0.9%, due to COVID-19 related costs for wages and personal protective equipment.

Our gross profit for the three months ended December 31, 2020 and 2019 was also impacted by:

Our gross profit was $23,571,000, or 15.8% of net sales, for the three months ended June 30, 2021 compared with $13,387,000, or 14.0% of net sales, for the three months ended June 30, 2020.

Our gross profit was impacted by (i) growth initiatives in connection with the expansion of our new product lines, in addition to the transition costs discussed below, and (ii) inflationary costs related to the global pandemic, including disruptions with worldwide supply chain, logistics services, and related higher freight costs.

Higher freight costs impacted gross profit by approximately $2,990,000, or 2.0%.

We also incurred additional expenses of $1,771,000 and $1,840,000 due to COVID-19 related costs for inefficiencies in the supply chain, wages and personal protective equipment during the three months ended June 30, 2021 and 2020, respectively.

Our gross profit for the three months ended June 30, 2021 and 2020 was also impacted by:

(i) transition expenses in connection with the expansion of our operations in Mexico of $1,947,000 and $3,301,000, respectively, and (ii) amortization of core premiums paid to customers related to new business of $2,531,000 and $1,223,000, respectively.

In addition, gross profit was positively impacted by (i) a 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 resulted in a write-down of $1,304,000 compared with $2,395,000 for the three months ended December 31, 2020 and 2019, respectively, and (ii) a $688,000 benefit for revised tariff costs during the three months ended December 31, 2020.

Our prior year gross profit was impacted by customer allowances related to new business of $777,000.

In addition, gross profit was impacted by (i) non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value, which resulted in a write-down of $984,000 compared with $1,384,000, and (ii) customer allowances and return accruals related to new business of $146,000 and $307,000 for the three months ended June 30, 2021 and 2020, respectively.

Operating Expenses

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General and Administrative.

Our general and administrative expenses for the three months ended December 31, 2020 were $14,005,000, which represents a decrease of $385,000, or 2.7%, from the three months ended December 31, 2019 of $14,390,000.

The decrease in general and administrative expense was primarily due to (i) $1,070,000 of decreased professional services, (ii) $569,000 of increased gain resulting from foreign currency transactions, (iii) $290,000 of decreased expense due to changes in revaluations of contingent consideration, and (iv) $253,000 of decreased travel.

These decreases in general and administrative expenses were partially offset by expenses resulting from our expansion in Mexico and other COVID-19 related costs, such as supply costs and expanded benefits to employees.

Our general and administrative expenses for the three months ended June 30, 2021 were $12,486,000, which represents an increase of $799,000, or 6.8%, from the three months ended June 30, 2020 of $11,687,000.

General and administrative expenses decreased to 8.4% of net sales for the three months ended June 30, 2021 compared with 12.3% in the prior year.

The increase in general and administrative expense was primarily due to (i) $997,000 of increased costs at our offshore locations, primarily resulting from our expansion in Mexico, (ii) $533,000 of increased share-based compensation due to equity grants made to employees in June 2021, and (iii) $468,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic.

These increases in general and administrative expenses were partially offset by $1,396,000 decreased professional services.

Sales and Marketing .

Our sales and marketing expenses for the three months ended December 31, 2020 were $4,698,000, which represents a decrease of $925,000, or 16.5%, from the three months ended December 31, 2019 of $5,623,000.

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) $348,000 from decreased travel and (ii) $552,000 of decreased trade shows expense.

Our sales and marketing expenses for the three months ended June 30, 2021 were $5,368,000, which represents an increase of $1,168,000, or 27.8%, from the three months ended June 30, 2020 of $4,200,000.

The increase in sales and marketing expense was primarily due to our cost-cutting measures in the prior year in response to COVID-19.

These increases in sales and marketing expense during the three months ended June 30, 2021 were primarily due to (i) $407,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, (ii) $338,000 of increased advertising expense, (iii) $258,000 of increased commissions, and (iv) $136,000 of increased travel.

Research and Development .

Our research and development expenses for the three months ended December 31, 2020 were $2,100,000, which represents a decrease of $74,000, or 3.4%, from the three months ended December 31, 2019 of $2,174,000.

The decrease in research and development expense was primarily due to our cost-cutting measures in response to COVID-19.

Our research and development expenses for the three months ended June 30, 2021 were $2,501,000, which represents an increase of $559,000, or 28.8%, from the three months ended June 30, 2020 of $1,942,000.

The increase in research and development expense was primarily due to our cost-cutting measures in the prior year in response to COVID-19.

These increases in research and development expenses during the three months ended June 30, 2021 were primarily due to (i) $319,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, (ii) $145,000 of increased samples for our library, and (iii) $78,000 of increased outside services.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts .

The remeasurement of our foreign currency-denominated lease liabilities resulted in non-cash gains of $8,638,000 and $2,128,000 for the three months ended December 31, 2020 and 2019, respectively, due to movements in foreign exchange rates.

In addition, the forward foreign currency exchange contracts resulted in non-cash gains of $3,817,000 and $1,644,000 for the three months ended December 31, 2020 and 2019, respectively, due to the changes in their fair values.

The remeasurement of our foreign currency-denominated lease liabilities resulted in non-cash gains of $2,795,000 and $1,985,000 for the three months ended June 30, 2021 and 2020, respectively, due to movements in foreign exchange rates.

In addition, the forward foreign currency exchange contracts resulted in a non-cash loss of $262,000 and a non-cash gain of $2,832,000 for the three months ended June 30, 2021 and 2020, respectively, due to the changes in their fair values.

Interest Expense

Interest Expense, net.

Our interest expense, net for the three months ended December 31, 2020 was $4,051,000, which represents a decrease of $2,828,000, or 41.1%, from the three months ended December 31, 2019 of $6,879,000.

Our interest expense, net, for the three months ended June 30, 2021 was $3,941,000, which represents a decrease of $468,000, or 10.6%, from the three months ended June 30, 2020 of $4,409,000.

The decrease in interest expense was primarily due to lower interest rates and lower average outstanding balances under our credit facility.

Provision for Income Taxes

We recorded income tax expense of $3,373,000, or an effective tax rate of 28.5%, and $1,502,000, or an effective tax rate of 63.5%, for the three months ended December 31, 2020 and 2019, respectively.

The effective tax rate for the three months ended December 31, 2020, 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).

Results of Operations for the Nine Months Ended December 31, 2020 and 2019

The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.

The following summarizes certain key operating data:

Nine Months Ended

Cash flow provided by (used in) operations

Finished goods turnover (annualized) (1

Annualized finished goods turnover for the period is calculated by multiplying cost of goods sold for the period by 1.3 and dividing the result by the average between beginning and ending finished goods inventory values, which includes all on-hand core inventory, for the period.

We believe this provides a useful measure of our ability to turn our inventory into revenues.

Net Sales and Gross Profit

The following summarizes net sales and gross profit:

Nine Months Ended

Cost of goods sold

Gross profit percentage

Our net sales for the nine months ended December 31, 2020 decreased by $12,442,000, or 3.2%, to $372,654,000 compared with net sales for the nine months ended December 31, 2019 of $385,096,000.

Sales for the period were impacted by a number of factors related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services— resulting in order delays of approximately $17,000,000, which are expected to be realized between the current fiscal fourth quarter and the first quarter of the new fiscal year.

In addition, our sales for the nine months ended December 31, 2020 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.

Gross Profit.

Our gross profit was $77,354,000, or 20.8% of net sales, for the nine months ended December 31, 2020 compared with $81,817,000, or 21.2% of net sales, for the nine months ended December 31, 2019.

Our gross profit was impacted by the global COVID-19 pandemic, including disruptions with worldwide supply chain, logistics services, and related higher freight costs.

Additionally, our gross profit was further impacted by $4,425,000, or 1.2%, due to COVID-19 related costs for wages and personal protective equipment.

Our gross profit for the nine months ended December 31, 2020 and 2019 was also impacted by:

(i) transition expenses in connection with the expansion of our operations in Mexico of $11,572,000 and $5,829,000, respectively and (ii) amortization of core premiums paid to customers related to new business of $4,269,000 and $3,543,000.

In addition, gross profit was impacted by (i) a $3,535,000 benefit for revised tariff costs for the nine months ended December 31, 2020, (ii) non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value and gain due to realignment of inventory at two customer distribution centers, which resulted in a net gain of $811,000 during the nine months ended December 31, 2020 compared with a write-down of $9,867,000 for the nine months ended December 31, 2019, and (iii) customer allowances and return accruals related to new business of $307,000 and $1,119,000 for the nine months ended December 31, 2020 and 2019, respectively.

Our prior year gross profit was impacted by net tariff costs of $1,067,000 not passed through to customers, and cost of $133,000 in connection with the cancellation of a customer contract.

Operating Expenses

The following summarizes operating expenses:

Nine Months Ended

General and administrative

Sales and marketing

Research and development

Foreign exchange impact of lease liabilities and forward contracts

Percent of net sales

General and administrative

Sales and marketing

Research and development

Foreign exchange impact of lease liabilities and forward contracts

General and Administrative.

Our general and administrative expenses for the nine months ended December 31, 2020 were $38,210,000, which represents a decrease of $1,200,000, or 3.0%, from the nine months ended December 31, 2019 of $39,410,000.

The decrease in general and administrative expense was primarily due to (i) $2,303,000 of decreased professional services, (ii) $841,000 of increased gain resulting from foreign currency transactions, (iii) $625,000 of decreased travel, and (iv) $485,000 of decreased expense due to changes in revaluations of contingent consideration.

Sales and Marketing .

Our sales and marketing expenses for the nine months ended December 31, 2020 were $13,224,000, which represents a decrease of $2,766,000, or 17.3%, from the nine months ended December 31, 2019 of $15,990,000.

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) $1,146,000 from decreased travel, (ii) $722,000 of decreased trade shows expense, (iii) $616,000 from decreased advertising and marketing expense, and (iv) $415,000 from decreased employee-related expenses.

Research and Development .

Our research and development expenses for the nine months ended December 31, 2020 were $6,014,000, which represents a decrease of $680,000, or 10.2%, from the nine months ended December 31, 2019 of $6,694,000.

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) $441,000 of decreased employee-related expenses, (ii) $101,000 of decreased travel, and (iii) $81,000 of decreased outside services.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts .

The remeasurement of our foreign currency denominated lease liabilities resulted in non-cash gains of $12,241,000 and $1,491,000 for the nine months ended December 31, 2020 and 2019, respectively, due to movements in foreign exchange rates.

In addition, the forward foreign currency exchange contracts resulted in non-cash gains of $9,016,000 and $1,016,000 for the nine months ended December 31, 2020 and 2019, respectively, due primarily to the changes in their fair values.

Interest Expense

Interest Expense, net.

Our interest expense, net for the nine months ended December 31, 2020 was $12,074,000, which represents a decrease of $7,501,000, or 38.3%, from the nine months ended December 31, 2019 of $19,575,000.

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

We recorded income tax expense of $8,448,000, or an effective tax rate of 29.0%, and $1,752,000, or an effective tax rate of 66.0%, for the nine months ended December 31, 2020 and 2019, respectively.

The effective tax rate for the nine months ended December 31, 2020, 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).

We recorded income tax expense of $947,000, or an effective tax rate of 52.4%, and an income tax benefit of $1,022,000, or an effective tax rate of 25.3%, for the three months ended June 30, 2021 and 2020, respectively.

The effective tax rate for the three months ended June 30, 2021 was primarily impacted by (i) specific jurisdictions that we do not expect to recognize the benefit of losses, (ii) foreign income taxed at rates that are different from the federal statutory rate, and (iii) non-deductible executive compensation under Internal Revenue Code Section 162(m).

Liquidity and Capital Resources

We had working capital (current assets minus current liabilities) of $96,282,000 and $90,624,000, a ratio of current assets to current liabilities of 1.3:1.0 at December 31, 2020 and March 31, 2020, respectively.

We generated cash during the nine months ended December 31, 2020 from operations and the use of receivable discount programs.

We had working capital (current assets minus current liabilities) of $105,403,000 and $96,725,000, a ratio of current assets to current liabilities of 1.3:1.0, at June 30, 2021 and March 31, 2021, respectively.

The increase in working capital was due primarily to the buildup of our inventory to meet anticipated future demand.

We generated cash during the three months ended June 30, 2021 from the use of our receivable discount programs and credit facility.

As we manage through the impacts of the COVID-19 pandemic, we have access to our existing cash, as well as our available credit facilities to meet short-term liquidity needs.

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Share Repurchase Program

As of December 31, 2020, $15,692,000 of the $37,000,000 authorized share repurchase program had been utilized and $21,308,000 remained available to repurchase shares, subject to the limit in our credit facility.

Our credit facility currently permits the payment of up to $30,000,000 of dividends and share repurchases for this fiscal year, subject to pro forma compliance with financial covenants.

We retired the 675,561 shares repurchased under this program through December 31, 2020.

Our board of directors approved a stock repurchase program of up to $37,000,000 of our common stock.

As of June 30, 2021, $16,831,000 was utilized and $20,169,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility.

We retired the 730,521 shares repurchased under this program through June 30, 2021.

Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.

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

Nine Months Ended

Three Months Ended

Cash flows provided by (used in):

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Effect of exchange rates on cash and cash equivalents

Net decrease in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Additional selected cash flow data:

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Capital expenditures

Net cash provided by operating activities was $72,484,000 during the nine months ended December 31, 2020 compared with net cash used in operating activities of $4,410,000 during the nine months ended December 31, 2019.

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 and 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 prior year operating activities were significantly impacted by our growth initiatives, including our new expanded footprint and product lines.

Net cash used in investing activities was $12,295,000 and $9,650,000 during the nine months ended December 31, 2020 and 2019, respectively, due to the redemption of short-term investments during the prior year and increased capital expenditures.

Net cash used in financing activities was $97,734,000 during the nine months ended December 31, 2020 compared with net cash provided by financing activities $13,546,000 during the nine months ended December 31, 2019.

The significant change in our financing activities resulted from the pay down of our debt by $95,813,000 during the nine months ended December 31, 2020 compared with borrowing to support our growth initiatives, including the expansion of our operations in Mexico and our product line expansion during the nine months ended December 31, 2019.

Net cash used in operating activities was $4,739,000 during the three months ended June 30, 2021 compared with net cash provided by operating activities of $22,388,000 during the three months ended June 30, 2020.

The significant change in our operating activities was due to (i) the buildup of our inventory to meet anticipated future demand, (ii) the paydown of 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 continue to be impacted, to a lesser extent, by our growth initiatives, including our expanded footprint and product lines.

Net cash used in investing activities was $2,089,000 and $3,038,000 during the three months ended June 30, 2021 and 2020, respectively.

The significant change in our investing activities was due primarily to decreased capital expenditures as we near the completion of our expansion in Mexico.

Net cash provided by financing activities was $16,094,000 during the three months ended June 30, 2021 compared with net cash used in financing activities $41,674,000 during the three months ended June 30, 2020.

The significant change in our financing activities was due mainly to additional borrowings under our credit facility during the three months ended June 30, 2021 compared with repayments under our credit facility during the three months ended June 30, 2020.

Capital Resources

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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.

The Credit Facility currently permits the payment of up to $29,430,000 of dividends and share repurchases for fiscal year 2022, subject to pro forma compliance with financial covenants.

In connection with the Credit Facility, the lenders have a security interest in substantially all of our assets.

In May 2021, we entered into a third amendment to the Credit Facility (the “Third Amendment”).

The Third Amendment, among other things, (i) extended the maturity date to May 28, 2026 from June 5, 2023, (ii) modified the fixed charge coverage ratio financial covenant, and (iii) modified the definition of “Consolidated EBITDA”.

We capitalized $1,102,000 of new debt issuance costs in connection with the Third Amendment.

The Term Loans require quarterly principal payments of $937,500.

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There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date.

The interest rate on our Term Loans and Revolving Facility was 2.91% and 2.90%, respectively at December 31, 2020, and 4.34% and 3.64%, respectively at March 31, 2020.

The interest rate on our Term Loans and Revolving Facility was 2.60% and 2.59%, respectively, at June 30, 2021, and 2.62% at March 31, 2021.

The Credit Facility, among other things, requires us to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio.

We were in compliance with all financial covenants as of December 31, 2020.

We were in compliance with all financial covenants as of June 30, 2021.

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

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Calculation as of

December 31, 2020

June 30, 2021

Maximum senior leverage ratio

Minimum fixed charge coverage ratio

We had cash of $12,800,000 at December 31, 2020 and paid down our outstanding debt by $95,813,000 during the nine months ended December 31, 2020.

However, t he Credit Facility allows up to $6,000,000 of credit for cash when computing the senior leverage ratio .

We had cash of $24,883,000 at June 30, 2021, however, t he Credit Facility only allows up to $6,000,000 of credit for cash when computing the senior leverage ratio .

Our senior leverage ratio would have been 1.51 had we paid down the Revolving Facility with cash on hand.

In addition to other covenants, the Credit Facility places limits on our ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem, or repurchase capital stock, alter the business conducted by us and our subsidiaries, transact with affiliates, prepay, redeem, or purchase subordinated debt, and amend or otherwise alter debt agreements.

We had $59,000,000 and $152,000,000 outstanding under the Revolving Facility at December 31, 2020 and March 31, 2020, respectively.

In addition, $5,937,000 was outstanding for letters of credit at December 31, 2020.

At December 31, 2020, after certain contractual adjustments, $127,236,000 was available under the Revolving Facility.

We had $103,000,000 and $84,000,000 outstanding under the Revolving Facility at June 30, 2021 and March 31, 2021, respectively.

In addition, $6,444,000 was outstanding for letters of credit at June 30, 2021.

At June 30, 2021, after certain contractual adjustments, $95,323,000 was available under the Revolving Facility.

Receivable Discount Programs

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The following is a summary of the receivable discount programs:

Nine Months Ended

Three Months Ended

Receivables discounted

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Off-Balance Sheet Arrangements

At December 31, 2020, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.

At June 30, 2021, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.

Capital Expenditures and Commitments

Capital Expenditures

Our total capital expenditures, including finance leases and non-cash capital expenditures were $14,223,000 and $13,231,000 for the nine months ended December 31, 2020 and 2019, respectively.

Our total capital expenditures, including finance leases and non-cash capital expenditures were $1,622,000 and $5,088,000 for the three months ended June 30, 2021 and 2020, respectively.

These capital expenditures primarily include the purchase of equipment for our current operations and the expansion of our operations in Mexico.

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There have been no material changes to our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2021, which was filed on June 14, 2021, except as discussed below.

New Accounting Pronouncements Recently Adopted

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued an accounting pronouncement related to the measurement of credit losses on financial instruments.

This pronouncement, along with a subsequent Accounting Standards Updates (“ASU”) issued to clarify certain provisions of the new guidance, changed the impairment model for most financial assets and requires the use of an “expected loss” model for instruments measured at amortized cost.

Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset.

The adoption of this guidance on April 1, 2020 increased our required disclosures for our expected credit losses but did not have a material effect on our condensed consolidated financial statements.

Prior to April 1, 2020, accounts receivable were recorded at cost less an allowance for doubtful accounts.

The net amount of accounts receivable and corresponding allowance for doubtful accounts were presented in the condensed consolidated balance sheets.

We maintain an allowance for uncollectible accounts receivable for estimated losses resulting from the failure or inability of 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 condensed consolidated balance sheets.

We maintain an allowance for credit losses resulting from the expected failure or inability of our customers to make required payments.

We recognize the allowance for credit losses at inception and reassess quarterly based on the asset’s expected collectability.

The allowance is based on multiple factors including historical experience with bad debts, the credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, such as COVID-19, as well as expectations of conditions in the future, if applicable.

Our allowance for credit losses is based on the assessment of the collectability of assets pooled together with similar risk characteristics.

We record a provision for expected credit losses using a loss-rate method based on the ratio of our historical write-offs to our average trade accounts receivable.

At each reporting period, we will assess whether financial assets in a pool continue to display similar risk characteristics.

If particular receivables no longer display risk characteristics that are similar to those of the receivables in the pool, we may determine that we need to move those receivables to a different pool or perform an individual assessment of expected credit losses for those specific receivables.

Fair Value Measurements

In August 2018, the FASB issued guidance, which changed the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 measurements, and the narrative description of measurement uncertainty should be applied prospectively only for the most recent interim or annual period presented in the initial year of adoption.

All other amendments should be applied retrospectively applied to all periods presented upon their effective date.

The adoption of this guidance on April 1, 2020 modified certain of our disclosures for our Level 3 fair value measurements but did not have an impact on our consolidated financial statements.

Reference Rate Reform

In March 2020, the FASB issued guidance that, for a limited time, eases the potential burden in accounting for reference rate reform.

The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met.

The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform.

These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022.

We will apply these amendments prospectively.

The adoption of this guidance on April 1, 2020 did not have an impact on our condensed consolidated financial statements for the three and nine months ended December 31, 2020.

New Accounting Pronouncements Not Yet Adopted

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued guidance that simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application.

This guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2020.

Early adoption is permitted.

We are currently evaluating the impact this guidance will have on our consolidated financial statements.

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

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis