What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-08-09 · 265 added, 103 removed, 116 unchanged (76% of the section changed)

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The following discussion and analysis presents factors that Motorcar Parts of America, Inc.

and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations.

and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of

This financial and business analysis should be read in conjunction with our March 31, 2021 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 14, 2021.

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This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our future performance that involve risks and uncertainties.

Various factors could cause actual results to differ materially from those expressed or implied by such statements.

Various factors could cause actual results

to differ materially from those expressed or implied by such statements.

These factors include, but are not limited to:

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delays in payments by customers;

the increasing customer pressure for lower prices and more favorable payment and other terms;

the increasing customer

pressure for lower prices and more favorable payment and other terms;

lower revenues than anticipated from new and existing contracts;

the increasing demands on our working capital;

the significant strain on working capital associated with large inventory purchases from customers;

the significant strain on working capital associated with large

inventory purchases from customers;

lower efficiency or production due to stay at home orders or other restrictions issued by governments due to COVID-19 concerns;

any meaningful difference between expected production needs and ultimate sales to our customers;

any meaningful difference between expected production needs and ultimate sales to

our customers;

investments in operational changes or acquisitions;

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our ability to maintain positive cash flows from operations;

our failure to meet the financial covenants or the other obligations set forth in our credit agreement and the lenders’ refusal to waive any such defaults;

our failure to meet the financial covenants or

the other obligations set forth in our credit agreement and the lenders’ refusal to waive any such defaults;

increases in interest rates;

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consumer preferences and general economic conditions;

increased competition in the automotive parts industry including increased competition from Chinese and other offshore manufacturers;

competition in the automotive parts industry including increased competition from Chinese and other offshore manufacturers;

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

supply chain delays or stoppages due to shipping delays;

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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potential tariffs, unforeseen increases in operating costs;

risks associated with cyber-attacks;

risks associated

with cyber-attacks;

risks associated with conflict minerals;

the impact of new tax laws and interpretations thereof;

uncertainties affecting our ability to estimate our tax rate and other factors discussed herein and in our other filings with the Securities and Exchange Commission (the “SEC”).

uncertainties affecting our ability to estimate our tax rate and other factors discussed herein and in our other filings with the

Securities and Exchange Commission (the “SEC”).

These and other risks and uncertainties may cause our actual results to differ materially and adversely from those expected in any forward-looking statements.

Readers are directed to risks and uncertainties identified below under “Risk Factors” and elsewhere in this report for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements.

Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Readers are directed to risks and

uncertainties identified below under “Risk Factors” and elsewhere in this report for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements.

Except as required by

law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Management Overview

We have 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.

We have determined through this review process that our business comprises three separate operating segments.

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.

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.

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.

(“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

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.

The remaining operating segment does not meet the quantitative thresholds for individual disclosure and we have combined our operating segments into a

single reportable segment.

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

The 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.

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 additional spikes in infections could negatively impact our business and financial condition.

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 emergence and spread of new variants of the virus, including the delta variant, the likelihood of

a resurgence of positive cases, the development, availability and public acceptance of effective treatments and vaccines, the speed at which such vaccines are administered, the efficacy of current vaccines against evolving strains or variants of

the virus, 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.

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.

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;

however, they continue to receive their compensation.

We also implemented safe work practices across all of our facilities, including work from home rules, staggered shifts, Plexiglas barriers, and many other safety precautions.

Our employees have embraced the challenges of working remotely, continuing to operate through constant communication with team members.

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

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.

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

equipment, which have negatively impacted our profitability.

These expanded benefits, supply costs and other COVID-19 related costs resulted in total expense, included in cost of goods sold and operating expenses in the condensed consolidated

statements of income, of $955,000 and $2,048,000 during the three months ended September 30, 2021 and 2020, respectively, and $1,809,000 and $4,343,000 during the six months ended September 30, 2021 and 2020, respectively.

Our Asian subsidiaries

received $48,000 and $44,000 from their local assistance programs during the three months ended September 30, 2021 and 2020, respectively, and $71,000 and $137,000 during the six months ended September 30, 2021 and 2020, respectively.

payments from the Canadian Government under the Canadian Emergency Wage Subsidy program of $484,000 and $849,000 during the three and six months ended September 30, 2020, respectively.

These payments are recorded as a reduction of cost of goods

sold and operating expenses in the condensed consolidated statements of income.

Results of Operations for the Three Months Ended September 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

September 30,

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 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.

for the fiscal quarter.

Annualized finished goods turnover for the three months ended September 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.

Net Sales and Gross Profit

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Three Months Ended

September 30,

Cost of goods sold

Gross profit percentage

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.

Our net sales for the three months ended September 30, 2021 were $175,548,000, which represents an increase of $20,818,000, or 13.5%, from the three months ended September 30, 2020 of

$154,730,000.

While our 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.

Net sales for the three months ended September 30, 2021 and 2020 include $13,740,000 and $12,779,000, respectively, in core revenue due to a realignment of inventory at certain customer distribution

We expect this realignment will benefit future sales as product mix changes.

Gross Profit.

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 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.

Our gross profit was $35,951,000, or 20.5% of net sales, for the three months ended September 30, 2021 compared with $39,726,000, or 25.7% of net sales, for the

three months ended September 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.

During the three months ended September 30, 2021, higher freight costs impacted gross profit by approximately $3,085,000, or

During the three months ended September 30, 2021, we also incurred additional expenses of $2,367,000 due to COVID-19 related costs for inefficiencies in the supply chain, increased salaries associated with COVID-19 vulnerable employee pay,

and personal protective equipment.

During the three months ended September 30, 2020, we incurred additional expenses of $1,533,000 due to increased salaries associated with COVID-19 bonuses, vulnerable employee pay, and personal protective

equipment in connection with the COVID-19 pandemic.

Our gross profit for the three months ended September 30, 2021 and 2020 was also impacted by (i) transition expenses in connection with the expansion of our brake-related operations in Mexico of $797,000 and

$4,054,000, respectively, and (ii) amortization of core premiums paid to customers related to new business of $3,012,000 and $1,518,000, respectively.

realizable value and gain due to realignment of inventory at customer distribution centers, which resulted in a net gain of $3,175,000 for the three months ended September 30, 2021 compared with a net gain of $3,499,000 for the three months ended

September 30, 2020, (ii) customer allowances related to new business of $178,000 for the three months ended September 30, 2021, and (iii) a $2,847,000 benefit for revised tariff costs during the three months ended September 30, 2020.

Operating Expenses

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Three Months Ended

September 30,

General and administrative

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General and Administrative.

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.

Our general and administrative expenses for the three months ended September 30, 2021 were $14,465,000, which represents an increase of $1,947,000, or 15.6%, from the three

months ended September 30, 2020 of $12,518,000.

The increase in general and administrative expense was primarily due to (i) $746,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the

COVID-19 pandemic, (ii) $633,000 of increased share-based compensation due to equity grants made to employees in June 2021, (iii) $390,000 of increased costs at our offshore locations, primarily resulting from our expansion in Mexico, and (iv)

$332,000 of increased expense resulting from foreign currency transactions.

These increases in general and administrative expenses were partially offset by $569,000 of decreased professional services during the three months ended September 30,

Sales and Marketing .

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.

Our sales and marketing expenses for the three months ended September 30, 2021 were $5,520,000, which represents an increase of $1,194,000, or 27.6%, from the three months ended

September 30, 2020 of $4,326,000.

These increases in sales and marketing expense during the three months ended September 30, 2021 were primarily due to (i) $373,000 of increased commissions due to higher sales, (ii) $341,000 of increased

employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, and (iii) $412,000 of aggregate increased marketing in connection with new business, advertising, and travel expense.

Research and Development .

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.

Our research and development expenses for the three months ended September 30, 2021 were $2,495,000, which represents an increase of $523,000, or 26.5%, from the three months

ended September 30, 2020 of $1,972,000.

These increases in research and development expenses during the three months ended September 30, 2021 were primarily due to (i) $462,000 of increased employee-related expenses, primarily due to salary

reductions in the prior year in response to the COVID-19 pandemic, and (ii) $40,000 of increased samples for our core library.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts .

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.

Our foreign exchange impact of lease liabilities and forward contracts for the three months ended September 30, 2021 was a non-cash loss

of $3,917,000, which represents an increase in expense of $7,902,000, or 198.3%, from the non-cash gain for three months ended September 30, 2020 of $3,985,000.

This increase was primarily due to (i) the remeasurement of our foreign

currency-denominated lease liabilities which resulted in a non-cash loss of $1,746,000 compared with a non-cash gain of $1,618,000 for the three months ended September 30, 2021 and 2020, respectively, due to movements in foreign exchange rates and

(ii) the forward foreign currency exchange contracts which resulted in a non-cash loss of $2,171,000 compared with a non-cash gain of $2,367,000 for the three months ended September 30, 2021 and 2020, respectively, due to the changes in their fair

Interest Expense

Interest Expense, net.

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.

Our interest expense for the three months ended September 30, 2021 of $3,620,000, was in line with interest expense for the three months ended

September 30, 2020 of $3,614,000.

Provision for Income Taxes

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).

We recorded income tax expense of $2,251,000, or an effective tax rate of 37.9%, and $6,097,000, or an effective tax rate of 28.6%, for the three months ended

September 30, 2021 and 2020, respectively.

Effective tax rates are based on current projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate.

The effective tax rate

for the three months ended September 30, 2021 was primarily impacted by (i) foreign income taxed at rates that are different from the federal statutory rate, (ii) non-deductible executive compensation under Internal Revenue Code Section 162(m), and

(iii) specific jurisdictions that we do not expect to recognize the benefit of losses.

Results of Operations for the Six Months Ended September 30, 2021 and 2020

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

The following summarizes certain key operating data:

Six Months Ended

September 30,

Cash flow (used in) provided by operations

Finished goods turnover (annualized) (1)

Annualized finished goods turnover for the fiscal period is calculated by multiplying cost of goods sold for the period by 2 and dividing the result by the average between beginning and ending non-core finished goods inventory values for

the fiscal period.

Annualized finished goods turnover for the six months ended September 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.

Net Sales and Gross Profit

The following summarizes net sales and gross profit:

Six Months Ended

September 30,

Cost of goods sold

Gross profit percentage

Our net sales for the six months ended September 30, 2021 were $324,582,000, which represents an increase of $74,496,000, or 29.8%, from the six months ended September 30, 2020 of $250,086,000.

chain and logistics services.

Net sales for the six months ended September 30, 2021 and 2020 include $13,740,000 and $12,779,000, respectively, in core revenue due to a realignment of inventory at certain customer distribution centers.

this realignment will benefit our future sales as product mix changes.

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

Gross Profit.

Our gross profit was $59,522,000, or 18.3% of net sales, for the six months ended September 30, 2021 compared with $53,113,000, or 21.2% of net sales, for the

six months ended September 30, 2020.

global pandemic, including disruptions with worldwide supply chain, logistics services, and related higher freight costs.

During the six months ended September 30, 2021, higher freight costs impacted gross profit by approximately $6,075,000, or

During the six months ended September 30, 2021, we also incurred additional expenses of $4,138,000 due to COVID-19 related costs for inefficiencies in the supply chain, increased salaries associated with COVID-19 vulnerable employee pay, and

personal protective equipment.

During the six months ended September 30, 2020, we incurred additional expenses of $3,373,000 due to increased salaries associated with COVID-19 bonuses, vulnerable employee pay, and personal protective equipment in

connection with the COVID-19 pandemic.

Our gross profit for the six months ended September 30, 2021 and 2020 was also impacted by (i) transition expenses in connection with the expansion of our brake-related operations in Mexico of $2,744,000 and

$7,355,000, respectively, and (ii) amortization of core premiums paid to customers related to new business of $5,543,000 and $2,741,000, respectively.

realizable value and gain due to realignment of inventory at customer distribution centers, which resulted in a net gain of $2,191,000 and $2,115,000 for the six months ended September 30, 2021 and 2020, respectively, (ii) customer allowances and

return accruals related to new business of $324,000 and $307,000 for the six months ended September 30, 2021 and 2020, respectively, and (iii) a $2,847,000 benefit for revised tariff costs during the six months ended September 30, 2020.

Operating Expenses

The following summarizes operating expenses:

Six Months Ended

September 30,

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 six months ended September 30, 2021 were $26,951,000, which represents an increase of $2,746,000, or 11.3%, from the six months

ended September 30, 2020 of $24,205,000, however, general and administrative expenses as a percentage of net sales decreased to 8.3% for the six months ended September 30, 2021 from 9.7% for the prior year.

The increase in general and

administrative expense was primarily due to (i) $1,387,000 of increased costs at our offshore locations, primarily resulting from our expansion in Mexico, (ii) $1,214,000 of increased employee-related expenses, primarily due to salary reductions in

the prior year in response to the COVID-19 pandemic, (iii) $1,166,000 of increased share-based compensation due to equity grants made to employees in June 2021, and (iv) $392,000 of increased expense resulting from foreign currency transactions.

These increases in general and administrative expenses were partially offset by $1,965,000 of decreased professional services.

Sales and Marketing .

Our sales and marketing expenses for the six months ended September 30, 2021 were $10,888,000, which represents an increase of $2,362,000, or 27.7%, from the six months ended

September 30, 2020 of $8,526,000.

This increase in sales and marketing expense during the six months ended September 30, 2021 was primarily due to (i) $748,000 of increased employee-related expenses, primarily due to salary reductions in the prior

year in response to the COVID-19 pandemic, (ii) $664,000 of increased marketing in connection with new business and advertising expense, (iii) $631,000 of increased commissions due to higher sales, and (iv) $222,000 of increased travel.

Research and Development .

Our research and development expenses for the six months ended September 30, 2021 were $4,996,000, which represents an increase of $1,082,000, or 27.6%, from the six months ended

September 30, 2020 of $3,914,000.

This increase in research and development expenses during the six months ended September 30, 2021 was primarily due to (i) $781,000 of increased employee-related expenses, primarily due to salary reductions in the

prior year in response to the COVID-19 pandemic, (ii) $185,000 of increased samples for our core library, and (iii) $101,000 of increased outside services.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts .

Our foreign exchange impact of lease liabilities and forward contracts for the six months ended September 30, 2021 was a non-cash loss

of $1,384,000, which represents an increase in expense of $10,186,000, or 115.7%, from the non-cash gain for six months ended September 30, 2020 of $8,802,000.

This increase was primarily due to (i) the remeasurement of our foreign

currency-denominated lease liabilities which resulted in non-cash gains of $1,049,000 compared with $3,603,000 for the six months ended September 30, 2021 and 2020, respectively, due to movements in foreign exchange rates and (ii) the forward

foreign currency exchange contracts which resulted in a non-cash loss of $2,433,000 compared with a non-cash gain of $5,199,000 for the six months ended September 30, 2021 and 2020, respectively, due to the changes in their fair values.

Interest Expense

Interest Expense, net.

Our interest expense, net, for the six months ended September 30, 2021 was $7,561,000, which represents a decrease of $462,000, or 5.8%, from the six

months ended September 30, 2020 of $8,023,000.

The decrease in interest expense was primarily due to lower interest rates and lower average outstanding balances under our credit facility, partially offset by lower interest income on our cash

Provision for Income Taxes

We recorded income tax expense of $3,198,000, or an effective tax rate of 41.3%, and $5,075,000, or an effective tax rate of 29.4%, for the six months ended

September 30, 2021 and 2020, respectively.

Effective tax rates are based on current projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate.

The effective tax rate

for the six months ended September 30, 2021 was primarily impacted by (i) foreign income taxed at rates that are different from the federal statutory rate, (ii) non-deductible executive compensation under Internal Revenue Code Section 162(m), and

(iii) specific jurisdictions that we do not expect to recognize the benefit of losses.

Liquidity and Capital Resources

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.

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.

We had working capital (current assets minus current liabilities) of $107,707,000 compared with $96,725,000, a ratio of current assets to current liabilities of 1.3:1.0, at September 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 six months ended September 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.

We believe our cash and cash equivalents, short-term investments, use of receivable discount programs, amounts available under our credit facility, and other sources are sufficient to

satisfy our expected future working capital needs, repayment of the current portion of our term loans, and lease and capital expenditure obligations over the next 12 months.

Share Repurchase Program

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.

As of September 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 September 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:

Three Months Ended

Cash flows provided by (used in):

Six Months Ended

September 30,

Cash flows (used in) provided by:

Operating activities

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Capital expenditures

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).

Net cash used in operating activities was $24,339,000 during the six months ended September 30, 2021 compared with net cash provided by operating activities of $39,330,000 during the six months ended September 30, 2020.

The significant change in

our operating activities was due to (i) a decrease in our accounts payable compared with an increase in the prior year, (ii) the buildup of our inventory to meet anticipated future demand, 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.

Net cash used in investing activities was $3,483,000 and $7,002,000 during the six months ended September 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 $30,283,000 during the six months ended September 30, 2021 compared with net cash used in financing activities $61,312,000 during the six months ended September 30, 2020.

The significant change in

our financing activities was due mainly to additional net borrowings under our credit facility during the six months ended September 30, 2021 to support the investment in our inventory and growth initiatives compared with repayments under our

credit facility during the six months ended September 30, 2020.

Capital Resources

Credit Facility

We are party to a $268,620,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $238,620,000 revolving loan facility, subject to borrowing base restrictions, a $24,000,000 sublimit for borrowings by Canadian borrowers, and a $20,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $30,000,000 term loan facility (the “Term Loans”).

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

The loans under the Credit Facility mature on June 5, 2023.

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.

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

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”.

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.

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.

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 2.60% and 2.59%, respectively, at June 30, 2021, and 2.62% at March 31, 2021.

The interest rate on our Term Loans and

Revolving Facility was 2.84% at September 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 June 30, 2021.

We were in compliance with all

financial covenants as of September 30, 2021.

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

Financial covenants

required under the

Credit Facility

Financial covenants required under the Credit Facility

Calculation as of

June 30, 2021

September 30, 2021

Maximum senior leverage ratio

Minimum fixed charge coverage 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 .

We had cash of $17,911,000 at September 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 1.89 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 $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.

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 $120,000,000 and $84,000,000 outstanding under the Revolving Facility at September 30, 2021 and March 31, 2021, respectively.

In addition, $6,694,000 was outstanding for letters of credit at September 30,

At September 30, 2021, after certain contractual adjustments, $90,935,000 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.

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

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.

payment terms to customers.

The following is a summary of the receivable discount programs:

Three Months Ended

Six Months Ended

September 30,

Receivables discounted

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Off-Balance Sheet Arrangements

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.

At September 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 $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.

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 for the full fiscal year 2022.

Our total capital expenditures, including finance leases and non-cash capital expenditures were $2,829,000 and $8,798,000 for the six months ended September 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.

We expect to incur approximately $13,500,000 of capital expenditures for our current operations and continued expansion of our operations in Mexico for

the remainder of our fiscal year 2022.

We have used and expect to continue using our working capital and other available capital resources to fund these capital expenditures.

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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.

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

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

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There have been no material changes in market risk from the information provided in Item 7A.

“Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K as of March 31, 2021, which was filed with the SEC on June 14, 2021.

“Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K as of March 31, 2021, which was filed with the SEC on

June 14, 2021.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis