MOTORCAR PARTS OF AMERICA INC 10-Q

Item 1. Financial Statements MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets September 30, 2021 March 31, 2021 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 17,911,000 $ 15,523,000 Short-term investments 2,072,000 1,652,000 Accounts receivable — net 60,663,000 63,122,000 Inventory 330,494,000 302,913,000 Contract assets 32,329,000 26,940,000 Prepaid expenses and other current assets 12,952,000 12,706,000 Total current assets 456,421,000 422,856,000 Plant and equipment — net 51,236,000 53,854,000 Operating lease assets 84,576,000 71,513,000 Long-term deferred income taxes 19,861,000 19,381,000 Long-term contract assets 305,991,000 270,213,000 Goodwill and intangible assets — net 7,713,000 8,534,000 Other assets 1,414,000 1,531,000 TOTAL ASSETS $ 927,212,000 $ 847,882,000 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 127,991,000 $ 152,735,000 Customer finished goods returns accrual 34,539,000 31,524,000 Contract liabilities 49,843,000 41,072,000 Revolving loan 120,000,000 84,000,000 Other current liabilities 6,638,000 6,683,000 Operating lease liabilities 6,033,000 6,439,000 Current portion of term loan 3,670,000 3,678,000 Total current liabilities 348,714,000 326,131,000 Term loan, less current portion 14,877,000 16,786,000 Long-term contract liabilities 162,007,000 125,223,000 Long-term deferred income taxes 74,000 73,000 Long-term operating lease liabilities 83,998,000 70,551,000 Other liabilities 7,295,000 7,973,000 Total liabilities 616,965,000 546,737,000 Commitments and contingencies Shareholders' equity: Preferred stock; par value $ 0.01 per share, 5,000,000 shares authorized; none issued - - Series A junior participating preferred stock; par value $ 0.01 per share, 20,000 shares authorized; none issued - - Common stock; par value $ 0.01 per share, 50,000,000 shares authorized; 19,172,755 and 19,045,386 shares issued and outstanding at September 30 , 2021 and March 31 , 2021 , respectively 192,000 190,000 Additional paid-in capital 225,170,000 223,058,000 Retained earnings 90,137,000 85,593,000 Accumulated other comprehensive loss ( 5,252,000 ) ( 7,696,000 ) Total shareholders' equity 310,247,000 301,145,000 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 927,212,000 $ 847,882,000 The accompanying notes to condensed consolidated financial statements are an integral part hereof. 4 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) Three Months Ended September 30, Six Months Ended September 30 , 2021 2020 2021 2020 Net sales $ 175,548,000 $ 154,730,000 $ 324,582,000 $ 250,086,000 Cost of goods sold 139,597,000 115,004,000 265,060,000 196,973,000 Gross profit 35,951,000 39,726,000 59,522,000 53,113,000 Operating expenses: General and administrative 14,465,000 12,518,000 26,951,000 24,205,000 Sales and marketing 5,520,000 4,326,000 10,888,000 8,526,000 Research and development 2,495,000 1,972,000 4,996,000 3,914,000 Foreign exchange impact of lease liabilities and forward contracts 3,917,000 ( 3,985,000 ) 1,384,000 ( 8,802,000 ) Total operating expenses 26,397,000 14,831,000 44,219,000 27,843,000 Operating income 9,554,000 24,895,000 15,303,000 25,270,000 Interest expense, net 3,620,000 3,614,000 7,561,000 8,023,000 Income before income tax expense 5,934,000 21,281,000 7,742,000 17,247,000 Income tax expense 2,251,000 6,097,000 3,198,000 5,075,000 Net income $ 3,683,000 $ 15,184,000 $ 4,544,000 $ 12,172,000 Basic net income per share $ 0.19 $ 0.80 $ 0.24 $ 0.64 Diluted net income per share $ 0.19 $ 0.78 $ 0.23 $ 0.63 Weighted average number of shares outstanding: Basic 19,135,356 19,022,414 19,094,904 18,999,461 Diluted 19,619,774 19,345,311 19,638,045 19,289,765 The accompanying notes to condensed consolidated financial statements are an integral part hereof. 5 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended September 30, Six Months Ended September 30 , 2021 2020 2021 2020 Net income $ 3,683,000 $ 15,184,000 $ 4,544,000 $ 12,172,000 Other comprehensive income (loss), net of tax: Foreign currency translation gain (loss) 611,000 ( 441,000 ) 2,444,000 ( 1,704,000 ) Total other comprehensive income (loss), net of tax 611,000 ( 441,000 ) 2,444,000 ( 1,704,000 ) Comprehensive income $ 4,294,000 $ 14,743,000 $ 6,988,000 $ 10,468,000 The accompanying notes to condensed consolidated financial statements are an integral part hereof. 6 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) Common Stock Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balance at March 31, 2021 19,045,386 $ 190,000 $ 223,058,000 $ 85,593,000 $ ( 7,696,000 ) $ 301,145,000 Compensation recognized under employee stock plans - - 1,576,000 - - 1,576,000 Exercise of stock options, net of shares withheld for employee taxes 19,837 - 354,000 - - 354,000 Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes 35,869 1,000 ( 543,000 ) - - ( 542,000 ) Foreign currency translation - - - - 1,833,000 1,833,000 Net income - - - 861,000 - 861,000 Balance at June 30, 2021 19,101,092 $ 191,000 $ 224,445,000 $ 86,454,000 $ ( 5,863,000 ) $ 305,227,000 Compensation recognized under employee stock plans - - 1,851,000 - - 1,851,000 Exercise of stock options, net of shares withheld for employee taxes 7,860 - 78,000 - - 78,000 Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes 63,803 1,000 ( 1,204,000 ) - - ( 1,203,000 ) Foreign currency translation - - - - 611,000 611,000 Net income - - - 3,683,000 - 3,683,000 Balance at September 30, 2021 19,172,755 $ 192,000 $ 225,170,000 $ 90,137,000 $ ( 5,252,000 ) $ 310,247,000 Common Stock Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balance at March 31, 2020 18,969,380 $ 190,000 $ 218,581,000 $ 64,117,000 $ ( 7,368,000 ) $ 275,520,000 Compensation recognized under employee stock plans - - 1,043,000 - - 1,043,000 Exercise of stock options 3,000 - 20,000 - - 20,000 Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes 29,953 - ( 207,000 ) - - ( 207,000 ) Foreign currency translation - - - - ( 1,263,000 ) ( 1,263,000 ) Net loss - - - ( 3,012,000 ) - ( 3,012,000 ) Balance at June 30, 2020 19,002,333 $ 190,000 $ 219,437,000 $ 61,105,000 $ ( 8,631,000 ) $ 272,101,000 Compensation recognized under employee stock plans - - 1,218,000 - - 1,218,000 Exercise of stock options 6,000 - 73,000 - - 73,000 Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes 18,254 - ( 140,000 ) - - ( 140,000 ) Foreign currency translation - - - - ( 441,000 ) ( 441,000 ) Net income - - - 15,184,000 - 15,184,000 Balance at September 30, 2020 19,026,587 $ 190,000 $ 220,588,000 $ 76,289,000 $ ( 9,072,000 ) $ 287,995,000 The accompanying notes to condensed consolidated financial statements are an integral part hereof. 7 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended September 30, 2021 2020 Cash flows from operating activities: Net income $ 4,544,000 $ 12,172,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 6,364,000 5,233,000 Amortization of interest 856,000 767,000 Amortization of core premiums paid to customers 5,543,000 2,741,000 Amortization of finished goods premiums paid to customers 324,000 - Noncash lease expense 3,656,000 3,410,000 Loss (gain) due to the change in the fair value of the contingent consideration 70,000 ( 65,000 ) Foreign exchange impact of lease liabilities and forward contracts 1,384,000 ( 8,802,000 ) Gain on short-term investments ( 175,000 ) ( 195,000 ) Net provision for inventory reserves 6,305,000 5,281,000 Net provision for customer payment discrepancies and credit losses 961,000 421,000 Deferred income taxes ( 434,000 ) 447,000 Share-based compensation expense 3,427,000 2,261,000 Loss on disposal of plant and equipment 34,000 1,000 Changes in operating assets and liabilities: Accounts receivable 1,403,000 661,000 Inventory ( 34,185,000 ) ( 9,685,000 ) Prepaid expenses and other current assets ( 859,000 ) 1,200,000 Other assets 108,000 297,000 Accounts payable and accrued liabilities ( 21,512,000 ) 22,745,000 Customer finished goods returns accrual 3,005,000 2,217,000 Contract assets, net ( 47,006,000 ) ( 10,735,000 ) Contract liabilities, net 45,087,000 14,368,000 Operating lease liabilities ( 2,701,000 ) ( 3,027,000 ) Other liabilities ( 538,000 ) ( 2,383,000 ) Net cash (used in) provided by operating activities ( 24,339,000 ) 39,330,000 Cash flows from investing activities: Purchase of plant and equipment ( 3,238,000 ) ( 6,810,000 ) Change in short-term investments ( 245,000 ) ( 192,000 ) Net cash used in investing activities ( 3,483,000 ) ( 7,002,000 ) Cash flows from financing activities: Borrowings under revolving loan 57,000,000 - Repayments of revolving loan ( 21,000,000 ) ( 58,000,000 ) Repayments of term loan ( 1,875,000 ) ( 1,875,000 ) Payments for debt issuance costs ( 1,102,000 ) - Payments on finance lease obligations ( 1,427,000 ) ( 1,183,000 ) Exercise of stock options 432,000 93,000 Cash used to net share settle equity awards ( 1,745,000 ) ( 347,000 ) Net cash provided by (used in) financing activities 30,283,000 ( 61,312,000 ) Effect of exchange rate changes on cash and cash equivalents ( 73,000 ) 255,000 Net increase (decrease) in cash and cash equivalents 2,388,000 ( 28,729,000 ) Cash and cash equivalents — Beginning of period 15,523,000 49,616,000 Cash and cash equivalents — End of period $ 17,911,000 $ 20,887,000 Supplemental disclosures of cash flow information: Cash paid for interest, net $ 6,654,000 $ 7,339,000 Cash paid for income taxes, net of refunds 4,525,000 1,436,000 Cash paid for operating leases 5,207,000 5,323,000 Cash paid for finance leases 1,613,000 1,359,000 Plant and equipment acquired under finance leases 252,000 1,847,000 Assets acquired under operating leases 15,953,000 15,564,000 Non-cash capital expenditures 198,000 2,085,000 The accompanying notes to condensed consolidated financial statements are an integral part hereof. 8 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 1. Company Background and Organization Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading supplier of automotive aftermarket non-discretionary replacement parts, and test solutions and diagnostic equipment. These replacement parts are primarily sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). The Company’s test solutions and diagnostic equipment primarily serves the global automotive component and powertrain testing market. The Company’s products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, 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, the Company has identified its chief operating decision maker (“CODM”), reviewed the documents used by the CODM, and understands how such documents are used by the CODM to make financial and operating decisions. The Company has determined through this review process that its business comprises three separate operating segments. Two of the operating segments meet all the aggregation criteria and are aggregated. The remaining operating segment does not meet the quantitative thresholds for individual disclosure and the Company has combined its operating segments into one reportable segment. Impact of the Novel Coronavirus (“COVID-19”) The outbreak of the COVID-19 pandemic continues to adversely impact the U.S. and global economies – creating uncertainty regarding the potential effects on the Company’s employees, supply chain, operations, and customer demand. The COVID-19 pandemic could impact the Company’s operations and the operations of its customers, suppliers, and vendors because of quarantines, facility closures, travel, and logistics restrictions. The extent to which the COVID-19 pandemic impacts the Company will depend on numerous factors and future developments, which are highly uncertain and cannot be predicted, including, but not limited to: (i) the severity of the virus, (ii) the occurrence and duration of additional spikes in infections, (iii) the effects of the pandemic on customers, suppliers, and vendors, (iv) the remedial actions and stimulus measures adopted by local, state and federal governments, (v) the availability and acceptance of vaccines, and (vi) the extent to which normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, the Company may continue to experience adverse impacts to its business because of an economic recession or depression that has occurred or may occur in the future. 2. Basis of Presentation and New Accounting Pronouncements Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2022. This report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2021, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2021. 9 Table of Contents The accompanying condensed consolidated financial statements have been prepared on a consistent basis with, and there have been no material changes to, except as noted below, the accounting policies described in Note 2 , Summary of Significant Accounting Policies, to the consolidated financial statements that are presented in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021 . Recently Adopted Accounting Pronouncements Income Taxes In December 2019, the FASB issued guidance that simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application. This guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2020. The adoption of this guidance on April 1, 2021 did not have any material impact on the Company’s consolidated financial statements. 3. Accounts Receivable — Net The Company has trade accounts receivable that result from the sale of goods and services. Accounts receivable — net includes offset accounts related to allowances for credit losses, customer payment discrepancies, and returned goods authorizations (“RGAs”) issued for in-transit unit returns. The Company believes its credit risk with respect to trade accounts receivable is limited due to its credit evaluation process and the long-term nature of its relationships with its largest customers. The Company utilizes a historical loss rate method, adjusted for any changes in economic conditions or risk characteristics, to estimate its expected credit losses each period. When developing an estimate of expected credit losses, the Company considers all available relevant information regarding the collectability of cash flows, including historical information, current conditions, and reasonable and supportable forecasts of future economic conditions over the contractual life of the receivable. The historical loss rate method considers past write-offs of trade accounts receivable over a period commensurate with the initial term of the Company’s contracts with its customers. The Company recognizes the allowance for credit losses at inception and reassesses quarterly based on management’s expectation of the asset’s collectability. The Company’s accounts receivable are short-term in nature and written off only when all collection attempts have failed. The Company uses receivable discount programs with certain customers and their respective banks (see Note 10). Accounts receivable — net is comprised of the following: September 30, 2021 March 31, 2021 Accounts receivable — trade $ 75,775,000 $ 81,549,000 Allowance for credit losses ( 326,000 ) ( 348,000 ) Customer payment discrepancies ( 1,176,000 ) ( 752,000 ) Customer returns RGA issued ( 13,610,000 ) ( 17,327,000 ) Total accounts receivable — net $ 60,663,000 $ 63,122,000 10 Table of Contents The following table provides a roll-forward of the allowance for credit losses that is deducted from accounts receivable to present the net amount expected to be collected. During the six months ended September 30, 2020, the Company wrote off amounts previously fully reserved for in connection with the bankruptcy filing of one of its customers. Six Months Ended September 30, 2021 2020 Balance at beginning of period $ 348,000 $ 4,252,000 Provision for expected credit losses 17,000 228,000 Recoveries - ( 100,000 ) Amounts written off charged against the allowance ( 39,000 ) ( 3,897,000 ) Balance at end of period $ 326,000 $ 483,000 4. Inventory Inventory is comprised of the following: September 30, 2021 March 31, 2021 Inventory Raw materials $ 149,460,000 $ 128,190,000 Work-in-process 8,297,000 5,233,000 Finished goods 173,096,000 168,184,000 330,853,000 301,607,000 Less allowance for excess and obsolete inventory ( 14,163,000 ) ( 13,246,000 ) Inventory — net 316,690,000 288,361,000 Inventory unreturned 13,804,000 14,552,000 Total inventory $ 330,494,000 $ 302,913,000 5. Contract Assets During the three months ended September 30, 2021 and 2020, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $ 1,687,000 and $ 892,000 , respectively. During the six months ended September 30, 2021 and 2020, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $ 2,671,000 and $ 2,276,000 , respectively. 11 Table of Contents Contract assets are comprised of the following: September 30, 2021 March 31, 2021 Short-term contract assets Cores expected to be returned by customers $ 19,704,000 $ 17,657,000 Upfront payments to customers 577,000 684,000 Finished goods premiums paid to customers 631,000 405,000 Core premiums paid to customers 11,417,000 8,194,000 Total short-term contract assets $ 32,329,000 $ 26,940,000 Remanufactured cores held at customers' locations $ 248,902,000 $ 229,918,000 Upfront payments to customers 357,000 486,000 Finished goods premiums paid to customers 3,062,000 2,731,000 Core premiums paid to customers 48,101,000 31,509,000 Long-term core inventory deposits 5,569,000 5,569,000 Total long-term contract assets $ 305,991,000 $ 270,213,000 6. Significant Customer and Other Information Significant Customer Concentrations The largest customers accounted for the following percentage of net sales: Three Months Ended September 30, Six Months Ended September 30, 2021 2020 2021 2020 Net sales Customer A 40 % 45 % 37 % 45 % Customer B 17 % 21 % 18 % 23 % Customer C 30 % 23 % 30 % 20 % The largest customers accounted for the following percentage of accounts receivable – trade: September 30, 2021 March 31, 2021 Accounts receivable - trade Customer A 37 % 50 % Customer B 19 % 23 % Customer C 10 % - % 12 Table of Contents Geographic and Product Information The Company’s products are sold predominantly in the U.S. and accounted for the following percentages of net sales: Three Months Ended September 30, Six Months Ended September 30, 2021 2020 2021 2020 Product line Rotating electrical products 73 % 80 % 71 % 77 % Wheel hub products 11 % 12 % 12 % 14 % Brake related products 14 % 7 % 15 % 8 % Other products 2 % 1 % 2 % 1 % 100 % 100 % 100 % 100 % Significant Supplier Concentrations The Company had no suppliers that accounted for more than 10% of inventory purchases for the three and six months ended September 30, 2021 and 2020. 7. Debt The Company is party to a $ 268,620,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders and PNC Bank, National Association, as administrative agent, consisting of (i) a $ 238,620,000 revolving loan facility, subject to borrowing base restrictions, a $ 24,000,000 sublimit for borrowings by Canadian borrowers, and a $ 20,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $ 30,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 5, 2023 . The Credit Facility currently permits the payment of up to $ 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 the assets of the Company. In May 2021, the Company 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 Company 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. There is also a facility fee of 0.375 % to 0.50 %, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on the Company’s Term Loans and Revolving Facility was 2.84 % at September 30, 2021 , and 2.62 % at March 31, 2021 . The Credit Facility, among other things, requires the Company to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all financial covenants at September 30, 2021. The Company had cash of $ 17,911,000 at September 30, 2021 , however, the Credit Facility only allows up to $ 6,000,000 of credit for cash when computing the senior leverage ratio. In addition to other covenants, the Credit Facility places limits on the Company’s ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem, or repurchase capital stock, alter the business conducted by the Company and its subsidiaries, transact with affiliates, prepay, redeem, or purchase subordinated debt, and amend or otherwise alter debt agreements. 13 Table of Contents The following summarizes information about the Term Loans: September 30, 2021 March 31, 2021 Principal amount of Term Loans $ 18,750,000 $ 20,625,000 Unamortized financing fees ( 203,000 ) ( 161,000 ) Net carrying amount of Term Loans 18,547,000 20,464,000 Less current portion of Term Loans ( 3,670,000 ) ( 3,678,000 ) Long-term portion of Term Loans $ 14,877,000 $ 16,786,000 Future repayments of the Term Loans are as follows: Year Ending March 31, 2022 - remaining six months $ 1,875,000 2023 3,750,000 2024 3,750,000 2025 3,750,000 2026 3,750,000 Thereafter 1,875,000 Total payments $ 18,750,000 The Company 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, 2021 . At September 30, 2021 , after certain contractual adjustments, $ 90,935,000 was available under the Revolving Facility. 8. Contract Liabilities Contract liabilities are comprised of the following: September 30, 2021 March 31, 2021 Short-term contract liabilities Customer core returns accruals $ 16,176,000 $ 12,710,000 Customer allowances earned 23,302,000 16,513,000 Customer deposits 3,515,000 2,234,000 Finished goods liabilities 1,956,000 1,883,000 Core bank liability 1,609,000 1,585,000 Accrued core payment 3,285,000 6,147,000 Total short-term contract liabilities $ 49,843,000 $ 41,072,000 Long-term contract liabilities Customer core returns accruals $ 142,647,000 $ 103,719,000 Customer allowances earned 177,000 313,000 Finished goods liabilities 1,980,000 2,678,000 Core bank liability 16,092,000 16,903,000 Accrued core payment 1,111,000 1,610,000 Total long-term contract liabilities $ 162,007,000 $ 125,223,000 14 Table of Contents 9. Leases The Company leases various facilities in North America and Asia under operating leases expiring through August 2033 . The Company has material nonfunctional currency leases that could have a material impact on the Company’s condensed consolidated statements of income. As required for other monetary liabilities, lessees remeasure foreign currency-denominated lease liabilities using the exchange rate at each reporting date, but the lease assets are nonmonetary assets measured at historical rates and are not affected by subsequent changes in the exchange rates. In connection with the remeasurement of these leases, the Company recorded a loss of $ 1,746,000 and a gain of $ 1,618,000 during the three months ended September 30, 2021 and 2020, respectively, and gains of $ 1,049,000 and $ 3,603,000 during the six months ended September 30, 2021 and 2020, respectively . These amounts are included in “foreign exchange impact of lease liabilities and forward contracts” in the condensed consolidated statements of income. Balance sheet information for leases is as follows: Leases Classification September 30, 2021 March 31, 2021 Assets: Operating Operating lease assets $ 84,576,000 $ 71,513,000 Finance Plant and equipment 8,036,000 8,852,000 Total leased assets $ 92,612,000 $ 80,365,000 Liabilities: Current Operating Operating lease liabilities $ 6,033,000 $ 6,439,000 Finance Other current liabilities 2,439,000 2,640,000 Long-term Operating Long-term operating lease liabilities 83,998,000 70,551,000 Finance Other liabilities 4,020,000 4,995,000 Total lease liabilities $ 96,490,000 $ 84,625,000 Lease cost recognized in the condensed consolidated statements of income is as follows: Three Months Ended Six Months Ended September 30, September 30, 2021 2020 2021 2020 Lease cost Operating lease cost $ 3,149,000 $ 2,877,000 $ 6,191,000 $ 5,560,000 Short-term lease cost 375,000 337,000 751,000 654,000 Variable lease cost 210,000 230,000 491,000 373,000 Finance lease cost: Amortization of finance lease assets 565,000 428,000 1,064,000 841,000 Interest on finance lease liabilities 89,000 93,000 186,000 176,000 Total lease cost $ 4,388,000 $ 3,965,000 $ 8,683,000 $ 7,604,000 15 Table of Contents Maturities of lease commitments at September 30, 2021 by fiscal year were as follows: Maturity of lease liabilities Operating Leases Finance Leases Total 2022 - remaining six months $ 5,184,000 $ 1,418,000 $ 6,602,000 2023 11,400,000 2,414,000 13,814,000 2024 9,964,000 1,612,000 11,576,000 2025 10,044,000 1,118,000 11,162,000 2026 10,320,000 432,000 10,752,000 Thereafter 75,101,000 - 75,101,000 Total lease payments 122,013,000 6,994,000 129,007,000 Less amount representing interest ( 31,982,000 ) ( 535,000 ) ( 32,517,000 ) Present value of lease liabilities $ 90,031,000 $ 6,459,000 $ 96,490,000 Other information about leases is as follows: September 30, 2021 March 31, 2021 Lease term and discount rate Weighted-average remaining lease term (years): Finance leases 3.1 3.4 Operating leases 10.8 11.1 Weighted-average discount rate: Finance leases 5.3 % 5.3 % Operating leases 5.7 % 5.9 % 10. Accounts Receivable Discount Programs The Company uses receivable discount programs with certain customers and their respective banks. Under these programs, the Company may sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow the Company to accelerate receipt of payment on customers’ receivables. The following is a summary of accounts receivable discount programs: Six Months Ended September 30, 2021 2020 Receivables discounted $ 268,410,000 $ 222,310,000 Weighted average days 333 341 Annualized weighted average discount rate 1.8 % 2.3 % Amount of discount recognized as interest expense $ 4,432,000 $ 4,781,000 11. Net Income per Share Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options, which would result in the issuance of incremental shares of common stock to the extent such impact is not anti-dilutive. 16 Table of Contents The following presents a reconciliation of basic and diluted net income per share: Three Months Ended September 30, Six Months Ended September 30, 2021 2020 2021 2020 Net income $ 3,683,000 $ 15,184,000 $ 4,544,000 $ 12,172,000 Basic shares 19,135,356 19,022,414 19,094,904 18,999,461 Effect of potentially dilutive securities 484,418 322,897 543,141 290,304 Diluted shares 19,619,774 19,345,311 19,638,045 19,289,765 Net income per share: Basic net income per share $ 0.19 $ 0.80 $ 0.24 $ 0.64 Diluted net income per share $ 0.19 $ 0.78 $ 0.23 $ 0.63 Potential common shares that would have the effect of increasing diluted net income per share or decreasing diluted net loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted net income per share. For the three months ended September 30, 2021 and 2020, there were 915,778 and 1,500,066 , respectively, of potential common shares not included in the calculation of diluted net income per share because their effect was anti-dilutive. For the six months ended September 30, 2021 and 2020, there were 707,660 and 1,500,066 , respectively, of potential common shares not included in the calculation of diluted net income per share because their effect was anti-dilutive . 12. Income Taxes The Company recorded income tax expense of $ 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. The Company 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 rates for the three and six months ended September 30, 2021, were 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 the Company does not expect to recognize benefit of losses. The Company and its subsidiaries file income tax returns in the U.S. federal, various state, and foreign jurisdictions with varying statutes of limitations. At September 30, 2021, the Company is not under examination in any jurisdiction, and remain subject to examination from the years ended March 31, 2017. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months. 13. Financial Risk Management and Derivatives Purchases and expenses denominated in currencies other than the U.S. dollar, which are primarily related to the Company’s overseas facilities, expose the Company to market risk from material movements in foreign exchange rates between the U.S. dollar and the foreign currencies. The Company’s primary risk exposure is from fluctuations in the value of the Mexican peso and to a lesser extent the Chinese yuan. To mitigate these risks, the Company enters into forward foreign currency exchange contracts to exchange U.S. dollars for these foreign currencies. The extent to which forward foreign currency exchange contracts are used, is modified periodically in response to the Company’s estimate of market conditions and the terms and length of anticipated requirements. The Company enters into forward foreign currency exchange contracts in order to reduce the impact of foreign currency fluctuations and not to engage in currency speculation. The use of derivative financial instruments allows the Company to reduce its exposure to the risk that the eventual cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in exchange rates between the U.S. dollar and the foreign currencies. The Company does not hold or issue financial instruments for trading purposes. The Company designates forward foreign currency exchange contracts for forecasted expenditure requirements to fund foreign operations. 17 Table of Contents The Company had forward foreign currency exchange contracts with a U.S. dollar equivalent notional value of $ 45,133,000 and $ 41,819,000 at September 30 , 2021 and March 31, 2021, respectively. These contracts generally have a term of one year or less, at rates agreed at the inception of the contracts. The counterparty to this derivative transaction is a major financial institution with investment grade credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the potential unrealized gains (which offset currency fluctuations adverse to the Company) in any such contract should this counterparty fail to perform as contracted. Any changes in the fair values of forward foreign currency exchange contracts are included in “foreign exchange impact of lease liabilities and forward contracts” in the condensed consolidated statements of income . The following shows the effect of derivative instruments on the condensed consolidated statements of income: (Loss) Gain Recognized as Foreign Exchange Impact of Lease Liabilities and Forward Contracts Derivatives Not Designated as Three Months Ended September 30, Six Months Ended September 30, Hedging Instruments 2021 2020 2021 2020 Forward foreign currency exchange contracts $ ( 2,171,000 ) $ 2,367,000 $ ( 2,433,000 ) $ 5,199,000 The fair value of the forward foreign currency exchange contracts of $ 1,004,000 is included in other current liabilities in the condensed consolidated balance sheet at September 30, 2021. The fair value of the forward foreign currency exchange contracts of $ 1,429,000 is included in prepaid and other current assets in the condensed consolidated balance sheet at March 31, 2021, respectively. The changes in the fair values of forward foreign currency exchange contracts are included in “foreign exchange impact of lease liabilities and forward contracts” in the condensed consolidated statements of cash flows for the six months ended September 30, 2021 and 2020 . 14. Fair Value Measurements The following summarizes financial assets and liabilities measured at fair value, by level within the fair value hierarchy: September 30, 2021 March 31, 2021 Fair Value Measurements Using Inputs Considered as Fair Value Measurements Using Inputs Considered as Fair Value Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3 Assets Short-term investments Mutual funds $ 2,072,000 $ 2,072,000 $ - $ - $ 1,652,000 $ 1,652,000 $ - $ - Prepaid expenses and other current assets Forward foreign currency exchange contracts - - - - 1,429,000 - 1,429,000 - Liabilities Accrued liabilities Short-term contingent consideration 980,000 - - 980,000 910,000 - - 910,000 Other current liabilities Deferred compensation 2,072,000 2,072,000 - - 1,652,000 1,652,000 - - Forward foreign currency exchange contracts 1,004,000 - 1,004,000 - - - - - Short-term Investments and Deferred Compensation The Company’s short-term investments, which fund its deferred compensation liabilities, consist of investments in mutual funds. These investments are classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis. 18 Table of Contents Forward Foreign Currency Exchange Contracts The forward foreign currency exchange contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers (See Note 13). Contingent Consideration In December 2018, the Company completed the acquisition of certain assets and assumption of certain liabilities from Mechanical Power Conversion, LLC (“E&M”). In connection with this acquisition, the Company is contingently obligated to make additional payments to the former owners of E&M up to an aggregate of $ 5,200,000 over a three-year period. E&M Gross Profit Earn-out Consideration The fair value of the three-year gross profit earn-out consideration was $ 980,000 and $ 910,000 at September 30, 2021 and March 31, 2021, respectively, determined using a Monte Carlo Simulation Model. Any subsequent changes in the fair value of the contingent consideration liability will be recorded in current period earnings as a general and administrative expense. The assumptions used to determine the fair value is as follows: September 30, 2021 Risk free interest rate 0.04 % Counter party rate 2.93 % Expected volatility 30 - 40 % Weighted average cost of capital 12.5 - 15.0 % The Company’s contingent consideration is recorded in accounts payable and accrued liabilities in its condensed consolidated balance sheets at September 30, 2021 and March 31, 2021, and is a Level 3 liability measured at fair value. The following table summarizes the activity for financial assets and liabilities utilizing Level 3 fair value measurements: Three Months Ended September 30, Six Months Ended September 30, Contingent Consideration 2021 2020 2021 2020 Beginning balance $ 850,000 $ 2,606,000 $ 910,000 $ 2,653,000 Changes in revaluations of contingent consideration included in earnings 130,000 ( 18,000 ) 70,000 ( 65,000 ) Ending balance $ 980,000 $ 2,588,000 $ 980,000 $ 2,588,000 During the three and six months ended September 30, 2021, the Company had no other significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loan, term loan and other long-term liabilities approximate their fair value based on the variable nature of interest rates and current rates for instruments with similar characteristics. 15. Share-based Payments Stock Options During the six months ended September 30, 2021, no options to purchase shares of the Company’s common stock were granted. The Company granted options to purchase 345,423 shares of common stock during the six months ended September 30, 2020. 19 Table of Contents The following is a summary of stock option transactions: Number of Shares Weighted Average Exercise Price Outstanding at March 31, 2021 1,744,885 $ 17.51 Granted - $ - Exercised ( 29,130 ) $ 16.01 Forfeited ( 2,592 ) $ 19.46 Outstanding at September 30, 2021 1,713,163 $ 17.53 At September 30, 2021, options to purchase 320,104 shares of common stock were unvested at a weighted average exercise price of $ 16.53 . At September 30, 2021, there was $ 1,832,000 of total unrecognized compensation expense related to unvested stock option awards. Compensation expense related to unvested stock option awards will be recognized over the weighted average remaining vesting period of approximately 1.4 years. Restricted Stock Units and Restricted Stock (collectively “RSUs”) During the six months ended September 30, 2021 and 2020, the Company granted 218,928 and 212,293 shares of RSUs, respectively, based on the closing market price on the grant date. The following is a summary of non-vested RSUs: Number of Shares Weighted Average Grant Date Fair Value Outstanding at March 31, 2021 354,484 $ 17.22 Granted 218,928 $ 22.27 Vested ( 184,434 ) $ 17.84 Forfeited ( 1,442 ) $ 19.57 Outstanding at September 30, 2021 387,536 $ 19.76 At September 30, 2021, there was $ 5,411,000 of unrecognized compensation expense related to these awards, which will be recognized over the weighted average remaining vesting period of approximately 1.9 years. Performance Stock Units (“PSUs”) In June 2021, the Company granted performance-based PSUs to its executives, which typically cliff vest after three-years subject to continued employment. These awards are contingent and granted separately for each of the following metrics: adjusted EBITDA, net sales, and relative total shareholder return (“TSR”). Compensation cost is determined at the grant date and recognized on a straight-line basis over the requisite service period to the extent the conditions are deemed probable. The number of shares earned at the end of the three-year period will vary, based only on actual performance, from 0 % to 150 % of the target number of PSUs granted. PSUs are not considered issued or outstanding ordinary shares of the Company. Adjusted EBITDA and net sales are considered performance conditions. The Company will reassess the probability of achieving each performance condition separately each reporting period. TSR is considered a market condition because it measures the Company’s return against the performance of the Russell 3000, excluding companies classified as financials and real estate, over a given period of time. Compensation cost related to the TSR award will not be adjusted even if the market condition is not met. 20 Table of Contents The Company calculated the fair value of the PSUs for each component individually. The fair value of PSUs subject to performance conditions is equal to the closing stock price on the grant date. The fair value of PSUs subject to the market condition is determined using the Monte Carlo valuation model. The following table summarizes the assumptions used in determining the fair value of the TSR awards: Six Months Ended September 30, 2021 Risk free interest rate 0.47 % Expected life in years 3 Expected volatility of MPA common stock 53.70 % Expected average volatility of peer companies 59.30 % Average correlation coefficient of peer companies 26.70 % Expected dividend yield - Grant date fair value $ 26.89 The following is a summary of non-vested PSUs: Number of Shares Weighted Average Grant Date Fair Value Outstanding at March 31, 2021 - $ - Granted 84,593 $ 23.19 Vested - $ - Forfeited - $ - Outstanding at September 30, 2021 84,593 $ 23.19 At September 30, 2021, there was $ 1,774,000 of unrecognized compensation expense related to these awards, which will be recognized over the weighted average remaining vesting period of approximately 2.7 years . 16. Commitments and Contingencies Warranty Returns The Company allows its customers to return goods that their consumers have returned to them, whether or not the returned item is defective (“warranty returns”). The Company accrues an estimate of its exposure to warranty returns based on a historical analysis of the level of this type of return as a percentage of unit sales. Amounts charged to expense for these warranty returns are considered in arriving at the Company’s net sales. 21 Table of Contents The following summarizes the changes in the warranty return accrual: Three Months Ended September 30, Six Months Ended September 30, 2021 2020 2021 2020 Balance at beginning of period $ 20,010,000 $ 22,192,000 $ 21,093,000 $ 18,300,000 Charged to expense 30,837,000 30,872,000 58,098,000 53,961,000 Amounts processed ( 29,972,000 ) ( 30,565,000 ) ( 58,316,000 ) ( 49,762,000 ) Balance at end of period $ 20,875,000 $ 22,499,000 $ 20,875,000 $ 22,499,000 Contingencies The Company is subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding the Company’s business. Following an audit in fiscal 2019, the U.S. Customs and Border Protection stated that it believed that the Company owed additional duties of approximately $ 17 million from 2011 through mid-2018 relating to products that it imported from Mexico. The Company does not believe that this amount is correct and believes that it has numerous defenses and intends to dispute this amount vigorously. The Company cannot assure that the U.S. Customs and Border Protection will agree or that it will not need to accrue or pay additional amounts in the future. 22 Table of Contents