Item 7. Management’s Discussion and Analysis
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements, including, without limitation, our expectations and statements regarding our outlook and future revenues, expenses, results of operations, liquidity, plans, strategies and objectives
of management and any assumptions underlying any of the foregoing. Our actual results may differ significantly from those projected in the forward-looking statements. Our forward-looking statements and factors that might cause future actual results
to differ materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in the section titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” of
this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update the forward-looking statements or our risk factors for any reason.
Management Overview
With a scalable infrastructure and abundant growth opportunities, we are focused on growing our aftermarket business in the North American marketplace and growing our leadership position in the test solutions and diagnostic equipment market by
providing innovative and intuitive solutions to our customers. Our investments in infrastructure and human resources during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines. These
investments included (i) 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 original 312,000 square foot
facility in Mexico.
Highlights and Accomplishments in Fiscal 2023
During fiscal 2023, we continued to execute our strategic plan – focusing on meaningful growth and improving profitability by leveraging our offshore infrastructure, industry position and customer relationships. The following significant
accomplishments support our optimism moving forward:
•
We achieved record fiscal fourth quarter and full-year sales, which increased 18.8 percent and 5.0 percent, respectively, with solid demand across multiple categories;
•
We experienced meaningful traction with our customers and consumers since last year’s launch of a comprehensive line of brake pads utilizing an industry-leading formulation, and brake rotors – serving the professional installer market under our Quality-Built ® brand;
•
We expanded sales with additional product line offerings and customers in Mexico;
•
We continued to improve efficiencies with expected ongoing benefits through increased production volume and pricing;
•
We focused on reduction in inventory levels following a strategic build up to meet demand during recent global supply chain challenges;
•
We enhanced our liquidity and capital resources with a $32 million strategic convertible note investment that supports us at an exciting pivotal point in our evolution;
•
We received increasing interest and orders for our Test Solutions and Diagnostic Equipment, including our emerging contract testing center, from major automotive retailers, major global automotive,
aerospace and research institutions ;
•
We continued our social responsibility initiatives with the successful launch of an Agri-farm organic food and community program in Mexico and a continued focus on opportunities to enhance our Environmental, Social and Governance practices on a global basis.
Trends Affecting Our Business
Our business is impacted by various factors within the economy that affect both our customers and our industry, including but not limited to inflation, interest rates, global supply chain disruptions, fuel costs, wage
rates, and other economic conditions. Given the nature of these various factors, we cannot predict whether or for how long certain trends will continue, nor can we predict to what degree these trends will impact us in the future.
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Inflation
The cost to manufacture and distribute our products is impacted by the cost of raw materials, finished goods, labor, and transportation. During fiscal 2023, we experienced continued inflationary pressure and higher costs
as a result of the increasing cost of raw materials, finished goods, labor, transportation, and other administrative costs. The increase in the cost of raw materials and finished goods are due in part to a shortage in the availability of certain
products and the higher cost of shipping. We can only pass our increased costs onto customers on a limited basis. Future general price inflation and its impact on costs and availability of materials could adversely affect our financial results.
Interest Rates
Interest rates are rising in an effort to curb higher inflation. We are experiencing higher interest costs for our borrowing and our customers’ receivable discount programs, which have interest costs that vary with
interest rate movements. The majority of our interest costs results from our customers’ receivable discount programs. The weighted average discount rate for these programs was 5.3% for fiscal 2023 compared with 1.9% for fiscal 2022. These higher
interest rates and any future increases in interest rates will continue to adversely affect our financial results.
Impact of COVID-19
The COVID-19 pandemic continues to adversely impact the U.S. and global economies – creating uncertainty regarding the potential effects on the supply chain disruptions, rate of inflation, increasing interest rates, and
customer demand. We incurred certain costs related to the COVID-19 pandemic, which are included in cost of goods sold and operating expenses in the consolidated statements of operations of $1,957,000 and $3,368,000 during fiscal 2023 and 2022,
respectively.
Employee Retention Credit
The CARES Act provides an employee retention credit (“ERC”) that is a refundable tax credit against certain employer taxes. In the fourth quarter of the fiscal year ended March 31, 2022, we amended certain payroll tax filings and applied for a
refund of $5,104,000. As of March 31, 2023, we determined that all contingencies related to the ERC were resolved and recorded a $5,104,000 receivable which is included in prepaid expenses and other current assets in the accompanying consolidated
balance sheet. The ERC was recognized as a reduction in employer payroll taxes and allocated to the financial statement captions from which the employee’s taxes were originally incurred. As a result, we recorded a reduction in expenses of
$2,034,000 in cost of goods sold, $1,377,000 in general and administrative expense, $968,000 in selling and marketing expense, and $725,000 in research and development expense, which is reflected in the accompanying consolidated statement of
operations for the year ended March 31, 2023. In April 2023, we received full payment of the ERC receivable.
Segment Reporting
Our three operating segments are as follows:
•
Hard Parts , including (i) light duty rotating electric products such as alternators and starters, (ii) wheel hub products, (iii) brake-related products, including brake calipers, brake boosters,
brake rotors, brake pads and brake master cylinders, and (iv) turbochargers,
•
Test Solutions and Diagnostic Equipment , including (i) applications for combustion engine vehicles, including bench top testers for alternators and starters, (ii) test solutions and diagnostic
equipment for the pre- and post-production of electric vehicles, (iii) software emulation of power systems applications for the electrification of all forms of transportation (including automobiles, trusts and the emerging electrification
of systems within the aerospace industry, such as electric vehicle charging stations), and
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•
Heavy Duty , including non-discretionary automotive aftermarket replacement hard parts for heavy-duty truck, industrial, marine, and agricultural applications.
Prior to the fourth quarter of fiscal 2023, our operating segments met the aggregation criteria and were aggregated. Effective as of the fourth quarter of fiscal 2023, we revised our segment reporting as we determined
that our three operating segments no longer met the criteria to be aggregated. Our Hard Parts operating segment meets the criteria of a reportable segment. The Test Solutions and Diagnostic Equipment and Heavy Duty segments are not material, are
not separately reportable, and are included within the “all other” category. See Note 19 of the notes to consolidated financial statements for more information.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with generally accepted accounting principles, or GAAP, in the United States. Our significant accounting policies are discussed in detail below and in Note 2 of the notes to
consolidated financial statements.
In preparing our consolidated financial statements, we use estimates and assumptions for matters that are inherently uncertain. We base our estimates on historical experiences and reasonable assumptions. Our use of estimates and assumptions
affect the reported amounts of assets, liabilities and the amount and timing of revenues and expenses we recognize for and during the reporting period. Actual results may differ from our estimates.
There continues to be uncertainty and disruption in the global economy and financial markets. We are not currently aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the
carrying value of our assets or liabilities as of March 31, 2023. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or
conditions.
Our remanufacturing operations include core exchange programs for the core portion of the finished goods. The Used Cores that we acquire and are returned to us from our customers are a necessary raw material for remanufacturing. We also offer
our customers marketing and other allowances that impact revenue recognition. These elements of our business give rise to more complex accounting than many businesses our size or larger.
Inventory
Inventory is comprised of: (i) Used Core and component raw materials, (ii) work-in-process, and (iii) remanufactured and purchased finished goods.
Used Core, component raw materials, and purchased finished goods are stated at the lower of average cost or net realizable value.
Work-in-process is in various stages of production and is valued at the average cost of Used Cores and component raw materials issued to work orders still open, including allocations of labor and overhead costs. Historically, work-in-process
inventory has not been material compared to the total inventory balance.
Remanufactured finished goods include: (i) the Used Core cost and (ii) the cost of component raw materials, and allocations of labor and variable and fixed overhead costs (the “Unit Cost”). The allocations of labor and variable and fixed
overhead costs are based on the actual use of the production facilities over the prior 12 months which approximates normal capacity. This method prevents the distortion in allocated labor and overhead costs that would occur during short periods of
abnormally low or high production. In addition, we exclude certain unallocated overhead such as severance costs, duplicative facility overhead costs, start-up costs, training, and spoilage from the calculation and expenses these unallocated
overhead costs as period costs. Purchased finished goods also include an allocation of fixed overhead costs.
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The estimate of net realizable value is subjective and based on our judgment and knowledge of current industry demand and management’s projections of industry demand. The estimates may, therefore, be revised if there are changes in the overall
market for our products or market changes that in our judgment impact our ability to sell or liquidate potentially excess or obsolete inventory. Net realizable value is determined at least quarterly as follows:
•
Net realizable value for finished goods by customer, by product line are determined based on the agreed upon selling price with the customer for a product in the trailing 12 months. We compare the average selling price, including any
discounts and allowances, to the finished goods cost of on-hand inventory, less any reserve for excess and obsolete inventory. Any reduction of value is recorded as cost of goods sold in the period in which the revaluation is identified.
•
Net realizable value for Used Cores are determined based on current core purchase prices from core brokers to the extent that core purchases in the trailing 12 months are significant. Remanufacturing consumes, on average, more than one
Used Core for each remanufactured unit produced since not all Used Cores are reusable. The yield rates depend upon both the product and customer specifications. We purchase Used Cores from core brokers to supplement our yield rates and Used
Cores not returned under the core exchange programs. We also consider the net selling price our customers have agreed to pay for Used Cores that are not returned under our core exchange programs to assess whether Used Core cost exceeds Used
Core net realizable value on a by customer, by product line basis. Any reduction of core cost is recorded as cost of goods sold in the period in which the revaluation is identified.
•
We record an allowance for potentially excess and obsolete inventory based upon recent sales history, the quantity of inventory on-hand, and a forecast of potential use of the inventory. We periodically review inventory to identify
excess quantities and part numbers that are experiencing a reduction in demand. Any part numbers with quantities identified during this process are reserved for at rates based upon our judgment, historical rates, and consideration of
possible scrap and liquidation values which may be as high as 100% of cost if no liquidation market exists for the part. As a result of this process, we recorded reserves for excess and obsolete inventory of $16,436,000 and $13,520,000 at
March 31, 2023 and 2022, respectively. This increase in the reserve was primarily due to excess inventory of certain finished goods on hand at March 31, 2023 compared with March 31, 2022.
We record vendor discounts as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold.
Inventory Unreturned
Inventory unreturned represents our estimate, based on historical data and prospective information provided directly by the customer, of finished goods shipped to customers that we expect to be returned, under our general right of return policy,
after the balance sheet date. Inventory unreturned includes only the Unit Cost of a finished goods. The return rate is calculated based on expected returns within the normal operating cycle, which is generally one year. As such, the related amounts
are classified in current assets. Inventory unreturned is valued in the same manner as our finished goods inventory.
Contract Assets
Contract assets consists of: (i) the core portion of the finished goods shipped to customers, (ii) upfront payments to customers in connection with customer contracts, (iii) core premiums paid to customers, (iv)
finished goods premiums paid to customers, and (v) long-term core inventory deposits.
Remanufactured Cores held at customers’ locations as a part of the finished goods sold to the customer are classified as long-term contract assets. These assets are valued at the lower of cost or net realizable value of
Used Cores on hand (See Inventory above). For these Remanufactured Cores, we expect the finished good containing the Remanufactured Core to be returned under our general right of return policy or a similar Used Core to be returned to us by the
customer, under our core exchange programs, in each case for credit. Remanufactured Cores and Used Cores returned by consumers to our customers but not yet returned to us are classified as “Cores expected to be returned by customers”, which are
included in short-term contract assets until we physically receive them during our normal operating cycle, which is generally one year.
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Upfront payments to customers represent marketing allowances, such as sign-on bonuses, slotting fees, and promotional allowances provided to our customers. These allowances are recognized as an asset and amortized over the appropriate period of
time as a reduction of revenue if we expect to generate future revenues associated with the upfront payment. If we do not expect to generate additional revenue, then the upfront payment is recognized in the
consolidated statements of operations when payment occurs as a reduction of revenue. Upfront payments expected to be amortized during our normal operating cycle, which is generally one year, are classified as short-term contract assets.
Core premiums paid to customers represent the difference between the Remanufactured Core acquisition price paid to customers generally in connection with new business, and the related Used Core cost. The core premiums are treated as an asset and
recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered. We consider, among other things, the length of our
largest ongoing customer relationships, duration of customer contracts, and the average life of vehicles on the road in determining the appropriate period of time over which to amortize these premiums. These core premiums are amortized over a
period typically ranging from six to eight years, adjusted for specific circumstances associated with the arrangement. Core premiums are recorded as long-term contract assets. Core premiums expected to be amortized
within our normal operating cycle, which is generally one year, are classified as short-term contract assets.
Finished goods premiums paid to customers represent the difference between the finished good acquisition price paid to customers, generally in connection with new business, and the related finished good cost, which is treated as an asset and recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered. We consider, among other things, the length of our
largest ongoing customer relationships, duration of customer contracts, and the average life of vehicles on the road in determining the appropriate period of time over which to amortize these premiums. Finished goods premiums are amortized over a
period typically ranging from six to eight years, adjusted for specific circumstances associated with the arrangement. Finished goods premiums are recorded as long-term contract assets. Finished goods premiums expected
to be amortized within our normal operating cycle, which is generally one year, are classified as short-term contract assets.
Long-term core inventory deposits represent the cost of Remanufactured Cores we have purchased from customers, which are held by the customers and remain on the customers’ premises. The costs of these Remanufactured Cores were established at the
time of the transaction based on the then current cost. The selling value of these Remanufactured Cores was established based on agreed upon amounts with these customers. We expect to realize the selling value and the related cost of these
Remanufactured Cores should our relationship with a customer end, a possibility that we consider remote based on existing long-term customer agreements and historical experience.
Revenue Recognition
Revenue is recognized when performance obligations under the terms of a contract with our customers are satisfied; generally, this occurs with the transfer of control of our products. Revenue is measured as the amount of consideration we expect
to receive in exchange for transferring goods or providing services. Revenue is recognized net of all anticipated returns, marketing allowances, volume discounts, and other forms of variable consideration .
Revenue is recognized either when products are shipped or when delivered, depending on the applicable contract terms.
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The price of a finished remanufactured product sold to customers is generally comprised of separately invoiced amounts for the Remanufactured Core included in the product (“Remanufactured Core value”) and the unit portion included in the product
(“Unit Value”), for which revenue is recorded based on our then current price list, net of applicable discounts and allowances. The Remanufactured Core value is recorded as a net revenue based upon the estimate of Used Cores that will not be
returned by the customer for credit. These estimates are subjective and based on management’s judgment and knowledge of historical, current, and projected return rates. As reconciliations are completed with the customers the actual rates at which
Used Cores are not being returned may differ from the current estimates. This may result in periodic adjustments of the estimated contract asset and liability amounts recorded and may impact the projected revenue recognition rates used to record
the estimated future revenue. These estimates may also be revised if there are changes in contractual arrangements with customers, or changes in business practices. A significant portion of the remanufactured automotive parts sold to customers are
replaced by similar Used Cores sent back for credit by customers under the core exchange programs (as described in further detail below). The number of Used Cores sent back under the core exchange programs is generally limited to the number of
similar Remanufactured Cores previously shipped to each customer.
Revenue Recognition — Core Exchange Programs
Full price Remanufactured Cores: When remanufactured products are shipped, certain customers are invoiced for the Remanufactured Core value of the product at the full Remanufactured Core sales price. For these Remanufactured Cores, revenue is
only recognized based upon an estimate of the rate at which these customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the core exchange programs. The remainder of the full price
Remanufactured Core value invoiced to these customers is established as a long-term contract liability rather than being recognized as revenue in the period the products are shipped as we expect these Remanufactured Cores to be returned for credit
under our core exchange programs.
Nominal price Remanufactured Cores: Certain other customers are invoiced for the Remanufactured Core value of the product shipped at a nominal (generally $0.01 or less) Remanufactured Core price. For these nominal Remanufactured Cores, revenue
is only recognized based upon an estimate of the rate at which these customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the core exchange programs. Revenue amounts are calculated based on
contractually agreed upon pricing for these Remanufactured Cores for which the customers are not returning similar Used Cores. The remainder of the nominal price Remanufactured Core value invoiced to these customers is established as a long-term
contract liability rather than being recognized as revenue in the period the products are shipped as we expect these Remanufactured Cores to be returned for credit under our core exchange programs.
Revenue Recognition; General Right of Return
Customers are allowed to return goods that their end-user customers have returned to them, whether or not the returned item is defective (warranty returns). In addition, under the terms of certain agreements and
industry practice, customers from time to time are allowed stock adjustments when their inventory of certain product lines exceeds the anticipated sales to end-user customers (stock adjustment returns). Customers have various contractual rights
for stock adjustment returns, which are typically less than 5% of units sold. In some instances, a higher level of returns is allowed in connection with significant restocking orders. The aggregate returns are generally limited to less than 20%
of unit sales.
The allowance for warranty returns is established based on a historical analysis of the level of this type of return as a percentage of total unit sales. The allowance for stock adjustment returns is based on specific
customer inventory levels, inventory movements, and information on the estimated timing of stock adjustment returns provided by customers. Stock adjustment returns do not occur at any specific time during the year. The return rate for stock
adjustments is calculated based on expected returns within the normal operating cycle, which is generally one year.
The Unit Value of the warranty and stock adjustment returns are treated as reductions of revenue based on the estimations made at the time of the sale. The Remanufactured Core value of warranty and stock adjustment
returns are provided for as indicated in the paragraph “Revenue Recognition – Core Exchange Programs”.
As is standard in the industry, we only accept returns from on-going customers. If a customer ceases doing business with us, we have no further obligation to accept additional product returns from that customer. Similarly, we accept product
returns and grant appropriate credits to new customers from the time the new customer relationship is established.
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Contract Liability
Contract liability consists of: (i) customer allowances earned, (ii) accrued core payments, (iii) customer core returns accruals, (iv) core bank liability, (v) finished goods liabilities, and (vi) customer deposits.
Customer allowances earned includes all marketing allowances provided to customers. Such allowances include sales incentives and concessions. Voluntary marketing allowances related to a single exchange of product are
recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered. Other marketing allowances, which may only be applied against future purchases, are recorded as a reduction to revenues in
accordance with a schedule set forth in the relevant contract. Sales incentive amounts are recorded based on the value of the incentive provided. Customer allowances to be provided to customers within our normal operating cycle, which is
generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities.
Accrued core payments represent the sales price of Remanufactured Cores purchased from customers, generally in connection with new business, which are held by these customers and remain on their premises. The sales
price of these Remanufactured Cores will be realized when our relationship with a customer ends, a possibility that we consider remote based on existing long-term customer agreements and historical experience. The payments to be made to customers
for purchases of Remanufactured Cores within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities.
Customer core returns accruals represent the full and nominally priced Remanufactured Cores shipped to our customers. When we ship product, we recognize an obligation to accept a similar Used Core sent back under the
core exchange programs based upon the Remanufactured Core price agreed upon by us and our customer. The contract liability related to Used Cores returned by consumers to our customers but not yet returned to us are classified as short-term
contract liabilities until we physically receive these Used Cores as they are expected to be returned during our normal operating cycle, which is generally one year and the remainder are recorded as long-term contract liabilities.
The core bank liability represents the full Remanufactured Core sales price for cores returned under our core exchange programs. The payment for these returned cores are made over a contractual repayment period pursuant
to our agreement with this customer. Payments to be made within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities.
Finished goods liabilities represents the agreed upon price of finished goods acquired from customers, generally in connection with new business. The payment for these finished goods are made over a contractual
repayment period pursuant to our agreement with the customer. Payments to be made within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract
liabilities.
Customer deposits represent the receipt of prepayments from customers for the obligation to transfer goods or services in the future. We classify these customer deposits as short-term contract liabilities as we expect
to satisfy these obligations within our normal operating cycle, which generally one year.
Customer Finished Goods Returns Accrual
The customer finished goods returns accrual represents our estimate of our exposure to customer returns, including warranty returns, under our general right of return policy to allow customers to return items that their end user customers have
returned to them and from time to time, stock adjustment returns when the customers’ inventory of certain product lines exceeds the anticipated sales to end-user customers. The customer finished goods returns accrual represents the Unit Value of
the estimated returns and is classified as a current liability due to the expectation that these returns will occur within the normal operating cycle of one year. Our customer finished goods returns accrual was $37,984,000 and $38,086,000 at March
31, 2023 and 2022, respectively. The change in the customer finished goods returns accrual primarily resulted from the timing of returned goods authorizations (“RGAs”) issued at March 31, 2023 compared with March 31, 2022.
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Income Taxes
We account for income taxes using the liability method, which measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements. The resulting asset or liability is adjusted to reflect changes in the tax laws as they occur. A valuation allowance is provided to reduce deferred tax assets when it is more likely than not that a
portion of the deferred tax asset will not be realized.
Realization of deferred tax assets is dependent upon our ability to generate sufficient future taxable income. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. We make these estimates and judgments about our future taxable income that are based on assumptions that are consistent with our future plans. A valuation allowance is established
when we believe it is not more likely than not all or some of a deferred tax assets will be realized. In evaluating our ability to recover deferred tax assets within the jurisdiction in which they arise, we consider all available positive and
negative evidence. Deferred tax assets arising primarily as a result of net operating loss carry-forwards and research and development credits in connection with our Canadian operations have been offset completely by a valuation allowance due to
the uncertainty of their utilization in future periods. Should the actual amount differ from our estimate, the amount of our valuation allowance could be impacted.
We have made an accounting policy election to recognize the U.S. tax effects of global intangible low-taxed income as a component of income tax expense in the period the tax arises.
Results of Operations
The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.
The following summarizes certain key operating consolidated data for the periods indicated:
Fiscal Years Ended March 31,
2023
2022
2021
Cash flows (used in) provided by operations
$
(21,754,000
)
$
(44,862,000
)
$
56,089,000
Finished goods turnover (1)
3.6
3.8
4.1
(1)
Finished goods turnover is calculated by dividing the cost of goods sold for the year by the average between beginning and ending non-core finished goods inventory values, for each fiscal year. We believe that this provides a useful
measure of our ability to turn our inventory into revenues. Our finished goods turnover for fiscal 2023 was impacted by our investment in inventory during the prior year to address disruptions related to the worldwide supply chain and
logistics challenges to meet higher anticipated future sales.
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Fiscal 2023 Compared with Fiscal 2022
Net Sales and Gross Profit
The following summarizes net sales and gross profit:
Fiscal Years Ended March 31,
2023
2022
Net sales
$
683,074,000
$
650,308,000
Cost of goods sold
569,112,000
532,443,000
Gross profit
113,962,000
117,865,000
Gross profit percentage
16.7
%
18.1
%
Net Sales . Our consolidated net sales for the year ended March 31, 2023 were $683,074,000, which represents an increase of $32,766,000, or 5.0%, from the year ended March 31, 2022 of $650,308,000. The
prior year’s net sales was positively impacted by $13,327,000 in core revenue due to a realignment of inventory at certain customer distribution centers. This increase in net sales for the year ended March 31, 2023 primarily reflects growing sales
of our brake-related products and higher sales of our rotating electric products, partially offset by disruptions to global supply chain and logistics services and inventory reduction initiatives from one of our largest customers.
The following summarizes consolidated net sales by product mix:
Years Ended March 31,
2023
2022
Rotating electrical products
67
%
69
%
Wheel hub products
11
%
13
%
Brake-related products
18
%
15
%
Other products
4
%
3
%
100
%
100
%
Gross Profit. Our consolidated gross profit was $113,962,000, or 16.7% of consolidated net sales, for the year ended March 31, 2023 compared with $117,865,000, or 18.1% of
consolidated net sales, for the year ended March 31, 2022. Our gross margin for the year ended March 31, 2023 reflects (i) higher per unit costs resulting from absorption of overhead costs as we manage our inventory levels, (ii) higher costs due to
disruptions to the global supply chain, logistics services, related higher freight costs, higher wages, (iii) impact of core revenue in the prior period due to a realignment of inventory at certain customer distribution centers, and (iv) changes in
product mix.
Our gross margin for the years ended March 31, 2023 and 2022 was impacted by (i) higher freight costs, net of certain price increases, of $3,290,000, and $9,135,000, respectively, (ii) additional expenses due to certain
costs for disruptions in the supply chain of $8,195,000 and $8,759,000, respectively, (iii) amortization of core and finished goods premiums paid to customers related to new business of $11,791,000 and
$11,960,000, respectively.
In addition, gross margin for the year ended March 31, 2023 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 $3,736,000 and (ii) a $2,034,000 reduction of payroll expense for the ERC.
For the year ended March 31, 2022, gross margin was impacted by non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower
of cost or net realizable value and gain due to realignment of inventory at certain customer distribution centers, which resulted in a net gain of $75,000. Gross margin for the year ended March 31, 2022 was further impacted by transition expenses
in connection with the expansion of our brake-related operations in Mexico of $2,744,000.
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Operating Expenses
The following summarizes consolidated operating expenses:
Fiscal Years Ended March 31,
2023
2022
General and administrative
$
54,756,000
$
57,499,000
Sales and marketing
21,729,000
22,833,000
Research and development
10,322,000
10,502,000
Foreign exchange impact of lease liabilities and forward contracts
(9,291,000
)
(1,673,000
)
Percent of net sales
General and administrative
8.0
%
8.8
%
Sales and marketing
3.2
%
3.5
%
Research and development
1.5
%
1.6
%
Foreign exchange impact of lease liabilities and forward contracts
(1.4
)%
(0.3
)%
General and Administrative. Our general and administrative expenses for fiscal 2023 were $54,756,000, which represents a decrease of $2,743,000, or 4.8%, from fiscal 2022 of $57,499,000. The decrease in
general and administrative expense during fiscal 2023 was primarily due to (i) $3,743,000 of decreased employee incentives as no bonuses were recorded for fiscal 2023, (ii) $2,602,000 of decreased share-based compensation in connection with equity
grants made to employees, and (iii) a $1,377,000 reduction of payroll expense for the ERC. These decreases were partially offset by (i) $1,640,000 of increased expense resulting from foreign currency transactions, (ii) $1,562,000 of increased
severance expense due to headcount reduction, (iii) $920,000 of increased employee-related expense at our offshore locations, (iv) $403,000 of increased information technology costs in connection with cybersecurity and other productivity tools, and
(v) $346,000 of increased professional services.
Sales and Marketing . Our sales and marketing expenses for fiscal 2023 were $21,729,000, which represents a decrease of $1,104,000, or 4.8%, from fiscal 2022 of $22,833,000. This decrease in sales and
marketing expense during fiscal 2023 was primarily due to (i) $1,359,000 of decreased employee-related expenses (including a $968,000 reduction of payroll expense for the ERC) due to our cost-cutting measures and (ii) $535,000 of decreased
marketing and advertising expenses. These decreases were partially offset by (i) $359,000 of increased trade shows as normal business expenses resumed, (ii) $370,000 of increased travel costs as some business travel resumed, and (iii) $171,000 of
increased commissions due to higher sales.
Research and Development . Our research and development expenses for fiscal 2023 were $10,322,000, which represents a decrease of $180,000, or 1.7%, from fiscal 2022 of $10,502,000. This decrease in
research and development expenses during fiscal 2023 was primarily due to (i) a $725,000 reduction of payroll expense related to the ERC and (ii) $265,000 of decreased outside services. These decreases were partially offset by (i) $558,000 of
increased samples for our core library and other research and development supplies and (ii) $238,000 of increased employee-related expenses.
Foreign Exchange Impact of Lease Liabilities and Forward Contracts . Our foreign exchange impact of lease liabilities and forward contracts for the years ended March 31, 2023 and 2022 were non-cash gains
of $9,291,000 and $1,673,000, respectively. This change was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in non-cash gains of $6,515,000 and $1,989,000 for the years ended March 31,
2023 and 2022, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in a non-cash gain of $2,776,000 compared with a non-cash loss of $316,000 for the years ended
March 31, 2023 and 2022, respectively, due to the changes in their fair values.
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Table of Contents
Operating Income
Consolidated Operating Income . Our consolidated operating income for the year ended March 31, 2023 was $36,446,000, which represents an increase of $7,742,000, or 27.0%, from the year ended March 31, 2022
of $28,704,000. Operating income increased primarily due to increased non-cash gains from the foreign exchange impact of lease liabilities and forward contracts and lower operating expenses, which were partially offset by lower gross profit as
discussed above.
Interest Expense
Interest Expense, net. Our interest expense for the year ended March 31, 2023 was $39,555,000, which represents an increase of $24,000,000, or 154.3%, from interest expense for
the year ended March 31, 2022 of $15,555,000. Approximately 86% of this increase was due to higher interest rates on our borrowing and accounts receivable discount programs, which have variable interest rates. In addition, during the year ended
March 31, 2023, utilization of our accounts receivable discount programs and our average borrowing under our credit facility increased.
Provision for Income Taxes
Income Tax . We recorded an income tax expense of $1,098,000, or an effective tax rate of (35.3)%, and income tax expense of $5,788,000, or an effective tax rate of 44.0%, for
fiscal 2023 and 2022, respectively. The effective tax rate for year ended March 31, 2023, 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).
Fiscal 2022 Compared with Fiscal 2021
Net Sales and Gross Profit
The following summarizes net sales and gross profit:
Fiscal Years Ended March 31,
2022
2021
Net sales
$
650,308,000
$
540,782,000
Cost of goods sold
532,443,000
431,321,000
Gross profit
117,865,000
109,461,000
Gross profit percentage
18.1
%
20.2
%
Net Sales . Our consolidated net sales for fiscal 2022 were $650,308,000, which represents an increase of $109,526,000, or 20.3%, from fiscal 2021 of $540,782,000. While our net sales increased across all
product lines due to strong demand for our products, we continued to experience a number of challenges related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services during both periods. Net sales
for fiscal 2022 and 2021 include $13,327,000 and $12,779,000, respectively, in core revenue due to a realignment of inventory at certain customer distribution centers.
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Table of Contents
The following summarizes sales mix:
Years Ended March 31,
2022
2021
Rotating electrical products
69
%
73
%
Wheel hub products
13
%
15
%
Brake-related products
15
%
10
%
Other products
3
%
2
%
100
%
100
%
Gross Profit. Our gross profit increased $8,404,000, or 7.7%, to $117,865,000 for fiscal 2022 from $109,461,000 for fiscal 2021. Our gross profit increased due to strong demand
across all product lines. Our consolidated gross margin was 18.1% of net sales for fiscal 2022 compared with 20.2% of net sales for fiscal 2021. The decrease in our gross margin was primarily due to inflationary costs related to the global
pandemic, including disruptions with worldwide supply chain, logistics services, and related higher freight costs. During fiscal 2022 and 2021, higher freight costs, net of certain price increases that went into effect during the latter part of
the current year, impacted gross margin by approximately $9,135,000, and $1,785,000, respectively. During fiscal 2022, we also incurred additional expenses of $8,759,000 due to COVID-19 related costs for disruptions in the supply chain, increased
salaries associated with COVID-19 vulnerable employee pay, and personal protective equipment. During fiscal 2021, we incurred additional expenses of $5,268,000 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 margin for fiscal 2022 and 2021 was also impacted by (i) transition expenses in connection with the expansion of our brake-related operations in Mexico of $2,744,000 and $16,353,000, respectively, and (ii)
amortization of core and finished goods premiums paid to customers related to new business of $11,960,000 and $6,691,000, respectively. Expansion of our brake-related operations in Mexico was completed
during the second quarter of fiscal 2022.
In addition, gross margin 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 and gain due to realignment of inventory at customer distribution centers, which resulted in a net gain of $75,000 and net write-down of $209,000 for fiscal 2022 and 2021, respectively, (ii) customer allowances and return
accruals related to new business of $307,000 recorded during fiscal 2021, (iii) net tariff costs of $332,000 not passed through to customers for fiscal 2021, and (iv) a $3,561,000 benefit for revised tariff costs recorded during fiscal 2021.
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Table of Contents
Operating Expenses
The following summarizes consolidated operating expenses:
Fiscal Years Ended March 31,
2022
2021
General and administrative
$
57,499,000
$
53,847,000
Sales and marketing
22,833,000
18,024,000
Research and development
10,502,000
8,563,000
Foreign exchange impact of lease liabilities and forward contracts
(1,673,000
)
(17,606,000
)
Percent of net sales
General and administrative
8.8
%
10.0
%
Sales and marketing
3.5
%
3.3
%
Research and development
1.6
%
1.6
%
Foreign exchange impact of lease liabilities and forward contracts
(0.3
)%
(3.3
)%
General and Administrative. Our general and administrative expenses for fiscal 2022 were $57,499,000, which represents an increase of $3,652,000, or 6.8%, from fiscal 2021 of $53,847,000, however, general
and administrative expenses as a percentage of net sales decreased to 8.8% for fiscal 2022 from 10.0% for the prior year. The increase in general and administrative expense was primarily due to (i) $2,040,000 of increased share-based compensation
due to equity grants made to employees in fiscal 2022, (ii) $353,000 of increased employee related expenses, primarily due to the reinstatement of salary reductions in the prior year in response to the COVID-19 pandemic, (iii) $905,000 of decreased
gain resulting from foreign currency transactions, (iv) $705,000 of increased costs at our offshore locations, (vi) $305,000 of increased information technology costs in connection with cybersecurity and other productivity tools, and (vii) $292,000
of increased general insurance costs. These increases in general and administrative expenses were partially offset by $1,329,000 of decreased professional services.
Sales and Marketing . Our sales and marketing expenses for fiscal 2022 were $22,833,000, which represents an increase of $4,809,000, or 26.7%, from fiscal 2021 of $18,024,000. This increase in sales and
marketing expense during fiscal 2022 was primarily due to (i) $1,500,000 of increased commissions due to higher sales, (ii) $1,304,000 of increased employee related expenses, primarily due to the reinstatement of salary reductions in the prior year
in response to the COVID-19 pandemic and increased headcount in the current year, (iii) $1,027,000 of increased marketing in connection with new business and advertising expense, (iv) $501,000 of increased travel as normal business operations
resume, and (v) $261,000 of increased trade shows expense as normal business operations resume.
Research and Development . Our research and development expenses for fiscal 2022 were $10,502,000, which represents an increase of $1,939,000, or 22.6%, from fiscal 2021 of $8,563,000. This increase in
research and development expenses during fiscal 2022 was primarily due to (i) $1,274,000 of increased employee related expenses, primarily due to the reinstatement of salary reductions in the prior year in response to the COVID-19 pandemic and
increased headcount during the current year, (ii) $504,000 of increased outside services primarily due to development projects, and (iii) $110,000 of increased samples for our core library and other research and development supplies.
Foreign Exchange Impact of Lease Liabilities and Forward Contracts . Our foreign exchange impact of lease liabilities and forward contracts for fiscal 2022 was a non-cash gain of $1,673,000 compared with a
non-cash gain for fiscal 2021 of $17,606,000. This change in gain was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities which resulted in non-cash gains of $1,989,000 compared with $9,893,000 for fiscal
2022 and 2021, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts which resulted in a non-cash loss of $316,000 compared with a non-cash gain of $7,713,000 for fiscal 2022 and
2021, respectively, due to the changes in their fair values.
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Table of Contents
Operating Income
Consolidated Operating Income . Our consolidated operating income for the year ended March 31, 2022 was $28,704,000, which represents a decrease of $17,929,000, or 38.4%, from the year ended March 31, 2021
of $46,633,000. Operating income decreased primarily due to decreased non-cash gains from foreign exchange impact of lease liabilities and forward contracts and increased operating expenses, which were partially offset by increased gross profit as
discussed above.
Interest Expense
Interest Expense, net. Our interest expense, net for fiscal 2022 was $15,555,000, which represents a decrease of $215,000, or 1.3%, from fiscal 2021 of $15,770,000. The decrease
in interest expense was primarily due to lower interest rates on our accounts receivable discount programs partially offset by increased borrowing under our credit facility.
Provision for Income Taxes
Income Tax . We recorded income tax expense of $5,788,000, or an effective tax rate of 44.0%, for fiscal 2022 and $9,387,000, or an effective tax rate of
30.4%, for fiscal 2021. The effective tax rate for fiscal 2022 was primarily impacted by (i) non-deductible executive compensation under Internal Revenue Code Section 162(m), (ii) income taxes associated with uncertain tax positions , (iii) specific jurisdictions that we do not expect to recognize the benefit of losses, and (iv) foreign income taxed at rates that are different from the federal statutory rate.
Liquidity and Capital Resources
Overview
We had working capital (current assets minus current liabilities) of $154,886,000 and $110,580,000, a ratio of current assets to current liabilities of 1.4:1.0 at March 31, 2023 and 1.3:1.0 at March 31, 2022. The increase in working capital
resulted primarily from (i) lower accounts payable balances, (ii) the pay down of our revolving loans from the net proceeds received from the issuance of $32,000,000 in convertible notes, (iii) higher accounts receivable, which resulted from higher
net sales for fiscal 2023, and (iv) a reduction of inventory that was built-up in the prior year to meet customer demand.
Our primary source of liquidity was from the use of our receivable discount programs, credit facility, and issuance of convertible notes during fiscal 2023. In addition, 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, 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.
On March 31, 2023, we issued $32,000,000 aggregate principal amount of convertible notes in a private placement offering. The convertible notes bear interest at a rate of 10% per year. The convertible notes may
either be redeemed for cash, converted into shares of our common stock, or a combination thereof, at our election. The aggregate proceeds from the offering were approximately $ 31,280,000 , net initial
purchasers’ fees and other related expenses. The notes will mature on March 30, 2029, unless earlier converted, repurchased or redeemed.
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Table of Contents
Cash Flows
The following summarizes cash flows as reflected in the consolidated statements of cash flows:
Fiscal Years Ended March 31,
2023
2022
2021
Cash (used in) provided by:
Operating activities
$
(21,754,000
)
$
(44,862,000
)
$
56,089,000
Investing activities
(4,191,000
)
(7,938,000
)
(14,214,000
)
Financing activities
14,308,000
60,215,000
(76,567,000
)
Effect of exchange rates on cash and cash equivalents
217,000
78,000
599,000
Net (decrease) increase in cash and cash equivalents
$
(11,420,000
)
$
7,493,000
$
(34,093,000
)
Additional selected cash flow data:
Depreciation and amortization
$
12,444,000
$
12,886,000
$
11,144,000
Capital expenditures
4,201,000
7,550,000
13,942,000
Fiscal 2023 Compared with Fiscal 2022
Net cash used in operating activities was $21,754,000 and $44,862,000 for fiscal 2023 and 2022, respectively. The significant change in our operating activities was due primarily to (i) a reduction of inventory that was built-up in the prior
year to meet customer demand, (ii) a reduction of accounts payable balances due to lower purchases as we continue to manage our inventory levels, and (iii) increased sales for fiscal 2023 compared with fiscal 2022, resulting in a higher accounts
receivable balance which will be collected in future periods. We continue to manage our working capital to maximize our operating cash flow.
Net cash used in investing activities was $4,191,000 and $7,938,000 for fiscal 2023 and 2022, respectively. The change in our investing activities primarily resulted from decreased capital expenditures due to the completion of our expansion of
our brake-related operations in Mexico during the second quarter of fiscal 2022.
Net cash provided by financing activities was $14,308,000 and $60,215,000 for fiscal 2023 and 2022, respectively. The significant change in our financing activities was due mainly to net repayments under our credit facility during fiscal 2023
compared to net borrowings under our credit facility during fiscal 2022 to support the investment in our inventory partially offset by $32,000,000 in proceeds less debt issuance costs from the issuance of our convertible notes during fiscal 2023.
In addition, we repurchased 106,486 shares of our common stock for $1,914,000 during fiscal 2022.
Fiscal 2022 Compared with Fiscal 2021
Net cash used in operating activities was $44,862,000 for fiscal 2022 compared with net cash provided by operating activities of $56,089,000 for fiscal 2021. The significant change in our operating activities was due
primarily to (i) increased sales for fiscal 2022 compared with fiscal 2021, resulting in a higher accounts receivable balance which will be collected in future periods and (ii) higher inventory purchases during the current year compared with the
prior year as we increased our inventory levels as a result of disruptions with worldwide supply chain and logistics services to meet higher anticipated sales, however, our days payable outstanding did not increase proportionately to our purchases
during the current year as compared with the prior year. Our operating results (net income plus the net add-back for non-cash transactions in earnings) were higher during fiscal 2022 as compared with fiscal 2021.
Net cash used in investing activities was $7,938,000 and $14,214,000 for fiscal 2022 and 2021, respectively. The significant change in our investing activities was due primarily to decreased capital expenditures in
connection with the completion of our expansion of our brake-related operations in Mexico during the second quarter of fiscal 2022.
Net cash provided by financing activities was $60,215,000 for fiscal 2022 compared with net cash used in financing activities $76,567,000 for fiscal 2021. The significant change in our financing activities was due mainly
to additional net borrowings under our credit facility during fiscal 2022 to support the investment in our inventory compared with repayments under our credit facility during fiscal 2021.
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Table of Contents
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”). The loans under the Credit Facility mature on May 28, 2026. The Credit Facility currently permits the payment of up to $29,043,000 of dividends and share repurchases for fiscal year 2023, subject to pro forma compliance with financial
covenants. In connection with the Credit Facility, the lenders have a security interest in substantially all of our assets.
The Term Loans require quarterly principal payments of $937,500. The Credit Facility bears interest at rates equal to either SOFR (as defined below) plus a margin of 2.75%, 3.00% or 3.25% or a reference rate plus a margin of 1.75%, 2.00% or
2.25%, 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 8.02% and 8.13%, respectively, at March 31, 2023, and 2.99% and 3.13%, respectively, at March 31, 2022.
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. In addition, 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.
On November 3, 2022, we entered into a fourth amendment to the Credit Facility, which among other things, (i) modified the fixed charge coverage ratio financial covenant for the fiscal quarters ending September 30, 2022
and December 31, 2022, (ii) modified the total leverage ratio financial covenant for the quarter ending September 30, 2022, (iii) modified the definition of “Consolidated EBITDA”, and (iv) replaced LIBOR as the benchmark rate with a replacement
benchmark based on the Secured Overnight Financing Rate (“SOFR”) effective November 3, 2022. The modifications to the financial covenants were effective as of September 30, 2022.
As of December 31, 2022, we identified certain defaults with respect to the Credit Facility, which arose from non-compliance with certain financial covenants. On February 3, 2023, we entered into the fifth amendment,
which among other things, (i) waived certain existing defaults and events of defaults arising from non-compliance with the fixed charge coverage ratio and senior leverage ratio financial covenants as of the end of the fiscal quarter ended December
31, 2022, (ii) modified the fixed charge coverage ratio and senior leverage ratio financial covenant levels for the quarters ending March 31, 2023 and June 30, 2023, (iii) modified the definitions of “Applicable Margin” and “Consolidated EBITDA”,
and (iv) added a new minimum undrawn availability financial covenant.
On March 31, 2023, we entered into a sixth amendment to the Credit Facility, which among other things, (i) permitted the issuance of the Convertible Notes (as defined below), (ii) amended the definition of Consolidated
EBITDA, and (iii) amended certain component definitions used in calculating the senior leverage ratio financial covenant to exclude the Convertible Notes (as defined below).
We were in compliance with all financial covenants as of March 31, 2023.
We had $145,200,000 and $155,000,000 outstanding under the Revolving Facility at March 31, 2023 and 2022, respectively. In addition, $6,370,000 was reserved for letters of credit at March 31, 2023. At March 31, 2023,
after certain adjustments, $87,050,000 was available under the Revolving Facility.
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Table of Contents
Convertible Notes
On March 31, 2023, we entered into a note purchase agreement (the “Note Purchase Agreement”) with Bison Capital Partners VI, L.P. and Bison Capital Partners VI-A, L.P. (collectively, the “Purchasers”) and Bison Capital
Partners VI, L.P., as the purchaser representative (the “Purchaser Representative”) for the issuance and sale of $32,000,000 in aggregate principal amount of convertible notes due in 2029 (the “Convertible Notes”) to be used for general corporate
purposes. The Convertible Notes bear interest at a rate of 10.0% per annum, compounded annually, and payable (i) in kind or (ii) in cash, annually in arrears on April 1 of each year, commencing on April 1, 2024. On June 8, 2023, we entered into
the first amendment to the Note Purchase Agreement, which among other things, removed a provision that specified the Purchasers would be entitled to receive a dividend or distribution payable in certain circumstances. This amendment was effective
as of March 31, 2023.
The aggregate proceeds from the offering were approximately $31,280,000, net of initial purchasers’ fees and other related expenses. The initial conversion rate is 66.6667 shares of our common stock per $1,000 principal
amount of notes (equivalent to an initial conversion price of approximately $15.00 per share of common stock). At March 31, 2023, we had 28,650,590 shares of our common stock available to be issued if the Convertible Notes were converted.
In connection with the Note Purchase Agreement, we entered into common stock warrants (the “Warrants”) with the Purchasers, which mature on March 30, 2029. The Warrants do not become exercisable unless a Company
Redemption (as defined below) occurs and the volume weighted average price of our common stock for 20 consecutive days prior to the redemption is less than $15.00. The fair value of the Warrants, using Level 3 inputs and the Monte Carlo simulation
model, was zero at March 31, 2023. We estimate the fair value of the Warrants at each balance sheet date. Any subsequent changes from the initial recognition in the fair value of the Warrants will be recorded in current period earnings in the
consolidated statements of operations.
The Convertible Notes may be converted, subject to certain conditions, at a conversion price of approximately $15.00 (the “Conversion Option”). The Convertible Notes also include a provision for a return of interest
(“Return of Interest”), which requires the Purchasers to return 15.0% of the interest paid to us in certain circumstances. The Return of Interest provision is accounted for as part of the Conversion Option and if the Conversion Option is exercised
in the future, the Return of Interest provision will remain outstanding until the Purchaser sells all of the underlying stock received upon conversion. Upon conversion, any value associated with the Return of Interest provision will be reflected as
a derivative asset upon conversion, with changes in fair value being recorded in earnings in the consolidated statements of operations until settlement in connection with the sale of the underlying stock by the Purchaser. Unless and until we
deliver a redemption notice, the Purchasers of the Convertible Notes may convert their Convertible Notes at any time at their option. Upon conversion, the Convertible Notes will be settled in shares of our common stock. The conversion rate and
conversion price are subject to customary adjustments upon the occurrence of certain events. The Convertible Notes have a stated maturity of March 30, 2029, subject to earlier conversion or redemption in accordance with their terms.
If there is a Fundamental Transaction, as defined in the Form of Convertible Promissory Note, we may redeem all or part of the Convertible Notes. Except in the case of the occurrence of a Fundamental Transaction, we may
not redeem the Convertible Notes prior to March 31, 2026. After March 31, 2026, we may redeem all or part of the Convertible Notes for a cash purchase (the “Company Redemption”) price equal to the redemption price plus $4,000,000, but only if (i)
we are listed on a national exchange, (ii) there is no “Event of Default” occurring and continuing and (iii) Adjusted EBITDA for the prior four quarters is greater than $80,000,000. The “Redemption Price” shall mean a cash amount equal to the
principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest. However, if the volume weighted average price of our common stock for 20 consecutive days prior to the notice of the Company Redemption is less than $15.00,
the Purchasers may exercise the warrants and we will pay the Redemption Price plus $2,000,000. However, if the volume weighted average price of our common stock is less than $8 for 20 days between March 31, 2023 and September 27, 2023, we will pay
the redemption price plus $5,000,000.
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Table of Contents
The Conversion Option and the Company Redemption both met the criteria for bifurcation from the Convertible Notes as derivatives and using the Monte Carlo simulation model were fair valued as a derivative liability of
$10,400,000 and an asset of $1,970,000 at March 31, 2023, respectively. The Company Redemption has been combined with the Conversion Option as a compound net derivative liability (the “Compound Net Derivative Liability”). The Compound Net
Derivative Liability has been recorded within convertible note, related party in the consolidated balance sheet at March 31, 2023. We estimate the fair value of the Compound Net Derivative Liability at each balance sheet date. Any subsequent
changes from the initial recognition in the fair value of the Compound Net Derivative Liability will be recorded in current period earnings in the consolidated statements of operations.
The Convertible Notes also contain additional features, such as, default interest and options related to a Fundamental Transaction, requiring bifurcation which were not separately accounted for as the value of such
features were not material at March 31, 2023. Any subsequent changes from the initial recognition in the fair value of those features will be recorded in current period earnings in the consolidated statements of operations.
The Convertible Notes include customary provisions relating to the occurrence of Events of Default, which include the following: (i) certain payment defaults on the Convertible Notes; (ii) certain events of bankruptcy,
insolvency and reorganization involving us or any of our subsidiaries; (iii) the entering of one or more final judgements or orders against us or any of our subsidiaries for an aggregate payment exceeding $25,000,000; (iv) the acceleration of
senior debt; (v) certain failures of us to comply with certain provisions of the Note Purchase Agreement or material breaches of the Note Purchase Agreement by us or any of our subsidiaries; (vi) any material provision of the Note Purchase
Agreement, the Convertible Notes, the guarantee, the subordination agreement, the warrants or the registration rights agreement, for any reason, ceases to be valid and binding on us or any subsidiary, or any subsidiary shall so claim in writing to
challenge the validity of or our liability under the Note Purchase Agreement, the Convertible Notes, or the registration rights agreement; or (vii) we fail to maintain the listing of our capital stock on a national securities exchange. Events of
Default will be subject to a 30-day cure period except for those related to clause (ii) and (iv) of the preceding sentence.
If an Event of Default occurs and is continuing, then, we shall deliver written notice to the Purchasers within 5 business days of first learning of such Event of Default. If an Event of Default involving bankruptcy,
insolvency or reorganization events with respect to us (and not solely with respect to our significant subsidiary) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Convertible Notes then outstanding will
immediately become due and payable without any further action.
Debt issuance costs of $1,006,000 are presented in the balance sheet as a direct deduction from the carrying amounts of the Convertible Notes at March 31, 2023. Debt issuance costs are amortized using the effective
interest method through the maturity of the Convertible Note and recorded in interest expense in the consolidated statements of operations. Debt issuance costs of $360,000 allocated to the Compound Net Derivative Liability were immediately expensed
to interest expense in the consolidated statements of operations for the year ended March 31, 2023.
Additionally, pursuant to the Note Purchase Agreement, subject to certain conditions, the Purchaser Representative shall have the right to nominate one director to serve (the “Investor Director”) on our Board of Directors
(the “Board”). If an Investor Director is not currently serving on the Board, and subject to certain other conditions set forth in the Note Purchase Agreement, the Purchaser Representative shall have the right to designate one person to have
observation rights with respect to all meetings of the Board. In connection with our entry into the Note Purchase Agreement, we have appointed Douglas Trussler to serve on our Board.
Receivable Discount Programs
We use receivable discount programs with certain customers and their respective banks. Under these programs, we have options to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are
sold. These discount arrangements allow us to accelerate receipt of payment on customers’ receivables. While these arrangements have reduced our working capital needs, there can be no assurance that these programs will continue in the future.
Interest expense resulting from these programs would increase if interest rates rise, if utilization of these discounting arrangements expands, if customers extend their payment to us, or if the discount period is extended to reflect more favorable
payment terms to customers.
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Table of Contents
The following is a summary of the receivable discount programs:
Fiscal Years Ended March 31,
2023
2022
Receivables discounted
$
548,376,000
$
525,441,000
Weighted average days
328
336
Weighted average discount rate
5.3
%
1.9
%
Amount of discount as interest expense
$
26,432,000
$
9,197,000
Multi-year Customer Agreements
We have or are renegotiating long-term agreements with many of our major customers. Under these agreements, which in most cases have initial terms of at least four years, we are designated as the exclusive or primary supplier for specified
categories of our products. Because of the very competitive nature of the market and the limited number of customers for these products, our customers have sought and obtained price concessions, significant marketing allowances and more favorable
delivery and payment terms in consideration for our designation as a customer’s exclusive or primary supplier. These incentives differ from contract to contract and can include (i) the issuance of a specified amount of credits against receivables
in accordance with a schedule set forth in the relevant contract, (ii) support for a particular customer’s research or marketing efforts provided on a scheduled basis, (iii) discounts granted in connection with each individual shipment of product,
and (iv) other marketing, research, store expansion or product development support. These contracts typically require that we meet ongoing performance standards.
While these longer-term agreements strengthen our customer relationships, the increased demand for our products often requires that we increase our inventories and personnel. Customer demands that we purchase their Remanufactured Core inventory
also require the use of our working capital. The marketing and other allowances we typically grant our customers in connection with our new or expanded customer relationships adversely impact the near-term revenues, profitability and associated
cash flows from these arrangements. However, we believe the investment we make in these new or expanded customer relationships will improve our overall liquidity and cash flow from operations over time.
Share Repurchase Program
In August 2018, our board of directors approved an increase in our share repurchase program from $20,000,000 to $37,000,000 of our common stock. During fiscal 2023, we did not repurchase any shares of our common stock. During fiscal 2022 and
2021, we repurchased 106,486 and 54,960 shares of our common stock, respectively, for $1,914,000 and $1,139,000, respectively. As of March 31, 2023, $18,745,000 was utilized and $18,255,000 remains available to repurchase shares under the
authorized share repurchase program, subject to the limit in our Credit Facility. We retired the 837,007 shares repurchased under this program through March 31, 2023. 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.
Capital Expenditures and Commitments
Our total capital expenditures, including capital leases and non-cash capital expenditures, were $4,792,000 for fiscal 2023 and $8,150,000 for fiscal 2022. These capital expenditures primarily include the purchase of equipment for our current
operations and the expansion of our operations in Mexico, which was completed during the second quarter of fiscal 2022. We expect to incur approximately $7,000,000 of capital expenditures primarily to support our current operations during fiscal
2024. We have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures.
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Contractual Obligations
The following summarizes our contractual obligations and other commitments as of March 31, 2023 and the effect such obligations could have on our cash flows in future periods:
Payments Due by Period
Contractual Obligations
Total
Less than
1 year
1 to 3
years
3 to 5
years
More than 5
years
Finance lease obligations (1)
$
5,008,000
$
2,064,000
$
2,406,000
$
532,000
$
6,000
Operating lease obligations (2)
113,671,000
13,567,000
24,634,000
21,541,000
53,929,000
Revolving facility (3)
145,200,000
-
-
145,200,000
-
Term loan (4)
14,947,000
4,655,000
8,391,000
1,901,000
-
Convertible notes (5)
56,704,000
-
-
-
56,704,000
Accrued core payment (6)
13,289,000
3,480,000
5,985,000
3,824,000
-
Core bank liability (7)
16,148,000
2,018,000
4,036,000
4,036,000
6,058,000
Finished goods liabilities (8)
1,710,000
1,277,000
433,000
-
-
Unrecognized tax benefits (9)
-
-
-
-
-
Other long-term obligations (10)
63,976,000
14,637,000
22,226,000
19,137,000
7,976,000
Total
$
430,653,000
$
41,698,000
$
68,111,000
$
196,171,000
$
124,673,000
(1)
Finance lease obligations represent amounts due under finance leases for various types of equipment.
(2)
Operating lease obligations represent amounts due for rent under our leases for all our facilities, certain equipment, and our Company automobile.
(3)
Obligations under our Revolving Facility mature on May 28, 2026. This debt is classified as a short term liability on our balance sheet as we expect to use our working capital to repay the amounts outstanding under our revolving loan.
(4)
Term Loan obligations represent the amounts due for principal payments as well as interest payments to be made. Interest payments were calculated based upon the interest rate for our Term Loan using the SOFR option at March 31, 2023,
which was 8.02%.
(5)
Obligations under our Convertible Notes mature on March 30, 2029. There are no future payments required under the Convertible Notes prior to their maturity, therefore, the carrying value of the notes plus interest payable in kind,
assuming no early redemption or conversion has occurred, is included in the above table based on their maturity date of March 30, 2029.
(6)
Accrued core payment represents the amounts due for principal of $12,227,000 and interest payments of $1,062,000 to be made in connection with the purchases of Remanufactured Cores from our customers, which are held by these customers
and remain on their premises.
(7)
The core bank liability represents the amounts due for principal of $15,268,000 and interest payments of $880,000 to be made in connection with the return of Used Cores from our customers.
(8)
Finished goods liabilities represents the amounts due for principal of $1,690,000 and interest payments of $20,000 to be made in connection with the purchase of finished goods from our customers.
(9)
We are unable to reliably estimate the timing of future payments related to uncertain tax position liabilities at March 31, 2023; therefore, future tax payment accruals related to uncertain tax positions in the amount of $1,964,000
have been excluded from the table above.
(10)
Other long-term obligations represent commitments we have with certain customers to provide marketing allowances in consideration for multi-year customer agreements to provide products over a defined period. We are not obligated to
provide these marketing allowances should our business relationships end with these customers.
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