Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk relates to changes in interest rates, foreign currency exchange rates, and customer credit. We do not enter into derivatives or other financial instruments for trading or speculative purposes. As our overseas operations
expand, our exposure to the risks associated with foreign currency fluctuations will continue to increase.
Interest rate risk
We are exposed to changes in interest rates primarily as a result of our borrowing and receivable discount programs, which have interest costs that vary with interest rate movements. Our credit facility bears interest at variable base rates,
plus an applicable margin. At March 31, 2023, our net debt obligations totaled $158,143,000. If interest rates were to increase 1%, our net annual interest expense on our credit facility would have increased by approximately $1,581,000. The
weighted average interest on our debt was 8.12% at March 31, 2023 compared to 3.12% at March 31, 2022. In addition, during the year ended March 31, 2023, receivables discounted were $548,376,000. For each $500,000,000 of accounts receivable we
discount over a period of 180 days, a 1% increase in interest rates would have increased our interest expense by $2,500,000. The weighted average discount rate on our factored receivables was 5.3% during fiscal 2023 compared with 1.9% for fiscal
2022.
Foreign currency risk
We are exposed to foreign currency exchange risk inherent in our anticipated purchases and expenses denominated in currencies other than the U.S. dollar. We transact business in the following foreign currencies; Mexican pesos, Malaysian ringgit,
Singapore dollar, Chinese yuan, and the Canadian dollar. Our primary currency risks result from fluctuations in the value of the Mexican peso and to a lesser extent the Chinese yuan. To mitigate these risks, we enter into forward foreign currency
exchange contracts to exchange U.S. dollars for these foreign currencies. The extent to which we use forward foreign currency exchange contracts is periodically reviewed in light of our estimate of market conditions and the terms and length of
anticipated requirements. The use of derivative financial instruments allows us to reduce our exposure to the risk that the eventual net cash outflow resulting from funding the expenses of the foreign operations will be materially affected by
changes in exchange rates. These contracts generally expire in a year or less. Any changes in the fair values of our forward foreign currency exchange contracts are reflected in current period earnings. Based upon our forward foreign currency
exchange contracts related to these currencies, an increase of 10% in exchange rates at March 31, 2023 would have increased our operating expenses by approximately $4,761,000. During fiscal 2023 and fiscal 2022, a gain of $2,776,000 and a loss of
$316,000, respectively, was recorded due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts. In addition, we recorded gains $6,515,000 and $1,989,000 in connection with the
remeasurement of foreign currency-denominated lease liabilities during fiscal 2023 and fiscal 2022, respectively.
Credit Risk
We regularly review our accounts receivable and allowance for credit losses by considering factors such as historical experience, credit quality and age of the accounts receivable, and the current economic conditions that may affect a customer’s
ability to pay such amounts owed to us. The majority of our sales are to leading automotive aftermarket parts suppliers. We participate in trade accounts receivable discount programs with our major customers. If the creditworthiness of any of our
customers was downgraded, we could be adversely affected, in that we may be subjected to higher interest rates on the use of these programs or we could be forced to wait longer for payment. Should our customers experience significant cash flow
problems, our financial position and results of operations could be materially and adversely affected, and the maximum amount of loss that would be incurred would be the outstanding receivable balance, Used Cores expected to be returned by
customers, and the value of the Remanufactured Cores held at customers’ locations. We maintain an allowance for credit losses that, in our opinion, provides for an adequate reserve to cover losses that may be incurred.
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Table of Contents
Item 8.
Financial Statements and Supplementary Data
The information required by this item is set forth in the consolidated financial statements, commencing on page F-1 included herein.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.