MOTORCAR PARTS OF AMERICA INC 10-K

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 on-going investments in global infrastructure and human resources 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. In addition, during fiscal 2025, we added a new warehousing and distribution facility in Malaysia to support our future direct shipment programs. During fiscal 2025, we ceased manufacturing at our Torrance, California facility, reduced our headcount, and incurred certain transition expenses in connection with our on-going strategy to utilize our global footprint to enhance operating efficiencies and expect to realize future benefit from these cost-saving measures. Highlights and Accomplishments in Fiscal 2025 During fiscal 2025, we continued to focus on strategic growth, improving profitability, and leveraging our industry position as a leading non-discretionary aftermarket parts supplier and customer relationships. The following significant accomplishments support our optimism: ● Sales increased by 5.5 percent to a record $757.4 million, despite industry softness in the fiscal year; ● Gross profit increased 16.1 percent to a record $153.8 million; ● Gross margin increased 1.8 percentage points to 20.3 percent; ● We generated cash from operating activities of approximately $45.5 million; ● Our net bank debt was reduced by $32.7 million to $81.4 million; ● We completed the relocation of certain operations to lower-cost locations as part of our ongoing commitment to continuous improvement; ● Market share for brake-related product lines increased for both our branded Quality-Built® and private label retail brake products; ● Expanded brand equity by increasing sales under the MPA portfolio of brands, including Quality-Built® in the professional installer market; ● We expanded our product coverage for starters and alternators, brake calipers, brake pads, brake rotors, brake boosters, brake master cylinders, and wheel hubs with more than 629 new part numbers -- covering more than approximately 130 million vehicles in operation in North America; ● Sales growth related to our emerging Mexican market presence continued to accelerate, driven by additional business from current customers; ● The roll out of our JBT-1 bench-top testers continued to gain momentum, with the majority of retail stores in North America deploying our diagnostic units, or, we believe, planning to install them; ● We added a new warehousing and distribution facility in Malaysia for future direct shipment programs; 29 Table of Contents ● We repurchased an aggregate 542,134 shares for $4.8 million for the full year under a current authorization program. ● Our strategy for neutralization of working capital is gaining momentum supported by inventory management and supply chain initiatives, including the benefits of our vendor supply chain financing program; and ● We made continued progress on further enhancing 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 foreign currency, evolving tariff policy, inflation, interest 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. Foreign Currency We are exposed to foreign currency exchange risks inherent in our 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, Indian rupee, 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. We have operations located outside the United States with various functional currencies. Because our consolidated financial statements are denominated in U.S. dollars, the assets, liabilities, net sales, and expenses that are denominated in currencies other than the U.S. dollar must be converted into U.S. dollars using exchange rates for the current period. As a result, fluctuations in foreign currency exchange rates may impact our financial results. Tariffs We source the majority of our raw materials and parts from suppliers in a variety of non-U.S. countries. The current U.S. government recently implemented tariffs and announced the possibility of increasing current tariffs or implementing additional ones. We expect these actions and retaliatory tariff adjustments by other countries to impact our business and contribute to inflationary cost increases. As a result, we are taking actions designed to mitigate the potential impacts of these tariffs, including, but not limited to, passing along price increases to our customers and negotiating cost concessions from our suppliers where possible. Absent any changes in trade regulations, we anticipate inflationary cost increases due to these tariffs and any resulting impact on macroeconomic conditions and our business to continue. There can be no assurance that the recently announced tariffs or future imposition of any tariffs, changes thereto, or actions taken by countries in response to the tariffs will not have a material adverse effect on our business, results of operations, financial condition, or liquidity in any period or that any actions we take to mitigate the impact of the tariffs will be effective. Inflation The cost to manufacture and distribute our products is impacted by the cost of raw materials, finished goods, labor, and transportation. During fiscal 2025, we continued to experience increased costs of raw materials, finished goods, higher labor costs in Mexico, and other administrative costs. 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. 30 Table of Contents Interest Rates Interest rates in the U.S. remain high as a result of the federal government’s efforts to curb on-going inflation. Although interest rates decreased slightly during fiscal 2025, overall, interest costs for our accounts receivable discount programs and borrowings under our credit facility, which have interest costs that vary with interest rate movements, remain high. The majority of our interest costs result from our accounts receivable discount programs, which had a weighted average discount rate of 6.2% for fiscal 2025 compared with 6.8% for fiscal 2024. The weighted average interest on borrowings under our credit facility was 7.46% at March 31, 2025 compared to 8.43% at March 31, 2024. Any future increases in interest rates will continue to adversely impact our financial results. Segment Reporting Our three operating segments are as follows: ● Hard Parts , which includes (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 , which includes (i) applications for combustion engine vehicles, including bench-top testers for alternators and starters, (ii) equipment for the pre- and post-production of electric vehicles, and (iii) software emulation of power system applications for the electrification of all forms of transportation (including automobiles, trucks, the emerging electrification of systems within the aerospace industry, and electric vehicle charging stations), and ● Heavy Duty , which includes non-discretionary automotive aftermarket replacement hard parts for heavy-duty truck, industrial, marine, and agricultural applications. 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, and are not required to be separately reported. See Note 20 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. 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, 2025. However, 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. 31 Table of Contents Recently Adopted Accounting Pronouncements Reportable Segment Disclosures In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (Topic 280) . This standard requires us to disclose significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and are included within each reported measure of segment operating results. The standard also requires us to disclose the total amount of any other items included in segment operating results, which were not deemed to be significant expenses for separate disclosure, along with a qualitative description of the composition of these other items. In addition, the standard also requires disclosure of the CODM’s title and position, as well as detail on how the CODM uses the reported measure of segment operating results to evaluate segment performance and allocate resources. The standard also aligns interim segment reporting disclosure requirements with annual segment reporting disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The adoption of this guidance as of March 31, 2025 increased our disclosures ( see Note 20 of the notes to consolidated financial statements ) but did not have any material effect on our consolidated financial statements. Accounting Pronouncements Not Yet Adopted Disclosure Improvements In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative . This standard was issued in response to the SEC’s disclosure update and simplification initiative, which affects a variety of topics within the Accounting Standards Codification. The amendments apply to all reporting entities within the scope of the affected Topics unless otherwise indicated. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. We are currently evaluating the impact this guidance will have on our financial statement disclosures. Improvements to Income Tax Disclosures In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740) . This standard requires us to provide further disaggregated income tax disclosures for specific categories on the effective tax rate reconciliation, as well as additional information about federal, state/local and foreign income taxes. The standard also requires us to annually disclose our income taxes paid (net of refunds received), disaggregated by jurisdiction. This guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The standard is to be applied prospective basis, although optional retrospective application is permitted. We are currently evaluating the impact this guidance will have on our financial statement disclosures. Disaggregation of Income Statement Expenses In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses (“DISE”) (Subtopic 220-40) . This standard requires us to disclose, in the footnotes at each interim and annual reporting period, information about expenses by the nature of the expense in addition to certain disclosures about selling expenses. Entities are required to include the following relevant expense captions: (i) purchase of inventory, (ii) employee compensation, (iii) depreciation, (iv) intangible asset amortization, and (v) depreciation, depletion and amortization recognized as part of oil and gas producing activities. In January 2025, the FASB issued ASU No. 2025-01, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40) Clarifying the Effective Date , which is intended to clarify the effective date of ASU No. 2024-03. As clarified in ASU 2025-01, the new guidance is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within annual reporting periods beginning after December 15, 2027. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our financial statement disclosures. 32 Table of Contents Debt with Conversion and Other Options In November 2024, the FASB issued ASU 2024-04, Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments , which seeks to clarify the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as an induced conversion. This guidance is effective for annual periods beginning after December 15, 2025, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements and disclosures. 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 expense these unallocated overhead costs as period costs. Purchased finished goods also include an allocation of fixed overhead costs. 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. 33 Table of Contents ● 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 $18,964,000 and $17,372,000 at March 31, 2025 and 2024, respectively. This increase in the reserve was primarily due to excess inventory of certain finished goods on hand at March 31, 2025 compared with March 31, 2024. 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. 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. 34 Table of Contents 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. 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 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. 35 Table of Contents 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. 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. 36 Table of Contents 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 is 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 $34,411,000 and $38,312,000 at March 31, 2025 and 2024, respectively. The change in the customer finished goods returns accrual primarily resulted from the timing of returned goods authorizations (“RGAs”) issued at March 31, 2025 compared with March 31, 2024. 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. The primary components of our income tax expense were (i) federal income taxes, (ii) state income taxes, (iii) change in realizable deferred tax items, (iv) foreign income taxed at rates that are different from the federal statutory rate, and (v) impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m). 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 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, including scheduled reversals of deferred tax liabilities, projected future taxable income, past financial performance, and tax planning strategies. At March 31, 2025 and 2024, we had a valuation allowance on deferred tax assets that is considered not more likely than not to be realized under U.S. GAAP. Should the actual amount differ from our estimate, the amount of our valuation allowance could be impacted. 37 Table of Contents 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, 2025 2024 2023 Cash flows provided by (used in) operations $ 45,477,000 $ 39,172,000 $ (21,754,000 ) Finished goods turnover (1) 3.8 3.7 3.6 (1) Finished goods turnover is calculated by dividing the cost of goods sold for the year by the average of 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. Fiscal 2025 Compared with Fiscal 2024 Net Sales and Gross Profit The following summarizes consolidated net sales and gross profit: Fiscal Years Ended March 31, 2025 2024 Net sales to external customers $ 757,354,000 $ 717,684,000 Cost of goods sold 603,526,000 585,133,000 Gross profit 153,828,000 132,551,000 Gross profit percentage 20.3 % 18.5 % Net Sales . Our consolidated net sales for fiscal 2025 were $757,354,000, which represents an increase of $39,670,000, or 5.5%, from fiscal 2024 of $717,684,000 due to strong demand for both our rotating electric and brake-related product lines. The following summarizes consolidated net sales by product mix: Years Ended March 31, 2025 2024 Rotating electrical products 67 % 66 % Brake-related products 21 % 20 % Wheel hub products 8 % 10 % Other products 4 % 4 % 100 % 100 % 38 Table of Contents Gross Profit. Our consolidated gross profit for fiscal 2025 increased $21,277,000, or 16.1%, to $153,828,000 from $132,551,000 for fiscal 2024. Our consolidated gross margin, as a percentage of consolidated net sales, improved by 1.8% for fiscal 2025 to 20.3% from 18.5% for fiscal 2024. The increase in our gross margin for fiscal 2025 reflects the benefit of our on-going strategy to utilize our global footprint to enhance operating efficiencies and our cost-saving initiatives. These increases were partially offset by (i) $4,607,000 for certain tariff costs paid for products sold before price increases were effective, (ii) $3,960,000 of certain one-time expenses for onboarding new business and (iii) $1,298,000 of transition expenses in connection with our on-going strategy to utilize our global footprint to enhance operating efficiencies. We expect to continue to realize benefits from these initiatives. In addition, our gross margin for fiscal 2025 compared with fiscal 2024 was impacted by (i) amortization of core and finished goods premiums paid to customers related to new business of $10,738,000 and $10,963,000, respectively and (ii) the 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 $2,805,000 and $5,353,000, respectively. Operating Expenses The following summarizes consolidated operating expenses: Fiscal Years Ended March 31, 2025 2024 General and administrative $ 64,047,000 $ 57,769,000 Sales and marketing 22,561,000 22,481,000 Research and development. 11,405,000 9,995,000 Foreign exchange impact of lease liabilities and forward contracts 15,892,000 (3,814,000 ) Percent of net sales General and administrative 8.5 % 8.0 % Sales and marketing 3.0 % 3.1 % Research and development 1.5 % 1.4 % Foreign exchange impact of lease liabilities and forward contracts 2.1 % (0.5 )% General and Administrative. Our general and administrative expenses for fiscal 2025 were $64,047,000, which represents an increase of $6,278,000, or 10.9%, from fiscal 2024 of $57,769,000. This increase was primarily due to a loss of $2,987,000 during fiscal 2025 compared with a gain of $515,000 during fiscal 2024 resulting from unfavorable fluctuations in foreign currency exchange rates on transactions denominated in foreign currencies during the year. In addition, our general and administrative expenses were impacted by $2,544,000 of increased severance during fiscal 2025 due to headcount reductions in connection with our strategy to enhance operating efficiencies. Sales and Marketing . Our sales and marketing expenses were consistent at $22,561,000 for fiscal 2025 compared with $22,481,000 for fiscal 2024. Research and Development . Our research and development expenses for fiscal 2025 were $11,405,000, which represents an increase of $1,410,000, or 14.1%, from fiscal 2024 of $9,995,000. This increase was primarily due to increased headcount, supplies, and outside consulting services. Foreign Exchange Impact of Lease Liabilities and Forward Contracts . Our foreign exchange impact of lease liabilities and forward contracts were a non-cash loss of $15,892,000 compared with a non-cash gain of $3,814,000 for fiscal 2025 and 2024, respectively. This change during fiscal 2025 compared with fiscal 2024 was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in a non-cash loss of $11,713,000 compared with a non-cash gain of $5,187,000, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in non-cash losses of $4,179,000 and $1,373,000, respectively, due to the changes in their fair values. 39 Table of Contents Operating Income Consolidated Operating Income . Our consolidated operating income for fiscal 2025 was $39,923,000 compared with $46,120,000 for fiscal 2024. This decrease was primarily due our foreign exchange impact of lease liabilities and forward contracts, which were a non-cash loss of $15,892,000 compared with a non-cash gain of $3,814,000 for fiscal 2025 and 2024, respectively, partially offset by higher gross profit and other items as discussed above. Interest Expense Interest Expense, net. Our interest expense for fiscal 2025 was $55,550,000, which represents a decrease of $4,490,000, or 7.5%, from interest expense for fiscal 2024 of $60,040,000. This decrease was primarily due to lower outstanding balances under our credit facility of $90,787,000 at March 31, 2025 compared with $128,000,000 at March 31, 2024 and lower interest rates on our accounts receivable discount programs and credit facility. The weighted average interest rate on our accounts receivable discount programs was 6.2% for fiscal 2025 compared with 6.8% for fiscal 2024. The weighted average interest on borrowings under our credit facility was 7.46% at March 31, 2025 compared to 8.43% at March 31, 2024. Change in Fair Value of Compound Net Derivative Liability Change in Fair Value of Compound Net Derivative Liability. Our change in fair value of compound net derivative liability was a non-cash loss of $60,000 compared with a non-cash gain of $1,020,000 for fiscal 2025 and 2024, respectively, associated with the convertible notes issued on March 31, 2023. Loss on Extinguishment of Debt Loss on Extinguishment of Debt. Our loss on extinguishment of debt was $168,000 in connection with the repayment of the remaining outstanding balance of our term loans during fiscal 2024. Provision for Income Taxes Income Tax . We recorded a income tax expense of $3,783,000, or an effective tax rate of (24.1)%, and $36,176,000, or an effective tax rate of (276.8)%, for fiscal 2025 and 2024, respectively. The effective tax rate for fiscal 2025 was primarily impacted by (i) the change in valuation allowance, (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). Our effective tax rate for fiscal 2024 was primarily impacted by the establishment of a valuation allowance on deferred tax assets that were not expected to be realized. Fiscal 2024 Compared with Fiscal 2023 A discussion of the changes in our results of operations for the year ended March 31, 2024, as compared with the year ended March 31, 2023, has been omitted from this Form 10-K but may be found in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the annual report on Form 10-K for the year ended March 31, 2024, filed with the SEC on June 11, 2024, and the 10-K/A for the fiscal year ended March 31, 2024 as filed with the SEC on June 28, 2024, which is available free of charge on the SEC’s website at www.sec.gov by searching with our ticker symbol “MPAA” or at our internet address, www.motorcarparts.com , by clicking “Investors/Financials/SEC Filings” located at the top of the page. 40 Table of Contents Liquidity and Capital Resources Overview We had working capital (current assets minus current liabilities) of $160,446,000 and $156,034,000, a ratio of current assets to current liabilities of 1.5:1.0 at March 31, 2025 and 1.4:1.0 at March 31, 2024. In June 2024, we enrolled in a feature with our lenders, under which we sweep our cash collections to pay down our revolving facility and borrow on-demand to fund payments. This feature is expected to reduce interest expense on borrowings under the credit facility. Our primary source of liquidity was from cash generated from operations, the use of our receivable discount programs, and credit facility during fiscal 2025. 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 liquidity needs, including lease and capital expenditure obligations over the next 12 months. Cash Flows The following summarizes cash flows as reflected in the consolidated statements of cash flows: Fiscal Years Ended March 31, 2025 2024 2023 Cash provided by (used in): Operating activities $ 45,477,000 $ 39,172,000 $ (21,754,000 ) Investing activities (4,469,000 ) (479,000 ) (4,191,000 ) Financing activities (44,655,000 ) (36,439,000 ) 14,308,000 Effect of exchange rates on cash and cash equivalents (898,000 ) 124,000 217,000 Net (decrease) increase in cash and cash equivalents $ (4,545,000 ) $ 2,378,000 $ (11,420,000 ) Additional selected cash flow data: Depreciation and amortization $ 10,400,000 $ 11,619,000 $ 12,444,000 Capital expenditures 4,578,000 1,000,000 4,201,000 Fiscal 2025 Compared with Fiscal 2024 Net cash provided by operating activities was $45,477,000 and $39,172,000 for fiscal 2025 and 2024, respectively. The increase in our net cash provided by operating activities was due to increased operating results (net loss plus the net add-back for non-cash transactions in earnings), partially offset by changes in our working capital requirements to support our growth initiatives. We continue to manage our working capital to maximize our operating cash flow. Net cash used in investing activities was $4,469,000 and $479,000 for fiscal 2025 and 2024, respectively. The change in our investing activities primarily resulted from increased capital expenditures. Net cash used in financing activities was $44,655,000 and $36,439,000 for fiscal 2025 and 2024, respectively. The change in our financing activities primarily resulted from (i) the net repayments of amounts outstanding under our revolving facility of $37,213,000 during fiscal 2025 compared with $17,200,000 during fiscal 2024 and (ii) the repurchase of 542,134 shares of our common stock for $4,832,000 during fiscal 2025. During the prior fiscal year, we paid off our remaining term loans of $13,125,000. 41 Table of Contents Fiscal 2024 Compared with Fiscal 2023 A discussion of the changes in our operating activities, investing activities, and financing activities for the year ended March 31, 2024, as compared with the year ended March 31, 2023, has been omitted from this Form 10-K but may be found in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the annual report on Form 10-K for the year ended March 31, 2024, filed with the SEC on June 11, 2024, and the 10-K/A for the fiscal year ended March 31, 2024, as filed with the SEC on June 28, 2024, which is available free of charge on the SEC’s website at www.sec.gov by searching with our ticker symbol “MPAA” or at our internet address, www.motorcarparts.com , by clicking “Investors/Financials/SEC Filings” located at the top of the page. 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 Term Loans were repaid during the year ended March 31, 2024. The Credit Facility matures on December 12, 2028. The lenders have a security interest in substantially all of our assets. In June 2024, we enrolled in a feature with our lenders, under which we sweep our cash collections to pay down our revolving facility and borrow on-demand to fund payments. This feature is expected to reduce interest expense on borrowings under the Credit Facility. We had $90,787,000 and $128,000,000 outstanding under the Revolving Facility at March 31, 2025 and 2024, respectively. In addition, $7,047,000 was outstanding for letters of credit at March 31, 2025. At March 31, 2025, after certain contractual adjustments, $135,150,000 was available under the Revolving Facility. The interest rate on our Revolving Facility was 7.46% and 8.43%, at March 31, 2025 and 2024, respectively. The Credit Facility requires us to maintain a minimum fixed charge coverage ratio if undrawn availability is less than 22.5% of the aggregate revolving commitments and a specified minimum undrawn availability. During the period ended March 31, 2025, undrawn availability was greater than the 22.5% threshold, therefore, the fixed charge coverage ratio financial covenant was not required to be tested. Convertible Notes On March 31, 2023, we entered into a note purchase agreement, as amended, (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”), which was 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. In April 2024, non-cash accrued interest on the Convertible Notes of $3,209,000 was paid in-kind and is included in the principal amount of Convertible Notes at March 31, 2025. 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, 2025, we had 28,240,973 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, 2025 and 2024. 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. 42 Table of Contents The Convertible Notes may be converted, subject to certain conditions, at an initial conversion price of $15.00, subject to adjustment as provided in the Convertible Notes (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, subject to reduction of the Return of Interest amount in the event that the Return of Interest amount would result in total payments to the Purchasers of less than two times the original principal amount. 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 (as defined below) plus $5,000,000, 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, the Purchasers may exercise the warrants and we will pay the Redemption Price plus $2,000,000. The Conversion Option and the Company Redemption both met the criteria for bifurcation from the Convertible Notes as derivatives and have been combined 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 sheets. The fair value of the Conversion Option and the Company Redemption option using Level 3 inputs and the Monte Carlo simulation model was a liability of $9,000,000 and $9,800,000, and an asset of $1,530,000 and $2,390,000 at March 31, 2025 and 2024, respectively. 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 is recorded in current period earnings in the consolidated statements of operations. During the years ended March 31, 2025 and 2024, we recorded a loss of $60,000 and a gain of $1,020,000, respectively, as the change in fair value of the Compound Net Derivative Liability in the consolidated statements of operations and consolidated statements of cash flows. 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, 2025 and 2024. Any subsequent changes from the initial recognition in the fair value of those features is 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 judgments or orders against us or any of our subsidiaries for an aggregate payment exceeding $25,000,000; (iv) the acceleration of senior debt or any other debt greater than $25,000,000; (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. 43 Table of Contents 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. Unamortized debt issuance costs of $916,000 and $1,058,000 are presented in the balance sheet as a direct deduction from the carrying amounts of the Convertible Notes at March 31, 2025 and 2024, respectively. Debt issuance costs are amortized using the effective interest method through the maturity of the Convertible Notes and recorded in interest expense in the consolidated statements of operations. The effective interest rate was 18.3% as of March 31, 2025 and 2024, respectively. 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 appointed Douglas Trussler to serve on our Board. Accounts Receivable Discount Programs We use accounts receivable discount programs offered by 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 accounts receivable discount programs 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 accounts receivable discount programs will continue in the future. Interest expense resulting from these accounts receivable discount programs would increase if interest rates rise, if utilization of these accounts receivable discount programs expand, if customers extend their payment to us, or if the discount period is extended to reflect more favorable payment terms to customers. The following is a summary of the accounts receivable discount programs: Fiscal Years Ended March 31, 2025 2024 Receivables discounted $ 643,918,000 $ 618,012,000 Weighted average days 343 336 Weighted average discount rate 6.2 % 6.8 % Amount of discount as interest expense $ 38,021,000 $ 39,175,000 44 Table of Contents Supplier Finance Programs We utilize a supplier finance program, which allows certain of our suppliers to sell their receivables due from us to participating financial institutions at the sole discretion of both the supplier and the financial institutions. The program is administered by a third party. Commitments from participating financial institutions that are available to suppliers under this program increased to $30,000,000 from $15,000,000 during fiscal 2025. We have no economic interest in the sale of these receivables and no direct relationship with the financial institution. Payments to the third-party administrator are based on services rendered and are not related to the volume or number of financing agreements between suppliers, financial institution, and the third-party administrator. We are not a party to agreements negotiated between participating suppliers and the financial institution. Our obligations to our suppliers, including amounts due and payment terms, are not affected by a supplier's decision to participate in this program. We do not provide guarantees and there are no assets pledged to the financial institution or the third-party administrator for the committed payment in connection with this program. At March 31, 2025 and 2024, we had $33,661,000 and $1,695,000, respectively, of outstanding supplier obligations confirmed as valid under this program, included in accounts payable in the consolidated balance sheets. The following is a summary of the changes in outstanding supplier obligations confirmed as valid under this program: Year Ended March 31, 2025 Confirmed obligations outstanding at March 31, 2024 $ 1,695,000 Invoices confirmed as valid during the year 91,951,000 Confirmed invoices paid during the year (59,985,000 ) Confirmed obligations outstanding at March 31, 2025 $ 33,661,000 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 2025, we repurchased 542,134 shares of our common stock for $4,832,000. During fiscal 2024 and 2023, we did not repurchase any shares of our common stock. As of March 31, 2025, $23,577,000 was utilized and $13,423,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility and Convertible Notes. We retired the 1,379,141 shares repurchased under this program through March 31, 2025. 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. 45 Table of Contents During fiscal 2025, we adopted a written trading plan under Rule 10b5-1 of the SEC rule to facilitate share repurchases under our current authorized program. The adoption of a 10b5-1 plan allows us the ability to repurchase shares when we would be ordinarily restricted from purchases due to blackout periods or being in possession of material non-public information. Capital Expenditures and Commitments Our total capital expenditures were $6,066,000 for fiscal 2025 and $1,755,000 for fiscal 2024. These capital expenditures include (i) cash paid for the purchase of plant and equipment, (ii) equipment acquired under finance leases, and (iii) non-cash capital expenditures. Capital expenditures for fiscal 2025 primarily include the purchase of equipment for our current operations and our global growth initiatives. We expect to incur approximately $9,500,000 of capital expenditures primarily to support our global growth initiatives and maintenance of our facilities and equipment during fiscal 2026. We have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures. Contractual Obligations The following summarizes our contractual obligations and other commitments as of March 31, 2025 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 to5 years More than 5 years Finance lease obligations (1) $ 3,557,000 $ 1,396,000 $ 1,555,000 $ 606,000 $ - Operating lease obligations (2) 92,392,000 13,983,000 23,760,000 22,530,000 32,119,000 Revolving facility (3) 90,787,000 - 90,787,000 Convertible notes (4) 56,704,000 - 56,704,000 Accrued core payment (5) 7,287,000 3,404,000 3,883,000 - Core bank liability (6) 12,113,000 2,018,000 10,095,000 - Finished goods liabilities (7) 518,000 518,000 - - Unrecognized tax benefits (8) - - - - Customer allowances earned (9) 47,194,000 14,451,000 21,430,000 9,265,000 2,048,000 Total $ 310,552,000 $ 35,770,000 $ 60,723,000 $ 179,892,000 $ 34,167,000 (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 and certain equipment. (3) Obligations under our Revolving Facility mature on December 12, 2028. 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 Facility. (4) 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. 46 Table of Contents (5) Accrued core payment represents the amounts due for principal of $6,964,000 and interest payments of $323,000 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. (6) The core bank liability represents the amounts due for principal of $11,843,000 and interest payments of $270,000 to be made in connection with the return of Used Cores from our customers. (7) Finished goods liabilities represents the amounts due for principal of $518,000 and no interest payments to be made in connection with the purchase of finished goods from our customers. (8) We are unable to reliably estimate the timing of future payments related to uncertain tax position liabilities at March 31, 2025; therefore, future tax payment accruals related to uncertain tax positions in the amount of $1,362,000 have been excluded from the table above. (9) Customer allowances earned 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.