The seller’s price to the extent total compensation for certain executive officers exceeds $1 million (less the amount of any “excess parachute payments” as defined in Section 280G of the Code) in any taxable year of the corporation. However, under Section 162(m) of the Code, the deduction limit does not apply to certain “performance-based” compensation. Stock optionsbuyer is fixed or determinable, and SARs will satisfy the “performance-based” exception if (a) the awards are made by a qualifying compensation committee, (b) the plan sets the maximum number of shares that can be granted to any person within a specified period and (c) the compensation is based solely on an increase in the stock price after the grant date. The 2010 Plan has been designed to permit the plan administrator to grant stock options and SARs which will qualify as “performance-based compensation.” In addition, other performance-based awards under the 2010 Plan may be intended to constitute QPBC, as discussed above.
2003 Long-Term Incentive Plan. Upon the receipt of the approval of our shareholders of the Original 2010 Plan, the 2010 Plan replaced our 2003 Long-Term Incentive Plan on January 14, 2011 and no further grants of awards under can be made under the 2003 Long-Term Incentive Plan.
2004 Non-Employee Director Stock Option Plan. The purpose of our 2004 Non-Employee Director Stock Option Plan (the “Non-Employee Director Stock Option Plan”)Collectability is to foster and promote our long-term financial success and interests and to materially increase the value of the equity interests in the Company by: (a) increasing our ability to attract and retain talented men and women to serve on our Board of Directors, (b) increasing the incentives that these non-employee directors have to help us succeed and (c) providing our non-employee directors with an increased opportunity to share in our long-term growth and financial success.reasonably assured.
Under the Non-Employee Director Stock Option Plan, each non-employee director was granted options to purchase 25,000 shares of our common stock upon their election to our Board of Directors. In addition, each non-employee director was awarded an option to purchase an additional 3,000 shares of our common stock for each full year of service on our Board of Directors. The exercise price for each of these options was equal to the fair market value of our common stock on the date the option was granted. The exercise price of an option was payable only in cash or an equivalent acceptable to our Compensation Committee. The Non-Employee Director Stock Option Plan also permitted the “cashless” exercise of options granted under the Non-Employee Director Stock Option Plan. Options awarded under the Non-Employee Director Stock Option Plan were not transferable other than as designated by the grantee by will or by the laws of descent and distribution unless otherwise provided in the option agreements pursuant to which such Options were awarded. Other than the options described in this paragraph, no non-employee director shall be eligible to receive any equity interest in the Company in consideration of such non-employee director’s service on our board.
Each of these options has a ten-year term. One-third of the options will be exercisable immediately upon grant, and one-half of the remaining portion of each option grant will vest and become exercisable on the first and second anniversary dates of the date of grant. Any options which remain unvested at the time a non-employee director’s service as a member of our board terminates shall terminate upon such termination of service unless such termination results from such non-employee director’s death or occurs upon a change of control, in which case all of such unvested options shall immediately vest upon such death or Change of Control (as defined in the Non-Employee Director Stock Option Plan). In the event of a Change of Control (as defined in the Non-Employee Director Stock Option Plan), we may, after notice to the grantee, require the grantee to “cash out” his rights by transferring them to the Company in exchange for their equivalent “cash value.”
A total of 275,000 shares of common stock were reserved for grants of stock options under the Non-Employee Director Stock Option Plan. In March 2014, the Non-Employee Director Stock Option Plan was replaced and the Company will not make any further grants under this plan.
Tax Consequences. Under current tax laws, the grant of an option generally will not be a taxable event to the optionee, and we will not be entitled to a deduction with respect to such grant. Upon the exercise of an option, the non-employee director optionee will recognize ordinary income at the time of exercise equal to the excess of the then fair market value of the shares of common stock received over the exercise price. The taxable incomeFor products shipped free-on-board (“FOB”) shipping point, revenue is recognized upon exercise of a nonqualified option will be treated as compensation income subject to withholding, and we will be entitled to deduct as a compensation expense an amount equal to the ordinary income an optionee recognizes with respect to such exercise. When common stock received upon the exercise of a nonqualified option subsequently is sold or exchanged in a taxable transaction, the holder thereof generally will recognize capital gain (or loss) equal to the difference between the total amount realized and the fair market value of the common stock on the date of exercise;shipment. For products shipped FOB destination, revenues are recognized on the characterestimated or actual date of such gain or lossdelivery. We include shipping and handling charges in the gross invoice price to customers and classify the total amount as long-term or short-term capital gain or loss will depend uponrevenue. All shipping and handling costs are expensed as incurred and included in cost of sales.
Revenue Recognition; Net-of-Core-Value Basis
The price of a finished remanufactured product sold to customers is generally comprised of separately invoiced amounts for the holding periodRemanufactured Core included in the product (“Remanufactured Core value”) and the unit value. The unit value is recorded as revenue based on our then current price list, net of applicable discounts and allowances. Based on our experience, contractual arrangements with customers and inventory management practices, a significant portion of the sharesremanufactured automotive parts we sell to customers are replaced by similar Used Cores sent back for credit by customers under our core exchange program. In accordance with our net-of-core-value revenue recognition policy, we do not recognize the Remanufactured Core value as revenue when the finished products are sold. We generally limit the number of Used Cores sent back under the core exchange program to the number of similar Remanufactured Cores previously shipped to each customer.
Revenue Recognition — Core Revenue
Full price Remanufactured Cores: When we ship a remanufactured product, we invoice certain customers for the Remanufactured Core value portion of the product at the full Remanufactured Core sales price but do not recognize revenue for the Remanufactured Core value at that time. For these Remanufactured Cores, we recognize core revenue based upon an estimate of the rate at which our customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under our core exchange program.
Nominal price Remanufactured Cores: We invoice other customers for the Remanufactured Core value portion of the product shipped at a nominal Remanufactured Core price. Unlike the full price Remanufactured Cores, we only recognize revenue from nominal Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program when we believe that we have met all of the following exercise.criteria:
We have a signed agreement with the customer covering the nominally priced Remanufactured Cores not expected to be sent back under the core exchange program, and the agreement must specify the number of Remanufactured Cores our customer will pay cash for in lieu of sending back a similar Used Core under our core exchange program and the basis on which the nominally priced Remanufactured Cores are to be valued (normally the average price per Remanufactured Core stipulated in the agreement).
The contractual date for reconciling our records and customer’s records of the number of nominally priced Remanufactured Cores not expected to be replaced by similar Used Cores sent back under our core exchange program must be in the current or a prior period.
The reconciliation must be completed and agreed to by the customer.
The amount must be billed to the customer.
AmendmentRevenue Recognition; General Right of Return
We allow our customers to return goods to us 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 with our customers and Termination. Our Board of Directors mayindustry practice, our customers from time to time amend,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, we allow a higher level of returns in connection with significant restocking orders. In addition, we allow customers to return goods to us that their end-user consumers have returned to them. We seek to limit the aggregate general right of returns to less than 20% of unit sales.
We provide for such anticipated returns of inventory by reducing revenue and our Boardthe related cost of Directors may terminate,sales for the Non-Employee Director Stock Option Plan, provided that no such action shall adversely affect any material vested benefits or rightsunits estimated to be returned as further described under the Non-Employee Director Stock Option Plan without the consent of the non-employee director affected by such action. In addition, no amendment may be made without the approval of our shareholders if shareholder approval is necessary in order to comply with applicable law.
2014 Non-Employee Director Incentive Award Plan. On February 23, 2014, our Board of Directors approved our 2014 Non-Employee Director Incentive Award Plan (the “2014 Plan”). On March 31, 2014, our shareholders approved the 2014 Plan. The purpose of the 2014 Plan is to enhance our valuecaptions “Customer Finished Goods Returns Accrual” and promote our success by linking the individual interests of non-employee directors to the interests of our shareholders and by providing such individuals with an incentive for outstanding performance to generate superior returns to our shareholders. The 2014 Plan is also intended to provide us with flexibility in our ability to motivate, attract, and retain the services of such individuals upon whose judgment, interest, and performance our success is largely dependent. The 2014 Plan does not provide for awards to employees or consultants of the Company. The 2014 Plan supersedes and replaces our 2004 Non-Employee Director Stock Option Plan in its entirety.
Director Equity Compensation Policy
As contemplated by the 2014 Plan, the Board adopted a director equity compensation policy (the “Policy”) upon effectiveness of the 2014 Plan. The Board may, at any time and from time to time, terminate, modify, amend or suspend the Policy; provided, however, that, without the prior consent of the Non-Employee Directors, no such action may adversely affect any rights or obligations with respect to any earned but unpaid Awards hereunder, whether or not the amounts of such Awards have been computed and whether or not such Awards are then payable. Each equity award described in the Policy shall be subject to the terms and conditions of the Plan and the applicable Award Agreement.
Under the 2014 Plan, upon a Non-Employee Director’s initial election or appointment (as applicable) to the Board on or after the effective date of the 2014 Plan, such Non-Employee Director shall automatically be granted, without further action by the Company, the Board, or the Company’s stockholders, an award of Restricted Stock Units (as defined in the 2014 Plan) to acquire a number of shares of Common Stock (rounded down to the nearest whole number) equal to the quotient obtained by dividing (i) $100,000 by (ii) the Fair Market Value (as defined in the 2014 Plan) of a share of Common Stock on the date of grant (rounded down to the nearest two decimal places) (each such grant, an “Initial RSU Award”). On the date of each annual meeting of the Company’s stockholders to occur on or after the effective date of the 2014 Plan, each Non-Employee Director shall automatically be granted, without further action by the Company, the Board, or the Company’s stockholders, an award of Restricted Stock Units to acquire a number of shares of Common Stock (rounded down to the nearest whole number) equal to the quotient obtained by dividing (i) $50,000 by (ii) the Fair Market Value (as defined in the 2014 Plan) of a share of Common Stock on the date of grant (rounded down to the nearest two decimal places) (each such grant, an “Annual RSU Award” and, together with the Initial RSU Awards, the “RSU Awards”)“Inventory Unreturned”.
One-third (1/3rd) of each RSU Award will vestOur allowance for warranty returns is established based on eacha historical analysis of the first (1st), second (2nd)level of this type of return as a percentage of total unit sales. Stock adjustment returns do not occur at any specific time during the year, and third (3rd) anniversariesthe expected level of these returns cannot be reasonably estimated based on a historical analysis. Our 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 to us by our customers. The return rate for stock adjustments is calculated based on expected returns within the normal operating cycle of one year.
Customer Finished Goods Returns Accrual
The customer finished goods returns accrual represents the non-core sales value of estimated warranty and stock adjustment 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 $17,805,000 and $17,667,000 at March 31, 2018 and 2017, respectively.
Accrued Core Payment
The accrued core payment represents the full Remanufactured Core sales price of Remanufactured Cores we have purchased from our customers, generally in connection with new business, which are held by these customers and remain on their premises. At the same time, we record the long-term core inventory for the Remanufactured Cores purchased at its cost, determined as noted under the caption “Long-term Core Inventory”. The difference between the full Remanufactured Core sales price of Remanufactured Cores and its related cost is treated as sales allowance reducing revenue when the purchases are made. 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 agreement and historical experience.
The repayments for these Remanufactured Core inventory purchases are made through the issuance of credits against that customer’s receivables either on a one-time basis or over an agreed-upon period. The accrued core payment is recorded as current and noncurrent liability in the consolidated balance sheets based on whether repayments will occur within the normal operating cycle of one year. Our net accrued core payment was $35,009,000 and $24,063,000 at March 31, 2018 and 2017, respectively. This increase in our accrued core payment was due to increased core purchases in connection with new business awarded to us during fiscal 2018.
Sales Incentives
We provide various marketing allowances to our customers, including sales incentives and concessions. 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 date of grant, subject to the holder’s continued status as a Non-Employee Director through each applicable vesting date; provided, however, that each RSU Award will vest in full (to the extent then-unvested) upon the holder’s Termination of Service (as defined in the 2014 Plan) due to his or her death. In addition, each RSU Award will vest in full immediately prior to a Change in Control (as defined in the 2014 Plan), subject to the holder’s continued status as a Non-Employee Director through at least immediately prior to such Change in Control (as defined in the 2014 Plan).
On June 10, 2015, the Board amended and restated the Director Compensation Corporate Policy. The only change effectuated by the amendment and restatement was the date of the Annual RSU Awards, which was changed to the date of the adoption of the amendment and restatement and each anniversary thereof.incentive provided.
DescriptionGoodwill
We evaluate goodwill for impairment at least annually during the fourth quarter of each fiscal year or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. We have concluded that there is one reporting unit and therefore test goodwill for impairment at the entity level. In testing for goodwill impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a two-step impairment test. We test goodwill for impairment under the two-step impairment test by first comparing the carrying value of net assets to the fair value of the 2014 Planreporting unit. If the fair value of the reporting unit exceeds the carrying value, goodwill is not considered impaired and no further testing is required. If the carrying value of the reporting unit exceeds the fair value, goodwill is potentially impaired and the second step of the impairment test must be performed. In the second step, we would compare the implied fair value of the goodwill to its carrying value to determine the amount of the impairment loss, if any. We completed the required annual testing of goodwill for impairment during the fourth quarter of fiscal 2018, and determined through the qualitative assessment that our goodwill of $2,551,000 at March 31, 2018 is not impaired.
Eligibility; AdministrationIntangible Assets
Our intangible assets other than goodwill are finite–lived and amortized on a straight-line basis over their respective useful lives. We analyze our finite-lived intangible assets for impairment when and if indicators of impairment exist. At March 31, 2018, our net intangible assets were $3,766,000 and there were no indicators of impairment.
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 Directorvaluation allowance is provided to reduce deferred tax assets when it is more likely than not that a portion of the Company who isdeferred tax asset will not an officerbe realized.
The primary components of our income tax expense are (i) the current liability or other employee (as determinedrefund due for federal, state and foreign income taxes and (ii) the change in the amount of the net deferred income tax asset, including the effect of any change in the valuation allowance.
In December 2017, new tax legislation was enacted in the United States (Tax Reform Act) which resulted in significant changes to income tax expense. As a result of the Tax Reform Act, we re-measured certain deferred tax assets and liabilities based on the newly enacted federal rate of 21%. Accordingly, the federal net deferred tax assets were written down to account for the change. These tax changes represent provisional amounts based on our current interpretation of the Tax Reform Act and may change as we receive additional clarification and implementation guidance. We will continue to analyze the effects of the Tax Reform Act on our financial statements and operations. Any additional impacts from the enactment of the Tax Reform Act will be recorded as they are identified during the measurement period as provided for in accordance with Section 3401(c)Staff Accounting Bulletin No. 118.
Realization of the Codedeferred 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 the Treasury Regulations thereunder)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 the Company or of any Affiliate (each “Non-Employee Director”)a deferred tax assets will be eligiblerealized. In evaluating our ability to receive awards underrecover 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 2014 Plan. AsJuly 2017 acquisition have been offset completely by a valuation allowance due to the uncertainty of March 31, 2016, seven Non-Employee Directors are eligible to participatetheir utilization in future periods. Should the 2014 Plan. Our 2014 Plan will be administered byactual amount differ from our Board, which may delegate its duties and responsibilities to committeesestimate, the amount of our directors and/or officers, subject to certain limitations that mayvaluation allowance could be imposed under applicable law or regulation, including Section 16 of the Exchange Act and/or stock exchange rules, as applicable. The plan administrator will have the authority to grant and set the terms of all awards under, make all determinations and interpretations under, prescribe all forms for use with, and adopt rules for the administration of, our 2014 Plan, subject to its express terms and conditions.
Under our 2014 Plan, an aggregate of 342,000 shares of our common stock are available for issuance under awards granted pursuant to our 2014 Plan, which shares may be treasury shares, authorized but unissued shares, or shares purchased in the open market. The number of authorized shares will be reduced by 1 share for each share issued pursuant to a stock option or SAR and by 1.7 shares for each share subject to a “full-value” equity award (which generally includes awards other than stock options and SARs, such as restricted stock and restricted stock units).
Our 2014 Plan provides for the grant of nonqualified stock options (“NSOs”), restricted stock, restricted stock units (“RSUs”), performance awards, dividend equivalent rights, stock payments, deferred stock, deferred stock units and SARs. Certain awards under our 2014 Plan may constitute or provide for a deferral of compensation, subject to Section 409A of the Code, which may impose additional requirements on the terms and conditions of such awards. All awards will be set forth in award agreements, which will detail all terms and conditions of the awards, including any applicable vesting and payment terms. Awards will generally be settled in shares of our common stock, but the plan administrator may provide for cash settlement of any award. A brief description of each award type follows.
| · | Stock Options. Stock options provide for the purchase of shares of our common stock in the future at an exercise price set on the grant date. The exercise price of a stock option may not be less than 100% of the fair market value of the underlying share on the date of grant, except with respect to certain substitute options granted in connection with a corporate transaction. The term of a stock option may not be longer than ten years. Vesting conditions determined by the plan administrator may apply to stock options, may include continued service, performance and/or other conditions. |
| · | Stock Appreciation Rights. SARs entitle their holder, upon exercise, to receive from us an amount equal to the appreciation of the shares subject to the award between the grant date and the exercise date. The exercise price of a SAR may not be less than 100% of the fair market value of the underlying share on the date of grant (except with respect to certain substitute SARs granted in connection with a corporate transaction) and the term of a SAR may not be longer than ten years. Vesting conditions determined by the plan administrator may apply to SARs, and may include continued service, performance and/or other conditions. |
| · | Restricted Stock; Deferred Stock; RSUs; Performance Awards. Restricted stock is an award of nontransferable shares of our common stock that remain forfeitable unless and until specified conditions are met, and which may be subject to a purchase price. For shares of restricted stock with performance-based vesting, dividends which are paid prior to vesting will only be paid to the extent that the performance-based vesting conditions are subsequently satisfied and the shares vest. Deferred stock and RSUs are contractual promises to deliver shares of our common stock in the future, which may also remain forfeitable unless and until specified conditions are met. Delivery of the shares underlying these awards may be deferred under the terms of the award or at the election of the participant, if the plan administrator permits such a deferral. Performance awards are contractual rights to receive a range of shares of our common stock, cash, or a combination of cash and shares, in the future based on the attainment of specified performance goals, in addition to other conditions which may apply to these awards. Conditions applicable to restricted stock, deferred stock, RSUs and performance shares may be based on continuing service with us or our affiliates, the attainment of performance goals and/or such other conditions as the plan administrator may determine. |
impacted.
| · | Stock Payments. Stock payments are awards of fully vested shares of our common stock that may, but need not be, made in lieu of base salary, bonus, fees or other cash compensation otherwise payable to any individual who is eligible to receive awards. |
Financial Risk Management and Derivatives
| · | Dividend Equivalent Rights. Dividend equivalent rights represent the right to receive the equivalent value of dividends paid on shares of our common stock and may be granted alone or in tandem with awards other than stock options or SARs. Dividend equivalents are credited as of dividend payments dates during the period between the date an award is granted and the date such award vests, is exercised, is distributed or expires, as determined by the plan administrator. Dividend equivalents with respect to an award with performance-based vesting that are based on dividends paid prior to the vesting of such award will only be paid to the extent that the performance-based vesting conditions are subsequently satisfied and the award vests. |
We are exposed to market risk from material movements in foreign exchange rates between the U.S. dollar and the currencies of the foreign countries in which we operate. As a result of our significant operations in Mexico, our primary risk relates to changes in the rates between the U.S. dollar and the Mexican peso. To mitigate this currency risk, we enter into forward foreign exchange contracts to exchange U.S. dollars for Mexican pesos. We also enter into forward foreign exchange contracts to exchange U.S. dollars for Chinese yuan in order to mitigate risk related to our purchases and payments to our Chinese vendors. The extent to which we use forward foreign 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 the exchange rates. We do not engage in currency speculation or hold or issue financial instruments for trading purposes. These contracts generally expire in a year or less. Any changes in the fair value of foreign exchange contracts are accounted for as an increase or decrease to general and administrative expenses in current period earnings.
Performance Awards. AllShare-based Payments
In accounting for share-based compensation awards, may be granted as performance awards (in addition to those identified above as performance awards), meaningwe follow the accounting guidance for equity-based compensation, which requires that any suchwe measure the cost of employee services received in exchange for an award will be subject to vesting and/or paymentof equity instruments based on the attainment of specified performance goals.
Certain Transactions. The plan administrator has broad discretion to equitably adjust the provisions of our 2014 Plan, as well as the terms and conditions of existing and future awards, to prevent the dilution or enlargement of intended benefits and facilitate necessary or desirable changes in the event of certain transactions and events affecting our common stock, such as stock dividends, stock splits, mergers, acquisitions, consolidations and other corporate transactions. In addition, in the event of certain non-reciprocal transactions with our shareholders known as “equity restructurings,” the plan administrator will make equitable adjustments to our 2014 Plan and outstanding awards. In the event of a change in controlgrant-date fair value of the company (as defined in our 2014 Plan),award. The cost associated with stock options is estimated using the surviving entity must assume outstanding awards or substitute economically equivalent awards for such outstanding awards; however, ifBlack-Scholes option-pricing model. The cost associated with restricted stock units is measured based on the surviving entity refuses to assume or substitute for outstanding awards, then the administrator may cause all awards will vest in full immediately prior to the transaction. If the surviving entity assumes or substitutes for outstanding awards, and a participant undergoes a terminationnumber of employment by reason of “Involuntary Termination” or “Good Reason” (both as defined in our 2014 Plan) on or within two years following the change in control, then all of the participant’s awards assumed or substituted for will vest in full. Individual award agreements may provide for additional accelerated vesting and payment provisions.
Foreign Participants; Transferability; Participant Payments. The plan administrator may modify award terms, establish sub-plans and/or adjust other terms and conditions of awards, subject to the share limits described above, in order to facilitate grants of awards subject to the laws and/or stock exchange rules of countries outside of the United States. With limited exceptions for estate planning, domestic relations orders, certain beneficiary designationsshares granted and the laws of descent and distribution, awards under our 2014 Plan are generally non-transferable prior to vesting and are exercisable only by the participant. With regard to tax withholding, exerciseclosing price and purchase price obligations arising in connection with awards under our 2014 Plan, the plan administrator may, in its discretion, accept cash or check, shares of our common stock that meet specified conditions,on the grant date, subject to continued employment. The cost of equity instruments is recognized in the consolidated statements of income on a “market sell order” or such other considerationstraight-line basis over the period during which an employee is required to provide service in exchange for the award. In addition, we account for forfeitures as it deems suitable.they occur.
Plan AmendmentSubsequent Events
Credit Facility
On June 5, 2018 we entered into an Amended and Termination. Restated Credit Facility (the “New Credit Facility”), with the lenders party thereto, and PNC Bank, National Association, as administrative agent, consisting of (i) a $200,000,000 revolving loan facility, subject to borrowing base restrictions, a $20,000,000 sublimit for borrowings by Canadian borrowers, and a $15,000,000 sublimit for letters of credit (the “New Revolving Facility) and (ii) a $30,000,000 term loan facility (the “New Term Loans”). The Board may amend or terminate our 2014 Plan at any time; however, except inloans under the New Credit Facility mature on June 5, 2023. In connection with certain changesthe New Credit Facility, the lenders were granted a security interest in capital structure, shareholder approval willsubstantially all of our assets.
Results of Operations
The following discussion and analysis should be required for any amendment that increasesread together with the number of shares available under our 2014 Plan or “reprices” any stock option or SAR (including any grant of cash or another award in respect of any stock option or SAR when the option or SAR price per share exceeds the fair market value of the underlying shares). No award may be granted pursuant to the 2010 Plan after the tenth anniversary of the date on which we adopt our 2014 Plan.financial statements and notes thereto appearing elsewhere herein.
2016 Plan Federal Income Tax ConsequencesThe following summarizes certain key operating data for the periods indicated:
| | Fiscal Years Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Gross profit percentage | | | 24.7 | % | | | 27.3 | % | | | 27.4 | % |
Cash flow (used in) provided by operations | | $ | (13,944,000 | ) | | $ | (5,269,000 | ) | | $ | 15,334,000 | |
Finished goods turnover (1) | | | 6.3 | | | | 6.7 | | | | 6.5 | |
(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. |
Fiscal 2018 Compared to Fiscal 2017
Net Sales and Gross Profit
The following is a general summary under current law of the material federal income tax consequences to participants in our 2014 Plan. This summary deals with the general tax principles that applysummarizes net sales and is provided only for general information. Some kinds of taxes, such as state, local and foreign income taxes, are not discussed.gross profit:
| | Fiscal Years Ended March 31, | |
| | 2018 | | | 2017 | |
| | | | | | |
Net sales | | $ | 428,072,000 | | | $ | 421,253,000 | |
Cost of goods sold | | | 322,199,000 | | | | 306,207,000 | |
Gross profit | | | 105,873,000 | | | | 115,046,000 | |
Gross profit percentage | | | 24.7 | % | | | 27.3 | % |
Non-Qualified Options. Net SalesThe grant. Our net sales for fiscal 2018 increased by $6,819,000, or 1.6%, to $428,072,000 compared to net sales for fiscal 2017 of a NSO will not be a taxable event for the grantee or result in a compensation expense deduction for us. Upon exercising a NSO, a grantee will recognize ordinary income in an amount equal$421,253,000. Our prior year net sales were positively impacted by $9,261,000 due to the difference between the exercise pricechange in our estimate for anticipated stock adjustment returns. The increase in our fiscal 2018 net sales was primarily due to growth in sales of our rotating electrical products and the fair market valuebrake booster products, in addition to sales of the common stock on the datediagnostic equipment as a result of exercise. Upon a subsequent sale or exchangeour July 2017 acquisition. Sales of shares acquired pursuant to the exerciserotating electrical products represented 78.0% and 78.6%, wheel hub products represented 16.9% and 18.5%, brake master cylinder products represented 2.3% and 2.9%, and other products represented 2.8% and 0%, of a NSO, the grantee will have taxable capital gain or loss, measurednet sales for fiscal 2018 and 2017, respectively. Our net sales were further impacted by the difference between the amount realized on the disposition and the tax basis of the shares of common stock (generally, the amount paid for the shares plus the amount treatedcertain customer allowances as ordinary income at the time the option was exercised).
If we comply with applicable reporting requirements, we will be entitled to a business expense deductiondiscussed below in the same amount and generally at the same time as the grantee recognizes ordinary income.Gross Profit paragraph.
Restricted Stock.Gross Profit. A grantee who is awarded sharesOur gross profit percentage was 24.7% for fiscal 2018 compared to 27.3% for fiscal 2017. Gross profit for fiscal 2018 was impacted by $8,459,000 for customer allowances and initial return and stock adjustment accruals related to new business entered into during fiscal 2018, less a cost of restrictedgoods sold offset of $649,000, transition expenses of $1,831,000 in connection with the expansion of our operations in Mexico, and a cost of goods sold impact of $269,000 for inventory step-up amortization. In addition, our gross profit for fiscal 2018 was further impacted by higher returns and lower overhead absorption. Our gross profit for fiscal 2017 was impacted by $12,727,000 for customer allowances and initial return and stock will not recognize any taxable incomeadjustment accruals related to new business less a cost of goods sold offset of $568,000, and a cost of goods sold impact of $1,457,000 for federal income tax purposesstart-up and ramp-up costs incurred related to our launch of brake power boosters. This decrease was partially offset by a 0.4% increase from the change in the year of the award, provided that the shares of commonestimate relating to stock are subject to restrictions requiring the restricted stock to be nontransferable and subject to a substantial risk of forfeiture. However, the grantee may elect under Section 83(b) of the Code to recognize compensation income in the year of the award in an amount equal to the fair market value of the common stock on the date of the award, less the purchase price, if any, determined without regard to the restrictions. If the grantee does not make such a Section 83(b) election, the fair market value of the common stock on the date the restrictions lapse, less the purchase price, if any, will be treated as compensation income to the grantee and will be taxable in the year the restrictions lapse. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.adjustments.
Restricted Stock Units. There are no immediate tax consequencesIn addition, our gross profit was further impacted by the lower of receiving an awardcost or net realizable value revaluation for remanufactured cores held at customers’ locations of restricted stock units under our 2014 Plan. A grantee who is awarded restricted stock units will be required to recognize ordinary income in an amount equal to the fair market value of shares issued to such grantee at the end of the restriction period or, if later, the date on which shares are delivered in respect of the RSUs. If the delivery date of the shares is deferred more than a short period after vesting, employment taxes will be due in the year of vesting. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount$9,091,000 for fiscal 2018 and generally at the same time as the grantee recognizes ordinary income.
Dividend Equivalent Awards. Grantees who receive dividend equivalent awards will be required to recognize ordinary income equal to the amount distributed to the grantee pursuant to the award. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.
Stock Appreciation Rights. There are no immediate tax consequences of receiving an award of SARs under the Incentive Award Plan. Upon exercising a SAR, a grantee will recognize ordinary income in an amount equal to the difference between the exercise price and the fair market value of the common stock on the date of exercise. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.
Performance Share Awards. Grantees who receive performance share awards generally will not realize taxable income at the time of the grant of the performance shares, and we will not be entitled to a deduction at that time. When the award is paid, whether in cash or common stock, the grantee will have ordinary income, and, if we comply with applicable reporting requirements, we will be entitled to a corresponding deduction.
Stock Payment Awards. Grantees who receive a stock payment in lieu of a cash payment that would otherwise have been made will be taxed as if the cash payment has been received, and, if we comply with applicable reporting requirements, we will have a deduction in the same amount.$5,788,000 for fiscal 2017.
Operating Expenses
The following summarizes operating expenses:
| | Fiscal Years Ended March 31, | |
| | 2018 | | | 2017 | |
| | | | | | |
General and administrative | | $ | 35,527,000 | | | $ | 31,124,000 | |
Sales and marketing | | | 15,030,000 | | | | 12,126,000 | |
Research and development | | | 5,692,000 | | | | 3,824,000 | |
| | | | | | | | |
Percent of net sales | | | | | | | | |
| | | | | | | | |
General and administrative | | | 8.3 | % | | | 7.4 | % |
Sales and marketing | | | 3.5 | % | | | 2.9 | % |
Research and development | | | 1.3 | % | | | 0.9 | % |
Deferred StockGeneral and Administrative.. A grantee receiving deferred stock generally will not have taxable income upon the issuance Our general and administrative expenses for fiscal 2018 were $35,527,000, which represents an increase of the deferred stock$4,403,000, or 14.1%, from general and we will not then be entitledadministrative expenses for fiscal 2017 of $31,124,000. The increase in fiscal 2018 was primarily due to (i) $1,573,000 of increased employee-related expenses to support our growth initiatives, (ii) a deduction. However, when shares underlying the deferred stock are issuedgain of $2,313,000 recorded during fiscal 2018 due to the grantee, he or she will realize ordinary income and, if we comply with applicable reporting requirements, we will be entitled to a deductionchange in an amount equal to the difference between the fair market value of the shareswarrant liability compared to a gain of $3,764,000 recorded during fiscal 2017, (iii) $1,093,000 of increased general and administrative expenses at the dateour offshore locations due primarily to support our growth initiatives and fluctuations in foreign currency exchange rates, (iv) $913,000 of issuance over the purchase price, if any, paid for the deferred stock. Employment taxes with respectgeneral and administrative expenses attributable to these awards will generally be due in the yearour July 2017 acquisition, and (v) $285,000 of vestingincreased travel. These increases were partially offset by $1,341,000 of decreased legal and other professional services.
Performance Awards. Sales and Marketing. Our sales and marketing expenses for fiscal 2018 increased $2,904,000, or 23.9%, to $15,030,000 from $12,126,000 for fiscal 2017. The awardincrease was due primarily (i) $1,305,000 of a performance or annual incentive award will have no federal income tax consequencessales and marketing expenses attributable to our July 2017 acquisition, (ii) $1,012,000 for us or for the grantee. The paymentpersonnel added to support our growth initiatives, and (iii) $503,000 of the award is taxable to a grantee as ordinary income. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.increased commissions.
Section 409AResearch and Development. Our research and development expenses increased by $1,868,000, or 48.8%, to $5,692,000 for fiscal 2018 from $3,824,000 for fiscal 2017. This increase was due primarily to (i) $1,755,000 attributable to our July 2017 acquisition and (ii) $399,000 for personnel added to support our growth initiatives. These increases were partially offset by (i) $170,000 of decreased expense for supplies and (ii) $119,000 of decreased expense for outside services.
Interest Expense
Interest Expense, net. Our interest expense, net for fiscal 2018 increased $2,351,000, or 18.0%, to $15,445,000 from $13,094,000 for fiscal 2017. The increase in interest expense in fiscal 2018 was due primarily to increased use of our accounts receivable discount programs, increased average outstanding borrowings as we continue to build our inventory to support anticipated higher sales, and the write-off of $231,000 of debt issuance costs.
Provision for Income Taxes
Income Tax. Our income tax expense was $17,863,000, an effective tax rate of 52.3%, and $17,305,000, an effective tax rate of 31.5% during fiscal 2018 and 2017, respectively. On December 22, 2017, the Tax Reform Act was enacted into law, which changed various corporate income tax provisions within the existing Internal Revenue Code. Certain typesThe Tax Reform Act, among other things, lowered the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of awards under our 2014 Plan, including, but not limitedforeign subsidiaries. As a result, we recorded a one-time non-cash tax charge of $4,863,000 related to RSUsthe revaluation of deferred tax assets and deferred stock, may constitute, or provide for,liabilities and a deferralone-time tax charge of compensation subject$530,000 due to Section 409Athe transition tax on deemed repatriation of the Code. Unless certain requirements set forth in Section 409A of the Code are complied with, holders of such awards may be taxed earlier than would otherwise be the case (e.g., at the time of vesting instead of the time of payment) and may be subject to an additional 20% penalty tax (and, potentially, certain interest penalties). To the extent applicable, our 2014 Plan and awards granted under our 2014 Plan are intended to be structured and interpreted to comply with Section 409A of the Code and the Department of Treasury regulations and other interpretive guidance that may be issued under Section 409A of the Code.
2016 Director Compensation
We use a combination of cash and equity incentives to compensate our non-employee directors. Directors who are also our employees received no compensation for their service on our Board of Directors in Fiscal 2016. To determine the appropriate level of compensation for our non-employee directors, we take into consideration the significant amount of time and dedication required by the directors to fulfill their duties on our Board of Directors and Board of Directors committees as well as the need to continue to attract highly qualified candidates to serve on our Board of Directors. The information provided in the following table reflects the compensation received by our directors for their service on our Board of Directors in Fiscal 2016.
Name | | Fees Earned or Paid in Cash | | | Stock Awards (1) | | | Option Awards (1) | | | All Other Compensation | | | Total | |
| | | | | | | | | | | | | | | |
Scott J. Adelson | | $ | 55,000 | | | $ | 50,000 | | | $ | - | | | $ | - | | | $ | 105,000 | |
Rudolph Borneo | | $ | 84,000 | | | $ | 50,000 | | | $ | - | | | $ | - | | | $ | 134,000 | |
David Bryan | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Joseph Ferguson | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Philip Gay | | $ | 99,000 | | | $ | 50,000 | | | $ | - | | | $ | - | | | $ | 149,000 | |
Mel Marks (2) | | $ | 55,000 | | | $ | 50,000 | | | $ | - | | | $ | 150,000 | | | $ | 255,000 | |
Duane Miller | | $ | 80,626 | | | $ | 50,000 | | | $ | - | | | $ | - | | | $ | 130,626 | |
Jeffrey Mirvis | | $ | 70,000 | | | $ | 50,000 | | | $ | - | | | $ | - | | | $ | 120,000 | |
(1) | Award amounts reflect the aggregate grant date fair value of the awards. |
(2) | On March 12, 2016, Mel Marks, a member of the Board of Directors passed away. |
Each of our non-employee directors receives annual compensation of $40,000 and is paid a fee of $3,000 for attending each Board of Directors meeting, $2,000 for attending each Audit Committee meeting and $1,000 for each Compensation Committee meeting. Each director is also reimbursed for reasonable out-of-pocket expenses incurred to attend Board of Directors or Board of Directors committee meetings. We pay Mr. Gay an additional $20,000 per year for assuming the responsibility for being Chairman of our Audit and Ethics Committees, we pay Mr. Borneo an additional $5,000 per year for assuming the responsibility for being Chairman of our Compensation Committee, and beginning August 2015 we pay Mr. Miller an additional $2,500 for being Chairman of our Nominating and Corporate Governance Committee.accumulated foreign income, during fiscal 2018.
UnderIn addition, the effective tax rate for fiscal 2018 is a blended rate reflecting the estimated benefit of one quarter of the federal tax rate reduction for fiscal 2018.
Fiscal 2017 Compared to Fiscal 2016
Net Sales and Gross Profit
The following summarizes net sales and gross profit:
| | Fiscal Years Ended March 31, | |
| | 2017 | | | 2016 | |
| | | | | | |
Net sales | | $ | 421,253,000 | | | $ | 368,970,000 | |
Cost of goods sold | | | 306,207,000 | | | | 268,046,000 | |
Gross profit | | | 115,046,000 | | | | 100,924,000 | |
Gross profit percentage | | | 27.3 | % | | | 27.4 | % |
Net Sales. Our net sales for fiscal 2017 increased by $52,283,000, or 14.2%, to $421,253,000 compared to net sales for fiscal 2016 of $368,970,000. The increase in our 2014 Non-Employee Director Incentive Award Plan, each non-employee directornet sales was across all existing product lines. $9,261,000 of this increase is granted an awarddue to the change in our estimate for anticipated stock adjustment returns. Sales of restrictedrotating electrical products represented 78.6% and 78.7%, wheel hub products represented 18.5% and 19.6%, and brake master cylinder products represented 2.9% and 1.7%, of net sales for fiscal 2017 and 2016, respectively. The increase in net sales was partially offset by allowances and returns related to new business as discussed below in the Gross Profit paragraph.
Gross Profit. Our gross profit percentage remained substantially consistent at 27.3% for fiscal 2017 compared to 27.4% for fiscal 2016. Our gross profit for fiscal 2017 was impacted by $12,727,000 for customer allowances and initial return and stock units withadjustment accruals related to new business less a grant date fair valuecost of $100,000 upon their electiongoods sold offset of $568,000, and a cost of goods sold impact of $1,457,000 for start-up and ramp-up costs incurred related to our Boardlaunch of Directors. In addition, each non-employee director is awarded restrictedbrake power boosters. This decrease was partially offset by a 0.4% increase from the change in estimate relating to stock units withadjustments. Our gross profit for fiscal 2016 was impacted by $14,364,000 for customer allowances related to new business less a grant date fair valuecost of $50,000goods sold offset of $809,000, and a cost of goods sold impact of $43,000 for each full yearstart-up costs incurred related to our launch of service on our Board of Directors.brake power boosters and $453,000 for inventory step-up amortization.
IndemnificationIn addition, our gross profit was further impacted by the lower of Executive Officerscost or net realizable value revaluation for remanufactured cores held at customers’ locations of $5,788,000 for fiscal 2017 and Directors
Article Seven of our Restated Certificate of Incorporation provides, in part, that to the extent required by New York Business Corporation Law, or NYBCL, no director shall have any personal liability to us or our shareholders$2,700,000 for damage for any breach of duty as such director, provided that each such director shall be liable under the following circumstances: (a) in the event that a judgment or other final adjudication adverse to such director establishes that his acts or omissions were in bad faith, involved intentional misconduct or a knowing violation of law or that such director personally gained in fact a financial profit or other advantage to which such director was not legally entitled or that such director’s acts violated Section 719 of the NYBCL or (b) for any act or omission prior to the adoption of Article Seven of our Restated Certificate of Incorporation.
Article Nine of our Amended and Restated Bylaws provide that we shall indemnify any person, by reason of the fact that such person is or was a director or officer of our Company or served any other corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise in any capacity at our request, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorney’s fees incurred as a result of an action or proceeding, or any appeal therefrom, provided, however, that no indemnification shall be made to, or on behalf of, any director or officer if a judgment or other final adjudication adverse to such director or officer establishes that (a) his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated, or (b) he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled.
We may purchase and maintain insurance for our own indemnification and for that of our directors and officers and other proper persons as described in Article Nine of our Amended and Restated Bylaws. We maintain and pay premiums for directors’ and officers’ liability insurance policies.
We are incorporated under the laws of the State of New York and Sections 721-726 of Article 7 of the NYBCL provide for the indemnification and advancement of expenses to directors and officers. Section 721 of the NYBCL provides that indemnification and advancement of expenses provisions contained in the NYBCL shall not be deemed exclusive of any rights which a director or officer seeking indemnification or advancement of expenses may be entitled, provided no indemnification may be made on behalf of any director or officer if a judgment or other final adjudication adverse to the director or officer establishes that his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled.
Section 722 of the NYBCL permits, in general, a New York corporation to indemnify any person made, or threatened to be made, a party to an action or proceeding by reason of the fact that he or she was a director or officer of that corporation, or served another entity in any capacity at the request of that corporation, against any judgment, fines, amounts paid in settlement and reasonable expenses, including attorney’s fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such person acted in good faith, for a purpose he or she reasonably believed to be in, or, in the case of service of another entity, not opposed to, the best interests of that corporation and, in criminal actions or proceedings, who in addition had no reasonable cause to believe that his or her conduct was unlawful. However, no indemnification may be made to, or on behalf of, any director or officer in a derivative suit in respect of (a) a threatened action or a pending action that is settled or otherwise disposed of or (b) any claim, issue or matter for which the person has been adjudged to be liable to the corporation, unless and only to the extent that a court in which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that the person is fairly and reasonably entitled to indemnify for that portion of settlement and expenses as the court deems proper.
Section 723 of the NYBCL permits a New York corporation to pay in advance of a final disposition of such action or proceeding the expenses incurred in defending such action or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount as, and to the extent, required by statute. Section 724 of the NYBCL permits a court to award the indemnification required by Section 722.fiscal 2016.
Section 725 provides for repayment of such expenses when the recipient is ultimately found not to be entitled to indemnification. Section 726 provides that a corporation may obtain indemnification insurance indemnifying itself and its directors and officers.
The foregoing is only a summary of the described sections of the NYBCL and our Restated Certificate of Incorporation, as amended, and Amended and Restated Bylaws and is qualified in its entirety by the reference to such sections and charter documents.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of our Board of Directors determines the compensation of our officers and directors. None of our executive officers currently serves on the compensation committee or board of directors of any other company of which any members of our Board of Directors or our Compensation Committee is an executive officer.
| Security Ownership of Certain Beneficial Owners And Management and Related Stockholder Matters |
Operating Expenses
The following table sets forth, assummarizes operating expenses:
| | Fiscal Years Ended March 31, | |
| | 2017 | | | 2016 | |
| | | | | | |
General and administrative | | $ | 31,124,000 | | | $ | 49,665,000 | |
Sales and marketing | | | 12,126,000 | | | | 9,965,000 | |
Research and development | | | 3,824,000 | | | | 3,008,000 | |
| | | | | | | | |
Percent of net sales | | | | | | | | |
| | | | | | | | |
General and administrative | | | 7.4 | % | | | 13.5 | % |
Sales and marketing | | | 2.9 | % | | | 2.7 | % |
Research and development | | | 0.9 | % | | | 0.8 | % |
General and Administrative. Our general and administrative expenses for fiscal 2017 were $31,124,000, which represents a decrease of July 20,$18,541,000, or 37.3%, from general and administrative expenses for fiscal 2016 certain information asof $49,665,000. The reduction in fiscal 2017 was primarily due to (i) a $3,764,000 gain recorded due to the common stock ownershipchange in the fair value of eachthe warrant liability during fiscal 2017 compared to a loss of $5,137,000 recorded during fiscal 2016, (ii) $8,805,000 of decreased legal expense as compared to fiscal 2016, which included $9,250,000 accrued in fiscal 2016 for the litigation settlement in the bankruptcy cases related to the discontinued subsidiaries partially offset by a $5,800,000 gain in connection with the settlement of litigation with Fenwick Automotive Products Limited and various of its subsidiaries, and (iii) $4,401,000 of decreased bad debt expense as compared to fiscal 2016, which included expense in fiscal 2016 resulting from the bankruptcy filing by one of our named executive officers, directors, all executive officerscustomers. These decreases were partially offset by (i) $974,000 of decreased gain recorded due to the change in the fair value of the contingent consideration in connection with our fiscal 2016 acquisition, (ii) $799,000 of increased share-based compensation, and directors as(iii) $700,000 of increased general and administrative expenses at our offshore locations due primarily to our growth initiatives.
Sales and Marketing. Our sales and marketing expenses for fiscal 2017 increased $2,161,000, or 21.7%, to $12,126,000 from $9,965,000 for fiscal 2016. This increase in fiscal 2017 was due primarily to (i) $1,045,000 for personnel added to support our growth initiatives, (ii) $710,000 of increased commissions, (iii) $167,000 of increased outside services, (iv) $127,000 of increased travel, and (v) $97,000 of increased trade show expense.
Research and Development. Our research and development expenses increased by $816,000, or 27.1%, to $3,824,000 for fiscal 2017 from $3,008,000 for fiscal 2016. This increase in fiscal 2017 was due primarily to (i) $550,000 for personnel added to support our growth initiatives, (ii) $144,000 of increased supplies, and (iii) $90,000 of increased outside services.
Interest Expense
Interest Expense, net. Our interest expense, net for fiscal 2017 decreased $3,150,000, or 19.4%, to $13,094,000 from $16,244,000 for fiscal 2016. The decrease in interest expense in fiscal 2017 was due primarily to (i) the write-off of previous debt issuance costs of $5,108,000 in fiscal 2016 in connection with the financing agreement which was terminated when we entered into a groupnew credit facility in June 2015 and all persons known(ii) lower interest rates and lower average outstanding balances on our loans. These decreases in interest expense were partially offset by us to be the beneficial owners of more than five percenthigher interest rates and increased use of our common stock. The percentage of common stock beneficially owned is based on 18,630,444 shares of common stock outstanding as of July 20, 2016.
Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage of ownership held by that person, shares of common stock subject to options held by that person that are currently exercisable or will become exercisable within 60 days of July 20, 2016 are deemed outstanding, while these shares are not deemed outstanding for determining the percentage ownership of any other person. Unless otherwise indicated in the footnotes below, the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Unless otherwise indicated in the footnotes below, the address of the stockholder is c/o Motorcar Parts of America, Inc. 2929 California Street, Torrance, CA 90503.accounts receivable discount programs during fiscal 2017.
Name and Address of Beneficial Shareholder | | | | | Amount and Nature of Beneficial Ownership (1) | | | Percent of Class | |
BlackRock Fund Advisors | | | | | | | | | |
55 East 52nd Street, New York, NY 10055 | | (2) | | | | 1,636,702 | | | | 8.9 | % |
Fine Capital Management, LLC | | | | | | | | | | | |
590 Madison Avenue, 27th Floor, New York, New York 10022 | | (2) | | | | 1,403,026 | | | | 7.7 | |
Columbia Management Investment Advisers, LLC | | | | | | | | | | | |
225 Franklin Street, Boston, MA 02110 | | (2) | | | | 1,086,717 | | | | 5.9 | |
Selwyn Joffe | | (3) | | | | 458,694 | | | | 2.4 | |
Scott Adelson | | (4) | | | | 51,184 | | | | * | |
Rudolph Borneo | | (5) | | | | 45,184 | | | | * | |
Philip Gay | | (6) | | | | 22,184 | | | | * | |
Duane Miller | | (7) | | | | 28,184 | | | | * | |
Jeffrey Mirvis | | (8) | | | | 46,184 | | | | * | |
Doug Schooner | | (9) | | | | 18,148 | | | | * | |
Steve Kratz | | (10) | | | | 64,373 | | | | * | |
Michael Umansky | | (11) | | | | 35,604 | | | | * | |
David Lee | | (12) | | | | 72,025 | | | | * | |
Kevin Daly | | (13) | | | | 14,668 | | | | * | |
Directors and executive officers as a group — 11 persons | | (14) | | | | 856,432 | | | | 4.5 | % |
Provision for Income Taxes
* Less than 1%Income Tax. Our income tax expense was $17,305,000, an effective tax rate of 31.5%, and $11,479,000, an effective tax rate of 52.1% during fiscal 2017 and 2016, respectively. Our income tax rate for fiscal 2017 was positively impacted by (i) a non-taxable gain in connection with the fair value adjustments on the warrants compared to a non-deductible loss in fiscal 2016 and (ii) $748,000 of excess tax benefits recorded through the provision for income taxes in fiscal 2017 as a result of the outstanding common stock.early adoption of the FASB’s new guidance on share-based compensation. In addition, the income tax rates for all periods are increased by the inclusion of state income taxes and non-deductible executive compensation under Internal Revenue Code Section 162(m). These increases in all periods were partially offset by the benefit of lower statutory tax rates in foreign taxing jurisdictions.
(1) | The listed shareholders, unless otherwise indicated in the footnotes below, have direct ownership over the amount of shares indicated in the table. |
Liquidity and Capital Resources
(2) | Based on information contained in filings made by such stockholders with the SEC on as reported in each such stockholder's most recent Schedule 13F filing. Since there may have been subsequent purchases or sales of securities, this information may not reflect the current holdings by these stockholders. |
Overview
(3) | Includes 325,633 shares issuable upon exercise of options under the 2010 Long Term Incentive Plan. |
We had negative working capital (current assets minus current liabilities) of $46,267,000 and $20,651,000, a ratio of current assets to current liabilities of 0.74:1.00 and 0.86:1.00, at March 31, 2018 and 2017, respectively. The long-term classification of our core inventory, the build-up of our inventory to support anticipated higher sales, new business with existing and potential new customers, and the addition of any new product lines have in the past, and will continue to require the use of working capital to grow our business.
(4) | Includes 40,000 shares issuable upon exercise of currently exercisable options granted under the 2004 Non-Employee Director Stock Option Plan. |
We generated cash during fiscal 2018 from the use of receivable discount programs with certain of our major customers and their respective banks, as well as from our credit facility. The cash generated from these activities was used primarily to build our inventory to support anticipated higher sales.
(5) | Includes 24,000 shares issuable upon exercise of currently exercisable options granted under the 2004 Non-Employee Director Stock Option Plan. |
In May 2018, we entered into the New Credit Facility consisting of a $200,000,000 revolving loan facility and a $30,000,000 term loan facility, maturing in June 2023.
(6) | Includes 21,000 shares issuable upon exercise of currently exercisable options granted under the 2004 Non-Employee Director Stock Option Plan. |
We believe our cash and cash equivalents, short-term investments, use of receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our expected future working capital needs, repayment of the current portion of our term loans, and lease and capital expenditure obligations over the next 12 months.
(7) | Includes 26,000 shares issuable upon exercise of currently exercisable options granted under the 2004 Non-Employee Director Stock Option Plan. |
Cash Flows
(8) | Includes 40,000 shares issuable upon exercise of currently exercisable options granted under the 2004 Non-Employee Director Stock Option Plan. |
The following summarizes cash flows as reflected in the consolidated statements of cash flows:
| | Fiscal Years Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Cash provided by (used in): | | | | | | | | | |
Operating activities | | $ | (13,944,000 | ) | | $ | (5,269,000 | ) | | $ | 15,334,000 | |
Investing activities | | | (15,278,000 | ) | | | (5,683,000 | ) | | | (7,582,000 | ) |
Financing activities | | | 33,142,000 | | | | (1,849,000 | ) | | | (46,982,000 | ) |
Effect of exchange rates on cash and cash equivalents | | | 100,000 | | | | (67,000 | ) | | | (103,000 | ) |
Net increase (decrease) in cash and cash equivalents | | | 4,020,000 | | | | (12,868,000 | ) | | | (39,333,000 | ) |
| | | | | | | | | | | | |
Additional selected cash flow data: | | | | | | | | | | | | |
Depreciation and amortization | | $ | 4,508,000 | | | $ | 3,714,000 | | | $ | 2,936,000 | |
Capital expenditures | | | 9,933,000 | | | | 4,929,000 | | | | 3,747,000 | |
(9) | Includes 10,948 shares issuable upon exercise of currently exercisable options under the 2010 Incentive Award Plan and includes 92 shares of common stock held by The Schooner 2003 Family Trust. Mr. Schooner expressly disclaims ownership of the shares held by The Schooner 2003 Family Trust. |
Fiscal 2018 Compared to Fiscal 2017
(10) | Includes 55,834 shares issuable upon exercise of currently exercisable options under the 2010 Incentive Award Plan |
Net cash used in operating activities was $13,944,000 and $5,269,000 during fiscal 2018 and 2017, respectively. The significant changes in our operating activities during fiscal 2018 as compared to fiscal 2017 were due primarily to (i) decreased operating results (net income plus net add-back for non-cash transactions in earnings), (ii) increased payments of income taxes, (iii) decreases in accounts receivable and accounts payable during fiscal 2018 compared to increases during fiscal 2017, (iv) the build-up of our inventory to support anticipated higher sales, and (v) increased core purchases, including accrued core payments of $13,816,000 during fiscal 2018.
(11) | Includes 28,367 shares issuable upon exercise of currently exercisable options under the 2010 Incentive Award Plan. |
Net cash used in investing activities was $15,278,000 and $5,683,000 during fiscal 2018 and 2017, respectively. This change was due primarily to our increased capital expenditures and acquisition-related activities.
Net cash provided by financing activities was $33,142,000 during fiscal 2018 compared to net cash used in financing activities of $1,849,000 during fiscal 2017. This change was due mainly to (i) increased net borrowing primarily to build our inventory to support anticipated higher sales, (ii) repurchases of our common stock under our share repurchase program, and (iii) cash received upon exercise of the supplier warrant during fiscal 2018.
Fiscal 2017 Compared to Fiscal 2016
Net cash used in operating activities was $5,269,000 during fiscal 2017 compared to net cash provided by operating activities of $15,334,000 during fiscal 2016. The significant decreases in our operating activities were due primarily to (i) an increase in accounts receivable during fiscal 2017 compared to a decrease during fiscal 2016, (ii) payments made in connection with new business, (iii) a decrease in customer finished goods returns accrual during fiscal 2017 compared to an increase during fiscal 2016, and (iv) increased inventory levels to support our future growth. These decreases were partially offset by (i) increased operating results (net income plus net add-back for non-cash transactions in earnings) and (ii) decreased net repayments for Remanufactured Core inventory purchases recorded as accrued core payment in the consolidated balance sheets.
Net cash used in investing activities was $5,683,000 and $7,582,000 during fiscal 2017 and 2016, respectively. This change was due primarily to a decrease in cash used for the acquisition related activities during fiscal 2017 as compared to fiscal 2016.
Net cash used in financing activities was $1,849,000 and $46,982,000 during fiscal 2017 and 2016, respectively. This change was due mainly to (i) the net repayment of our long-term debt in fiscal 2016 in connection with the financing agreement which was terminated when we entered into a new credit facility in June 2015, (ii) the payment of debt issuance costs associated with this new credit facility, (iii) fewer stock options exercised during fiscal 2017 as compared to fiscal 2016, and (iv) the repurchase of shares under our share repurchase program during fiscal 2017.
Capital Resources
Debt
We are party to the following credit agreements.
Credit Facility
We are party to a $145,000,000 senior secured financing, as amended, (the “Credit Facility”) with the lenders party thereto, and PNC Bank, National Association, as administrative agent, consisting of (i) a $120,000,000 revolving loan facility, subject to borrowing base restrictions and a $15,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $25,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 3, 2020. In connection with the Credit Facility, the lenders were granted a security interest in substantially all of our assets. The Credit Facility permits the payment of up to $10,000,000 of dividends per calendar year, subject to a minimum availability threshold and pro forma compliance with financial covenants. This amount was increased to $15,000,000 under the April 2017 amendment to the Credit Facility.
In April 2017, we entered into a consent and fourth amendment to the Credit Facility (the “Fourth Amendment”) which, among other things, (i) increased the borrowing base limit with respect to inventory located in Mexico, (ii) amended the definition and calculation of consolidated EBITDA to raise the limitation on the add-back for non-capitalized transaction expenses related to the expansion of operations in Mexico, (iii) increased the annual limit on permitted stock repurchases and dividends, and (iv) modified certain other categories (including increasing certain baskets for permitted acquisitions) and thresholds to, among other things, further accommodate the expansion of our operations in Mexico.
In July 2017, we entered into a fifth amendment to the Credit Facility (the “Fifth Amendment”) which, among other things, amended the definition of permitted acquisitions, permitted indebtedness, and pledge agreements.
The Term Loans require quarterly principal payments of $781,250. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.50%, 2.75% or 3.00% or a reference rate plus a margin of 1.50%, 1.75% or 2.00%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.25% to 0.375%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on our Term Loans and Revolving Facility was 4.42% and 4.52%, respectively, at March 31, 2018 and 3.29% and 3.55%, respectively, at March 31, 2017.
The Credit Facility, among other things, requires us to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all financial covenants as of March 31, 2018.
The following summarizes the financial covenants required under the Credit Facility:
| | Calculation as of March 31, 2018 | | | Financial covenants required per the Credit Facility | |
| | | | | | |
Maximum senior leverage ratio | | | 0.89 | | | | 2.50 | |
Minimum fixed charge coverage ratio | | | 1.34 | | | | 1.15 | |
In addition to other covenants, the Credit Facility places limits on our ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by us and our subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.
We had $54,000,000 and $11,000,000 outstanding under the Revolving Facility at March 31, 2018 and 2017, respectively. In addition, $260,000 was reserved for standby letters of credit for workers’ compensation insurance and $600,000 for commercial letters of credit at March 31, 2018. At March 31, 2018, $65,140,000, subject to certain adjustments, was available under the Revolving Facility.
WX Agreement
In August 2012, we entered into a Revolving Credit/Strategic Cooperation Agreement (the “WX Agreement”) with Wanxiang America Corporation (the “Supplier”) and the discontinued subsidiaries. In connection with the WX Agreement, we issued a warrant (the “Supplier Warrant”) to the Supplier to purchase up to 516,129 shares of our common stock for an exercise price of $7.75 per share exercisable at any time after August 22, 2014 and on or prior to September 30, 2017.
On September 8, 2017, the Supplier exercised the Supplier Warrant in full and paid us $4,000,000. As a result of the exercise, the Supplier Warrant is no longer outstanding. The fair value of the Supplier Warrant on the exercise date was $9,566,000 using level 3 inputs and the Monte Carlo simulation model. The following assumptions were used to calculate the fair value of the Supplier Warrant: dividend yield of 0%, expected volatility of 26.4%, risk-free interest rate of 0.96%, subsequent financing probability of 0%, and an expected life of 0.06 years. We recorded a non-cash reclassification of the Supplier Warrant’s fair value to shareholders’ equity on the exercise date, with no further adjustments to the fair value of the Supplier Warrant being required. The fair value of the Supplier Warrant was $11,879,000 at March 31, 2017 and was included in other liabilities in the consolidated balance sheet.
During the years ended March 31, 2018 and 2017, a gain of $2,313,000 and $3,764,000, respectively, was recorded in general and administrative expenses due to the change in the fair value of this warrant liability.
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 allows 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.
The following is a summary of the receivable discount programs:
| | Years Ended March 31, | |
| | 2018 | | | 2017 | |
| | | | | | |
Receivables discounted | | $ | 357,224,000 | | | $ | 352,369,000 | |
Weighted average days | | | 340 | | | | 342 | |
Weighted average discount rate | | | 3.3 | % | | | 2.9 | % |
Amount of discount as interest expense | | $ | 11,182,000 | | | $ | 9,724,000 | |
Off-Balance Sheet Arrangements
At March 31, 2018, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.
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. Our contracts with major customers expire at various dates through April 2021.
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
On February 2, 2018, our board of directors increased our share repurchase program authorization from $15,000,000 to $20,000,000 of our common stock. As of March 31, 2018, $11,630,000 of the $20,000,000 had been utilized and $8,370,000 remained available to repurchase shares under the authorized share repurchase program, subject to the limit in our credit facility. We retired the 511,746 shares repurchased under this program through March 31, 2018. 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, were $13,411,000 and $5,731,000 for fiscal 2018 and 2017, respectively. These capital expenditures primarily include the purchase of equipment for our current operations and the expansion of our operations in Mexico. We expect to invest approximately $17,000,000 in fiscal 2019 to support our growth initiatives and continued expansion of our operations in Mexico. 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, 2018 and the effect such obligations could have on our cash flows in future periods:
| | Payments Due by Period | |
Contractual Obligations | | Total | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Capital lease obligations (1) | | $ | 5,598,000 | | | $ | 1,627,000 | | | $ | 2,519,000 | | | $ | 1,452,000 | | | | - | |
Operating lease obligations (2) | | | 53,061,000 | | | | 5,873,000 | | | | 8,938,000 | | | | 7,426,000 | | | $ | 30,824,000 | |
Revolving loan | | | 54,000,000 | | | | 54,000,000 | | | | - | | | | - | | | | - | |
Term loan (3) | | | 18,559,000 | | | | 3,820,000 | | | | 14,739,000 | | | | - | | | | - | |
Accrued core payment (4) | | | 36,778,000 | | | | 17,421,000 | | | | 14,516,000 | | | | 4,841,000 | | | | - | |
Unrecognized tax benefits (5) | | | - | | | | - | | | | - | | | | - | | | | - | |
Other long-term obligations (6) | | | 69,176,000 | | | | 30,154,000 | | | | 38,909,000 | | | | 113,000 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 237,172,000 | | | $ | 112,895,000 | | | $ | 79,621,000 | | | $ | 13,832,000 | | | $ | 30,824,000 | |
(12)(1) | Includes 60,167 shares issuableCapital lease obligations represent amounts due under capital leases for various types of equipment. |
(2) | Operating lease obligations represent amounts due for rent under our leases for all our facilities (including our new distribution center in Tijuana, Mexico), certain equipment, and our Company automobile. |
(3) | Term loan obligations represent the amounts due for principal payments as well as interest payments to be made. Interest payments were calculated based upon exercisethe interest rate for our term loan using the LIBOR option at March 31, 2018, which was 4.42%. |
(4) | Accrued core payment represents the amounts due for principal and interest payments to be made in connection with the purchases of currently exercisable options underRemanufactured Cores from our customers, which are held by these customers and remain on their premises. |
(5) | We are unable to reliably estimate the 2010 Incentive Award Plan.timing of future payments related to uncertain tax position liabilities at March 31, 2018 in the amount of $1,219,000; therefore, this amount has been excluded from the table above. However, future tax payment accruals related to uncertain tax positions are included in our consolidated balance sheets, reduced by the associated federal deduction for state taxes. |
(6) | Other long-term obligations represent commitments we have with certain customers to provide marketing allowances in consideration for long-term 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. |
(13)Item 7A. | Includes 6,567 shares of unvested Restricted Stock issued under the 2010 Long Term Incentive Plan.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, 2018, our net debt obligations totaled $70,981,000. If interest rates were to increase 1%, our net annual interest expense would have increased by approximately $710,000. In addition, for each $10,000,000 of accounts receivable we discount over a period of 180 days, a 1% increase in interest rates would increase our interest expense by $50,000.
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 ringit, 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, 2018 would have increased our general and administrative expenses by approximately $2,953,000. During fiscal 2018 and 2017, a gain of $752,000 and $843,000, respectively, were recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts.
Credit Risk
We regularly review our accounts receivable and allowance for doubtful accounts 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. We maintain an allowance for doubtful accounts that, in our opinion, provides for an adequate reserve to cover losses that may be incurred.
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.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and made known to the officers who certify the Company’s financial reports and to other members of senior management and the board of directors as appropriate to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of management, including our chief executive officer, chief financial officer, and chief accounting officer, we have conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(b) and 15d-15(e). Based on this evaluation, our chief executive officer, chief financial officer, and chief accounting officer concluded that MPA’s disclosure controls and procedures were effective as of March 31, 2018.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United State of America, applying certain estimates and judgments as required.
Internal control over financial reporting includes those policies and procedures that:
(14)1. | Includes 487,516 shares issuable upon exercisePertain to the maintenance of currently exercisable options granted underrecords that, in reasonable detail, accurately and fairly reflect the 2010 Incentive Award Plantransactions and 151,000 shares issuable upon exercisedispositions of currently exercisable options granted under the 2004 Non-Employee Director Stock Option Plan.assets of the company; |
2. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
3. | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our chief executive officer, chief financial officer, and chief accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in the 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of March 31, 2018.
The effectiveness of our internal control over financial reporting as of March 31, 2018 has been audited by the Company’s independent registered public accounting firm, Ernst & Young LLP. Their assessment is included in the accompanying Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting.
Changes in Internal Control Over Financial Reporting
There were no changes in MPA’s internal control over financial reporting during the fourth quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, MPA’s internal control over financial reporting.
None.
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this item is incorporated by reference to our Definitive Proxy Statement in connection with our next Annual Meeting of Stockholders (the “Proxy Statement”).
The information required by this item is incorporated by reference to the Proxy Statement.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this item is incorporated by reference to the Proxy Statement.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
In November 2014, Mr. Mel Marks was appointed to serve as a director for all of our Asian subsidiaries, in addition to his position as one of our directors. Mr. Marks received compensation at the annual rate of $150,000 for his services in addition to his regular compensation as one of our directors. For additional information, see the discussion under the caption “Executive Compensation” “2016 Director Compensation.”
We do not have a written policy applicable to any transaction, arrangement or relationship between us and a related party. Our practice with regards to related party transactions has been for our Board of Directors, or a committee thereof, to review, approve and/or ratify such transactions as they arise. In making its determination to approve or ratify a transaction, our Board of Directors, or a committee thereof, would consider such factors as (i) the extent of the related party’s interest in the transaction, (ii) if applicable, the availability of other sources of comparable products or services, (iii) whether the terms of the related party transaction are no less favorable than terms generally available in unaffiliated transactions under like circumstances, (iv) the benefit to us, and (v) the aggregate value of the transaction.
Director Independence
Information regarding the independence of our directors can be found in Item 10 “Directors, Executive Officers and Corporate Governance - Corporate Governance, Board of Directors and Committees of the Board of Directors.”
Item 14. | Principal Accountant Fees and Services |
The following table summarizesinformation required by this item is incorporated by reference to the total fees we paid to our independent certified public accountants, Ernst & Young LLP, for professional services provided during the following fiscal years ended March 31:
| | 2016 | | | 2015 | | | 2014 | |
Audit Fees | | $ | 1,623,000 | | | $ | 1,676,000 | | | $ | 1,564,000 | |
Tax Fees | | | 234,000 | | | | 168,000 | | | | 542,000 | |
Total | | $ | 1,857,000 | | | $ | 1,844,000 | | | $ | 2,106,000 | |
Audit fees in Fiscal 2016, 2015 and 2014 consisted of (i) the audit of our annual financial statements, (ii) the reviews of our quarterly financial statements, and (iii) audit of internal control over financial reporting.Proxy Statement.
Tax fees in Fiscal 2016 and 2015 related primarilyItem 14. | Principal Accountant Fees and Services |
The information required by this item is incorporated by reference to the preparation of federal and state tax returns, transfer pricing, and federal and state examinations. Tax fees in fiscal 2014 related primarily to the preparation of federal and state tax returns, impairment analysis, and federal and state examinations.
Our Audit Committee must pre-approve all audit and non-audit services to be performed by our independent auditors and will not approve any services that are not permitted by SEC rules. All of the audit and non-audit related fees in Fiscal 2016, 2015 and 2014 were pre-approved by the Audit Committee.Proxy Statement.
PART IV
Item 15. | Exhibits, Financial Statement Schedules.Schedules |
Exhibits.a. | Documents filed as part of this report: |
The following exhibits are filed with this Amendment: | (1) | Index to Consolidated Financial Statements: |
Reports of Independent Registered Public Accounting Firm | 54 |
Consolidated Balance Sheets | F-1 |
Consolidated Statements of Income | F-2 |
Consolidated Statements of Comprehensive Income | F-3 |
Consolidated Statements of Shareholders’ Equity | F-4 |
Consolidated Statements of Cash Flows | F-5 |
Notes to Consolidated Financial Statements | F-6 |
Schedule II — Valuation and Qualifying Accounts | S-1 |
Number | | Description of Exhibit | | Method of Filing |
| | | | |
3.1 | | Certificate of Incorporation of the Company | | Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form SB-2 declared effective on March 22, 1994 (the “1994 Registration Statement”). |
| | | | |
3.2 | | Amendment to Certificate of Incorporation of the Company | | Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (No. 33-97498) declared effective on November 14, 1995 (the “1995 Registration Statement”). |
| | | | |
| | Amendment to Certificate of Incorporation of the Company | | Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1997. |
| | | | |
| | Amendment to Certificate of Incorporation of the Company | | Incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1998 (the “1998 Form 10-K”). |
| | | | |
| | Amendment to Certificate of Incorporation of the Company | | Incorporated by reference to Exhibit C to the Company’s proxy statement on Schedule 14A filed with the SEC on November 25, 2003. |
| | | | |
| | Amended and Restated By-Laws of the Company | | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on August 24, 2010. |
| | | | |
| | Certificate of Amendment of the Certificate of Incorporation of the Company | | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on April 17, 2014. |
| | | | |
| | Amendment to the Amended and Restated By-Laws of the Company | | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 14, 2016. |
Number | | Description of Exhibit | | Method of Filing |
| | | | |
| | Amendment to the Amended and Restated By-Laws of the Company | | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on February 22, 2017. |
| | | | |
| | 2004 Non-Employee Director Stock Option Plan | | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A for the 2004 Annual Shareholders Meeting. |
| | | | |
| | 2010 Incentive Award Plan | | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on December 15, 2010. |
| | | | |
| | Amended and Restated 2010 Incentive Award Plan | | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 5, 2013. |
| | | | |
| | Second Amended and Restated 2010 Incentive Award Plan | | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 3, 2014. |
| | | | |
| | 2014 Non-Employee Director Incentive Award Plan | | Incorporated by reference to Appendix B to the Proxy Statement on Schedule 14A filed on March 3, 2014. |
| | | | |
| | Third Amended and Restated 2010 Incentive Award Plan | | Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on November 20, 2017. |
| | | | |
10.1 | | Amendment to Lease, dated October 3, 1996, by and between the Company and Golkar Enterprises, Ltd. relating to additional property in Torrance, California | | Incorporated by reference to Exhibit 10.17 to the December 31, 1996 Form 10-Q. |
| | | | |
10.2 | | Lease Agreement, dated September 19, 1995, by and between Golkar Enterprises, Ltd. and the Company relating to the Company’s facility located in Torrance, California | | Incorporated by reference to Exhibit 10.18 to the 1995 Registration Statement. |
| | | | |
| | Form of Indemnification Agreement for officers and directors | | Incorporated by reference to Exhibit 10.25 to the 1997 Registration Statement. |
| | | | |
| | Second Amendment to Lease, dated March 15, 2002, between Golkar Enterprises, Ltd. and the Company relating to property in Torrance, California | | Incorporated by reference to Exhibit 10.44 to the 2003 10-K. |
| | | | |
| | Addendum to Vendor Agreement, dated May 8, 2004, between AutoZone Parts, Inc. and the Company | | Incorporated by reference to Exhibit 10.15 to the 2004 10-K. |
| | | | |
| | Form of Orbian Discount Agreement between the Company and Orbian Corp. | | Incorporated by reference to Exhibit 10.17 to the 2004 10-K. |
Number | | Description of Exhibit | | Method of Filing |
| | | | |
| | Form of Standard Industrial/Commercial Multi-Tenant Lease, dated May 25, 2004, between the Company and Golkar Enterprises, Ltd for property located at 530 Maple Avenue, Torrance, California | | Incorporated by reference to Exhibit 10.18 to the 2004 10-K. |
| | | | |
| | Build to Suit Lease Agreement, dated October 28, 2004, among Motorcar Parts de Mexico, S.A. de CV, the Company and Beatrix Flourie Geoffroy | | Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on November 2, 2004. |
| | | | |
| | Amendment No. 3 to Pay-On-Scan Addendum, dated August 22, 2006, between AutoZone Parts, Inc. and the Company | | Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on August 30, 2006. |
| | | | |
| | Amendment No. 1 to Vendor Agreement, dated August 22, 2006, between AutoZone Parts, Inc. and Motorcar Parts of America, Inc. | | Incorporated by reference to Exhibit 99.2 to Current Report on Form 8-K filed on August 30, 2006. |
| | | | |
| | Lease Agreement Amendment, dated October 12, 2006, between the Company and Beatrix Flourie Geoffroy | | Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on October 20, 2006. |
| | | | |
| | Third Amendment to Lease Agreement, dated as of November 20, 2006, between Motorcar Parts of America, Inc. and Golkar Enterprises, Ltd. | | Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on November 27, 2006. |
| | | | |
| | Amended and Restated Employment Agreement, dated as of December 31, 2008, by and between the Company and Selwyn Joffe | | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed January 7, 2009. |
| | | | |
| | Vendor Agreement dated as of March 31, 2009, between the Company and AutoZone Parts, Inc. | | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed May 5, 2009. |
| | | | |
| | Core Amendment to Vendor Agreement, dated as of March 31, 2009, between the Company and AutoZone Parts, Inc. | | Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed May 5, 2009. |
| | | | |
| | Vendor Agreement Addendum, dated as of March 31, 2009, between the Company and AutoZone Parts, Inc. | | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K/A filed on December 23, 2009. |
| | | | |
| | Core Amendment to Vendor Agreement Addendum, dated as of March 31, 2009, between the Company and AutoZone Parts, Inc. | | Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K/A filed on December 23, 2009. |
| | | | |
| | Master Vendor Agreement, dated as of April 1, 2009, between the Company and O’Reilly Automotive, Inc. | | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on January 13, 2010. |
Number | | Description of Exhibit | | Method of Filing |
| | | | |
| | Letter Agreement, dated as of April 1, 2009, between the Company and O’Reilly Automotive, Inc. | | Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on January 13, 2010. |
| | | | |
| | Vendor Agreement Addendum, dated as of April 1, 2009 between the Company and O’Reilly Automotive, Inc. | | Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on January 13, 2010. |
| | | | |
| | Core Amendment No. 3 to Vendor Agreement, dated as of May 31, 2011, by and between Motorcar Parts of America, Inc. and AutoZone Parts, Inc. | | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on June 16, 2011. |
| | | | |
| | Core Amendment No. 4 to Vendor Agreement, dated as of May 31, 2011, by and between Motorcar Parts of America, Inc. and AutoZone Parts, Inc. | | Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on June 16, 2011. |
| | | | |
| | Addendum No. 2 to Amendment No. 1 to Vendor Agreement, dated as of May 31, 2011, by and between Motorcar Parts of America, Inc. and AutoZone Parts, Inc. | | Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on June 16, 2011. |
| | | | |
| | Fifth Amendment, dated as of November 17, 2011, to that certain Standard Industrial Commercial Single Tenant Lease-Gross, dated as of September 19, 1995, between Golkar Enterprises, Ltd and Motorcar Parts of America, Inc., as amended | | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on November 25, 2011. |
| | | | |
| | Right of First Refusal Agreement, dated May 3, 2012 | | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 7, 2012. |
| | | | |
| | Employment Agreement, dated as of May 18, 2012, between Motorcar Parts of America, Inc., and Selwyn Joffe | | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 24, 2012. |
| | | | |
| | Revolving Credit/Strategic Cooperation Agreement, dated as of August 22, 2012, by and among Motorcar Parts of America, Inc. (solely for purposes of provisions specified thereto), Fenwick Automotive Products Limited and Wanxiang America Corporation | | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 28, 2012. |
| | | | |
| | Guaranty, dated as of August 22, 2012, by Motorcar Parts of America, Inc. for the benefit of Wanxiang America Corporation | | Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on August 28, 2012. |
| | | | |
| | Warrant to Purchase Common Stock, dated as of August 22, 2012, issued by Motorcar Parts of America, Inc. to Wanxiang America Corporation | | Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on August 28, 2012. |
Number | | Description of Exhibit | | Method of Filing |
| | | | |
| | Form of Stock Option Notice for use in connection with stock options granted to Selwyn Joffe pursuant to the Motorcar Parts of America, Inc. 2010 Incentive Award Plan | | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 12, 2013. |
| | | | |
| | Form of Stock Option Agreement for use in connection with stock options granted to Selwyn Joffe pursuant to the Motorcar Parts of America, Inc. 2010 Incentive Award Plan | | Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on August 12, 2013. |
| | | | |
| | Amended and Restated Financing Agreement, dated as of November 6, 2013, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent | | Incorporated by reference to Exhibit 10.1 to Amended Quarterly Report on Form 10-Q/A filed on February 10, 2014. |
| | | | |
| | Third Amendment to Amended and Restated Financing Agreement, dated as of December 11, 2014, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent | | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 12, 2014. |
| | | | |
| | Fourth Amendment to Amended and Restated Financing Agreement, dated as of April 30, 2015, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent | | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 1, 2015. |
| | | | |
| | Revolving Credit, Term Loan and Security Agreement, dated as of June 3, 2015, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent | | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 8, 2015. |
| | | | |
| | First Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of November 5, 2015, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent | | Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed on November 9, 2015. |
Number | | Description of Exhibit | | Method of Filing |
| | | | |
| | Consent and Second Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of May 19, 2016, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent | | Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed on August 9, 2016. |
| | | | |
| | Third Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of March 24, 2017, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent | | Incorporated by reference to Exhibit 10.38 to Annual Report on Form 10-K filed on June 14, 2017. |
| | | | |
| | Fourth Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of April 24, 2017, among Motorcar Parts of America, Inc., each lender from time to time party thereto and PNC Bank, National Association, as administrative agent | | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 27, 2017. |
| | | | |
| | Fifth Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of July 18, 2017, among Motorcar Parts of America, Inc., each lender from time to time party thereto and PNC Bank, National Association, as administrative agent | | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on July 24, 2017. |
| | | | |
| | Amended and Restated Credit Facility, dated as of June 5, 2018, among Motorcar Parts of America, Inc., each lender from time to time party thereto and PNC Bank, National Association, as administrative agent | | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on June 11, 2018. |
| | | | |
| | Motorcar Parts of America, Inc., Code of Business Conduct and Ethics, as amended, effective January 15, 2015 | | Incorporated by reference to Exhibit 14.1 to Current Report on Form 8-K filed on January 20, 2015. |
| | | | |
| | List of Subsidiaries | | Filed herewith. |
| | | | |
| | Consent of Independent Registered Public Accounting Firm Ernst & Young LLP | | Filed herewith. |
| | | | |
| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | | Filed herewith. |
| | | | |
| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | | Filed herewith. |
Number | | Description of Exhibit | | Method of Filing |
| | | | |
| | Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | | Filed herewith. |
| | | | |
| | Certifications of Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | | Filed herewith. |
| | | | |
101.INS | | XBRL Instance Document | | Filed herewith. |
| | | | |
101.SCM | | XBRL Taxonomy Extension Schema Document | | Filed herewith. |
| | | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith. |
| | | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith. |
| | | | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith. |
| | | | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith. |
* | Portions of this exhibit have been granted confidential treatment by the SEC. |
** | Portions of this exhibit have been omitted pursuant to a confidential treatment request submitted separately to the SEC pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in those agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
None.
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MOTORCAR PARTS OF AMERICA, INC. | |
| | | |
Dated: July 29, 2016June 14, 2018 | By: | /s/ David Lee | |
| | David Lee | |
| | Chief Financial Officer | |
| | | |
Dated: July 29, 2016June 14, 2018 | By: | /s/ Kevin Daly | |
| | Kevin Daly | |
| | Chief Accounting Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K/A10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated:
/s/ Selwyn Joffe | Chief Executive Officer and Director | July 29, 2016June 14, 2018 |
Selwyn Joffe | (Principal Executive Officer) | |
| | |
/s/ David Lee | Chief Financial Officer | July 29, 2016June 14, 2018 |
David Lee | (Principal Financial Officer) | |
| | |
/s/ Kevin Daly | Chief Accounting Officer | July 29, 2016June 14, 2018 |
Kevin Daly | (Principal Accounting Officer) | |
| | |
/s/ Scott Adelson | Director | July 29, 2016June 14, 2018 |
Scott Adelson | | |
| | |
/s/ Rudolph Borneo | Director | July 29, 2016June 14, 2018 |
Rudolph Borneo | | |
| | |
/s/ Philip Gay | Director | July 29, 2016June 14, 2018 |
Philip Gay | | |
| | |
/s/ Duane Miller | Director | July 29, 2016June 14, 2018 |
Duane Miller | | |
| | |
/s/ Jeffrey Mirvis | Director | July 29, 2016June 14, 2018 |
Jeffrey Mirvis | | |
| | |
/s/ David Bryan | Director | July 29, 2016June 14, 2018 |
David Bryan | | |
| | |
/s/ Joseph Ferguson | Director | July 29, 2016June 14, 2018 |
Joseph Ferguson | | |
| | |
/s/ Barbara Whittaker | Director | June 14, 2018 |
Barbara Whittaker | | |
| | |
/s/ Timothy Vargo | Director | June 14, 2018 |
Timothy Vargo | | |
MOTORCAR PARTS OF AMERICA, INC.
AND SUBSIDIARIES
CONTENTS
| Page |
Reports of Independent Registered Public Accounting Firm | 54 |
Consolidated Balance Sheets | F-1 |
Consolidated Statements of Income | F-2 |
Consolidated Statements of Comprehensive Income | F-3 |
Consolidated Statements of Shareholders’ Equity | F-4 |
Consolidated Statements of Cash Flows | F-5 |
Notes to Consolidated Financial Statements | F-6 |
Schedule II — Valuation and Qualifying Accounts | S-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Motorcar Parts of America, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Motorcar Parts of America, Inc. and subsidiaries’ internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Motorcar Parts of America, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of March 31, 2018, based on COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2018, and the related notes and schedule and our report dated June 14, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitation of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ Ernst & Young LLP |
| |
Los Angeles, California | |
June 14, 2018 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Motorcar Parts of America, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Motorcar Parts of America, Inc. and subsidiaries
(the Company) as of March 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2018, and the related notes and financial statement schedule listed in the index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated June 14, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ Ernst & Young LLP |
| |
We have served as the Company’s auditor since 2007 | |
| |
Los Angeles, California | |
June 14, 2018 | |
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,
| | 2018 | | | 2017 | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 13,049,000 | | | $ | 9,029,000 | |
Short-term investments | | | 2,828,000 | | | | 2,140,000 | |
Accounts receivable — net | | | 15,738,000 | | | | 26,017,000 | |
Inventory— net | | | 76,275,000 | | | | 67,516,000 | |
Inventory unreturned | | | 7,508,000 | | | | 7,581,000 | |
Income tax receivable | | | 7,796,000 | | | | 1,709,000 | |
Prepaid expenses and other current assets | | | 11,491,000 | | | | 8,139,000 | |
Total current assets | | | 134,685,000 | | | | 122,131,000 | |
Plant and equipment — net | | | 28,322,000 | | | | 18,437,000 | |
Long-term core inventory — net | | | 301,656,000 | | | | 262,922,000 | |
Long-term core inventory deposits | | | 5,569,000 | | | | 5,569,000 | |
Long-term deferred income taxes | | | 10,556,000 | | | | 13,546,000 | |
Goodwill | | | 2,551,000 | | | | 2,551,000 | |
Intangible assets — net | | | 3,766,000 | | | | 3,993,000 | |
Other assets | | | 7,392,000 | | | | 6,990,000 | |
TOTAL ASSETS | | $ | 494,497,000 | | | $ | 436,139,000 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 73,273,000 | | | $ | 85,960,000 | |
Accrued liabilities | | | 11,799,000 | | | | 10,077,000 | |
Customer finished goods returns accrual | | | 17,805,000 | | | | 17,667,000 | |
Accrued core payment | | | 16,536,000 | | | | 11,714,000 | |
Revolving loan | | | 54,000,000 | | | | 11,000,000 | |
Other current liabilities | | | 4,471,000 | | | | 3,300,000 | |
Current portion of term loan | | | 3,068,000 | | | | 3,064,000 | |
Total current liabilities | | | 180,952,000 | | | | 142,782,000 | |
Term loan, less current portion | | | 13,913,000 | | | | 16,935,000 | |
Long-term accrued core payment | | | 18,473,000 | | | | 12,349,000 | |
Long-term deferred income taxes | | | 226,000 | | | | 180,000 | |
Other liabilities | | | 5,957,000 | | | | 15,212,000 | |
Total liabilities | | | 219,521,000 | | | | 187,458,000 | |
Commitments and contingencies | | | | | | | | |
Shareholders’ equity: | | | | | | | | |
Preferred stock; par value $.01 per share, 5,000,000 shares authorized; none issued | | | - | | | | - | |
Series A junior participating preferred stock; par value $.01 per share, 20,000 shares authorized; none issued | | | - | | | | - | |
Common stock; par value $.01 per share, 50,000,000 shares authorized; 18,893,102 and 18,648,854 shares issued and outstanding at March 31, 2018 and 2017, respectively | | | 189,000 | | | | 186,000 | |
Additional paid-in capital | | | 213,609,000 | | | | 205,646,000 | |
Retained earnings | | | 66,606,000 | | | | 50,290,000 | |
Accumulated other comprehensive loss | | | (5,428,000 | ) | | | (7,441,000 | ) |
Total shareholders’ equity | | | 274,976,000 | | | | 248,681,000 | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 494,497,000 | | | $ | 436,139,000 | |
The accompanying notes to consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended March 31,
| | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Net sales | | $ | 428,072,000 | | | $ | 421,253,000 | | | $ | 368,970,000 | |
Cost of goods sold | | | 322,199,000 | | | | 306,207,000 | | | | 268,046,000 | |
Gross profit | | | 105,873,000 | | | | 115,046,000 | | | | 100,924,000 | |
Operating expenses: | | | | | | | | | | | | |
General and administrative | | | 35,527,000 | | | | 31,124,000 | | | | 49,665,000 | |
Sales and marketing | | | 15,030,000 | | | | 12,126,000 | | | | 9,965,000 | |
Research and development | | | 5,692,000 | | | | 3,824,000 | | | | 3,008,000 | |
Total operating expenses | | | 56,249,000 | | | | 47,074,000 | | | | 62,638,000 | |
Operating income | | | 49,624,000 | | | | 67,972,000 | | | | 38,286,000 | |
Interest expense, net | | | 15,445,000 | | | | 13,094,000 | | | | 16,244,000 | |
Income before income tax expense | | | 34,179,000 | | | | 54,878,000 | | | | 22,042,000 | |
Income tax expense | | | 17,863,000 | | | | 17,305,000 | | | | 11,479,000 | |
| | | | | | | | | | | | |
Net income | | $ | 16,316,000 | | | $ | 37,573,000 | | | $ | 10,563,000 | |
| | | | | | | | | | | | |
Basic net income per share | | $ | 0.87 | | | $ | 2.02 | | | $ | 0.58 | |
| | | | | | | | | | | | |
Diluted net income per share | | $ | 0.84 | | | $ | 1.93 | | | $ | 0.55 | |
Weighted average number of shares outstanding: | | | | | | | | | | | | |
Basic | | | 18,854,993 | | | | 18,608,812 | | | | 18,233,163 | |
Diluted | | | 19,514,775 | | | | 19,418,706 | | | | 19,066,093 | |
The accompanying notes to consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years Ended March 31,
| | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Net income | | $ | 16,316,000 | | | $ | 37,573,000 | | | $ | 10,563,000 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | |
Unrealized gain (loss) on short-term investments (net of tax of $118,000, $111,000, and $(8,000), respectively) | | | 218,000 | | | | 196,000 | | | | (13,000 | ) |
Foreign currency translation gain (loss) | | | 1,795,000 | | | | (2,785,000 | ) | | | (2,321,000 | ) |
Total other comprehensive income (loss), net of tax | | | 2,013,000 | | | | (2,589,000 | ) | | | (2,334,000 | ) |
| | | | | | | | | | | | |
Comprehensive income | | $ | 18,329,000 | | | $ | 34,984,000 | | | $ | 8,229,000 | |
The accompanying notes to consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
For the Years Ended March 31,
| | Common Stock | | | | | | | | | | | | | |
| | Shares | | | Amount | | | Additional Paid-in Capital Common Stock | | | Retained Earnings (Accumulated Deficit) | | | Accumulated Other Comprehensive Income (Loss) | | | Total | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Balance at March 31, 2015 | | | 17,974,598 | | | $ | 180,000 | | | $ | 191,279,000 | | | $ | 1,262,000 | | | $ | (2,518,000 | ) | | $ | 190,203,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Compensation recognized under employee stock plans | | | - | | | | - | | | | 2,584,000 | | | | - | | | | - | | | | 2,584,000 | |
Exercise of stock options | | | 510,637 | | | | 5,000 | | | | 5,387,000 | | | | - | | | | - | | | | 5,392,000 | |
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes | | | 46,516 | | | | - | | | | (913,000 | ) | | | - | | | | - | | | | (913,000 | ) |
Tax benefit from employee stock options exercised | | | - | | | | - | | | | 5,313,000 | | | | - | | | | - | | | | 5,313,000 | |
Unrealized gain (loss) on investments, net of tax | | | - | | | | - | | | | - | | | | - | | | | (13,000 | ) | | | (13,000 | ) |
Foreign currency translation | | | - | | | | - | | | | - | | | | - | | | | (2,321,000 | ) | | | (2,321,000 | ) |
Net income | | | - | | | | - | | | | - | | | | 10,563,000 | | | | - | | | | 10,563,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2016 | | | 18,531,751 | | | $ | 185,000 | | | $ | 203,650,000 | | | $ | 11,825,000 | | | $ | (4,852,000 | ) | | $ | 210,808,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative-effect adjustment | | | - | | | | - | | | | - | | | | 892,000 | | | | - | | | | 892,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at April 1, 2016 | | | 18,531,751 | | | $ | 185,000 | | | $ | 203,650,000 | | | $ | 12,717,000 | | | $ | (4,852,000 | ) | | $ | 211,700,000 | |
Compensation recognized under employee stock plans | | | - | | | | - | | | | 3,383,000 | | | | - | | | | - | | | | 3,383,000 | |
Exercise of stock options | | | 133,731 | | | | 1,000 | | | | 1,661,000 | | | | - | | | | - | | | | 1,662,000 | |
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes | | | 53,031 | | | | 1,000 | | | | (1,059,000 | ) | | | - | | | | - | | | | (1,058,000 | ) |
Repurchase and cancellation of treasury stock, including fees | | | (69,659 | ) | | | (1,000 | ) | | | (1,989,000 | ) | | | - | | | | - | | | | (1,990,000 | ) |
Unrealized gain (loss) on investments, net of tax | | | - | | | | - | | | | - | | | | - | | | | 196,000 | | | | 196,000 | |
Foreign currency translation | | | - | | | | - | | | | - | | | | - | | | | (2,785,000 | ) | | | (2,785,000 | ) |
Net income | | | - | | | | - | | | | - | | | | 37,573,000 | | | | - | | | | 37,573,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2017 | | | 18,648,854 | | | $ | 186,000 | | | $ | 205,646,000 | | | $ | 50,290,000 | | | $ | (7,441,000 | ) | | $ | 248,681,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Compensation recognized under employee stock plans | | | - | | | | - | | | | 3,766,000 | | | | - | | | | - | | | | 3,766,000 | |
Exercise of stock options | | | 55,351 | | | | 1,000 | | | | 480,000 | | | | - | | | | - | | | | 481,000 | |
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes | | | 47,508 | | | | 1,000 | | | | (597,000 | ) | | | - | | | | - | | | | (596,000 | ) |
Repurchase and cancellation of treasury stock, including fees | | | (374,740 | ) | | | (4,000 | ) | | | (9,247,000 | ) | | | - | | | | - | | | | (9,251,000 | ) |
Exercise of warrant for shares of common stock | | | 516,129 | | | | 5,000 | | | | 13,561,000 | | | | - | | | | - | | | | 13,566,000 | |
Unrealized gain (loss) on investments, net of tax | | | - | | | | - | | | | - | | | | - | | | | 218,000 | | | | 218,000 | |
Foreign currency translation | | | - | | | | - | | | | - | | | | - | | | | 1,795,000 | | | | 1,795,000 | |
Net income | | | - | | | | - | | | | - | | | | 16,316,000 | | | | - | | | | 16,316,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2018 | | | 18,893,102 | | | $ | 189,000 | | | $ | 213,609,000 | | | $ | 66,606,000 | | | $ | (5,428,000 | ) | | $ | 274,976,000 | |
The accompanying notes to consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended March 31,
| | 2018 | | | 2017 | | | 2016 | |
Cash flows from operating activities: | | | | | | | | | |
Net income | | $ | 16,316,000 | | | $ | 37,573,000 | | | $ | 10,563,000 | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | | | | | | | | |
Depreciation | | | 3,798,000 | | | | 3,101,000 | | | | 2,315,000 | |
Amortization of intangible assets | | | 710,000 | | | | 613,000 | | | | 621,000 | |
Amortization of debt issuance costs | | | 1,060,000 | | | | 716,000 | | | | 790,000 | |
Write-off of debt issuance costs | | | - | | | | - | | | | 5,108,000 | |
Amortization of interest on accrued core payment | | | 670,000 | | | | 704,000 | | | | 736,000 | |
(Gain) loss due to the change in the fair value of the warrant liability | | | (2,313,000 | ) | | | (3,764,000 | ) | | | 5,137,000 | |
Gain due to the change in the fair value of the contingent consideration | | | - | | | | (16,000 | ) | | | (990,000 | ) |
Net provision for inventory reserves | | | 8,491,000 | | | | 3,864,000 | | | | 4,518,000 | |
Net provision for (recovery of) customer payment discrepancies | | | 998,000 | | | | 718,000 | | | | (299,000 | ) |
Net provision for doubtful accounts | | | 21,000 | | | | 3,000 | | | | 4,404,000 | |
Deferred income taxes | | | 3,055,000 | | | | 6,510,000 | | | | (3,781,000 | ) |
Share-based compensation expense | | | 3,766,000 | | | | 3,383,000 | | | | 2,584,000 | |
Loss on disposal of plant and equipment | | | 161,000 | | | | 13,000 | | | | 7,000 | |
Change in operating assets and liabilities, net of acquisitions: | | | | | | | | | | | | |
Accounts receivable | | | 10,854,000 | | | | (18,145,000 | ) | | | 4,647,000 | |
Inventory | | | (6,847,000 | ) | | | (10,058,000 | ) | | | 3,054,000 | |
Inventory unreturned | | | 73,000 | | | | 2,939,000 | | | | (2,687,000 | ) |
Income tax receivable | | | (6,081,000 | ) | | | (1,686,000 | ) | | | 3,981,000 | |
Prepaid expenses and other current assets | | | (2,507,000 | ) | | | (2,647,000 | ) | | | (1,216,000 | ) |
Other assets | | | (384,000 | ) | | | (3,339,000 | ) | | | (477,000 | ) |
Accounts payable and accrued liabilities | | | (11,621,000 | ) | | | 12,446,000 | | | | 6,620,000 | |
Customer finished goods returns accrual | | | 138,000 | | | | (8,709,000 | ) | | | 6,698,000 | |
Long-term core inventory | | | (45,839,000 | ) | | | (24,964,000 | ) | | | (53,408,000 | ) |
Long-term core inventory deposits | | | - | | | | - | | | | 26,002,000 | |
Accrued core payment | | | 10,276,000 | | | | (3,180,000 | ) | | | (11,266,000 | ) |
Other liabilities | | | 1,261,000 | | | | (1,344,000 | ) | | | 1,673,000 | |
Net cash (used in) provided by operating activities | | | (13,944,000 | ) | | | (5,269,000 | ) | | | 15,334,000 | |
Cash flows from investing activities: | | | | | | | | | | | | |
Purchase of plant and equipment | | | (9,933,000 | ) | | | (4,929,000 | ) | | | (3,747,000 | ) |
Purchase of business | | | (4,993,000 | ) | | | (705,000 | ) | | | (2,701,000 | ) |
Additions to short term investments | | | (352,000 | ) | | | (49,000 | ) | | | (1,134,000 | ) |
Net cash used in investing activities | | | (15,278,000 | ) | | | (5,683,000 | ) | | | (7,582,000 | ) |
Cash flows from financing activities: | | | | | | | | | | | | |
Borrowings under revolving loan | | | 84,000,000 | | | | 65,001,000 | | | | 29,000,000 | |
Repayments under revolving loan | | | (41,000,000 | ) | | | (61,001,000 | ) | | | (22,000,000 | ) |
Borrowings under term loan | | | - | | | | - | | | | 25,000,000 | |
Repayments of term loan | | | (3,125,000 | ) | | | (3,125,000 | ) | | | (86,063,000 | ) |
Payments for debt issuance costs | | | (462,000 | ) | | | (433,000 | ) | | | (2,337,000 | ) |
Payments on capital lease obligations | | | (905,000 | ) | | | (591,000 | ) | | | (374,000 | ) |
Payment of contingent consideration | | | - | | | | (314,000 | ) | | | - | |
Exercise of stock options | | | 481,000 | | | | 1,662,000 | | | | 5,392,000 | |
Excess tax benefits from stock-based compensation | | | - | | | | - | | | | 5,313,000 | |
Cash used to net share settle equity awards | | | (596,000 | ) | | | (1,058,000 | ) | | | (913,000 | ) |
Repurchase of common stock, including fees | | | (9,251,000 | ) | | | (1,990,000 | ) | | | - | |
Exercise of warrant | | | 4,000,000 | | | | - | | | | - | |
Net cash provided by (used in) financing activities | | | 33,142,000 | | | | (1,849,000 | ) | | | (46,982,000 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | 100,000 | | | | (67,000 | ) | | | (103,000 | ) |
Net increase (decrease) in cash and cash equivalents | | | 4,020,000 | | | | (12,868,000 | ) | | | (39,333,000 | ) |
Cash and cash equivalents — Beginning of period | | | 9,029,000 | | | | 21,897,000 | | | | 61,230,000 | |
Cash and cash equivalents — End of period | | $ | 13,049,000 | | | $ | 9,029,000 | | | $ | 21,897,000 | |
| | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | | | |
Interest, net | | $ | 13,623,000 | | | $ | 11,674,000 | | | $ | 9,812,000 | |
Income taxes, net of refunds | | | 19,657,000 | | | | 12,378,000 | | | | 3,762,000 | |
Non-cash investing and financing activities: | | | | | | | | | | | | |
Property acquired under capital lease | | $ | 3,478,000 | | | $ | 802,000 | | | $ | 2,454,000 | |
Contingent consideration | | | - | | | | - | | | | 1,320,000 | |
The accompanying notes to consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Company Background and Organization
Overview
Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading manufacturer, remanufacturer, and distributor of aftermarket automotive and light truck applications. The Company also, to a lesser extent, is a manufacturer, remanufacturer, and distributor of heavy duty truck and industrial and agricultural application parts. These replacement parts are sold for use on vehicles after initial vehicle purchase. These automotive parts are sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). The Company’s products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake master cylinders, and (iv) other products which include turbochargers, brake power boosters, and diagnostic equipment. The Company added turbochargers through an acquisition in July 2016. The Company began selling brake power boosters in August 2016. As a result of an acquisition in July 2017, its business also now includes developing and selling diagnostic equipment for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles.
The Company obtains used automotive parts, commonly known as Used Cores, primarily from its customers under the Company’s core exchange program. It also purchases Used Cores from vendors (core brokers). The customers grant credit to the consumer when the used part is returned to them, and the Company in turn provides a credit to the customers upon return to the Company. These Used Cores are an essential material needed for the remanufacturing operations.
The Company has remanufacturing, warehousing and shipping/receiving operations for automotive parts in North America and Asia. In addition, the Company utilizes various third party warehouse distribution centers in North America.
2. Summary of Significant Accounting Policies
New Accounting Pronouncements Not Yet Adopted
Revenue Recognition
In May 2014, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, codified in Accounting Standards Codification (“ASC”) 606, “Revenue Recognition - Revenue from Contracts with Customers” (“ASC 606”), which amends the guidance in the former ASC 605, “Revenue Recognition”. ASC 606 as initially issued was effective for annual periods beginning after December 15, 2016, and interim periods within that reporting period for a public entity. The Company may elect either a full retrospective transition method, which requires the restatement of all periods presented, or a modified retrospective transition method, which requires a cumulative-effect adjustment as of the date of initial adoption. In August 2015, the FASB delayed the effective date by one year to annual periods beginning after December 15, 2017, and interim periods within that reporting period for a public entity. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company will adopt the new standard on April 1, 2018 and has elected to utilize the full retrospective transition method.
ASC 606 establishes the requirements for recognizing revenue from contracts with customers. The standard requires entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under the new standard, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for the good or service. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
Due to the impact of the new standard, the Company has made changes to its business processes, systems, and controls. A project team was formed and evaluated and guided the implementation process. The Company performed a preliminary assessment, which included the identification of the key contractual terms in its primary revenue streams and the comparison of historical accounting policies and practices to the requirements of the new standard by revenue stream. The preliminary assessment resulted in the identification of potential accounting differences that will arise from the application of the new standard. The implementation team completed its contract review phase of the project during the third quarter, which included identifying the population of contracts and completing an analysis of the potential accounting impacts of the new standard on individual contracts. During the fourth quarter, the implementation team identified the changes to business processes, systems, and controls to support recognition, presentation, and disclosure under the new standard and will implement these changes during the first quarter of fiscal 2019 as described in the subsequent paragraphs.
The Company’s primary revenue stream is derived from the sale of remanufactured products to its customers pursuant to long-term customer contracts. The Company will continue to recognize revenue at a point in time as it satisfies its performance obligation of transferring control of the product to the customer. The Company recognizes revenues net of anticipated returns, marketing allowances, volume discounts, and other forms of variable consideration more fully described below. The Company also reviewed customer options to acquire additional goods or services and has preliminarily determined no material rights exist within its contracts. The Company does not currently anticipate that the adoption of ASU 2014-09 will have a material impact on previously reported revenue amounts. See discussion regarding Remanufactured Cores below.
The Company currently anticipates that the adoption of ASU 2014-09 will primarily impact reclassifications to certain balance sheet accounts to conform to the presentation and disclosure requirements of ASC 606. For example, the Company currently accounts for Remanufactured Cores anticipated to be returned as long-term core inventory and the refund liability as a contra-account receivable account as illustrated in Note 6. Under ASC 606, the Company currently anticipates it will reclassify this asset to a contractual asset and recognize a contractual liability for amounts expected to be refunded to customers.
The Company also analyzed specific contractual provisions related to sales contracts that include Remanufactured Cores. The Company recognizes revenue for sales of cores not expected to be replaced by a similar Used Core sent back under the core exchange program only upon meeting certain criteria as noted under the caption “Revenue Recognition” below. The adoption of ASU 2014-09 may result in an acceleration of revenue recognition, as it requires the Company to estimate the amount of cores not expected to be returned upon the initial recognition of revenue for contracts that include Remanufactured Cores. As the Company has elected the full retrospective method of adoption, the impact to each reporting period will be measured as the net impact of (i) the acceleration of revenue into a prior period versus what was previously recorded in that period and (ii) the acceleration of revenue into that period previously recognized in a later period (the change in the estimated volume of returns in the comparable recast periods). Given that third-party information available to meet the criteria outlined in Note 2, Summary of Significant Accounting Policies, may be available at different points of time in a given fiscal period, the timing of the revenue recognized in these periods may be less predictive under ASC 605 as compared to the estimation process required under ASU 2014-09. The anticipated increase to previously reported revenues for the year ended March 31, 2016 is less than $2.0 million. The anticipated decrease to previously reported revenues for the year ended March 31, 2017 is less than $0.9 million. The anticipated decrease to reported revenues in the current fiscal year ended March 31, 2018 is less than $0.4 million.
In order to properly determine the transaction price related to its sales contracts, the Company has also analyzed its various forms of consideration paid to its vendors including up-front payments for future contracts. Based on the analysis completed through the year ended March 31, 2018, the Company currently does not anticipate a change to its legacy accounting practices as a result of the adoption of ASU 2014-09 to account for up-front payments to its vendors. Under current accounting practices, if the Company expects to generate future revenues associated with an up-front payment, then an asset is recognized and amortized over the appropriate period of time as a reduction of revenue. If the Company does not expect to generate additional revenue then the up-front payment is recognized in the consolidated statements of income when payment occurs as a reduction of revenue.
ASU 2014-09 also codified the guidance on other assets and deferred costs relating to contracts with customers with the addition of ASC 340-40. This guidance relates to the accounting for costs of an entity to obtain and fulfill a contract to provide goods or services to the customer. Under the new guidance, an entity shall recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs. In the Company’s review of the various costs to obtain contracts with its customers, it has preliminarily determined that currently no significant costs are incurred that meet the capitalization criteria. The Company’s primary cost to fulfill contracts, other than inventory related costs, relates to shipping and handling activities, which continue to be expensed as incurred consistent with historical accounting practices.
The new guidance provides several practical expedients, which the Company anticipates adopting. The first of these practical expedients allows a company to expense incremental costs of obtaining a contract as incurred if the amortization period would have been one year or less. As noted above, the Company has preliminarily concluded that it does not have any such costs that qualify for capitalization but will apply the practical expedient to the extent that such costs incurred in prospective periods qualify. Similarly, the Company plans to adopt guidance which allows for the effects of a significant financing component to be ignored if a company expects that the period between the transfer of the goods and services to the customer and payment will be one year or less. Finally, the Company plans to adopt guidance that allows a company to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations.
Financial Instruments
In January 2016, the FASB issued guidance that amends the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company expects to apply the amendments in the new guidance by means of a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of the first quarter of fiscal 2019. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
Leases
In February 2016, the FASB issued new guidance that requires balance sheet recognition of a right-of-use asset and lease liability by lessees for operating leases. The new guidance also requires new disclosures providing additional qualitative and quantitative information about the amounts recorded in the financial statements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new guidance requires a modified retrospective approach with optional practical expedients. The Company will adopt this guidance in the first quarter of fiscal 2020. The Company is currently evaluating the impact the provisions of this guidance will have on its consolidated financial statements, but expects that it will result in a significant increase to its long-term assets and liabilities on the consolidated balance sheets.
Business Combinations
In January 2017, the FASB issued guidance which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. A reporting entity should apply the amendment prospectively. The adoption of this guidance in the first quarter of fiscal 2019 is not expected to have any material impact on the Company’s consolidated financial statements.
Goodwill Impairment
In January 2017, the FASB issued guidance which simplifies the test for goodwill impairment. This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. This guidance must be applied on a prospective basis. The Company is currently evaluating the impact the provisions of this guidance will have on its consolidated financial statements.
Modifications to Share-Based Payment Awards
In May 2017, the FASB issued guidance to provide clarity and reduce (i) the diversity in practice and (ii) the cost and complexity when applying the accounting guidance for equity-based compensation to a change to the terms or conditions of a share-based payment award. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. This guidance should be applied prospectively to an award modified on or after that adoption date. The adoption of this guidance in the first quarter of fiscal 2019 is not expected to have any material impact on the Company’s consolidated financial statements.
Derivatives and Hedging
In August 2017, the FASB issued guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this update also make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the guidance allows for early adoption in any interim period after issuance of the update. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Motorcar Parts of America, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.
Reclassification of Prior Period Balances
The income tax receivable has been reclassified from prepaid and other current assets in the consolidated balance sheet at March 31, 2017 to conform to the consolidated balance sheet presentation at March 31, 2018. In addition, the income tax receivable has been reclassified from prepaid and other current assets in the consolidated statements of cash flows for the years ended March 31, 2017 and 2016 to conform to the consolidated statement of cash flow presentation for the year ended March 31, 2018.
Segment Reporting
Pursuant to the guidance provided under the FASB ASC for segment reporting, the Company has identified its chief executive officer as chief operating decision maker (“CODM”), has reviewed the documents used by the CODM, and understands how such documents are used by the CODM to make financial and operating decisions. The Company has determined through this review process that it has one reportable segment for purposes of recording and reporting its financial results.
Cash and Cash Equivalents
Cash primarily consists of cash on hand and bank deposits. Cash equivalents consist of money market funds. The Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions.
Accounts Receivable
The allowance for doubtful accounts is developed based upon several factors including customer credit quality, historical write-off experience and any known specific issues or disputes which exist as of the balance sheet date. Accounts receivable are written off only when all collection attempts have failed. The Company does not require collateral for accounts receivable.
The Company has receivable discount programs that have been established with certain major customers and their respective banks. Under these programs, the Company has the option to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. Once the customer chooses which outstanding invoices are going to be made available for discounting, the Company can accept or decline the bundle of invoices provided. The receivable discount programs are non-recourse, and funds cannot be reclaimed by the customer or its bank after the related invoices have been discounted.
Inventory
Non-core Inventory
Non-core inventory is comprised of (i) non-core raw materials, (ii) the non-core value of work in process, (iii) the non-core value of remanufactured finished goods, and (iv) purchased finished goods. Used Cores, the Used Core value of work in process and the Remanufactured Core portion of finished goods are classified as long-term core inventory as described below under the caption “Long-term Core Inventory.” Used Cores are a source of raw materials used in the manufacturing of the Company’s products.
Non-core inventory is stated at the lower of cost or net realizable value. The cost of non-core remanufactured inventory approximates average historical purchase prices paid for raw materials, and is based upon the direct costs of material and an allocation of labor and variable and fixed overhead costs. The cost of purchased finished goods inventory approximates average historical purchase prices paid, and an allocation of fixed overhead costs. The cost of non-core inventory is evaluated at least quarterly during the fiscal year and adjusted as necessary to reflect current lower of cost or net realizable value levels. These adjustments are determined for individual items of inventory within each of the three classifications of non-core inventory as follows:
Non-core raw materials are recorded at average cost, which is based on the actual purchase price of raw materials on hand. The average cost is updated quarterly. This average cost is used in the inventory costing process and is the basis for allocation of materials to finished goods during the production process.
Non-core work in process is in various stages of production and is valued at the average cost of materials issued to open work orders. Historically, non-core work in process inventory has not been material compared to the total non-core inventory balance.
The cost of remanufactured finished goods includes the average cost of non-core raw materials and allocations of labor and variable and fixed overhead costs. The allocations of labor and variable and fixed overhead costs are determined based on the average actual use of the production facilities over the prior twelve 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, the Company excludes 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 as period costs.
The Company records 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. The Company periodically reviews 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 management’s 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. The Company had recorded reserves of $6,682,000 and $4,125,000 for excess and obsolete inventory at March 31, 2018 and 2017, respectively. The quantity thresholds and reserve rates are subjective and are based on management’s judgment and knowledge of current and projected industry demand. The reserve estimates may, therefore, be revised if there are changes in the overall market for the Company’s products or market changes that in management’s judgment, impact its ability to sell or liquidate potentially excess or obsolete inventory.
The Company records vendor discounts as a reduction of inventories that are recognized as a reduction to cost of sales as the inventories are sold.
Inventory Unreturned
Inventory unreturned represents the Company’s estimate, based on historical data and prospective information provided directly by the customer, of finished goods shipped to customers that the Company expects to be returned, under its general right of return policy, after the balance sheet date. Because all cores are classified separately as long-term assets, the inventory unreturned balance includes only the added unit value of a finished good. The return rate is calculated based on expected returns within the normal operating cycle of one year. As such, the related amounts are classified in current assets.
Inventory unreturned is valued in the same manner as the Company’s finished goods inventory.
Long-term Core Inventory
Long-term core inventory consists of:
Used Cores purchased from core brokers and held in inventory at the Company’s facilities,
Used Cores returned by the Company’s customers and held in inventory at the Company’s facilities,
Used Cores returned by end-users to customers but not yet returned to the Company are classified as Remanufactured Cores until they are physically received by the Company,
Remanufactured Cores held in finished goods inventory at the Company’s facilities; and
Remanufactured Cores held at customer locations as a part of the finished goods sold to the customer. For these Remanufactured Cores, the Company expects the finished good containing the Remanufactured Core to be returned under the Company’s general right of return policy or a similar Used Core to be returned to the Company by the customer, in each case, for credit.
Long-term core inventory is recorded at average historical purchase prices determined based on actual purchases of inventory on hand. The cost and net realizable value of Used Cores for which sufficient recent purchases have occurred are deemed the same as the purchase price for purchases that are made in arm’s length transactions.
Long-term core inventory recorded at average historical purchase prices is primarily made up of Used Cores for newer products related to more recent automobile models or products for which there is a less liquid market. The Company purchases these Used Cores from core brokers to supplement the yield from returned cores and the under return by consumers.
Used Cores obtained in core broker transactions are valued based on average purchase price. The average purchase price of Used Cores for more recent automobile models is retained as the cost for these Used Cores in subsequent periods even as the source of these Used Cores shifts to the core exchange program.
Long-term core inventory is recorded at the lower of cost or net realizable value. In the absence of sufficient recent purchases the Company uses the net selling price its customers have agreed to pay for Used Cores that are not returned to the Company under the Company’s core exchange program to assess whether Used Core cost exceeds Used Core net realizable value on a customer by customer basis.
The Company classifies all of its core inventories as long-term assets. The determination of the long-term classification is based on its view that the value of the cores is not consumed or realized in cash during the Company’s normal operating cycle, which is one year for most of the cores recorded in inventory. According to guidance provided under the FASB ASC, current assets are defined as “assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.” The Company does not believe that the economic value of core inventories, which the Company classifies as long-term, is consumed because the credits issued upon the return of Used Cores offset the amounts invoiced when the Remanufactured Cores included in finished goods were sold. The Company does not expect the economic value of core inventories to be consumed, and thus the Company does not expect to realize cash, until its relationship with a customer ends, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience.
However, historically for certain finished goods sold, the Company’s customer will not send the Company a Used Core to obtain the credit the Company offers under its core exchange program. Therefore, based on the Company’s historical estimate, the Company derecognizes the core value for these finished goods as the Company believes the economic value has been consumed and the Company has realized cash.
For these reasons, the Company concluded that it is more appropriate to classify core inventory as long-term assets.
Long-term Core Inventory Deposit
The long-term core inventory deposit represents the cost of Remanufactured Cores the Company has 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, determined as noted under the caption “Long-term Core Inventory”. The selling value of these Remanufactured Cores was established based on agreed upon amounts with these customers. The Company expects to realize the selling value and the related cost of these Remanufactured Cores should its relationship with a customer end, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience.
Customer Finished Goods Returns Accrual
The customer finished goods returns accrual represents the Company’s estimate of its exposure to customer returns, including warranty returns, under its 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 non-core sales 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.
Accrued Core Payment
The accrued core payment represents the full Remanufactured Core sales price of Remanufactured Cores the Company has purchased from its customers, generally in connection with new business, which are held by these customers and remain on their premises. At the same time, the Company records the long-term core inventory for the Remanufactured Cores purchased at its cost, determined as noted under the caption “Long-term Core Inventory”. The difference between the full Remanufactured Core sales price of Remanufactured Cores and its related cost is treated as sales allowance reducing revenue when the purchases are made. The Company expects to realize the selling value and the related cost of these Remanufactured Cores should its relationship with a customer end, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience.
The repayments for these Remanufactured Core inventory purchases are made through the issuance of credits against that customer’s receivables either on a one-time basis or over an agreed-upon period. The accrued core payment is recorded as a current and noncurrent liability in the consolidated balance sheets based on whether repayments will occur within the normal operating cycle of one year.
Income Taxes
The Company accounts 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 the Company’s income tax provision are (i) the current liability or refund due for federal, state and foreign income taxes and (ii) the change in the amount of the net deferred income tax asset, including the effect of any change in the valuation allowance.
In December 2017, new tax legislation was enacted in the United States (Tax Reform Act) which resulted in significant changes to income tax expense. As a result of the Tax Reform Act, the Company re-measured certain deferred tax assets and liabilities based on the newly enacted federal rate of 21%. Accordingly, the federal net deferred tax assets were written down to account for the change. These tax changes represent provisional amounts based on the Company’s current interpretation of the Tax Reform Act and may change as it receives additional clarification and implementation guidance. The Company will continue to analyze the effects of the Tax Reform Act on its financial statements and operations. Any additional impacts from the enactment of the Tax Reform Act will be recorded as they are identified during the measurement period as provided for in accordance with Staff Accounting Bulletin No. 118.
Realization of deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income. Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the Company’s net deferred tax assets. The Company makes these estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s future plans. A valuation allowance is established when the Company believes it is not more likely than not all or some of a deferred tax assets will be realized. In evaluating the Company’s ability to recover deferred tax assets within the jurisdiction in which they arise, the Company considers 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 the Company’s July 2017 acquisition have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods. Should the actual amount differ from the Company’s estimates, the amount of the valuation allowance could be impacted.
Plant and Equipment
Plant and equipment are stated at cost, less accumulated depreciation. The cost of additions and improvements are capitalized, while maintenance and repairs are charged to expense when incurred. Depreciation is provided on a straight-line basis in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Machinery and equipment are depreciated over a range from five to ten years. Office equipment and fixtures are depreciated over a range from three to ten years. Leasehold improvements are depreciated over the lives of the respective leases or the service lives of the leasehold improvements, whichever is shorter. Depreciation of assets recorded under capital leases is included in depreciation expense.
Intangible Assets
The Company’s intangible assets other than goodwill are finite–lived and amortized on a straight-line basis over their respective useful lives. Finite-lived intangible assets are analyzed for impairment when and if indicators of impairment exist. At March 31, 2018, the Company’s intangible assets were $3,766,000 and there were no indicators of impairment.
Goodwill
The Company evaluates goodwill for impairment at least annually during the fourth quarter of each fiscal year or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The Company has concluded that there is one reporting unit and therefore, tests goodwill for impairment at the entity level. In testing for goodwill impairment, the Company may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the Company’s qualitative assessment indicates that goodwill impairment is more likely than not, a two-step impairment test is performed. The Company tests goodwill for impairment under the two-step impairment test by first comparing the carrying value of net assets to the fair value of the reporting unit. If the fair value of the reporting unit exceeds the carrying value, goodwill is not considered impaired and no further testing is required. If the carrying value of the reporting unit exceeds the fair value, goodwill is potentially impaired and the second step of the impairment test must be performed. In the second step, the Company would compare the implied fair value of the goodwill to its carrying value to determine the amount of the impairment loss, if any. The Company completed the required annual testing of goodwill for impairment during the fourth quarter of the year ended March 31, 2018, and determined through the qualitative assessment that its goodwill of $2,551,000 is not impaired.
Debt Issuance Costs
Debt issuance costs include fees and costs incurred to obtain financing. Debt issuance costs related to the Company’s term loans are presented in the balance sheet as a direct deduction from the carrying amount of the term loans. Debt issuance costs related to the Company’s revolving loan are presented in prepaid expenses and other current assets in the accompanying consolidated balance sheets, regardless of whether or not there are any outstanding borrowings under the revolving loan. These fees and costs are amortized using the straight-line method, which approximates the effective interest rate method, over the terms of the related loans and are included in interest expense in the Company’s consolidated statements of income.
Foreign Currency Translation
For financial reporting purposes, the functional currency of the foreign subsidiaries is the local currency. The assets and liabilities of foreign operations for which the local currency is the functional currency are translated into the U.S. dollar at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average exchange rates during the year. The accumulated foreign currency translation adjustment is presented as a component of comprehensive income or loss in the consolidated statements of shareholders’ equity.
Revenue Recognition
The Company recognizes revenue when performance by the Company is complete and all of the following criteria have been met:
Persuasive evidence of an arrangement exists,
Delivery has occurred or services have been rendered,
The seller’s price to the buyer is fixed or determinable, and
Collectability is reasonably assured.
For products shipped free-on-board (“FOB”) shipping point, revenue is recognized on the date of shipment. For products shipped FOB destination, revenues are recognized on the estimated or actual date of delivery. The Company includes shipping and handling charges in its gross invoice price to customers and classifies the total amount as revenue. All shipping and handling costs are expensed as incurred and included in cost of sales.
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 for the value added by remanufacturing (“unit value”). Unit value revenue is recorded based on the Company’s price list, net of applicable discounts and allowances. The Company allows customers to return slow moving and other inventory. The Company provides for such returns of inventory by reducing revenue and cost of sales for the unit value of goods sold that are expected to be returned based on a historical return analysis and information obtained from customers about current stock levels as further described under the captions “Customer Finished Goods Returns Accrual” and “Inventory Unreturned”.
The Company accounts for revenues and cost of sales on a net-of-core-value basis. The Company has determined that its business practices and contractual arrangements result in a significant portion of the Remanufactured Cores sold being replaced by similar Used Cores sent back for credit by customers under the Company’s core exchange program. Accordingly, the Company excludes the value of Remanufactured Cores from revenue.
When the Company ships a product, it recognizes an obligation to accept a similar Used Core sent back under the core exchange program by recording a contra receivable account based upon the Remanufactured Core price agreed upon by the Company and its customer. Upon receipt of a Used Core, the Company grants the customer a credit based on the Remanufactured Core price billed and restores the Used Core to on-hand inventory.
When the Company ships a product, it invoices certain customers for the Remanufactured Core portion of the product at full Remanufactured Core sales price. For these Remanufactured Cores, the Company recognizes core revenue based upon an estimate of the rate at which the Company’s customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the Company’s core exchange program.
In addition, the Company recognizes revenue related to Remanufactured Cores originally sold at a nominal price and not expected to be replaced by a similar Used Core under the core exchange program. Unlike the full price Remanufactured Cores, the Company only recognizes revenue from nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program when the Company believes it has met all of the following criteria:
The Company has a signed agreement with the customer covering the nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program. This agreement must specify the number of Remanufactured Cores its customer will pay cash for in lieu of sending back a similar Used Core and the basis on which the nominally priced Remanufactured Cores are to be valued (normally the average price per Remanufactured Core stipulated in the agreement).
The contractual date for reconciling the Company’s records and customer’s records of the number of nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program must be in the current or a prior period.
The reconciliation of the nominally priced Remanufactured Cores must be completed and agreed to by the customer.
The amount must be billed to the customer.
Marketing Allowances
The Company records the cost of all marketing allowances provided to its 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. See Note 15 for a description of all marketing allowances.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising expenses for the years ended March 31, 2018, 2017 and 2016 were $610,000, $525,000 and $474,000, respectively.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options and warrants, which would result in the issuance of incremental shares of common stock.
The following presents a reconciliation of basic and diluted net income per share.
| | Years Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Net income | | $ | 16,316,000 | | | $ | 37,573,000 | | | $ | 10,563,000 | |
| | | | | | | | | | | | |
Basic shares | | | 18,854,993 | | | | 18,608,812 | | | | 18,233,163 | |
Effect of dilutive stock options and warrants | | | 659,782 | | | | 809,894 | | | | 832,930 | |
Diluted shares | | | 19,514,775 | | | | 19,418,706 | | | | 19,066,093 | |
Net income per share: | | | | | | | | | | | | |
Basic net income per share | | $ | 0.87 | | | $ | 2.02 | | | $ | 0.58 | |
| | | | | | | | | | | | |
Diluted net income per share | | $ | 0.84 | | | $ | 1.93 | | | $ | 0.55 | |
The effect of dilutive options and warrants excludes (i) 448,039 shares subject to options with exercise prices ranging from $27.40 to $34.17 per share for the year ended March 31, 2018, (ii) 293,239 shares subject to options with exercise prices ranging from $28.68 to $34.17 per share for the year ended March 31, 2017, and (iii) 1,100 shares subject to options with an exercise price of $34.17 per share for the year ended March 31, 2016, which were anti-dilutive.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. On an on-going basis, the Company evaluates its estimates, including those related to the carrying amount of plant and equipment; valuation of acquisition-related intangible assets including goodwill, impairment of long-lived assets, valuation and return allowances for receivables, inventories, and deferred income taxes; accrued liabilities, warrant liability, share-based compensation, and litigation and disputes.
The Company uses significant estimates in the calculation of sales returns. These estimates are based on the Company’s historical return rates and an evaluation of estimated sales returns from specific customers.
The Company uses significant estimates in the calculation of the lower of cost or net realizable value of long-term core inventory.
The Company’s calculation of inventory reserves involves significant estimates. The basis for the inventory reserve is a comparison of inventory on hand to historical production usage or sales volumes.
The Company uses significant estimates in the calculation of its income tax provision or benefit by using forecasts to estimate whether it will have sufficient future taxable income to realize its deferred tax assets. There can be no assurances that the Company’s taxable income will be sufficient to realize such deferred tax assets.
The Company uses significant estimates in the ongoing calculation of potential liabilities from uncertain tax positions that are more likely than not to occur.
A change in the assumptions used in the estimates for sales returns, inventory reserves and income taxes could result in a difference in the related amounts recorded in the Company’s consolidated financial statements.
Financial Instruments
The carrying amounts of cash, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loan, term loan and other long-term liabilities approximate their fair value based on current rates for instruments with similar characteristics.
Share-Based Payments
In accounting for share-based compensation awards, the Company follows the accounting guidance for equity-based compensation, which requires that the Company measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost associated with stock options is estimated using the Black-Scholes option-pricing model. The cost associated with restricted stock units is measured based on the number of shares granted and the closing price of the Company’s common stock on the grant date, subject to continued employment. The cost of equity instruments is recognized in the consolidated statements of income on a straight-line basis over the period during which an employee is required to provide service in exchange for the award. In addition, the Company accounts for forfeitures as they occur.
The Black-Scholes option-pricing model requires the input of subjective assumptions including the expected volatility of the underlying stock and the expected holding period of the option. These subjective assumptions are based on both historical and other information. Changes in the values assumed and used in the model can materially affect the estimate of fair value.
The following summarizes the Black-Scholes option-pricing model assumptions used to derive the weighted average fair value of the stock options granted during the periods noted.
| | Years Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Weighted average risk free interest rate | | | 1.92 | % | | | 1.39 | % | | | 1.73 | % |
Weighted average expected holding period (years) | | | 5.82 | | | | 5.84 | | | | 5.76 | |
Weighted average expected volatility | | | 47.28 | % | | | 47.42 | % | | | 46.84 | % |
Weighted average expected dividend yield | | | - | | | | - | | | | - | |
Weighted average fair value of options granted | | $ | 12.63 | | | $ | 13.09 | | | $ | 14.14 | |
Credit Risk
The majority of the Company’s sales are to leading automotive aftermarket parts suppliers. Management believes the credit risk with respect to trade accounts receivable is limited due to the Company’s credit evaluation process and the nature of its customers. However, should the Company’s customers experience significant cash flow problems, the Company’s 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.
Deferred Compensation Plan
The Company has a deferred compensation plan for certain members of management. The plan allows participants to defer salary and bonuses. The assets of the plan are held in a trust and are subject to the claims of the Company’s general creditors under federal and state laws in the event of insolvency. Consequently, the trust qualifies as a Rabbi trust for income tax purposes. The plan’s assets consist primarily of mutual funds and are classified as available for sale. The investments are recorded at market value, with any unrealized gain or loss recorded as other comprehensive income or loss in shareholders’ equity. Adjustments to the deferred compensation liability are recorded in operating expenses. The Company did not redeem any of its short-term investments for the payment of deferred compensation liabilities during the years ended March 31, 2018 and 2017. The carrying value of plan assets was $2,828,000 and $2,140,000, and deferred compensation liability was $2,828,000 and $2,140,000 at March 31, 2018 and 2017, respectively. During the years ended March 31, 2018, 2017, and 2016, an expense of $118,000, $(14,000) and $409,000, respectively, was recorded for each year related to the deferred compensation plan.
Comprehensive Income or Loss
Comprehensive income or loss is defined as the change in equity during a period resulting from transactions and other events and circumstances from non-owner sources. The Company’s total comprehensive income or loss consists of net unrealized income or loss from foreign currency translation adjustments and unrealized gains or losses on short-term investments.
3. Acquisition
Pursuant to a share repurchase agreement dated July 18, 2017, the Company completed the acquisition of all the equity interests of D&V Electronics Ltd. (“D&V”) based in Ontario, Canada, a privately held developer and manufacturer of leading edge diagnostic equipment for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles.
The Company allocated the final purchase consideration to acquire D&V to finite-lived intangible assets of $308,000 for developed technology with an estimated useful life of 3 years and $185,000 for trademarks with an estimated useful life of 2 years, $3,379,000 for inventory, and other net assets of $1,121,000. The assets and results of operations of D&V were not significant to the Company’s consolidated financial position or results of operations, and thus pro forma information is not presented.
4. Goodwill and Intangible Assets
Goodwill
The following summarizes the change in the Company’s goodwill:
| | Years Ended March 31, | |
| | 2018 | | | 2017 | |
Balance at beginning of period | | $ | 2,551,000 | | | $ | 2,053,000 | |
Goodwill acquired | | | - | | | | 498,000 | |
Translation adjustment | | | - | | | | - | |
Impairment | | | - | | | | - | |
| | | | | | | | |
Balance at end of period | | $ | 2,551,000 | | | $ | 2,551,000 | |
Intangible Assets
The following is a summary of acquired intangible assets subject to amortization at March 31:
| | | | 2018 | | | 2017 | |
| | Weighted Average Amortization Period | | Gross Carrying Value | | | Accumulated Amortization | | | Gross Carrying Value | | | Accumulated Amortization | |
Intangible assets subject to amortization | | | | | | | | | | | | | | |
Trademarks | | 9 years | | $ | 885,000 | | | $ | 316,000 | | | $ | 705,000 | | | $ | 191,000 | |
Customer relationships | | 13 years | | | 5,900,000 | | | | 2,937,000 | | | | 5,900,000 | | | | 2,421,000 | |
Developed technology | | 3 years | | | 301,000 | | | | 67,000 | | | | - | | | | - | |
Total | | | | $ | 7,086,000 | | | $ | 3,320,000 | | | $ | 6,605,000 | | | $ | 2,612,000 | |
The Company did not retire any fully amortized intangible assets during the year ended March 31, 2018. The Company retired $33,000 of fully amortized intangible assets during the year ended March 31, 2017.
Amortization expense for acquired intangible assets is as follows:
| | Years Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Amortization expense | | $ | 710,000 | | | $ | 613,000 | | | $ | 621,000 | |
The estimated future amortization expense for acquired intangible assets subject to amortization is as follows:
Year Ending March 31, | | | |
2019 | | $ | 771,000 | |
2020 | | | 711,000 | |
2021 | | | 613,000 | |
2022 | | | 580,000 | |
2023 | | | 580,000 | |
Thereafter | | | 511,000 | |
Total | | $ | 3,766,000 | |
5. Short-Term Investments
The short-term investments contain the assets of the Company’s deferred compensation plan. The plan’s assets consist primarily of mutual funds and are classified as available for sale. The Company did not redeem any short-term investments for the payment of deferred compensation liabilities during the years ended March 31, 2018 and 2017. At March 31, 2018 and 2017, the fair market value of the short-term investments was $2,828,000 and $2,140,000, and the deferred compensation liability to plan participants was $2,828,000 and $2,140,000, respectively.
6. Accounts Receivable — Net
Included in accounts receivable — net are significant offset accounts related to customer allowances (see Note 15), customer payment discrepancies, returned goods authorizations (“RGA”) issued for in-transit unit returns, estimated future credits to be provided for Used Cores returned by the customers (see Note 2) and potential bad debts. Due to the forward looking nature and the different aging periods of certain estimated offset accounts, they may not, at any point in time, directly relate to the balances in the accounts receivable—trade account.
Accounts receivable — net is comprised of the following at March 31:
| | 2018 | | | 2017 | |
Accounts receivable — trade | | $ | 83,700,000 | | | $ | 76,902,000 | |
Allowance for bad debts | | | (4,142,000 | ) | | | (4,140,000 | ) |
Customer allowances earned | | | (11,370,000 | ) | | | (7,880,000 | ) |
Customer payment discrepancies | | | (1,110,000 | ) | | | (751,000 | ) |
Customer returns RGA issued | | | (15,274,000 | ) | | | (12,710,000 | ) |
Customer core returns accruals | | | (36,066,000 | ) | | | (25,404,000 | ) |
Less: total accounts receivable offset accounts | | | (67,962,000 | ) | | | (50,885,000 | ) |
Total accounts receivable — net | | $ | 15,738,000 | | | $ | 26,017,000 | |
Warranty Returns
The Company allows its customers to return goods that their customers have returned to them, whether or not the returned item is defective (“warranty returns”). The Company accrues an estimate of its exposure to warranty returns based on a historical analysis of the level of this type of return as a percentage of total unit sales. Amounts charged to expense for these warranty returns are considered in arriving at the Company’s net sales. At March 31, 2018 and 2017, the Company’s total warranty return accrual was $16,646,000 and $14,286,000, respectively, of which $7,204,000 and $5,303,000, respectively, was included in the customer returns RGA issued balance in the above table for expected credits to be issued against accounts receivable and $9,442,000 and $8,983,000, respectively, was included in the customer finished goods returns accrual in the consolidated balance sheets for estimated future warranty returns.
The following summarizes the change in the Company’s warranty return accrual:
| | Years Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Balance at beginning of period | | $ | 14,286,000 | | | $ | 10,845,000 | | | $ | 10,904,000 | |
Charged to expense | | | 105,156,000 | | | | 99,673,000 | | | | 80,099,000 | |
Amounts processed | | | (102,796,000 | ) | | | (96,232,000 | ) | | | (80,158,000 | ) |
Balance at end of period | | $ | 16,646,000 | | | $ | 14,286,000 | | | $ | 10,845,000 | |
7. Inventory
Non-core inventory, inventory unreturned, long-term core inventory, and long-term core inventory deposits are as follows at March 31:
| | 2018 | | | 2017 | |
Non-core inventory | | | | | | |
Raw materials | | $ | 25,805,000 | | | $ | 21,515,000 | |
Work in process | | | 635,000 | | | | 641,000 | |
Finished goods | | | 53,973,000 | | | | 48,337,000 | |
| | | 80,413,000 | | | | 70,493,000 | |
Less allowance for excess and obsolete inventory | | | (4,138,000 | ) | | | (2,977,000 | ) |
Total | | $ | 76,275,000 | | | $ | 67,516,000 | |
| | | | | | | | |
Inventory unreturned | | $ | 7,508,000 | | | $ | 7,581,000 | |
Long-term core inventory | | | | | | | | |
Used cores held at the Company's facilities | | $ | 53,278,000 | | | $ | 38,713,000 | |
Used cores expected to be returned by customers | | | 12,970,000 | | | | 11,752,000 | |
Remanufactured cores held in finished goods | | | 34,201,000 | | | | 27,667,000 | |
Remanufactured cores held at customers' locations (1) | | | 203,751,000 | | | | 185,938,000 | |
| | | 304,200,000 | | | | 264,070,000 | |
Less allowance for excess and obsolete inventory | | | (2,544,000 | ) | | | (1,148,000 | ) |
Total | | $ | 301,656,000 | | | $ | 262,922,000 | |
| | | | | | | | |
Long-term core inventory deposits | | $ | 5,569,000 | | | $ | 5,569,000 | |
(1) | Remanufactured cores held at customers’ locations represent the core portion of the Company’s customers’ finished goods at the Company’s customers’ locations. |
8. Plant and Equipment
The following summarizes plant and equipment, at cost, at March 31:
| | 2018 | | | 2017 | |
Machinery and equipment | | $ | 42,976,000 | | | $ | 32,589,000 | |
Office equipment and fixtures | | | 11,380,000 | | | | 11,806,000 | |
Leasehold improvements | | | 7,832,000 | | | | 7,641,000 | |
| | | 62,188,000 | | | | 52,036,000 | |
Less accumulated depreciation | | | (33,866,000 | ) | | | (33,599,000 | ) |
Total | | $ | 28,322,000 | | | $ | 18,437,000 | |
Plant and equipment located in the foreign countries where the Company has facilities, net of accumulated depreciation, totaled $14,919,000 and $3,855,000 at March 31, 2018 and 2017, respectively. These assets constitute substantially all the long-lived assets of the Company located outside of the United States.
9. Capital Lease Obligations
The Company leases various types of machinery and computer equipment under agreements accounted for as capital leases and included in plant and equipment as follows at March 31:
| | 2018 | | | 2017 | |
Cost | | $ | 7,092,000 | | | $ | 3,663,000 | |
Less: accumulated depreciation | | | (1,446,000 | ) | | | (893,000 | ) |
| | | | | | | | |
Total | | $ | 5,646,000 | | | $ | 2,770,000 | |
Future minimum lease payments for the capital leases are as follows:
Year Ending March 31, | | | |
2019 | | $ | 1,627,000 | |
2020 | | | 1,474,000 | |
2021 | | | 1,045,000 | |
2022 | | | 839,000 | |
2023 | | | 613,000 | |
Total minimum lease payments | | | 5,598,000 | |
Less amount representing interest | | | (514,000 | ) |
Present value of future minimum lease payments | | | 5,084,000 | |
Less current portion of lease payments | | | (1,388,000 | ) |
Long-term portion of lease payments | | $ | 3,696,000 | |
The current portion of lease payments of $1,388,000 is included in other current liabilities and the long-term portion of lease payments of $3,696,000 is included in other liabilities in the accompanying consolidated balance sheet at March 31, 2018.
10. Accrued Core Payment
At March 31, 2018 and 2017, the Company recorded $35,009,000 and $24,063,000, respectively, representing the net accrued core payment for the Remanufactured Core inventory purchased from its customers, which are held by these customers and remain on their premises.
Future repayments for accrued core payment are as follows:
Year Ending March 31, | | | | |
2019 | | $ | 17,421,000 | |
2020 | | | 7,865,000 | |
2021 | | | 6,651,000 | |
2022 | | | 4,841,000 | |
Total accrued core payment | | | 36,778,000 | |
Less amount representing interest | | | (1,769,000 | ) |
Present value of accrued core payment | | | 35,009,000 | |
Less current portion of accrued core payment | | | (16,536,000 | ) |
Long-term portion of accrued core payment | | $ | 18,473,000 | |
11. Debt
The Company has the following credit agreements.
Credit Facility
The Company is party to a $145,000,000 senior secured financing, as amended, (the “Credit Facility”) with the lenders party thereto, and PNC Bank, National Association, as administrative agent, consisting of (i) a $120,000,000 revolving loan facility, subject to borrowing base restrictions and a $15,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $25,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 3, 2020. In connection with the Credit Facility, the lenders were granted a security interest in substantially all of the assets of the Company. The Credit Facility permits the payment of up to $10,000,000 of dividends per calendar year, subject to a minimum availability threshold and pro forma compliance with financial covenants. This amount was increased to $15,000,000 under the April 2017 amendment to the Credit Facility.
In April 2017, the Company entered into a consent and fourth amendment to the Credit Facility (the “Fourth Amendment”) which, among other things, (i) increased the borrowing base limit with respect to inventory located in Mexico, (ii) amended the definition and calculation of consolidated EBITDA to raise the limitation on the add-back for non-capitalized transaction expenses related to the expansion of operations in Mexico, (iii) increased the annual limit on permitted stock repurchases and dividends, and (iv) modified certain other categories (including increasing certain baskets for permitted acquisitions) and thresholds to, among other things, further accommodate the expansion of operations in Mexico.
In July 2017, the Company entered into a fifth amendment to the Credit Facility (the “Fifth Amendment”) which, among other things, amended the definition of permitted acquisitions, permitted indebtedness, and pledge agreements.
The Term Loans require quarterly principal payments of $781,250. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.50%, 2.75% or 3.00% or a reference rate plus a margin of 1.50%, 1.75% or 2.00%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.25% to 0.375%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on the Company’s Term Loans and Revolving Facility was 4.42% and 4.52%, respectively, at March 31, 2018 and 3.29% and 3.55%, respectively, at March 31, 2017.
The Credit Facility, among other things, requires the Company to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all financial covenants as of March 31, 2018.
In addition to other covenants, the Credit Facility places limits on the Company’s ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by the Company and its subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.
The following summarizes information about the Company’s Term Loans at March 31:
| | 2018 | | | 2017 | |
Principal amount of term loan | | $ | 17,188,000 | | | $ | 20,312,000 | |
Unamortized financing fees | | | (207,000 | ) | | | (313,000 | ) |
Net carrying amount of term loan | | | 16,981,000 | | | | 19,999,000 | |
Less current portion of term loan | | | (3,068,000 | ) | | | (3,064,000 | ) |
Long-term portion of term loan | | $ | 13,913,000 | | | $ | 16,935,000 | |
Future repayments of the Company’s Term Loans are as follows:
Year Ending March 31, | | | |
2019 | | $ | 3,125,000 | |
2020 | | | 3,125,000 | |
2021 | | | 10,938,000 | |
Total payments | | $ | 17,188,000 | |
The Company had $54,000,000 and $11,000,000 outstanding under the Revolving Facility at March 31, 2018 and 2017, respectively. In addition, $260,000 was reserved for standby letters of credit for workers’ compensation insurance and $600,000 for commercial letters of credit at March 31, 2018. At March 31, 2018, $65,140,000, subject to certain adjustments, was available under the Revolving Facility.
WX Agreement
In August 2012, the Company entered into a Revolving Credit/Strategic Cooperation Agreement (the “WX Agreement”) with Wanxiang America Corporation (the “Supplier”) and the discontinued subsidiaries. In connection with the WX Agreement, the Company issued a warrant (the “Supplier Warrant”) to the Supplier to purchase up to 516,129 shares of the Company’s common stock for an exercise price of $7.75 per share exercisable at any time after August 22, 2014 and on or prior to September 30, 2017.
On September 8, 2017, the Supplier exercised the Supplier Warrant in full and paid the Company $4,000,000. As a result of the exercise, the Supplier Warrant is no longer outstanding. The fair value of the Supplier Warrant on the exercise date was $9,566,000 using level 3 inputs and the Monte Carlo simulation model. The following assumptions were used to calculate the fair value of the Supplier Warrant: dividend yield of 0%, expected volatility of 26.4%, risk-free interest rate of 0.96%, subsequent financing probability of 0%, and an expected life of 0.06 years. The Company recorded a non-cash reclassification of the Supplier Warrant’s fair value to shareholders’ equity on the exercise date, with no further adjustments to the fair value of the Supplier Warrant being required. The fair value of the Supplier Warrant was $11,879,000 at March 31, 2017 and was included in other liabilities in the consolidated balance sheet.
During the years ended March 31, 2018 and 2017, a gain of $2,313,000 and $3,764,000, respectively, was recorded in general and administrative expenses due to the change in the fair value of this warrant liability.
12. Accounts Receivable Discount Programs
The Company uses receivable discount programs with certain customers and their respective banks. Under these programs, the Company may sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow the Company to accelerate receipt of payment on customers’ receivables.
The following is a summary of the Company’s accounts receivable discount programs:
| | Years Ended March 31, | |
| | 2018 | | | 2017 | |
| | | | | | |
Receivables discounted | | $ | 357,224,000 | | | $ | 352,369,000 | |
Weighted average days | | | 340 | | | | 342 | |
Weighted average discount rate | | | 3.3 | % | | | 2.9 | % |
Amount of discount as interest expense | | $ | 11,182,000 | | | $ | 9,724,000 | |
13. Financial Risk Management and Derivatives
Purchases and expenses denominated in currencies other than the U.S. dollar, which are primarily related to the Company’s facilities overseas, expose the Company to market risk from material movements in foreign exchange rates between the U.S. dollar and the foreign currency. The Company’s primary risk exposure is from fluctuations in the value of the Mexican peso and to a lesser extent the Chinese yuan. To mitigate these risks, the Company enters into forward foreign currency exchange contracts to exchange U.S. dollars for these foreign currencies. The extent to which forward foreign currency exchange contracts are used is modified periodically in response to the Company’s estimate of market conditions and the terms and length of anticipated requirements.
The Company enters into forward foreign currency exchange contracts in order to reduce the impact of foreign currency fluctuations and not to engage in currency speculation. The use of derivative financial instruments allows the Company to reduce its exposure to the risk that the eventual cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in exchange rates. The Company does not hold or issue financial instruments for trading purposes. The forward foreign currency exchange contracts are designated for forecasted expenditure requirements to fund foreign operations.
The Company had forward foreign currency exchange contracts with a U.S. dollar equivalent notional value of $31,304,000 and $26,880,000 at March 31, 2018 and 2017, respectively. These contracts generally expire in a year or less, at rates agreed at the inception of the contracts. The counterparty to this derivative transaction is a major financial institution with investment grade or better credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the potential unrealized gains (which offset currency fluctuations adverse to the Company) in any such contract should this counterparty fail to perform as contracted. Any changes in the fair values of forward foreign currency exchange contracts are reflected in current period earnings and accounted for as an increase or offset to general and administrative expenses.
The following shows the effect of the Company’s derivative instruments on its consolidated statements of income:
| | Gain (Loss) Recognized within General and Administrative Expenses | |
Derivatives Not Designated as | | Years Ended March 31, | |
Hedging Instruments | | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Forward foreign currency exchange contracts | | $ | 752,000 | | | $ | 843,000 | | | $ | 777,000 | |
The fair value of the forward foreign currency exchange contracts of $1,179,000 and $427,000 are included in prepaid and other current assets in the accompanying consolidated balance sheets at March 31, 2018 and 2017, respectively.
14. Fair Value Measurements
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a three-tier valuation hierarchy based upon observable and unobservable inputs:
Level 1 — Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 — Valuation is based upon unobservable inputs that are significant to the fair value measurement.
The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The following sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis according to the valuation techniques the Company used to determine their fair values at:
| | March 31, 2018 | | | March 31, 2017 | |
| | | | | Fair Value Measurements Using Inputs Considered as | | | | | | Fair Value Measurements Using Inputs Considered as | |
| | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
Short-term investments | | | | | | | | | | | | | | | | | | | | | | | | |
Mutual funds | | $ | 2,828,000 | | | $ | 2,828,000 | | | | - | | | | - | | | $ | 2,140,000 | | | $ | 2,140,000 | | | | - | | | | - | |
Prepaid expenses and other current assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Forward foreign currency exchange contracts | | | 1,179,000 | | | | - | | | $ | 1,179,000 | | | | - | | | | 427,000 | | | | - | | | $ | 427,000 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other current liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred compensation | | | 2,828,000 | | | | 2,828,000 | | | | - | | | | - | | | | 2,140,000 | | | | 2,140,000 | | | | - | | | | - | |
Other liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Warrant liability | | | - | | | | - | | | | - | | | | - | | | | 11,879,000 | | | | - | | | | - | | | $ | 11,879,000 | |
Short-term Investments and Deferred Compensation
The Company’s short-term investments, which fund its deferred compensation liabilities, consist of investments in mutual funds. These investments are classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis.
Forward Foreign Currency Exchange Contracts
The forward foreign currency exchange contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers and classified as Level 2. During the years ended March 31, 2018 and 2017, gains of $752,000 and $843,000, respectively, were recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts.
Level 3 Fair Value Measurements
The following summarizes the activity for Level 3 fair value measurements:
| | Years Ended March 31, | |
| | 2018 | | | 2017 | |
| | Supplier Warrant | | | Contingent Consideration | | | Supplier Warrant | | | Contingent Consideration | |
|
Beginning balance | | $ | 11,879,000 | | | $ | - | | | $ | 15,643,000 | | | $ | 330,000 | |
Newly issued | | | - | | | | - | | | | - | | | | - | |
Total (gain) loss included in net income | | | (2,313,000 | ) | | | - | | | | (3,764,000 | ) | | | (16,000 | ) |
Exercises/settlements (1) | | | (9,566,000 | ) | | | - | | | | - | | | | (314,000 | ) |
Net transfers in (out) of Level 3 | | | - | | | | - | | | | - | | | | - | |
Ending balance | | $ | - | | | $ | - | | | $ | 11,879,000 | | | $ | - | |
(1) | Represents the fair value of the Supplier Warrant as of the exercise date (see Note 11). |
During the year ended March 31, 2018, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loan, term loan and other long-term liabilities approximate their fair value based on current rates for instruments with similar characteristics.
15. Commitments and Contingencies
Operating Lease Commitments
The Company leases various facilities in North America and Asia under operating leases expiring through December 2032, which includes the 15-year lease for a new 410,000 square foot facility in Tijuana, Mexico. The Company also has short-term contracts of one year or less covering its third party warehouses that provide for contingent payments based on the level of sales that are processed through the third party warehouse.
The remaining future minimum rental payments under the above operating leases are as follows:
Year Ending March 31, | | | |
2019 | | $ | 5,873,000 | |
2020 | | | 4,437,000 | |
2021 | | | 4,501,000 | |
2022 | | | 4,360,000 | |
2023 | | | 3,066,000 | |
Thereafter | | | 30,824,000 | |
| | | | |
Total minimum lease payments | | $ | 53,061,000 | |
During the years ended March 31, 2018, 2017 and 2016, the Company incurred total operating lease expenses of $4,362,000, $3,495,000 and $3,263,000, respectively.
Commitments to Provide Marketing Allowances under Long-Term Customer Contracts
The Company has or is renegotiating long-term agreements with many of its major customers. Under these agreements, which in most cases have initial terms of at least four years, the Company is designated as the exclusive or primary supplier for specified categories of the Company’s products. Because of the very competitive nature of the market and the limited number of customers for these products, the Company’s customers have sought and obtained price concessions, significant marketing allowances, and more favorable delivery and payment terms in consideration for the Company’s 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 the Company meet ongoing performance standards. The Company’s contracts with major customers expire at various dates through April 2021. While these longer-term agreements strengthen the Company’s customer relationships, the increased demand for the Company’s products often requires that the Company increase its inventories and personnel. Customer demands that the Company purchase their Remanufactured Core inventory also require the use of the Company’s working capital.
The marketing and other allowances the Company typically grants its customers in connection with its new or expanded customer relationships adversely impact the near-term revenues, profitability, and associated cash flows from these arrangements. Such allowances include sales incentives and concessions and typically consist of: (i) allowances which may only be applied against future purchases and are recorded as a reduction to revenues in accordance with a schedule set forth in the long-term contract, (ii) allowances related to a single exchange of product that are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered, and (iii) allowances that are made in connection with the purchase of inventory from a customer.
The following summarizes the breakout of allowances discussed above, recorded as a reduction to revenues:
| | Years Ended March 31, | |
| | 2018 | | 2017 | | 2016 | |
| | | | | | | |
Allowances incurred under long-term customer contracts | | $ | 24,829,000 | | | $ | 23,684,000 | | | $ | 29,845,000 | |
Allowances related to a single exchange of product | | | 79,813,000 | | | | 67,262,000 | | | | 47,451,000 | |
Allowances related to core inventory purchase obligations | | | 2,545,000 | | | | 5,470,000 | | | | 2,268,000 | |
Total customer allowances recorded as a reduction of revenues | | $ | 107,187,000 | | | $ | 96,416,000 | | | $ | 79,564,000 | |
The following presents the Company’s commitments to incur allowances, excluding allowances related to a single exchange of product, which will be recognized as a charge against revenue, and customer Remanufactured Core purchase obligations, which will be recognized in accordance with the terms of the relevant long-term customer contracts:
Year Ending March 31, | | | |
2019 | | $ | 30,154,000 | |
2020 | | | 21,927,000 | |
2021 | | | 16,982,000 | |
2022 | | | 113,000 | |
| | | | |
Total marketing allowances | | $ | 69,176,000 | |
16. Significant Customer and Other Information
Significant Customer Concentrations
The Company’s largest customers accounted for the following total percentage of net sales:
| | Years Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Customer A | | | 41 | % | | | 44 | % | | | 48 | % |
Customer B | | | 24 | % | | | 20 | % | | | 18 | % |
Customer C | | | 19 | % | | | 19 | % | | | 21 | % |
Customer D | | | 4 | % | | | 4 | % | | | 3 | % |
The Company’s largest customers accounted for the following total percentage of accounts receivable — trade at March 31:
| | 2018 | | | 2017 | |
Customer A | | | 36 | % | | | 33 | % |
Customer B | | | 16 | % | | | 18 | % |
Customer C | | | 22 | % | | | 12 | % |
Customer D | | | 5 | % | | | 16 | % |
Geographic and Product Information
The Company’s products are predominantly sold in the U.S. and accounted for the following total percentage of net sales:
| | Years Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Rotating electrical products | | | 78 | % | | | 78 | % | | | 78 | % |
Wheel hub products | | | 17 | % | | | 19 | % | | | 20 | % |
Brake master cylinders products | | | 2 | % | | | 3 | % | | | 2 | % |
Other products | | | 3 | % | | | - | % | | | - | % |
| | | 100 | % | | | 100 | % | | | 100 | % |
Significant Supplier Concentrations
No suppliers accounted for more than 10% of the Company’s inventory purchases for the years ended March 31, 2018, 2017 and 2016.
17. Income Taxes
On December 22, 2017, comprehensive tax reform legislation known as the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Tax Reform Act amends the Internal Revenue Code to reduce U.S. tax rates and modify policies, credits and deductions for individuals and businesses. The effects of the Tax Reform Act on the Company are as follows:
Remeasurement of Deferred Taxes
The Tax Reform Act permanently reduces the U.S. federal corporate income tax rate from 35% to 21%, effective for tax years beginning after 2017. GAAP requires an adjustment to deferred taxes as a result of a change in the corporate tax rate in the period that the change is enacted, with the change recorded to the current year tax provision. Accordingly, the Company has remeasured its deferred tax assets and liabilities at the new tax rate and recorded a one-time noncash tax charge of $4,863,000 to deferred income taxes for the year ended March 31, 2018. This charge is reflected in the Company’s increased effective tax rate for the year.
Mandatory Transition Tax
In connection with the move by the U.S. to a partial territorial tax system, the Tax Reform Act provides for the exclusion of foreign-sourced dividends received by a U.S. corporation from its foreign-owned corporations beginning in 2018. In addition, the Tax Reform Act imposes a toll charge in 2017 on the deemed repatriation of a U.S. shareholder’s pro-rata share of certain foreign subsidiaries’ post-1986 accumulated earnings. The toll charge assesses an effective tax rate of 15.5% on cash and other liquid assets of U.S.-owned foreign corporations, while subjecting all other property of such corporations to an effective tax rate of 8.0%, and allows for available foreign tax credits to reduce the resulting toll charge. Taxpayers may elect to pay this tax liability over eight years on an interest-free basis. The Company has accrued an estimated toll charge liability of $530,000, reflected in current taxes payable as of March 31, 2018.
Executive Compensation
The Tax Reform Act maintains the $1,000,000 limitation on deductible compensation to cover employees. However, it eliminates the current exception for performance-based compensation and expands the definition of covered employees to include the chief financial officer. The expansion of executive compensation limitations are effective in 2018. The modifications do not apply to remuneration paid pursuant to a written binding contract in effect on November 2, 2017 if it was not materially modified on or after that date.
As a result of the Tax Reform Act, the SEC provided guidance (Staff Accounting Bulletin 118 (“SAB 118”)) that allows public companies to record provisional amounts for those impacts, with the requirement that the accounting be completed in a period not to exceed one year from the date of enactment. As of March 31, 2018, the Company has not completed the accounting for the tax effects of the Tax Reform Act. Therefore, the Company has recorded provisional amounts for the effects of the Tax Reform Act, including but not limited to, the following primary impacts of the Tax Reform Act: remeasurement of deferred tax assets and liabilities and the estimated calculation of the one-time mandatory transition tax on undistributed earnings of foreign affiliates.
The income tax expense is as follows:
| | Years Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Current tax expense | | | | | | | | | |
Federal | | $ | 12,153,000 | | | $ | 9,451,000 | | | $ | 12,400,000 | |
State | | | 1,406,000 | | | | 318,000 | | | | 1,995,000 | |
Foreign | | | 1,215,000 | | | | 1,455,000 | | | | 803,000 | |
| | | | | | | | | | | | |
Total current tax expense | | | 14,774,000 | | | | 11,224,000 | | | | 15,198,000 | |
| | | | | | | | | | | | |
Deferred tax expense (benefit) | | | | | | | | | | | | |
Federal | | | 2,779,000 | | | | 4,291,000 | | | | (2,929,000 | ) |
State | | | 333,000 | | | | 2,174,000 | | | | (757,000 | ) |
Foreign | | | (23,000 | ) | | | (384,000 | ) | | | (33,000 | ) |
| | | | | | | | | | | | |
Total deferred tax expense (benefit) | | | 3,089,000 | | | | 6,081,000 | | | | (3,719,000 | ) |
| | | | | | | | | | | | |
Total income tax expense | | $ | 17,863,000 | | | $ | 17,305,000 | | | $ | 11,479,000 | |
Deferred income taxes consist of the following at March 31:
| | 2018 | | | 2017 | |
Assets | | | | | | |
Accounts receivable valuation | | $ | 3,915,000 | | | $ | 4,697,000 | |
Allowance for customer incentives | | | 2,038,000 | | | | 2,894,000 | |
Inventory obsolescence reserve | | | 1,666,000 | | | | 1,608,000 | |
Stock options | | | 1,728,000 | | | | 1,971,000 | |
Intangibles, net | | | 59,000 | | | | 339,000 | |
Estimate for returns | | | 1,115,000 | | | | 3,191,000 | |
Accrued compensation | | | 1,152,000 | | | | 1,785,000 | |
Net operating losses | | | 1,079,000 | | | | 834,000 | |
Tax credits | | | 1,363,000 | | | | - | |
Other | | | 2,091,000 | | | | 2,065,000 | |
| | | | | | | | |
Total deferred tax assets | | $ | 16,206,000 | | | $ | 19,384,000 | |
| | | | | | | | |
Liabilities | | | | | | | | |
Property and equipment, net | | | (1,025,000 | ) | | | (1,605,000 | ) |
Other | | | (3,072,000 | ) | | | (4,413,000 | ) |
| | | | | | | | |
Total deferred tax liabilities | | $ | (4,097,000 | ) | | $ | (6,018,000 | ) |
| | | | | | | | |
Less valuation allowance | | $ | (1,779,000 | ) | | $ | - | |
| | | | | | | | |
Net deferred tax assets | | $ | 10,330,000 | | | $ | 13,366,000 | |
| | | | | | | | |
Net long-term deferred income tax liability | | | (226,000 | ) | | | (180,000 | ) |
Net long-term deferred income tax asset | | | 10,556,000 | | | | 13,546,000 | |
| | | | | | | | |
Total | | $ | 10,330,000 | | | $ | 13,366,000 | |
At March 31, 2018, the Company had state net operating loss carryforwards of $932,000. The net operating loss carryforwards expire between fiscal years 2022 and 2036.
Realization of deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income. Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the Company’s net deferred tax assets. The Company makes these estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s future plans. A valuation allowance is established when the Company believes it is not more likely than not all or some of a deferred tax assets will be realized. In evaluating the Company’s ability to recover deferred tax assets within the jurisdiction in which they arise, the Company considers 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 the Company’s July 2017 acquisition have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods. Should the actual amount differ from the Company’s estimates, the amount of the valuation allowance could be impacted.
For the years ended March 31, 2018, 2017, and 2016, the primary components of the Company’s income tax expense were (i) the impact of the changes as a result of the Tax Reform Act, (ii) foreign income taxed at rates that are different from the federal statutory rate, (iii) non-deductible expenses in connection with the fair value adjustments on the warrants, (iv) impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m), (v) the impact of uncertain tax positions, (vi) the change in the blended state rate, and (vii) the excess tax benefit relating to share-based compensation.
The difference between the income tax expense at the federal statutory rate and the Company’s effective tax rate is as follows:
| | Years Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Statutory federal income tax rate | | | 31.5 | % | | | 35.0 | % | | | 35.0 | % |
State income tax rate, net of federal benefit | | | 3.3 | % | | | 2.2 | % | | | 4.0 | % |
Excess tax benefit from stock compensation | | | (0.7 | )% | | | (1.4 | )% | | | - | % |
Foreign income taxed at different rates | | | (2.6 | )% | | | (0.7 | )% | | | (0.8 | )% |
Warrants | | | (2.1 | )% | | | (2.4 | )% | | | 8.2 | % |
Non-deductible executive compensation | | | 1.0 | % | | | 0.8 | % | | | 2.2 | % |
Change in valuation allowance | | | 4.9 | % | | | - | % | | | - | % |
Effects of mandatory redeemed repatriation | | | 1.6 | % | | | - | % | | | - | % |
Effects of U.S. tax rate changes | | | 14.2 | % | | | - | % | | | - | % |
Uncertain Tax Positions | | | 0.6 | % | | | (0.2 | )% | | | 0.4 | % |
Other income tax | | | 0.6 | % | | | (1.8 | )% | | | 3.1 | % |
| | | | | | | | | | | | |
| | | 52.3 | % | | | 31.5 | % | | | 52.1 | % |
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions with varying statutes of limitations. At March 31, 2018, the Company is not under examination in any jurisdiction and the years ended March 31, 2017, 2016, and 2015 remain subject to examination. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | Years Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Balance at beginning of period | | $ | 1,092,000 | | | $ | 1,181,000 | | | $ | 1,117,000 | |
Additions based on tax positions related to the current year | | | 234,000 | | | | 141,000 | | | | 57,000 | |
Additions for tax positions of prior year | | | - | | | | 106,000 | | | | 217,000 | |
Reductions for tax positions of prior year | | | (107,000 | ) | | | - | | | | (210,000 | ) |
Settlements | | | - | | | | (336,000 | ) | | | - | |
| | | | | | | | | | | | |
Balance at end of period | | $ | 1,219,000 | | | $ | 1,092,000 | | | $ | 1,181,000 | |
At March 31, 2018, 2017 and 2016, there are $1,054,000, $840,000 and $678,000 of unrecognized tax benefits that if recognized would affect the annual effective tax rate.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits as part of income tax expense. During the years ended March 31, 2018, 2017, and 2016, the Company recognized approximately $5,000, $51,000, and $34,000 in interest and penalties. The Company had approximately $146,000 and $141,000 for the payment of interest and penalties accrued at March 31, 2018 and 2017, respectively.
18. Defined Contribution Plans
The Company has a 401(k) plan covering all employees who are 21 years of age with at least six months of service. The plan permits eligible employees to make contributions up to certain limitations, with the Company matching 50% of each participating employee’s contribution up to the first 6% of employee compensation. Employees are immediately vested in their voluntary employee contributions and vest in the Company’s matching contributions ratably over five years. The Company’s matching contribution to the 401(k) plan was $389,000, $353,000, and $347,000 for the years ended March 31, 2018, 2017, and 2016, respectively.
19. Share-based Payments
At March 31, 2018, there were 342,000 shares of the Company’s common stock reserved for grants to the Company’s non-employee directors under the 2014 Non-Employee Director Incentive Award Plan (the “2014 Plan”). Under the 2014 Plan, (i) 35,659 and 37,383 of restricted stock units were issued and (ii) 236,976 and 263,078 shares of common stock were available for grant under this plan at March 31, 2018 and 2017, respectively.
At March 31, 2018, there were 3,950,000 shares of common stock reserved for grant to all employees of the Company under the 2010 Incentive Award Plan (the “2010 Plan”). Under the 2010 Plan, (i) 98,169 and 88,894 shares of restricted stock units were outstanding, (ii) options to purchase 1,046,298 and 898,009 shares of common stock were outstanding, and (iii) 1,573,810 and 688,765 shares of common stock were available for grant at March 31, 2018 and 2017, respectively.
In addition, at March 31, 2018 and 2017, options to purchase 97,000 and 128,000 shares of common stock, respectively, were outstanding under the 2004 Non-Employee Director Stock Option Plan. There were no options outstanding to purchase common stock under the 2003 Long-Term Incentive Plan at March 31, 2018 and options to purchase 10,350 shares of common stock were outstanding under this plan at March 31, 2017. No options remain available for grant under these plans.
The shares of common stock issued upon exercise of a previously granted stock option are considered new issuances from shares reserved for issuance upon adoption of the various plans. The Company requires that the option holders provide a written notice of exercise to the stock plan administrator and payment for the shares prior to issuance of the shares.
Stock Options
The following is a summary of stock option activity during the year:
| | Number of Shares | | | Weighted Average Exercise Price | |
Outstanding at March 31, 2016 | | | 1,036,359 | | | $ | 14.92 | |
Granted | | | 170,890 | | | $ | 27.27 | |
Exercised | | | (55,351 | ) | | $ | 8.65 | |
Forfeited | | | (8,600 | ) | | $ | 28.92 | |
Outstanding at March 31, 2017 | | | 1,143,298 | | | $ | 16.97 | |
At March 31, 2018, options to purchase 325,274 shares of common stock were unvested at the weighted average exercise price of $28.23.
Based on the market value of the Company’s common stock at March 31, 2018, 2017, and 2016, the pre-tax intrinsic value of options exercised was $913,000, $2,477,000, and $14,002,000, respectively. The total fair value of stock options vested during the years ended March 31, 2018, 2017, and 2016 was $1,572,000, $1,290,000, and $905,000, respectively.
The following summarizes information about the options outstanding at March 31, 2018:
| | | Options Outstanding | | Options Exercisable |
Range of Exercise price | | | Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Life In Years | | | Aggregate Intrinsic Value | | Shares | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value |
$4.17 to $6.25 | | | | 49,000 | | | $ | 4.87 | | | | 1.35 | | | | | | 49,000 | | | $ | 4.87 | | | |
$6.26 to $7.43 | | | | 354,534 | | | | 6.48 | | | | 4.70 | | | | | | 354,534 | | | | 6.48 | | | |
$7.44 to $19.94 | | | | 211,132 | | | | 9.86 | | | | 5.23 | | | | | | 211,132 | | | | 9.86 | | | |
$19.95 to $34.17 | | | | 528,632 | | | | 27.96 | | | | 8.12 | | | | | | 203,358 | | | | 27.54 | | | |
| | | | 1,143,298 | | | $ | 16.97 | | | | 6.24 | | $ | 8,555,000 | | | 818,024 | | | $ | 12.49 | | $ | 8,555,000 |
The aggregate intrinsic values in the above table represent the pre-tax value of all in-the-money options if all such options had been exercised on March 31, 2018 based on the Company’s closing stock price of $21.43 as of that date.
At March 31, 2018, there was $2,795,000 of total unrecognized compensation expense from stock-based compensation granted under the plans, which is related to non-vested shares. The compensation expense is expected to be recognized over a weighted average vesting period of 1.7 years.
Restricted Stock Units (“RSUs”)
During the years ended March 31, 2018 and 2017, the Company granted 77,854 and 62,637 shares of RSUs, respectively, with an estimated grant date fair value of $2,157,000 and $1,774,000, respectively, which was based on the closing market price on the date of grant. The fair value related to these awards is recognized as compensation expense over the vesting period. These awards generally vest in three equal installments beginning each anniversary from the grant date, subject to continued employment. Upon vesting, these awards may be net share settled to cover the required withholding tax with the remaining amount converted into an equivalent number of shares of common stock. Total shares withheld during the years ended March 31, 2018 and 2017 were 21,361 and 36,586, respectively, and was based on the value of these awards as determined by the Company’s closing stock price on the vesting date.
The following is a summary of changes in the status of non-vested RSUs during the year:
| | Number of Shares | | | Weighted Average Grant Date Fair Value | |
Non-vested at March 31, 2017 | | | 126,277 | | | $ | 28.26 | |
Granted | | | 77,854 | | | $ | 27.70 | |
Vested | | | (68,869 | ) | | $ | 27.41 | |
Forfeited | | | (1,434 | ) | | $ | 28.37 | |
Non-vested at March 31, 2018 | | | 133,828 | | | $ | 28.37 | |
As of March 31, 2018, there was $2,648,000 of unrecognized compensation expense related to these awards, which will be recognized over the remaining vesting period of approximately 1.9 years.
20. Litigation
The Company is subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding the Company’s business. Management does not believe that the outcome of these other matters will have a material adverse effect on its financial position or future results of operations.
21. Share Repurchase Program
As of March 31, 2018, the Company’s board of directors had approved a stock repurchase program of up to $20,000,000 of its common stock. As of March 31, 2018, $11,630,000 of the $20,000,000 had been utilized and $8,370,000 remained available to repurchase shares under the authorized share repurchase program, subject to the limit in the Company’s credit facility. The Company retired the 511,746 shares repurchased under this program through March 31, 2018. The Company’s share repurchase program does not obligate it to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.
22. Accumulated Other Comprehensive Income (Loss)
The following summarizes the changes in accumulated other comprehensive income (loss) for the years ended March 31:
| | 2018 | | | 2017 | |
| | Unrealized Gain on Short-Term Investments | | | Foreign Currency Translation | | | Total | | | Unrealized Gain on Short-Term Investments | | | Foreign Currency Translation | | | Total | |
| | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 528,000 | | | $ | (7,969,000 | ) | | $ | (7,441,000 | ) | | $ | 332,000 | | | $ | (5,184,000 | ) | | $ | (4,852,000 | ) |
Other comprehensive income (loss), net of tax | | | 218,000 | | | | 1,795,000 | | | | 2,013,000 | | | | 196,000 | | | | (2,785,000 | ) | | | (2,589,000 | ) |
Amounts reclassified from other comprehensive income (loss), net of tax | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Ending balance | | $ | 746,000 | | | $ | (6,174,000 | ) | | $ | (5,428,000 | ) | | $ | 528,000 | | | $ | (7,969,000 | ) | | $ | (7,441,000 | ) |
23. Subsequent Events
Credit Facility
On June 5, 2018 the Company entered into an Amended and Restated Credit Facility (the “New Credit Facility”), with the lenders party thereto, and PNC Bank, National Association, as administrative agent, consisting of (i) a $200,000,000 revolving loan facility, subject to borrowing base restrictions, a $20,000,000 sublimit for borrowings by Canadian borrowers, and a $15,000,000 sublimit for letters of credit (the “New Revolving Facility) and (ii) a $30,000,000 term loan facility (the “New Term Loans”). The loans under the New Credit Facility mature on June 5, 2023. In connection with the New Credit Facility, the lenders were granted a security interest in substantially all of the assets of the Company.
24. Unaudited Quarterly Financial Data
The following summarizes selected quarterly financial data for the year ended March 31, 2018.
| | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | |
| | | | | | | | | | | | |
Net sales | | $ | 95,063,000 | | | $ | 111,774,000 | | | $ | 100,127,000 | | | $ | 121,108,000 | |
Cost of goods sold | | | 69,224,000 | | | | 84,612,000 | | | | 77,583,000 | | | | 90,780,000 | |
Gross profit | | | 25,839,000 | | | | 27,162,000 | | | | 22,544,000 | | | | 30,328,000 | |
Operating expenses: | | | | | | | | | | | | | | | | |
General and administrative | | | 6,187,000 | | | | 8,615,000 | | | | 11,915,000 | | | | 8,810,000 | |
Sales and marketing | | | 3,394,000 | | | | 3,457,000 | | | | 4,048,000 | | | | 4,131,000 | |
Research and development | | | 1,002,000 | | | | 1,240,000 | | | | 1,678,000 | | | | 1,772,000 | |
Total operating expenses | | | 10,583,000 | | | | 13,312,000 | | | | 17,641,000 | | | | 14,713,000 | |
Operating income | | | 15,256,000 | | | | 13,850,000 | | | | 4,903,000 | | | | 15,615,000 | |
Other expense: | | | | | | | | | | | | | | | | |
Interest expense, net | | | 3,314,000 | | | | 3,522,000 | | | | 3,953,000 | | | | 4,656,000 | |
Income before income tax expense | | | 11,942,000 | | | | 10,328,000 | | | | 950,000 | | | | 10,959,000 | |
Income tax expense | | | 4,316,000 | | | | 4,027,000 | | | | 7,756,000 | | | | 1,764,000 | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 7,626,000 | | | $ | 6,301,000 | | | $ | (6,806,000 | ) | | $ | 9,195,000 | |
| | | | | | | | | | | | | | | | |
Basic net income (loss) per share | | $ | 0.41 | | | $ | 0.34 | | | $ | (0.36 | ) | | $ | 0.48 | |
| | | | | | | | | | | | | | | | |
Diluted net income (loss) per share | | $ | 0.39 | | | $ | 0.33 | | | $ | (0.36 | ) | | $ | 0.47 | |
The following summarizes selected quarterly financial data for the year ended March 31, 2017:
| | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | |
| | | | | | | | | | | | |
Net sales | | $ | 85,412,000 | | | $ | 108,836,000 | | | $ | 112,595,000 | | | $ | 114,410,000 | |
Cost of goods sold | | | 65,021,000 | | | | 78,178,000 | | | | 80,225,000 | | | | 82,783,000 | |
Gross profit | | | 20,391,000 | | | | 30,658,000 | | | | 32,370,000 | | | | 31,627,000 | |
Operating expenses: | | | | | | | | | | | | | | | | |
General and administrative | | | 3,625,000 | | | | 9,869,000 | | | | 7,952,000 | | | | 9,678,000 | |
Sales and marketing | | | 2,634,000 | | | | 2,707,000 | | | | 3,234,000 | | | | 3,551,000 | |
Research and development | | | 869,000 | | | | 905,000 | | | | 1,039,000 | | | | 1,011,000 | |
Total operating expenses | | | 7,128,000 | | | | 13,481,000 | | | | 12,225,000 | | | | 14,240,000 | |
Operating income | | | 13,263,000 | | | | 17,177,000 | | | | 20,145,000 | | | | 17,387,000 | |
Other expense: | | | | | | | | | | | | | | | | |
Interest expense, net | | | 2,819,000 | | | | 3,189,000 | | | | 3,357,000 | | | | 3,729,000 | |
Income before income tax expense | | | 10,444,000 | | | | 13,988,000 | | | | 16,788,000 | | | | 13,658,000 | |
Income tax expense | | | 2,936,000 | | | | 4,845,000 | | | | 5,678,000 | | | | 3,846,000 | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 7,508,000 | | | $ | 9,143,000 | | | $ | 11,110,000 | | | $ | 9,812,000 | |
| | | | | | | | | | | | | | | | |
Basic net income per share | | $ | 0.40 | | | $ | 0.49 | | | $ | 0.59 | | | $ | 0.53 | |
| | | | | | | | | | | | | | | | |
Diluted net income per share | | $ | 0.39 | | | $ | 0.47 | | | $ | 0.57 | | | $ | 0.50 | |
Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year shown elsewhere in the Annual Report on Form 10-K.
Schedule II — Valuation and Qualifying Accounts
Accounts Receivable — Allowance for doubtful accounts
Years Ended March 31, | | Description | | Balance at beginning of period | | | Charge to (recovery of) bad debts expense | | | Acquisition | | | Amounts written off | | | Balance at end of period | |
2018 | | Allowance for doubtful accounts | | $ | 4,140,000 | | | $ | 21,000 | | | $ | - | | | $ | 19,000 | | | $ | 4,142,000 | |
2017 | | Allowance for doubtful accounts | | $ | 4,284,000 | | | $ | 3,000 | | | $ | - | | | $ | 147,000 | | | $ | 4,140,000 | |
2016 | | Allowance for doubtful accounts | | $ | 629,000 | | | $ | 4,404,000 | | | $ | - | | | $ | 749,000 | | | $ | 4,284,000 | |
Accounts Receivable — Allowance for customer-payment discrepancies
Years Ended March 31, | | Description | | Balance at beginning of period | | | Charge to (recovery of) discrepancies expense | | | Acquisition | | | Amounts Processed | | | Balance at end of period | |
2018 | | Allowance for customer-payment discrepancies | | $ | 751,000 | | | $ | 998,000 | | | $ | - | | | $ | 639,000 | | | $ | 1,110,000 | |
2017 | | Allowance for customer-payment discrepancies | | $ | 703,000 | | | $ | 718,000 | | | $ | - | | | $ | 670,000 | | | $ | 751,000 | |
2016 | | Allowance for customer-payment discrepancies | | $ | 852,000 | | | $ | (299,000 | ) | | $ | - | | | $ | (150,000 | ) | | $ | 703,000 | |
Inventory — Allowance for excess and obsolete inventory
Years Ended March 31, | | Description | | Balance at beginning of period | | | Provision for excess and obsolete inventory | | | Acquisition | | | Amounts written off | | | Balance at end of period | |
2018 | | Allowance for excess and obsolete inventory | | $ | 4,125,000 | | | $ | 8,491,000 | | | $ | 77,000 | (1) | | $ | 6,011,000 | | | $ | 6,682,000 | |
2017 | | Allowance for excess and obsolete inventory | | $ | 3,626,000 | | | $ | 3,864,000 | | | $ | - | | | $ | 3,365,000 | | | $ | 4,125,000 | |
2016 | | Allowance for excess and obsolete inventory | | $ | 2,675,000 | | | $ | 4,518,000 | | | $ | - | | | $ | 3,567,000 | | | $ | 3,626,000 | |
| (1) | Allowance for excess and obsolete inventory established in the opening balance sheet in connection with the Company’s July 2017 acquisition. |
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