The following discussion contains forward-looking statements, including, without limitation, our expectations and statements regarding our outlook and future revenues, expenses, results of operations, liquidity, plans, strategies and objectives of management and any assumptions underlying any of the foregoing. Our actual results may differ significantly from those projected in the forward-looking statements. Our forward-looking statements and factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in the section titled "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" of this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update the forward-looking statements or our risk factors for any reason.
We have a multi-pronged platform for growth within the automotive aftermarket for non-discretionary replacement hard parts and test solutions. In addition, we offer diagnostic equipment applications focused on the fast-evolving electric mobility markets. Our investments in infrastructure and human resources during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines and continues to be transformative and scalable. These investments included (i) a 410,000 square foot distribution center, (ii) two buildings totaling 372,000 square feet for remanufacturing and core sorting of brake calipers, and (iii) the realignment of production at our initial 312,000 square foot facility in Mexico. New products introduced through our growth strategies include: (i) the addition of brake calipers in August 2019; (ii) alternators and starters for heavy-duty truck, industrial, marine, and agriculture applications, through an acquisition in January 2019; (iii) brake power boosters in August 2016; and (iv) turbochargers through an acquisition in July 2016. In addition, our test solutions and diagnostic equipment include: (a) the design and manufacture of test solutions and diagnostic equipment for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles through an acquisition in July 2017 and (b) the design and manufacture of advanced power emulators (AC and DC) and custom power electronic products for the automotive and aerospace industries through an acquisition in December 2018.
Highlights and Accomplishments in Fiscal 2022
During fiscal 2022, we accomplished the following significant successes despite ongoing worldwide supply chain and logistics challenges and inflationary pressures:
• We achieved organic sales growth of more than 20 percent;
• We developed a comprehensive line of brake pads, utilizing an industry-leading
formulation, and brake rotors, serving the professional installer market under
our Quality Built® brand;
• We secured multi-year new business commitments and opportunities of more than
$100 million, primarily across multiple brake-related products;
• We successfully expanded sales through additional product line offerings in
• We completed a multi-year expansion program of our facilities in Mexico,
including completion of a new brake caliper remanufacturing facility;
• We added capacity to support anticipated future growth with limited additional
• We extended the maturity date of our Credit Facility from June 2023 to May 2026
to enhance our liquidity and capital resources;
• We secured inventory which enabled us to support our customers, meet demand and
obtain new business -- despite worldwide supply chain and logistics challenges;
• We secured purchase orders from all major automotive retailers for rotating
• We opened an electric vehicle ("EV") contract testing center in Detroit,
• We continued a series of prestigious Tier-1 wins for our EV technology with
orders from major global automotive, aerospace and research institutions;
• Equally important, we continued our social responsibility initiatives with
plans to launch an Agri-farm organic food and community program in Mexico and
continued our focus on opportunities to enhance our Environmental, Social and
Governance practices on a global basis.
Impact of the Novel Coronavirus ("COVID-19")
The COVID-19 pandemic has spread globally and created significant volatility, uncertainty and economic disruption in many countries, including the countries in which we operate. National, state and local governments in these countries continue to implement a variety of measures in response that have the effect of restricting or limiting, among other activities, the operations of certain businesses. We continue to experience disruptions with worldwide supply chain and logistics services. We are unable to predict accurately the ultimate long-term impact that COVID-19 will have on our business and financial condition. While the near-term outlook appears positive, any additional government shutdowns or the emergence and spread of new variants of the virus, including the Delta or Omicron variant, the likelihood of a resurgence of positive cases, the development, availability and public acceptance of effective treatments and vaccines, the speed at which such vaccines are administered, the efficacy of current vaccines against evolving strains or variants of the virus, could negatively impact our business and financial condition.
There have been no serious outbreaks in any of our production facilities; however, a serious outbreak could affect our production capabilities. We experienced inefficiencies in operations due to the implementation of additional personnel safety measures throughout our facilities.
Enhanced levels of communication at all levels within the organization are critical to address the ever-changing landscape brought on by COVID-19, especially with most of our office staff continuing to work from home partially. Such efforts have included, additional board check-in meetings, executive committee meetings, and town hall style communications with all employees, as appropriate. We continue to incur costs as a result of COVID-19, including employee costs, such as expanded benefits and frontline incentives, and other operating costs associated with the provision of personal protective equipment, which have negatively impacted our profitability. These expanded benefits, supply costs and other COVID-19 related costs resulted in total expense, included in cost of goods sold and operating expenses in the consolidated statements of operations, of $3,368,000 and $7,316,000 during fiscal 2022 and 2021, respectively. Our Asian subsidiaries received $71,000 and $171,000 from their local assistance programs during fiscal 2022 and 2021, respectively. We received payments from the Canadian Government under the Canadian Emergency Wage Subsidy program of $1,130,000 during fiscal 2021. These payments are recorded as a reduction of cost of goods sold and operating expenses in the consolidated statements of income.
Pursuant to the guidance provided under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") for segment reporting, we have identified our chief operating decision maker ("CODM"), reviewed the documents used by the CODM, and understand how such documents are used by the CODM to make financial and operating decisions. We have determined through this review process that our business comprises three separate operating segments. All of the operating segments meet all the aggregation criteria, and are aggregated. 26
We prepare our consolidated financial statements in accordance with generally accepted accounting principles, or GAAP, in the United States. Our significant accounting policies are discussed in detail below and in Note 2 of the notes to consolidated financial statements. In preparing our consolidated financial statements, we use estimates and assumptions for matters that are inherently uncertain. We base our estimates on historical experiences and reasonable assumptions. Our use of estimates and assumptions affect the reported amounts of assets, liabilities and the amount and timing of revenues and expenses we recognize for and during the reporting period. Actual results may differ from our estimates. There continues to be uncertainty and disruption in the global economy and financial markets in connection with the COVID-19 pandemic. We are not currently aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of our assets or liabilities as of March 31, 2022. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. Our remanufacturing operations include core exchange programs for the core portion of the finished goods. The Used Cores that we acquire and are returned to us from our customers are a necessary raw material for remanufacturing. We also offer our customers marketing and other allowances that impact revenue recognition. These elements of our business give rise to more complex accounting than many businesses our size or larger.
In December 2019, the FASB issued guidance that simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application. This guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2020. The adoption of this guidance on April 1, 2021 did not have any material impact on our consolidated financial statements.
Inventory is comprised of: (i) Used Core and component raw materials, (ii) work-in-process, and (iii) remanufactured and purchased finished goods.
Used Core, component raw materials, and purchased finished goods are stated at the lower of average cost or net realizable value.
Work-in-process is in various stages of production and is valued at the average cost of Used Cores and component raw materials issued to work orders still open, including allocations of labor and overhead costs. Historically, work-in-process inventory has not been material compared to the total inventory balance. Remanufactured finished goods include: (i) the Used Core cost and (ii) the cost of component raw materials, and allocations of labor and variable and fixed overhead costs (the "Unit Cost"). The allocations of labor and variable and fixed overhead costs are based on the actual use of the production facilities over the prior 12 months which approximates normal capacity. This method prevents the distortion in allocated labor and overhead costs that would occur during short periods of abnormally low or high production. In addition, we exclude certain unallocated overhead such as severance costs, duplicative facility overhead costs, start-up costs, training, and spoilage from the calculation and expenses these unallocated overhead costs as period costs. Purchased finished goods also include an allocation of fixed overhead costs. The estimate of net realizable value is subjective and based on our judgment and knowledge of current industry demand and management's projections of industry demand. The estimates may, therefore, be revised if there are changes in the overall market for our products or market changes that in our judgment impact our ability to sell or liquidate potentially excess or obsolete inventory. Net realizable value is determined at least quarterly as follows:
• Net realizable value for finished goods by customer, by product line are
determined based on the agreed upon selling price with the customer for a
product in the trailing 12 months. We compare the average selling price,
including any discounts and allowances, to the finished goods cost of on-hand
inventory, less any reserve for excess and obsolete inventory. Any reduction of
value is recorded as cost of goods sold in the period in which the revaluation
• Net realizable value for Used Cores are determined based on current core
purchase prices from core brokers to the extent that core purchases in the
trailing 12 months are significant. Remanufacturing consumes, on average, more
than one Used Core for each remanufactured unit produced since not all Used
Cores are reusable. The yield rates depend upon both the product and customer
specifications. We purchase Used Cores from core brokers to supplement our
yield rates and Used Cores not returned under the core exchange programs. We
also consider the net selling price our customers have agreed to pay for Used
Cores that are not returned under our core exchange programs to assess whether
Used Core cost exceeds Used Core net realizable value on a by customer, by
product line basis. Any reduction of core cost is recorded as cost of goods
sold in the period in which the revaluation is identified.
• We record an allowance for potentially excess and obsolete inventory based upon
recent sales history, the quantity of inventory on-hand, and a forecast of
potential use of the inventory. We periodically review inventory to identify
excess quantities and part numbers that are experiencing a reduction in demand.
Any part numbers with quantities identified during this process are reserved
for at rates based upon our judgment, historical rates, and consideration of
possible scrap and liquidation values which may be as high as 100% of cost if
no liquidation market exists for the part. As a result of this process, we
recorded reserves for excess and obsolete inventory of $13,520,000 and $13,246,000 at March 31, 2022 and 2021, respectively.
We record vendor discounts as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold.
Inventory unreturned represents our estimate, based on historical data and prospective information provided directly by the customer, of finished goods shipped to customers that we expect to be returned, under our general right of return policy, after the balance sheet date. Inventory unreturned includes only the Unit Cost of a finished goods. The return rate is calculated based on expected returns within the normal operating cycle, which is generally one year. As such, the related amounts are classified in current assets. Inventory unreturned is valued in the same manner as our finished goods inventory.
Contract assets consists of: (i) the core portion of the finished goods shipped to customers, (ii) upfront payments to customers in connection with customer contracts, (iii) core premiums paid to customers, (iv) finished goods premiums paid to customers, and (v) long-term core inventory deposits. Remanufactured Cores held at customers' locations as a part of the finished goods sold to the customer are classified as long-term contract assets. These assets are valued at the lower of cost or net realizable value of Used Cores on hand (See Inventory above). For these Remanufactured Cores, we expect the finished good containing the Remanufactured Core to be returned under our general right of return policy or a similar Used Core to be returned to us by the customer, under our core exchange programs, in each case for credit. Remanufactured Cores and Used Cores returned by consumers to our customers but not yet returned to us are classified as "Cores expected to be returned by customers", which are included in short-term contract assets until we physically receive them during our normal operating cycle, which is generally one year. Upfront payments to customers represent the marketing allowances, such as sign-on bonuses, slotting fees, and promotional allowances provided to our customers. These allowances are recognized as an asset and amortized over the appropriate period of time as a reduction of revenue if we expect to generate future revenues associated with the upfront payment. If we do not expect to generate additional revenue, then the upfront payment is recognized in the consolidated statements of operations when payment occurs as a reduction of revenue. Upfront payments expected to be amortized during our normal operating cycle, which is generally one year, are classified as short-term contract assets. 28
Core premiums paid to customers represent the difference between the Remanufactured Core acquisition price paid to customers generally in connection with new business, and the related Used Core cost, which is treated as an asset and recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered. We consider, among other things, the length of our largest ongoing customer relationships, duration of customer contracts, and the average life of vehicles on the road in determining the appropriate period of time over which to amortize these premiums. These core premiums are amortized over a period typically ranging from six to eight years, adjusted for specific circumstances associated with the arrangement. Core premiums are recorded as long-term contract assets. Core premiums expected to be amortized within our normal operating cycle, which is generally one year, are classified as short-term contract assets. Finished goods premiums paid to customers represent the difference between the finished good acquisition price paid to customers, generally in connection with new business, and the related finished good cost, which is treated as an asset and recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered. We consider, among other things, the length of our largest ongoing customer relationships, duration of customer contracts, and the average life of vehicles on the road in determining the appropriate period of time over which to amortize these premiums. Finished goods premiums are amortized over a period typically ranging from six to eight years, adjusted for specific circumstances associated with the arrangement. Finished goods premiums are recorded as long-term contract assets. Finished goods premiums expected to be amortized within our normal operating cycle, which is generally one year, are classified as short-term contract assets. Long-term core inventory deposits represent the cost of Remanufactured Cores we have purchased from customers, which are held by the customers and remain on the customers' premises. The costs of these Remanufactured Cores were established at the time of the transaction based on the then current cost. The selling value of these Remanufactured Cores was established based on agreed upon amounts with these customers. We expect to realize the selling value and the related cost of these Remanufactured Cores should our relationship with a customer end, a possibility that we consider remote based on existing long-term customer agreements and historical experience.
Revenue is recognized when performance obligations under the terms of a contract with our customers are satisfied; generally, this occurs with the transfer of control of our products. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Revenue is recognized net of all anticipated returns, marketing allowances, volume discounts, and other forms of variable consideration. Revenue is recognized either when products are shipped or when delivered, depending on the applicable contract terms. The price of a finished remanufactured product sold to customers is generally comprised of separately invoiced amounts for the Remanufactured Core included in the product ("Remanufactured Core value") and the unit portion included in the product ("Unit Value"), for which revenue is recorded based on our then current price list, net of applicable discounts and allowances. The Remanufactured Core value is recorded as a net revenue based upon the estimate of Used Cores that will not be returned by the customer for credit. These estimates are subjective and based on management's judgment and knowledge of historical, current, and projected return rates. As reconciliations are completed with the customers the actual rates at which Used Cores are not being returned may differ from the current estimates. This may result in periodic adjustments of the estimated contract asset and liability amounts recorded and may impact the projected revenue recognition rates used to record the estimated future revenue. These estimates may also be revised if there are changes in contractual arrangements with customers, or changes in business practices. A significant portion of the remanufactured automotive parts sold to customers are replaced by similar Used Cores sent back for credit by customers under the core exchange programs (as described in further detail below). The number of Used Cores sent back under the core exchange programs is generally limited to the number of similar Remanufactured Cores previously shipped to each customer. 29
Revenue Recognition - Core Exchange Programs
Full price Remanufactured Cores: When remanufactured products are shipped, certain customers are invoiced for the Remanufactured Core value of the product at the full Remanufactured Core sales price. For these Remanufactured Cores, revenue is only recognized based upon an estimate of the rate at which these customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the core exchange programs. The remainder of the full price Remanufactured Core value invoiced to these customers is established as a long-term contract liability rather than being recognized as revenue in the period the products are shipped as we expect these Remanufactured Cores to be returned for credit under our core exchange programs. Nominal price Remanufactured Cores: Certain other customers are invoiced for the Remanufactured Core value of the product shipped at a nominal (generally $0.01 or less) Remanufactured Core price. For these nominal Remanufactured Cores, revenue is only recognized based upon an estimate of the rate at which these customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the core exchange programs. Revenue amounts are calculated based on contractually agreed upon pricing for these Remanufactured Cores for which the customers are not returning similar Used Cores. The remainder of the nominal price Remanufactured Core value invoiced to these customers is established as a long-term contract liability rather than being recognized as revenue in the period the products are shipped as we expect these Remanufactured Cores to be returned for credit under our core exchange programs.
Revenue Recognition; General Right of Return
Customers are allowed to return goods that their end-user customers have returned to them, whether or not the returned item is defective (warranty returns). In addition, under the terms of certain agreements and industry practice, customers from time to time are allowed stock adjustments when their inventory of certain product lines exceeds the anticipated sales to end-user customers (stock adjustment returns). Customers have various contractual rights for stock adjustment returns, which are typically less than 5% of units sold. In some instances, a higher level of returns is allowed in connection with significant restocking orders. The aggregate returns are generally limited to less than 20% of unit sales. The allowance for warranty returns is established based on a historical analysis of the level of this type of return as a percentage of total unit sales. The allowance for stock adjustment returns is based on specific customer inventory levels, inventory movements, and information on the estimated timing of stock adjustment returns provided by customers. Stock adjustment returns do not occur at any specific time during the year. The return rate for stock adjustments is calculated based on expected returns within the normal operating cycle, which is generally one year. The Unit Value of the warranty and stock adjustment returns are treated as reductions of revenue based on the estimations made at the time of the sale. The Remanufactured Core value of warranty and stock adjustment returns are provided for as indicated in the paragraph "Revenue Recognition - Core Exchange Programs". As is standard in the industry, we only accept returns from on-going customers. If a customer ceases doing business with us, we have no further obligation to accept additional product returns from that customer. Similarly, we accept product returns and grant appropriate credits to new customers from the time the new customer relationship is established.
Contract liability consists of: (i) customer allowances earned, (ii) accrued core payments, (iii) customer core returns accruals, (iv) core bank liability, (v) finished goods liabilities, and (vi) customer deposits. Customer allowances earned includes all marketing allowances provided to customers. Such allowances include sales incentives and concessions. Voluntary marketing allowances related to a single exchange of product are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered. Other marketing allowances, which may only be applied against future purchases, are recorded as a reduction to revenues in accordance with a schedule set forth in the relevant contract. Sales incentive amounts are recorded based on the value of the incentive provided. Customer allowances to be provided to customers within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. 30
Accrued core payments represent the sales price of Remanufactured Cores purchased from customers, generally in connection with new business, which are held by these customers and remain on their premises. The sales price of these Remanufactured Cores will be realized when our relationship with a customer ends, a possibility that we consider remote based on existing long-term customer agreements and historical experience. The payments to be made to customers for purchases of Remanufactured Cores within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. Customer core returns accruals represent the full and nominally priced Remanufactured Cores shipped to our customers. When we ship product, we recognize an obligation to accept a similar Used Core sent back under the core exchange programs based upon the Remanufactured Core price agreed upon by us and our customer. The contract liability related to Used Cores returned by consumers to our customers but not yet returned to us are classified as short-term contract liabilities until we physically receive these Used Cores as they are expected to be returned during our normal operating cycle, which is generally one year and the remainder are recorded as long-term contract liabilities. The core bank liability represents the full Remanufactured Core sales price for cores returned under our core exchange programs. The payment for these returned cores are made over a contractual repayment period pursuant to our agreement with this customer. Payments to be made within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. Finished goods liabilities represents the agreed upon price of finished goods acquired from customers, generally in connection with new business. The payment for these finished goods are made over a contractual repayment period pursuant to our agreement with the customer. Payments to be made within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. Customer deposits represent the receipt of prepayments from customers for the obligation to transfer goods or services in the future. We classify these customer deposits as short-term contract liabilities as we expect to satisfy these obligations within our normal operating cycle, which generally one year.
Customer Finished Goods Returns Accrual
The customer finished goods returns accrual represents our estimate of our exposure to customer returns, including warranty returns, under our general right of return policy to allow customers to return items that their end user customers have returned to them and from time to time, stock adjustment returns when the customers' inventory of certain product lines exceeds the anticipated sales to end-user customers. The customer finished goods returns accrual represents the Unit Value of the estimated returns and is classified as a current liability due to the expectation that these returns will occur within the normal operating cycle of one year. Our customer finished goods returns accrual was $38,086,000 and $31,524,000 at March 31, 2022 and 2021, respectively. The increase in the customer finished goods returns accrual primarily resulted from the timing of returned goods authorizations ("RGAs") issued at March 31, 2022 compared with March 31, 2021.
We account for income taxes using the liability method, which measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The resulting asset or liability is adjusted to reflect changes in the tax laws as they occur. A valuation allowance is provided to reduce deferred tax assets when it is more likely than not that a portion of the deferred tax asset will not be realized. 31
Realization of deferred tax assets is dependent upon our ability to generate sufficient future taxable income. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We make these estimates and judgments about our future taxable income that are based on assumptions that are consistent with our future plans. A valuation allowance is established when we believe it is not more likely than not all or some of a deferred tax assets will be realized. In evaluating our ability to recover deferred tax assets within the jurisdiction in which they arise, we consider all available positive and negative evidence. Deferred tax assets arising primarily as a result of net operating loss carry-forwards and research and development credits in connection with our Canadian operations have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods. Should the actual amount differ from our estimate, the amount of our valuation allowance could be impacted. We have made an accounting policy election to recognize the U.S. tax effects of global intangible low-taxed income as a component of income tax expense in the period the tax arises. Results of Operations
The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.
The following summarizes certain key operating data for the periods indicated: Fiscal Years Ended March 31, 2022 2021 2020 Cash flows (used in) provided by operations $ (44,862,000 ) $ 56,089,000 $ 18,795,000 Finished goods turnover (1) 3.8 4.1 4.1
(1) Finished goods turnover is calculated by dividing the cost of goods sold for
the year by the average between beginning and ending non-core finished goods
inventory values, for each fiscal year. We believe that this provides a
useful measure of our ability to turn our inventory into revenues. The
decrease in finished goods turnover for fiscal 2022 reflects our continued
investment in inventory to address disruptions related to the worldwide supply chain and logistics challenges to meet higher anticipated future sales.
Net Sales and Gross Profit
The following summarizes net sales and gross profit:
Fiscal Years Ended March 31, 2022 2021 Net sales $ 650,308,000 $ 540,782,000 Cost of goods sold 532,443,000 431,321,000 Gross profit 117,865,000 109,461,000 Gross profit percentage 18.1 % 20.2 % Net Sales. Our net sales for fiscal 2022 were $650,308,000, which represents an increase of $109,526,000, or 20.3%, from fiscal 2021 of $540,782,000. While our net sales increased across all product lines due to strong demand for our products, we continued to experience a number of challenges related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services during both periods. Net sales for fiscal 2022 and 2021 include $13,327,000 and $12,779,000, respectively, in core revenue due to a realignment of inventory at certain customer distribution centers. We expect this realignment will benefit our future sales as product mix changes. 32
The following summarizes sales mix:
Fiscal Years Ended March 31, 2022 2021 Rotating electrical products 69.2 % 72.8 % Wheel hub products 13.0 % 15.6 % Brake-related products 14.5 % 9.7 % Other products 3.3 % 1.9 % 100.0 % 100.0 % Gross Profit. Our gross profit increased $8,404,000, or 7.7%, to $117,865,000 for fiscal 2022 from $109,461,000 for fiscal 2021. Our gross profit increased due to strong demand across all product lines. Our gross margin was 18.1% of net sales for fiscal 2022 compared with 20.2% of net sales for fiscal 2021. The decrease in our gross margin was primarily due to inflationary costs related to the global pandemic, including disruptions with worldwide supply chain, logistics services, and related higher freight costs. During fiscal 2022 and 2021, higher freight costs, net of certain price increases that went into effect during the latter part of the current year, impacted gross margin by approximately $9,135,000, and $1,785,000, respectively. During fiscal 2022, we also incurred additional expenses of $8,759,000 due to COVID-19 related costs for disruptions in the supply chain, increased salaries associated with COVID-19 vulnerable employee pay, and personal protective equipment. During fiscal 2021, we incurred additional expenses of $5,268,000 due to increased salaries associated with COVID-19 bonuses, vulnerable employee pay, and personal protective equipment in connection with the COVID-19 pandemic. Our gross margin for fiscal 2022 and 2021 was also impacted by (i) transition expenses in connection with the expansion of our brake-related operations in Mexico of $2,744,000 and $16,353,000, respectively, and (ii) amortization of core and finished goods premiums paid to customers related to new business of $11,960,000 and $6,691,000, respectively. Expansion of our brake-related operations in Mexico was completed during the second quarter of fiscal 2022. In addition, gross margin was impacted by (i) non-cash quarterly revaluation of cores that are part of the finished goods on the customers' shelves (which are included in contract assets) to the lower of cost or net realizable value and gain due to realignment of inventory at customer distribution centers, which resulted in a net gain of $75,000 and net write-down of $209,000 for fiscal 2022 and 2021, respectively, (ii) customer allowances and return accruals related to new business of $307,000 recorded during fiscal 2021, (iii) net tariff costs of $332,000 not passed through to customers for fiscal 2021, and (iv) a $3,561,000 benefit for revised tariff costs recorded during fiscal 2021. 33
The following summarizes operating expenses:
Fiscal Years Ended March 31, 2022 2021 General and administrative $ 57,499,000 $ 53,847,000 Sales and marketing 22,833,000 18,024,000 Research and development 10,502,000 8,563,000 Foreign exchange impact of lease liabilities and forward contracts
General and administrative 8.8 % 10.0 % Sales and marketing 3.5 % 3.3 % Research and development 1.6 % 1.6 %
Foreign exchange impact of lease liabilities and forward contracts
(0.3 )% (3.3 )% General and Administrative. Our general and administrative expenses for fiscal 2022 were $57,499,000, which represents an increase of $3,652,000, or 6.8%, from fiscal 2021 of $53,847,000, however, general and administrative expenses as a percentage of net sales decreased to 8.8% for fiscal 2022 from 10.0% for the prior year. The increase in general and administrative expense was primarily due to (i) $2,040,000 of increased share-based compensation due to equity grants made to employees in fiscal 2022, (ii) $353,000 of increased employee related expenses, primarily due to the reinstatement of salary reductions in the prior year in response to the COVID-19 pandemic, (iii) $905,000 of decreased gain resulting from foreign currency transactions, (iv) $705,000 of increased costs at our offshore locations, (vi) $305,000 of increased information technology costs in connection with cybersecurity and other productivity tools, and (vii) $292,000 of increased general insurance costs. These increases in general and administrative expenses were partially offset by $1,329,000 of decreased professional services. Sales and Marketing. Our sales and marketing expenses for fiscal 2022 were $22,833,000, which represents an increase of $4,809,000, or 26.7%, from fiscal 2021 of $18,024,000. This increase in sales and marketing expense during fiscal 2022 was primarily due to (i) $1,500,000 of increased commissions due to higher sales, (ii) $1,304,000 of increased employee related expenses, primarily due to the reinstatement of salary reductions in the prior year in response to the COVID-19 pandemic and increased headcount in the current year, (iii) $1,027,000 of increased marketing in connection with new business and advertising expense, (iv) $501,000 of increased travel as normal business operations resume, and (v) $261,000 of increased trade shows expense as normal business operations resume. Research and Development. Our research and development expenses for fiscal 2022 were $10,502,000, which represents an increase of $1,939,000, or 22.6%, from fiscal 2021 of $8,563,000. This increase in research and development expenses during fiscal 2022 was primarily due to (i) $1,274,000 of increased employee related expenses, primarily due to the reinstatement of salary reductions in the prior year in response to the COVID-19 pandemic and increased headcount during the current year, (ii) $504,000 of increased outside services primarily due to development projects, and (iii) $110,000 of increased samples for our core library and other research and development supplies. Foreign Exchange Impact of Lease Liabilities and Forward Contracts. Our foreign exchange impact of lease liabilities and forward contracts for fiscal 2022 was a non-cash gain of $1,673,000 compared with a non-cash gain for fiscal 2021 of $17,606,000. This change in gain was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities which resulted in non-cash gains of $1,989,000 compared with $9,893,000 for fiscal 2022 and 2021, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts which resulted in a non-cash loss of $316,000 compared with a non-cash gain of $7,713,000 for fiscal 2022 and 2021, respectively, due to the changes in their fair values. 34
Interest Expense, net. Our interest expense, net for fiscal 2022 was $15,555,000, which represents a decrease of $215,000, or 1.3%, from fiscal 2021 of $15,770,000. The decrease in interest expense was primarily due to lower interest rates on our accounts receivable discount programs partially offset by increased borrowing under our credit facility.
Income Tax. We recorded income tax expense of $5,788,000, or an effective tax rate of 44.0%, for fiscal 2022 and $9,387,000, or an effective tax rate of 30.4%, for fiscal 2021. The effective tax rate for fiscal 2022 was primarily impacted by (i) non-deductible executive compensation under Internal Revenue Code Section 162(m), (ii) income taxes associated with uncertain tax positions, (iii) specific jurisdictions that we do not expect to recognize the benefit of losses, and (iv) foreign income taxed at rates that are different from the federal statutory rate.
A discussion of the changes in our results of operations for the year ended March 31, 2021, as compared with the year ended March 31, 2020, has been omitted from this Form 10-K but may be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the annual report on Form 10-K for the year ended March 31, 2021, filed with the SEC on June 14, 2021, which is available free of charge on the SEC's website at www.sec.gov by searching with our ticker symbol "MPAA" or at our internet address, www.motorcarparts.com, by clicking "Investors" located at the top of the page.
We had working capital (current assets minus current liabilities) of $110,580,000 and $96,725,000, a ratio of current assets to current liabilities of 1.3:1.0, at March 31, 2022 and 2021, respectively. The increase in working capital resulted from our investment in inventory to address disruptions related to the worldwide supply chain and logistics challenges to meet higher anticipated sales. We generated cash during fiscal 2022 from the use of receivable discount programs and credit facility. In addition, we have access to our existing cash, as well as our available credit facilities to meet short-term liquidity needs. We believe our cash and cash equivalents, 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. 35
The following summarizes cash flows as reflected in the consolidated statements of cash flows: Fiscal Years Ended March 31, 2022 2021 2020 Cash (used in) provided by: Operating activities $ (44,862,000 ) $ 56,089,000 $ 18,795,000 Investing activities (7,938,000 ) (14,214,000 ) (11,594,000 ) Financing activities 60,215,000 (76,567,000 ) 32,153,000 Effect of exchange rates on cash and cash equivalents 78,000 599,000 351,000
Net increase (decrease) in cash and cash equivalents $ 7,493,000 $ (34,093,000 ) $ 39,705,000
Additional selected cash flow data: Depreciation and amortization $ 12,886,000 $ 11,144,000 $ 9,561,000 Capital expenditures 7,550,000
Net cash used in operating activities was $44,862,000 for fiscal 2022 compared with net cash provided by operating activities of $56,089,000 for fiscal 2021. The significant change in our operating activities was due primarily to (i) increased sales for fiscal 2022 compared with fiscal 2021, resulting in a higher accounts receivable balance which will be collected in future periods and (ii) higher inventory purchases during the current year compared with the prior year as we increased our inventory levels as a result of disruptions with worldwide supply chain and logistics services to meet higher anticipated sales, however, our days payable outstanding did not increase proportionately to our purchases during the current year as compared with the prior year. Our operating results (net income plus the net add-back for non-cash transactions in earnings) were higher during fiscal 2022 as compared with fiscal 2021. Net cash used in investing activities was $7,938,000 and $14,214,000 for fiscal 2022 and 2021, respectively. The significant change in our investing activities was due primarily to decreased capital expenditures in connection with the completion of our expansion of our brake-related operations in Mexico during the second quarter of fiscal 2022. Net cash provided by financing activities was $60,215,000 for fiscal 2022 compared with net cash used in financing activities $76,567,000 for fiscal 2021. The significant change in our financing activities was due mainly to additional net borrowings under our credit facility during fiscal 2022 to support the investment in our inventory compared with repayments under our credit facility during fiscal 2021.
A discussion of the changes in our operating activities, investing activities, and financing activities for the year ended March 31, 2021, as compared with the year ended March 31, 2020, has been omitted from this Form 10-K but may be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the annual report on Form 10-K for the year ended March 31, 2021, filed with the SEC on June 14, 2021, which is available free of charge on the SEC's website at www.sec.gov by searching with our ticker symbol "MPAA" or at our internet address, www.motorcarparts.com, by clicking "Investors" located at the top of the page.
We are party to a $268,620,000 senior secured financing, (as amended from time to time, the "Credit Facility") with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $238,620,000 revolving loan facility, subject to borrowing base restrictions, a $24,000,000 sublimit for borrowings by Canadian borrowers, and a $20,000,000 sublimit for letters of credit (the "Revolving Facility") and (ii) a $30,000,000 term loan facility (the "Term Loans"). The loans under the Credit Facility mature on June 5, 2023. The Credit Facility currently permits the payment of up to $29,430,000 of dividends and share repurchases for fiscal year 2022, subject to pro forma compliance with financial covenants. In connection with the Credit Facility, the lenders have a security interest in substantially all of our assets. 36
In May 2021, we entered into a third amendment to the Credit Facility (the "Third Amendment"). The Third Amendment, among other things, (i) extended the maturity date from June 5, 2023 to May 28, 2026, (ii) modified the fixed charge coverage ratio financial covenant, and (iii) modified the definition of "Consolidated EBITDA". We capitalized $1,159,000 of new debt issuance costs in connection with the Third Amendment. The Term Loans require quarterly principal payments of $937,500. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.25%, 2.50% or 2.75% or a reference rate plus a margin of 1.25%, 1.50% or 1.75%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on our Term Loans and Revolving Facility was 2.99% and 3.13%, respectively, at March 31, 2022, and 2.62% at March 31, 2021. 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, 2022. Our Consolidated EBITDA for the purposes of bank covenant calculations was $62,540,000 for fiscal 2022. The following summarizes the financial covenants required under the Credit Facility: Financial covenants required per the Credit Calculation as of Facility March 31, 2022 Maximum senior leverage ratio 3.00
Minimum fixed charge coverage ratio 1.10
We had cash of $23,016,000 at March 31, 2022, however, the Credit Facility only allows up to $6,000,000 of credit for cash when computing the senior leverage ratio. Our senior leverage ratio would have been 2.55 had we paid down the Revolving Facility with cash on hand. 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 $155,000,000 and $84,000,000 outstanding under the Revolving Facility at March 31, 2022 and 2021, respectively. In addition, $6,370,000 was reserved for letters of credit at March 31, 2022. At March 31, 2022, after certain adjustments, $77,250,000 was available under the Revolving Facility.
We use receivable discount programs with certain customers and their respective banks. Under these programs, we have options to sell those customers' receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow us to accelerate receipt of payment on customers' receivables. While these arrangements have reduced our working capital needs, there can be no assurance that these programs will continue in the future. Interest expense resulting from these programs would increase if interest rates rise, if utilization of these discounting arrangements expands, if customers extend their payment to us, or if the discount period is extended to reflect more favorable payment terms to customers. 37
The following is a summary of the receivable discount programs:
Fiscal Years Ended March 31, 2022 2021 Receivables discounted $ 525,441,000 $ 491,285,000 Weighted average days 336 334 Weighted average discount rate 1.9 % 2.1 %
Amount of discount as interest expense $ 9,197,000 $ 9,513,000
We have or are renegotiating long-term agreements with many of our major customers. Under these agreements, which in most cases have initial terms of at least four years, we are designated as the exclusive or primary supplier for specified categories of our products. Because of the very competitive nature of the market and the limited number of customers for these products, our customers have sought and obtained price concessions, significant marketing allowances and more favorable delivery and payment terms in consideration for our designation as a customer's exclusive or primary supplier. These incentives differ from contract to contract and can include (i) the issuance of a specified amount of credits against receivables in accordance with a schedule set forth in the relevant contract, (ii) support for a particular customer's research or marketing efforts provided on a scheduled basis, (iii) discounts granted in connection with each individual shipment of product, and (iv) other marketing, research, store expansion or product development support. These contracts typically require that we meet ongoing performance standards. While these longer-term agreements strengthen our customer relationships, the increased demand for our products often requires that we increase our inventories and personnel. Customer demands that we purchase their Remanufactured Core inventory also require the use of our working capital. The marketing and other allowances we typically grant our customers in connection with our new or expanded customer relationships adversely impact the near-term revenues, profitability and associated cash flows from these arrangements. However, we believe the investment we make in these new or expanded customer relationships will improve our overall liquidity and cash flow from operations over time.
In August 2018, our board of directors approved an increase in our share repurchase program from $20,000,000 to $37,000,000 of our common stock. During fiscal 2022 and 2021, we repurchased 106,486 and 54,960 shares of our common stock, respectively, for $1,914,000 and $1,139,000, respectively. During fiscal 2020, we did not repurchase any shares of our common stock. As of March 31, 2022, $18,745,000 was utilized and $18,255,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility. We retired the 837,007 shares repurchased under this program through March 31, 2022. 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.
Our total capital expenditures, including capital leases and non-cash capital expenditures, were $8,150,000 for fiscal 2022 and $16,806,000 for fiscal 2021. These capital expenditures primarily include the purchase of equipment for our current operations and the expansion of our operations in Mexico, which was completed during the second quarter of fiscal 2022. We expect to incur approximately $10,000,000 of capital expenditures primarily to support our current operations during fiscal 2023. We have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures. 38
The following summarizes our contractual obligations and other commitments as of March 31, 2022 and the effect such obligations could have on our cash flows in future periods: Payments Due by Period Less than 1 to 3 3 to 5 More than 5 Contractual Obligations Total 1 year years years years Finance lease obligations (1) $ 6,184,000 $ 2,549,000 $ 2,993,000 $ 642,000 $ - Operating lease obligations (2) 117,090,000 11,497,000 20,126,000 20,847,000 64,620,000 Revolving facility (3) 155,000,000 - - 155,000,000 - Term loan (4) 18,204,000 4,272,000 8,165,000 5,767,000 - Accrued core payment (5) 2,713,000 1,758,000 853,000 102,000 - Core bank liability (6) 18,165,000 2,018,000
145,000 - Unrecognized tax benefits (8) - - - - - Other long-term obligations (9) 70,633,000 23,672,000 19,267,000 16,557,000 11,137,000 Total $ 391,178,000 $ 47,347,000 $ 56,903,000 $ 203,096,000 $ 83,832,000 ____________
(1) Finance lease obligations represent amounts due under finance leases for
(2) Operating lease obligations represent amounts due for rent under our leases
for all our facilities, certain equipment, and our Company automobile.
(3) Obligations under our Revolving Facility mature on May 28, 2026. This debt is
classified as a short term liability on our balance sheet as we expect to use
our working capital to repay the amounts outstanding under our revolving
(4) Term Loan obligations represent the amounts due for principal payments as
well as interest payments to be made. Interest payments were calculated based
upon the interest rate for our Term Loan using the LIBOR option at March 31,
(5) Accrued core payment represents the amounts due for principal of $2,607,000
and interest payments of $106,000 to be made in connection with the purchases
of Remanufactured Cores from our customers, which are held by these customers
and remain on their premises.
(6) The core bank liability represents the amounts due for principal of
$16,901,000 and interest payments of $1,264,000 to be made in connection with
the return of Used Cores from our customers.
(7) Finished goods liabilities represents the amounts due for principal of
$3,125,000 and interest payments of $64,000 to be made in connection with the
purchase of finished goods from our customers.
(8) We are unable to reliably estimate the timing of future payments related to
uncertain tax position liabilities at March 31, 2022; therefore, future tax
payment accruals related to uncertain tax positions in the amount of $1,975,000 have been excluded from the table above.
(9) Other long-term obligations represent commitments we have with certain
customers to provide marketing allowances in consideration for multi-year
customer agreements to provide products over a defined period. We are not
obligated to provide these marketing allowances should our business relationships end with these customers. 39
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