MOTORCAR PARTS OF AMERICA INC - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

FOR THE TRANSITION PERIOD FROM       TO

Commission File No. 001-33861

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (310) 212-7910

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

There were 19,020,587 shares of Common Stock outstanding at August 3, 2020.

MOTORCAR PARTS OF AMERICA, INC.

TABLE OF CONTENTS

MOTORCAR PARTS OF AMERICA, INC.

GLOSSARY

The following terms are frequently used in the text of this report and have the meanings indicated below.

“Used Core” — An automobile part which has previously been used in the operation of a vehicle. Generally, the Used Core is an original equipment (“OE”) automobile part installed by the vehicle manufacturer and subsequently removed for replacement. Used Cores contain salvageable parts which are an important raw material in the remanufacturing process. We obtain most Used Cores by providing credits to our customers for Used Cores returned to us under our core exchange program. Our customers receive these Used Cores from consumers who deliver a Used Core to obtain credit from our customers upon the purchase of a newly remanufactured automobile part. When sufficient Used Cores are not available from our customers, we purchase Used Cores from core brokers, who are in the business of buying and selling Used Cores. The Used Cores purchased from core brokers or returned to us by our customers under the core exchange program, and which have been physically received by us, are part of our raw material and work-in-process inventory. Used Cores returned by consumers to our customers but not yet returned to us are classified as contract assets until we physically receive these Used Cores.

“Remanufactured Core” — The Used Core underlying an automobile part that has gone through the remanufacturing process and through that process has become part of a newly remanufactured automobile part. The remanufacturing process takes a Used Core, breaks it down into its component parts, replaces those components that cannot be reused and reassembles the salvageable components of the Used Core and additional new components into a remanufactured automobile part. Remanufactured Cores held for sale at our customer locations are included in long-term contract assets. The Remanufactured Core portion of stock adjustment returns are classified as contract assets until we physically receive them

.

PART I — FINANCIAL INFORMATION

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

The accompanying notes to condensed consolidated financial statements are an integral part hereof.

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part hereof.

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part hereof.

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part hereof.

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part hereof.

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020

(Unaudited)

		June 30, 2020				March 31, 2020
Accounts receivable — trade		$	82,835,000			$	109,164,000
Allowance for credit losses			(425,000	)			(4,252,000	)
Customer payment discrepancies			(754,000	)			(1,040,000	)
Customer returns RGA issued			(15,518,000	)			(12,124,000	)
Total accounts receivable — net		$	66,138,000			$	91,748,000

		Three Months Ended
		June 30, 2020
Balance at beginning of period		$	4,252,000
Provision for expected credit losses			170,000
Recoveries			(100,000	)
Amounts written off charged against the allowance			(3,897,000	)
Balance at end of period		$	425,000

		June 30, 2020				March 31, 2020
Inventory
Raw materials		$	108,143,000			$	99,360,000
Work-in-process			5,165,000				3,906,000
Finished goods			131,823,000				135,601,000
			245,131,000				238,867,000
Less allowance for excess and obsolete inventory			(13,812,000	)			(13,208,000	)
Inventory — net			231,319,000				225,659,000
Inventory unreturned			9,934,000				9,021,000
Total inventory		$	241,253,000			$	234,680,000

		June 30, 2020				March 31, 2020
Short-term contract assets
Cores expected to be returned by customers		$	22,912,000			$	12,579,000
Upfront payments to customers			2,198,000				2,865,000
Core premiums paid to customers			4,914,000				4,888,000
Total short-term contract assets		$	30,024,000			$	20,332,000
Long-term contract assets
Remanufactured cores held at customers’ locations		$	213,469,000			$	217,616,000
Upfront payments to customers			418,000				589,000
Core premiums paid to customers			15,279,000				15,766,000
Long-term core inventory deposits			5,569,000				5,569,000
Total long-term contract assets		$	234,735,000			$	239,540,000

		Three Months Ended June 30,
		2020				2019
Net sales
Customer A			45	%			38	%
Customer B			26	%			23	%
Customer C			17	%			20	%

		June 30, 2020				March 31,2020
Accounts receivable - trade
Customer A			28	%			28	%
Customer B			31	%			14	%
Customer C			13	%			33	%

		Three Months Ended June 30,
		2020				2019
Rotating electrical products			72	%			75	%
Wheel hub products			18	%			18	%
Brake related products			9	%			4	%
Other products			1	%			3	%
			100	%			100	%

		June 30, 2020				March 31, 2020
Principal amount of term loan		$	23,437,000			$	24,375,000
Unamortized financing fees			(216,000	)			(235,000	)
Net carrying amount of term loan			23,221,000				24,140,000
Less current portion of term loan			(3,678,000	)			(3,678,000	)
Long-term portion of term loan		$	19,543,000			$	20,462,000

Year Ending March 31,
2021 - remaining nine months		$	2,812,000
2022			3,750,000
2023			3,750,000
2024			13,125,000
Total payments		$	23,437,000

		June 30, 2020				March 31, 2020
Short-term contract liabilities
Customer core returns accruals		$	11,355,000			$	4,126,000
Customer allowances earned			12,769,000				13,844,000
Customer deposits			1,538,000				1,365,000
Core bank liability			770,000				528,000
Accrued core payment, net			8,286,000				8,048,000
Total short-term contract liabilities		$	34,718,000			$	27,911,000
Long-term contract liabilities
Customer core returns accruals		$	69,212,000			$	77,927,000
Customer allowances earned			517,000				542,000
Core bank liability			14,892,000				7,556,000
Accrued core payment, net			5,504,000				6,076,000
Total long-term contract liabilities		$	90,125,000			$	92,101,000

			June 30, 2020				March 31, 2020
Leases	Classification
Assets:
Operating	Operating lease assets		$	68,729,000			$	53,029,000
Finance	Plant and equipment			7,504,000				6,922,000
Total leased assets			$	76,233,000			$	59,951,000
Liabilities:
Current
Operating	Operating lease liabilities		$	6,249,000			$	5,104,000
Finance	Other current liabilities			2,289,000				2,059,000
Long-term
Operating	Long-term operating lease liabilities			74,426,000				61,425,000
Finance	Other liabilities			4,556,000				3,905,000
Total lease liabilities			$	87,520,000			$	72,493,000

		Three Months Ended June 30,
		2020				2019
Lease cost
Operating lease cost		$	2,683,000			$	1,898,000
Short-term lease cost			317,000				403,000
Variable lease cost			143,000				130,000
Finance lease cost:
Amortization of finance lease assets			413,000				358,000
Interest on finance lease liabilities			83,000				68,000
Total lease cost		$	3,639,000			$	2,857,000

Maturity of lease liabilities		Operating Leases				Finance Leases				Total
2021- remaining nine months		$	8,237,000			$	1,981,000			$	10,218,000
2022			10,312,000				2,338,000				12,650,000
2023			9,237,000				1,701,000				10,938,000
2024			8,097,000				927,000				9,024,000
2025			8,095,000				528,000				8,623,000
Thereafter			69,261,000				49,000				69,310,000
Total lease payments			113,239,000				7,524,000				120,763,000
Less amount representing interest			(32,564,000	)			(679,000	)			(33,243,000	)
Present value of lease liabilities		$	80,675,000			$	6,845,000			$	87,520,000

		Three Months Ended June 30,
		2020				2019
Lease term and discount rate
Weighted-average remaining lease term (years):
Finance leases			3.4				3.1
Operating leases			11.7				12.4
Weighted-average discount rate:
Finance leases			5.6	%			5.0	%
Operating leases			5.9	%			5.6	%

		Three Months Ended June 30,
		2020				2019
Receivables discounted		$	111,360,000			$	96,854,000
Weighted average days			345				346
Annualized weighted average discount rate			2.5	%			3.9	%
Amount of discount recognized as interest expense		$	2,686,000			$	3,649,000

		Three Months Ended June 30,
		2020				2019
Net loss		$	(3,012,000	)		$	(6,151,000	)
Basic shares			18,976,178				18,822,178
Effect of potentially dilutive securities			-				-
Diluted shares			18,976,178				18,822,178
Net loss per share:
Basic net loss per share		$	(0.16	)		$	(0.33	)
Diluted net loss per share		$	(0.16	)		$	(0.33	)

		Gain Recognized within General and Administrative Expenses
Derivatives Not Designated as		Three Months Ended June 30,
Hedging Instruments		2020				2019
Forward foreign currency exchange contracts		$	2,832,000			$	35,000

		June 30, 2020																March 31, 2020
						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		$	1,061,000			$	1,061,000			$	-			$	-			$	850,000			$	850,000			$	-			$	-
Liabilities
Accrued liabilities
Short-term contingent consideration			2,076,000				-				-				2,076,000				2,190,000				-				-				2,190,000
Other current liabilities
Deferred compensation			1,061,000				1,061,000				-				-				850,000				850,000				-				-
Forward foreign currency exchange contracts			3,452,000				-				3,452,000				-				6,284,000				-				6,284,000				-
Other liabilities
Long-term contingent consideration			530,000				-				-				530,000				463,000				-				-				463,000

		June 30, 2020
Risk free interest rate			0.18	%
Counter party rate			6.70	%
Probability			100.00	%

		June 30, 2020
Risk free interest rate			0.16	%
Counter party rate			6.70	%
Expected volatility (1)			37.00	%
Weighted average cost of capital (1)			13.30	%

(1)	The range for expected volatility was 32.5% to 42.5% and the range for the weighted average cost of capital was 12.5% to 14.0%.

		June 30, 2020
Risk free interest rate			0.16	%
Counter party rate			10.55	%
Revenue volatility (1)			6.50	%
Revenue discount rate (1)			2.00	%
Asset volatility (1)			41.00	%

(1)	The range for revenue volatility was 5.5% to 7.5%, 1.5% to 2.5% for the revenue discount rate, and 36% to 46% for asset volatility.

		Three Months Ended June 30,
		2020				2019
		Contingent Consideration				Contingent Consideration
Beginning balance		$	2,653,000			$	4,721,000
Changes in revaluations of contingent consideration included in earnings			(47,000	)			249,000
Ending balance		$	2,606,000			$	4,970,000

		Three Months Ended June 30,
		2020
Weighted average risk free interest rate			0.44	%
Weighted average expected holding period (years)			5.97
Weighted average expected volatility			44.92	%
Weighted average expected dividend yield			-
Weighted average fair value of options granted		$	6.43

		Number of Shares				Weighted Average Exercise Price
Outstanding at March 31, 2020			1,536,123			$	18.18
Granted			341,825			$	15.14
Exercised			(3,000	)		$	6.62
Forfeited			(11,509	)		$	24.20
Outstanding at June 30, 2020			1,863,439			$	17.60

		Number of Shares				Weighted Average Grant Date Fair Value
Outstanding at March 31, 2020			201,983			$	20.06
Granted			112,293			$	15.15
Vested			(43,929	)		$	22.63
Outstanding at June 30, 2020			270,347			$	17.60

		Three Months Ended June 30,
		2020				2019
Balance at beginning of period		$	18,300,000			$	19,475,000
Charged to expense			23,089,000				23,185,000
Amounts processed			(19,197,000	)			(26,842,000	)
Balance at end of period		$	22,192,000			$	15,818,000

The following discussion and analysis presents factors that Motorcar Parts of America, Inc. and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with our March 31, 2020 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 15, 2020.

Disclosure Regarding Private Securities Litigation Reform Act of 1995

This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our future performance that involve risks and uncertainties. Various factors could cause actual results to differ materially from those expressed or implied by such statements. These factors include, but are not limited to: the current and future impacts of the COVID-19 public health crisis; concentration of sales to a small number of customers; changes in the financial condition of or our relationship with any of our major customers; increases in the average accounts receivable collection period; the loss of sales to customers; delays in payments by customers; the increasing customer pressure for lower prices and more favorable payment and other terms; lower revenues than anticipated from new and existing contracts; the increasing demands on our working capital; the significant strain on working capital associated with large inventory purchases from customers; lower efficiency or production due to stay at home orders issued by governments due to COVID-19 concerns; any meaningful difference between expected production needs and ultimate sales to our customers; investments in operational changes or acquisitions; our ability to obtain any additional financing we may seek or require; our ability to maintain positive cash flows from operations; our failure to meet the financial covenants or the other obligations set forth in our credit agreement and the lenders’ refusal to waive any such defaults; increases in interest rates; the impact of high gasoline prices; consumer preferences and general economic conditions; increased competition in the automotive parts industry including increased competition from Chinese and other offshore manufacturers; difficulty in obtaining Used Cores and component parts or increases in the costs of those parts; political, criminal or economic instability in any of the foreign countries where we conduct operations; currency exchange fluctuations; potential tariffs, unforeseen increases in operating costs; risks associated with cyber-attacks; risks associated with conflict minerals; the impact of new tax laws and interpretations thereof; uncertainties affecting our ability to estimate our tax rate and other factors discussed herein and in our other filings with the Securities and Exchange Commission (the “SEC”). These and other risks and uncertainties may cause our actual results to differ materially and adversely from those expected in any forward-looking statements. Readers are directed to risks and uncertainties identified below under “Risk Factors” and elsewhere in this report for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Management Overview

We have been focused on implementing a multi-pronged platform for growth within the non-discretionary automotive aftermarket for the replacement parts and diagnostic testing industry, through organic growth and acquisitions. Our investments in infrastructure and human resources, including the consolidation of our distribution center in Mexico and the significant expansion of manufacturing capacity, are expected to be transformative and scalable. As a result, gross profit and net income have been impacted, and our future performance and opportunities should be considered with these factors in mind.

Our products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, and brake master cylinders, and (iv) diagnostics and other products, which include diagnostics systems, advanced power emulators used for the development of electric vehicles and aerospace applications, and custom power electronic products for quality control in the development and production of electric vehicles and turbochargers.

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. Two of the operating segments meet all the aggregation criteria, and are aggregated. The remaining operating segment does not meet the quantitative thresholds for individual disclosure and we have combined our operating segments into a single reportable segment.

Impact of the Novel Coronavirus (“COVID-19”)

The recent outbreak of 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 have implemented a variety of measures in response to the COVID-19 pandemic that have the effect of restricting or limiting, among other activities, the operations of certain businesses.

We experienced a significant reduction in customer demand for our products during April 2020, but sales have substantially recovered; however; at this time, 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 outook appears positive, any additional government shut-downs would negatively impact our  business and financial condition. There have been no serious outbreaks in any of our production facilities. If there was a serious outbreak in any of our production facilities, our production capabilities would be negativey impacted.

Our business has continued to operate as we have been declared an essential business; however, we have experienced disruption in our global supply chain as a result of the ongoing impact of COVID-19 at all of our facilities as well as our supply partners. In addition, we experienced inefficiencies at our Mexico and Asian production and distribution facilities due to a shutdown for a brief period. The implementation of additional personnel safety measures, required throughout our production facilities, negatively affects our production efficiencies. These personnel safety measures included adding an additional shift in conjunction with reducing the number of hours in the existing shift, greater spacing (less personnel) in production areas and sanitizing procedures between shifts. High-risk employees at all of our facilities have been required to remain at home; however, they continue to receive their compensation. We also implemented safe work practices across all of our facilities, including work from home rules, staggered shifts, Plexiglas barriers, and many other safety precautions. Our employees have embraced the challenges of working remotely, continuing to operate effectively through constant communication with team members.

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. Such efforts have included, weekly board check-in meetings, daily executive committee meetings, as needed, and regular town hall style communications with all employees.

To date, we have incurred increased costs as a result of COVID-19, including increased employee costs, such as expanded benefits and frontline incentives, and other operating costs, such as 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 approximately $2,295,000 of total expense included in cost of goods sold and operating expenses in the condensed consolidated statements of operations for the three months ended June 30, 2020. We have received approximately $365,000 in payments from the Canadian Government under the Canadian Emergency Wage Subsidy program and our Asian subsidiaries have received approximately $93,000 from their local government assistance programs. These payments are included in cost of goods sold and operating expenses in the condensed consolidated statements of operations for the three months ended June 30, 2020. In addition, we deferred the employer’s share of social security taxes of $369,000, which is included in other liabilities in the condensed consolidated balance sheet at June 30, 2020.

Due to the seriousness of the COVID-19 pandemic and the unknown impact at the time on our business, we conserved cash wherever practicable. We implemented furloughs, layoffs, and salary reductions. Salary decreases affected 175 employees, ranging from 5% - 50% of base pay.  In addition, we implemented a worldwide travel ban and controls on all other expenses, including a freeze on hiring and salary increases.

Results of Operations for the Three Months Ended June 30, 2020 and 2019

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:

Net Sales and Gross Profit

The following summarizes net sales and gross profit:

Net Sales. Our net sales for the three months ended June 30, 2020 decreased by $13,792,000, or 12.6%, to $95,356,000 compared with net sales for the three months ended June 30, 2019 of $109,148,000. This decrease in our net sales was due primarily to the negative economic effects of the COVID-19 pandemic partially offset by the expansion of our automotive aftermarket brake-related product offerings introduced in the later part of fiscal 2020, which contributed net sales of $2,925,000 during the three months ended June 30, 2020.

Operating Expenses

The following summarizes operating expenses:

General and Administrative. Our general and administrative expenses for the three months ended June 30, 2020 were $6,870,000, which represents a decrease of $5,130,000, or 42.8%, from general and administrative expenses for the three months ended June 30, 2019 of $12,000,000. This decrease was due to (i) a non-cash gain of $2,832,000 compared with a non-cash gain $35,000 recorded due to the change in the fair value of the forward foreign currency exchange contracts during the three months ended June 30, 2020 and 2019, respectively, (ii) a non-cash gain of $1,985,000 compared with a non-cash gain of $502,000 recorded due to the remeasurement of foreign currency-denominated lease liabilities during the three months ended June 30, 2020 and 2019, respectively, and (iii) $910,000 from decreased professional services.

Sales and Marketing. Our sales and marketing expenses for the three months June 30, 2020 decreased $719,000, or 14.6%, to $4,200,000 from $4,919,000 for the three months ended June 30, 2019 primarily due to our cost-cutting measures in connection with COVID-19. These decreases in sales and marketing expense were as follows: (i) $408,000 from decreased travel, (ii) $157,000 from decreased marketing expense in connection with new business, (iii) $125,000 from decreased employee-related expenses.

Research and Development. Our research and development expenses decreased by $430,000, or 18.1%, to $1,942,000 for the three months ended June 30, 2020 from $2,372,000 for the three months ended June 30, 2019 primarily due to our cost-cutting measures in connection with COVID-19. These decreases in research and development were as follows: (i) $181,000 from decreased supplies and (ii) $165,000 from decreased employee-related expenses.

Interest Expense

Interest Expense, net. Our interest expense, net for the three months ended June 30, 2020 decreased $1,764,000, or 28.6%, to $4,409,000 from $6,173,000 for the three months ended June 30, 2019, primarily due to lower interest rates.

Provision for Income Taxes

Income Tax. We recorded an income tax benefit of $1,022,000, or an effective tax rate of 25.3%, and an income tax benefit of $1,730,000, or an effective tax rate of 22.0%, for the three months ended June 30, 2020 and 2019, respectively. The effective tax rate for the three months ended June 30, 2020, was primarily impacted by non-deductible executive compensation under Internal Revenue Code Section 162(m) and foreign income taxed at rates that are different from the federal statutory rate.

Liquidity and Capital Resources

Overview

We had working capital (current assets minus current liabilities) of $87,410,000 and $90,624,000, a ratio of current assets to current liabilities of 1.3:1.0 at June 30, 2020 and March 31, 2020, respectively.

We generated cash during the three months ended June 30, 2020 from operations and the use of receivable discount programs. As we manage through the impacts of the COVID-19 pandemic, 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.

Share Repurchase Program

As of June 30, 2020, $15,692,000 of the $37,000,000 authorized share repurchase program had been utilized and $21,308,000 remained available to repurchase shares, subject to the limit in our credit facility. Our credit facility permits the payment of up to $20,000,000 of dividends and share repurchases per fiscal year, subject to a minimum availability threshold and pro forma compliance with financial covenants. We retired the 675,561 shares repurchased under this program through June 30, 2020. 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.

Cash Flows

The following summarizes cash flows as reflected in the condensed consolidated statements of cash flows:

Net cash provided by operating activities was $22,388,000 during the three months ended June 30, 2020 compared with net cash used in operating activities of $18,379,000 during the three months ended June 30, 2019. The significant change in our operating activities was due to increased collections of accounts receivable and a less significant increase in our inventory as we continue to manage our inventory levels during the three months ended June 30, 2020.

Net cash used in investing activities was $3,038,000 and $2,668,000 during the three months ended June 30, 2020 and 2019, respectively, due primarily to decreased purchases of plant and equipment for our current operations and the expansion of our operations in Mexico. In addition, we generated cash from the redemption of short-term investments during the three months ended June 30, 2019.

Net cash used in financing activities was $41,674,000 during the three months ended June 30, 2020 compared with net cash provided by financing activities $22,328,000 during the three months ended June 30, 2019. The significant change in our financing activities was due mainly to repayments under our credit facility during the three months ended June 30, 2020 compared with borrowing under our credit facility during the three months ended June 30, 2019.

Capital Resources

Credit Facility

We are party to a $268,620,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $238,620,000 revolving loan facility, subject to borrowing base restrictions, a $24,000,000 sublimit for borrowings by Canadian borrowers, and a $20,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $30,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 5, 2023. The Credit Facility permits the payment of up to $20,000,000 of dividends and share repurchases per fiscal year, subject to a minimum availability threshold and pro forma compliance with financial covenants. In connection with the Credit Facility, the lenders have a security interest in substantially all of our assets.

The Term Loans require quarterly principal payments of $937,500. The Credit Facility bears interest at rates equal to either 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 2.93% and 2.94%, at June 30, 2020, respectively, and 4.34% and 3.64% at March 31, 2020, respectively.

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 June 30, 2020.

The following summarizes the financial covenants required under the Credit Facility:

While we made payments to our Revolving Facility of $40,000,000, in light of COVID-19, we elected not to further pay down our Revolving Facility and accumulated cash of $27,464,000 as of June 30, 2020. Our credit arrangement only allows up to $6,000,000 of credit for cash when computing the senior leverage ratio. If we had paid down the Revolving Facility with cash on hand, our senior leverage ratio would have been 1.62. 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 $112,000,000 and $152,000,000 outstanding under the Revolving Facility at June 30, 2020 and March 31, 2020, respectively. In addition, $5,679,000 was outstanding for letters of credit at June 30, 2020. At June 30, 2020, after certain contractual adjustments, $85,097,000 was available under the Revolving Facility.

Receivable Discount Programs

We use receivable discount programs with certain customers and their respective banks. Under these programs, we have options to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow us to accelerate receipt of payment on customers’ receivables. While these arrangements have reduced our working capital needs, there can be no assurance that these programs will continue in the future. Interest expense resulting from these programs would increase if interest rates rise, if utilization of these discounting arrangements expands, if customers extend their payment to us, or if the discount period is extended to reflect more favorable payment terms to customers.

The following is a summary of the receivable discount programs:

Off-Balance Sheet Arrangements

At June 30, 2020, 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.

Capital Expenditures and Commitments

Capital Expenditures

Our total capital expenditures, including finance leases and non-cash capital expenditures were $5,088,000 and $4,653,000 for the three months ended June 30, 2020 and 2019, 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 incur approximately $6,300,000 of capital expenditures for our current operations and approximately $11,000,000 for continued expansion of our operations in Mexico during fiscal 2021. We have used and expect to continue using our working capital and other available capital resources to fund these capital expenditures.

Litigation

There have been no material changes to our litigation matters that are presented in our Annual Report on Form 10-K for the year ended March 31, 2020, which was filed on June 15, 2020.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2020, which was filed on June 15, 2020, except as discussed below.

New Accounting Pronouncements Recently Adopted

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued an accounting pronouncement related to the measurement of credit losses on financial instruments. This pronouncement, along with a subsequent Accounting Standards Updates (“ASU”) issued to clarify certain provisions of the new guidance, changes the impairment model for most financial assets and requires the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The adoption of this guidance on April 1, 2020 increased our required disclosures for our expected credit losses but did not have a material effect on our condensed consolidated financial statements.

Prior to April 1, 2020, accounts receivable were recorded at cost less an allowance for doubtful accounts. The net amount of accounts receivable and corresponding allowance for doubtful accounts were presented in the condensed consolidated balance sheets. We maintain an allowance for uncollectible accounts receivable for estimated losses resulting from the failure or inability of its customers to make required payments. Furthermore, receivable balances were assessed quarterly for impairment and an allowance was recorded if the receivable was considered impaired. Subsequent to April 1, 2020, accounts receivable are recorded at amortized cost less an allowance for credit losses that are not expected to be recovered. The net amount of accounts receivable and corresponding allowance for credit losses are presented separately in the condensed consolidated balance sheets. We maintain an allowances for credit losses resulting from the expected failure or inability of our customers to make required payments. We recogniz the allowance for credit losses at inception and reassess quarterly based on the asset’s expected collectability. The allowance is based on multiple factors including historical experience with bad debts, the credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, such as COVID-19, as well as expectations of conditions in the future, if applicable. Our allowance for credit losses is based on the assessment of the collectability of assets pooled together with similar risk characteristics.

We pool our receivables based on the shared risk characteristics of our customers. We record a provision for expected credit losses using a loss-rate method based on the ratio of our historical write-offs to our average trade accounts receivable. At each reporting period, we will assess whether financial assets in a pool continue to display similar risk characteristics. If particular receivables no longer display risk characteristics that are similar to those of the receivables in the pool, we may determine that we need to move those receivables to a different pool or perform an individual assessment of expected credit losses for those specific receivables.

Fair Value Measurements

In August 2018, the FASB issued guidance, which changes the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 measurements, and the narrative description of measurement uncertainty should be applied prospectively only for the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively applied to all periods presented upon their effective date. The adoption of this guidance on April 1, 2020 modified certain of our disclosures for our Level 3 fair value measurements but did not have an impact on our condensed consolidated financial statements.

Reference Rate Reform

In March 2020, the FASB issued guidance that, for a limited time, eases the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We will apply these amendments prospectively. The adoption of this guidance on April 1, 2020 did not have an impact on our condensed consolidated financial statements for the three months ended June 30, 2020.

New Accounting Pronouncements Not Yet Adopted

Income Taxes

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. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our condensed consolidated financial statements.

There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K as of March 31, 2020, which was filed with the SEC on June 15, 2020.

Evaluation of Disclosure Controls and Procedures

 

We have established disclosure controls and procedures designed 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 communicated to management, including our chief executive officer, chief financial officer, and chief accounting officer, 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(e) 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 June 30, 2020.

Inherent Limitations on Effectiveness of Controls

 

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 States of America, applying certain estimates and judgments as required.

 

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.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that occurred during the three months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

There have been no material changes to our litigation matters that are presented in our Annual Report on Form 10-K for the year ended March 31, 2020, which was filed on June 15, 2020.

There have been no material changes in the risk factors set forth in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed on June 15, 2020.

Limitation on Payment of Dividends and Share Repurchases

The Credit Facility permits the payment of up to $20,000,000 of dividends and share repurchases per fiscal year, subject to a minimum availability threshold and pro forma compliance with financial covenants.

Purchases of Equity Securities by the Issuer

Shares repurchased during the three months ended June 30, 2020 were as follows:

None.