MOTORCAR PARTS OF AMERICA INC - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2021

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 19,119,059 shares of Common Stock outstanding at August 2, 2021.

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.

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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 Income (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, 2021

(Unaudited)

		June 30, 2021				March 31, 2021
Accounts receivable — trade		$	67,212,000			$	81,549,000
Allowance for credit losses			(273,000	)			(348,000	)
Customer payment discrepancies			(797,000	)			(752,000	)
Customer returns RGA issued			(12,123,000	)			(17,327,000	)
Total accounts receivable — net		$	54,019,000			$	63,122,000

		Three Months Ended June 30,
		2021				2020
Balance at beginning of period		$	348,000			$	4,252,000
Provision for expected credit losses			(36,000	)			170,000
Recoveries			-				(100,000	)
Amounts written off charged against the allowance			(39,000	)			(3,897,000	)
Balance at end of period		$	273,000			$	425,000

		June 30, 2021				March 31, 2021
Inventory
Raw materials		$	140,109,000			$	128,190,000
Work-in-process			7,189,000				5,233,000
Finished goods			173,725,000				168,184,000
			321,023,000				301,607,000
Less allowance for excess and obsolete inventory			(13,945,000	)			(13,246,000	)
Inventory — net			307,078,000				288,361,000
Inventory unreturned			13,607,000				14,552,000
Total inventory		$	320,685,000			$	302,913,000

		June 30, 2021				March 31, 2021
Short-term contract assets
Cores expected to be returned by customers		$	15,024,000			$	17,657,000
Upfront payments to customers			533,000				684,000
Finished goods premiums paid to customers			644,000				405,000
Core premiums paid to customers			10,063,000				8,194,000
Total short-term contract assets		$	26,264,000			$	26,940,000
Remanufactured cores held at customers' locations		$	243,389,000			$	229,918,000
Upfront payments to customers			398,000				486,000
Finished goods premiums paid to customers			3,191,000				2,731,000
Core premiums paid to customers			40,611,000				31,509,000
Long-term core inventory deposits			5,569,000				5,569,000
Total long-term contract assets		$	293,158,000			$	270,213,000

		Three Months Ended June 30,
		2021				2020
Net sales
Customer A			34	%			45	%
Customer B			20	%			26	%
Customer C			31	%			17	%

		June 30, 2021				March 31,2021
Accounts receivable - trade
Customer A			43	%			50	%
Customer B			24	%			23	%
Customer C			1	%			-

		Three Months Ended June 30,
		2021				2020
Product line
Rotating electrical products			67	%			72	%
Wheel hub products			14	%			18	%
Brake related products			16	%			9	%
Other products			3	%			1	%
			100	%			100	%

		June 30, 2021				March 31, 2021
Principal amount of Term Loans		$	19,687,000			$	20,625,000
Unamortized financing fees			(213,000	)			(161,000	)
Net carrying amount of Term Loans			19,474,000				20,464,000
Less current portion of Term Loans			(3,670,000	)			(3,678,000	)
Long-term portion of Term Loans		$	15,804,000			$	16,786,000

Year Ending March 31,
2022 - remaining nine months		$	2,812,000
2023			3,750,000
2024			3,750,000
2025			3,750,000
2026			3,750,000
Thereafter			1,875,000
Total payments		$	19,687,000

		June 30, 2021				March 31, 2021
Short-term contract liabilities
Customer core returns accruals		$	12,350,000			$	12,710,000
Customer allowances earned			17,298,000				16,513,000
Customer deposits			2,735,000				2,234,000
Finished goods liabilities			2,424,000				1,883,000
Core bank liability			1,597,000				1,585,000
Accrued core payment, net			4,584,000				6,147,000
Total short-term contract liabilities		$	40,988,000			$	41,072,000
Long-term contract liabilities
Customer core returns accruals		$	132,469,000			$	103,719,000
Customer allowances earned			245,000				313,000
Finished goods liabilities			2,668,000				2,678,000
Core bank liability			16,499,000				16,903,000
Accrued core payment, net			1,623,000				1,610,000
Total long-term contract liabilities		$	153,504,000			$	125,223,000

Leases	Classification		June 30, 2021				March 31, 2021
Assets:
Operating	Operating lease assets		$	87,924,000			$	71,513,000
Finance	Plant and equipment			8,592,000				8,852,000
Total leased assets			$	96,516,000			$	80,365,000
Liabilities:
Current
Operating	Operating lease liabilities		$	5,434,000			$	6,439,000
Finance	Other current liabilities			2,584,000				2,640,000
Long-term
Operating	Long-term operating lease liabilities			85,889,000				70,551,000
Finance	Other liabilities			4,606,000				4,995,000
Total lease liabilities			$	98,513,000			$	84,625,000

		Three Months Ended
		June 30,
		2021				2020
Lease cost
Operating lease cost		$	3,042,000			$	2,683,000
Short-term lease cost			376,000				317,000
Variable lease cost			281,000				143,000
Finance lease cost:
Amortization of finance lease assets			499,000				413,000
Interest on finance lease liabilities			97,000				83,000
Total lease cost		$	4,295,000			$	3,639,000

Maturity of lease liabilities		Operating Leases				Finance Leases				Total
2022 - remaining nine months		$	7,807,000			$	2,246,000			$	10,053,000
2023			11,351,000				2,404,000				13,755,000
2024			9,968,000				1,610,000				11,578,000
2025			10,041,000				1,118,000				11,159,000
2026			10,320,000				432,000				10,752,000
Thereafter			75,101,000				-				75,101,000
Total lease payments			124,588,000				7,810,000				132,398,000
Less amount representing interest			(33,265,000	)			(620,000	)			(33,885,000	)
Present value of lease liabilities		$	91,323,000			$	7,190,000			$	98,513,000

		June 30, 2021				March 31, 2021
Lease term and discount rate
Weighted-average remaining lease term (years):
Finance leases			3.2				3.4
Operating leases			11.0				11.1
Weighted-average discount rate:
Finance leases			5.3	%			5.3	%
Operating leases			5.7	%			5.9	%

		Three Months Ended June 30,
		2021				2020
Receivables discounted		$	146,669,000			$	111,360,000
Weighted average days			329				345
Annualized weighted average discount rate			1.8	%			2.5	%
Amount of discount recognized as interest expense		$	2,473,000			$	2,686,000

		Three Months Ended June 30,
		2021				2020
Net income (loss)		$	861,000			$	(3,012,000	)
Basic shares			19,054,481				18,976,178
Effect of potentially dilutive securities			604,576				-
Diluted shares			19,659,057				18,976,178
Net income (loss) per share:
Basic net income (loss) per share		$	0.05			$	(0.16	)
Diluted net income (loss) per share		$	0.04			$	(0.16	)

		Gain (Loss) Recognized as Foreign Exchange Impact of Lease Liabilities and Forward Contracts
Derivatives Not Designated as		Three Months Ended June 30,
Hedging Instruments		2021				2020
Forward foreign currency exchange contracts		$	(262,000	)		$	2,832,000

		June 30, 2021																March 31, 2021
						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		$	1,823,000			$	1,823,000			$	-			$	-			$	1,652,000			$	1,652,000			$	-			$	-
Prepaid expenses and other current assets
Forward foreign currency exchange contracts			1,167,000				-				1,167,000				-				1,429,000				-				1,429,000				-
Liabilities
Accrued liabilities
Short-term contingent consideration			850,000				-				-				850,000				910,000				-				-				910,000
Other current liabilities
Deferred compensation			1,823,000				1,823,000				-				-				1,652,000				1,652,000				-				-

		June 30, 2021
Risk free interest rate			0.06	%
Counter party rate			3.00	%
Expected volatility			30-40	%
Weighted average cost of capital			13-15.5	%

		Three Months Ended June 30,
Contingent Consideration		2021				2020
Beginning balance		$	910,000			$	2,653,000
Changes in revaluations of contingent consideration included in earnings			(60,000	)			(47,000	)
Ending balance		$	850,000			$	2,606,000

		Number of Shares				Weighted Average Exercise Price
Outstanding at March 31, 2021			1,744,885			$	17.51
Granted			-			$	-
Exercised			(21,270	)		$	18.24
Forfeited			(900	)		$	17.90
Outstanding at June 30, 2021			1,722,715			$	17.50

		Number of Shares				Weighted Average Grant Date Fair Value
Outstanding at March 31, 2021			354,484			$	17.22
Granted			218,673			$	22.27
Vested			(59,483	)		$	16.62
Forfeited			-			$	-
Outstanding at June 30, 2021			513,674			$	19.44

		Three Months Ended June 30,
		2021
Risk free interest rate			0.47	%
Expected life in years			3
Expected volatility of MPA common stock			53.70	%
Expected average volatility of peer companies			59.30	%
Average correlation coefficient of peer companies			26.70	%
Expected dividend yield			-
Grant date fair value		$	26.89

		Number of Shares				Weighted Average Grant Date Fair Value
Outstanding at March 31, 2021			-			$	-
Granted			84,593			$	23.19
Vested			-			$	-
Forfeited			-			$	-
Outstanding at June 30, 2021			84,593			$	23.19

		Three Months Ended June 30,
		2021				2020
Balance at beginning of period		$	21,093,000			$	18,300,000
Charged to expense			27,261,000				23,089,000
Amounts processed			(28,344,000	)			(19,197,000	)
Balance at end of period		$	20,010,000			$	22,192,000

Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2021 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 14, 2021.

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 or other restrictions 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; supply chain delays or stoppages due to shipping delays; 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 a multi-pronged platform for growth within the non-discretionary automotive aftermarket for the replacement parts and test solutions and diagnostic equipment industry, through organic growth and acquisitions. 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) the opening of 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.

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, brake rotors, brake pads, and brake master cylinders, and (iv) other products, which include turbochargers and test solutions and diagnostic equipment used for electric vehicle powertrain development and manufacturing including electric motor test systems, e-axle test systems, advanced power emulators, charging unit test systems, test systems for alternators, starters, belt starter generators and bench-top testers used by the automotive retail segment.

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 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 additional spikes in infections 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. These personnel safety measures include 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 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, additional board check-in meetings and executive committee meetings, as needed, and regular town hall style communications with all employees.

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. During the three months ended June 30, 2021 and 2020, these expanded benefits, supply costs and other COVID-19 related costs resulted in $854,000 and $2,295,000, respectively, of total expense included in cost of goods sold and operating expenses in the condensed consolidated statements of operations.  During the three months ended June 30, 2021 and 2020, our Asian subsidiaries received $23,000 and $93,000, respectively, from their local assistance programs. During the three months ended June 30, 2020, we received $365,000, in payments from the Canadian Government under the Canadian Emergency Wage Subsidy program. These payments are recorded as a reduction of cost of goods sold and operating expenses in the condensed consolidated statements of operations.

Results of Operations for the Three Months Ended June 30, 2021 and 2020

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, 2021 were $149,034,000, which represents an increase of $53,678,000, or 56.3%, from the three months ended June 30, 2020 of $95,356,000. Net sales for the quarter increased across all product lines due to strong demand for our products. We continue to experience a number of challenges related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services. Our prior year net sales were also impacted by the COVID-19 pandemic.

In addition, gross profit 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, which resulted in a write-down of $984,000 compared with $1,384,000, and (ii) customer allowances and return accruals related to new business of $146,000 and $307,000 for the three months ended June 30, 2021 and 2020, respectively.

Operating Expenses

The following summarizes operating expenses:

General and Administrative. Our general and administrative expenses for the three months ended June 30, 2021 were $12,486,000, which represents an increase of $799,000, or 6.8%, from the three months ended June 30, 2020 of $11,687,000. General and administrative expenses decreased to 8.4% of net sales for the three months ended June 30, 2021 compared with 12.3% in the prior year. The increase in general and administrative expense was primarily due to (i) $997,000 of increased costs at our offshore locations, primarily resulting from our expansion in Mexico, (ii) $533,000 of increased share-based compensation due to equity grants made to employees in June 2021, and (iii) $468,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic. These increases in general and administrative expenses were partially offset by $1,396,000 decreased professional services.

Sales and Marketing. Our sales and marketing expenses for the three months ended June 30, 2021 were $5,368,000, which represents an increase of $1,168,000, or 27.8%, from the three months ended June 30, 2020 of $4,200,000. The increase in sales and marketing expense was primarily due to our cost-cutting measures in the prior year in response to COVID-19. These increases in sales and marketing expense during the three months ended June 30, 2021 were primarily due to (i) $407,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, (ii) $338,000 of increased advertising expense, (iii) $258,000 of increased commissions, and (iv) $136,000 of increased travel.

Research and Development. Our research and development expenses for the three months ended June 30, 2021 were $2,501,000, which represents an increase of $559,000, or 28.8%, from the three months ended June 30, 2020 of $1,942,000. The increase in research and development expense was primarily due to our cost-cutting measures in the prior year in response to COVID-19. These increases in research and development expenses during the three months ended June 30, 2021 were primarily due to (i) $319,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, (ii) $145,000 of increased samples for our library, and (iii) $78,000 of increased outside services.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts. The remeasurement of our foreign currency-denominated lease liabilities resulted in non-cash gains of $2,795,000 and $1,985,000 for the three months ended June 30, 2021 and 2020, respectively, due to movements in foreign exchange rates. In addition, the forward foreign currency exchange contracts resulted in a non-cash loss of $262,000 and a non-cash gain of $2,832,000 for the three months ended June 30, 2021 and 2020, respectively, due to the changes in their fair values.

Interest Expense

Interest Expense, net. Our interest expense, net, for the three months ended June 30, 2021 was $3,941,000, which represents a decrease of $468,000, or 10.6%, from the three months ended June 30, 2020 of $4,409,000. The decrease in interest expense was primarily due to lower interest rates and lower average outstanding balances under our credit facility.

Provision for Income Taxes

Income Tax. We recorded income tax expense of $947,000, or an effective tax rate of 52.4%, and an income tax benefit of $1,022,000, or an effective tax rate of 25.3%, for the three months ended June 30, 2021 and 2020, respectively. The effective tax rate for the three months ended June 30, 2021 was primarily impacted by (i) specific jurisdictions that we do not expect to recognize the benefit of losses, (ii) foreign income taxed at rates that are different from the federal statutory rate, and (iii) non-deductible executive compensation under Internal Revenue Code Section 162(m).

Liquidity and Capital Resources

Overview

We had working capital (current assets minus current liabilities) of $105,403,000 and $96,725,000, a ratio of current assets to current liabilities of 1.3:1.0, at June 30, 2021 and March 31, 2021, respectively. The increase in working capital was due primarily to the buildup of our inventory to meet anticipated future demand.

We generated cash during the three months ended June 30, 2021 from the use of our receivable discount programs and credit facility. 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

Our board of directors approved a stock repurchase program of up to $37,000,000 of our common stock. As of June 30, 2021, $16,831,000 was utilized and $20,169,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility. We retired the 730,521 shares repurchased under this program through June 30, 2021. 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 used in operating activities was $4,739,000 during the three months ended June 30, 2021 compared with net cash provided by operating activities of $22,388,000 during the three months ended June 30, 2020. The significant change in our operating activities was due to (i) the buildup of our inventory to meet anticipated future demand, (ii) the paydown of our accounts payable balances, and (iii) increased operating results (net income plus the net add-back for non-cash transactions in earnings). In addition, our operating activities continue to be impacted, to a lesser extent, by our growth initiatives, including our expanded footprint and product lines.

Net cash used in investing activities was $2,089,000 and $3,038,000 during the three months ended June 30, 2021 and 2020, respectively. The significant change in our investing activities was due primarily to decreased capital expenditures as we near the completion of our expansion in Mexico.

Net cash provided by financing activities was $16,094,000 during the three months ended June 30, 2021 compared with net cash used in financing activities $41,674,000 during the three months ended June 30, 2020. The significant change in our financing activities was due mainly to additional borrowings under our credit facility during the three months ended June 30, 2021 compared with repayments under our credit facility during the three months ended June 30, 2020.

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 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.

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 to May 28, 2026 from June 5, 2023, (ii) modified the fixed charge coverage ratio financial covenant, and (iii) modified the definition of “Consolidated EBITDA”. We capitalized $1,102,000 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 2.60% and 2.59%, respectively, at June 30, 2021, 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 June 30, 2021.

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

We had cash of $24,883,000 at June 30, 2021, 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 1.51 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 $103,000,000 and $84,000,000 outstanding under the Revolving Facility at June 30, 2021 and March 31, 2021, respectively. In addition, $6,444,000 was outstanding for letters of credit at June 30, 2021. At June 30, 2021, after certain contractual adjustments, $95,323,000 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, 2021, 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 $1,622,000 and $5,088,000 for the three months ended June 30, 2021 and 2020, 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 $12,300,000 of capital expenditures for our current operations and approximately $4,000,000 for continued expansion of our operations in Mexico for the full fiscal year 2022. 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, 2021, which was filed on June 14, 2021.

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, 2021, which was filed on June 14, 2021, except as discussed below.

Recently Adopted Accounting Pronouncements

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. The adoption of this guidance on April 1, 2021 did not have any material impact on our 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, 2021, which was filed with the SEC on June 14, 2021.

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, 2021.

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, 2021 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, 2021, which was filed on June 14, 2021.

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, 2021, filed on June 14, 2021.

Limitation on Payment of Dividends and Share Repurchases

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.

Purchases of Equity Securities by the Issuer

Shares repurchased during the three months ended June 30, 2021 were as follows:

None.