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What changed in MOTORCAR PARTS OF AMERICA INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of MOTORCAR PARTS OF AMERICA INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+258 added−191 removedSource: 10-K (2023-06-14) vs 10-K (2022-06-14)

Top changes in MOTORCAR PARTS OF AMERICA INC's 2023 10-K

258 paragraphs added · 191 removed · 143 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

33 edited+7 added−15 removed44 unchanged
Biggest changeWe have expanded our test solutions and diagnostic equipment applications for combustion engine vehicles, including bench top testers for alternators and starters, and offer test solutions and diagnostic equipment for the pre- and post-production of electric vehicles, as well as software emulation of power systems applications for the electrification of all forms of transportation, including automobiles, trucks and the emerging electrification of systems with the aerospace industry including electric vehicle charging systems. 5 Table of Contents The global automotive component and powertrain test solutions and diagnostic equipment market represents a multi-billion-dollar market, and solidly establishes our growth for today and the future, as electrification becomes increasingly important around the world.
Biggest changeSegment Reporting Our three operating segments are as follows: • Hard Parts , including (i) light duty rotating electric products such as alternators and starters, (ii) wheel hub products, (iii) brake-related products, including brake calipers, brake boosters, brake rotors, brake pads and brake master cylinders, and (iv) turbochargers, • Test Solutions and Diagnostic Equipment , including (i) applications for combustion engine vehicles, including bench top testers for alternators and starters, (ii) test solutions and diagnostic equipment for the pre- and post-production of electric vehicles, (iii) software emulation of power systems applications for the electrification of all forms of transportation (including automobiles, trucks and the emerging electrification of systems within the aerospace industry, such as electric vehicle charging stations), and 6 Table of Contents • Heavy Duty , including non-discretionary automotive aftermarket replacement hard parts for heavy-duty truck, industrial, marine, and agricultural applications.
Our Board of Directors appointed the Audit Committee with direct oversight of Company’s: (i) information security policies, including periodic assessment of risk of information security breach, training program, significant threat changes and vulnerabilities and monitoring metrics and (ii) effectiveness of information security policy implementation.
Our Board of Directors appointed the Audit Committee with direct oversight of our: (i) information security policies, including periodic assessment of risk of information security breach, training program, significant threat changes and vulnerabilities and monitoring metrics and (ii) effectiveness of information security policy implementation.
We believe we have a strong relationship with the union that represents our employees. Our facilities are located in labor markets with readily available access to skilled and unskilled workers. Our relationship and communication with our unionized and non-represented workforce is good. Inclusion and Diversity . Our board is ethnically diverse and comprised of 10 independent directors, including three women.
We believe we have a strong relationship with the union that represents our employees. Our facilities are located in labor markets with readily available access to skilled and unskilled workers. Our relationship and communication with our unionized and non-represented workforce is good. Inclusion and Diversity . Our board is ethnically diverse and comprised of 9 independent directors, including three women.
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 and maintain their Remanufactured Core inventory also requires the use of our working capital.
These contracts typically require that we meet ongoing performance standards. 7 Table of Contents 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 and maintain their Remanufactured Core inventory also requires the use of our working capital.
We also sell test solutions and diagnostic equipment via direct and indirect sales channels, technical conferences, and trade shows to some of the world’s leading automotive companies, and to the aerospace/aviation sector. We also offer testing services at our technical center located in Detroit, Michigan.
We also sell test solutions and diagnostic equipment to the automotive chains listed above and via direct and indirect sales channels, technical conferences, and trade shows to some of the world’s leading automotive companies, and to the aerospace/aviation sector. We offer testing services at our technical center located in Detroit, Michigan.
We perform supplier qualification, product inspection and testing according to our IATF 16949 or ISO 9001:2015 certified quality systems to assure product quality levels. We also perform periodic site audits of our suppliers’ manufacturing facilities. 9 Table of Contents Environmental, Social and Governance (ESG) and Human Capital Our Culture.
We perform supplier qualification, product inspection and testing according to our IATF 16949 or ISO 9001:2015 certified quality systems to assure product quality levels. We also perform periodic site audits of our suppliers’ manufacturing facilities. Environmental, Social and Governance (ESG) and Human Capital Our Culture.
The majority of our products are remanufactured at our facilities in Mexico, Canada, and to a lesser extent in Malaysia. We continue to maintain production of certain remanufactured units that require specialized service and/or rapid turnaround in our Torrance, California facility. We also manufacture and assemble new products at our facilities in Malaysia and India.
The majority of our products are remanufactured at our facilities in Mexico, Canada, and to a lesser extent in Malaysia. We continue to maintain production of certain remanufactured units that require specialized service at our Torrance, California facility. We also manufacture and assemble new products at our facilities in Malaysia and India.
We consistently support and pilot our customers’ supply management initiatives in addition to providing demand analytics, inventory management services, online training guides, and market share and retail store layout information to our customers. • Technological innovation. We continue to expand our research and development teams as we further develop in-house technologies and advanced testing methods.
We consistently support and pilot our customers’ supply management initiatives in addition to providing demand analytics, inventory management services, online training guides, and market share and retail store layout information to our customers. 5 Table of Contents • Technological innovation. We continue to expand our research and development teams as we further develop in-house technologies and advanced testing methods.
Any meaningful reduction in the level of sales to any of these customers, deterioration of the financial condition of any of these customers or the loss of any of these customers could have a materially adverse impact on our business, results of operations, and financial condition. 7 Table of Contents Customer Arrangements; Impact on Working Capital .
Any meaningful reduction in the level of sales to any of these customers, deterioration of the financial condition of any of these customers or the loss of any of these customers could have a materially adverse impact on our business, results of operations, and financial condition. Customer Arrangements; Impact on Working Capital .
We believe that our commitment to our Company, our employees and the communities within which we operate has led to high employee satisfaction and low employee turnover, and our commitment to our customers, suppliers and business partners has resulted in high customer satisfaction, as evidenced by the customer awards that we routinely win, and decades-long customer relationships. Environmental.
We believe that our commitment to our Company, our employees and the communities within which we operate has led to high employee satisfaction and low employee turnover, and our commitment to our customers, suppliers and business partners has resulted in high customer satisfaction, as evidenced by the customer awards that we routinely win, and decades-long customer relationships. 9 Table of Contents Environmental.
Our products are sold under our customers’ widely recognized private label brand names and our own brand names including Quality-Built ® , Pure Energy™, D&V Electronics, Dixie Electric, DelStar ® , and Select Power Source™.
Our products are sold under our customers’ widely recognized private label brand names and our own brand names including Quality-Built ® , Pure Energy™, D&V Electronics, Dixie Electric, and DelStar ® .
Sales to our three largest customers in the aggregate represented 85%, 87%, and 84%, and sales to our largest customer, AutoZone, represented 38%, 42%, and 38% of our net sales during fiscal 2022, 2021 and 2020, respectively.
Sales to our three largest customers in the aggregate represented 84%, 85%, and 87%, and sales to our largest customer, represented 37%, 38%, and 42% of our net sales during fiscal 2023, 2022 and 2021, respectively.
In addition, we have plans to launch an Agri-farm organic food and community program in Mexico to enhance our social responsibility practices on a global basis. Information Security and Risk Oversight We have an information security risk program committed to regular risk management practices surrounding the protection of confidential data.
In addition, we launched an Agri-farm organic food and community program in Mexico to enhance our social responsibility practices on a global basis. 10 Table of Contents Information Security and Risk Oversight We have an information security risk program committed to regular risk management practices surrounding the protection of confidential data.
As of March 31, 2022, we employed approximately 5,800 people, with 400 people in the United States, 4,900 people in Mexico, 200 people Canada, and 300 people in Malaysia and China. Approximately 5,400 people are production employees. We have non-union and unionized facilities. Approximately 4,800 production employees are covered by a local union.
As of March 31, 2023, we employed approximately 5,600 people, with 400 people in the United States, 4,800 people in Mexico, 200 people Canada, and 200 people in Malaysia and China. Approximately 5,200 people are production employees. We have non-union and unionized facilities. Approximately 4,700 production employees are covered by a local union.
The components are cleaned in an environmentally sound process that employs customized equipment and cleaning materials in accordance with the required specifications of the particular component. All components known to be subject to major wear and those components determined not to be reusable or repairable are replaced by new components.
The components are cleaned in an environmentally sound process that employs customized equipment and cleaning materials in accordance with the required specifications of the particular component. All components known to be subject to major wear and those components determined not to be reusable or repairable are replaced by new components. Non-salvageable components of the Used Core are sold as scrap.
We believe an inclusive workforce is critical to our success, with an ongoing focus on the hiring, retention, and advancement of women and other underrepresented ethnic groups. The Company employs 37% women and 63% men globally. In the United States, 76% of our workforce are considered ethnic minorities. Health, Safety and Wellness .
We believe an inclusive workforce is critical to our success, with an ongoing focus on the hiring, retention, and advancement of women and other underrepresented ethnic groups. We employ 38% women and 62% men globally. In the United States, 76% of our workforce are considered ethnic minorities. Health, Safety and Wellness .
Sales, Marketing and Distribution We sell our products to the largest automotive chains, including Advance (inclusive of Carquest, Autopart International, and Worldpac), AutoZone, Genuine Parts (NAPA), and O’Reilly with an aggregate of approximately 25,000 retail outlets. In addition, our products are sold to OES customers, professional installers, and a diverse group of automotive warehouse distributors.
Sales, Marketing and Distribution We sell our hard parts products to the largest automotive chains, including Advance (inclusive of Carquest, Autopart International, and Worldpac), AutoZone, Genuine Parts (NAPA), and O’Reilly with an aggregate of approximately 26,000 retail outlets. In addition, these products are sold to warranty replacement programs (“OES”) customers, professional installers, and a diverse group of automotive warehouse distributors.
During fiscal 2022, we sold approximately 99% of our products in North America, with approximately 1% of our products sold in Asian and European countries. We publish printed and electronic catalogs with part numbers and applications for our hard parts products along with a detailed technical glossary and informational database.
During fiscal 2023, we sold approximately 98% of our products in North America, with approximately 2% of our products sold in Asian and European countries. We publish printed and electronic catalogs with part numbers and applications for our products along with a detailed technical glossary and informational database.
Non-salvageable components of the Used Core are sold as scrap. 8 Table of Contents After the cleaning process is complete, the salvageable components of the Used Core are inspected and tested as prescribed by our IATF 16949 and ISO 9001:2015 approved quality programs, which have been implemented throughout the production processes.
After the cleaning process is complete, the salvageable components of the Used Core are inspected and tested as prescribed by our IATF 16949 and ISO 9001:2015 approved quality programs, which have been implemented throughout the production processes. IATF 16949 and ISO 9001:2015 are internationally recognized, world class, quality programs.
This elevated level of technology aims to deliver our customers high quality products and support services. Test Solutions and Diagnostic Equipment Rotating Electrical • We provide industry-leading test solutions and diagnostic equipment to both original equipment manufacturers and the aftermarket.
This elevated level of technology aims to deliver our customers high quality products and support services. Test Solutions and Diagnostic Equipment • We provide industry-leading test solutions and diagnostic equipment to both original equipment manufacturers and the aftermarket. We are continuously upgrading our equipment to accommodate testing for the latest alternator and starter technology for both existing and new customers.
Our programs are intended to support the physical and mental well-being with the tools and resources for employees to improve or maintain their health, and we encourage engagement in healthy behaviors for team members and their families. 10 Table of Contents In response to the COVID-19 pandemic, we implemented numerous changes in the interest of our team members.
Our programs are intended to support the physical and mental well-being with the tools and resources for employees to improve or maintain their health, and we encourage engagement in healthy behaviors for team members and their families. Compensation and benefits .
In addition to wages and salaries, these programs may include annual cash bonuses, stock awards, a 401(k) Plan, healthcare, and insurance, and implemented methodologies to manage performance, provide feedback and develop talent. Social Responsibility. We are firmly committed to social responsibility.
We provide competitive compensation and benefit programs that meet the needs of our employees, and are tailored to their local markets. In addition to wages and salaries, these programs may include annual cash bonuses, stock awards, a 401(k) Plan, healthcare, and insurance, and implemented methodologies to manage performance, provide feedback and develop talent. Social Responsibility.
In addition, we provide industry leading maintenance and service support for our test solutions and diagnostic equipment to provide a better end-user experience and value to our customers. Electric Vehicle and Aerospace • Market and grow our new product lines on a global basis.
These software and hardware upgrades are also available for existing products that the customer is using. In addition, we provide industry leading maintenance and service support for our test solutions and diagnostic equipment to provide a better end-user experience and value to our customers. • Market and grow our new product lines on a global basis.
The distinction between these two markets has become less defined over the years, as retail outlets leverage their distribution strength and store locations to attract customers.
The distinction between these two markets has become less defined over the years, as retail outlets leverage their distribution strength and store locations to attract customers. D emand for replacement parts generally increases with the age of vehicles and miles driven, which provides favorable opportunities for sales of our products.
The current population of light-duty vehicles in the U.S. is approximately 280 million, and the average age of these vehicles is approximately 12 years and is expected to continue to grow, in particular during recession years. The aged vehicle population provides favorable opportunities for sales of our products.
The current population of light-duty vehicles in the U.S. is approximately 285 million, and the average age of these vehicles is approximately 12 years and is expected to continue to grow, in particular during recession years. Although miles driven can fluctuate for various reasons, including fuel prices, they have been generally increasing for several years.
Growth Strategies and Key Initiatives As noted above, we have a multi-pronged growth strategy: first, we are focused on growing our aftermarket hard parts business in the North American marketplace; second, we are focused on growing our leadership position in test solutions and diagnostic equipment by providing innovative and intuitive solutions to our customers; and third, we are focused on growing our electric vehicle testing business servicing original equipment manufacturers for automotive and aerospace applications on a global basis.
Growth Strategies and Key Initiatives With a scalable infrastructure and abundant growth opportunities, we are focused on growing our aftermarket business in the North American marketplace and growing our leadership position in the test solutions and diagnostic equipment market by providing innovative and intuitive solutions to our customers.
In addition, we are well-positioned to supply test solutions and diagnostic equipment to the aerospace industry to support its shift to electric power driven control systems in airplanes. 6 Table of Contents Products We carry approximately 37,000 stock keeping units (“SKUs”) to support automotive replacement parts and test solutions and diagnostic equipment.
In addition, we are well-positioned to supply test solutions and diagnostic equipment to the aerospace industry to support its shift to electric power driven control systems in airplanes. Heavy Duty • Market and grow our innovative design solutions and commitment to quality.
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 (a) turbochargers and (b) 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 and starters, belt starter generators, bench-top testers, and specialized test services for electric vehicle inverters.
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, (iv) turbochargers, (v) test solutions and diagnostic equipment products, and (vi) heavy-duty products.
Inspection and testing are conducted at multiple stages of the remanufacturing process, and each finished product is inspected and tested on equipment designed to simulate performance under operating conditions. To maximize remanufacturing efficiency, we store component parts ready for assembly in our production facilities. Our remanufacturing processes combine product families with similar configurations into dedicated factory work cells.
Upon passage of all tests, which are monitored by designated quality control personnel, all the component parts are assembled in a work cell into a finished product. Inspection and testing are conducted at multiple stages of the remanufacturing process, and each finished product is inspected and tested on equipment designed to simulate performance under operating conditions.
Our non-discretionary automotive aftermarket replacement parts for heavy-duty truck, industrial, marine, and agricultural applications, which have some overlap with the automotive aftermarket, are also sold via specialty distribution channels through OES, fleet, and auto electric outlets. In addition to our hard parts business, our position within the test solutions and diagnostic equipment market is particularly promising.
Our heavy-duty products, which have some overlap with the light-duty automotive aftermarket, are also sold via specialty distribution channels through OES, fleet, and auto electric outlets.
Item 1. Business General We are a leading supplier of automotive aftermarket non-discretionary replacement parts and test solutions and diagnostic equipment.
Item 1. Business General We are a leading supplier of automotive aftermarket non-discretionary replacement parts and test solutions and diagnostic equipment -- building upon industry leading technology to be “The Global Leader for Parts and Solutions that Move Our World Today and Tomorrow” . We operate in the $130 billion non-discretionary automotive aftermarket for replacement hard parts in North America.
In addition, our socially responsible initiatives include subsidized food programs for certain employees, donations to community organizations, sponsorship of sport teams and weekend family events, which hopefully, will become possible again as our Company and the world recovers.
We are firmly committed to social responsibility. While safety, respect, and inclusion have always been fundamental to our company, these qualities are more important than ever. Our socially responsible initiatives include subsidized food programs for certain employees, donations to community organizations, sponsorship of sport teams and weekend family events.
This remanufacturing process, known as “lean manufacturing,” eliminated a large number of inventory moves and the need to track inventory movement through the remanufacturing process. This lean manufacturing process has been fully implemented at our existing production facilities and we expect to implement this process at our recently acquired facilities.
To maximize remanufacturing efficiency, we store component parts ready for assembly in our production facilities. 8 Table of Contents Our remanufacturing processes combine product families with similar configurations into dedicated factory work cells. This remanufacturing process, known as “lean manufacturing,” eliminated a large number of inventory moves and the need to track inventory movement through the remanufacturing process.
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Consistent with our strategic vision statement to be “The Global Leader for Parts and Solutions that Move Our World Today and Tomorrow” , we have implemented a multi-pronged platform for growth in hard parts and test solutions and diagnostic equipment, which are discussed further in the sections below.
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Our hard parts products include light-duty rotating electrical products, wheel hub products, brake-related products, and turbochargers.
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We operate in the $130 billion market for non-discretionary automotive aftermarket replacement hard parts business in North America. Our current products in the hard parts business include a significant presence in the rotating electrical category (alternators and starters).
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In addition, we sell test solutions and diagnostic equipment, which were added with our acquisitions of D&V Electronics Ltd. in July 2017 and Mechanical Power Conversion, LLC in December 2018 and heavy-duty rotating electrical products, which were added with our January 2019 acquisition of Dixie Electric, Ltd. The automotive aftermarket is divided into two markets.
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In January 2019, we expanded our presence into the non-discretionary automotive aftermarket replacement parts for heavy-duty truck, industrial, marine and agricultural applications category with the acquisition of Dixie Electric, Ltd (“Dixie”), a privately held manufacturer and remanufacturer of alternators and starters, based in Ontario, Canada .
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In addition, we operate in the $11 billion-plus rapidly emerging global market for automotive test solutions and diagnostic equipment and see the opportunity for accelerating growth rates for today and the future as electrification becomes increasingly important around the world.
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This acquisition added an estimated $698 million market opportunity for heavy-duty rotating electrical to our existing rotating electrical business. We have a scalable infrastructure, and our growth opportunities remain abundant.
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We also operate in the $700 million market for medium and heavy-duty automotive aftermarket replacement parts for truck, industrial, marine, and agricultural applications.
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Our growth strategy relating to hard parts includes growing market share in all of our existing hard parts product lines with a significant focus on our expanding line of brake products.
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We continue to develop and improve product performance, ease of installation or coverage simplification to deliver installation-ready products to provide extended service life and reduced downtime for our existing and new customers. Products We carry approximately 37,000 stock keeping units (“SKUs”) to support automotive replacement parts and test solutions and diagnostic equipment.
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Our premium non-discretionary automotive aftermarket replacement parts for light-duty applications are primarily sold to automotive retail chain stores and warehouse distributors throughout North America, and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”).
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Prior to the fourth quarter of fiscal 2023, our operating segments met the aggregation criteria and were aggregated. Effective as of the fourth quarter of fiscal 2023, we revised our segment reporting as we determined that our three operating segments no longer met the criteria to be aggregated. Our Hard Parts operating segment meets the criteria of a reportable segment.
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Although miles driven can fluctuate for various reasons, including fuel prices, they have been generally increasing for several years prior to 2020. D emand for replacement parts generally increases with the age of vehicles and miles driven. The automotive aftermarket is divided into two markets.
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The Test Solutions and Diagnostic Equipment and Heavy Duty segments are not material, are not separately reportable, and are included within the “all other” category. See Note 19 of the notes to consolidated financial statements for more information.
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We are focused on expanding our test solutions and diagnostic equipment for performance, endurance, and production of multiple components in the electric power train – providing simulation, emulation, and production applications for the electrification of both automotive and aerospace industries, including electric vehicle charging systems.
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We are continuously upgrading our equipment to accommodate testing for the latest alternator and starter technology for both existing and new customers. These software and hardware upgrades are also available for existing products that the customer is using.
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Segment Reporting 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.
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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.
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IATF 16949 and ISO 9001:2015 are internationally recognized, world class, quality programs. Upon passage of all tests, which are monitored by designated quality control personnel, all the component parts are assembled in a work cell into a finished product.
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All of these changes meet and/or exceed Centers for Disease Control, World Health Organization, and other government regulations. These programs involve providing employees with flexible working arrangements – including, where appropriate, the ability to work from home, and the implementation of numerous safety policies and practices at all of our facilities. Please see the discussion in Item 7.
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“Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in Item 1A “Risk Factors” for further information regarding the COVID-19 pandemic. Compensation and benefits . We provide competitive compensation and benefit programs that meet the needs of our employees, and are tailored to their local markets.
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While safety, respect, and inclusion have always been fundamental to our company, these qualities are more important than ever given the global pandemic and the impact it is having on our employees, family members, and the community at large. Medical professionals are onsite or within close proximity to our operations, and management is doing everything possible to address the challenges.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

35 edited+12 added−7 removed72 unchanged
Biggest changeThe extent to which these conditions impact us will depend on numerous factors and future developments, which are highly uncertain and cannot be predicted, including, but not limited to: (i) general economic and growth conditions, (ii) the impact of inflation on our expenses, (iii) the effects of the Russia/Ukraine conflict on international trade, customers, suppliers, and vendors, (iv) public health crises, such as the COVID-19 pandemic, (v) actions and stimulus measures adopted by local, state and federal governments, and (vi) the extent to which normal economic and operating conditions can resume.
Biggest changeThe extent to which these conditions impact us will depend on numerous factors and future developments, which are highly uncertain and cannot be predicted, including, but not limited to: (i) general economic and growth conditions, (ii) the impact of inflation on our expenses, (iii) the effects of the Russia/Ukraine conflict on international trade, customers, suppliers, and vendors, (iv) public health crises, such as the COVID-19 pandemic, and (v) the extent to which we return to “normal” economic and operating conditions or the economy stabilizes to a “new normal.” Even if some of these conditions subside, we may continue to experience adverse impacts to our business because of an economic recession or depression that has occurred or may occur in the future, as well as the lingering effects on logistics, supply chain and the social norms of society.
It is also possible, in the future, that we may experience the following risks related to doing business in foreign markets and importing products from abroad, such as the following: • imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our product that may be imported into the U.S. from countries or regions where we do business; • political or military conflict involving the U.S., which could cause a delay in the transportation of our products and an increase in transportation costs; • heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods; and • our ability to enforce any agreements with our foreign suppliers.
It is also possible, in the future, that we may experience the following risks related to doing business in foreign markets and importing products from abroad, such as the following: ● imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our product that may be imported into the U.S. from countries or regions where we do business; ● political or military conflict involving foreign countries or the U.S., which could cause a delay in the transportation of our products and an increase in transportation costs; ● heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods; and ● our ability to enforce any agreements with our foreign suppliers.
Risks are inherent in international operations, including: • exchange controls and currency restrictions; • currency fluctuations and devaluations; • changes in local economic conditions; • repatriation restrictions (including the imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries); • global sovereign uncertainty and hyperinflation in certain foreign countries; 17 Table of Contents • laws and regulations relating to export and import restrictions; • exposure to government actions; • increased required employment related costs; and • exposure to local political or social unrest including resultant acts of war, terrorism or similar events.
Risks are inherent in international operations, including: • exchange controls and currency restrictions; • currency fluctuations and devaluations; • changes in local economic conditions; • repatriation restrictions (including the imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries); • global sovereign uncertainty and hyperinflation in certain foreign countries; • laws and regulations relating to export and import restrictions; 17 Table of Contents • exposure to government actions; • increased required employment related costs; and • exposure to local political or social unrest including resultant acts of war, terrorism or similar events.
In addition, we also get pressure from our suppliers to pay them faster and our customers to pay us slower, which could impact our cash flows. 12 Table of Contents Risks Related to Our Business and Industry We rely on a few large customers for a majority of our business, and the loss of any of these customers, significant changes in the prices, marketing allowances or other important terms provided to any of these customers or adverse developments with respect to the financial condition of these customers could reduce our net income and operating results.
In addition, we also get pressure from our suppliers to pay them faster and our customers to pay us slower, which impacts our cash flows. 12 Table of Contents Risks Related to Our Business and Industry We rely on a few large customers for a majority of our business, and the loss of any of these customers, significant changes in the prices, marketing allowances or other important terms provided to any of these customers or adverse developments with respect to the financial condition of these customers could reduce our net income and operating results.
We could experience adverse impacts from these conditions in a number of ways, including, but not limited to, the following which have occurred to some extent during this fiscal year: • supply chain delays or stoppages due to shipping delays (cargo ship, train and truck shortages as well as staffing shortages) resulting in increased freight costs, closed supplier facilities or distribution centers, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas; • reduced and/or deferred consumer demand for our products as a result of the economic downturn; • change in demand for or availability of our products as a result of our customers modifying their restocking, fulfillment, or shipping practices; • increased raw material, and other input costs resulting from market volatility; • increased working capital needs and/or an increase in trade accounts receivable write-offs as a result of increased financial pressures on our suppliers or customers; and • fluctuations in foreign currency exchange rates or interest rates resulting from market uncertainties.
We could experience adverse impacts from these conditions in a number of ways, including, but not limited to, the following which have occurred to some extent during this fiscal year: • supply chain delays or stoppages due to shipping delays (cargo ship, train and truck shortages as well as staffing shortages) resulting in increased freight costs, closed supplier facilities or distribution centers, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas; • change in demand for or availability of our products as a result of our customers modifying their restocking, fulfillment, or shipping practices; • increased raw material, and other input costs resulting from market volatility; • increased working capital needs and/or an increase in trade accounts receivable write-offs as a result of increased financial pressures on our suppliers or customers; and • fluctuations in foreign currency exchange rates or interest rates resulting from market uncertainties.
These contracts generally expire in a year or less. Any change in the fair value of foreign exchange contracts is accounted for as an increase or decrease to “foreign exchange impact of lease liabilities and forward contracts” in the consolidated statements of operations.
These contracts generally expire in a year or less. Any change in the fair value of foreign exchange contracts is accounted for as an increase or decrease to foreign exchange impact of lease liabilities and forward contracts in the consolidated statements of operations.
Risks Related to Owning Our Stock Our stock price may be volatile and could decline substantially. Our stock price has fluctuated in the past and may decline substantially in the future as a result of developments in our business, the volatile nature of the stock market, and other factors beyond our control.
Risks Related to Owning Our Stock Our stock price is volatile and could decline substantially. Our stock price has fluctuated in the past and may decline substantially in the future as a result of developments in our business, the volatile nature of the stock market, and other factors beyond our control.
If we are not able to invest in or adopt changes to our systems, or such upgrades take longer or cost more than anticipated, our business, financial condition and operating results may be adversely affected. Cyber-attacks or other breaches of information technology security could adversely impact our business and operations.
If we are not able to invest in or adopt changes to our systems, or such upgrades take longer or cost more than anticipated, our business, financial condition and operating results may be adversely affected. 20 Table of Contents Cyber-attacks or other breaches of information technology security could adversely impact our business and operations.
Sustained raw material price increases has had an impact on our product costs and profitability to date, but we are unable to determine the overall impact, in the future, at this time. 14 Table of Contents Our financial results are affected by automotive parts failure rates that are outside of our control.
Sustained raw material price increases has had an impact on our product costs and profitability to date, but we are unable to determine the overall impact, in the future, at this time. Our financial results are affected by automotive parts failure rates that are outside of our control.
For example, common risks include: • raw material shortages; • problems with oceanic shipping, including shipping container shortages; • increased customs inspections of import shipments or other factors causing delays in shipments; and • increases in shipping rates, all of which we experienced.
For example, common risks include: 15 Table of Contents • raw material shortages; • problems with oceanic shipping, including shipping container shortages; • increased customs inspections of import shipments or other factors causing delays in shipments; and • increases in shipping rates, all of which we experienced.
The products we manufacture or contract to manufacture contain small quantities of Tin and Gold. We manufacture or contract to manufacture one product with small quantities of Tantalum. For the reporting year ending December 31, 2021, we surveyed 283 smelters, refiners, or metal processing facilities for these minerals that are, or could be, in our supply chain.
The products we manufacture or contract to manufacture contain small quantities of Tin and Gold. We manufacture or contract to manufacture one product with small quantities of Tantalum. For the reporting year ending December 31, 2022, we surveyed 211 smelters, refiners, or metal processing facilities for these minerals that are, or could be, in our supply chain.
Of these, 69% were validated as conflict-free, per publicly available information on the Conflict Free Sourcing Initiative website.
Of these, 89% were validated as conflict-free, per publicly available information on the Conflict Free Sourcing Initiative website.
We are exposed to market risk from material movements in foreign exchange rates between the U.S. dollar and the currencies of the foreign countries in which we operate. In fiscal 2022, approximately 24% of our total expenses were in currencies other than the U.S. dollar.
We are exposed to market risk from material movements in foreign exchange rates between the U.S. dollar and the currencies of the foreign countries in which we operate. In fiscal 2023, approximately 25% of our total expenses were in currencies other than the U.S. dollar.
Work stoppages, production shutdowns and similar events could significantly disrupt our business. Because the automotive industry relies heavily on just-in-time delivery of components during the assembly and manufacture of vehicles, a work stoppage or production shutdown at one or more of our manufacturing and assembly facilities could have adverse effects on our business.
Because the automotive industry relies heavily on just-in-time delivery of components during the assembly and manufacture of vehicles, a work stoppage or production shutdown at one or more of our manufacturing and assembly facilities could have adverse effects on our business.
Any of the foregoing, or a combination of them, could cause us to incur additional expenses and materially and adversely impact our business, financial condition, results of operations, or liquidity. Increasing attention to environmental, social, and governance matters may impact our business, financial results, or stock price.
We may also incur significant expenses to pursue and consummate acquisitions. Any of the foregoing, or a combination of them, could cause us to incur additional expenses and materially and adversely impact our business, financial condition, results of operations, or liquidity. Increasing attention to environmental, social, and governance matters may impact our business, financial results, or stock price.
A reduction in the failure rates of automotive parts would adversely affect our sales and profitability. Our reliance on foreign suppliers for some of the automotive parts we sell to our customers or included in our products presents risks to our business .
A reduction in the failure rates of automotive parts would reduce the demand for our products and thus adversely affect our sales and profitability. 14 Table of Contents Our reliance on foreign suppliers for some of the automotive parts we sell to our customers or included in our products presents risks to our business .
These risks and uncertainties include: • the difficulty in integrating newly-acquired businesses and operations in an efficient and effective manner; • the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions; • the potential loss of key employees of the acquired businesses; • the risk of diverting the attention of senior management from our operations; • risks associated with integrating financial reporting and internal control systems; • difficulties in expanding information technology systems and other business processes to accommodate the acquired businesses; and • future impairments of any goodwill of an acquired business. 19 Table of Contents We may also incur significant expenses to pursue and consummate acquisitions.
These risks and uncertainties include: • the difficulty in integrating newly-acquired businesses and operations in an efficient and effective manner; • the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions; • the potential loss of key employees of the acquired businesses; • the risk of diverting the attention of senior management from our operations; • risks associated with integrating financial reporting and internal control systems; • difficulties in expanding information technology systems and other business processes to accommodate the acquired businesses; and • future impairments of any goodwill of an acquired business.
In addition, because we depend on independent third parties to manufacture a significant portion of our wheel hub, brake-related products, and other purchased finished goods, we cannot be certain that we will not experience operational difficulties with such manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality controls and failure to meet production deadlines or increases in manufacturing costs. 15 Table of Contents An increase in the cost or a disruption in the flow of our imported products may significantly decrease our sales and profits.
In addition, because we depend on independent third parties to manufacture a significant portion of our wheel hub, brake-related products, and other purchased finished goods, we cannot be certain that we will not experience operational difficulties with such manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality controls and failure to meet production deadlines or increases in manufacturing costs.
Our net sales are concentrated among a small number of large customers. Sales to our three largest customers in the aggregate represented 85%, and sales to our largest customer represented 38% of our net sales during fiscal 2022.
Our net sales are concentrated among a small number of large customers. Sales to our three largest customers in the aggregate represented 84%, and sales to our largest customer represented 37% of our net sales during fiscal 2023.
We recorded a non-cash loss of $316,000 and a non-cash gain of $7,713,000 due to the change in the fair value of the forward foreign currency exchange contracts during fiscal 2022 and 2021, respectively. In addition, we recorded gains of $1,989,000 and $9,893,000 in connection with the remeasurement of foreign currency-denominated lease liabilities during fiscal 2022 and 2021, respectively.
We recorded a non-cash gain of $2,776,000 and a non-cash loss of $316,000 due to the change in the fair value of the forward foreign currency exchange contracts during fiscal 2023 and 2022, respectively. In addition, we recorded gains of $6,515,000 and $1,989,000 in connection with the remeasurement of foreign currency-denominated lease liabilities during fiscal 2023 and 2022, respectively.
Many factors may cause the market price for our common stock to decline, including: (i) our operating results failing to meet the expectations of securities analysts or investors in any period, (ii) downward revisions in securities analysts’ estimates, (iii) market perceptions concerning our future earnings prospects, (iv) public or private sales of a substantial number of shares of our common stock, (v) adverse changes in general market conditions or economic trends, and (vi) market shocks generally or in our industry, such as what has recently occurred.
Many factors may cause the market price for our common stock to decline, including: (i) our operating results failing to meet the expectations of securities analysts or investors in any period, (ii) downward revisions in securities analysts’ estimates, (iii) market perceptions concerning our future earnings prospects, (iv) public or private sales of a substantial number of shares of our common stock, (v) adverse changes in general market conditions or economic trends, and (vi) market shocks generally or in our industry, such as what has recently occurred. 19 Table of Contents General Risk Factors We may continue to make strategic acquisitions of other companies or businesses and these acquisitions introduce significant risks and uncertainties, including risks related to integrating the acquired businesses and achieving benefits from the acquisitions.
These factors include the timing and level of marketing allowances provided to our customers, actual sales during the relevant period, pricing strategies, the mix of products sold during a reporting period, and general market and competitive conditions.
Our gross profit percentage fluctuates due to numerous factors, some of which are outside of our control. These factors include the timing and level of marketing allowances provided to our customers, actual sales during the relevant period, pricing strategies, the mix of products sold during a reporting period, and general market and competitive conditions.
Changes in terms with, significant allowances for and collections from these customers could affect our operating results and cash flows. The loss of or a significant decline in sales to any of these customers could adversely affect our business, results of operations, and financial condition. Failure to compete effectively could reduce our market share and significantly harm our financial performance.
Changes in terms with, significant allowances for, and collections from these customers could affect our operating results and cash flows. Failure to compete effectively could reduce our market share and significantly harm our financial performance.
As of March 31, 2022, we had $171,694,000 of debt outstanding, most of which is at variable interest rates. Fluctuations in those rates could impact our operating results and cash flows. In particular, interest rates have been rising recently, which increases our interest expense. In addition, our credit facility has covenants that limit aspects of our operations.
As of March 31, 2023, we had $158,325,000 of debt outstanding under our credit facility, which is at variable interest rates. Fluctuations in those rates could impact our operating results and cash flows. In particular, interest rates have been rising recently, which increases our interest expense.
Any weakness in the credit markets could result in significant constraints on liquidity and availability of borrowing terms from lenders and accounts payable terms with vendors.
Any weakness in the credit markets could result in significant constraints on liquidity and availability of borrowing terms from lenders and accounts payable terms with vendors. These issues could also result in more stringent lending standards and terms and higher interest rates.
If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot assure you that our internal control over financial reporting will be effective in the future or that other material weakness will not be discovered in the future.
We cannot assure you that our internal control over financial reporting will be effective in the future or that other material weakness will not be discovered in the future.
These customer demands have put continued pressure on our operating margins and profitability, resulted in periodic contract renegotiation to provide more favorable prices and terms to these customers and significantly increased our working capital needs. In addition, this customer concentration leaves us vulnerable to any adverse change in the financial condition of these customers.
Customer demands have put continued pressure on our operating margins and profitability, resulted in periodic contract renegotiation to provide more favorable prices and terms to these customers and significantly increased our working capital needs. The loss of or a significant decline in sales to any of these customers could adversely affect our business, results of operations, and financial condition.
If we fail to meet any of these covenants in the future, there is no assurance that our lenders will waive any such defaults. If obtained, any such waiver may impose significant costs or covenants on us. In addition, as the capital markets get more volatile, it may become more difficult to obtain such waivers or refinance our debt.
If we fail to meet any of these covenants in the future, there is no assurance that our lenders will waive any such defaults or that we will otherwise be able to cure them. If we obtained a waiver, it may impose significant costs or covenants on us.
Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage. Weakness in conditions in the global credit markets and macroeconomic factors could adversely affect our financial condition and results of operations.
Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage.
Merchandise manufactured offshore represents a significant portion of our total product purchases. A disruption in the shipping or cost of such merchandise may significantly decrease our sales and profits. In addition, if imported merchandise becomes more expensive or unavailable, the transition to alternative sources may not occur in time to meet our demands.
An increase in the cost or a disruption in the flow of our imported products may significantly decrease our sales and profits. Merchandise manufactured offshore represents a significant portion of our total product purchases. A disruption in the shipping or cost of such merchandise may significantly decrease our sales and profits.
Merchandise from alternative sources may also be of lesser quality and more expensive than those we currently import. Risks associated with our reliance on imported merchandise include disruptions in the shipping and importation or increase in the costs of imported products.
Risks associated with our reliance on imported merchandise include disruptions in the shipping and importation or increase in the costs of imported products.
Our past material weakness, and any future failure to maintain effective internal control over financial reporting, may affect our ability to accurately report our financial results and could materially and adversely affect the market price of our common stock.
Our failure to maintain effective internal control over financial reporting may affect our ability to accurately report our financial results and could materially and adversely affect the market price of our common stock. Under the Sarbanes-Oxley Act, we must maintain effective disclosure controls and procedures and internal control over financial reporting, which requires significant resources and management oversight.
These fluctuations have resulted from many factors, including shifts in the demand and pricing for our products, general economic conditions, including changes in prevailing interest rates, and the introduction of new products. Our gross profit percentage fluctuates due to numerous factors, some of which are outside of our control.
Our operating results may continue to fluctuate significantly. We have experienced significant variations in our annual and quarterly results of operations. These fluctuations have resulted from many factors, including shifts in the demand and pricing for our products, general economic conditions, including changes in prevailing interest rates, and the introduction of new products.
Products manufactured overseas and imported into the U.S. and other countries are subject to import restrictions and duties, which could delay their delivery or increase their cost. Following an audit in fiscal 2019, the U.S.
Products manufactured overseas and imported into the U.S. and other countries are subject to import restrictions and duties, which could delay their delivery or increase their cost. We are subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business.
Under the Sarbanes-Oxley Act, we must maintain effective disclosure controls and procedures and internal control over financial reporting, which requires significant resources and management oversight. Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company.
Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed.
Removed
Even if some of these conditions subside, we may continue to experience adverse impacts to our business because of an economic recession or depression that has occurred or may occur in the future, as well as the lingering effects on logistics, supply chain and the social norms of society.
Added
In addition, customer concentration leaves us vulnerable to any adverse change in the financial condition of these customers.
Removed
During fiscal 2022, our production capacity at our Malaysian facility was impacted due to local government mandated restrictions in connection with the ongoing COVID-19 pandemic. Due to this reduction in production capacity, we were required to outsource certain finished goods purchases to meet demand, which resulted in incremental tariffs.
Added
We regularly review our accounts receivable and allowance for credit losses by considering factors such as historical experience, credit quality and age of the accounts receivable, and the current economic conditions that may affect a customer’s ability to pay such amounts owed to us. The majority of our sales are to leading automotive aftermarket parts suppliers.
Removed
Customs and Border Protection stated that it believed that we owed additional duties of approximately $17 million from 2011 through mid-2018 relating to products that we imported from Mexico. We do not believe that this amount is correct and believe that we have numerous defenses and are disputing this amount vigorously. We cannot assure you that the U.S.
Added
We participate in trade accounts receivable discount programs with our major customers. If the creditworthiness of any of our customers was downgraded, we could be adversely affected, in that we may be subjected to higher interest rates on the use of these discount programs or we could be forced to wait longer for payment.
Removed
Customs and Border Protection will agree or that we will not need to accrue or pay additional amounts in the future. Our operating results may continue to fluctuate significantly. We have experienced significant variations in our annual and quarterly results of operations.
Added
Should our customers experience significant cash flow problems, our financial position and results of operations could be materially and adversely affected, and the maximum amount of loss that would be incurred would be the outstanding receivable balance, Used Cores expected to be returned by customers, and the value of the Remanufactured Cores held at customers’ locations.
Removed
General Risk Factors We may continue to make strategic acquisitions of other companies or businesses and these acquisitions introduce significant risks and uncertainties, including risks related to integrating the acquired businesses and achieving benefits from the acquisitions.
Added
We maintain an allowance for credit losses that, in our opinion, provides for an adequate reserve to cover losses that may be incurred. However we cannot assure you that our losses will not exceed our reserve for the reasons and risks above.
Removed
Modest economic growth in most major industrial countries in the world and uncertain prospects for continued growth threaten to cause tightening of the credit markets, more stringent lending standards and terms, and higher interest rates. The persistence of these conditions could have a material adverse effect on our borrowings and the availability, terms and cost of such borrowings.
Added
These changes may also reduce demand for our products for combustion engine vehicles. Work stoppages, production shutdowns and similar events could significantly disrupt our business.
Removed
In addition, deterioration in the U.S. economy could materially and adversely impact our operating results. 20 Table of Contents
Added
In addition, if imported merchandise becomes more expensive or unavailable, the transition to alternative sources may not occur in time to meet our demands. Merchandise from alternative sources may also be of lesser quality and more expensive than those we currently import.
Added
The weighted average interest on our debt was 8.12% at March 31, 2023 compared to 3.12% at March 31, 2022. In addition, our credit facility has covenants that limit aspects of our operations. In addition, on March 31, 2023, we issued and sold $32,000,000 in aggregate principal amount of 10.0% convertible notes due in 2029 (the “Convertible Notes”).
Added
The issuance of shares of our common stock upon conversion of the Convertible Notes may dilute the ownership interests of existing stockholders and reduce our per share results of operations. Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock.
Added
In addition, as the capital markets get more volatile, it may become more difficult to obtain such waivers or refinance our debt. Weakness in conditions in the global credit markets and macroeconomic factors , including interest rates, could adversely affect our financial condition and results of operations.
Added
The banking industry and global credit markets also experience difficulties from time to time, and issues involving our lenders could impact our deposits, the availability, terms and cost of borrowings or our ability to refinance our debt.
Added
In addition, we are exposed to changes in interest rates primarily as a result of our borrowing and receivable discount programs, which have interest costs that vary with interest rate movements. Any limitations on our ability to fund our operations could have a material adverse effect on our business, financial condition and ability to grow.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeSquare Feet Leased or Owned Expiration Torrance, CA Remanufacturing, Warehouse, Administrative, and Office 231,000 Leased March 2032 Tijuana, Mexico Remanufacturing, Warehouse, and Office 312,000 Leased August 2033 Tijuana, Mexico Distribution Center and Office 410,000 Leased December 2032 Tijuana, Mexico Remanufacturing, Warehouse, and Office 199,000 Leased December 2032 Tijuana, Mexico Core Induction, Warehouse, and Office 173,000 Leased December 2032 Ontario, Canada Remanufacturing, Warehouse, and Office 157,000 Leased May 2023 Ontario, Canada Manufacturing, Warehouse, and Office 35,000 Leased December 2022 Singapore & Malaysia Remanufacturing, Warehouse, and Office 114,000 Leased Various through July 2024 Shanghai, China Warehouse and Office 27,000 Leased March 2023 We believe the above mentioned facilities are sufficient to satisfy our current and foreseeable operations.
Biggest changeSquare Feet Leased or Owned Expiration Torrance, CA Remanufacturing, Warehouse, Administrative, and Office 231,000 Leased March 2032 Tijuana, Mexico Remanufacturing, Warehouse, and Office 312,000 Leased August 2033 Tijuana, Mexico Distribution Center and Office 410,000 Leased December 2032 Tijuana, Mexico Remanufacturing, Warehouse, and Office 199,000 Leased December 2032 Tijuana, Mexico Core Induction, Warehouse, and Office 173,000 Leased December 2032 Tijuana, Mexico Warehouse 104,000 Leased May 2024 Singapore & Malaysia Remanufacturing, Warehouse, and Office 114,000 Leased Various through December 2024 Shanghai, China Warehouse and Office 27,000 Leased March 2024 Ontario, Canada Remanufacturing, Warehouse, and Office 157,000 Leased May 2026 Ontario, Canada Manufacturing, Warehouse, and Office 35,000 Leased December 2024 We believe the above mentioned facilities are sufficient to satisfy our current and foreseeable operations.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeCustoms and Border Protection stated that it believed that we owed additional duties of approximately $17 million from 2011 through mid-2018 relating to products that we imported from Mexico. We do not believe that this amount is correct and believe that we have numerous defenses and are disputing this amount vigorously. We cannot assure you that the U.S.
Biggest changeCustoms and Border Protection (“CBP”) stated that it believed that we owed additional duties relating to products that we imported from Mexico from 2011 through mid-2018. The CBP recently requested that we pay additional duties of approximately $3,900,000 from 2011 through mid-2018 related to the findings of the Audit.
Item 3. Legal Proceedings We are subject to various lawsuits and claims in the normal course of business. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business. Following an audit in fiscal 2019, the U.S.
Item 3. Legal Proceedings We are subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business. Following an audit in fiscal 2019 (“Audit”), the U.S.
Customs and Border Protection will agree or that we will not need to accrue or pay additional amounts in the future.
We do not believe that this amount is correct and believe that we have numerous defenses and are disputing this amount vigorously. We cannot assure that the CBP will agree or that we will not need to accrue or pay additional amounts in the future.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeEquity Compensation Plan Information The following summarizes our equity compensation plans as of March 31, 2022: Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders 2,179,155 (1) $ 17.53 (2) 682,788 (3) Equity compensation plans not approved by security holders N/A N/A N/A Total 2,179,155 $ 17.53 682,788 (1) Consists of (i) stock options issued under the 2004 Non-Employee Director Stock Option Plan, (ii) restricted stock units and restricted stock (collectively “RSUs”), performance stock units (PSU’s), and stock options issued under the Fourth Amended and Restated 2010 Incentive Award Plan (the “2010 Plan”), and (iii) RSUs issued under our 2014 Non-Employee Director Incentive Award Plan (the “2014 Plan”).
Biggest changeThe initial conversion rate is 66.6667 shares of our common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $15.00 per share of common stock). 22 Table of Contents Equity Compensation Plan Information The following summarizes our equity compensation plans as of March 31, 2023: Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c ) Equity compensation plans approved by security holders 1,854,795 (1 ) $ 20.20 (2 ) 871,432 (3 ) Equity compensation plans not approved by security holders N/A N/A N/A Total 1,854,795 $ 20.20 871,432 (1) Consists of (i) 6,000 stock options issued under the 2004 Non-Employee Director Stock Option Plan, (ii) 366,169 restricted stock units and restricted stock (collectively “RSUs”), 192,696 performance stock units (PSU’s), and 1,226,745 stock options issued under the Fourth Amended and Restated 2010 Incentive Award Plan (the “2010 Plan”), (iii) 10,417 RSUs issued under our 2014 Non-Employee Director Incentive Award Plan (the “2014 Plan”), and (iv) 52,768 RSUs issued under our 2022 Incentive Award Plan (the “2022 Plan”).
Purchases of Equity Securities by the Issuer Share repurchase activity during the fourth quarter of fiscal 2022 was as follows: Periods Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) January 1 - January 31, 2022: Open market and privately negotiated purchases - $ - - $ 18,255,000 February 1 - February 28, 2022: Open market and privately negotiated purchases - $ - - 18,255,000 March 1 - March 31, 2022: Open market and privately negotiated purchases - $ - - 18,255,000 Total 0 0 $ 18,255,000 (1) As of March 31, 2022, $18,745,000 of the $37,000,000 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.
Purchases of Equity Securities by the Issuer Share repurchase activity during the fourth quarter of fiscal 2023 was as follows: Periods Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) January 1 - January 31, 2023: Open market and privately negotiated purchases - $ - - $ 18,255,000 February 1 - February 28, 2023: Open market and privately negotiated purchases - $ - - 18,255,000 March 1 - March 31, 2023: Open market and privately negotiated purchases - $ - - 18,255,000 Total 0 0 $ 18,255,000 (1) As of March 31, 2023, $18,745,000 of the $37,000,000 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.
We retired the 837,007 shares repurchased under this program through March 31, 2023. 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.
(3) Consists of shares available for future issuance under our 2010 Plan and 2014 Plan. 22 Table of Contents Stock Performance Graph The following graph compares the cumulative return to holders of our common stock for the five years ending March 31, 2022 with the NASDAQ Composite Total Returns Index and the Zacks Retail and Wholesale Auto Parts Index.
(3) Consists of shares available for future issuance under our 2022 Plan. 23 Table of Contents Stock Performance Graph The following graph compares the cumulative return to holders of our common stock for the five years ending March 31, 2023 with the NASDAQ Composite Total Returns Index and the Zacks Retail and Wholesale Auto Parts Index.
The comparison assumes $100 was invested at the close of business on March 31, 2017 in our common stock and in each of the comparison groups, and assumes reinvestment of dividends. 23 Table of Contents
The comparison assumes $100 was invested at the close of business on March 31, 2018 in our common stock and in each of the comparison groups, and assumes reinvestment of dividends. 24 Table of Contents
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is traded on the NASDAQ Global Select Market under the trading symbol MPAA. As of June 7, 2022, there were 19,118,651 shares of common stock outstanding held by 11 holders of record.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is traded on the NASDAQ Global Select Market under the trading symbol MPAA. As of June 6, 2023, there were 19,494,615 shares of common stock outstanding held by 11 holders of record.
Added
Sales of Unregistered Securities On March 31, 2023, we issued $32,000,000 aggregate principal amount of convertible notes (the “Convertible Notes”) in a private placement offering to persons reasonably believed to be qualified institutional buyers pursuant to the exemption from registration provided by Rule 144A under the Securities Act. The Convertible Notes bear interest at a rate of 10% per year.
Added
The Convertible Notes may either be redeemed for cash, converted into shares of our common stock, or a combination thereof, at our election. The Convertible Notes are presented as convertible notes, net of unamortized debt issuance costs, on the consolidated balance sheet.
Added
The aggregate proceeds from the offering were approximately $ 31,280,000 million, net of initial purchasers’ fees and other related expenses. The notes will mature on March 30, 2029, unless earlier converted, repurchased or redeemed.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeHighlights 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 Mexico; • 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 capital investment; • 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 electric bench-top testing equipment; • We opened an electric vehicle (“EV”) contract testing center in Detroit, Michigan; • We continued a series of prestigious Tier-1 wins for our EV technology with orders from major global automotive, aerospace and research institutions; 25 Table of Contents • 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.
Biggest changeThe following significant accomplishments support our optimism moving forward: • We achieved record fiscal fourth quarter and full-year sales, which increased 18.8 percent and 5.0 percent, respectively, with solid demand across multiple categories; • We experienced meaningful traction with our customers and consumers since last year’s launch of 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 expanded sales with additional product line offerings and customers in Mexico; • We continued to improve efficiencies with expected ongoing benefits through increased production volume and pricing; • We focused on reduction in inventory levels following a strategic build up to meet demand during recent global supply chain challenges; • We enhanced our liquidity and capital resources with a $32 million strategic convertible note investment that supports us at an exciting pivotal point in our evolution; • We received increasing interest and orders for our Test Solutions and Diagnostic Equipment, including our emerging contract testing center, from major automotive retailers, major global automotive, aerospace and research institutions ; • We continued our social responsibility initiatives with the successful launch of an Agri-farm organic food and community program in Mexico and a continued focus on opportunities to enhance our Environmental, Social and Governance practices on a global basis.
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.
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.
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 Table of Contents Operating Expenses 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 (1,673,000 ) (17,606,000 ) Percent of net sales 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.
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. 37 Table of Contents Operating Expenses The following summarizes consolidated 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 (1,673,000 ) (17,606,000 ) Percent of net sales 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 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.
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 consolidated gross margin was 18.1% of net sales for fiscal 2022 compared with 20.2% of net sales for fiscal 2021.
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.
Our consolidated 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.
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.
In addition, 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 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.
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, 2023. These estimates may change, as new events occur and additional information is obtained.
Share Repurchase Program In August 2018, our board of directors approved an increase in our share repurchase program from $20,000,000 to $37,000,000 of our common stock. During fiscal 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.
Share Repurchase Program In August 2018, our board of directors approved an increase in our share repurchase program from $20,000,000 to $37,000,000 of our common stock. During fiscal 2023, we did not repurchase any shares 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.
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.
These investments included (i) a 410,000 square foot distribution center, (ii) two buildings totaling 372,000 square feet for remanufacturing and core sorting of brake calipers, and (iii) the realignment of production at our original 312,000 square foot facility in Mexico.
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.
As of March 31, 2023, $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, 2023.
Similarly, we accept product returns and grant appropriate credits to new customers from the time the new customer relationship is established. Contract Liability Contract liability consists of: (i) customer allowances earned, (ii) accrued core payments, (iii) customer core returns accruals, (iv) core bank liability, (v) finished goods liabilities, and (vi) customer deposits.
Similarly, we accept product returns and grant appropriate credits to new customers from the time the new customer relationship is established. 31 Table of Contents Contract Liability Contract liability consists of: (i) customer allowances earned, (ii) accrued core payments, (iii) customer core returns accruals, (iv) core bank liability, (v) finished goods liabilities, and (vi) customer deposits.
Any reduction of value is recorded as cost of goods sold in the period in which the revaluation is identified. 27 Table of Contents • 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.
Any reduction of value is recorded as cost of goods sold in the period in which the revaluation is identified. • Net realizable value for Used Cores are determined based on current core purchase prices from core brokers to the extent that core purchases in the trailing 12 months are significant.
(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 Table of Contents
(10) 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. 45 Table of Contents
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 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 $37,984,000 and $38,086,000 at March 31, 2023 and 2022, respectively.
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.
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 $7,000,000 of capital expenditures primarily to support our current operations during fiscal 2024.
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.
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.
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.
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 8.02% and 8.13%, respectively, at March 31, 2023, and 2.99% and 3.13%, respectively, at 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. Capital Expenditures and Commitments 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.
Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions. Capital Expenditures and Commitments Our total capital expenditures, including capital leases and non-cash capital expenditures, were $4,792,000 for fiscal 2023 and $8,150,000 for fiscal 2022.
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.
The following summarizes certain key operating consolidated data for the periods indicated: Fiscal Years Ended March 31, 2023 2022 2021 Cash flows (used in) provided by operations $ (21,754,000 ) $ (44,862,000 ) $ 56,089,000 Finished goods turnover (1) 3.6 3.8 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.
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 Table of Contents Interest Expense Interest Expense, net.
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. 38 Table of Contents Operating Income Consolidated Operating Income .
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.
Our investments in infrastructure and human resources during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines.
(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) We are unable to reliably estimate the timing of future payments related to uncertain tax position liabilities at March 31, 2023; therefore, future tax payment accruals related to uncertain tax positions in the amount of $1,964,000 have been excluded from the table above.
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 Table of Contents 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 Multi-year Customer Agreements We have or are renegotiating long-term agreements with many of our major customers.
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. 43 Table of Contents The following is a summary of the receivable discount programs: Fiscal Years Ended March 31, 2023 2022 Receivables discounted $ 548,376,000 $ 525,441,000 Weighted average days 328 336 Weighted average discount rate 5.3 % 1.9 % Amount of discount as interest expense $ 26,432,000 $ 9,197,000 Multi-year Customer Agreements We have or are renegotiating long-term agreements with many of our major customers.
(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) Accrued core payment represents the amounts due for principal of $12,227,000 and interest payments of $1,062,000 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.
Liquidity and Capital Resources Overview 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.
Liquidity and Capital Resources Overview We had working capital (current assets minus current liabilities) of $154,886,000 and $110,580,000, a ratio of current assets to current liabilities of 1.4:1.0 at March 31, 2023 and 1.3:1.0 at March 31, 2022.
(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) Finished goods liabilities represents the amounts due for principal of $1,690,000 and interest payments of $20,000 to be made in connection with the purchase of finished goods from our customers.
(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) The core bank liability represents the amounts due for principal of $15,268,000 and interest payments of $880,000 to be made in connection with the return of Used Cores from our customers.
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.
Revenue is recognized either when products are shipped or when delivered, depending on the applicable contract terms. 30 Table of Contents 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.
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.
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.
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.
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. 29 Table of Contents Upfront payments to customers represent marketing allowances, such as sign-on bonuses, slotting fees, and promotional allowances provided to our customers.
Capital Resources Debt 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 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. 40 Table of Contents 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”).
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.
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.
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.
The Term Loans require quarterly principal payments of $937,500. The Credit Facility bears interest at rates equal to either SOFR (as defined below) plus a margin of 2.75%, 3.00% or 3.25% or a reference rate plus a margin of 1.75%, 2.00% or 2.25%, in each case depending on the senior leverage ratio as of the applicable measurement date.
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.
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. Inventory Inventory is comprised of: (i) Used Core and component raw materials, (ii) work-in-process, and (iii) remanufactured and purchased finished goods.
Income Taxes We account for income taxes using the liability method, which measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements.
The change in the customer finished goods returns accrual primarily resulted from the timing of returned goods authorizations (“RGAs”) issued at March 31, 2023 compared with March 31, 2022. 32 Table of Contents Income Taxes We account for income taxes using the liability method, which measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements.
The 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.
The loans under the Credit Facility mature on May 28, 2026. The Credit Facility currently permits the payment of up to $29,043,000 of dividends and share repurchases for fiscal year 2023, 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.
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.
Purchased finished goods also include an allocation of fixed overhead costs. 28 Table of Contents 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 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 Table of Contents 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.
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.
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.
The significant change in our financing activities was due mainly to net repayments under our credit facility during fiscal 2023 compared to net borrowings under our credit facility during fiscal 2022 to support the investment in our inventory partially offset by $32,000,000 in proceeds less debt issuance costs from the issuance of our convertible notes during fiscal 2023.
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.
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.
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.
Revenue is recognized net of all anticipated returns, marketing allowances, volume discounts, and other forms of variable consideration .
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.
In evaluating our ability to recover deferred tax assets within the jurisdiction in which they arise, we consider all available positive and negative evidence.
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 Table of Contents 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.
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.
Interest payments were calculated based upon the interest rate for our Term Loan using the LIBOR option at March 31, 2022, which was 2.99%.
Interest payments were calculated based upon the interest rate for our Term Loan using the SOFR option at March 31, 2023, which was 8.02%. (5) Obligations under our Convertible Notes mature on March 30, 2029.
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.
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 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 Table of Contents Cash Flows 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 13,942,000 14,156,000 Fiscal 2022 Compared with Fiscal 2021 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 notes will mature on March 30, 2029, unless earlier converted, repurchased or redeemed. 39 Table of Contents Cash Flows The following summarizes cash flows as reflected in the consolidated statements of cash flows: Fiscal Years Ended March 31, 2023 2022 2021 Cash (used in) provided by: Operating activities $ (21,754,000 ) $ (44,862,000 ) $ 56,089,000 Investing activities (4,191,000 ) (7,938,000 ) (14,214,000 ) Financing activities 14,308,000 60,215,000 (76,567,000 ) Effect of exchange rates on cash and cash equivalents 217,000 78,000 599,000 Net (decrease) increase in cash and cash equivalents $ (11,420,000 ) $ 7,493,000 $ (34,093,000 ) Additional selected cash flow data: Depreciation and amortization $ 12,444,000 $ 12,886,000 $ 11,144,000 Capital expenditures 4,201,000 7,550,000 13,942,000 Fiscal 2023 Compared with Fiscal 2022 Net cash used in operating activities was $21,754,000 and $44,862,000 for fiscal 2023 and 2022, respectively.
In addition, we have access to our existing cash, as well as our available credit facilities to meet short-term liquidity needs.
Our primary source of liquidity was from the use of our receivable discount programs, credit facility, and issuance of convertible notes during fiscal 2023. In addition, we have access to our existing cash, as well as our available credit facilities to meet short-term liquidity needs.
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. Receivable Discount Programs We use receivable discount programs with certain customers and their respective banks.
We were in compliance with all financial covenants as of March 31, 2023. We had $145,200,000 and $155,000,000 outstanding under the Revolving Facility at March 31, 2023 and 2022, respectively. In addition, $6,370,000 was reserved for letters of credit at March 31, 2023.
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 Table of Contents Realization of deferred tax assets is dependent upon our ability to generate sufficient future taxable income.
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.
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.
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. 36 Table of Contents The following summarizes sales mix: Years Ended March 31, 2022 2021 Rotating electrical products 69 % 73 % Wheel hub products 13 % 15 % Brake-related products 15 % 10 % Other products 3 % 2 % 100 % 100 % Gross Profit.
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 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 have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures. 38 Table of Contents Contractual Obligations 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 Contractual Obligations Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 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 4,036,000 4,036,000 8,075,000 Finished goods liabilities (7) 3,189,000 1,581,000 1,463,000 145,000 - 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 various types of equipment.
We have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures. 44 Table of Contents Contractual Obligations The following summarizes our contractual obligations and other commitments as of March 31, 2023 and the effect such obligations could have on our cash flows in future periods: Payments Due by Period Contractual Obligations Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Finance lease obligations (1) $ 5,008,000 $ 2,064,000 $ 2,406,000 $ 532,000 $ 6,000 Operating lease obligations (2) 113,671,000 13,567,000 24,634,000 21,541,000 53,929,000 Revolving facility (3) 145,200,000 - - 145,200,000 - Term loan (4) 14,947,000 4,655,000 8,391,000 1,901,000 - Convertible notes (5) 56,704,000 - - - 56,704,000 Accrued core payment (6) 13,289,000 3,480,000 5,985,000 3,824,000 - Core bank liability (7) 16,148,000 2,018,000 4,036,000 4,036,000 6,058,000 Finished goods liabilities (8) 1,710,000 1,277,000 433,000 - - Unrecognized tax benefits (9) - - - - - Other long-term obligations (10) 63,976,000 14,637,000 22,226,000 19,137,000 7,976,000 Total $ 430,653,000 $ 41,698,000 $ 68,111,000 $ 196,171,000 $ 124,673,000 (1) Finance lease obligations represent amounts due under finance leases for various types of equipment.
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.
We record vendor discounts as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold.
We expect this realignment will benefit our future sales as product mix changes. 32 Table of Contents 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.
The following summarizes consolidated net sales by product mix: Years Ended March 31, 2023 2022 Rotating electrical products 67 % 69 % Wheel hub products 11 % 13 % Brake-related products 18 % 15 % Other products 4 % 3 % 100 % 100 % Gross Profit.
Except as required by law, we assume no obligation to update the forward-looking statements or our risk factors for any reason. Management Overview 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.
Except as required by law, we assume no obligation to update the forward-looking statements or our risk factors for any reason.
Upfront payments expected to be amortized during our normal operating cycle, which is generally one year, are classified as short-term contract assets. 28 Table of Contents 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.
The core premiums are treated as an asset and recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered.
We 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.
We believe that this provides a useful measure of our ability to turn our inventory into revenues.
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 Table of Contents Critical Accounting Policies We prepare our consolidated financial statements in accordance with generally accepted accounting principles, or GAAP, in the United States.
The Test Solutions and Diagnostic Equipment and Heavy Duty segments are not material, are not separately reportable, and are included within the “all other” category. See Note 19 of the notes to consolidated financial statements for more information. Critical Accounting Policies We prepare our consolidated financial statements in accordance with generally accepted accounting principles, or GAAP, in the United States.
Removed
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.
Added
Management Overview With a scalable infrastructure and abundant growth opportunities, we are focused on growing our aftermarket business in the North American marketplace and growing our leadership position in the test solutions and diagnostic equipment market by providing innovative and intuitive solutions to our customers.
Removed
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.
Added
Highlights and Accomplishments in Fiscal 2023 During fiscal 2023, we continued to execute our strategic plan – focusing on meaningful growth and improving profitability by leveraging our offshore infrastructure, industry position and customer relationships.
Removed
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.
Added
Trends Affecting Our Business Our business is impacted by various factors within the economy that affect both our customers and our industry, including but not limited to inflation, interest rates, global supply chain disruptions, fuel costs, wage rates, and other economic conditions.
Removed
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 .
Added
Given the nature of these various factors, we cannot predict whether or for how long certain trends will continue, nor can we predict to what degree these trends will impact us in the future. 26 Table of Contents Inflation The cost to manufacture and distribute our products is impacted by the cost of raw materials, finished goods, labor, and transportation.
Removed
We are unable to predict accurately the ultimate long-term impact that COVID-19 will have on our business and financial condition.
Added
During fiscal 2023, we experienced continued inflationary pressure and higher costs as a result of the increasing cost of raw materials, finished goods, labor, transportation, and other administrative costs. The increase in the cost of raw materials and finished goods are due in part to a shortage in the availability of certain products and the higher cost of shipping.
Removed
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.
Added
We can only pass our increased costs onto customers on a limited basis. Future general price inflation and its impact on costs and availability of materials could adversely affect our financial results. Interest Rates Interest rates are rising in an effort to curb higher inflation.
Removed
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.
Added
We are experiencing higher interest costs for our borrowing and our customers’ receivable discount programs, which have interest costs that vary with interest rate movements. The majority of our interest costs results from our customers’ receivable discount programs. The weighted average discount rate for these programs was 5.3% for fiscal 2023 compared with 1.9% for fiscal 2022.
Removed
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.
Added
These higher interest rates and any future increases in interest rates will continue to adversely affect our financial results. Impact of COVID-19 The COVID-19 pandemic continues to adversely impact the U.S. and global economies – creating uncertainty regarding the potential effects on the supply chain disruptions, rate of inflation, increasing interest rates, and customer demand.
Removed
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.
Added
We incurred certain costs related to the COVID-19 pandemic, which are included in cost of goods sold and operating expenses in the consolidated statements of operations of $1,957,000 and $3,368,000 during fiscal 2023 and 2022, respectively. Employee Retention Credit The CARES Act provides an employee retention credit (“ERC”) that is a refundable tax credit against certain employer taxes.
Removed
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.
Added
In the fourth quarter of the fiscal year ended March 31, 2022, we amended certain payroll tax filings and applied for a refund of $5,104,000.
Removed
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.
Added
As of March 31, 2023, we determined that all contingencies related to the ERC were resolved and recorded a $5,104,000 receivable which is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

7 edited+2 added−1 removed6 unchanged
Biggest changeIf interest rates were to increase 1%, our net annual interest expense would have increased by approximately $1,717,000. In addition, for each $10,000,000 of accounts receivable we discount over a period of 180 days, a 1% increase in interest rates would increase our interest expense by $50,000.
Biggest changeFor each $500,000,000 of accounts receivable we discount over a period of 180 days, a 1% increase in interest rates would have increased our interest expense by $2,500,000. The weighted average discount rate on our factored receivables was 5.3% during fiscal 2023 compared with 1.9% for fiscal 2022.
However, should our customers experience significant cash flow problems, our financial position and results of operations could be materially and adversely affected, and the maximum amount of loss that would be incurred would be the outstanding receivable balance, Used Cores expected to be returned by customers, and the value of the Remanufactured Cores held at customers’ locations.
Should our customers experience significant cash flow problems, our financial position and results of operations could be materially and adversely affected, and the maximum amount of loss that would be incurred would be the outstanding receivable balance, Used Cores expected to be returned by customers, and the value of the Remanufactured Cores held at customers’ locations.
We maintain an allowance for credit losses that, in our opinion, provides for an adequate reserve to cover losses that may be incurred. 40 Table of Contents
We maintain an allowance for credit losses that, in our opinion, provides for an adequate reserve to cover losses that may be incurred. 46 Table of Contents
Any changes in the fair values of our forward foreign currency exchange contracts are reflected in current period earnings. Based upon our forward foreign currency exchange contracts related to these currencies, an increase of 10% in exchange rates at March 31, 2022 would have increased our operating expenses by approximately $4,189,000.
Any changes in the fair values of our forward foreign currency exchange contracts are reflected in current period earnings. Based upon our forward foreign currency exchange contracts related to these currencies, an increase of 10% in exchange rates at March 31, 2023 would have increased our operating expenses by approximately $4,761,000.
Interest rate risk We are exposed to changes in interest rates primarily as a result of our borrowing and receivable discount programs, which have interest costs that vary with interest rate movements. Our credit facility bears interest at variable base rates, plus an applicable margin. At March 31, 2022, our net debt obligations totaled $171,694,000.
Interest rate risk We are exposed to changes in interest rates primarily as a result of our borrowing and receivable discount programs, which have interest costs that vary with interest rate movements. Our credit facility bears interest at variable base rates, plus an applicable margin. At March 31, 2023, our net debt obligations totaled $158,143,000.
During fiscal 2022 and fiscal 2021, a loss of $316,000 and a gain of $7,713,000, respectively, was recorded due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts.
During fiscal 2023 and fiscal 2022, a gain of $2,776,000 and a loss of $316,000, respectively, was recorded due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts.
In addition, we recorded gains $1,989,000 and $9,893,000 in connection with the remeasurement of foreign currency-denominated lease liabilities during fiscal 2022 and fiscal 2021, respectively.
In addition, we recorded gains $6,515,000 and $1,989,000 in connection with the remeasurement of foreign currency-denominated lease liabilities during fiscal 2023 and fiscal 2022, respectively.
Removed
We believe the credit risk with respect to trade accounts receivable is limited due to our credit evaluation process and the nature of our customers.
Added
If interest rates were to increase 1%, our net annual interest expense on our credit facility would have increased by approximately $1,581,000. The weighted average interest on our debt was 8.12% at March 31, 2023 compared to 3.12% at March 31, 2022. In addition, during the year ended March 31, 2023, receivables discounted were $548,376,000.
Added
We participate in trade accounts receivable discount programs with our major customers. If the creditworthiness of any of our customers was downgraded, we could be adversely affected, in that we may be subjected to higher interest rates on the use of these programs or we could be forced to wait longer for payment.

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