# Motorcar Parts of America Inc: Form 10-Q for the period ended Sep 30, 2017

- Company: [Motorcar Parts of America Inc](/companies/mpaa.md) (CIK 918251)
- Form: 10-Q
- Filed: 2017-11-09
- Accepted by EDGAR: Nov 9, 2017, 16:01 ET
- Period: 2017-09-30
- Accession: 0001140361-17-041804
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/918251/000114036117041804/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/918251/000114036117041804/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2017-07-01 to 2017-09-30 | $84.6m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2017-04-01 to 2017-09-30 | $153.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2017-07-01 to 2017-09-30 | $27.2m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2017-04-01 to 2017-09-30 | $53.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2017-07-01 to 2017-09-30 | $1.2m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2017-04-01 to 2017-09-30 | $2.2m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2017-07-01 to 2017-09-30 | $13.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-04-01 to 2017-09-30 | $29.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2017-07-01 to 2017-09-30 | $4.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-04-01 to 2017-09-30 | $8.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-07-01 to 2017-09-30 | $6.3m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-04-01 to 2017-09-30 | $13.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-07-01 to 2017-09-30 | $0.33 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-04-01 to 2017-09-30 | $0.72 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-07-01 to 2017-09-30 | $0.34 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-04-01 to 2017-09-30 | $0.75 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-07-01 to 2017-09-30 | 19,356,809 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-04-01 to 2017-09-30 | 19,371,144 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2017-04-01 to 2017-09-30 | −$8.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2017-04-01 to 2017-09-30 | $2.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2017-04-01 to 2017-09-30 | $4.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-09-30 | $15.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-09-30 | $143.8m | us-gaap:AssetsCurrent |
| Total assets | at 2017-09-30 | $461.5m | us-gaap:Assets |
| Current liabilities | at 2017-09-30 | $161.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-09-30 | $187.4m | us-gaap:Liabilities |
| Long-term debt | at 2017-09-30 | $15.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2017-09-30 | $3.1m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2017-09-30 | $274.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 39,721 characters.

The following discussion and analysis presents factors that Motorcar Parts of America, Inc. and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with our March 31, 2017 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 14, 2017, as amended by the Form 10-K/A filed with the SEC on July 31, 2017.

### Disclosure Regarding Private Securities Litigation Reform Act of 1995

This report contains certain forward-looking statements with respect to our future performance that involve risks and uncertainties. Various factors could cause actual results to differ materially from those projected in such statements. These factors include, but are not limited to: concentration of sales to a small number of customers, changes in the financial condition of or our relationship with any of our major customers, increases in the average accounts receivable collection period, the loss of sales to customers, delays in payments by customers, the increasing customer pressure for lower prices and more favorable payment and other terms, lower revenues than anticipated from new and existing contracts, the increasing demands on our working capital, the significant strain on working capital associated with large inventory purchases from customers, any meaningful difference between expected production needs and ultimate sales to our customers, investments in operational changes or acquisitions, our ability to obtain any additional financing we may seek or require, our ability to achieve positive cash flows from operations, potential future changes in our previously reported results as a result of the identification and correction of errors in our accounting policies or procedures or the potential material weaknesses in our internal controls over financial reporting, our failure to meet the financial covenants or the other obligations set forth in our credit agreement and the lenders’ refusal to waive any such defaults, increases in interest rates, the impact of high gasoline prices, consumer preferences and general economic conditions, increased competition in the automotive parts industry including increased competition from Chinese and other offshore manufacturers, difficulty in obtaining Used Cores and component parts or increases in the costs of those parts, political, criminal or economic instability in any of the foreign countries where we conduct operations, currency exchange fluctuations, unforeseen increases in operating costs, risks associated with cyber-attacks, risks associated with conflict minerals, and other factors discussed herein and in our other filings with the SEC.

### Management Overview

We are a leading manufacturer, remanufacturer, and distributor of aftermarket automotive parts for import and domestic cars, light trucks, heavy duty, agricultural and industrial applications. We sell our products predominantly in North America to the largest auto parts retail and traditional warehouse chains and to major automobile manufacturers for both their aftermarket programs and their OES programs. Our products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake master cylinders, and (iv) other products which include turbochargers, brake power boosters, and diagnostic equipment. We added turbochargers with our acquisition in July 2016. We began selling brake power boosters in August 2016. As a result of our acquisition in July 2017, our business also now includes developing and selling diagnostics systems for alternators and starters, electric vehicle power-train and battery technology.

The aftermarket for automobile parts is divided into two markets. The first is the DIY market, which is generally serviced by the large retail chain outlets. Consumers who purchase parts from the DIY channel generally install parts into their vehicles themselves. In most cases, this is a less expensive alternative than having the repair performed by a professional installer. The second is the professional installer market, commonly known as the DIFM market. This market is generally serviced by the traditional warehouse distributors, the dealer networks, and the commercial divisions of retail chains. Generally, the consumer in this channel is a professional parts installer. Our products are distributed to both the DIY and DIFM markets.

Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), for segment reporting, we have identified our chief executive officer as our chief operating decision maker (“CODM”), have reviewed the documents used by the CODM, and understand how such documents are used by the CODM to make financial and operating decisions. We have determined through this review process that we have one reportable segment for purposes of recording and reporting our financial results.

### Results of Operations for the Three Months Ended September 30, 2017 and 2016

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.

The following summarizes certain key operating data:

|  | Three Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Gross profit percentage | 24.3% | 28.2% |
| Cash flow used in operations | $(7,504,000) | $(8,477,000) |
| Finished goods turnover (annualized) (1) | 5.4 | 5.9 |

(1) Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost of goods sold for the quarter by 4 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the fiscal quarter. We believe this provides a useful measure of our ability to turn our inventory into revenues.

### Net Sales and Gross Profit

The following summarizes net sales and gross profit:

|  | Three Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Net sales | $111,774,000 | $108,836,000 |
| Cost of goods sold | 84,612,000 | 78,178,000 |
| Gross profit | 27,162,000 | 30,658,000 |
| Gross profit percentage | 24.3% | 28.2% |

*Net Sales*. Our net sales for the three months ended September 30, 2017 increased by $2,938,000, or 2.7%, to $111,774,000 compared to net sales for the three months ended September 30, 2016 of $108,836,000. The increase in our net sales was primarily due to higher sales of brake power boosters and diagnostics systems which resulted from our July 2017 acquisition. This increase was partially offset by initial return and stock adjustment accruals related to new business as discussed below in the Gross Profit paragraph.

*Gross Profit.* Our gross profit percentage was 24.3% for the three months ended September 30, 2017 compared to 28.2% for the three months ended September 30, 2016. Gross profit for the three months ended September 30, 2017 was impacted by $2,496,000 for initial return and stock adjustment accruals related to new business less a cost of goods sold offset of $362,000. In addition, our gross profit for the three months ended September 30, 2017 was further impacted by higher returns and lower purchasing volume impacting overhead absorption. Our gross profit for the three months ended September 30, 2016 was impacted by $3,547,000 for customer allowances and initial return and stock adjustment accruals related to new business less a cost of goods sold offset of $213,000, and a cost of goods sold impact of $16,000 for start-up costs incurred related to our launch of brake power boosters.

### Operating Expenses

The following summarizes operating expenses:

|  | Three Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| General and administrative | $8,615,000 | $9,869,000 |
| Sales and marketing | 3,457,000 | 2,707,000 |
| Research and development | 1,240,000 | 905,000 |
| **Percent of net sales** |  |  |
| General and administrative | 7.7% | 9.1% |
| Sales and marketing | 3.1% | 2.5% |
| Research and development | 1.1% | 0.8% |

*General and Administrative.* Our general and administrative expenses for the three months ended September 30, 2017 were $8,615,000, which represents a decrease of $1,254,000, or 12.7%, from general and administrative expenses for the three months ended September 30, 2016 of $9,869,000. This decrease was primarily due to a $1,020,000 gain compared to a loss of $824,000 recorded due to the change in the fair value of the warrant liability during the three months ended September 30, 2017 and 2016, respectively. This decrease was partially offset by (i) $334,000 of increased general and administrative expenses at our offshore locations and (ii) $291,000 of general and administrative expenses attributable to our July 2017 acquisition.

*Sales and Marketing*. Our sales and marketing expenses for the three months ended September 30, 2017 increased $750,000, or 27.7%, to $3,457,000 from $2,707,000 for the three months ended September 30, 2016. The increase was due primarily to (i) $279,000 of sales and marketing expenses attributable to our July 2017 acquisition, (ii) $231,000 of increased commissions, and (iii) $165,000 for personnel added to support our growth initiatives.

*Research and Development*. Our research and development expenses increased by $335,000, or 37.0%, to $1,240,000 for the three months ended September 30, 2017 from $905,000 for the three months ended September 30, 2016, primarily attributable to our July 2017 acquisition.

### Interest Expense

*Interest Expense, net.* Our interest expense, net for the three months ended September 30, 2017 increased $333,000, or 10.4%, to $3,522,000 from $3,189,000 for the three months ended September 30, 2016. The increase in interest expense was due primarily to increased use of our accounts receivable discount programs and increased average outstanding borrowings.

### Provision for Income Taxes

*Income Tax*. Our income tax expense for the three months ended September 30, 2017 and 2016 was $4,027,000, or an effective tax rate of 39.0%, and $4,845,000, or an effective tax rate of 34.6%, respectively. Our income tax rate for both periods includes the required adjustments to reflect the appropriate six-month rate for each fiscal year. The income tax rate for the three months ended September 30, 2017 was higher than the federal statutory rate primarily due to (i) state income taxes, which were partially offset by the benefit of lower statutory tax rates in foreign taxing jurisdictions and (ii) non-deductible executive compensation under Internal Revenue Code Section 162(m). In addition, our income tax rate for the three months ended September 30, 2016 was positively impacted by the excess tax benefits on share-based compensation of $199,000.

### Results of Operations for the Six Months Ended September 30, 2017 and 2016

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.

The following summarizes certain key operating data:

|  | Six Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Gross profit percentage | 25.6% | 26.3% |
| Cash flow used in operations | $(8,148,000) | $(22,316,000) |
| Finished goods turnover (annualized) (1) | 5.6 | 6.0 |

(1) Annualized finished goods turnover for the fiscal period is calculated by multiplying cost of goods sold for the period by 2 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the fiscal period. We believe this provides a useful measure of our ability to turn our inventory into revenues.

### Net Sales and Gross Profit

The following summarizes net sales and gross profit:

|  | Six Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Net sales | $206,837,000 | $194,248,000 |
| Cost of goods sold | 153,836,000 | 143,199,000 |
| Gross profit | 53,001,000 | 51,049,000 |
| Gross profit percentage | 25.6% | 26.3% |

*Net Sales*. Our net sales for the six months ended September 30, 2017 increased by $12,589,000, or 6.5%, to $206,837,000 compared to net sales for the six months ended September 30, 2016 of $194,248,000. The increase in our net sales was attributable to higher sales of rotating electrical products, brake power boosters, and diagnostics systems, which resulted from our July 2017 acquisition. In addition, our net sales were further impacted by initial return and stock adjustment accruals related to new business as discussed below in the Gross Profit paragraph.

*Gross Profit.* Our gross profit percentage was 25.6% for the six months ended September 30, 2017 compared to 26.3% for the six months ended September 30, 2016. Gross profit for the six months ended September 30, 2017 was impacted by $2,496,000 for initial return and stock adjustment accruals related to new business less a cost of goods sold offset of $362,000. In addition, our gross profit for the six months ended Sept 30, 2017 was further impacted by higher returns and lower purchasing volume impacting overhead absorption. Our gross profit for the six months ended September 30, 2016 was impacted by $11,957,000 for customer allowances and initial return and stock adjustment accruals related to new business less a cost of goods sold offset of $568,000, and a cost of goods sold impact of $140,000 for start-up costs incurred related to our launch of brake power boosters.

### Operating Expenses

The following summarizes operating expenses:

|  | Six Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| General and administrative | $14,802,000 | $13,494,000 |
| Sales and marketing | 6,851,000 | 5,341,000 |
| Research and development | 2,242,000 | 1,774,000 |
| **Percent of net sales** |  |  |
| General and administrative | 7.2% | 6.9% |
| Sales and marketing | 3.3% | 2.7% |
| Research and development | 1.1% | 0.9% |

*General and Administrative.* Our general and administrative expenses for the six months ended September 30, 2017 were $14,802,000, which represents an increase of $1,308,000, or 9.7%, from general and administrative expenses for the six months ended September 30, 2016 of $13,494,000. The increase was primarily due to (i) a $2,313,000 gain compared to a $4,765,000 gain recorded due to the change in the fair value of the warrant liability during the six months ended September 30, 2017 and 2016, respectively, (ii) $570,000 of increased general and administrative expenses at our offshore locations, and (iii) $291,000 of general and administrative expenses attributable to our July 2017 acquisition. These increases were partially offset by a $722,000 gain recorded due to the change in the fair value of the forward foreign currency exchange contracts during the six months ended September 30, 2017 compared to a $1,186,000 loss recorded during the six months ended September 30, 2016.

*Sales and Marketing*. Our sales and marketing expenses for the six months ended September 30, 2017 increased $1,510,000, or 28.3%, to $6,851,000 from $5,341,000 for the six months ended September 30, 2016. The increase was due primarily (i) $631,000 of increased commissions, (ii) $395,000 for personnel added to support our growth initiatives, and (iii) $279,000 of sales and marketing expenses attributable to our July 2017 acquisition.

*Research and Development*. Our research and development expenses increased by $468,000, or 26.4%, to $2,242,000 for the six months ended September 30, 2017 from $1,774,000 for the six months ended September 30, 2016, due primarily to (i) $332,000 attributable to our July 2017 acquisition and (ii) $166,000 for personnel added to support our growth initiatives.

### Interest Expense

*Interest Expense, net.* Our interest expense, net for the six months ended September 30, 2017 increased $828,000, or 13.8%, to $6,836,000 from $6,008,000 for the six months ended September 30, 2016. The increase in interest expense was due primarily to increased use of our accounts receivable discount programs and increased average outstanding borrowings.

### Provision for Income Taxes

*Income Tax*. Our income tax expense for the six months ended September 30, 2017 and 2016 was $8,343,000, or an effective tax rate of 37.5%, and $7,781,000, or an effective tax rate of 31.8%, respectively. The income tax rates for all periods are increased by (i) state income taxes, which were partially offset by the benefit of lower statutory tax rates in foreign taxing jurisdictions and (ii) non-deductible executive compensation under Internal Revenue Code Section 162(m). These increases were partially offset by (i) non-taxable gains in connection with the fair value adjustment on the warrants of $2,313,000 and $4,765,000 for the six months ended September 30, 2017 and 2016, respectively and (ii) excess tax benefits on share-based compensation of $150,000 and $590,000 for the six months ended September 30, 2017 and 2016, respectively.

### Liquidity and Capital Resources

### Overview

At September 30, 2017 and March 31, 2017, we had negative working capital (current assets minus current liabilities) of $17,660,000 and $20,651,000, respectively, and a ratio of current assets to current liabilities of 0.89:1.00 and 0.86:1.00, respectively. The long-term classification of our core inventory, new business with existing and potential new customers, and the addition of any new products lines will continue to require the use of working capital to grow our business.

We generated cash during the six months ended September 30, 2017 from the use of receivable discount programs with certain of our major customers and their respective banks, as well as from our credit facility. The cash generated from these activities was used primarily to build our inventory levels to support anticipated higher sales.

We believe our cash and cash equivalents, short-term investments, use of receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our expected future working capital needs, repayment of the current portion of our term loans, and lease and capital expenditure obligations over the next 12 months.

### Share Repurchase Program

As of September 30, 2017, our board of directors had approved a stock repurchase program of up to $15,000,000 of our common stock. As of September 30, 2017, $6,855,000 of the $15,000,000 had been utilized and $8,145,000 remained available to repurchase shares under the authorized share repurchase program. We retired the 303,665 shares repurchased under this program through September 30, 2017. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.

### Cash Flows

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

| Cash provided by (used in): | Six Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Operating activities | $(8,148,000) | $(22,316,000) |
| Investing activities | (7,660,000) | (3,464,000) |
| Financing activities | 21,827,000 | 9,448,000 |
| Effect of exchange rates on cash and cash equivalents | 42,000 | (113,000) |
| Net increase (decrease) in cash and cash equivalents | $6,061,000 | $(16,445,000) |
| **Additional selected cash flow data:** |  |  |
| Depreciation and amortization | $2,153,000 | $1,770,000 |
| Capital expenditures | 2,460,000 | 2,594,000 |

Net cash used in operating activities was $8,148,000 and $22,316,000 during the six months ended September 30, 2017 and 2016, respectively. The significant changes in our operating activities were due primarily to (i) a decrease in accounts receivable during the six months ended September 30, 2017 compared to an increase during the six months ended September 30, 2016 and (ii) increased payments of income taxes. In addition, our prior year operating activities were impacted by payments made in connection with new business.

Net cash used in investing activities was $7,660,000 and $3,464,000 during the six months ended September 30, 2017 and 2016, respectively. This change was due primarily to our acquisition-related activities.

Net cash provided by financing activities was $21,827,000 and $9,448,000 during the six months ended September 30, 2017 and 2016, respectively. This change was due mainly to increased net borrowing. The cash used to repurchase shares of our common stock under our share repurchase program was mostly offset by cash received upon exercise of the Supplier Warrant during the six months ended September 30, 2017.

### Capital Resources

#### Debt

We are party to the following credit agreements.

#### Credit Facility

We are a party to a $145,000,000 senior secured financing, as amended, (the “Credit Facility”) with the lenders party thereto, and PNC Bank, National Association, as administrative agent, consisting of (i) a $120,000,000 revolving loan facility, subject to borrowing base restrictions and a $15,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $25,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 3, 2020. In connection with the Credit Facility, the lenders were granted a security interest in substantially all of our assets. Our Credit Facility permits the payment of up to $10,000,000 of dividends per calendar year, subject to a minimum availability threshold and pro forma compliance with financial covenants. This amount was increased to $15,000,000 under the April 2017 amendment to the Credit Facility.

In April 2017, we entered into a consent and fourth amendment to the Credit Facility (the “Fourth Amendment”) which, among other things, (i) increased the borrowing base limit with respect to inventory located in Mexico, (ii) amended the definition and calculation of consolidated EBITDA to raise the limitation on the add-back for non-capitalized transaction expenses related to the expansion of operations in Mexico, (iii) increased the annual limit on permitted stock repurchases and dividends, and (iv) modifies certain other baskets (including increasing certain baskets for permitted acquisitions) and thresholds to, among other things, further accommodate the expansion of operations in Mexico.

In July 2017, we entered into a fifth amendment to the Credit Facility (the “Fifth Amendment”) which, among other things, amended the definition of permitted acquisitions, permitted indebtedness, and pledge agreements.

The Term Loans require quarterly principal payments of $781,250. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.50%, 2.75% or 3.00% or a reference rate plus a margin of 1.50%, 1.75% or 2.00%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.25% to 0.375%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on our Term Loans and Revolving Facility was 3.74% and 3.96%, respectively, at September 30, 2017 and 3.29% and 3.55%, respectively, at March 31, 2017.

The Credit Facility, among other things, requires us to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all financial covenants as of September 30, 2017.

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

|  | Calculation as of September 30, 2017 | Financial covenants required under the Credit Facility |
| --- | ---: | ---: |
| Maximum senior leverage ratio | 0.58 | 2.50 |
| Minimum fixed charge coverage ratio | 1.79 | 1.15 |

In addition to other covenants, the Credit Facility places limits on our ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by us and our subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.

We had $36,000,000 and $11,000,000 outstanding under the Revolving Facility at September 30, 2017 and March 31, 2017, respectively. In addition, $260,000 was reserved for standby letters of credit for workers’ compensation insurance and $600,000 for commercial letters of credit at September 30, 2017. At September 30, 2017, $83,140,000, subject to certain adjustments, was available under the Revolving Facility.

#### WX Agreement

In August 2012, we entered into a Revolving Credit/Strategic Cooperation Agreement (the “WX Agreement”) with Wanxiang America Corporation (the “Supplier”) and the discontinued subsidiaries. In connection with the WX Agreement, we issued a warrant (the “Supplier Warrant”) to the Supplier to purchase up to 516,129 shares of our common stock for an exercise price of $7.75 per share exercisable at any time after August 22, 2014 and on or prior to September 30, 2017.

On September 8, 2017, the Supplier exercised the Supplier Warrant in full and paid us $4,000,000. As a result of the exercise, the Supplier Warrant is no longer outstanding. The fair value of the Supplier Warrant on the exercise date was $9,566,000 using level 3 inputs and the Monte Carlo simulation model. The following assumptions were used to calculate the fair value of the Supplier Warrant: dividend yield of 0%, expected volatility of 26.4%, risk-free interest rate of 0.96%, subsequent financing probability of 0%, and an expected life of 0.06 years. We recorded a non-cash reclassification of the Supplier Warrant’s fair value to shareholders’ equity on the exercise date, with no further adjustments to the fair value of the Supplier Warrant being required. The fair value of the Supplier Warrant was $11,879,000 at March 31, 2017 and was included in other liabilities in the consolidated balance sheet.

During the three months ended September 30, 2017 and 2016, a gain of $1,020,000 and a loss of $824,000, respectively, were recorded in general and administrative expenses due to the change in the fair value of this warrant liability. During the six months ended September 30, 2017 and 2016, a gain of $2,313,000 and $4,765,000, respectively, were recorded in general and administrative expenses due to the change in the fair value of this warrant liability.

#### Receivable Discount Programs

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

The following is a summary of the receivable discount programs:

|  | Six Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Receivables discounted | $175,209,000 | $167,670,000 |
| Weighted average days | 341 | 341 |
| Annualized weighted average discount rate | 3.1% | 2.8% |
| Amount of discount as interest expense | $5,090,000 | $4,408,000 |

#### Off-Balance Sheet Arrangements

At September 30, 2017, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.

### Capital Expenditures and Commitments

### Capital Expenditures

Our capital expenditures were $2,460,000 and $2,594,000 for the six months ended September 30, 2017 and 2016, respectively. These capital expenditures primarily represent the purchase of equipment for our office, manufacturing and warehouse facilities. We expect our fiscal 2018 capital expenditures to be approximately $7,500,000 to support our current operations. In addition, we expect to invest approximately $11,000,000 in capital expenditures in connection with the expansion of our operations in Mexico during fiscal 2018. We expect to use our working capital and/or incur additional capital lease obligations to finance these capital expenditures.

### Litigation

There have been no material changes to our litigation matters that are presented in our Annual Report on Form 10-K for the year ended March 31, 2017, which was filed on June 14, 2017 and as amended by the Form 10-K/A filed with the SEC on July 31, 2017.

### Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2017, which was filed on June 14, 2017, except as discussed below.

### New Accounting Pronouncements Not Yet Adopted

#### Revenue Recognition

In May 2014, the FASB issued guidance codified in ASC 606, “Revenue Recognition - Revenue from Contracts with Customers” (“ASC 606”), which amends the guidance in the former ASC 605, “Revenue Recognition”. ASC 606 is effective for annual periods beginning after December 15, 2016, and interim periods within that reporting period for a public company. An entity may elect either a full retrospective transition method, which requires the restatement of all periods presented, or a modified retrospective transition method, which requires a cumulative effect recognized as of the date of initial application to be used on transition. In August 2015, the FASB delayed the effective date by one year to annual periods beginning after December 15, 2017, and interim periods within that reporting period for a public company. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Accordingly, the updated standard is effective for us as of April 1, 2018 and we do not plan to early adopt. We are currently in the process of determining whether we will utilize the full or modified retrospective method of adoption allowed by the new standard and the impact on our consolidated financial statements and footnote disclosures. The determination of utilizing the full retrospective or modified retrospective method of adoption will be driven by the changes required by ASC 606 and our ability to recast past financial statements based upon those requirements. We will continue to provide enhanced disclosures as we continue our assessment.

ASC 606 establishes the requirements for recognizing revenue from contracts with customers. The standard requires entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under the new standard, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for the good or service. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

Due to the impact the new standard may have on our business processes, systems, and controls, a project team has been formed to evaluate and guide the implementation process. We have performed a preliminary assessment, which has included the identification of the key revenue streams and the comparison of historical accounting policies and practices to the requirements of the new standard by revenue stream. The assessment has resulted in the identification of potential accounting differences that may arise from the application of the new standard. The implementation team has also made substantial progress in the contract review phase of the project which includes identifying the population of contracts for a deeper analysis of the potential accounting impacts due to the new standard for individual contracts. During the second quarter, the team continued to identify changes to business processes, systems and controls to support recognition, presentation and disclosure under the new standard. A detailed implementation plan for the second half of fiscal 2018 has been developed and includes tasks around data gathering, identification of the new journal entries, training, design of new processes and controls as well as testing of the controls.

We anticipate that the adoption of ASU 2014-09 will primarily impact the timing of revenue recognition for nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program and will result in an acceleration of revenue recognition in addition to some changes to revenue related disclosures and financial statement presentation. Conversely, we do not expect there to be a significant effect, other than classification, upon the balance sheet for anticipated returned cores. We currently account for fully priced Remanufactured Cores anticipated to be returned as long term core inventory. Under ASC 606, we will reclassify this asset to a contractual asset and recognize a contractual liability for amounts expected to be refunded to customers. For certain contracts, we offer customer incentives that may be considered a material right to the customer under ASC 606. These incentives may result in us having multiple performance obligations in an agreement and may delay the timing of revenues. In addition, certain payments made to customers in connection with future contracts may be deferred and amortized over future periods. While we have made substantial progress in identifying the likely impacts of the new standard, we have not yet determined a range of the potential quantitative impact.

ASC 606 provides several practical expedients, for which we anticipate adopting. The first of these practical expedients allows us to expense incremental costs of obtaining a contract as incurred if the amortization period would have been one year or less. Similarly, we plan to adopt guidance which allows for the effects of a significant financing component to be ignored if we expect that the period between the transfer of the goods and services to the customer and payment will be one year or less. Finally, we plan to adopt guidance which allows us to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations. We continue to evaluate the impact ASC 606, related amendments and interpretive guidance will have on our consolidated financial statements.

#### Financial Instruments

In January 2016, the FASB issued guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. A reporting entity should apply the new guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We are currently evaluating the impact the provisions of this guidance will have on our consolidated financial statements.

#### Leases

In February 2016, the FASB issued new guidance that requires balance sheet recognition of a right-of-use asset and lease liability by lessees for operating leases. The new guidance also requires new disclosures providing additional qualitative and quantitative information about the amounts recorded in the financial statements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new guidance requires a modified retrospective approach with optional practical expedients. We are required to adopt this guidance in the first quarter of fiscal 2020. We are currently evaluating the impact the provisions of this guidance will have on our consolidated financial statements, but expect that it will result in a significant increase to our long-term assets and liabilities on the consolidated balance sheets.

#### Business Combinations

In January 2017, the FASB issued guidance which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. A reporting entity should apply the amendment prospectively. We are currently evaluating the impact the provisions of this guidance will have on our consolidated financial statements.

#### Goodwill Impairment

In January 2017, the FASB issued guidance which simplifies the test for goodwill impairment. This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. This guidance must be applied on a prospective basis. We are currently evaluating the impact the provisions of this guidance will have on our consolidated financial statements.

#### Modifications to Share-Based Payment Awards

In May 2017, the FASB issued guidance to provide clarity and reduce (i) the diversity in practice and (ii) the cost and complexity when applying the accounting guidance for equity-based compensation to a change to the terms or conditions of a share-based payment award. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. This guidance should be applied prospectively to an award modified on or after that adoption date. We are currently evaluating the impact the provisions of this guidance will have on our consolidated financial statements.

#### Derivatives and Hedging

In August 2017, the FASB issued guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this update also make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the guidance allows for early adoption in any interim period after issuance of the update. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

## Market risk

As filed, 256 characters.

There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K as of March 31, 2017, which was filed with the SEC on June 14, 2017.

## Controls and procedures

As filed, 3,201 characters.

### Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including our chief executive officer, chief financial officer, and chief accounting officer, as appropriate to allow timely decisions regarding required disclosures.

Under the supervision and with the participation of management, including our chief executive officer, chief financial officer, and chief accounting officer, we have conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our chief executive officer, chief financial officer, and chief accounting officer concluded that MPA’s disclosure controls and procedures were effective as of September 30, 2017.

### Inherent Limitations Over Internal Controls

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required.

Internal control over financial reporting includes those policies and procedures that:

1\. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

2\. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

3\. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

### Changes in Internal Control Over Financial Reporting

There were no changes in MPA’s internal control over financial reporting during the second quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, MPA’s internal control over financial reporting.

## Risk factors

As filed, 256 characters.

There have been no material changes in the risk factors set forth in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended March 31, 2017, filed on June 14, 2017 and as amended by the Form 10-K/A filed with the SEC on July 31, 2017.

Filed Nov 9, 2017.
Source: SEC EDGAR, the filing index for accession 0001140361-17-041804. Last ingested by Listed: Oct 24, 2026, 15:00 ET. No prices; not investment advice.