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4-Traders Homepage  >  Equities  >  Nasdaq  >  Motorcar Parts of America, Inc.    MPAA

MOTORCAR PARTS OF AMERICA, INC. (MPAA)
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Motorcar Parts of America : AMERICA INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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02/09/2018 | 10:15pm CEST

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 maintain 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 through an acquisition in July 2016. We began selling brake power boosters in August 2016. As a result of an 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.

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  Table of Contents
Results of Operations for the Three Months Ended December 31, 2017 and 2016

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

The following summarizes certain key operating data:

                                                  Three Months Ended
                                                     December 31,
                                                 2017            2016
Gross profit percentage                              22.5 %          28.7 %

Cash flow (used in) provided by operations $ (1,655,000 )$ 1,506,000 Finished goods turnover (annualized) (1)

              5.2             6.3



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(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
                                   December 31,
                              2017              2016
Net sales                 $ 100,127,000$ 112,595,000
Cost of goods sold           77,583,000        80,225,000
Gross profit                 22,544,000        32,370,000
Gross profit percentage            22.5 %            28.7 %



Net Sales. Our net sales for the three months ended December 31, 2017 decreased by $12,468,000, or 11.1%, to $100,127,000 compared to net sales for the three months ended December 31, 2016 of $112,595,000. Our prior year net sales were positively impacted by $9,261,000 due to the change in our estimate for anticipated stock adjustment returns. Our net sales of wheel hub products and diagnostics systems, which resulted from our July 2017 acquisition, were higher during the three months ended December 31, 2017 compared to the prior year period. We have experienced year-over-year market share growth in rotating electrical. However, sales for the quarter were soft due to lower replenishment orders and customer inventory reduction initiatives. We believe that these factors are temporary. The remaining decrease in net sales was due to certain customer allowances as discussed below in the Gross Profit paragraph.

Gross Profit. Our gross profit percentage was 22.5% for the three months ended December 31, 2017 compared to 28.7% for the three months ended December 31, 2016. Gross profit for the three months ended December 31, 2017 was impacted by $3,242,000 for customer allowances related to new business, transition expenses of $803,000 in connection with the expansion of our operations in Mexico, and a cost of goods sold impact of $40,000 for inventory step-up in connection with our July 2017 acquisition. In addition, our gross profit for the three months ended December 31, 2017 was further impacted by higher returns as a percentage of sales (see Net Sales above), lower production volume impacting overhead absorption, and product mix. Our gross profit for the three months ended December 31, 2016 was impacted by volume and stock update discounts for rotating electrical products and by $258,000 for customer allowances related to new business. In addition, our gross profit for the three months ended December 31, 2016 was positively impacted by $4,066,000, or 1.3%, due to the change in estimate relating to stock adjustments.

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Table of Contents The lower of cost or net realizable value revaluation for remanufactured cores held at customers' locations was $2,187,000 for the three months ended December 31, 2017 and $1,295,000 for the three months ended December 31, 2016.

Operating Expenses

The following summarizes operating expenses:

                                  Three Months Ended
                                     December 31,
                                 2017            2016
General and administrative   $ 11,915,000$ 7,952,000
Sales and marketing             4,048,000       3,234,000
Research and development        1,678,000       1,039,000

Percent of net sales

General and administrative           11.9 %           7.1 %
Sales and marketing                   4.0 %           2.9 %
Research and development              1.7 %           0.9 %


General and Administrative. Our general and administrative expenses for the three months ended December 31, 2017 were $11,915,000, which represents an increase of $3,963,000, or 49.8%, from general and administrative expenses for the three months ended December 31, 2016 of $7,952,000. This increase was primarily due to (i) $1,043,000 of increased employee-related expenses to support our growth initiatives, (ii) $820,000 of increased loss recorded due to the change in the fair value of the forward foreign currency exchange contracts, (iii) $453,000 of increased legal expense due primarily to timing of our annual shareholders' meeting, (iv) $346,000 of increased general and administrative expenses at our offshore locations to support our growth initiatives, and (v) $299,000 of general and administrative expenses attributable to our July 2017 acquisition. In addition, the three months ended December 31, 2016 included $962,000 of gain recorded due to the change in the fair value of the warrant liability, which was settled on September 8, 2017.

Sales and Marketing. Our sales and marketing expenses for the three months ended December 31, 2017 increased $814,000, or 25.2%, to $4,048,000 from $3,234,000 for the three months ended December 31, 2016. The increase was due primarily to $626,000 of sales and marketing expenses attributable to our July 2017 acquisition and $201,000 for personnel added to support our growth initiatives.

Research and Development. Our research and development expenses increased by $639,000, or 61.5%, to $1,678,000 for the three months ended December 31, 2017 from $1,039,000 for the three months ended December 31, 2016, primarily attributable to our July 2017 acquisition.

Interest Expense

Interest Expense, net. Our interest expense, net for the three months ended December 31, 2017 increased $596,000, or 17.8%, to $3,953,000 from $3,357,000 for the three months ended December 31, 2016. The increase in interest expense was due primarily to increased use of our accounts receivable discount programs, the write-off of $231,000 of debt issuance costs, and increased average outstanding borrowings as we build our inventory levels to support anticipated higher sales.

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  Table of Contents
Provision for Income Taxes

Income Tax. Our income tax expense for the three months ended December 31, 2017 and 2016 was $7,756,000, or an effective tax rate of 816.4%, and $5,678,000, or an effective tax rate of 33.8%, respectively. On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Reform Act") was enacted into law, which changed various corporate income tax provisions within the existing Internal Revenue Code. The Tax Reform Act, among other things, lowered the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. As a result, we recorded a one-time non-cash tax charge of $6,290,000 related to the revaluation of deferred tax assets and liabilities and a one-time tax charge of $545,000 due to the transition tax on deemed repatriation of accumulated foreign income, during the three months ended December 31, 2017.

In addition, our income tax rate for the three months for both periods includes the required adjustments to reflect the appropriate nine-month rate for each fiscal year.

Results of Operations for the Nine Months Ended December 31, 2017 and 2016

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

The following summarizes certain key operating data:

                                                 Nine Months Ended
                                                    December 31,
                                               2017             2016
Gross profit percentage                            24.6 %            27.2 %
Cash flow used in operations               $ (9,803,000 )$ (20,810,000 )
Finished goods turnover (annualized) (1)            5.9               6.4



--------------------------------------------------------------------------------

(1) Annualized finished goods turnover for the fiscal period is calculated by

    multiplying cost of goods sold for the period by 1.33 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:

                                 Nine Months Ended
                                   December 31,
                              2017              2016
Net sales                 $ 306,964,000$ 306,843,000
Cost of goods sold          231,419,000       223,424,000
Gross profit                 75,545,000        83,419,000
Gross profit percentage            24.6 %            27.2 %



Net Sales. Our net sales for the nine months ended December 31, 2017 increased by $121,000 to $306,964,000 compared to net sales for the nine months ended December 31, 2016 of $306,843,000. Our prior year net sales were positively impacted by $9,261,000 due to the change in our estimate for anticipated stock adjustment returns. Our net sales were further impacted by certain customer allowances as discussed below in Gross Profit paragraph.

Gross Profit. Our gross profit percentage was 24.6% for the nine months ended December 31, 2017 compared to 27.2% for the nine months ended December 31, 2016. Gross profit for the nine months ended December 31, 2017 was impacted by $5,738,000 for customer allowances and initial return and stock adjustment accruals related to new business less a cost of goods sold offset of $362,000, transition expenses of $803,000 in connection with the expansion of our operations in Mexico, and a cost of goods sold impact of $269,000 for inventory step-up in connection with our July 2017 acquisition. In addition, our gross profit for the nine months ended December 31, 2017 was further impacted by higher returns, lower purchasing volume impacting overhead absorption, and product mix. Our gross profit for the nine months ended December 31, 2016 was impacted by $12,215,000 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. In addition, our gross profit for the nine months ended December 31, 2016 was positively impacted by $4,066,000, or 0.5%, due to the change in estimate relating to stock adjustments.

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Table of Contents The lower of cost or net realizable value revaluation for remanufactured cores held at customers' locations was $6,263,000 for the nine months ended December 31, 2017 and $3,488,000 for the nine months ended December 31, 2016.

Operating Expenses

The following summarizes operating expenses:

                                   Nine Months Ended
                                     December 31,
                                 2017             2016
General and administrative   $ 26,717,000$ 21,446,000
Sales and marketing            10,899,000        8,575,000
Research and development        3,920,000        2,813,000

Percent of net sales

General and administrative            8.7 %            7.0 %
Sales and marketing                   3.6 %            2.8 %
Research and development              1.3 %            0.9 %


General and Administrative. Our general and administrative expenses for the nine months ended December 31, 2017 were $26,717,000, which represents an increase of $5,271,000, or 24.6%, from general and administrative expenses for the nine months ended December 31, 2016 of $21,446,000. The increase was primarily due to (i) a gain of $2,313,000 recorded during the nine months ended December 31, 2017 due to the change in the fair value of the warrant liability compared to a gain of $5,727,000 recorded during the nine months ended December 31, 2016, (ii) $984,000 of increased employee-related expenses to support our growth initiatives, (iii) $917,000 of increased general and administrative expenses at our offshore locations, and (iv) $589,000 of general and administrative expenses attributable to our July 2017 acquisition. These increases were partially offset by $1,088,000 of decreased loss recorded due to the change in the fair value of the forward foreign currency exchange contracts.

Sales and Marketing. Our sales and marketing expenses for the nine months ended December 31, 2017 increased $2,324,000, or 27.1%, to $10,899,000 from $8,575,000 for the nine months ended December 31, 2016. The increase was due primarily (i) $905,000 of sales and marketing expenses attributable to our July 2017 acquisition, (ii) $596,000 for personnel added to support our growth initiatives, and (iii) $558,000 of increased commissions.

Research and Development. Our research and development expenses increased by $1,107,000, or 39.4%, to $3,920,000 for the nine months ended December 31, 2017 from $2,813,000 for the nine months ended December 31, 2016, due primarily to $1,015,000 attributable to our July 2017 acquisition and $289,000 for personnel added to support our growth initiatives partially offset by $120,000 of decreased expense for supplies.

Interest Expense

Interest Expense, net. Our interest expense, net for the nine months ended December 31, 2017 increased $1,424,000, or 15.2%, to $10,789,000 from $9,365,000 for the nine months ended December 31, 2016. The increase in interest expense was due primarily to increased use of our accounts receivable discount programs, increased average outstanding borrowings as we build our inventory levels to support anticipated higher sales, and the write-off of $231,000 of debt issuance costs.

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  Table of Contents
Provision for Income Taxes

Income Tax. Our income tax expense for the nine months ended December 31, 2017 and 2016 was $16,099,000, or an effective tax rate of 69.3%, and $13,459,000, or an effective tax rate of 32.7%, respectively. On December 22, 2017, the Tax Reform Act was enacted into law, which changed various corporate income tax provisions within the existing Internal Revenue Code. The Tax Reform Act, among other things, lowered the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. As a result, we recorded a one-time non-cash tax charge of $6,290,000 related to the revaluation of deferred tax assets and liabilities and a one-time tax charge of $545,000 due to the transition tax on deemed repatriation of accumulated foreign income, during the nine months ended December 31, 2017.

In addition, the effective tax rate for the nine months ended December 31, 2017 is a blended rate reflecting the estimated benefit of one quarter of the federal tax rate reduction for fiscal 2018.

Liquidity and Capital Resources

Overview

At December 31, 2017 and March 31, 2017, we had negative working capital (current assets minus current liabilities) of $40,609,000 and $20,651,000, respectively, and a ratio of current assets to current liabilities of 0.74:1.00 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 nine months ended December 31, 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 December 31, 2017, our board of directors had approved a stock repurchase program of up to $15,000,000 of our common stock. As of December 31, 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. On February 2, 2018, our board of directors increased the share repurchase program authorization from $15,000,000 to $20,000,000 of our common stock. 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.

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  Table of Contents
Cash Flows

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

                                                                      Nine Months Ended
                                                                        December 31,
                                                                   2017              2016
Cash provided by (used in):
Operating activities                                           $  (9,803,000 )$ (20,810,000 )
Investing activities                                             (10,045,000 )      (4,821,000 )
Financing activities                                              20,805,000         7,910,000
Effect of exchange rates on cash and cash equivalents                 46,000          (235,000 )
Net increase (decrease) in cash and cash equivalents           $   1,003,000$ (17,956,000 )

Additional selected cash flow data:
Depreciation and amortization                                  $   3,322,000$   2,718,000
Capital expenditures                                               4,765,000         4,127,000



Net cash used in operating activities was $9,803,000 and $20,810,000 during the nine months ended December 31, 2017 and 2016, respectively. The significant changes in our operating activities were due primarily to (i) decreases in accounts receivable and accounts payable during the nine months ended December 31, 2017 compared to increases during the nine months ended December 31, 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 $10,045,000 and $4,821,000 during the nine months ended December 31, 2017 and 2016, respectively. This change was due primarily to our acquisition-related activities and increased capital expenditures.

Net cash provided by financing activities was $20,805,000 and $7,910,000 during the nine months ended December 31, 2017 and 2016, respectively. This change was due mainly to increased net borrowing primarily to build our inventory levels to support anticipated higher sales. 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 nine months ended December 31, 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 categories (including increasing certain baskets for permitted acquisitions) and thresholds to, among other things, further accommodate the expansion of operations in Mexico.

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Table of Contents 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 4.12% and 4.33%, respectively, at December 31, 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 December 31, 2017.

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

                                                               Financial covenants
                                       Calculation as of       required under the
                                       December 31, 2017         Credit Facility
Maximum senior leverage ratio                        0.63                      2.50
Minimum fixed charge coverage ratio                  1.64                      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 December 31, 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 December 31, 2017. At December 31, 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.

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Table of Contents During the nine months ended December 31, 2017 and 2016, a gain of $2,313,000 and $5,727,000, respectively, was recorded in general and administrative expenses due to the change in the fair value of this warrant liability. During the three months ended December 31, 2016, a gain of $962,000 was 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:

                                                   Nine Months Ended
                                                     December 31,
                                                2017              2016
Receivables discounted                      $ 263,833,000$ 254,795,000
Weighted average days                                 341               341
Annualized weighted average discount rate             3.2 %             2.9 %

Amount of discount as interest expense $ 7,854,000$ 6,864,000

Off-Balance Sheet Arrangements

At December 31, 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 for our current operations were $2,413,000 and $3,850,000 for the nine months ended December 31, 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, our capital expenditures for the expansion of our operations in Mexico were $2,352,000 and $277,000 for the nine months ended December 31, 2017 and 2016, respectively. We expect to invest approximately $11,000,000 in capital expenditures in connection with this expansion during fiscal 2018. We expect to use our working capital and/or incur additional capital lease obligations to finance these capital expenditures.

Subsequent Event

Share Repurchase Program

On February 2, 2018, our board of directors increased the share repurchase program authorization from $15,000,000 to $20,000,000 of our common stock. 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.

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.

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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 ASU 2014-09, Revenue from Contracts with Customers, 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 entity. We 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 adoption. 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 entity. 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. While we anticipate selecting the full retrospective method, that final determination will be driven by the changes required by ASC 606 and our ability to recast past financial statements based upon those requirements. We anticipate completing our assessment of the adoption method by the end of our current fiscal year.

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 contractual terms in our primary revenue stream 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 of the new standard on individual contracts. During the third quarter, the implementation team continued to identify changes to business processes, systems and controls to support recognition, presentation and disclosure under the new standard. The detailed implementation plan for the second half of fiscal 2018 continues to be executed including such tasks as data gathering, identification of the new journal entries, training, design of new processes and controls as well as testing of the controls.

Our primary revenue stream is derived from the sale of remanufactured products to our customers pursuant to long-term customer contracts. We will continue to recognize revenue at a point in time as we satisfy our performance obligation of transferring control of the product to the customer. We recognize revenues net of anticipated returns, marketing allowances, volume discounts and other forms of variable consideration more fully described below. We also reviewed customer options to acquire additional goods or services and have preliminarily determined no material rights exist within our contracts. We do not currently anticipate that the adoption of ASU 2014-09 to have a material impact on previously reported revenue amounts. See discussion regarding nominally priced Remanufactured Cores below.

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Table of Contents We currently anticipate that the adoption of ASU 2014-09 will primarily impact reclassifications to certain balance sheet accounts to conform to the presentation and disclosure requirements of ASC 606. For example, we currently account for fully priced Remanufactured Cores anticipated to be returned as long-term core inventory and the refund liability as a contra-account receivable account as illustrated in Note 5 of the condensed notes to consolidated financial statements for the quarter ended December 31, 2017. Under ASC 606, we currently anticipate that we will reclassify this asset to a contractual asset and recognize a contractual liability for amounts expected to be refunded to customers.

We also analyzed specific contractual provisions related sales contracts which include nominally priced Remanufactured Cores. We recognize revenue for sales of cores not expected to be replaced by a similar Used Core sent back under the core exchange program only upon meeting certain criteria as previously described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements that are presented in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017. The adoption of ASU 2014-09, may result in an acceleration of revenue recognition, as it requires us to estimate the amount of cores not expected to be returned upon the initial recognition of revenue for contracts which include nominally priced Remanufactured Cores. We currently do not expect that the change in the accounting policy for core exchange program to have a significant impact on our consolidated statements of operations.

In order to properly determine the transaction price related to our sales contracts, we have also analyzed our various forms of consideration paid to our vendors including up-front payments for future contracts. Based on the analysis completed through the quarter ended December 31, 2017, we currently do not anticipate a change to our legacy accounting practices as a result of the adoption of ASU 2014-09 to account for up-front payments to our vendors. Under current accounting practices, if we expect to generate future revenues associated with an up-front payment, then an asset is recognized and amortized over the appropriate period of time as a reduction of revenue. If we do not expect to generate additional revenue then the up-front payment is recognized in the consolidated statements of operations when payment occurs as a reduction of revenue. We analyze each up-front payment based on the substance and economics of the payment and therefore we are not able to make an accounting policy election for such payments, consistent with views expressed by the FASB Transition Resource Group ("TRG") members in related discussions.

ASU 2014-09 also codified the guidance on other assets and deferred costs relating to contracts with customers with the addition of ASC 340-40. This guidance relates to the accounting for costs of an entity to obtain and fulfill a contract to provide goods or services to the customer. Under the new guidance, an entity shall recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs. In our review of the various costs to obtain contracts with customers, we have preliminarily determined that currently no significant costs are incurred that meet the capitalization criteria. Our primary cost to fulfill contracts relates to shipping and handling activities which continue to be expensed as incurred consistent with historical accounting practices.

The new guidance provides several practical expedients, for which we anticipate adopting. The first of these practical expedients allows a company to expense incremental costs of obtaining a contract as incurred if the amortization period would have been one year or less. As noted above, we have preliminarily concluded that we do not have any such costs that qualify for capitalization but will apply the practical expedient such that costs incurred in prospective periods qualify. Similarly, we plan to adopt guidance which allows for the effects of a significant financing component to be ignored if a company expects 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 a company 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 of ASU 2014-09, related amendments and interpretive guidance will have on our consolidated financial statements.

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 impacts for the potential differences described above. In summary, we do not expect there to be a significant impact to the amount of revenue previously recorded but do anticipate a significant impact related to the classification of certain assets and liabilities for the reasons discussed in the preceding paragraphs.

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  Table of Contents
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. The adoption of this guidance is not expected to have any material impact 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. The adoption of this guidance is not expected to have any material impact 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.

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