The Company considered the qualitative aggregation criteria in ASC 280-10-50-11 in relation to each of its operating segments, noting that (i) each operating segment sells automotive products, (ii) the nature of the production process is similar in that the manufacturing process combines skilled labor from certified and licensed technicians with raw materials, manufactured components, purchased components, and purchased capital components to complete the Company’s products, (iii) customers for each operating segment are predominately large, U.S. based, automotive retailers, original equipment manufacturers, professional installers, and a diverse group of automotive warehouse distributors, and many of our customers are customers of all three segments, (iv) products for each operating segment are sold via in-house and outside sales teams directly to the Company’s customers, as described above, and (v) each operating segment operates in the non-discretionary automotive aftermarket. Based on the above, the Company concluded that each of its three operating segments meets the qualitative aggregation criteria in ASC 280-10-50-11.

After completing the qualitative analysis, the Company considered whether its operating segments also have similar economic characteristics and can be aggregated. The Company primarily assesses performance and allocates resources based on adjusted gross margin for each of the operating segments. The Company considered the guidance in ASC 280-10-55-7A through 55-7C which indicates that companies should look to past and present performance as indicators that segments are expected to have the same future prospects. As of March 31, 2022, the Company concluded that the operating segments were expected to have the same future prospects based on past performance and expectations, as described below.

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(1)

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(2)

Test Solutions and Diagnostic Equipment only included D&V Canada, which was acquired in fiscal 2018 (July 2017).

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The Company’s adjusted gross margins for fiscal 2018 for the Hard Parts and Test Solutions and Diagnostic Equipment segments met the aggregation criteria.

During fiscal 2019, the Company acquired D&V USA (December 2018) and Dixie (January 2019). At that time, adjusted gross margins were not consistent as the businesses were recently acquired although, the Company expected the adjusted gross margins for these businesses to approximate those for the Hard Parts segment over the next two to three years (fiscal 2021 to 2022) once the integration was completed.

In fiscal 2020 through 2022, the Company continued its efforts to integrate these businesses, however, adjusted gross margins diverged due to anomalies caused by the COVID-19 pandemic. Results of each of the operating segments were impacted to different degrees by pandemic-related costs, demand, increased expenses for supply chain disruptions, logistics services, inflationary costs, and differing timing of effectuating price increases to customers.

Due to these disruptions, the date of expected convergence was delayed. As of the end of fiscal 2022, the Company’s expectation was to achieve future convergence by the end of fiscal 2024 for each of its three operating segments, once the effects of the pandemic subsided and the aforementioned integration is completed. Therefore, the Company concluded that all of the aggregation criteria had been met as of March 31, 2022. Further, had the Company disaggregated the segments it would have resulted in the presentation of Hard Parts as the only reportable segment under ASC 280 with the other two reported as “All Other.” Although not determinative, the Company’s assessment in the prior year considered that such a disaggregation presentation of the segments would not have impacted a financial statement user's understanding of the business and consolidated results.

The Company evaluates its segments as part of its annual financial statement close process following the completion of its annual budgeting process. In respectful consideration of the Staff’s comment, the Company has accelerated its annual evaluation of its segments for fiscal 2023 and has considered the long-term expectations for its segments as of year-end, including consideration of the growth of the businesses, revisions to prior year expectations, and strategic plans.

As a result of its most recent evaluation, the Company determined that convergence of the adjusted gross margins of its businesses is no longer expected in the near term due to (i) the continuing nature of changes arising from the COVID-19 pandemic that were previously believed to be temporary, including higher freight (net of certain price increases) and certain disruptions in the supply chain primarily affecting the Hard Parts segment, (ii) the results of integration efforts in fiscal 2023, and (iii) other organizational changes implemented through the fiscal fourth quarter to change management and revise product offerings that have impacted the nature and scope of operations at the Test Solutions and Diagnostic Equipment and Heavy Duty segments. As a result, the Company will disaggregate its segments and intends to report the Hard Parts segment as one reportable segment and the Test Solutions and Diagnostic Equipment and Heavy Duty segments combined within an “all other” category in future filings, beginning with the Form 10-K for the fiscal year ending March 31, 2023, as illustrated in Exhibit A. The combination of the segments within the “all other” category was determined in accordance with ASC 280-10-50-15 as neither segment met the quantitative thresholds for separate reporting outlined in ASC 280-10-50-12 nor the combination criteria in ASC 280-10-50-13. The Company will recast its prior year segment disclosures to be presented on a comparative basis as required per ASC 280.

 

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