Motorcar Parts of America, Inc. — Form 10-Q Summary
Business context and reporting period
MPA supplies non-discretionary automotive aftermarket replacement parts and diagnostic equipment, including rotating electrical products, wheel hubs and bearings, brake master cylinders, turbochargers, power electronics and diagnostic systems. The company reports one operating segment. This filing covers the three months ended June 30, 2019, the first quarter of fiscal 2020, compared with the three months ended June 30, 2018.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $109.1 million | $91.7 million | 19.1% increase |
| Gross profit | $17.6 million | $16.4 million | 7.5% increase |
| Gross margin | 16.1% | 17.8% | Down 1.7 percentage points |
| Operating loss | $1.7 million | $1.9 million | Loss narrowed by $0.2 million |
| Interest expense, net | $6.2 million | $5.1 million | 21.6% increase |
| Net loss | $6.2 million | $5.5 million | Loss increased by $0.7 million |
| Net loss per share | $0.33 | $0.29 | Loss per share increased |
| Cash flow from operations | $(18.4) million | $(0.9) million | Greater use of cash |
Cash and cash equivalents were $11.2 million at June 30, 2019, compared with $9.9 million at March 31, 2019. Short-term investments were $2.1 million. Working capital was $69.1 million, with a current ratio of approximately 1.2:1.0.
Inventory increased to $262.1 million from $233.7 million at March 31, 2019. Total contract assets were $233.6 million, including $189.5 million of remanufactured cores held at customer locations.
Revolving debt was $135.4 million, term-loan principal was $27.2 million, and letters of credit totaled $4.0 million. After contractual adjustments, $72.4 million was available under the revolving facility. The company was in compliance with its debt covenants; the senior leverage ratio was 2.36 versus a maximum of 3.00, and fixed-charge coverage was 1.34 versus a minimum of 1.10.
Capital expenditures were $4.0 million in cash purchases, or $4.7 million including finance leases. The company expects approximately $7 million of capital expenditures for current operations and approximately $18 million for continued Mexico expansion during fiscal 2020.
Material changes versus the prior comparable period
- Sales increased primarily from continued growth in rotating electrical products, wheel hubs, brake power boosters and diagnostic equipment, with $5.3 million attributable to acquisitions completed in late fiscal 2019.
- Gross margin declined because of a $4.6 million non-cash revaluation write-down of remanufactured cores, $1.4 million of Mexico transition expenses, $1.1 million of core buy-back premium amortization, $1.1 million of net tariff costs, $0.4 million related to a canceled customer contract and $0.1 million of stock-adjustment costs.
- Operating expenses increased to $19.3 million from $18.2 million. General and administrative expense was broadly stable, while sales and marketing and research and development expenses increased with acquisitions and growth initiatives.
- Interest expense increased by $1.1 million because of higher average borrowings, inventory investment and greater use of receivable discount programs.
- Operating cash use increased substantially, driven by inventory build-up, Mexico expansion, core buy-back payments and weaker working-capital benefits from accounts receivable.
- The company adopted ASC 842 on April 1, 2019, recognizing $50.8 million of operating lease assets and $53.0 million of operating lease liabilities at adoption. Lease liabilities totaled $57.3 million at June 30, 2019.
- Foreign-currency derivative results improved to a $35,000 gain from a $2.7 million loss in the prior-year quarter. The company also recorded a $502,000 gain from remeasurement of foreign-currency lease liabilities.
Guidance, outlook, risks and unusual items
Management expects growth initiatives, including Mexico distribution consolidation, manufacturing-capacity expansion, product-line expansion and recent acquisitions, to be transformative and scalable, but acknowledged that these investments continue to pressure gross profit, earnings and cash flow. Management believes available cash, short-term investments, receivable discount programs and revolving-facility availability will be sufficient for expected working-capital needs, debt repayments, leases and capital expenditures over the next 12 months.
Receivables discounted totaled $96.9 million during the quarter, generating $3.6 million of interest expense. Continued availability of these programs is not assured, and costs could rise with higher interest rates, increased utilization or extended payment terms.
U.S. Customs and Border Protection indicated that it believes the company owes approximately $17 million of additional duties for products imported from Mexico during 2011 through mid-2018. MPA disputes the amount and intends to contest it, but cannot assure that no accrual or payment will be required.
The company disclosed an ongoing material weakness in internal control over financial reporting involving insufficient review and oversight of accounting policies, including inventory, and inadequate technical-accounting oversight at a subsidiary. Remediation is expected to continue through fiscal 2020 and is expected to be completed before fiscal year-end, although additional steps may be required.
Other key risks include customer concentration, inventory and used-core availability, tariff and foreign-exchange exposure, reliance on debt and receivable discounting, covenant compliance, acquisitions, competition, pricing pressure, economic conditions and the ability to generate positive operating cash flow. The three largest customers represented 81% of quarterly sales.
Most important facts for investors to verify
- Whether sales growth converts into improved margins and positive operating cash flow as Mexico expansion and acquisition integration progress.
- The sustainability and valuation of the company’s large inventory and contract-asset balances, particularly remanufactured cores held at customer locations.
- Revolving-borrowing levels, borrowing-base availability, receivable discounting and continued compliance with financial covenants.
- The ultimate outcome and potential financial impact of the approximately $17 million customs-duty dispute.
- Progress toward remediation of the material weakness in internal controls.
- The effect of tariffs, customer pricing actions, foreign exchange and the company’s concentrated customer base on future earnings.
- Whether planned fiscal 2020 capital expenditures of approximately $25 million can be funded while maintaining adequate liquidity.