Motorcar Parts of America, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2017, representing the second quarter and first six months of fiscal 2018. Results are unaudited. Motorcar Parts of America manufactures, remanufactures and distributes aftermarket automotive parts, including rotating electrical products, wheel hubs, brake master cylinders, turbochargers, brake power boosters and diagnostic systems. The company operates as one reportable segment.
Financial performance
| Metric | Three months ended Sept. 30, 2017 | Three months ended Sept. 30, 2016 | Six months ended Sept. 30, 2017 | Six months ended Sept. 30, 2016 |
|---|---|---|---|---|
| Net sales | $111.8 million | $108.8 million | $206.8 million | $194.2 million |
| Gross profit | $27.2 million | $30.7 million | $53.0 million | $51.0 million |
| Gross margin | 24.3% | 28.2% | 25.6% | 26.3% |
| Operating income | $13.9 million | $17.2 million | $29.1 million | $30.4 million |
| Net income | $6.3 million | $9.1 million | $13.9 million | $16.7 million |
| Diluted earnings per share | $0.33 | $0.47 | $0.72 | $0.86 |
Second-quarter sales increased 2.7%, while six-month sales increased 6.5%, primarily from higher rotating electrical, brake power booster and diagnostic-system sales, including the July 2017 acquisition of D&V Electronics. Profitability declined as gross margin contracted 390 basis points in the quarter and 70 basis points for the six-month period. Management attributed the quarterly margin pressure to initial return and stock-adjustment accruals for new business, higher returns and lower purchasing volume affecting overhead absorption.
Second-quarter operating income margin was approximately 12.4%, compared with 15.8% in the prior year; six-month operating income margin was approximately 14.1%, compared with 15.7%. Net margin was approximately 5.6% for the quarter and 6.7% for the six-month period, versus 8.4% and 8.6%, respectively, in the comparable periods.
Cash flow, liquidity and debt
- Net cash used in operating activities was $8.1 million for the first six months of fiscal 2018, an improvement from $22.3 million used in the prior-year period. The quarter itself used $7.5 million of operating cash.
- Investing cash use was $7.7 million, including $5.0 million for the D&V acquisition and $2.5 million of capital expenditures.
- Financing activities provided $21.8 million, principally from net revolving-loan borrowings. Cash increased $6.1 million to $15.1 million at September 30, 2017.
- Current assets were $143.8 million and current liabilities were $161.5 million, producing negative working capital of $17.7 million and a current ratio of 0.89:1.
- The company had $36.0 million outstanding under its revolving facility and $18.8 million of term-loan principal outstanding. Approximately $83.1 million was available under the revolving facility, subject to adjustments and borrowing-base restrictions.
- The senior secured credit facility totals $145.0 million and matures June 3, 2020. The company was in compliance with all financial covenants; senior leverage was 0.58 versus a maximum of 2.50, and fixed-charge coverage was 1.79 versus a minimum of 1.15.
- Receivable discount programs covered $175.2 million of receivables during the six months, generating $5.1 million of interest expense. Management stated that liquidity sources should meet expected needs for the next 12 months.
Material changes and unusual items
- In July 2017, the company acquired D&V Electronics, adding diagnostics systems and electric-vehicle power-train and battery technology. The acquisition included $3.4 million of inventory and $0.5 million of finite-lived intangible assets; management stated that D&V was not material to consolidated results.
- The Supplier Warrant was exercised in full on September 8, 2017 for $4.0 million. It covered 516,129 shares and is no longer outstanding. The company recorded a $2.3 million six-month gain from changes in warrant fair value before exercise, compared with a $4.8 million gain in the prior-year period.
- Inventory increased to $88.9 million from $67.5 million at March 31, 2017, while long-term core inventory increased to $265.6 million from $262.9 million. The company continues to require substantial working capital to support core inventory and anticipated growth.
- The company repurchased $4.5 million of common stock during the six months. As of September 30, $6.9 million of a $15.0 million authorization had been used, leaving $8.1 million available.
- The company expects fiscal 2018 capital expenditures of approximately $7.5 million for current operations plus approximately $11.0 million for expansion in Mexico.
Outlook, risks and contingencies
The filing does not provide formal revenue or earnings guidance. Management expects liquidity to be sufficient for the next 12 months but anticipates continued working-capital requirements, particularly for inventory and Mexico expansion. The company also expects to adopt ASC 606 revenue recognition on April 1, 2018. Management anticipates accelerated revenue recognition for certain nominally priced remanufactured cores and reclassification of certain core-related balances, but has not determined the quantitative impact.
- Sales are highly concentrated: two customers accounted for 73% of second-quarter sales and 69% of six-month sales.
- Core inventory, customer returns, allowances and customer payment discrepancies require significant estimates and could affect reported revenue, margins and liquidity.
- Negative working capital and reliance on revolving borrowings and receivable discount programs expose the company to refinancing, interest-rate and customer-payment risks.
- Key risks include customer concentration, pricing pressure, competition, availability and cost of used cores, foreign-exchange exposure, foreign operating conditions, cyber risks and potential covenant compliance issues.
- The company has approximately $26.3 million in foreign-currency forward contracts, primarily related to Mexican peso and Chinese yuan exposure.
- The filing reports no material changes to previously disclosed litigation or risk factors, and no off-balance-sheet financing arrangements.
Investor verification points
- Verify whether the gross-margin decline from new-business return and stock-adjustment accruals is temporary or recurring.
- Monitor customer concentration, customer allowances, return accruals and the collectability of receivables.
- Assess whether operating cash flow improves as inventory is converted into sales and whether receivable discounting remains available.
- Review funding needs and covenant headroom associated with the planned $11.0 million Mexico expansion.
- Track the quantitative effect and transition method selected for ASC 606 adoption.
- Evaluate acquisition integration and the commercial contribution of D&V’s diagnostic and electric-vehicle technologies.