Business Context and Reporting Period
Motorcar Parts of America, Inc. manufactures, remanufactures, and distributes aftermarket automotive parts, including alternators, starters, wheel hub assemblies, and bearings. The company sells primarily in North America through retail chains, warehouse distributors, and automobile manufacturers. This unaudited Form 10-Q covers the three months ended June 30, 2014, the first quarter of fiscal 2015, compared with the three months ended June 30, 2013.
The company reports one aggregated segment comprising rotating electrical products and wheel hub assemblies and bearings. The prior-year period included $100.9 million of income from discontinued operations related to the Fenco bankruptcy and deconsolidation; the current period includes no discontinued-operation income.
Key Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $63.0 million | $50.2 million |
| Gross profit | $17.8 million | $16.0 million |
| Gross margin | 28.3% | 31.9% |
| Operating income | $10.1 million | $4.1 million |
| Income from continuing operations | $3.9 million | $0.1 million |
| Net income | $3.9 million | $101.0 million |
| Diluted EPS | $0.25 | $6.91 |
| Cash flow from continuing operations | $2.6 million provided | $3.1 million used |
- Sales increased 25.3%, primarily from growth in rotating electrical products and the full-quarter contribution from wheel hub products introduced in June 2013.
- Operating expenses declined to $7.7 million from $11.9 million, mainly because of lower legal and professional-service costs and favorable changes in warrant and foreign-exchange valuations.
- Interest expense declined 13.0% to $3.4 million. Income tax expense was $2.7 million, representing a 40.7% effective tax rate.
- Cash was $24.7 million at June 30, 2014, compared with $24.6 million at March 31, 2014. Working capital was $17.6 million, with a current ratio of approximately 1.2:1.
- Accounts receivable, net, declined to $8.0 million from $22.3 million at March 31, 2014, largely reflecting collections and customer-related offsets. Long-term core inventory increased to $149.4 million from $143.5 million.
- Capital expenditures were $0.6 million. Finished-goods turnover declined to 5.9 times annualized from 7.2 times.
Debt, Liquidity, and Financing
- Term-loan principal outstanding was $90.8 million, with a net carrying amount of $85.5 million. The term loans require quarterly principal payments of $2.1 million and mature in November 2018.
- The company had $10.0 million outstanding under its revolving facility. The June 2014 amendment increased total revolving commitments from $30.0 million to $40.0 million; $28.6 million was available at quarter-end, subject to adjustments.
- Term-loan interest was 6.75%; revolving-loan interest was 2.66%, using the LIBOR options. The company was in compliance with all financial covenants at June 30, 2014.
- Receivables discounted increased to $68.6 million from $44.2 million in the prior-year quarter, generating $1.3 million of discount expense. Management stated that cash, short-term investments, receivable discount programs, available borrowing capacity, and other sources should cover expected needs for the next twelve months.
- The company expects fiscal 2015 capital expenditures of $3.0 million to $7.0 million, financed through working capital and potentially additional capital leases.
Material Changes and Unusual Items
- Gross margin declined 360 basis points because wheel hub products carry lower margins than rotating electrical products. The quarter also included $442,000 of upfront allowances and $189,000 of start-up costs related to new business and product introductions.
- General and administrative expense benefited from a $1.1 million gain on the Supplier Warrant valuation and a $0.2 million gain on foreign-exchange contracts. The comparable prior-year quarter included a $1.6 million warrant loss and a $0.7 million foreign-exchange loss.
- The prior-year net income was materially inflated by the $118.1 million gain on deconsolidation of Fenco, partially offset by supplier-guarantee losses and Fenco operating losses. This item did not recur.
- The company entered into a universal shelf registration statement allowing potential offerings of up to $100 million of securities, although no offering is reported in this filing.
- At June 30, 2014, the Supplier Warrant liability was $8.9 million and could result in future earnings volatility from valuation changes.
Outlook, Risks, and Contingencies
- Management reported commitments for significant new business on existing product lines, expected to begin shipping later in fiscal 2015. Actual volumes may differ because customer contracts permit adjustments and modifications.
- Key risks include dependence on major customers, pricing pressure, working-capital requirements, large inventory and core purchases, availability and cost of Used Cores, competition from offshore manufacturers, foreign-currency movements, interest rates, and the ability to maintain positive operating cash flow and comply with debt covenants.
- Customer concentration is significant: Customer A represented 53% of quarterly sales and Customer B represented 22%. The largest supplier represented 13% of inventory purchases.
- The company remains subject to potential claims arising from the Fenco bankruptcy, including claims involving alleged wrongful acts, fiduciary breaches, negligence, conversion, and employee obligations in the United States and Canada. The filing does not provide a clear quantified exposure.
- Receivable discount programs reduce working-capital needs but may not continue and could become more expensive if interest rates, utilization, or customer payment terms change.
- Forward foreign-exchange contracts had a notional value of $18.2 million and primarily address Mexican peso and Chinese yuan exposure.
- Management stated that disclosure controls were effective as of June 30, 2014 and that there were no material changes in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify the sustainability and margin impact of wheel hub growth, including the effects of start-up costs and upfront customer allowances.
- Assess reliance on Customers A and B and the continued availability and cost of receivable discount programs.
- Monitor core inventory growth, customer returns, warranty accruals, and the company’s ability to convert inventory into cash.
- Review term-loan amortization, covenant compliance, available revolver capacity, and refinancing needs before the November 2018 maturity.
- Track developments in Fenco-related litigation and any potential claims or settlements.
- Separate recurring operating performance from nonrecurring warrant, foreign-exchange, and prior-year discontinued-operation effects.