Business Context and Reporting Period
Motorcar Parts of America, Inc. manufactures, remanufactures and distributes aftermarket automotive parts, primarily alternators and starters, and began selling wheel hub assemblies and bearings in June 2013. The Form 10-Q covers the three and six months ended September 30, 2013, within fiscal 2014. Following the loss of control and Chapter 7 bankruptcy filing of Fenco entities, Fenco is reported as discontinued operations and MPA has one reportable segment.
Financial Performance and Position
| Metric | Three months ended September 30, 2013 | Prior comparable period | Six months ended September 30, 2013 | Prior comparable period |
|---|---|---|---|---|
| Net sales | $66.2 million | $57.7 million | $116.4 million | $104.5 million |
| Gross profit | $19.7 million | $20.1 million | $35.7 million | $34.9 million |
| Gross margin | 29.8% | 34.9% | 30.7% | 33.4% |
| Operating income | $8.5 million | $13.5 million | $12.6 million | $20.2 million |
| Income from continuing operations | $2.2 million | $6.5 million | $2.3 million | $8.9 million |
| Net income (loss) | $2.2 million | $(8.9) million | $103.1 million | $(18.8) million |
| Diluted earnings (loss) per share | $0.15 | $(0.62) | $7.06 | $(1.32) |
| Cash flow from continuing operations | $10.6 million | $10.9 million | $7.5 million | $0.3 million |
Six-month sales increased 11.5%, primarily from wheel hub products and higher alternator and starter sales. Gross margin declined because wheel hub products carried lower margins and the prior-year period benefited from unusually low manufacturing costs. Operating income declined as general and administrative expense increased substantially, including warrant fair-value losses, foreign-exchange losses, professional fees and Fenco-related costs.
At September 30, 2013, cash was $23.5 million, short-term investments were $0.5 million, working capital was $24.6 million and the current ratio was 1.3 to 1. Total assets were $289.5 million and shareholders’ equity was $99.9 million, compared with a deficit of $3.5 million at March 31, 2013. Long-term core inventory was $128.1 million, and total inventory, including unreturned and deposited core amounts, remained a significant use of capital.
Debt, Liquidity and Cash Flow
- Term loan debt was $102.9 million at September 30, 2013, including $8.4 million classified as current. The financing agreement was secured by substantially all company assets.
- There were no revolving loan borrowings; $16.2 million was available under the revolving facility, subject to reserves and borrowing-base restrictions.
- MPA borrowed an additional $20.0 million under the term loan in August 2013 and used $20.8 million to pay liabilities under the Fenco supplier guaranty.
- Operating cash flow from continuing operations was $7.5 million for the six months, aided by a $7.0 million income-tax refund and working-capital changes. Investing cash use was $1.5 million, primarily for equipment, while financing cash from continuing operations was $18.1 million.
- Receivable discount programs covered $100.1 million of receivables during the six months and generated $2.2 million of discount expense. Management stated that cash, receivable discounting, available credit and other sources were expected to fund working capital, debt service, leases and capital expenditures for the next twelve months.
- Fiscal 2014 capital expenditures were expected to be $2.0 million to $3.0 million, financed through working capital and additional capital leases.
Material Changes, Outlook and Risks
- Fenco was deconsolidated effective May 31, 2013 and filed for Chapter 7 bankruptcy on June 10, 2013. The six-month results include a $118.1 million gain on deconsolidation, a $20.5 million loss related to supplier-guarantee obligations, approximately $5.9 million of Fenco losses before deconsolidation and a $9.2 million related tax benefit. These items drove the reported $103.1 million six-month net income and are not indicative of recurring operating performance.
- The Fenco bankruptcy may result in claims by the bankruptcy trustee or creditors. The filing states that the nature, validity and ultimate resolution of potential claims were uncertain.
- MPA was in compliance with its financing covenants at September 30, 2013. Reported covenant calculations were a 2.38 senior leverage ratio versus a 3.55 maximum, 1.89 fixed-charge coverage versus a 1.05 minimum, and $43.4 million of consolidated EBITDA versus a $31.0 million minimum.
- After quarter-end, the November 6, 2013 financing amendment increased the revolving commitment to $30.0 million, reduced the term-loan commitment to $95.0 million, extended final maturity to November 6, 2018, and permitted conditional equity repurchases of up to $10.0 million. The amended agreement imposes leverage, fixed-charge coverage, EBITDA and other restrictive covenants.
- Customer concentration increased: one customer represented 55% of quarterly sales and 50% of six-month sales. The company also identified dependence on core availability, customer relationships, pricing pressure, working-capital requirements, interest rates, foreign exchange and covenant compliance as material risks.
- Warrant fair-value losses totaled $2.4 million for the quarter and $4.0 million for the six months. The warrant liability was $6.0 million at September 30, 2013, and the related noncash valuation changes increased general and administrative expense.
- On October 9, 2013, MPA paid $626,500 to purchase an option covering 100,000 common shares held by a director-related party. MPA also paid $304,000 to Houlihan Lokey for Fenco restructuring services; a director was an executive of that firm.
Facts Investors Should Verify
- Whether wheel hub sales can grow beyond the single major customer and whether their lower margins improve.
- Whether operating cash flow remains positive without reliance on tax refunds, receivable discounting or additional borrowing.
- Compliance with the amended financing agreement’s leverage, fixed-charge coverage, EBITDA and other covenants, including required quarterly principal payments.
- The ultimate cost and resolution of claims or contingencies arising from the Fenco bankruptcy and supplier guaranty.
- The sustainability of customer concentration and the company’s ability to manage core inventory, returns accruals and working-capital demands.
- The effect of warrant revaluations, foreign-exchange movements and high interest costs on recurring earnings.