Motorcar Parts of America, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2011, within fiscal 2012. The filing was signed and filed March 7, 2012. Results include Fenco from its May 6, 2011 acquisition, limiting comparability with prior periods.
Business Context
MPA remanufactures, manufactures and distributes automotive parts in North America and internationally. Following the Fenco acquisition, the company reported two segments: rotating electrical products and under-the-car products, including steering components, brake calipers, master cylinders, hub assemblies, bearings, clutches and related products.
Key Financial Metrics
| Metric | Three months ended September 30, 2011 | Three months ended September 30, 2010 | Six months ended September 30, 2011 | Six months ended September 30, 2010 |
|---|---|---|---|---|
| Net sales | $107.6 million | $41.0 million | $178.1 million | $77.2 million |
| Gross profit | $15.3 million | $12.7 million | $24.6 million | $24.2 million |
| Gross margin | 14.2% | 30.9% | 13.8% | 31.4% |
| Operating income (loss) | $(0.4) million | $7.5 million | $(3.0) million | $12.9 million |
| Net income (loss) | $(5.6) million | $3.5 million | $(11.9) million | $6.0 million |
| Diluted EPS | $(0.45) | $0.29 | $(0.96) | $0.49 |
| Cash flow from operations | Not separately presented | Not separately presented | $(45.2) million | $9.1 million |
Segment performance: For the six months, rotating electrical sales were $84.8 million and operating income was $10.3 million. The under-the-car segment generated $93.4 million of sales but an operating loss of $13.2 million. Its gross margin was negative 3.5%, compared with a 32.2% gross margin for rotating electrical.
Balance sheet at September 30, 2011: Cash was $1.2 million, short-term investments were $0.3 million, total assets were $492.8 million, total liabilities were $382.6 million and shareholders’ equity was $110.3 million. Current assets of $177.1 million compared with current liabilities of $202.1 million produced negative working capital of approximately $25.0 million and a current ratio of 0.9 to 1.
Debt and liquidity: The company had $37.5 million outstanding under the old parent revolving facility, $47.7 million under the Fenco revolving facility, and $16.5 million of term loans, before capital lease obligations. Availability was approximately $6.6 million under the old parent revolving facility and $2.6 million under the Fenco revolving facility. Receivables discounted during the six-month period totaled $133.2 million, generating $3.4 million of interest expense.
Material Changes Versus the Prior Comparable Period
- Sales increased 162.6% in the second quarter and 130.7% for the six-month period, primarily because of the Fenco acquisition; existing rotating electrical sales also increased.
- Gross margin declined substantially because the newly acquired under-the-car segment operated near breakeven or at a loss, with customer-service penalties, personnel replacement and training costs, premium inventory purchases, freight, discontinued product-line losses and acquisition-related inventory fair-value step-up charges.
- Six-month operating cash flow changed from $9.1 million provided in 2010 to $45.2 million used in 2011, driven largely by inventory investment, lower accounts payable and accrued liabilities, and the under-the-car segment’s operating losses.
- Total assets increased from $191.9 million at March 31, 2011 to $492.8 million, reflecting the acquisition and substantially higher inventory, core inventory, goodwill and intangible assets.
- The company retrospectively adjusted and restated first-quarter fiscal 2012 results for revised provisional acquisition valuations. The restated June 30, 2011 net loss increased from $2.4 million to $6.3 million.
Outlook, Commentary, Risks and Unusual Items
- Management expected gross-margin improvement from cost savings in production, warehousing and distribution, but provided no quantified earnings or revenue guidance in the filing.
- The Fenco segment incurred approximately $17.2 million of net loss subsequent to acquisition through September 30, 2011 and used approximately $49.3 million of operating cash.
- The company recorded $3.4 million of cost of goods sold in the first six months for the Fenco inventory fair-value step-up; $0.8 million remained to be expensed as of September 30, 2011.
- In December 2011, MPA announced discontinuation of the constant velocity axle product line and closure of its Bedford, New Hampshire facility. The product line contributed $3.3 million of sales and a $1.8 million gross loss in the six months ended September 30, 2011.
- In January 2012, MPA replaced the old parent credit agreement with $75 million of term loans and up to $20 million of revolving loans, with maturity in January 2017. The term loans carry margins of 7.0% over the reference rate or 8.0% over Eurodollar rates.
- Fenco was not in compliance with its minimum EBITDA covenant and interim financial statement delivery requirement at September 30, 2011. A lender waiver was obtained March 5, 2012, extending the delivery date for December 31, 2011 financial statements to March 31, 2012.
- Management identified a material weakness in Fenco’s internal control over financial reporting relating to inadequate systems for core and other transactions and ineffective period-end account reconciliation oversight. Fenco was excluded from the company’s initial internal-control assessment under the permitted acquisition integration period.
- Foreign exchange contracts produced a $1.9 million loss in general and administrative expense for the six-month period, compared with a $0.3 million loss in the prior year.
- Key risks include customer concentration, dependence on core inventory and receivable discount programs, covenant compliance, limited liquidity, integration of Fenco, foreign sourcing and currency exposure, product quality and service levels, and the ability to generate positive operating cash flow.
Most Important Facts to Verify
- Whether Fenco achieved sustainable positive margins and operating cash flow after the restructuring and service-level initiatives.
- Compliance with the New Parent Company Loans and Fenco credit agreement covenants, including minimum EBITDA and fixed-charge requirements.
- Availability and continued access to receivable discount programs and revolving credit facilities.
- Realizability of inventory, long-term core inventory and customer core-return accrual estimates, which were subject to significant provisional valuation assumptions.
- Remediation and auditor evaluation of the Fenco material weakness in internal controls.
- Financial impact of the CV axle discontinuation, facility closure and other discontinued product lines.
- Whether the company’s stated liquidity sources are sufficient given negative working capital, low cash balances and substantial inventory requirements.