Motorcar Parts of America, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the unaudited quarter and six months ended September 30, 2012, the second quarter of fiscal 2013. Motorcar Parts of America manufactures, remanufactures, and distributes aftermarket automotive parts through two reportable segments: rotating electrical products and undercar products. The undercar segment primarily reflects the May 2011 Fenco acquisition.
Key Financial Metrics
| Metric | Three months ended September 30, 2012 | Six months ended September 30, 2012 |
|---|---|---|
| Net sales | $111.6 million | $200.7 million |
| Gross profit | $16.7 million | $28.8 million |
| Gross margin | 15.0% | 14.4% |
| Operating income (loss) | $1.2 million | $(2.3) million |
| Net loss | $(8.9) million | $(18.8) million |
| Net loss per diluted share | $(0.62) | $(1.32) |
| Net cash provided by (used in) operating activities | $2.2 million | $(14.5) million |
- Rotating electrical sales were $57.7 million for the quarter and $104.5 million for the six months; segment gross margins were 34.9% and 33.4%, respectively.
- Undercar sales were $54.0 million for the quarter and $96.2 million for the six months; segment gross margins were negative 6.3% in both periods.
- Cash was $32.3 million at September 30, 2012, compared with $32.6 million at March 31, 2012. Short-term investments were $0.4 million.
- Working capital was negative $14.3 million, with a current ratio of 0.9 to 1.0.
- Total liabilities were $420.5 million and shareholders’ equity was $68.5 million at September 30, 2012.
- Term loan balances totaled approximately $94.4 million, including the current portion, and the Fenco revolving loan balance was $42.1 million. No parent-company revolving loans were outstanding.
- Available borrowing capacity was approximately $17.0 million under the parent-company revolver and $9.0 million under the Fenco revolving facility, subject to applicable restrictions and borrowing bases.
- Receivables discounted during the six months totaled $157.3 million, generating $3.8 million of interest expense.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 3.7% from $107.6 million to $111.6 million, driven by a 26.1% increase in rotating electrical sales, partially offset by a 12.8% decline in undercar sales.
- Six-month sales increased 12.6% from $178.1 million to $200.7 million, reflecting the full-period contribution from Fenco and growth in rotating electrical products.
- Quarterly gross margin improved from 13.9% to 15.0%; six-month gross margin improved from 12.4% to 14.4%. The improvement was primarily attributable to rotating electrical products.
- Despite improved gross margins, the quarterly net loss widened from $5.4 million to $8.9 million and the six-month net loss widened from $13.7 million to $18.8 million.
- Net interest expense increased 81.8% for the quarter and 112.1% for the six months, reaching $6.2 million and $11.2 million, respectively.
- Operating cash usage improved from $45.2 million to $14.5 million for the six months, primarily because inventory and core-related balances declined; however, operations remained cash-flow negative.
- The company raised $15.0 million gross, or $14.0 million net, through a private placement of 1.936 million common shares at $7.75 per share.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management’s principal priority is the turnaround of the undercar business through improved customer service, product quality, manufacturing and logistics productivity, discontinued product lines, and cost reductions. Management expects these initiatives to be substantially completed in the first quarter of fiscal 2014.
- The company discontinued supplying undercar products to a major unprofitable customer. That customer represented approximately 31% of undercar sales for the six months ended September 30, 2012. The company retained rotating electrical sales to the customer.
- Undercar results included significant unusual or nonrecurring costs, including $1.4 million of third-party logistics termination fees, $1.3 million of production workforce severance, $1.9 million of customer penalties, $1.5 million of losses from discontinued product lines, and other vendor, customer, and premium freight costs.
- The company agreed to terminate a Pennsylvania logistics provider effective November 5, 2012, including a $1.4 million termination fee and rent of $95,000 per month for up to eight months.
- Fenco entered into a supplier-backed credit line of up to $22.0 million; approximately $17.0 million was outstanding at September 30, 2012. The arrangement requires minimum annual purchases and is guaranteed by the company and certain subsidiaries.
- The company expects fiscal 2013 capital expenditures of approximately $3.0 million to $4.0 million.
- Management stated that available cash, short-term investments, receivable discount programs, credit facilities, and the Fenco credit line should be sufficient for expected needs over the next twelve months, but emphasized dependence on operating cash flow, the undercar turnaround, customer and supplier financial condition, and continued access to financing.
- Debt agreements contain leverage, fixed-charge coverage, EBITDA, borrowing availability, and capital expenditure covenants. The company reported compliance as of September 30, 2012, but future compliance depends on operating performance. Parent-company term loans bear interest at LIBOR plus 8.5% or a base rate plus 7.5% and mature January 17, 2017.
- The company issued warrants connected with its debt and supplier arrangements. Warrant liabilities totaled $1.6 million at September 30, 2012 and are remeasured through earnings.
- The resale registration statement for the April 2012 private placement had not become effective by September 30, 2012. The company accrued $150,000 of potential liquidated damages.
- Goodwill and intangible asset impairment tests were performed after the undercar customer termination; management concluded that no impairment was required.
- Disclosure controls were not effective as of September 30, 2012 because the filing was not timely and a material weakness in Fenco’s financial statement close process had not been remediated. The weakness involved inadequate systems, oversight, reconciliations, documentation, and personnel with appropriate U.S. GAAP expertise.
- In December 2012, the company entered into an agreement allowing its founder and an affiliated entity to sell up to $300,000 of company stock back to the company at a 10% discount to a specified market-price formula, subject to financing-agreement approval.
Most Important Facts for Investors to Verify
- Whether the undercar turnaround achieves sustained positive gross margins and operating cash flow, particularly after the loss of the major unprofitable customer.
- Future compliance with debt covenants and the availability of revolver and supplier-backed financing.
- The company’s ability to fund continuing operating cash needs while working capital remains negative.
- The accuracy and timeliness of Fenco’s financial close process and remediation of the disclosed material weakness.
- The extent of customer concentration, including the effect of the discontinued undercar relationship and the remaining exposure to major customers.
- The ultimate cost of logistics termination, severance, customer penalties, inventory reserves, warranty returns, and other turnaround-related items.
- The dilution and cash obligations associated with outstanding warrants, the supplier receivable-sale option, and potential liquidated damages on the private placement.