Business Context and Reporting Period
Motorcar Parts of America, Inc. supplies remanufactured and purchased automotive aftermarket replacement parts and diagnostic equipment. Products include rotating electrical components, wheel hubs, brake master cylinders, turbochargers, brake power boosters, and automotive, aerospace, and electric-vehicle diagnostic systems. Approximately 98% of fiscal 2019 sales were in North America.
The filing is a Form 10-K for the fiscal year ended March 31, 2019. The requested “2018 Q4” period is not the filing period; the filing includes unaudited fourth-quarter fiscal 2019 results and comparable fiscal 2018 quarterly data.
Sales were highly concentrated: AutoZone represented 38% of fiscal 2019 net sales, while the three largest customers represented 83%.
Key Financial Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $472.8 million | $427.5 million | Up 10.6% |
| Gross profit | $89.2 million | $107.0 million | Down 16.7% |
| Gross margin | 18.9% | 25.0% | Down 6.1 percentage points |
| Operating income | $15.6 million | $50.8 million | Down 69.2% |
| Net income (loss) | $(7.8) million | $19.3 million | Shifted to loss |
| Diluted EPS | $(0.42) | $0.99 | Decreased |
| Net cash used in operating activities | $(40.3) million | $(13.9) million | Greater use of cash |
| Capital expenditures | $11.1 million | $9.9 million | Increased |
Fourth-quarter fiscal 2019 net sales were $129.1 million, gross profit was $26.0 million, operating income was $5.5 million, and net loss was $2.8 million. Fourth-quarter fiscal 2018 net sales were $119.7 million, operating income was $14.1 million, and net income was $8.4 million.
At March 31, 2019, cash and cash equivalents were $9.9 million, short-term investments were $3.3 million, working capital was $73.5 million, and total assets were $632.4 million. Inventory increased to $233.7 million from $161.2 million, while excess and obsolete inventory reserves increased to $11.9 million from $6.7 million.
Debt included $110.4 million outstanding under the revolving facility and $27.9 million of term loans. The revolving facility had $88.7 million of availability after adjustments and letters-of-credit reserves. The interest rate on the revolving and term facilities was 5.24% at March 31, 2019. The company was in compliance with its debt covenants, reporting a senior leverage ratio of 2.02 versus a maximum of 3.00 and a fixed-charge coverage ratio of 1.46 versus a minimum of 1.10.
Material Changes Versus the Prior Comparable Period
- Sales increased primarily from market-share gains in rotating electrical products and higher diagnostic-equipment sales, including the benefit of acquisitions.
- Gross margin declined substantially because of $8.2 million of Mexico transition expenses, $6.0 million of customer allowances and stock-adjustment costs, $4.1 million of core-premium amortization, $1.5 million of net tariff costs, higher freight and wage costs, and ramp-up expenses.
- Non-cash revaluation write-downs for remanufactured cores held at customers’ locations increased to $18.8 million from $9.1 million.
- Operating expenses rose to $73.5 million from $56.2 million, driven by higher general and administrative, sales and marketing, and research and development costs.
- Interest expense increased to $23.2 million from $15.4 million due to higher borrowings, increased use of receivable discount programs, and higher interest rates.
- Operating cash outflow increased to $40.3 million, primarily because of inventory expansion, Mexico operations, and $28.3 million of payments for core buy-backs associated with new business.
- The company acquired E&M Power in December 2018 and Dixie Electric in January 2019. Cash consideration was approximately $4.5 million for E&M and $8.0 million for Dixie, with additional contingent consideration obligations.
- The company adopted ASC 606 retrospectively and corrected previously issued immaterial errors. Fiscal 2018 and 2017 comparatives are presented as adjusted.
Guidance, Outlook, Risks, and Unusual Items
Management expects continued growth from aftermarket hard parts, diagnostic equipment, electric-vehicle and aerospace testing products, acquisitions, and expanded Mexico manufacturing and distribution capacity. The company expects approximately $25 million of fiscal 2020 capital expenditures, including approximately $18 million for Mexico expansion. No formal revenue or earnings guidance is provided in the filing.
- Management expects cash, investments, receivable discount programs, available credit, and other sources to fund anticipated working capital, debt repayments, leases, and capital expenditures over the next 12 months.
- On June 4, 2019, the company amended its credit facility, increasing revolving capacity to $238.6 million and modifying financial covenants, borrowing-base eligibility, capital-expenditure limits, and other baskets.
- U.S. Customs and Border Protection asserted that the company may owe approximately $17 million of additional duties relating to Mexican imports from 2011 through mid-2018. The company disputes the amount and intends to contest it; the ultimate exposure is uncertain.
- Management and the independent auditor identified a material weakness in internal control over financial reporting arising from insufficient technical accounting resources and deficiencies involving accounting policies, inventory, revenue recognition, and controls at D&V Electronics. Remediation was expected to extend through fiscal 2020.
- Customer concentration, pricing pressure, substantial customer allowances, inventory levels, core availability, foreign operations, tariffs, currency movements, interest rates, and reliance on receivable discount programs are significant risks.
- Operating lease obligations totaled $102.2 million as of March 31, 2019. The company expected adoption of the new lease standard to add approximately $53 million of lease liabilities and $51 million of right-of-use assets.
- The company had $66.7 million of future marketing-allowance commitments under long-term customer agreements, excluding allowances tied to individual product exchanges.
Most Important Facts for Investors to Verify
- Verify the sustainability of sales growth and whether gross-margin pressure from customer concessions, core costs, tariffs, and Mexico expansion is moderating.
- Assess the company’s ability to convert earnings into cash while inventory and contract assets remain substantial and operating cash flow is negative.
- Review customer concentration, particularly the 38% exposure to AutoZone and 83% concentration among the three largest customers.
- Monitor revolving debt utilization, receivable discounting costs, covenant compliance, interest-rate sensitivity, and the June 2019 credit-facility amendment.
- Track the resolution and potential financial impact of the $17 million customs-duty claim.
- Evaluate remediation of the material weakness and the integration and performance of recent acquisitions.
- Confirm the accounting impact of ASC 606, the prior-period error corrections, inventory reserves, core-return estimates, and other significant management judgments.