Business Context and Reporting Period
Motorcar Parts of America, Inc. manufactures, remanufactures, and distributes aftermarket automotive parts, including rotating electrical products, wheel hubs and bearings, brake master cylinders, turbochargers, and brake power boosters. The company reports one operating segment and sells primarily in North America.
This unaudited Form 10-Q covers the three months ended June 30, 2017, the first quarter of fiscal 2018, compared with the three months ended June 30, 2016.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 |
|---|---|---|
| Net sales | $95.1 million | $85.4 million |
| Gross profit | $25.8 million | $20.4 million |
| Gross margin | 27.2% | 23.9% |
| Operating income | $15.3 million | $13.3 million |
| Net income | $7.6 million | $7.5 million |
| Diluted earnings per share | $0.39 | $0.39 |
| Cash used in operating activities | $0.6 million | $13.8 million |
| Capital expenditures | $0.6 million | $1.6 million |
- Sales increased 11.3%, while gross profit increased approximately 26.7%. Net income increased approximately 1.6%.
- Operating margin was approximately 16.1%, compared with approximately 15.5% in the prior-year quarter. Net margin was approximately 8.0%, compared with approximately 8.8%.
- Cash and cash equivalents were $8.1 million at June 30, 2017, compared with $9.0 million at March 31, 2017. Short-term investments were $2.4 million.
- Working capital was negative $20.2 million, with a current ratio of 0.86:1.00.
- Inventory was $82.2 million, up from $67.5 million at March 31, 2017. Long-term core inventory was $264.7 million, compared with $262.9 million.
- Total liabilities were $179.6 million and shareholders’ equity was $255.3 million at June 30, 2017.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by higher rotating electrical product sales and brake power booster sales, which began in August 2016. Wheel hub and brake master cylinder sales declined.
- Gross margin improved by 330 basis points. The prior-year quarter included $8.4 million of customer allowances and initial return and stock-adjustment accruals related to new business, as well as $124,000 of start-up costs for a new product line.
- General and administrative expense increased 70.7% to $6.2 million. Comparability was affected by a $1.3 million gain from the supplier warrant revaluation in 2017 versus a $5.6 million gain in 2016, and by a $1.1 million foreign-exchange contract gain in 2017 versus a $0.7 million loss in 2016.
- Interest expense increased 17.6% to $3.3 million, primarily because of higher interest rates and greater use of receivables discount programs.
- Receivables discounted increased to $86.5 million from $80.6 million, while the annualized weighted-average discount rate increased to 3.1% from 2.7%.
- Operating cash use improved substantially from $13.8 million to $0.6 million, but inventory investment consumed $14.9 million of cash during the quarter.
Debt, Liquidity, Outlook, and Risks
- The company had a $145 million senior secured credit facility consisting of a $120 million revolving facility and a $25 million term loan facility, maturing June 3, 2020.
- Revolving borrowings were $15.0 million, term-loan principal was $19.5 million, and $104.1 million was available under the revolving facility, subject to adjustments and borrowing-base restrictions.
- The company was in compliance with its debt covenants. The senior leverage ratio was 0.34 versus a maximum of 2.50, and the fixed-charge coverage ratio was 2.09 versus a minimum of 1.15.
- Management stated that cash, short-term investments, receivables discount programs, credit-facility availability, and other sources were sufficient for expected working-capital needs, debt repayments, lease obligations, and capital expenditures over the next 12 months.
- Fiscal 2018 capital expenditures were expected to be approximately $7.5 million for current operations plus approximately $11 million for expansion in Mexico. The filing does not provide formal revenue or earnings guidance.
- The company expects to adopt ASC 606 revenue recognition on April 1, 2018 and had not yet determined the transition method or financial-statement impact. Areas under review include core-value revenue recognition, returns, warranties, customer allowances, and principal-versus-agent considerations.
- In July 2017, the company amended its credit facility and acquired D&V Electronics Ltd., a Canadian developer and manufacturer of diagnostic systems. Management stated that the acquisition was not significant enough to require pro forma information.
- Principal risks include customer concentration, working-capital requirements, inventory and Used Core availability, customer returns and allowances, reliance on receivables discount programs, interest-rate and foreign-exchange exposure, covenant compliance, competition, overseas operating risks, cybersecurity, and the ability to generate positive operating cash flow.
Most Important Facts for Investors to Verify
- Whether sales growth and improved gross margin are sustainable after adjusting for prior-year new-business accruals and current-period return levels.
- The quality and liquidity of inventory, particularly the $264.7 million long-term core inventory balance and the increase in finished goods inventory.
- Reliance on customer concentration: four customers represented 89% of quarterly sales, with the largest customer representing 40%.
- Future cash needs for Mexico expansion, planned capital expenditures, inventory growth, debt service, and share repurchases.
- The effect of higher interest rates and continued use of receivables discount programs on earnings and cash flow.
- The eventual ASC 606 adoption method and its effect on revenue, core-related assets and liabilities, returns, allowances, and reported comparability.
- The filing contains inconsistent figures for cumulative share-repurchase-program utilization: the financial statement note reports $4.358 million utilized, while a Part II disclosure states $4.658 million. The remaining authorization is reported as $10.642 million in both disclosures.