Motorcar Parts of America, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2015, including fourth-quarter results for the three months ended March 31, 2015. The company manufactures, remanufactures and distributes aftermarket automotive parts, including rotating electrical products, wheel hubs and bearings, and brake master cylinders. Results are reported in one segment and exclude the discontinued Fenco subsidiary.
Financial performance and position
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Net sales | $301.7 million | $258.7 million | +16.6% |
| Gross profit | $81.6 million | $81.6 million | Approximately flat |
| Gross margin | 27.0% | 31.5% | Down 4.5 percentage points |
| Operating income | $33.6 million | $32.1 million | +4.6% |
| Income from continuing operations | $11.5 million | $6.5 million | +76.7% |
| Diluted EPS from continuing operations | $0.65 | $0.42 | +54.8% |
| Operating cash flow | $(9.5) million | $13.3 million | Declined $22.7 million |
| Capital expenditures | $3.7 million | $3.0 million | Increased |
Fourth quarter: Net sales were $83.9 million, gross profit was $20.9 million, operating income was $8.4 million, and net income was $3.1 million. Diluted EPS was $0.16. Fourth-quarter gross margin was approximately 24.9%, based on reported gross profit and sales.
- Cash increased to $61.2 million from $24.6 million; working capital increased to $66.6 million from $22.1 million.
- Current assets were $181.8 million and current liabilities were $115.2 million, producing a current ratio of approximately 1.6:1.
- Term-loan carrying value was $80.1 million, with no revolving-loan balance at year-end. Approximately $35.95 million was available under the revolving facility, subject to adjustments.
- Total assets were $421.8 million and shareholders’ equity was $190.2 million.
- Long-term core inventory increased to $189.0 million from $143.5 million, reflecting customer core purchases and inventory requirements associated with new business.
- Receivables discounted through customer-related programs totaled $261.0 million during the year, with $4.9 million of related interest expense.
Material changes versus the prior comparable period
- Sales growth reflected the full-year contribution from wheel hub products, increased rotating electrical sales, recognition of $16.3 million of previously deferred core revenue, and the launch of brake master cylinders in July 2014.
- Gross margin fell materially because of product mix and significant allowances and costs, including $5.7 million for core purchases tied to new rotating-electrical business, $4.4 million for certain product returns, $2.9 million for core inventory purchases, and $2.8 million of initial warranty accruals.
- Operating income increased despite lower gross margin because general and administrative expense declined 4.6%, primarily due to lower warrant fair-value losses.
- Net interest expense declined to $13.1 million from $18.3 million, primarily because of lower borrowing rates and prior-year financing-cost write-offs.
- Operating cash flow turned negative as the company funded higher inventory, core purchases and working-capital needs for new business. The fiscal 2014 comparison benefited from a $16.5 million income-tax refund.
- The company raised $67.0 million of net proceeds in a September 2014 public offering of 2.76 million shares, increasing shares outstanding and shareholders’ equity.
- Fiscal 2014 net income included $100.9 million from discontinued Fenco operations, including a $118.1 million deconsolidation gain. Fiscal 2015 had no discontinued-operation income, making reported total net income comparisons less meaningful.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2016 capital expenditures of approximately $4.0 million, primarily for equipment, information technology and leasehold improvements.
- Management stated that cash, investments, receivable discount programs, available financing and other sources were expected to fund working-capital needs, debt repayments, capital leases and capital expenditures for the next 12 months.
- Management cited new product and customer awards, expansion in the DIFM channel, the brake master cylinder line, and strategic acquisitions as growth initiatives. No formal revenue or earnings guidance was provided.
- Customer concentration is substantial: AutoZone represented 56% of fiscal 2015 sales, while the four largest customers represented 89%.
- Customer pricing concessions, marketing allowances, extended payment terms, return rights and core-purchase obligations materially affect margins, working capital and cash flow. Customer allowances recorded against revenue rose to $70.0 million from $49.6 million.
- Fenco-related litigation remains a material contingency. A $1.0 million reserve was recorded for certain employee-related claims; additional claims, including an M&T Bank lawsuit seeking unspecified damages, remain possible.
- The company operates primarily in Mexico and Asia and faces currency, political, supply-chain, imported-product, labor and quality risks. Forward currency contracts had a $19.4 million notional value at year-end, and fiscal 2015 losses of $1.0 million were recorded on such contracts.
- Term-loan principal repayments total $84.5 million through fiscal 2019, including $59.3 million scheduled in fiscal 2019. The company was in compliance with its fiscal 2015 debt covenants.
- Subsequent to year-end, the company acquired OE Plus, a small alternator and starter remanufacturer, and entered into a new $125.0 million senior secured credit facility on June 3, 2015.
- Management and Ernst & Young reported effective disclosure controls and effective internal control over financial reporting as of March 31, 2015, with an unqualified audit opinion.
Important facts for investors to verify
- Whether sales growth from new product lines and customer awards can offset margin pressure from allowances, returns, warranty costs and product mix.
- The sustainability of negative operating cash flow and the extent to which inventory and customer core purchases continue to consume liquidity.
- Dependence on AutoZone and other major customers, including renewal terms, pricing concessions and marketing-allowance commitments.
- Debt repayment capacity, covenant compliance and the terms and borrowing-base availability under the June 2015 credit facility.
- The ultimate cost and resolution of Fenco-related litigation and other contingent liabilities.
- The valuation and recoverability of the $189.0 million long-term core inventory and $31.6 million of core inventory deposits.
- The effect of the September 2014 equity issuance and potential dilution from approximately 1.39 million outstanding options and the Wanxiang warrant covering up to 516,129 shares.