Motorcar Parts of America, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended December 31, 2013; filed February 10, 2014. The company manufactures, remanufactures, and distributes aftermarket automotive parts, primarily alternators and starters, and began selling wheel hub assemblies and bearings in June 2013. Fenco operations were deconsolidated and presented as discontinued operations following Fenco’s Chapter 7 bankruptcy filing.
Financial performance and position
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Net sales | $65.6 million | $50.7 million | $182.0 million | $155.1 million |
| Gross profit | $21.9 million | $16.3 million | $57.6 million | $51.2 million |
| Gross margin | 33.4% | 32.2% | 31.7% | 33.0% |
| Operating income | $10.0 million | $5.1 million | $22.5 million | $25.3 million |
| Income from continuing operations | $1.1 million | $1.8 million | $3.4 million | $10.7 million |
| Net income (loss) | $1.1 million | $0.9 million | $104.3 million | $(17.9) million |
| Diluted EPS | $0.08 | $0.06 | $7.04 | $(1.25) |
- Quarterly sales increased 29.4%, driven by growth in rotating electrical products and initial wheel hub sales. Nine-month sales increased 17.3%.
- Quarterly gross margin improved because of enhanced purchasing and production absorption. Nine-month gross margin declined because wheel hub products carried lower margins.
- Interest expense increased to $6.5 million in the quarter and $15.1 million year to date, partly because of financing-cost write-offs, higher borrowings, and costs associated with the Fenco guarantee.
- Continuing-operations cash flow was $12.2 million for the quarter and $19.7 million for the nine months, compared with cash use of $4.4 million and $4.0 million, respectively, in the prior comparable periods.
- At December 31, 2013, cash was $33.3 million, short-term investments were $0.5 million, working capital was $13.6 million, and the current ratio was 1.2 to 1.
- Inventory increased to $43.2 million from $31.8 million at March 31, 2013, while long-term core inventory increased to $134.5 million from $118.2 million.
- Debt comprised a $95.0 million amended term-loan commitment, with $89.1 million recorded as current and long-term term debt net of discounts, and $10.0 million drawn under the revolving facility. Revolving availability was $17.5 million after outstanding letters of credit.
Material changes versus the prior comparable period
- Fenco was deconsolidated effective May 31, 2013 after loss of control and filed for Chapter 7 bankruptcy in June 2013. The nine-month results include a $118.1 million gain on deconsolidation, a $20.5 million loss related to guarantees of supplier obligations, a $9.2 million related tax benefit, and approximately $5.9 million of Fenco losses before deconsolidation.
- Consequently, nine-month net income of $104.3 million is substantially driven by the discontinued-operations gain and is not representative of recurring operating profitability.
- The company’s ninth financing amendment increased revolving commitments to $30.0 million, reduced term loans to $95.0 million, extended final maturity to November 6, 2018, and modified covenants and equity-repurchase permissions.
- The term-loan LIBOR-based interest rate declined to 6.75% from 10.5% at March 31, 2013. Quarterly principal payments are $2.1 million.
- The company paid $20.8 million in August 2013 to satisfy liabilities under its guarantee of Fenco supplier obligations and now reports no material WX Agreement obligations other than indemnification.
- Warrant-liability remeasurement losses increased general and administrative expense by $2.9 million in the quarter and $6.9 million year to date.
Outlook, risks, contingencies, and unusual items
- Management believes cash, short-term investments, receivable-discount programs, available borrowing capacity, and other sources will satisfy expected working-capital, debt-repayment, lease, and capital-expenditure needs for the next twelve months.
- Fiscal 2014 capital expenditures are expected to range from $2.0 million to $3.0 million, financed through working capital and potentially additional capital leases.
- Management was in compliance with all financing covenants at December 31, 2013. Reported covenant calculations were senior leverage of 2.14 versus a maximum of 3.30, fixed-charge coverage of 1.91 versus a minimum of 1.05, and EBITDA of $49.2 million versus a minimum of $31.3 million.
- Key risks include customer concentration, pressure for lower prices and favorable terms, substantial core-inventory requirements, dependence on receivable-discount programs, availability and cost of used cores, interest-rate and currency exposure, competition, covenant compliance, and the ability to generate positive operating cash flow.
- Four customers accounted for approximately 86% of quarterly sales and 88% of year-to-date sales; one customer represented 54% and 52%, respectively.
- The company faces potential claims by the Fenco bankruptcy trustee or creditors. The filing does not provide a clear estimate of the potential amount or ultimate resolution of such claims.
- Forward foreign-currency contracts had a notional value of $17.7 million at December 31, 2013. The company recorded a year-to-date loss of $0.8 million on these contracts.
- Disclosure controls and procedures were deemed effective as of December 31, 2013, and no material control changes were reported during the quarter.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the $118.1 million Fenco deconsolidation gain when assessing earnings quality.
- Review liquidity after considering $99.1 million of recorded term and revolving debt, required quarterly amortization, interest expense, and borrowing-base restrictions.
- Assess whether the new wheel hub business can grow while improving the nine-month gross margin, which declined to 31.7%.
- Monitor customer concentration, receivable-discount dependence, customer returns accruals, and the substantial $134.5 million long-term core-inventory balance.
- Review the Fenco bankruptcy guarantee, indemnification exposure, and any subsequent creditor or trustee claims.
- Evaluate the sensitivity of reported earnings to noncash warrant-liability remeasurements, which generated a $6.9 million year-to-date expense.