Business Context and Reporting Period
Motorcar Parts of America, Inc. manufactures, remanufactures, and distributes aftermarket automotive parts, primarily alternators and starters, through retail, warehouse-distributor, professional-installer, and original-equipment-service channels. This unaudited Form 10-Q covers the three months ended June 30, 2013, the first quarter of fiscal 2014, with comparisons to June 30, 2012.
Following the loss of control and subsequent Chapter 7 bankruptcy filings of the Fenco entities, Fenco was deconsolidated effective May 31, 2013 and presented as discontinued operations. The Company now reports one operating segment.
Financial Performance and Position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $50.245 million | $46.799 million | Up 7.4% |
| Gross profit | $16.014 million | $14.819 million | Up 8.1% |
| Gross margin | 31.9% | 31.7% | Up 20 basis points |
| Operating income | $4.102 million | $6.697 million | Down 38.7% |
| Income from continuing operations | $0.103 million | $2.367 million | Down 95.6% |
| Net income | $100.980 million | $(9.862) million | Includes Fenco deconsolidation gain |
| Diluted earnings per share | $6.94 | $(0.70) | Discontinued operations contributed $6.93 |
- Continuing-operations operating margin was approximately 8.2%, versus 14.3% in the prior-year quarter. Continuing-operations net margin was approximately 0.2%, versus 5.1%.
- General and administrative expense increased 62.9% to $9.632 million, driven principally by warrant revaluation losses, foreign-currency-contract losses, legal and Fenco-related costs, restructuring fees, consulting, offshore expenses, and share-based compensation.
- Interest expense increased 35.5% to $3.925 million, partly reflecting higher loan balances and vendor-payable interest; prior-year interest expense included $0.896 million of interest income from a Fenco note receivable.
- Cash was $15.191 million at June 30, 2013, compared with $19.346 million at March 31, 2013. Working capital was $30.573 million, with a current ratio of 1.5 to 1.
- Net cash used in operating activities was $3.072 million from continuing operations and $2.093 million including discontinued operations. Capital expenditures were $0.381 million.
- Term loan debt totaled $83.442 million, including the current portion. No revolving loans were outstanding; $14.389 million was available, subject to borrowing-base restrictions and letter-of-credit reservations.
- Long-term core inventory was $122.625 million, and long-term core inventory deposits were $27.805 million, highlighting the working-capital intensity of the business.
Material Changes Versus the Prior Comparable Period
- Sales increased $3.446 million, primarily from higher sales to existing customers. Lower per-unit manufacturing costs improved gross margin, partly offset by lower scrap-metal revenue.
- Operating income declined despite higher sales and gross profit because operating expenses rose substantially, especially general and administrative costs.
- Continuing-operations cash usage improved from $10.606 million to $3.072 million, but operations remained cash-flow negative.
- Fenco’s assets and liabilities were removed from the consolidated balance sheet. The deconsolidation reduced total assets by $82.771 million and total liabilities by $200.866 million, producing a $118.095 million gain.
- Fenco-related discontinued operations included approximately $5.910 million of losses through May 31, 2013, a $20.464 million loss associated with guarantees of supplier obligations, and a $9.156 million tax benefit.
- Shareholders’ equity increased from a deficit of $3.514 million at March 31, 2013 to $97.603 million at June 30, 2013, primarily because of the Fenco deconsolidation gain.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected fiscal 2014 capital expenditures of approximately $2.0 million to $3.0 million, financed through working capital and additional capital-lease obligations.
- Management stated that cash, short-term investments, receivable-discount programs, available credit, and other sources were expected to cover working-capital needs, scheduled debt repayments, capital leases, and capital expenditures over the next twelve months.
- The senior financing agreement matures January 17, 2017 and bears interest at LIBOR plus 8.5% or base rate plus 7.5%. The Company was in compliance with its financial covenants at June 30, 2013, including a 2.09 senior leverage ratio versus a 3.05 maximum, a 1.67 fixed-charge coverage ratio versus a 1.15 minimum, and $40.258 million of EBITDA versus a $30.5 million minimum.
- A June 2013 amendment waived a potential default related to the audit opinion on fiscal 2013 financial statements and imposed additional liquidity requirements. The filing states that June 28 liquidity exceeded the required level by $6.141 million, subject to adjustments.
- Fenco’s bankruptcy triggered an event of default under the supplier credit agreement. Approximately $19.864 million was outstanding as of June 10, 2013 and became immediately due subject to subordination. The Company has guaranteed the obligations, and unpaid amounts may bear escalating interest rates.
- Warrant liabilities increased to $3.584 million at June 30, 2013, generating a $1.570 million expense. Forward foreign-currency contracts generated a $0.733 million loss.
- Sales are highly concentrated: four customers represented 84% of quarterly sales, including one customer at 44% and another at 25%.
- Potential claims may be asserted by the Fenco bankruptcy trustee or creditors. The filing states that the nature, basis, and ultimate resolution of any such claims are uncertain.
- Other risks include dependence on receivable-discount programs, negative operating cash flow, substantial core-inventory requirements, customer pricing pressure, availability and cost of used cores, foreign-exchange exposure, covenant compliance, competition, and the ability to obtain additional financing.
Facts Investors Should Verify
- Whether continuing operations can generate positive operating cash flow while maintaining substantial core inventory and customer-support obligations.
- The resolution, timing, and ultimate cash impact of the $19.864 million Fenco supplier obligation and any bankruptcy-related claims.
- Compliance with the amended liquidity requirements and other debt covenants as required thresholds increase.
- Whether receivable-discount programs remain available and on economically attractive terms.
- The sustainability of customer concentration, gross-margin performance, and sales growth after the Fenco deconsolidation.
- The effect of warrant revaluations, foreign-currency movements, interest costs, and other non-operating or unusual items on future earnings.