Business Context and Reporting Period
Motorcar Parts of America, Inc. (MPA) supplies non-discretionary automotive aftermarket replacement parts, including rotating electrical, wheel hub, brake-related and other products, as well as test solutions and diagnostic equipment. The company sells primarily to North American automotive retailers, warehouse distributors and automobile manufacturers. This unaudited Form 10-Q covers the three months ended June 30, 2021, the first quarter of fiscal 2022, compared with the three months ended June 30, 2020.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $149.0 million | $95.4 million | +56.3% |
| Gross profit | $23.6 million | $13.4 million | +76.1% |
| Gross margin | 15.8% | 14.0% | +180 bps |
| Operating income | $5.7 million | $0.4 million | Improved |
| Net income (loss) | $0.9 million | $(3.0) million | Returned to profitability |
| Diluted EPS | $0.04 | $(0.16) | Improved |
| Cash flow from operations | $(4.7) million | $22.4 million | Decreased $27.1 million |
Operating expenses were $17.8 million versus $13.0 million in the prior-year quarter. Net interest expense declined to $3.9 million from $4.4 million. The effective tax rate was 52.4%, compared with a 25.3% tax benefit rate in the prior-year period, primarily due to jurisdictional losses without expected tax benefits, differing foreign tax rates and nondeductible executive compensation.
At June 30, 2021, cash and cash equivalents were $24.9 million, short-term investments were $1.8 million and working capital was $105.4 million. Inventory increased to $320.7 million from $302.9 million at March 31, 2021, primarily to support anticipated demand. Total assets were $903.9 million and shareholders’ equity was $305.2 million.
Debt included $103.0 million outstanding under the revolving facility and $19.7 million of term-loan principal. The company had $95.3 million of availability under the revolving facility after contractual adjustments and $6.4 million of outstanding letters of credit. The company was in compliance with its debt covenants, reporting a senior leverage ratio of 1.57 against a maximum of 3.00 and a fixed-charge coverage ratio of 1.34 against a minimum of 1.10.
Material Changes Versus the Prior Comparable Period
- Sales increased across all product lines, reflecting strong demand and comparison with a COVID-19-affected prior-year quarter.
- Gross margin improved despite approximately $3.0 million of higher freight costs, supply-chain inflation and other pandemic-related inefficiencies.
- Operating income and net income improved substantially, aided by higher sales, lower interest expense and lower net foreign-exchange expense.
- Operating cash flow turned negative because of inventory buildup, reduced accounts payable and increased contract assets, compared with positive operating cash flow in the prior year.
- Financing cash flow was positive $16.1 million, primarily reflecting $32.0 million of revolving borrowings partially offset by $13.0 million of repayments and other debt-related payments.
- The May 2021 third amendment extended the credit facility maturity from June 5, 2023 to May 28, 2026, modified the fixed-charge coverage covenant and revised the definition of Consolidated EBITDA. The company capitalized $1.1 million of related debt issuance costs.
- Product mix shifted toward brake-related products, which represented 16% of sales versus 9% in the prior-year quarter; rotating electrical products declined to 67% from 72% and wheel hub products to 14% from 18%.
Guidance, Outlook, Risks and Unusual Items
Management stated that the near-term outlook appeared positive but did not provide specific revenue, earnings or margin guidance. The company expects approximately $12.3 million of capital expenditures for current operations and approximately $4.0 million for continued Mexico expansion during fiscal 2022.
- COVID-19 continues to create uncertainty involving employee health, production capacity, customer demand, supply chains and global logistics. COVID-related costs were $854,000 in the quarter, compared with $2.3 million in the prior-year quarter.
- Supply-chain disruption and higher freight costs reduced gross profit; management quantified the freight impact at approximately $3.0 million, or 2.0% of sales.
- Mexico expansion generated $1.9 million of transition expenses, while amortization of core premiums paid to customers was $2.5 million.
- Foreign-currency lease remeasurement produced a $2.8 million gain, while forward currency contracts generated a $0.3 million loss. The company had $43.6 million of forward-contract notional exposure at quarter-end.
- Customer concentration is significant: three customers represented 34%, 20% and 31% of quarterly sales. The largest customer represented 43% of trade receivables.
- The company relies on receivable discount programs; $146.7 million of receivables were discounted during the quarter, generating $2.5 million of interest expense. These programs may not continue and costs could rise with higher rates, greater utilization or extended payment periods.
- MPA disputes an approximately $17 million claim by U.S. Customs and Border Protection for additional duties on products imported from Mexico between 2011 and mid-2018. The company has not accrued the amount and cannot assure that it will not ultimately owe additional duties.
- Warranty return accruals were $20.0 million at June 30, 2021. The company also faces risks related to customer concentration, used-core availability, inventory requirements, competition, tariffs, currency movements, interest rates, cybersecurity and covenant compliance.
- The board’s $37.0 million repurchase authorization had $20.2 million remaining at June 30, 2021. No shares were repurchased during the quarter.
Important Facts for Investors to Verify
- Whether sales growth and the 15.8% gross margin are sustained after COVID-19 comparisons, freight inflation, transition costs and core-premium amortization.
- Whether operating cash flow recovers as inventory and contract assets normalize, given the quarter’s $4.7 million operating cash outflow.
- Revolving debt levels, borrowing-base availability, receivable-discount-program utilization and compliance with the revised credit covenants.
- The outcome and potential accounting impact of the approximately $17 million customs-duty dispute.
- The financial effect of customer concentration and any changes in payment terms, returns or receivable collection periods.
- Progress and remaining costs associated with Mexico expansion and the company’s projected fiscal 2022 capital expenditures.
- Continuing COVID-19, supply-chain, logistics, foreign-exchange and input-cost risks, none of which can be reliably quantified from the filing.