Motorcar Parts of America, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2021. The filing also presents unaudited fourth-quarter fiscal 2021 results for the quarter ended March 31, 2021. The company supplies remanufactured and aftermarket automotive parts, including rotating electrical products, wheel hubs, brakes, turbochargers, and test solutions and diagnostic equipment.
Financial Performance and Key Metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $540.8 million | $535.8 million | Up 0.9% |
| Gross profit | $109.5 million | $118.4 million | Down 7.6% |
| Gross margin | 20.2% | 22.1% | Down 190 basis points |
| Operating income | $46.6 million | $16.7 million | Up $29.9 million |
| Net income | $21.5 million | $(7.3) million | Returned to profitability |
| Diluted earnings per share | $1.11 | $(0.39) | Improved |
| Cash flow from operations | $56.1 million | $18.8 million | Up $37.3 million |
| Capital expenditures | $13.9 million | $14.2 million | Down slightly |
Fiscal 2021 sales included $12.8 million of core revenue associated with inventory realignment at two customer distribution centers. Product mix was approximately 72.8% rotating electrical, 15.6% wheel hubs, 9.7% brake-related products, and 1.9% test solutions and other products.
Fourth-quarter fiscal 2021 sales were $168.1 million, gross profit was $32.1 million, operating income was $5.5 million, and net income was $0.8 million, or $0.04 diluted earnings per share. The comparable fourth quarter of fiscal 2020 reported sales of $150.7 million, gross profit of $36.6 million, an operating loss of $5.5 million, and a net loss of $8.2 million.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $15.5 million at March 31, 2021, compared with $49.6 million a year earlier.
- Working capital was $96.7 million, with a current ratio of approximately 1.3:1.0.
- Net debt obligations were $104.5 million. Revolving debt declined to $84.0 million from $152.0 million, and total debt repayments during fiscal 2021 were $71.8 million.
- After contractual adjustments, $125.3 million was available under the revolving facility. The company was in compliance with its financial covenants, with a senior leverage ratio of 1.46 versus a maximum of 3.00 and fixed-charge coverage of 1.26 versus a minimum of 1.10.
- Receivables discounted increased to $491.3 million from $461.5 million. Related discount expense declined to $9.5 million from $14.8 million as the weighted-average discount rate fell to 2.1% from 3.3%.
- Inventory increased to $288.4 million from $225.7 million, primarily to support anticipated demand. Excess and obsolete inventory reserves were $13.2 million.
- On May 28, 2021, the company amended its credit facility, extending maturity from June 5, 2023 to May 28, 2026 and modifying the fixed-charge coverage covenant and Consolidated EBITDA definition.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly stable, but gross profit and gross margin declined because of higher freight costs, COVID-19-related wages and protective equipment, and increased Mexico transition expenses.
- Operating income benefited materially from a $17.6 million foreign-exchange gain in fiscal 2021, compared with an $18.2 million foreign-exchange expense in fiscal 2020. The fiscal 2021 gain included a $9.9 million lease-liability remeasurement gain and a $7.7 million forward-contract gain.
- Interest expense declined 37.0% to $15.8 million because of lower interest rates and lower average borrowings.
- Cash flow from operations improved substantially despite a $73.6 million inventory investment, supported by higher collections and increased accounts payable.
- Customer concentration increased: the largest customer represented 42% of fiscal 2021 sales, while the three largest customers represented 87%, compared with 38% and 84%, respectively, in fiscal 2020.
- Customer finished-goods returns accrual increased to $31.5 million from $25.3 million, and total contract assets increased to $297.2 million from $259.9 million.
- The company repurchased 54,960 shares for $1.1 million during fiscal 2021. The remaining authorization was $20.2 million, subject to credit-facility limitations.
Outlook, Commentary, Risks, and Unusual Items
Management stated that demand substantially recovered after a significant decline in April 2020, but continuing supply-chain and logistics disruptions remain. COVID-19 caused $7.3 million of fiscal 2021 costs, partially offset by $1.3 million of Canadian and Asian government assistance. The company conserved liquidity, imposed expense controls, and temporarily used furloughs, layoffs, and salary reductions, all of which were reinstated by September 30, 2020.
Management expects approximately $16.3 million of fiscal 2022 capital expenditures, consisting of approximately $12.3 million for current operations and $4.0 million for continued Mexico expansion. The company believes available cash, credit capacity, receivable discount programs, and other resources will satisfy expected needs over the next 12 months.
- Customer concentration and customer demands for price concessions, marketing allowances, extended terms, and core inventory create margin and working-capital pressure.
- The company relies on core availability, offshore suppliers, international shipping, and operations in Mexico, Canada, Malaysia, and Asia. Tariffs, freight costs, labor disruptions, currency movements, and supply shortages could materially affect results.
- U.S. Customs and Border Protection asserted that approximately $17 million of additional duties may be owed for Mexican imports from 2011 through mid-2018. The company disputes the amount and has not indicated that the matter is resolved.
- Variable-rate debt creates interest-rate exposure; management estimated that a 1% increase in rates would increase annual interest expense by approximately $1.0 million.
- Core exchange programs and marketing allowances require significant estimates. At March 31, 2021, related contract assets were $297.2 million and contract liabilities were $166.3 million.
- The company reported an unqualified audit opinion and effective disclosure controls and internal control over financial reporting as of March 31, 2021.
Investor Verification Items
- Verify whether the fiscal 2021 operating improvement is sustainable excluding the $17.6 million foreign-exchange benefit and other unusual items.
- Monitor gross-margin recovery, freight and labor costs, Mexico transition expenses, and the pace of inventory reduction.
- Assess customer concentration, renewal and renegotiation terms, marketing allowances, return rates, and the collectability of customer-related contract assets.
- Review compliance with the amended credit facility, available borrowing capacity, variable-rate exposure, and the company’s ability to continue reducing debt.
- Track the outcome and potential financial exposure of the approximately $17 million Customs and Border Protection duty dispute.
- Evaluate the effect of COVID-19, supply-chain disruption, tariffs, foreign exchange, and offshore manufacturing risks on future sales and profitability.