Motorcar Parts of America, Inc. — Form 10-Q Summary
Business context and reporting period
Motorcar Parts of America manufactures, remanufactures and distributes aftermarket automotive, light truck, heavy-duty truck, industrial and agricultural parts, including rotating electrical products, wheel hubs, brake master cylinders and diagnostic equipment. The company reports one operating segment. This filing covers the unaudited quarter ended June 30, 2018, the first quarter of fiscal 2019, compared with the quarter ended June 30, 2017.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $92.565 million | $95.519 million | Down 3.1% |
| Gross profit | $17.251 million | $26.676 million | Down 35.3% |
| Gross margin | 18.6% | 27.9% | Down 930 basis points |
| Operating income (loss) | $(1.217) million | $16.093 million | Declined to a loss |
| Net income (loss) | $(5.014) million | $8.151 million | Declined to a loss |
| Diluted EPS | $(0.27) | $0.42 | Down $0.69 |
| Cash flow from operations | $(0.924) million | $(0.644) million | Greater use of cash |
- Cash and cash equivalents were $12.242 million at June 30, 2018, supplemented by $3.053 million of short-term investments.
- Working capital was $91.742 million, with a current ratio of 1.5:1.0.
- Net inventory increased to $187.342 million from $161.210 million at March 31, 2018; inventory reserves increased to $8.606 million from $6.682 million.
- Total contract assets were $224.334 million, including $207.792 million of long-term contract assets primarily representing remanufactured cores held at customer locations.
- Debt included $45.406 million outstanding under the revolving facility and $30.000 million of term-loan principal. The company had $128.694 million available under the amended revolving facility, subject to borrowing-base adjustments, and $734,000 reserved for letters of credit.
- Investing cash outflows were $1.701 million, including $1.546 million of capital expenditures. Financing activities provided $1.955 million.
Material changes versus the prior comparable period
- Sales declined because of lower replenishment orders and weak industry sales early in the quarter, customer allowances related to new business and higher stock-adjustment accruals. Management stated that sales recovered later in the quarter and that market share increased across product lines.
- Gross margin deteriorated due to $1.207 million of customer allowances, $1.755 million of Mexico transition expenses, higher freight, shipment timing, stock-adjustment accruals, lower overhead absorption and a $2.624 million lower-of-cost-or-net-realizable-value revaluation for cores held at customer locations.
- General and administrative expense nearly doubled to $12.340 million. The increase included a $2.666 million loss on foreign-currency forward contracts versus a $1.052 million gain in the prior-year quarter, increased professional fees, acquisition-related costs and Mexico growth expenses. The prior-year period also benefited from a $1.293 million gain on a warrant liability.
- Interest expense increased 53.1% to $5.075 million, driven by higher receivables-discounting costs, higher borrowings and rates, and a $303,000 write-off of prior debt issuance costs.
- Accounts receivable discount programs covered $86.785 million of receivables, with a 4.1% annualized weighted-average discount rate versus 3.1% previously; related interest expense increased to $3.324 million from $2.522 million.
- Effective April 1, 2018, the company adopted ASC 606 using full retrospective presentation. The adoption changed the presentation of accounts receivable, inventory, contract assets and contract liabilities and adjusted the June 30, 2017 comparison, including a $456,000 increase in prior-year sales and a $525,000 increase in prior-year net income.
- The company also recorded a $746,000 net-of-tax cumulative-effect adjustment to opening retained earnings for new financial-instrument accounting guidance.
Guidance, outlook, commentary and risks
- Management expects approximately $17 million of fiscal 2019 capital expenditures to support growth initiatives and expansion in Mexico.
- Management believes cash, short-term investments, receivables-discounting programs, available revolver capacity and other sources will be sufficient for expected working capital, debt repayment, lease and capital expenditure needs over the next 12 months.
- In June 2018, the company amended its secured credit facility, increasing the revolving commitment to $200 million and the term loan facility to $30 million, with maturity extended to June 2023. The company was compliant with all covenants at June 30, 2018; the reported senior leverage ratio was 1.04 versus a maximum of 3.00, and fixed-charge coverage was 1.28 versus a minimum of 1.10.
- Key risks include customer concentration, customer payment delays, working-capital demands from inventory and core purchases, reliance on receivables discounting, covenant compliance, interest-rate and foreign-exchange volatility, availability and cost of used cores, competition, economic conditions, cybersecurity and accounting or tax changes.
- The company expects to adopt the new lease standard in fiscal 2020 and anticipates a significant increase in reported long-term assets and liabilities. The filing states that there were no material changes to reported litigation or risk factors.
- On August 6, 2018, the board increased the share-repurchase authorization from $20 million to $37 million. No shares were repurchased during the quarter, and $8.370 million remained available under the prior authorization at June 30, 2018.
- Management reported effective disclosure controls and procedures as of June 30, 2018, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the later-quarter sales recovery and anticipated demand materialize after the weak start to the quarter.
- Whether gross margins recover from 18.6% and whether Mexico transition costs, customer allowances, freight and inventory revaluation charges decline.
- Inventory growth, reserve adequacy and the company’s ability to convert significant core-related inventory and contract assets into cash.
- Continued availability and cost of the receivables-discounting programs, and the effect of higher discount rates on interest expense.
- Compliance with secured-credit-facility covenants and borrowing-base availability as inventory and working-capital requirements change.
- Foreign-currency exposure, particularly the effect of Mexican peso and Chinese yuan movements on earnings and derivative valuations.
- The effect of ASC 606 and subsequent accounting changes on reported revenue, margins, contract assets, contract liabilities and comparability.