Business Context and Reporting Period
Motorcar Parts of America, Inc. manufactures, remanufactures, and distributes aftermarket automotive parts, including alternators, starters, wheel hubs and bearings, and brake master cylinders. The company reports one operating segment and sells primarily in North America to automotive retailers, warehouse distributors, and automobile manufacturers. This unaudited Form 10-Q covers the quarter and six months ended September 30, 2014, the second quarter of fiscal 2015.
Financial Performance and Position
| Metric | Three months ended September 30, 2014 | Three months ended September 30, 2013 | Six months ended September 30, 2014 | Six months ended September 30, 2013 |
|---|---|---|---|---|
| Net sales | $70.8 million | $66.2 million | $133.8 million | $116.4 million |
| Gross profit | $18.4 million | $19.7 million | $36.2 million | $35.7 million |
| Gross margin | 26.0% | 29.8% | 27.1% | 30.7% |
| Operating income | $6.2 million | $8.5 million | $16.3 million | $12.6 million |
| Income from continuing operations | $1.5 million | $2.2 million | $5.4 million | $2.3 million |
| Net income | $1.5 million | $2.2 million | $5.4 million | $103.1 million |
| Diluted earnings per share | $0.09 | $0.15 | $0.33 | $7.02 |
Six-month operating cash flow from continuing operations was $12.6 million, compared with $7.5 million in the prior-year period. Investing cash flow was negative $1.3 million, primarily for equipment and facility expenditures. Financing activities provided $53.1 million, principally reflecting $67.0 million of net proceeds from a September public equity offering, partly offset by debt repayments.
At September 30, 2014, cash and cash equivalents were $89.0 million, short-term investments were $0.6 million, and working capital was $79.6 million. Current assets were $170.4 million and current liabilities were $90.7 million, producing a current ratio of approximately 1.9:1. Long-term core inventory was $155.5 million, and total assets were $376.6 million.
Term-loan principal was $88.7 million, with a net carrying amount of $83.7 million. There were no revolving-loan borrowings at quarter-end; approximately $38.9 million was available under the amended revolving facility, subject to adjustments. The term loan bears interest at 6.75% under the LIBOR option and matures in November 2018. The company was in compliance with its financial covenants, including a senior leverage ratio of 1.43 versus a maximum of 3.30, fixed-charge coverage of 1.93 versus a minimum of 1.05, and consolidated EBITDA of $62.1 million versus a minimum of $32.0 million.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 7.1%; six-month sales increased 14.9%, driven by growth in rotating electrical products, wheel hubs, and the introduction of brake master cylinders.
- Gross margin declined 380 basis points in the quarter and 360 basis points for the six-month period. The decline reflected $6.6 million of product returns, $2.9 million of allowances related to core purchases, and a $0.6 million initial warranty accrual for brake master cylinders, among other launch-related costs.
- Quarterly operating income declined 26.3%, while six-month operating income increased 29.8%. Six-month results benefited from lower general and administrative expense, including lower warrant-liability remeasurement expense and lower foreign-exchange contract losses.
- Interest expense declined to $3.3 million in the quarter and $6.8 million for the six months, primarily due to lower rates on long-term debt, partly offset by greater use of receivables discount programs.
- The company issued 2.76 million common shares at $26.00 per share in September 2014, generating $67.0 million of net proceeds. These proceeds helped repay the $10.0 million revolving-loan balance outstanding at March 31, 2014.
- Prior-year six-month net income included $100.9 million of income from discontinued operations related primarily to the deconsolidation of Fenco. Current-period results contain no discontinued-operation income.
- Receivables discounted increased to $136.3 million from $100.1 million, while discount expense increased to $2.5 million from $2.2 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects fiscal 2015 capital expenditures of approximately $3.0 million to $7.0 million, primarily for equipment, information technology, and leasehold improvements. Management stated that cash, short-term investments, receivables discount programs, available revolver capacity, and other sources should satisfy expected working-capital needs, scheduled debt repayments, capital leases, and capital expenditures over the next twelve months.
Management reported commitments for significant new business on existing product lines expected to begin shipping later in the fiscal year and intends to introduce additional product lines. However, the filing does not provide quantified earnings or revenue guidance.
- Customer concentration is significant: one customer represented 53% of six-month sales and 41% of trade receivables; a second represented 22% of sales.
- Working capital is sensitive to inventory purchases, core availability, customer returns, allowances, and the timing of collections. Finished-goods turnover declined to 6.3 times quarterly annualized and 5.9 times on a six-month annualized basis.
- The company faces claims and potential additional claims related to the bankruptcy of the former Fenco entities, including allegations involving fiduciary duties, negligence, conversion, and employee obligations. The filing states that management does not expect a material adverse effect, but potential losses are not clearly quantified.
- The $10.3 million supplier warrant liability is measured using Level 3 assumptions and generated a $0.3 million six-month loss from fair-value changes.
- Foreign-exchange contracts had a notional value of $18.5 million and produced a six-month loss of $0.1 million. The company remains exposed to movements in the Mexican peso and Chinese yuan.
- Additional risks include pricing pressure, competition from offshore manufacturers, difficulty or increased costs in obtaining used cores and components, interest-rate increases, covenant compliance, reliance on receivables discount programs, and general economic conditions.
- The company reported effective disclosure controls as of September 30, 2014 and no material changes in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify whether product returns, core-purchase allowances, warranty accruals, and launch costs normalize and whether gross margins recover.
- Monitor brake master-cylinder volumes, customer acceptance, warranty experience, and the timing of new awarded business.
- Reconcile liquidity using cash, revolver availability, receivables discounting, inventory requirements, and scheduled term-loan repayments.
- Assess the sustainability and cost of the receivables discount programs, including exposure to higher rates or changed customer payment terms.
- Review customer concentration and the effect of any changes in major-customer relationships, pricing, or payment terms.
- Track developments in Fenco-related litigation and any resulting settlements, judgments, or additional liabilities.
- Distinguish recurring operating performance from prior-year discontinued-operation gains and current-period warrant and foreign-exchange fair-value effects.