Motorcar Parts of America, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2021. The filing was dated November 9, 2021. MPA supplies non-discretionary automotive aftermarket replacement parts, remanufactured components, and test solutions and diagnostic equipment, primarily in North America.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Six Months Ended September 30 |
|---|---|---|
| Net sales | $175.5 million, up 13.5% | $324.6 million, up 29.8% |
| Gross profit | $36.0 million | $59.5 million |
| Gross margin | 20.5%, versus 25.7% | 18.3%, versus 21.2% |
| Operating income | $9.6 million, versus $24.9 million | $15.3 million, versus $25.3 million |
| Net income | $3.7 million, versus $15.2 million | $4.5 million, versus $12.2 million |
| Diluted EPS | $0.19, versus $0.78 | $0.23, versus $0.63 |
| Cash flow from operations | $(19.6) million | $(24.3) million, versus $39.3 million provided |
- September 30, 2021 cash and cash equivalents were $17.9 million, with $2.1 million of short-term investments.
- Working capital was $107.7 million, with a current ratio of 1.3:1.0.
- Inventory increased to $330.5 million from $302.9 million at March 31, 2021, primarily to support anticipated demand.
- Revolving borrowings were $120.0 million, compared with $84.0 million at March 31, 2021. Term-loan principal was $18.8 million.
- Letters of credit totaled $6.7 million, and $90.9 million was available under the revolving facility after contractual adjustments.
- Total lease liabilities were $96.5 million, including $84.0 million of long-term operating lease liabilities.
- Capital expenditures were $3.2 million for the six-month period. Management expected approximately $13.5 million of additional fiscal 2022 capital expenditures.
Material Changes Versus the Prior Comparable Period
- Sales increased substantially across product lines, including stronger brake-related sales. Brake-related products represented 14% of quarterly sales versus 7% in the prior-year quarter; rotating electrical products declined to 73% from 80%.
- Gross margins declined because of higher freight and supply-chain costs, inflation, growth and transition costs, increased amortization of customer core premiums, and COVID-19-related expenses.
- Higher freight costs reduced gross profit by approximately $3.1 million in the quarter and $6.1 million year to date.
- Mexico brake-operation transition expenses declined to $0.8 million in the quarter and $2.7 million year to date, from $4.1 million and $7.4 million, respectively.
- Operating expenses increased, while foreign-exchange effects shifted from a $4.0 million gain in the prior-year quarter to a $3.9 million loss. The six-month comparison shifted from an $8.8 million gain to a $1.4 million loss.
- Operating cash flow deteriorated because of inventory investment, increased contract assets, and lower accounts payable, and was funded partly through additional revolving borrowings.
- The effective tax rate rose to 37.9% for the quarter and 41.3% for the six-month period, versus 28.6% and 29.4%, respectively.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that the near-term outlook appeared positive but warned that COVID-19, including the Delta variant, could continue to disrupt demand, production, logistics, and supply chains.
- Management believes cash, short-term investments, receivable-discount programs, available revolver capacity, and other sources are sufficient for expected working capital, debt repayment, leases, and capital expenditures over the next 12 months.
- The May 2021 credit-facility amendment extended the stated maturity to May 28, 2026, modified the fixed-charge coverage covenant, and resulted in $1.1 million of capitalized debt issuance costs.
- At September 30, 2021, MPA was compliant with its covenants: senior leverage ratio of 1.95 versus a maximum of 3.00, and fixed-charge coverage ratio of 1.37 versus a minimum of 1.10.
- The company discounted $268.4 million of receivables during the six-month period; the related discount recognized as interest expense was $4.4 million.
- The three largest customers represented approximately 87% of quarterly sales and 85% of six-month sales, creating significant customer-concentration risk.
- U.S. Customs and Border Protection asserted that approximately $17 million of additional duties may be owed for imports from Mexico covering 2011 through mid-2018. MPA disputes the claim and has not indicated that an accrual is required.
- Other risks include supply-chain delays, difficulty obtaining used cores and component parts, foreign-exchange volatility, interest-rate increases, customer payment delays, competition, tariffs, cybersecurity, and potential production interruptions.
- The company had authorized a $37.0 million share-repurchase program; $16.8 million had been used and $20.2 million remained available at September 30, 2021. No shares were repurchased during the quarter.
Investor Verification Checklist
- Verify whether inventory growth and contract-asset balances convert into sales and operating cash flow without additional borrowing.
- Monitor gross-margin recovery as freight, supply-chain, COVID-19, Mexico transition, and core-premium costs normalize.
- Assess liquidity under the revolving facility, including borrowing-base availability, covenant headroom, and the reliance on receivable discounting.
- Track customer concentration, payment terms, receivable collection periods, and the continued financial condition of the three largest customers.
- Follow the status and potential financial impact of the approximately $17 million customs-duty dispute.
- Reconcile the amended credit-facility maturity and restrictions on dividends and repurchases with future capital-allocation plans.